document,summary,source
"Before September 2001, we and others had demonstrated significant, long- standing vulnerabilities in aviation security, some of which are depicted in figure 1. These included weaknesses in screening passengers and baggage, controlling access to secure areas at airports, and protecting air traffic control computer systems and facilities. To address these and other weaknesses, ATSA created the Transportation Security Administration and established security requirements for the new agency with mandated deadlines. Before September 2001, screeners, who were then hired by the airlines, often failed to detect threat objects located on passengers or in their carry- on luggage. Principal causes of screeners’ performance problems were rapid turnover and insufficient training. As we previously reported, turnover rates exceeded 100 percent a year at most large airports, leaving few skilled and experienced screeners, primarily because of low wages, limited benefits, and repetitive, monotonous work. In addition, before September 2001, controls for limiting access to secure areas of airports, including aircraft, did not always work as intended. As we reported in May 2000, our special agents used fictitious law enforcement badges and credentials to gain access to secure areas, bypass security checkpoints at two airports, and walk unescorted to aircraft departure gates. The agents, who had been issued tickets and boarding passes, could have carried weapons, explosives, or other dangerous objects onto aircraft. DOT’s Inspector General also documented numerous problems with airport access controls, and in one series of tests, nearly 7 out of every 10 attempts by the Inspector General’s staff to gain access to secure areas were successful. Upon entering the secure areas, the Inspector General’s staff boarded aircraft 117 times. The Inspector General further reported that the majority of the aircraft boardings would not have occurred if employees had taken the prescribed steps, such as making sure doors closed behind them. Our reviews also found that the security of the air traffic control computer systems and of the facilities that house them had not been ensured. The vulnerabilities we identified, such as not ensuring that contractors who had access to the air traffic control computer systems had undergone background checks, made the air traffic control system susceptible to intrusion and malicious attacks. The air traffic control computer systems provide information to air traffic controllers and aircraft flight crews to help ensure the safe and expeditious movement of aircraft. Failure to protect these systems and their facilities could cause a nationwide disruption of air traffic or even collisions and loss of life. Over the years, we made numerous recommendations to the Federal Aviation Administration (FAA), which, until ATSA’s enactment, was responsible for aviation security. These recommendations were designed to improve screeners’ performance, strengthen airport access controls, and better protect air traffic control computer systems and facilities. As of September 2001, FAA had implemented some of these recommendations and was addressing others, but its progress was often slow. In addition, many initiatives were not linked to specific deadlines, making it difficult to monitor and oversee their implementation. ATSA defined TSA’s primary responsibility as ensuring security in all modes of transportation. The act also shifted security-screening responsibilities from the airlines to TSA and established a series of requirements to strengthen aviation security, many of them with mandated implementation deadlines. For example, the act required the deployment of federal screeners at 429 commercial airports across the nation by November 19, 2002, and the use of explosives detection technology at these airports to screen every piece of checked baggage for explosives not later than December 31, 2002. However, the Homeland Security Act subsequently allowed TSA to grant waivers of up to 1 year to airports that would not be able to meet the December deadline. Some aviation security responsibilities remained with FAA. For example, FAA is responsible for the security of its air traffic control and other computer systems and of its air traffic control facilities. FAA also administers the Airport Improvement Program (AIP) trust fund, which is used to fund capital improvements to airports, including some security enhancements, such as terminal modifications to accommodate explosives detection equipment. Over the past 2 years, TSA and FAA have taken major steps to increase aviation security. TSA has implemented congressional mandates and explored options for increasing the use of technology and information to control access to secure areas of airports and to improve passenger screening. FAA has focused its efforts on enhancing the security of the nation’s air traffic control systems and facilities. In ongoing work, we are examining some of these efforts in more detail (see app. IV). In its first year, TSA worked to establish its organization and focused primarily on meeting the aviation security deadlines set forth in ATSA, accomplishing a large number of tasks under a very ambitious schedule. In January 2002, TSA had 13 employees—1 year later, the agency had about 65,000 employees. TSA reported that it met over 30 deadlines during 2002 to improve aviation security. (See app. I for the status of mandates in ATSA.) For example, according to TSA, it met the November 2002 deadline to deploy federal passenger screeners at airports across the nation by hiring, training, and deploying over 40,000 individuals to screen passengers at 429 commercial airports (see fig. 2); hired and deployed more than 20,000 individuals to screen all checked has been using explosives detection systems or explosives trace detection equipment to screen about 90 percent of all checked baggage as of December 31, 2002; has been using alternative means such as canine teams, hand searches, and passenger-bag matching to screen the remaining checked baggage; confiscated more than 4.8 million prohibited items (including firearms, knives, and incendiary or flammable objects) from passengers; and has made substantial progress in expanding the Federal Air Marshal Service. In addition, according to FAA, U.S. and foreign airlines met the April 2003 deadline to harden cockpit doors on aircraft flying in the United States. Not unexpectedly, TSA experienced some difficulties in meeting these deadlines and achieving these goals. For example, operational and management control problems, cited later in this testimony, emerged with the rapid expansion of the Federal Air Marshal Service, and TSA’s deployment of some explosives detection systems was delayed. As a result, TSA had to grant waivers of up to a year (until Dec. 31, 2003) to a few airports, authorizing them to use alternative means to screen all checked baggage. Recently, airport representatives with whom we spoke expressed concern that not all of these airports would meet the new December 2003 deadline established in their waivers because, according to the airport representatives, there has not been enough time to produce, install, and integrate all of the systems required to meet the deadline. To strengthen control over access to secure areas of airports and other transportation facilities, TSA is pursuing initiatives that make greater use of technology and information. For example, the agency is investigating the establishment of a Transportation Workers Identification Card (TWIC) program. TWIC is intended to establish a uniform, nationwide standard for the secure identification of 12 million workers who require unescorted physical or cyber access to secure areas at airports and other transportation facilities. Specifically, TWIC will combine standard background checks and biometrics so that a worker can be positively matched to his or her credential. Once the program is fully operational, the TWIC card will be the standard credential for airport workers and will be accepted by all modes of transportation. According to TSA, developing a uniform, nationwide standard for identification will minimize redundant credentialing and background checks. Currently, each airport is required, as part of its security program, to issue credentials to workers who need access to secure, nonpublic areas, such as baggage loading areas. Airport representatives have told us that they think a number of operational issues need to be resolved for the TWIC card to be feasible. For example, the TWIC card would have to be compatible with the many types of card readers used at airports around the country, or new card readers would have to be installed. At large airports, this could entail replacing hundreds of card readers, and airport representatives have expressed concerns about how this effort would be funded. In April 2003, TSA awarded a contract to test and evaluate various technologies at three pilot sites. In addition, TSA has continued to develop the next-generation Computer Assisted Passenger Prescreening System (CAPPS II)—an automated passenger screening system that takes personal information, such as a passenger’s name, date of birth, home address, and home telephone number, to confirm the passenger’s identity and assess a risk level. The identifying information will be run against national security information and commercial databases, and a “risk” score will be assigned to the passenger. The risk score will determine any further screening that the passenger will undergo before boarding. TSA expects to implement CAPPS II throughout the United States by the fall of 2004. However, TSA’s plans have raised concerns about travelers’ privacy rights. It has been suggested, for example, that TSA is violating privacy laws by not explaining how the risk assessment data will be scored and used and how a TSA decision can be appealed. These concerns about the system will need to be addressed as it moves toward implementation. In ongoing work, we are examining CAPPS II, including how it will function, what safeguards will be put in place to protect the traveling public’s privacy, and how the system will affect the traveling public in terms of costs, delays, and risks. Additionally, TSA has begun to develop initiatives that could enable it to use its passenger screening resources more efficiently. For example, TSA has requested funding for fiscal year 2004 to begin developing a registered traveler program that would prescreen low-risk travelers. Under a registered traveler program, those who voluntarily apply to participate in the program and successfully pass background checks would receive a unique identifier or card that would enable them to be screened more quickly and would promote greater focus on those passengers who require more extensive screening at airport security checkpoints. In prior work, we identified key policy and implementation issues that would need to be resolved before a registered traveler program could be implemented. Such issues include the (1) criteria that should be established to determine eligibility to apply for the program, (2) kinds of background checks that should be used to certify applicants’ eligibility to enroll in the program and the entity who should perform these checks, (3) security-screening procedures that registered travelers should undergo and the differences between these procedures and those for unregistered travelers, and (4) concerns that the traveling public or others may have about equity, privacy, and liability. Since September 2001, FAA has continued to strengthen the security of the nation’s air traffic control computer systems and facilities in response to 39 recommendations we made between May 1998 and December 2000. For example, FAA has established an information systems security management structure under its Chief Information Officer, whose office has developed an information systems security strategy, security architecture (that is, an overall blueprint), security policies and directives, and a security awareness training campaign. This office has also managed FAA’s incident response center and implemented a certification and accreditation process to ensure that vulnerabilities in current and future air traffic control systems are identified and weaknesses addressed. Nevertheless, the office faces continued challenges in increasing its intrusion detection capabilities, obtaining accreditation for systems that are already operational, and managing information systems security throughout the agency. In addition, according to senior security officials, FAA has completed assessments of the physical security of its staffed facilities, but it has not yet accredited all of these air traffic control facilities as secure in compliance with its own policy. Finally, FAA has worked aggressively over the past 2 years to complete background investigations of numerous contractor employees. However, ensuring that all new contractors are assessed to determine which employees require background checks, and that those checks are completed in a timely manner, will be a continuing challenge for the agency. Although TSA has focused much effort and funding on ensuring that bombs and other threat items are not carried onto commercial aircraft by passengers or in their luggage, vulnerabilities remain, according to aviation experts, TSA officials, and others. In particular, these vulnerabilities affect air cargo, general aviation, and airport perimeter security. For information on legislative proposals that would address these potential vulnerabilities and other aviation security issues, see appendix II. As we and DOT’s Inspector General have reported, vulnerabilities exist in securing the cargo carried aboard commercial passenger and all-cargo aircraft. TSA has reported that an estimated 12.5 million tons of cargo are transported each year—9.7 million tons on all-cargo planes and 2.8 million tons on passenger planes. Some potential security risks associated with air cargo include the introduction of undetected explosive and incendiary devices in cargo placed aboard aircraft; the shipment of undeclared or undetected hazardous materials aboard aircraft; and aircraft hijackings and sabotage by individuals with access to cargo aircraft. To address some of the risks associated with air cargo, ATSA requires that all cargo carried aboard commercial passenger aircraft be screened and that TSA have a system in place as soon as practicable to screen, inspect, or otherwise ensure the security of cargo on all-cargo aircraft. In August 2003, the Congressional Research Service reported that less than 5 percent of cargo placed on passenger airplanes is physically screened. TSA’s primary approach to ensuring air cargo security and safety and to complying with the cargo-screening requirement in the act is the “known shipper” program—which allows shippers that have established business histories with air carriers or freight forwarders to ship cargo on planes. However, we and DOT’s Inspector General have identified weaknesses in the known shipper program and in TSA’s procedures for approving freight forwarders. Since September 2001, TSA has taken a number of actions to enhance cargo security, such as implementing a database of known shippers in October 2002. The database is the first phase in developing a cargo- profiling system similar to the Computer-Assisted Passenger Prescreening System. However, in December 2002, we reported that additional operational and technological measures, such as checking the identity of individuals making cargo deliveries, have the potential to improve air cargo security in the near term. We further reported that TSA lacks a comprehensive plan with long-term goals and performance targets for cargo security, time frames for completing security improvements, and risk-based criteria for prioritizing actions to achieve those goals. Accordingly, we recommended that TSA develop a comprehensive plan for air cargo security that incorporates a risk management approach, includes a list of security priorities, and sets deadlines for completing actions. TSA agreed with this recommendation and expects to develop such a plan by the fall of 2003. It will be important that this plan include a timetable for implementation and that TSA expeditiously reduce the vulnerabilities in this area. Since September 2001, TSA has taken limited action to improve general aviation security, leaving it far more open and potentially vulnerable than commercial aviation. General aviation is vulnerable because general aviation pilots are not screened before takeoff and the contents of general aviation planes are not screened at any point. General aviation includes more than 200,000 privately owned airplanes, which are located in every state at more than 19,000 airports. Over 550 of these airports also provide commercial service. In the last 5 years, about 70 aircraft have been stolen from general aviation airports, indicating a potential weakness that could be exploited by terrorists. Moreover, it was reported that the September 11 hijackers researched the use of crop dusters to spread biological or chemical agents. General aviation’s vulnerability was revealed in January 2002, when a Florida teenage flight student crashed a single-engine Cessna airplane into a Tampa skyscraper. FAA has since issued a notice with voluntary guidance for flight schools and businesses that provide services for aircraft and pilots at general aviation airports. The suggestions include using different keys to gain access to an aircraft and start the ignition, not giving students access to aircraft keys, ensuring positive identification of flight students, and training employees and pilots to report suspicious activities. However, because the guidance is voluntary, it is unknown how many general aviation airports have implemented these measures. We reported in June 2003 that TSA was working with industry stakeholders as part of TSA’s Aviation Security Advisory Council to close potential security gaps in general aviation. According to our recent discussions with industry representatives, however, the stakeholders have not been able to reach a consensus on the actions needed to improve security in general aviation. General aviation industry representatives, such as the Aircraft Owners and Pilots Association and General Aviation Manufacturers Association, have opposed any restrictions on operating general aviation aircraft and believe that small planes do not pose a significant risk to the country. Nonetheless, some industry representatives indicated that the application of a risk management approach would be helpful in determining the next steps in improving general aviation security. (We discuss risk management in more detail later in this testimony.) To identify these next steps, TSA chartered a working group on general aviation within the existing Aviation Security Advisory Committee, and this working group is scheduled to report to the full committee in the fall of 2003. We have ongoing work that is examining general aviation security in further detail. Airport perimeters present a potential vulnerability by providing a route for individuals to gain unauthorized access to aircraft and secure areas of airports (see fig. 4). For example, in August 2003, the national media reported that three boaters wandered the tarmac at Kennedy International Airport after their boat became beached near a runway. In addition, terrorists could launch an attack using a shoulder-fired missile from the perimeter of an airport, as well as from locations just outside the perimeter. For example, in separate incidents in the late 1970s, guerrillas with shoulder-fired missiles shot down two Air Rhodesia planes. More recently, the national media have reported that since September 2001, al Qaeda has twice tried to down planes outside the United States with shoulder-fired missiles. We reported in June 2003 that airport operators have increased their patrols of airport perimeters since September 2001, but industry officials stated that they do not have enough resources to completely protect against missile attacks. A number of technologies could be used to secure and monitor airport perimeters, including barriers, motion sensors, and closed-circuit television. Airport representatives have cautioned that as security enhancements are made to airport perimeters, it will be important for TSA to coordinate with FAA and the airport operators to ensure that any enhancements do not pose safety risks for aircraft. We have separate ongoing work examining the status of efforts to improve airport perimeter security and assessing the nature and extent of the threat from shoulder- fired missiles. TSA’s efforts to strengthen and sustain aviation security face several longer-term challenges in the areas of risk management, funding, coordination, strategic human capital management, and building a results- oriented organization. As aviation security is viewed in the larger context of transportation and homeland security, it will be important to set strategic priorities so that national resources can be directed to the greatest needs. Although TSA initially focused on increasing aviation security, it has more recently begun to address security in the other transportation modes. However, the size and diversity of the national transportation system make it difficult to adequately secure, and TSA and the Congress are faced with demands for additional federal funding for transportation security that far exceed the additional amounts made available. We have advocated the use of a risk management approach to guide federal programs and responses to better prepare for and withstand terrorist threats, and we have recommended that TSA use this approach to strengthen security in aviation as well as in other transportation modes. A risk management approach is a systematic process to analyze threats, vulnerabilities, and the criticality (or relative importance) of assets to better support key decisions linking resources with prioritized efforts for results. Comprehensive risk-based assessments support effective planning and resource allocation. Figure 5 describes this approach. TSA agreed with our recommendation and has adopted a risk management approach in attempting to enhance security across all transportation modes. TSA’s Office of Threat Assessment and Risk Management is developing two assessment tools that will help assess criticality, threats, and vulnerabilities. The first tool, which assesses criticality, will arrive at a criticality score for a facility or transportation asset by incorporating factors such as the number of fatalities that could occur during an attack and the economic and sociopolitical importance of the facility or asset. This score will enable TSA, in conjunction with transportation stakeholders, to rank facilities and assets within each mode and thus focus resources on those that are deemed most important. TSA is working with another Department of Homeland Security office—the Information Analysis and Infrastructure Protection Directorate—to ensure that the criticality tool will be consistent with the Department’s overall approach for managing critical infrastructure. The second tool—the Transportation Risk Assessment and Vulnerability Evaluation tool (TRAVEL)—will assess threats and analyze vulnerabilities for all transportation modes. The tool produces a relative risk score for potential attacks against a transportation asset or facility. In addition, TRAVEL will include a cost-benefit component that compares the cost of implementing a given countermeasure with the reduction in relative risk due to that countermeasure. We reported in June 2003 that TSA plans to use this tool to gather comparable threat and vulnerability information across all transportation modes. It is important for TSA to complete the development of the two tools and use them to prepare action plans for specific modes, such as aviation, and for transportation security generally. Two key funding and accountability challenges will be (1) paying for increased aviation security and (2) ensuring that these costs are controlled. The costs associated with the equipment and personnel needed to screen passengers and their baggage alone are huge. The administration requested $4.2 billion for aviation security for fiscal year 2004, which included about $1.8 billion for passenger screening and $944 million for baggage screening. ATSA created a passenger security fee to pay for the costs of aviation security, but the fee has not generated enough money to do so. DOT’s Inspector General reported that the security fees are estimated to generate only about $1.7 billion in fiscal year 2004. A major funding issue is paying for the purchase and installation of the remaining explosives detection systems for the airports that received waivers, as well as for the reinstallation of the systems that were placed in airport lobbies last year and now need to be integrated into airport baggage-handling systems. Integrating the equipment with the baggage- handling systems is expected to be costly because it will require major facility modifications. For example, modifications needed to integrate the equipment at Boston’s Logan International Airport are estimated to cost $146 million. Estimates for Dallas/Fort Worth International Airport are $193 million. DOT’s Inspector General has reported that the cost of integrating the equipment nationwide could be as high as $3 billion. A key question is how to pay for these installation costs. Funds from FAA’s AIP grants and passenger facility charges are eligible sources for funding this work. In fiscal year 2002, AIP grant funds totaling $561 million were used for terminal modifications to enhance security. However, using these funds for security reduced the funding available for other airport development projects, such as projects to bring airports up to federal design standards and reconstruction projects. In February 2003, we identified letters of intent as a funding option that has been successfully used to leverage private sources of funding. TSA has since signed letters of intent with three airports—Boston Logan, Dallas-Fort Worth, and Seattle-Tacoma International Airports. Under the agreements, TSA will pay 75 percent of the cost of integrating the explosives detection equipment into the baggage-handling systems. The payments will stretch out over 3 to 4 years. Airport representatives said that about 30 more airports have requested similar agreements. The slow pace of TSA’s approval process has raised concerns about delays in reinstalling and integrating explosives detection equipment with baggage-handling systems—delays that will require more labor-intensive and less efficient baggage screening by other approved means. To provide financial assistance to airports for security-related capital investments, such as the installation of explosives detection equipment, proposed aviation reauthorization legislation would establish an aviation security capital fund that would authorize $2 billion over the next 4 years. The funding would be made available to airports in letters of intent, and large- and medium-hub airports would be expected to provide a match of 10 percent of a project’s costs. A 5 percent match would be required for all other airports. This legislation would provide a dedicated source of funding for security-related capital investments and could minimize the need to use AIP funds for security. An additional funding issue is how to ensure continued investment in transportation research and development. For fiscal year 2003, TSA was appropriated about $110 million for research and development, of which $75 million was designated for the next-generation explosives detection systems. However, TSA has proposed to reprogram $61.2 million of these funds to be used for other purposes, leaving about $12.7 million to be spent on research and development this year. This proposed reprogramming could limit TSA’s ability to sustain and strengthen aviation security by continuing to invest in research and development for more effective equipment to screen passengers, their carry-on and checked baggage, and cargo. In ongoing work, we are examining the nature and scope of research and development work by TSA and the Department of Homeland Security, including their strategy for accelerating the development of transportation security technologies. By reprogramming funds and making acknowledged use of certain funds for purposes other than those intended, TSA has raised congressional concerns about accountability. According to TSA, it has proposed to reprogram a total of $849.3 million during fiscal year 2003, including the $61.2 million that would be cut from research and development and $104 million that would be taken from the federal air marshal program and used for unintended purposes. Because of these congressional concerns, we were asked to investigate TSA’s process for reprogramming funds for the air marshal program and to assess the implications of the proposed funding reductions in areas such as the numbers of hours flown and flights taken. We have ongoing work to address these issues. To ensure appropriate oversight and accountability, it is important that TSA maintain clear and transparent communication with the Congress and industry stakeholders about the use of its funds. In July 2002, we reported that long-term attention to cost and accountability controls for acquisition and related business processes will be critical for TSA, both to ensure its success and to maintain its integrity and accountability. According to DOT’s Inspector General, although TSA has made progress in addressing certain cost-related issues, it has not established an infrastructure that provides effective controls to monitor contractors’ costs and performance. For example, in February 2003, the Inspector General reported that TSA’s $1 billion hiring effort cost more than most people expected and that TSA’s contract with NCS Pearson to recruit, assess, and hire the screener workforce contained no safeguards to prevent cost increases. The Inspector General found that TSA provided limited oversight for the management of the contract expenses and, in one case, between $6 million and $9 million of the $18 million paid to a subcontractor appeared to be a result of wasteful and abusive spending practices. As the Inspector General recommended, TSA has since hired the Defense Contract Audit Agency to audit its major contracts. To ensure control over TSA contracts, the Inspector General has further recommended that the Congress set aside a specific amount of TSA’s contracting budget for overseeing contractors’ performance with respect to cost, schedule, and quality. Sustaining the aviation security advancements of the past 2 years also depends on TSA’s ability to form effective partnerships with federal, state, and local agencies and with the aviation community. Effective, well- coordinated partnerships at the local level require identifying roles and responsibilities; developing effective, collaborative relationships with local and regional airports and emergency management and law enforcement agencies; agreeing on performance-based standards that describe desired outcomes; and sharing intelligence information. The lynchpin in TSA’s efforts to coordinate with airports and local law enforcement and emergency response agencies is, according to the agency, the 158 federal security directors and staff that TSA has deployed nationwide. The security directors’ responsibilities include ensuring that standardized security procedures are implemented at the nation’s airports; working with state and local law enforcement personnel, when appropriate, to ensure airport and passenger security; and communicating threat information to airport operators and others. Airport representatives, however, have indicated that the relationships between federal security directors and airport operators are still evolving and that better communication is needed at some airports. Key to improving the coordination between TSA and local partners is establishing clearly defined roles. In some cases, concerns have arisen about conflicts between the roles of TSA, as the manager of security functions at airports, and of airport officials, as the managers of other airport operations. Industry representatives viewed such conflicts as leading to confusion in areas such as communicating with local entities. According to airport representatives, for example, TSA has developed guidance or rules for airports without involving them, and time-consuming changes have then had to be made to accommodate operational factors. The representatives maintain that it would be more efficient and effective to consider such operational factors earlier in the process. Ultimately, inadequate coordination and unclear roles result in inefficient uses of limited resources. TSA also has to ensure that the terrorist and threat information gathered and maintained by law enforcement and other agencies—including the Federal Bureau of Investigation, the Immigration and Naturalization Service, the Central Intelligence Agency, and the Department of State—is quickly and efficiently communicated among federal agencies and to state and local authorities, as needed. Disseminating such information is important to allow those who are involved in protecting the nation’s aviation system to address potential threats rather than simply react to known threats. In aviation security, timely information sharing among agencies has been hampered by the agencies’ reluctance to share sensitive information and by outdated, incompatible computer systems. As we found in reviewing 12 watch lists maintained by nine federal agencies, information was being shared among some of them but not among others. Moreover, even when sharing was occurring, costly and overly complex measures had to be taken to facilitate it. To promote better integration and sharing of terrorist and criminal watch lists, we have recommended that the Department of Homeland Security, in collaboration with the other departments and agencies that have and use watch lists, lead an effort to consolidate and standardize the federal government’s watch list structures and policies. In addition, as we found earlier this year, representatives of numerous state and local governments and transportation industry associations indicated that the general threat warnings received by government agencies are not helpful. Rather, they said, transportation operators, including airport operators, want more specific intelligence information so that they can understand the true nature of a potential threat and implement appropriate security measures. As it organizes itself to protect the nation’s transportation system, TSA faces the challenge of strategically managing its workforce of more than 60,000 people, most of whom are deployed at airports or on aircraft to detect weapons and explosives and to prevent them from being taken aboard and used on aircraft. Additionally, over the next several years, TSA faces the challenge of “right-sizing” this workforce as efficiency is improved with new security-enhancing technologies, processes, and procedures. For example, as explosives detection systems are integrated with baggage-handling systems, the use of more labor-intensive screening methods, such as trace detection techniques and manual searches of baggage, can be reduced. Other planned security enhancements, such as CAPPS II and the registered traveler program, also have the potential to make screening more efficient. To assist agencies in managing their human capital more strategically, we have developed a model that identifies cornerstones and related critical success factors that agencies should apply and steps they can take. Our model is designed to help agency leaders effectively lead and manage their people and integrate human capital considerations into daily decision- making and the program results they seek to achieve. In January 2003, we reported that TSA was addressing some critical human capital success factors by hiring personnel, using a wide range of tools available for hiring, and beginning to link individual performance to organizational goals. However, concerns remain about the size and training of that workforce, the adequacy of the initial background checks for screeners, and TSA’s progress in setting up a performance management system. As noted earlier in this testimony, TSA now plans to reduce its screener workforce by 6,000 by September 30, 2003, and it has proposed cutting the workforce by an additional 3,000 in fiscal year 2004. This planned reduction has raised concerns about passenger delays at airports and has led TSA to begin hiring part-time screeners to make more flexible and efficient use of its workforce. In addition, TSA used an abbreviated background check process to hire and deploy enough screeners to meet ATSA’s screening deadlines in 2002. After obtaining additional background information, TSA terminated the employment of some of these screeners. TSA reported 1,208 terminations as of May 31, 2003, that it ascribed to a variety of reasons, including criminal offenses and failures to pass alcohol and drug tests. Furthermore, the national media have reported allegations of operational and management control problems that emerged with the expansion of the Federal Air Marshal Service, including inadequate background checks and training, uneven scheduling, and inadequate policies and procedures. In ongoing work, we are examining the effectiveness of TSA’s efforts to train, equip, and supervise passenger screeners, and we are assessing the effects of expansion on the Federal Air Marshal Service. In addition, we reported in January 2003 that TSA had taken the initial steps in establishing a performance management system linked to organizational goals. Such a system will be critical for TSA to motivate and manage staff, ensure the quality of screeners’ performance, and, ultimately, restore public confidence in air travel. For TSA to sustain enhanced aviation security over the long term, it will be important for the agency to continue to build a results-oriented culture within the new Department of Homeland Security. To help federal agencies successfully transform their cultures, as well as the new Department of Homeland Security merge its various components into a unified department, we identified key practices that have consistently been found at the center of successful mergers, acquisitions, and transformations. These key practices, together with implementation strategies such as establishing a coherent mission and integrated strategic goals to guide the transformation, can help agencies become more results oriented, customer focused, and collaborative. (See app. III.) These practices are particularly important for the Department of Homeland Security, whose implementation and transformation we have designated as high risk. The Congress required TSA to adopt a results-oriented strategic planning and reporting framework and, specifically, to provide an action plan with goals and milestones to outline how acceptable levels of performance for aviation security would be achieved. In prior work, we reported that TSA has taken the first steps in performance planning and reporting by defining its mission, vision, and values and that this practice would continue to be important when TSA moved into the Department of Homeland Security. Therefore, we recommended that TSA take the next steps to implement results-oriented practices. These steps included establishing performance goals and measures for all modes of transportation as part of a strategic planning process that involves stakeholders, defining more clearly the roles and responsibilities of its various offices in collaborating and communicating with stakeholders; and formalizing the roles and responsibilities of governmental entities for transportation security. Table 1 shows selected ATSA requirements, TSA’s actions and plans, and the next steps we recommended. TSA agreed with our recommendations. After spending billions of dollars over the past 2 years on people, policies, and procedures to improve aviation security, we have much more security now than we had before September 2001, but it has not been determined how much more secure we are. The vast number of guns, knives, and other potential threat items that screeners have confiscated suggests that security is working, but it also suggests that improved public awareness of prohibited items could help focus resources where they are most needed and reduce delays and inconvenience to the public. Faced with vast and competing demands for security resources, TSA should continue its efforts to identify technologies, such as CAPPS II, that will leverage its resources and potentially improve its capabilities. Improving the efficiency and effectiveness of aviation security will also require risk assessments and plans that help maintain a balance between security and customer service. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee may have. For further information on this testimony, please contact Gerald L. Dillingham at (202) 512-2834. Individuals making key contributions to this testimony include Elizabeth Eisenstadt, David Hooper, Jennifer Kim, Heather Krause, Maren McAvoy, John W. Shumann, and Teresa Spisak. Require new background checks for those who have access to secure areas of the airport. Institute a 45-day waiting period for aliens seeking flight training for planes of 12,500 pounds or more. Establish qualifications for federal screeners. Report to the Congress on improving general aviation security. Screen all checked baggage in U.S. airports using explosives detection systems, passenger-bag matching, manual searches, canine units, or other approved means. The Federal Aviation Administration (FAA) is to develop guidance for air carriers to use in developing programs to train flight and cabin crews to resist threats (within 60 days after FAA issues the guidance, each airline is to develop a training program and submit it to FAA; within 30 days of receiving a program, FAA is to approve it or require revisions; within 180 days of receiving FAA’s approval, the airline is to complete the training of all flight and cabin crews). Develop a plan to train federal screeners. Foreign and domestic carriers are to provide electronic passenger and crew manifests to Customs for flights from foreign countries to the United States. Begin collecting the passenger security fee. The Under Secretary is to assume civil aviation security functions from FAA. Implement an aviation security program for charter carriers. Begin awarding grants for security-related research and development. The National Institute of Justice is to report to the Secretary on less-than-lethal weapons for flight crew members. Report to the Congress on the deployment of baggage screening equipment. Report to the Congress on progress in evaluating and taking the following optional Require 911 capability for onboard passenger telephones. Establish uniform IDs for law enforcement personnel carrying weapons on planes or in secure areas. Establish requirements for trusted traveler programs. Develop alternative security procedures to avoid damage to medical products. Provide for the use of secure communications technologies to inform airport security forces about passengers who are identified on security databases. Require pilot licenses to include a photograph and biometric identifiers. Use voice stress analysis, biometric, or other technologies to prevent high-risk passengers from boarding. Deploy federal screeners, security managers, and law enforcement officers to screen passengers and property. Report to the Congress on screening for small aircraft with 60 or fewer seats. Establish pilot program to contract with private screening companies (program to last until Nov. 19, 2004). Screen all checked baggage by explosives detection systems. Carriers are to transfer screening property to TSA. FAA is to issue an order prohibiting access to the flight deck, requiring strengthened cabin doors, requiring that cabin doors remain locked, and prohibiting possession of a key for all but the flight deck crew. Improve perimeter screening of all individuals, goods, property, and vehicles. Screen all cargo on passenger flights and cargo-only flights. Establish procedures for notifying FAA, state and local law enforcement officers, and airport security of known threats. Establish procedures for airlines to identify passengers who pose a potential security threat. FAA is to develop and implement methods for using cabin video monitors, continuously operating transponders, and notifying flight deck crew of a hijacking. Require flight training schools to conduct security awareness programs for employees. Completed Work with airport operators to strengthen access control points and consider deploying technology to improve security access. Provide operational testing for screeners. Assess dual-use items that seem harmless but could be dangerous and inform screening personnel. Establish a system for measuring staff performance. Establish management accountability for meeting performance goals. Periodically review threats to civil aviation, including chemical and biological weapons. Ongoing Except where otherwise indicated, the Transportation Security Administration (TSA) is responsible for implementing the provisions. H.R. 2144 - Aviation Security Technical Corrections and Improvements Act - Many of the important provisions of this bill have been incorporated into the Conference Report version of the FAA Reauthorization Act, H.R. 2115. S. 1409 - Rebuild America Act of 2003 - Establishes a new grant program in the Department of Homeland Security (DHS) for airport security improvements, including projects to replace baggage conveyer systems and projects to reconfigure terminal baggage areas as needed to install explosives detection systems. The Under Secretary for Border and Transportation Security is authorized to issue letters of intent to airports for these types of projects. One billion dollars is authorized for this program. H.R. 2555 - House and Senate versions of the Department of Homeland Security Appropriations Act for 2004 House version - Makes fiscal year 2004 appropriations of $3.679 billion for the Transportation Security Administration (TSA) to provide civil aviation security services (aviation security, federal air marshals, maritime and land security, intelligence, research and development, and administration): $1.673 billion for passenger screening activities, $1.285 billion for baggage screening activities, $721 million for airport support and enforcement presence, $235 million for physical modifications of airports to provide for the installation of checked baggage explosives detection systems, and $100 million for the procurement of the explosives detection systems. Continues to cap the number of screeners at 45,000 full-time equivalent positions. Prohibits the use of funds authorized in this act to pursue or adopt regulations requiring airport sponsors to provide, without cost to TSA, building construction, maintenance, utilities and expenses, or space for services relating to aviation security (excluding space for necessary checkpoints). Senate Version of H.R. 2555 - Makes fiscal year 2004 appropriations of $4.524 billion for TSA to provide civil aviation security services: $3.185 billion for screening activities, $1.339 billion for airport support and enforcement presence, $309 million for physical modifications of airports to provide for the installation of checked baggage explosives detection systems, and $151 million for the procurement of the explosives detection systems. Prohibits the use of funds authorized in this act to pursue or adopt regulations requiring airport sponsors to provide, without cost to TSA, building construction, maintenance, utilities and expenses, or space for services relating to aviation security (excluding space for necessary checkpoints). Prohibits the use of funds authorized in this act for the Computer Assisted Passenger Prescreening System (CAPPS II) until GAO has reported to the Committees on Appropriations that certain requirements have been met, including (1) the existence of a system of due process by which passengers considered to pose a threat may appeal their delay or prohibition from boarding a flight; (2) that the underlying error rate of databases will not produce a large number of false positives that will result in a significant number of passengers being treated mistakenly or security resources being diverted; (3) that TSA has stressed-tested and demonstrated the efficacy and predictive accuracy of all search tools in CAPPS II; and (4) that the Secretary has established an internal oversight board to monitor the manner in which CAPPS II is being developed and prepared. Requires a report from the Secretary of Homeland Security on actions taken to develop countermeasures for commercial aircraft against shoulder-fired missile systems and vulnerability assessments of this threat for larger airports. H.R. 2115 - Flight 100 - Century of Aviation Reauthorization Act - Conference Report version - Gives FAA the authority to take a certificate action if it is notified by DHS that the holder of the certificate presents a security threat. Gives the Secretary of Transportation the authority to make grants to general aviation entities (including airports, operators, and manufacturers) to reimburse them for security costs incurred and revenues lost because of restrictions imposed by the federal government in response to the events of September 11. The bill authorizes $100 million for these grants. Authorizes DHS to reimburse air carriers and airports for all security screening activities they are still performing, such as for providing catering services and checking documents at security checkpoints and for providing the space and facilities used to perform screening functions to the extent funds are available. Requires air carriers to carry out a training program for flight and cabin crews to prepare for possible threat conditions. TSA is required to establish minimum standards for this training within 1 year of the act’s passage. Requires DHS to report in 6 months on the effectiveness of aviation security, specifically including the air marshal program; hardening of cockpit doors; and security screening of passengers, checked baggage, and cargo. Establishes within DHS a grant program to airport sponsors for (1) projects to replace baggage conveyer systems related to aviation security; (2) projects to reconfigure terminal baggage areas as needed to install explosives detection systems; and (3) projects to enable the Under Secretary for Border and Transportation Security to deploy explosives detection systems behind the ticket counter, in the baggage sorting area, or in line with the baggage handling system. Requires $250 million annually from the existing aviation security fee that is paid by airline passengers to be deposited in an Aviation Security Capital Fund and made available to finance this grant program. Requires TSA to certify that civil liberty and privacy issues have been addressed before implementing CAPPS II and requires GAO to assess TSA’s compliance 3 months after TSA makes the required certification. Allows cargo pilots to carry guns under the same program for pilots of passenger airlines. Permits an off-duty pilot to transport the gun in a lockbox in the passenger cabin rather than in the baggage hold. Also provides that both passenger and cargo pilots should be treated equitably in their access to training. Requires security audits of all foreign repair stations within 18 months after TSA issues rules governing the audits. The rules must be issued within 240 days of enactment. Requires background checks on aliens seeking flight training in aircraft regardless of the size of the aircraft. For all training on small aircraft, includes a notification requirement but no waiting period. For training on larger aircraft, adopts an expedited procedure if the applicant already has training, a license, or a background check, and adopts a 30-day waiting period for first-time training on large aircraft. Makes TSA responsible for the background check. Requires TSA to issue an interim final rule in 60 days to implement this section. This section takes effect when that rule becomes effective. S.236 - Background Checks for Foreign Flight School Applicants - Amends federal aviation law to require a background check of alien flight school applicants without regard to the maximum certificated weight of the aircraft for which they seek training. (Currently, a background check is required for flight crews operating aircraft with a maximum certificated takeoff weight of 12,500 pounds or more.) S. 165 - Air Cargo Security Act - House companion bill (H.R. 1103) - Amends federal aviation law to require the screening of cargo that is to be transported in passenger aircraft operated by domestic and foreign air carriers in interstate air transportation. Directs TSA to develop a strategic plan to carry out such screening. Requires the establishment of systems that (1) provide for the regular inspection of shipping facilities for cargo shipments; (2) provide an industrywide pilot program database of known shippers of cargo; (3) train persons that handle air cargo to ensure that such cargo is properly handled and safeguarded from security breaches; and (4) require air carriers operating all-cargo aircraft to have an approved plan for the security of their air operations area, the cargo placed aboard the aircraft, and persons having access to their aircraft on the ground or in flight. H.R. 1366 - Aviation Industry Stabilization Act - Requires the Under Secretary for Border and Transportation Security, after all cockpit doors are strengthened, to consider and report to the Congress on whether it is necessary to require federal air marshals to be seated in the first class cabin of an aircraft with strengthened cockpit doors. Requires the Under Secretary to (1) undertake action necessary to improve the screening of mail so that it can be carried on passenger flights and (2) reimburse air carriers for certain screening and related activities, as well as the cost of fortifying cockpit doors, and for any financial losses attributed to the loss of air traffic resulting from the use of force against Iraq in calendar year 2003. Establishes an air cargo security working group composed of various groups to develop recommendations on the enhancement of the current known shipper program. H. R. 115 - Aviation Biometric Badge Act - Amends federal aviation law to direct TSA to require by regulation that each security screener (or employee who has unescorted access, or may permit other individuals to have unescorted access, to an aircraft or a secured area of the airport) be issued a biometric security badge that identifies a person by fingerprint or retinal recognition. H. R. 1049 - Arming Cargo Pilots Against Terrorism Act - Senate companion bill (S. 516) - Expresses the sense of Congress that a flight deck crew member of a cargo aircraft should be armed with a firearm to defend such aircraft against attacks by terrorists that could use the aircraft as a weapon of mass destruction or for other terrorist purposes. Amends federal transportation law to authorize the training and arming of flight deck crew members (pilots) of all-cargo air transportation flights to prevent acts of criminal violence or air piracy. H.R. 765 - (No title) - Legislation to arm cargo pilots - Amends federal aviation law to allow cargo pilots (not just air passenger pilots) to participate in the federal flight deck officer program. H.R. 580 - Commercial Airline Missile Defense Act - Senate companion bill - S. 311 - Directs the Secretary of Transportation to issue regulations that require all turbojet aircraft of air carriers to be equipped with a missile defense system. Requires the Secretary to purchase such defense systems and make them available to all air carriers. Sets forth certain interim security measures to be taken before the deployment of such defense systems. Define and articulate a succinct and compelling reason for change. Balance continued delivery of services with merger and transformation activities. Establish a coherent mission and integrated strategic goals to guide the transformation. Adopt leading practices for results-oriented strategic planning and reporting. Focus on a key set of principles and priorities at the outset of the transformation. Embed core values in every aspect of the organization to reinforce the new culture. Set implementation goals and a time line to build momentum and show progress from day one. Make public implementation goals and a time line. Seek and monitor employee attitudes and take appropriate follow-up actions. dentify cultural features of merging organizations to increase understanding of former work environments. Attract and retain key talent. Establish an organizationwide knowledge and skills inventory to exchange knowledge among merging organizations. Dedicate an implementation team to manage the transformation process. Establish networks to support the implementation team. Select high-performing team members. Use the performance management system to define responsibility and ensure accountability for change. Adopt leading practices to implement effective performance management systems with adequate safeguards. Establish a communication strategy to create shared expectations and report related progress. Communicate early and often to build trust. Ensure consistency of message. Encourage two-way communication. Provide information to meet specific needs of employees. Involve employees to obtain their ideas and gain their ownership for the transformation. Use employee teams. Involve employees in planning and sharing performance information. Incorporate employee feedback into new policies and procedures. Delegate authority to appropriate organizational levels. Adopt leading practices to build a world-class organization. Transportation Security Research and Development Programs at DHS and TSA Key Questions: (1) What were the strategy and organizational structure for transportation security research and development (R&D) prior to 9/11 and what is the current strategy and structure? (2) How do DHS and TSA select their transportation security R&D projects and what projects are in their portfolios? (3) What are DHS’s and TSA’s goals and strategies for accelerating the development of transportation security technologies? (4) What are the nature and scope of coordination of R&D efforts between DHS and TSA, as well as with other public and private sector research organizations? Key Questions: (1) How has the federal air marshal program evolved, in terms of recruiting, training, retention, and operations since its management was transferred to TSA? (2) To what extent has TSA implemented the internal controls needed to meet the program’s operational and management control challenges? (3) To what extent has TSA developed plans and initiatives to sustain the program and accommodate its future growth and maturation? Key Questions: (1) What are the status and associated costs of TSA’s efforts to acquire, install, and operate explosives detection equipment (electronic trace detection technology and explosives detection systems) to screen all checked baggage by December 31, 2003? (2) What are the benefits and trade-offs—to include costs, operations, and performance— of using alternative explosives detection technologies currently available for baggage screening? Reprogramming of Air Marshal Program Funds Key Questions: (1) Describe the internal preparation, review, and approval process for DHS’s reprogrammings and, specifically, the process for the May 15 and July 25 reprogramming requests for the air marshal program. (2) Determine whether an impoundment or deferral notice should have been sent to the Congress and any other associated legal issues. (3) Identify the implications, for both the air marshal program and other programs, of the pending reprogramming request. Key Questions: (1) How have security concerns and measures changed at general aviation airports since September 11, 2001? (2) What steps has TSA taken to improve general aviation security? Background Checks for Banner-Towing Aircraft Key Questions: (1) What are the procedures for conducting background and security checks for pilots of small banner-towing aircraft requesting waivers to perform stadium overflights? (2) To what extent have these procedures been followed in conducting required background and security checks since September 11, 2001? (3) How effective have these procedures been in reducing risks to public safety? TSA’s Computer Assisted Passenger Prescreening System II (CAPPS II) Key Questions: (1) How will the CAPPS II system function and what data will be needed to make the system operationally effective? (2) What safeguards will be put in place to protect the traveling public’s privacy? (3) What systems and measures are in place to determine whether CAPPS II will result in improved national security? (4) What impact will CAPPS II have on the traveling public and on the airline industry in terms of costs, delays, risks, inconvenience, and other factors? Key Questions: (1) What efforts have been taken or planned to ensure that passenger screeners comply with federal standards and other criteria, including efforts to train, equip, and supervise passenger screeners? (2) What methods does TSA use to test screeners’ performance, and what have been the results of these tests? (3) How have the results of tests of TSA passenger screeners compared with the results achieved by screeners before September 11, 2001, and at five pilot program airports? (4) What actions is TSA taking to remedy performance concerns? TSA’s Efforts to Implement Sections 106, 136, and 138 of the Aviation and Transportation Security Act Key Questions: What is the status of TSA’s efforts to implement (1) section 106 of the act requiring improved airport perimeter access security, (2) section 136 requiring the assessment and deployment of commercially available security practices and technologies, and (3) section 138 requiring background investigations for TSA and other airport employees? Assessment of the Portable Air Defense Missile Threat Key Questions: (1) What are the nature and extent of the threat from man- portable air defense systems (MANPAD)? (2) How effective are U.S. controls on the use of exported MANPADs? (3) How do multilateral efforts attempt to stem MANPAD proliferation? (4) What types of countermeasures are available to minimize this threat and at what cost? Airline Assistance Determination of Whether the $5 Billion Provided by P.L. 107-42 Was Used to Compensate the Nation’s Major Air Carriers for Their Losses Stemming from the Events of Sept. 11, 2001 Key Questions: (1) Was the $5 billion used only to compensate major air carriers for their uninsured losses incurred as a result of the terrorist attacks? (2) Were carriers reimbursed, per the act, only for increases in insurance premiums resulting from the attacks? TSA’s Use of Sole-Source Contracts Key Questions: (1) To what extent does TSA follow applicable acquisition laws and policies, including those for ensuring adequate competition? (2) How well does TSA’s organizational structure facilitate effective, efficient procurement? (3) How does TSA ensure that its acquisition workforce is equipped to award and oversee contracts? (4) How well do TSA’s policies and processes ensure that TSA receives the supplies and services it needs on time and at reasonable cost? Transportation Security: Federal Action Needed to Help Address Security Challenges. GAO-03-843. Washington, D.C.: June 30, 2003. Transportation Security: Post-September 11th Initiatives and Long- Term Challenges. GAO-03-616T. Washington, D.C.: April 1, 2003. Aviation Security: Measures Needed to Improve Security of Pilot Certification Process. GAO-03-248NI. Washington, D.C.: February 3, 2003. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Vulnerabilities and Potential Improvements for the Air Cargo System. GAO-03-286NI. Washington, D.C.: December 20, 2002. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Vulnerabilities and Potential Improvements for the Air Cargo System. GAO-03-344. Washington, D.C.: December 20, 2002. Aviation Security: Vulnerability of Commercial Aviation to Attacks by Terrorists Using Dangerous Goods. GAO-03-30C. Washington, D.C.: December 3, 2002. Aviation Security: Registered Traveler Program Policy and Implementation Issues. GAO-03-253. Washington, D.C.: November 22, 2002. Aviation Security: Transportation Security Administration Faces Immediate and Long-Term Challenges. GAO-02-971T. Washington, D.C.: July 25, 2002. Aviation Security: Information Concerning the Arming of Commercial Pilots. GA0-02-822R. Washington, D.C.: June 28, 2002. Aviation Security: Deployment and Capabilities of Explosive Detection Equipment. GAO-02-713C. Washington, D.C.: June 20, 2002. (CLASSIFIED) Aviation Security: Information on Vulnerabilities in the Nation’s Air Transportation System. GAO-01-1164T. Washington, D.C.: September 26, 2001. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Information on the Nation’s Air Transportation System Vulnerabilities. GAO-01-1174T. Washington, D.C.: September 26, 2001. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Vulnerabilities in, and Alternatives for, Preboard Screening Security Operations. GAO-01-1171T. Washington, D.C.: September 25, 2001. Aviation Security: Weaknesses in Airport Security and Options for Assigning Screening Responsibilities. GAO-01-1165T. Washington, D.C.: September 21, 2001. Aviation Security: Terrorist Acts Demonstrate Urgent Need to Improve Security at the Nation’s Airports. GAO-01-1162T. Washington, D.C.: September 20, 2001. Aviation Security: Terrorist Acts Illustrate Severe Weaknesses in Aviation Security. GAO-01-1166T. Washington, D.C.: September 20, 2001. Responses of Federal Agencies and Airports We Surveyed about Access Security Improvements. GAO-01-1069R. Washington, D.C.: August 31, 2001. Responses of Federal Agencies and Airports We Surveyed about Access Security Improvements. GAO-01-1068R. Washington, D.C.: August 31, 2001. (RESTRICTED) FAA Computer Security: Recommendations to Address Continuing Weaknesses. GAO-01-171. Washington, D.C.: December 6, 2000. Aviation Security: Additional Controls Needed to Address Weaknesses in Carriage of Weapons Regulations. GAO/RCED-00-181. Washington, D.C.: September 29, 2000. FAA Computer Security: Actions Needed to Address Critical Weaknesses That Jeopardize Aviation Operations. GAO/T-AIMD-00-330. Washington, D.C.: September 27, 2000. FAA Computer Security: Concerns Remain Due to Personnel and Other Continuing Weaknesses. GAO/AIMD-00-252. Washington, D.C.: August 16, 2000. Aviation Security: Long-Standing Problems Impair Airport Screeners’ Performance. GAO/RCED-00-75. Washington, D.C.: June 28, 2000. Aviation Security: Screeners Continue to Have Serious Problems Detecting Dangerous Objects. GAO/RCED-00-159. Washington, D.C.: June 22, 2000. (NOT FOR PUBLIC DISSEMINATION) Computer Security: FAA Is Addressing Personnel Weaknesses, but Further Action Is Required. GAO/AIMD-00-169. Washington, D.C.: May 31, 2000. Security: Breaches at Federal Agencies and Airports. GAO-OSI-00-10. Washington, D.C.: May 25, 2000. Aviation Security: Screener Performance in Detecting Dangerous Objects during FAA Testing Is Not Adequate. GAO/T-RCED-00-143. Washington, D.C.: April 6, 2000. (NOT FOR PUBLIC DISSEMINATION) Combating Terrorism: How Five Foreign Countries Are Organized to Combat Terrorism. GAO/NSIAD-00-85. Washington, D.C.: April 7, 2000. Aviation Security: Vulnerabilities Still Exist in the Aviation Security System. GAO/T-RCED/AIMD-00-142. Washington, D.C.: April 6, 2000. U.S. Customs Service: Better Targeting of Airline Passengers for Personal Searches Could Produce Better Results. GAO/GGD-00-38. Washington, D.C.: March 17, 2000. Aviation Security: Screeners Not Adequately Detecting Threat Objects during FAA Testing. GAO/T-RCED-00-124. Washington, D.C.: March 16, 2000. (NOT FOR PUBLIC DISSEMINATION) Aviation Security: Slow Progress in Addressing Long-Standing Screener Performance Problems. GAO/T-RCED-00-125. Washington, D.C.: March 16, 2000. Computer Security: FAA Needs to Improve Controls Over Use of Foreign Nationals to Remediate and Review Software. GAO/AIMD-00-55. Washington, D.C.: December 23, 1999. Aviation Security: FAA’s Actions to Study Responsibilities and Funding for Airport Security and to Certify Screening Companies. GAO/RCED- 99-53. Washington, D.C.: February 24, 1999. Aviation Security: FAA’s Deployments of Equipment to Detect Traces of Explosives. GAO/RCED-99-32R. Washington, D.C.: November 13, 1998. Air Traffic Control: Weak Computer Security Practices Jeopardize Flight Safety. GAO/AIMD-98-155. Washington, D.C.: May 18, 1998. Aviation Security: Progress Being Made, but Long-Term Attention Is Needed. GAO/T-RCED-98-190. Washington, D.C.: May 14, 1998. Air Traffic Control: Weak Computer Security Practices Jeopardize Flight Safety. GAO/AIMD-98-60. Washington, D.C.: April 29, 1998. (LIMITED OFFICIAL USE –DO NOT DISSEMINATE) Aviation Security: Implementation of Recommendations Is Under Way, but Completion Will Take Several Years. GAO/RCED-98-102. Washington, D.C.: April 24, 1998. Combating Terrorism: Observations on Crosscutting Issues. T-NSIAD-98- 164. Washington, D.C.: April 23, 1998. Aviation Safety: Weaknesses in Inspection and Enforcement Limit FAA in Identifying and Responding to Risks. GAO/RCED-98-6. Washington, D.C.: February 27, 1998. Aviation Security: FAA’s Procurement of Explosives Detection Devices. GAO/RCED-97-111R. Washington, D.C.: May 1, 1997. Aviation Security: Commercially Available Advanced Explosives Detection Devices. GAO/RCED-97-ll9R. Washington, D.C.: April 24, 1997. Aviation Safety and Security: Challenges to Implementing the Recommendations of the White House Commission on Aviation Safety and Security. GAO/T-RCED-97-90. Washington, D.C.: March 5, 1997. Aviation Security: Technology’s Role in Addressing Vulnerabilities. GAO/T-RCED/NSIAD-96-262. Washington, D.C.: September 19, 1996. Aviation Security: Oversight of Initiatives Will Be Needed. C-GAO/T- RCED/NSIAD-96-20. Washington, D.C.: September 17, 1996. (CLASSIFIED) Aviation Security: Urgent Issues Need to Be Addressed. GAO/T- RCED/NSIAD-96-251. Washington, D.C.: September 11, 1996. Aviation Security: Immediate Action Needed to Improve Security. GAO/T-RCED/NSIAD-96-237. Washington, D.C.: August 1, 1996. Aviation Security: FAA Can Help Ensure That Airports’ Access Control Systems Are Cost Effective. GAO/RCED-95-25. Washington, D.C.: March 1, 1995. Aviation Security: Development of New Security Technology Has Not Met Expectations. GAO/RCED-94-142. Washington, D.C.: May 19, 1994. Aviation Security: Additional Actions Needed to Meet Domestic and International Challenges. GAO/RCED-94-38. Washington, D.C.: January 27, 1994. Homeland Security: Information Sharing Responsibilities, Challenges, and Key Management Issues. GAO-03-715T. Washington, D.C.: May 3, 2003. Information Technology: Terrorist Watch Lists Should Be Consolidated to Promote Better Integration and Sharing. GAO-03-322. Washington, D.C.: April 15, 2003. Combating Terrorism: Observations on National Strategies Related to Terrorism. GAO-03-519T. Washington, D.C.: March 3, 2003. Transportation Security Administration: Actions and Plans to Build a Results-Oriented Culture. GAO-03-190. Washington, D.C.: January 17, 2003. Major Management Challenges and Program Risks: Department of Homeland Security. GAO-03-102. Washington, D.C.: January 1, 2003. Major Management Challenges and Program Risks: Department of Transportation. GAO-03-108. Washington, D.C.: January 2003. National Preparedness: Integration of Federal, State, Local, and Private Sector Efforts Is Critical to an Effective National Strategy for Homeland Security. GAO-02-621T. Washington, D.C.: April 11, 2002. Homeland Security: Progress Made, More Direction and Partnership Sought. GAO-02-490T. Washington, D.C.: March 12, 2002. A Model of Human Capital Management. GAO-02-373SP. Washington, D.C.: March 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","In the 2 years since the terrorist attacks of September 11, 2001, the security of our nation's civil aviation system has assumed renewed urgency, and efforts to strengthen aviation security have received a great deal of congressional attention. On November 19, 2001, the Congress enacted the Aviation and Transportation Security Act (ATSA), which created the Transportation Security Administration (TSA) within the Department of Transportation (DOT) and defined its primary responsibility as ensuring security in aviation as well as in other modes of transportation. The Homeland Security Act, passed on November 25, 2002, transferred TSA to the new Department of Homeland Security, which assumed overall responsibility for aviation security. GAO was asked to describe the progress that has been made since September 11 to strengthen aviation security, the potential vulnerabilities that remain, and the longer-term management and organizational challenges to sustaining enhanced aviation security. Since September 11, 2001, TSA has made considerable progress in meeting congressional mandates designed to increase aviation security. By the end of 2002, the agency had hired and deployed about 65,000 passenger and baggage screeners, federal air marshals, and others, and it was using explosives detection equipment to screen about 90 percent of all checked baggage. TSA is also initiating or developing efforts that focus on the use of technology and information to advance security. One effort under development, the next-generation Computer-Assisted Passenger Prescreening System (CAPPS II), would use national security and commercial databases to identify passengers who could pose risks for additional screening. Concerns about privacy rights will need to be addressed as this system moves toward implementation. Although TSA has focused on ensuring that bombs and other threat items are not carried onto planes by passengers or in their luggage, vulnerabilities remain in air cargo, general aviation, and airport perimeter security. Each year, an estimated 12.5 million tons of cargo are transported on all-cargo and passenger planes, yet very little air cargo is screened for explosives. We have previously recommended, and the industry has suggested, that TSA use a risk-management approach to set priorities as it works with the industry to determine the next steps in strengthening aviation security. TSA faces longer-term management and organizational challenges to sustaining enhanced aviation security that include (1) developing and implementing a comprehensive risk management approach, (2) paying for increased aviation security needs and controlling costs, (3) establishing effective coordination among the many entities involved in aviation security, (4) strategically managing its workforce, and (5) building a results-oriented culture within the new Department of Homeland Security. TSA has begun to respond to recommendations we have made addressing many of these challenges, and we have other studies in progress.",govreport
"Congress passed LDA and IRC sections 4911 and 162(e) at different times and for different purposes. LDA, which was enacted in 1995 and became effective on January 1, 1996, requires organizations that lobby certain federal officials in the legislative and executive branches to register with the Secretary of the Senate and the Clerk of the House of Representatives. It also requires lobbying organizations that register to semiannually report expenditures and certain other information related to their lobbying efforts. Congress intended LDA’s registration and reporting requirements to provide greater public disclosure of attempts by paid lobbyists to influence decisions made by various federal legislative and executive branch officials. Unlike LDA, neither IRC section 162(e) nor section 4911 was intended to facilitate the public disclosure of lobbying. IRC section 4911, which was enacted in 1976, provides for a limit on the amount of lobbying by 501(c)(3) organizations and thereby helps clarify the extent to which these public charities can lobby without jeopardizing their tax-exempt status. Section 162(e), as amended in 1993, denies the federal income tax deductibility of certain lobbying expenses for businesses. It does not otherwise place restrictions on lobbying activities. LDA requires lobbying organizations, such as lobbying firms, to register with the Secretary of the Senate and the Clerk of the House of Representatives no later than 45 days after they first make a lobbying contact on behalf of a client. Also, organizations that have employees who lobby on behalf of the organizations—the organizations on which this report focuses—must register under LDA. The lobbying registration includes such information as the registering organization’s name and address; the client’s name and address; the names of all individuals acting as lobbyists for the client; the general and specific issues to be addressed by lobbying; and organizations substantially affiliated with the client, including foreign organizations. An organization that has employees who lobby on the organization’s behalf must identify itself as both the registering organization and the client, because the organization’s own employees represent the organization. LDA includes minimum dollar thresholds in its registration requirements. Specifically, an organization with employees who lobby on the organization’s behalf does not have to register under LDA unless its total lobbying expenses exceed or are expected to exceed $20,500 during the 6 month reporting period (i. e., January through June and July through December of each year). LDA also includes minimum thresholds for determining which employees must be listed as lobbyists in the lobbying registration. Under LDA, to be listed as a lobbyist, an individual must make more than one lobbying contact and must spend at least 20 percent of his or her time engaged in lobbying activities on behalf of the client or employing organization during the 6 month reporting period. An organization must have both $20,500 in lobbying expenses and an employee who makes more than one lobbying contact and spends at least 20 percent of his or her time lobbying before it is required to register under LDA. All organizations that register under LDA must file lobbying reports with the Secretary of the Senate and Clerk of the House of Representatives for every 6 month reporting period. The lobbying reports filed under LDA by organizations that lobby on their own behalf must include the following disclosures: total estimated expenses relating to lobbying activities (total expenses are reported either by checking a box to indicate that expenses were less than $10,000 or by including an amount, rounded to the nearest $20,000, for expenses of $10,000 or more); a three-digit code for each general issue area (such as AGR for Agriculture and TOB for Tobacco) addressed during lobbyists’ contacts with federal government officials; specific issues, such as bill numbers and references to specific executive branch actions that are addressed during lobbyists’ contacts with federal government officials; the House of Congress and federal agencies contacted; the name of each individual who acted as a lobbyist; and the interest of the reporting organization’s foreign owners or affiliates in each specific lobbying issue. Unless it terminates its registration, once a lobbying organization registers, it must file reports semiannually, regardless of whether it has lobbied during the period. Under LDA, lobbying firms that are hired to represent clients are required to use the LDA lobbying definition. However, LDA gives organizations that lobby on their own behalf and that already use an IRC lobbying definition for tax purposes the option of using the applicable IRC lobbying definition (IRC sections 4911 or 162(e)), instead of the LDA lobbying definition, for determining whether the LDA registration threshold of $20,500 in semiannual lobbying expenses is met and calculating the lobbying expenses to meet the LDA reporting requirement. For all other purposes of the act, including reporting issues addressed during contacts with federal government officials and the House of Congress and federal agencies contacted, LDA provides that organizations using an IRC definition must (1) use the IRC definition for executive branch lobbying and (2) use the LDA definition for legislative branch lobbying. By allowing certain organizations to use an IRC definition to calculate lobbying expenses, LDA helps those organizations avoid having to calculate their lobbying expenses under two different lobbying definitions—the LDA definition for reporting under LDA and the applicable IRC definition for calculating those expenses for tax purposes. An organization that chooses to use the applicable IRC definition, instead of the LDA definition to calculate its lobbying expenses, must use the IRC definition for both lobbying reports filed during a calendar year. However, from one year to the next, the organization can switch between using the LDA definition and using the applicable IRC definition. Under LDA, we are required to report to Congress on (1) the differences among the definitions of certain lobbying-related terms found in LDA and the IRC, (2) the impact that any differences among these definitions may have on filing and reporting under the act, and (3) any changes to LDA or to the appropriate sections of the IRC that the Comptroller General may recommend to harmonize the definitions. As agreed with your offices, our objectives for this report were to describe the differences between the LDA and IRC section 4911 and 162(e) determine the impact that differences in the definitions may have on registration and reporting under LDA, including information on the number of organizations using each definition and the expenses they have reported; and identify and analyze options, including harmonizing the three definitions, that may better ensure that the public disclosure purposes of LDA are realized. To identify the differences among the LDA and IRC lobbying definitions, we reviewed the relevant statutory provisions. We also reviewed related regulations and guidance, including guidance issued by the Secretary of the Senate and the Clerk of the House of Representatives. We also reviewed journal articles and an analysis of the definitions of lobbying and met with registered lobbyists, representatives of nonprofit and business organizations, and other parties who were knowledgeable about the different statutory definitions and their effect on lobbying registrations. To determine the differences among the LDA and IRC lobbying definitions regarding the number of federal executive branch officials covered for contacts dealing with nonlegislative matters, we reviewed the LDA and IRC statutory definitions of covered executive branch officials that apply for lobbying contacts on nonlegislative matters. To determine the number of officials covered by these definitions, we counted the number of Executive Schedule Levels I through V positions listed in sections 5312 through 5316 of Title 5 of the United States Code. In several cases, these sections of Title 5 list federal boards and commissions as having Executive Schedule positions but do not specify the number of such positions. In these cases, we did not attempt to determine the number of positions and counted only one position for each such listed board or commission. Thus, our estimate of the number of Executive Schedule Levels I through V positions is understated. Further, to determine the number of officials covered, we obtained data from The United States Government Manual 1998/1999 on cabinet-level officials and the number of offices in the Executive Office of the President; the Department of Defense (DOD) on military personnel ranked 0-7 and above as of September 30, 1997; the U.S. Coast Guard, the Public Health Service, and the National Oceanic and Atmospheric Administration (NOAA) on the number of commissioned corps ranked 0-7 and above as of February 1999; the Office of Personnel Management’s (OPM) Central Personnel Data File on the number of Schedule C officials as of September 30, 1997; and Budget of the United States Government, Appendix, Fiscal Year 1999 on the actual full-time-equivalent employment for fiscal year 1997 in each office of the Executive Office of the President. To determine the impact that differences in the definitions may have on registration and reporting under LDA, we first had to define how we would measure impact. We defined impact as (1) the way differences among the definitions can affect who must register with the Secretary of the Senate and the Clerk of the House of Representatives and what lobbying expenses and related information must be included in those reports; (2) the number of organizations that reported using the LDA and IRC section 4911 and 162(e) definitions when reporting lobbying expenses and related information for July through December 1997; and (3) the lobbying expenses reported under each of the three definitions for this period. To determine the way differences among the definitions can affect who must register and what they must report, we reviewed, analyzed, and categorized the general effects of the differences that we found among the definitions under our first objective. We also looked for possible effects during our reviews of statutes, regulations, guidance, and journal articles. Finally, we discussed the possible effects of the differences among the definitions with registered lobbyists, representatives of nonprofit and business organizations, and other knowledgeable parties. To identify the number of organizations that reported using the definitions of lobbying in LDA or IRC to calculate their lobbying expenses for July through December 1997 and to determine the lobbying expenses reported under LDA that were calculated using one of the three definitions, we obtained data on all lobbying reports filed with the Secretary of the Senate during this period from the new lobbying database of the Senate Office of Public Records. Only the lobbying reports for one semiannual period—July through December 1997—were available from the new database when we began our analysis in October 1998. Using the database, we identified the number of organizations that lobbied on their own behalf and filed reports for the period July through December 1997. We also analyzed the reported expenses of these organizations and determined the mean and median expenses reported under each of the three definitions. Because lobbyists did not round their lobbying expenses to the nearest $20,000 in some cases, as required by LDA, we rounded all reported expenses to the nearest $20,000 before conducting our analysis. Officials from the Senate Office of Public Records said that they had not verified the data in the database, and we did not perform a reliability assessment of the data contained in this database. However, we reviewed the lobbying reports of all organizations whose lobbying expenses were recorded in the database as being less than $10,000, which is the minimum amount required to be recorded on the lobbying form, but had erroneous Senate Office of Public Records codes. We corrected any errors we found before conducting our analysis. To identify and analyze options that may better ensure that the public disclosure purposes of LDA are realized, we relied on (1) information we collected from our review of the relevant literature on lobbying, including statutory provisions, regulations, and guidance; and (2) our findings for our first two objectives. We did our work during two periods. From November 1996 through April 1997, we reviewed the differences in the LDA and IRC definitions of lobbying-related terms. As agreed by the Senate Committee on Governmental Affairs and the House Subcommittee on the Constitution, Committee on the Judiciary, we postponed completing our review until data on lobbying expenses became available. The second period of our review was from October 1998 through January 1999, after we obtained data on lobbying expenses from the new lobbying database of the Senate Office of Public Records. We did our work in Washington, D.C., and in accordance with generally accepted government auditing standards. We obtained technical comments on a draft of this report from the Internal Revenue Service and incorporated changes in the report as appropriate. The Clerk of the House of Representatives, the Secretary of the Senate, and the Department of the Treasury had no comments on the report. The contacts, activities, and expenses that are considered to be lobbying under the LDA lobbying definition differ in many ways from those covered by the IRC definitions. Most significantly, LDA covers contacts only with federal officials; the IRC definitions cover contacts with officials in other levels of government as well as attempts to influence the public through grassroots lobbying. Also, the definitions differ in their coverage of contacts with federal officials depending on whether the contact was on a legislative or nonlegislative matter. Table 1 and the following sections present some of the key differences in coverage under the different definitions. Appendix I discusses these differences in more detail; and appendix II provides a detailed table of the differences among the definitions concerning coverage of the federal, state, and local levels of government. LDA covers only the lobbying of federal government officials, so organizations using the LDA definition would not include any information in their lobbying reports about lobbying state and local officials. But both IRC lobbying definitions cover contacts with state government officials to influence state legislation. In addition, both IRC definitions cover contacts with local government officials to influence local government legislation, but IRC section 162(e) provides an exception for contacts with local legislative officials regarding legislation of direct interest to the organization. The LDA lobbying definition covers only lobbying of federal government officials, so organizations using the LDA definition would not include in their lobbying reports any information related to attempts to influence legislation by affecting the opinions of the public—that is, grassroots lobbying. Both IRC lobbying definitions cover grassroots lobbying, such as television commercials; newspaper advertisements; and direct mail campaigns to influence federal, state, and local legislation, including referenda and ballot initiatives. To determine if a lobbyist’s contact with a federal government official is covered by one of the three lobbying definitions, one must (1) have certain information about the government official, such as whether the official is in the legislative or executive branch; and (2) know whether a legislative or nonlegislative subject was addressed during the contact. The three definitions differ in many ways regarding the officials and subjects they cover. The LDA definition does not distinguish between covered legislative and executive branch officials on the basis of whether the subject of the lobbyist’s contact is legislative or nonlegislative in nature. The IRC definitions define covered officials differently, depending on whether the subject of the lobbying contact was legislative or nonlegislative in nature. When the subject of a lobbyist’s contact concerns a nonlegislative matter, such as a regulation, grant, or contract, LDA covers more officials than the IRC definitions cover. When the subject of a lobbyist’s contact is a legislative matter, both IRC definitions potentially cover more levels of executive branch officials than the LDA definition does. Under LDA, lobbying organizations’ contacts with all Members of Congress and employees of Congress and approximately 4,600 executive branch officials are covered for either legislative or nonlegislative subjects. In contrast, under IRC section 4911, contacts with legislative or executive branch officials, including Members of Congress and the President, about any nonlegislative subject do not count as lobbying. Also, under IRC section 162(e), contacts with Members of Congress and other legislative branch officials do not count as lobbying if they deal with a nonlegislative subject; and very few executive branch officials are covered if contacts are about nonlegislative matters. As table 2 shows, LDA covers 10 times the number of executive branch officials that IRC section 162(e) covers for nonlegislative matters; it also contrasts with IRC section 4911, which does not cover federal officials for nonlegislative contacts. For contacts on legislation, LDA covers contacts with Members of Congress, employees of Congress and the approximately 4,600 executive branch officials shown in table 2. In contrast, for contacts on legislation, the IRC definitions cover Members of Congress, employees of Congress, and any executive branch officials who may participate in the formulation of the legislation. Therefore, for contacts addressing legislation, the IRC definitions potentially cover more levels of executive branch officials than the LDA definition does. LDA contains 19 exceptions to the definition of lobbying; however, for the most part, these exceptions make technical clarifications in the law and do not provide special exceptions for particular groups. The IRC section 162(e) definition has one exception in the statute, which is for contacts with local government legislative branch officials on legislation of direct interest to the organization. In addition, IRC section 162(e) has seven exceptions, which are provided for by Treasury Regulations and which are technical clarifications of the statutory provisions. IRC section 4911 has five exceptions, and two of these could allow a significant amount of lobbying expenses to be excluded from IRC section 4911 coverage. The first is an exception for making available the results of nonpartisan analysis, study, or research. Due to this exception, IRC section 4911 does not cover 501(c)(3) organizations’ advocacy on legislation as long as the organization provides a full and fair exposition of the pertinent facts that would enable the public or an individual to form an independent opinion or conclusion. The second significant exception under IRC section 4911 is referred to as the self-defense exception. This exception excludes from coverage lobbying expenses related to appearances before, or communications to, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization. According to IRS officials, this exception provides that a 501(c)(3) nonprofit tax-exempt organization can lobby legislative branch officials on matters that might affect its tax-exempt status or the activities it can engage in without losing its tax-exempt status, and such lobbying will not be counted under the IRC section 4911 definition. According to IRS officials, this exception does not cover lobbying on state or federal funding. For those organizations that lobby on their own behalf, the choice of using either the LDA definition or the applicable IRC definition can significantly affect whether they must register with the Secretary of the Senate and the Clerk of the House of Representatives. In addition, the lobbying definition an organization uses can materially affect the information, such as federal- level lobbying, it must disclose on its semiannual lobbying report. Allowing organizations to use an IRC definition for LDA reporting can result in organizations disclosing information that may not be comparable, is unrelated to LDA’s purpose, or that falls short of what LDA envisions. However, of the 1,824 organizations that lobbied on their own behalf and filed reports under LDA from July through December 1997, most reported using the LDA definition. Those organizations that used the IRC section 162(e) definition had the highest mean and median expenses reported. The lobbying definition an organization uses, which governs how it calculates lobbying expenses, can affect whether the organization is required to register under LDA. If (1) the actual or expected expenses of an organization lobbying on its own behalf exceed or are expected to exceed the $20,500 LDA threshold for a 6-month period, and (2) the organization has an employee that makes more than one lobbying contact and spends at least 20 percent of his or her time lobbying during the same 6-month period, then the organization must register. Lobbying activities and contacts that count toward the $20,500 and 20 percent thresholds depend on which lobbying definition—LDA, IRC section 4911, or IRC section 162(e)—an organization uses. If an activity is not covered under a particular definition, then the expenses related to that activity do not count toward the lobbying expenses of an organization using that definition. In some cases, allowing organizations to use an IRC definition instead of the LDA definition could result in the organization having covered lobbying expenses below the $20,500 threshold and no employees who spend 20 percent of their time lobbying; however, if the organization used the LDA definition, its lobbying expenses and activities could be above the LDA registration thresholds. For example, for an organization that primarily focuses its lobbying efforts on lobbying federal officials about nonlegislative matters, using an IRC definition is likely to result in lower covered lobbying expenses than using the LDA definition and, therefore, could result in an organization not meeting the $20,500 registration threshold. This could occur because any contacts with legislative branch officials about nonlegislative matters are not covered under either IRC sections 4911 or 162(e). Also, for contacts on nonlegislative matters, IRC section 4911 does not cover executive branch officials, and IRC section 162(e) covers only about one-tenth of the executive branch officials that LDA covers. Thus, an organization could spend over $20,500 lobbying federal officials who are covered by LDA for nonlegislative matters, with the possibility that none of these expenses would count toward the registration requirement if the organization used an IRC definition. It is also possible that an organization could have over $20,500 in lobbying expenses and one or more employees spending 20 percent of their time lobbying by using an IRC definition, when using an LDA definition would put its covered expenses below $20,500 and put its lobbying employees under the 20-percent threshold. For example, the IRC definitions potentially cover contacts with more executive branch officials than LDA covers when those contacts are about legislation. So, if an organization lobbies executive branch officials not covered under LDA in order to influence legislation, those contacts would count as lobbying under the IRC definitions but not under the LDA definition. This could result in the organization’s covered lobbying expenses being above the $20,500 threshold and in an employee’s time spent on lobbying being above the 20 percent threshold. However, no data exist to determine the number of organizations (1) that are not registered under LDA as a result of using an IRC definition or (2) that met the thresholds under an IRC definition but not under the LDA definition. Similarly, the individuals who must be listed as lobbyists on an organization’s lobbying registration can be affected by the choice of definition. Individuals must be listed as lobbyists on the registration if they make more than one lobbying contact and spend at least 20 percent of their time engaged in lobbying activities for their employers during the 6 month reporting period. Using an IRC definition instead of the LDA definition could result in an individual not being listed as a lobbyist on his or her organization’s registration or subsequent semiannual report. For example, this could occur if a lobbyist spends most of his or her time lobbying high-level officials at independent federal agencies about regulations, contracts, or other nonlegislative matters, because the IRC definitions do not consider such contacts as lobbying. Just as the choice of definition affects whether an organization must register under LDA with the Secretary of the Senate and the Clerk of the House of Representatives, the choice of definition also can materially affect the information that is reported semiannually. Because an organization can switch from using the LDA definition one year to using the applicable IRC definition another year and vice versa, organizations can use the definitions that enable them to minimize what they must disclose on their lobbying reports. The three definitions were written at different times for different purposes, so what they cover differs in many ways, both subtle and substantial. These differences result in organizations that use one definition reporting expenses and related information that organizations using another definition would not report. The reported expenses and other information may provide less disclosure and may be unrelated to what is needed to fulfill LDA’s purpose of publicly disclosing the efforts of lobbyists to influence federal officials’ decisionmaking. Whether an organization uses the LDA definition or the applicable IRC definition, it is required to disclose on its lobbying report its total estimated expenses for all activities covered by the definition. Thus, organizations using the LDA definition must report all expenses for lobbying covered federal government officials about subject matters covered by LDA. Similarly, organizations using an IRC definition must disclose on their lobbying reports all expenses for activities that are covered by the applicable IRC definition, including federal, state, and local government lobbying and grassroots lobbying. However, organizations report only their total expenses, so the lobbying reports do not reveal how much of the reported expenses were for individual activities and for what level of government. Thus, even if an organization using the LDA definition reported the same total lobbying expenses as an organization using an IRC definition, it would be impossible to tell from the lobbying reports how similar the two organizations’ federal lobbying efforts may have been. In addition, an organization reporting under an IRC definition would be, in all likelihood, including expenses that are not related to LDA’s focus on federal lobbying because the IRC definitions go beyond lobbying at the federal level. An organization reporting under an IRC definition could also be reporting less information on federal level lobbying than would be provided under the LDA definition, which Congress wrote to carry out the public disclosure purpose of LDA. For example, the IRC definitions include far fewer federal officials in their definitions for lobbying on nonlegislative matters. Also, an organization using the IRC section 4911 definition could exclude considerable lobbying expenses from its lobbying report, if its lobbying fell under the IRC section 4911 exception for nonpartisan analysis or the self- defense exception. For example, in 1995, a 501(c)(3) tax-exempt nonprofit organization lobbied against legislation that would have sharply curtailed certain activities of charities. On its 1995 tax return, the organization, which used the IRC section 4911 definition to calculate its lobbying expenses for tax purposes, reported about $106,000 in lobbying expenses. However, in a letter to a congressional committee, the organization stated that its 1995 lobbying expenses totaled over $700,000; it cited the self- defense exception as a reason for excluding about $594,000 in lobbying expenses from its tax return. In contrast to reporting expenses, when reporting information other than expenses on the LDA lobbying reports, organizations are required to report only information related to federal lobbying. This information includes issues addressed during lobbying contacts with federal government officials and the House of Congress and federal agencies contacted. Therefore, if an organization uses an IRC definition and includes expenses for state lobbying and grassroots lobbying in its total lobbying expenses, it is not required to report any issues or other information related to those nonfederal expenses. Further, LDA provides that for reporting information other than expenses for contacts with federal executive branch officials, organizations using an IRC definition to calculate their expenses must use the IRC definition for reporting other information. But for contacts with federal legislative branch officials, organizations using an IRC definition to calculate their lobbying expenses must use the LDA definition in determining what other information, such as the issues addressed during lobbyists’ contacts and the House of Congress contacted, must be disclosed on their reports. Because of this latter provision, organizations that use an IRC definition and lobby legislative branch officials about nonlegislative matters are required to disclose the issues addressed and the House of Congress contacted, even though they are not required to report the expenses related to this lobbying. For the July through December 1997 reporting period, lobbying firms that had to use the LDA definition to calculate lobbying income filed reports for 9,008 clients. In addition, for this reporting period, 1,824 organizations that lobbied on their own behalf and were able to elect which definition to use in calculating their lobbying expenses filed lobbying reports. Of the 1,824 organizations, 1,306 (71 percent) used the LDA definition to calculate their lobbying expenses. Another 157 organizations (9 percent) elected to use the IRC 4911 definition. Finally, 361 organizations (20 percent) used the IRC 162(e) definition to calculate their lobbying expenses. (See table 3.) Data do not exist that would enable us to estimate the number of organizations that may not be registered because they used an IRC definition but would have had to register had they used the LDA definition. Because computerized registration data were available only for one 6- month period when we did our analysis, we did not analyze changes in registrations over time. Thus, we do not know whether, or to what extent, organizations switch between definitions from year to year as allowed by LDA. Organizations that lobbied on their own behalf and reported using the IRC section 162(e) definition had the highest mean and median expenses reported. These organizations had 87 percent higher mean lobbying expenses than organizations that reported using the LDA definition and 58 percent higher mean lobbying expenses than those using the IRC section 4911 definition. Organizations that reported using the IRC section 162(e) definition had $180,000 in median expenses; organizations that reported using the LDA definition and those that reported using the IRC section 4911 definition each had median expenses of $80,000. Organizations that lobby on their own behalf do not have to register if their lobbying expenses for the 6 month reporting period are below $20,500. However, until a registered organization terminates its registration, it must file lobbying reports, even if its lobbying expenses are below the $20,500 registration threshold. activities. Therefore, data do not exist that would help explain the reasons for the differences. Table 4 shows the total, mean, and median expenses for organizations using each of the three lobbying definitions that reported having $10,000 or more in lobbying expenses from July to December 1997. Table 4 includes only data on organizations reporting lobbying expenses of $10,000 or more, because organizations with less than $10,000 in expenses check a box on the LDA reporting form and do not include an amount for their expenses. Because, as shown in table 3, many more of these organizations used the LDA definition than used either of the IRC definitions, it follows that the largest total amount of all expenses reported was under the LDA definition. Because the differences among the three lobbying definitions can significantly affect who registers and what they report under LDA, the current statutory provisions do not always complement LDA’s purpose. As discussed earlier, allowing organizations to use an IRC definition for LDA purposes can result in organizations (1) not registering under LDA, (2) disclosing information that may not be comparable, and (3) disclosing information that is unrelated to LDA’s purpose or that falls short of what LDA envisions. Options for revising the statutory framework exist; LDA requires us to consider one option, harmonizing the definitions; and we identified two other options on the basis of our analysis. Those options are eliminating the current authorization for businesses and tax-exempt organizations to use the IRC lobbying definitions for LDA reporting and requiring organizations that use an IRC lobbying definition to include only expenses related to federal lobbying covered by that IRC definition when the organizations register and report under LDA. The options address, in varying degrees, the effects of the differences on registration and reporting, but all have countervailing effects that must be balanced in determining what, if any, change should be made. In addition to charging us with analyzing the differences among the three lobbying definitions and the impact of those differences on organizations’ registration and reporting of their lobbying efforts, LDA charges us with reporting any changes that we may recommend to harmonize those definitions. Harmonization implies the adoption of a common definition that would be used for LDA’s registration and reporting purposes and for the tax reporting purposes currently served by the IRC definitions. Harmonizing the three lobbying definitions would ensure that organizations would not have the burden of keeping track of their lobbying expenses and activities under two different definitions–one for tax purposes and another for LDA registration and reporting purposes. Requiring the use of a common definition would also mean that no alternative definitions could be used to possibly avoid LDA’s registration requirement and that all data reported under the common definition would be comparable. However, developing a lobbying definition that could be used for the purposes of LDA, IRC section 4911, and IRC section 162(e) would require Congress to revisit fundamental decisions it made when it enacted each definition. For example, if a common definition included state lobbying expenses that are included under the current IRC definitions, then the current objective of LDA to shed light on efforts to influence federal decisionmaking would essentially be rewritten and expanded. On the other hand, if a common definition did not include state lobbying expenses, fundamental decisions that were made when the statutes containing the IRC definitions were written would be similarly modified. Adopting a harmonized definition of lobbying could result in organizations disclosing less information on lobbying reports, if the new definition covered less than what is covered by the current LDA definition. In addition, a new definition would not be used only by organizations lobbying on their own behalf, which currently have the option of using an IRC definition for LDA reporting, but also by lobbying firms, which currently must use the LDA definition for their clients’ lobbying reports. Eliminating the current authorization for using the IRC lobbying definitions for LDA purposes would mean that consistent registration and reporting requirements would exist for all lobbyists, and the requirements would be those developed by Congress specifically for LDA. This would result in all organizations following the LDA definition for LDA purposes; thus, only the data that Congress determined were related to LDA’s purposes would be reported. However, this option could increase the reporting burden of the relatively small number of organizations currently using the IRC definitions under LDA, because it would require them to track their lobbying activities as defined by LDA while also tracking the activities covered under the applicable IRC lobbying definition. The last option we identified would require organizations that elected to use an IRC definition for LDA to use only expenses related to federal lobbying efforts as defined under the IRC definitions when they determine whether they should register and what they should report under LDA. This would improve the alignment of registrations and the comparability of lobbying information that organizations reported, because organizations that elected to use the IRC definitions would no longer be reporting to Congress on their state, local, or grassroots lobbying. The reporting of expenses under this option would be similar to the reporting of all other information required under LDA, such as issues addressed and agencies contacted, which are based on contacts with federal officials. However, this option would only partially improve the comparability of data being reported by organizations using different definitions. Differences in the reported data would remain because the LDA and IRC definitions do not define lobbying of federal officials identically. LDA requires tracking contacts with a much broader set of federal officials than do the IRC definitions when lobbying contacts are made about nonlegislative matters. In addition, because differences would remain between the LDA and IRC definitions of lobbying at the federal level under this option, organizations might still avoid registering under LDA and might still report information that would differ from that reported by organizations using the LDA definition. For example, because the IRC lobbying definitions include fewer federal executive branch officials when a contact is about a nonlegislative matter, organizations using an IRC definition might still have expenses under the $20,500 threshold for lobbying; whereas, under the LDA definition they might exceed the threshold. Finally, this option could impose some additional reporting burden for the relatively small number of organizations currently using IRC definitions for LDA purposes. Reporting only federal lobbying when they use an IRC definition could result in some increased recordkeeping burden if these organizations do not currently segregate such data in their recordkeeping systems. The three lobbying definitions we reviewed were adopted at different times to achieve different purposes. What they cover differs in many subtle and substantial ways. LDA was enacted to help shed light on the identity of, and extent of effort by, lobbyists who are paid to influence decisionmaking in the federal government. IRC section 4911 was enacted to help clarify the extent to which 501(c)(3) organizations could lobby without jeopardizing their tax-exempt status, and IRC section 162(e) was enacted to prevent businesses from deducting lobbying expenses from their federal income tax. Because the IRC definitions were not enacted to enhance public disclosure concerning federal lobbying, as was the LDA definition, allowing organizations to use the IRC definitions for reporting under LDA may not be consistent with achieving the level and type of public disclosure that LDA was enacted to provide. Allowing organizations to use an IRC definition instead of the LDA definition for calculating lobbying expenses under LDA can result in some organizations not filing lobbying registrations, because the use of the IRC definition could keep their federal lobbying below the LDA registration thresholds. On the other hand, under certain circumstances, organizations could meet the thresholds when using the IRC definition but would not do so if they used the LDA definition. We do not know how many, if any, organizations are not registered under LDA that would have met the registration thresholds under LDA but not under the applicable IRC definition. Giving organizations a choice of definitions to use each year can undermine LDA’s purpose of disclosing the extent of lobbying activity that is intended to influence federal decisionmaking, because organizations may disclose very different information on lobbying reports, depending on which definition they use. When an organization can choose which definition to use each year, it can choose the definition that discloses the least lobbying activity. Further, if an organization uses an IRC definition for its lobbying report, the report can include expenses for state, local, and grassroots lobbying that are unrelated to the other information on the report that only relates to federal lobbying. Also, if an organization uses an IRC definition, its lobbying report can exclude expenses and/or other information about lobbying that is not covered under the selected IRC definition (e.g., contacts about nonlegislative matters) but that nevertheless constitutes an effort to influence federal decisionmaking. In this situation, less information would be disclosed than LDA intended. Because the differences among the LDA and IRC lobbying definitions can significantly affect who registers and what they report under LDA, the use of the IRC definitions can conflict with LDA’s purpose of disclosing paid lobbyists’ efforts to influence federal decisionmaking. Options for reducing or eliminating these conflicts exist. These options include (1) harmonizing the definitions, (2) eliminating organizations’ authorization to use an IRC definition for LDA purposes, or (3) requiring those that use an IRC definition to include only expenses related to federal lobbying under the IRC definition when they register and report under LDA. The options, to varying degrees, could improve the alignment of registrations and the comparability of reporting with Congress’ purpose of increasing public disclosure of federal lobbying efforts. However, each option includes trade-offs between better ensuring LDA’s purposes and other public policy objectives and could result in additional reporting burden in some cases. In our opinion, the trade-offs involved in the option of harmonizing the definitions are disproportionate to the problem of LDA registrations and reporting not being aligned with LDA’s purpose. Harmonizing the definitions would best align registrations and reporting with LDA’s purposes if LDA’s definition is imposed for tax purposes as well, which would significantly alter previous congressional decisions about how best to define lobbying for tax purposes. Adopting a common lobbying definition that includes activities, such as state lobbying, that are covered under the current IRC definitions would require a rewrite and expansion of LDA’s objective of shedding light on efforts to influence federal decisionmaking. Such major changes in established federal policies that would be required to harmonize the definitions appear to be unwarranted when only a small portion of those reporting under LDA use the IRC definitions. The trade-offs for the other two options are less severe. Eliminating organizations’ authorization to use a tax definition for LDA purposes would ensure that all lobbyists register and report under the definition that Congress wrote to carry out LDA’s purpose. However, eliminating the authorization likely would impose some additional burden on the relatively small number of organizations currently using IRC definitions for LDA. Requiring that only expenses related to federal-level lobbying under the IRC definitions be used for LDA purposes would not align reporting with LDA’s purposes as thoroughly as eliminating the authorization to use an IRC definition for LDA would. Under this option organizations could still avoid registering under LDA when the use of an IRC definition results in total expenses falling below the LDA registration threshold. The option also could impose some additional recordkeeping burden for the relatively small number of organizations currently using the IRC definitions. If Congress believes that the inclusion of nonfederal lobbying expenses and the underreporting of lobbying efforts at the federal level due to the optional use of the IRC lobbying definitions seriously detract from LDA’s purpose of public disclosure, then it should consider adopting one of two options. Congress could remove the authorization for organizations to use an IRC definition for reporting purposes. In this case, data reported to the Senate and House would adhere to the LDA definition, which Congress enacted specifically to achieve LDA’s public reporting purpose. Alternatively, Congress could allow organizations to continue using the IRC definitions but require that they use only the expenses related to federal-level lobbying that those definitions yield when they register and report under LDA. The data reported would be more closely aligned with LDA’s purpose of disclosing federal level lobbying efforts, but some differences would remain between the data so reported and the data that would result from applying only the LDA definition. If either of these options were considered, Congress would need to weigh the benefit of reporting that would be more closely aligned with LDA’s public disclosure purpose against the additional reporting burden that some organizations would likely bear. On February 11, 1999, we sent a draft of this report for review and comment to the Clerk of the House of Representatives, the Secretary of the Senate, the Secretary of the Treasury, and the Commissioner of the Internal Revenue Service. Representatives of the Clerk of the House of Representatives, the Secretary of the Senate, and the Secretary of the Treasury told us that no comments would be forthcoming. On February 17, 1999, we met with officials from the Internal Revenue Service, and they provided technical comments on a draft of this report. On the basis of their comments, we made changes to the report as appropriate. In a letter dated March 5, 1999, the Chief Operations Officer of the Internal Revenue Service stated that IRS had reached general consensus with us on the technical matters in the report. We are sending copies of this report to Senator Carl Levin; Senator Ted Stevens; Senator William V. Roth, Jr., Chairman, and Senator Daniel P. Moynihan, Ranking Minority Member, Senate Committee on Finance; Representative Bill Archer, Chairman, and Representative Charles B. Rangel, Ranking Minority member, House Committee on Ways and Means; the Honorable Gary Sisco, Secretary of the Senate; the Honorable Jeff Trandahl, Clerk of the House of Representatives; the Honorable Robert E. Rubin, Secretary of the Treasury; and the Honorable Charles O. Rossotti, Commissioner of Internal Revenue. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix IV. Please call me on (202) 512-8676 if you have any questions. The types of activities and contacts that are covered by the Lobbying Disclosure Act of 1995 (LDA) lobbying definition are significantly different from those covered under the Internal Revenue Code (IRC) definitions. First, LDA does not cover grassroots lobbying. The IRC lobbying definitions cover grassroots lobbying, such as television advertisements and direct mail campaigns, that are intended to influence legislation at the federal, state, or local levels. Second, LDA covers lobbying only at the federal level. However, both IRC definitions cover lobbying of federal officials, as well as state and local government officials. The IRC definitions potentially cover contacts with more levels of executive branch officials than LDA covers when those contacts are about legislation. However, when contacts are about nonlegislative subject matters, such as regulations or policies, LDA covers contacts with a broader range of federal officials than the IRC definitions. Further, LDA’s definition of lobbying includes legislative matters and an extensive list of nonlegislative matters. IRC section 4911 only covers lobbying contacts that address specific legislative proposals. IRC section 162(e) covers lobbying contacts on legislative and nonlegislative subjects, but its coverage of legislative subjects is somewhat more limited than LDA’s coverage, and its coverage of nonlegislative subjects is not clearly defined. Grassroots lobbying—efforts to influence legislation by influencing the public’s view of that legislation—is covered under the IRC definitions but not under the LDA definition. Grassroots lobbying campaigns can use such means as direct mailings and television, radio, and newspaper advertisements and can be very expensive. Both IRC section 4911 and IRC section 162(e) cover grassroots lobbying at the federal, state, and local levels. However, IRC section 4911 has a narrower definition of grassroots lobbying than IRC section 162(e) does. Under IRC section 4911, grassroots lobbying is defined as any attempt to influence legislation through an attempt to affect the opinions of the general public or any segment thereof. To be considered grassroots lobbying under IRC section 4911, a communication with the public must refer to a specific legislative proposal, reflect a view on such legislative proposal, and encourage the recipient of the communication to take action with respect to such legislative proposal. IRC section 162(e) does not have the same stringent tests that IRC section 4911 has for determining if a communication with the public is grassroots lobbying. Under IRC section 162(e), communications with the public that attempt to develop a grassroots point of view by influencing the general public to propose, support, or oppose legislation are considered to be grassroots lobbying. To be considered as grassroots lobbying under IRC section 162(e), a communication with the public does not have to encourage the public to take action with respect to a specific legislative proposal. Therefore, the IRC section 162(e) grassroots lobbying provision is likely to encompass more lobbying campaigns than IRC section 4911 does. The LDA lobbying definition covers only contacts with federal government officials and does not require lobbyists to report any expenses for contacts with state and local government officials. This is consistent with LDA’s overall purpose of increasing public disclosure of the efforts of lobbyists paid to influence federal decisionmaking. The IRC lobbying definitions also cover contacts with federal government officials. However, in contrast to LDA, the IRC lobbying definitions require that expenses for contacts with state officials to influence state legislation be included in lobbying expenses. Further, both IRC lobbying definitions cover contacts with local government officials to influence local government legislation; but coverage of local government contacts is limited under IRC section 162(e), because that section has an exception for contacts with local councils on legislation of direct interest to the organization. (Contacts with state and local government officials to influence something other than legislation, such as a state or local policy or regulation, are not covered by either of the IRC definitions.) The amounts spent lobbying state governments can be significant. For example, in 1997, under state lobbying disclosure laws, reported spending on lobbying state government officials was $144 million in California, $23 million in Washington, and $23 million in Wisconsin. Whether a lobbyist’s contact with a federal government official counts as lobbying under any of the three lobbying definitions depends, in part, on whether the contact is with a covered official. Covered officials are defined by several factors, such as their branch of government, the office they work in, and their rank. All three definitions include as lobbying lobbyists’ contacts with legislative branch officials—Members and employees of Congress—to influence legislation. However, for contacts with executive branch officials to influence legislation and contacts with either legislative branch or executive branch officials on legislative matters, such as regulations and contracts, the definitions of what is counted as lobbying differ significantly. Under LDA, contacts with any covered government officials about any legislative or nonlegislative matters covered by LDA are considered lobbying contacts, and their associated expenses must be reported. However, under the IRC definitions, whether the contact is on legislative or nonlegislative matters determines which officials are covered. For contacts to influence legislation, any executive branch officials who may participate in the formulation of legislation are covered under both IRC definitions. But, for nonlegislative matters, IRC section 4911 covers no executive branch officials, and IRC section 162(e) covers very few executive branch officials. Many of the executive branch officials covered by LDA for contacts on any lobbying subject are not covered by IRC section 162(e) when contacts are intended to influence nonlegislative matters. Also, none of the executive branch officials covered by LDA are covered by IRC section 4911 for contacts on nonlegislative matters, because IRC section 4911 covers only contacts to influence legislation. For contacts to influence the official actions or positions of an executive branch official on nonlegislative matters, IRC section 162(e) provides a list of covered executive branch officials. LDA’s list of covered executive branch officials includes all the officials on the IRC section 162(e) list, plus several more categories of officials. LDA’s list applies to contacts on any matter covered by LDA—legislative or nonlegislative. Table I.1 shows that LDA covers about 10 times the number of officials that IRC section 162(e) covers for nonlegislative matters. As shown in table I.1, LDA and IRC section 162(e) include contacts with the President and Vice President and Cabinet Members and similar high- ranking officials and their immediate deputies. In the Executive Office of the President, LDA includes all contacts with all offices; IRC section 162(e) includes only all officials in the White House Office and the two most senior level officers in the other agencies of the Executive Office of the President. Further, LDA includes contacts with officials in levels II through V of the Executive Schedule, which includes agency heads and deputy and assistant secretaries; IRC section 162(e) does not. Also, LDA includes contacts with officials at levels O-7 and above, such as Generals and Admirals, in the uniformed services. Finally, LDA includes contacts with all Schedule C appointees, who are political appointees (graded GS/GM-15 and below) in positions that involve determining policy or require a close, confidential relationship with the agency head or other key officials of the agency. The narrow scope of IRC section 162(e)’s list of covered executive branch officials can result in organizations not including on their lobbying reports expenses or other information, such as issues addressed, relating to contacts with very high-ranking officials. For example, if an organization made contacts to influence an official action or position with the top official at most independent agencies, including the National Aeronautics and Space Administration, the General Services Administration, the Export-Import Bank, and the Federal Communications Commission, these contacts would not be considered as contacts with covered executive branch officials and therefore would not be covered by the IRC section 162(e) definition. Similarly, contacts on nonlegislative matters with the heads of agencies within cabinet departments, such as the heads of the Internal Revenue Service, the Occupational Safety and Health Administration, the Bureau of Export Administration, and the Food and Drug Administration, would not be considered as contacts with officials at a high enough level for the list of covered executive branch officials under the IRC section 162(e) definition. However, contacts with all of these officials would be covered under the LDA definition of lobbying. The two IRC definitions generally provide the same coverage of contacts with executive branch officials for influencing legislation. The two definitions provide that a contact with “any government official or employee who may participate in the formulation of legislation” made to influence legislation must be counted as a lobbying expense. Thus, these definitions potentially cover many more levels of executive branch officials than are included on LDA’s list of covered executive branch officials. LDA’s list of covered officials is shown in table I.1 and applies to both legislative and nonlegislative matters. Therefore, contacts with officials in the Senior Executive Service or in grades GS/GM-15 or below who are not Schedule C appointees would generally count as lobbying contacts under the IRC definitions if such contacts were for the purpose of influencing legislation and those officials participated in the formulation of legislation. But such contacts would not count as lobbying contacts under the LDA definition, because LDA does not include these officials as covered executive branch officials. Neither IRC section 162(e) nor IRC section 4911 covers contacts with legislative branch officials on nonlegislative matters. The two IRC definitions cover only legislative branch officials in regard to contacts to influence legislation. However, LDA counts as lobbying any contacts with Members of Congress and congressional employees on any subject matter covered by LDA. Therefore, a lobbyist who contacts Members of Congress to influence a proposed federal regulation would be required to count these contacts in lobbying expenses calculated under the LDA definition and to disclose the issues addressed and the House of Congress contacted. LDA and the two IRC definitions cover the same federal legislative branch officials for contacts made to influence legislation. LDA covers contacts with any Member or employee of Congress for contacts on any legislative or nonlegislative subject matter covered by the act. Both IRC definitions cover contacts with any Member or employee of Congress for contacts made to influence legislation. The subject matters for which contacts with officials count as lobbying are different under the three lobbying definitions. LDA provides a comprehensive list of subjects about which contacts with a covered official are considered to be lobbying. For example, for nonlegislative matters, the list includes, in part, “the formulation, modification, or adoption of a federal rule, regulation, Executive order, or any other program, policy, or position of the United States Government.” Under IRC section 4911, the only subject covered by lobbying contacts is “influencing legislation.” Under IRC section 162(e), the subjects covered are “influencing legislation” and “influencing official actions or positions” of executive branch officials. The phrase “official actions or positions” applies to contacts on nonlegislative matters. Further, more specific information about what was covered in a lobbyist’s contact is needed under IRC sections 4911 and 162(e) than is needed under LDA to determine if the contact should count as lobbying. For legislative matters, LDA covers “the formulation, modification, or adoption of Federal legislation (including legislative proposals).” In contrast, for legislative matters, the IRC lobbying definitions list only “influencing legislation,” which, according to the Treasury Regulations, refers to contacts that address either specific legislation that has been introduced or a specific legislative proposal that the organization supports or opposes. Under both IRC definitions, a contact to influence legislation is a contact that refers to specific legislation and reflects a view on that legislation. Therefore, a lobbyist’s contact with a legislative branch official in which the lobbyist provides information or a general suggestion for improving a situation but in which the lobbyist does not reflect a view on specific legislation would not be considered to be a lobbying contact under the IRC definitions. For example, the Treasury regulations for IRC section 162(e) provide an example of a lobbying contact in which a lobbyist tells a legislator to take action to improve the availability of new capital. In this example, the lobbyist is not referring to a specific legislative proposal, so the contact does not count as lobbying. However, according to the Treasury Regulations, a lobbyist’s contact with a Member of Congress in which the lobbyist urges a reduction in the capital gains tax rate to increase the availability of new capital does count as lobbying, because the contact refers to a specific legislative proposal. In contrast, because LDA covers legislation from its formulation to adoption, the fact that a specific legislative proposal was not addressed during a lobbyist’s contact with a government official does not prevent the contact from being counted as a lobbying contact. LDA’s list of nonlegislative matters under its definition of “lobbying contact” seems to include most activities of the federal government. The list includes the formulation, modification, or adoption of a federal rule, regulation, executive order, or any other program, policy, or position of the United States Government; the administration or execution of a federal program or policy (including the negotiation, award, or administration of a federal contract, grant, loan, or permit, or license); and the nomination or confirmation of a person for a position subject to confirmation by the Senate. IRC section 4911 does not include any nonlegislative matters in its lobbying definition. The only nonlegislative matter included under the IRC section 162(e) lobbying definition is “any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.” However, neither IRC section 162(e) nor its regulations define what is meant by “official actions or positions,” thus leaving the interpretation of what activities to count up to the lobbyist. Some lobbyists might consider an official action to be almost anything a federal official does while at work, while others might consider that official actions must be more formal actions, such as those requiring the signing of official documents. LDA contains 19 exceptions to the definition of lobbying and IRC sections 4911 and 162(e) contain 5 and 7 exceptions, respectively. These exceptions are listed in appendix III. Although LDA includes an extensive list of exceptions, for the most part these exceptions make technical clarifications in the law and do not provide special exceptions for particular groups. Many of the LDA exceptions are for contacts made during the participation in routine government business, and some of these are for contacts that would be part of the public record. For example, these include (1) contacts made in response to a notice in the Federal Register soliciting communications from the public and (2) a petition for agency action made in writing and required to be a matter of public record pursuant to established agency procedures. Other exceptions are for contacts dealing with confidential information, such as contacts “not possible to report without disclosing information, the unauthorized disclosure of which is prohibited by law.” LDA includes four exceptions for particular groups, including an exception for contacts made by public officials acting in an official capacity; an exception for representatives of the media making contacts for news purposes; an exception for any contacts made by certain tax-exempt religious organizations; and an exception for contacts made with an individual’s elected Member of Congress or the Member’s staff regarding the individual’s benefits, employment, or other personal matters. Of the five exceptions to the IRC section 4911 lobbying definition, two could allow a significant amount of lobbying expenses to be excluded from IRC section 4911 coverage. The first is an exception for making available the results of nonpartisan analysis, study, or research. Due to this exception, IRC section 4911 does not cover 501(c)(3) organizations’ advocacy on legislation as long as the organization provides a full and fair exposition of the pertinent facts that would enable the public or an individual to form an independent opinion or conclusion. The second significant exception under IRC section 4911 is referred to as the self-defense exception. This exception excludes from coverage lobbying expenses related to appearances before, or communications to, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax- exempt status, or the deduction of contributions to the organization. According to IRS officials, this exception provides that a 501(c)(3) nonprofit tax-exempt organization can lobby legislative branch officials on matters that might affect its tax-exempt status or the activities it can engage in without losing its tax exempt status, and such lobbying will not be counted under the IRC section 4911 definition. According to IRS officials, this exception does not cover lobbying on state or federal funding. The IRC section 162(e) definition has one exception in the statute, which is for contacts with local government legislative branch officials on legislation of direct interest to the organization. In addition, IRC section 162(e) has seven exceptions, which are provided for by Treasury Regulations. These seven exceptions provide technical clarifications to the statutory provisions and do not appear to exclude a significant amount of expenses that would be counted as lobbying expenses under the other lobbying definitions. For example, the IRC section 162(e) exceptions include (1) any communication compelled by subpoena, or otherwise compelled by federal or state law; and (2) performing an activity for purposes of complying with the requirements of any law. This appendix contains detailed information about which contacts, activities, and expenses are covered under the definitions of lobbying for LDA, IRC section 4911, and IRC section 162(e). Table II.1 shows the coverage of federal lobbying. Table II.2 shows the coverage of state lobbying, and table II.3 shows the coverage of local lobbying. IRC section 162(e) Yes 2 U.S.C. 1602 (7) Yes Treas. Reg. § 56.4911-3(a) Yes 26 U.S.C. 162(e)(5)(C) Yes 2 U.S.C. 1602(8)(A)(i) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(i) & (4)(C) & (D) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 162(e)(1)(A) & (4)(A) Yes 26 U.S.C. 162(e)(1)(A) & (4)(A) President, Vice President; Executive Schedule level I, cabinet-level officials, and their immediate deputies Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes 2 U.S.C. 1602(8) (A)(i) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8) (A)(i) & (3)(D) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(C) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) IRC section 162(e) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 162(e)(1)(A) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(ii) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(ii) & (4)(C) & (D) President, Vice President; Executive Schedule level I, cabinet-level officials, and their immediate deputies Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(D) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Yes 2 U.S.C. 1602(8)(A)(iii) & 4(A) IRC section 162(e) Yes 2 U.S.C. 1602(8)(A)(iii) & (4)(C) & (D) President, Vice President; Executive Schedule level I, cabinet-level officials, and their immediate deputies Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(D) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes2 U.S.C. 1602(8)(A) & (3)(A), (B) & (D) Yes2 U.S.C. 1602(8)(A) & (3)(D) Yes2 U.S.C. 1602(8)(A) & (3)(E) Yes2 U.S.C. 1602(8)(A) & (3)(F) IRC section 162(e) Yes2 U.S.C. 1602(8)(A) & (3)(C) Yes2 U.S.C. 1602(8)(A) & (3)(C) Yes2 U.S.C. 1602(8)(A) & (3)(C) Yes 26 U.S.C. 162(e)(1)(D) & (6)(C) Yes 26 U.S.C. 162(e)(1)(D) & (6)(C) Yes 2 U.S.C. 1602(8)(A)(iv) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(iv) &(4)(C) & (D) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 162(e)(1)(A)& (4)(A) Yes 26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 4911(d)(1)(B) Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(D) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(C) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) IRC section 162(e) Yes 26 U.S.C. 4911(d)(1)(A) & (e)(2) Yes 26 U.S.C. 162(e)(1)(C) & (4)(B) 26 U.S.C. 4911(e)(2) IRC section 162(e) Yes Treas. Reg. § 56.4911-3(a) Yes 26 U.S.C. 162(e)(5)(C) Yes 26 U.S.C. 4911(d)(1)(A) & (e)(2) Yes 26 U.S.C. 162(e)(1)(C ) & (4)(B) 26 U.S.C. 4911(e)(2) IRC section 162(e) Yes Treas. Reg. § 56.4911-3(a) Yes 26 U.S.C. 162(e)(5)(C) Yes 26 U.S.C. 4911(d)(1)(B) & (e)(2) Yes 26 U.S.C. 4911(d)(1)(B) & (e)(2) Yes 26 U.S.C. 4911(d)(1)(B) & (e)(2) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 4911(d)(1)(A) & (e)(2) Yes 26 U.S.C. 162(e)(1)(C)& (e)(4)(B) 26 U.S.C. 4911 (e)(2) Title 2 of the United States Code contains 19 exceptions to LDA’s lobbying definition. Under Title 2, the term “lobbying contact” does not include a communication that is: 1. made by a public official acting in the public official’s official capacity; 2. made by a representative of a media organization if the purpose of the communication is gathering and disseminating news and information to the public; 3. made in a speech, article, publication, or other material that is distributed and made available to the public, or through radio, television, cable television, or other medium of mass communication; 4. made on behalf of a government of a foreign country or a foreign political party and disclosed under the Foreign Agents Registration Act of 1938;5. a request for a meeting, a request for the status of an action, or any other similar administrative request, if the request does not include an attempt to influence a covered executive branch official or a covered legislative branch official; 6. made in the course of participation in an advisory committee subject to the Federal Advisory Committee Act; 7. testimony given before a committee, subcommittee, or task force of Congress, or submitted for inclusion in the public record of a hearing conducted by such committee, subcommittee, or task force; 8. information provided in writing in response to an oral or written request by a covered executive branch official or a covered legislative branch official for specific information; 9. required by subpoena, civil investigative demand, or otherwise compelled by statute, regulation, or other action of Congress or an agency, including any communication compelled by a federal contract, grant, loan, permit, or license; 10. made in response to a notice in the Federal Register, Commerce Business Daily, or other similar publication soliciting communications from the public and directed to the agency official specifically designated in the notice to receive such communications; 11. not possible to report without disclosing information, the unauthorized disclosure of which is prohibited by law; 12. made to an official in an agency with regard to—(1) a judicial proceeding or a criminal or civil law enforcement inquiry, investigation, or proceeding; or (2) a filing or proceeding that the government is specifically required by statute or regulation to maintain or conduct on a confidential basis–if that agency is charged with responsibility for such proceeding, inquiry, investigation, or filing; 13. made in compliance with written agency procedures regarding an adjudication conducted by the agency under section 554 of Title 5 or substantially similar provisions; 14. a written comment filed in the course of a public proceeding or any other communication that is made on the record in a public proceeding; 15. a petition for agency action made in writing and required to be a matter of public record pursuant to established agency procedures; 16. made on behalf of an individual with regard to that individual’s benefits, employment, or other personal matters involving only that individual, except that this clause does not apply to any communication with—(1) a covered executive branch official, or (2) a covered legislative branch official (other than the individual’s elected Members of Congress or employees who work under such Member’s direct supervision)–with respect to the formulation, modification, or adoption of private legislation for the relief of that individual; 17. a disclosure by an individual that is protected under the amendments made by the Whistleblower Protection Act of 1989 under the Inspector General Act of 1978 or under another provision of law; 18. made by (1) a church, its integrated auxiliary, or a convention or association of churches that is exempt from filing a federal income tax return under paragraph (2)(A)(i) of such section 6033(a) of Title 26, or (2) a religious order that is exempt from filing a federal income tax return under paragraph (2)(A)(iii) of such section 6033(a); and 19. between (1) officials of a self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act) that is registered with or established by the Securities and Exchange Commission as required by that act or a similar organization that is designated by or registered with the Commodities Future Trading Commission as provided under the Commodity Exchange Act; and (2) the Securities and Exchange Commission or the Commodities Future Trading Commission, respectively, relating to the regulatory responsibilities of such organization under the act. Title 26 of the United States Code contains five exceptions to the lobbying definition in IRC section 4911. Under IRC section 4911, the term “influencing legislation”, with respect to an organization, does not include: 1. making available the results of nonpartisan analysis, study, or research; 2. providing technical advice or assistance (where such advice would otherwise constitute influencing of legislation) to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be; 3. appearances before, or communications to, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization; 4. communications between the organization and its bona fide members with respect to legislation or proposed legislation of direct interest to the organization and such members, other than communications that directly encourage the members to take action to influence legislation; 5. any communication with a government official or employee, other than (1) a communication with a member or employee of a legislative body (where such communication would otherwise constitute the influencing of legislation), or (2) a communication the principal purpose of which is to influence legislation. Title 26 of the United States Code contains a single exception to the lobbying definition in IRC section 162(e): 1. appearances before, submission of statements to, or sending communications to the committees, or individual members, of local councils or similar governing bodies with respect to legislation or proposed legislation of direct interest to the taxpayer. In addition, the Treasury Regulations contain eight exceptions: 2. any communication compelled by subpoena, or otherwise compelled by federal or state law;3. expenditures for institutional or “good will” advertising which keeps the taxpayer’s name before the public or which presents views on economic, financial, social, or other subjects of a general nature but which do not attempt to influence the public with respect to legislative matters;4. before evidencing a purpose to influence any specific legislation— determining the existence or procedural status of specific legislation, or the time, place, and subject of any hearing to be held by a legislative body with respect to specific legislation;5. before evidencing a purpose to influence any specific legislation— preparing routine, brief summaries of the provisions of specific legislation; 6. performing an activity for purposes of complying with the requirements of any law; 7. reading any publications available to the general public or viewing or listening to other mass media communications; and 8. merely attending a widely attended speech. Alan N. Belkin, Assistant General Counsel Rachel DeMarcus, Assistant General Counsel Jessica A. Botsford, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a legislative requirement, GAO reviewed the reporting of lobbying activities by organizations that have employees who lobby on the organizations' behalf and have the option to report their lobbying expenses under the Lobbying Disclosure Act (LDA) of 1995 or applicable Internal Revenue Code (IRC) provisions that they use for tax purposes, focusing on: (1) the differences between the LDA and IRC section 4911 and 162(e) definitions of lobbying; (2) the impact that differences in the definitions may have on registration and reporting under LDA, including information on the number of organizations using each definition and the expenses they have reported; and (3) identifying and analyzing options, including harmonizing the three definitions, that may better ensure that the public disclosure purposes of LDA are realized. GAO noted that: (1) the LDA definition covers only contacts with federal officials; (2) the IRC definitions cover contacts with federal, state, and local officials as well as attempts to influence the public through grassroots lobbying; (3) the definitions differ in their coverage of contacts with federal officials, depending on whether the contact concerns a legislative or nonlegislative matter; (4) the differences in the lobbying definitions can affect whether organizations register under LDA; (5) an organization that engages or expects to engage in certain lobbying activities during a 6-month period, including incurring at least $20,500 in lobbying expenses, is required to register under LDA; (6) the definition an organization uses in calculating its lobbying expenses determines the expenses it counts toward the $20,500 threshold; (7) when using the LDA definition would result in expenses of more than $20,500, an organization may be able to use the applicable IRC definition to keep its lobbying expenses below $20,500 or vice versa; (8) the lobbying definition an organization uses affects the information it must disclose on its semiannual lobbying report; (9) when using an IRC definition, an organization must report its total lobbying expenses for all activities covered by that definition; (10) however, all of these expenses are reported in one total amount, so the lobbying reports do not indicate the amount related to different levels of government and types of lobbying activities; (11) when organizations report information other than expenses, they are required to report only information related to federal government lobbying, regardless of whether they use the LDA definition or one of the IRC definitions to calculate expenses; (12) because of the differences in definitions, information disclosed on lobbying reports filed by organizations using the IRC definitions is not comparable to information on reports filed by organizations using the LDA definition; (13) under the IRC definitions, organizations can disclose less information than under the LDA definition; (14) of the organizations that lobbied on their own behalf and had the option of using an IRC definition for reporting expenses under LDA, most used the LDA definition; (15) the organizations that reported using the IRC section 162(e) definition had the highest mean and median expenses; and (16) because the differences among the three lobbying definitions can significantly affect who registers and what they report under LDA, the use of the IRC definitions can conflict with LDA's public disclosure purpose.",govreport
"GAO has been assessing strategic sourcing and the potential value of applying these techniques to federal acquisitions for more than a decade. In 2002, GAO reported that leading companies of that time committed to a strategic approach to acquiring services—a process that moves a company away from numerous individual procurements to a broader aggregate approach—including developing knowledge of how much they were spending on services and taking an enterprise-wide approach to As a result, companies made structural changes services acquisition.with top leadership support, such as establishing commodity managers— responsible for purchasing services within a category—and were better able to leverage their buying power to achieve substantial savings. Strategic sourcing can encompass a range of tactics for acquiring products and services more effectively and efficiently. In addition to leveraged buying, tactics include managing demand by changing behavior, achieving efficiencies through standardization of the acquisition process, evaluating total cost of ownership, and better managing supplier relationships. We have particularly emphasized the importance of comprehensive spend analysis for efficient procurement since 2002. Spend analysis provides knowledge about how much is being spent for goods and services, who the buyers are, who the suppliers are, and where the opportunities are to save money and improve performance. Private sector companies are using spend analysis as a foundation for employing a strategic approach to procurement. We have previously reported that because procurement at federal departments and agencies is generally decentralized, the federal government is not fully leveraging its aggregate buying power to obtain the most advantageous terms and conditions for its procurements. Agencies act more like many unrelated, medium-sized businesses and often rely on hundreds of separate contracts for many commonly used items, with prices that vary widely. Recognizing the benefits of strategic sourcing, the Office of Management and Budget (OMB) issued a memorandum in 2005 that implemented strategic sourcing practices. Agencies were directed to develop and implement strategic sourcing efforts based on the results of spend analyses. In addition to individual agency efforts, a government-wide strategic sourcing program—known as the Federal Strategic Sourcing Initiative (FSSI)—was established in 2005. FSSI was created to address government-wide opportunities to strategically source commonly purchased products and services and eliminate duplication of efforts across agencies. The FSSI mission is to encourage agencies to aggregate requirements, streamline processes, and coordinate purchases of like products and services to leverage spending to the maximum extent possible. At the time of our 2012 report, four FSSI efforts were ongoing— focused on office supplies, domestic delivery of packages, telecommunications, and print management—and three were planned related to SmartBUY, Wireless plans and devices, and publication licenses. In our September 2012 report, we found that most of the agencies we reviewed leveraged a fraction of their buying power through strategic sourcing. More specifically, in fiscal year 2011, the Department of Defense (DOD), Department of Homeland Security (DHS), Department of Energy, and Department of Veterans Affairs (VA) accounted for 80 percent of the $537 billion in federal procurement spending, but reported managing about 5 percent of that spending, or $25.8 billion, through strategic sourcing efforts. Similarly, we found that the FSSI program had only managed a small amount of spending through its four government- wide strategic sourcing initiatives in fiscal year 2011, although it reported achieving significant savings on those efforts. Further, we found that most selected agencies’ efforts did not address their highest spending areas, such as services, which provides opportunities for significant savings. We found that when strategically sourced contracts were used, agencies generally reported achieving savings. For example, selected agencies generally reported savings ranging from 5 percent to over 20 percent of spending through strategically sourced contracts. In fiscal year 2011, DHS reported managing 20 percent of its spending and achieving savings of $324 million. At the government-wide level, the FSSI program reported managing $339 million through several government-wide initiatives in fiscal year 2011 and achieving $60 million in savings, or almost 18 percent of the procurement spending it managed through these initiatives. After strategic sourcing contracts are awarded, realizing cost savings and other benefits depends on utilization of these contracts. We found that only 15 percent of government-wide spending for the products and services covered by the FSSI program went through FSSI contracts in fiscal year 2011. Agencies cited a variety of reasons for not participating, such as wanting to maintain control over their contracting activities, or because the agency had unique requirements. FSSI use is not mandatory and agencies face no consequences for not using FSSI contract vehicles. There are a variety of impediments to strategic sourcing in the federal setting but several stood out prominently in our 2012 review.agencies faced challenges in obtaining and analyzing reliable and detailed data on spending as well as securing expertise, leadership support, and developing metrics. Data: Our reports have consistently found that the starting point for strategic sourcing efforts is having good data on current spending and yet this is the biggest stumbling block for agencies. A spending analysis reveals how much is spent each year, what was bought, from whom it was bought, and who was purchasing it. The analysis also identifies where numerous suppliers are providing similar goods and services—often at varying prices—and where purchasing costs can be reduced and performance improved by better leveraging buying power and reducing the number of suppliers to meet needs. The FSSI program and selected agencies generally cited the Federal Procurement Data System-Next Generation (FPDS-NG)—the federal government’s current system for tracking information on contracting actions—as their primary source of data, and noted numerous deficiencies with these data for the purposes of conducting strategic sourcing research. Agencies reported that when additional data sources are added, incompatible data and separate systems often presented problems. We have previously reported extensively on issues agencies faced in gathering data to form the basis for their spend analysis. However, some agencies have been able to make progress on conducting enterprise-wide opportunity analyses despite flaws in the available data. For example, both the FSSI Program Management Office and DHS told us that current data, although imperfect, provide sufficient information for them to begin to identify high spend opportunities. DHS has in fact evaluated the majority of its 10 highest-spend commodities and developed sourcing strategies for seven of those based on its analysis of primarily FPDS-NG data. Further, we have previously reported that the General Services Administration estimated federal agencies spent about $1.6 billion during fiscal year 2009 purchasing office supplies from more than GSA used available data on spending to support 239,000 vendors.development of the Office Supplies Second Generation FSSI, which focuses office supply spending to 15 strategically sourced contracts. Expertise: Officials at several agencies also noted that the lack of trained acquisition personnel made it difficult to conduct an opportunity analysis and develop an informed sourcing strategy. For example, Army officials cited a need for expertise in strategic sourcing and spend analysis data, and OMB officials echoed that a key challenge is the dearth of strategic sourcing expertise in government. VA and Energy also reported this challenge. A few agencies have responded to this challenge by developing training on strategic sourcing for acquisition personnel. For example, the Air Force noted that it instituted training related to strategic sourcing because it is necessary to have people who are very strong analytically to do the front-end work for strategic sourcing, and these are the hardest to find. The training course facilitates acquisition personnel in obtaining the strong analytical skills to perform steps like market evaluation. VA has also begun to develop training to address this challenge. Leadership commitment: We also found in 2012 that most of the agencies we reviewed were challenged by a lack of leadership commitment to strategic sourcing, although improvements were under way. We have reported that in the private sector, the support and commitment of senior management is viewed as essential to facilitating companies’ efforts to re-engineer their approaches to acquisition as well as to ensuring follow through with the strategic sourcing approach. However, we found in 2012 that leaders at some agencies were not dedicating the resources and providing the incentives that were necessary to build a strong foundation for strategic sourcing. Metrics: A lack of clear guidance on metrics for measuring success has also impacted the management of ongoing FSSI efforts as well as most selected agencies’ efforts. We found that agencies were challenged to produce utilization rates and other metrics—such as spending through strategic sourcing contracts and savings achieved— that could be used to monitor progress. Several agencies also mentioned a need for sustained leadership support and additional resources in order to more effectively monitor their ongoing initiatives. Agency officials also mentioned several disincentives that can discourage procurement and program officials from proactively participating in strategic sourcing, and at many agencies, these disincentives have not been fully addressed by leadership. Key disincentives identified by agency officials include the following: A perception that reporting savings due to strategic sourcing could lead to program budgets being cut in subsequent years, Difficulty identifying existing strategic sourcing contracts that are available for use as there is no centralized source for this information, A perception that strategically sourced contract vehicles may limit the ability to customize requirements, A desire on the part of agency officials to maintain control of their Program officials’ and contracting officers’ relationships with existing The opportunity to get lower prices by going outside of strategically sourced contracts. Leaders at some agencies have proactively introduced practices that address these disincentives to strategically source. For example, DHS and VA reported increasing personal incentives for key managers by adding strategic sourcing performance measures to certain executives’ performance evaluations. In addition, several agencies including DOD, DHS, and VA have instituted policies making use of some strategic sourcing contracts mandatory or mandatory “with exception,” although the extent to which these policies have increased use of strategic sourcing vehicles is not yet clear. Some agencies have made use of automated systems to direct spending through strategic sourcing contracts. For example, FSSI issued a blanket purchase agreement through its office supplies initiative that included provisions requiring FSSI prices to be automatically applied to purchases made with government purchase cards. VA reported that its utilization rate for the office supplies FSSI contracts increased from 12 percent to 90 percent after these measures took effect. In fiscal year 2012, the federal government obligated $307 billion to acquire services ranging from the management and operations of government facilities, to information technology services, to research and development. This represents over half of all government procurements. Making services procurement more efficient is particularly relevant given the current fiscal environment, as any savings from this area can help agencies mitigate the adverse effects of potential budget reductions on their mission. Moreover, our reports have shown that agencies have difficulty managing services acquisition and have purchased services inefficiently, which places them at risk of paying more than necessary. These inefficiencies can be attributed to several factors. First, agencies have had difficulty defining requirements for services, such as developing clear statements of work which can reduce the government’s risk of paying for more services than needed. Second, agencies have not always leveraged knowledge of contractor costs when selecting contract types. Third, agencies have missed opportunities to increase competition for services due to overly restrictive and complex requirements; a lack of access to proprietary, technical data; and supplier preferences. We found that strategic sourcing efforts addressed products significantly more often than services and that agencies were particularly reluctant to apply strategic sourcing to the purchases of services. For example, of the top spending categories that DOD components reported targeting through implemented strategic sourcing initiatives, only two are services. Officials reported that they have been reluctant to strategically source services for a variety of reasons, such as difficulty in standardizing requirements or a decision to focus on less complex commodities that can demonstrate success. Yet, like the commercial sector, federal agencies can be strategic about buying services. For example, DHS has implemented a strategic sourcing initiative for engineering and technical services, which is also in the top 10 spending categories for the Army, Air Force, and Navy. The reluctance of federal agencies to apply strategic sourcing to services stands in sharp contrast to leading companies. As described below, leading companies perceive services as prime candidates for strategic sourcing, though they tailor how they acquire these services based on complexity and availability. Given the trend of increased federal government spending on services and today’s constrained fiscal environment, this Committee asked that we identify practices used by large commercial organizations in purchasing services. We reported on the results of this review in April 2013. Like the federal government, leading companies have experienced growth in spending on services, and over the last 5 to 7 years, have been examining ways to better manage them. Officials from seven leading companies GAO spoke with reported saving 4 to15 percent over prior year spending through strategically sourcing the full range of services they buy, including services very similar to what the federal government buys: facilities management, engineering, and information technology, for example. Leading company practices suggest that it is critical to analyze all procurement spending with equal rigor and with no categories that are off limits. Achieving savings can require a departure from the status quo. Companies’ keen analysis of spending, coupled with central management and knowledge sharing about the services they buy, is key to their savings. Their analysis of spending patterns can be described as comprising two essential variables: the complexity of the service and the number of suppliers for that service. Knowing these variables for any given service, companies tailor their tactics to fit the situation; they do not treat all services the same. In our 2013 report, we highlighted quotes from company officials that illuminate what their approach to increasing procurement efficiency means to them (see table 1). Leading companies generally agreed that the following foundational principles are all important to achieving successful services acquisition outcomes: maintaining spend visibility, developing category strategies, focusing on total cost of ownership, and regularly reviewing strategies and tactics. Taken together, these principles enable companies to better identify and share information on spending and increase market knowledge about suppliers to gain situational awareness of their procurement environment. This awareness positions companies to make more informed contracting decisions. For example, in addition to leveraging knowledge about spending, leading companies centralize procurement decisions by aligning, prioritizing, and integrating procurement functions within the organization. The companies we spoke with overcame the challenge of having a decentralized approach to purchasing services, which had made it difficult to share knowledge internally or use consistent procurement tactics. Without a centralized procurement process, officials told us, companies ran the risk that different parts of the organization could be unwittingly buying the same item or service, thereby missing an opportunity to share knowledge of procurement tactics proven to reduce costs. Company officials noted that centralizing procurement does not necessarily refer to centralizing procurement activity, but to centralizing procurement knowledge. This is important because there is a perception in the federal community that strategic sourcing requires the creation of a large, monolithic buying organization. Companies also develop category-specific procurement strategies with stakeholder buy-in in order to use the most effective sourcing strategies for each category. Category-specific procurement strategies describe the most cost-effective sourcing vehicles and supplier selection criteria to be used for each category of service, depending on factors such as current and projected requirements, volume, cyclicality of demand, risk, the services that the market is able to provide, supplier base competition trends, the company’s relative buying power, and market price trends. Company officials told us that category strategies help them conduct their sourcing according to a proactive strategic plan and not just on a reactive, contract-by-contract basis. One company’s Chief Procurement Officer referred to the latter as a “three bids and a buy” mentality that can be very narrowly focused and result in missed opportunities such as not leveraging purchases across the enterprise or making decisions based only on short term requirements. Similarly, Boeing says it sometimes chooses to execute a short-term contract to buy time if market research shows a more competitive deal can be obtained later. In addition, companies focus on total cost of ownership—making a holistic purchase decision by considering factors other than price. This is also contrary to a perception that strategic sourcing can lose a focus on best value. For example, while Walmart may often award a contract to the lowest bidder, it takes other considerations into account—such as average invoice price, time spent on location, average time to complete a task, supplier diversity, and sustainability—when awarding contracts. Humana is developing internal rate cards for consulting services that would help the company evaluate contractors’ labor rates based on their skill level. Pfizer’s procurement organization monitors compliance with company processes and billing guidelines. The company considers its procurement professionals as essentially risk managers rather than contract managers because they need to consider what is best for the company and how to minimize total cost of ownership while maintaining flexibility. By following the foundational principles to improve knowledge about their procurement environment, companies are well positioned to choose procurement tactics tailored to each service. While companies emphasize the importance of observing the principles, including category strategies, they do not take a one-size-fits-all approach to individual service purchase decisions. Two factors—the degree of complexity of the service and the number of available suppliers—determine the choice of one of four general categories of procurement tactics appropriate for that service: leveraging scale, standardizing requirements, prequalifying suppliers, and understanding cost drivers. Figure 1 below shows how the two factors help companies categorize different services and select appropriate tactics. For commodity services with many suppliers, such as administrative support, facilities maintenance, and housekeeping, companies generally focus on leveraging scale and competition to lower cost. Typical tactics applicable to this quadrant of services include consolidating purchases across the organization; using fixed price contracts; developing procurement catalogs with pre-negotiated prices for some services; and varying bidding parameters such as volume and scale in order to find new ways to reduce costs. For commodity services with few suppliers, such as specialized logistics and utilities, companies focus on standardizing requirements. Typical tactics applicable to this quadrant of services include paring back requirements in order to bring them more in line with standard industry offerings, and developing new suppliers to maintain a competitive industrial base. For example, Walmart holds pre-bid conferences with suppliers such as those supplying store security for “Black Friday”—the major shopping event on the day after Thanksgiving—to discuss requirements and what suppliers can provide. Delphi makes an effort to maintain a competitive industrial base by dual-sourcing certain services in order to minimize future risk—a cost trade-off. For knowledge-based services with many suppliers, such as information technology, legal, and financial services, companies prequalify and prioritize suppliers to highlight the most competent and reasonable suppliers. Typical tactics applicable to this quadrant of services include prequalifying suppliers by skill level and labor hour rates; and tracking supplier performance over time in order to inform companies’ prioritization of suppliers based on efficiency. For example, Pfizer Legal Alliance was created to channel the majority of legal services to pre-selected firms. Delphi only awards contracts to companies on their Category Approved Supplier List. The list is approved by Delphi leadership and is reviewed annually. For knowledge-based services with few suppliers, such as engineering and management support and research and development services, companies aim to maximize value by better understanding and negotiating individual components that drive cost. Typical tactics applicable to this quadrant of services include negotiating better rates on the cost drivers for a given service; closely monitoring supplier performance against pre-defined standards; benchmarking supplier rates against industry averages in order to identify excess costs; and improving collaboration with suppliers (see table 2). Companies we reviewed are not content to remain limited by their environment; over the long term, they generally seek to reduce the complexity of requirements and bring additional suppliers into the mix in order to commoditize services and leverage competition. This dynamic, strategic approach has helped companies demonstrate annual, sustained savings. Companies generally aim to commoditize services over the long term as much as possible because, according to them, the level of complexity directly correlates with cost. Companies also aim to increase competition, whether by developing new suppliers or reducing requirements complexity, which could allow more suppliers to compete. In doing so, companies can leverage scale and competition to lower costs. OMB and other agencies have recently taken actions to expand the use of strategic sourcing. In September 2012, GAO recommended that the Secretary of Defense, the Secretary of Veterans Affairs, and the Director of OMB take a series of detailed steps to improve strategic sourcing efforts. More specifically, we recommended that DOD evaluate the need for additional guidance, resources, and strategies, and focus on DOD’s highest spending categories; VA evaluate strategic sourcing opportunities, set goals, and establish OMB issue updated government-wide guidance on calculating savings, establish metrics to measure progress toward goals, and identify spending categories most suitable for strategic sourcing. In commenting on the September 2012 report, DOD, VA, and OMB concurred with the recommendations and stated they would take action to adopt them. We reported in April 2013 that DOD and VA had not fully adopted a strategic sourcing approach but had actions under way. For example, at that time, DOD had developed a more comprehensive list of the department’s strategic sourcing efforts, was creating additional guidance that includes a process for regular review of proposed strategic sourcing initiatives, noted a more focused targeting of top procurement spending categories for supplies, equipment, and services, and was assessing the need for additional resources to support strategic sourcing efforts. VA reported that it had taken steps to better measure spending through strategic sourcing contracts and was in the process of reviewing business cases for new strategic sourcing initiatives, and adding resources to increase strategic sourcing efforts. In 2012, OMB released a Cross-Agency Priority Goal Statement, which called for agencies to strategically source at least two new products or services in both 2013 and 2014 that yielded at least 10 percent savings. At least one of these new initiatives is to target information technology commodities or services. In December 2012, OMB further directed certain agencies to reinforce senior leadership commitment by designating an official responsible for coordinating the agency’s strategic sourcing activities. In addition, OMB identified agencies that should take a leadership role on strategic sourcing. OMB called upon these agencies to lead government-wide strategic sourcing efforts by taking steps such as recommending management strategies for specific goods and services to ensure that the federal government receives the most favorable offer possible. OMB directed these agencies to promote strategic sourcing practices inside their agencies by taking actions including collecting data on procurement spending. In closing, current fiscal pressures and budgetary constraints have heightened the need for agencies to take full advantage of strategic sourcing. These practices drive efficiencies and yield benefits beyond savings, such as increased business knowledge and better supplier management. Government-wide strategic sourcing efforts have been initiated, and federal agencies have improved and expanded upon their use of strategic sourcing to achieve cost savings and other benefits. However, little progress has been made over the past decade and much more needs to be done to better incorporate strategic sourcing leading practices, increase the amount of spending through strategic sourcing, and direct more efforts at high spend categories, such as services. Companies have shown that it is possible to save money by strategically managing services. They have done so not just by consolidating purchases of simple, commodity-like services; they have devised strategies and tactics to manage sophisticated services. Companies have also shown that savings come over a wide base and that results can be achieved with leadership, shared data, and a focus on strategic categories that is dynamic rather than static. Strategic sourcing efforts to date have targeted a small fraction of federal procurement spending. As budgets decline, however, it is important that the cost culture in federal agencies change. Adopting leading practices can enable agencies to provide more for the same budget. Chairman Carper, Ranking Member Coburn, and Members of the Committee, this concludes my statement. I would be pleased to answer any questions at this time. For future questions about this statement, please contact me at (202) 512-4841 or chaplainc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include W. William Russell, Assistant Director; Peter Anderson; Leigh Ann Haydon; John Krump; Roxanna Sun; Molly Traci; Ann Marie Udale; Alyssa Weir; and Rebecca Wilson. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","GAO has reported that the government is not fully leveraging its aggregate buying power. Strategic sourcing, a process that moves an organization away from numerous individual procurements to a broader aggregate approach, has allowed leading companies to achieve savings of 10 percent or more. A savings rate of 10 percent of total federal procurement spending would represent more than $50 billion annually. While strategic sourcing makes good sense and holds the potential to achieve significant savings, federal agencies have been slow to embrace it, even in a time of great fiscal pressure. This statement highlights GAO's recent findings related to the use of strategic sourcing across government, best practices leading companies are adopting to increase savings when acquiring services, and recent actions that could facilitate greater use of strategic sourcing. GAO's testimony is based largely on GAO's September 2012 report on strategic sourcing and GAO's April 2013 report on leading practices for acquiring services, as well as other GAO reports on contracting and acquisition. Most of the agencies GAO reviewed for its September 2012 report leveraged a fraction of their buying power. More specifically, in fiscal year 2011, the Departments of Defense (DOD), Homeland Security, Energy, and Veterans Affairs (VA) accounted for 80 percent of the $537 billion in federal procurement spending, but reported managing about 5 percent of that spending, or $25.8 billion, through strategic sourcing efforts. Similarly, GAO found that the Federal Strategic Sourcing Initiative had only managed a small amount of spending through its four government-wide strategic sourcing initiatives in fiscal year 2011, although it reported achieving significant savings on those efforts. Further, we found that most selected agencies' efforts did not address their highest spending areas, such as services, which may provide opportunities for significant savings. Companies' keen analysis of spending is key to their savings, coupled with central management and knowledge sharing about the services they buy. Their analysis of spending patterns comprises two essential variables: the complexity of the service and the number of suppliers for that service. Knowing these variables for any given service, companies tailor their tactics to fit the situation, and do not treat all services the same. Leading companies generally agreed that foundational principles--maintaining spend visibility, centralizing procurement, developing category strategies, focusing on total cost of ownership, and regularly reviewing strategies and tactics--are all important to achieving successful services acquisition outcomes. Taken together, these principles enable companies to better identify and share information on spending and increase market knowledge about suppliers to gain situational awareness of their procurement environment and make more informed contracting decisions. Like the federal government, leading companies have experienced growth in spending on services, and over the last 5 to 7 years have been examining ways to better manage spending. Officials from seven leading companies GAO spoke with reported saving 4 to 15 percent over prior year spending through strategically sourcing the full range of services they buy, including those very similar to what the federal government buys--for example, facilities management, engineering, and information technology. Agencies have not fully adopted a strategic sourcing approach but some have actions under way. For example, in April 2013, DOD was assessing the need for additional resources to support strategic sourcing efforts, and noted a more focused targeting of top procurement spending categories for supplies, equipment, and services. VA reported that it had taken steps to better measure spending through strategic sourcing contracts and was in the process of reviewing business cases for new strategic sourcing initiatives. In 2012, the Office of Management and Budget (OMB) released a Cross-Agency Priority Goal Statement, which called for agencies to strategically source at least two new products or services in both 2013 and 2014 that yield at least 10 percent savings. In December 2012, OMB further directed agencies to reinforce senior leadership commitment by designating an official responsible for coordinating the agency's strategic sourcing activities. In addition, OMB identified agencies that should take a leadership role on strategic sourcing. OMB directed these agencies to promote strategic sourcing practices inside their agencies by taking actions including collecting data on procurement spending. GAO is not making any new recommendations in this testimony. GAO has made recommendations to OMB, DOD, VA, and other agencies on key aspects of strategic sourcing and acquisition of products and services in the past. These recommendations addressed such matters as setting goals and establishing metrics. OMB and the agencies concurred with the recommendations, and are in the process of implementing them.",govreport
"Current surface transportation programs do not effectively address the transportation challenges the nation faces. Collectively, post-interstate-era programs addressing highway, transit, and safety are an agglomeration that has been established over half a century without a well-defined vision of the national interest and federal role. Many surface transportation programs are not linked to performance of the transportation system or grantees, as most highway, transit, and safety funds are distributed through formulas that only indirectly relate to needs and may have no relationship to performance. In addition, the programs often do not use the best tools or best approaches, such as using more rigorous economic analysis to select projects. Finally, the fiscal sustainability of the numerous highway, transit, and safety programs funded by the Highway Trust Fund is in doubt, as a result of increased spending from the fund without commensurate increases in revenues. Since the Federal-Aid Highway Act of 1956 funded the modern federal highway program, the federal role in surface transportation has expanded to include broader goals, more programs, and a variety of program structures. Although most surface transportation funds remain dedicated to highway infrastructure, federal surface transportation programs have grown in number and complexity, incorporating additional transportation, environmental, and societal goals. While some of these goals have led to new grant programs in areas such as transit, highway safety, and motor carrier safety, others have led to additional procedural requirements for receiving federal aid, such as environmental review and transportation planning requirements. This expansion has also created a variety of grant structures and federal approaches for establishing priorities and distributing federal funds. Most highway infrastructure funds continue to be distributed to states in accordance with individual grant program formulas and eligibility requirements. However, broad program goals, eligibility requirements, and authority to transfer funds between highway programs give state and local governments broad discretion to allocate highway infrastructure funds according to their priorities. Although some transit formula grant programs also give grantees considerable discretion to allocate funds, a portion of transit assistance requires grantees to compete for funding based on specific criteria and goals. Similarly, basic safety formula grant programs are augmented by smaller programs that directly target federal funds to specific goals and actions using financial incentives and penalty provisions. We have found that many federal surface transportation programs are not effective at addressing key transportation challenges, such as increasing congestion and growing freight demand, because federal goals and roles are unclear, and many programs lack links to needs or performance. The goals of federal surface transportation programs are numerous and sometimes conflicting, which contributes to a corresponding lack of clarity in the federal role. For example, despite statutes and regulations that call for an intermodal approach (one that creates connections across modes), only one federal program is specifically directed at intermodal infrastructure. Most highway, transit, and safety grant funds are distributed through formulas that have only an indirect relationship to needs and many have no relationship to performance or outcomes. The largest safety grants are more likely than highway grants to be focused on goals rather than specific transportation systems such as the interstate system, and several highway safety and motor carrier safety grants allocate incentive funds on the basis of performance or state efforts to carry out specific safety- related activities. However, since the majority of surface transportation funds are distributed without regard to performance, it is difficult to assess the impact of recent record levels of federal highway expenditures. For example, while the condition of highways showed some improvement between 1997 and 2004, traffic congestion increased in the same period. Mechanisms to link programs to goals also appear insufficient because, particularly within the Federal-aid Highway program, federal rules for transferring funds between different highway infrastructure programs are flexible, weakening the distinctions between individual programs (see fig. 1). Surface transportation programs often do not employ the best tools and approaches to ensure effective investment decisions. Rigorous economic analysis does not generally drive the investment decisions of state and local governments—in a 2004 survey of state departments of transportation, 34 of 43 state departments of transportation cited political support and public opinion as very important factors, whereas 8 said the same of the ratio of benefits to costs. The federal government also does not possess adequate data to assess outcomes or implement performance measures. For example, the Department of Transportation (DOT) does not have a central source of data on congestion, even though it has identified congestion as a top priority. While some funds can be transferred between highway and transit programs, modally stovepiped funding nevertheless impedes efficient planning and project selection. Additionally, tools to make better use of existing infrastructure, such as intelligent transportation systems and congestion pricing, have not been deployed to their full potential. The solvency of the federal surface transportation program is at risk because expenditures now exceed revenues for the Highway Trust Fund, and projections indicate that the balance of the Highway Trust Fund will soon be exhausted. According to the Congressional Budget Office (CBO), the Highway Account will face a shortfall in 2009, the Transit Account in 2012. The rate of expenditures has affected its fiscal sustainability. As a result of the Transportation Equity Act for the 21st Century (TEA-21), Highway Trust Fund spending rose 40 percent from 1999 to 2003 and averaged $36.3 billion in contract authority per year. The upward trend in expenditures continued under the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), which provided an average of $57.2 billion in contract authority per year. While expenditures from the trust fund have grown, revenues into the fund have not kept pace. The current fuel tax of 18.4 cents per gallon has been in place since 1993, and the buying power of the fixed cents-per-gallon amount has since been eroded by inflation. The reallocation to the Highway Trust Fund of 4.3 cents of federal fuel tax previously dedicated to deficit reduction provided an influx of funds beginning in 1997. However, this influx has been insufficient to sustain current spending levels. Furthermore, while federal funding for transportation has increased, the total funding for transportation may not increase to the same extent because federal funds may be substituted for state and local funds. Thus, added federal funds may not lead to a commensurate increase in the total investment in highways because state and local governments can shift nonfederal funds away from highways to other purposes. Increases in federal funding do appear to reduce state spending for the same purpose, reducing the return on the federal investment. Research estimates that about 50 percent of each additional federal grant dollar for the highway program displaces funds that states would otherwise have spent on highways. As we have previously reported, this situation argues for a fundamental reexamination of the federal approach to surface transportation problems and a restructuring of federal programs to create more focused, performance-based, and sustainable programs. In cases for which there is a significant national interest, maintaining strong federal financial support and a more direct federal involvement in the program may be needed. In other cases, functions may best be carried out by other levels of government or not at all. There may also be cases for which federal financial support is desirable but a more results-oriented approach is appropriate. In addition, depending on the transportation issue and the desired goals, different options and approaches may be appropriate for different problems. Restructuring the current approach to transportation problems will take time, but a vision and strategy are needed to begin the process of transforming to a set of policies and programs to effectively address the nation’s transportation needs and priorities. Through our prior analyses of existing programs, we identified a framework of principles that could help drive an assessment of proposals for restructuring and funding federal surface transportation programs. These principles include (1) creating well-defined goals based on identified areas of national interest, (2) establishing and clearly defining the federal role in achieving each goal, (3) incorporating performance and accountability into funding decisions, (4) employing the best tools and approaches to improve results and emphasize return on investment, and (5) ensuring fiscal sustainability. We have also developed a series of illustrative questions that can be used to determine the extent to which restructuring and funding proposals are aligned with each principle. We developed these principles and illustrative questions based on prior analyses of existing surface transportation programs as well as a body of work that we have developed for Congress, including GAO’s High-Risk, Performance and Accountability, and 21st Century Challenges reports. The principles do not prescribe a specific approach to restructuring or funding, but they do provide key attributes that will help ensure that restructured surface transportation programs address current challenges. Our previous work has shown that identifying areas of national interest is an important first step in any proposal to restructure and fund surface transportation programs. In identifying areas of national interest, proposals should consider existing 21st century challenges and how future trends could affect emerging areas of national importance—as well as how the national interest and federal role may vary by area. For example, experts have suggested that federal transportation policy should recognize emerging national and global imperatives, such as reducing the nation’s dependence on oil and minimizing the impact of the transportation system on global climate change. Once the various national interests in surface transportation have been identified, proposals should also clarify specific goals for federal involvement in surface transportation programs. Goals should be specific and outcome-based to ensure that resources are targeted to projects that further the national interest. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund surface transportation programs create well-defined goals based on identified areas of national interest. To what extent are areas of national interest clearly defined? To what extent are areas of national interest reflective of future trends? To what extent are goals defined in relation to identified areas of national interest? After the various national interests and specific goals for federal involvement in surface transportation have been identified, the federal role in working toward each goal should be established. The federal role should be defined in relation to the roles of state and local governments, regional entities, and the private sector. Where the national interest is greatest, the federal government may play a more direct role in setting priorities and allocating resources as well as fund a higher share of program costs. Conversely, where the national interest is less evident, state and local governments and others could assume more responsibility. For example, efforts to reduce transportation’s impact on greenhouse gas emissions may warrant a greater federal role than other initiatives, such as reducing urban congestion, since the impacts of greenhouse gas emissions are widely dispersed, whereas the impacts of urban congestion may be more localized. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund the surface transportation programs establish and clearly define the federal role in achieving each goal. To what extent is the federal role directly linked to defined areas of national interest and goals? To what extent is the federal role defined in relation to the roles of state and local governments, regional entities, and the private sector? To what extent does the proposal consider how the transportation system is linked to other sectors and national policies, such as environmental, security, and energy policies? Our previous work has shown that an increased focus on performance and accountability for results could help the federal government target resources to programs that best achieve intended outcomes and national transportation priorities. Tracking specific outcomes that are clearly linked to program goals could provide a strong foundation for holding grant recipients responsible for achieving federal objectives and measuring overall program performance. In particular, substituting specific performance measures for the current federal procedural requirements could help make the program more outcome-oriented. For example, if reducing congestion were an established federal goal, outcome measures for congestion, such as reduced travel time, could be incorporated into the programs to hold state and local governments responsible for meeting specific performance targets. Furthermore, directly linking the allocation of resources to the program outcomes would increase the focus on performance and accountability for results. Incorporating incentives or penalty provisions into grants can further hold grantees and recipients accountable for achieving results. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund surface transportation programs incorporate performance and accountability into funding decisions. Are national performance goals identified and discussed in relation to state, regional, and local performance goals? To what extent are performance measures outcome-based? To what extent is funding linked to performance? To what extent does the proposal include provisions for holding stakeholders accountable for achieving results? We have previously reported that the effectiveness of any overall federal program design can be increased by promoting and facilitating the use of the best tools and approaches to improve results and emphasize return on investment. Importantly, given the projected growth in federal deficits, constrained state and local budgets, and looming Social Security and Medicare spending commitments, the resources available for discretionary programs will be more limited—making it imperative to maximize the national public benefits of any federal investment through a rigorous examination of the use of such funds. A number of specific tools and approaches can be used to improve results and return on investment including using economic analysis, such as benefit-cost analysis, in project selection; requiring grantees to conduct post-project evaluations; creating incentives to better utilize existing infrastructure; providing states and localities with greater flexibility to use certain tools, such as tolling and congestion pricing; and requiring maintenance-of-effort provisions in grants. Using these tools and approaches could help surface transportation programs more directly address national transportation priorities. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund surface transportation programs employ the best tools and approaches to improve results and emphasize return on investment. To what extent do the proposals consider how costs and revenues will be shared among federal, state, local, and private stakeholders? To what extent do the proposals address the need better to align fees and taxes with use and benefits? To what extent are trade-offs between efficiency and equity considered? Do the tools and approaches align with the level of federal involvement in a given policy area? To what extent do the proposals provide flexibility and incentives for state and local governments to choose the most appropriate tool in the toolbox? Our previous work has shown that transportation funding, and the Highway Trust Fund in particular, faces an imbalance of revenues and expenditures and other threats to its long term sustainability. Furthermore, the sustainability of transportation funding should also be seen in the context of the broader, governmentwide problem of fiscal imbalance. The federal role in transportation funding must be reexamined to ensure that it is sustainable in this new fiscal reality. A sustainable surface transportation program will require targeted investment, with adequate return on investment, from not only the federal government but also state and local governments and the private sector. The following illustrative questions can be used to determine the extent to which proposals to restructure and fund surface transportation programs ensure fiscal sustainability. To what extent do the proposals reexamine current and future spending on surface transportation programs? Are the recommendations affordable and financially stable over the long- term? To what extent are the recommendations placed in the context of federal deficits, constrained budgets, and other spending commitments, and to what extent do they meet a rigorous examination of the use of federal funds? To what extent are recommendations considered in the context of trends that could affect the transportation system in the future, such as population growth, increased fuel efficiency, and increased freight traffic? Current concerns about the sustainability and performance of existing programs suggest that this is an opportune time for Congress to more clearly define the federal role in transportation and improve progress toward specific, nationally defined outcomes. Given the scope of the needed transformation, it may be necessary to shift policies and programs incrementally or on a pilot basis to gain practical lessons for a coherent, sustainable, and effective national program and funding structure to best serve the nation for the 21st century. Absent changes in planned spending, a variety of funding and financing options will likely be needed to address projected transportation funding shortfalls. Although some of the demand for additional investment in transportation could be reduced, there is a growing consensus that some level of additional investment in transportation is warranted. A range of options—from altering existing or introducing new funding approaches to employing various financing mechanisms—could be used to help meet the demand for additional investments. Each of these options has different merits and challenges, and the selection of any of them will likely involve trade-offs among different policy goals. Furthermore, the suitability of any of these options depends on the level of federal involvement or control that policymakers desire for a given area of policy. However, as we have reported, when infrastructure investment decisions are made based on sound evaluations, these options can lead to an appropriate blend of public and private funds to match public and private costs and benefits. Estimates from multiple sources indicate that additional investment in the transportation system could be warranted. For example, in its January 2008 report, the National Surface Transportation Policy and Revenue Study Commission (Policy Commission) recommended an annual investment of about $225 billion from all levels of government in the surface transportation system—an increase of about $140 billion from current spending levels. Similarly, the Congressional Budget Office recently estimated that an annual investment of about $165 billion in surface transportation could be economically justifiable. In addition, in its February 2008 interim report, the National Surface Transportation Infrastructure Financing Commission (Financing Commission) noted that one of its base assumptions is that there is a gap between current funding levels and investment needs. However, some of the demand for additional investment in transportation infrastructure could be reduced. We have previously reported that the ways in which revenue is generated and distributed can influence the decisions made by users as well as decision-making and programs at the state and local levels. In particular, our previous work has shown that current funding and decision-making processes provide a built-in preference for projects that build or maintain transportation infrastructure rather than try to use existing infrastructure more efficiently—which would reduce the overall demand for additional investments. CBO also recently reported that some of the demand for additional spending on infrastructure could be met by providing incentives to use existing infrastructure more efficiently. In its February 2008 interim report, the Financing Commission noted the need to use new approaches and technologies to maximize the use of current capacity. We have also previously reported that increased federal highway grants influence states and localities to substitute federal funds for funds they otherwise would have spent on highways for other purposes. Consequently, additional federal investments in transportation do not necessarily translate into commensurate levels of spending by the states and localities on transportation. Addressing this “leakage” with such tools as maintenance-of-effort requirements could maximize the effectiveness of federal investments. The principles we have identified for restructuring the surface transportation programs can also be used as a framework for considering levels of investment and the funding and financing options described below. For example, in defining the federal role in funding transportation, we have previously reported that where the national interest is greatest, having the federal government fund a higher share of program costs could be appropriate. Conversely, where the national interest is less evident, state and local governments, and others could assume more responsibility. In addition, incorporating incentives or penalty provisions into different funding and financing approaches can help ensure performance and accountability. Various existing funding approaches could be altered or new funding approaches could be developed, to help fund investments in the nation’s infrastructure. These various approaches can be grouped into two categories: taxes and user fees. A variety of taxes have been and could be used to fund the nation’s infrastructure, including excise, sales, property, and income taxes. For example, federal excise taxes on motor fuels are the primary source of funding for the federal surface transportation program. Fuel taxes are attractive because they have provided a relatively stable stream of revenues and the collection and enforcement costs are relatively low. However, fuel taxes do not currently convey to drivers the full costs of their use of the road—such as the costs of wear and tear, congestion, and pollution. Moreover, federal motor fuel taxes have not been increased since 1993—and thus the purchasing power of fuel tax revenues has eroded with inflation. As CBO has previously reported, the existing fuel taxes could be altered in a variety of ways to address this erosion, including increasing the per-gallon tax rate and indexing the rates to inflation. Some transportation stakeholders have suggested exploring the potential of using a carbon tax, or other carbon pricing strategies, to help fund infrastructure investments. In a system of carbon taxes, fossil fuel emissions would be taxed, with the tax proportional to the amount of carbon dioxide released in its combustion. Because a carbon tax could have a broad effect on consumer decisions, we have previously reported that it could be used to complement Corporate Average Fuel Economy standards, which require manufacturers meet fuel economy standards for passenger cars and light trucks to reduce oil consumption. A carbon tax would create incentives that could affect a broader range of consumer choices as well as provide revenue for infrastructure. Another funding source for infrastructure is user fees. The concept underlying user fees—that is, users pay directly for the infrastructure they use—is a long-standing aspect of many infrastructure programs. Examples of user fees that could be altered or introduced include fees based on vehicle miles traveled (VMT) on roadways; freight fees, such as a per- container charge; congestion pricing of roads; and tolling. VMT fees. To more directly reflect the amount a vehicle uses the road, users could be charged a fee based on the number of vehicle miles traveled. In 2006, the Oregon Department of Transportation conducted a pilot program designed to test the technological and administrative feasibility of a VMT fee. The pilot program demonstrated that a VMT fee could be implemented to replace the fuel tax as the principal source of transportation revenue by utilizing a Global Positioning System (GPS) to track miles driven and collecting the VMT fee ($0.012 per mile traveled) at fuel pumps that can read information from the GPS. As we have previously reported, using a GPS could also track mileage in high congestion zones, and the fee could be adjusted upward for miles driven in these areas or during more congested times of day such as rush hour—a strategy that might reduce congestion and save fuel. In addition, the system could be designed to apply different fees to vehicles, depending on their fuel economy. On the federal level, a VMT fee could be based on odometer readings, which would likely be a simpler and less costly way to implement such a program. A VMT fee—unless it is adjusted based on the fuel economy of the vehicle—does not provide incentives for customers to buy vehicles with higher fuel economy ratings because the fee depends only on mileage. Also, because the fee would likely be collected from individual drivers, a VMT fee could be expensive for the government to implement, potentially making it a less cost-effective approach than a motor fuel or carbon tax. The Oregon study also identified other challenges including concerns about privacy and technical difficulties in retrofitting vehicles with the necessary technology. Freight fees. Given the importance of freight movement to the economy, the Policy Commission recently recommended a new federal freight fee to support the development of a national program aimed at strategically expanding capacity for freight transportation. While the volume of domestic and international freight moving through the country has increased dramatically and is expected to continue growing, the capacity of the nation’s freight transportation infrastructure has not increased at the same rate as demand. To support the development of a national program for freight transportation, the Policy Commission recommended the introduction of a federal freight fee. The Policy Commission notes that a freight fee, such as a per-container charge, could help fund projects that remedy chokepoints and increase throughput. The Policy Commission also recommended that a portion of the customs duties, which are assessed on imported goods, be used to fund capacity improvements for freight transportation. The majority of customs duties currently collected, however, are deposited in the U.S. Treasury’s general fund for the general support of federal activities. Therefore, designating a portion of customs duties for surface transportation funding would not create a new source of revenue, but rather transfer funds from the general fund. Congestion pricing. As we have previously reported, congestion pricing, or road pricing, attempts to influence driver behavior by charging fees during peak hours to encourage users to shift to off-peak periods, use less congested routes, or use alternative modes. Congestion pricing can also help guide capital investment decisions for new transportation infrastructure. In particular, as congestion increases, toll rates also increase, and such increases (sometimes referred to as “congestion surcharges”) signal increased demand for physical capacity, indicating where capital investments to increase capacity would be most valuable. Furthermore, these congestion surcharges can potentially enhance mobility by reducing congestion and the demand for roads when the surcharges vary according to congestion to maintain a predetermined level of service. The most common form of congestion pricing in the United States is high-occupancy toll lanes, which are priced lanes that offer drivers of vehicles that do not meet the occupancy requirements the option of paying a toll to use lanes that are otherwise restricted for high- occupancy vehicles. Financing mechanisms can provide flexibility for all levels of government when funding additional infrastructure projects, particularly when traditional pay-as-you-go funding approaches, such as taxes or fees, are not set at high enough levels to meet demands. The federal government currently offers several programs to provide state and local governments with incentives such as bonds, loans, and credit assistance to help finance infrastructure. Financing mechanisms can create potential savings by accelerating projects to offset rapidly increasing construction costs and offer incentives for investment from state and local governments and from the private sector. However, each financing strategy is, in the final analysis, a form of debt that ultimately must be repaid with interest. Furthermore, since the federal government’s cost of capital is lower than that of the private sector, financing mechanisms, such as bonding, may be more expensive than timely, full, and up-front appropriations. Finally, if the federal government chooses to finance infrastructure projects, policy makers must decide how borrowed dollars will be repaid, either by users or by the general population either now or in the future through increases in taxes or reductions in other government services. A number of available mechanisms can be used to help finance infrastructure projects. Examples of these financing mechanisms follow. Bonding. A number of bonding strategies—including tax-exempt bonds, private activity bonds, Grant Anticipation Revenue Vehicles (GARVEE) bonds, and Grant Anticipation Notes (GAN)—offer flexibility to bridge funding gaps when traditional revenue sources are scarce. For example, state-issued GARVEE or GAN bonds provide capital in advance of expected federal funds, allowing states to accelerate highway and transit project construction and thus potentially reduce construction costs. Through April 2008, 20 states and two territories issued approximately $8.2 billion of GARVEE-type debt financing and 20 other states are actively considering bonding or seeking legislative authority to issue GARVEEs. Furthermore, SAFETEA-LU authorized the Secretary of Transportation to allocate $15 billion in tax-exempt bonds for qualified highway and surface freight transfer facilities. To date, $5.3 billion has been allocated for six projects. Several bills have been introduced in this Congress that would increase investment in the nation’s infrastructure through bonding. For example, the Build America Bonds Act would provide $50 billion in new infrastructure funding through bonding. Although bonds can provide up- front capital for infrastructure projects, they can be more expensive for the federal government than traditional federal grants. This higher expense results, in part, because the government must compensate the investors for the risks they assume through an adequate return on their investment. Loans, loan guarantees, and credit assistance. The federal government currently has two programs designed to offer credit assistance for surface transportation projects. The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorized the Federal Highway Administration to provide credit assistance, in the form of direct loans, loan guarantees, and standby lines of credit for projects of national significance. A similar program, Railroad Rehabilitation and Improvement Financing (RRIF), offers loans to acquire, improve, develop, or rehabilitate intermodal or rail equipment and develop new intermodal railroad facilities. To date, 15 TIFIA projects have been approved totaling over $4.8 billion in credit assistance and the RRIF program has approved 21 loan agreements worth more than $747 million. These programs are designed to leverage federal funds by attracting substantial nonfederal investments in infrastructure projects. However, the federal government assumes a level of risk when it makes or guarantees loans for projects financed with private investment. Revolving funds. Revolving funds can be used to dedicate capital to be loaned for qualified infrastructure projects. In general, loaned dollars are repaid, recycled back into the revolving fund, and subsequently reinvested in the infrastructure through additional loans. Such funds exist at both the federal and the state levels and are used to finance various infrastructure projects ranging from highways to water mains. For example, two federal funds support water infrastructure financing, the Clean Water State Revolving Fund for wastewater facilities, and the Drinking Water State Revolving Fund for drinking water facilities. Under each of these programs, the federal government provides seed money to states, which they supplement with their own funds. These funds are then loaned to local governments and other entities for water infrastructure construction and upgrades and various water quality projects. In addition, State Infrastructure Banks (SIBs)—capitalized with federal and state matching funds—are state-run revolving funds that make loans and provide credit enhancements and other forms of nongrant assistance to infrastructure projects. Through June 2007, 33 SIBs have made approximately 596 loan agreements worth about $6.2 billion to leverage other available funds for transportation projects across the nation. Furthermore, other funds— such as a dedicated national infrastructure bank—have been proposed to increase investment in infrastructure with a national or regional significance. A challenge for revolving funds in general is maintaining their capitalized value. Defaults on loans and inflation can reduce the capitalized value of the fund—necessitating an infusion of capital needed to continue the fund’s operations. Another important and emerging vehicle for funding investments in transportation is public-private partnerships. In February 2008 we reported on highway public-private partnerships. These arrangements show promise as a viable alternative, where appropriate, to help meet growing and costly transportation demands and have the potential to provide numerous benefits to the public sector. The highway public- private partnerships created to date have resulted in advantages from the perspective of state and local governments, such as the construction of new infrastructure without using public funding, and obtaining funds by extracting value from existing facilities for reinvestment in transportation and other public programs. For example, the state of Indiana received $3.8 billion from leasing the Indiana Toll Road and used those proceeds to fund a 10-year statewide transportation plan. Highway public-private partnerships potentially provide other benefits, including the transfer or sharing of project risks to the private sector. Such risks include those associated with construction costs and schedules and having sufficient levels of traffic and revenues to be financially viable. In addition, the public sector can potentially benefit from increased efficiencies in operations and life-cycle management, such as increased use of innovative technologies. Finally, through the use of tolling, highway public-private partnerships offer the potential to price highways to better reflect the true costs of operating and maintaining them and to increase mobility by adjusting tolls to manage demand, as well as the potential for more cost effective investment decisions by private investors. Highway public-private partnerships also entail potential costs and risks. Most importantly, there is no “free” money in public-private partnerships. While highway public-private partnerships can be used to obtain financing for highways, these funds are largely a new source of borrowed funds—a form of privately issued debt that must be repaid to private investors seeking a return on their investment by road users over what potentially could be a period of several generations. Though concession agreements can limit the extent to which a concessionaire can raise tolls, it is likely that tolls will increase on a privately operated highway to a greater extent than they would on a publicly operated toll road. To the extent that a private concessionaire gains market power by control of a road where there are not other viable travel alternatives, the potential also exists that the public could pay tolls that are higher than tolls based on the cost of the facilities, including a reasonable rate of return. Additionally, because large up-front concession payments have, in part, been used to fund immediate needs, it remains to be seen whether these agreements will provide long- term benefits to future generations who will potentially be paying progressively higher toll rates throughout the length of a concession agreement. Highway public-private partnerships are also potentially more costly than traditional public procurement—for example, there are costs associated with the need to hire financial and legal advisors. In short, while highway public-private partnerships have promise, they are not a panacea for meeting all transportation system demands. Ultimately the extent to which public-private partnerships can be used as a tool to help meet the nation’s transportation financing challenges will depend on the ability of states to effectively manage and implement them. For example, states must have appropriate enabling legislation in place and the institutional ability to manage complex contractual mechanisms— either in the form of in-house expertise or through contractors. Most importantly, the extent to which public-private partnerships can be used as a tool to help meet the nation’s transportation funding challenges will depend on how well states are able to weigh public interest considerations. The benefits of public-private partnerships are potential benefits—that is, they are not assured and can only be achieved by weighing them against potential costs and trade-offs through careful, comprehensive analysis to determine whether public-private partnerships are appropriate in specific circumstances and, if so, how best to implement them, and how best to protect the public interest. In considering the numerous issues surrounding the protection of the public interest, we reached the following conclusions in our February 2008 report on highway public-private partnerships: First, consideration of highway public-private partnerships could benefit from more consistent, rigorous, systematic, and up-front analysis. While highway public-private partnerships are fairly new in the United States, and although they are meant to serve the public interest, it is difficult to be confident that these interests are being protected when formal identification and consideration of public and national interests has been lacking, and where limited up-front analysis of public interest issues using established criteria has been conducted. Partnerships to date have identified and protected the public interest largely through terms contained in concession contracts, including maintenance and expansion requirements, protections for the workforce, and oversight and monitoring mechanisms to ensure that private partners fulfilled their obligations. While these protections are important, governments in other countries, including Australia and the United Kingdom, have developed systematic approaches to identifying and evaluating public interest before agreements are entered into, including the use of public interest criteria, as well as assessment tools, and require their use when considering private investments in public infrastructure. For example, a state government in Australia uses a public interest test to determine how the public interest would be affected in eight specific areas, including whether the views and rights of affected communities have been heard and protected and whether the process is sufficiently transparent. While similar tools have been used to some extent in the United States, their use has been more limited. Using up-front public interest analysis tools can also assist public agencies in determining the expected benefits and costs of a project and an appropriate means to deliver the project. Not using such tools may lead to certain aspects of protecting public interest being overlooked. Second, fresh thinking is needed on the appropriate federal approach. DOT has done much to promote the benefits, but comparatively little to either assist states and localities in weighing potential costs and trade-offs, nor to assess how potentially important national interests might be protected in highway public-private partnerships. This is in many respects a function of the design of the federal program as few mechanisms exist to identify potential national interests in cases where federal funds have not or will not be used. For example, although the Indiana Toll Road is part of the Interstate Highway System and most traffic on the road is interstate in nature, federal officials had little involvement in reviewing the terms of this concession agreement because minimal federal funds were used to construct it, and those funds were repaid to the federal government. The historic test of the presence of federal funding may have been relevant at a time when the federal government played a larger role in financing highways but may no longer be relevant when there are new players and multiple sources of financing, including potentially significant private money. Reexamining the federal role in transportation provides an opportunity to identify the emerging national public interests in highway public-private partnerships and determine how highway public-private partnerships fit in with national programs. On the basis of these conclusions, we recommended that Congress direct the Secretary of Transportation to develop and submit objective criteria for identifying national public interests in highway public-private partnerships, including any additional legal authority, guidance, or assessment tools that would be appropriately required. We are pleased to note that in a recent testimony before the House, the Secretary indicated a willingness to begin developing such criteria. This is no easy task, however. The recent Policy Commission report illustrates the challenges of identifying national public interests as the Policy Commission’s recommendations for future restrictions—including limiting allowable toll increases and requiring concessionaires to share revenues with the public sector—stood in sharp contrast to the dissenting views of three commissioners. We believe any potential federal restrictions on highway public-private partnerships must be carefully crafted to avoid undermining the potential benefits that can be achieved. Reexamining the federal role in transportation provides an opportunity for DOT we believe, to play a targeted role in ensuring that national interests are considered, as appropriate. The nation’s surface transportation programs are no longer producing the desired results. The reliability of the nation’s surface transportation system is declining as congestion continues to grow. Although infusing surface transportation programs with additional funding, especially in light of the projected shortfalls in the Highway Trust Fund, could be viewed as a quick and direct solution, past experience shows that increased funding for the program does not necessarily translate into improved performance. Furthermore, the nation’s current fiscal outlook may make such solutions fiscally imprudent. In addition, before additional federal funds are committed to the nation’s surface transportation programs, we believe a fundamental reexamination of the program is warranted. Such a reexamination would require reviewing the results of surface transportation programs and testing their continued relevance and relative priority. Appropriate funding sources and financing mechanisms can then be tailored for programs that continue to be relevant in today’s environment and address a national interest, such as freight movement. Over the coming months, various options to restructure and fund surface transportation programs will likely be put forward by a range of transportation stakeholders. Ultimately, Congress and other federal policymakers will have to determine which option—or which combination of options—best meets the nation’s needs. There is no silver bullet that can solve the nation’s transportation challenges, and many of the options, such as allowing greater private-sector investment in the nation’s infrastructure, could be politically difficult to implement both nationally and locally. The principles that we identified provide a framework for evaluating these various options. Although the principles do not prescribe a specific approach to restructuring and funding the programs, they do provide key attributes that will help ensure that a restructured surface transportation program addresses current challenges. We will continue to assist the Congress as it works to evaluate the various options and develop a national transportation policy for the 21st century that improves the design of transportation programs, the delivery of services, and accountability for results. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee might have. For further information on this statement, please contact JayEtta Z. Hecker at (202) 512-2834 or heckerj@gao.gov. Individuals making key contributions to this testimony were Robert Ciszewski, Nikki Clowers, Steve Cohen, Barbara Lancaster, Matthew LaTour, and Nancy Lueke. Federal User Fees: A Design Guide, GAO-08-386SP. Washington, D.C.: May 29, 2008. Physical Infrastructure: Challenges and Investment Options for the Nation’s Infrastructure, GAO-08-763T. Washington, D.C.: May 8, 2008. Surface Transportation: Restructured Federal Approach Needed for More Focused, Performance-Based, and Sustainable Programs, GAO-08-400. Washington, D.C.: March 6, 2008. Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest, GAO-08-44. Washington, D.C.: February 8, 2008. Surface Transportation: Preliminary Observations on Efforts to Restructure Current Program, GAO-08-478T. Washington, D.C.: February 6, 2008. Congressional Directives: Selected Agencies’ Processes for Responding to Funding Instructions, GAO-08-209. Washington, D.C.: January 31, 2008. Long-Term Fiscal Outlook: Action Is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future, GAO-08-411T. Washington, D.C.: January 29, 2008. Federal-Aid Highways: Increased Reliance on Contractors Can Pose Oversight Challenges for Federal and State Officials, GAO-08-198. Washington, D.C.: January 8, 2008. Freight Transportation: National Policy and Strategies Can Help Improve Freight Mobility. GAO-08-287. Washington, D.C.: January 7, 2008. A Call For Stewardship: Enhancing the Federal Government’s Ability to Address Key Fiscal and Other 21st Century Challenges. GAO-08-93SP. Washington, D.C.: December 17, 2007. Transforming Transportation Policy for the 21st Century: Highlights of a Forum. GAO-07-1210SP. Washington, D.C.: September 19, 2007. Surface Transportation: Strategies Are Available for Making Existing Road Infrastructure Perform Better. GAO-07-920. Washington, D.C.: July 26, 2007. Intermodal Transportation: DOT Could Take Further Actions to Address Intermodal Barriers. GAO-07-718. Washington, D.C.: June 20, 2007. Performance and Accountability: Transportation Challenges Facing Congress and the Department of Transportation. GAO-07-545T. Washington, D.C.: March 6, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Highway Finance: States’ Expanding Use of Tolling Illustrates Diverse Challenges and Strategies. GAO-06-554. Washington, D.C.: June 28, 2006. Highway Congestion: Intelligent Transportation Systems’ Promise for Managing Congestion Falls Short, and DOT Could Better Facilitate Their Strategic Use. GAO-05-943. Washington, D.C.: September 14, 2005. 21st Century Challenges: Reexamining the Base of the Federal Government. GAO-05-325SP. Washington, D.C.: February 1, 2005. Highway and Transit Investments: Options for Improving Information on Projects’ Benefits and Costs and Increasing Accountability for Results. GAO-05-172. Washington, D.C.: January 24, 2005. Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future Program Design. GAO-04-802. Washington, D.C.: August 31, 2004. Marine Transportation: Federal Financing and a Framework for Infrastructure Investments. GAO-02-1033. Washington, D.C.: September 9, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. This published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","The nation has reached a critical juncture with its current surface transportation policies and programs. Demand has outpaced the capacity of the system, resulting in increased congestion. In addition, without significant changes in funding levels or planned spending, the Highway Trust Fund--the major source of federal highway and transit funding-- is projected to incur significant deficits in the years ahead. Exacerbating concerns about the solvency of the Highway Trust Fund is the federal government's bleak fiscal condition and outlook. As a result, other federal revenue sources may not be available to help solve the nation's current transportation challenges. This statement is based on a body of work that GAO has completed over the past several years for Congress. This testimony discusses (1) GAO's recent findings on the structure and performance of the current surface transportation program (GAO-08-400), (2) a framework to assess proposals for restructuring of the surface transportation program, (3) potential options to fund investments in the surface transportation system, and (4) our recent findings on the benefits, costs, and trade-offs of using public-private partnerships to help fund transportation investments (GAO-08-44). Since federal fundingfor the interstate system was established in 1956, the federal role in surface transportation has expanded to include broader goals, more programs, and a variety of program structures. Consequently, the goals of current programs are numerous and sometimes conflicting, and the federal role in these programs is unclear. For example, federal programs do not effectively address key transportation challenges, such as increasing congestion and freight demand. Many surface transportation programs are also not linked to performance of the transportation system or of the grantees, and programs often do not employ the best tools and approaches. Finally, the fiscal sustainability of the numerous highway, transit, and safety programs funded by the Highway Trust Fund is in doubt, because spending from the fund has increased without commensurate increases in revenues. A number of principles can help guide the assessment of proposals to restructure and fund federal surface transportation programs. These principles include (1) ensuring goals are well defined and focused on the national interest, (2) ensuring the federal role in achieving each goal is clearly defined, (3) ensuring accountability for results by entities receiving federal funds, (4) employing the best tools and approaches to improve results and emphasize return on targeted federal investment, and (5) ensuring fiscal sustainability. A range of options could be used to fund the growing demand for additional investment in the surface transportation system. There are two revenue sources for these additional investments: taxes and fees. Financing mechanisms, such as bonding and revolving funds, could also be used to fund transportation infrastructure projects when tax and user fee approaches are not sufficient to meet demands. However, these financing mechanisms are all forms of debt that ultimately must be repaid with interest by the general population through tax increases or reductions in government services. Each of these options has different merits and challenges, and the selection of any of them will likely involve trade-offs among different policy goals. Highway public-private partnerships show promise as a viable alternative, where appropriate, to help meet growing and costly transportation demands. The highway public-private partnerships created to date have resulted in advantages from the perspective of state and local governments, such as the construction of new infrastructure without using public funding. However, highway public-private partnerships also entail potential costs and risks including the reality that funds from public-private partnerships are largely a new source of borrowed funds--a form of privately issued debt that must be repaid to private investors. Ultimately the extent to which public-private partnerships can be used to help meet the nation's transportation funding challenges will depend on the ability of states to weigh potential benefits against potential costs and trade-offs to determine whether public-private partnerships are appropriate in specific circumstances--and if so--how best to implement them and protect the public interest.",govreport
"FAA engages in three primary activities: aviation safety oversight, ATC, and airport infrastructure development (see fig. 1). The costs associated with each of these activities generally depend on the nature and usage of the specific service FAA provides. FAA safety activities include the licensing of pilots and mechanics, as well as the inspection of various aspects of the aviation system, such as aircraft and airline operations. According to FAA, the costs associated with these safety activities are primarily driven by the volume of each (e.g., the number of licenses and inspections). ATC includes a variety of complex activities that guide and control the flow of aircraft through the NAS. Generally, commercial aircraft fly under instrument flight rules (IFR) that require ATC services throughout a flight. Such flights rely on FAA staff in control towers to guide them from the terminal to the runway, and through takeoff. Once in the air and beyond the immediate vicinity of the airport, they rely on terminal radar approach control centers (TRACONs) to guide them out of the airspace in a broader area surrounding the airport. Services provided by control towers and TRACONs are referred to as terminal services. The TRACONs then pass flights off to air route traffic control centers (ARTCC), which provide en- route control until the flights near their destinations; services provided by ARTCCs are referred to as en-route services. When a flight nears its destination, control is passed back to a TRACON, and then to tower guidance, to land and proceed to an airport gate. General aviation’s (GA) use of these services varies greatly. Nearly all business jet flights file flight plans for IFR services, as do roughly half of GA piston flights. Many GA flights operate entirely under visual flight rules (VFR) and may not require any ATC services at all if they do not fly to airports that have towers. These other GA flights may require ground control, or rely on beacons or flight service stations en route. FAA states that the costs imposed by each flight are influenced by the amount and nature of the specific services it uses, and by whether the flight operates at peak periods. FAA funds airport infrastructure development through the Airport Improvement Program (AIP). AIP is a multibillion-dollar grant program that provides funding for the airports included in FAA’s National Plan of Integrated Airport Systems, which includes airports that range from the largest commercial service airports in the United States to small GA airports. Unlike safety and ATC services, AIP expenditures are not the direct result of costs imposed by users of the NAS. FAA distributes AIP funding based on congressional priorities established in authorizing and appropriation legislation. Accordingly, apart from some relatively small administrative expenses, FAA’s spending for AIP does not represent a “cost” of providing services to users. Therefore, it is not possible to establish a direct link between AIP expenditures and taxes or charges paid by system users based on their use of FAA services. The Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to help fund the development of a nationwide airport and airway system. The Trust Fund provides funding for FAA’s two capital accounts, AIP and the Facilities and Equipment account, which funds technological improvements to the ATC system. The Trust Fund also provides funding for the Research, Engineering, and Development account, which funds continued research on aviation safety, mobility, and environmental issues. In addition, the Trust Fund supports part of FAA’s operations. To fund these accounts, the Trust Fund is credited with revenues collected from system users through the following dedicated excise taxes: 7.5 percent ticket tax on domestic airline tickets $3.30 domestic passenger segment tax (excluding flights to or from rural airports) 6.25 percent tax on the price paid for transportation of domestic cargo or $0.043/gallon tax on domestic commercial aviation fuel $0.193/gallon tax on domestic GA gasoline $0.218/gallon tax on domestic GA jet fuel $14.50/person tax on international arrivals and departures, indexed to 7.5 percent tax on mileage awards (frequent flyer awards tax) $7.30 per passenger tax on flights between the continental United States and Alaska or Hawaii (or between Alaska and Hawaii), indexed to inflation Trust Fund revenues totaled $10.7 billion in fiscal year 2005. The ticket tax was the largest single source of Trust Fund revenue in fiscal year 2005, totaling about $5.2 billion, or about 48 percent of all Trust Fund receipts. The passenger ticket tax was followed by the passenger segment tax and the international departure/arrival taxes, which each totaled about $1.9 billion; fuel taxes, which totaled $870 million; the cargo/mail tax, which totaled $461 million; and interest income, which totaled $430 million. Figure 2 shows the shares received from each source in fiscal year 2005. Since the Trust Fund’s creation in 1970, revenues have, in aggregate, exceeded spending commitments, resulting in a surplus or an uncommitted balance, although expenditures from the Trust Fund exceeded revenues in 2005. The Trust Fund’s uncommitted balance, which was about $1.9 billion at the end of fiscal year 2005, depends on the revenues flowing into the fund and the appropriations made available from the fund for various spending accounts. Policy choices, structural changes in the aviation industry, and external events have affected revenues flowing into and out of the fund. For example, the uncommitted balance has been declining in recent years because Trust Fund revenues for the last 5 years have been less than FAA’s forecasted levels. Figure 3 shows the fluctuations in the Trust Fund’s uncommitted balance since its inception. In addition to Trust Fund revenues, in most years General Fund revenues have been used to fund FAA. The General Fund contribution has varied greatly, ranging from 0 percent to 59 percent of FAA’s budget (see fig. 4). From fiscal year 1997, the year when existing Trust Fund excise taxes were authorized, through fiscal year 2006, the General Fund contribution has averaged 20 percent of FAA’s total budget. About $2.6 billion was appropriated for fiscal year 2006 from the General Fund for FAA’s operations. This amount represents about 18 percent of FAA’s total appropriation. The National Civil Aviation Review Commission (Commission) issued a Congressional report in 1997 analyzing several issues, including alternative funding means to meet the needs of the nation’s aviation system. The Commission’s report identified a number of concerns with FAA’s funding structure as it existed at the time the Commission began its work. To address these concerns, the Commission made several unanimous recommendations, including that FAA’s revenues be more closely linked to the costs of services provided to support ATC activities, including capital investments. The Commission also recommended that General Fund revenues be used to fund aviation security and safety activities and government use of the air traffic system, and that GA operators continue to pay a fuel tax, although perhaps at a higher rate. Some stakeholders support the current excise tax system, stating that it has been successful in funding FAA, has low administrative costs, and distributes the tax burden in a reasonable manner. Other stakeholders, including FAA, state that under the current system, the disconnect between the revenues contributed by users and the costs they impose on the NAS raises revenue adequacy, equity, and efficiency concerns. Trends in, and FAA’s projections of, both inflation-adjusted fares and average plane size suggest that the revenue collected under the current funding system has fallen and will continue to fall relative to FAA’s workload and costs, supporting revenue adequacy concerns. Comparisons of revenue contributed and costs imposed by different flights provide support for equity and efficiency concerns. However, the extent to which revenue and costs are linked depends critically on how the costs of FAA’s services are assigned to NAS users. Thus, assessing the extent to which the current approach or any other approach aligns costs with revenues would require completing an analysis of costs, using either a cost accounting system or cost finding techniques to distribute costs to the various NAS users. FAA stated that it has made substantial progress in designing a cost accounting system, implementing it throughout its lines of business, and modifying it to determine costs by user group. Some stakeholders believe that maintaining the current funding structure for FAA is appropriate because it has been successful in funding FAA for many years, suggesting that there is no urgent reason to change it. According to these stakeholders, the revenues collected from users under the current funding system, along with General Fund revenues provided by Congress, have been sufficient for the United States to develop a safe and efficient aviation system. As the number of air travelers grew, so did revenues going into the Trust Fund. Even though revenues fell during the early years of this decade as the demand for air travel fell, they began to rise again in fiscal year 2004 (see fig. 5); FAA estimates that revenues will continue to increase. In addition, these stakeholders state that administrative costs of the current system are relatively low. Another argument put forward by some industry stakeholders and analysts for maintaining the current funding structure is that this structure provides a reasonable allocation of the funding burden between commercial aviation and GA. With the current funding structure, system users who are subject to the commercial taxes—including commercial airlines, air taxis, and many fractional ownership operations—contribute about 97 percent of the tax revenue that accrues to the Trust Fund. The remaining GA operators, including those who operate purely private corporate and individual aircraft, contribute about 3 percent. Representatives of the GA segment of the industry contend that collecting the bulk of the user- contributed revenues from the commercial segment is appropriate because the ATC system exists at its current size to accommodate the demands of commercial aviation and GA users should not be asked to contribute more than the incremental costs that result from also providing services to GA aircraft. Although the incremental costs are not precisely known, GA representatives have told us that they believe that the revenues currently collected from fuel taxes are a rough approximation of the incremental costs that FAA incurs from providing services to GA aircraft. According to FAA, all cost studies to date concluded that GA users pay less than the costs they impose on the system, while commercial aviation users pay more than the costs they impose on the system. The disconnect between sources of Trust Fund revenues and FAA costs under the current funding system raises concerns that the current system will not produce adequate revenue in the future to keep pace with FAA’s workload increases and, consequently, FAA’s costs. The principle of revenue adequacy requires a funding system to produce revenues commensurate with workload changes over time. However, under FAA’s current funding system, increases in FAA’s workload will not necessarily be accompanied by revenue increases because users are not directly charged for the costs they impose on FAA from their use of the NAS. Rather, Trust Fund revenues are primarily dependent on the prices of tickets (the domestic ticket tax) and the number of passengers on a plane (the domestic ticket tax, the domestic passenger segment tax, and the international passenger tax); neither of these factors are directly related to workload, which is driven by flight control and safety activities. Long-term industry trends and FAA forecasts of declines in air fares and the growing use of smaller aircraft support revenue adequacy concerns. To illustrate the disconnect between revenues and costs, table 1 provides an example of revenues generated by different aircraft making similar flights. The use of multiple flights by smaller aircraft to carry the same number of travelers as one larger aircraft increases FAA’s workload, but will not necessarily be accompanied by increased revenues from system users to fund FAA’s additional costs associated with the workload increase. This example shows the taxes that would be generated from transporting 105 passengers from Los Angeles to San Francisco by (1) one flight using a common narrow-body jet (Boeing 737), and (2) three flights using a common regional jet (CRJ-200). In this case, the narrow-body jet has the capacity to carry 132 passengers, while each regional jet has the capacity to carry 48 passengers. As the table shows, differences in FAA’s workload are not reflected in revenues. FAA states, all other factors being equal (e.g., time of flight), that the total ATC costs of the three regional jet flights would be about three times the cost of one narrow-body flight. Revenues from the three regional jet flights, however, total only about $37, or 3 percent, more than the revenue generated by the one narrow-body jet flight. Revenue increases are not linked to cost increases because, under the current system, revenues are primarily influenced by the number of passengers, the average price of tickets, and the amount of fuel used—not the costs imposed on FAA through the use of its services. The disconnect between revenues and workload can work both ways; increases in the number of passengers on planes (e.g., larger planes or higher load factors) or increases in fares can result in higher revenues relative to workload. In fact, load factors have increased over the past several years, and fares have increased over the past year. However, long- term trends and FAA’s projections for both domestic fares and plane size suggest that Trust Fund revenues have declined relative to FAA’s workload and will likely continue to do so for the next several years. Trends in average fares suggest that the Trust Fund is collecting less revenue relative to workload than in the past, and FAA’s projections suggest that this decline will continue. Since the passenger ticket tax is a percentage of the ticket price, reductions in the average ticket price result in lower ticket tax revenues relative to FAA’s workload. Domestic airfares, adjusted for inflation, have steadily declined over the past 25 years, from an average of $233 in 1981 to $148 in 2005 (see fig. 6). This reduction represents an average decline of about 1.9 percent per year. Even though there have been increases in fares over the past year, FAA projects average fares will continue to decline over time. In FAA’s most recent forecast, inflation-adjusted domestic yields—a proxy measure for fares— are projected to decline approximately 8.5 percent over the next 10 years. Trends in the average size of airplanes also suggest that the Trust Fund is collecting less revenue relative to workload than in the past, and FAA’s projections suggest that this decline will continue (see fig. 7). Since smaller planes carry fewer passengers and burn less fuel, reductions in average plane size mean lower ticket tax, segment tax, and fuel tax revenue accrues to the Trust Fund relative to FAA’s workload. This decline in the average number of seats per aircraft is the result of airlines’ moving toward a substantially greater reliance on regional and narrow-body jets. Scheduled capacity (available seat miles) increased 29 percent from 1996 through 2005. During this time, wide-body jet capacity fell 42 percent, narrow-body jet capacity grew 35 percent, and regional jet capacity grew over 2900 percent. As a result, regional jets accounted for nearly 10 percent of scheduled capacity in 2005, up from less than 1 percent in 1995. In addition to projecting growth in commercial flights, FAA is projecting substantial growth in GA traffic, which will also add to FAA’s workload. Some aviation stakeholders have expressed concerns that the current approach to collecting funds from users through excise taxes creates inequities because the revenue contributions of different flights are not directly linked to the costs of the services that these flights receive from FAA. As noted, factors that influence the revenue contribution that a commercial flight makes to the Trust Fund are the number of passengers, the average price of tickets, and the amount of fuel used. None of these factors, however, are directly related to the cost of the ATC services that a flight receives from FAA. Table 2 shows FAA’s estimates of the revenue contributions made by various flights. Since FAA estimates that similar flights impose similar costs on the agency, the substantial differences in the revenue contributions of these flights raise issues of fairness. One equity issue is that similar commercial flights may contribute very different amounts of revenue. As shown in this example, a 767 flight contributes more than twice as much as two similar 737 flights. There is also a difference between the contributions for the two similar 737 flights; one flight contributes 14 percent more than the other flight. Concerns also exist about the fairness of the distribution of the funding burden between commercial airlines and GA operators. Domestic commercial passenger flights, and some flights typically considered GA flights that carry commercial passengers, are subject to, among other potential excise taxes, the passenger ticket tax, the passenger segment tax, the cargo/mail tax, and the fuel tax. GA flights (excluding those that carry commercial passengers) are subject only to a fuel tax. As a result, the revenue contributions of similar commercial and GA flights may be substantially different. For example, the taxes that the Trust Fund would receive from two different types of business jet flights would be substantially less than the taxes received from similar commercial flights (see table 2). Although the commercial and GA flights might receive the same services from FAA, raising equity concerns because of the large difference in revenue contribution, there is debate over whether GA and commercial flights should be assigned the same costs for similar flights because parties disagree on how to assign the fixed costs associated with the ATC system. Representatives of the commercial aviation industry favor assigning those costs to all system users in proportion to their use of the system. Representatives of GA, on the other hand, state that the system exists at its present size to serve the needs of the commercial aviation industry and that GA should be assigned only the incremental costs of serving GA (i.e., those costs that would not otherwise exist). Without a consensus on how to assign ATC costs to users, it is not possible to assess the extent to which the current approach or any other results in a distribution of the funding burden between commercial airlines and GA operators that approximates the distribution of costs attributable to those groups. Some stakeholders have also raised concerns that the current funding system does not provide aircraft operators with incentives to use FAA services in the most efficient manner. For users to make efficient decisions about their use of the NAS, their price for using the system (the taxes or charges they pay) should accurately reflect the costs their use imposes on the system. These prices, along with other factors influencing supply and demand, will influence users’ decisions about the type, size, and number of aircraft to operate, and when and where to operate them. Given the importance of some of these other factors to users’ decisions about using the NAS, the influence of prices charged for FAA’s services on these decisions may be comparatively small for some users. As discussed previously, FAA states that under the current funding system the taxes collected from users do not accurately reflect the costs those users impose on the system; some flights likely pay more than the costs they impose, while others likely pay less. These price differences suggest that the current funding structure creates incentives for inefficient use of the NAS. Users who pay more in taxes than the costs they impose may make less than optimal use of the system, while those who pay less than the costs they impose may make more than optimal use of the system. An airline’s decision about how many flights to offer in a given market illustrates how the current system does not provide incentives for efficient use of the system. In this example (the same one used for the revenue adequacy discussion), an airline is deciding how many daily flights it should provide for the Los Angeles to San Francisco market (see table 3). It estimates that the market demand at the fare it is charging totals 105 passengers per day, and it faces the choice of providing the market with one daily flight with a narrow-body jet (Boeing 737), or three daily flights with a regional jet (CRJ-200)—all flight choices are assumed to depart during peak periods. In this scenario, the revenue collected from the three regional jet flights—$1,215—is about 3 percent more than the revenue collected from the one narrow-body jet flight—$1,178. FAA states however, that each flight would impose similar costs on the agency, so FAA’s costs would be roughly 3 times more to handle the three regional jet flights than to handle the one medium jet flight. In this example, however, there is little financial incentive ($37) for the airline to limit its imposition of additional costs on FAA by using one flight instead of three flights. This situation is made worse during times when the NAS is congested. There are two issues associated with congestion. The first is plane size; if all other factors are equal, such as demand for air travel, it is more efficient to serve congested airspace with larger planes because they can move more passengers per flight. Second, when congestion is a factor, efficiency requires consideration of the delay costs imposed on other system users. Charging similar flights equally, regardless of plane size, and incorporating congestion costs, would create financial incentives to improve efficiency. Alternative funding options for collecting revenues from NAS users present both advantages and disadvantages. The degree to which alternative funding options could address concerns about the current excise system ultimately depends on the extent to which the contributions required from users actually reflect the costs they impose on the system. Given the diverse nature of FAA’s activities, a combination of alternative options may offer the most promise for linking revenues and costs. Switching to any alternative funding option would raise administrative and transition issues. For example, any cost-based funding system would require FAA to complete the appropriate cost analysis using either a cost accounting system or cost finding techniques. Some stakeholders who support the adoption of direct user charges also support a change in FAA’s governance structure—for example, commercializing air navigation services—but we found no evidence that the adoption of direct charges would require a governance change. The six funding options considered here include two that would modify the current excise tax structure and four that would adopt more direct charges to users. Without more detailed information and an understanding of the costs different flights impose on the NAS, any assessment of the current system or alternative funding options is only preliminary. The degree to which alternative funding options could address revenue adequacy, equity, and efficiency concerns, relative to the current system, ultimately depends on the extent to which the contributions required from users actually reflect the costs they impose on the system. More precise assessments of the current or alternative funding options are possible only if cost finding techniques are used throughout FAA. The two options we reviewed that would modify the current excise tax structure are relying solely on a fuel tax and increasing the passenger segment tax to replace the passenger ticket tax. One possible modification to the current system would be to increase the current aviation fuel taxes—which levy a specific amount per gallon of fuel—to replace the revenue lost by eliminating the remaining excise taxes and charges. Advocates of reliance on a fuel tax funding system state that it is appealing compared to the current system because there is a correlation between the time a plane spends in the system and the amount of fuel a plane uses. To the extent that time in the system is related to cost, this relationship creates at least a partial link between revenues and costs, which could partially address the revenue adequacy, equity, and efficiency concerns about the current system. In addition, advocates of the fuel tax state that a fuel tax is inexpensive and simple to administer. Under the current system the Internal Revenue Service (IRS) is responsible for collecting fuel taxes at the point of sale, and these funds are then deposited to the Treasury, which then credits the Trust Fund. FAA has no responsibility for collecting the revenue. Thus, transitioning to an all-fuel- tax funding system would be relatively easy, since the administrative system is already in place. Furthermore, the tax is easy for consumers to understand, and compliance is simple and inexpensive. From a revenue adequacy perspective, fuel taxes compare favorably with other existing excise taxes because they are more directly linked to workload. Thus, all things being equal, increases in workload over time would likely result in fuel tax revenue increases. Nonetheless, two factors that lead to lower fuel consumption will erode the ability of a fuel tax to generate revenue over time. First, while the incentive created through the tax to conserve fuel will promote more efficient use of the system, it will lead to lower fuel consumption, which will reduce revenues. Second, technological advances that increase the fuel efficiency of airplanes will reduce fuel consumption relative to FAA’s workload, leading to lower revenues relative to FAA’s workload; the new 787 aircraft and a recent effort to outfit planes with winglets are examples of these advances. Thus, it is likely that the fuel tax rate would have to be raised from time to time to be adequate in the long run. The extent to which a fuel tax would address equity issues appears to be limited. Although FAA states that there is a correlation between the time a plane spends in the NAS and fuel consumption, the extent to which fuel consumption correlates with costs imposed on FAA has not been established. First, there may be a relationship between time in the system and en-route control costs, but the relationship between time in the system and the costs of other FAA activities, such as terminal costs, is not obvious. Second, even if the fuel tax were limited to funding en-route costs, the connection between fuel consumption and those costs appears to be incomplete. For example, since heavier planes burn more fuel per mile than lighter planes, they would be required to contribute more for spending the same amount of time in the system. As with equity issues, the potential for a fuel tax to address efficiency issues appears limited because the connection between revenues and costs is incomplete. A fuel tax can create an incentive for operators to minimize their fuel consumption (e.g., by flying at off-peak times to avoid congestion delays) and, therefore, their time in the NAS. To the extent that time in the system correlates with costs imposed, this incentive can lead to improved efficiency. However, any relationship between time in the system and costs imposed on FAA appears to be limited to en-route control costs. A second option that represents a modification of the current system is to increase the current passenger segment tax to replace revenues lost by eliminating the current passenger ticket tax. Under this option, all other current excise taxes would remain unchanged, implying no change to revenues collected from cargo carriers and GA operators. This option would likely increase the tax differential between passengers traveling on one-stop (or more than one-stop) flights and those traveling on nonstop flights on the same route. As a result, there might be a shift in travelers’ demand toward more nonstop service, which might, in turn, lead airlines to operate more nonstop service. Because there is a partial link between the number of segments an airline operates and the cost of the services FAA provides to that carrier, this option might have some advantages over the present tax structure in terms of revenue adequacy, efficiency and equity. However, because there is no link to the cost of some of the other services that FAA provides, these advantages are limited. Compared to the present funding structure, this option might address concerns about revenue adequacy over time, but many of the concerns associated with the current system would likely remain. One way in which a passenger segment tax might better correlate to FAA’s workload is that commercial flights that include a stop require more terminal services from FAA than nonstop flights, and taxes based on the number of passenger segments traveled will increase as the number of stops increases. In addition, the current passenger segment tax is indexed to the Consumer Price Index so that it is adjusted each year to account for inflation, which preserves the purchasing power of the revenues collected. However, other services that FAA provides could increase without any increase in passenger segment tax revenues. For example, if the average distance of commercial flights increases, the cost of providing en-route services will rise, but the passenger segment taxes paid will not rise because they are not based on distance traveled or time in controlled airspace. Furthermore, passenger segment taxes apply only to commercial flights, so they have no advantage over ticket taxes in providing revenue adequate to fund cost increases associated with providing services to cargo and GA aircraft. In addition, there would be no improvement in providing adequate revenue for safety and security expenditures. Compared to ticket taxes, higher flight passenger segment taxes have the potential to increase equity by better aligning revenues with costs, and they create some additional incentives for efficient use of FAA services. However, these effects are likely to be limited because the tax revenues are aligned only to some cost elements and the tax applies only to commercial aircraft. With increased passenger segment taxes, the difference in the amount of taxes commercial airlines would have to pay for one-stop service compared with nonstop service would be greater. This greater difference in taxes might represent an improvement in equity compared to the present funding system because one-stop flights require more terminal and approach services from FAA than nonstop flights. This greater difference in taxes could also create an incentive to provide more nonstop service. Substituting nonstop for one-stop service could reduce the airlines’ need for FAA’s terminal and approach services. However, this incentive could be quite small relative to other factors that influence airlines’ service-offering decisions, so the effect on efficiency could also be quite small. In addition, airlines would have no additional incentive to be efficient in their use of en-route services because the passenger segment tax is not linked to time in controlled airspace, and there would be no change from the current structure in incentives for cargo and GA operators. Administrative and transition issues would be minimal, since this option would require only a change in the current tax per flight segment and the elimination of the passenger ticket tax. The four funding options we reviewed that would involve more direct charges to users include weight/distance charges, en-route charges, flight segment charges, and certification charges. Charges based on weight and distance traveled are used by a number of foreign air navigation service providers and are supported by the International Civil Aviation Organization. As suggested by the name, this option would base charges to users on the weight of the plane and the distance it travels within the NAS. According to their advocates, weight/distance charges are more appealing than the current system because they would establish a more direct relationship between revenues and costs by incorporating distance into the formula, thereby creating an incentive to limit excess use of FAA’s ATC en-route services. In addition, advocates say, weight/distance charges would strike a balance between basing charges on the ability-to-pay principle and more directly linking costs and revenues by incorporating both weight and distance in the distribution of costs among users. A weight/distance charge, relative to the current funding system, would be likely to improve the revenue adequacy of the system. Revenue adequacy is addressed by the incorporation of a cost component into the weight/distance formula. Generally, air navigation service providers that use a weight/distance formula regularly adjust the cost component to ensure that revenues match costs. For example, FAA’s counterpart in France—la Direction Générale de l’Aviation Civile—annually adjusts the cost component of its weight/distance formula on the basis of en-route charges. This adjustment ensures that revenues not only cover costs, but also do not exceed costs. As with the fuel tax, the extent to which a weight/distance charge would address equity issues appears to be limited. While there may be a relationship between the distance a plane travels in the NAS and the costs it imposes, the introduction of the weight component into the formula weakens any such connection. For example, since heavier planes would be charged more than lighter planes, they would be required to contribute more for traveling the same distance in the system, even though they may not impose greater costs on the ATC system. If a relationship between weight and distance in the system and costs imposed can be established, it is likely to be limited to en-route control costs. There is no obvious relationship between the weight/distance formula and other FAA activities—terminal control services and safety activities. Since the connection between revenues and costs is incomplete because of the weight component, the potential for a weight/distance charge to address efficiency issues also appears limited. The distance component of a weight/distance charge creates an incentive for operators to minimize their use of the NAS. To the extent that distance in the system correlates with costs imposed, this incentive could improve efficiency. However, the correlation between distance and costs imposed is limited by the introduction of the weight component. Furthermore, the relationship between distance in the system and the costs imposed on FAA is likely to be limited to en-route control costs, excluding consideration of the costs associated with terminal control and safety activities. Implementing a weight/distance charge would also involve significant administrative and transition issues. FAA would have to determine how to administer a weight/distance charging system for which it does not currently have the organizational capacity. FAA stated that one option would be to contract the billing out to a private party, much as European Union countries such as France contract out their billing to Eurocontrol. En-route charges would be based on the time users spend in the NAS or the distance they travel through the NAS. According to their advocates, en- route charges are more appealing than the current system because they would create a more direct relationship between revenues and costs. Therefore, compared to the current system, advocates say en-route charges would (1) better ensure that revenues are adequate to cover costs over time, (2) address equity issues, and (3) create incentives for efficient use of the current system. An en-route charge, relative to the current funding system, would be likely to improve the revenue adequacy of the system. As with weight/distance charges, en-route charges could address revenue adequacy concerns by incorporating a cost component into the charging formula that could be regularly adjusted to reflect any changes in costs. This approach could ensure, over time, that revenues match costs. As with other funding options discussed here, the ability of en-route charges to address equity and efficiency issues raised by the current system appears to be limited. According to FAA, there is a strong relationship between time and distance in the system and en-route costs imposed by users. Thus, if en-route charges were limited to funding en- route control costs, they might address equity issues raised by the current system by equating charges to costs imposed, depending on how costs are assigned. Furthermore, en-route charges for en-route control would create clear financial incentives to use the system more efficiently; less use of the system would lead to proportionately lower charges. However, there is no obvious relationship between time or distance in the system and other FAA activities—terminal control services and safety activities. As a result, if en-route charges were used to fund all FAA activities, their ability to address equity and efficiency issues is unclear. Implementing en-route charges would also involve significant administrative and transition issues. FAA would have to develop the organizational capacity to administer and collect en-route charges, which would include completing the appropriate cost analysis using either a cost accounting system or cost finding techniques. Flight segment charges to users would be based on the departures and landings that aircraft make at various airports throughout the NAS. According to their advocates, flight segment charges are more appealing than the current system because they would establish a more direct relationship between revenues and costs. Therefore, compared to the current system, advocates say that flight segment charges would (1) better ensure that revenues are adequate to cover costs over time, (2) address equity issues, and (3) create incentives for efficient use of the current system by directly connecting charges with costs imposed by users. A flight segment charge, relative to the current funding system, would be likely to improve the revenue adequacy of the system. As with weight/distance charges, flight segment charges could address revenue adequacy concerns by incorporating a cost component into the charging formula that could be adjusted regularly to reflect any changes in costs. This approach could ensure that, over time, revenues match costs. As with other funding options discussed here, the ability of flight segment charges to address equity and efficiency issues raised by the current system appears to be limited. FAA states that there is a strong relationship between departures and landings in the system and costs imposed by flights for terminal control handled by TRACONs. Thus, if flight segment charges were limited to funding terminal control costs, they might address equity issues raised by the current system by equating charges to costs imposed, depending on how costs were assigned. Furthermore, flight segment charges for terminal control would create clear financial incentives to use the system more efficiently: less use of the system would lead to proportionately lower charges. However, there is no obvious relationship between flight segments and other FAA activities—en-route control and safety activities. As a result, if flight segment charges were used to fund all FAA activities, their ability to address equity and efficiency issues would be limited. Implementing flight segment charges would involve administrative and transition issues similar to those associated with en-route charges. FAA would have to develop the organizational capacity to administer and collect flight segment charges and complete the appropriate cost analysis using either a cost accounting system or cost finding techniques. Certification charges to users would cover specific safety services provided by FAA, such as certificates for air worthiness, air operators, and air agencies; registration for air personnel, aircraft, and medical personnel; designees and delegations; and international training. According to their advocates, certification charges would be more appealing than the current system because they would establish a direct relationship between revenues and costs, which would address the revenue adequacy, equity, and efficiency concerns associated with the current system. Certification charges have the potential to fulfill revenue adequacy requirements for safety costs over time because they are directly linked to workload; charges would be assessed for each certificate issued. Thus, as workload changed over time (increasing or decreasing), so would the revenue from certification charges. In addition, any certification system would likely have the flexibility to adjust charges as costs changed. Certification charges, however, could not support all of FAA’s funding requirements, so this option would have to be used in combination with other revenue sources. According to FAA officials, there is a clear relationship between certification charges and the specific safety activities for which users would be charged. Thus, if certification charges were limited to funding the associated safety costs, they would address equity issues raised by the current system by equating charges to costs imposed; this equity improvement, however, would be limited to funding for safety activities. Furthermore, certification charges would likely create financial incentives to use the system efficiently, since charges would increase in proportion to use. FAA raises the concern that imposing certification charges for safety services would adversely affect safety because such charges would create incentives to avoid the use of safety services and, in some cases, ATC services. Our review of available data from five air navigation service providers in other countries found that since their air traffic control services were commercialized and charges were implemented, the safety of the services remained the same or improved. For example, data from New Zealand and Canada show fewer incidents of loss of separation (the distance required between planes) since commercialization. Implementing certification charges would involve administrative and transition issues similar to those associated with en-route and flight segment charges. FAA would have to develop the organizational capacity to administer and collect certification charges and complete the appropriate cost analysis using either a cost accounting system or cost finding techniques. Using a combination of workload-related taxes or charges to fund FAA might best address the revenue adequacy, equity, and efficiency concerns associated with the current funding structure, given that the costs of FAA’s ATC and safety activities are driven by different factors. No single option that we reviewed creates a direct link between revenues and all components of FAA’s activity costs. Fuel taxes, weight/distance charges, or en-route charges based on time or distance spent in the NAS could be used to create a more direct link with FAA’s costs of providing en-route ATC services. A segment tax for passengers or a flight segment charge could be used to create a more direct link with the costs of FAA’s terminal services. Certification charges could be used to create a more direct link with the costs of FAA’s various safety-related activities. Thus, some combination of options, such as en-route charges to fund en-route costs, flight segment charges to fund terminal control costs, and certification charges to fund some safety costs, might best address concerns with the current system by providing a better link between revenues and costs than any of these options used separately. According to one stakeholder, however, the administrative expense of using multiple funding options might outweigh the benefits of such an approach. According to FAA, other air navigation service providers, such as those in the European Union, have been able to administer direct charges without incurring excessive administrative costs. In discussing alternative funding options, some stakeholders have stated that if user charges are adopted, users should have more input into FAA’s operation, citing the “user pays, user says” principle. To many stakeholders, this principle implies that the adoption of direct user charges would require a change in FAA’s governance structure that could limit congressional influence on the agency while expanding the influence of airlines and other users. Many stakeholders support such a change, pointing out that many countries that rely on direct charges to fund aviation activities have commercialized their air navigation service providers. We did not find any evidence that a change in FAA’s governance structure would be required if direct charges were adopted. Federal law provides general authority for federal agencies to institute user charges except when otherwise prohibited. In FAA’s case, Congress has specifically prohibited the agency from instituting any new user charges under this general authority in every DOT appropriation act since 1998. Furthermore, under the current funding system, users already provide most of the revenue used to fund FAA programs through excise taxes. Adopting direct charges would change the manner in which revenues are collected from users, but would not necessarily change the aggregate contribution from users. Since users pay most of FAA’s program costs now, it is unclear what additional role users should play in FAA’s decision-making under an alternative system. Recent reforms in France’s Direction Générale de l’Aviation Civile illustrate how a government agency has moved toward a cost-based system of charges to fund the air navigation services it provides without changing the underlying governance structure. The French organization’s activities fall into two broad divisions —safety and regulation, and ATC. Safety and regulation are funded through a combination of general government support and specific user charges. For example, there are charges for pilots’ licenses, medical certificates, inspections, and aircraft registration. ATC activities are split into two categories—en-route control and terminal control. For en-route control, France must abide by the European Union’s regulations, which are based on principles established by the International Civil Aviation Organization. This approach incorporates a weight/distance formula that is used to determine charges for specific aircraft based on their activity. Although the formula distributes charges across aircraft differently by incorporating weight as a factor, the amount of the charges is based on cost data that are verified by the European Union. Eurocontrol actually bills users of the system; all European Union countries collect en-route charges through this organization. Terminal control charges are not directly based on cost factors, but are billed along with the en-route control charges through Eurocontrol. Allowing FAA to use debt financing for capital projects have advantages and disadvantages. Many stakeholders have identified the use of debt financing—such as bonds—as a means of funding FAA capital projects, such as components of NGATS or existing ATC facilities and equipment. Some stakeholders believe debt financing is attractive because it could provide FAA with a stable source of revenue to fund capital development and, at the same time, spread the costs out over the life of a capital project as its benefits are realized. If Congress approved the use of debt financing for FAA, the agency could borrow through the Treasury or directly from the private capital market, depending on what authority Congress provided. Debt-financing raises significant concerns, however, because it encumbers future resources and because expenditures from debt proceeds may not be subject to the congressional oversight that appropriations receive. In addition, debt financing is subject to federal budget scoring rules and raises issues associated with borrowing costs that are particularly important in light of the federal government’s long- term fiscal imbalance. According to its supporters, debt financing has a number of advantages, one of which is that it could provide FAA with a stable source of revenue to fund capital development. FAA officials state that the uncertainty associated with the appropriation process makes planning for large, complex, and expensive ATC systems difficult. Another advantage cited is that debt financing would allow the costs of capital projects to be repaid as the benefits are received, better aligning costs and benefits. Finally, supporters of debt financing, including an investment firm, state that the private capital market may offer disciplinary mechanisms that may encourage FAA to manage itself more efficiently. The discipline occurs because, to receive funding for projects, FAA would need to adhere to bond covenants, which are rules that govern how FAA will pay obligations. One investment firm noted, however, that projects could be overcapitalized, or “gold plated,” if FAA were given the authority to borrow without caps on the number and costs of projects it funds. For example, a significant amount of debt could be issued for projects with minimal marginal benefits to users. As a result, an investment firm noted, there may need to be a governing board with multiple aviation stakeholders, including airlines, airports, and air traffic controllers, to determine which capital projects are needed and how they will be funded. Treasury officials also question whether the private capital market will provide any market discipline to FAA debt obligations because investors may perceive that the obligations are backed by the federal government, and not just agency revenues. Treasury officials further noted that they could perform credit analyses similar to those done by private investment firms, which, when combined with statutory borrowing caps and other credit terms and conditions, would serve to protect the financial interests of the general taxpayer. To borrow from the Treasury, FAA would need borrowing authority from Congress. There are various ways Congress can provide borrowing authority, each with different legal, financial, and structural implications. For example, some government entities generate their own revenue to pay for borrowing costs, whereas others pay with appropriations. Some government entities with borrowing authority are federal agencies, such as the Bonneville Power Administration (BPA), while others are independent establishments, such as the U.S. Postal Service. Once borrowing authority is granted, the Treasury sets the terms and conditions for borrowing. FAA could borrow from the Treasury, using revenue options such as taxes, user fees, or appropriations to repay the debt, depending on the type of bond. Figure 8 describes the process for borrowing from the Treasury. In borrowing from the private capital market, FAA could issue general revenue (GR) or general obligation (GO) bonds. Both types of bonds would require FAA to pay interest and principal to bond holders, but the revenue sources used to make these payments would differ. A GR bond requires taxes or user fees to pay the interest and principal, while a GO bond uses expected appropriations. Several nonfederal government entities currently borrow from the private capital market using GR and GO bonds. In aviation, most commercial airports issue GR bonds for airport capital improvements that are backed by general revenues from the airport, including aircraft landing fees, concessions, and parking fees, for airport capital improvements. In surface transportation, some states issue grant anticipation revenue vehicle (GARVEE) bonds backed by anticipated federal apportionments to fund highways. However, the eligibility of a GARVEE bond for reimbursement with federal apportionments does not constitute a commitment by the federal government to provide for paying the principal or interest on the bond. The Department of Transportation, which oversees the GARVEE program, reimburses the state for debt service expenses as part of the annual federal-aid obligation authority. Figure 9 describes the process for borrowing from the private capital market. For FAA to borrow from the private capital market, Congress would need to give the agency statutory authority. Depending on how Congress writes the statute, FAA could use any revenue option—taxes, user fees, or appropriations—to secure the bond. According to some representatives of investment banks and Treasury officials, no organizational changes for FAA, such as a change to a government corporation or corporate entity, would be needed. Currently, some government corporations borrow from the private capital market, including the Tennessee Valley Authority (TVA). TVA is an independent, wholly owned federal corporation established by the Tennessee Valley Authority Act of 1933 that sells bonds in the private capital market to finance its capital improvements for power programs. TVA pays for its operations and debt service with revenues from its energy sales. Since TVA first issued bonds, Moody’s Investors Service and Standard & Poor’s have assigned TVA’s bonds their highest credit rating— Aaa/AAA. TVA does not receive a direct federal guarantee, although the interest rate charged by the private capital market suggests that there is an implied federal guarantee. Debt financing is subject to federal budget scoring rules and raises issues regarding borrowing costs that are particularly important in light of the federal government’s long term structural fiscal imbalance. How the borrowing authority is carried out will affect both budget scoring and costs. When an agency uses borrowing authority to finance a capital project, budget authority and obligations are recorded in the budget when the investments are made. Current budget scoring rules require that budget authority and obligations for the full cost of capital projects be scored upfront in the year that the obligations are made. Over time, the outlays will equal the budget authority and obligations that were scored upfront. As an example, if FAA borrowed $5 million with a 10 year bond to purchase air traffic control equipment, the $5 million would be scored as budget authority and obligations in the year or years in which FAA signed the contract or contracts to purchase the equipment, and not distributed annually over 10 years. Since this budget treatment is the same as if appropriations were obtained, there is little scoring incentive for an agency to borrow. Among the negative consequences of not scoring all government activities in the year in which obligations are made, according to CBO, is that the federal government’s obligations are understated. A Treasury official said the Treasury is supportive of budget scoring, noting that if the borrowing is for a purely governmental purpose, then that activity should be scored according to federal budget scoring rules. We have also reported that up- front budget scoring for capital projects should be maintained, since the budget should reflect the government’s commitments up front. If FAA was granted borrowing authority, the associated costs would likely be higher if the agency borrowed directly from the private capital market instead of through the Treasury. According to Treasury and representatives of investment firms, the federal government’s costs associated with debt financing for FAA’s capital projects would likely be lower if FAA borrowed through the Treasury than if FAA borrowed directly from the private capital market because the Treasury would likely be charged a lower interest rate to borrow money. Interest rates charged to FAA would likely be higher because bonds issued by FAA would likely be viewed as a greater credit risk compared to Treasury bonds because Treasury’s bonds are backed by the full faith and credit of the U.S. government, whereas FAA debt would not be. In addition, if FAA borrowed directly from the private capital market, the transaction costs of borrowing would likely be higher than if FAA borrowed through the Treasury; investment banks that serve as debt underwriters charge fees for these services, while the Treasury would charge a minimal administrative fee, if any. Treasury officials told us that it is the agency’s long-standing policy that all debt issued by federal entities, including FAA, should be issued solely to the Treasury because centralized financing of all such debt through the agency is the least expensive, most efficient means of financing this debt. The costs to the government associated with funding FAA’s capital spending through appropriations would be comparable to the costs of borrowing through the Treasury. The costs of borrowing from the private sector are based, in part, on how risky the revenue is that will be used for bond interest payments. Although all revenue options—taxes, user fees, and appropriations—can be used to repay borrowings, each option has a different risk profile. The Treasury noted that if FAA were to borrow from the private capital market against revenues that were subject to appropriations, there would most likely be a risk premium added to the credit rating to compensate for the risk that appropriations may not be provided. This risk premium would make borrowing more expensive. However, representatives from investment firms we interviewed noted that FAA may receive a high credit rating given that ATC services are essential and FAA has a monopoly in providing them. If a capital project has a high degree of “essentiality,” then it is assumed that the government will pay for the project through appropriations if that is the revenue source. Representatives of an investment firm we interviewed also noted that FAA may receive an implied federal guarantee because it is a federal agency. However, representatives of another investment firm we interviewed also said that many of FAA’s assets may have a low degree of marketability. That is, lenders may have difficulty selling an asset in the market in case of a bond default because there may be few willing buyers in the market for it. Borrowing costs are particularly important in light of the federal government’s long-term fiscal imbalance. As the baby boom generation ages, mandatory federal commitments to health and retirement programs will consume an ever-increasing share of the nation’s gross domestic product and federal budgetary resources, placing severe pressures on all discretionary programs, including those that fund defense, education, and transportation. Our simulations show that by 2040, revenues to the federal government might barely cover interest on the debt—leaving no money for either mandatory or discretionary programs—and that balancing the budget could require cutting federal spending by as much as 60 percent, raising taxes by up to 2½ times their current level, or some combination of the two. Accordingly, any program or policy change that may increase costs requires sound justification and careful consideration before adoption. We previously reported that agencies with authority to borrow were financing a large portion of their programs with debt and were repaying their debt with appropriations or new borrowing, rather than through revenue collections. As a result, we recommended that only those agencies that would, in all likelihood, be able to repay their borrowing through revenue collections be granted authority to borrow. We provided a draft of this report to DOT and Treasury for review and comment. We received comments from DOT through an e-mail from FAA’s Director of the Office of Aviation Policy and Plans on September 11, 2006, and from Treasury through an e-mail from the Deputy Assistant Secretary of Government Financial Policy on September 8, 2006. Neither DOT nor Treasury explicitly agreed or disagreed with our observations, and both raised a number of concerns. DOT stated that, in its opinion, although a change in FAA’s governance may not be statutorily required, it may be important as a matter of policy. DOT stated that because air navigation service providers are by nature monopoly providers, users need assurance that their concerns are taken into account in cost control and investment decisions, particularly under a system that more closely ties users’ contributions to the costs of the system. DOT stated that an alternative governance mechanism, along with user fees, could give system users a structured advisory role in how moneys are spent, costs are allocated, and charges are set to recover those costs, while still retaining the inherently governmental decision-making authority within FAA and DOT. In addition, DOT maintained that a governance mechanism specifically designed to give users input into investment decisions and cost recovery would add a valuable layer of discipline in optimizing the system to accommodate users’ needs most efficiently. In contrast, according to DOT, a system in which FAA/DOT could charge fees to cover costs with no meaningful stakeholder involvement would be much less attractive to the stakeholders. Finally, DOT stated, such an arrangement is fully consistent with the position of the International Civil Aviation Organization, which calls for user charges to be set in consultation between the service provider and the user community. DOT may want to encourage Congress to consider the issue of governance structure. However, we did not include an analysis of governance issues in the scope of our review; therefore, we did not provide a more detailed discussion of the issue in this report. DOT stated that our discussion of the need to analyze FAA’s costs implied FAA has not developed any cost accounting or cost allocation systems. Although we agree that FAA has made progress in implementing a cost accounting system, its current accounting system is not able to provide the information required for a cost allocation analysis. Therefore, in our view, our report does not mischaracterize the status of FAA’s cost accounting system by stating that an analysis of the extent to which the current funding approach, or alternative funding approaches, aligns costs with revenues would require the completion of a cost accounting system or the use of cost finding techniques. Our point is that this capability would be needed to operate under a cost-based user charge system. DOT stated that it believes user fees would provide greater revenue stability than taxes because user fees could be set up to be adjusted periodically without changes in the law, thus providing greater flexibility in aligning revenues to cover costs. Nonetheless, we continue to believe that revenue stability is not likely to vary much across the funding options. Significant decreases in the demand for air travel would decrease revenue regardless of whether the current funding structure is maintained or any of the options are adopted. Furthermore, increasing direct user charges while air travel demand was falling would increase costs for aircraft operators at the same time as their revenues were declining and might be no easier than increasing excise taxes. DOT also provided some clarifying and technical comments, which we incorporated where appropriate. According to Treasury, GAO raised several critical issues, but did not provide any analysis that would help policymakers judge reform options. Specifically, Treasury expressed concern that we did not (1) provide a more comprehensive discussion of FAA costs and cost shares, including any available cost information that provides insight into the issue, (2) evaluate FAA’s efforts to implement cost accounting, and (3) state whether FAA’s cost accounting program is likely, when completed, to generate cost information that is useful in determining a fair and efficient distribution of costs among users. We agree with Treasury that a more detailed analysis of FAA costs and cost shares should be conducted to inform the FAA reauthorization debate, and that this information would improve the analysis of specific alternative funding options. FAA’s current accounting system is not able to provide the information required for a cost allocation analysis. We believe that using partial cost information, as suggested by Treasury, would not be appropriate. Moreover, conducting a comprehensive cost analysis was beyond the scope of this report. Treasury also said that our report repeats claims made by interest groups without evaluating them, giving the sense that each argument is equally valid, even though policymakers need some way to evaluate them. This was not the objective of the report. We provided a basis for evaluating the current and alternative funding options by outlining criteria, including revenue adequacy, equity, and efficiency, and discussing the implications of these criteria with respect to specific funding options. Treasury raised concerns that a number of statements were attributed to “some stakeholders,” rather than the specific groups or individuals that made the statements, noting that attribution helps the reader evaluate the statements. In response, we added some attribution as appropriate. Treasury also noted its long-standing policy that all debt issued by federal entities, including FAA, should be issued solely to the Treasury, because centralized Treasury financing of all such debt is the least expensive, most efficient means of financing this debt. Treasury further maintained that market discipline would not be applied to FAA debt obligations issued directly to the private capital market because investors would perceive the obligations were backed by the federal government. We added language to the report to clarify Treasury’s position on these issues. Treasury also provided some clarifying and technical comments, which we incorporated where appropriate. As agreed with your offices, unless you announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees; the Secretary of Transportation; the Administrator, FAA; the Secretary of the Treasury; and the Director, OMB. Copies will also be available to others upon request and at no cost on GAO’s Web site at www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3834 or dillinghamg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. To accomplish all of our objectives, we reviewed relevant research, including GAO products, academic research, congressional testimony, industry group publications, and stakeholders’ responses to questions FAA asked them about its funding. We also interviewed officials from government agencies, including the Federal Aviation Administration (FAA), the Office of Management and Budget (OMB), the Congressional Budget Office (CBO), and the Department of the Treasury (Treasury); representatives of aviation industry groups, including the Air Transport Association, the Aircraft Owners and Pilots Association (AOPA), and the National Business Aviation Association; and academic and financial experts. In addition, as discussed in the following paragraphs, we performed further work to accomplish each objective. To assess the advantages and concerns that have been raised about the current approach to collecting revenues from national airspace system (NAS) users to fund FAA and the extent to which the available evidence supports the concerns, we examined FAA budget data, Airport and Airway Trust Fund (Trust Fund) revenue data, FAA forecasts, data reported to the Department of Transportation (DOT) on aircraft size and airfares (DOT Form 41 data), and FAA aviation activity data. We used data on tax revenues associated with different types of flights to assess the link between increases in FAA’s workload and increases in Trust Fund revenue. We obtained the FAA budget, Trust Fund, forecast, and aviation activity data from FAA. To assess the reliability of these data, we interviewed knowledgeable officials and reviewed the quality control procedures FAA applies to these data, and subsequently determined that the data were sufficiently reliable for our purposes. We obtained the DOT Form 41 data from BACK Aviation Solutions, a private contractor that provides these data to interested parties. We used these data to examine trends in aircraft size and airfares because of their impact on the relationship between Trust Fund revenues and FAA’s workload. To identify potential alternative funding options for FAA and criteria for comparing these options, we obtained information on the experience of foreign air navigation service providers by reviewing relevant GAO reports and other literature and interviewing officials at Eurocontrol and France’s FAA counterpart, la Direction Générale de l’Aviation Civile. We also interviewed representatives of Air France, AOPA-France, the International Air Transport Association, the Association of European Airlines, and Aéroports de Paris. Through our literature review and these interviews, we identified longer-run revenue adequacy, equity, efficiency, and administrative considerations as appropriate criteria for assessing the current and alternative funding options. We considered both modifications to the current excise tax structure and various forms of direct charges for FAA services as possible alternatives to the current tax structure. In selecting options for analysis, we considered whether there was a link between the option and some element of FAA’s workload. To identify the advantages and disadvantages of authorizing FAA to use debt financing for capital projects, we reviewed the borrowing authorities of other U.S. governmental entities, including the Tennessee Valley Authority and the Bonneville Power Administration. We conducted our work from May 2005 through August of 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, the following individuals made key contributions to this report: Ashley Alley, Christine Bonham, Jay Cherlow, Tammy Conquest, Colin Fallon, Carol Henn, David Hooper, Maureen Luna-Long, Maren McAvoy, Rich Swayze, and Matt Zisman.","The Federal Aviation Administration (FAA), the Airport and Airway Trust Fund (Trust Fund), and the excise taxes that support the Trust Fund are scheduled for reauthorization at the end of fiscal year 2007. FAA is primarily supported by the Trust Fund, which receives revenues from a series of excise taxes paid by users of the national airspace system (NAS). The Trust Fund's uncommitted balance decreased by more than 70 percent from the end of fiscal year 2001 through the end of fiscal year 2005. The remaining funding is derived from the General Fund. This report focuses on the portion of revenues generated from users of the NAS and addresses the following key questions: (1) What advantages and concerns have been raised about the current approach to collecting revenues from NAS users to fund FAA, and to what extent does available evidence support the concerns? (2) What are the implications of adopting alternative funding options to collect the revenues contributed by users that fund FAA's budget? (3) What are the advantages and disadvantages of authorizing FAA to use debt financing for capital projects? This report is based on interviews with relevant federal agencies, including FAA, the Office of Management and Budget, and the Congressional Budget Office. GAO also obtained relevant documents from these agencies, other key stakeholders, and academic and financial experts. Some stakeholders support the current excise tax system, stating that it has been successful in funding FAA, has low administrative costs, and distributes the tax burden in a reasonable manner. Other stakeholders, including FAA, state that under the current system there is a disconnect between revenues contributed by users and the costs they impose on the NAS that raises revenue adequacy, equity, and efficiency concerns. Trends and FAA projections in both inflation-adjusted fares and average plane size suggest that the revenue collected under the current funding system has fallen and will continue to fall relative to FAA's workload and costs, supporting revenue adequacy concerns. Comparisons of revenue contributed and costs imposed by different flights provide support for equity and efficiency concerns. The extent to which revenues and costs are linked, however, depends critically on how costs are allocated. Thus, to assess the extent to which the current approach or other approaches aligns costs with revenues would require completing an analysis of costs, using either a cost accounting system or cost finding techniques to assign costs to NAS users. The implications of adopting alternative funding options to collect revenue from NAS users and address concerns about the current excise tax system vary depending on the extent to which users' revenue contributions reflect the costs those users impose on FAA. This report considers six selected funding options, including two that modify the current excise tax structure and four that adopt more direct charges to users. Given the diverse nature of FAA's activities, a combination of alternative options may offer the most promise for linking revenues and costs. Switching to any alternative funding option would raise administrative and transition issues. Some stakeholders who support the adoption of direct user charges also support a change in FAA's governance structure, but GAO found no evidence adoption of direct charges requires this. Authorizing FAA to use debt financing for capital projects would have advantages and disadvantages. Some stakeholders identify debt financing as attractive because it could provide FAA with a stable source of revenue to fund capital developments, while at the same time spreading the costs out over the life of a capital project as its benefits are realized. Debt financing raises significant concerns, however, because it encumbers future resources, and expenditures from debt proceeds may not be subject to the congressional oversight that appropriations receive. Concerns regarding borrowing costs, oversight, and encumbering future resources are particularly important in light of the federal government's long-term structural fiscal imbalance. The Departments of Transportation and Treasury provided comments and technical clarifications on a draft of this report which we have incorporated or responded to as appropriate. DOT's comments focused on governance reforms required to adopt a user fee approach, and whether we accurately described the status of FAA's accounting system. Treasury's raised concerns about the level of analytical development for the options and associated issues. Data was not available to conduct the analysis Treasury suggested, and we agree necessary. However, we believe the report provides useful information to facilitate debate on the options.",govreport
"On January 6, 1993, the Institute of Medicine published a report that discussed secret U.S. chemical weapons programs during World War II. The report found that an estimated 60,000 military personnel participated as human experimental subjects in tests of exposure to mustard agents and lewisite and unknown numbers of additional servicemembers may have been exposed to these substances through their participation in the production, transportation, and/or storage of these chemical substances. On February 18, 1993, we issued a report that found VA lacked information about individuals who were exposed during secret DOD chemical tests. After Members of Congress, the President of the United States, and the Secretary of Defense exchanged a series of letters about this issue in 1993, the Deputy Secretary of Defense issued an agencywide memo that released all individuals from any nondisclosure restrictions that might have been placed on them, tasked the secretaries of the military departments to undertake efforts to declassify and provide to VA as soon as possible information about individuals who were potentially exposed, and directed OUSD (P&R) to establish a task force to monitor the status of DOD’s efforts. As a result, OUSD (P&R), the military services, and VA developed the Chemical Weapons Exposure Study Task Force to identify DOD personnel exposed to chemical substances during testing, training, transport, production, and storage. By conducting site visits and other research efforts, the task force identified approximately 6,400 servicemembers and civilians who were potentially exposed to mustard, lewisite, and other chemical substances. The office created a database with information about these individuals (hereafter referred to as OUSD (P&R) database) and, according to OUSD (P&R), sent certificates of commendation to more than 700 individuals for whom it could find contact information. In addition to its own research, OUSD (P&R), on behalf of the task force, issued a task order for a contractor to analyze, extract, and develop a database of information on all volunteers and/or other subjects potentially exposed to live chemical or biological substances. The contractor developed a database and issued a series of reports that identified the locations of human exposures to chemical substances, including those resulting from tests and a variety of other activities such as transportation, production, storage, and disposal. Congress continued to look into this issue during 1994 through a series of hearings and a staff report that was prepared for the U.S. Senate’s Committee on Veteran Affairs. The issue of servicemembers being used as human subjects during DOD’s chemical and biological tests received high-level attention again in 2000, when the acting Secretary of Veterans Affairs wrote a letter to the Secretary of Defense requesting assistance in obtaining information about a series of then-classified chemical and biological tests under DOD’s Project 112 program. OASD (HA) officials consequently initiated some actions to identify potentially exposed individuals. Subsequently, DOD, VA, and Congress exchanged a series of correspondence about the need to identify individuals who were potentially exposed during these tests. Eventually, the Defense Authorization Act for FY 2003 required DOD to submit to Congress and the Secretary of Veterans Affairs a comprehensive plan for the review, declassification, and submittal to VA of all DOD records and information on Project 112 that are relevant to the provision of benefits by the Secretary of Veterans Affairs to members of the armed forces who participated in that project. During this effort, DOD identified 5,842 servicemembers and estimated that 350 civilians had been potentially exposed during Project 112 tests, and this information was entered into a Project 112 database. The act further required the Comptroller General to evaluate the plan and its implementation. The Defense Authorization Act for FY 2003 also required DOD to work with veterans and veterans service organizations to identify DOD projects or tests outside of Project 112 that may have exposed members of the armed forces to chemical or biological substances. In June 2004, we reported that DOD had not yet begun its investigation to identify such projects or tests and recommended that the Secretary of Defense direct the appropriate office(s) to finalize and implement a plan for identifying DOD projects and tests conducted outside of Project 112 that might have exposed servicemembers to chemical or biological substances and ensure that the plan addresses the scope, reporting requirements, milestones, and responsibilities for those involved in completing this effort. According to an OASD (HA) official, OASD (HA) made an informal agreement with OUSD (AT&L) to undertake this effort since OASD (HA) did not have the resources to conduct an investigation itself or to fund a contractor to do the research. In September 2004, OUSD (AT&L)’s chemical and biological defense office issued a task order to fulfill this provision of the legislation. The research being done as a result of this task order is ongoing as of December 2007. In June 2003, after having identified several thousand servicemembers and hundreds of civilians as having been potentially exposed to chemical or biological substances during Project 112, DOD stopped actively searching for additional individuals. According to a knowledgeable DOD official, this decision was made without a sound and documented cost-benefit analysis. The Defense Authorization Act for FY 2003 required DOD to review records and information necessary to identify members of the armed forces who were or may have been exposed to chemical or biological substances as a result of Project 112. Subsequently, in June 2003, DOD issued a report to Congress that stated that 5,842 servicemembers and an estimated 350 civilians might have been exposed during Project 112 tests. The report also indicated that DOD had ceased its active search for individuals potentially exposed during Project 112 tests and that it would investigate any new information that may be presented as well as share any additional or changed information with VA and the public. In 2004, we reported that DOD performed a reasonable investigation of servicemembers who were potentially exposed to the substances used during Project 112 tests. However, we found that DOD had not exhausted all possibilities for identifying additional servicemembers and civilian personnel who had been potentially exposed. Therefore, we recommended that DOD determine the feasibility of addressing these unresolved issues. In response to our recommendation, DOD determined continuing an active search for individuals had reached the point of diminishing returns, and reaffirmed its decision to cease active searches. This decision was not supported by any objective analysis of the potential costs and benefits of continuing the effort. Instead, this decision was made by officials in OASD (HA) who had a working knowledge of Project 112 tests and the contents of chemical and biological test record repositories. These officials concluded that the record repositories that had been searched contained the majority of Project 112 documents; therefore, they believed that the bulk of exposures related to Project 112 tests had already been identified. Furthermore, the officials decided that the application of resources necessary to continue searching for Project 112 exposures would result in a diminishing return on their investment. The Office of Management and Budget has stated that a good cost-benefit analysis should include a statement of the assumptions, the rationale behind them, and a review of their strengths and weaknesses. This could include a full accounting of information known, related costs, benefits, and challenges of continuing to search for additional Project 112 participants. Moreover, our prior work has shown that there are elements integral to a sound cost-benefit analysis. For example, the analysis should include a thorough evaluation of the social benefits and costs of investments, identify objectives to ensure a clear understanding of the desired outcome, and include a list of the relevant impacts to ensure that all aspects are considered. DOD could not provide us with a quantitative analysis based on objective data or any documented criteria because OASD (HA) was not required to provide any support or basis for the decision. Since DOD’s June 2003 report to Congress and its decision to cease actively searching for additional exposures, additional individuals who may have been exposed as a result of Project 112 tests have been identified through various non-DOD sources, as shown in table 1. For example, the Institute of Medicine conducted a study on the long-term health effects of participation in the shipboard hazard and defense tests that were conducted as a subset of Project 112. This study identified 394 individuals who had been potentially exposed and who were previously unknown to DOD. According to DOD and Institute of Medicine officials, the additional names were discovered when the Institute of Medicine applied a more inclusive methodology in its research. In addition, our previous work in 2004 reported that DOD did not exhaust all possible sources of information during its investigation of Project 112 and our own research for that report resulted in the identification of 39 additional potentially exposed servicemembers. For example, DOD had limited success in identifying exposures during land-based tests because it was unable to find documentation, and it did not specifically search for individual civilian personnel in its investigation because it considered them to be outside of its scope. Furthermore, DOD officials have told us that veterans who participated in Project 112 tests have contacted DOD on their own initiative in search of information and documentation related to their exposures, which has resulted in 165 additional veterans being identified as having been potentially exposed during these tests. DOD’s current effort to identify individuals who may have been exposed to chemical or biological substances during activities outside of Project 112, discussed in the following section of this report, has also resulted in the discovery of information related to Project 112 tests. Specifically, the DOD contractor has found evidence that individuals who DOD already knew were potentially exposed to substances during at least one known Project 112 test were also potentially exposed during other Project 112 tests. In light of the increasing number of individuals who have been identified since DOD ceased actively searching, until DOD makes a sound and documented decision regarding the cost and benefits of actively searching for individuals potentially exposed during Project 112 tests, Congress and veterans may continue to question the completeness and accuracy of DOD’s effort. Although DOD has taken action to identify individuals who were potentially exposed during chemical or biological tests outside of Project 112, we identified several shortcomings in the current effort. Specifically, we found that DOD’s approach was hampered by (1) a lack of clear and consistent objectives, scope of work, and information needs; (2) management and oversight weaknesses; (3) a limited use of the work of other entities that previously identified exposed individuals; and (4) a lack of transparency in DOD’s efforts. In response to the Defense Authorization Act for FY 2003 and our May 2004 recommendation that DOD finalize and implement a plan to identify individuals who were potentially exposed during tests conducted outside of Project 112, DOD issued a task order in September 2004. The task order identified four sets of tasks that the contractor was to undertake to accomplish the task order’s objectives within 3 years—perform literature searches, conduct and review on-site data collections, data mine existing databases, and augment a database maintained by the contractor. The contractor has issued monthly reports on its work to OUSD (AT&L)’s chemical and biological defense office, which indicate that the contractor has taken action on each of these tasks. OUSD (AT&L)’s chemical and biological defense office and the contractor have agreed that the on-site reviews will be conducted at a total of 18 sites that were identified and prioritized based on established criteria, such as relevance and number of documents expected to be present. As of October 2007, the contractor has completed on-site data collection at 5 of these 18 sites, and as of December 2007 was collecting data at 3 additional sites. During its site visits, the contractor’s staff searches a variety of documents for information that pertains to human exposure to chemical or biological substances. The documents that are identified as having relevant information are then scanned into an electronic file and the information from those documents—such as the individual’s name, the substance to which the subject was exposed, and the activity that resulted in the exposure—is entered into a database. The contractor conducts a quality assurance review before this information is delivered to OASD (HA) officials. OASD (HA) officials told us that they perform a detailed review of this information, query the contractor to resolve errors or inconsistencies, and make modifications to the information provided by the contractor if they have received or read other information that they believe could add contextual sophistication. Once OASD (HA) officials complete their review of the information, it is added to the DOD chemical and biological test database that they maintain (hereafter referred to as the OUSD (AT&L) task order database). While the database information is not provided to OUSD (AT&L)’s chemical and biological defense office, the contractor’s monthly report to this office includes the number of identified individuals that the contractor has provided to OASD (HA). The task order identified specific locations for the contractor to review and was supposed to be completed in September 2007; however, the contractor was unable to complete its work within the 3-year schedule and has subsequently received a 3-year extension. This task order is valued at almost $4.5 million, and the estimated value of the extension is between $2.5 million and $3.7 million. Based on the project’s June 2007 concept of operations plan, which DOD developed as a result of this review, the contractor is expected to meet the project’s objectives and complete collection and analysis of information obtained from 18 data collection sites by September 2010. Since the remaining sites have been prioritized based on expected level of information and other criteria, DOD officials believe that the remaining data collection efforts could be completed more quickly. DOD’s current effort to identify individuals potentially exposed to chemical or biological substances lacks clear and consistent objectives, scope of work, and information needs, which affects DOD’s ability to know whether it has accomplished the project’s goals. First, the objectives of DOD’s current effort are inconsistent. The Defense Authorization Act for FY 2003, which was the genesis for DOD’s current effort, directed the Secretary of Defense to identify DOD projects or tests outside of Project 112 that may have exposed members of the armed forces to chemical or biological substances. However, the focus of the current effort has expanded to include other exposures, including those resulting from immunizations, transportation, storage, and occupational accidents. This occurred because the documents that are guiding this effort, including the project’s September 2004 statement of work and its June 2007 concept of operations plan, have been used interchangeably to define the scope of the work. We identified a difference of opinion between DOD and VA regarding the overall focus of the contractor’s research efforts. Officials in OUSD (AT&L)’s chemical and biological defense office stated that they believe the contractor should focus only on identifying participants in DOD tests since the Defense Authorization Act for FY 2003 was the genesis of this task order, and they believe that the primary interest is in individuals who were not aware of their exposures or are unable to report their exposures due to the classified nature of the tests. They also believe that individuals accidentally exposed at a work location might be protected under occupational health regulations and statutes. However, VA officials stated that they would prefer that DOD provide information on all exposures, including those not associated with DOD tests, since VA is responsible for adjudicating all claims by servicemembers, regardless of how they were exposed. The contractor conducting the search has included all types of exposures in its research, which according to DOD and contractor officials is based on VA’s stated preferences. Second, the scope of DOD’s current effort is unclear. Specifically, while the Defense Authorization Act for FY 2003 directed DOD to identify only members of the armed forces, the task order’s 2004 statement of work and the June 2007 concept of operations plan state that the objective of the project is to collect information on all servicemembers and civilian personnel who might have been exposed from 1946 to present. However, DOD’s current effort has not included an active search of civilian personnel. Instead, at the direction of DOD, the contractor is collecting information on civilians who may have been exposed to chemical or biological substances when it comes across those names while searching for servicemembers. DOD officials stated that they focused their efforts on servicemembers because VA has actively requested information about servicemembers from DOD for years and the department has not received any inquiries about the civilians. At the time of our review, the contractor had collected information on approximately 700 civilian personnel who were potentially exposed to chemical or biological substances. Third, the amount and type of information that the contractor needs to collect for this effort has been expanded from the original task order requirement. The task order specifies that the information to be collected should identify potential human exposure events, the names of test programs, chemical and biological substances involved, and the names of volunteers or participants. However, DOD has expanded the information that the contractor should collect, which may be lengthening the time for the contractor to complete its work. For example, in February 2007, officials from one of the repository sites provided the contractor a CD with names and exposure information for 2,300 individuals who were exposed to a series of biological tests at Fort Detrick, Maryland, known as Operation Whitecoat. However, as of October 2007, the contractor had not provided DOD with these names because it was adding information, such as the test objective and summary, and exposure and treatment information. Since most of these 2,300 individuals had been previously aware of their exposures due to Fort Detrick’s independent outreach efforts, a DOD official who has worked with these individuals has stated that it is unclear how much additional information the contractor needs to collect about this group. While OASD (HA) officials have said that the additional information has been helpful for their needs, they and VA officials have also acknowledged that the identity of the chemical or biological substance to which an individual was potentially exposed is the most pertinent information. Without consistent guidance about the objectives, scope of work, and information necessary to meet DOD’s goals and objectives, DOD’s current effort might not produce the desired results. After discussing this issue with DOD officials, in December 2007 officials in OUSD (AT&L)’s chemical and biological defense office stated that they plan to revise the task order’s statement of work, concept of operations plan, and a DOD implementation plan to clarify the scope of work and the focus of the research to servicemembers—the original focus as identified in the Defense Authorization Act for FY 2003. Until recently, DOD’s current effort has lacked adequate oversight of the contractor activities and results. We have previously reported that providing effective oversight is essential and, at times, DOD’s oversight was wanting, as it did not always task personnel with oversight duties or establish clear lines of accountability. While OUSD (AT&L)’s chemical and biological defense office established three different points of contact throughout the life of the task order who participated in meetings when the work started in 2004 and assisted the contractor undertaking the effort in accessing repository sites when requested, these points of contact were not performing active oversight activities nor were they designated as the project manager for this effort. During our review, officials in OUSD (AT&L)’s chemical and biological defense office realized that their predecessors had not selected a project manager and selected one of the office’s civilian employees to oversee the effort. We also found that DOD had not visited any of the repository sites where the contractor had proposed or completed its research to ensure that the work was effectively and efficiently meeting the task order’s objectives. We visited the three repository sites where the contractor was conducting its work during our review. At one location, a knowledgeable DOD official expressed concerns to us that the contractor’s presence and research in one of the site’s libraries might not be needed. However, since officials in OUSD (AT&L)’s chemical and biological defense office had not visited the site or met with site officials, they were unaware of these concerns and therefore were unable to decide whether the contractor should be conducting work at that particular site or whether the research funds and time should be spent at a site that they believe might provide more relevant information. In addition, until June 2007, OUSD (AT&L)’s chemical and biological defense office had not regularly evaluated the effectiveness or efficiency of the contractor’s work. For example, at the time of our review, officials in OUSD (AT&L)’s chemical and biological office told us that they did not know the extent to which each of the task order’s four tasks was meeting its objective to identify servicemembers and civilians who were potentially exposed to chemical or biological substances during testing and other activities. Therefore, DOD was not in a position to determine whether the task order needed to be modified to focus DOD’s resources and the contractor’s research efforts to those tasks that will best meet its objectives. Further, while the contractor had implemented its own quality assurance/quality control process that was approved by OUSD (AT&L)’s chemical and biological defense office, the office had not taken any action to independently assess the accuracy and characterization of the information that the contractor was providing to the OASD (HA), which maintains DOD’s databases of potentially exposed individuals. As a result, officials in OUSD (AT&L)’s chemical and biological defense office, who are responsible for overseeing the contractor’s efforts, have limited knowledge about the accuracy and characterization of the information that was being collected. Review and assessment of the contractor-provided data by the project manager are important because we identified potential problems with the accuracy of that information. For example, our work indicated that there are discrepancies between the number of individuals reported by the contractor in its monthly reports to OUSD (AT&L)’s chemical and biological office and the number of individuals that exist in OASD (HA)’s database that could not be adequately explained. In addition, at the time of our review, the characterization in the contractor’s monthly reports provided to OUSD (AT&L)’s chemical and biological defense office that all of these individuals were potentially exposed during chemical or biological tests gave the wrong impression to the project manager. For example, while the contractor has characterized the individuals it has identified as having been involved in DOD’s chemical and biological “tests”, an unknown number of these exposures resulted from immunizations, transportation, occupational, and storage accidents. This number also includes individuals who might have been associated with the tests but who were not exposed to any substances, such as those who participated in physical exercises to test the durability of chemical and biological suits or who could have been part of a test control group. OASD (HA) officials were able to identify at least 1,800 names in the database that were not exposed to any substances, which leaves about 7,100 names in the database that have been potentially exposed to chemical or biological substances, as shown in table 2. DOD and contractor officials stated that they have included these names in the database so that they could appropriately respond to these individuals’ concerns if they contact DOD or VA. Specifically, according to DOD, including these names in the database enables the department to refute any claims by individuals who participated in tests where they were not exposed to any chemical or biological substances. We identified a variety of factors affecting the ability of OUSD (AT&L)’s chemical and biological defense office to provide oversight, including a lack of consistent leadership, inadequate internal controls, a shortage of personnel, and a lack of defined roles and responsibilities. For example, the position that was identified as the office’s point of contact for the task order is a 1-year position. Consequently, the contractor has had to work with three different individuals during the first 3 years of the task order. The official holding this position during our review requested and was granted a 2-year extension in this position, and thus he has been able to implement a number of internal controls to improve the oversight and accountability of this project. In addition, until September 2007, the respective roles and responsibilities of OUSD (AT&L)’s chemical and biological defense office and OASD (HA) had not been clearly identified. In September 2007, in response to our review, OUSD (AT&L)’s chemical and biological defense office and OASD (HA) signed an implementation plan that identified their respective roles and responsibilities. In planning, executing, and evaluating DOD’s current effort, OUSD (AT&L)’s chemical and biological defense office did not fully leverage the work of other entities that had previously identified exposed individuals. Multiple DOD and non-DOD organizations have conducted a variety of independent efforts since the early 1990s, through which they have identified thousands of individuals who were potentially exposed during chemical or biological tests. These entities possess specific information about the tests—to include the location of test records—and the personnel conducting the work developed institutional knowledge. While OUSD (AT&L)’s chemical and biological defense office leveraged Project 112 information from the OASD (HA), it did not leverage information available from other DOD and non-DOD sources. For example, between 1993 and 1997, the joint DOD-VA task force identified approximately 6,400 individuals who were potentially exposed to sulfur mustard, lewisite, and other chemical substances. OUSD (P&R) led the effort by using some of its own personnel to conduct the research and visit several repository sites in addition to issuing a task order for a contractor—the same contractor DOD is currently using to research and identify tests and exposures—to develop a database containing information on the location, chemicals tested, and dates of the chemical weapons research program. During this period, OUSD (P&R) personnel involved with the research became very knowledgeable about the issues, collected boxes of information, and issued various reports. OUSD (P&R) officials transferred the names of the individuals who were identified to OASD (HA) officials in April 2005. According to OUSD (P&R) officials, however, officials in OUSD (AT&L)’s chemical and biological defense office had not met with any of the personnel with institutional knowledge or examined any of the documents that OUSD (P&R) still maintained. Since OUSD (P&R)’s reports identified locations of exposures, officials in OUSD (AT&L)’s chemical and biological defense office could have used this information as another source to help validate and prioritize the repository sites proposed by the contractor for its current effort, and to eliminate potential redundancy. Furthermore, as a result of independent research efforts by the Institute of Medicine about the health effects of DOD chemical tests using human subjects, the organization developed a database that contained the names and addresses of more than 4,000 servicemembers who were potentially exposed to chemical substances during a series of tests at Edgewood, Maryland. However, OUSD (AT&L)’s chemical and biological defense office was not aware of this database since the office had not coordinated with the organization. Institute of Medicine officials told us that they believe the names and contact information in this database could help DOD with its efforts since the names were collected from the same locations where the contractor for DOD’s current effort is doing its research. Subsequent to our September 2007 meeting with the Institute of Medicine, its officials contacted OASD (HA) to establish the protocols to transfer the names of identified individuals to DOD so that it can determine whether these individuals are already included in any of DOD’s databases. Without communicating and coordinating with DOD and non- DOD organizations that have previously conducted similar efforts, DOD’s current effort will not be able to take advantage of existing information so that it can focus its resources on the areas where information is missing. DOD’s current effort lacks transparency since it has not worked with veterans, and it has not kept Congress and veterans service organizations fully informed about the status of its efforts. Although DOD officials conducted outreach to veterans during its Project 112 research effort and the Defense Authorization Act for FY 2003 required DOD to work with veterans and veterans service organizations to identify projects and tests outside of Project 112 that may have exposed members of the armed forces to chemical and biological substances, DOD has not included veterans and veterans service organizations during its current effort. DOD also has not kept Congress, veterans, and the public informed on the status of its current effort as it did during its Project 112 investigation. Specifically, in 2002, DOD established a public internet site to provide interested persons with information on what happened during those tests that might have affected the health of those who served. The internet site included a status report on DOD’s efforts so that veterans and others could monitor the progress, and it also contained reports, documents, and links to related internet sites. The internet site, which was operated by OASD (HA), has not been updated with information about DOD’s current effort to identify individuals outside of Project 112. Representatives from a veterans service organization that has pursued information regarding DOD’s use of servicemembers as human subjects told us they were not aware of DOD’s current effort and they believe DOD has not been transparent and forthcoming with the information that it has obtained. These officials stated that the continuous lack of collaboration and transparency has negatively affected the level of trust veterans and the veterans service organization have in DOD regarding its commitment to fully identify and disclose information regarding these tests. The representatives stated that it is imperative for DOD to be as transparent as possible so that Congress, veterans, and the public have reason to believe the cloak of secrecy regarding these tests has been lifted and individuals who were potentially exposed could receive appropriate medical care and benefits. DOD officials acknowledged the importance of keeping veterans informed so that they know that these tests are no longer classified, they are entitled to a medical screening for long-term health effects, and they can assist in DOD’s efforts to identify other individuals who might have been exposed. Until DOD is more transparent about its efforts to identify individuals who were potentially exposed during these previously classified tests, Congress, veterans, and the public could have reason to believe that the cloak of secrecy has not been lifted and not realize the reasonableness, effectiveness, success, and challenges of DOD’s current effort. DOD and VA have had limited success in notifying individuals who were potentially exposed to chemical and biological substances during Project 112 tests or testing that occurred outside of Project 112 due to several factors. First, DOD has inconsistently transmitted information about identified servicemembers to VA. Second, VA has not used all available resources to obtain contact information for servicemembers who were identified as having been potentially exposed. Finally, DOD has not taken any actions to notify civilians who have been identified. While DOD and VA have a process in place to share the names of servicemembers who are identified as having been potentially exposed to chemical and biological substances, the transmission of information between the two agencies has been inconsistent. To date, DOD has provided information to VA as agreed upon through an informal arrangement. Under the arrangement, DOD generally provides VA with the servicemember’s name, as well as any information related to the potential exposure that DOD uncovered during its investigation, such as the chemical or biological substance that was used, the dosage of the chemical or biological substance, and the date of the exposure. As of October 2007, DOD had used this process to transmit to VA approximately 20,700 names of servicemembers who had been potentially exposed to chemical or biological substances. The informal arrangement between DOD and VA did not establish a schedule for the exchange of information, so DOD provides newly acquired exposure information to VA in batches of varying size and at inconsistent intervals. When we began our work we found that DOD had not provided VA with any updates after September 2006 even though, as of June 2007, DOD had added approximately 1,800 additional servicemember names to its chemical and biological exposure database. Subsequent to our inquiries, however, DOD provided VA with an update in September 2007. According to DOD officials, regular updates to VA have been delayed because of a number of factors, including competing priorities such as current military operations, lack of personnel, database management issues, and lack of an impetus to take a proactive approach. Although limited personnel and competing priorities might be valid issues, until DOD provides regular updates of identified servicemembers to VA in a timely manner, VA will be unable to notify identified veterans about their potential exposure to chemical or biological substances. VA has not used certain available resources to obtain contact information for and to notify veterans who were identified as having been potentially exposed to chemical or biological substances. To notify veterans who were potentially exposed to chemical or biological substances during DOD tests, VA matches the list of potentially exposed veterans it obtains from DOD against its own database of veterans to find either contact information or a Social Security number. If no Social Security number is located, VA matches the available veterans’ information to information contained in the National Personnel Records Center. Once a Social Security number is obtained, VA usually uses a private credit bureau and on occasion has used the Internal Revenue Service database to obtain contact information for the veteran. In responding to a draft of this report, VA notes that it uses the credit bureau for a variety of reasons, including its up-to-date data transmissions from the Social Security Administration, expedience in responding, and general accuracy of information. As shown in table 3, as of December 2007, VA had obtained contact information for and sent notification letters to 48 percent of the names that DOD provided to them and that they may be able to contact. VA officials noted that while the total number of notification letters sent is 48 percent of the number of names that DOD has provided to them and that they may be able to contact, it represents all of the individuals for whom they were able to obtain contact information. A number of factors beyond VA’s control have impeded its ability to notify veterans of their potential exposure to chemical or biological substances. For example, some records have been lost or destroyed, and existing documentation contains limited information and often does not identify names of participants, while others were not turned in by the scientists who were conducting the research. When the records can be found, they do not necessarily identify the participants, but may instead refer to control numbers that were issued to the participants, which cannot be cross-referenced to other documents for identification. For those records that do include identification of participants, the information may contain only the participants’ initials, nicknames, or only first or last names. Also, since a number of these records do not include the participant’s military service number or social security number, it is difficult to determine the exact identity of these individuals. Further, the contact information that VA is able to obtain may not be accurate. For example, more than 860 notification letters have been returned as undeliverable to VA. However, VA is not using other available resources to obtain contact information to notify veterans. For example, while VA told us that it was using a company that is able to provide current contact information as a source, it had not coordinated with the Social Security Administration to obtain contact information for veterans receiving social security benefits or to identify deceased veterans using the agency’s death index and had not regularly used the Internal Revenue Service’s information. VA officials acknowledged that they had not directly used the death index and that a memorandum of understanding with the Social Security Administration might facilitate a new way to accomplish this. However, they noted the credit bureau receives weekly updates from the Social Security Administration’s death index. VA officials also acknowledged that it planned to make more frequent use of IRS databases. Until VA implements a more effective process to obtain contact information for veterans, some veterans will remain unaware of their potential exposure or the availability of health exams and the potential for benefits directly related to an exposure. DOD has not taken any actions to notify civilians who have been identified as having been potentially exposed during Project 112 tests and other chemical and biological tests, due in part to a lack of specific guidance defining the requirements to notify civilians. The Defense Authorization Act for FY 2003 required DOD to identify its tests or projects that may have exposed members of the armed forces to chemical or biological substances, but did not specifically address civilian personnel who may have been affected by these tests. However, in our 2004 report we recommended that DOD address the appropriateness of and responsibility for reporting new information, such as the identification of additional potentially exposed servicemembers, civilian employees, contractors, and foreign nationals who participated in the tests. In its response to our report, DOD concurred with our recommendation and stated that it would determine the appropriate reporting channels for civilian employees, contractors, and foreign national participants who were identified as being potentially exposed. However, DOD has not taken any action with the approximately 1,900 civilian names that it maintains, as shown in table 4. Instead, DOD has focused its efforts on the identification and notification of servicemembers who were potentially exposed. DOD officials stated that they have focused on identifying and notifying servicemembers since the primary impetus for their efforts to identify and notify individuals who may have been exposed has been requests for information from veterans and VA. OASD (HA) has not acted in part because it is unclear whether it is required to notify civilians or transmit civilian exposure information to another agency for notification. During our review, DOD and Department of Labor officials stated that they were unaware of a requirement for them to notify civilians of their potential exposure. However, our April 2005 report about civilian and contractor exposures to chemical substances in Vietnam identified compensation programs that might be available for civilians who were exposed during these chemical and biological tests if they come forward and present evidence that they were potentially exposed. Specifically, federal employees can file claims for workers compensation with their employing agency, which refers the claims to the Department of Labor under the Federal Employees Compensation Act. Employees who work under contract to the U.S. government can file workers compensation claims through their employers with the employers’ insurance carrier. Without an effort to develop and provide guidance for notifying civilians, those civilians who have been identified may not be aware of their potential exposure. Since World War II, potentially tens of thousands of military personnel and civilians have been exposed to chemical or biological substances during previously classified DOD tests. As this population becomes older, it will become more imperative for DOD and VA to identify and notify these individuals in a timely manner because they might be eligible for health care or other benefits. While DOD has concluded that continuing an active search for individuals potentially exposed during Project 112 has reached a point of diminishing returns, it has not conducted an informed cost- benefit analysis, which could guide DOD in identifying the extent to which it might need to take additional actions. Without conducting a sound and documented cost-benefit analysis that includes a full accounting of information known and the challenges associated with continuing to search for Project 112 participants, DOD will not be in a position to make an informed and transparent decision about whether any of the remaining investigative leads could result in meaningful opportunities to identify additional potentially exposed individuals. Furthermore, until DOD conducts such an analysis, Congress, veterans, and the public may continue to question the completeness and accuracy of DOD’s efforts. Moreover, while DOD has undertaken efforts to identify and notify individuals who were potentially exposed during tests outside of Project 112, the department has not worked with veterans and veterans service organizations during its current effort as required by the Defense Authorization Act for FY 2003, and it has not coordinated its efforts with other DOD and non-DOD organizations. Until DOD and VA undertake more effective and efficient efforts to identify and notify potentially exposed individuals—including consistent guidance about the scope of work, such as clearly defined goals and objectives and agreement on the type and amount of information that is necessary to collect; effective internal controls and oversight practices; coordination with other entities to leverage existing information; regular updates to VA; and utilization of all available resources—Congress, veterans, and the public may continue to question DOD and VA’s commitment to this effort. Furthermore, in the absence of transparency about these previously classified tests and DOD’s efforts to identify individuals who were potentially exposed, Congress, veterans, and the public could have reason to believe that the cloak of secrecy has not been lifted and may not understand the success and challenges of DOD’s current effort. While DOD and VA have developed a process for notifying servicemembers who were potentially exposed, it is unclear whether DOD or any other agency, such as the Department of Labor, is required to notify potentially exposed civilians who are identified. Therefore, without specific guidance that defines the requirements, roles and responsibilities, and mechanisms to notify civilians who have been potentially exposed to chemical or biological substances, these individuals might continue to be unaware of their circumstances. We are suggesting the Congress consider the following two matters: To provide greater transparency and resolve outstanding questions related to DOD’s decision to cease actively searching for the identification of individuals associated with Project 112, Congress should consider requiring the Secretary of Defense to consult with and address the concerns of VA, veterans, and veterans service organizations; to conduct and document an analysis that includes a full accounting of information known, and the related costs, benefits, and challenges associated with continuing the search for additional Project 112 participants; and to provide Congress with the results of this analysis. Our draft report addressed this recommendation to the Secretary of Defense; however, because DOD disagreed, we elevated this to a matter for congressional consideration. To ensure that civilians who were potentially exposed to chemical or biological substances as a result of tests conducted or sponsored by DOD are aware of their circumstances, Congress should consider requiring the Secretary of Defense, in consultation with the Secretary of Labor, to develop specific guidance that defines the requirements, roles and responsibilities, and mechanisms to notify civilians who have been potentially exposed to chemical or biological substances. To ensure a sound and documented process for DOD’s decision regarding the identification of individuals associated with Project 112, we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense for Personnel and Readiness to conduct and document an analysis that includes a full accounting of information known, and the related costs, benefits, and challenges associated with continuing the search for additional Project 112 participants, and to provide Congress with the results of this analysis. In developing the analysis, DOD should consult with and address the identified concerns of VA, veterans, and veterans service organizations. To ensure that DOD’s current effort to identify individuals who were potentially exposed during chemical and biological tests outside of Project 112 are more efficient, effective, and transparent, and to ensure that its databases contain accurate information, we recommend that the Secretary of Defense direct the Office of Under Secretary of Defense for Acquisition, Technology, and Logistics to take the following four actions: in coordination with the Office of the Under Secretary of Defense for Personnel and Readiness and the Secretary of Veterans Affairs, modify the guidance about the scope of work for its current effort, such as the statement of work and concept of operations plan, to clearly define consistent, reasonable, and acceptable goals and objectives, and the type and amount of information that will need to be collected to meet these goals and objectives; implement effective internal controls and oversight practices, such as periodic site visits, regular assessments of the contactor’s efforts, and quality assurance reviews of the information provided by the contractor; coordinate and communicate with other entities that previously identified exposed individuals to leverage existing information, including institutional knowledge and documents; and make its efforts transparent with regular updates to Congress, the public, and veterans service organizations. To ensure that DOD has taken appropriate action in its efforts to notify servicemembers who were potentially exposed, we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense for Personnel and Readiness to take appropriate action to address the factors—such as competing priorities and database management weaknesses—affecting DOD’s ability to forward the names of potentially exposed individuals to VA in a timely and effective manner. To ensure that all veterans who have been identified as having been potentially exposed to chemical or biological substances have been notified, we recommend that the Secretary of Veterans Affairs take steps to increase its use of available resources, such as the Internal Revenue Service, to implement a more efficient and effective process for obtaining contact information for living veterans. We requested comments from DOD, VA, and the Department of Labor on a draft copy of this report. DOD generally agreed with five recommendations, but disagreed with the first recommendation to conduct and document a cost-benefit analysis associated with continuing the search for additional Project 112 participants, and to provide Congress with the results of this analysis. VA agreed with one recommendation and partially agreed with another recommendation that pertained to its activities. The Department of Labor did not provide us any comments. Because DOD disagreed with the recommendation to conduct and document a cost-benefit analysis associated with continuing the search for additional Project 112 participants and has not adequately addressed our May 2004 recommendation to determine the feasibility of addressing unresolved issues associated with Project 112, we added a Matter for Congress to consider directing the Secretary of Defense to conduct such an analysis. DOD and VA also provided technical comments, which we incorporated as appropriate. DOD’s and VA’s comments are reprinted in appendices II and III, respectively. DOD agreed to and has in some cases begun taking action to respond to five of the recommendations. Specifically, DOD stated that it has already coordinated on updating program goals and objectives for the identification of individuals who were potentially exposed during chemical and biological tests outside of Project 112 and is revising the statement of work, implementation plan, and concept of operations to ensure consistent guidance and deliverables. DOD also stated that it has taken steps to increase oversight of the project and has established an implementation plan with OASD (HA) delineating oversight responsibilities. In addition, DOD stated that it will take steps to determine if other organizations are conducting similar work to identify potentially exposed individuals and will coordinate and leverage all available information. The department also stated that it will expand its current efforts to update the public and make efforts more transparent. Finally, DOD and VA are in the process of discussing short-term and long-term improvements necessary for improving the transfer of information to VA in a timely and effective manner. We believe these are positive steps that, when completed, will address the intent of our recommendations. DOD did not agree with the first recommendation to conduct and document an analysis that includes a full accounting of information known, and the related costs, benefits, and challenges associated with continuing the search for additional Project 112 participants, and to provide Congress with the results of this analysis. DOD stated that it believes it made a full accounting of its efforts available to Congress in 2003, that it has not received any credible leads that would allow DOD to continue its research, and that it currently knows of no other investigative leads that would meaningfully supplement what it believes to be a total picture of Project 112. However, as discussed in our May 2004 report, we identified a number of credible leads that could possibly result in additional Project 112 information. In addition, as discussed in this report, almost 600 additional individuals who were potentially exposed during Project 112 (more than a 10 percent increase) have been identified by non- DOD sources since DOD’s 2003 report to Congress and its decision to cease actively searching for additional exposures. In light of the increasing number of individuals who have been identified since DOD provided its report to Congress in 2003 and ceased its active search for additional individuals, until the department provides a more substantive analysis that supports its decision to cease active searches for additional individuals potentially exposed during Project 112 tests, Congress and veterans may continue to question the completeness and level of commitment to this effort. Because DOD has disagreed with our recommendation and has not adequately addressed our May 2004 recommendation to determine the feasibility of addressing unresolved issues associated with Project 112, we have added a Matter for Congress to consider directing the Secretary of Defense to conduct such an analysis. In response to our recommendations, VA agreed to work with DOD to modify the guidance about the scope of work for its current effort to clearly define consistent, reasonable, and acceptable goals and objectives; and the types and amount of information that will need to be collected to meet these goals and objectives. VA also agreed to contact the Internal Revenue Service to determine if a more timely response can be obtained from them to assist VA in notifying individuals potentially exposed to chemical or biological substances. We believe these steps are consistent with the intent of our recommendations. However, VA disagreed with a part of our recommendation that it needs to pursue information from the Social Security Administration since the credit bureau that VA uses to obtain contact information already receives the same information from the Social Security Administration. Accordingly, we adjusted our recommendation to the Secretary of Veterans Affairs so that it did not refer to the Social Security Administration as another source of information. We are sending copies of this report to other interested congressional committees, the Secretary of Defense, the Secretary of Veterans Affairs, and the Secretary of Labor. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-5431 or dagostinod@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix IV. To assess the Department of Defense’s (DOD) efforts since 2003 to identify servicemembers and civilians who may have been exposed to chemical or biological substances used during tests conducted under Project 112, we reviewed and analyzed documents pertaining to Project 112, including DOD’s 2003 Report to Congress: Disclosure of Information on Project 112 to the Department of Veterans Affairs. We interviewed officials at the Office of the Secretary of Defense, Washington, D.C., including the Under Secretary of Defense for Acquisition, Technology, and Logistics, and the Under Secretary for Personnel and Readiness. We also interviewed officials at the Office of the Assistant Secretary of Defense for Health Affairs who were responsible for conducting DOD’s investigation of Project 112 tests and have been designated as the single point of contact for providing information related to tests and potential exposures during Project 112. We interviewed officials at the Institute of Medicine and reviewed their 2007 report on the long-term health effects of participation in the shipboard hazard and defense tests of Project 112. In addition, we reviewed and analyzed our prior reports as well as reports of other organizations to provide a historical and contextual framework for evaluating DOD’s efforts. To evaluate DOD’s current effort to identify servicemember and civilian exposures that occurred during activities outside of Project 112 tests, we reviewed and analyzed reports, briefings, and documents and interviewed officials at the Office of the Secretary of Defense, Washington, D.C., including the Under Secretary of Defense for Acquisition, Technology, and Logistics and the Under Secretary of Defense for Personnel and Readiness. We also interviewed officials at the Office of the Assistant Secretary of Defense for Health Affairs, who have been designated as the single point of contact for providing information related to tests and potential exposures outside of Project 112. In addition, we interviewed officials at the U.S. Army Medical Research Institute of Infectious Diseases and the U.S. Army Medical Research and Materiel Command, Fort Dietrich, Maryland; the Department of Veterans Affairs, Washington, D.C.; the Institute of Medicine, Washington, D.C.; the Vietnam Veterans of America, Silver Spring, Maryland; and DOD’s contractor currently conducting research to identify potential exposures that occurred outside of Project 112. We also evaluated DOD’s methodology for identifying servicemembers and civilians who may have been exposed to chemical or biological substances by observing the process the contractor uses to conduct research at repositories containing documents related to chemical and biological exposures from tests and other activities, such as the transportation and storage of chemical and biological substances. We interviewed officials and observed storage facilities at the three chemical or biological substance exposure record repositories where the contractor was currently conducting its work: Edgewood Chemical and Biological Center Technical Library, Aberdeen Proving Grounds, Maryland; U.S. Army Research, Development, and Engineering Command Historical Office, Aberdeen Proving Grounds, Maryland; and U.S. Army Medical Research Institute of Infectious Diseases Technical Library, Fort Detrick, Maryland. In addition, we interviewed officials and observed the records storage area at the U.S. Army Medical Research Institute of Infectious Diseases Medical Records Office, Fort Detrick, Maryland, where information about Operation Whitecoat is maintained. We also reviewed DOD’s outreach efforts and the extent to which DOD coordinated with other agencies that might have useful information, including the Department of Veterans Affairs (VA), the Department of Labor, the Institute of Medicine, and the Vietnam Veterans of America. To evaluate VA’s process to notify servicemembers whom DOD has determined may have been exposed to a chemical or biological substance, we interviewed VA officials with the Veteran’s Benefit Administration, Veteran’s Health Administration, and Office of Planning and Policy, and gathered data concerning their success in making notifications. In particular, we documented the number of servicemembers whose names had been provided to VA by DOD, the extent to which notification letters were sent, the extent to which veterans were deceased, and the number of cases where sufficient documentation was not available to obtain contact information to make notifications. We assessed the reliability of DOD’s and VA’s data by interviewing agency officials knowledgeable about the data and by reviewing existing information about the data and the systems used to maintain and produce them. Although we found that there were potential problems with the quality and reliability of the information, we determined that the data were sufficient for the purposes of this report. We conducted this performance audit from June 2007 to February 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Robert L. Repasky (Assistant Director), Tommy Baril, Renee S. Brown, Brian D. Pegram, Steven Putansu, Terry L. Richardson, and Karen Thornton made key contributions to this report. Agent Orange: Limited Information Is Available on the Number of Civilians Exposed in Vietnam and Their Workers’ Compensation Claims. GAO-05-371. Washington, D.C.: April 22, 2005. Chemical And Biological Defense: DOD Needs to Continue to Collect and Provide Information on Tests and Potentially Exposed Personnel. GAO- 04-410. Washington, D.C.: May 14, 2004. Human Experimentation: An Overview on Cold War Era Programs. GAO/T-NSIAD-94-266. Washington, D.C.: September 28, 1994. Veterans Disability: Information From Military May Help VA Assess Claims Related to Secret Tests. GAO/NSIAD-93-89. Washington, D.C.: February 18, 1993.","Tens of thousands of military personnel and civilians were potentially exposed to chemical or biological substances through Department of Defense (DOD) tests since World War II. DOD conducted some of these tests as part of its Project 112 test program, while others were conducted as separate efforts. GAO was asked to (1) assess DOD's efforts to identify individuals who were potentially exposed during Project 112 tests, (2) evaluate DOD's current effort to identify individuals who were potentially exposed during tests conducted outside of Project 112, and (3) determine the extent to which DOD and the Department of Veterans Affairs (VA) have taken action to notify individuals who might have been exposed during chemical and biological tests. GAO analyzed documents and interviewed officials from DOD, VA, the Department of Labor, and a veterans service organization. Since 2003, DOD has stopped actively searching for individuals who were potentially exposed to chemical or biological substances during Project 112 tests, but did not provide a sound and documented basis for that decision. In 2003, DOD reported it had identified 5,842 servicemembers and estimated 350 civilians as having been potentially exposed during Project 112, and indicated that DOD would cease actively searching for additional individuals. However, in 2004, GAO reported that DOD did not exhaust all possible sources of information and recommended that DOD determine the feasibility of identifying additional individuals. In response to GAO's recommendation, DOD determined continuing an active search for individuals had reached the point of diminishing returns, and reaffirmed its decision to cease active searches. This decision was not supported by an objective analysis of the potential costs and benefits of continuing the effort, nor could DOD provide any documented criteria from which it made its determination. Since June 2003, however, non-DOD sources--including the Institute of Medicine--have identified approximately 600 additional names of individuals who were potentially exposed during Project 112. Until DOD provides a more objective analysis of the costs and benefits of actively searching for Project 112 participants, DOD's efforts may continue to be questioned. DOD has taken action to identify individuals who were potentially exposed during tests outside of Project 112, but GAO identified four shortcomings in DOD's current effort. First, DOD's effort lacks clear and consistent objectives, scope of work, and information needs that would set the parameters for its efforts. Second, DOD has not provided adequate oversight to guide this effort. Third, DOD has not fully leveraged information obtained from previous research efforts that identified exposed individuals. Fourth, DOD's effort lacks transparency since it has not kept Congress and veterans service organizations fully informed of the progress and results of its efforts. Until DOD addresses these limitations, Congress, veterans, and the American public can not be assured that DOD's current effort is reasonable and effective. DOD and VA have had limited success in notifying individuals potentially exposed during tests both within and outside Project 112. DOD has a process to share the names of identified servicemembers with VA; however, DOD has delayed regular updates to VA because of a number of factors, such as competing priorities. Furthermore, although VA has a process for notifying potentially exposed veterans, it was not using certain available resources to obtain contact information to notify veterans or to help determine whether they were deceased. Moreover, DOD had not taken any action with the civilian names, focusing instead on veterans since the primary impetus for the research has been requests from VA. DOD has refrained from taking action on civilians in part because it lacks specific guidance that defines the requirements to notify civilians. Until these issues are addressed, some identified veterans and civilians will remain unaware of their potential exposure.",govreport
"For almost a decade, the government of Mexico has sought to combat the growing power of criminal groups that initially emerged as DTOs in the 1980s and 1990s. This struggle became a national priority in 2006 when then-President Felipe Calderón mobilized the Mexican military and law enforcement agencies to disrupt DTO operations and target their leadership structures. As the Congressional Research Service reported, while these efforts have continued, under current President Enrique Peña Nieto, who was elected in 2012, there has been a shift in emphasis toward reducing criminal violence that threatens the security of civilians and the business sector. According to a RAND Corporation report, besides trafficking billions of dollars’ worth of narcotics into the United States annually, Mexican DTOs’ criminal activity now extends to other areas, including human trafficking, kidnapping, money laundering, extortion, bribery, racketeering, and weapons trafficking. According to the Strategy DTOs require a constant supply of firearms and ammunition to assert control over the territory where they operate, eliminate rival criminals, enforce illicit business dealings, and resist government operations. The Strategy indicates that firearms that criminal organizations acquire from the United States are primarily transported overland into Mexico using the same routes and methods employed when smuggling bulk cash south and drugs north across the U.S.-Mexico border. The Strategy also notes that within the United States, DTOs or their agents typically rely on “straw purchasers.” According to ATF, a “straw purchase” occurs when a person who is a convicted felon (or otherwise prohibited by federal law from purchasing a firearm) or who wishes to remain anonymous, uses a third party, the straw purchaser, to execute the paperwork necessary to purchase a firearm from a federally licensed firearms dealer. The straw purchaser is a person who, but for making false statements on the license application, would otherwise be eligible under federal law to purchase a firearm and is therefore able to pass the mandatory background check conducted by the federal firearms licensee. Although straw purchasers may legally purchase firearms for their own possession and use, when they purchase firearms on behalf of criminals or others, they violate federal law by making a false statement to a federal firearms licensee on the required forms. Firearm trafficking organizations also frequently obtain firearms from unlicensed private sellers in secondary markets, particularly at gun shows and flea markets or through classified ads or private-party Internet postings, according to ATF officials. The surge in criminal activity by DTOs along the U.S.-Mexico border has generated concern among policymakers that this violence is spilling over into the United States. Since 2009, according to the National Drug Threat Assessment—which is produced by the U.S. Department of Justice’s National Drug Intelligence Center, Mexican-based DTOs have been known to operate in more than a thousand cities in the United States. While the extent of violence seen in Mexico has not been reported in the United States, law enforcement officials in two border cities we visited told us that murders and other criminal activity on the U.S. side are often linked to Mexican DTO activities. The governments of the United States and Mexico have committed to work together to stem the activities of these criminal organizations, including illicit arms trafficking. From fiscal year 2008 to fiscal year 2015, Congress appropriated about $2.5 billion in assistance for Mexico that has been provided through the Mérida Initiative, including approximately $194 million provided in the Consolidated and Further Continuing Appropriations Act, 2015. For fiscal year 2016, the administration’s budget request for the Mérida Initiative is $119 million, from various accounts. The Mérida Initiative is a bilateral security partnership between the United States and Mexico to fight organized crime and build the capacity of Mexico’s justice sector and law enforcement institutions to uphold the rule of law. Among the many activities supported under the Mérida Initiative, some assistance is provided to help combat firearms trafficking, such as providing canines trained to detect weapons and ammunition, and non-intrusive inspection equipment to detect the flow of illicit goods, including firearms. DOJ’s ATF and DHS’s ICE are the two primary agencies combating illicit sales and trafficking of firearms across the Southwest border. ATF combats firearms trafficking within the United States and from the United States to other countries as part of its mission under the Gun Control Act (see table 1). ATF is responsible for investigating criminal and regulatory violations of federal firearms laws, among other responsibilities. In carrying out its responsibilities, ATF licenses and regulates federal firearms licensees to ensure that they comply with applicable laws and regulations. ATF also traces U.S. and foreign manufactured firearms for international, federal, state, and local law enforcement agencies to link a firearm recovered in a criminal investigation to its first retail purchaser. This information can be used to help link a suspect in the criminal investigation to a firearm or identify potential traffickers. ATF is the only entity within the U.S. government with the capacity to trace firearms seized in crimes in Mexico. The agency has conducted investigations to identify and prosecute individuals involved in firearms trafficking schemes and has provided training to Mexican law enforcement officials on firearms identification and tracing techniques, among other efforts. ICE enforces U.S. export laws, and ICE agents and other staff address a range of issues, including combating the illicit smuggling of money, people, drugs, and firearms (see table 2). As the primary federal law enforcement agency responsible for investigating international smuggling operations and enforcing U.S. export laws, ICE’s Homeland Security Investigations division targets the illegal movement of U.S.-origin firearms, ammunition, and explosive weapons with the goal of preventing the procurement of these items by DTOs and other transnational criminal organizations. ICE’s investigative strategy includes the identification and prosecution of criminal networks and individuals responsible for the acquisition and movement of firearms from the United States. Other U.S. agencies that contribute to the effort to stem firearms trafficking to Mexico include: CBP. DHS’s CBP is charged with managing, securing, and controlling the nation’s borders for both people and cargo entering and leaving the United States. CBP’s outbound mission is to facilitate the movement of legitimate cargo, while interdicting the illegal export of weapons and other contraband out of the United States. State. State’s Bureau of International Narcotics and Law Enforcement Affairs (INL) advises the President, Secretary of State, and government agencies on policies and programs to combat international narcotics and crime. INL programs support State’s strategic goals to reduce the entry of illegal drugs into the United States and to minimize the impact of international crime on the United States and its citizens. INL oversees funding provided to build the capacity of Mexico to fight organized crime under the Mérida Initiative, including funds to support efforts to combat firearms trafficking. ONDCP. ONDCP is a White House component whose principal purpose is to establish policies, priorities, and objectives for the nation’s drug control program. It produces a number of publications, including the Strategy—first issued in 2007. The Strategy is intended to serve as an overarching guide for combating criminal activity along the U.S.-Mexico border; since 2009 it has included a Weapons Chapter in recognition of the threat posed by the smuggling of firearms across the Southwest border. Given ATF’s and ICE’s roles in combating firearms trafficking, these agencies share responsibility for preparing the information presented in the Weapons Chapter of the Strategy. While ONDCP tracks progress by U.S. agencies in meeting these objectives, it is not directly involved in planning or implementing their activities. Data from ATF on firearms seized in Mexico and traced from calendar year 2009 to 2014 indicate that the majority originated in the United States. Because of the illicit nature of the trafficking, the exact number of firearms trafficked from the United States into Mexico is unknown. Similarly, ATF officials noted that since firearms seized in Mexico are not always submitted for tracing the same year they were seized, or are not submitted at all, it is not possible to develop data to track trends on firearms seized. However, ATF uses the number of firearms seized and traced as an indicator to estimate extent of illicit firearms trafficking. While the government of Mexico collects data on the number of firearms its law enforcement entities seize each year, our analysis and findings refer exclusively to the universe of firearms seized in Mexico that were submitted for tracing using eTrace. According to ATF data, of the 104,850 firearms seized by Mexican authorities and submitted for tracing from 2009 to 2014, there were 73,684, or 70 percent, found to have originated in the United States. About 17 percent of the total, 17,544 firearms, were traced to a country other than the United States. ATF could not determine the origin of 13,622 (13 percent) of these firearms because of incomplete information. See figure 1. From 2009 to 2011, numbers of firearms seized by Mexican authorities and submitted for tracing fluctuated significantly, followed by a steady decline after 2011. According to ATF officials, shifts in the number of guns seized and traced do not necessarily reflect fluctuations in the volume of firearms trafficked from the United States to Mexico from one year to the next. ATF staff explained that there are several factors that have influenced the year-to-year variance in the number of firearms traced since 2009. For example, they explained that the high number of firearms traced in 2009 reflects a single submission by the Mexican military to ATF for tracing of a backlog of thousands of firearms. Conversely, ATF officials noted there was a lower number of firearms submitted for tracing in 2010 because that is the year eTrace in Spanish was initially deployed in Mexico, and Mexican law enforcement officials at the local, state, and federal level had to be trained on using the system. In 2011, a much higher number of firearms were traced as Mexican officials became proficient in using the system. Finally, U.S. and Mexican officials suggest the decline since 2011 may reflect a period of adjustment in cooperation under the Peña Nieto administration. This included the centralization of access to eTrace in Mexico’s Attorney General’s Office and retraction of eTrace accounts from federal, state, and local law enforcement, which resulted in fewer Mexican law enforcement officials able to trace firearms using the system. According to Mexican law enforcement officials we interviewed, DTOs prefer high caliber weapons with greater firepower, including high caliber rifles or long guns, and military grade equipment. Officials explained that the firearms of choice for drug traffickers are high caliber assault rifles, such as AK type and AR 15 type, which are available for purchase in the United States and which can be converted to fully automatic fire (i.e., converted into machine guns). Officials also noted that in recent years they have seen DTOs acquire military equipment, such as .50 caliber machine guns, rocket launchers, and grenade launchers. However, they said that unlike firearms typically used by DTOs, which often can be traced back to the United States, this type of equipment is known to often be trafficked into Mexico from leftover Central American military stockpiles from past conflicts. See figure 2 for examples of long and short guns (also referred to as handguns). According to data provided by ICE, the agency seized 5,951 firearms that were destined for Mexico in the last 6 years. Of firearms seized by ICE from 2009 to 2014, 2,341, or 39 percent, were long guns—including rifles and shotguns. During the same period, ICE seized 3,610 short guns— including revolvers and pistols (see fig. 3). According to data provided by ATF, almost half of all firearms seized in Mexico and traced in the last 5 years were long guns. From 2009 through 2014, 49,566 long guns—rifles and shotguns—were seized and traced. During that same period, 53,156 short guns—including revolvers and pistols—were seized and traced. The data also show a substantial decline in the number of long guns traced since 2011 (see fig. 4). Mexican law enforcement officials said that in the last 2 years they often seized more handguns than rifles, but stated that the use of high caliber rifles by cartels is still widespread. According to ATF officials, steps the bureau has taken to combat firearms trafficking to Mexico have made it more difficult for firearms traffickers to acquire long guns. Specifically, they noted implementation of Demand Letter 3, which requires licensed dealers and pawnbrokers in Arizona, California, New Mexico, and Texas to report multiple sales of certain rifles. According to ATF, information from multiple sales reports on long guns allows the bureau to identify indicators of suspicious or high-volume purchasing by individuals, repetitive purchasing, and purchases by associates, as well as geographical trends for such sales. ATF officials reported that this information has helped them identify firearms traffickers and others involved in a timelier manner, which on several occasions has led to arrests and seizures of firearms intended for trafficking to Mexico. From 2011 to 2014, 490 long guns that had been recorded as part of multiple sales transactions under Demand Letter 3 were seized in crime scenes—259 in the United States, 209 in Mexico, and 22 in undetermined locations. Most of the firearms seized in Mexico that were traced and found to be of U.S. origin from 2009 to 2014 came from U.S. Southwest border states. While guns seized in Mexico of U.S. origin were traced to all of the 50 states, most came from Texas, California, and Arizona. As shown in figure 5, of all firearms seized in Mexico that were traced and identified to be of U.S. origin, about 41 percent came from Texas, 19 percent from California, and 15 percent from Arizona. According to ATF, in fiscal year 2014, there were about 10,134 licensed dealers and pawnbrokers in the four Southwest border states, many of them along the border. This represents about 16 percent of the approximately 63,311 licensed dealers and pawnbrokers nationwide. These licensed dealers and pawnbrokers can operate in locations such as gun shops, pawn shops, their own homes, or gun shows. According to ATF officials, most firearms seized in Mexico and traced back to the United States are purchased in the United States then transferred illegally to Mexico. ATF has been able to determine the original retail purchaser for about 45 percent of firearms seized in Mexico and traced to the United States from 2009 to 2014. However, ATF was unable to determine a purchaser for 53 percent, because of factors such as incomplete identifying data on trace request forms, altered serial numbers, no response from the federal firearm licensee to ATF’s request for trace information, or incomplete or never received out-of-business licensee records. ATF and Mexican government officials told us that a new complicating factor in their efforts to fight firearms trafficking is the use of weapons parts transported to Mexico to be later assembled into finished firearms. According to documents provided by ATF, firearm parts include unfinished receivers barrels, triggers and hammers, buttstocks, pistol grips, pins, bolts, springs, and other items. Figure 6 shows some of these firearms parts. None of these firearm parts are classified as firearms under the Gun Control Act. In general, U.S. federal laws and regulations requiring manufacturers and importers of firearms to identify firearms with a serial number do not apply to parts, unless otherwise specified by law. Federal firearms licensees and other retailers are not required to report on the acquisition and disposition of firearm parts as they must for firearms. Furthermore, any individual in the United States may legally acquire and possess certain firearm parts that are not otherwise proscribed by law, including persons prohibited from possessing firearms and ammunition, such as convicted felons. Firearms may be assembled by using parts kits that include all of the components of a fully operable firearm minus the firearm receiver or frame, which may be obtained separately. ATF officials explained that in order to circumvent marking requirements on transactions involving firearms and thus avoid tracing, criminals will sometimes use unfinished receivers, such as “castings” or “flats,” rather than fully functional receivers. A frame or receiver by itself is classified as a firearm by definition under the Gun Control Act. The receiver is the part of the firearm that houses the operating parts, typically the bolt or bolt carrier group, the magazine well, and the trigger group. A casting is essentially a piece of metal fabricated with the exterior features and contours of the firearm receiver for which it is intended to substitute, but that without further machining will not function as a firearm. Castings and flats are commonly referred to as 80 percent receivers in marketing materials and advertisements promoting their sale. The “80 percent” label is intended to convey that the product has been cast or fabricated with most of the features of a finished, functional firearm receiver, but it will require further machining to function as a firearm (see fig. 7). A receiver flat is a piece of metal that has the same dimensions as a receiver, but that has not been shaped into a firearm configuration. In this form, it cannot accept any component parts, but with the proper equipment it can be readily bent into shape and molded into a receiver (see fig. 8). According to documents provided by ATF, since kits, castings, and flats are not classified as firearms, transfers of those items are not regulated under the Gun Control Act or National Firearms Act. Although ICE officials noted they are subject to export control laws, they have no serial numbers and generally no markings; thus, firearms assembled with them are untraceable. In addition, receivers and firearms parts are small and when transported separately may not be easily identified as items intended for the production of firearms. They are also easy to conceal, making it more challenging for customs authorities to detect illicit shipments of such parts. According to ATF officials, there are no reliable data on the extent of firearm parts trafficking from the United States into Mexico. They noted, however, that recent seizures of firearms parts, firearms made with unmarked parts, and equipment used to assemble or manufacture firearms in Mexico suggest an emerging reliance by criminal organizations on this source of weapons. For example, law enforcement officials in Mexico described to us two high-profile cases in 2014 involving illicit firearm parts assembly of this type. One was in Guadalajara, where Jalisco state police seized hundreds of unfinished receivers and pieces of sophisticated equipment being used to complete high caliber rifles. The second was in Tijuana, where Baja California state police seized 25 rifles in the process of assembly with firearm parts from the United States. ATF and ICE have taken several steps to improve coordination on efforts to combat firearms trafficking that we previously identified. In 2009, we reported instances of dysfunctional operations, duplicative initiatives, and jurisdictional conflicts between ATF and ICE. In response to our recommendations on how to address these challenges, ATF and ICE updated and signed an interagency collaboration memorandum of understanding (MOU) in June 2009. In their revised MOU, the agencies committed to a shared goal of keeping the public safe by using the tools given to both agencies and which are vital to the effective control of domestic and international trafficking of firearms, ammunition, explosives, weapons, and munitions. Specifically, the MOU set forth roles and requirements for each agency with respect to (1) intelligence and information sharing, (2) general investigative guidelines, (3) specific investigative guidelines, (4) sources of information, and (5) conflict resolution. This effort to improve coordination and optimize use of the agencies’ expertise provided the basis to address the issues that had hampered interagency collaboration prior to the MOU’s implementation. ICE and ATF officials said that after the MOU was signed, they held joint training exercises and conferences to ensure that agents had knowledge of the MOU and its jurisdictional parameters and collaboration requirements. Officials from each agency in headquarters, Mexico, and border locations we visited indicated that personnel working on firearms trafficking to Mexico were generally aware of the MOU’s key provisions and collaborated on this basis. Agency officials also highlighted a more recent joint interagency conference in September 2014, which sought to provide participants with a common understanding of collaborative efforts and respective areas of jurisdiction. Additionally, senior agency headquarters officials asserted that there is extensive cooperation between ATF and ICE, at the headquarters and field office levels. ATF and ICE officials in border field offices we visited confirmed that they were familiar with the MOU and that it provides them guidance on interagency collaboration. Similarly, ATF and ICE officials in Mexico stated that since they are co-located physically, they have a greater opportunity to work together closely on firearms trafficking-related cases, and an ICE official said that they rely on the MOU to help define their respective roles. Nevertheless, we identified persistent challenges in information sharing and some disagreement on the agencies’ respective roles in investigations. For example, ATF and ICE disagree on the extent to which trace data on firearms seized in Mexico collected through eTrace should be shared to support ICE firearms trafficking investigations. According to an ICE assistant deputy director, these firearms trace data from Mexico are currently only shared on a limited basis with ICE. Several ICE officials expressed an interest in obtaining access to these data and indicated that this access would enhance their ability to identify methodologies used by firearms traffickers and trends in criminal activity along the Southwest border. ICE officials responsible for investigations said that trace data should be shared in accordance to the MOU, which states “ATF shall report to the appropriate ICE field office in a timely manner any intelligence received relating to the illegal exportation, attempted exportation, or planned exportation of any item on the United States Munitions List...” However, the MOU does not address how general trafficking information, such as that submitted through eTrace by a third law enforcement agency, may be shared. ATF officials asserted that their agency shares trace data on firearms seized in Mexico with ICE according to established agency polices, which currently only allow ATF to provide non-case-specific information to other agencies in aggregate form. With respect to the results of individual trace requests, ATF officials explained that they are provided only to the law enforcement agency that submits the trace information; generally, this information is not shared with third parties, including other law enforcement agencies. ATF would have to obtain authorization from the third-party law enforcement agency that submitted the trace information to share it with ICE. Thus, ATF cannot automatically share information with ICE on firearm traces submitted by Mexican law enforcement agencies without their authorization. ATF staff said these policies are set forth in the agreements ATF signs with each law enforcement agency for the use of eTrace. Officials from ATF and ICE said there are joint efforts under way to find a mechanism to share this information. Additionally, the 2009 MOU sets forth investigative guidelines to define the roles and responsibilities of ATF and ICE pursuant to their respective statutory authorities. For example, the MOU states that “the regulation and inspection of the firearms industry is within the sole purview of ATF” and that “all investigative activities at the port of entry, borders and their functional equivalents must be coordinated through ICE.” Notwithstanding these guidelines, we found some confusion among some agency officials about the appropriate roles of their counterparts in conducting investigations. For example, a senior ICE official responsible for investigations questioned the involvement of ATF in firearms trafficking investigations to Mexico, because, according to the official, ATF’s jurisdiction focuses on combating domestic firearms violations. ICE officials also expressed concerns that the involvement of ATF’s international desk with Mexican agencies may create confusion among Mexican government authorities over the roles that ICE and ATF play in addressing firearms trafficking cases. However, an ICE assistant deputy director explained that pursuant to the Arms Export Control Act, ICE has primary jurisdiction over violations related to the international trafficking of firearms, but many such trafficking investigations begin with domestic criminal activities for which ATF has jurisdiction. Therefore, he stressed that it is essential that the two agencies collaborate to leverage ICE’s international and ATF’s domestic legal authorities. He added that ATF’s international operations also provide much-needed capacity building regarding forensics and e-Trace activities in Mexico. However, ICE and ATF must work to ensure that confusion is not created among Mexican agencies regarding the responsibilities for the investigation of international firearms trafficking by U.S. authorities. ATF officials agree that their agency’s efforts to combat firearms trafficking are concentrated in the United States, and that they recognize the role of ICE in addressing transnational weapons trafficking. However, some ATF officials said that it is incorrect to suggest that ICE has exclusive jurisdiction with respect to illicit cross-border firearms trafficking to Mexico. According to these officials, most investigations involving the smuggling of firearms from the United States to Mexico implicate ATF jurisdiction, because they typically involve the illegal acquisition of firearms inside the United States. ATF’s jurisdiction extends to unlawful acquisition of firearms by prohibited persons, straw purchasing, and other unlawful transfers of firearms. ATF officials added that the bureau’s statutory responsibility for tracing firearms includes the deployment of eTrace to Mexican and other foreign law enforcement entities, and noted that eTrace entries from Mexico can result in the opening of firearm trafficking investigations focused on criminal activity in the United States. ATF officials also acknowledge that because of the nature of firearms trafficking to Mexico, many investigations involve overlapping jurisdiction with respect to cross-border offenses squarely within ICE’s jurisdiction. They also noted the critical role ATF plays in providing training and capacity building on firearms and explosives identification and tracing for Mexican law enforcement. During our fieldwork, Mexican law enforcement agencies confirmed the benefits they derived from ATF capacity-building efforts, and they said they regarded ATF as their lead U.S. counterpart in investigating firearms trafficking. Thus, although ATF has established productive cooperative relations with Mexican agencies, there may also be some confusion in Mexico over ATF’s and ICE’s roles in combating firearms trafficking, as expressed by some ICE officials. In prior work, we have identified several interagency mechanisms that can be used to improve collaboration among agencies working on a shared mission, such as information sharing, agency roles and responsibilities, and oversight and monitoring. We have also reported that written interagency agreements, such as MOUs, are most effective when they are regularly updated and monitored. We observed that when implementation of such agreements is not regularly monitored, there is sporadic and limited collaboration among agencies. We also have found that agencies that create a means to monitor, evaluate, and report the results of collaborative efforts can better identify areas for improvement. Immediately after the MOU was updated in 2009, the agencies committed to undertake efforts to ensure that its provisions would be implemented accordingly. For example, at that time, ICE informed GAO that headquarters had a process to obtain information from ICE field offices every 60 days to identify coordination issues with ATF that could not be resolved at the field level within the framework of the MOU. In such situations, ICE headquarters would then work with the appropriate ATF component to resolve the issue. ICE officials explained these initial monitoring efforts were designed to ensure that the updated MOU was being effectively followed as it introduced several provisions or guidelines on how ATF and ICE should collaborate on firearms trafficking. However, according to ICE officials, this process was only in place during the initial implementation period of the MOU, and the effort was not sustained. Currently, officials from both agencies acknowledged that there is no specific mechanism in place to monitor implementation of the MOU. However, each agency’s officials referred to different efforts that they said provide an opportunity to monitor interagency collaboration under the MOU. For example, a deputy assistant director for ICE stated that coordination between ICE and ATF on firearms trafficking cases occurs at the Export Enforcement Coordination Center as well as at the field level. ICE’s Export Enforcement Coordination Center is intended to serve as the primary forum within the federal government for executive departments and agencies to coordinate their export control enforcement efforts. The Center seeks to maximize information sharing, consistent with national security and applicable laws. Thus, it is likely that coordination challenges between ICE and ATF on firearms trafficking could potentially be detected at the Center. However, given the Center’s broader responsibility to enhance export control enforcement efforts with multiple agencies, it is not directly intended to monitor implementation of the MOU. Moreover, coordination challenges related to the MOU persist even though the Center has been in place for 5 years, indicating that this may not be an effective means to monitor the MOU’s implementation. Senior ATF officials said that although there is no formal arrangement to regularly monitor implementation of the MOU, they consider joint interagency training to be an effective approach to ensure that officials from both agencies are familiar with the provisions of the MOU and are working together effectively. However, only two such training exercises have taken place—one in 2014 and another in September 2015. The training is intended to acquaint officials from both agencies with how the agencies coordinate firearms trafficking efforts, and as part of the training, the MOU provisions are discussed, but these training exercises do not constitute a mechanism for consistent monitoring of implementation of the MOU. By not sustaining a monitoring process for the MOU, the agencies have no assurance that its provisions are being implemented effectively, and challenges we identified are continuing to persist without a process for resolution. Mexican and U.S. officials described how upon coming to power in December 2012, the current administration of Mexican President Enrique Peña Nieto undertook a reevaluation of U.S.-Mexico law enforcement collaboration, including efforts to combat firearms trafficking. According to some officials, the government of Mexico took steps to consolidate law enforcement cooperative activities under an approach termed Ventanilla Única—which translates to Single Window. Under Ventanilla Única, Mexico’s Interior Ministry has become the primary entity through which Mérida Initiative training and equipment are coordinated, including capacity-building activities related to firearms trafficking. The government of Mexico also established a single point of contact within Mexico’s Office of the Attorney General to approve joint investigations with U.S. counterparts. Additionally, Mexican officials explained that Mexican law categorizes firearms trafficking as a federal crime and permits only federal authorities to work on such cases. This has led to some notable changes in the way U.S. and Mexican authorities work together on firearms trafficking efforts. One of these changes stemmed from the decision to centralize access to ATF’s eTrace in the Mexican Attorney General’s Office. Consistent with our prior recommendations, in 2010, ATF reached an agreement for deployment of eTrace in Spanish in Mexico, with Mexican authorities. According to ATF, this was a significant investment for which ATF provided training to numerous officials from various Mexican federal, state, and local law enforcement agencies on the use of eTrace, while assigning accounts to allow them to access the system. However, by 2013 the Mexican government retracted access to many of these accounts, effectively limiting eTrace in Mexico to certain authorized officials in the office of Mexico’s Attorney General. Mexican officials explained that the decision to consolidate access at the Attorney General’s office was intended to provide the government of Mexico with more effective control over the information associated with eTrace, and to support a central repository of evidence related to federal crimes such as trafficking of firearms. However, U.S. officials and some Mexican authorities said that limiting access to eTrace to a single governmental entity has restricted opportunities for bilateral collaboration. Some U.S. officials based in Mexico similarly noted that limiting access to eTrace diminished tracing of total firearms seized by Mexican authorities. Another significant change following the reassessment of bilateral collaboration, which began in 2012, was the suspension of periodic meetings of a working group known as GC Armas, which brought together U.S. and Mexican officials from various agencies involved in combating firearms trafficking. According to ATF officials, prior to 2013, GC Armas held periodic meetings annually with the participation of approximately 70 to 100 officials from both governments. These officials shared useful information on firearms trafficking trends, trace data, investigations, collaboration questions, and many other issues. ATF officials said that oftentimes very productive cooperative efforts on firearms trafficking began informally at GC Armas meetings and were subsequently formalized. Mexican officials similarly characterized GC Armas meetings as contributing in a fundamental manner to reaching significant agreement between law enforcement in both countries on how to combat firearms trafficking. They noted one such bilateral effort that resulted in a comprehensive assessment of firearms and explosives trafficking with recommendations for each country on sharing information and cooperating on cross-border investigations. Officials from both countries explained that while bilateral coordination did not cease after the suspension of GC Armas meetings, overall collaboration slowed down with fewer opportunities to promote bilateral firearms trafficking initiatives. U.S. and Mexican authorities acknowledge the challenges to law enforcement efforts posed by continuing corruption among some Mexican officials. As we discussed in our 2009 report, concerns about corruption within Mexican government agencies often limit U.S. officials’ ability to develop a full partnership with their Mexican counterparts. Officials we met with from ATF, ICE, CBP, and State continued to express such concerns regarding corruption in Mexico. Some Mexico-based ICE officials, for example, stated that they are conscious that their U.S.-based colleagues will not always share with them all of the information they have on firearms trafficking investigations because of concerns about corruption. That is, ICE officials in the United States and along the U.S.- Mexican border are concerned about sharing information with ICE officials based in Mexico, fearing that the information may unintentionally reach corrupt Mexican authorities and compromise their investigations. According to ICE officials, concerns they had about corruption in Mexico were exacerbated early in the Peña Nieto administration when a vetted unit of Mexican law enforcement officials that they trusted and that ICE had trained and worked with for several years was disbanded. U.S. officials also highlighted the problems frequent turnover in Mexican law enforcement pose for bilateral efforts to combat criminal activities, including firearms trafficking. Some U.S. officials explained that recurring personnel changes aggravate the issue of corruption. In a country such as Mexico, where there is an underlying concern about government corruption, frequent turnover complicates efforts to develop trust with counterpart officials. Other U.S. officials noted that there are no civil service protections in Mexico, so there can be a virtually complete change in the staff of a government agency when a new administration comes into office, or even when the head of an agency is reassigned. As a result, all of the people who received specialized training, such as firearms recognition, can be removed suddenly leaving no institutional memory, which complicates planning future collaboration and program implementation. Similarly, ATF officials commented that oftentimes Mexican law enforcement personnel in key positions for whom they provided firearms training were subsequently replaced. While turnover has been a recurring challenge for U.S. agencies working in Mexico, various U.S. officials said that it appears to have been particularly frequent in the past few years. For example, the spokesperson for one U.S. agency in Mexico noted that in the past 5 years the division responsible for implementing professional development at a key Mexican law enforcement entity has been replaced seven times. While both U.S. and Mexican officials collaborating on firearms trafficking said that bilateral efforts had been scaled back after the Peña Nieto administration came into power, these officials noted that over the past year collaborative activities have been bolstered and are gaining momentum. For example, around the time of our fieldwork in Mexico, CBP was working with Mexican authorities to deploy specially trained canine units able to detect firearms and explosives around the country. Similarly, ATF was providing training on firearms identification for Mexican Customs. A Mexican Customs spokesman stressed the importance of such training in helping front-line customs officers recognize and safely secure not just firearms but also ammunition, firearms’ components, and explosives that criminals try to smuggle across the border. He explained that this training has been critical in allowing officers at the border to perform their mission. Mexican Attorney General officials also noted their increasing level of cooperation with U.S. authorities on firearms trafficking. They highlighted ATF training on the use of eTrace and the resumption of GC Armas meetings in 2015. ICE officials also told us that they have recently reestablished the vetted unit in Mexico, which improves trusted working relationships with Mexican counterparts. Finally, in addition to renewing existing collaborative efforts with Mexican law enforcement counterparts, ATF has also sought to reach out to other Mexican government entities. For example, this year ATF has been collaborating with the Mexican Navy on training for firearms and explosives detection, identification, and seizure. Mexican Navy officers expressed gratitude for this training, noting that they are increasingly confronting real-world situations that require this type of knowledge. The indicator used in the Strategy to track progress by U.S. agencies to stem firearms trafficking to Mexico does not adequately measure implementation of the strategic objective. The Strategy includes strategic objectives and indicators for each of its nine issue chapters to ensure effective implementation. The strategic objective for the Weapons Chapter is to “stem the flow of illegal weapons across the Southwest border into Mexico.” ONDCP’s indicator for this chapter is the “number of firearms trafficking/smuggling seizures with a nexus to Mexico.” The Strategy does not further define the indicator, but ONDCP staff explained that it refers to the number of firearms seized in Mexico that are traced by ATF. While ONDCP’s Strategy asserts that it is critical to have indicators that enable tracking the implementation of objectives, this indicator for the Weapons Chapter does not effectively track the status of efforts to stem the flow of illegal weapons across the Southwest border. As previously noted in this report, ATF officials readily acknowledge that shifts in the number of guns seized and traced do not necessarily reflect fluctuations in the volume of firearms trafficked from the United States to Mexico in any particular year. There are many factors that could account for the number of firearms traced in a given year beside the number of firearms smuggled from the Unites States. Moreover, as discussed above, for various reasons the number of firearms seized in Mexico and traced back to the United States shifted significantly year to year after 2009 and then declined steadily since 2011. Thus, while the number of firearms seized and traced by ATF is useful to provide an overall indication of firearms of U.S. origin found in Mexico, by itself it is not an adequate measure of progress agencies are making to stem the flow of firearms trafficked from the United States into Mexico. Additionally, ONDCP has not reported progress made on the strategic objective in the Weapons Chapter in 2011 or 2013. ONDCP staff said they anticipate that the 2015 Strategy will include a section to report on the outcomes of the last 2 years, and they plan to report on this indicator. Beside the strategic objective and indicator, the Weapons Chapter of the Strategy also includes five supporting actions, along with associated activities to achieve those actions; see table 3. According to an ONDCP spokesman, while the number of firearms seized in Mexico and traced by ATF may be an indicator of the flow of firearms across the border, these five supporting actions and their associated activities should also be considered to get a full picture of the agencies’ progress in combating arms trafficking. ONDCP officials said that they monitor progress in combating arms trafficking by obtaining periodic information from ATF and ICE on their implementation of these and other activities. Our review of the Weapons Chapter in the 2011 and 2013 Strategies determined that, generally, accomplishments under each supporting action were discussed. For example, in the 2011 Strategy, one supporting action called for ATF to increase staffing at the El Paso Intelligence Center Firearms and Explosives Trafficking Intelligence Unit through the incorporation of partner agencies. In 2013, the Strategy included an update that the unit had incorporated a CBP analyst dedicated to weapons-related intelligence. Similarly, in 2011, the agencies said they had plans under way to train over 200 Mexican law enforcement personnel in how to correctly use eTrace. The 2013 Strategy noted that 350 Mexican law enforcement personnel had received training on using eTrace. Nevertheless, the supporting actions described in the Strategy are not consistently linked to indicators or regularly measured. Currently, the narrative related to these supporting actions typically covers ongoing efforts by the agencies to address these actions, but it does not include a measure of overall progress. By including these supporting actions and activities in the Weapons Chapter as measures, ONDCP could better assess the agencies’ efforts in combating firearms trafficking because this would provide a more comprehensive assessment. Although ATF and ICE have pledged, through the 2009 MOU, to collaborate effectively to combat firearms trafficking, these agencies have not set up a mechanism to monitor implementation of the MOU that would allow them to identify and address information sharing and collaboration challenges. Consequently, gaps in information sharing and some disagreement about agency roles in the broader effort to combat firearms trafficking have emerged that weaken the effectiveness of the MOU. It is unclear to what extent ONDCP’s Strategy has advanced U.S. government efforts to combat firearms trafficking, since the indicator used to track progress, by itself, is not sufficient to measure progress made by U.S. agencies in stemming arms trafficking to Mexico. Other actions that agencies take to stem the flow of firearms from the United States into Mexico may be worth considering as additional measures of progress, such as the number of interdictions of firearms destined for Mexico, the number of investigations leading to indictments for firearms trafficking related to Mexico, and the number of convictions of firearms traffickers with a nexus to Mexico. By including these types of measures in a comprehensive indicator or set of indicators, ONDCP will be better positioned to monitor progress on stemming firearms trafficking across the Southwest border. We recommend that the Attorney General of the United States and the Secretary of Homeland Security convene cognizant officials from ATF and ICE to institute a mechanism to regularly monitor the implementation of the MOU and inform agency management of actions that may be needed to enhance collaboration and ensure effective information sharing. To ensure effective implementation of the strategic objective of the Weapons Chapter of the Strategy, we recommend that the ONDCP Director establish a more comprehensive indicator, or set of indicators, that more accurately reflects progress made by ATF and ICE in meeting the strategic objective. We provided a draft of this report for review and comment to the Departments of Homeland Security, Justice, and State; and the Office of National Drug Control Policy. DHS agreed with our recommendation regarding monitoring implementation of the MOU and provided written comments in response to the draft, reproduced in appendix II. In comments on the draft report provided via e-mail by a designated ATF Audit Liaison Officer, DOJ also agreed with this recommendation, noting that ATF officials will work with counterparts at DHS to create a mutually acceptable method to further enhance implementation of the MOU. State did not provide comments on the draft report. In e-mail comments provided by a designated General Counsel official, ONDCP concurred with our recommendation to establish a more comprehensive set of indicators for the Weapons Chapter of the Strategy. Accordingly, ONDCP indicated that it would work with ICE and ATF to develop additional indicators to evaluate their progress. The indicators developed through this collaborative process will be used in future iterations of the Strategy beginning with the next report in 2017. ICE and ATF also provided technical comments which we incorporated throughout the report where appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Homeland Security; the Attorney General of the United States; the Director of the Office of National Drug Control Policy; the Secretary of State; and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6991 or farbj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To identify data available on the origin of firearms trafficked to Mexico that were seized and traced, we relied primarily on the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) data compiled by its National Tracing Center (NTC).The data provided by NTC were obtained from ATF’s Firearms Tracing System, most of which is developed through eTrace submissions. We discussed with cognizant NTC officials the methodology used to collect these data and reviewed supporting agency documentation. Based on these discussions, we determined that NTC data were sufficiently reliable to permit an analysis of where the firearms seized in Mexico that were submitted for tracing had been manufactured and whether they had been imported into the United States before arriving in Mexico. For those firearms that were traced to a retail dealer in the United States before being trafficked to Mexico, NTC data also contained information on the states where they had originated. NTC trace data also contained information allowing identification of the types of firearms that were most commonly seized in Mexico and subsequently traced. We corroborated this information in discussions with U.S. and Mexican law enforcement officials. Since firearms seized in Mexico are not always submitted for tracing within the same year as they were seized, it was not possible for us to develop data to track trends on the types of firearms seized year to year. Similarly, we were unable to obtain quantitative data from U.S. or Mexican government sources on the users of illicit firearms in Mexico. However, there was consensus among U.S. and Mexican law enforcement officials that most illicit firearms seized in Mexico had been in the possession of organized criminal organizations linked to the drug trade. The involvement of criminal organizations with ties to drug trafficking in the trafficking of illicit firearms into Mexico was confirmed by law enforcement intelligence sources. We learned about the use of firearms parts for the assembly of firearms in Mexico through our interviews with cognizant U.S. and Mexican government and law enforcement officials and through review of ATF-provided documents. To learn more about U.S. government efforts to combat illicit sales of firearms in the United States and to stem the flow of these firearms across the Southwest border into Mexico, we interviewed cognizant officials from the Department of Justice’s (DOJ) ATF, the Department of Homeland Security’s (DHS) Immigration and Customs Enforcement (ICE) and Customs and Border Protection (CBP), and the Department of State (State) regarding their relevant efforts. We obtained data from ATF and ICE on funding for their respective efforts to address firearms trafficking to Mexico, and data from ICE on seizures of southbound firearms. To assess the reliability of the data, we discussed sources and the methodology use to develop the data with agency officials. We determined that the information provided to us was sufficiently reliable to describe agencies’ efforts to combat firearms trafficking. We also conducted fieldwork at U.S.-Mexico border crossings at El Paso, Texas, and San Diego, California. In these locations, we interviewed ATF, CBP, and ICE officials responsible for overseeing and implementing efforts to stem the flow of illicit firearms trafficking to Mexico and related law enforcement initiatives. We reviewed and analyzed DOJ and DHS documents relevant to U.S. government efforts and collaboration to address arms trafficking to Mexico, including funding data provided to us by ATF and ICE, the 2009 memorandum of understanding (MOU) between ICE and ATF, data from ICE on seizures of firearms destined for Mexico, data from ATF and ICE on efforts to investigate and prosecute cases involving arms trafficking to Mexico, and agency reports and assessments related to the issue. We also reviewed relevant prior GAO reports, Congressional Research Service reports and memorandums, and reports from DOJ’s Office of Inspector General related to ATF’s efforts to enforce federal firearms laws. We reviewed provisions of federal firearms laws relevant to U.S. government efforts to address firearms trafficking to Mexico, including the Gun Control Act of 1968, the National Firearms Act of 1934, and the Arms Export Control Act of 1976. We did not independently review any Mexican laws for this report. To determine how well agencies collaborated with Mexican authorities to combat illicit firearms trafficking, we conducted fieldwork in Mexico City, Guadalajara, and border locations in Ciudad Juarez and Tijuana, Mexico. In Mexico, we met with ATF, CBP, ICE, and State officials working on law enforcement issues at the U.S. embassy. We interviewed Mexican government officials engaged in efforts to combat firearms trafficking from the Attorney General’s Office (Procuraduría General de la República), the Federal Police (Policía Federal); the Ministry of Public Safety (Secretaría de Seguridad Pública); the Ministry of Defense (Secretaría de la Defensa Nacional); the Mexican National Intelligence Agency (Centro de Investigación y Seguridad Nacional, or CISEN); the Mexican Navy (Secretaría de Marina or Armada de Mexico); Customs (Servicio de Administración Tributaria); the Forensic Science Institute of Jalisco (Instituto Jalisciense de Ciencias Forenses); Attorney General Regional Offices, Federal Police, and State Police in Tijuana and Ciudad Juarez; and the State Attorney General in Guadalajara. Because our fieldwork was limited to selected locations along the Southwest border and in the interior of Mexico, our observations in these locations are illustrative but are not generalizable and may not be representative of all efforts to address the issue. To assess the extent to which the National Southwest Border Counternarcotics Strategy (Strategy) outlines U.S. goals and progress made in efforts to stem firearms trafficking to Mexico, we reviewed the 2011 and 2013 versions of the Strategy’s Weapons Chapter and the 2010 implementation guide. We also met with Office of National Drug Control Policy officials responsible for the implementation and monitoring the Strategy, as well as with ATF and ICE officials responsible for writing the Weapons Chapter and overseeing implementation and reporting on activities described within their respective agencies. In addition to the contact named above, Charles Johnson (Director), Juan Gobel (Assistant Director), Francisco Enriquez (Analyst-in-Charge), Danny Baez, and Julia Jebo-Grant made key contributions to this report. Ashley Alley, Karen Deans, Justin Fisher, and Oziel Trevino provided additional assistance.","Violent crimes committed by drug trafficking organizations in Mexico often involve firearms, and a 2009 GAO report found that many of these firearms originated in the United States. ATF and ICE have sought to stem firearms trafficking from the United States to Mexico. GAO was asked to undertake a follow-up review to its 2009 report ( GAO-09-709 ) addressing these issues. This report examines, among other things, (1) the origin of firearms seized in Mexico that have been traced by ATF, (2) the extent to which collaboration among U.S. agencies combating firearms trafficking has improved, and (3) the extent to which the National Southwest Border Counternarcotics Strategy measures progress by U.S. agencies to stem firearms trafficking to Mexico. To address these objectives, GAO analyzed program information and firearms tracing data from 2009 to 2014, and met with U.S. and Mexican officials on both sides of the border. According to data from the Department of Justice's Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), 73,684 firearms (about 70 percent) seized in Mexico and traced from 2009 to 2014 originated in the United States. ATF data also show that these firearms were most often purchased in Southwest border states and that about half of them were long guns (rifles and shotguns). According to Mexican government officials, high caliber rifles are the preferred weapon used by drug trafficking organizations. According to ATF data, most were purchased legally in gun shops and at gun shows in the United States, and then trafficked illegally to Mexico. U.S. and Mexican law enforcement officials also noted a new complicating factor in efforts to fight firearms trafficking is that weapons parts are being transported to Mexico to be later assembled into finished firearms, an activity that is much harder to track. In 2009, GAO reported duplicative initiatives, and jurisdictional conflicts between ATF and the Department of Homeland Security's Immigration and Customs Enforcement (ICE). That year, in response to GAO's recommendations on these problems, ATF and ICE updated an interagency memorandum of understanding (MOU) to improve collaboration. ATF and ICE have taken several steps since then to improve coordination on efforts to combat firearms trafficking, such as joint training exercises and conferences to ensure that agents are aware of the MOU and its jurisdictional parameters and collaboration requirements. However, GAO found that ATF and ICE do not regularly monitor the implementation of the MOU. In the absence of a mechanism to monitor MOU implementation and ensure that appropriate coordination is taking place between the two agencies, GAO found that gaps in information sharing and misunderstandings related to their roles and responsibilities persist. The indicator used to track U.S. agencies' efforts to stem firearms trafficking to Mexico in the Office of National Drug Control Policy's (ONDCP) National Southwest Border Counternarcotics Strategy , by itself, does not adequately measure progress. ONDCP tracks progress based on the number of arms seized in Mexico and traced to the United States; however, this number does not reflect the total volume of firearms trafficked from the United States, and it does not take into account other key supporting agency actions and activities as measures. GAO recommends that the Secretary of Homeland Security and the Attorney General of the United States take steps to formally monitor implementation of the 2009 MOU between ATF and ICE. GAO also recommends that ONDCP establish comprehensive indicators that more accurately reflect progress made in efforts to stem arms trafficking to Mexico. The Departments of Homeland Security and Justice, and ONDCP agreed with GAO's recommendations.",govreport
"Each state has a central repository for receiving criminal history information contributed by law enforcement agencies, prosecutors, courts, and corrections agencies throughout the state. Each repository compiles this information into criminal history records (commonly called “rap sheets”), which are to be made available to criminal justice personnel for authorized purposes. Typically, a criminal history record is created for each individual offender (each “subject”). The record is to contain relevant identifiers (including fingerprints) and information about all arrests and their dispositions, such as whether the criminal charges were dropped or resulted in an acquittal or a conviction. Efforts to improve criminal history records nationwide predate NCHIP by more than 2 decades. For example, the development of computerized criminal history systems in the states was a priority of the Law Enforcement Assistance Administration, established by the Omnibus Crime Control and Safe Streets Act of 1968. Also, during much of the 1970s, 1980s, and early 1990s—largely without specifically appropriated funds—BJS (or its predecessor, the National Criminal Justice Information and Statistics Service) took the lead in encouraging states to computerize criminal records and ensure conformity with evolving FBI standards. In the 1990s, efforts to improve the accuracy, completeness, and accessibility of criminal history records received an impetus with passage of various federal statutes, particularly the Brady Handgun Violence Prevention Act (“Brady Act”), which, among other things, authorized grants for the improvement of state criminal history records and amended the Gun Control Act of 1968; the National Child Protection Act of 1993, which was enacted to provide national criminal background checks for child care providers; and the Violent Crime Control and Law Enforcement Act of 1994, which, among other things, strove to improve access to court protection orders and records of individuals wanted for stalking and domestic violence. With initial grant awards to states in 1995, NCHIP was designed by BJS to implement these federal mandates to improve public safety by enhancing the nation’s criminal history records systems. In 1998, NCHIP’s scope was expanded in response to federal directives to develop or improve sex offender registries and to contribute data to a national sex offender registry. Also, in 1998, the “permanent” provisions of the Brady Act went into effect with the implementation of NICS—the computerized system designed to instantly (as the name indicates) conduct presale background checks of purchasers of any firearm (both handguns and long guns). In contrast, the “interim” provisions of the Brady Act (effective from 1994 to 1998) applied to handgun purchases only, and law enforcement officers were allowed a maximum of 5 business days to conduct presale background checks for evidence of felony convictions or disqualifying information. The effectiveness of NICS depends largely on the availability of automated records—including the final dispositions of arrests, such as whether the criminal charges resulted in convictions or acquittals. In this regard, many criminal justice agencies, from police departments to the courts, are generators of records relevant to NICS. Over the years, BJS has tried to ensure that the use of NCHIP funds was closely coordinated with the federal Edward Byrne Memorial Grant Program, which requires that states use at least 5 percent of their awards for improving criminal history records. All 50 states, the District of Columbia, and the U.S. territories have been recipients of NCHIP grant awards, which totaled more than $438 million during fiscal years 1995 through 2003. Also, as mentioned previously, to ensure national compatibility and accessibility of records, recipients’ uses of NCHIP funds must conform with the FBI’s standards for national data systems—including, as applicable, NICS, NCIC, III, and IAFIS. Regarding IAFIS, for example, most states have some type of automated fingerprint identification system (AFIS); a state can use NCHIP funds to enhance its AFIS by purchasing Livescan equipment, if the state has implemented (or is implementing) procedures to ensure that the AFIS is compatible with FBI standards. More details about the national data systems are presented in appendix II. For the recent fiscal years we studied, states used NCHIP grants primarily to support NICS in conducting background checks of firearms’ purchasers. According to BJS data, a total of $165.2 million in NCHIP grants was awarded during fiscal years 2000 through 2003. Of this total, a majority— over 75 percent—was used for NICS-related purposes that encompassed a broad range of activities, such as converting manual records to automated formats and purchasing equipment to implement computerized systems or upgrade existing systems. All other uses of NCHIP grants during this period, according to BJS, also had either direct or indirect relevance to building an infrastructure of nationally accessible records, such as implementing technology to support the automated transfer of fingerprint data to IAFIS. We found that a state’s participation status in NICS— whether the state was a full participant, partial participant, or nonparticipant—made little difference in how NCHIP funds were used by states. As indicated in table 1, NCHIP award amounts can be grouped into six spending categories in which BJS awarded a total of $165.2 million in NCHIP grants for fiscal years 2000 through 2003. A majority of these funds was used for NICS-related purposes. For example, the two largest categories of spending—NICS/III/criminal records improvements and disposition reporting improvements—accounted for over 75 percent of total program awards during this period. Both categories directly affected NICS. The NICS/III/criminal records improvements category affected NICS by focusing on activities for improving records related to federal firearms disqualifiers and enhancing access to these records through III. Similarly, the disposition reporting improvements category provided access to information about the disposition of arrests—information that is critical for determining whether persons are legally prohibited from purchasing firearms. Regarding this category, BJS encourages states to focus on making systemic improvements rather than using staff to manually research records to determine dispositions. Nonetheless, according to BJS, states may use NCHIP funds to research arrest dispositions in response to specific NICS-related queries, if the information is subsequently added to the automated system. BJS officials could not quantify the NCHIP grant amounts that all states have allocated for staff to research arrest dispositions. Officials in 2 of the 5 case-study states indicated that their states had used NCHIP funding to research missing arrest dispositions and update criminal history records in response to specific NICS-related queries. One of these states (Maryland) used $41,000 of its fiscal year 2002 NCHIP award to fund a full-time position for researching the state’s archived criminal history records. Also, table 1 shows that BJS awarded 3 percent of NCHIP funding specifically for protection order activities to improve records related to this firearms-purchase disqualifier. The other categories in table 1AFIS/Livescan activities, sex offender registry enhancements, and national security/antiterrorism activitieswere for records improvement efforts that do not directly impact NICS. However, according to BJS, even if not NICS-related, each of the six spending categories in table 1 had either direct or indirect relevance to building an infrastructure of nationally accessible records, such as implementing technology to support the automated transfer of fingerprint data to IAFIS. Appendix III presents more information about the use of NCHIP funds in the 5 case-study states, and appendix IV presents information about the use of NCHIP funds in the 5 priority states. As mentioned previously, for purposes of NICS background checks of persons purchasing firearms, states are categorized as full participants, partial participants, or nonparticipants. As table 2 shows, we found little difference in the use of NCHIP funds by states based on their participation status in NICS. With relatively minor exceptions, the relative order of spending across categories was the same in all three types of states. Of the various spending categories, NICS/III/records improvements reflected the largest difference in percentage points—that is, a difference of 12 percentage points between the partial participant states (47 percent) and the full participant states (35 percent). A BJS official stated that this difference is not substantial and might occur because some states have legislation with slightly different prohibitors for purchasing firearms. Using their own funds, in addition to NCHIP grants and other federal funds, states have made progress in automating criminal history records and making them accessible nationally. For example, the percentage of the nation’s criminal history records that are automated increased from 79 percent at the end of 1993 to 86 percent at the end of 1995 and to 89 percent at the end of 2001, according to BJS’s most recent biennial survey of states. To ensure national compatibility and accessibility of records, recipients’ uses of NCHIP funds must conform with the FBI’s standards for national data systems—including, as applicable, NICS, NCIC, III, and IAFIS. Such conformance is important, for example, because III is the primary system used to access state-held data for NICS checks. The number of states participating in III increased from 26 at the end of 1993 to 30 at the end of 1995 and to 45 by May 2003, indicating growth in compatible automated records. On the other hand, progress has been more limited for some NICS-related purposes. For example, automated information on the disposition of felony and other potentially disqualifying arrests is not always widely available. Also, automated information is not always available to identify other prohibited purchasers of firearms, such as persons convicted of a misdemeanor crime of domestic violence, persons adjudicated as mental defective, or persons who are unlawful users of controlled substances. In fiscal year 2004, BJS plans to begin using a new, performance-based tool for making NCHIP funding decisions. In recent years, with the use of state and federal funds, criminal history record automation levels in the states and the accessibility of these records nationally have improved. BJS survey data from the end of 1993 to the end of 2001 (the most recent data) show that increases in automation levels have outpaced increases in the number of criminal history records. Specifically, while the number of total records increased 35 percent during this period, the number of automated records increased 52 percent— which indicates progress in automating older criminal history records. Also, the number of records accessible by the III system increased 196 percent (see fig. 1). Overall, the percentage of the nation’s criminal history records that are automated increased from 79 percent at the end of 1993 to 86 percent at the end of 1995 and to 89 percent at the end of 2001. The number of states participating in III increased from 26 at the end of 1993 to 30 at the end of 1995 and to 45 by May 2003. Also, according to BJS, other indicators of improved automation levels and accessibility are as follows: In 1997, the FBI established the NCIC Protection Order File to provide a repository for protection order records. As of May 2003 (within 6 years of implementation), 43 states and 1 territory had contributed more than 778,000 records to this system. In 1999, in response to mandates in the amendments to the Jacob Wetterling Crimes Against Children and Sexually Violent Offender Registration Act, the FBI established a national sex offender database for states to register and verify addresses of sex offenders. As of May 2003 (within 5 years of implementation), 50 states, the District of Columbia, and 3 territories had contributed all of their then-applicable records (over 300,000 records) to the National Sex Offender Registry. In 1999, the FBI implemented IAFISa computerized system for storing, comparing, and exchanging fingerprint data in a digital format. As of April 2003 (within 4 years of implementation), 44 states, the District of Columbia, and 3 territories had submitted some portions of their fingerprint files electronically to the FBI for entry into IAFIS. BJS officials told us that NCHIP funds played a role in leading states to these and other accomplishments. Similarly, officials in the 5 case-study states we visited told us that the criminal history record improvements in their states would not have been possible without NCHIP funds. According to BJS officials, NCHIP is best viewed as being an “umbrella” program that pools or coordinates various streams of monies. The officials noted that NCHIP grants generally should not be viewed in isolation, apart from funds that the states themselves spend for these initiatives. That is, the NCHIP grants generally provide the seed money or the supplemental funds that the states need to undertake major system upgrades or to implement an overall plan for modernizing their information systems. While NCHIP requires that states provide a 10 percent match to the federal funds awarded, officials in the case-study states told us that their states typically have invested much more than the required 10 percent. For example, 1 state that has received over $5 million in NCHIP funds estimated that over $20 million of its own funds have been invested in system improvements since 1995. Another state, receiving almost $7 million in NCHIP grants, estimated that $35.4 million in state resources have been spent on improving and automating its systems. In addition to NCHIP and state-provided funds, other federal programs provide funds that can be used to improve criminal history records. For example, the Bureau of Justice Assistance provides funds to states through Byrne grants, a block grant program that requires states to set aside 5 percent of any award for criminal justice information systems to assist law enforcement, prosecution, courts and corrections organizations. In addition to criminal history record improvements, Byrne grants may be used for a variety of other system-related activities that are not related to NCHIP. Examples include activities involving systems to collect criminal intelligence and systems to collect driving-under-the influence data. According to Bureau of Justice Assistance data for fiscal years 2001 through 2003, almost $73 million in Byrne grants were set-aside to improve criminal justice information systems. Grants are also now available for antiterrorism purposes under the Crime Identification Technology Act of 1998, as amended by the United Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) of 2001. Besides characterizing NCHIP as an umbrella program, BJS officials also described it as being a “partnership” program—among BJS, the FBI, and the states and localities—for building a national infrastructure to facilitate the interstate exchange of information. The officials explained that such exchanges or accessibility are needed to support a variety of both criminal justice purposes (e.g., making decisions regarding pretrial release, sentencing, etc.) and noncriminal justice purposes (e.g., conducting background checks of firearms’ purchasers, child-care providers, etc.). The BJS officials noted that NCHIP funds often are spread across a variety of long-term initiatives undertaken by the states’ executive and judicial branch agencies to upgrade the architecture and coverage of criminal records information systems. For some NICS-related purposes, limited progress had been made in the automation and accessibility of relevant records. For example, automated information on the disposition of older felony and other potentially disqualifying arreststhat is, information regarding whether the criminal charges against the arrested individual were dropped or proceeded to be prosecuted and resulted in a conviction or acquittalis critical for conducting background checks of persons purchasing firearms but is not always widely available. Also, automated information is not always available to identify other prohibited purchasers, such as persons convicted of misdemeanor crimes of domestic violence, adjudicated as mental defectives, or who are unlawful users of controlled substances. In conducting background checks of firearms’ purchasers, automated information on whether the criminal charges against arrested individuals were dropped or proceeded to be prosecuted and resulted in a conviction or acquittal is not always widely available. For example, 23 of the 38 states that responded to a question on final dispositions in BJS’s most recent biennial survey reported that 75 percent or less of their arrest records had final dispositions recorded (see table 3). It is important to draw a distinction between old and new arrest records with respect to disposition reporting. The BJS Director told us that, given limited resources, the agency has always emphasized to the states the importance of making certain that records of recent criminal activity are updated and compatible with FBI standards. In this regard, the Director explained that many states adopted a “day 1” approach in using NCHIP funds to improve records—that is, improve new records first—and left a number of old, inactive records archived in state repositories. The Director noted that BJS research, with FBI assistance, has indicated that older arrest records account for much of the “open arrest” problem. That is, of the criminal history records for which missing disposition information was never recorded, about one-half involve arrests that occurred before 1984 and three-quarters pre-date NCHIP. Nonetheless, while states have made progress in automating newer disposition information—and automating disposition information discovered when conducting research of older records—achieving universal automation of disposition information continues to present challenges, as table 3 indicates. BJS has recognized that, whenever criminal history records show arrests without final dispositions, there is the potential for delays in responding to presale firearms inquiries because, in most instances, disqualifications result from convictions rather than arrests. Since 1995, BJS has encouraged states to contact court representatives and determine how NCHIP funds can be used to improve disposition reporting. Further, since 2000, BJS has required that such contacts be documented in the states’ application packages for NCHIP funds. For example, in the Fiscal Year 2003 Program Announcement (Mar. 2003), BJS specified that “all applications will be required to demonstrate that court needs have been considered, and if no funds for upgrading court systems capable of providing disposition data are requested, applicants should include a letter from the State court administrator or Chief Justice indicating that the courts have been consulted in connection with the application.” The Gun Control Act of 1968, as amended, specifies four nonfelony or noncriminal categories that prohibit an individual from owning or purchasing a firearmthat is, persons who (1) have been convicted of a misdemeanor crime of domestic violence, (2) are subject to certain outstanding court protection orders, (3) have been adjudicated as mentally defective, or (4) are unlawful users of controlled substances. Generally, states have used NCHIP funds to provide information for only one of these four categories—court protection orders. For fiscal years 2000 through 2003, states received a total of approximately $5.3 million in NCHIP funds to develop systems for reporting information to the FBI to be included in the NCIC Protection Order File as indicated in table 1. As of May 2003, states had made more than 778,000 records of court protection orders available to the national file. However, the availability of information regarding domestic violence misdemeanor convictions, mental health commitments, and controlled substance abusers is problematic for various reasons. For example, according to BJS, problems in identifying domestic violence misdemeanor convictions are twofold—(1) misdemeanor data traditionally have not been maintained at the state level in an automated format and (2) misdemeanor assault charges rarely specify the victim-offender relationship unless domestic violence is specifically charged. That is, domestic violence-related offenses can be difficult to distinguish from misdemeanors broadly classified as assaults. Since fiscal year 1996, BJS has encouraged states to use NCHIP funds to improve access to domestic violence records. BJS has provided direction, for example, to the states to set “flags” on the records of persons known to have a conviction for domestic violence. Records regarding mental health commitments are often not available nationally for reasons beyond the control of NCHIP. For instance, state mental health laws, privacy laws, or doctor-patient considerations may preclude federal law enforcement officials from routinely accessing some of these records. According to BJS, the area of mental health records and their shareability is a very difficult area—and is an area in which BJS has encouraged states to do more with NCHIP funds since fiscal year 1996. The FBI’s strategy—which BJS encourages the states to use—has been to create a Denied Persons File in the NICS Index where the reason for denial is not given unless the denial is appealed. In reference to substance abuse, BJS noted that federal law is very unclear regarding who is a prohibited person, which makes it very difficult for states to make records available to the FBI for NICS checks. Also, BJS noted that states have no central registries of active drug users or addicts. Given the complications of federal definitions, BJS emphasized that it would be a very challenging undertaking to develop such registries and keep them current. Overall, as table 4 indicates, a national system for domestic violence misdemeanor records is not available, only 10 states have provided mental health records to the NICS Index, and only 3 states have provided substance abuse records. According to BJS, most states have chosen to use NCHIP awards to automate criminal history records overall and improve criminal history record systems, rather than focus on improving access to these four specific types of records. BJS recognizes that ensuring the availability of additional nonfelony or noncriminal records involves various considerations or challenges that extend beyond simply providing more money to improve records. For example, as mentioned previously, BJS noted that federal law is very unclear regarding who is a prohibited person in reference to substance abuse. BJS has recognized that the absence of widely accessible information on domestic violence misdemeanors and noncriminal disqualifying factors is among the most important issues affecting the accuracy and timeliness of presale background checks of firearms purchasers. Thus, for several years, BJS has been encouraging states to use NCHIP funds to make improvements. Recently, for example, in providing NCHIP guidance in the Fiscal Year 2003 Program Announcement (Mar. 2003), BJS encouraged states to develop systems that would make this information available nationally. As mentioned previously, NCHIP’s goal is to improve public safety by enhancing the quality, completeness, and accessibility of the nation’s criminal history and sex offender record systems and the extent to which such records can be used and analyzed for criminal justice and authorized noncriminal justice purposes. To better measure progress toward this goal, BJS is developing a tool—a criminal history records quality index (RQI)—to uniformly characterize and monitor performance across jurisdictions and over time. RQI is to be based on a series of key indicators or outcome measures, such as the proportion of fully automated criminal history records in a state’s repository, the proportion of court dispositions transmitted electronically to the repository, and the extent to which the state submits data electronically to the FBI. According to BJS, RQI will be used to assess the progress of records quality at both the state and national levels, identify critical records improvement activities by pinpointing areas of deficiency and permit BJS to target specific problems and deficiencies for allocating future funding at the individual state level. After RQI is operationalized, BJS plans to begin using it for NCHIP funding decisions. Initial RQI development—and pilot testing in 10 states—was completed in 2003. As of January 2004, according to BJS, collection of the underlying RQI measures data from the other 46 jurisdictions (40 states, the District of Columbia, the 5 U.S. territories) was still ongoing. BJS hopes to receive RQI data submissions from all jurisdictions by April 30, 2004. One of the most relevant factors for policymakers to consider when debating the future of NCHIP is the extent of cumulative progress (and shortfalls) to date in creating national, automated systems that cover all needed types of information. While states have made progress, more work remains. For NICS-related purposes, as discussed previously, automated information is not always widely available on the disposition of felony and other potentially disqualifying arrests, nor on other prohibited purchasers, such as persons convicted of a misdemeanor crime of domestic violence. Another relevant factor to consider is that the demand for background checks is growing, with increases in recent years driven by screening requirements for employment and other noncriminal justice purposes. Furthermore, technology is not static, which necessitates periodic upgrades or replacements of automated systems for them to remain functional. As discussed previously, much progress has been made in automating records in recent years. On the other hand, some areas reflect a continuing need for improvements. For instance, the availability of and access to arrest disposition informationnecessary for timely presale background checks of persons purchasing firearms—continues to be problematic. Such information is important for preventing or minimizing the sale of firearms by “default proceed.” That is, by statute, if a background check is not completed within 3 business days, the sale of the firearm is allowed to proceed by default, sometimes to prohibited persons. In 2000, we reported that default proceeds occurred primarily due to a lack of arrest dispositions in states’ automated criminal history records and that many of these transactions involved individuals—2,519 purchasers during a 10-month period—who were later determined by the FBI to be prohibited persons. We further reported that firearms being transferred to prohibited persons presented public safety risks and placed resource demands on law enforcement agencies in retrieving the firearms. More recently, according to the FBI, over one-third (1,203) of the total 3,259 firearms retrieved in 2002 by the Bureau of Alcohol, Tobacco, Firearms, and Explosives occurred because disposition information for felony arrests could not be determined within 3 days. Another one-third (1,052) of the total retrievals in 2002 involved background checks whereby FBI examiners were unable to timely determine from available records that misdemeanor assault convictions involved domestic violence. A national system for domestic violence misdemeanor records is not available (see table 4). To further support NICS, table 4 also indicates that there is still much opportunity for improving the availability of records regarding persons who have been adjudicated as mentally defective and persons who are unlawful users of controlled substances. Additional examples (not exhaustive) of opportunities for further progress in automating records and/or enhancing national systems include the following: 5 states (Hawaii, Kentucky, Louisiana, Maine, and Vermont), the District of Columbia, and the 5 U.S. territories (American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands) still do not participate in III; 7 states (Hawaii, Mississippi, Nevada, New Jersey, Utah, Virginia, and West Virginia), the District of Columbia, and 4 U.S. territories (American Samoa, Guam, Northern Mariana Islands, and Puerto Rico) have not contributed any data to the NCIC Protection Order File; and 6 states (Arkansas, Delaware, Missouri, Nevada Vermont, and Wyoming) and 2 U.S. territories (Northern Mariana Islands and Puerto Rico) have not submitted any files electronically to IAFIS. In debating the future of NCHIP, another relevant factor for policymakers to consider is that the demand for background checks is growing, with increases in recent years driven by screening requirements for employment and other noncriminal justice purposes. Generally, background checks for these “civil” purposes are based on fingerprint submissions—in contrast to the “name-based” searches conducted under NICS. The number of civil fingerprint submissions to the FBI has increased substantially in recent years. As figure 2 shows, for 5 of the 7 years during 1996 to 2002, the number of civil fingerprint submissions exceeded the number of criminal fingerprint submissions (i.e., fingerprints of criminal suspects or arrestees). In the most recent year (2002), civil fingerprint submissions totaled 9.1 million, whereas criminal fingerprint submissions totaled 8.4 million. The growth in civil fingerprint submissions is partly attributable to 1993 federal legislation that encouraged states to have procedures requiring fingerprint-based national searches of criminal history records of individuals seeking paid or volunteer positions with organizations serving children, the elderly, or the disabled. As of February 2004, according to BJS, 47 states had enacted legislation authorizing these record checks. Further, in 2003, federal legislation was enacted that establishes, in general, a pilot program in 3 states to conduct fingerprint-based background checks on individuals seeking volunteer positions involving interactions with children. Within 6 months of the date of the 2003 Act’s enactment, the Attorney General is to conduct a feasibility study to determine, among other things, the number of background checks that would be required if the pilot were implemented nationwide and the impact these additional checks might have on the FBI and IAFIS. If this pilot program is implemented nationally, BJS officials estimate that millions of additional background checks would be required annually. Homeland security concerns are another factor that has increased the demand for fingerprint-based background checks. Since the events of September 11, 2001, Congress passed legislation to protect the nation from future terrorist attacks. These laws require that individuals employed in sensitive positions undergo background checks to qualify for employment. FBI and BJS officials expect the number of applicant background checks to be in the millions, as homeland defense laws are fully implemented. Examples of federal homeland defense legislation and the number of checks anticipated follow: USA PATRIOT Act of 2001—Requires background checks on commercially licensed drivers who transport hazardous materials. Officials from the FBI’s Criminal Justice Information Services Division estimated that 800,000 to 1,000,000 individuals held commercial licenses at the time the USA PATRIOT Act was passed. Under the act, license renewals, in addition to new licensees, will need background checks to qualify for commercial licenses. Aviation and Transportation Security Act of 2001—Requires background checks of those individuals in security screener positions or other positions such as those with unescorted access to aircraft or secured areas of an airport. New background checks are required for those employees already hired at the time of the Aviation and Transportation Security Act’s passage as well as for individuals seeking employment. This act further requires background checks of foreigners seeking enrollment in flight schools. The Transportation Security Administration has requested over 105,365 background checks since passage of the act in November 2001. In addition to these checks, FBI officials estimated that flight school checks alone could result in up to 50,000 fingerprint checks annually. Public Health Security and Bioterrorism Preparedness and Response Act of 2002—Requires the Attorney General to conduct background on persons possessing, using, or transferring various toxins and biological agents. FBI officials estimated that this law could result in 30,000 checks annually. Another factor for consideration is that technology is not static and can change rapidly, which necessitates periodic upgrades or replacements of automated systems. For example, 1 case-study state used fiscal year 1995 NCHIP funds to purchase Livescan equipment for its major metropolitan areas. According to state officials, this equipment is now outdated and fiscal year 2003 NCHIP funds will be used to purchase new equipment. According to state officials, the 1995 machines will be retained for installation in other areas, such as the state’s less populous or more rural counties. Another relevant factor is how long-term funding needs will be met. Replacing outdated equipment and automating records can be expensive. States advocate that steady or long-term funding streams are important for implementing technological advances. In this regard, states do not rely entirely on NCHIP grants for system improvements. That is, states view NCHIP funding as “seed” or supplemental money and contribute from their own coffers to fund these upgrades. For instance, as noted previously, officials in the case-study states told us that their states typically have invested much more than the 10 percent matching funds required by NCHIP. The overarching goal of NCHIP—building a national infrastructure to facilitate the interstate exchange of criminal history and other relevant records—is important for many purposes. Without such an infrastructure, individuals who are, in fact, prohibited but whose records are inaccessible, or do not reflect such a prohibition may be allowed to purchase firearms, creating safety concerns not only for the general public, but also for the law enforcement officials responsible for retrieving these firearms after the prohibited status is ascertained. Further, inaccurate, incomplete, or inaccessible records and systems do not help to prevent persons who have been convicted of crimes to be hired in paid or volunteer positions with organizations serving children, the elderly, or the disabled, putting these populations at risk for abuse or worse. Also, accurate, complete, and accessible records and systems are necessary to respond to the needs and requirements of homeland security and to avert terrorism, particularly with respect to individuals employed in sensitive positions. Since its initiation in 1995, NCHIP has provided more than $438 million in federal grants nationwide. Using their own funds, as well as NCHIP and other federal grants, states have made much progress in automating their records and making them accessible nationally by conforming with the FBI’s standards for applicable national data systems—such as NICS, NCIC, III, and IAFIS. Continued progress toward establishing and sustaining a national infrastructure inherently will involve a partnering of federal, state, and local resources and long-term commitments from all governmental levels. On January 28, 2004, we provided a draft of this report for comment to the Department of Justice. In a response letter, dated February 13, 2004, the Assistant Attorney General (Office of Justice Programs) commented that the report fairly and accurately described NCHIP, its accomplishments, and the continued need to promote state and local participation in national criminal history records systems. Also, the Assistant Attorney General commented that the following issues mentioned in the report should be highlighted: Given limited resources, it is important to draw the distinction between old and new arrest records with respect to disposition coverage. BJS has always emphasized to the states the importance of making certain that records of recent criminal activity were updated and compatible with FBI standards. In many cases, state laws prohibit sharing mental health information because of confidentiality and doctor-patient privacy laws. The strategy for the FBI, and one which BJS has encouraged the states to use, has been to utilize the Denied Persons File in the NICS Index where the reason for denial of a firearm purchase is not given unless the denial is appealed. Most states do not fingerprint misdemeanants, and misdemeanor assault charges rarely specify the victim-offender relationship (unless domestic violence is specifically charged). BJS has given strong direction to the states to set flags on the records of persons known to have a conviction for domestic violence. No state has a central registry of active drug users or addicts. It will be challenging to develop such registries and to keep them current. In perspective, the number of problematic firearms sales—that is, default proceeds that result in a need to retrieve firearms from prohibited purchasers—is very small compared to the 8 million to 9 million background checks conducted each year. RQI, a metric developed by BJS, is a major step forward and may provide a significant opportunity for evaluating performance over time and establishing a basis for targeting future assistance to state and local participants in federal funding programs. The full text of the Assistant Attorney General’s letter is presented in appendix V. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this report. At that time, we will send copies of this report to interested congressional committees and subcommittees. We will also make copies available to others on request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report or wish to discuss the matter further, please contact me at (202) 512-8777 or Danny Burton at (214) 777-5600. Other key contributors to this report are listed in appendix VI. As requested by the Chairman, House Committee on the Judiciary, our overall objective was to broadly review the National Criminal History Improvement Program (NCHIP). Managed by the Department of Justice’s Bureau of Justice Statistics (BJS), NCHIP is a federal grant program to build a national infrastructure to facilitate the interstate exchange of criminal history and other relevant records—that is, to improve the accuracy, completeness, and accessibility of records used by various national systems. One of the primary systems is the National Instant Criminal Background Check System (NICS), which is managed by the Federal Bureau of Investigation (FBI) and is used to conduct presale background checks of persons purchasing firearms. As agreed with the requester’s office, this report presents information on how states have used NCHIP grant funds, particularly the extent to which they have been used by states for NICS-related purposes; the progressusing NCHIP grants and other funding sourcesthat states have made in automating criminal history and other relevant records and making them accessible nationally; and the various factors that are relevant considerations for policymakers in debating the future of NCHIP. Regarding the use of NCHIP grant funds, as further agreed with the requester’s office, this report also presents information on (1) the use of such funds by the priority states and their progress in automating records and (2) whether any of the 50 states have used NCHIP funds to develop or implement a ballistics registration systemthat is, a system that stores digital images of the markings made on bullets and cartridge casings when firearms are discharged. In addressing the objectives, to the extent possible, we focused on obtaining national or programwide perspectives. For example, we reviewed BJS’s biennial national survey data or reports on the automation status of all states’ criminal history records. Further, we interviewed NCHIP managers at BJS and NICS managers at the FBI’s Criminal Justice Information Services Division (Clarksburg, W. Va.). Also, we reviewed BJS program documentation that describes allowable NCHIP spending activities. In addition, given that NCHIP consolidates criminal records improvement funding authorized by various federal laws, we reviewed these laws, such as the Brady Handgun Violence Prevention Act, and related legislative histories. Also, to provide supplemental or more in-depth perspectives, we conducted case studies of 5 recipient states (California, Maryland, Mississippi, Texas, and West Virginia). We selected these states to reflect a range of various factors or considerations—the amounts of grant funding received, status of NICS participation, and levels of automation, as well as to encompass different geographic areas of the nation (see table 5). To obtain an overview of how all jurisdictions (the 50 states, District of Columbia, and 5 U.S. territories) have used NCHIP grant funds, we requested that BJS provide us information on total awards for each of the 4 most recent fiscal years (2000 through 2003)—with the amounts disaggregated into applicable spending categories. Generally, NCHIP spending can be grouped into six spending categories: (1) NICS/Interstate Identification Index (III)/criminal records improvements, (2) disposition reporting improvements, (3) Automated Fingerprint Identification System (AFIS)/Livescan activities, (4) sex offender registry enhancements, (5) protection order activities, and (6) national security/antiterrorism activities. In cases where expenditures could be included in more than one category, BJS judgmentally selected the category that was the most descriptive of the activity. We reviewed BJS documentation and interviewed BJS officials to determine which of these spending categories involved NICS-related purposes. In addition, we analyzed the spending category information in reference to the 50 states’ participation status in NICS (full participant, partial participant, or nonparticipant) to determine any general differences in the types of NCHIP-funded projects undertaken. Similarly, we analyzed the spending category information to determine how the 5 priority states had used NCHIP grant funds (see app. IV). For more in-depth perspectives, we reviewed data on the use of NCHIP grant funds by the 5 states we selected for case studies. Preliminarily, we reviewed information in grant files maintained by the Office of the Comptroller (a component of the Department of Justice’s Office of Justice Programs). Then, we visited each of the 5 states and interviewed state officials responsible for NCHIP-funded projects. At our request, using definitions provided by BJS, the officials grouped their respective state’s grant awards into applicable spending categories (see app. III). For some NCHIP-funded activities, officials in the case-study states indicated that expenditures could be included in more than one category. In these cases, based on input from state officials, we selected the category that was most descriptive of the activity. For each of the case-study states, these spending category analyses covered NCHIP grant awards for fiscal year 1995 (when the program was initiated) through fiscal year 2002 (the most current data available at the time of our visits). Regarding ballistics registration systems, we interviewed NCHIP managers to determine if NCHIP guidelines allow NCHIP funds to be used to develop and implement such systems and, if so, the extent to which states have used or are planning to use NCHIP funds for this purpose. In addition, in visiting the 5 case-study states, we asked state officials if NCHIP money had been or would be used to develop and implement ballistics registration systems. We reviewed BJS’s biennial survey data and/or reports (for 1993, 1995, 1997, 1999, and 2001) on the automation status of states’ criminal history records. We contacted BJS managers to clarify (when necessary) the survey data and discuss automation progress, including the contributing roles played by NCHIP and other federal grants and by the states’ use of their own funds. Further, we reviewed BJS and FBI information regarding the progress of states in making criminal history and other relevant records accessible nationally by, for example, conforming with the FBI’s standards for national data systems—including, as applicable, NICS, the National Crime Information Center (NCIC), III, and the Integrated Automated Fingerprint Identification System (IAFIS). Also, in each of the 5 case-study states, we discussed these issues with state officials. To determine various factors that are relevant considerations for policymakers in debating the future of NCHIP, we interviewed NCHIP and NICS managers, as well as officials in the 5 case-study states. We also contacted officials from other organizations, such as SEARCH (The National Consortium for Justice Information and Statistics) and the American Prosecutors Research Institute. Further, we relied on insights gained in addressing the objectives of this work. To assess the reliability of BJS’s data (by spending category) on NCHIP funds awarded to all jurisdictions for fiscal years 2000 through 2003 (see table 1) and to the 5 case-study states for fiscal years 1995 through 2002 (see tables 6 through 11), we reviewed existing documentation related to the data sources, electronically tested the data to identify obvious problems with completeness or accuracy, and interviewed knowledgeable agency officials about the data. We determined that the NCHIP funds data were sufficiently reliable for the purposes of this report. To assess the reliability of data reported by BJS based on its biennial surveys of state criminal history information systems for 1993, 1995, 1997, 1999, and 2001, we (1) reviewed the published survey results and (2) interviewed officials knowledgeable about the surveys. We determined that the biennial survey data were sufficiently reliable for the purposes of this report. BJS strives to create national criminal history records systems that contain accurate, complete, and accessible information. To accomplish this, since 1995, BJS has awarded approximately $438 million in NCHIP grants to states, the District of Columbia, and U.S. territories to help these jurisdictions improve their records and establish automated capabilities that enhance participation in national criminal history records systems. Each state operates a central criminal history records repository that receives information regarding individuals’ criminal histories from a number of sources throughout the state, including state and local law enforcement agencies, prosecutors, courts, and corrections agencies. For each individual, the repository compiles the information from these sources into a comprehensive criminal history record for that person. These records are commonly referred to as “rap sheets.” By means of statewide telecommunications systems, the repositories make these records available to criminal justice personnel for authorized purposes, such as pretrial release and sentencing decisions. The repositories also provide criminal history records for authorized noncriminal justice purposes. For example, with increasing frequency, state and federal laws are requiring local law enforcement agencies to conduct criminal history background checks on persons seeking employment in sensitive positions (such as child and elder care) and for occupational license authorizations. The FBI has historically maintained criminal history record files on all federal offenders and on state offenders to the extent that states voluntarily submit state criminal history information. The FBI also maintains a nationwide telecommunications system that enables federal, state, and local criminal justice agencies to conduct national record searches and to obtain criminal justice related-information, for example, about individuals who are arrested and prosecuted in other states. Criminal record services are also provided to noncriminal justice agencies authorized by federal law to obtain such records. The practice of maintaining duplicative state offender records at both the state and federal levels is being replaced by efforts to build an automated infrastructure that will make all criminal history records accessible nationally. To fully participate in the national systems that are to comprise this infrastructure, a jurisdiction must have an automated criminal history record system that meets FBI standards for participation. For example, the state’s automated system must be compatible with the federal systems and be capable of responding automatically to requests for records. The principal national, federal systems are discussed in the following paragraphs. Prior to 1967, the FBI’s criminal history records were manual files. In 1967, the FBI established NCIC, an automated, nationally accessible database of criminal justice and justice-related records. NCIC provides automated information on wanted and missing persons, as well as identifiable stolen property, such as vehicles and firearms. Each state has a central control terminal operator, who is connected to NCIC through a dedicated telecommunications line maintained by the FBI. Authorized local agencies use their state’s law enforcement telecommunications network to access NCIC through the respective operator. An investigator can obtain information on wanted and missing persons and stolen property by requesting a search by name or other nonfingerprint-based identification. Information provided can include graphics, such as mug shots, pictures of tattoos, and signatures in a paperless, electronic format. Using this system, an investigator can also perform searches for “sound alike” names, such as “Knowles” for “Nowles.” The system has an enhanced feature for searching all derivatives of names, such as Jeff, Geoff, Jeffrey. NCIC includes the National Sex Offender Registry and a Protection Order File (discussed later). NCIC data may be provided only for criminal justice and other specifically authorized purposes. For example, authorized purposes include presale firearms checks, as well as checks on potential employees of criminal justice agencies, federally chartered or insured banks or securities firms, and state and local governments. Maintained by the FBI, the III system is an interstate, federal-state computer network, which currently provides the means of conducting national criminal history record searches to determine whether a person has a criminal record anywhere in the country. This system is designed to tie the automated criminal history records databases of state central repositories and the FBI together into a national system by means of an “index-pointer” approach. The FBI maintains an identification index of persons arrested for felonies or serious misdemeanors under state or federal law. The index includes identification information (such as name, date of birth, race, and sex), FBI numbers, and state identification numbers from each state holding information about the individual. Criminal justice agencies nationwide can transmit search inquiries based on name or other identifiers automatically through state law enforcement telecommunications networks and the FBI’s NCIC telecommunications lines. According to the FBI, the III system responds to search inquiries within seconds. If the search results in a “hit,” the system automatically requests records using the applicable FBI and state identification numbers, and each repository holding information on the individual forwards its records to the requesting agency. The FBI provides responses for states that are not yet participants in III. Under Brady Handgun Violence Prevention Act requirements, the FBI established NICS to provide instant background checks of individuals applying to purchase firearms from federally licensed dealers. Federal law prohibits the purchase or possession of a firearm by any person who (1) has been convicted of a crime punishable by a prison term exceeding 1 year, (2) is a fugitive from justice, (3) is an unlawful user of controlled substances, (4) has been adjudicated as mental defective, (5) is an illegal or unlawful alien, (6) has been discharged dishonorably from the armed forces, (7) has renounced his or her U.S. citizenship, (8) has been convicted of a misdemeanor crime of domestic violence, or (9) is subject to certain domestic violence protection orders. The three primary, component databases searched by NICS are III, NCIC (including the Protection Order File and a file of active felony or misdemeanor warrants), and the NICS Index. This third database was created solely for presale background checks of firearms purchasers and contains disqualifying information contributed by local, state, and federal agencies. For example, the database contains information on individuals who are prohibited from purchasing firearms because they are aliens unlawfully in the United States, are persons who have renounced their U.S. citizenship, have been adjudicated as mental defectives, have been committed to a mental institution, have been dishonorably discharged from the armed forces, or are unlawful users of or addicted to controlled substances. The FBI established the National Sex Offender Registry (NSOR) to enable state sex offender information to be obtained and tracked from one jurisdiction to another. In 1994, the Jacob Wetterling Crimes Against Children and Sexually Violent Offender Registration Act (the Jacob Wetterling Act) required that states create sex offender registries within 3 years or lose some of their federal grant funds. The law further provided that—when any offender convicted of committing a criminal sexual act against a minor or committing any sexually violent offense—is released from custody or supervision into the community, he or she must register with law enforcement agencies for a period of 10 years. The act was amended in 1996 to require the FBI to establish a NSOR and to register and verify addresses of sex offenders when a state’s registry does not meet the minimum compliance standards required by the Jacob Wetterling Act. According to the FBI Law Enforcement Bulletin, all 50 states currently have sex offender registration laws, and all states require a registration period of at least 10 years, with some states requiring lifetime registration. State registry information typically includes the offender’s name, address, Social Security number, date of birth, physical description, photograph, and fingerprints. NSOR is a component of NCIC that serves as a pointer system to identify a sex offender’s records in the III system. When agencies request authorized fingerprint-based criminal history background checks, NSOR will flag the subjects who are registered sex offenders. The FBI established the Protection Order File in 1997 to provide a repository for protection order records. The purpose of this NCIC component is to permit interstate enforcement of protection orders and the denial of firearms transfers to individuals who are the subjects of court protection orders. Such orders include civil and criminal court orders issued to prevent a person from committing violent, threatening, or harassing acts against another individual. A protection order can preclude the person from contacting, communicating with, and being in physical proximity to a named individual. State and federal law enforcement agencies can submit protection orders to the NCIC Protection Order File. In 1999, the FBI implemented IAFIS, a computerized system for storing, comparing, and exchanging digitized fingerprint data. Most fingerprint data submitted to IAFIS originate when a local or state law enforcement agency arrests a suspect. At that time, the agency takes the suspect’s fingerprints manually (using ink and paper fingerprint cards) or electronically (using optical scanning equipment). The agency forwards a copy of the fingerprints—along with nonbiometric data such as name and age—through its state repository to the FBI. Electronic submissions are automatically entered into IAFIS, and paper submissions sent through the mail are scanned into an electronic format for entry. When a set of fingerprints is submitted, IAFIS searches for a prior entry in the system that matches the suspect’s nonbiometric personal identifying data. If a prior entry is not found, the system compares the submitted fingerprints with those previously stored in the computer’s memory to determine if the suspect has an entry under another name. This information can be used for a number of purposes, including positively identifying arrestees to prevent the premature release of suspects who use false names and are wanted in other jurisdictions. To support crime scene investigations, the system can also compare a full or partial fingerprint from a crime scene with the prints stored in the database to identify a suspect. This appendix presents information about the use of NCHIP funds by 5 case-study statesCalifornia, Maryland, Mississippi, Texas, and West Virginia—for fiscal years 1995 through 2002. As mentioned previously, we selected these states to reflect a range of factors or considerations—that is, the amounts of grant funding received, status of NICS participation, and levels of automation, as well as to encompass different geographic areas of the nation (see app. I). NCHIP funding amounts can be grouped into six categories of spending established by BJS to track the use of program funds. These six categories are (1) NICS/III/criminal records improvements, (2) disposition reporting improvements, (3) AFIS/Livescan activities, (4) sex offender registry enhancements, (5) protection order activities, and (6) national security/antiterrorism activities. Table 6 shows that since the inception of NCHIP in 1995, 4 of the 5 case- study states have devoted the majority of their grant awards for the first two BJS spending categories—NICS/III/criminal records improvements and disposition reporting improvements. Expenditures in the first category include overall system upgrades, equipment purchases, database development, and other activities required to bring states in compliance with FBI standards so that the states may participate in national systems maintained by the FBI. Expenditures in the second category include efforts to automate disposition records and provide linkages for reporting these records to the state’s central records repository. Maryland, the only case-study state that did not devote the majority of its funds to the first two categories, still allocated nearly half (48 percent) of its total grant awards for these two areas. Maryland devoted a large amount (40 percent) of its NCHIP funding to AFIS/Livescan activities, as did Texas (45 percent). For all 5 case-study states, the NCHIP funding detailed in table 6 represented “seed” or “catalyst” money and, therefore, accounted for only a portion of the total criminal records improvement spending. For example, according to California officials, state resources accounted for 85 percent of records improvement funding in California during fiscal year 2002-03. The remaining 15 percent consisted of NCHIP grants (6 percent) and other federal sources (approximately 9 percent). Three of the other 4 states provided data indicating that NCHIP grants accounted for less than a majority of the criminal records improvement funding in the respective state. More details on each case-study state’s use of NCHIP funds are presented in the following sections. During fiscal years 1995 through 2002, BJS awarded California a total of $29.9 million in NCHIP fundsthe most of any state. As shown in table 7, California allocated approximately two-thirds (66 percent) of its NCHIP awards for NICS/III/criminal records improvements. For example, the state devoted over $4.9 million of program funds to projects for converting manual fingerprint and palm print cards to an electronic format and matching records maintained by the FBI’s III system to those maintained by the state repository. According to California officials, these efforts will improve overall criminal record keeping and benefit NICS by improving the state’s response to queries on prospective gun purchasers. Officials also said that the state has used NCHIP funds to improve the reporting of case dispositions to the state’s central repository. For example, officials have used program funds to improve disposition reporting in the 28 counties that represent 70 percent of the disposition volume for the entire state. As a result, these 28 counties report 100 percent of their dispositions to the state central repository via a magnetic tape batch process occurring three times a week. In addition, California officials are conducting an NCHIP-funded pilot project in one county to test the feasibility of moving to a real-time updating system for disposition reporting rather than the current batching approach. During fiscal years 1995 through 2002, BJS awarded Maryland $6.8 million in NCHIP funds. As shown in table 8, Maryland allocated the largest percentage (40 percent or $2.7 million) of its NCHIP awards for AFIS/Livescan activities. This category, together with NICS/III/criminal records improvement, accounted for over three-fourths (76 percent) of the state’s use of NCHIP funds. Regarding the first category in table 8, Maryland devoted a sizeable portion of its NCHIP award ($1.2 million) to make the state’s automated systems compatible with the FBI’s NCIC database, which was updated and expanded in 2000. In addition, Maryland is using nearly $200,000 of program funds to convert over 700,000 historical arrest records (older than October 1998) to a format compatible with the FBI’s III system. This effort will make older records accessible to the FBI, which will improve NICS background checks. In the category of disposition reporting, Maryland has also implemented a $360,000 NCHIP project to automate reporting from the courts (including case dispositions) to the central records repository on a daily basis. Maryland currently reports dispositions from courts to the state’s central records repository through weekly magnetic tape updates. For purposes of NICS, Maryland is a partial participant state. That is, a designated state agency (Maryland State Police) conducts background checks for handgun purchases, whereas the FBI conducts such checks for long gun purchases. For both types of firearms purchases (handguns and long guns), another state agency (Maryland State Archives) provides support (researching the disposition results of arrests) for criminal history records generated before 1982. In fiscal year 2002, the Maryland State Archives received $41,000 in NCHIP funds to conduct disposition research for NICS queries from the FBI. Earlier, due to a lack of state funding, this state agency had discontinued such research for a period of approximately 3-1/2 months (March 18 to July 2, 2002). According to Maryland and BJS officials, the $41,000 award in 2002 was the first distribution of NCHIP funds to the Maryland State Archives since the inception of the grant program. As shown in table 9, for fiscal years 1995 through 2002, Mississippi allocated approximately three-fourths (76 percent) of its NCHIP funds for projects in the category of NICS/III/criminal records improvements. NCHIP projects in this category centered on creation of and support for the state’s computerized criminal history database. According to state officials, prior to the rollout of the state’s new automated criminal history database in March 1998, Mississippi was without any type of arrest record automation. After the rollout, Mississippi was one of fewer than 10 states with an automated system whereby every arrest record was automatically associated with a fingerprint record and made available to authorized inquirers across the state and the nation. Mississippi officials told us that, without NCHIP, this advance in records automation would not have been possible. On the other hand, in responding to BJS’s latest biennial survey (2001), Mississippi reported that 3 percent of its automated criminal records included final dispositionsthe lowest among the responding case-study states. However, as indicated in table 9, Mississippi is using NCHIP funds for various projects to improve disposition reporting. During fiscal years 1995 through 2002, BJS awarded Texas $19.5 million in NCHIP fundsthe third highest total among all states, behind only California and New York. As shown in table 10, Texas allocated about half (52 percent) of its NCHIP funds for NICS/III/criminal records improvements. A significant project in this category is an ongoing upgrade of the state’s computerized criminal history system. According to state officials, this upgrade will “rewrite” the system to meet new demands and expectations. For example, the rewrite will allow Texas to “flag” domestic violence misdemeanors (a category for prohibiting firearms sales under NICS) at the arrest, prosecution, and court levels. During this period, Texas also allocated 45 percent of its NICHIP funds for AFIS/Livescan activitiesthe highest percentage for this category among the 5 case-study states. To implement electronic reporting of arrest data, Texas used NCHIP funds to purchase Livescan equipment for placement in 4 major cities and 27 of the state’s 254 counties. According to Texas officials, these cities and counties account for a majority of the state’s total arrests. Also, as shown in table 10, Texas allocated 2 percent of its NCHIP awards for disposition reporting improvementsthe lowest among the 5 case- study states. However, according to Texas officials, criminal case disposition reporting is recognized as an area in need of improvement and will be addressed by future projects funded by NCHIP. Also, as an example of recent progress in Texas, BJS noted that NCHIP funds were used to automate approximately 52,600 court disposition records from Harris County—which includes Houston, the most populous city in Texas—for inclusion in the state’s central repository. During fiscal years 1995 through 2002, BJS awarded West Virginia approximately $4.7 million in NCHIP funds. As shown in table 11, West Virginia allocated half of its NCHIP funds for NICS/III/criminal records improvements. Also, the state allocated 35 percent for disposition reporting improvementsthe highest percentage for this category among the 5 case-study states. The purpose of the ongoing projects in this category is to automate the reporting of court data (including case dispositions) to the state’s central records repository. According to its 2003 NCHIP grant application, West Virginia was the last state to implement an AFIS. NCHIP funding assisted the state to implement its system by financing a study to determine AFIS requirements and costs. West Virginia officials noted that plans call for placing Livescan equipment in each of the state’s nine regional jails, which are to be booking sites for all persons entering the state’s criminal justice system. This appendix provides information on the 5 states that BJS identified as having the lowest levels of criminal history record automation in 1994. Maine, Mississippi, New Mexico, Vermont, and West Virginia were designated as priority states, making each eligible to receive an additional $1 million in funding during NCHIP’s first year. NCHIP was tasked with implementing statutory grant provisions that required the states with the lowest levels of criminal history record automation receive priority funds from the program to give them some extra help in automating their records. This additional funding for priority states applied to only the first year of NCHIP grant awards. Also, this appendix provides information about whether any of the 50 states have used NCHIP funds to develop or implement a ballistics registration system—that is, a system that stores digital images of the markings made on bullets and cartridge casings when firearms are discharged. For fiscal years 2000 through 2003, table 12 shows that the priority states allocated 70 percent of their NCHIP awards for NICS/III/criminal records improvements and disposition reporting improvements. The remaining 30 percent of the priority states’ NCHIP award amounts was allocated for AFIS/Livescan activities, sex offender registry enhancements, and protection order activities. None of the priority states allocated NCHIP award amounts for national security/antiterrorism activities. The priority states have made progress in automating their criminal history records. Prior to NCHIP, these states had approximately 1.4 million records in manual formats and very few automated records. By 2003, BJS estimated that these 5 states had over 1 million automated records. More specifically, as shown in table 13, biennial surveys of state criminal history record repositories also indicate the priority states have made progress in automating their records. For example, New Mexico and Mississippi progressed from little or no automation in 1993 to 100 percent automation in 2001. The other priority states also have made progress in automating their records but have not yet achieved full automation. According to Mississippi officials, NCHIP played a critical role in the state’s successes in automating and sharing criminal history information. The officials noted, for instance, that receiving the “priority” designation and the accompanying additional funds enabled Mississippi to begin automating its criminal history records and take advantage of the latest technology developments. Similarly, a West Virginia official commented that the additional priority funding helped the state establish and begin implementing an automated fingerprint identification system, the backbone of West Virginia’s entire records improvement and automation project. Another indicator of progress is participation in III, the system used for a number of law enforcement-related purposes, including background checks of persons purchasing firearms. As of May 2003, 3 of the 5 priority states participated in III, with New Mexico joining the program in 1997 and Mississippi and West Virginia joining in 1998. At the time of our review, Maine and Vermont were not participating in III. According to BJS, Maine’s participation may not occur until some time in 2004 because the state is in the process of undertaking a major revision of its entire criminal justice information technology infrastructure. Vermont officials reported to BJS that the state is currently using NCHIP funds to install a new system that is fundamental to III participation and that the state will be III-compliant by January 2004. States must ensure that their computerized criminal history records systems meet specific FBI criteria and that these systems are compatible with the FBI’s national data systems before the FBI will allow states to provide records nationally through III. The 5 priority states have also increased their participation in other national systems. According to BJS officials, all 5 states participate in the National Sex Offender Registry, 4 of the 5 states have provided some portion of their criminal fingerprints electronically to IAFIS, and 3 states have submitted protection order records to the NCIC Protection Order File. BJS officials said that no NCHIP funds have been used to develop or implement a ballistics registration system—a system typically used as an investigative tool to compare crime scene evidence to the stored images. Also, according to BJS officials, NCHIP funds are to improve the availability of information on the “person,” rather than to improve investigative tools. BJS does not plan to expand the scope of NCHIP funding to include investigative tools because improvements are still needed in the ability to identify prohibited purchasers of firearms, such as individuals with domestic violence misdemeanor convictions. Of the 5 case-study states we visited, only 1 (Maryland) had developed a ballistics registration system. According to BJS and state officials, federal funding was not used to develop or implement this system. In addition to the above, Grace Coleman, Geoffrey Hamilton, Michael H. Harmond, Kevin L. Jackson, Jan B. Montgomery, Jerome T. Sandau, Linda Kay Willard, and Ellen T. Wolfe made key contributions to this report.","Public safety concerns require that criminal history records be accurate, complete, and accessible. Among other purposes, such records are used by the Federal Bureau of Investigation's (FBI) National Instant Criminal Background Check System (NICS) to ensure that prohibited persons do not purchase firearms. Initiated in 1995, the National Criminal History Improvement Program represents a partnership among federal, state, and local agencies to build a national criminal records infrastructure. Under the program, the Department of Justice's Bureau of Justice Statistics (BJS) annually provides federal grants to states to improve the quality of records and their accessibility through NICS and other national systems maintained by the FBI. GAO examined (1) how states have used program grant funds, particularly the extent to which such funds have been used for NICS-related purposes; (2) the progress--using program grants and other funding sources--that states have made in automating criminal history and other relevant records and making them accessible nationally; and (3) the various factors that are relevant considerations for policymakers in debating the future of the program. States have used program grants primarily to support NICS in conducting presale background checks of firearms' purchasers. BJS data show that over 75 percent of the total $164.3 million in program grants awarded in fiscal years 2000 through 2003 was used for NICS-related purposes. These uses encompassed a broad range of activities, such as converting manual records to automated formats and purchasing equipment to implement computerized systems or upgrade existing systems. All other uses of program grants, according to BJS, also had either direct or indirect relevance to building an infrastructure of nationally accessible records. Using their own funds, in addition to the program and other federal grants, states have made progress in automating criminal history records and making them accessible nationally. The percentage of the nation's criminal history records that are automated increased from 79 percent in 1993 to 89 percent in 2001, according to BJS's most recent data. Also, the number of states participating in the Interstate Identification Index--a ""pointer system"" to locate criminal history records anywhere in the country--increased from 26 at year-end 1993 to 45 by May 2003. But, progress has been more limited for some NICS-related purposes. A national system for domestic violence misdemeanor records is not available. Also, as of May 2003, only 10 states had made mental health records available to NICS, and only 3 states had provided substance abuse records. One of the most relevant factors for policymakers to consider when debating the future of the program is the extent of cumulative progress (and shortfalls) to date in creating national, automated systems. While states have made progress, more work remains. Also, the demand for background checks is growing, and technology is not static, which necessitates periodic upgrades or replacements of automated systems. Continued progress toward establishing and sustaining a national infrastructure inherently will involve long-term commitments from all governmental levels. Justice commented that GAO's report fairly and accurately described the program and its accomplishments.",govreport
"With the enactment of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in 1980, the Congress created the Superfund program to clean up the nation’s most severely contaminated hazardous waste sites. The Congress extended the program in 1986 and 1990 and is now considering another reauthorization. Under CERCLA, EPA investigates contaminated areas and places the most highly contaminated sites on the National Priorities List (NPL) for study and cleanup. As of December 1996, there were 1,210 sites on the NPL. After a site is placed on the NPL, EPA extensively studies and evaluates the site to determine the appropriate cleanup remedy for it. The remedy selected depends upon the site’s characteristics, such as the types and levels of contamination, the risks posed to human health and the environment, and the applicable cleanup standards. The site’s cleanup can be conducted by EPA or the party responsible for the contamination, with oversight by EPA or the state. Through fiscal year 1995, the latest period for which EPA has data, EPA had selected incineration as a Superfund cleanup remedy 43 times, or in about 6 percent of the decisions on remedies it had reached through that date.At the time of our review, three incinerators were operating at Superfund sites—the Bayou Bonfouca site in Louisiana, the Times Beach site in Missouri, and the Baird and McGuire site in Massachusetts. As of October 1996, EPA planned to use incineration at four additional sites. Incineration is the burning of substances by a controlled flame in an enclosed area that is referred to as a kiln. Incineration involves four basic steps: (1) wastes, such as contaminated soil, are prepared and fed into the incinerator; (2) the wastes are burned, converting contamination into residual products in the form of ash and gases; (3) the ash is collected, cooled, and removed from the incinerator; and, (4) the gases are cooled, remaining contaminants are filtered out, and the cleaned gases are released to the atmosphere through the incinerator’s stack. (See fig. 1.) Incinerators may be fixed facilities that accept waste from a variety of sources, or they may be transportable or mobile systems. Fixed facility hazardous waste incinerators are required by the Resource Conservation and Recovery Act of 1976 (RCRA) to obtain an operating permit from EPA. RCRA regulates all facets of the generation, transportation, treatment, storage, and disposal of hazardous wastes in the United States. RCRA requires that fixed facility hazardous waste incinerators be operated according to EPA’s regulations and be inspected by EPA every 2 years. Incinerators used to clean Superfund sites are generally “transportable,” that is, they are transported to the site in pieces, assembled, and removed when the cleanup is complete. These incinerators are constructed and operated by contractors. CERCLA exempts any portion of a cleanup action conducted entirely on-site, including incineration, from the need to obtain any permit. However, CERCLA requires EPA to apply legally applicable or relevant and appropriate environmental standards from other federal laws, including RCRA, to Superfund cleanups. Accordingly, EPA requires incinerators at Superfund sites to meet RCRA’s substantive requirements, such as the act’s standards for emissions. EPA relies on four principal methods to ensure the safe operation of incinerators used to clean up Superfund sites. These methods are (1) setting site-specific standards for emissions and operations, (2) incorporating safety features into an incinerator’s emergency systems, (3) monitoring emissions at the incinerator’s stack and along the site’s perimeter, and (4) providing 24-hour on-site oversight. (See app. I for more details on the safeguards at the three incinerators in operation at the time of our review.) EPA establishes specific cleanup standards for each incinerator used at a Superfund site. These standards are based on studies of the site’s characteristics (e.g., the type and concentration of contamination present) conducted during the incinerator’s design and construction. Standards can be adopted from other environmental programs or laws, such as RCRA or the Toxic Substances Control Act. Typically, RCRA’s standards for fixed facility hazardous waste incinerators are applied. RCRA’s standards govern the extent to which an incinerator must destroy and remove contaminants and set limits on emissions from the incinerator. EPA establishes the operating parameters needed for the incinerator to achieve the emissions standards and tests the parameters through a “trial burn” required under RCRA. The operating parameters can include the temperature of the kiln, the minimum oxygen levels needed to break down contaminants in the kiln, and the maximum carbon monoxide levels that may be produced. Although not required by EPA’s regulations, a trial burn plan was reviewed by a RCRA expert at all the sites we visited to determine whether the proper operating conditions were being tested. According to EPA officials, if the incinerator operates within the parameters established at the trial burn, the incinerator will be operating safely. Besides establishing standards for emissions and operations, EPA requires engineering controls to prevent the standards from being exceeded. In addition, incinerators at the three sites we visited had built-in safety features unique to each model to prevent excessive emissions of contaminants in the event of an emergency shutdown. RCRA’s regulations, which EPA applies at Superfund sites, require that incinerators have devices, called automatic waste feed cutoffs, that will stop contaminated waste from being fed into an incinerator when the operating conditions deviate from the required operating parameters. The waste feed would be cut off, for example, when a change in pressure or a drop in temperature occurred that could compromise the kiln’s effective incineration of the contaminants. These cutoffs are set with a “cushion” so that the waste feed shuts down before the incinerator operates outside the established parameters. The number and type of waste feed cutoffs will depend on the requirements for each site. According to EPA officials, some cutoffs are routine, to be expected during the normal course of an incinerator’s operations, and a sign that the safety mechanisms are working properly. For example, cutoffs can be triggered by expected changes in pressure within the kiln brought on by variations in the waste input stream. However, other cutoffs, especially repeated cutoffs, can be signs of problems. At the three sites we visited, all of the incinerators had some additional safety measures, not required by regulation, in the event that a critical part of the incinerator failed. At the Times Beach and the Bayou Bonfouca sites, the incinerators have emergency systems that fully shut down the incinerator and decontaminate the gases remaining in the system at the time of the shutdown. These systems seal off the gases and expose them to a high-temperature flame to destroy any residual contamination. At the Baird and McGuire site, the emergency system ensures that metals and particulates are removed before gases are emitted from the kiln. The most common reason for activating the emergency systems at the three sites was a shutdown caused by a power outage. EPA continuously monitors the air in the vicinity of an incinerator to ensure that emissions from the stack and from areas where soil is being excavated before being put into the incinerator do not exceed the maximum permitted levels. Air monitoring at the sites involves measuring conditions in real time and performing detailed laboratory analyses of samples that are collected over a longer period of time. For example, at the Baird and McGuire site, stack emissions are monitored continuously to measure key indicators of combustion, such as the oxygen levels in exhaust gases, to ensure that the incinerator is operating properly. For organic contamination, a more detailed laboratory analysis is carried out during the trial burn to provide additional assurance that dioxin, a cancer-causing substance produced by the burning of organic substances, is not excessively emitted. The Baird and McGuire site also has nine air monitors at its perimeter, each of which is hooked up to alarms that sound if emission levels approach the established parameters. These monitors, which are intended primarily to detect possible emissions from the on-site excavation of contaminated soil, monitor and record data every minute. According to the incineration contractor’s project manager at the Baird and McGuire site, the air monitors picked up elevated levels only once during an excavation, when a drum of chemicals was removed. In a situation such as this, the excavation is slowed to bring emissions down to required levels. According to EPA’s reports for the three sites we visited, emissions from the incinerators’ stacks never exceeded the permitted levels. Although 24-hour oversight is not required by regulations or formal EPA policy, Corps of Engineers or state officials continuously observed the operations of the incinerator at each of the sites we visited. For the two cleanups that EPA managed (at the Baird and McGuire and Bayou Bonfouca sites), EPA had contracted with the U.S. Army Corps of Engineers for on-site oversight, while at Times Beach, where a responsible party was conducting the cleanup, a Missouri state agency provided oversight. At the time of our visit, these sites had staff to cover operations 24 hours a day. For example, at Baird and McGuire, 12 Corps of Engineers staff were assigned to monitor the incinerator’s operations. On-site observation involves visual inspections and record reviews to ensure that the incineration companies are meeting the operating conditions specified by EPA. At the sites we visited, Corps of Engineers or state officials were responsible for checking the operating parameters displayed on computer screens in the incineration control rooms and inspecting measurement devices on incineration equipment to verify that they were working properly. For example, at Times Beach, a state official monitored operations from an on-site computer screen, while a state RCRA employee obtained the computerized information from his office in the state capitol to ensure that the conditions of the state’s RCRA permit were being met. At Bayou Bonfouca, Corps officials examined operation log books and talked to incinerator operators to look for any problems and oversaw the procedures for testing and sampling emissions from the incinerator. The officials were also responsible for reviewing the air-monitoring reports and operation summary reports required of the incineration company and reporting their findings to EPA. In addition to the safeguards discussed above, EPA planned two additional methods to promote the safe operation of Superfund incinerators but never fully implemented them. First, EPA issued a directive requiring inspectors from its hazardous waste incinerator inspection program to periodically evaluate Superfund incinerators. This requirement had not been followed at two of the three incinerators operating at the time of our review. Second, EPA has not carried out its intention to systematically ensure that the lessons learned about an incinerator’s operations in one incineration project are applied to subsequent projects. EPA is relying upon informal communication to transfer “best practices” from one incineration project to the next. In 1991, EPA issued a directive requiring that the same type of inspections that are conducted at RCRA-permitted hazardous waste incinerators be conducted at Superfund incinerators. In 1993, EPA issued interim guidance on how to perform these inspections at Superfund incinerators. This guidance required that inspectors in EPA’s regional offices review the operating records for Superfund incinerators and examine the units to ensure that they were operating within their established parameters. Only one of the three incinerators we visited had received such an inspection. That incinerator received two inspections, one of which was conducted while the incinerator was shut down for maintenance. EPA regional staff we talked to were unaware of the directive and guidance on these inspections. EPA headquarters personnel told us that they were unaware that the inspections were not taking place but confirmed with the regions that only one region was inspecting Superfund incinerators. EPA officials attributed the lack of inspections to the higher priority given to other enforcement demands and a reorganization of enforcement functions, which muddied the responsibility for inspecting the incinerators. Headquarters officials said they would encourage the regions to do the inspections in the future. According to officials from EPA’s Office of Enforcement and Compliance Assurance (OECA), who are responsible for implementing the inspection program, RCRA incinerator inspectors had visited Superfund incinerators when the guidance was first issued in 1993. However, these inspectors said their inspections were hampered because they did not have a site-specific document containing the requirements for each incinerator’s operations that they could use to evaluate these operations. At Superfund sites where transportable incinerators are used, EPA may specify standards, operating parameters, emergency controls, and requirements for air monitoring and on-site oversight in various documents, such as a contract with the operator of the incinerator, a court-approved consent decree with the responsible party, or a work plan for the site. In contrast, fixed facility hazardous waste incinerators require a RCRA permit, which documents the conditions under which an incinerator must operate. Inspectors use the conditions specified in the permit as criteria for evaluating the incinerator’s operations. For Superfund incinerators, however, an operating permit is not required. The 1993 interim guidance for inspecting Superfund incinerators recognized the need for a single document specifying site-specific operating requirements and procedures and stated that such a document would be developed. However, no such document was developed because, according to EPA officials, other priorities intervened. EPA officials attributed the lack of recent Superfund incinerator inspections, in part, to the lack of a consolidated list of requirements. The Superfund, RCRA, and OECA officials we interviewed on this question agreed that Superfund incinerators should be inspected. They stated that experienced RCRA hazardous waste incinerator inspectors in EPA’s regional offices have knowledge and experience that makes them well qualified to evaluate the operations of Superfund incinerators. These officials believed that an inspection by an outside, independent inspector was important even if an incinerator had on-site oversight. RCRA officials told us that at the few RCRA-permitted hazardous waste incinerators with on-site inspectors, the inspectors are rotated every 6 months in order to maintain their independence and objectivity. In addition, they said that experienced incinerator inspectors would have more expertise than the Corps of Engineers or state staff assigned to oversee the incinerators’ operations. Although these staff do receive training, they are generally not experts on incineration. Because EPA site managers may work on as few as one or two projects at a time and because incineration is not a common remedy at Superfund sites, managers may have limited experience with incineration. However, EPA does not have any formal mechanism to share the lessons learned about an incinerator’s operations. The need for information-sharing is illustrated by experiences at two sites we visited. The Bayou Bonfouca site had a policy to stop feeding waste to the incinerator during severe storms. This policy was adopted to reassure the public that the incinerator would not suffer an emergency shutdown during a storm-related power outage. The Times Beach site, which was using the same incinerator model, did not formally adopt this policy until after a severe storm had knocked out the power at that incinerator, causing an emergency shutdown. The storm and power outage caused the emergency emissions system and the perimeter air monitors to fail. (See app. I for details.) The lessons learned from these problems could be applied to future incineration projects to prevent similar problems from arising. However, EPA has no formal mechanism to ensure that other incineration projects can benefit from the Times Beach experience. EPA officials agreed that they should be sharing the lessons learned from each site. According to officials, they had intended to do so by issuing fact sheets, but the effort was dropped before any fact sheets were issued. The officials stated that the fact sheets were not issued because of a fear that information on problems with incinerators’ operations could be used against them in litigation. In addition, they attempted to have monthly conference calls with all of the managers of incineration sites, but the effort soon faded away. However, EPA officials told us that they do informally share lessons learned through discussions with regional staff responsible for incineration sites. Also, they encourage site managers to visit other incineration sites to learn from the experiences there; however, they do not currently intend to revive their plans for preparing fact sheets. EPA employs a number of techniques to encourage the safe operation of Superfund incinerators. These techniques include mechanical features, such as air monitors, as well as operational procedures, such as 24-hour independent oversight. However, residents of the areas surrounding incinerators frequently desire an extra degree of assurance that the incinerators are operating safely. EPA has not followed through on other opportunities to improve its oversight of incinerators and thereby provide additional assurance to the public. First, EPA has not followed its own policy of having RCRA hazardous waste incinerator inspectors inspect Superfund incinerators. Although these inspections would provide the public with independent evaluations of the incinerators’ compliance, they did not take place, in part, because consolidated lists were not made available to inspectors of the standards, design requirements, and operating rules for each site where incineration is used. Inspectors could use such lists, just as they use the operating permits for fixed facility hazardous waste incinerators, as an aid in evaluating compliance. Second, EPA’s attempts to systematically share the lessons learned from site to site were never fully implemented. Because incinerators are being used at relatively few Superfund sites, EPA project managers may have little or no experience with them. These managers would benefit from the experiences of other managers of sites where incinerators have been used. At the sites we visited, operational problems occurred that might be avoided at other incineration projects if the knowledge gained was preserved and shared. To provide further assurance that incinerators at Superfund sites are being operated safely, we recommend that the Administrator, EPA, implement the agency’s guidance for having RCRA hazardous waste incinerator inspectors evaluate Superfund incinerators, including the development of a single document specifying site-specific operating requirements and procedures for these incinerators, and document the lessons learned about safe operation from the experiences of each Superfund site where incineration is used and institute a systematic process to share this information at other sites where incinerators are used. We provided copies of a draft of this report to EPA for its review and comment. On January 29, 1997, we met with EPA officials, including a senior process manager from EPA’s Office of Emergency and Remedial Response and officials from EPA’s Office of Enforcement and Compliance Assurance and Solid Waste and Emergency Response, to obtain their comments. EPA generally agreed with the facts, conclusions, and recommendations in the report. However, while not disagreeing that the lessons learned should be documented, EPA did question the benefits of preparing voluminous site-specific studies on lessons learned, given the decreasing use of incineration. We concur that the type of documentation should be concise and the format useful. EPA also provided technical and editorial comments, which we incorporated in the report as appropriate. To examine EPA’s oversight of incinerators at Superfund sites, we visited the three Superfund sites with operating incinerators: the Baird and McGuire site in Massachusetts, the Bayou Bonfouca/Southern Shipbuilding site in Louisiana, and the Times Beach site in Missouri. At these sites, we spoke with EPA, state government, U.S. Army Corps of Engineers, and contractor officials to determine how the incinerators operate, what safety measures they employ to ensure safe operation, and what oversight activities occur. We also interviewed EPA officials in regions I, VI, and VII and in the headquarters offices of Solid Waste, Emergency and Remedial Response; Pollution Prevention and Toxics; and Enforcement and Compliance Assurance. In addition, we obtained and analyzed documents and data from EPA and from the relevant states, counties, and responsible parties when necessary. Our work was performed in accordance with generally accepted government auditing standards from February through December 1996. As arranged with your offices, unless you publicly announce its contents earlier, we will make no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies of the report to other appropriate congressional committees; the Administrator, EPA; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. Should you need further information, please call me at (202) 512-6520. Major contributors to this report are listed in appendix II. We visited the three Superfund incinerators that were in operation at the time of our review: the Baird and McGuire site in Holbrook, Massachusetts; the Bayou Bonfouca/Southern Shipbuilding site in Slidell, Louisiana; and the Times Beach Superfund site near St. Louis, Missouri. A brief description of the incineration project at each site follows. The Baird and McGuire site, approximately 14 miles south of Boston, is a former chemical manufacturing facility that operated for 70 years until it was shut down in 1983. This 20-acre site is contaminated with approximately 200,000 pounds of chemicals and metals, including creosote, herbicides and pesticides, arsenic, lead, and dioxin. Chemicals from the site have contaminated groundwater, a nearby river, and a nearby lake. EPA chose to incinerate soil and other contaminated material on-site because it judged that this remedy would be the most protective of human health and because complicating factors made other remedies, such as covering the contaminated areas with a clay cap, inappropriate. These factors included the location of part of the site in a 100-year flood plain, the existence of wetlands on the site, and the potential for the contamination to spread farther (via groundwater) if the site was not effectively treated. In addition, dioxin is present at the site, leaving few off-site treatment possibilities because regulations limit the locations at which dioxin-contaminated material can be treated. The operation of the incinerator at the Baird and McGuire site began in June 1995 and is expected to be completed in April 1997. The incinerator was designed specifically to remediate the high levels of metal contamination at the site. (See fig. I.1.) It is configured to capture the metals (which cannot be destroyed by the incineration process and may be present in the gases produced by the burn) in a pollution control device before they are emitted into the atmosphere. The incinerator has 13 automatic waste feed cutoffs. In case the incinerator is totally shut down, a diesel backup system will keep filtration systems running to prevent the release of hazardous emissions. Emissions from the site are monitored continuously from the incinerator’s stack and from nine locations along the site’s perimeter. Oversight is carried out by 12 staff from the U.S. Army Corps of Engineers, who receive technical assistance from an engineering consulting firm. According to a Corps engineer at the site, the Corps staff complete inspection reports detailing on-site events 2 to 3 times per day and provide weekly summary reports for EPA’s review. The Bayou Bonfouca site includes 55 acres of sediment and surface water that were contaminated with wood-treating chemicals from an abandoned creosote works plant. The main threats to human health at this site included direct contact with contaminated groundwater, the potential for contamination to spread to a nearby waterway during flooding, and the potential for direct contact with concentrated hazardous material at the unsecured site. From February 1992 through September 1995, EPA incinerated contaminated soil and other material. After incinerating the waste from the Bayou Bonfouca site, EPA began to use the incinerator to burn similar wastes from the nearby Southern Shipbuilding Superfund site. (See fig. I.2.) This site was contaminated with 110,000 cubic yards of sludge, containing mostly polycyclic aromatic hydrocarbons that were left from barge cleaning and repair operations. Polycyclic aromatic hydrocarbons are chemicals formed during the incomplete burning of coal, oil, gas, refuse, or other organic substances. In addition to 15 automatic waste feed cutoff parameters to prevent the incinerator from operating outside the regulatory limits, the incinerator has an emergency stack venting system that further treats the gases from the kiln if the incinerator is totally shut down. In case of a power outage or another event that would cause the major functions of the incinerator to fail, this emergency system draws the kiln gases into an emergency stack where a flame further destroys contaminants. According to an incineration contractor official at the Bayou Bonfouca site, this emergency system prevents the release of kiln gases that exceed emission regulations. Oversight at the Bayou Bonfouca site is carried out by a team of nine Corps of Engineers inspectors. These inspectors check the computer screens in the incinerator’s control room every 2 hours to ensure that the incinerator is operating within the regulatory parameters set during the trial burn. The Corps team also inspects the incinerator’s machinery, is present for all sampling and testing done by the incineration company, and documents all of the automatic waste feed cutoffs. Corps officials review monthly, quarterly, and yearly reports from the incineration contractor. Air monitoring at the site includes continuous monitoring from the stack, the excavation site, and other areas of the site, and samples are taken daily for more complete chemical analysis. According to Corps officials, emissions have never exceeded regulatory levels. In addition, EPA Region VI had two RCRA inspections completed at the Bayou Bonfouca site. However, the incinerator was shut down for maintenance at the time of one of the inspections. This Bayou Bonfouca/Southern Shipbuilding project was completed in November 1996. The Times Beach Superfund site is a 0.8-square-mile area, 20 miles southwest of St. Louis, that was contaminated with dioxin. The contamination resulted from spraying unpaved roads with dioxin-tainted waste oil to control dust. EPA decided to incinerate soil from Times Beach and 26 other nearby sites that were contaminated in the same way. (See fig. I.3.) EPA believed that incineration was the best remedy for the large volumes of dioxin-contaminated soil and the large pieces of contaminated debris to be treated. The incineration project at Times Beach began in March 1996 and is expected to be completed in March 1997. The Times Beach site is unusual because EPA obtained a RCRA permit to operate the incinerator. A permit is generally not required at Superfund sites, and the process of obtaining it resulted in some delays in beginning operations. However, EPA regional officials obtained the permit to provide nearby residents with additional assurance that the incinerator would operate safely and would be removed after the project was completed, rather than being kept in place to burn contaminated material from other sites. As required by the permit, the Times Beach incinerator has 17 automatic waste feed cutoffs. In addition, the incinerator includes the same emergency system that is used at Bayou Bonfouca. Oversight at Times Beach is handled primarily by the Missouri Department of Natural Resources. State officials monitor operations on-site and via computer in the state capitol. Three on-site state employees originally provided oversight 24 hours a day. Currently, the state has oversight officials at the site 11-1/2 hours each weekday and 9 hours a day on the weekend. In addition, they conduct unannounced random visits to the site during off hours. To supplement the state’s oversight, St. Louis County inspects operations and tracks the results of air-monitoring testing to ensure that the incinerator’s emissions are in compliance with the limits set in the county’s air pollution permit. According to a county official, although formal inspections are required about once every 2 years, the county informally monitors the site more frequently. As with the other sites, Times Beach has two levels of air monitoring: continuous monitoring and a more detailed laboratory analysis. According to EPA officials, emissions from the incinerator have never exceeded the permissible levels. Despite extensive monitoring at the Times Beach site, incidents have occurred. Once, when an unexpected storm interrupted electrical power and caused a shutdown, the emergency system failed to fire. High winds had blown out the pilot lights on this treatment system, which should have fired after the power to the incinerator had been lost. Without the firing, the emergency system did not further treat the kiln gases as it was designed to do. Although EPA concluded that the event caused no significant health effects, the agency could only estimate emission levels during the shutdown because the air-monitoring equipment that would have recorded the actual emission levels was on the same circuit as the incinerator and, therefore, was not operating during the event. To prevent future emergency shutdowns from storm-related power losses, the incineration contractor hired local weather forecasting services to improve storm warnings and formally adopted a standard operating procedure to stop the waste feeds during severe weather. (This standard operating procedure had already been in force at the Bayou Bonfouca/Southern Shipbuilding Superfund site when the event occurred.) In addition, other measures were taken to prevent the emergency system’s pilot lights from being blown out and to decrease the number of power outages. Improper handling of the emission samples taken during a dioxin stack test was alleged following the discovery that the test samples were taken by a company that is a subsidiary of the incineration contractor. EPA maintains that the incinerator operator followed all required procedures for testing the samples. EPA has no regulation that prohibits the incineration contractor or one of its subsidiaries from taking, transporting, or analyzing the test samples. In addition, the time taken to deliver the samples to the laboratory was questioned—8 days from the time the samples left the site until they arrived at the laboratory. According to EPA officials, the samples are stable, making the time taken to get them to the laboratory unimportant. State officials reviewed the testing and determined that the results were valid. However, in December 1996, the EPA Ombudsman issued a report on the allegations and recommended that a new stack test be conducted to ensure public confidence in the cleanup. EPA agreed to implement the Ombudsman’s recommendation. James F. Donaghy, Assistant Director Jacqueline M. Garza, Staff Evaluator Richard P. Johnson, Attorney Adviser William H. Roach, Jr., Senior Evaluator Paul J. Schmidt, Senior Evaluator Magdalena A. Slowik, Intern Edward E. Young, Jr., Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed the Environmental Protection Agency's (EPA) use of incineration at Superfund sites, focusing on: (1) what safeguards EPA uses to promote the safe operation of incinerators at these sites; and (2) whether EPA has fully implemented its planned system of safeguards. GAO noted that: (1) EPA relies upon four main methods to promote the safe operation of incinerators used at Superfund sites; (2) these methods are: (a) required site-specific standards for an incinerator's emissions and performance; (b) engineering safety features built into the incinerator's systems; (c) air monitoring to measure the incinerator's emissions; and (d) on-site observation of the incinerator's operations; (3) EPA sets standards after it studies each site's characteristics; (4) each incinerator is designed with safety features intended to stop its operation if it fails to meet the specified operating conditions; (5) air monitors are placed in the incinerator's stack and around the site's perimeter to measure the incinerator's emissions; (6) at the three Superfund sites with ongoing incineration projects at the time of GAO's review, EPA had arranged for 24-hour, on-site oversight from either the U.S. Army Corps of Engineers or a state government to ensure that the incinerator was operating properly; (7) in addition to the four methods discussed above, EPA managers intended to use two other techniques, inspections and applications of lessons learned, to encourage safe operations, but neither was fully implemented; (8) EPA has not used inspectors from its hazardous waste incinerator inspection program to evaluate the operations of all Superfund incinerators as it required in a 1991 directive; (9) only one of the three incinerators GAO visited had received such an inspection; (10) EPA regional staff responsible for hazardous waste incinerator inspections were unaware that the Superfund incinerators were supposed to be inspected, and EPA headquarters officials were unaware that the inspections were not occurring; (11) EPA managers did not follow through on their intention to systematically apply the lessons learned from incineration at one site to other sites; (12) they had intended to prepare documents describing problems and solutions at each incineration project for use in designing and operating other projects and to hold periodic conference calls with the managers from incineration sites to discuss issues of common interest; (13) both of these methods of transferring information were dropped for various reasons; (14) GAO found that the lessons learned from the problems experienced at the sites GAO visited could benefit other sites; and (15) EPA headquarters officials told GAO that they encouraged Superfund project managers to share their experiences with incineration but had not facilitated this exchange in a structured way.",govreport
"SEC’s financial statements, including the accompanying notes, present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, SEC’s assets, liabilities, net position, net costs, changes in net position, budgetary resources, and custodial activity as of, and for the fiscal years ended, September 30, 2007, and September 30, 2006. However, misstatements may nevertheless occur in other financial information reported by SEC and may not be prevented or detected because of the internal control deficiencies described in this report. As disclosed in footnote 1.C. to SEC’s financial statements, in fiscal year 2007, SEC changed its method of accounting for user fees collected in excess of current-year appropriations. Because of the material weakness and significant deficiencies in internal control discussed below, SEC did not maintain effective internal control over financial reporting as of September 30, 2007, and thus did not have reasonable assurance that misstatements material in relation to the financial statements would be prevented or detected on a timely basis. Although certain compliance controls should be improved, SEC maintained, in all material respects, effective internal control over compliance with laws and regulations as of September 30, 2007, that provided reasonable assurance that noncompliance with laws and regulations that could have a direct and material effect on the financial statements would be prevented or detected on a timely basis. Our opinion on internal control is based on criteria established under 31 U.S.C. § 3512(c)(d), commonly referred to as the Federal Managers’ Financial Integrity Act (FMFIA) and the Office of Management and Budget (OMB) Circular No. A-123, Management Accountability and Control. During this year’s audit, we identified significant control deficiencies in SEC’s financial reporting process, which taken collectively, result in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. Therefore, we considered the combination of the following control deficiencies to collectively constitute a material weakness in SEC’s financial reporting process: period-end financial reporting process, disgorgements and penalties accounts receivable, accounting for transaction fee revenue, and preparing financial statement disclosures. In addition to the material weakness discussed above, we identified three significant deficiencies in internal control, which although not material weaknesses, represent significant deficiencies in the design or operation of internal control. Although we are considering these issues separately from the material weakness described above, they nevertheless adversely affect SEC’s ability to meet financial reporting and other internal control objectives. These deficiencies concern property and equipment, and accounting for budgetary resources. In our prior year audit, we reported on weaknesses we identified in the areas of SEC’s (1) recording and reporting of disgorgements and penalties, (2) information systems controls, and (3) property and equipment controls. During fiscal year 2007, SEC improved its controls over the accuracy, timeliness, and completeness of the disgorgement and penalty data and used a much improved database for the initial recording and tracking of these data. However, the processing of these data for financial reporting purposes is still done through a manual process that is prone to error. We found that the internal controls that compensated for the manual processing of the related accounts receivable balances in fiscal year 2006 were not effective in fiscal year 2007. This issue is included in the material weakness in SEC’s financial reporting process for fiscal year 2007. SEC continues to make progress in resolving the information security weaknesses. Previously identified weaknesses, though, still need to be addressed, along with new weaknesses we found during this year’s audit. Therefore, we consider information security to be a significant deficiency as of September 30, 2007. In addition, we continued to identify the same weaknesses in controls over property and equipment during this year’s audit, and therefore, we considered this area to be a significant deficiency as of September 30, 2007. Although SEC had one material weakness and three significant control deficiencies in internal control, SEC’s financial statements were fairly stated in all material respects for fiscal years 2007 and 2006. However, the weaknesses in internal control noted above may adversely affect decisions by SEC management that is based, in whole or in part, on information that is inaccurate because of this weakness. In addition, unaudited financial information reported by SEC, including performance information, may also contain misstatements resulting from these weaknesses. We will be reporting additional details concerning the material weakness and the significant deficiencies separately to SEC management, along with recommendations for corrective actions. We will also be reporting less significant matters involving SEC’s system of internal controls separately to SEC management. During this year’s audit, we found control deficiencies in SEC’s period-end financial reporting process, in its calculation of accounts receivable for disgorgements and penalties, in its accounting for transaction fee revenue, and in preparing its financial statement disclosures. We believe these control deficiencies, collectively, constitute a material weakness. SEC’s financial management system does not conform to the systems requirements of OMB Circular No. A-127, Financial Management Systems. Specifically, Circular No. A-127 requires that financial management systems be designed to provide for effective and efficient interrelationships between software, hardware, personnel, procedures, controls, and data contained within the systems. Circular No. A-127 further states that financial systems must have common data elements, common transaction processing, consistent internal controls, and efficient transaction entry, and that reports produced by the systems shall provide financial data that can be traced directly to the general ledger accounts. SEC’s period-end financial reporting process for recording transactions, maintaining account balances, and preparing financial statements and disclosures are supported to varying degrees by a collection of automated systems that are not integrated or compatible with its general ledger system. These automated systems’ lack of integration and compatibility require that extensive compensating manual and labor-intensive accounting procedures, involving large spreadsheets and numerous posting and routine correcting journal entries, dominate SEC’s period-end financial reporting process. Some of SEC’s subsidiary systems, such as that for property and equipment and for disgorgements and penalties, do not share common data elements and common transaction processing with the general ledger system. Therefore, intermediary information processing steps, including extensive use of spreadsheets, manipulation of data, and manual journal entries, are needed to process the information in SEC’s general ledger. This processing complicates review of the transactions and greatly increases the risk that the transactions are not recorded completely, properly, or consistently, ultimately affecting the reliability of the data presented in the financial statements. Our identification this year of errors in SEC’s calculation of disgorgement and penalty accounts receivable, discussed below, illustrates this risk. The risk to data reliability is further increased because basic controls over electronic data, such as worksheet and password protection, change history, and controls over data verification, such as control totals and record counts, were not consistently used during the data processing between the source systems and the general ledger. In addition, currently, SEC’s general ledger has several unconventional posting models and other limitations that prevent proper recording of certain transactions. As a result, SEC’s year-end reporting process requires extensive routine correcting journal entries to correct errors created by incorrectly posted transactions in its general ledger. We also noted that SEC’s documentation used to crosswalk individual accounts to the financial statement line items contained an incorrect routing to a line item on SEC’s Statement of Budgetary Resources for SEC’s year-end financial statement preparation process, which caused a material error in SEC’s draft financial statements. Also, SEC did not have detailed written documentation of its methodologies and processes for preparing financial statements and disclosures, increasing the risk of inconsistent and improper reporting and the risk that disruptions and error may arise when staff turnover occurs. As part of its enforcement responsibilities, SEC issues orders and administers judgments ordering, among other things, disgorgements, civil monetary penalties, and interest against violators of federal securities laws. SEC recognizes a receivable when SEC is designated in an order or a final judgment to collect the assessed disgorgements, penalties, and interest. At September 30, 2007, the gross amount of disgorgements and penalties accounts receivable was $330 million, with a corresponding allowance of $266 million resulting in a net receivable of $64 million. In our reviews of the interim June 30, 2007, and year-end September 30, 2007, balances of accounts receivable for disgorgements and penalties, we found errors in SEC’s spreadsheet formulas resulting in overstatements of these receivable balances for both periods. These errors consisted of incorrectly changed spreadsheet formulas that affected the final calculated balances. SEC subsequently detected and corrected the June 30 errors, but then made different spreadsheet calculation errors in the year-end balances as of September 30, 2007, which we detected as part of our audit. SEC made adjustments to correct the errors, which were not material. However, SEC’s process for calculating its accounts receivable for disgorgements and penalties presents a high risk that significant errors could occur and not be detected. The main cause of these errors is the breakdown this year in the manual controls that were intended to compensate for the lack of an integrated accounting system for disgorgements and penalties, as discussed above. Specifically, although the journal entries posting the amounts to the general ledger were reviewed, this review did not extend to the preparation of the spreadsheet SEC used to document the accounts receivable calculation at June 30 and September 30, 2007, and therefore, was not sufficient to detect significant spreadsheet formula errors. As one of its sources of revenue, SEC collects securities transaction fees paid by self-regulatory organizations (SRO) to SEC for stock transactions. SRO transaction fees are payable to the SEC twice a year –in March for the previous months September through December, and in September for the previous months January through August. Since the SROs are not required to report the actual volume of transactions until 10 business days after each month end, SEC estimates and records an amount receivable for fees payable by the SROs to SEC for activity during the month of September. At September 30, 2007, SEC estimated this receivable amount at $100.6 million. Based on information SEC received in mid-October concerning the actual volume of transactions, the amount of claims receivable at September 30, 2007, should have been $74.4 million. In previous years, SEC made adjustments to reflect the actual volume of transactions; however, SEC does not have written procedures to help ensure that this adjustment is made as a routine part of its year-end financial reporting process. We proposed, and SEC posted, the necessary audit adjustment to correct the amount of transaction fee revenue for fiscal year 2007. Statement on Auditing Standards No.1, Codification of Auditing Standards and Procedures, which explains the accounting requirements for subsequent events, requires that events or transactions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements should be considered for adjustment to or disclosure in the financial statements through the date that the financial statements are issued. In addition, the concept of consistency in financial reporting provides that accounting methods, including those for determining estimates, once adopted, should be used consistently from period to period unless there is good cause to change. In our review of SEC’s year-end draft financial statement disclosures, we noted numerous errors including misstated amounts, improper break out of line items, and amounts from fiscal year-end 2006 incorrectly brought forward as beginning balances for fiscal year 2007. For example, in its disclosure for Custodial Revenues and Liabilities, SEC improperly excluded approximately $320 million in collections. In another example, for its disclosure on Fund Balance with Treasury, SEC misclassified approximately $90 million into incorrect line items. Also, in its disclosure for Fiduciary Assets and Liabilities, SEC’s beginning balances for Fund Balance with Treasury and for Liability for Fiduciary Activity were each misstated by $8.9 million due to errors in carrying forward ending balances from September 30, 2006. SEC revised the financial statement disclosures to correct the errors that we noted. We believe the cause of these and numerous other errors in the disclosures is due mainly to the lack of a documented timeline and process for completing the fiscal year 2007 financial statements and disclosures, including review of the disclosures. In addition, the cumbersome and complicated nature of SEC’s financial reporting process discussed above did not allow SEC finance staff sufficient time to carry out thorough and complete reviews of the disclosures in light of the November 15 reporting deadline. We also identified three control deficiencies that adversely affect SEC’s ability to meet its internal control objectives. These conditions concern deficiencies in controls over (1) information security, (2) property and equipment, and (3) accounting for budgetary resources, which are summarized below. SEC relies extensively on computerized information systems to process, account for, and report on its financial activities and make payments. To provide reasonable assurance that financial information and financial assets are adequately safeguarded from inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction, effective information security controls are essential. These controls include security management, access controls, configuration management, physical security, and contingency planning. Weaknesses in these controls can impair the accuracy, completeness, and timeliness of information used by management and increase the potential for undetected material misstatements in the agency’s financial statements. During fiscal year 2007, SEC made important progress in mitigating certain control weaknesses that were previously reported as unresolved at the time of our prior review. For example, SEC developed a comprehensive program for monitoring access activities to its computer network environment, tested and evaluated the effectiveness of controls for the general ledger system, and documented authorizations for software modifications. SEC also took corrective action to restrict access to sensitive files on its servers, change default database accounts that had known or weak passwords, and apply strong encryption key management practices for managing secure connections. Despite this progress, SEC has not consistently implemented certain key information security controls to effectively safeguard the confidentiality, integrity, and availability of its financial and sensitive information and information systems. During this year’s audit, we identified continuing and new information security weaknesses that increase the risk that (1) computer resources (programs and data) will not be adequately protected from unauthorized disclosure, modification, and destruction; (2) access to facilities by unauthorized individuals will not be adequately controlled; and (3) computer resources will not be adequately protected and controlled to ensure the continuity of data processing operations when unexpected interruptions occur. For example, SEC had not yet mitigated weaknesses related to malicious code attacks on SEC’s workstations, had not yet adequately documented access privileges for a major application, and had not yet implemented an effective intrusion detection system. New control weaknesses in authorization, boundary protection, configuration management, and audit and monitoring that we identified this year include for example, the use of a single, shared user account for posting journal vouchers in a financial application, inadequate patching of enterprise databases, and inadequate auditing and monitoring capabilities on its database servers. Lapses in physical security enabled unauthorized network access from a publicly accessible location within SEC Headquarters. In addition, SEC did not have contingency plans for key desktops that support manual processes such as the preparation of spreadsheets. These weaknesses existed, in part, because SEC has not yet fully implemented its information security program. Collectively, these problems represent a significant deficiency in SEC’s internal control over information systems and data. Specifically, the continuing and newly identified weaknesses decreased assurances regarding the reliability of the data processed by the systems and increased the risk that unauthorized individuals could gain access to critical hardware and software and intentionally or inadvertently access, alter, or delete sensitive data or computer programs. Until SEC consistently implements all key elements of its information security program, the information that is processed, stored, and transmitted on its systems will remain vulnerable, and management will not have sufficient assurance that financial information and financial assets are adequately safeguarded from inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction. We will be issuing a separate report on issues we identified regarding information security concerns at SEC. SEC’s property and equipment consists of general-purpose equipment used by the agency; capital improvements made to buildings leased by SEC for office space; and internal-use software development costs for projects in development and production. SEC acquired approximately $27 million dollars in property and equipment during fiscal year 2007. Similar to our last year’s audit, during the course of testing fiscal year 2007 additions, we noted numerous instances of inaccuracies in recorded acquisition costs and dates for property and equipment purchases, as well as unrecorded property and equipment purchases, and errors in amounts capitalized and amortized for internal-use software projects. In addition, errors were carried forward from the previous year. These systemic errors did not materially affect the balances reported for property and equipment or the corresponding depreciation/amortization expense amounts in SEC’s financial statements for fiscal year 2007; however, these conditions evidence a significant deficiency in control over the recording of property and equipment that affects the reliability of its recorded balances for property and equipment. Specifically, SEC lacks a process that integrates controls over capitalizing and recording property and equipment purchases. For example, SEC does not have a formalized, documented process for comparing quantity and type of item received against the corresponding order for property purchases. In addition, SEC does not have sufficient oversight of the recording of acquisition dates and values of the capitalized property. Further, SEC’s lack of an integrated financial management system for accounting for property and equipment, as discussed above, requires compensating procedures, which were not effective, to ensure that manual calculations, such as those for depreciation and amortization, are accurate. Until it has a systemic process that incorporates effective controls over receiving, recording, capitalizing, and amortizing property and equipment purchases, SEC will not have sufficient assurance over the accuracy and completeness of its reported balances for property and equipment. For fiscal year 2007, SEC incurred $877 million in obligations, which represents legal liabilities against funds available to SEC to pay for goods and services ordered. At September 30, 2007, SEC reported that the amount of budgetary resources obligated for undelivered orders was $255 million, which reflects obligations for goods or services that had not been delivered or received as of that date. In our testing of undelivered order transactions for this year’s audit, we identified several concerns over SEC’s accounting for obligations and undelivered orders. Specifically, we found numerous instances in which SEC (1) recorded obligations prior to having documentary evidence of a binding agreement for the goods or services, (2) recorded invalid undelivered order transactions due to an incorrect posting configuration in SEC’s general ledger, and (3) made errors in recording new obligations and deobligations due to the use of incorrect accounts and by posting incorrect amounts in the general ledger. The majority of exceptions related to these issues, amounting to approximately $76 million, were corrected by SEC through adjusting journal entries. While the remaining uncorrected amounts did not materially affect the balances on the Statement of Budgetary Resources at September 30, 2007, ineffective processes that caused these errors constitute a significant deficiency in SEC’s internal control over recording and reporting of obligations, and puts SEC at risk that the amounts recorded in the general ledger and reported on SEC’s Statement of Budgetary Resources are misstated. Specifically, SEC’s general ledger is not configured to properly post related entries, thereby resulting in the need to routinely correct entries. Extensive reviews of the budgetary transactions, along with significant adjusting journal entries, are needed to compensate for the system limitations. The errors in recording new obligations and deobligations that we found in our audit indicate a lack of effective review over those transactions. Further, SEC does not have policies or internal controls to prevent recording of obligations that are not valid. Recording obligations prior to having documentary evidence of a binding agreement for the goods and services is a violation of the recording statute, and may result in funds being reserved unnecessarily and therefore made unavailable for other uses should the agreement not materialize. In addition, early recording of obligations may result in charging incorrect fiscal year funds for an agreement executed in a later fiscal year. Our tests for compliance with selected provisions of laws and regulations disclosed no instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards or OMB audit guidance. However, the objective of our audit was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. SEC’s Management’s Discussion and Analysis and other accompanying information contain a wide range of data, some of which are not directly related to the financial statements. We do not express an opinion on this information. However, we compared this information for consistency with the financial statements and discussed the methods of measurement and presentation with SEC officials. Based on this limited work, we found no material inconsistencies with the financial statements or nonconformance with OMB guidance. However, because of the internal control weaknesses noted above, misstatements may occur in related performance information. SEC management is responsible for (1) preparing the financial statements in conformity with U.S. generally accepted accounting principles; (2) establishing, maintaining, and assessing internal control to provide reasonable assurance that the broad control objectives of FMFIA are met; and (3) complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles; and (2) management maintained effective internal control, the objectives of which are the following: Financial reporting: Transactions are properly recorded, processed, and summarized to permit the timely and reliable preparation of financial statements in conformity with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition. Compliance with applicable laws and regulations: Transactions are executed in accordance with (1) laws governing the use of budgetary authority, (2) other laws and regulations that could have a direct and material effect on the financial statements, and (3) any other laws, regulations, or governmentwide policies identified by OMB audit guidance. We are also responsible for (1) testing compliance with selected provisions of laws and regulations that could have a direct and material effect on the financial statements and for which OMB audit guidance requires testing and (2) performing limited procedures with respect to certain other information appearing in SEC’s Performance and Accountability Report. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by evaluated the overall presentation of the financial statements; obtained an understanding of SEC and its operations, including its internal control related to financial reporting (including safeguarding of assets) and compliance with laws and regulations (including execution of transactions in accordance with budget authority); obtained an understanding of the design of internal controls related to the existence and completeness assertions relating to performance measures as reported in Management’s Discussion and Analysis, and determined whether the internal controls have been placed in operation; tested relevant internal controls over financial reporting and compliance with applicable laws and regulations, and evaluated the design and operating effectiveness of internal control; considered SEC’s process for evaluating and reporting on internal control and financial management systems under the FMFIA; and tested compliance with selected provisions of the following laws and their related regulations: the Securities Exchange Act of 1934, as amended; the Securities Act of 1933, as amended; the Antideficiency Act; laws governing the pay and allowance system for SEC employees; the Prompt Payment Act; and the Federal Employees’ Retirement System Act of 1986. We did not evaluate all internal controls relevant to operating objectives as broadly defined by the FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to controls over financial reporting and compliance. Because of inherent limitations in internal control, misstatements due to error or fraud, losses, or noncompliance may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate. We did not test compliance with all laws and regulations applicable to SEC. We limited our tests of compliance to those required by OMB audit guidance and other laws and regulations that had a direct and material effect on, or that we deemed applicable to, SEC’s financial statements for the fiscal year ended September 30, 2007. We caution that noncompliance may occur and not be detected by these tests and that this testing may not be sufficient for other purposes. We performed our work in accordance with U.S. generally accepted government auditing standards and OMB audit guidance. SEC’s management provided comments on a draft of this report. They are discussed and evaluated below and are reprinted in appendix III. In commenting on a draft of this report, SEC’s Chairman said he was pleased to receive an unqualified opinion on SEC’s financial statements. The Chairman discussed SEC’s plans to remediate this material weakness before the end of fiscal 2008, and to address each of the findings and recommendations identified during the audit. The Chairman emphasized SEC’s commitment to enhance its controls in all operational areas and to ensure reliability of financial reporting, soundness of operations, and public confidence in SEC’s mission. The complete text of SEC’s comments is reprinted in appendix III.","Established in 1934 to enforce the securities laws and protect investors, the Securities and Exchange Commission (SEC) plays an important role in maintaining the integrity of the U.S. securities markets. Pursuant to the Accountability of Tax Dollars Act of 2002, SEC is required to prepare and submit to Congress and the Office of Management and Budget audited financial statements. GAO agreed, under its audit authority, to perform the audit of SEC's financial statements. GAO's audit was done to determine whether, in all material respects, (1) SEC's fiscal year 2007 financial statements were reliable and (2) SEC's management maintained effective internal control over financial reporting and compliance with laws and regulations. GAO also tested SEC's compliance with certain laws and regulations. In GAO's opinion, SEC's fiscal year 2007 and 2006 financial statements were fairly presented in all material respects. However, because of a material weakness in internal control over SEC's financial reporting process, in GAO's opinion, SEC did not have effective internal control over financial reporting as of September 30, 2007. Recommendations for corrective action will be included in a separate report. Although certain compliance controls should be improved, SEC did maintain in all material respects effective internal control over compliance with laws and regulations material in relation to the financial statements as of September 30, 2007. In addition, GAO did not find reportable instances of noncompliance with the laws and regulations it tested. In its 2006 report, GAO reported on weaknesses in the areas of SEC's (1) recording and reporting of disgorgements and penalties, (2) information systems controls, and (3) property and equipment controls. During fiscal year 2007, SEC improved its controls over the accuracy, timeliness, and completeness of the disgorgement and penalty data and used a much improved database for the initial recording and tracking of these data. However, the processing of these data for financial reporting purposes is still done through a manual process that is prone to error. GAO found that the internal controls that compensated for the manual processing of the related accounts receivable balances in fiscal year 2006 were not effective in fiscal year 2007. This issue is included in the material weakness in SEC's financial reporting process for fiscal year 2007. Other control deficiencies included in this material weakness concern SEC's period-end closing process, accounting for transaction fee revenue, and preparation of financial statement disclosures. GAO also identified three significant deficiencies in internal control during fiscal year 2007. Although SEC has taken steps to strengthen its information security, some of the weaknesses identified in GAO's previous audit persisted and GAO found new weaknesses during this year's audit. Therefore, GAO is reporting information security as a significant deficiency as of September 30, 2007. In addition, GAO continued to identify the same weaknesses in controls over property and equipment and therefore considers this area a significant deficiency as of September 30, 2007. GAO also identified a new significant deficiency concerning SEC's accounting for budgetary transactions. In commenting on a draft of this report, SEC's Chairman emphasized SEC's commitment to enhance its controls in all operational areas and to ensure reliability of financial reporting, soundness of operations, and public confidence in SEC's mission.",govreport
"The Postal Service, the nation’s largest civilian employer, had about 765,000 career employees at the end of fiscal year 1997. Service employees include craft employees, the largest group; EAS; the Postal Career Executive Service (PCES); and others, such as inspectors for the Postal Inspection Service. The Service structure includes headquarters, 11 areas, and 85 performance clusters, with cluster-level employees making up about 96 percent of the Service workforce. For the purposes of this review, we focused on the cluster-level EAS workforce. The EAS workforce consists primarily of employees in EAS 11 through 26 positions. EAS management-level positions begin at EAS 16 and include such positions as postmaster, manager of customer services, and manager of postal operations. At the end of fiscal year 1997, EAS positions totaled 80,238, or about 10 percent of total Service career-level employees. PCES, established in 1979, includes Service senior-level officers and executives in positions such as area vice presidents. At the end of fiscal year 1997, the Service had about 900 employees in PCES positions. We did not include employees in PCES positions in our analyses for this report. According to the Service, one of its corporate goals is a commitment to employees, which includes an effort to provide equal employment opportunities to all employees, take advantage of its diverse workforce, and compete effectively in the communications marketplace. To that end, the Service created its Diversity Development Department in headquarters in 1992, which was to foster an all-inclusive business environment. The head of the Department reports directly to the Deputy Postmaster General. The Department is responsible for, among other things, actively supporting the recruitment, retention, and upward mobility of women and minorities. In addition, the Service’s 1999 Annual Performance Plan includes achieving a diverse workforce as one of its goals. To determine the effectiveness of the Service’s diversity development program, the Postal Service Board of Governors commissioned Aguirre International, a contractor, to undertake a 6-month study (May 2, 1997, to Nov. 2, 1997) of workforce diversity at the Postal Service. The study addressed Service personnel and supplier diversity and was issued in October 1997. The report stated that the Service was a leader in meeting affirmative action goals as well as striving for parity between its workforce and the CLF. It also stated, among other things, that women and minorities appeared to be experiencing problems advancing to management jobs at EAS 17 and above positions. The Board of Governors subsequently directed the Service to develop an action plan for dealing with the diversity issues raised by Aguirre. The Service developed an action plan and briefed the Board on the plan in April 1998. In our previous letter, we reviewed promotions to EAS 16 and above positions at four selected performance clusters. Documentation in the promotion files and our discussions with Service officials provided evidence that the Service’s required promotion procedures we reviewed were followed for the 127 fiscal year 1997 promotions at these 4 sites. In addition, for 117 of these promotions, we provided statistical data on the distribution of the specific EEO groups throughout the promotion process stages—applications received, applicants considered best qualified, and applicants promoted. The specific EEO groups discussed in this report include white, black, Hispanic, Asian, and Native American men and women. We did our work from July 1998 through January 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Postmaster General and from Aguirre International’s Director of Operations. The Postal Service’s oral comments and Aguirre’s written comments are discussed near the end of this letter. Further details about the scope and methodology of our review can be found in appendix I. The analyses that follow show how the representation of cluster-level women and minority groups (1) compared with their representation in the 1990 CLF; (2) changed between fiscal years 1993 and 1997 in EAS 17 and above positions; (3) among those promoted to EAS 17 and above positions in fiscal year 1997, compared with their representation in EAS 17 and above positions in fiscal year 1997 (before the promotions); and (4) in EAS 17 and above positions, compared with their representation in EAS 11 through 16 positions in fiscal year 1997. We also made similar comparisons for women and minorities involving the remainder of the Postal Service workforce located at the headquarters and area office levels, as detailed in appendix II. Table 1 shows that when we compared fiscal year 1997 data for the Service’s cluster-level workforce with CLF data from the 1990 decennial census, black and Asian men and women and Hispanic men were fully represented, while Hispanic women, Native American men and women, and white women were underrepresented. Specifically, black men and women comprised 11.3 and 9.6 percent, respectively, of the cluster workforce compared with their respective 5.0 and 5.5 percent representation in the CLF; Asian men and women comprised 3.5 and 1.9 percent, respectively, of the workforce compared with their respective 1.5 and 1.3 percent representation in the CLF. However, white and Hispanic women were underrepresented, comprising 22.1 percent and 2.0 percent, respectively, of the workforce compared with their respective 35.3 percent and 3.4 percent CLF representation. White men were represented in the workforce similarly to their level of representation in the CLF. In addition to the cluster-level workforce data presented in table 1, we analyzed similar data for the Service’s headquarters-level and area office- level workforces. Table II.1 in appendix II shows that white and Hispanic women and Native American men were underrepresented among the three workforce levels. Native American women were underrepresented among cluster employees and headquarters employees, but not among area office employees. Hispanic men were underrepresented among headquarters and area office employees, while white men were underrepresented among area office employees. Black and Asian men and women were fully represented in all three workforce levels. Figure 1 shows our analysis of the representation of women and minorities at the cluster level in EAS 17 and above positions in fiscal year 1993 compared with fiscal year 1997. As the figure shows, generally, the representation of women and minorities increased over this period; black men’s representation decreased 0.6 percent over this period. Also, white men’s representation decreased over this period by about 2.0 percent. Table II.2 in appendix II shows this same type of comparison between the 2 fiscal years for women and minorities in EAS 17 and above positions at the headquarters and area office levels. At the headquarters level, in addition to the slight decrease in representation of black and white men as happened at the cluster level, representation of Native American men also showed a slight decrease. At the area office level, the representation of black men, Asian men, and Native American men all generally decreased. Also, at the headquarters and area office levels, the representation of white men decreased. As shown in figure 2, we compared the representation of each EEO group at the cluster level promoted to EAS 17 and above positions in fiscal year 1997 with their representation in EAS 17 and above positions at the cluster level in fiscal year 1997 before the promotions. Our analysis showed that the representation of women and all minority groups among those promoted was higher than the representation of women and minority groups in EAS 17 and above positions, with the exception of Asian women. Also, the representation of white males in promotions to these higher EAS positions was lower than their representation in the cluster-level workforce. Table II.3 in appendix II shows the same type of information for the same period for the headquarters and area office workforce levels. At the headquarters level, representation of women and all minority groups among those promoted was higher than their representation in EAS 17 and above positions, with the exception of Asian women and black and Native American men. However, at the area office level, representation of white women; Hispanic men and women; and Native American men and women was lower than their representation in EAS 17 and above positions. Also, white men were promoted at a rate lower than their representation at the headquarters and area office levels. Table 2 shows our last comparison, the fiscal year 1997 representation of women and minorities in EAS 17 and above positions with their representation in EAS 11 through 16 positions. We made this comparison because employees in EAS 11 through 16 positions represent the workforce pool from which selections for promotion to EAS 17 and above positions would likely be made. Our analyses in table 2 show that among cluster-level employees, the overall representation of women and minorities in EAS 17 and above positions was lower than it was in EAS 11 through 16 positions in fiscal year 1997—42 percent compared to 61 percent. Table II.4 in appendix II shows variation in the representation of women and minorities in the higher EAS positions at the headquarters and area office levels compared with their representation in EAS 11 through 16 positions. Based on our own standards for designing studies and developing methodologies to evaluate programs, we believe that the methodologies used by Aguirre International were generally reasonable, appropriate, and relevant given the established study parameters, including the 6-month time frame in which the study was to be completed and the complexities associated with addressing the sensitive issue of diversity in an organization as large as the Postal Service. In addition, limitations resulting from the study’s parameters, as well as cautions regarding the study’s findings, were noted throughout the report. However, in our review of the Aguirre report, we noted one area of concern: The report stated that it appeared that a glass ceiling impeded the progression of women and minorities to EAS 17 and above positions, but in our opinion, the report did not explicitly define the term glass ceiling or present convincing supporting evidence. At the direction of the Postal Service Board of Governors, the Service contracted with Aguirre International to study the Service’s diversity program. The Board was specifically interested in the Service’s progress in meeting its goal of creating a Service workforce as diverse as the CLF. The Board asked Aguirre to look at several areas, including hiring, promoting, training and development, and contracting. Aguirre was to complete the study within a 6-month period—May 2, 1997, through November 2, 1997. The Aguirre report stated that the study was designed to assess the effectiveness of the Service’s diversity program in eight research areas, which are listed in appendix III of this report. The approach to the study taken by Aguirre researchers involved the use of multiple research methods to research the eight questions (see app. III). Aguirre’s report indicated that it had performed numerous data analyses, reviewed written policies and practices, validated a Service database, visited 10 postal sites, and conducted a survey and interviews. Such an approach allowed the issues presented in the report to be discussed from several perspectives, which in our opinion and based on our standards for performing studies and evaluations, was an acceptable methodological approach. For example, Aguirre made what we believe were appropriate adjustments to the 1990 Census CLF data to arrive at compatible postal districts for comparisons. Aguirre staff developed models and adjusted the models to allow for Service hiring requirements and restrictions, such as English language proficiency and veteran’s preference. Using these data, they made numerous comparisons of the Postal workforce to the CLF. In addition, the report indicated that Aguirre staff gathered data from various organizational levels in the Service. It indicated that the staff spoke with Service officials at headquarters and selected sites, a number of Service employees, potential Service employees, and contractors to obtain their perspectives on diversity-related issues in the Service. Aguirre staff also visited selected Service sites and conducted employee surveys and interviews. They arranged focus group discussions with community residents who were viewed as potential employees to gather information about, among other things, their views on barriers to diversity at the Service. They also held focus groups with and interviewed potential contractors to explore the extent to which any known barriers might impede contractors, especially minority-owned contractors, from obtaining Service business. In addition, the Aguirre report referred to organizations with success in the area of diversity and used internal benchmarking to report “promising practices” within the Service. Certain study parameters set by the Board of Governors, such as the time frame for the study and the preselection of certain sites, resulted in numerous study limitations. The Aguirre report clearly noted these limitations in appropriate sections, citing appropriate cautions for readers regarding the study’s findings. According to the Aguirre Project Director, the 6-month period for the study that was set by the Board of Governors affected the manner in which the study was implemented in a number of ways. She said Aguirre wanted to further analyze the data but ran out of time. She also said that interviews and discussions with Service employees, potential employees, and potential contractors were limited in that Aguirre staff spoke only with individuals located near the sites they visited. Thus, the views of these individuals may not represent the views of similar individuals at other Service sites. Finally, the Aguirre report recognizes the information obtained from Aguirre’s visits to postal sites may not be typical of Service sites throughout the country. The Board selected the first 5 of the 10 sites visited because these sites had known diversity problems or were of special interest to particular Board members. This resulted in a highly urban sample of sites. Aguirre attempted to balance these sites by selecting five others based on demographics that were more rural and, according to Aguirre and Service officials, that had achieved some success in the area of diversity. However, even this larger sample of 10 sites had African-American representation that was twice that of the other 75 performance clusters that were not selected for review. Indeed, the report cautioned readers that the views of individuals at these sites could not be generalized to the Service as a whole. As a result, the findings from the site visits may be more indicative of specific sites selected rather than the status of the Service overall. Aguirre stated in its report that it appeared that a glass ceiling existed at positions beginning at EAS 17 for women and minorities. Aguirre did not explicitly define the term glass ceiling. Further, Aguirre officials told us that Aguirre based its finding of the glass ceiling primarily on its analyses of fiscal year 1996 data and comparisons of that data with the CLF and secondarily on discussions it had with Service employees. Specifically, Aguirre compared the level of women and minority representation at the various levels or positions within the EAS with their representation in the CLF. Because the representation of women and minorities in positions beginning at EAS 17 was less than their representation in the CLF, Aguirre stated that it appeared that a glass ceiling began at EAS 17 positions. In addition, the Project Leader for the Aguirre study told us that although Aguirre’s finding of a glass ceiling was supported primarily by its analyses and comparisons of data, the finding was also supported by the views of postal workers, many of whom perceived that barriers existed to the promotion of women and minorities to higher EAS and PCES positions. She said that the views of the Service employees Aguirre interviewed were consistent—that is, barriers, such as a perceived “old boy network,” prevented women and minorities from progressing to EAS 17 and above positions. However, she acknowledged, as did the Aguirre report, that the views expressed by these individuals at these sites could not be generalized to the entire Service workforce. We do not believe that it is appropriate to compare the EEO group representation in specific EAS positions or levels in the Service with the CLF because CLF data are not, nor were they intended to be, broken down into an appropriate pool of employees for such a comparison (i.e., similar positions or levels, as well as individuals with appropriate qualifications for those positions). Both the Aguirre Project Director and Project Leader for the study told us that Aguirre used the comparison with the CLF because the Service asked them to. Nevertheless, the Service also disagreed with Aguirre’s glass-ceiling finding on the basis of its comparison of women and minorities in specific EAS positions with the general CLF. Further, we believe that the use of the term glass ceiling in the Aguirre report could be misleading, particularly if the term were to be interpreted by readers in a general sense—that is, an upper limit beyond which few or no women and minorities could pass. Under this definition, and according to our review of workforce and promotion data for EAS 17 and above cluster-level employees in fiscal year 1997, no glass ceiling existed. For example, as shown in table 3, we found that for the cluster level, women and minorities were present in all positions and had been promoted to most of those positions. In addition, the percentage of women and minorities being promoted into these higher EAS positions was generally greater than was their representation in the same positions in fiscal year 1997 (before the promotions). For example, for EAS 17 positions, women and minorities comprised about 54 percent of the positions and received about 58 percent of the promotions. However, both our analyses and Aguirre’s suggest that opportunity may exist for the Service to increase the diversity of its workforce in the higher EAS positions, even though a glass ceiling does not appear to exist. For example, women and minorities were often less represented in the EAS 17 and above positions than they were in the EAS 11 to 16 positions. Service officials stated that the Aguirre report was intended to provide an impression of the overall state of diversity in the Postal Service. In that context, Service officials said that they have accepted the report’s basic message that the Service needs to strengthen its diversity program and have developed and begun implementing a plan to do so. They said that although it was difficult to determine the exact number of recommendations contained in the Aguirre report, they believe the actions they have under way or planned will address the major issues, concerns, and recommendations Aguirre reported. Service officials also said that their initiatives would result in ongoing changes in the way that the Service incorporates diversity into its operations. The Service developed 23 initiatives designed to improve its diversity program and address what it believed to be the Aguirre report’s major issues, concerns, and recommendations. As of December 1998, the Service reported that it had completed implementation of nine of the initiatives and was on schedule for completing the remaining initiatives, with the exception of two initiatives for which completion would be delayed. We did not verify the accuracy of the Service’s estimate of the completion status of initiatives in process nor did we evaluate whether any of the initiatives would resolve the concerns raised by Aguirre. When Service officials reported that a new policy or process had been established to partially or fully address 1 of its 23 initiatives, we obtained available documentation confirming the new policy or process. The Service organized its 23 diversity initiatives into 6 functional groups. Table 4 shows these six groups, the specific initiatives established within each group, Service estimates of the status of its efforts to implement the initiatives, and target completion dates for implementing the initiatives. The projected completion dates shown in the table are those initially established by the Service. As of December 1998, the Service reported that it was progressing in its implementation of the 23 initiatives. The Service reported that nine initiatives had been completed, and seven were 90 to 99 percent complete. Of the remaining inititiatives, three were estimated to be 80 percent complete, and four ranged from 30 percent to 50 percent complete. Service officials said that initiative 22—using supplier diversity data to measure the success of the Supplier Diversity Program—will be partially delayed because of the need to focus resources on resolving the Year 2000 computer system issue. Also, initiative 23—establishing accountability for complying with the Supplier Diversity Program for all Service employees making purchases—will require more time than initially established so that discussions with buyers on issues associated with accountability for supplier diversity can occur. According to Service Diversity Development officials, their statement that initiatives were 100-percent complete indicated that, in some cases, a policy, process, procedure, or plan had been developed and approved but that the relevant actions covered by the policy, process, procedure, or plan were still ongoing. However, for other completed initiatives, no further actions were to be taken. For example, for initiative 1, after a new Diversity Development policy statement was issued, no further actions to implement this initiative were considered necessary. This was also the case for initiatives 2 and 3—revising the Diversity Business Plan and establishing a Diversity Oversight Group. However, for initiatives 4 (evaluating the current Diversity Development Organization and staff and establishing appropriate headquarters and field staffing), 6 (establishing an economic incentive for attaining diversity targets), 16 (expanding Supplier Diversity Program communications), 18 (linking local buying to the commitment for the Supplier Diversity Program), and 20 (making it easier for suppliers to participate more effectively in the postal purchasing process), actions associated with these initiatives were still under way. Likewise, some other initiatives may involve additional action after the Service designates them 100-percent complete. Service Diversity Development officials said that they plan to monitor the implementation of new policies, processes, procedures, or plans covered by the 23 initiatives, at least on a quarterly basis, until they become standard operating procedures. Service officials also told us that they expected the monitoring process to be operational by the spring of 1999 and that, consequently, the scopes, completion dates, and implementation status for some of the initiatives could change. Service officials said that the Board of Governors did not request that they address all of Aguirre’s recommendations. Rather, they were asked to develop initiatives that they believed would help improve diversity at the Service and result in improvements in the way that the Service incorporated diversity in its operations, thereby improving Service diversity overall. They said that they believed their initiatives have addressed Aguirre’s major issues, concerns, and recommendations. Service officials noted that determining the exact number of Aguirre’s recommendations was difficult because recommendations were noted in several locations in the report and many of them appeared to be duplicative. Service officials also noted that it was sometimes unclear as to whether Aguirre’s statements were intended as recommendations or just observations. We also found it difficult to determine with precision the number of specific Aguirre recommendations for the same reasons the Service cited. For example, in chapter 5 of its report, Aguirre stated that the Service may want to do further study of the employees it classifies as American Indian/Alaskan Native since many of the employees in this category consider themselves to be something else. It is not clear whether Aguirre intended this statement to be a recommendation or an action the Service could consider. Also, the Service’s initiative 1 as shown in table 4 was designed to address five different Aguirre recommendations, all of which seemed to be directed at the same concern—developing and issuing a clear corporate policy on diversity. Service officials said that other recommendations by Aguirre called for actions that the Service was already taking or planned to take. For example, Aguirre recommended that the Service define the attrition rate that can be predicted using age and past performance for trainers and EEO experts. The Service said that this information would be available from its New Workforce Planning Model, which was already in the design phase of development. Service officials said that several of Aguirre’s recommendations seemed to be based on inaccuracies or misstatements about current Service policies and procedures. For example, Aguirre reported that the Service usually selects bidders with the lowest price. Aguirre recommended that bidder selection should consider other criteria, such as quality of the processes and products, as well as price. Service officials told us that they did not accept this recommendation because it is already their general policy to make awards based on “best value” not lowest price. Further, Service officials said that for some of Aguirre’s recommendations, they found no basis or rationale and did not plan to implement them at this time. For example, Aguirre recommended that a minimum of 7 percent of the Service’s total contract dollars be awarded to minority suppliers. Service officials said that they did not find any supporting rationale for this recommendation, and they believed that the Service’s current goal of 6 percent of total contract dollars to be awarded to minority businesses by 2002 was appropriate. The Service collects a variety of diversity-related data and has a number of initiatives under way in response to the Aguirre report that are designed to improve its data collection methods and use as well as to enhance its ability to meet its diversity goals and objectives. The Service is also in the process of establishing targets and measures to use in assessing its progress toward meeting its diversity goals and objectives. However, the Service does not have reliable data on the flow of applicants through its promotion processes that would help it to identify and remove any barriers to the promotion of women and minorities. The Service collects a wide variety of diversity data that are primarily related to its program areas, such as Purchasing and Materials. Managers of these program areas, in coordination with the Service’s Diversity Development Department, are to use these data to help achieve program goals and Service diversity goals. For example, the Purchasing and Materials Department is to collect data on the dollar size and number of contracts awarded to women and minority-owned businesses. The Aguirre report, while acknowledging that the Service collects a substantial amount of diversity-related data, made a number of comments, observations, and recommendations to the Service related to gathering, using, and monitoring such data. At least 5 of the Service’s 23 initiatives (initiatives 5, 6, 8, 18, and 22) involve some of the issues raised by Aguirre about gathering and using diversity-related data. For example, Aguirre observed that the Service did not systematically track credit card purchases by gender or EEO group and thus data on the differential impact of the credit card program on women and minority contractors are not available. The Service plans to address this issue through initiative 18, which is aimed at improving supplier diversity. In November 1998, the Service released its 1999 Annual Performance Plan related to its performance goals, objectives, and associated measures as part of its implementation of the Government Performance and Results Act of 1993 (Results Act). Within the plan, the Service identified a goal of improving employee and organizational effectiveness. The plan also stated that one of the subcomponents of that goal was the strategy to “manage and develop human capital.” Under that strategy, the plan identified the need to “achieve a diverse workforce.” Further, the Annual Performance Plan stated that based on the Aguirre study’s findings and recommendations, the Service had prepared a diversity development action plan to promote the hiring of women and minorities, improve recruitment hiring and promotion activities, and develop indicators to measure progress linked to this strategy. In addition, the Service’s Diversity Business Plan, dated December 3, 1998, supports the Service’s strategic plan. The business plan contains four principal diversity objectives, which, according to Diversity Development officials, are to be used in partnership with other organizational functions to develop programs and initiatives that will help achieve Service diversity goals. The four objectives are (1) articulate a clear diversity message; (2) ensure the representation of all employee groups in all levels of Postal Service employment; (3) create a work environment that is free from discrimination and sexual harassment; and (4) establish and maintain a strong, competitive, and diverse supplier base. According to the Manager of Diversity Policy and Planning, now that the business plan has been approved, the Service is in the beginning stages of developing specific targets and measures that would help the Service track its progress in meeting its diversity goals and objectives. According to the Service, methods to evaluate and measure success will be completed no later than March 30, 1999. Along with the establishment of diversity goals and objectives, the establishment of specific targets and measures will help the Service to focus the efforts of its numerous organizational units, achieve accountability, gauge progress, and meet goals. Although the Service has had a requirement for many years that its managers are to collect applicant data for EAS promotions and enter that data into a central electronic database, according to the Service, most locations have fallen behind in entering these data into the system. Thus, the Service has not been in the best position to analyze data on women and minorities as they move, or do not move, through the Service’s promotion process or to determine if and for what reason impediments or barriers exist to the promotion of women and minorities to higher levels of responsibility in the Service, generally, and within the EAS, specifically. The Vice President of Human Resources, in February 1997, sent a memorandum to area and district human resource managers reminding them that the requirement to collect applicant-flow data was still effective. She noted that such information was critical to Service efforts to examine the promotion process for continuous improvement. Although recognizing that managers were facing various priorities, she asked that managers develop a plan for collecting and entering past applicant data into the Promotion Report System. She also noted that this automated system was the source of data for the Applicant Flow Tracking System (AFTS), a system vital to the Diversity Development Department’s responsibility for reporting promotion demographics. According to a manager in the Service’s Human Resources Department, the Service has had a centralized, computer-based tracking system in place for the last 10 years—the AFTS—which is to track diversity data related to promotions within the Service. He acknowledged, however, that participation in this system varies across Service units. Some units have consistently entered the data into the AFTS as required, while others have never entered the data. Another manager in Human Resources said that this inconsistent use of the AFTS and subsequent incomplete data in the system have occurred because unit managers have few incentives to see that the data are entered into the system because the system is not tied to any essential information system, such as accounting and payroll or the employee master file. In addition, he said that there have been few or no consequences to these managers for not doing so. Because of the unreliability of the AFTS database, the Service has to use the Employee Master File and a separate personnel action database to obtain race, ethnicity, and gender data for those applicants who are promoted; the Service cannot readily compile and use this information on applicants seeking promotion. A reliable and complete database on all applicants would (1) provide an essential baseline against which to assess the promotion progress of specific EEO groups and (2) help the Service identify and remove or reduce the impact of barriers to the promotion of women and minorities. For example, during our initial review in response to your request, we noted that there were no Hispanic women applicants for promotion to EAS levels 17 and above in the Service’s Atlanta performance cluster in fiscal year 1997. The Service could use this type of information to (1) determine whether any problems or barriers existed in the cluster that had caused this situation, and if so, (2) take appropriate corrective action. In fiscal year 1997, overall women and minority representation in the Service’s cluster-level workforce did not parallel that of the 1990 CLF. Relative to their representation in the CLF, several specific EEO groups were fully represented, while others were underrepresented. Also, in fiscal year 1997, women and minorities were generally promoted to EAS 17 and above positions in percentages higher than or close to their workforce representation in the three workforce levels—cluster, headquarters, and area offices. As of September 1997, women and minorities were present in all EAS 17 and above positions and generally had been promoted to EAS 17 and above positions during 1997 in the three workforce levels. Nonetheless, as of September 1997, women and minority representation was generally lower in EAS 17 and above positions than it was in EAS 11 through 16 positions. Overall, given the short time frame and preselection of sites that resulted in certain study limitations, we believe that the multiple methodologies Aguirre used for its study were reasonable, relevant, and appropriate. However, Aguirre’s finding that a glass ceiling appeared to exist at positions beginning at EAS 17 could be misleading. Evidence that Aguirre cited to support this finding was not convincing, and according to our analysis, women and minorities were generally represented in and were being promoted to EAS 17 and above positions, albeit at varying percentages, for the period we reviewed. Neither the Service nor we could determine the exact number of recommendations made by Aguirre. Nevertheless, the Service is making progress in implementing the 23 initiatives it developed in response to the Aguirre report, which are aimed at strengthening its diversity program. We believe that the Service’s ongoing plan to continue monitoring the implementation of policies, processes, procedures, and plans covered by its 23 initiatives is especially important given the Service’s designation of some initiatives as being completed when such policies, processes, procedures, and plans have been developed and approved although specific actions required by some of these initiatives may still be ongoing. Service initiatives to better capture and use data in response to the Aguirre study appear reasonable. However, the Service has not yet (1) established and implemented targets and measures for tracking the Service’s progress in meeting its diversity goals and objectives or (2) fully captured or used EEO data on applicants as they progress, or do not progress, through the Service’s promotion process. The Service has developed diversity goals and objectives, and now that its Diversity Business Plan has been approved, is in the process of developing specific targets and measures for assessing its progress in meeting its goals and objectives. However, the Service is not capturing reliable EEO data on promotion applicants’ progress through the promotion process. Although we recognize that collecting and using EEO data on promotion applicants will require additional effort, such data are important for identifying problems and barriers affecting women and minorities in the promotion process. We recommend that the Postmaster General ensure that appropriate Service officials capture EEO group data in the AFTS and use these data to help improve the Service’s diversity program, including the identification of any barriers that might impede promotions to high-level EAS positions. On February 4, 1999, we were informed by the Postal Service that the Vice President of Diversity Development and the Vice President of Human Resources concurred with the information provided in the draft report. In addition, the Vice President of Human Resources stated that, in response to our recommendation, she would reemphasize to the field the need to enter data into the Promotion Report System, which is the source of the data for the AFTS. Also she stated that once the data are complete and reliable, they can be used as a tool to identify the point that impedes the promotions of applicants to high-level EAS positions. On January 28, 1999, Aguirre provided written comments stating that it found our report to be instructive and informative. Aguirre noted the conditions under which its study was done, such as a charged atmosphere at the Service and the short time frame for the study. Aguirre also noted differences between the scope of its study and ours, such as its (1) use of fiscal year 1996 data compared to our use of fiscal year 1997 data and (2) inclusion of PCES data while our review did not. Aguirre also pointed out that it found clear distinctions in perceptions about the types of positions within the EAS levels, and that to do a thorough analysis, one should look at these differences. For example, Aguirre said it found that women were overrepresented in the attorney area and in rural postmaster jobs and underrepresented in more “power and influence” positions. We believe that Aguirre was suggesting that these differences in scope could account for differences between the results of its study and ours. We used fiscal year 1997 data in our analysis because it was the latest period for which complete data were available. We did not include PCES positions in our analysis because we were asked to analyze the Service’s EAS workforce. An analysis of any perceived or actual differences in representation of women and minorities among types of EAS positions was beyond the scope of our review. Nevertheless, even with these differences in scope, we do not believe that there were significant differences between the results of our work and Aguirre’s study results in those areas that we both addressed. Both reports point out that women and minorities were less represented in higher EAS positions than they were in lower EAS positions. In addition, our report does not take issue with Aguirre’s view that barriers may exist to the promotion of women and minorities to high-level EAS positions. Aguirre further stated that it stood behind its conclusion that there seemed to be a drop in the numbers of women and minorities somewhere around the EAS 17 through 22 level based on data presented in its report. Aguirre said that these data were coupled with the views of Service employees it interviewed who believed that a barrier, or “in their terms, a glass ceiling” existed near or around this EAS level. However, our concern is that Aguirre’s use of the term glass ceiling in its report could be misleading because (1) Aguirre did not define the term glass ceiling in its report; (2) the data in its report did not, in our view, support the existence of a glass ceiling as defined in the general sense, that is, an upper limit beyond which few or no women and minorities could advance; and (3) data in both Aguirre’s report and in our report showed that women and minorities were represented in and were promoted to levels above EAS 17, showing the advancement of women and minorities. The Postal Service raised a similar concern about Aguirre’s use of the term glass ceiling. Nevertheless, we agree with Aguirre that opportunity may exist for the Service to increase diversity at higher EAS levels, and our report recommends that the Service ensure that appropriate EEO group data are captured and used so that any barriers impeding the promotion of women and minorities to high-level EAS positions can be identified. Aguirre said that our report lacked a discussion of the “feeder flow” from which Postal employees move into higher level EAS positions. We believe, however, that our report addressed this issue, at least in part, through our analysis of the diversity of the Service’s EAS 11 through 16 workforce, which forms the pool from which promotions to EAS 17 and above positions would likely come. Finally, Aguirre provided several technical comments, which we considered and included in our report as appropriate. We are sending copies of this report to the Chairman and Ranking Minority Member of the Subcommittee on the Postal Service, House Committee on Government Reform; the Chairman and Ranking Minority Member of the Subcommittee on International Security, Proliferation, and Federal Services, Senate Committee on Governmental Affairs; the Postmaster General; and Aguirre International. We will also make copies available to others on request. If you have any questions concerning this report, please call me on (202) 512-8387. Major contributors to this report are listed in appendix IV. This report, which follows our previous letter on selected promotions of women and minorities to Executive and Administrative Schedule (EAS) management-level positions, provides (1) information about the overall extent to which women and minorities have been promoted to or are represented in EAS management-level positions in the Postal Service; (2) our observations on the methodology used by a private contractor, Aguirre International, to study workforce diversity at the U.S. Postal Service; (3) the status of the Service’s efforts to address the recommendations in the Aguirre report; and (4) our analysis of whether the Service could better capture and use data to achieve its diversity objectives. To determine the overall extent to which women and minorities have been promoted to or are represented in EAS management-level jobs, we obtained Service workforce statistics from the its Diversity Development Department and annual promotion statistics for career-level employees, with the exception of the Postal Career Executive Service (PCES), from the Human Resources Information Systems Office. The Diversity Development Department, in conjunction with the Service’s Minneapolis Data Center, provided us with data tapes containing information related to the equal employment opportunity (EEO) composition of the Service career-level workforce for Service fiscal years 1993 through 1997. We chose to focus our analysis on these years since major downsizing and other changes occurred in the Service in 1992 because of an extensive reorganization. Data from fiscal year 1998 were not available at the time of our analysis. The data we used included EAS level; race, national origin, and gender; location of employee; number of employees by EEO group; and civilian labor force (CLF) statistics for each EEO group. We did not verify these data by comparing them to original source documents. We obtained information on promotions from the Service’s Human Resource Information Office; this information was compiled from the Employee Master and Payroll Accounting files. Using the “nature of action” code from Forms 50, Notice of Personnel Action, we identified career-level employees who had been promoted, by EAS level, throughout the Service. We used this information to assess the extent of promotions to specific EAS positions by EEO groups in the Service. Our limited verification of this promotion data against the promotions reviewed at the three areasreported on in our previous letter showed it to be accurate. We used this information to construct a workforce profile by EEO group at three workforce levels—headquarters, area offices, and performance clusters. In our analysis, we included all career-level employees from each performance cluster; employees reporting to area offices, whether they were located in an area office or a cluster facility; and headquarters’ employees, including employees physically housed at L’Enfant Plaza in Washington, D.C., as well as those reporting to headquarters but located elsewhere. We analyzed data provided by the Service for the three groups of employees: (1) cluster-level employees, who represented 732,112 (or 95.7 percent) of the about 765,000 career-level employees at the Service at the end of fiscal year 1997; (2) area office employees, who represented 21,864 (2.9 percent) of the career-level employees; and (3) headquarters’ employees, who represented 10,707 (1.4 percent) of the career-level employees. We looked at employees in the three workforce levels because responsibility and authority for diversity is separated into these three levels. To provide some context for the results of our analysis, we first compared the 1997 Service data with CLF data from the 1990 decennial census separately for the three workforce levels of employees. We used figures from the 1990 census because this was the comparative baseline used by the Service and by Aguirre International in its study. We recognize there are more recent estimates that would have accounted for the changes in the population, especially in the Hispanic and Asian subpopulations in certain areas. However, these estimates are not broken down into a geographic level that is comparable to Service performance clusters. Regarding promotions to women and minorities as well as the Aguirre report’s finding of a glass ceiling at EAS 17 and above positions, we did several analyses: First, we considered how the representation of each of the 10 EEO groups in EAS 17 and above positions had changed between fiscal years 1993 and 1997. Second, we considered whether the percentage of employees in each of the 10 EEO groups (i.e., white, black, Hispanic, Asian, and Native American men and women) that were promoted to EAS 17 and above positions during fiscal year 1997 were greater or less than the percentages of employees in each of the 10 EEO groups that were employed in those positions at the beginning of fiscal year 1997 (before the promotions). We computed a ratio statistic to express the percentage of employees in each of the 10 EEO groups that were promoted to EAS 17 and above positions during fiscal year 1997 compared with the percentage of employees in each group already employed in EAS 17 and above positions before the promotions. The positive ratio of 1.23 for black men, for example, was the percentage of all promotions going to black men (10.85 percent) divided by the percentage of the cluster-level workforce, which was black men at EAS 17 and above (8.81 percent) at the beginning of fiscal year 1997. These same comparisons and ratios were done separately for cluster, headquarters, and area office employees. Finally, we considered how the representation of the various groups of women and minorities in higher level EAS positions (17 through 30) compared with their representation in the lower level EAS positions (11 through 16). To provide observations on the methodology used by Aguirre International in its study of workforce diversity at the Service, we reviewed the Aguirre report and the methodologies used in relation to the study’s objectives, limitations, and findings. In addition, we reviewed both the comments from the Advisory Diversity Team on Aguirre’s draft report and Aguirre’s response to Service questions. We also interviewed the Project Director for the Aguirre study. We reviewed a copy of the contract and statement of work between the Service and Aguirre International, and discussed the report with the two secretaries to the Board of Governors. We also looked at the Aguirre study’s methodology in relation to the U.S. Equal Employment Opportunity Commission’s guidance and our previous work on diversity-related issues. To provide information on the status of the Service’s efforts to address the Aguirre report’s recommendations, we reviewed the Service’s response to the study as well as several status reports prepared by the Diversity Oversight Committee, which is a Servicewide committee established to oversee the implementation of the Service’s response to the Aguirre report. We also interviewed the Vice President of Diversity Development as well as the manager in charge of the Supplier Development and Diversity program in the Purchasing and Materials Department concerning the Aguirre report’s recommendations, among other things. We reviewed the Service’s action plan, which laid out 23 initiatives and was prepared in response to the Aguirre report. We limited our verification of the implementation status of the 23 initiatives to obtaining and reviewing available relevant documents, such as plans and directives, prepared by the Service. To determine whether the Service could improve its capture and use of diversity-related data, we reviewed (1) diversity-related data historically collected and used by the Service; (2) Aguirre’s recommendations related to data collection and the Service’s response to them; (3) Service documents prepared in response to the Results Act; and (4) Service documents related to the AFTS. In addition, we interviewed knowledgeable Service officials and Aguirre’s Project Director. We did our work from July 1998 through January 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Postmaster General and Aguirre International’s Director of Operations. The Postal Service’s oral comments and Aguirre’s written comments are discussed near the end of the letter. The following tables present information on women and minority representation at the three Service workforce levels—the cluster, headquarters, and area office levels—and includes the following comparisons for women and minorities: representation at the three workforce levels as of the end of fiscal year 1997 compared with their representation in the 1990 CLF (table II.1); changes in women and minority representation at EAS 17 and above positions at the three workforce levels for fiscal years 1993 and 1997 (table II.2); promotions to EAS 17 and above positions as of the end of fiscal year 1997 compared with women and minority representation in those positions at all three workforce levels during fiscal year 1997 before the promotions (table II.3); and women and minority representation in EAS 17 and above positions compared with their representation in EAS 11 through 16 positions (table II.4). Table II.1 shows that when comparing Service data as of the end of fiscal year 1997 with CLF data from the 1990 decennial census, black and Asian men and women were fully represented, while white and Hispanic women and Native American men were underrepresented at headquarters, in the area offices, and among cluster-level employees. Native American women were also underrepresented among the large group of cluster employees as well as among headquarters personnel. In addition, white men were underrepresented among area office employees, while Hispanic men were underrepresented at the headquarters and area office levels. As shown in table II.2, we determined how the representation of the 10 EEO groups in the higher EAS positions had changed between fiscal years 1993 and 1997. White and black men were the only EEO groups that decreased in their representation among all three workforce levels at EAS 17 and above positions during this period. Native American men also decreased in their representation among employees at high-level EAS positions at headquarters and area offices, and Asian men decreased slightly in their representation among employees at high-level EAS positions at the area offices. As shown in table II.3, we determined whether the percentages of employees in each of the 10 EEO groups that were promoted to EAS 17 and above positions during fiscal year 1997 were greater or less than the percentages of employees in each of the 10 EEO groups employed at those levels at the beginning of fiscal year 1997 (before the promotions). Asian women were the only group other than white men, among cluster- level employees, who were not promoted during fiscal year 1997 to EAS 17 and above positions in numbers that would have been sufficient to increase their representation in those higher EAS positions. This was also true for black men, Asian women, and Native American men among headquarters’ employees. Among area office employees, the percentages of white women and Hispanic and Native American men and women promoted to EAS 17 and above positions were not as large as the percentages employed at those higher levels. White men were the only group for which percentages of promotions to 17 and above positions were lower than the percentages of white men already employed in those positions across all three workforce levels. As shown in table II.4, we determined whether, as of the end of fiscal year 1997, the representation of various EEO groups of minority men and women employed in EAS 17 and above positions resembled their representation in EAS 11 through 16 positions. Among cluster-level employees and headquarters employees, all EEO groups of women—but none of the groups of men, except black men at headquarters and Asian men at the cluster level—were less well represented in EAS 17 through 30 positions than they were in EAS 11 through 16 positions. Among area office employees, Hispanic men and Asian and Native American men and women fared better while black men, similar to black and Hispanic women, were less well represented in EAS 17 and above positions compared with the EAS 11 through 16 positions. Table III.1 provides the details of the primary methodologies used by Aguirre researchers to develop answers to the eight research questions on which the study was based. As shown in the table, Aguirre researchers used multiple methods to research the questions, including extensive data analysis. Table III.1: Aguirre Study’s Eight Research Areas and the Methodological Approach Taken Eight research areas (1) How does the composition of the postal workforce by race/national origin and gender compare to the population nationally and locally? Methodologies used by Aguirre researchers Developed statistical analysis of (1) Census CLF dataand (2) Service workforce data at national and local levels Created models for mapping Census data into race and national origin Did Service workforce trend analysis Reviewed Service written policies and practices for hiring Interviewed Service national and local staff Analyzed Service workforce data Compared local Service workforce data with CLF data Interviewed potential employees (3) Does the Diversity Reporting System provide accurate information on the race and national origin of Service employees? Reviewed written Service policies and practices in assigning employees to race/national origin categories; also interviewed relevant Service staff at national and local levels Analyzed two data files: Active Employee Reference file and Personnel Actions file, extracted from Notice of Personnel Action, Form 50 Surveyed sample of employees selected from Diversity Reporting System to verify race and national origin (4) Do promotion policies and practices result in promotions that are proportionate to the number of minority groups represented in the workforce, nationally and locally? Reviewed Service’s written policies and practices for promotions Interviewed Service staff at national and local levels Analyzed Service workforce data for distribution of annual promotions by level, EEO group, and compared the data with CLF data (5) How well do Training and Development Programs address diversity needs? Interviewed training and diversity staff in each of the 10 sites as well as in (6) How effectively does Postal Service contracting and subcontracting with minority-owned business support diversity goals, nationally and locally? Eight research areas (7) How does the Postal Service Diversity Program compare with those of other large organizations? Methodologies used by Aguirre researchers Compared Service’s diversity program in the area of contracting with that of Compared Service’s diversity program with those of other companies that have achieved success with diversity (e.g., Motorola, Allstate, and Harvard Pilgrim Health Care) (8) What strategic direction should the Diversity Program take? Identified best practices used by other organizations in the private sector reported to have successful diversity programs Identified promising practices used in Service’s Diversity program Identified certain organizations’ diversity programs/objectives as models against which the Service can compare its strategies, etc. William R. Chatlos, Senior Social Science Analyst Douglas Sloane, Senior Social Science Analyst Hazel Bailey, Evaluator (Communications Analyst) Sherrill H. Johnson, Assistant Director Billy W. Scott, Evaluator-in-Charge The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed the promotion of women and minorities to high-level Executive and Administrative Schedule (EAS) management positions (EAS 17 and above) in the U.S. Postal Service (USPS), focusing on: (1) the overall extent to which women and minorities have been promoted to or are represented in EAS 17 and above positions in USPS; (2) GAO's observations on the methodology used by a private contractor, Aguirre International, to study workforce diversity at USPS; (3) the status of USPS' efforts to address the recommendations contained in the Aguirre report; and (4) GAO's analysis of whether USPS could better capture and use data to achieve its diversity objectives. GAO noted that: (1) at the end of fiscal year (FY) 1997, black and Asian men and women and Hispanic men were fully represented while Hispanic women, Native American men and women, and white women were underrepresented in USPS at the cluster level when compared with the civilian labor force; (2) representation of women and minorities at the cluster level in EAS 17 and above positions increased between fiscal years (FY) 1993 and 1997, with the exception of black men whose representation decreased; (3) in FY 1997, women and all minority groups, except Asian women, at the cluster lever were promoted to EAS 17 and above positions at higher rates than women and minority groups were represented in those EAS positions; (4) despite this progress, the overall representation of women and minorities at the cluster level in EAS 17 and above positions was almost 20 percent lower than their representation in EAS 11 through 16 positions at the end of (FY) 1997; (5) similar comparisons at the headquarters and area office workforce levels showed some variations regarding the representation of specific equal employment opportunity (EEO) groups; (6) GAO believes that the methodologies used by Aguirre International were generally reasonable, appropriate, and relevant given the parameters established for the study and the complexities surrounding the sensitive issue of diversity in such a large organization; (7) however, GAO believes that Aguirre's finding of a glass ceiling beginning at EAS 17 positions could be misleading; (8) USPS reviewed the Aguirre report and developed 23 initiatives that it believed addresses the report's major issues and recommendations; (9) USPS believes its 23 initiatives will significantly strengthen its diversity program and address most of Aguirre's concerns; (10) USPS believes that it is generally on or ahead of its schedule for implementing these initiatives; (11) by the spring of 1999, USPS plans to create an ongoing monitoring process to ensure full implementation of its initiatives, which will result in revised scopes, completion dates, and implementation status for some of the initiatives; (12) USPS has recently developed broad goals and objectives for its diversity program, but it has not yet established specific targets and measures for determining its progress toward meeting its diversity goals and objectives; and (13) USPS officials said that specific targets and measures would be established no later than March 30, 1999.",govreport
"DOD defines an MWD as any canine bred, procured, or acquired to meet DOD’s requirements to support operations in the protection of installations, resources, and personnel. These requirements include explosive and illegal narcotic detection capabilities, patrol, tracking, and other requirements. As part of their duties, MWDs can be deployed to assist in operations outside of their assigned military installation. MWDs are removed from service when they can no longer perform their duties due to medical or behavior problems, when they are no longer needed by the military, or in other circumstances, such as when a handler dies in action. In 2000, a law commonly known as “Robby’s Law” was enacted to promote the adoption of MWDs after their military service. According to this law, the military shall make an MWD that is suitable for adoption available for adoption at the end of the dog’s “useful life” or when the dog is no longer needed by the department. Robby’s Law has been amended a number of times since first enacted. Most recently, the NDAA for FY 2016 established priorities among the authorized recipients of MWDs that are removed from service. The amendment generally requires that MWDs be made available first to former handlers, who care for and train the MWDs. The amendment gives second priority to others capable of humanely caring for the MWD, and, finally, it gives the lowest priority to law enforcement agencies. After an MWD is adopted, Robby’s Law provides that “the United States shall not be liable for any veterinary expense associated with (an adopted MWD) for a condition of the military animal before transfer” regardless of whether the condition is known at the time of adoption. While DOD is authorized to establish and maintain a veterinary care system for adopted MWDs, no federal funds may be used for this purpose. DOD uses the term “disposition” to describe the process of removing MWDs from service. Disposition of MWDs can be initiated at any military location that has an MWD program. All the military services follow the same process outlined in Air Force Instruction 31-126, which includes the policies and procedures for the MWD program. (See fig. 1.) All decisions regarding the removal of MWDs from service are made by a review board, which includes the Commander of the Air Force’s 341st Training Squadron, a representative of the 341st Training Squadron or designee, a Veterinary Corps Officer (Army veterinarian), and a Veterinary Corps Officer behavioral representative (an Army veterinarian who is trained in animal behavior). Air Force officials told us that the review board may also consult with the Kennel Master, who manages the kennel at the military installation where the MWD is located, as well as the veterinary staff at Joint Base San Antonio, Texas, when making decisions about removing an MWD from service. Air Force officials told us that handlers who are interested in adopting an MWD must communicate their interest to the Kennel Master where the MWD is located. The Kennel Master is responsible for annotating WDMS to show the handler’s interest in adoption, including adding the handler’s name and contact information. The handler is responsible for maintaining contact with the Kennel Master and updating this contact information, if needed. In the event that multiple handlers are interested in adopting the MWD, the Unit Commander of the entity that owns the MWD is responsible for determining which handler is in the best interest of the MWD. Air Force officials told us that in these cases, the most recent handler would typically adopt the MWD. Air Force officials told us that they are in the process of updating their adoption policy. For example, the new policy outlines a method for recording whether or not the MWD was adopted by a former handler. They also told us they plan to update the MWD service record to include a checkbox to indicate whether the MWD was adopted by a handler, and that these service records will be scanned into WDMS. Officials have told us that these procedures will be implemented when the updated Air Force Instruction becomes effective, likely in the spring of 2017. The Army Veterinary Service has the lead responsibility for the medical care of all DOD-owned animals, including MWDs. Specifically, the Army provides medical care for MWDs through its Public Health Command Regions and Activities and the DOD MWD Veterinary Service at Joint Base San Antonio, Texas. During the MWD disposition process, Army Veterinary Corps Officers are responsible for providing a recommendation letter and a consultation/referral form that describes each MWD’s medical condition and suitability for adoption. The Army also maintains a veterinary care system that provides medical care to privately owned animals of individuals with access to medical services at a military installation, including adopted MWDs. The Army charges individuals with privately owned animals for the medical care of their pets. According to Army officials, the charges for veterinary care were developed based on a review of supply costs, estimated manpower costs, historical costs for services, and recommended guidance on cost considerations established by the American Animal Hospital Association. DOD uses three systems to track different types of information about MWDs, including information related to their removal from service. The number of MWDs that have been adopted, transferred, or euthanized has varied over the past 5 years. Officials from the Air Force and Army use three separate systems to track information on MWDs. Two of the systems—WDMS and the Central Repository—are maintained by the Air Force, while ROVR, the electronic medical record system, is maintained by the Army. (See table 1.) Each of these systems has a different role in documenting information related to an MWD’s removal from service. WDMS documents the MWD’s status when it is removed from service, including whether the MWD is adopted, transferred, or euthanized. This status of the MWD can be verified using documents maintained in the Central Repository, which is used to store copies of records for MWDs that have been removed from service—most of which are not contained in WDMS. Lastly, ROVR is used to provide medical information for consideration of an MWD’s removal from service and to document an MWD’s euthanization, if needed. Based on our review of data from these systems and related documentation, the number of MWDs adopted or transferred during 2011 through 2015 varied, with the highest numbers in 2012 and 2013. An Air Force official explained that these higher numbers of adoptions and transfers in 2012 and 2013 were due to a decreased need for MWDs during deployments. The number of euthanized MWDs varied to a lesser extent. (See figure 2.) Some of the adopted MWDs included in these data were likely never deployed outside of their assigned military installations. According to Air Force officials, some MWDs may have been acquired by the military but then did not qualify for enrollment in the MWD program due to performance or medical reasons. Other MWDs were enrolled in the program but were removed from service for similar reasons before they were 3 years old. According to Air Force officials, these dogs were also likely never deployed into service. (See table 2.) Available data for 55 percent of the MWDs adopted in 2014 and 2015 indicate that prevalent medical conditions included skin, dental, and musculoskeletal issues. The potential costs for treating these prevalent medical conditions are difficult to determine due to variations in potential courses of treatment and other factors. However, we did obtain information on recommended preventative care and estimated costs for older breeds used by the MWD program from the chief of staff of a network of private veterinary hospitals. Based on our analysis of electronic medical records with master problem lists—available for approximately 55 percent (421 of 772) of the MWDs adopted in 2014 and 2015—we found that the most prevalent medical conditions were as follows: skin conditions or ear infections, dental disease or injury, arthritis or degenerative joint disease, degenerative lumbo-sacral stenosis. Some MWDs had more than one medical condition, and as a result, they may have been included in more than one category. (See table 3.) An Army veterinarian told us that “skin conditions or ear infections” and “dental disease or injury”—the two most prevalent medical conditions we identified—are unlikely to result in removal from service as these conditions generally can be treated or resolved. (See prevalent medical conditions 1 and 2 in table 3.) The remaining three prevalent medical conditions we identified are associated with musculoskeletal issues and are more likely to result in MWDs’ removal from service. (See prevalent medical conditions 3, 4, and 5 in table 3.) According to an Army veterinarian, these conditions are common in breeds maintained by the MWD program. For example, degenerative lumbo-sacral stenosis is common in German Shepherd dogs, one of the preferred breeds for the MWD program. The potential costs for treating these prevalent medical conditions may vary based on a number of factors, including the course of treatment, the underlying cause for the condition, and geographic location. According to an Army official and representatives from a national network of private veterinary hospitals, there are no standardized medical treatment protocols for animals that would dictate particular courses of treatment for specific medical conditions. Therefore, costs for these conditions would vary. Furthermore, the chief of staff of a network of private veterinary hospitals in New Jersey, which provides free specialty care to adopted MWDs in its area, told us that it would be difficult to estimate treatment costs because some of the prevalent health conditions we identified for MWDs could have different underlying causes, which would serve as the basis for treatment options and costs. For example, lameness could have different root causes, so it would be difficult to estimate treatment costs for this condition without knowing the contributing factors. Adopted MWDs need preventative care regardless of their medical conditions. Based on our analysis, the average age of most MWDs that had electronic medical records with master problem lists in ROVR and were adopted during 2014 and 2015 was about 9 years old, with a range from 1 to 14 years. The chief of staff of a private network of veterinary hospitals in New Jersey provided us with the types of preventative care they recommend for 9-year old Labrador Retrievers, Belgian Malinois, and German Shepherd dogs—the most common breeds used by the MWD program. The chief of staff also provided estimated costs for these procedures, which are specific to this private network of veterinary hospitals. (See table 4.) An Army veterinarian reviewed the information provided by the chief of staff and concurred that the identified procedures and costs were reasonable. Although owners of adopted MWDs are responsible for the costs of their care, some assistance with privately provided veterinary care is available through nonprofit organizations. Individuals with access to DOD medical care may also purchase care for their adopted MWDs at military installations. However, the types of available veterinary services vary by military installation, and some installations do not offer veterinary services. Owners of adopted MWDs may obtain assistance with privately provided veterinary care through nonprofit organizations. Assistance for adopted MWDs is primarily available through the U.S. War Dogs Association, an organization that offers (1) a prescription drug program (free prescription drugs for registered MWDs), (2) free specialty care through Red Bank Veterinary Hospital in New Jersey, and (3) financial assistance of up to $500 for emergency care and up to $100 for euthanasia. About 400 former MWDs were registered with the association as of August 2016, according to the association’s president. In addition to assistance with medical care, the association also finds new homes for adopted MWDs when the owners are no longer able to take care of them. According to Air Force officials, individuals who adopt MWDs receive information about the U.S. War Dogs Association at the time of adoption. These officials told us that this is the only nonprofit organization’s information they provide to individuals adopting MWDs. Other nonprofit organizations that inquire about adopted MWDs are directed to contact the U.S. War Dogs Association. Some assistance with privately provided medical care is also available through other organizations, such as the American Humane organization, which helps cover some medical costs for adopted MWDs when their owners are unable to pay for their care. Officials from this organization told us they currently cover medical care costs for about 21 former MWDs. Information about potential services provided by the American Humane organization is available on its website. Owners of adopted MWDs may purchase veterinary services through DOD if they have access to medical services at military installations. According to an Army official, access to medical care is generally available for active duty servicemembers, their dependents, retirees and their dependents, as well as reservists on active orders. However, the types of veterinary services offered vary by military installation, and some installations do not offer any veterinary services. (See table 5.) The Army’s Public Health Center maintains an interactive map on its website that provides information about the types of veterinary services that are available at military installations. According to an Army official, the link for this interactive map is listed on all veterinary service newsletters, brochures, and posters. This website has also been publicized in an Army newsletter for retired soldiers, surviving spouses, and family. We provided a draft of this report to DOD for comment. DOD concurred with the report and provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committee, and the Secretaries of Defense, the Air Force, and the Army. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-7114 or at draperd@gao.gov. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in the appendix. In addition to the contact named above, Bonnie Anderson, Assistant Director; Danielle Bernstein, Analyst-in-Charge; Jennie Apter; and Kenisha Cantrell made key contributions to this report. Also contributing were Jennifer Rudisill and Mary Denigan-Macauley.","DOD has used MWDs since World War II to assist and protect servicemembers at installations within the United States and at deployment sites worldwide. As of October 2016, about 1,800 MWDs were in service. The Air Force is responsible for procuring and assigning all MWDs for the military. The Army is responsible for the medical care of all military animals, including MWDs. Questions have been raised as to whether MWDs' experiences during deployment may result in conditions that pose future health challenges. Based on those questions, a House Report accompanying the proposed version of the National Defense Authorization Act for Fiscal Year 2017 included a provision for GAO to assess end-of-service veterinary care for MWDs. This report examines (1) how DOD tracks information about MWDs, and how many MWDs were adopted, transferred, or euthanized over the past 5 years (2011-2015); (2) prevalent medical conditions of adopted MWDs for 2014 and 2015; and (3) what assistance is available for individuals who adopt MWDs. GAO obtained and analyzed data from the three systems used to track information on MWDs, observed system demonstrations, interviewed Air Force and Army officials, and reviewed related documentation. GAO also interviewed relevant nonprofit organizations that provide assistance to individuals who adopt MWDs. DOD concurred with the report and provided technical comments, which GAO incorporated as appropriate. The Department of Defense (DOD) uses three systems to track information about Military Working Dogs (MWDs), including information related to their removal from service at which time they can be put up for adoption, transferred to a law enforcement agency, or euthanized for health or behavioral reasons. According to an Air Force official, the number of MWDs adopted or transferred over the past 5 years (2011 through 2015) varied based on changes in deployment needs. The number of euthanized MWDs varied to a lesser extent. Based on medical data available for 421 of 772 MWDs adopted during 2014 and 2015, GAO found that the most prevalent medical conditions included skin and dental issues. An Army veterinarian told GAO that these medical conditions are unlikely to result in MWDs' removal from service as these conditions generally can be treated or resolved. Other prevalent medical conditions, such as arthritis, are associated with musculoskeletal issues, which are more likely to result in MWDs' removal from service. The veterinarian told us these types of musculoskeletal issues are common in breeds maintained by the MWD program, which include Labrador Retrievers, Belgian Malinois, and German Shepherd dogs. While owners of adopted MWDs are responsible for the costs of veterinary care, some assistance with these costs is available through nonprofit organizations, such as the U.S. War Dogs Association. Individuals with access to DOD medical care—such as active-duty servicemembers and their dependents—may also purchase care for their adopted MWDs at veterinary clinics located at military installations. However, the types of veterinary services vary by installation, and some installations do not offer any veterinary services.",govreport
"The Comanche program was established in 1983 to replace the Army’s light helicopter fleet. The contractor team of Sikorsky Aircraft Corporation and Boeing Helicopter Company were expected to design a low-cost, lightweight, advanced technology helicopter capable of performing the primary missions of armed reconnaissance and attack. Critical to achieving these capabilities are the successful development of advanced technologies, including composite materials, advanced avionics and propulsion systems, and sophisticated software and hardware. The Army must meet ambitious maintainability goals in order to (1) realize significantly lower operating and support costs predicted for this program and (2) achieve a wartime operational availability for the Comanche of 6 hours per day. In December 1994, the Secretary of Defense directed the Army to restructure the Comanche helicopter program as part of efforts to meet budgetary constraints. The Secretary’s restructure decision reduced funding for the program from $4.2 billion to $2.2 billion for fiscal years 1996 through 2001. In addition to extending the development phase by 3 years, it also called for two flyable prototypes to be produced and the Comanche production decision to be deferred. In response to the Secretary’s decision, the Army proposed a program restructure that would allow it to acquire, within the Secretary’s funding constraint, six aircraft in addition to the two prototypes by deferring developmental efforts to fiscal year 2002 and beyond. DOD approved the proposal in March 1995. The Army’s restructuring of the Comanche program continues risks (1) associated with making production decisions before knowing whether the aircraft will be able to perform as required and (2) of higher program costs. According to DOD’s April 1990 guidelines for determining degrees of concurrency, a program with high concurrency typically proceeds into low-rate initial production before significant initial operational test and evaluation is completed. Regarding the need to keep concurrency low, the guidelines note that establishing programs with no concurrency, or a low degree of concurrency, avoids the risks that (1) production items have to be retrofitted to make them work properly and (2) system design will not be thoroughly tested. As we recently reported, aircraft systems, including the T-45A and C-17, that entered low-rate initial production before successfully completing initial operational testing and evaluation experienced significant and sometimes costly modifications to achieve satisfactory performance. Under the Army’s restructured program, operational testing will not begin until after the low-rate initial production decision is made, continuing the risks associated with the highly concurrent Comanche program. In responding to the Secretary’s restructure decision, the Army proposed, and was subsequently granted approval, to buy six “early operational capability” aircraft, in addition to the two prototypes that were to be acquired under the Secretary’s decision. According to program officials, these aircraft are estimated to cost in excess of $300 million. The Army does not consider these aircraft as either prototype or low-rate initial production aircraft; however, program officials believe that when these aircraft are fielded, the Army will be able to better evaluate the Comanche’s mission capability. The Army intends to fund these aircraft by deferring additional developmental efforts to fiscal years 2002 and beyond. Under the Army’s restructured program, operational testing will not begin until well after funds are committed to buy production aircraft. Armed reconnaissance and attack mission equipment packages are to be integrated into the six early operational aircraft by fiscal year 2004. The Army plans to use these aircraft to start operational testing by about August 2005. However, long-lead production decisions are scheduled for November 2003, and low-rate initial production is planned to start in November 2004, about 9 months before operational testing begins. According to DOD’s guidelines, the amount of risk associated with concurrency can be limited by reducing production aircraft to the minimum necessary to perform initial operational testing. The Army maintains that under the stretched out program it can conduct initial operational testing with the six early operational aircraft. Because the restructure has provided the additional time and aircraft, the Army has an opportunity to significantly reduce or eliminate program concurrency and its associated risks by completing operational testing before committing funds to any production decisions. The Comanche was originally justified to the Congress as a relatively inexpensive aircraft. However, since 1985, the program has experienced significant increases in program acquisition unit cost. Funding reductions have caused the program to undergo significant restructuring, resulting in sharp decreases in planned acquisition quantities and lengthening of development schedules, thereby increasing Comanche program costs. In 1985, the Comanche had estimated total program acquisition costs of about $61 billion for 5,023 aircraft (or $12.1 million per aircraft). In 1992, we reported that (1) as of October 1991, the program acquisition unit cost had increased to $27.4 million, (2) acquisition quantities had been reduced to 1,292 aircraft, and (3) future increases in cost per aircraft were likely.As of February 1995, the Comanche’s estimated program acquisition unit cost was $34.4 million per aircraft, a 185-percent increase from the 1985 estimate. The estimated total program acquisition cost for the planned acquisition of 1,292 aircraft is now more than $44 billion. Both the Secretary’s decision and the Army’s restructure would extend the development program by about 3 years and, under either, increase the risk of higher total program cost and cost per aircraft. However, in reviewing the Army’s restructure proposal, DOD noted some concern over Comanche program costs for fiscal year 2002 and beyond and the large increase in investment programs projected to occur about that time. We are also concerned that the Army’s plan to defer additional developmental efforts to fiscal year 2002 and beyond may increase the risk that needed funds may not be available to perform the deferred developmental effort. The Comanche program’s uncertainties in software development and aircraft maintainability increase the risk that the aircraft will not perform successfully. We believe the restructuring provides additional time to resolve these issues before the decision to enter production is made. The Comanche will be the most computerized, software-intensive Army helicopter ever built. The Army estimates that about 1.4 million lines of code are required to perform and integrate mission critical functions. With additional ground support and training software to be developed, the total program will have more than 2.7 million lines of code. This compares to about 573,000 lines of code for the upgraded Apache attack helicopter with fire control radar. The Army estimates 95 percent of the Comanche’s total software will be written in Ada, a DOD-developed programming language. The Army plans to demonstrate initial software performance with the mission equipment package, which includes the flight control system, during first flight of the Comanche, scheduled for November 1995. The development and integration of on-board, embedded computer systems is a significant program objective. The Comanche’s performance and capability depend heavily on these systems and efforts have been ongoing to solve the problems associated with these systems. Nevertheless, (1) software development problems still exist with the Ada compilation system, (2) delays in software development and testing are occurring, and (3) improvements are needed in configuration management. If these issues are not resolved, the aircraft’s performance and capability will be degraded and first flight could be delayed. Almost all of the Comanche software will be developed in the Ada programming language; however, software developers are not using the same version of the Ada compilation system. The Ada compilation system translates Ada code into machine language so that software can be used by the Comanche’s computers. For example, it is being used to help develop software for use on the mission equipment package that is critical for first flight. Subcontractors and the contractor team should be using the same, qualified version of this compilation system to ensure effective software integration. However, fixes to individual compiler software problems are not being shared with all developers; therefore, they are not using a common compilation system. These problems have already delayed qualification testing of the compilation system by 1 year. The lack of a uniform, qualified compilation system among software developers could put first flight at risk, according to the Defense Plant Representative Office. Problems with software integration may show up once integration testing begins in the June to November 1995 time frame. If that occurs, there may not be time to fix problems prior to scheduled first flight. The program is experiencing high turnover of software engineers at one of the contractor team’s facilities. In its December 1994, monthly assessment report, the Defense Plant Representative Office, which is responsible for contract oversight, observed that high turnover of software personnel was putting scheduled first flight at risk. Loss of key personnel has already contributed to schedule slippage in several critical software development areas. Software development for the following areas has been affected: the airborne engine monitoring system, aircraft systems management, control database, and crewstation interface management. The contractor team has formulated a “get well” plan that is dependent on being able to hire additional personnel in these areas. However, hiring additional qualified personnel is difficult, according to the Defense Plant Representative Office, because employment would be short term. The flight control system software verification testing is also being delayed. As of February 8, 1995, Boeing had conducted only 163 of approximately 500 tests originally planned to be completed by that date. The subcontractor responsible for developing this software has been late delivering software for testing and has provided faulty software to Boeing, according to the Defense Plant Representative Office. Boeing established a recovery plan for this area that would have resulted in a completion date in March 1995—about a 1-month delay from the original plan. However, in February 1995, the contractor revised the recovery plan to reflect a completion date of July 1995—a 5-month delay. The flight control system is critical to first flight, according to the Defense Plant Representative Office. However, because of delays with verification testing, the Defense Plant Representative Office is concerned that the remaining verification testing, as well as, the validation and formal qualification testing will not be completed in a timely manner. As a result, first flight may be delayed. Boeing is scheduled to complete these tests prior to first flight. According to the program office, Boeing’s plan to complete the testing calls for it to be conducted concurrently. If major problems occur in any one of the testing phases, there may not be enough time to fix the problem and complete all testing before first flight. Configuration management is the discipline of applying technical and administrative direction and surveillance to (a) control the flow of information between organizations and activities within a project; (b) manage the ownership of, and changes to, controlled information; (c) ensure information consistency; and (d) enable product release, acceptance, and maintenance. The part of configuration management used to report software problems and changes among the contractor team and subcontractors has shortcomings that put software development at risk. In its November 1994 monthly assessment report, the Defense Plant Representative Office observed that the lack of a common problem reporting system made proper handling of software related changes difficult. Furthermore, the report noted that this situation could adversely impact scheduled first flight of the Comanche. As of February 1995, the contractor team still did not have a common, automated database available to track problem change reports. Thus, the contractor team, as well as subcontractors, did not have visibility over changes made to software. Maintainability requirements are important to achieving lower operating and support costs and wartime availability goals. However, these goals are at risk because key maintainability requirements such as direct maintenance man-hours per flight hour (MMH/FH), the mean time to repair (MTTR), and fault isolation may not be achievable. Individually, failure to meet these parameters may not be a significant problem; however, collectively they affect the ability of the Comanche to achieve lower operating and support cost and wartime availability objectives. In March 1987, the Army established a 2.6 direct MMH/FH requirement for the Comanche. It represents the corrective and preventive maintenance per flight hour expected to be performed at the unit level. The Army formulated its planned wartime operating tempo for a Comanche battalion based on 6 hours a day per aircraft, or 2,200 flying hours per year. It then determined the maintenance factor needed to support this operating tempo—2.6 MMH/FH. As the MMH/FH level increases, the number of maintainers needed to sustain the 2,200 wartime flying hour goal increases, as do operating and support costs. Conversely, if the Army could not increase the number of maintainers, the planned operating tempo would have to be reduced. The reasonableness of the Comanche’s 2.6 direct MMH/FH requirement has been debated for several years within the Army and DOD. Representatives from the program office; the Army Materiel Systems Analysis Activity, which independently evaluates program testing results; the Office of the Assistant Secretary of the Army for Research, Development, and Acquisition; and the Army Cost and Economic Analysis Center met on October 28, 1994, to discuss the direct MMH/FH goal for the Comanche program. They agreed that the 2.6-MMH/FH requirement was not a realistic, achievable goal. Consequently, Army officials reached consensus and agreed on 3.2 direct MMH/FH as the Army-wide position for this parameter. However, during these discussions, Army Materiel Systems Analysis Activity personnel noted that attaining a 3.2-MMH/FH goal represented a medium to high risk, while a 4.3-MMH/FH goal had a low to medium risk. Increasing the maintenance factor increased the number of maintainers needed and will increase estimated operating and support costs by about $800 million over a 20-year period. The direct MMH/FH requirement does not represent the total maintenance burden for the Comanche because it does not include indirect maintenance time. The Army does not normally collect data on indirect maintenance time. According to the program office, its best estimate of indirect maintenance time, following Army guidance, is 2.5 MMH/FH, and this figure has been used for calculating manpower needs for crew chief personnel on the Comanche. Thus, the total maintenance burden assumed for the Comanche is currently 5.7 MMH/FH (3.2 direct MMH/FH plus 2.5 indirect MMH/FH). To minimize turnaround time for repairs at the unit and depot, the Army established MTTR requirements of 52 minutes for repairs at the unit level and up to 12 hours at the depot level for the Comanche. These requirements represents the average time expected to diagnose a fault, remove and repair an item, and perform an operational check and/or test flight. We determined that any increase in MTTR above 1 hour will begin to impact the Army’s wartime availability goal of 2,200 hours per year, unless additional maintenance personnel are available. As of January 1995, the contractor team was estimating that the Army would achieve 59 minutes for unit level repairs. According to contractor team officials, the requirement was not being met because the cure time required for composite material used on the aircraft was greater than expected. The contractor team discussed changing the MTTR requirement to 1 hour; however, the program office believes the problem could be resolved and did not believe the specification should be changed. The contractor team has not yet developed MTTR estimates for depot-level repair. The Comanche’s diagnostic system is required to correctly isolate failed mechanical and electrical components at least 80 percent of the time with a high degree of accuracy. A high level of accuracy is essential as it allows maintainers to isolate and fix problems at the unit level. If the fault isolation requirement is not met, the Comanche is unlikely to achieve its MTTR requirement, thereby adversely affecting the Army’s ability to execute its maintenance concept and its wartime availability goals. Contractor team officials stated the fault isolation requirement was very optimistic, and although they are striving to meet this requirement, it may eventually have to be changed. As of January 1995, the contractor team predicted the system could achieve an overall 69-percent fault isolation rate; however, this rate would not meet the specification for mechanical and electrical component fault isolation. There are design limitations on two components, according to the program office, and changes to bring these components into conformance with specifications would be costly and increase the weight of the aircraft. Therefore, as of January 1995, the contractor team and the program office have agreed not to take action on these components. The Army established a requirement of a 1-percent false removal rate for the Comanche. A false removal occurs when a part removed from the aircraft shows no evidence of failure when tested. This requirement is dependent, to a large extent, on the success of the fault detection/isolation system in detecting and isolating failed components. Program personnel characterize the 1-percent requirement as stringent and one that will be challenging to achieve. An Army Materiel Systems Analysis Activity official believes some design improvements have occurred in this area, but the risk associated with achieving this requirement still remains high. If the Comanche does not meet this requirement, estimated operating and support costs for the Comanche will be higher than previously predicted. The Army has not had good experience in developing fault detection/isolation and false removal systems for other aircraft. In September 1990, we reported that the fault detection and isolation system on the Apache aircraft did not always accurately detect the component that caused a particular fault, and the system detected faults that did not actually exist about 40 percent of the time. As a result, Apache maintainers had to perform additional work to locate failed components. Recently, through a reliability program, the false removal rate for the targeting and night vision systems on the Apache improved to about 10 to 15 percent, according to Army officials. This is still significantly higher than the 1-percent requirement established for the Comanche program. Although the program is experiencing technical problems, it is currently meeting its goals of reducing maintenance levels and keeping overall weight growth within acceptable limits for the Comanche. The Army’s maintenance concept for the Comanche program is predicated on two levels of maintenance—unit- and depot-level maintenance. This concept is important to achieving operating and support savings predicted for the program because it eliminates the intermediate level of maintenance. Unit-level maintenance entails removing and replacing components required to return the aircraft to a serviceable condition. Depot-level maintenance requires higher level maintenance skills and sophisticated capital equipment and facilities not found at the unit level. The Army traditionally uses a three-level maintenance concept that includes intermediate-level maintenance to handle component repairs. Intermediate-level maintenance is usually located close to the battalion. It is performed on components that cannot be easily repaired at the unit level and do not require the more sophisticated repairs done at the depot level. As of January 1995, no Comanche component had been designated for repair at the intermediate level, according to the program office. Contractor team personnel are conducting repair level analysis on Comanche components to determine whether components should be repaired at unit, intermediate, or depot facilities, according to program and contractor team officials. Any candidates identified for intermediate-level repair are reviewed for possible design changes that could allow maintenance at the unit or depot level. If economically feasible, the contractor team will make design changes to the component to preclude the need for intermediate-level repair. As of February 7, 1995, the Comanche’s empty weight increased from its original specification of 7,500 pounds to 7,883 pounds. Although the Comanche’s weight continues to increase, it remains within the allowable design limit of 7,997 pounds. Weight increases affect vertical rate of climb performance on the Comanche. The Army established a limit of 500 feet-per-minute as the minimum acceptable vertical rate of climb performance. If the Comanche’s weight exceeds 8,231 pounds, the engine will have to be redesigned to produce enough power at 95 percent maximum rated engine power to sustain the minimum 500 feet-per-minute vertical rate of climb requirement. We recommend that the Secretary of Defense require the Army to complete operational testing to validate the Comanche’s operational effectiveness and suitability before committing any funds to acquire long-lead production items or enter low-rate initial production. DOD generally concurred with the findings and original recommendations in our draft report. In commenting on the draft report, DOD offered explanations about why the problems that we identified were occurring and what they were doing to fix those problems. DOD disagreed with the report’s conclusion about false removals and stated that we had not presented any evidence that the Comanche’s 1-percent false removal rate may not be achievable. We still believe that the false removal goal is high risk and adjusted the report to more clearly reflect our concern. Regarding our draft report recommendation that DOD develop program fixes that achieve program goals and reduce the risks we identified, DOD concurred and noted that the approved restructuring will significantly reduce risk. DOD concurred with our other draft recommendation not to commit production funds to the program until performance and mission requirements are met and noted that the program would be reviewed by DOD before approving the Army’s request to proceed to the engineering and manufacturing development phase—the Milestone II decision scheduled for October 2001. Because DOD concurred in our draft report recommendations and is taking action on them, we are no longer including them in this report. However, our analysis of information on the restructuring obtained after we had submitted our draft report to DOD has further heightened our concerns about the risk of concurrency; therefore, we have revised the report and added a new recommendation. Under the stretched out, restructured Comanche program, operational testing is not even scheduled to begin until after the low-rate initial production decision is made. This approach continues the risks associated with making production decisions before knowing whether the aircraft will be able to perform as required. Prior to the restructure, the Army planned to start operational testing with eight aircraft in May 2003. Under the restructured program, the Army plans to start operational testing with six helicopters by about August 2005. We believe that the stretched out time frame and the six aircraft acquired under the restructure provide sufficient time and aircraft to operationally test the Comanche prior to making any production decisions. Additionally, because operational testing is not scheduled until about August 2005, DOD will not be in a position at Milestone II in October 2001 to adequately address whether the Comanche program is meeting its performance requirements. DOD’s comments are presented in their entirety in appendix I, along with our evaluation. To assess cost changes, software development, maintainability, and weight growth issues, we reviewed program documents and interviewed officials from the Department of the Army headquarters, Washington, D.C.; the Comanche Program Manager’s Office, St. Louis, Missouri; the U.S. Army Materiel Systems Analysis Activity, Aberdeen Proving Ground, Maryland; the Ada Validation Facility, Wright-Patterson Air Force Base, Ohio; and the Office of the Assistant Secretary of Defense for Program Analysis and Evaluation, Washington, D.C. We also reviewed program documents and interviewed contractor and Defense Plant Representative Office officials at the Boeing Helicopter Company, Philadelphia, Pennsylvania; the Sikorsky Aircraft Corporation, Stratford, Connecticut; and the Comanche Joint Program Office, Trumbull, Connecticut. We conducted our review between August 1994 and February 1995 in accordance with generally accepted government auditing standards. We are also sending copies of this report to the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations, the Senate Committee on Governmental Affairs, and the House Committee on Government Reform and Oversight; the Director, Office of Management and Budget; and the Secretaries of Defense and the Army. We will also provide copies to others upon request. This report was prepared under the direction of Thomas J. Schulz, Associate Director, Systems Development and Production Issues. Please contact Mr. Schulz at (202) 512-4841 if you or your staff have any questions concerning this report. Other major contributors to this report are listed in appendix II. The following are GAO’s comments on the Department of Defense’s (DOD) letter dated April 20, 1995. 1. As DOD’s comments note, there are many measures of unit cost, such as average unit flyaway cost, program acquisition unit cost, and unit procurement cost. We believe that the program unit cost that we used in the report—which the footnote in the report defines as total research, development, and acquisition costs in current dollars—is as valid as flyaway cost to portray program cost growth over time. We have adjusted the report to more clearly define the basis of the unit cost we use. 2. These comments are dealt with on pages 11 and 12 of the report and in our responses to the specific DOD comments that follow. Report material on costs and concurrency has been revised to reflect information obtained after our fieldwork had been concluded. 3. The report does not say that maintainability goals will never be met. We pointed out that some key maintainability requirements are not being met and, therefore, there is a risk that the Army may not achieve the lower operating and support costs and wartime availability goals that it has established for this program. We also said that individually, failure to meet these parameters may not be a significant problem; however, collectively they affect the ability of the Comanche to achieve the cost and availability goals. This point is clearly illustrated in DOD’s comments on the failure of the fault isolation system. According to DOD, “Fault isolation is one of the key diagnostic system requirements. The DOD agrees that if the fault isolation requirement is not met, the Comanche is unlikely to achieve its mean-time-to-repair requirement, . . .”. 4. We still believe that this goal is very aggressive. DOD acknowledges that this goal is stringent and the Army has not had good experience in the past with false removals on other aircraft. Additionally, as noted in the report, Army Materiel Systems Analysis Activity said the risk associated with achieving this requirement remains high. We changed the section heading to emphasize the high risk. Gary L. Billen Robert D. Spence Lauri A. Bischof Michael W. Buell Karen A. Rieger The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","GAO reviewed the Army's Comanche helicopter program, focusing on cost and technical issues associated with the restructured program. GAO found that: (1) the past risks associated with the Comanche's development and production will continue under the Army's restructured program; (2) production decisions will be made before operational testing of the Comanche begins and the development phase will be extended beyond fiscal year 2002; (3) the acquisition of six additional aircraft will allow the Army to conduct operational testing before committing funds to any further production decisions; (4) the Comanche's unit costs have tripled in the last 10 years due to program restructuring and a 74-percent decrease in procurement quantities; (5) the Comanche may not meet its wartime availability and operating cost requirements due to technical problems; and (6) the Comanche program is currently meeting its maintenance requirements and weight growth limits.",govreport
"The Food Stamp Program provides eligible low-income households with paper coupons or electronic benefits that can be redeemed for food in stores nationwide. FNS funds food stamp benefits and about half of the states’ administrative costs and establishes regulations for implementing the Food Stamp Program. FNS regulations require that states certify household eligibility at least annually and establish requirements for households to report changes that occur after they are certified. Recently, FNS introduced several options and waivers to food stamp rules and regulations in order to increase program access and reduce the reporting burden on working families while minimizing the potential for payment errors. These include options and waivers related to program eligibility, reporting requirements, extending food stamp benefits to households leaving TANF, and options related to TANF recipients. To monitor program accountability, FNS’s quality control system measures states’ performance in accurately determining food stamp eligibility and calculating benefits. States implement the Food Stamp Program by determining whether households meet established limits on gross income and assets, calculating monthly benefits for eligible households, and issuing benefits to households. The actual amount of the food stamp benefit is based on household income after certain deductions—including shelter, dependent care, and child support. To be eligible for benefits, a household’s gross income may not exceed 130 percent of the federal poverty level and the value of its assets may not exceed $2,000. If the household owns a vehicle worth more than $4,650, the excess value is included in calculating the household’s assets. Recipients of TANF cash assistance are automatically eligible for food stamps—a provision referred to as “categorical eligibility” — and do not have to go through a separate food stamp eligibility determination process. In the wake of welfare reform, many needy families that are no longer receiving TANF cash assistance may receive other TANF- funded services or benefits. FNS gave states the option to extend categorical eligibility to families receiving TANF-funded benefits or services. States can determine which TANF-funded services or benefits confer categorical eligibility to food stamps. FNS offers two options that states can use to allow households to own a vehicle worth more than the amount allowed in current regulations and remain eligible for food stamp benefits. One option allows states to replace the federal food stamp vehicle asset rule with the vehicle asset rule from any TANF assistance program, as long as the rule is more liberal than the federal rule. States adopting the rule of a TANF-funded program must apply it to all applicants for food stamp benefits. States can also use the categorical eligibility option as a way to exclude all vehicles, as well as other assets the family may have, from the determination of eligibility for food stamps. This option affects the food stamp eligibility only of families authorized to receive a TANF-funded service or benefit. After eligibility is established, households are certified to be eligible for food stamps for periods ranging from 1 to 24 months, with 3-, 6-, and 12- month periods the most common. The length of the certification period depends on household circumstances, but only households in which all members are elderly or disabled can be certified for more than 12 months. Once the certification period ends, households must reapply for benefits, at which time eligibility and benefit levels are re-determined. Households with stable income are generally given longer certification periods than households with fluctuating income. Prior to welfare reform, federal regulations required households to have a face-to-face interview with an agency worker at each re-certification. Current regulations give states the option to require only one face-to-face interview a year regardless of the length of the certification period. Between certification periods, households must report changes in their circumstances—such as household composition, income, and expenses— that may affect their eligibility or benefit amounts. States determine how frequently households must file reports. A state may require a household to submit a monthly report on their financial circumstances along with required verification even if nothing changed. If a household is not required to file a monthly report, it is required to report changes in income and other circumstances as they occur—called “change reporting.” States can require different types of reporting for different household types and generally require households with earnings to report more frequently than households with no earned income. FNS offers alternatives to monthly and change reporting: quarterly and semiannual reporting. Both of these reporting methods decrease the frequency with which households with earnings are required to report. FNS also offers three waivers to change reporting that reduce the reporting burden on households with earnings. (See table 1.) USDA now provides a transitional benefit option to states to help families leaving TANF retain their food stamp benefits. Because families leaving TANF are no longer automatically eligible for food stamps based on their receipt of TANF cash assistance, they cannot receive food stamps without a re-determination of eligibility. The Transitional Benefit Alternative, introduced in November 2000, gives states the option to continue to provide families with their same food stamp benefit amount for 3 months after they leave welfare. As part of its deliberations on food stamp reauthorization, the Congress is considering extending the transitional benefit to 6 months. Finally, recognizing that TANF and the Food Stamp Program generally are administered by the same agency at the local level, the 1996 welfare reform legislation provided an option for states to merge their TANF and Food Stamp Program rules into a single set of eligibility and benefit requirements for households receiving both TANF and food stamps. This option, called the Simplified Food Stamp Program, allows states to align all of their TANF and Food Stamp Program rules. The option also allows states to implement a portion of the simplified program in which only the food stamp work requirement is replaced by TANF’s work requirement. FNS monitors states’ performance by assessing how accurately they determine food stamp eligibility and calculate benefits. Under FNS’s quality control system, the states calculate their payment errors by drawing a statistical sample to determine whether participating households received the correct benefit amount. The states review case information and make home visits to determine whether households were eligible for benefits and received the correct benefit payment. FNS regional offices validate the results by reviewing a subset of each state’s sample to determine its accuracy and make adjustments to the state’s overpayment and underpayment errors as necessary. States are penalized if their payment error rate is higher than the national average, which was 8.9 percent in fiscal year 2000. Food Stamp Program payment errors occur for a variety of reasons. Overpayments can be caused by inadvertent or intentional errors made by recipients and caseworkers. According to FNS’ quality control system, the states overpaid food stamp recipients about $976 million in fiscal year 2000 and underpaid recipients about $360 million. A little over half of these errors occurred when state food stamp workers made mistakes, such as misapplying complex food stamp rules in calculating benefits. The remaining errors occurred because participants, either inadvertently or deliberately, did not provide accurate information to state food stamp offices. According to USDA, about half of all payment errors are due to an incorrect determination of the household’s income. In 1999, every state except one had a higher payment error rate among households with earnings as compared with households without earnings. Because their hours of work per week vary and they change jobs frequently, low-wage workers often have fluctuating incomes. Recipients are required to report these income changes, and eligibility workers must adjust their food stamp benefits correctly to avoid payment errors. In order to minimize payment errors, states usually certify households with earnings for shorter periods and require them to report more frequently than households with no earned income. Almost all states used one or more options or waivers to change their food stamp eligibility determination process. More than half of the states chose to confer categorical eligibility for food stamps to households receiving certain TANF-funded services or benefits. Thirty-three states used available options to exempt some or all vehicles from counting as assets. States used these options to increase the number of households to be eligible for food stamps, to simplify the administrative process for eligibility workers, and to support working families; however, most of these states considered them a cumbersome way to increase access to food stamps. Thirty-four states extended eligibility for food stamps to households that are eligible to receive TANF-funded services or benefits. Many states conferred categorical eligibility only to households receiving TANF-funded benefits such as emergency assistance and childcare; while some states conferred categorical eligibility to food stamp applicants simply by providing them with information and referral services paid for with TANF funds. For example, during the food stamp application process, clients who may be financially ineligible for food stamps could become categorically eligible for benefits by virtue of having received a referral to a specific TANF-funded program. Although the primary reason states gave for conferring categorical eligibility was to increase access to food stamps by making households who are eligible for a TANF-funded service automatically eligible for food stamps, states cited other benefits of this option. For example, by eliminating the need to calculate the value of a food stamp applicant’s assets, the eligibility worker’s administrative burden is reduced. Furthermore, five states noted that conferring categorical eligibility for food stamps makes children eligible for the school lunch program, even if the household does not actually qualify for a food stamp benefit. (See fig. 1.) While about two-thirds of the states used the categorical eligibility option, some states pointed out difficulties that the option created. For example, many individuals made categorically eligible for food stamps through receipt of a pamphlet or referral to a service may in fact not actually qualify for a food stamp benefit, possibly increasing the administrative burden on food stamp workers. In addition, several officials said they would like the food stamp rules pertaining to categorical eligibility simplified. They noted that categorical eligibility is determined in part by the source of the funding for the program under which the household receives noncash benefits or services. Because many programs have multiple funding sources, it can be difficult to determine whether a particular program meets the TANF funding requirements. Another official said that categorical eligibility is difficult to explain to staff. Other officials noted problems tied to the variation from state to state that the option creates. One official commented that allowing states to determine which of their welfare-funded services to use in granting categorical eligibility for food stamps could create a great deal of national variation in who can access this federal entitlement program. Using TANF-funded services as a basis for categorical eligibility, a state official explained, is a complicated way of excluding vehicles when determining food stamp eligibility. Thirty-three states used available options to exempt some or all vehicles from counting as assets in determining food stamp eligibility in order to increase access, support clients’ work efforts, or simplify eligibility determination for food stamp workers. (See fig. 2.) Twenty-nine of these states chose to replace their food stamp vehicle rules with their TANF program rules.While most of these states replaced their food stamp vehicle asset rules with their TANF cash assistance rules, a few states used rules from their TANF noncash assistance childcare programs. Seven states told us that they used the option to confer categorical eligibility to recipients of TANF-funded services as a way to exclude all vehicles and other assets from eligibility determination. Specifically, six of the seven states told us that they used categorical eligibility to increase access to food stamps and three said that they used it to support client work efforts. (See fig. 3.) While most states used available options to liberalize the way vehicles are considered in the food stamp eligibility determination process, 17 states used existing Food Stamp Program rules regarding vehicles. Seven of these states said that they could not replace their food stamp vehicle rules with TANF vehicle rules because their TANF rules were more restrictive than their food stamp rules. In at least one of these states, changes to TANF rules required approval by the state’s legislative body. State officials in almost half of the states told us that the Food Stamp Program’s vehicle asset rules should be changed to exempt at least one vehicle per household. Other state officials wanted the exemption value of a vehicle increased to reflect the current cost of vehicles. Almost all states used a reporting option or waiver to change the way households with earnings are required to report changes in their circumstances that could affect their eligibility for food stamps as well as their benefit amount. These options and waivers allowed states to alter the standard reporting methods of monthly and change reporting. Many states told us that they used reporting options and waivers to reduce their payment errors, to ease program administration, and to simplify paperwork requirements for households. Because some reporting options applied to specific households only, many states considered them somewhat restrictive. The most frequently used reporting alternatives were those that eliminated the requirement to report changes in earned income of $25 or more per month. Eighteen states chose a waiver allowing households to report changes in employment status, which includes changes in wage rates, number of hours worked in a week, and a move from part-time to full-time employment or vice-versa. Seventeen states chose the waiver to require recipients to report only changes in income that exceeded $80 or $100. (See fig. 4.) States are allowed to use more than one reporting option or waiver. Thirteen states used two or more alternatives. However, some states chose not to use any reporting options or waivers, citing concerns over payment errors and the cost and burden of implementation, such as the cost of reprogramming computer systems to implement a new reporting system. Ten states used the semiannual reporting option, and 5 states used the waiver allowing quarterly reporting. In these states, households with earned income are allowed to report semiannually or quarterly without reporting changes in between. Households subject to semiannual reporting are required to report if their gross income exceeds 130 percent of poverty. Should a household report a change that would increase the household’s food stamp benefit, the state must make the change; however, the state is generally not allowed to make changes that would reduce the food stamp benefit amount. States are held responsible only for errors resulting from miscalculating benefits at certification, or if income exceeds 130 percent of poverty and the change is not reported. State agencies are not held responsible for errors if the household experienced a change in its circumstances that the household did not report if the state’s policies do not require the household to report the change. States selecting the semiannual reporting requirement must certify households for at least a 6-month period, and they have the option to eliminate every other face- to-face interview because of the new rule requiring only one face-to-face interview a year. Although the semiannual reporting option provides states with an opportunity to reduce the reporting burden on working families with some impunity from payment errors, some states want to adjust the food stamp benefit in response to all reported changes in household income. Half of the states using the semiannual option requested and received a waiver allowing them to adjust benefits based on all changes reported by families. State officials gave various reasons for requesting this waiver to semiannual reporting. In some states, the Food Stamp Program shared the same computer system and database used for determining eligibility for other programs, such as TANF and Medicaid. Since these states link their programs, changes that families report to one program often automatically change the food stamp data, and states wanted the ability to adjust benefits according to this new information. Other states said that the waiver was useful because their food stamp workers have always adjusted food stamps based on reported changes; not to do so for all food stamp recipients would be confusing. Officials in 28 states said they are considering the semiannual reporting option. Nine states would implement the option only with the waiver allowing them to act on all reported changes in part because of computer integration issues. Others would consider the option with a waiver allowing them to apply it to all food stamp households, not just households with earnings. Twelve states are not using or considering the semiannual reporting option. Officials in these states told us the option is either too burdensome to implement, the rules are too complicated, or that it might increase payment errors. Officials from 38 states said that additional changes to the reporting requirements were needed. Some noted that states should be allowed to use the same reporting requirements for all households, not just households with earnings. Although states told us that a primary reason they used reporting options and waivers was to minimize the payment error associated with earnings, concern over payment accuracy affected states’ decisions regarding other options and waivers as well. For example, although FNS gave states the option to limit face-to-face interviews to once a year, some states continue to require households with earnings to come in more frequently because of concerns over payment accuracy. Officials in 45 states told us that the effect on their payment error rate was either the most important factor or a contributing factor in their decision to use particular options and waivers. As a result, officials in many states said that USDA’s quality control program should not focus solely on payment accuracy. State officials also suggested changes in the way that payment errors are calculated. For example, they noted that client and agency error should be counted separately from client error, because the agency had no control over whether the client reported required information correctly. Although only three states reported using the Transitional Benefit Alternative, many states told us they plan on using it. At the time of our interviews, the 3-month Transitional Benefit Alternative was not yet fully implemented, but states could request this option. Twenty states said that they were considering it. Twenty-seven states said they would implement the proposed 6-month Transitional Benefit Alternative if it became available. The primary reason that states would provide a transitional benefit is to support working families. Many states said that the option helped with the transition from welfare to work by stabilizing the families after they leave welfare by guaranteeing a fixed food stamp benefit regardless of how their income fluctuates during the transitional benefit period. (See fig. 5.) Some states that would use the 6-month option but not the 3-month option said that the additional 3 months of support to families making the transition from welfare to work would make the implementation costs worthwhile. The 12 states that had decided not to use transitional benefits said they were concerned about the implementation costs. At least eight of these states indicated that the computer changes required to implement the transitional benefit would be extensive. (See fig. 6.) Eighteen states said they were undecided about the 3-month option, and 14 states had not yet decided about the 6-month option. Several of the undecided states indicated that they were concerned about potential costs associated with reprogramming their computers. No state is implementing or plans to implement all aspects of the Simplified Food Stamp Program option. The main reason states gave for not choosing this option was that it was too complex and difficult to implement. The simplified program option was to be a vehicle for creating conformity between TANF and the Food Stamp Program by merging the programs’ rules into a single set of requirements for individuals receiving both types of assistance. However, as we reported earlier, since not all needy households receive both TANF and food stamps, the states selecting the simplified program option would, in effect, be operating three programs: one program for TANF recipients following state TANF rules; one program for food stamp recipients following federal food stamp regulations; and the simplified program for recipients of both food stamps and TANF. Furthermore, to whatever extent the states use the simplified program, they must also have demonstrated that total federal costs would not be more than the costs incurred under the regular Food Stamp Program—that is, the program has to be “cost neutral.” Figure 8 shows the reasons states gave for not choosing the option. In addition, while states are not planning to use the simplified program, some state officials indicated that it might be worthwhile to develop such a program if it could apply to all food stamp households, not just households receiving both TANF and food stamps. While no state is implementing all aspects of the simplified program option, nine states reported using some of the flexibility offered under the program. Eight states are aligning their food stamp and TANF work requirements. One state is aligning its TANF and food stamp reporting requirements to reduce the reporting burden on households participating in both programs. We provided USDA with the opportunity to comment on a draft of this report. While USDA did not provide formal comments, it did provide technical comments, which we incorporated where appropriate. We are sending copies of this report to the Secretary of Agriculture, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. If you or your staff have questions about this report, please contact me on (202) 512-7215 or Dianne Blank on (202) 512-5654. Individuals making key contributions to this report include Margaret Boeckmann, Elizabeth Morrison, and Lara Carreon. U.S. General Accounting Office. Food Stamp Program: Implementation of Electronic Benefit Transfer System. GAO-02-332. Washington, D.C.: 2002. U.S. General Accounting Office. Food Stamp Program: Program Integrity and Participation Challenges. GAO-01-881T. Washington, D.C.: 2001. U.S. General Accounting Office. Food Stamp Program: States Seek to Reduce Payment Error and Program Complexity. GAO-01-272. Washington, D.C.: 2001. U.S. General Accounting Office. Welfare Reform: Few States are Likely to Use the Simplified Food Stamp Program. GAO/RCED-99-43. Washington, D.C.: 2001. U.S. General Accounting Office. Food Stamp Program: Various Factors Have Led to Declining Participation. GAO/RCED-99-185. Washington, D.C.: 2002).","To help states administer their Food Stamp Programs, the Food and Nutrition Service (FNS) offers options and waivers to their program rules and regulations. Almost all states used options or waivers in their food stamp eligibility determination process. More than half of the states chose to make households receiving Temporary Assistance for Needy Families (TANF) services automatically eligible for food stamps. Thirty-three states exempted some or all vehicles in the determination of food stamp eligibility. Although most states used these options and waivers, they considered them a cumbersome way to increase access to the program for families owning a vehicle. Almost all states used at least one option or waiver to change the reporting methods required of food stamp household earnings. The most frequently used reporting waivers exempted recipients from reporting changes in earned income of $25 or more per month. States used these options and waivers to simplify paperwork requirements for both the food stamp recipient and eligibility worker. Although few states were using the new option to provide food stamp benefits to families leaving TANF, 20 other states planned to implement the option. No state was implementing or planning to implement all aspects of the simplified program option, which allows states to merge their TANF and Food Stamp Program for families receiving both types of assistance. States told GAO that the simplified program option would make administering the programs more difficult because it creates a separate program, covering only a subset of food stamp recipients. However, nine states were using a portion of the simplified program to align their food stamp and TANF work or reporting requirements.",govreport
"Established in 1965, HUD is the principal federal agency responsible for programs in four areas—housing assistance, community development, housing finance, and regulatory issues related to areas such as lead-based paint abatement and fair housing. To carry out its many responsibilities, HUD was staffed by 9,386 employees as of February 1999. Housing Assistance: HUD provides (1) public housing assistance through allocations to public housing authorities and (2) private-market housing assistance under section 8 of the U. S. Housing Act of 1937 for properties—referred to as project-based assistance—or for tenants—known as tenant-based assistance. In contrast to entitlement programs, which provide benefits to all who qualify, the benefits of HUD’s housing assistance programs are limited by budgetary constraints to only about one-fourth of those who are eligible. Community Development: Primarily through grants to the states, large metropolitan areas, small cities, towns, and counties, HUD provides community planning and development funds for local economic development under its Community Development Block Grant (CDBG) and Empowerment Zone/Enterprise Community Programs (EZ/EC), housing development under its HOME Program, and assistance to the homeless under its McKinney Act Homeless Programs. The funding for some programs, such as those for the homeless, may also be distributed directly to nonprofit groups and organizations. Housing Finance: The Federal Housing Administration (FHA) insures lenders—including mortgage banks, commercial banks, savings banks, and savings and loan associations—against losses on mortgages for single-family properties, multifamily properties, and other facilities. The Government National Mortgage Association, a government-owned corporation within HUD, guarantees investors the timely payment of principal and interest on securities issued by lenders of FHA-insured and VA- and Rural Housing Service-guaranteed loans. Regulatory Issues: HUD is responsible for regulating interstate land sales, home mortgage settlement services, manufactured housing, lead-based paint abatement, and home mortgage disclosures. HUD also supports fair housing programs and is partially responsible for enforcing federal fair housing laws. The Congress supports HUD’s programs through annual appropriations that are subject to spending limits under the Budget Enforcement Act, as amended. For fiscal year 2000, HUD is proposing a total budget of about $28 billion in new discretionary budget authority, which, in combination with available budget authority from prior years, will help support about $34 billion in discretionary outlays. This request represents a 9-percent increase in budget authority over fiscal year 1999. In its Fiscal Year 2000 Budget Summary, HUD states that its proposed budget will allow the renewal of all Section 8 rental assistance contracts, increases to virtually all program areas, and continued increases to programs, such as CDBG and Homeless, that address communities’ worst case needs. The summary also states that many program enhancements will be initiated, and, as we discuss below, HUD proposes to fund many set-asides within existing programs. HUD’s fiscal year 2000 budget request includes 19 new initiatives and programs that were not funded during fiscal year 1999. Some, however, may have been funded in prior years. These fall under various programs, including Community Development and Planning, Public and Indian Housing, and Housing Programs. This request includes seven set-asides totaling $210 million. Five of the set-asides ($60 million) will be funded within the CDBG Program and two ($150 million) in the HOME Program. See appendix I for a list of the proposed fiscal year 2000 initiatives and their status in fiscal year 1999. We also note that HUD’s fiscal year 2000 request includes significant funding increases in several ongoing programs, including Section 8 contract renewals. See appendix II for a list of these programs. While the budget impact—a net increase of about 9 percent in new budget authority—of the new programs and increases to existing programs that HUD proposes is not overwhelming, the proposed budget does raise questions about HUD’s capacity to manage such an increase. Questions arise for two reasons: First, HUD is currently going through a significant, complex, and time-consuming organizational reform in which many functions that it once managed in many field offices will be managed in one or more “centers” in various parts of the country. This reform is necessary to improve the efficiency and effectiveness of HUD’s operations and to address long-standing yet basic problems in program management. To accommodate this reform, HUD is moving and retraining many of its staff. Second, new initiatives and programs require a certain amount of dedicated resources to plan, implement, and manage over the long term. It is questionable whether these resources are available at this point in the reinvention of HUD. Therefore, we are concerned about whether HUD has the capacity to effectively initiate and oversee the set of new programs it is proposing for fiscal year 2000 while it is also trying to develop for itself a new operating style and way of doing business. One of the largest program increases in HUD’s fiscal year 2000 budget proposal is in its Section 8 housing assistance program (see app. II). For the past few years, we have reviewed the accuracy of HUD’s budget proposals for the tenant-based and project-based components of this program and have found many inconsistencies. For example, in July 1998, we reported that the Department had not identified all available Section 8 project-based unexpended balances and accounted for them in its budget process. As a result, HUD requested $1.3 billion in its fiscal year 1999 request for project-based funding that it did not need to cover shortfalls in current contracts. To remedy such overstatements, we recommended that HUD’s future funding requests for the Section 8 program—both the tenant-based and the project-based components—fully consider unexpended balances that may be available to offset funding needs. HUD has improved its annual review of unexpended balances. Although HUD’s budget justification shows that funding needs to cover contract shortfalls will be met by existing unexpended balances, it does not identify the estimated funding shortfall or the amount of unexpended balances available in each of the project- and tenant-based components. As a result, we cannot assess the extent to which the Department’s budget request includes the use of unexpended project-based balances. Therefore, we have requested information from HUD on its shortfall estimates and on the unexpended balances that may be available to fund these shortfalls. Balances in excess of those needed to fund shortfalls could be used to offset HUD’s request for contract renewal funding. HUD’s fiscal year 2000 budget justification raises other issues about its Section 8 program request that we believe warrant review. These issues include the basis for the contract renewal costs for the Section 8 project-based program for fiscal year 2000—more than $3 billion—as well as the basis for renewal costs beyond 2000. The budget proposal shows that HUD’s estimates of the unit costs of some project-based housing are substantially higher than HUD projected just a year ago. Moreover, unlike prior years, HUD’s fiscal year 2000 budget does not provide estimates of Section 8 costs in the years following 2000. Therefore, we have requested information that would support HUD’s assumptions and source data for both the number of units and average unit costs for this program in fiscal year 2000 and for several years thereafter. We also believe that the basis for the substantial increase in total Section 8 project-based and tenant-based outlays—$2.5 billion—should be examined, as well as HUD’s rationale for the $4.2 billion advance appropriation for fiscal year 2001 requested in the fiscal year 2000 budget request. HUD’s CDBG Program provides communities with grants for activities that will benefit low- and moderate-income people, prevent or eliminate slum or blight, or meet urgent community need. While CDBG is largely allocated on a formula basis, funds are also set aside for specific purposes such as Community Outreach Partnership, Hispanic Serving Institutions, and Historically Black Colleges and Universities. HUD’s fiscal year 2000 budget request for the CDBG Program proposes set-asides for 10 projects or initiatives totaling about $428 million. Of the 10 set-asides, half are for new initiatives totaling about $60 million. These new set-asides include Metropolitan Job Links, Homeownership Zones, EZ/EC Technical Assistance, EZ Round II Planning and Implementation, and a Citizens Volunteer Housing Corps. The CDBG Program is HUD’s most flexible tool for assisting communities to meet local development priorities. To help monitor it and other formula grant programs like HOME and Housing Opportunities for Persons With AIDS, HUD developed the Integrated Disbursement and Information System (IDIS) to provide current information on how grantees are using federal funds and what they are achieving with those funds. However, our recent work shows that IDIS, as implemented, does not provide detailed performance information. Also, because of its design, the information in IDIS is incomplete, inaccurate and untimely. Many states are apprehensive about using the problem-plagued system and plan to adopt it only if forced to do so by law. To broaden IDIS, HUD plans a replacement system, called the Departmental Grants Management System that HUD plans to design to track every grant. However, HUD plans to convert the current version of IDIS for use in the new grants management system, which may occur over the next several years. Also of immediate concern is the fact that IDIS is not secure, which opens up the possibility of unapproved access to program funds. Because of the poor quality of information in IDIS and a replacement system not being readily available, we are concerned that the activities and projects under CDBG may not be sufficiently reported and considered for budget request offsets. This is of particular concern because past budget requests show that actual CDBG unobligated balances have been increasing at a rate well over $50 million annually since fiscal year 1996. Moreover, in 1998, the authority to use about $7.6 million in CDBG funds expired. Although a reasonable explanation for this expiration may exist, we would not expect funds to expire without benefiting grantees, given the flexibility for the uses of CDBG funds and the discretion grantees have for their use. Contract Administration is a new initiative in fiscal year 2000 under HUD’s Housing Certificate Fund. HUD is requesting $209 million for this program, of which $42 million will be available to contractors who have not formerly participated in this activity. According to HUD, the use of contract administrators to manage project-based Section 8 housing assistance contracts will relieve HUD field staff of many duties they currently perform in this regard, allowing them to concentrate on their direct responsibilities, such as monitoring program effectiveness and ensuring that property owners are accountable for the rental subsidy payments they receive. Duties to be shifted to the new contract administrators include conducting annual physical inspections of the properties, reviewing project financial statements, and verifying tenants’ income and eligibility for program rental assistance benefits. HUD’s Section 8 Financial Management Center would oversee the work of contract administrators, and the Department would select contract administrators through a competitive procurement process. However, because of the documented weaknesses in HUD’s contracting practices in other areas, we question whether HUD is prepared to administer a new contracting initiative of this size. We, HUD’s Inspector General, and the National Academy of Public Administration have cited weaknesses in HUD’s contracting and procurement practices: inadequate oversight of contracted services because of a lack of skilled, trained staff; workload imbalances; and unclear duties, time frames, costs, and products. In addition, the Department has been under an investigation by its Inspector General for allegations of improper contract solicitation and administration of its contracts in the Department’s Note Sales program. Therefore, we believe that to ensure the success of HUD’s contracting for the new Section 8 contract administration initiative, HUD may need to provide some assurances to the Congress that the Department will have an adequate administrative structure and sufficient staffing in place to provide proper oversight of a new contracting program of this magnitude. HUD is also proposing an increase in its EZ Program. HUD’s $150 million request for Urban Empowerment Zones includes $45 million that would be distributed to the 15 communities that were designated as Strategic Planning Communities. These communities, which submitted applications for Round II EZ designation but were not chosen, could use the funds to support activities proposed in their EZ applications. Eligible activities include those covered by HUD’s CDBG and the Social Services Block Grant Program administered by the Department of Health and Human Services. However, under CDBG, HUD has already included a $10 million set-aside for meritorious communities that applied for Round II EZ designation but were not chosen. It is unclear why HUD needs to fund the same communities with two different programs. We provided a draft of this statement to HUD for its review and comment. Departmental officials, including HUD’s Chief Financial Officer, provided comments on several issues, including the number of programs or new initiatives that we listed and categorized as new for fiscal year 2000. HUD officials stated that programs that were funded in the past, such as Section 8 vouchers, should not be considered new, although they meet our criterion of not receiving funding in fiscal year 1999. We have included these programs because our purpose in listing new programs and initiatives is to provide an indication of the additional workload HUD may have in the approaching year. We believe that a 1 or more year break in a program’s funding can create administrative workload, even though the Department retains programmatic expertise among its staff and contractors. HUD officials also suggested that we check some of the budget figures that we reported in the statement. We did so and made adjustments where necessary. This concludes my prepared testimony, Mr. Chairman. I would be happy to respond to any questions that you or the Members of the Subcommittee might have. (Table notes on next page) For this table, GAO defined new programs and initiatives as any program or initiative that the Congress did not fund in fiscal year 1999. However, some of these programs or initiatives may have been funded in prior years. FHA Mutual Mortgage Insurance and Cooperative Management Housing Insurance Funds program account Mortgage Insurance Limitation in FHA’s Mutual Mortgage Insurance and Cooperative Management Housing Insurance Funds 105 (Table notes on next page) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO discussed the Department of Housing Urban Development's (HUD) fiscal year (FY) 2000 budget request, focusing on: (1) new initiatives or significant increases proposed by HUD; and (2) observations about HUD's request for funding related to several areas GAO has reported on in the past year. GAO noted that: (1) to support 19 new programs and initiatives, HUD is requesting nearly $731 million of its $28 billion total request for FY 2000; (2) in each case, Congress did not provide funding for the activity in FY 1999, although in some cases the program has been funded in prior years; (3) GAO is concerned about HUD's overall capacity to plan for, administer, and oversee this many new programs, particularly when HUD itself is undergoing significant organizational reform and when some of the new initiatives are in areas, such as contracting, that HUD's performance has been questioned in the past; (4) one of the most significant increases in HUD's current programs for FY 2000 is a $1 billion increase in its Section 8 rental housing assistance program; (5) however, the budget does not provide sufficient information to evaluate this request; (6) GAO believes a number of associated issues exist that warrant review; (7) HUD's tracking and oversight of its Community Development and Planning grants are made difficult because information in its grants management information system is unreliable; (8) although HUD plans to replace the current system for managing and tracking Community Development Block Grants, a new system is several years away from implementation; (9) in the meantime, HUD's FY 2000 budget request proposes to continue adding set-asides to the block grant; (10) however, HUD cannot be assured that financial tracking of the individual grants and grantees will be adequate; (11) in one of its largest new initiatives, HUD is requesting over $200 million in FY 2000 to fund contract administrators for the contracts it has with owners of multifamily properties in HUD's project-based Section 8 housing assistance program; (12) however, work that GAO, HUD's Inspector General, and the National Academy of Public Administration have done in the past on HUD's contracting activities identified weaknesses in HUD's ability to administer contracts and monitor contractors' performance; (13) however, GAO believes that the success of this program will depend on the adequacy of HUD's contract selection, administration, and oversight of these contracts; (14) HUD is proposing both a new initiative and a program increase in the area of empowerment zones as well as two set-asides in the Community Development Block Grant Program for empowerment zones; and (15) these proposals raise questions about how the programs will coordinate with and benefit from each other because they target similar beneficiaries.",govreport
"The Military Health System operated by DOD is large and complex and has a dual health care mission—readiness and benefits. The readiness mission provides medical services and support to the armed forces during contingency operations and involves deploying medical personnel and equipment, as needed, around the world to support military forces. The benefits mission provides medical services and support to members of the armed forces, their family members, and others eligible for DOD health care, such as retired servicemembers and their families. DOD’s health care mission is carried out directly through military medical centers, hospitals, and clinics throughout the United States and overseas, commonly referred to as military treatment facilities, as well as by civilian health care providers through TRICARE. Military treatment facilities make up DOD’s direct care system for providing health care to beneficiaries. DOD’s delivery of health care services includes, among other things, inpatient and outpatient care. Inpatient care refers to care for a patient who is formally admitted to a hospital or an institution for treatment, or care. Outpatient care, also known as ambulatory care, refers to health care services for an actual or potential disease, injury, or lifestyle-related problem that does not require admission to a medical treatment facility for inpatient care. The Assistant Secretary of Defense (Health Affairs) is responsible for ensuring the effective execution of DOD’s health care mission and exercises authority, direction, and control over medical personnel authorizations and policy, facilities, funding, and other resources within DOD. The TRICARE Management Activity operates under the authority, direction, and control of Health Affairs. In 2008, the TRICARE Management Activity approved plans to renovate LRMC and the 86th MDG clinic at their existing locations. The initial LRMC plans included renovation of the inpatient tower; construction of an additional tower for emergency medicine, inpatient nursing units, and other clinical and support activities; and demolition of older facilities. The initial plans for the 86th MDG clinic included construction of a single building to consolidate health care services provided at separate facilities that currently make up the 86th MDG clinic. In 2009, the Office of the Deputy Under Secretary of Defense (Installations and Environment), together with Health Affairs, conducted a cost-benefit analysis that included consideration of alternative sites as well as consolidation of the two projects into a single medical center, and determined that consolidating the aging LRMC and 86th MDG clinic into one new facility that provides tertiary care in an area adjacent to Ramstein Air Base, known as the Weilerbach Storage Area, would be more efficient and cost- effective than pursuing two separate renovation or reconstruction projects. The replacement medical center will be operated and maintained by the Army, with the Air Force to provide clinical services that are currently offered at the 86th MDG clinic. The version of DOD’s guidance governing the planning and acquisition of military health facilities (DOD Instruction 6015.17) that was in effect when the facility requirements for the replacement medical center were determined in 2010 described the procedures to be used by the military departments to prepare project proposals for military treatment facilities. This instruction also identified the types of documentation needed to support a project proposal. The documentation includes, among other things, the current and projected beneficiary population served in a military treatment facility’s catchment area, as well as current and projected staffing and workload data. Army Medical Command, with input from the Air Force Medical Support Agency, developed a report that summarizes the projected health care requirements for Military Health System beneficiaries in the areas served by the proposed medical center. Generally, the combination of workload data and staffing requirements are key considerations for determining the size and configuration of military treatment facilities. These facility space requirements are identified in a Program for Design document, which lists square footage requirements per medical department and room. The estimated square footage is then used as the basis for developing overall project cost estimates as reflected on DD Form 1391 (Military Construction Project Data), the standard format used throughout DOD to support the planning and execution of military construction projects. Figure 1 provides an illustration of the process used in determining project costs for the replacement medical center. In planning for the proposed replacement medical center, DOD officials considered beneficiary population data, contingency operations, and changes or expected changes in troop strength known at the time. However, more recent posture changes, announced in January 2012, are currently being assessed by military medical officials for their impact on the replacement medical center. DOD used beneficiary population data as of March 2010 and data on historical patterns of patient migration to identify the areas served by the proposed replacement medical center. A majority of the beneficiaries expected to receive health care from the replacement medical center are located within a 55-mile radius of it. DOD officials told us that because the replacement medical center was designed for peacetime operations—with the capacity to expand to meet the needs of contingency operations—reductions in ongoing contingency operations in Afghanistan would not have an impact on facility DOD posture in Europe has been reduced over the past requirements.few years, and DOD had previously announced that one of four brigade combat teams currently stationed in Europe would be removed by 2015. According to DOD officials, this posture change was not expected to have a significant impact on the size of the replacement medical center because DOD plans to continue to use the facilities at Baumholder, Germany, which will be vacated by the brigade combat team, for other DOD personnel. In January 2012, DOD announced its decision to remove a second brigade combat team currently stationed in Europe, thereby reducing the remaining number of brigade combat teams in Europe to two—one stationed in Germany and the other in Italy. At the time of our review, DOD officials told us that they were in the process of assessing these proposed changes in posture to better understand their ramifications for DOD’s medical facility needs. The replacement medical center will serve as the only tertiary-level referral hospital for the EUCOM, Central Command, and Africa Command theaters of operation. Because of these unique aspects, according to medical planners they did not use typical DOD catchment area standards. Military treatment facilities are typically designed to offer sufficient health care for active duty beneficiaries and their dependents within a 40-mile radius of the military treatment facility. In the case of LRMC, medical planners determined that the historical patterns of care indicated that this area should be a 55-mile radius. Medical planners in the Office of the Secretary of Defense, the Army, and the Air Force analyzed historical patterns of patient migration and contingency operations at LRMC and the 86th MDG to define four catchment areas. See figure 2 for the location of these four catchment areas. The four catchment areas, as defined by military medical planners, are based on populations of patients who are enrolled as beneficiaries or who are eligible to enroll for the following locations: 1. The Kaiserslautern Military Community catchment area includes all beneficiaries enrolled in LRMC, 86th MDG, and Kleber/Kaiserslautern military treatment facilities. This catchment area is approximately 55- miles in radius surrounding the proposed facility’s site. 2. The Germany-wide catchment area includes all beneficiaries enrolled in the Kaiserslautern Military Community catchment area plus beneficiaries enrolled in the military treatment facilities in Germany. This catchment area definition was essential in determining the patterns of enrolled beneficiaries’ use of German health care.3. The Europe Regional Medical Command catchment area includes all beneficiaries in the Germany-wide catchment area plus beneficiaries enrolled in all military treatment facilities in Italy and Belgium. This catchment area reflects historical inpatient referral patterns at LRMC. 4. The EUCOM catchment area includes all enrolled beneficiaries and eligible beneficiaries in Europe, including all beneficiaries in the other three catchment areas. Table 1 shows the beneficiary population, by catchment area and beneficiary category, as of March 2010. In appendix II we include catchment area populations by beneficiary category, for fiscal years 2006 through 2011. According to DOD officials, the flow of patients from theaters of operation, including contingency operations, minimally affects the volume of inpatient care at LRMC and outpatient care at both LRMC and 86th MDG. Table 2 shows that approximately half of all inpatient care at LRMC, a little more than 77 percent of outpatient care at LRMC, and almost 96 percent of outpatient care at the 86th MDG is provided to beneficiaries located within the Kaiserslautern Military Community catchment area as well as the Germany-wide catchment area. According to DOD officials, the replacement medical center is being sized for peacetime operations, not for contingency operations. However, these officials told us that the replacement medical center is being designed with the flexibility to expand capacity during surges to be able to handle casualties that result from contingency operations. DOD officials determined that the replacement medical center should be able to accommodate contingency operations’ medical needs similar to those experienced in Fallujah, Iraq, during November 2004, in which the United States sustained about 100 casualties and 600 wounded over a 2- month period. For this reason, the new medical center is designed to be able to nearly double its medical/surgical bed capacity if needed to support contingency operations. According to Army officials, to mitigate the increase in patient workload resulting from surges caused by contingency operations, the new medical center will follow the procedures currently in use at LRMC. These procedures require that priority be given to active duty servicemembers, and therefore, other beneficiaries normally treated at LRMC would be directed to German health care facilities during a time when surge capability is needed (and capacity is constrained) and then redirected back to LRMC when the workload from contingency operations lessens. DOD has been reducing its military posture in Europe since German reunification in 1990. At its peak, the United States had approximately 350,000 active duty servicemembers stationed in EUCOM’s area of responsibility. The size of DOD’s military posture in EUCOM’s area of responsibility is currently estimated at about 78,000 active duty servicemembers. DOD has been reducing its medical treatment capacity over time to correspond to the reduction in the number of military servicemembers stationed in Europe. Today, LRMC is DOD’s only remaining tertiary care medical center in Europe. Furthermore, it is the only medical center in Europe, Asia, or Africa that serves beneficiaries from the EUCOM, Central Command, Africa Command, and Special Operations Command areas of responsibility. In 2004, DOD announced its plans for an overseas basing strategy that called for reducing the number of Army brigade combat teams stationed in Europe from four to two. However, in the February 2010 Quadrennial Defense Review, DOD decided that it would retain all four Army brigade combat teams in Europe, rather than returning two to the United States as originally planned. Moreover, in April 2011, based on several factors, including consultations with allies and the findings of the North Atlantic Treaty Organization's new Strategic Concept, DOD announced that it planned to remove by 2015 only a single brigade combat team from Europe. According to DOD officials, the brigade they anticipated removing from Europe was stationed at U.S. Army Garrison (USAG) Baumholder, Germany, initially leaving brigades at USAG Grafenwoehr and USAG Vilseck, which are located close to one another in Germany and at USAG Vicenza, Italy. There are also elements of the Grafenwoehr brigade at USAG Schweinfurt, Germany. DOD also has plans to eventually close four Army locations in Germany—Heidelberg, Mannheim, Bamberg, and Schweinfurt. As a result of these closures, the elements of the Grafenwoehr brigade at Schweinfurt were expected to move to Grafenwoehr when Schweinfurt closed. As of the date of this report, the four brigade combat teams are still assigned at their original locations in EUCOM. The April 2011 announcement also included a DOD decision to station four Aegis Cruisers in Spain, a change that would increase the military beneficiary population in Europe. Figure 3 shows the locations of DOD military installations in Europe where posture changes are expected to take place that could affect the facility requirements for the replacement medical center. The brigade combat team currently located at Baumholder is within the Kaiserslautern Military Community catchment area and is expected to reduce the beneficiary population when it leaves. According to Army officials, the brigade consists of approximately 4,200 soldiers, who are accompanied by about 6,300 dependents. However, according to DOD officials, when this brigade leaves Baumholder other DOD personnel will be restationed there because Baumholder is considered an enduring installation with accessible joint military training facilities nearby. Army officials also told us that because some of the housing at Baumholder is substandard, they expect only 2,300 to 3,500 servicemembers to move to Baumholder. Using the Army ratio of 1.5 dependents to each military member indicates that as approximately 10,500 servicemembers and their dependents who are medical beneficiaries of LRMC leave the catchment area, they will be replaced by 5,750 to 8,750 new servicemembers and their dependents—an overall reduction in the Kaiserslautern Military Community catchment area of from 4,750 to 1,750 beneficiaries. DOD officials told us that even though the beneficiary population at Baumholder will be reduced, they expect this change to have little impact on the workload and sizing requirements for the replacement medical center. In October 2009, DOD hired an independent contractor, Noblis, to perform a sensitivity analysis that would provide an order of magnitude estimate of potential changes to the beneficiary population that would need to occur to affect the size of the facility. This sensitivity analysis was further refined and updated in 2010. It specifically assessed the type of population changes that would require the addition or subtraction of intensive-care unit (ICU) and medical/surgical beds, as well as specialty care exam rooms for outpatients. The analysis concluded that the planned capacities for the replacement medical center would be resilient to sizable changes in the population served. A population change of up to 70,000 beneficiaries—a change in the total EUCOM beneficiary population of about 29 percent—would necessitate resizing of the requirements for ICU or medical/surgical beds by the addition or subtraction of a 20-bed module. A population change of 25,000 to 31,000 beneficiaries—a change in the total EUCOM beneficiary population of between 10 percent and 13 percent would necessitate re-sizing requirements for specialty care exam rooms by the addition or subtraction of an 8 to 10 exam room module. DOD officials told us that changes in the beneficiary population are expected to occur in the EUCOM catchment area through 2015. Although some of these changes will increase the population in certain locations, the overall change will be a reduction in the overall number of beneficiaries in EUCOM’s area of responsibility. The following beneficiary changes are expected: The Army expects a reduction in the Europe Regional Medical Command’s active duty servicemembers and their dependents’ population of about 21,000—a reduction in the total EUCOM beneficiary population by about 8 percent—by fiscal year 2015, according to the Updated (FY10) Health Care Requirements Analysis. However, it does not expect a significant change to the beneficiary population in the immediate Kaiserslautern Military Community catchment area. The Air Force does not expect a change in its beneficiary population through fiscal year 2015. The Navy expects to gain about 1,200 sailors from the stationing of the Aegis Cruisers in Rota, Spain, along with about 1,300 additional dependents—for a total increase of about 2,500 beneficiaries, or a 1 percent gain in the total EUCOM beneficiary population. Based on the results of DOD’s 2009 sensitivity analysis, the expected changes would not necessitate a change in the number of ICU beds, medical/surgical beds, or outpatient exam rooms. In January 2012, however, DOD announced new posture decisions that will further reduce EUCOM’s troop strength. According to DOD, these posture decisions are part of a deficit reduction package based on the Budget Control Act of 2011 requirement to reduce the department’s future expenditures by approximately $487 billion over the next decade. EUCOM data indicate that by 2015 approximately 71,500 active duty military servicemembers will remain in Europe following the latest changes to DOD’s European posture. According to the January 2012 DOD publication Defense Budget Priorities and Choices, DOD has updated its April 2011 plans for its European basing strategy and has stated that it intends to now remove two brigade combat teams from Europe. These two brigades are currently located at Baumholder and Grafenwoehr with elements of the brigade in Grafenwoehr located in Schweinfurt. As a result, the elements in Schweinfurt will not relocate to Grafenwoehr as previously planned. DOD’s decision to remove two brigades from Europe and how this shift in troop numbers will affect health care requirements in the EUCOM area of responsibility have yet to be fully determined. However, DOD officials noted that they did not believe the removal of a second brigade combat team would affect the beneficiary population of the replacement medical center because the second brigade is currently stationed outside the immediate Kaiserslautern Military Community catchment area. DOD officials told us that they have started a review to confirm that the shift in DOD posture will not affect the requirements for the proposed replacement medical center. They noted that recent troop reductions are being studied to determine what impact, if any, they will have on the proposed size of the replacement medical center. They also noted that they are developing a sensitivity analysis to accommodate the information and will include it as part of DOD’s statutorily required recertification of the facility. As of the date of this report, they had not completed the study because along with the recertification, DOD must also submit a plan for implementing GAO’s recommendations with respect to the LRMC facility. When developing facility requirements for the replacement medical center, DOD officials incorporated many patient quality of care and environmentally friendly design standards. However, our review of the documentation DOD provided in support of these facility requirements revealed gaps, inconsistencies, and calculation errors that required extensive explanation by DOD officials to understand the deviations and decisions made to develop the requirements. Without clear documentation that explains how the analyses were performed and any adjustments made, stakeholders and decision makers lack reasonable assurance that the proposed replacement medical center will be appropriately sized to meet the needs of the expected beneficiary population in Europe. DOD officials used checklists and discussions with external health care providers to incorporate updated patient quality of care standards into the facility requirements for the replacement medical center; they also incorporated environmentally friendly design standards. They used DOD’s military hospital construction checklists to ensure that they incorporated updated patient quality of care standards, such as evidence-based design and world-class standards, when determining the size of the replacement medical center. For example, DOD officials told us they used the Evidence Based Design Checklist—which DOD created in August 2007 and updated in 2009—to incorporate design concepts into health care construction projects that have impacts on patient-centered care. Examples of evidence-based design include single-patient instead of multiple-patient rooms to better accommodate family involvement in the provision of care and to better control infections, and studying layouts and workspace ergonomics to maximize work pattern efficiency. Additionally, DOD officials and the architectural and engineering firm contracted for the design of the replacement medical center used DOD’s Military Health Service World-Class Checklist to ensure that world-class standards were integrated into the facility’s design. The checklist identifies areas for DOD officials to research to help ensure that world-class standards are systematically developed, validated, and communicated with project teams. The completed checklist described examples of how world-class standards—which encompass many of the evidence-based designs from the Evidence Based Design Checklist—were integrated into the facility’s design. Some of the world-class standards incorporated into the facility requirements were (1) optimizing the size and position of the patient windows to provide exterior views for the patient from the bed, (2) providing patient and family control over the environment in the patient room (e.g., heating and cooling), and (3) providing full height walls with higher noise transmission ratings (a higher noise transmission rating blocks more noise from transmitting through a wall) in spaces where patients would be asked to disclose personal information. DOD officials told us they also met with officials from Department of Veterans Affairs’ hospitals, private sector hospitals, and German hospitals to obtain information on evidence-based practices for providing health care that could be applied to the replacement medical center’s design. DOD has also incorporated additional environmental and efficiency features into the design of the replacement medical center and expects to exceed the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) green building standards, which have been adopted by several federal agencies. The LEED system awards points for meeting a variety of standards and certifies buildings as silver, gold, or platinum. The replacement medical center’s current design will likely qualify for a “silver” certification. However, the facility’s extensive energy efficiency and renewable energy features indicate that it may qualify for a “gold” certification once it has met the more stringent German design requirements. For example, the project will use low water plumbing fixtures and commercial kitchen equipment available in Germany to reduce water use and achieve higher efficiency. DOD sized the replacement medical center based on projected patient workload data. However, our review of the planning documentation DOD provided in support of its facility requirements showed that there were (1) inconsistencies in how DOD projected patient workload and applied the planning criteria, (2) some areas where the planning documentation did not clearly show how DOD officials had applied the formulas provided in the criteria to generate requirements, and (3) calculation errors throughout. DOD guidance in effect when the facility was designedprovided that when designing medical facilities, planners should develop patient workload factors—both current and projected—and use these factors to determine the sizing requirements for the facility. While DOD officials acknowledged that inconsistencies, gaps in documentation, and calculation errors existed in the requirements documentation, they did not think the identified issues alone would necessitate a revision of the facility requirements. However, because DOD has not yet determined the effects of the newly proposed posture changes on projected patient workload— which in turn drives the requirement for the facility size—it is not known if the inconsistencies, gaps, and calculation errors coupled with the posture change will require DOD to revise its facility requirements. DOD officials plan to examine these concerns in their recertification process. The Updated (FY10) Health Care Requirements Analysis report for LRMC captures some of these data and steps DOD used to determine the sizing requirements for the replacement medical center (see table 3 for the sizing requirements that DOD developed, by medical center department). Inconsistencies in projecting workload and applying criteria. To project most inpatient and outpatient workload for the replacement medical center, DOD officials used fiscal year 2010 estimated patient workload data as a baseline. However, they used different baseline data in different parts of the analysis. For example, in determining the number of labor and delivery rooms, DOD officials did not use workload data from fiscal year 2010 as the baseline. According to DOD officials, the obstetrician workload has historically been relatively stable. Therefore, they used the labor and delivery room workload data from the Health Care Requirements Analysis, which had been conducted in fiscal year 2008 to support the original plan for renovating and reconstructing LRMC and determined that the data were accurate enough for their purposes. Once DOD officials determined what projected workload data to use in their calculations for the new facility, they were to use the criteria in DOD Space Planning Criteria for Health Facilities to calculate the facility’s requirements, for example, the appropriate number of inpatient beds and outpatient exam rooms. DOD officials generally used the formulas provided in this document, but they applied them inconsistently when determining the appropriate size for individual departments within the facility. For example, the space planning criteria direct DOD officials to divide an inpatient department’s projected workload—in this case, the average daily census—by a particular occupancy rate to determine the number of inpatient beds that would be required. The criteria specify that certain inpatient beds should be designed in modules of 4, 6, or 8 beds. DOD generally followed these criteria in calculating the number of nursing unit medical/surgical beds, a type of inpatient bed. The criteria specify an occupancy rate of 85 percent for inpatient medical/surgical beds. Following this formula, DOD officials divided the projected average daily census (48.7 patients) by 0.85. This calculation resulted in a requirement for 57.3 beds. To conform to the modular grouping criteria, DOD officials rounded to 60 beds. However, in determining the number of inpatient behavioral health beds DOD officials deviated from these criteria. The projected average daily census for behavioral health was 24 patients. The space planning criteria specify a 70 percent occupancy rate for psychiatric (i.e., behavioral health) beds when the average daily census is fewer than 25 patients, instead of the 85 percent occupancy rate specified for nursing unit medical/surgical beds. Nevertheless, DOD officials used an 85 percent occupancy rate to calculate the requirement for behavioral health beds. This resulted in a requirement for 28.2 beds—rounded to 30 beds to conform to the modular grouping criteria. According to DOD officials, they chose to use a different occupancy rate factor because they reasoned that since space planning criteria had not been updated to reflect the shift to single occupancy rooms, the 70 percent rate would likely result in a requirement for a higher number of beds. Following the space planning criteria’s guidance would have produced a requirement for 34.3 beds, which would have been rounded to 36 beds to account for the modular grouping criteria. As a result, the need for behavioral health beds may actually be higher than DOD officials determined. The documentation did not clearly convey the reasons for the deviations or adjustments DOD officials made when applying the criteria, and as a result, decision makers may lack reasonable assurances that the number of beds required would be sufficient to meet the needs of the expected beneficiary population in Europe. Although these deviations or adjustments may not adversely affect the size of the replacement medical center, their effect when combined with the yet to be assessed posture changes remains unknown. Inadequate documentation of how facility requirements were estimated. DOD’s documentation of its processes for determining the replacement medical center’s sizing requirements did not always clearly indicate how DOD officials had generated these requirements and omitted details that would have helped demonstrate how DOD officials had determined the size of the replacement medical center. For example, DOD’s planning documentation reported contradictory methods for projecting patient workload. According to the Updated (FY10) Health Care Requirements Analysis, DOD used three different scenarios to project the facility’s workload, resulting in a low, a midrange, and a high projection; all three scenarios used estimated patient workload data from fiscal year 2010 as the baseline: Scenario A excluded the workload attributable to the conflicts in Iraq and Afghanistan, and assumed that the change in patient workload would continue to follow the trend set over the previous 5 years. Scenario B adjusted for potential future decreases in beneficiary population, and assumed that the change in patient workload would continue to follow the trend set over the previous 5 years. Scenario C assumed that the change in patient workload would continue to follow the trend set over the previous 5 years and made no exclusions or adjustments. The Updated (FY10) Health Care Requirements Analysis first reported using Scenario B—the scenario that resulted in midrange projections—to project inpatient and outpatient workload for the replacement facility. However, later sections of the document report the use of different methods to project patient workload. DOD officials confirmed that they had used a combination of methods to project inpatient and outpatient workload, and that they had used Scenario B only to validate these projections after they had calculated them. These officials acknowledged that the Updated (FY10) Health Care Requirements Analysis could have better documented how these projections were developed. The lack of clear documentation makes it difficult to understand the processes used without extensive explanation by DOD officials. In addition, the Updated (FY10) Health Care Requirements Analysis omitted details on how DOD officials developed certain data. For example, the document does not show how DOD officials projected inpatient workload for behavioral health beds, only noting that the projected average daily census was 24 patients. Although the Updated (FY10) Health Care Requirements Analysis did not document how the average daily census was calculated, DOD officials told us that the historical data on inpatient behavioral health workload were not sufficient for projecting workload because LRMC’s behavioral health inpatient capacity was such that any beneficiaries other than active duty servicemembers were referred to the German economy for treatment. Therefore, the officials said they used another method (Scenario C) to project workload, so that the facility would have the inpatient behavioral health capacity to treat additional patients. The planning documentation also does not show how DOD officials projected the number of providers required for outpatient ambulatory departments. The Updated (FY10) Health Care Requirements Analysis contains a table with the number of outpatient ambulatory providers but does not show how or whether projected outpatient workload data for the replacement medical center were used to determine the number of outpatient providers that would be required. These gaps in documentation make it unclear whether the size of the replacement medical center will be adequate to meet the needs of the beneficiary population, and when combined with potential posture changes and previously discussed deviations or adjustments, the extent to which they may affect the size of the facility is unknown. Calculation errors in the planning documentation. We also found several calculation errors within the Updated (FY10) Health Care Requirements Analysis report. One table in the report that shows historical (5-year average), baseline, and projected workload for inpatient and outpatient care had errors in the 5-year average column for inpatient and bed days of care. When we spoke with DOD officials, dispositionswe pointed out these errors. DOD officials acknowledged the errors and noted that the correct numbers could be found in a separate table in the report’s appendix—although the appendix table was not listed as a reference to support the historical workload numbers. Additionally, a table in the report’s appendix, which illustrated the different projected inpatient and outpatient workload data, calculated using the three different scenarios, had many calculation errors in the projected outpatient workload columns. Specifically, in calculating projected workload using Scenarios A and B, DOD incorrectly used the 5-year average—instead of the fiscal year 2010 data—as a baseline, and when using Scenario C, DOD adjusted for potential decreases in the beneficiary population, although this scenario did not call for such an adjustment. As a result, outpatient workload data using Scenario B, for example, was calculated to be 288,534 encounters instead of 328,944 (a 14 percent difference). The projected data derived by incorrectly applying Scenario B were then used in another table in the report’s appendix to verify that the projected outpatient provider staffing would be sufficient to treat the projected number of outpatients. DOD officials acknowledged the error and provided us with correct data. According to DOD officials, even though there was a 14 percent difference in the projected outpatient workload data, the outpatient provider staffing levels would still be sufficient. Although these calculation errors may not adversely affect the size of the replacement medical center, it remains unknown to what extent this error will affect facility requirements when combined with the yet to be assessed posture changes, previously discussed deviations or adjustments, and gaps in documentation. Standards for internal controls include, among other things, control activities. Control activities include policies, procedures, techniques, and mechanisms that enforce management’s directives. They can include a wide range of activities—such as authorizations, verifications, and documentation—that should be readily available for examination. Detailed and appropriate documentation is a key component of internal controls. Without clear documentation of key analyses, and of how adjustments to facility requirements were made, stakeholders lack reasonable assurances that the proposed replacement medical center will be able to provide the appropriate health care capacity to meet the needs of the beneficiary population it is expected to serve. In developing the cost estimate for the replacement facility, DOD followed many of the best practices in developing estimates of capital projects, but DOD minimally documented the data sources, calculations, and estimating methodologies used in developing the cost estimate. Further, it is anticipated that the replacement medical center will become the hub of a larger medical-services-related campus, for which neither cost estimates nor time frames have yet been developed. The GAO Cost Estimating and Assessment Guide contains cost estimating best practices that have been identified by GAO and cost experts within organizations throughout the federal government and industry. These best practices can be grouped into four general characteristics of sound cost estimating: 1. “Accurate” refers to being unbiased and ensuring that the cost estimating is not overly conservative or overly optimistic and is based on an assessment of most likely costs. 2. “Credible” refers to discussing any limitations of the analysis because of uncertainty or bias surrounding data or assumptions used in the cost estimating process. 3. “Comprehensive” refers to ensuring that cost elements are neither omitted nor double counted, and all cost-influencing ground rules and assumptions are detailed. 4. “Well documented” refers to thoroughly documenting the process, including source data and significance, clearly detailed calculations and results, and explanations of why particular methods and references were chosen. See appendix III for detailed information on each of these cost estimating characteristics. In addition, Office of Management and Budget (OMB) best practices note that programs should maintain current and well-documented estimates of program costs, and that these estimates should encompass the full life cycle of the program. The characteristics of sound cost estimating are divided into individual criteria, which we used to assess DOD’s process for developing its cost estimate. Our process for evaluating the cost estimate consisted of assigning an assessment rating for the various criteria evaluated on a 1 to 5 scale: not met = 1, minimally met = 2, partially met = 3, substantially met = 4, and met = 5. Then, we took the average of the individual assessment ratings to determine an overall rating for each of the overarching characteristics: accurate, credible, comprehensive, and well documented. Criteria assessed as not applicable were not given a score and were not included in our calculation of the overall assessment. Furthermore, our review of DOD’s process for developing the cost estimate does not reflect an assessment of how facility requirements were developed or their quality, but only a determination of whether they are described in technical documentation and reflected in the estimate.However, as discussed previously in this report, during our assessment of DOD’s process for determining facility requirements for the replacement medical center, we found some calculation errors in the facility requirements. Table 4 provides a summary of our assessment of DOD’s cost estimating process. We determined that the cost estimate for the replacement medical center had been updated as project requirements were better defined. The overall cost estimate was broken down into costs per square foot, which were based on historical records of costs and actual experiences from other comparable programs. Although the DD Form 1391 does not include documentation regarding how inflation was factored into the estimated costs for the replacement medical center, DOD officials told us that costs on the DD Form 1391 have been adjusted for inflation using departmental guidance. We found no evidence indicating that the cost estimate is biased. However, it is not possible to fully assess the accuracy and reliability of a cost estimate without conducting a risk analysis that indicates the confidence level associated with the project’s estimated cost. Yet, the independent estimate and estimate validation that are further described below are sufficient to meet the requirements of this criterion. DOD hired an architecture and engineering firm to validate the cost estimate using a cross-check of major cost elements to determine whether alternative methods would have produced similar results. The contractor concluded that the cost estimate was valid. It also developed an independent cost estimate and determined that the design of the facility was within 1 percent of the size listed on the DD Form 1391, and that the resulting cost was also within 1 percent of DOD’s cost estimate. DOD officials told us that they also hired a separate firm to develop sensitivity and risk analyses that were designed to meet GAO cost estimating standards as published in the Cost Estimating and Assessment Guide. However, we found some limitations in these analyses. The only cost drivers evaluated were the exchange rate, German inflation, the cost of various raw materials, and a composite labor rate. The analyses did not evaluate the potential cost impact of variations in the beneficiary population, catchment area, level of care provided, or amount of battle-related injuries. Moreover, the analyses did not evaluate the cost impact of varying the square footage requirements documented in the Program for Design.credible, key cost elements should be tested for sensitivity, and other cost estimating techniques should be used to cross-check the reasonableness of the ground rules and assumptions. It is also important to determine how sensitive the final results are to changes in key assumptions and parameters. DOD’s cost estimating methodology for the replacement medical center substantially met best practice criteria for overall comprehensiveness, but some costs and assumptions were not included in the individual criteria that make up the comprehensive cost estimating characteristic. The cost estimate generally includes categories of costs for the design, construction, and outfitting of the replacement medical center. Additionally, DOD provided an appropriate work breakdown structure for the facility to help ensure that cost elements were neither omitted nor double counted. DOD also provided us with technical baseline documentation, including the Updated (FY10) Health Care Requirements Analysis report and the Program for Design, which defines the technical and programmatic requirements of the project. DOD officials told us that technical baseline documentation was developed by qualified personnel—including a multidisciplinary team of health care planners, architects, and engineers—and has been updated as the project has evolved. We found no instances in which any costs for design, construction, and outfitting of the replacement medical center were omitted. Although DOD provided us with some cost information as well as technical baseline documentation, additional recurring life cycle costs were, for the most part, not available, resulting in this subcategory criterion for comprehensiveness being rated as minimally met. The cost estimate does not include any facility sustainment costs, costs for supporting infrastructure, or any operation and maintenance costs for personnel or equipment required to operate the facility. In addition, the cost estimate does not include costs associated with the disposition or retirement of proposed medical center facilities at the end of their life cycles, such as demolition or renovation costs. In addition, DOD officials said costs associated with the disposition of the current LRMC or 86th MDG are not included in the cost estimate. Army officials told us that the facilities that make up the current LRMC will remain under the auspices of the Army. These officials noted that following completion of the replacement medical center, ownership of the current LRMC facilities will transfer to Army Installation and Management Command. Under this arrangement, these facilities will no longer be classified as part of the Military Health System. Therefore, Army officials told us that any costs associated with their disposition should not be included in the overall estimate for the replacement medical center. The 86th MDG clinic consists of 13 separate buildings. The remaining components that make up the current 86th MDG clinic will be transferred to Ramstein Air Base. According to 86th MDG officials, some of these buildings will remain in use following completion of the replacement medical center, while others will be demolished. However, it has not been decided how the remaining clinic buildings will be used; the officials said that this decision will be made by the installation commander at Ramstein Air Base. Since demolition or continued use of the remaining facilities will require DOD funding, these costs should be captured; they will help to show the full cost impact of the replacement medical center project. Further, the cost estimate contains minimal documentation of cost-influencing ground rules and assumptions. DOD officials noted that some of the ground rules and assumptions have been included in the technical baseline documentation. However, we could not find a documented reference or link in the technical baseline documentation we examined to specific cost elements in the DD Form 1391. We also found no evidence of documentation of the risks associated with assumptions, which should be traced to specific cost elements. A life cycle cost estimate should encompass all past (or sunk), present, and future costs for every aspect of the program, regardless of funding source, including all government and contractor costs. Without a full accounting of life cycle costs, management will have difficulty successfully planning program resource requirements and making wise decisions about where to allocate resources. Cost estimates are typically based on limited information and therefore need to be bound by the constraints that make estimating possible. These constraints are usually defined by ground rules and assumptions. However, because such assumptions are best guesses, the risks associated with a change to any of these assumptions must be identified and assessed. Many assumptions profoundly influence cost; the subsequent rejection of even a single assumption could invalidate many aspects of the cost estimate. Unless ground rules and assumptions are clearly documented, a cost estimate will not provide a basis for developing resolutions concerning areas of potential risk. Furthermore, it will not be possible to reconstruct the estimate when the original estimators are no longer available. A well-documented cost estimate is essential if an effective independent review is to ensure that it is valid. However, the documentation DOD provided in support of its cost estimate did not clearly demonstrate how facility requirements had been factored into cost elements. DOD’s cost estimate lacked documentation that described, in detail, the calculations performed and the estimating methodology used to derive the cost for each element of the replacement medical center. None of the documents provided to us included detailed documentation of how DOD developed and refined the cost estimate. A complete documentation of source data would include, for each line item in the cost estimate, a reference to a specific data source or sources (including the document and page number) used as the basis for each square footage and unit cost amount. For example, the cost estimate contains line item estimates for electricity, water/sewer/gas, steam/chilled water distribution, and storm drainage. However, from the documentation provided, it is not possible to determine how these requirements were used to develop cost estimates. The technical baseline description and data in the technical baseline documentation are spread across several documents, including the Updated (FY10) Health Care Requirements Analysis report, Program for Design, and a Planning Charrette Discussion. However, only the Planning Charrette Discussion is referenced in the cost estimate on the DD Form 1391. Moreover, we found minor differences between the square footage requirements in the Program for Design and the cost estimate as described on the DD Form 1391. For example, the Program for Design reports a total gross square footage requirement of 1,293,409 and the cost estimate reports a total requirement of 1,340,731 square feet. It was not possible to compare square footage amounts for various components of the facility because of the differing levels of detail in the Program for Design and the cost estimate. The difference in square footage numbers between the Program for Design and the DD Form 1391 is not documented; therefore, the reasons for the difference are unclear. Since the technical baseline is intended to serve as the basis for developing a cost estimate, it should be discussed in the cost estimate documentation. Cost estimators should provide a briefing to management about how the estimate was constructed—including specific details about the program’s technical characteristics, assumptions, data, cost estimating methodologies, sensitivity, risk, and uncertainty—so management can gain confidence that the estimate is accurate, complete, and high in quality. However, we found no documentation of a detailed review and approval that included the estimate’s technical foundation, ground rules and assumptions, estimating methods, data sources, sensitivity analysis, risks and uncertainty, cost drivers, cost phasing, contingency reserves, or affordability. DOD officials confirmed our conclusion that their cost estimating process was not fully documented. They told us that they had developed supporting facility costs using expert opinion and parametric models; however, these were not listed in the cost estimate. According to DOD officials, DOD guidance does not require detailed documentation as part of the DD Form 1391 cost estimate. Under DOD’s cost methodology, as the project design matures, so does the level of cost analysis. DOD officials asserted that the current cost estimate is appropriate for the current level of design. DOD officials acknowledged that better documentation would have provided more support and information to the various decision makers in the process and would be a good practice to follow. If the cost estimate for the replacement medical center does not include detailed documentation, stakeholders cannot reasonably conclude that it is reliable. In addition, DOD and Congress may not have the information they need to make fully informed decisions about the facility. If a cost estimate does not fully account for life cycle costs, management will have difficulty successfully planning program resource requirements and making wise decisions. Poorly documented cost estimates can cause a program’s credibility to suffer, because the documentation cannot explain the rationale of the methodology or the calculations underlying the cost elements. Further, without clear technical baseline documentation, the cost estimate will not be based on a comprehensive program description and will lack specific information regarding technical and program risks. Unless the cost estimate is fully documented, it cannot be reconciled with an independent cost estimate. DOD officials told us that the replacement medical center will be a fully functioning military treatment facility and not require any additional support facilities to fulfill its mission of providing inpatient and outpatient care. However, in the Strategic Concept of Operations section of the Updated (FY10) Health Care Requirements Analysis report for the replacement medical center, the center is described as being the hub of a medical-services-related campus at Weilerbach Storage Area. The medical campus is expected to be an integrated health care campus that would include hospital and ancillary components as well as outpatient, administrative, and educational components. The other facilities that DOD expects to develop for this campus under separate military projects include warrior transition unit facilities, medical transition detachment housing, and possibly medical troop barracks, among other facilities. At this time, DOD has not determined the additional costs for these facilities, nor has it developed a time frame for their construction. However, Army officials told us that plans for the campus concept are still predecisional and that certain facilities would only be replicated at Weilerbach Storage Area following the expiration of their useful life. For instance, the child care center near the current LRMC will remain there until it requires renovation or reconstruction. At that point, a similar facility would be constructed at Weilerbach Storage Area to replace it, so that staff working at the replacement medical center would not have to leave the area for day care services for their children. The need to replace the outdated LRMC and the 86th MDG clinic to ensure that military servicemembers and their families receive the care they deserve is widely recognized. A critical step toward meeting this goal is the development of a credible and comprehensive assessment of the facility requirements and the cost of the replacement medical center. DOD’s evolving posture in Europe will likely have an impact on the size of the beneficiary population served by the replacement medical center. However, DOD’s current needs assessment contains inconsistencies and errors in how it used patient workload and staffing data to determine facility requirements, such as facility size. In several situations, DOD officials adjusted the criteria being used but failed to document their rationale or need for taking these steps. Moreover, the documentation used to support the determination of the facility requirements does not clearly describe the methodology or calculations used to develop the requirements, and these requirements provided the basis for the cost estimate. DOD officials have indicated that the issues GAO has identified may not have a substantial impact on the size of the replacement medical center, but they have not yet taken specific action to determine what the individual or cumulative effects would be. DOD’s cost estimating methodology substantially met many best practices criteria but was only minimally documented. Congress has required the Secretary of Defense recertify to the Appropriations Committees in writing that the replacement medical center is properly sized and scoped to meet current and projected health care requirements. With this recertification, DOD has an opportunity to determine the impact the proposed posture changes will have on the proposed facility requirements and revise its documentation to provide clear support for how it developed its facility requirements. Without clear documentation of how key requirements were developed and how they factored into the development of facility requirements and cost, DOD cannot fully demonstrate that the proposed replacement medical center will provide adequate health care capacity at the current estimated cost. To ensure that the replacement medical center is appropriately sized to meet the health care needs of beneficiaries in a cost-effective manner, we recommend that as part of the facility’s recertification process, the Secretary of Defense direct the Assistant Secretary of Defense (Health Affairs) to take the following two actions: provide sufficient and clear documentation on how medical planners applied DOD criteria to determine the facility’s requirements, including how and why medical planners made adjustments to the criteria, and correct any calculation errors and show what impact, if any, these errors had on the sizing of the facility. Furthermore, in light of recently announced posture changes and potential adjustments that may need to be made in facility requirements based on correcting identified calculation errors in the original documentation, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense (Health Affairs) to revise the cost estimate for the center, incorporating the best practices outlined in the GAO Cost Estimating and Assessment Guide to reflect these potential posture changes, update it with the revised calculations as part of the recertification more thoroughly document the data, assumptions, calculations, and methodology used to develop specific cost elements. In written comments to a draft of this report, DOD agreed with our conclusions and each of our recommendations. DOD stated that it recently conducted a reassessment of the original $1.2 billion project submitted in the Fiscal Year 2012 President’s Budget request that responds to GAO’s recommendations by utilizing the most current data, including recently announced force structure changes, and providing a documented audit trail of how the size, scope, and cost of the alternatives were developed. Although we are encouraged that DOD has performed a reassessment, DOD did not make it available for our review. DOD’s comments noted that the reassessment will be provided once approved by the Secretary of Defense. As a result, we are unable to confirm at this time that these actions have been taken. Therefore, we believe our recommendations are still appropriate until the reassessment is released and documentation made available. DOD also provided technical and clarifying comments, which we incorporated as appropriate into this report. DOD’s comments are reprinted in their entirety in appendix IV. We are sending copies of this report to the interested congressional committees, Secretary of Defense; the Secretaries of the Army and the Air Force; and the Director of the Office of Management and Budget. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact us at (202) 512-7968 or mctiguej@gao.gov or (202) 512-7114 or draperd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. To describe how DOD officials considered potential changes to DOD’s posture in Europe—and their possible effect on the beneficiary population—when developing facility requirements for the replacement medical center, we obtained available posture planning documentation, including population estimates, and compared it with the beneficiary population data used in planning assumptions for the replacement medical center. We also obtained and reviewed Health Care Requirements Analysis documentation containing beneficiary population information and requested and reviewed more recent updates of this information. We met with officials from the Offices of the Assistant Secretary of Defense (Health Affairs) and the Deputy Under Secretary of Defense (Installations and Environment), U.S. European Command, U.S. Army Europe, and U.S. Air Forces Europe to gain insight into possible scenarios that are being considered for posture changes in Europe. In addition we talked with some of the above individuals and met with officials with the U.S. Army Corps of Engineers Europe and with the U.S. Army Installation Command Europe to discuss how the location for the replacement medical center was selected. We also discussed with some of the officials above the steps they had taken to ensure reasonable accuracy of DOD beneficiary data and determined that the data specifically related to the proposed replacement medical center were sufficiently reliable for the purposes of this report. To assess DOD’s process for determining facility requirements for the replacement medical center to determine to what extent it incorporated quality standards into its design and adhered to DOD guidance, we obtained and reviewed documents detailing the process and any data used in the development of the requirements for the replacement facility. Specifically, we obtained and reviewed documentation used to develop plans for the proposed replacement medical center, such as health care requirements analyses and facility designs. We also reviewed relevant documentation—including checklists—to determine whether DOD included quality and environmentally friendly standards, such as world- class standards and Leadership in Energy and Environmental Design (LEED) green building standards. We also identified key assumptions used to determine facility requirements for the replacement medical center and obtained and reviewed applicable legal and departmental guidance, including DOD instructions and directives, and compared them with the documented assumptions and methods used to develop the facility’s requirements. Additionally, we reviewed their facility requirements documentation for calculation errors and attempted to duplicate their results. We also met with medical and construction planners with the Office of the Assistant Secretary of Defense (Health Affairs), the TRICARE Management Activity, U.S. Army Medical Command, the Landstuhl Regional Medical Center (LRMC), the Air Force Medical Support Agency, and the 86th Medical Group (MDG) to discuss how they determined the size of the replacement medical center. To review the process used to develop the cost estimate for the facility to determine to what extent DOD followed established best practices for developing its cost estimate, we obtained and reviewed available cost estimates for the proposed replacement medical center as well as supporting documentation that was used to determine overall costs. We evaluated this information using GAO’s standardized methodology of cost estimating best practices. For our reporting needs, we collapsed these best practices into four general characteristics for sound cost estimating: accurate, credible, comprehensive, and well documented. We determined the overall assessment by rating whether DOD followed best practices that make up each of the four characteristics. We assigned a number to our ratings: not met = 1, minimally met = 2, partially met =3, substantially met = 4, and met = 5. We took the average of the individual assessment ratings to determine the overall rating for each of the four characteristics. Criteria assessed as not applicable were not given a score and not included in the overall assessment calculation. We met with officials from the Office of the Assistant Secretary of Defense (Health Affairs), the TRICARE Management Activity, Army Medical Command, the Air Force Medical Support Agency, and the U.S. Army Corps of Engineers prior to our evaluation to explain our approach for reviewing DOD’s cost estimating process and to discuss project costs. We also met with these officials to discuss the results of our evaluation. To determine the overall costs of the replacement medical center, we obtained and reviewed planning documents. We also met with officials from LRMC and 86th MDG to discuss what the future plans are for the current facilities following construction of the replacement medical center. We conducted this performance audit from July 2011 through May 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The GAO Cost Estimating and Assessment Guide contains cost estimating best practices that have been identified by GAO and cost experts within organizations throughout the federal government and industry. For our reporting needs, we collapsed these best practices into four general characteristics of sound cost estimating: accuracy, credibility, comprehensiveness, and well documented. Table 5 provides detailed information on each of these cost estimating characteristics. In addition to the contacts named above, Laura Durland, Assistant Director; Marcia Mann, Assistant Director; Josh Margraf; Jeff Mayhew; and Richard Meeks made key contributions to this report. Joanne Landesman assisted in the message and report development, Amie Steele assisted in developing the report’s tables and graphics, Jennifer Echard and Dave Brown provided methodological support, and Michael Willems provided legal support.","Landstuhl Regional Medical Center (LRMC) is DOD’s only tertiary medical center in Europe that provides specialized care for servicemembers, retirees, and their dependents. Wounded servicemembers requiring critical care are medically evacuated from overseas operations to the 86th Medical Group clinic at Ramstein Air Base to receive stabilization care before being transported to LRMC for intensive care. According to DOD, both facilities were constructed in the 1950s and are undersized to meet current and projected workload requirements. DOD plans to consolidate both facilities into a single medical center at an estimated cost of $1.2 billion. In this report, GAO (1) describes how DOD considered changes in posture and the beneficiary population when developing facility requirements, (2) assesses DOD’s process for determining facility requirements, and (3) reviews DOD’s process to develop the facility’s cost estimate. GAO examined posture planning documentation, beneficiary demographic data, plans for the replacement medical center, and relevant DOD guidance, as well as interviewed relevant DOD officials. Department of Defense (DOD) officials considered current beneficiary population data, contingency operations, and most of the expected changes in troop strength when planning for the replacement medical center. However, recently announced posture changes in January 2012 have yet to be assessed for their impact on the facility. DOD estimates that the replacement medical center will provide health care for nearly 250,000 beneficiaries. A majority of those who are expected to receive health care from the center come from within a 55-mile radius of the facility. DOD officials told us that because the replacement medical center was designed for peacetime operations—with the capacity to expand to meet the needs of contingency operations—reductions in ongoing contingency operations in Afghanistan would not have an impact on facility requirements. At the time of this review, DOD officials said they were in the process of assessing proposed changes in posture to better understand their possible impact on the sizing of the replacement medical center. DOD officials incorporated patient quality of care standards as well as environmentally friendly design elements in determining facility requirements for the replacement medical center. DOD also determined the size of the facility based on its projected patient workload. Internal control standards require the creation and maintenance of adequate documentation, which should be clear and readily available for examination to inform decision making. However, GAO’s review of the documentation DOD provided in support of its facility requirements showed (1) inconsistencies in how DOD applied projected patient workload data and planning criteria to determine the appropriate size for individual medical departments, (2) some areas where the documentation did not clearly demonstrate how planners applied criteria to generate requirements, and (3) calculation errors throughout. Without clear documentation of key analyses—including information on how adjustments to facility requirements were made—and without correct calculations, stakeholders and decision makers lack reasonable assurances that the replacement medical center will be appropriately sized to meet the needs of the expected beneficiary population in Europe. DOD’s process for developing the approximately $1.2 billion cost estimate for the replacement medical center was substantially consistent with many cost estimating best practices, such as cross-checking major cost elements to confirm similar results. However, DOD minimally documented the data sources, calculations, and estimating methodologies it used in developing the cost estimate. Additionally, DOD anticipates that the new facility will become the hub of a larger medical-services-related campus, for which neither cost estimates nor time frames have yet been developed. Without a cost estimate for the facility that includes detailed documentation, DOD cannot fully demonstrate that the proposed replacement medical center will provide adequate health care capacity at the current estimated cost. Further, DOD and Congress may not have the information they need to make fully informed decisions about the facility. GAO recommends that DOD provide clear and thorough documentation of how it determined the facility’s size and cost estimate, correct any calculation errors, and update its cost estimate to reflect these corrections and recent posture changes. In commenting on a draft of this report, DOD concurred with GAO’s recommendations and stated that it has conducted a reassessment of the project that will be released once approved by the Secretary of Defense.",govreport
"Estimates of the size of the alien population subject to removal vary. A report from the Pew Research Center estimated the population of unauthorized aliens in the United States to be approximately 12 million as of March 2006. According to DHS, the population of aliens subject to removal from the United States has grown in recent years. DHS’s Office of Immigration Statistics estimated that the population of aliens subject to removal has increased by half a million from January 2005 to January 2006. Additionally, DHS has estimated that the removable alien population grew by 24 percent from 8.5 million in January of 2000 to 10.5 million in January of 2005. Aliens who are in violation of immigration laws are subject to removal from the United States. Over 100 violations of immigration law can serve as the basis for removal from the United States, including, among other things, criminal activity, health reasons (such as having a communicable disease), previous removal from the United States, and lack of proper documentation. ICE investigations resulted in 102,034 apprehensions, or about 8 percent of the approximately 1.3 million DHS apprehensions in 2005. Four main categories constituted the basis for aliens removed by DHS in 2005: (1) aliens entering without inspection, by, for example, illegally crossing the border where there is no formal U.S. port of entry; (2) aliens attempting to enter the United States without proper documents or through fraud, at U.S. ports of entry; (3) aliens with criminal convictions or believed to have engaged in certain criminal activities, such as terrorist activities or drug trafficking; and (4) aliens who are in violation of their terms of entry (e.g., expired visa). Our review of ICE policies and procedures, along with interviews at ICE field offices, showed that officers exercise discretion throughout various phases of the alien apprehension and removal process, but the initial phases of the process—initiating removals, apprehending aliens, issuing removal documents and detaining aliens—involve the most discretion. Officers in OI and DRO field offices told us that they exercise discretion for aliens with humanitarian issues and aliens who are not investigation targets on a case-by-case basis with guidance and approval from supervisors. Officers told us they typically encounter (1) aliens who are the target of an investigation and (2) aliens who are not the target of an investigation but who are encountered through the course of an operation and are subject to removal. While officers told us that discretion with regard to aliens who are fugitives, criminals, and other investigation targets is limited by clearly prescribed policies and procedures, they told us that they have more latitude to exercise discretion when they encounter aliens who are not fugitives or criminals and are not targets of ICE investigations, particularly when encountering aliens with humanitarian issues. The alien apprehension and removal process encompasses six phases: (1) initial encounter, (2) apprehension, (3) charging, (4) detention, (5) removal proceedings, and (6) final removal. Our review of federal regulations, ICE policies, guidance, and interviews showed the parts of the removal process from the time officers encounter aliens as part of an operation to the time they determine whether to detain an alien involve the most discretion. During removal proceedings and final removal, ICE attorneys and DRO officers can exercise discretion only in clearly delineated situations prescribed by ICE policies and statutory and regulatory requirements. Officers told us that during the initial phases of the apprehension and removal process, they encounter situations that require them to pursue alternate ways to initiate removals, in lieu of apprehending aliens. During encounters with aliens, officers told us that they decide how to exercise discretion for aliens on a case-by-case basis with input from supervisors or experienced officers. Specifically, officers told us that they exercise discretion when they encounter aliens who (1) present humanitarian concerns such as medical issues or being the sole caregiver for minor children or (2) are not the primary target of their investigations. DRO and OI officers told us that their primary goal is to initiate removal proceedings for any alien they encounter who is subject to removal. However, officers told us that in some instances, they might decide not to pursue any action against an alien who they suspect to be removable. Officers at two OI and one DRO field office told us that, in some instances, they are unable to initiate removal action against every alien they encounter during the course of an operation. Officers noted that several factors—such as the availability of detention space, travel time to an alien’s location, and competing enforcement priorities—affect their decisions to initiate removal action against an alien. Officers at one of the seven OI field offices we visited also told us that because of limited resources they have to make trade-offs between dedicating resources to aliens who pose a threat to public safety and those who do not—that is, noncriminal aliens—which in some instances result in decisions to not initiate removal action against noncriminal aliens. Our review of DHS and ICE guidance showed that officers’ ability to exercise discretion is limited for aliens who are investigation targets, such as criminal aliens and fugitive aliens who have ignored a final removal order. Discretion for apprehending these aliens is limited due to clearly prescribed policies, and procedures—such as requirements under the INA to detain terrorists or certain criminals—governing the handling of these aliens. By contrast, officers at all seven DRO and seven OI field offices we visited told us that they have discretion to process and apprehend aliens who are not investigation targets or aliens who present humanitarian circumstances. In such circumstances, officers told us that they can exercise discretion by deciding to (1) apprehend an alien and transport the alien to an ICE facility for processing, (2) issue the alien an NTA by mail, or (3) schedule an appointment for the alien to be processed at an ICE facility at a later date. For example, in looking for a criminal alien who is the target of an investigation, a fugitive operations team may encounter a friend or relative of the targeted alien—who is also removable—but not the primary target of an ICE investigation. If the friend or relative has a humanitarian circumstance, like being the primary caregiver for small children, the officers can decide to not apprehend the friend or relative and opt for processing at a later time after reviewing the circumstances of the case and determining that no other child care option is available at the time. In such instances, ICE headquarters officials told us that officers are to confirm child welfare claims made by an alien and determine whether other child care arrangements can be made. Headquarters officials also told us that aliens do not always divulge that they are the sole caretakers of children but explained that if ICE agents became aware of an alien’s child welfare responsibility, agents must take steps to ensure that the child or children are not left unattended. In addition, officers at two OI offices and one DRO office told us that in some instances, such as when aliens are sole caretakers for minor children or are ill, they will schedule appointments for aliens who are not investigation targets to process them at a later date. Officers at five of the seven OI field offices and two of the seven DRO offices we visited also told us that they will mail an NTA—as an alternative to apprehension—to aliens who present humanitarian issues such as medical conditions or child welfare issues. At another OI field office, officers told us that when determining whether to apprehend aliens or use an alternative to apprehension—for aliens who are not investigation targets—they also consider manpower availability. Our review of ICE guidance and procedures showed that most of an officer’s discretion in the charging phase relates to the decision to grant voluntary departure. Officers told us that when not statutorily prohibited from granting voluntary departure, they have some discretion in determining whether to issue an NTA and thus initiate formal removal proceedings or grant voluntary departure in lieu of initiating formal removal proceedings, which typically results in a hearing before an immigration judge. Officers told us that they may consider factors like humanitarian concerns and ICE priorities when exercising discretion to grant voluntary departure. On the basis of our review of ICE data, we noted significant variation in the use of voluntary departure across field offices. Our review of OI apprehension data also showed that three OI field offices near the U.S. southwestern border initiated a relatively higher number of voluntary departures (equal or greater than the number of NTAs issued). ICE headquarters officials noted that officers at field offices near the U.S. southwestern border employ voluntary departure generally because of their proximity to the U.S.-Mexico border, which enables them to easily transport Mexican nationals to Mexico. Figure 1 illustrates the number of NTAs and voluntary departure issued by OI field offices. Our review of procedures also showed that if detention is not mandated by the INA, officers have discretion to determine if an alien will be detained or released pending the alien’s immigration court hearing. When making this determination, ICE guidance instructs officers to consider a number of factors, such as humanitarian issues, flight risk, availability of detention space, and whether the alien is a threat to the community. Officers at two DRO field offices we visited told us that they exercise discretion to release aliens from custody if appropriate facilities are not available or if detention space is needed for aliens who pose a greater threat to public safety. At one OI field office, officers provided an example of an operation where they released two women and two children on their own recognizance because of the lack of appropriate detention space to house women and children. Officers at another DRO field office also noted that detaining women and juveniles can be challenging because of limited space to accommodate them. Detention determinations made by officers can be reexamined by immigration judges upon an alien’s request. Our review of ICE policy and DRO’s field operational manual showed that ICE attorneys—who generally enter the process once proceedings have begun—and officers have less discretion in the later phases of the apprehension and removal process. Once an alien’s case arrives at the removal proceedings phase and is being reviewed by ICE attorneys, we found that the use of discretion at this stage is limited by clear policy and guidelines. Our review of ICE policy and interviews with attorneys at 5 of 7 Chief Counsel Offices showed that most aliens have few alternatives to appearing before immigration court after entering the removal proceeding phase. Circumstances in which ICE might not pursue proceedings include a legally insufficient NTA; an alien’s eligibility for an immigration benefit, such as lawful permanent residency; and an alien’s serving as a witness in a criminal investigation or prosecution. In these specific cases, ICE attorneys can exercise discretion not to pursue proceedings by asking the immigration court to terminate removal proceedings if the NTA has been filed with the court. ICE OPLA guidance also permits ICE attorneys to take steps to resolve a case in immigration court for purposes of judicial economy, efficiency of process, or to promote justice. Examples in the guidance include cases involving sympathetic humanitarian circumstances like an alien with a U.S. citizen child with a serious medical condition or disability, or an alien or close family member who is undergoing treatment for a potentially life-threatening disease. ICE policy states that DRO may exercise discretion and grant some form of relief to the alien, such as a stay of removal and deferred action at the final phase of the process. A stay of removal is specifically authorized by statute and constitutes a decision that removal of an alien should not immediately proceed. Deferred action gives a case a lower removal priority, but is not an entitlement for the alien to remain in the United States. While some aliens could be granted a stay or deferred action by DRO field office managers, DRO officers told us that DRO seeks to execute removal orders in the vast majority of cases. DRO officers in field offices told us that they could recall only a handful of cases when DRO officers did not execute a removal order after it was issued by an immigration judge. Supervisors in one DRO field office recalled a case in which a stay was granted to an aggravated felon who had a serious medical condition. Officers at DRO and OI field offices who are responsible for apprehending, charging, and detaining removable aliens are to rely on formal and on-the- job training, guidance provided by supervisors, and guidance provided in field operational manuals to inform their decision making regarding alien apprehensions and removals. Consistent with internal control standards, which call for training to be aimed at developing and retaining employee skill levels to achieve changing organizational needs, ICE has updated some of the training it offers to officers responsible for making alien apprehension and removal decisions. Some of the updated training includes, among other things, implementing worksite enforcement training, supervisory training for OI supervisors, and Spanish language training for newly hired DRO officers. These updates have the potential to provide critical information to officers and supervisors to better support their decision making. However, ICE guidance, including ICE’s field operational manuals and ICE memorandums, on the exercise of discretion during the alien apprehension and removal process does not serve to fully support officer decision making in cases involving humanitarian issues and aliens who are not primary targets of ICE investigations. For example, ICE has not completed efforts to provide officers with complete and up to date guidance to reflect expanded worksite and fugitive operations enforcement efforts. ICE headquarters officials told us that they do not have a time frame for completing efforts to update available guidance in field operational manuals. In addition, although Chief Counsel Offices provide information regarding legal developments to DRO and OI officers to guide their decision making, ICE does not have a mechanism to ensure that such information is disseminated consistently to officers across field offices. The lack of comprehensive guidance and a mechanism by which to help ensure that officers receive consistent information regarding legal developments puts ICE officers at risk of taking actions that are not appropriate exercises of discretion and do not support the agency’s operational objectives. Internal control standards state that training should be aimed at developing and retaining employee skill levels to meet changing organizational needs. Officers at DRO and OI field offices who are responsible for apprehending, charging, and detaining removable aliens rely on formal and on-the-job training and guidance provided by supervisors to inform their decision making regarding alien apprehensions and removals. ICE has recently begun undertaking reviews and revisions of training that are consistent with these internal controls by updating and revising existing training curricula and implementing new training curricula for OI and DRO officers to provide critical information to officers and supervisors to better inform their decision making. These actions are important steps for providing officers with relevant information to inform their decision making. In early 2007, OI instituted a 2-week worksite enforcement training course geared toward informing ICE officers regarding criminal investigation techniques and procedures, which also provides information on the exercise of discretion regarding aliens who present humanitarian issues. OI headquarters officials identified worksite enforcement as a training need, since these operations are expanding, and an OI headquarters official told us that most OI officers had not participated in major worksite enforcement operations since 1998 and that many of the officers who participate are temporarily assigned to the operation from other duties or locations. Because of expanded worksite enforcement operations, officials told us that OI instituted worksite enforcement training, which will be offered to 100 OI officers per year. Headquarters officials told us that resource constraints preclude ICE from offering worksite enforcement training to all officers. In addition to worksite enforcement training, OI officials told us that they are also in the process of instituting additional changes to training curricula that could better support officer decision making: OI officials told us that they developed a 3-week training course for first-line supervisors, with 1 week of the course designed to provide information on legal issues pertaining to removal dispositions, such as instances when to issue an NTA or grant voluntary departure. An OI official told us that OI is developing a 3-week refresher training course for experienced OI officers, to reinforce these officers’ knowledge of alien apprehension and removal operations. According to OI’s chief of training, this course should be implemented by the second quarter of fiscal year 2008. OI officials have revised an “On the Job” training manual that tracks tasks that new officers must complete in their first 18 months on the job. According to an OI training official, by completing the tasks outlined in the manual, officers should have a full understanding of the requirements for processing aliens, which include exercising discretion throughout the apprehension and removal process (e.g., whether to immediately apprehend the alien or to mail an NTA). Like OI officials, DRO officials have also taken steps to strengthen training for DRO officers. In April 2007, DRO added a Spanish language course to its basic training curriculum. According to DRO headquarters training officials, this training will better equip officers to communicate with aliens and thus help ensure that officers make appropriate decisions about how to exercise discretion for aliens. In addition, DRO is developing a 3-week refresher training for experienced DRO officers designed to provide officers with skills, tactics and legal updates pertaining to alien apprehension and removal operations and plans to implement this course in October 2008. DRO headquarters officials also told us that they will institute a 2-year “On the Job” training program in September 2007. According to officials, this program is to provide newly appointed officers with additional training on immigration laws, competencies, and tasks related to their jobs. While the recent changes to the OI and DRO training curricula are positive steps in better aligning ICE training with operations, it is too soon for us to assess the effectiveness of these efforts. According to internal control standards, management is responsible for developing and documenting the detailed policies, procedures, and practices to ensure that they are an integral part of operations. DRO and OI officers generally rely on (1) OI and DRO field operational manuals; (2) DHS and ICE memorandums; and (3) an OI-developed worksite enforcement operational guidebook for guidance and policies to perform their duties, including making decisions regarding alien apprehensions and removals. However, ICE guidance to instruct officer decision making in cases involving humanitarian issues and aliens who are not primary targets of ICE investigations during the alien apprehension and removal process is not comprehensive and has not been updated by headquarters officials to reflect ICE’s expanded worksite and fugitive operations. In addition, although officers exercise discretion when deciding whether or not to take action to initiate the removal process, ICE does not have guidance on officers’ exercise of discretion on who to stop, question, and arrest when initiating the removal process. Without comprehensive policies, procedures, and practices, ICE lacks assurance that management directives will be conducted as intended and that ICE officers have the appropriate tools to fully inform their exercise of discretion. ICE’s OI and DRO field operational manuals were created by ICE’s legacy agency—Immigration and Naturalization Service (INS), which was reorganized under the newly formed Department of Homeland Security in March of 2003. Both of these manuals, which are largely unchanged from the guidance developed and employed by INS, are currently undergoing revisions. Our review of these manuals shows that they do not offer comprehensive and updated guidance to instruct officers on the exercise of discretion in cases involving aliens with humanitarian issues and aliens who are not targets of ICE investigations. For example, OI’s field operational manual offers some guidance on options for addressing aliens with caregiver issues who are encountered during worksite operations, such as ensuring that an alien’s dependents receive timely and appropriate care. However, the guidance does not include, for example, provisions for aliens with medical conditions. OI headquarters officials told us that they are in the process of revising OI’s field operational manual but have not yet updated the sections corresponding to alien apprehensions and removals. With respect to DRO’s field operational manual, some guidance is available to help officers decide whether to detain aliens pending their immigration hearings, but it does not clarify how officers should exercise discretion to determine detention for nonmandatory detention cases, especially for aliens with humanitarian issues or aliens who are not targets of ICE investigations. DRO headquarters officials told us that they are revising a chapter in the manual on fugitive operations but the revisions are not yet available to DRO officers in the field. For both the OI manual and the fugitive operations chapter in the DRO manual, headquarters officials told us that they did not yet know if the revisions would include guidance on the use of discretion for aliens with humanitarian issues or aliens who are not the targets of ICE investigations. Moreover, OI and DRO officials could not provide a time frame for when the revisions will be completed. The various ICE organizational units with removal responsibilities have issued some guidance to help guide their own officers’ and attorneys’ exercise of discretion for aliens with humanitarian issues, but the guidance either is not comprehensive with regard to the various circumstances the officers and attorneys may encounter or does not apply to officers who have the authority to initiate removal proceedings. A memo issued in 2006 by DRO to its field offices, outlines severe medical illnesses as a basis for exercising discretion when deciding whether to detain aliens who are not subject to mandatory detention. While this memo provides important guidance for exercising discretion during the detention phase for aliens with medical issues, it does not address child welfare and primary caretaker issues. In addition, a 2005 memo issued by OPLA permits ICE attorneys to take steps not to pursue proceedings by asking the immigration court to terminate removal proceedings if the NTA has been filed with the court. Examples in the guidance include cases involving sympathetic humanitarian circumstances like an alien with a U.S. citizen child with a serious medical condition or disability, or an alien or close family member who is undergoing treatment for a potentially life- threatening disease. However, this memo is directed at Chief Counsel attorneys, who do not have the authority to initiate removal proceedings. Instead, only supervisory DRO and OI officers can initiate removals, and as a result the memo is not clearly applicable to them. In addition, DHS, OI, DRO, and OPLA have also issued their own separate memorandums that guide officers’ actions at different points of the apprehension and removal process. Each memorandum is generally directed to officers and attorneys under the respective ICE unit that issues it, resulting in a number of memos distributed via a number of different mechanisms within each ICE unit. These memorandums do not offer comprehensive guidance on exercising discretion for aliens with humanitarian circumstances or aliens who are not the primary targets of ICE investigations. For example, OI issued a memo in May 2006, which instructs officers to schedule appointments as a last resort for juvenile aliens, elderly aliens, or aliens with health conditions to be processed at a later date, rather than apprehend these aliens at the time of the encounter or mail them an NTA. This guidance addresses important humanitarian issues, but it is only directed to ICE officers who are responding to calls from local law enforcement agencies. Furthermore, it does not define or fully delineate circumstances that might constitute “last resort.” Another memo issued by DHS in October 2004 provides officers and supervisors with flexibility on detaining aliens (who are not subject to mandatory detention) depending on the circumstances of the case, such as available bed space. However, this memo does not offer specific guidance on determining detention for aliens with humanitarian circumstances or aliens who are not primary targets of ICE investigations. In addition to ICE field operational manuals and various memorandums, an OI headquarters official told us that ICE has recently instituted a worksite enforcement operational guidebook to assist in the proper planning, execution, and reporting of worksite enforcement operations. Our review of this guidebook showed that it discusses, among other things, operational planning and coordination, including instructions on reporting requirements at the arrest site and working with other ICE units, like DRO. However, although ICE plans to regularly update its worksite enforcement operational guidebook based on lessons learned from past worksite operations, the current guidebook that ICE provided us in August 2007 does not include any guidance about how officers should factor humanitarian issues into their decision making during the apprehension and removal process. Finally, in our review of the worksite enforcement operational guidebook, we did not find guidance to inform officers’ exercise of discretion on whom to stop, question, and arrest when initiating the removal process—guidance that was also lacking in the various operational manuals and memorandums. In our review of documents from 26 OI field offices, we also noted that only 3 of these field offices have developed local guidance to guide officers’ discretion in the initial phases of the apprehension and removal process. However, the local guidance we reviewed is not comprehensive because the 3 offices do not have guidance that covers the use of discretion throughout the phases of the alien apprehension and removal process when officers can exercise discretion. For example, 1 of the 3 offices has guidance on scheduling appointments for future processing for aliens with humanitarian concerns. Another office has guidance that covers factors to consider when exercising discretion for cases involving humanitarian issues as well as guidance on deciding whether to detain aliens who are not investigation targets. ICE has recently expanded its worksite enforcement and fugitive operations, increasing the probability that officers in the field will have to exercise discretion in their encounters with aliens who present humanitarian issues or aliens who were not the targets of their investigations—particularly noncriminal aliens. With these expanded operations, the need for up to date and comprehensive guidance to reduce the risk of improper decision making becomes increasingly important. According to ICE data, in fiscal year 2006, ICE made, through its worksite enforcement operations, 716 criminal arrests, which include aliens subject to removal who are charged with criminal violations, and 3,667 administrative arrests, which refer to alien workers who are unlawfully present in the United States but have not been charged with criminal violations. These data show a sharp increase from fiscal year 2005, as noted in figure 2. Through July 2007 of fiscal year 2007, ICE made 742 criminal arrests and 3,651 administrative arrests in its worksite operations; these arrests surpassed the combined arrests for worksite enforcement operations from fiscal year 2002 to fiscal year 2005. According to a senior ICE headquarters official, from fiscal year 2003 through the third quarter of fiscal year 2007, ICE has also experienced over a six-fold increase in the number of new officers dedicated to worksite enforcement operations, many of whom are temporarily assigned to worksite operations. ICE reported that it has also expanded fugitive operations and plans to increase the number of fugitive operation teams from 18 in 2006 to 75 by the end of fiscal year 2007. Annual performance goals for each of these teams call for 1,000 apprehensions per team. As of April 27, 2007, ICE officers had arrested 17,321 aliens through its fugitive operation teams in fiscal year 2007, a 118 percent increase in arrests since fiscal year 2005. ICE’s expanding worksite enforcement and fugitive operations both present officers with circumstances that could require the use of discretion, specifically cases that involve aliens with humanitarian issues or aliens who are not ICE targets. Expanded fugitive operations may increase the number of encounters that officers have with removable aliens who are not the primary targets or priorities of ICE investigations. For cases involving these aliens, additional guidance could provide ICE with better assurance that its officers are equipped to exercise discretion and prioritize enforcement activities appropriately. In large-scale worksite enforcement operations, officers have encountered numerous aliens who have presented humanitarian issues. For this type of case, comprehensive guidance on how to weigh relevant aspects of aliens’ circumstances or humanitarian factors would provide ICE with enhanced assurance that officers are best equipped to appropriately determine whether aliens should be apprehended, how they should be charged, and whether they should be detained. A recent large-scale worksite enforcement operation in Massachusetts highlights the importance of having comprehensive and up to date guidance to help inform officers’ decision making when they encounter aliens with humanitarian issues. In this operation, ICE officers encountered aliens who had humanitarian issues, including aliens who were primary caretakers of children and had to assess the totality of the circumstances in numerous cases, in real time, to decide how to handle each case in coordination with other entities, such as social service agencies, state government, and local law enforcement. ICE issued a fact sheet about this operation on its external Web site that discussed difficulties in coordinating and communicating with these entities on issues of operational plans, detention space, access to detainees, and information about arrestees. The fact sheet noted that ICE arrested 362 removable aliens and transported over 200 of these aliens to detention facilities in Texas due to a lack of bed space in Massachusetts. In addition, 60 aliens were initially released during administrative processing at the time of the operation for child welfare or family health reasons, and additional aliens were released later for these reasons. According to ICE officials, another concern ICE officers face as they attempt to exercise discretion is that these officers encounter aliens who sometimes do not divulge their status as sole caregivers for children. Complex environments like the one described here demonstrate the need for up to date and comprehensive guidance that supports ICE’s operational objectives and use government resources in the most effective and efficient manner. Internal control standards state that effective communications should occur in a broad sense with information flowing down, across, and up the organization. This includes communicating information in a form and within a time frame that enables officials in carrying out their duties. In carrying out their duties, ICE officers require information on relevant legal developments—such as court decisions modifying existing interpretations of immigration laws—to help inform their decision making regarding removal dispositions (e.g., NTA or voluntary departure). However, ICE has not instituted a mechanism to ensure that legal developments are consistently disseminated to ICE officers across all field offices. For example, officers at only two DRO field offices and one OI field office we visited received current information on legal developments from their Chief Counsel Office, which is responsible for disseminating this information, while others did not receive such information at all or did not receive it when they needed it for case processing. In addition, officers at two of the seven OI field offices we visited expressed a need for more information regarding legal developments to better inform their decision making regarding removal dispositions. Officers at one OI field office told us that there are occasions when they do not receive the necessary legal guidance until they have already processed a case. Chief Counsel offices independently decide when and what information to disseminate regarding legal developments. Officers at seven DRO and six OI field offices we visited told us that they can consult Chief Counsel attorneys to seek guidance on legal issues. Although relying on Chief Counsel field offices to disseminate information and advise officers on legal issues can help officers when making decisions, without a formalized mechanism to consistently disseminate information that officers can use when they process cases, officers might not receive information necessary to make sound removal decisions that comply with the most recent legal developments. ICE has two control mechanisms in place to monitor its removal operations—established supervisory review practices and procedures and an inspection program. However, ICE does not have a mechanism to allow it to analyze information specific to the exercise of discretion. Internal control standards advise agencies to design internal controls to ensure that ongoing monitoring occurs in the course of normal operations. This monitoring includes regular management and supervisory activities, comparisons, reconciliations, and other actions people take in performing their duties. ICE relies primarily on the judgment of experienced field officers and supervisory reviews to provide assurance that officers’ decision making complies with established policies and procedures. In addition to supervisory reviews, ICE has recently taken steps to institute an inspection program designed to oversee field offices’ compliance with established policies and procedures. However, neither supervisory reviews nor ICE’s newly instituted inspection program offers a mechanism for management to collect and analyze information specific to officers’ exercise of discretion in alien apprehension and removal decisions across all field offices. The ability to collect and analyze data about the exercise of discretion across field offices could provide ICE with additional assurance that it can identify and respond to areas that may require some type of corrective action. Moreover, without these data and analyses, ICE is not positioned to compile and communicate lessons learned to help support officers’ decision making capacity. One way for agencies to help ensure that ongoing monitoring occurs in the course of normal operations is to design appropriate supervision to help provide oversight of internal controls. Consistent with this activity, ICE policy requires supervisory review of officer decisions on a case-by-case basis to ensure that officers’ decisions comply with established policies and procedures for alien apprehension and removal decisions. ICE officers are to document the specific immigration charges lodged against an alien, as well as the custody decision made by officers, on a standardized form. Throughout the alien apprehension and removal process, supervisors are responsible for reviewing and authorizing decisions made by officers. For example, when officers are determining whether to detain or release an alien from custody, ICE memorandums state that supervisors must approve an officer’s decision. In addition, according to ICE headquarters officials, supervisors at both DRO and OI field offices are to review officers’ apprehension and removal decisions to ensure that officers use the most appropriate removal disposition and to ensure that officers’ decisions comply with legal requirements, policies, and procedures. Headquarters officials also told us that supervisors are responsible for approving and signing off on decisions to grant voluntary departure and issue NTAs and other removal dispositions issued by officers. Officials at all seven DRO and seven OI field offices we visited also told us that supervisors are responsible for reviewing instances when officers have exercised discretion, such as when encountering aliens with humanitarian issues. Officers at field offices we visited also noted that they consult with experienced officers or supervisors when making these decisions and that operations are typically conducted by teams where officers’ collective knowledge is used to make discretionary decisions. Table 1 outlines the types of reviews conducted by experienced officers, supervisors, and managers at DRO and OI field offices. ICE’s Office of Professional Responsibility instituted an inspection program for OI field offices in July 2007, consistent with internal control standards for monitoring operations by designing mechanisms for identifying and communicating deficiencies to managers. According to the headquarters official responsible for overseeing the inspection program, ICE plans to implement a similar inspection program for DRO field offices in the fall of 2007. According to this official, the inspection program is designed to determine whether field offices are complying with the established policies and procedures selected for review. The inspection program consists of two areas: (1) an annual self-inspection process under which all field offices must respond to a Web-based questionnaire covering operational activities and (2) a field inspection program under which all OI and DRO field offices are to be inspected by headquarters officials at least once during a 4-year cycle. In instances where field offices are not compliant, field officials must develop a plan of action to address discrepancies that are identified. For OI offices, examples of areas that are to be reviewed include procedures for processing aliens, as well as methods for ensuring that operational plans are prepared and approved before arrests are conducted. For DRO field offices, areas that are to be reviewed, among other things, include compliance with procedures to ensure that aliens are served with a copy of an NTA, as well as procedures for completing and obtaining approval for operational plans in advance of fugitive operations. Our review of the self-inspection questionnaires and our discussion with the program manager showed that the inspection program is not designed to analyze information on officer decision making regarding alien apprehensions and removals. An important purpose of internal control monitoring is to allow agencies to assess the quality of performance over time. Specifically, internal control standards recommend that managers compare trends in actual performance to expected results throughout the organization in order to identify any areas that may require corrective action to help ensure operations support operational objectives. Although, ICE has some controls in place to monitor operations related to alien apprehensions and removals, neither supervisory review nor its inspection program offer managers information to specifically analyze officer decision making for trends across the 75 OI, DRO and Chief Counsel field offices that might indicate the need for a corrective action, such as additional training or clarification of procedures, or that might reveal best practices for achieving desired outcomes. ICE does not have a mechanism for collecting and analyzing data on officers’ exercise of discretion in determining what removal processing option to employ, such as officers’ basis for scheduling an appointment to process an alien at a later date for aliens who present humanitarian circumstances or the frequency of such actions. Additionally, ICE does not collect and analyze the actions taken by officers (e.g., scheduling an appointment, or mailing an NTA) in addressing aliens presenting humanitarian issues. Such information could be used by managers to identify trends in actions taken by officers to address aliens with humanitarian issues that could in turn be used to make any necessary modifications to guidance, policies or training. ICE policy outlines a mechanism to capture and analyze information regarding officers’ discretionary decisions made as part of worksite enforcement operations, but this inspection mechanism has not been used consistently. ICE officials told us that, as part of worksite enforcement operations, its officers make decisions in the field on a case-by-case basis in a time-constrained environment. In recent worksite operations, officers have apprehended thousands of aliens in operations conducted in various cities across the nation. Our review of ICE’s worksite enforcement training curriculum and OI’s field operational manual showed that ICE policy outlines a key internal control—after-action reports—which are to capture, among other things, information on significant or unusual incidents or circumstances that may have occurred during an operation; a listing of the number of aliens arrested, reasons for the release of detained or arrested aliens, and any allegations of civil rights violations or other complaints. However, a senior headquarters official responsible for overseeing OI’s worksite enforcement division told us that although after- action reports are still outlined as requirements in OI’s training curriculum (dated April 2007) and in the OI field operational manual, ICE has eliminated this requirement. According to OI headquarters officials, prior to the reporting requirement change, after-action reports had only been prepared for one worksite enforcement operation, which was conducted in 2006, since ICE was created. The senior headquarters official told us that, in lieu of after action reports, OI intends to collect information on lessons learned as part of its worksite enforcement guidebook. Our review of the guidebook provided to us by ICE showed that the guidebook did not yet reflect lessons learned. The scale and complexity of recent ICE worksite operations, such as an operation in Massachusetts involving difficulties coordinating and communicating with social service agencies, state government, and local law enforcement on issues of operational plans, detention space, access to detainees, and information about aliens who were apprehended, highlight the need for ICE to be able to learn from past experiences, thereby providing ICE officers with a richer knowledge base to inform their decision making under difficult circumstances. Moreover, since ICE has experienced a more than six-fold increase (between fiscal year 2003 and the third quarter of fiscal year 2007) in the number of new officers participating in worksite enforcement operations, more officers are making decisions and exercising discretion in these complex environments. Having a mechanism that provides ICE with information regarding its enforcement operations across all field offices would help identify areas needing corrective action regarding officer decision making. For example, having comprehensive information on factors considered by officers and actions taken by them (e.g., scheduling an appointment for later processing, or mailing an NTA) to address aliens with humanitarian issues could lead to revised policies and procedures. In addition, such a mechanism could help ICE protect its credibility and integrity against allegations of alien mistreatment by having readily available information to ensure that officer decision making complies with established policies and procedures. Without a mechanism to catalog and collect information— agencywide—on the exercise of discretion, ICE managers cannot analyze trends to provide additional assurance that officer decision making complies with established ICE policies and operational objectives, nor is ICE positioned to refine operational approaches based on a review of best practices across field offices. ICE relies on two databases to document officers’ decisions regarding alien apprehensions: (1) the Enforcement Case Tracking System (ENFORCE), which is primarily used to collect alien biographical information and removal option employed, such as voluntary departure or an NTA, and (2) the Deportable Alien Control System (DACS), which is used to track the location of detained aliens, as well as the status of aliens’ immigration court hearings. However, headquarters officials told us that the details of discretionary decisions (e.g., factors considered in deciding whether to apprehend an alien or detain an alien, based on humanitarian reasons) are not recorded in ENFORCE and DACS. Officials explained that officers may record information explaining their decisions in each of these systems’ narrative sections. However, according to officials, inputting this information is not a requirement, and information recorded by officers in the narrative sections of these databases is not analyzed by field managers or headquarters officials. Headquarters officials responsible for overseeing ENFORCE and DACS told us that ICE plans to update these systems to provide other capabilities. A headquarters official responsible for overseeing ENFORCE told us that ICE plans to integrate aspects of ENFORCE with another system—the Treasury Enforcement Communications System (TECS)— used by officers to track criminal investigations. According to this official, the proposed changes will allow officers to more easily access information pertaining to apprehended aliens and associated criminal investigations. In addition, a headquarters official responsible for overseeing the DACS system told us that ICE is piloting a program to merge DACS with ENFORCE, with the goal of creating one case management system for collecting information on alien apprehensions and for tracking the progress of alien removal proceedings. However, it is unclear whether these plans and the resulting systems would provide information ICE managers need to monitor and analyze officer decision making across all field offices. The DHS Office of Inspector General (OIG) has recognized the need to upgrade ICE data systems so that management has reliable data to make programmatic decisions and assess performance with regard to detention and removal programs, including identifying trends associated with underlying decisions made during the alien removal process. In April 2006, the OIG reported that DACS lacks the ability to readily provide DRO management with the data analysis capabilities to manage the detention and removal program in an efficient and effective manner because (1) the information stored in DACS was not always accurate or up to date and (2) DRO could not readily query DACS to obtain statistical reports on detentions and removals. The OIG stated that the lack of reliable program analysis capabilities could detrimentally affect DRO’s ability to identify emerging trends and identify resource needs. According to the OIG, this data system should, at a minimum, be able to provide quality immigration- related data on various factors including, among other things, the rationale underlying DRO’s decision to release an alien from detention or not to detain individual aliens. OIG recommended that ICE expedite efforts to develop and implement a system capable of meeting data collection and analysis needs relating to detention and removal, including a plan showing milestone dates, funding requirements, and progress toward completing the project. DHS and ICE concurred with the OIG’s recommendation and said that it would prepare a project plan for developing and deploying the system in an expedited manner. Although DHS and ICE said that the new system is to allow users to capture, search, and review information in specific areas, including information on detention and removal case details, the response was not specific about whether it would contain information on the rationale for making these decisions. Having information on officers’ exercise of discretion, including their rationale for making decisions, would provide ICE managers a basis for identifying potential problems, analyzing trends, and compiling best practices. ICE headquarters officials told us that collecting and managing data that detail decisions made by officers could be costly. However, ICE has not evaluated the costs or alternatives for creating a mechanism capable of providing ICE with usable information that it can analyze to identify trends in the exercise of discretion. For example, ICE has not considered the costs and benefits of such a mechanism in connection with planned or ongoing information system updates. Until ICE assesses costs and alternatives for collecting these data, it will not be in a good position to select and implement an approach that will provide ICE assurance that it can identify any best practices that should be reinforced or areas that might require corrective actions—by, for example, modifying policies, procedures, or training. Given that 75 field offices are involved in the alien apprehension and removal process and that oversight of these offices lies with three ICE units, a comprehensive mechanism for reviewing officers’ decision making could provide ICE with meaningful information to promote the appropriate use of discretion, identify best practices, and analyze any significant differences across field offices in order to take appropriate action. Appropriate exercise of discretion during the alien removal process is an essential part of ICE’s law enforcement efforts as it conducts operations in complex environments and with finite resources to identify, locate, and remove many of the estimated 12 million aliens subject to removal from the United States. Internal controls, like training, guidance, and monitoring that are designed to help ICE ensure that its officers are well equipped to consistently make decisions that support its operational objectives, are crucial for ICE to help provide assurance that its officers exercise discretion in a manner that protects the agency’s integrity, advances its mission, and provides the greatest value to the nation. Although ICE has taken steps in the area of training to develop and retain officer skills, ICE’s guidance does not comprehensively address key aspects of the alien apprehension and removal process, such as dealing with humanitarian issues and aliens who are not investigation targets. In light of the increased number of circumstances that might call for the exercise of discretion in ICE’s expanded enforcement efforts, comprehensive guidance—including factors that should be considered when officers make apprehension, charging, and detention determinations for aliens with humanitarian issues—to better support officers’ decision making to provide ICE with enhanced assurance that discretion is exercised appropriately. Without established time frames for updating guidance, ICE lacks a means to track progress and ensure accountability for accomplishing the updates. Moreover, developing a mechanism for consistently disseminating legal information would help to ensure that officers have the most recent information on legal developments that may affect the decisions they make. Finally, collecting information on officers’ exercise of discretion could provide ICE with enhanced assurance that officers and supervisors across field offices are making decisions that reflect the agency’s operational objectives regarding alien apprehensions and removals and could also help managers identify best practices or areas that may require management action. Although ICE officials have noted that collecting and managing data about the exercise of discretion could be costly, ICE has not evaluated the costs of and alternatives for collecting such information. For instance, as ICE updates the systems it uses to manage other operational data, it could consider the costs and benefits of integrating this data collection function as part of other planned system redesigns. However, without an assessment of the costs and alternatives for collecting data on officer decision making, whether in association with planned system updates or not, ICE is not in the best position to select and implement an approach that provides ICE assurance that it can identify best practices to support decision making capacity or, more importantly, recurrent or systematic issues that could jeopardize its mission. To enhance ICE’s ability to inform and monitor its officers’ use of discretion in alien apprehensions and removals, we recommend the Secretary of Homeland Security direct the Assistant Secretary of ICE to take the following three actions: develop time frames for updating existing policies, guidelines, and procedures for alien apprehension and removals and include in the updates factors that should be considered when officers make apprehension, charging, and detention determinations for aliens with humanitarian issues; develop a mechanism to help ensure that officers are consistently provided with updates regarding legal developments necessary for making alien apprehension and removal decisions; evaluate the costs and alternatives of developing a reporting mechanism by which ICE senior managers can analyze trends in the use of discretion to help identify areas that may require management actions—such as changes to guidance, procedures, and training. We requested comments on a draft of this report from the Secretary of Homeland Security. In an October 4, 2007 letter, DHS agreed with our three recommendations and discussed the actions ICE plans to take to address them, which are summarized below and included in their entirety in appendix II. With regard to our recommendation that ICE develop time frames for updating existing policies, including factors that should be considered when making apprehension, charging, and detention decisions, DHS said that ICE would reevaluate and republish all existing policies, guidelines, and procedures pertaining to the exercise of discretion during calendar year 2008. With regard to our recommendation that ICE evaluate the costs and alternatives of developing a mechanism by which to analyze trends in the use of discretion, DHS said that ICE anticipates initiating this evaluation by December 1, 2007. With regard to our recommendation to develop a mechanism to help ensure that officers are consistently provided with updates regarding legal developments, DHS explained that ICE believes that policies are in place to address the needs of the operational components for up to date legal guidance, and that officers rely primarily on local Chief Counsel Offices for information on legal developments. DHS said that this localized approach reflects the fact that significant developments in case law often result from decisions of the 12 United States Courts of Appeal and that such decisions are often inconsistent and only have application within the geographic boundaries where they arise. Nonetheless, DHS commented that ICE recognizes that consistency in the dissemination of legal updates is of great importance to agents and officers and said that ICE will look to develop best practices to ensure the latest legal updates are disseminated to agents and officers through each Chief Counsel’s office. We believe ICE identification and implementation of best practices would be important in helping ensure that updates on legal developments are consistently provided to officers. We are sending copies of this report to selected congressional committees, the Secretary of Homeland Security, the Assistant Secretary of U.S. Immigration and Customs Enforcement, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available to others on request. In addition, the report will be available on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report or wish to discuss them matter further, please contact me at (202) 512-8777 or stanar@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors are listed in appendix III. This review examined how Immigration and Customs Enforcement (ICE) ensures that discretion is used in the most fair, reasoned, and efficient manner. Along these lines, we examined whether ICE has designed internal controls to guide and monitor officers’ exercise of discretion when making alien apprehension and removal decisions, consistent with internal control standards for the federal government. Specifically, this review addresses the following three questions: 1. When and how do ICE officers and attorneys exercise discretion during the alien apprehension and removal process? 2. What internal controls has ICE designed to guide officer decision making to enhance its assurance that the exercise of discretion supports its operational objectives? 3. What internal controls has ICE designed to oversee and monitor officer decision making during the alien apprehension and removal process to enhance ICE’s assurance that the exercise of discretion supports its operational objectives? To address these objectives, we obtained and analyzed information at ICE’s Office of Investigations (OI), Office of Detention and Removal Operations (DRO), and the Office of the Principal Legal Advisor (OPLA) within the Department of Homeland Security (DHS) in Washington, D.C. We also carried out work at 14 ICE field offices—seven OI and seven DRO field offices—located in seven cities throughout the United States: Chicago, Detroit, Los Angeles, New York, Philadelphia, Phoenix, and San Diego and seven ICE Chief Counsel Offices (which serve as OPLA’s field offices) at these same locations. We selected these locations considering field office size, ICE data on alien apprehensions, and geographic dispersion. Regarding alien apprehensions, about 40 percent of all ICE Office of Investigations apprehensions during fiscal year 2006 were made by the seven OI offices selected for our review. As we did not select a probability sample of field offices or Chief Counsels’ offices to review, the results of our work at these locations cannot be projected to field offices nationwide. To identify when and how officers and attorneys exercise discretion during the alien apprehension and removal process, we reviewed relevant laws and regulations as well as applicable policies, memorandums, operational manuals, and training materials developed by OI, DRO, and OPLA headquarters offices. We also spoke with headquarters officials in the OI, DRO, and OPLA operational divisions regarding the exercise of discretion in the alien apprehension and removal process. At each of the field locations we visited, we collected and reviewed available locally developed field guidance, memorandums, and training materials applicable to the exercise of discretion during the apprehension and removal process. We also conducted small group interviews with officers, supervisors, and managers at the 14 OI and DRO field offices we selected as part of our nonprobability sample to determine when and how officers at those locations exercise discretion, and when and how officers are expected to exercise discretion, during the alien apprehension and removal process. In addition, we conducted small group interviews with attorneys, supervisors, and managers at the 7 Chief Counsel offices we visited to determine when and how attorneys exercise discretion, and when and how they are expected to exercise discretion, once formal removal proceedings have been initiated by OI and DRO officers. As we did not select probability samples of ICE officers and attorneys, supervisors, and managers to interview at the field offices we selected, the results of these interviews may not represent the views of ICE officers and attorneys and their supervisors and managers nationwide. To address internal controls ICE has designed to guide officer decision making, we reviewed field operational manuals, policy memorandums, and training materials developed by OI, DRO, and OPLA headquarters offices. We also requested locally developed written guidance and policies and procedures regarding alien apprehension and removal procedures from all DRO, OI and Chief Counsel field offices. We received and reviewed locally developed guidance from 13 of OI’s 26 field offices and 12 of Chief Counsel’s 26 field offices. The purpose of this review was to identify the range of policies and guidance developed by field units that we did not capture as part of our nonprobability sample of ICE field offices. We did not receive locally developed guidance from DRO’s 23 field offices, as DRO headquarters officials told us that DRO field offices do not rely on locally developed guidance and instead rely on national policies and memorandums. As part of our work at the ICE field offices we visited, we also discussed and identified guidance and training provided to officers and attorneys with regard to the guidance and information available to them when exercising discretion during the apprehension and removal process, including guidance about nontargeted aliens, humanitarian issues, and updates on legal developments. We then compared the national and local guidance, memorandums, and training materials in place with internal control standards to determine whether these controls were consistent with the standards. In addition, we met with headquarters officials responsible for the development of policy and training of field unit operations for OI and DRO and we interviewed OPLA officials responsible for developing policy and training for Chief Counsel Offices to discern their role in developing and providing guidance and information to ICE officers, attorneys, supervisors, and managers involved in the alien apprehension and removal process. To address what internal controls ICE has designed to oversee and monitor officer decision making during the alien apprehension and removal process, we reviewed relevant laws, regulations, and field operational manuals. We also interviewed OI, DRO and OPLA headquarters officials, field officers, and field attorneys to identify the types of oversight that are in place. We examined what controls were in place to provide assurance that removal decisions are consistent with established policies, procedures, and guidelines across field offices, and examined whether these controls were designed to be consistent with the internal control standards. We did not test ICE controls in place as part of our review. We also interviewed headquarters officials responsible for overseeing ICE’s enforcement operations to examine controls in place to monitor enforcement activities. We met with ICE headquarters officials responsible for overseeing ICE databases containing information pertinent to alien apprehension and removal outcomes, and we inquired about information collected in these databases regarding officer decision making, including cases involving humanitarian issues and cases involving aliens who are not targets of ICE investigations. We also interviewed ICE officers, supervisors, and management personnel at the ICE field offices we visited to identify the types of supervisory reviews and approvals required for decisions made by ICE officers and attorneys and the documentation to be reviewed and approved by supervisors in regard to these decisions. We reviewed data on alien apprehensions for worksite enforcement operations, for fiscal year 2002 through fiscal year 2007, to identify trends in ICE’s expanded enforcement efforts. We also reviewed data on alien apprehensions resulting from fugitive operations. To determine the reliability of the data, we interviewed headquarters officials responsible for overseeing and verifying the data, reviewed existing documentation regarding the data, and interviewed headquarters officials responsible for tracking statistics pertaining to the data. We conducted our work between August 2006 and September 2007 in accordance with generally accepted government auditing standards. In addition to the above, John F. Mortin, Assistant Director; Teresa Abruzzo; Joel Aldape; Frances Cook; Katherine Davis; Kathryn Godfrey; Wilfred Holloway; and Ryan Vaughan made key contributions to this report.","Officers with U.S. Immigration and Customs Enforcement (ICE) within the Department of Homeland Security (DHS) investigate violations of immigration laws and identify aliens who are removable from the United States. ICE officers exercise discretion to achieve its operational goals of removing any aliens subject to removal while prioritizing those who pose a threat to national security or public safety and safeguarding aliens' rights in the removal process. The General Accountability Office (GAO) was asked to examine how ICE ensures that discretion is used in the most fair, reasoned, and efficient manner possible. GAO reviewed (1) when and how ICE officers and attorneys exercise discretion and what internal controls ICE has designed to (2) guide decision making and (3) oversee and monitor officers' decisions. To conduct this work, GAO reviewed ICE manuals, memorandums, and removal data, interviewed ICE officials, and visited 21 of 75 ICE field offices. ICE officers exercise discretion throughout the alien apprehension and removal process, but primarily during the initial phases of the process when deciding to initiate removals, apprehend aliens, issue removal documents, and detain aliens. Officers GAO interviewed at ICE field offices said that ICE policies and procedures limit their discretion when encountering the targets of their investigations--typically criminal or fugitive aliens, but that they can exercise more discretion for other aliens they encounter. Officers also said that they consider humanitarian circumstances, such as sole caregiver responsibilities or medical reasons, when making these decisions. Attorneys, who generally enter later in the process, and officers told GAO that once removal proceedings have begun, discretion is limited to specific circumstances, such as if the alien is awaiting approval of lawful permanent resident status. Consistent with internal control standards, ICE has begun to update and enhance training curricula to better support officer decision making. However, ICE has not taken steps to ensure that written guidance designed to promote the appropriate exercise of discretion during alien apprehension and removal is comprehensive and up to date and has not established time frames for updating guidance. For example, field operational manuals have not been updated to provide information about the appropriate exercise of discretion in light of a recent expansion of ICE worksite enforcement and fugitive operations, in which officers are more likely to encounter aliens with humanitarian issues or who are not targets of investigations. Also, ICE does not have a mechanism to ensure the timely dissemination of legal developments to help ensure that officers make decisions in line with the most recent interpretations of immigration law. As a result, ICE officers are at risk of taking actions that do not support operational objectives and making removal decisions that do not reflect the most recent legal developments. Consistent with internal control standards, ICE relies on supervisory reviews to ensure that officers exercise appropriate discretion and has instituted an inspection program designed to ensure that field offices comply with established policies and procedures. However, ICE lacks other controls to help monitor performance across the 75 field offices responsible for making apprehension and removal decisions. A comprehensive mechanism for reviewing officers' decision making could provide ICE with meaningful information to analyze trends to identify areas that may need corrective action and to identify best practices. ICE officials acknowledged they do not collect the data necessary for such a mechanism and said doing so may be costly. Without assessing costs and alternatives, ICE is not in a position to select an approach that will help identify best practices and areas needing corrective action.",govreport
"Ground ambulance services are provided by a wide range of organizations that differ in organizational structure, staffing types, types of transports offered, and revenue sources. Medicare payments for ambulance services are made up of two components: a service-level payment for the type of transport provided and a mileage payment. Providers may be affiliated with an institution (such as a hospital or a fire department) and share resources and operational costs, or they may be independent and freestanding. In addition, providers may be for-profit, nonprofit, or government-based. Providers may rely heavily on volunteers, use both volunteers and paid staff, or use only paid staff. Providers may specialize in nonemergency transports, or offer both nonemergency and emergency (those responding to a 911 call) transports. Also, some providers offer only basic life support (BLS) services, while others offer advanced life support (ALS) services. ALS services require the skills of a medical technician who is more specialized and trained, such as a paramedic, than the technician who can provide BLS services. Revenue sources depend on the resources available in communities and communities’ choices about funding ambulance services. They may include community tax support, charitable donations, in-kind contributions, state and federal grants, subscription programs,payments from Medicare or Medicaid and private health insurance companies (including patient copayments or coinsurance). The mix and amount of revenues available may vary. Communities differ by the level of tax support for specific services, such as ensuring a minimum level of service in remote areas, sophistication of transport vehicles, and the training level of the staff. Medicare pays ambulance providers through a national fee schedule. (See fig. 5 in app. I for an overview of the Medicare ambulance payment formula.) Payments have two components: 1. service-level payment: for the type of transport provided, such as an ALS Level 1 transport;2. mileage payment. The mileage payment is determined by the number of miles traveled with a patient during an ambulance transport and the mileage base rate. Since 2002, CMS has increased the rural mileage rate (which also applies to super-rural transports) by 50 percent for miles 1 through 17. See 67 Fed. Reg. 9100 (Feb. 27, 2002) (adding subpart H to 42 C.F.R. part 414); 42 C.F.R. § 414.610(c)(5)(i)(2011) (this mileage rate increase is not set to expire). Also see fig. 5 in app. I for an overview of the Medicare ambulance payment formula. Improvement, and Modernization Act of 2003, temporarily extended by subsequent acts, and most recently extended through the end of 2012 by the Middle Class Tax Relief and Job Creation Act of 2012. Providers paid under a fee schedule generally have an incentive to keep their costs to deliver services at or below the fee schedule rate. Some providers rely heavily on Medicare revenues, and adequate Medicare margins for these providers may help ensure that beneficiaries have access to ambulance services. In our 2007 report, we found that providers with lower transport volumes generally had higher costs per Because of transport than providers with greater transport volumes.high fixed costs for maintaining readiness—the availability of an ambulance and crew for immediate emergency responses—providers with low volumes, which still need to maintain readiness, tended to have higher costs per transport. Other significant factors that affected cost per transport included level of volunteer staff hours, percentage of Medicare transports that are BLS, percentage of Medicare transports that are super-rural, and level of community tax support. Providers’ costs for providing ground ambulance transports were highly variable in 2010, ranging from a low of $224 per transport to a high of $2,204, with a median cost per transport of $429. The variability of costs per transport reflected differences in certain provider characteristics, such as volume of transports, intensity of Medicare transports, and level of government subsidies received. Providers reported that personnel costs accounted for the largest percentage of their total costs in 2010 and contributed the most to increases in total costs between 2009 and 2010. The median cost per ground ambulance transport for providers in our sample was $429 in 2010, but providers’ costs per transport ranged from a low of $224 to a high of $2,204. Five percent of providers had costs per transport that were less than $253, and 5 percent had costs per transport that were more than $924. Figure 1 shows the distribution of 2010 costs per transport for providers in our sample. Among the population of providers from which our sample was drawn, the estimated median cost per transport ranged from $401 to $475, which represents the 95 percent statistical confidence interval around the median and is the range within which we expect the population median cost per transport to fall in 95 percent of the samples we could have drawn. Super-rural providers had estimated median costs per transport that were significantly higher than urban providers (see table 1). The variability associated with our survey data did not allow us to conclude that rural providers’ estimated median costs per transport were significantly different from super-rural or urban providers. As will be discussed later, when we controlled for other provider characteristics that affected cost per transport using regression analysis, differences in cost per transport by service area were not significant.characteristics other than service area were more important in explaining the variation in cost per transport. The median Medicare margin, including add-on payments, was about positive 2 percent in 2010 for the 153 providers in our sample.removed the add-on payments, we found that payments decreased for the providers in our sample, resulting in a lower median Medicare margin of negative 1 percent for those providers. See table 2. Ambulance transports for all Medicare fee-for-service beneficiaries in the nation increased by 33 percent from 2004 to 2010. All three service areas—urban, rural, and super-rural—experienced growth. Transports per 1,000 beneficiaries in super-rural areas grew the most, by 41 percent, and transports per 1,000 beneficiaries in rural and urban areas increased by 35 percent and 32 percent, respectively. (See table 4.) The increase in ambulance transports from 2004 to 2010 is attributable primarily to an increase in BLS nonemergency transports, which rose by 59 percent from 2004 to 2010. Super-rural areas experienced the largest increase in BLS nonemergency transports (82 percent). The increase in Medicare beneficiaries’ use of ambulance services did not appear to be caused by changes in the demographic characteristics of beneficiaries. For example, factors such as age, race, and sex remained stable from 2004 to 2010 in urban, rural, and super-rural areas. Representatives we spoke with from one ambulance provider organization suggested that some of the increase in ambulance transports was attributable to increased billing for Medicare ambulance services at the local-government level. Some local governments that provided ambulance transports free of charge had been reluctant in the past to bill insurers such as Medicare because patients would then be financially responsible for out-of-pocket insurance costs, such as deductibles and copayments. The increased out-of-pocket costs for patients had the potential to result in less community support of ambulance providers through fewer charitable contributions and fewer volunteers. However, these local governments have begun to bill Medicare as well as other insurers because of increased budgetary pressures. Representatives we spoke with also added that the introduction of the national fee schedule in 2002 may have contributed to increased billing because it allowed providers to better anticipate the amount of revenue they could receive from Medicare. The Department of Health and Human Services (HHS) Office of Inspector General (OIG) has explored increases in ambulance utilization and has cited improper payments as one potential cause. For example, HHS OIG found that nonemergency transports, including BLS nonemergency transports, made up the majority of improper payments for ambulance services, and particularly transports for dialysis services. HHS OIG also found that Medicare’s ambulance transport benefit is highly vulnerable to abuse and found that many ambulance transports paid for by Medicare did not meet Medicare program requirements, including transports that were not medically necessary. We provided a draft of this report to HHS and invited representatives of AAA to review the draft. HHS had no general or technical comments on behalf of CMS. The AAA representatives provided oral comments and generally agreed with our findings; however, AAA had some questions regarding our methodology and conclusions, which we clarified in the report where appropriate and discuss below. In addition, AAA provided technical comments, which we incorporated as appropriate. AAA representatives questioned whether the Medicare margin results were comparable to those of the 2007 report and were concerned that readers would conclude that providers’ Medicare margins have increased over time. We clarified in the report that we do not consider the results reported in 2007 and in the current report to be directly comparable because the samples examined in each report were different and we reported median Medicare margins in the current report whereas in 2007 we reported average Medicare margins. AAA representatives noted that our sample contains providers that have been in business since at least 2003 and that the cost data from this sample may not be representative of all ambulance providers. We agree that the providers in our sample represent mature and well-established organizations—an advantage because this approach avoids start-up organizations with potentially high start-up costs, as described in our scope and methodology. Despite the differences in the samples and the type of measure used for reporting Medicare margins, both of these studies showed wide variation in costs per transport and Medicare margins. AAA representatives had some questions about the results of our regression analysis. For example, the regression results suggest that ambulance providers that receive a greater proportion of government subsidies tend to have higher costs. The representatives theorized that providers with higher costs seek additional government support and did not think this finding was consistent with how their industry operates. As described in the report, the Medicare Payment Advisory Commission found an association between increased resources and increased costs in the hospital industry and theorizes that such hospitals face less pressure to control costs. We found an association in the ambulance industry but determining causality was beyond the scope of our work. AAA representatives also questioned the regression analysis results that indicated that providers’ use of volunteer staff did not significantly contribute to differences in providers’ total costs, because our survey data indicated that personnel costs were, on average, 61 percent of providers’ total costs. The results may be a consequence of the relatively small sample size and, in addition, a small proportion of providers in our sample using volunteer staff (21 percent). Finally, the AAA representatives commented that ground ambulance providers’ current Medicare payments are lower than those we calculated for 2010 because of the expiration of a required temporary increase in Medicare payments for certain geographic areas, the implementation of a policy for reporting fractional mileage, and the introduction of a productivity adjustment relative to the annual inflation adjustment of the fee schedule. In addition, AAA noted that the cost of fuel has increased since 2010. We acknowledge that these factors likely lowered Medicare payments and increased costs for some providers after 2010, the most recent year for which data were available when we began our study. We are sending copies of this report to other congressional committees and the Administrator of CMS. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of the report. GAO staff who made major contributions to this report are listed in appendix II. This appendix describes the data and methods we used to respond to our research objectives. We conducted a survey of ambulance providers to collect data on their costs and other characteristics. We relied on these survey data for much of our analyses and supplemented our survey results with information from other sources, including Medicare claims data, as appropriate. We also analyzed Medicare claims data to determine payments to ambulance providers as well as to determine the number of Medicare ambulance transports. We tested the internal consistency and reliability of the data from our survey and the Medicare claims data and determined that all data sources were adequate for our purposes. We conducted our work from April 2012 through September 2012 in accordance with generally accepted government auditing standards. To collect data on ground ambulance providers’ costs, revenues, transports, and organizational characteristics for calendar year 2010, or for the fiscal year that corresponded to all or the majority of a provider’s calendar year 2010 data, we sent a web-based survey to a random, nationally representative sample of 294 eligible ambulance providers. We obtained data from 154 providers for a response rate of 52 percent, after excluding cost outliers and surveys with unreliable data. We determined that our sample was nationally representative of the approximately 2,900 ambulance providers that billed Medicare in 2003 and 2010, were still operational in 2012, and did not share costs with nonambulance services or air ambulance services. However, the small sample size and the variability of reported costs reduced the precision of our estimates. We drew potentially eligible providers for our survey from an existing sample, originally developed for our 2007 report, of 900 non-hospital- based ground ambulance providers that billed Medicare in 2003. Through Internet searches and phone contacts to ambulance providers, we excluded any providers that (1) were no longer in business; (2) shared costs with nonambulance services, such as those providers affiliated with a fire department; or (3) we were otherwise not able to contact.did for the 2007 report, we excluded ground ambulance providers that also provided air ambulance services. After all exclusions, we had 294 eligible providers for potential survey participation. On the basis of the number of providers that were eligible for our sample and the number of providers that responded to our survey, we calculated sample weights to estimate how many Medicare ambulance providers our sample represented. To develop our survey instrument, we modified the survey instrument used for our 2007 report, which was mailed to ambulance providers, to tailor it to our current objectives and format it for use as a web-based survey. We retained questions about ambulance providers’ costs, revenues, and transports, as well as questions to identify organizational characteristics that might affect ambulance providers’ costs, such as the use of volunteer staff. We added questions related to changes in total cost (increases or decreases) from 2009 to 2010 and the cost components that most contributed to the changes. We also asked providers for their National Provider Identifier (NPI), which providers use to bill Medicare, and their Provider Transaction Access Number (PTAN). These numbers enabled us to identify and analyze Medicare claims for We needed these current identifiers to link the providers we surveyed.the providers in our sample to Medicare claims data because our sample was based on the sampling frame of our 2007 report, and Medicare has implemented a new identification system since then. We sought feedback on our survey instrument from both internal and external sources. It was reviewed by internal survey experts and pretested on seven ambulance providers. We also consulted with the American Ambulance Association (AAA), an industry group that represents ambulance providers. On the basis of the feedback we received, we modified the survey instrument as appropriate. We sent our survey by e-mail to 294 eligible ambulance providers on April 12, 2012. We asked providers to complete the survey within 2 weeks of receipt. We later extended this deadline 2 weeks to give providers more time to complete the survey. Providers were encouraged to contact us by e-mail or a toll-free number so that we could resolve any questions or problems. We sent three reminder e-mails to providers that had not yet completed the survey (6, 14, and 21 days after sending the survey to providers) and made two rounds of reminder telephone calls to encourage participation. AAA and the National Association of Emergency Medical Technicians encouraged providers to participate in the survey. When providers returned surveys that were incomplete, invalid, or resulted in conflicting responses to key items, we conducted follow-up by phone and e-mail. We took steps to ensure that the data reported in the survey were valid and reliable. First, we included in the survey instrument questions intended to validate the reported cost data. For example, we asked providers whether certain cost components (such as personnel costs) were included in the total cost amount submitted, and we asked how confident providers were about the total cost amount submitted. As a result, we excluded from our analyses one provider that was not confident in the total cost amount. Second, we conducted analyses to identify any incomplete data or inconsistencies in responses. If we found such data, we contacted the provider to try to obtain complete or corrected data. We excluded three providers that were not able to provide complete data on total cost or total transports. Third, we used a lognormal distribution to exclude outliers with a cost per transport more than three standard deviations from the mean. We excluded three providers with costs per transport that were outliers. All computer programs we used for our analyses were peer reviewed to verify that they were written correctly and executed properly. On the basis of our efforts to validate the data, including computer testing and corrections, we concluded that the data were sufficiently valid and reliable for our purposes. All sample surveys are subject to sampling error—that is, the extent to which the survey results differ from what would have been obtained from the population instead of the sample. The sample is only one of a number of samples that we might have drawn. As a result, we reported the results of our analyses with their 95 percent confidence intervals. The 95 percent confidence interval refers to the range of values within which we would expect the true population value to fall in 95 percent of the samples we could have drawn. We analyzed 2010 Medicare claims data for the survey nonrespondents and compared this information with similar claims data for providers in our sample. Using Medicare claims data for all survey recipients, we were able to test for potential nonresponse bias for the characteristics contained in the claims data. The nonresponse analysis did not find any statistically measurable bias that would affect our analyses of providers’ costs. We used regression analysis to investigate the relationship between providers’ total cost and provider characteristics that may have affected their costs. We opted for a total cost model using a logarithmic functional form because it is well grounded in microeconomic theory. Although we considered using a similar model of the same functional form with cost per transport as the dependent variable, we determined that the parameter estimates of such a model would be similar to the total cost model. Provider characteristics included in our model were: (1) volume of transports, (2) cost of doing business, (3) mix of Medicare transports, (4) intensity of Medicare transports, (5) service area, (6) use of volunteer staff, (7) receipt of government subsidies, and (8) ownership type. We used those results to produce a graph illustrating the relationship between cost per transport and volume of transports. We also used the results of the regression analysis to estimate the effect on providers’ cost per transport of reducing the value of each of two variables that were significant in the regression. See table 5 for the characteristics included in the model, how each characteristic was measured, and the data source for each characteristic. Our regression analysis modeled total cost at the provider level as a function of the provider characteristics described above. We used ordinary least squares to model the log of total costs for a provider.model was specified in log-log form to conform to standard microeconomic theory regarding cost functions. The two continuous independent variables—transport volume and geographic practice cost index (GPCI)—were entered in log form. The remaining variables were not entered in log form because they were either indicator variables (value of 0 or 1) or percentage variables (values ranging from 0 to 1.00). Three of the explanatory variables in the regression were statistically significant at the 1 percent or better level in explaining the variation in providers’ total costs: total transports, percentage of revenues from The government subsidies, and percentage of Medicare transports that were nonemergency. Table 6 shows the regression results. We used the regression results to predict the log of total cost and then converted it to total cost by taking the antilog. We applied an adjustment to the resulting prediction of total cost to account for the fact that our regression was for log total cost rather than total cost. We then divided total cost by total transports to derive cost per transport. We used this method to produce predictions of cost per transport for the range of 1 to 20,000 transports shown in figure 2 of the report. We also used the regression results to estimate the effect on cost per transport of a reduced percentage of revenues from government subsidies and a reduced percentage of nonemergency transports. In each case, we held the other variables in the regression model at their regression sample mean and calculated cost per transport for the sample two ways: one with the value of the variable of interest set at its sample average and another with it set at a value 25 percent less. We reported the difference between these two values for each variable. To examine the relationship between Medicare payments and providers’ costs, we used Medicare claims data to calculate Medicare payments in 2010 for the providers in our sample, and we calculated Medicare margins—the percentage difference between providers’ Medicare payments per transport and their costs per transport. To examine ambulance transports per 1,000 Medicare beneficiaries, we used Medicare claims data and Centers for Medicare & Medicaid Services (CMS) 2010 Medicare enrollment data. We found CMS’s claims and enrollment data to be sufficiently reliable for the purposes of this report. We calculated 2010 Medicare payments for the providers in our sample using Medicare carrier claims data. We identified relevant ambulance claims for 153 providers by using the NPIs (which providers use to bill Medicare) and PTANs reported by providers on the survey. We excluded any Medicare claims without either service-level or mileage payments and any claims with service-level payments that were more than three standard deviations from the mean of the log distribution for all such claims. We also excluded any claims for transports with multiple patients because the calculations for these payments require additional information not available on Medicare claims. See figure 5 for the payment formulas specified in the Medicare ambulance fee schedule. To calculate service-level payments, we used the type of transport identified on the claim to determine the associated relative value unit, which is a constant multiplier that adjusts the service-level base rate to account for the mix and intensity of the service, and we used the 2010 service-level base rate of $209.65. We used the zip code where the transport originated to determine the adjustment from the geographic practice cost index (GPCI), which is used to account for the different costs of operating ambulance services in different regions of the country. In accordance with CMS’s payment methodology, we adjusted 70 percent of the service-level payment by the GPCI, and we did not adjust the other 30 percent by the GPCI. We also used the zip code where the transport originated to determine the applicable urban, rural, or super-rural add-on payment rate. To calculate mileage payments, we used the number of miles reported on the claim and the 2010 mileage base rate of $6.74. We used the zip code where the transport originated to determine the applicability of the permanent mileage increase for miles 1 through 17 for rural and super-rural transports and to determine the applicable urban, rural, or super-rural add-on payment rate. The total fee schedule payment for each transport is the sum of the service-level and mileage payments. We calculated payments with and without the applicable add-on payment rates, and we assumed that providers charged the maximum allowed amount under the ambulance fee schedule.that our payment calculations were comparable to actual payments made based on the claims, we compared the payments we calculated with add- ons to the payment amounts on the claims for a random sample of 6,000 urban, rural, and super-rural claims, and we found the difference in the amounts to be less than 1 percent. All payments are expressed in 2010 dollars. To ensure For the providers in our sample, we reported the median of providers’ Medicare payment per transport by predominant service area (urban, rural, or super-rural) and for all providers. Medicare payment per transport, we divided the sum of the provider’s Medicare payments by the sum of its Medicare transports. To calculate each provider’s Medicare margin, we used the provider’s cost per transport, as calculated from the survey responses, and its Medicare payment per transport, described in the previous section. We subtracted the provider’s cost per transport from its Medicare payment per transport, and we divided this amount by the provider’s Medicare payment per transport. For the providers in our sample, we reported the median Medicare margin and the distribution of providers’ Medicare margins by predominant service area (urban, rural, or super-rural) and for all providers. As we did in the 2007 report, we classified providers as super-rural if 60 percent or more of their Medicare transports in 2010 originated in a super-rural zip code. We classified providers as rural if they did not meet the super-rural definition and 60 percent or more of their Medicare transports in 2010 originated in rural or super-rural zip codes. We classified providers as urban if they did not meet the rural or super-rural classifications. Since some providers furnish transports in more than one area, there is likely to be some measurement error in identifying the full effect of service area on costs. excluded claims with service-level payments outside of three standard deviations from the mean of the log distribution for all such claims for each of these years. We counted Medicare beneficiaries as the number of months beneficiaries were enrolled in Medicare Part A or B in 2010 divided by 12. We then divided the number of transports by the number of enrolled Medicare beneficiaries and multiplied the quotient by 1,000. We also examined the change in transports per 1,000 Medicare beneficiaries from 2004 to 2010. Medicare claims data, which are used by the Medicare program as a record of payments made to health care providers, are closely monitored by both CMS and Medicare Administrative Contractors—contractors that process, review, and pay claims for Medicare Part B–covered services, including ambulance services. The data are subject to various internal controls, including checks and edits performed by the contractors before claims are submitted to CMS for payment approval. Although we did not review these internal controls, we assessed the reliability of Medicare claims data by reviewing related CMS documentation, interviewing agency officials about the data, and comparing payments in a sample of claims to expected payments based on Medicare’s published ambulance fee schedule. We determined that the Medicare claims data were sufficiently reliable for the purposes of this report. In addition, we assessed the reliability of CMS’s enrollment data by reviewing related CMS documentation and comparing the enrollment data to published sources. We determined that Medicare enrollment data were sufficiently reliable for the purposes of this report. In addition to the contact named above, Christine Brudevold, Assistant Director; Ramsey Asaly; Carl S. Barden; Stella Chiang; Carolyn Fitzgerald; Leslie V. Gordon; Corissa Kiyan; Rich Lipinski; Elizabeth T. Morrison; Aubrey Naffis; and Eric Wedum made key contributions to this report. Ambulance Providers: Costs and Expected Medicare Margins Vary Greatly. GAO-07-383. Washington, D.C.: May 23, 2007. Ambulance Services: Medicare Payments Can Be Better Targeted to Trips in Less Densely Populated Areas. GAO-03-986. Washington, D.C.: September 19, 2003.","Since 2004, Congress has authorized supplemental temporary payments, called ""add-on"" payments, to augment Medicare fee schedule payments to ambulance providers. The add-on payments increased payments for transports in urban, rural, and super-rural (the least densely populated) areas by $175 million in calendar year 2011, according to the Medicare Payment Advisory Commission. In 2007, GAO reported a decline in transports by beneficiaries in super-rural areas and recommended that the Centers for Medicare & Medicaid Services (CMS) monitor beneficiary use of ambulance transports to ensure access to services, particularly in super-rural areas. The Middle Class Tax Relief and Job Creation Act of 2012 required GAO to update the 2007 report. GAO examined, for 2010 (the most recent year complete data were available when GAO began the study), (1) ground ambulance provider costs for transports, (2) the relationship between Medicare payments and provider costs, and (3) beneficiary use of ground ambulance transports. To do this work, GAO sent a survey to a sample of eligible providers based on the 2007 report sample asking for provider costs and characteristics. The sample is representative of all ground ambulance providers that billed Medicare in 2003 and 2010, were operational in 2012, and did not share costs with nonambulance services or air ambulance services. GAO also performed a regression analysis to examine factors that affect costs, analyzed Medicare claims and enrollment data, and interviewed representatives of ambulance provider organizations. CMS reviewed a draft of this report and had no comments. Ground ambulance providers' costs per transport for 2010 varied widely. The median cost per transport for the providers in GAO's sample was $429, ranging from $224 to $2,204 per transport. Provider characteristics that affected cost per transport were volume of transports (including both Medicare and non-Medicare transports), intensity of transports (the proportion of Medicare transports that were nonemergency), and the extent to which providers received government subsidies. Higher volume of transports, higher proportions of nonemergency transports, and lower government subsidies were associated with lower costs per transport. Providers reported that personnel cost was the largest cost component in their 2010 total costs and the biggest contributor to increases in their total costs from 2009 to 2010. The median Medicare margin, including add-on payments, was about +2 percent in 2010 (meaning that providers' Medicare payments per transport exceeded their overall costs per transport) for the providers in GAO's sample, but Medicare margins varied widely for those providers. When GAO removed the add-on payments, payments decreased for the providers in the sample, resulting in a lower median Medicare margin of -1 percent. Due to the wide variability of Medicare margins for providers in the sample, GAO cannot determine whether the median provider among the providers in the population that the sample represents had a negative or positive margin. The median Medicare margin with add-on payments ranged from about -2 percent to +9 percent, while the median Medicare margin without add-on payments ranged from about -8 percent to +5 percent. Ground ambulance transports for all Medicare fee-for-service beneficiaries grew 33 percent from 2004 to 2010. Transports by beneficiaries nationwide grew the most in super-rural areas (41 percent) relative to urban and rural areas. The increase overall is attributable primarily to an increase of 59 percent over this period in basic life support (BLS) nonemergency transports, which include noninvasive interventions, such as administering oxygen. In comparing this growth by service area, BLS nonemergency transports in super-rural areas grew the most--by 82 percent. Representatives from an ambulance provider organization suggested the increase in transports may be from increased billing by local governments. Some local governments that used to provide Medicare transports free of charge may bill Medicare now because of increased budgetary pressures. The Department of Health and Human Services Office of Inspector General has cited improper payments--which can be the result of billing mistakes--as one potential cause for increases in Medicare ambulance utilization and has stated that the Medicare ambulance transport benefit is highly vulnerable to abuse, with some payments for transports not meeting program requirements.",govreport
"Supply Chain Integration, an office under the Office of the Assistant Secretary of Defense for Logistics & Materiel Readiness, Under Secretary of Defense for Acquisition, Technology and Logistics, is the department- wide office responsible for leading the development of DOD supply chain policies as well as improving accountability, visibility, and control of all critical assets, including SRC I ammunition. In addition, the Army has a prominent role in managing SRC I ammunition, as the Army procures a majority of the department’s ammunition and provides wholesale storage for the other military services at Army depots. The Army depots ship SRC I ammunition owned by the other military services to their respective locations at their request. Also, Army depots conduct semiannual physical inventories of all SRC I ammunition as required of all installations storing SRC I ammunition. SRC I ammunition may also be located—generally in small quantities—at retail locations, such as military service installations, bases, and ammunition supply points. Each military service has entities responsible for the accountability, physical inventory, and transportation of SRC I ammunition. According to military service ammunition data, the Army, Navy, Marine Corps, and Air Force collectively had approximately 226,000 SRC I missiles and rockets in the continental United States, as of April 30, 2015, as shown in table 1. In addition, USTRANSCOM is designated by DOD Directive as the DOD’s single manager for transportation, other than Service-unique or theater- assigned assets and as the DOD Distribution Process Owner. This designation includes transportation of SRC I ammunition. The Military Surface Deployment and Distribution Command, which falls under USTRANSCOM, tracks the movement of SRC I ammunition. Additionally, according to DOD officials, the Military Surface Deployment and Distribution Command coordinates responses to transportation issues of SRC I ammunition while in transit. Table 2 shows key stakeholders and roles in the transportation of SRC I ammunition. DODM 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E) sets forth DOD policy on the physical security of sensitive conventional AA&E. According to DODM 5100.76, continuous program and policy oversight is required to ensure protection of AA&E within DOD, and DOD components are required to track and conduct physical inventories of SRC I ammunition by serial number. Further, DOD policy requires SRC I ammunition to have a higher level of protection and security than that provided for SRC II through SRC IV conventional ammunition. DOD and the military services have policy and guidance on how to account for, safeguard, conduct physical inventories, adjust if necessary, track, and ship SRC I ammunition within and between services and to contractors for repair. Appendix III provides additional detail on DOD policy and military service guidance relevant to the management of SRC I ammunition. The military services have several automated information systems for managing accountability and visibility of SRC I ammunition. These automated information systems also maintain various item-specific data such as serial number, production lot number, DOD identification codes, serviceability, reporting location, ownership, quantity, and shipment information. Figure 1 shows the automated information systems. The department is in the final stages of evaluating various automated information systems, including NLAC, to be designated as the DOD-wide authoritative source of data for conventional ammunition, including SRC I ammunition. DOD’s evaluation to select one authoritative information system for conventional ammunition comes in response to our March 2014 recommendation that the department designate an authoritative source of data on conventional ammunition, which includes SRC I ammunition. Also, the evaluation is in response to a congressional mandate to issue department-wide guidance by September 2015 to designate an authoritative source of data for conventional ammunition. According to OSD officials, the to-be-designated visibility system will serve as a repository of ammunition data collected through regular data feeds from the military services’ automated information systems. Since 1994, we have issued several reports about the management of SRC I ammunition, focusing on serial-number registration, physical inventories, and transportation issues. In 1994, we found that while the Navy and the Marine Corps began controlling missiles by serial number in 1990 and 1992, respectively, the Army was working on obtaining control of SRC I missiles by serial number. Further, we found that the military services were not regularly conducting physical inventories of SRC I missiles and we made recommendations to strengthen inventory accountability, which the department concurred with and implemented. In our September 1997 report, we found the military services had different procedures and requirements for maintaining oversight of SRC I rockets. Specifically, we found that the Marine Corps maintained oversight and visibility of its weapons by serial number, whereas the Army and the Navy managed their SRC I rockets by production lot and quantity. DOD concurred with our recommendation to manage SRC I rockets by serial number and reissued DOD policy in 2000. In our 2000 report, we found internal controls weaknesses at an Army ammunition depot that resulted in a loss of accountability and control over SRC I rockets. For example, serial number control of SRC I rockets was lost at the time of shipment from the contractor because serial numbers listed on receiving reports that accompanied shipments did not correspond to the actual items and quantities of the respective shipments. In March 2014, we reported on DOD’s management of conventional ammunition, and found, among other things, some limitations of the military services’ use of automated information systems that affected their ability to facilitate efficient management of conventional ammunition. We found that NLAC, the department-wide repository of ammunition data, had limitations in providing visibility of ammunition and recommended that the department select an authoritative source of department-wide ammunition data to improve DOD’s ability to provide total asset visibility over conventional ammunition. DOD concurred and stated that it would assess the alternatives and designate the appropriate solution by the fourth quarter of fiscal year 2015. Also, we recommended that DOD identify and implement internal controls, consistent with federal internal control standards, that would provide reasonable assurance that NLAC collects comprehensive, accurate data from other service ammunition systems. DOD concurred and stated in its agency response to our report that the Army updated the performance work statement for NLAC to include analyzing new data sources to identify improved system interfacing that will improve data accuracy, completeness, quality assurance, and auditability. For more details of our findings, recommendations, and the status of actions taken by DOD relating to DOD’s management of SRC I ammunition, see appendix IV. The military services have maintained accountability of SRC I ammunition at 11 sampled locations in the continental United States; however, we identified gaps in some service-level guidance and procedures for how SRC I ammunition is accounted for across locations. We found that the Air Force does not track SRC I ammunition by serial number but has plans to revise its guidance. Also, we found Air Force procedures have not maintained accountability for items owned by other services and stored at Air Force locations. Further, the military services generally recorded shipment and receipt in their accountability systems, but the receipt was not always recorded in a timely manner. Finally, we found that Army processes and information systems do not provide full accountability for in-transit items. We found that the military services have maintained accountability in their automated information systems of SRC I ammunition at the 11 sampled locations we reviewed. DOD policy calls for continuous program and policy oversight to ensure protection of AA&E, to include SRC I ammunition, within DOD. Likewise, military service guidance details accountability of AA&E, including maintenance of records. We found that, for our sample of 616 SRC I ammunition items, 612 of the 616 records matched the military services’ automated information systems and the remaining 4, although not recorded as required, were accounted for by service officials. Additionally, as part of our sample, we observed SRC I ammunition that was being readied for rapid deployment, as shown in figure 2, and documented the serial number and other identifying information, and verified the information in the Army’s systems. Additionally, we found that, in accordance with DOD policy and military service guidance and at required frequencies, the military services conducted physical inventories of SRC I ammunition to ensure accountability at 22 selected military service locations in the continental United States. We analyzed inventory memorandums from all Army depots storing SRC I ammunition, as well as selected military service locations, and found that the physical inventories were recorded as being conducted. Inventory personnel stated there were no delays or challenges in completing the physical inventories of SRC I ammunition because of sequestration or other budgetary concerns. Further, during our review, we identified instances in which the Navy and Army had taken actions to enhance the accountability of their physical inventories. First, we found that the Army, Marine Corps, and Air Force certify completion of the physical inventory of SRC I ammunition through a signed memorandum. According to Navy officials, Navy policy does not require certification through a signed memorandum. Rather, the Navy OIS system captures a Date of Last Inventory; however, Navy officials acknowledged they did not have a business process to use this data point. After we identified this, Navy officials took action to begin developing a business process to identify late inventories. Second, according to Navy officials, in an effort to better align with DOD policy, the Navy revised guidance in April 2015 to align with requirements in DODM 5100.76 so it would reflect specific intervals for completing physical inventories: monthly for unit levels and semiannually for non-unit level. Third, we examined the physical inventory process at a contractor location. We found the contractor had completed physical inventories of SRC I missiles in its custody, although the contract did not specify the frequency or approach for conducting physical inventories. When we asked Army officials to provide documentation from the contractor verifying that physical inventories were completed, the officials acknowledged they do not receive verification from the contractor upon completion of physical inventories, but stated they have taken action and are evaluating methodology to ensure they receive documentation to verify that the contractor has completed physical inventories in the future. We found that the military services, except the Air Force, track SRC I ammunition by serial number in their respective accountability systems, and the Air Force has plans to revise its guidance regarding tracking. The Air Force tracks SRC I ammunition in its accountability system, CAS, by quantities within production lot numbers. CAS does not have the capability to track SRC I ammunition by serial number because CAS does not have a field to enter serial numbers. With this limitation, the Air Force also cannot conduct physical inventories of SRC I ammunition by serial number. We found in September 1997 that the military services did not uniformly track SRC I rockets by serial number and recommended that the services manage SRC I rockets by serial number to have total visibility over the numbers and locations of rockets. The department concurred and reissued policy in 2000 to require DOD components to track and conduct physical inventories of SRC I ammunition by serial number. However, Air Force guidance reissued in June 2015 recognizes that CAS cannot track SRC I ammunition by serial number and will instead track by quantities within production lot numbers. Air Force officials have recognized that they are not meeting DOD requirements for tracking SRC I ammunition by serial number, but are in the process of modernizing CAS to track by serial number. According to Air Force officials, the Air Force previously focused on the development of another enterprise information system to track, among other things, ammunition; however, the Air Force cancelled the system and is now in the process of upgrading CAS. The Air Force provided supporting documentation to confirm plans for CAS modernization by 2017. According to Air Force officials, this upgrade will modernize the system through technological upgrades that also includes provisions to improve auditability of CAS. Upon upgrading CAS to track SRC I ammunition by serial number, Air Force officials plan to reissue Air Force guidance to ensure that the Air Force tracks and conducts physical inventories of SRC I ammunition by serial number. If the Air Force does not modify CAS to include serial numbers, the Air Force will continue to lack serial number traceability of SRC I ammunition and will not meet DOD requirements. By tracking SRC I ammunition by quantities within production lot numbers, the Air Force will not have detailed information to support life-cycle traceability requirements, such as a transactional history including inventory, maintenance, repair, service records and/or supply, for each serial number, which may affect their ability to investigate instances of lost or stolen SRC I ammunition. Air Force policy does not require accountability in its system of record for items owned by other services and stored at Air Force locations. We identified 55 SRC I ammunition items owned by the Army or Marine Corps that were in the physical custody of the Air Force, but the Air Force did not maintain accountability of these items in its system of record— CAS. DOD policy requires that the DOD component that has physical custody of materiel in storage maintain accountability for that materiel in the component’s system of record, regardless of which DOD component owns the materiel. However, we found that Air Force guidance does not require personnel to maintain accountability in its system of record for SRC I ammunition items owned by other services but in the physical custody of the Air Force, and instead allows ammunition owned by other services to be tracked in a “non-accountable” program within CAS. This non-accountable program tracks information such as net explosive weight and asset visibility; however, according to Air Force officials, the non- accountable program does not maintain an audit trail or history that would document receipt and provide a record of how the SRC I ammunition was managed while at the Air Force location. We found that, consistent with DOD policy, Army, Navy, and Marine Corps guidance generally requires that accountability for ammunition in the physical custody of the service be maintained in the service’s system of record, regardless of which service owns the ammunition. Accountability for the 55 SRC I ammunition items we identified that were owned by the Army or Marine Corps that were shipped to and in the physical custody of the Air Force was not maintained in any service’s system of record while at the Air Force location. These items included: 40 Marine Corps-owned SRC I ammunition items that were stored at an Air Force location for approximately 11 months. Marine Corps officials were able to provide evidence that these items were shipped back to a Marine Corps location after the 11 months of storage at the Air Force location. 5 Army-owned AT4 anti-armor weapons that were shipped to an Air Force installation for Army training purposes. According to Air Force officials, these SRC I ammunition items have been expended, but Army and Air Force officials did not provide us related documentation. 10 additional Army-owned AT4 anti-armor weapons that were shipped to an Air Force installation for Army training purposes. For these 10 items, Army information systems show that the items were expended and turned in 2 and a half months after shipment, but Army and Air Force officials did not provide us documentation of accountability for the assets during the time they were in Air Force custody. Air Force officials stated that these ammunition items were managed on the non-accountable program because the ammunition was Marine Corps or Army property of which the Air Force did not intend to take ownership. According to Air Force officials, the assets had been deleted once the items were removed from the munitions storage area. Air Force officials could not provide us key information about these shipments, such as the date the shipments were accepted into the munitions storage area, to whom the ammunition items were issued, or when the ammunition items were issued because they said that information was no longer available in the non-accountable program. Marine Corps and Army officials told us that the ammunition items would likely have been managed by the unit— for example, by using a separate system or a manual process such as a spreadsheet. However, they did not provide a copy of the document that was used. Air Force officials updated guidance in June 2015 to place more restrictions on the use of the non-accountable program, including for SRC I ammunition items, but the guidance continues to allow the use of the non-accountable record when the Air Force does not intend to take ownership of the ammunition. According to Air Force officials, the decision of whether to maintain accountability for ammunition owned by other services in CAS depends on the operational situation and tactical environment. For example, for 20 additional SRC I ammunition items we reviewed that were owned by the Army but in the physical custody of the Air Force for testing purposes, Air Force officials maintained accountability in CAS and were able to provide transaction history. Officials told us that the Air Force is in the process of updating CAS to facilitate tracking of SRC I ammunition by owner and will move toward having most assets in CAS. However, if the Air Force does not revise guidance to clarify that accountability for all SRC I ammunition items in the Air Force’s custody—regardless of ownership—should be maintained in the Air Force’s system of record, both the Air Force and the owning service will lack a record of receipt and management of the SRC I ammunition while at the Air Force location; also the owning service will not have full assurance that accountability was maintained. We found that the military services generally recorded shipment and receipt of SRC I ammunition in their accountability systems; however, we found that existing Army depot and Marine Corps guidance do not specify a time frame for receipting shipments of SRC I ammunition. Marine Corps officials told us they generally adhere to the Navy’s guidance, which requires receipting of shipments within 1 business day, but Marine Corps installations are not required to follow that guidance. DOD policy emphasizes the need for continuous oversight to ensure protection of sensitive conventional arms, ammunition and explosives given that if these items are left vulnerable they have the potential to jeopardize the safety and security of personnel, activities, missions, and installations worldwide. DOD policy delegates to DOD component heads the responsibility to implement the procedures of DODM 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E) (Feb. 28, 2014) and develop supplemental guidance for the protection of arms, ammunition, and explosives in accordance with DODI 5100.76 Safeguarding Conventional Arms, Ammunition, and Explosives (AA&E) (May 20, 2010). However, the military services varied in the extent to which they have developed guidance that addresses the time frame within which SRC I ammunition should be receipted on the accountable record. Air Force guidance specifies SRC I ammunition be receipted on the accountable record immediately; Army guidance for retail locations specifies within 24 hours; and Navy guidance specifies within 1 business day. In contrast, Army, at the depot-level, and the Marine Corps have not finalized guidance that addresses the required time frame for receipting SRC I ammunition. In our review, we found that, generally, for those services with guidance, SRC I ammunition was receipted on the accountable record within specified time frames, while the services without guidance were more likely to receipt SRC I ammunition days after arrival, and in some instances, more than 5 days after arrival. In a non-generalizable sample of 104 shipments that we reviewed, we found the record of shipment in the shipper’s accountability system. For 100 of the 104 shipments, we found a corresponding receipt in the receiver’s accountability system. Of the four shipments for which we did not find a corresponding receipt, two were shipments of Army-owned items to the Air Force locations that the Air Force did not maintain in its accountable system because it did not own the items, and other two were shipments of Navy-owned SRC I items to a contractor for inspection. However, we found that approximately 20 percent of shipments of SRC I ammunition in our non-generalizable sample were not receipted within the time frames stated in military service policy or described as standard practice by military service officials. Of the 104 shipments we reviewed, we were able to compare receipt information to arrival time for 99 shipments, and we found that 21 of these 99 shipments were not receipted on the services’ accountability system within 2 business days after the arrival of the shipment. All of the military services either have documented policy that requires receipting SRC I ammunition on the accountable record within 1 business day or less or told us that they generally adhere to that time frame, but in our analysis, we allowed for 2 business days because military services’ information systems may take an additional business day to record transactions. Table 3 provides additional details of receipting time frames for each service. Air Force locations and Army retail locations are required by service guidance to adhere to established time frames for receipting SRC I ammunition, and all shipments we reviewed at Air Force locations for which we located receipts and all but 2 shipments we reviewed at the Army retail locations were receipted on the accountable record within 2 business days, as shown in table 3 above. In contrast, we found that the Army, at the depot-level, and the Marine Corps have not finalized guidance that addresses the required time frame for receipting SRC I ammunition. As identified in table 3, 12 of 21 shipments to Army depots and 5 of 30 shipments to Marine Corps locations were receipted more than 2 business days after arrival. An Army official told us that depots are required to receipt inbound shipments within 24 hours based on a policy letter issued prior to 2010, and that this requirement has also been in draft guidance since 2013, but that the guidance has not yet been finalized. Similarly, the Marine Corps does not have a receipting timeframe for SRC I ammunition in its guidance. Marine Corps officials told us they generally adhere to the Navy’s guidance, which requires receipting of shipments within 1 business day, but Marine Corps installations are not required to follow that guidance. Marine Corps officials told us that as of October 2015 they were in the process of incorporating a required time frame for receipting SRC I ammunition in Marine Corps guidance but did not provide a specific time frame for revising the guidance. Until the Army, at the depot-level, and the Marine Corps finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition, Army and Marine Corps officials will not have the data they need to help assure accountability for all shipped SRC I ammunition. The Air Force and Navy have policies regarding maintaining in-transit accountability for shipped SRC I ammunition that generally adhere to DOD requirements, and the Marine Corps has planned system updates to adhere to requirements; however, the Army’s policy and processes do not fully adhere. DOD policy requires that the DOD component directing materiel into an in-transit status will retain accountability within the logistics records for that materiel until there is a formal acknowledgment of receipt. The Air Force and Navy maintain in-transit tables in their accountability systems that can be used to track ammunition that has been shipped but not yet receipted. Additionally, the Navy requires all in- transit materiel remain accountable to the issuing activity until properly receipted or resolved, and Air Force policy requires that each receiver acknowledge—orally or in writing or through other automated means— that the shipped SRC I items were received, and the date the assets were received. The Marine Corps has planned system updates to adhere to DOD requirements to maintain accountability for in-transit SRC I ammunition items. According to Marine Corps officials, the Marine Corps tracks Marine Corps-owned assets in transit until formal acknowledgement of receipt in its OIS-MC system, but Marine Corps ammunition supply points do not maintain accountability for SRC I ammunition in transit to another service. Marine Corps officials told us that the system of record used by Marine Corps ammunition supply points is being upgraded in fiscal year 2016 to facilitate compliance with in-transit requirements. The Army does not maintain accountability for all in-transit items within the logistics records for that materiel until there is a formal acknowledgement of receipt. Army regulations require the Joint Munitions Command to track shipments of SRC I ammunition from depot to depot, depot to unit, or unit to depot using DTTS and to monitor shipping documents and receipts to ensure they are closed or posted in a timely manner. However, officials from the Joint Munitions Command told us they do not receive confirmation of receipt from some entities, including other military services and some contractors. The Army’s systems do not maintain in-transit tables that show items that have been shipped out of one location and are due in to another. When the Army ships SRC I ammunition from depots or retail locations, it drops those items from its accountable systems without a requirement to confirm or document that the shipment was received. For SRC I ammunition shipments to other Army locations, the Army retains visibility of shipments by maintaining a record of SRC I ammunition items that have been shipped in its Worldwide Ammunition Reporting System-New Technology (WARS-NT) database, and matches up shipped items and receipted items by serial number to confirm that the items were received. However, for shipments to other military services, Army officials told us that the Army clears shipped items from its WARS-NT records upon receiving confirmation that the items were shipped. Army officials told us that limitations in their depot-level system, called LMP, and in their retail-level system, called the Standard Army Ammunition System, prevent them from maintaining full accountability for in-transit items, and that this deficiency, which affects all classes of supply, has been identified by the Army since 2012 at both the depot and retail level but that a solution has not yet been developed because, in part, of technical complexities. However, Army officials have not evaluated or identified actions that the Army could take to enable it to retain accountability for in-transit items until acknowledgment of receipt. Unless the Army evaluates and identifies actions to retain accountability for in-transit items until acknowledgement of receipt, the Army will not have a path forward to ensure that accountability for in-transit SRC I ammunition was maintained and the ammunition was received, thereby creating a potential gap in accountability and visibility of this ammunition. The military services have not consistently ensured timely, complete, and accurate information to maintain full visibility of SRC I ammunition in the continental United States. We found the Army has not ensured timely and complete information of SRC I ammunition returned to the contractor, but has begun to take action to ensure reporting to WARS-NT to improve visibility. We also found the Army had inaccurately categorized two variants of SRC I rockets, but took immediate action to add the rocket variants to the catalog listing of SRC I ammunition. Further, we identified examples of the military services not entering timely information in the Defense Transportation Tracking System (DTTS) on shipments to aid Military Surface Deployment and Distribution Command tracking by satellite, and of the services entering inaccurate or incomplete data about shipments of SRC I ammunition, which affects visibility of SRC I ammunition in transit. We found that the Army did not have timely, complete, or accurate information of its SRC I ammunition, but has taken action in two areas in order to improve visibility. In one area, we found Army officials had not ensured timely and complete information of SRC I ammunition returned to the contractor for repair, upgrade, maintenance, or testing and had not followed guidance for maintaining visibility of SRC I missiles. While the Army’s WARS-NT system, which is the Army’s official system for tracking SRC I ammunition, provided visibility of SRC I missiles located at the contractor facility, WARS-NT did not have timely or complete records to show visibility of all SRC I missiles at the contractor’s site. In January 2015, we identified an October 2014 shipment of 58 SRC I missiles sent from an Army depot to a contractor facility for repair. Although we confirmed during our site visit that the 58 missiles were located at the contractor’s facility and that the contractor’s automated information system accounted for the missiles, we found that WARS-NT did not have timely or complete data about the shipped 58 SRC I missiles. After we identified the discrepancies in records systems, Army officials acknowledged that while it is an Army requirement for a contractor to report the receipt of these items to the WARS-NT program office, this requirement was not included in the contract. Army officials are taking action and are coordinating a modification to the contract to require the prime contractor to routinely report receipt of shipments to WARS-NT per Army regulation. In the second area, we found that WARS-NT had inaccurately categorized two variants of SRC I rockets. Specifically, we found 55 SRC I ammunition items—variants of the M72 rocket—were not included in the WARS-NT system as SRC I ammunition items. After we noted the omission of the rocket variants in WARS-NT as SRC I ammunition, Army officials took action in August 2015 to add the rocket variants to the catalog listing of SRC I ammunition and in the WARS-NT system as SRC I ammunition. We found that the military services, as required by DOD regulation, used satellite tracking for nearly all of the 104 shipments of SRC I ammunition that we reviewed; however, the services did not always enter timely, accurate, and complete information that is required to aid tracking. The Defense Transportation Regulation requires satellite tracking of shipments of SRC I ammunition via the Defense Transportation Tracking System (DTTS). We found that 103 of 104 shipments of SRC I ammunition in a non-generalizable sample we reviewed were tracked in DTTS using satellite monitoring. DTTS, which is maintained by the Military Surface Deployment and Distribution Command, which falls under the U.S Transportation Command, provides satellite tracking capability of shipments of sensitive conventional arms, ammunition and explosives, including SRC I ammunition items, from the point of departure until the point of arrival. However, we observed problems with the timeliness, accuracy, and completeness of the data provided by the military services in DTTS, which limited the information available to aid the Military Surface Deployment and Distribution Command’s tracking of these shipments and its ability to facilitate responses to any incidents, if necessary. We found that the military services did not always enter timely information in DTTS on SRC I ammunition shipments to aid the Military Surface Deployment and Distribution Command’s tracking of SRC I ammunition by satellite. We observed timeliness problems both at the point of shipment departure and the point of shipment arrival. Shipment departure: The Defense Transportation Regulation specifies that the military services’ shipping offices must enter shipping information in DTTS prior to carrier departure. Data provided by the Military Surface Deployment and Distribution Command showed that information about 93 of 1,008 shipments identified as containing SRC I items between November 1, 2013, and April 30, 2015, were not in DTTS at the time of carrier departure. According to Military Surface Deployment and Distribution Command’s data, information was entered more than 1 hour after carrier departure for 68 of the 93 shipments. On average, information about these 68 shipments was not entered until approximately 8 hours after departure. According to Military Surface Deployment and Distribution Command officials, when information is not entered in the DTTS at the time of carrier departure, the command is still notified that these shipments are on the road when drivers turn on their satellite monitoring devices. However, the command does not have information about the contents of these shipments and therefore DTTS is unable to provide essential information to initiate rapid emergency response to in-transit accidents or incidents to minimize effect. Additionally, if a driver did not turn on the satellite monitoring device, the command would not be alerted to that situation since it would be unaware that a shipment was expected. Shipment arrival: The Defense Transportation Regulation requires entry into DTTS of confirmation of receipt of SRC I shipments within 2 hours of the offloading of each shipment. Data provided by the Military Surface Deployment and Distribution Command for SRC I shipments between November 1, 2013, and April 30, 2015, showed that 572 of 992 shipments to the military services containing SRC I items were not confirmed within the calendar month that they arrived. Further, as of April 30, 2015, Military Surface Deployment and Distribution Command data shows a backlog of 364 SRC I shipments to the military services dating as far back as November 2011 that had not been confirmed. According to Military Surface Deployment and Distribution Command officials, shipments that are not confirmed in DTTS as required hinder their ability to ensure successful transportation of SRC I ammunition because it requires the command to rely solely on the carrier to confirm that SRC I ammunition has been delivered. The Military Surface Deployment and Distribution Command and the military services have taken steps to improve the timeliness of data in DTTS. The Military Surface Deployment and Distribution Command works with designated military service representatives on transportation issues, and provides reports to the military representatives on timeliness of confirmation of individual SRC I shipments and SRC I shipments from prior months that have not been confirmed. Military Surface Deployment and Distribution Command officials also told us that they have been working to try to reduce systemic causes of shipments not being in DTTS at the time of shipment departure, such as system interface delays. Similarly, military service representatives told us that they have also tried to address issues of timeliness of reporting in DTTS. For example, the Army issued guidance in May 2014 reminding transportation offices and ammunition supply points of their responsibilities with regard to entering information in DTTS. However, both Military Surface Deployment and Distribution Command officials and the military service representatives acknowledged their collaboration could be improved to determine what information is needed to improve the military services’ oversight of the timeliness of data entry in DTTS. For example: With regard to shipments not entered in the system in a timely manner, Military Surface Deployment and Distribution Command officials told us that they provided reports to the military service representatives on shipments not in the system at the time of departure; however, they stopped notifying the military service representatives through emails to request assistance because they did not observe a decrease in the number of such shipments. With regard to shipment confirmations, while the Military Surface Deployment and Distribution Command continues to provide reports on SRC I shipments that were not confirmed in a timely manner, military service representatives told us that the information they are provided does not include sufficient detail for them to work with receiving locations to improve compliance with confirmation requirements. For example, the report provided by the Military Surface Deployment and Distribution Command does not identify the office responsible for confirmation, and it provides arrival time rather than offload time, although confirmation requirements in the Defense Transportation Regulation cite time elapsed from offload time. Until the Military Surface Deployment and Distribution Command and the military services collaboratively determine the specific information required for the military services to ensure timely data entry into DTTS, in accordance with the Defense Transportation Regulation, the Military Surface Deployment and Distribution Command will continue to lack full visibility of shipments of SRC I ammunition at certain points during the shipping process and the military services will not be well positioned to improve their oversight of the timeliness of data entry. We identified examples of the military services entering incomplete or inaccurate data in DTTS about shipments of SRC I ammunition. Incomplete information: The transportation control number for 8 of 104 shipments in our sample was not listed in DTTS, which limits the information available to the Military Surface Deployment and Distribution Command about individual shipments being tracked. For example, if one or more transportation control numbers associated with a shipment are not listed in DTTS, the Military Surface Deployment and Distribution Command may not have accurate information about the type, quantity, and security risk category of ammunition being tracked. 164 of 1,008 SRC I shipments from November 1, 2013, through April 30, 2015, which were reported to us by the Military Surface Deployment and Distribution Command, were missing data in the Department of Defense Identification Code field, which provides information about the specific type of ammunition being shipped. Inaccurate information—9 of 104 shipments in our sample had inaccurate controlled inventory items codes and were not identified in DTTS as SRC I shipments, which required us to go back to the Military Surface Deployment and Distribution Command to obtain additional information to confirm the shipment had been tracked by satellite. According to Standards for Internal Control in the Federal Government, agencies should have relevant, reliable, and timely information for decision-making and external reporting purposes. Completeness and accuracy are key characteristics of reliable data and refer to (1) the extent to which relevant records are present and that fields in each record are populated appropriately; (2) recorded data reflect the actual underlying information. Military Surface Deployment and Distribution Command officials told us that they attempted to address completeness and accuracy issues on a shipment-by-shipment basis. According to the officials, when an operator responsible for tracking an individual shipment notices missing or inaccurate information—such as when information in the paperwork given to the driver does not match information in the system—the operator attempts to work with the military service’s shipping office to correct that information for the shipment. However, neither the military services nor the Military Surface Deployment and Distribution Command have conducted an analysis of the problems the Military Surface Deployment and Distribution Command has observed with the completeness and accuracy of data entered by the military services to identify areas for improvement on a broader scale. Until the military services, with the aid of the Military Surface Deployment and Distribution Command, conduct analysis of the completeness and accuracy of data entered into DTTS by shippers on SRC I ammunition shipments, DOD will continue to lack full visibility of shipments of SRC I ammunition and the military services will not be well positioned to improve their oversight of the completeness and accuracy of the data. SRC I ammunition is treated as a higher risk than other conventional ammunition and serves as a potential threat if it were obtained and used by unauthorized individuals or groups. We found that the military services maintained accountability in their automated information systems of SRC I ammunition at 11 sampled locations. However, we found examples of SRC I ammunition items that were in the physical custody of the Air Force but owned by other services and accountability was not maintained on the Air Force’s system of record. If the Air Force does not revise guidance to clarify that accountability of all SRC I ammunition items in the Air Force’s custody—regardless of ownership—is maintained in the Air Force’s system of record, both the Air Force and the owning service will not have full assurance that accountability was maintained. Also, we found that the military services generally recorded shipment and receipt of SRC I ammunition in their accountability systems, but the Army and Marine Corps do not have guidance that required the receipting of SRC I ammunition in a timely manner, in accordance with DOD policy. Until the Army, at the depot-level, and the Marine Corps finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition, Army and Marine Corps officials will not have the data they need to help assure accountability for all shipped SRC I ammunition. Further, the Air Force, Navy, and Marine Corps have policies or plans regarding maintaining in-transit accountability for shipped SRC I ammunition to generally adhere to DOD requirements, but the Army’s policy and processes do not fully adhere. Unless the Army evaluates and identifies actions to retain accountability for in-transit items until acknowledgment of receipt, the Army will not have a path forward to ensure that accountability for in-transit SRC I ammunition was maintained and the ammunition was received, thereby creating a potential gap in accountability and visibility of this ammunition. In addition, we found that the military services have not always entered timely information in DTTS on SRC I ammunition shipments, as specified in the Defense Transportation Regulation, to aid the Military Surface Deployment and Distribution Command’s tracking and visibility of SRC I ammunition by satellite. However, the Military Surface Deployment and Distribution Command and the military services have not agreed on the specific information required for the military services to ensure timely data entry into DTTS, in accordance with the Defense Transportation Regulation. Moreover, we identified examples of the military services entering incomplete or inaccurate data in DTTS about shipments of SRC I ammunition. Until the Military Surface Deployment and Distribution Command and the military services collaboratively determine the specific information required for the military services to ensure timely data entry into DTTS, and the military services, with the aid of the Military Surface Deployment and Distribution Command, conduct analysis of the completeness and accuracy of data entered into DTTS military services’ shipping offices on SRC I ammunition shipments, the Military Surface Deployment and Distribution Command will continue to lack full visibility of shipments of SRC I ammunition and the military services will not be well positioned to improve their oversight of the timeliness, completeness, and accuracy of data entered in DTTS. We are making six recommendations to enhance the department’s policy and procedures and improve the accountability and visibility of SRC I ammunition. To ensure the accountability and protection of SRC I ammunition, in accordance with DOD policy, we recommend the Secretary of Defense direct the Secretary of the Air Force to revise guidance to clarify that accountability for all SRC I ammunition items in the Air Force’s custody— regardless of ownership—should be maintained in the Air Force’s system of record. To ensure the Army and Marine Corps record the receipt of shipped SRC I ammunition in their accountability systems, and in accordance with DOD policy, we recommend the Secretary of Defense direct: the Secretary of the Army to finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition at the depot level. the Commandant of the Marine Corps to finalize and implement guidance that addresses the required time frame for receipting SRC I ammunition at Marine Corps locations. To ensure the Army retains accountability of SRC I ammunition in an in- transit status, consistent with DOD policy, we recommend the Secretary of Defense direct the Secretary of the Army to evaluate and identify actions to enable the Army to retain accountability for in-transit items until acknowledgment of receipt. To help improve visibility and tracking of SRC I ammunition shipments, we recommend the Secretary of Defense direct the Secretaries of the military departments and the Military Surface Deployment and Distribution Command, through the Commander of the U.S. Transportation Command, to collaboratively determine the specific information required for the military services to ensure timely data entry into DTTS, in accordance with the Defense Transportation Regulation. To help improve the completeness and accuracy of data provided by the military services to the Military Surface Deployment and Distribution Command in accordance with federal internal control standards, we recommend the Secretary of Defense direct the Secretaries of the military departments, with the aid of the Military Surface Deployment and Distribution Command, to conduct analysis of the completeness and accuracy of the data entered into DTTS. We provided a draft of this report to DOD for review and comment; the department provided technical comments that we considered and incorporated as appropriate. DOD also provided written comments on our recommendations, which are reprinted in appendix V. In commenting on this draft, DOD concurred with all six of our recommendations. With respect to the first recommendation to ensure the accountability and protection of SRC I ammunition, DOD stated that the Air Force released a memorandum on December 24, 2015, directing Air Force units to account for all SRC I ammunition items in their custody, regardless of ownership, and to maintain them in the Combat Ammunition System. Additionally, DOD stated that such procedures will be included in Air Force guidance by September 30, 2016. With respect to our second and third recommendations to ensure the Army and Marine Corps record the receipt of shipped SRC I ammunition in their accountability systems within the required timeframes, DOD stated that the Army will include procedures on the required time frame for receipting SRC I ammunition at the depot-level in their guidance by September 30, 2016. Further, DOD stated that the Marine Corps has issued interim guidance via a Naval Message in January 2016 to address SRC I ammunition accountability along with required receipt times and that such procedures will be included in their guidance by June 30, 2016. Regarding our fourth recommendation to ensure the Army retains accountability of SRC I ammunition in an in-transit status, DOD stated that the Army will evaluate and identify by June 30, 2016, actions to enable the Army to retain accountability for in-transit items until acknowledgment of receipt. Further, DOD stated the proposed actions will then be prioritized for incorporation into any required follow-on work with Army Class V management systems, such as the Logistics Modernization Program and the Standard Army Ammunition System. Regarding our fifth recommendation to help improve visibility and tracking of SRC I ammunition shipments, DOD stated that the military services and the Military Surface Deployment and Distribution Command will collaboratively determine the specific information the Military Surface Deployment and Distribution Command can provide to the military services to correct data missing in DTTS at the time of shipment, and to complete shipment receipts. Furthermore, to provide greater oversight of the DTTS data, DOD stated the military services and the Military Surface Deployment and Distribution Command will develop the processes required to ensure regular feedback on accuracy and timeliness. Finally, with respect to our sixth recommendation to help improve the completeness and accuracy of data provided by the military services to the Military Surface Deployment and Distribution Command, DOD stated that the military services and the Military Surface Deployment and Distribution Command will complete the necessary analysis of the completeness and accuracy of the data entered into DTTS. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-5257 or merrittz@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix VI. Our review of the Department of Defense’s (DOD) management of SRC I ammunition focused on the four military services— Army, Navy, Marine Corps, and Air Force— because each military service owns, stores, and ships SRC I ammunition. To determine the extent to which the military services have maintained accountability of SRC I ammunition in the continental United States, we reviewed DOD policy and military service guidance, including Department of Defense Manual (DODM) 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E), (Apr. 17, 2012), among others, detailing: continuous accountability, frequency and process for conducting physical inventories, process for making adjustments to the electronic record if necessary, tracking of SRC I ammunition by serial number, and the shipment of SRC I ammunition in the continental United States. During our review, we visited 11 military locations—including 3 Army depots and 8 military service locations, such as military service installations, bases, and ammunition supply points, with SRC I ammunition—selected based on a number of factors including the size of SRC I inventory, the number of shipments to and from the location, and the variety of SRC I ammunition being stored. We also visited a contractor with a current production contract for SRC I missiles as SRC I ammunition items are in the contractor’s custody while at the contractor’s facility for repair, maintenance, or upgrade. Additionally, we interviewed OSD and military services officials responsible for the management of SRC I ammunition, including inventory personnel and transportation officials, to gain an understanding of the frequency and process for conducting physical inventories and how shipments of SRC I ammunition are coordinated. We compared a non-generalizable sample of over 600 SRC I ammunition items against the records in the military services’ automated information systems to verify accountability. For the Army we used the Logistics Modernization Program (LMP), Standard Army Ammunition System- Modernization (SAAS-MOD), and Worldwide Ammunition Reporting System-New Technology (WARS-NT). For the Navy and Marine Corps we used Ordnance Information System- Wholesale (OIS-W), Ordnance Information System-Retail (OIS-R), and Ordnance Information System- Marine Corps (OIS-MC). For the Air Force we used Combat Ammunition System (CAS). Specifically, during our site visits to 11 military locations and 1 contractor location, we went through storage buildings with SRC I ammunition and selected SRC I ammunition from different pallets to include a range of SRC I items as well as items from recent shipments, and documented identifying information including serial and production lot number. We verified the Army, Navy, and Marine Corps SRC I ammunition items by serial and lot number. Due to the way the Air Force maintains its records, we verified their SRC I ammunition to records based on lot number and quantity. We analyzed DOD policy and military service guidance on frequency and process for conducting physical inventories and reviewed supporting documentation to determine whether the services were maintaining accountability by conducting physical inventories according to requirements. For Army depots, we collected documentation of completed physical inventories for three fiscal years prior to our audit work— 2012, 2013, and 2014 and conducted site visits to three Army depots to observe a walk-through of their physical inventory process. We selected the three Army depots to visit based on a number of factors, including range in quantity and type of SRC I in storage and recent shipments. To supplement our site visits, we also interviewed inventory personnel at the remaining depots regarding the physical inventory process and process for adjusting the electronic record, if necessary. For five military service locations we visited, we requested documentation of the last three completed physical inventories to obtain a variety of physical inventories (e.g., monthly, quarterly, annually, or change in command) and we also observed a walk-through of their physical inventory process. Further, to supplement our site visits, we randomly selected 10 additional Air Force locations and obtained documentation for their last three completed physical inventories. We reviewed the inventories for our non- generalizable sample of 22 selected locations to determine whether physical inventories were being conducted in accordance with DOD policy and military service guidance and at required frequencies. Finally, during our site visit with the contractor, we confirmed the contractor had completed physical inventories of SRC I missiles in its custody as well as discussed with officials how they conduct physical inventories of SRC I ammunition at their location. We also examined the military services’ guidance and procedures for maintaining accountability for items owned by one service but in the physical custody of another service. We analyzed DOD policy and military service guidance on maintaining accountability for ammunition to determine the extent to which military services’ guidance aligned with DOD policy. We also analyzed data and documents obtained from the Air Force, Army, and Marine Corps on 55 SRC I items from 4 shipments of SRC I ammunition in the continental United States that contained ammunition owned by the Army or Marine Corps that was shipped to and held in the physical custody of the Air Force but for which we had found that accountability was not maintained on the Air Force’s system of record. We identified these items because we were unable to locate receipts for certain shipments in the Air Force’s system of record when we reviewed it for our analysis of the timeliness of receipt of shipments of SRC I ammunition described below. Information we report about the number of SRC I items or shipments we identified as being owned by another service but in the physical custody of the Air Force and not maintained on the Air Force’s accountable record is non-generalizable to the overall universe of SRC I items but provides insights on how the Air Force manages items in its physical custody that are owned by another service. Further, we analyzed shipping documents and military service data for a non-generalizable sample of 104 SRC I shipments, and compared receipting time frames for these shipments to military service guidance to analyze how accountability was maintained. When the military services did not have documented guidance on receipting time frames, we obtained information from military service officials about standard procedures followed by the military service. Our sample was comprised of shipments that occurred between November 1, 2013, and April 30, 2015, and that were shipped to or from locations we visited or interviewed. We selected these time frames to provide an 18-month window that provided one prior year’s data and six months that coincided with the period when we were conducting field work. Further, we selected our sample to reflect shipments to or from a variety of military services, locations, and location types. Because our sample of shipments is non-generalizable, results of our analysis cannot be used to make inferences about all SRC I shipments within the continental United States but they provide insights on the military services’ adherence to DOD policy and service-level guidance or standard practice regarding the shipment of SRC I ammunition. For the 104 shipments in our sample, we obtained and reviewed shipping documents and receipt data from the receiving military services’ accountability systems. We compared the receipt data from the receiving military service’s accountability systems to data on shipment arrival time at the receiving location that we obtained from the Defense Transportation Tracking System (DTTS), maintained by the Military Surface Deployment and Distribution Command. For our analysis, we analyzed whether shipments were receipted within 2 business days of the day of arrival of the shipment even though either service guidance or standard practice generally required receipting within 1 business day or less. We allowed for 2 business days because military services’ information systems may take an additional business day to record transactions. Also, we analyzed military service guidance related to providing accountability for in-transit items and compared that guidance to DOD policy to assess whether the military services’ policies and processes for maintaining accountability for in-transit SRC I ammunition items enabled the military services to maintain accountability of SRC I ammunition in the continental United States. When we determined that a military service’s guidance and processes did not align with DOD policy, we requested and reviewed additional documentation, such as analyses of gaps in information system capabilities and documentation of planning of system upgrades, and conducted interviews with military service officials to determine the reasons for the differences. To determine the extent to which DOD has maintained visibility of SRC I ammunition in the continental United States, we reviewed DOD policy and military service guidance, including DODM 5100.76 and the Defense Transportation Regulation, among others, detailing procedures to maintain visibility of SRC I ammunition, including in-transit visibility during shipment, satellite tracking of shipments, and timeframes for entering shipment information into DTTS. In addition, we interviewed relevant officials at the Office of the Secretary of Defense, the military services, U.S. Transportation Command, and the Military Surface Deployment and Distribution Command to gain an understanding of how visibility is maintained in their automated information systems, how shipments of SRC I ammunition are processed for shipping and entered into DTTS, and how visibility is maintained while the shipment is in transit. We obtained SRC I ammunition data from each of the military services’ automated information systems as of April 30, 2015, and analyzed this data for timely, complete and accurate information to maintain full visibility of SRC I ammunition in the continental United States. Specifically, we compared this data, based on a number of elements including type of SRC I ammunition, location in the continental United States, condition of the SRC I ammunition, and military service ownership codes, against information in the department’s National Level Ammunition Capability (NLAC) system, a DOD-wide repository that provides visibility of SRC I ammunition data, to identify inconsistencies across DOD and the military services. We also analyzed DOD requirements for satellite tracking from the Defense Transportation Regulation and obtained and analyzed information from DTTS provided by the Military Surface Deployment and Distribution Command about satellite tracking of shipments of SRC I ammunition in the continental United States from November 1, 2013, through April 30, 2015, to gain an understanding of how visibility is maintained. We analyzed data from November 1, 2013, to April 30, 2015, to correspond to the time frame we used to select our non-generalizable sample of shipments for review. To examine whether the military services used satellite tracking for shipments included in our non-generalizable sample of 104 shipments described above, we compared the transportation control number for each shipment in our sample to transportation control numbers associated with SRC I shipments in DTTS. When we could not locate a shipment in DTTS by transportation control number, we followed up with the Military Surface Deployment and Distribution Command to obtain additional information about the shipment, since in some cases the transportation control number was in DTTS but not in the data provided to us since the data was provided based on a bill-of-lading number. For the shipments that neither we nor the Military Surface Deployment and Distribution Command could locate in DTTS, we requested additional information about the shipment from military service officials to attempt to locate the shipment in DTTS through a means besides the transportation control number. For example, in some cases, the shipper had not identified the shipment in DTTS by transportation control number, and we were able to obtain and search on the bill-of-lading number to confirm that the shipment had been tracked in DTTS. We also examined the extent to which the military services provided timely data in DTTS, in accordance with the Defense Transportation Regulation, to ensure visibility. We analyzed data and reports provided by the Military Surface Deployment and Distribution Command from DTTS to identify the number of SRC I shipments between November 1, 2013, and April 30, 2015, for which information had not been entered into the system at the time of shipment departure and the number of shipments that were not confirmed within the calendar month of arrival. Further, we examined the extent to which the military services provided accurate and complete data in DTTS. We compared values for key data fields in DTTS, such as the DOD Identification Code and transportation control number, to shipping documents for selected shipments from our sample of 104 shipments. We also analyzed the number of missing values for selected data fields in DTTS for the 1,008 SRC I shipments in the continental United States between November 1, 2013, and April 30, 2015, reported to us by the Military Surface Deployment and Distribution Command. While we identified some issues related to the accuracy and completeness of DTTS data that are described in this report and may affect the reliability of the overall number of SRC I shipments during this time frame, we determined that the data were sufficiently reliable for our purposes of analyzing information about individual shipments in our sample and general trends in the timeliness, accuracy, and completeness of data entry in DTTS. To obtain additional information about the timeliness, accuracy, and completeness issues we identified and steps that were being taken to address these issues, we conducted interviews with U.S Transportation Command and Military Surface Deployment and Distribution Command officials, as well as representatives from each of the military services who are assigned to coordinate with the Military Surface Deployment and Distribution Command on transportation issues and reviewed additional documentation provided by the Military Surface Deployment and Distribution Command and the military services, such as reporting provided by the Military Surface Deployment and Distribution Command to the military services. Table 4 lists the offices that we visited or contacted during our review. We conducted this performance audit from September 2014 to February 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Department of Defense Manual (DODM) 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives (AA&E) sets forth DOD policy on the physical security of sensitive conventional AA&E. According to DODM 5100.76, continuous program and policy oversight is required to ensure protection of AA&E within DOD, and DOD components are required to track and conduct physical inventories of SRC I ammunition by serial number. DOD policy requires SRC I ammunition to be treated as a higher risk than other conventional ammunition which requires a higher level of protection and security. DOD and the military services have policy and guidance on how to account for, safeguard, conduct physical inventories, adjust if necessary, track, and ship SRC I ammunition within and between services and to contractors for repair, as shown in table 5 below. In May 2014, we found that the department has experienced some challenges in implementing hazardous materials (HAZMAT) regulations and other guidance, which can adversely affect the safe, timely, and cost- effective transportation of HAZMAT. For example, we found that at least 44 times during fiscal years 2012 and 2013, DOD installations did not provide commercial carriers with access to secure hold areas for arms, ammunition, and explosives shipments or assist them in finding alternatives, as required by DOD regulations. We made 3 recommendations and all 3 have been closed as implemented. Table 7 summarizes our recommendations and their implementation status. In March 2014, we found that the military services’ automated information systems used to maintain accountability for ammunition inventory have some limitations that affect their ability to facilitate efficient management of conventional ammunition. For example, the systems cannot directly exchange ammunition data because they use different exchange formats that require extra time and resources to ensure data efficiency when exchanging between systems. We also found that Army reports of ammunition inventory data, used in the process for collecting and sharing ammunition data among the military services do not include information on certain missiles. We concluded that without incorporating these items in the Army’s report, DOD may lack full transparency about all available items and may miss opportunities to avoid procurement costs for certain usable items that may already be available in the Army’s stockpile. We made 7 recommendations, of which 2 have been implemented and 5 remain open. Table 8 summarizes our recommendations and their implementation status. In April 2000, we found internal controls weaknesses at an Army ammunition depot that resulted in a loss of accountability and control over SRC I rockets. For example, serial number control of SRC I rockets was lost at the time of shipment from the contractor because serial numbers listed on receiving reports that accompanied shipments did not correspond to the actual items and quantities of the respective shipments. We also noted that these control weaknesses indicate that the depot’s inventory business processes for these sensitive items do not fully comply with federal accounting and systems requirements. We made 10 recommendations, of which 9 have been implemented and 1 has not been implemented. Table 9 summarizes our recommendations and their implementation status. In September 1997, we found oversight weaknesses with SRC I rockets and that the military services have different procedures and requirements for maintaining oversight of the rockets. Further, we found that discrepancies existed between records of the number of missiles and a physical count we conducted. In addition, we identified that some facilities were not fully complying with DOD physical security requirements. We made 5 recommendations, of which all 5 have been closed as implemented. Table 10 summarizes the recommendations and their implementation status. In September 1994, we found discrepancies in the quantities, locations, and serial numbers of SRC I missiles inventories, which we concluded indicated that the services’ oversight and recordkeeping for the missiles is poor. We also noted, among other findings, that the services did not know how many missiles they should have in their possession because they lacked systems to track the missiles by serial number. We made 6 recommendations, all of which have been implemented. Table 11 summarizes the recommendations and their implementation status. In addition to the contact named above, Marilyn Wasleski (Assistant Director), Laura Czohara, Martin de Alteriis, Amie Lesser, Felicia Lopez, Sean Manzano, Anne McDonough-Hughes, Steve Pruitt, and Richard Powelson made key contributions to this report.","DOD manages a stockpile of more than 226,000 SRC I missiles and rockets in the continental United States. SRC I conventional ammunition, which refers to nonnuclear, portable missiles and rockets in a ready-to-fire configuration, is managed as a higher risk than other conventional ammunition and serves as a potential threat if it were obtained by unauthorized individuals or groups. Senate Report 113-176 (2014) included a provision for GAO to review aspects of DOD's management of SRC I ammunition. This report addresses the extent to which the military services have maintained (1) accountability and (2) visibility (i.e., access to accurate information) of SRC I ammunition in the continental United States. GAO reviewed DOD and military service policies, regulations, and guidance on physical inventories and shipping of SRC I ammunition; conducted visits at a non-generalizable sample of 11 military service locations selected based on inventory size and number of shipments of SRC I ammunition; interviewed officials; and analyzed data on SRC I on-hand assets as of April 30, 2015, and on non-generalizable samples of SRC I shipments from November 1, 2013, to April 30, 2015. The military services maintained accountability (i.e., accurate records) of Security Risk Category (SRC) I conventional ammunition at 11 sampled locations within the continental United States; however, GAO identified gaps in some service-level guidance and procedures for how SRC I ammunition is accounted for across locations. GAO identified instances in which the Navy and Army had taken actions to enhance the accountability of the physical inventories of SRC I ammunition, such as the Army evaluating its methodology to ensure contractors with SRC I ammunition in their custody submit documentation to verify completion of inventories. However, GAO identified 55 SRC I ammunition items that were in the physical custody of the Air Force—though owned by the Army or Marine Corps—but accountability was not maintained in any service's system of record while at the Air Force location. Department of Defense (DOD) policy requires that the DOD component having physical custody of materiel maintain accountability in its records regardless of the owner, but the Air Force's guidance requires that ammunition owned by other services be tracked only in a “non-accountable” program. If the Air Force does not revise its guidance to require that accountability be maintained regardless of ownership, the Air Force and the owning service will not have complete records of management of the ammunition and the owning service will not have full assurance that accountability was maintained. GAO found that Army and Marine Corps guidance does not specify a time frame for receipting shipments of SRC I ammunition. Records showed that 12 of 21 shipments to Army depots and 5 of 30 shipments to Marine Corps locations were receipted more than 2 business days after truck arrival. Until Army and Marine Corps officials finalize and implement guidance on required time frames for receipting SRC I ammunition, officials cannot reasonably assure accountability for all shipped SRC I ammunition. The military services have not consistently ensured timely, complete, and accurate information to maintain full visibility of SRC I ammunition in the continental United States. For example, 93 of 1,008 shipments GAO examined were not entered in DOD's Defense Transportation Tracking System (DTTS) at the time of departure. Also, 9 of 104 shipments GAO examined in more detail had inaccurate controlled inventory item codes and were not identified in DTTS as SRC I shipments. The Military Surface Deployment and Distribution Command and the military services have not collaboratively determined the specific information required for the military services to ensure timely data entry into DTTS. Further, the military services, with the aid of the Military Surface Deployment and Distribution Command, have not conducted analysis of the completeness and accuracy of data entered into DTTS by shippers on SRC I ammunition shipments. Until these actions are taken, the Military Surface Deployment and Distribution Command will not have full visibility of shipments of SRC I ammunition and the military services will not be well positioned to improve their oversight of the timeliness, completeness, and accuracy of data entered in DTTS. GAO recommends that DOD revise and finalize guidance and improve the timeliness, completeness, and accuracy of information to maintain full accountability and visibility of SRC I ammunition. DOD concurred with all six recommendations and identified specific steps it has already taken as well as plans to address them.",govreport
"With virtually billions of records, the federal government is the largest single producer, collector, and user of information in the United States. In order to carry out the various missions of the federal government, federal agencies collect and maintain personal information such as name, date of birth, address, and SSNs to distinguish among individuals and ensure that people receive the services or benefits they are entitled to under the law. SSA is responsible for issuing SSNs as part of its responsibility for administering three major income support programs for the elderly, disabled, and their dependents: the Old-Age and Survivors Insurance; Disability Insurance; and Supplemental Security Income. SSA is also the repository of information on individuals’ wages and earnings. This information is used in tax administration and is reported by individuals on their federal income tax returns. Tax return information may only be disclosed as permitted by the IRC. Information transmitted to SSA has been protected from disclosure by statute and regulation since the inception of the Social Security program. To maintain the confidentiality of the personal information the agency collects to carry out its mission, in June 1937, SSA adopted its first regulation, known as “Regulation No. 1,” to protect the privacy of individuals’ records and to include a pledge of confidentiality. The regulation was reinforced by amendments to the Social Security Act in 1939, which became the statutory basis for maintaining the confidentiality of SSA’s records. For decades, the act, along with Regulation No. 1, formed the basis for SSA’s disclosure policy. However, the enactment of subsequent legislation—the Freedom of Information Act (FOIA) in 1966 and Government in the Sunshine Act in 1976—caused SSA to reexamine its disclosure and confidentiality policy. This legislation placed the burden on SSA, as well as other federal agencies, to justify withholding information requested. Still, SSA’s policy is designed to protect the privacy rights of individuals to the fullest extent possible while permitting the exchange of records required to fulfill its administrative and program responsibilities. Over the years, SSA’s disclosure policy has been revised to comply with about 25 statutes, including the Privacy Act. The Privacy Act of 1974 is the primary law governing the protection of personal privacy by agencies of the federal government. The Privacy Act regulates the collection, maintenance, use, and disclosure of personal information that federal agencies maintain in a system of records. The act requires that, at the time the information is collected, agencies inform an individual of the following: (1) authority for the collection and whether it is mandatory or voluntary, (2) the principal purpose for the collection of information, (3) what the routine uses for the information may be, and (4) what the consequences are of not providing the information. The act applies to systems of records maintained by federal agencies, and with certain exceptions, prohibits agencies from disclosing such records without the consent of the individual whose records are being sought. The act authorizes 12 exceptions under which a federal agency may disclose information in its records without consent, as shown in table 1. The Privacy Act requires that the Office of Management and Budget (OMB) issue guidance and oversee agency implementation of the act. The act does not generally apply to state and local government records; state laws vary widely regarding disclosure of personal information in state government agencies’ control. The Privacy Act, under the law enforcement exception, outlines the minimum criteria that must be met by a law enforcement agency to obtain personal information without an individual’s consent. The act requires that the request specify the information being sought and the law enforcement activity being carried out. The request must be in writing, and signed by the agency head. In addition, OMB guidance permits agencies to disclose a personal record covered by the Privacy Act to law enforcement at the agencies’ own initiative, when a violation of law is suspected; provided that such disclosure has been established in advance as a “routine use” and misconduct is related to the purposes for which the records are maintained. The routine use exception of the Privacy Act permits disclosure of individuals’ personal information if the requested use is compatible with the purpose for which the information was initially collected. Under the act, agencies are required to keep an accurate accounting regarding each disclosure of a record to any person or to another agency and to retain the accounting for at least 5 years or the life of the record, whichever is longer. Under OMB guidance, an agency need not keep track of every disclosure at the time it is made, but the agency must be able to reconstruct an accurate and complete accounting of disclosures. While SSA’s policy permits the sharing of nontax information with law enforcement, it does so only under certain conditions and is more restrictive than both the law enforcement exception specified under the Privacy Act and the disclosure policies of most federal agencies. Before allowing the disclosure of information, SSA’s disclosure policy requires SSA officials to consider several factors such as the nature of the alleged criminal activity, what information has been requested, and which agency has made the request. Such considerations are above and beyond what is included in the law enforcement exception to the Privacy Act. SSA maintains that it must have a restrictive disclosure policy because much of the information the agency collects is especially personal. In addition, SSA officials believe that the agency must uphold the pledge it made to the public to keep this information confidential when SSA first began collecting it. Unlike SSA, the policies of most major federal agencies allow the disclosure of information to law enforcement if the requests for information meet the requirements outlined in the Privacy Act. However, like SSA’s disclosure policy, the disclosure policies of the IRS and the Bureau of the Census, which have disclosure requirements prescribed in their statutes, are more restrictive than the Privacy Act and the disclosure policies of most federal agencies. While SSA has a long history of protecting individuals’ privacy, the agency’s disclosure policy allows the disclosure of information to law enforcement under certain conditions. These conditions require that SSA officials consider several factors before they release individuals’ personal information. For example, they must examine the nature of the alleged criminal activity, what information has been requested, and which agency has made the request. SSA will share information if the criminal activity involves one of the following: Fraud or other criminal activity in Social Security programs. SSA will provide information necessary to investigate or prosecute fraud or other criminal activity in Social Security programs. Nonviolent crimes and criminal activity in other government programs that are similar to Social Security programs. SSA may also disclose information to investigate and prosecute fraud and other criminal activity in similar benefit programs, including state welfare/social services programs such as Medicare or Medicaid, unemployment compensation, food stamps, and general assistance and federal entitlement programs administered by the Department of Veterans Affairs, Office of Personnel Management, and the Railroad Retirement Board. Violent and serious crimes. SSA may disclose information when a violent crime has been committed and the individual who is the subject of the information requested has been (1) indicted or convicted of the crime and (2) the penalty for conviction is incarceration for at least 1 year and a day regardless of the sentence imposed. SSA might also disclose information when a person violates parole and the violent crime provisions of the original conviction have been met. SSA defines violent and serious crimes as those characterized by the use of physical force or by the threat of physical force causing actual injury, or coercing the victim to act for fear of suffering serious bodily harm. Such crimes include but are not limited to: murder; rape; kidnapping; armed robbery; burglary of a dwelling; arson; drug trafficking or drug possession with intent to manufacture, import, export, distribute or dispense; hijacking; car-jacking; and terrorism. Provisions of other federal statutes that require that SSA disclose its records such as in connection with civil or criminal violations involving federal income tax or the location of aliens. SSA will disclose information when another federal statute requires disclosure, such as the IRS statute for tax purposes or the Immigration and Naturalization statute for locating aliens. The jeopardy or potential jeopardy of the security and safety of SSA’s clients, personnel, or facilities. SSA will disclose information about an individual if that individual is involved in an activity that places the health, safety or security of SSA clients, personnel, or facilities in jeopardy or potential jeopardy. After the disclosure, SSA must send a notice of the disclosure to the individual whose record was disclosed. SSA’s disclosure policy is contained in 20 C.F.R. Part 401 and is promulgated through regulations outlined in its “Program Operations Manual System” (POMS) and Emergency Messages. POMS is the primary tool the field offices use to assist them in making appropriate disclosure decisions when they receive requests from law enforcement agencies. POMS provides detailed guidance and incorporates references to disclosures covered by 25 different statutes, which are located in at least 15 different sections of the POMS. SSA uses Emergency Messages, usually limited to a one-time only emergency situation, to provide implementing guidance in emergency situations. For example, on September 19, 2001, SSA issued an emergency message to field offices instructing them to direct all law enforcement requests related to the terrorists’ attacks of September 11, 2001, to SSA’s OIG’s Office. SSA’s regulations are designed for implementation at all levels of the agency, including SSA’s field offices, regions, and headquarters offices. SSA can make disclosures through its headquarters, 1,336 field offices, or 10 regional offices. Disclosures can also be made through SSA’s OIG, the law enforcement component of SSA that is responsible for conducting audits and investigations of agency programs and activities. The OIG is authorized to handle disclosures through a memorandum of understanding (MOU) with SSA. The OIG investigations staff conducts and coordinates activity related to fraud, waste, abuse, and mismanagement of SSA programs and operations. The OIG investigations staff also conducts joint investigations with other federal, state, and local law enforcement agencies. The OIG investigations staff is located in 60 locations that comprise 31 field offices and 10 field divisions. SSA’s OIG is authorized to disclose individuals’ personal information to law enforcement agencies as agreed with SSA under a MOU. In July 2000, SSA’s OIG and the Commissioner of SSA signed an MOU, which outlines the conditions under which the OIG can disclose to law enforcement agencies certain limited information from SSA’s records in cases involving fraud of a Social Security program or misuse of an SSN. Under the MOU, the OIG can disclose whether a given name and SSN match the name and SSN in records at SSA, referred to as SSN verification. The MOU delegates authority to OIG employees at all levels. SSA requires that the OIG ensure that law enforcement requests meet the same requirements outlined in the Privacy Act as well as those outlined in SSA’s POMS and other guidance. In addition, law enforcement requests must include the name and SSN to be reviewed and a certification that the individual about whom information is sought is suspected of misusing an SSN or of committing another crime against a Social Security program. Under the MOU, the OIG is permitted to open an investigation and participate in joint investigations with law enforcement officials, if the OIG determines that further investigation is warranted. SSA requires that the OIG submit an annual report to the Commissioner of SSA, no later than 30 days after the end of the fiscal year. The annual report must reflect the total number of SSN verification requests received and responses made, if the number is different, broken down by OIG field division. SSA also requires that the OIG maintain records from each fiscal year for 1 year. The Commissioner of SSA can revoke the delegation of authority to the OIG described in the MOU at any time by providing a 30-day notice. While any SSA office can make disclosures, the Privacy Officer within SSA’s Office of Disclosure Policy, located in the Office of General Counsel, has overall responsibility for overseeing the agency’s implementation of the disclosure policy. Except for requests involving national security issues, which are referred to the Privacy Officer at SSA headquarters and ultimately to the Commissioner of SSA, field locations handle requests for disclosing information because the offices are at the local level where information is frequently needed. Privacy Coordinators are located in the regional offices and are available to assist the field offices on questions about disclosures. The Privacy Coordinators report to the Privacy Officer. When SSA receives a request from law enforcement agencies, SSA officials must first determine whether the request is valid, that is, in writing on the agency’s letterhead, specifies the records being requested, and is signed by an official of the requesting office. SSA field office officials are instructed to rely on their knowledge of local law enforcement agencies to determine whether a request is from the proper person. For valid requests, SSA officials must also determine whether the agency requesting the information has jurisdiction in the particular case. Other specific criteria considered in determining whether SSA will disclose individuals’ personal information to law enforcement agencies are outlined in figure 1. Tax information is disclosed consistent with IRC 6103. SSA officials told us that in all cases, the agency’s practice is to provide only the minimum amount of information necessary to assist law enforcement. For law enforcement requests that do not fit neatly in the categories described or do not meet the specific criteria outlined in SSA’s policy, SSA’s Commissioner decides whether or not the agency will share the requested information using the Commissioner’s ad hoc authority. The Commissioner’s ad hoc authority is generally reserved for exceptional cases approved on a case-by-case basis. For example, following the September 11th, 2001, terrorist attacks, the Commissioner’s ad hoc authority was invoked to disclose to the FBI and other law enforcement agencies information in SSA’s files concerning suspects or other persons who may have had information on the attacks and to help identify and locate victims and members of their families. Certain requirements must be met in order to invoke the Commissioner’s ad hoc authority. The request must be deemed appropriate and necessary, SSA’s regulations cannot specify what is to be done in the circumstance in question, and no provision of law can specifically prohibit the disclosure. SSA policy prohibits the disclosure of tax return information under the Commissioner’s ad hoc authority. SSA officials told us that the Commissioner invokes this authority infrequently and had rendered decisions to disclose information to law enforcement agencies 35 times between April 1981 and October 2002. Unlike SSA’s disclosure policy, the Privacy Act requires that fewer criteria be met before a disclosure is made. However, SSA officials state that the agency must protect tax information and maintain the pledge of confidentiality that the agency made long before the Privacy Act was enacted. Therefore, SSA’s policy imposes additional requirements as a condition for disclosure. Over the years, SSA has modified its disclosure policy to incorporate legislative requirements, but where it had discretion, SSA has continued to focus its policy on protecting individuals’ privacy and upholding the pledge of confidentiality. The law enforcement exception of the Privacy Act permits disclosure of individuals’ personal information when a law enforcement agency (1) requests the information for an authorized law enforcement activity, (2) makes the request through the agency head, (3) submits the request in writing, and (4) specifies the information requested and the law enforcement activity involved. Under the Privacy Act, a law enforcement agency investigating a person suspected of embezzlement or shoplifting could submit a request to most federal agencies, including SSA, for information seeking or verifying the person’s name, SSN, date of birth, last known address, and other data. Most federal agencies would probably provide that information from their records covered by the Privacy Act. However, under SSA’s policy, no information would be given to the law enforcement agency because SSA has determined that these are not crimes that warrant any disclosure of individuals’ personal information. Additionally, the Privacy Act includes a routine use exception, which allows personal information to be disclosed on the initiative of the custodian agency. To qualify for a routine use, the proposed use of the information must be compatible with the purpose for which the information was obtained. Agencies must publish their routine uses in the Federal Register. SSA relies on the routine use exception to disclose information to law enforcement when fraud or other violations are suspected in SSA’s programs and other similar federal income or health maintenance programs. SSA’s disclosure policy is more restrictive than the disclosure policies of most major federal agencies, with IRS and the Census Bureau, being exceptions. However, unlike SSA’s disclosure policy, the policies of the IRS and Census are specifically provided in statute. Most major federal agencies’ policies allow for disclosures to law enforcement agencies under the law enforcement or the routine use exceptions of the Privacy Act. The law enforcement exception of the Privacy Act permits all federal agencies to disclose personal information to law enforcement agencies upon written request from the law enforcement agency. Twenty of the 24 major federal agencies have issued regulations that reference that disclosure authority. In addition, OMB guidance permits agencies to disclose personal information covered by the Privacy Act to law enforcement agencies under the routine use exception of the Privacy Act. The routine use exception permits federal agencies, at their own initiative, to disclose personal information without consent if the use is compatible with the purpose for which the information was collected. OMB guidance permits such a disclosure to a law enforcement agency when a violation of law is suspected, provided that such disclosure has been established in advance as a “routine use” and the misconduct is related to the purposes for which the information is collected and maintained. Fourteen of the 24 major federal agencies have established law enforcement routine use exceptions that are generally applicable to their systems of records. Some agencies alternatively only apply the law enforcement routine use exception to specific systems of records. Accordingly, under the Privacy Act, disclosure of personal information to law enforcement agencies may be permitted, depending on the agency and the circumstances, either by the law enforcement exception or the routine use exception. SSA, however, does not permit such disclosures from SSA program records under either exception. As already discussed, SSA requires considerations above and beyond the requirements in the Privacy Act. (See app. II for a list of federal agencies’ rules referencing the Privacy Act law enforcement disclosure authority and those authorizing a general law enforcement routine use exception.) Although SSA’s disclosure policy for law enforcement is restrictive relative to most other federal agencies, IRS and Census also have restrictive disclosure requirements, which are outlined in these agencies’ statutes. IRS’s disclosures of tax returns and return information are governed by Internal Revenue Code Section 6103, which prohibits disclosures unless specifically authorized in statute. This statutory restriction serves to protect the confidentiality of personal and financial information in IRS’s possession and ensure compliance with tax laws. A court order is generally required to open tax returns or other tax information to federal law enforcement officials investigating a federal nontax crime or preparing for a grand jury or other judicial proceeding, without the knowledge or consent of the taxpayer involved. The Attorney General, the Deputy Attorney General, and other Justice Department officials specifically named in the statute, are permitted to seek a court order. To obtain a court order, the requester has to demonstrate that: reasonable cause exists to believe that a specific criminal act has been committed and tax return information is or may be relevant to a matter relating to the commission of the criminal act; the information being sought will be used exclusively in a federal criminal investigation concerning the criminal act; and cannot be reasonably obtained, under the circumstances, from another source. Information federal law enforcement obtains from IRS generally cannot be shared with state and local law enforcement. However, the Victims of Terrorism Tax Relief Act of 2001 permits federal law enforcement agencies involved in terrorist investigations/intelligence gathering to redisclose this information to officers and employees of state and local law enforcement who are directly engaged in investigating or analyzing intelligence concerning the terrorist incidents, threats, or activities. The disclosure authority for Census is spelled out in statute under Title 13 of the United States Code. The Census statute prohibits the disclosure of any individual’s Census data other than for use by the Census, making information that the Bureau of the Census collects and maintains immune from the legal process. Unlike IRS, a court order will not permit the Census Bureau to disclose information to law enforcement agencies or any other entities that may request an individual’s personal information. Regulations provide that a person’s individual census information may not be disclosed to the public for 72 years from the decennial census for which the information was collected and the fine for wrongful disclosure of confidential census information is imprisonment of up to 5 years or a fine up to $250,000, or both. The statute further restricts the use of individuals’ Census data to the Secretary of Commerce, or bureau and agency employees. Additionally, Census data for individuals may only be (1) used for statistical purposes for which it was supplied; (2) published in a manner so that an individual’s information cannot be identified; and (3) examined by persons who have been sworn as officers or employees of the Department of Commerce, or the Bureau of the Census. The statute even protects from compulsory disclosure, copies of Census information that an individual may have retained for their own personal use. Accordingly, “no department, bureau, agency, officer, or employee of the government, except the Secretary of Commerce in carrying out the statutory duties of the agency, shall require copies of information an individual may have retained.” An individual’s personal retained copies of census forms are immune from the legal process and cannot be admitted as evidence in any action, suit, or other judicial or administrative proceeding without the individual’s consent. SSA maintains that it must have a restrictive disclosure policy to protect individuals’ personal information, even from law enforcement requests, because much of the information the agency collects is especially personal and was initially obtained under the pledge of confidentiality. SSA officials told us that they try to limit disclosure because the agency has no control over the extent to which information will be safeguarded once disclosed. In addition, Social Security has universal coverage and an individual cannot refuse to be assigned an SSN. The Social Security Act requires that SSA compile wage and employment data for each individual. According to an SSA official, individuals cannot receive Social Security benefits without having an SSN. In SSA’s disclosure policy, the agency recognizes that its rules for disclosure are more restrictive than the Privacy Act and cites several reasons why. According to SSA, it seldom has records that are useful to law enforcement agencies and information from tax returns— such as addresses or employment information—cannot be disclosed. Also, SSA contends that its resources should not be diverted for nonprogram purposes. Finally, SSA says that it has a long-standing pledge to the public to maintain the confidentiality of its records. Although SSA’s policy supports sharing limited information with law enforcement under certain conditions, we found evidence that some SSA field office staff are confused about the policy that could result in staff applying it inconsistently. Information provided to law enforcement is generally limited to the verification of a name and SSN, though more information may be provided under certain circumstances. Information obtained through our selected site visits and survey results indicated that SSA field offices might have denied law enforcement requests when they could have provided information and instances in which offices might have provided more information than was permitted under SSA’s policy. Because SSA is not required to and therefore, does not maintain aggregated data showing what requests were made, whether they were approved, and what information was given to fulfill them, we could not determine the extent to which these inconsistencies occurred. Information provided to law enforcement is routinely limited to the verification of a name and SSN, though more information may be provided under certain circumstances. When law enforcement provides SSA with the name and SSN of an indicted or convicted criminal, SSA can conduct a search on the SSN to determine if it is valid and if it matches the name provided by law enforcement. If the name and the SSN do not match, SSA will not usually identify to whom the SSN actually belongs, though they will tell law enforcement that there was no match. Except to identify and locate illegal aliens, SSA generally will not provide any information if law enforcement only provides an SSN and wants to know to whom it is assigned. Under certain circumstances, such as when SSA’s OIG conducts a joint investigation with other law enforcement agencies involving fraud against one of SSA’s programs, the OIG is allowed to provide any information available in SSA’s data system, short of IRS data. SSA tries to ensure that its disclosure policy is consistently implemented in all field offices. SSA takes various steps to ensure the consistent applications of its disclosure policy. For example, SSA has taken steps to educate its staff about its disclosure policy. SSA managers indicated that SSA staff is given disclosure policy training when they start employment and such training is refreshed as needed. Additionally, SSA posts the policy on its internal Web site and on Compact Disc-Read-Only Memory (CD-ROM) for staff reference. Furthermore, a regional “privacy coordinator” is available to answer staff questions about proper disclosure procedures. One SSA regional office provided a chart to all SSA field offices within its “program circle” that briefly summarizes SSA’s policy on access and disclosure without consent. Although this chart had not been updated since July 1996, it was viewed by the manager we talked with as a handy guide for what could be disclosed and also provided references to the location of a more thorough explanation of SSA’s policy in their POMS. In addition, to ensure that disclosure procedures are followed, field office managers told us that they usually handle information requests from law enforcement officials rather than leaving this duty to staff. However, we noted in our survey and during selected site visits, a limited number of instances where SSA’s disclosure policy appears to have been inconsistently applied. In some instances, law enforcement might have received more information than permitted under SSA’s policy. For example, one SSA OIG office we visited provided a law enforcement agency with the name, SSN, date of birth, place of birth, and parents’ name when it seemed that only the name and SSN verification results should have been provided. In another case, an SSA official reported that a state law enforcement officer stopped an individual and telephoned SSA requesting information to verify the SSN, date of birth, place of birth, and sex and was provided the results over the telephone. Although SSA’s policy permits the verification of the name and SSN, such requests are required to be in writing. In other instances, requests that should have been approved might have been turned down. For example, one SSA field office manager told us that nothing could be disclosed to law enforcement if the request for information pertained to an individual suspected of misusing an SSN because the individual had not been indicted or convicted of this crime. However, SSA’s policy would appear to permit disclosure in this situation. Another SSA field office manager told us that office would not disclose any information without consent from the individual for whom the information is being requested. Several possible reasons exist for the inconsistent application of SSA’s disclosure policy. Although our survey showed that most SSA field offices receive requests for information from law enforcement, SSA field officials we spoke with said that they do not receive requests frequently. For example, several officials told us that they received fewer than 10 requests in 2002. Because requests are infrequent, staff must often consult the policy to help them to respond properly. However, many staff members consider the policy confusing. For example, one field office manager said that, “We have doubts as to what information should be provided to U.S. Border Patrol.” Similarly, a manager in another field office said, “SSA disclosure policy should be written in “Plain English” to make it easy to understand by all readers.” A different field office manager commented, “ Disclosure policy is still frequently confusing for much of our staff.” This lack of clarity leads to confusion about what should be disclosed. For example, one manager said, “ is quite confusing. It’s hard to know what you can disclose.” Another manager commented, “I think the policy should be clearer than it is. There’s too much…’if this, then that, but not this and so on.’” In addition, SSA’s responsibilities to both assist law enforcement and protect individuals’ privacy may be exacerbating the confusion and inconsistent application of the agency’s policy. For example, officials at SSA headquarters said that they want to help law enforcement as much as possible, but they believed they must also protect the privacy of the information in their systems of records in order to perform SSA’s primary mission. Some managers in SSA field offices believed that the agency should provide information to law enforcement. However, several field office managers expressed their concerns and reluctance about sharing information with law enforcement agencies. Employees who provide information to an individual inappropriately could be subject to a penalty, including suspension or termination from SSA. Therefore, rather than risk disclosing information inappropriately, some officials might err on the side of caution and not disclose information even when it is permitted under the agency’s disclosure policy. Consistent application of SSA’s disclosure policy cannot be assessed because, according to OMB guidelines, SSA is not required to maintain aggregated data showing what requests were made, whether they were approved, and what information was given to fulfill them. According to SSA, disclosures of individuals’ personal information are kept in individuals’ files. While SSA policy does not stipulate that field offices must keep track of requests made by a law enforcement agency, our survey revealed some information about these requests. For example, we estimate that 82 percent of SSA field offices indicated that they had received requests for personal information from law enforcement agencies. However, 71 percent of SSA’s field offices do not maintain a record of requests made by law enforcement agencies. While the majority of SSA field offices do not maintain records of law enforcement requests, results from our survey showed that 90 percent of the SSA OIG offices maintain these data for disclosures the OIG made. The SSA OIG is required to report to the SSA Commissioner aggregated data annually on disclosures made. According to the OIG, it also keeps a hard copy of requests made by law enforcement agencies for at least 1 year. On the basis of these aggregated data, between fiscal years 2000 and 2002, SSA OIG regional divisions fulfilled almost 30,000 requests from law enforcement agencies for name and SSN verification. Table 2 shows the number of verifications fulfilled by SSA OIG regional divisions and headquarters. However, no numbers are kept on denied law enforcement requests. According to SSA OIG officials, in most cases, law enforcement officers contact OIG offices by telephone before submitting a request so no written record exists if the OIG does not grant the request for information. While some law enforcement officials we spoke with were unfamiliar with SSA’s disclosure policies, most were generally satisfied with the information provided by SSA, though most would like more. Some law enforcement agencies at the state and local level were unfamiliar with the process for obtaining information and expressed frustration with their attempts to obtain information from SSA. Law enforcement officials indicated that the SSN and name verification SSA provided was often helpful to their investigations. However, most wanted SSA to provide additional information such as address, date of birth, and employer or family information. SSA officials have several concerns about expanding SSA’s disclosure policy. Findings from site visits indicated that some law enforcement officers at the state and local level, who generally request information from SSA field offices, are unfamiliar with the process for obtaining information from SSA offices. Because SSA does not have written procedures on its disclosure policy available to law enforcement, some officers find out how to obtain information virtually by trial and error. For example, one officer told us that after having his initial request for information, which was not in writing turned down because he had not followed proper procedures, he obtained a search warrant to obtain the information from SSA. The officer said that no one at SSA explained to him the procedures for obtaining information until he got the search warrant. It is unclear when or if SSA officials let law enforcement officers know what procedures need to be followed to get information. Federal law enforcement agencies, on the other hand, more often understood the Privacy Act’s procedures. Further, most federal law enforcement agencies we spoke with submitted their requests to SSA’s OIG—itself, a federal law enforcement agency. Our survey results indicated that on average in 2002, 46 percent of the requests made to OIG offices came from federal law enforcement agencies while 27 percent of the requests made to SSA field offices on average came from federal law enforcement agencies. While details on SSA’s disclosure policy are available in their POMS and other SSA documents that summarize this information, it is not readily available to law enforcement. A summary of the policy can be found on SSA’s Web site under the caption “Code of Federal Regulations for Social Security.” However, it is not easy to find and provides little detail on what SSA will provide to law enforcement. Further, the Web site does not provide law enforcement with instructions on what they need to do to get the information. Officials from federal, state, and local law enforcement agencies we spoke with were generally satisfied with the information provided by SSA although most would like more information on individuals. Law enforcement officials indicated that, although in most cases SSA only verified a name and SSN, the information received was useful to their investigations and, in some cases, was enough to help convict an individual of a crime. The information received from SSA was considered by law enforcement as the most accurate and up-to-date information available to help in their investigations. Law enforcement was also satisfied with the time in which SSA provided the information. In many cases, law enforcement officers we spoke with indicated that SSA provided the information very quickly. In addition, one SSA OIG official told us that when procedures are followed correctly, the OIG can reply back in 24 hours or less, depending on the information requested. SSA confirmed the timeliness of its responses to law enforcement requests. We estimate that over 90 percent of both SSA field office and OIG respondents reported that it took 24 hours or less to fulfill a request. Our survey results showed that 40 percent of SSA field offices and 21 percent of SSA OIG offices reported that it took less than an hour to fulfill a request from a law enforcement agency. Although most of the law enforcement officials we spoke with were satisfied with information provided by SSA, several believed the information provided was insufficient. Several of these law enforcement officials believed that the name and SSN verification was not enough to help with their investigations. These individuals generally wanted additional information such as the suspect’s wage information, address, employer, and date of birth. In documents provided to us, SSA’s OIG listed the following situations in which the OIG could not provide information to law enforcement. provides the SSN and wants to know to whom it is assigned; wants information to locate witnesses or suspects in high profile cases or wants information on individuals with Alzheimer’s disease who are lost, wants information on next of kin; wants information to locate a fugitive who may be receiving benefits under SSA’s Old-Age and Survivors Insurance program and its Disability Insurance program; wants information to make identifications in child pornography cases; wants information to determine if there has been any activity on a Social Security account in a custodial interference case; and wants information on SSNs related to non-SSA-related fraud cases or counterfeit cases. Some law enforcement officials were unhappy with SSA’s refusal to provide such information, especially because they believed that SSA could easily provide it in a short period of time. For example, one federal officer who investigates nonviolent felony crimes said that SSA seems more concerned about someone committing fraud against one of its programs than about identity theft involving the use of someone’s SSN. He also said that SSA would not provide him with any information on the person whose identity was being stolen. Another officer said that because he could not get necessary information from SSA, he had resorted to other means of gathering the information needed. The officer said that depending on resources available, it could take up to 3 weeks to get someone’s SSN through other sources. Furthermore, the officer said that while he could make the case without the SSA information, the information SSA can provide would be invaluable to helping fully prosecute a case. Many SSA officials in the field and OIG offices agreed that SSA’s disclosure policy is too restrictive. Many believed that, for legitimate investigations, the policy should allow for disclosures to law enforcement officials of whatever information they need. One SSA OIG official said that, as a law enforcement officer, he believed that he should be able to provide information to another law enforcement officer especially when he knew that doing so would help with a case and also because law enforcement officers would be more willing to share information with the OIG. While the SSA Commissioner can invoke ad hoc authority for certain specific cases to disclose information, as was done in response to the disclosure requests related to the September 11 terrorist attacks, SSA officials said that the use of this authority must be limited. SSA headquarters officials believe that expanding its disclosure policy would hamper its ability to ensure that individuals’ personal information is protected and that resources are not diverted from administering Social Security benefit programs. Protecting individuals’ privacy and providing information to law enforcement that could be helpful in solving crimes or ensuring national security are two important yet sometimes seemingly conflicting policy objectives. SSA places a high priority on privacy, and its policy for disclosure to law enforcement agencies goes beyond the requirements of the Privacy Act. SSA’s disclosure policy attempts to preserve its pledge to maintain individuals’ privacy while cooperating with law enforcement and complying with applicable statutes. The end result is a complex policy that is more restrictive than the Privacy Act requirements and those of most federal agencies and more like the policies of IRS and Census, agencies that maintain personal information whose requirements are embodied in statute. In addition, some SSA field office staff and local law enforcement officers find SSA’s policy confusing and sometimes frustrating. As a possible consequence of SSA staff and local law enforcement’s confusion about SSA’s policy, law enforcement may be denied requested information even though SSA’s policy permits its disclosure or law enforcement may receive information that SSA’s policy does not permit. Although we could not assess the overall level of consistency in the application of SSA’s policy, we believe eliminating or reducing confusion about the agency’s policy would help ensure consistent application, and that this can be achieved with relatively modest actions on SSA’s part. To help ensure consistent application of SSA’s disclosure policy for law enforcement in all of its offices and to better assist law enforcement agencies making disclosure requests, we recommend that the Commissioner of SSA do the following: Take steps to eliminate confusion about the agency’s disclosure policy. These steps could include clarifying SSA’s policy; providing additional or refresher training to staff; or delegating decision-making authority for law enforcement requests to specified locations such as the OIG, regional privacy coordinators, or other units that SSA determines would have expertise in this area. Provide law enforcement with information on SSA’s disclosure policy and procedures. For example, this information could be provided on its Web site, in informational pamphlets, or some other written format. We obtained written comments on a draft of this report from the Commissioner of SSA. SSA’s comments are reproduced in appendix III. SSA also provided technical comments, which we incorporated in the report as appropriate. We also provided a draft of this report to the Departments of Commerce, Justice, and Treasury for review and comment. These three agencies reported that they had no comments. SSA stated that our draft report accurately reflected the importance of SSA’s disclosure policy to the agency’s mission but it presents an incomplete description of both the statutory basis for and rationale behind the policy. Further, SSA stated that the draft report does not take into account the statutory basis for the nondisclosure of tax information or the statutory support for the agency’s long-standing confidentiality pledge; therefore, SSA believes that our findings and recommendations are “overbroad.” We are aware of SSA’s obligation under the IRC and took this into consideration during our review of SSA’s disclosure policy; however, we have revised the report, where appropriate, to clarify that our observations about SSA’s disclosure policy relative to the Privacy Act do not extend to SSA’s disclosure of tax information. Disclosure of tax information is controlled by section 6103 of the IRC. We also provided additional reference to the statutory basis and rationale behind SSA’s disclosure policy. SSA also commented that 42 U.S.C. 1306 provided an independent basis for nondisclosures, apart from the Privacy Act. The report recognizes that 42 U.S.C. 1306 provides the basis for SSA’s disclosure policy and we have added a citation for this authority. Section 1306 provides SSA authority to regulate the dissemination of information in its custody as otherwise permitted by federal law. Other federal law includes the Privacy Act. Our report merely points out that SSA has used this authority to regulate in a more restrictive fashion than the Privacy Act requires. SSA stated that it believed that our characterizing the agency’s policy as more restrictive than most federal agencies does SSA a disservice because many federal agencies have little interaction with the public at large. SSA states that the only two agencies of SSA’s size and scope with respect to gathering information from the public to accomplish their missions are IRS and Census, which have more restrictive disclosure policies and statutes that prohibit disclosures. We believe that our comparison and characterization of SSA’s disclosure policy is fair. We compared SSA’s disclosure policy to those of the other 23 agencies covered by the Chief Financial Officers’ Act. We decided also to compare SSA’s policy to those of IRS and Census because they are similar in size and scope of data maintained on individuals. All of the agencies we compared are subject to the Privacy Act. As we reported, SSA’s disclosure policy, as well as those of IRS and the Census Bureau is more restrictive than most federal agencies. SSA agreed in part with our recommendation that the Commissioner take steps to eliminate confusion that may cause inconsistent application of the policy. SSA acknowledged that the policy is complex and could lead to occasional inconsistent application. However, SSA stated that it provides extensive instructions in its POMS for employees and the instructions refer staff to experts in regional and central offices for assistance when needed. SSA also stated that its regional offices have provided employees access to Intranet sites that clarify disclosure policy, but the agency will consider providing additional refresher training as appropriate. In addition, SSA stated it is currently reviewing improvements to the POMS sections that address law enforcement disclosures that the agency believes will address our concerns. SSA expressed concern about the option to consider delegating “decision-making authority for law enforcement requests to specified locations such as the OIG...” SSA stated that the Inspectors General Act of 1978 prohibits agencies from transferring programmatic functions to the Inspector General. We acknowledge in our report that SSA provides guidance on its disclosure policy in its POMS. While we found that employees were aware of this guidance, SSA staff told us that they found SSA’s policy confusing. We believe additional training as well as improvements to the POMS that clarify or simplify SSA’s policy should help ensure consistent application. With respect to SSA’s concern about our recommendation to consider delegating decision-making authority for law enforcement requests to specified locations such as the OIG, regional privacy officers, or other units that SSA determines would have expertise in this area, we did not intend to imply that programmatic functions be transferred to the OIG. Our recommendation was aimed at directing disclosure requests to units that currently perform this function and that appear to have expertise in SSA’s disclosure policy. We simply intended to provide options for SSA to better utilize the resources they already have in place to determine whether law enforcement requests are permitted under SSA’s disclosure policy. The OIG, who currently responds to law enforcement requests as authorized under an MOU with SSA, was only one of the units we suggested as an option. We continue to believe that delegating authority to handle disclosure requests to specified units with expertise in SSA’s disclosure policy would be a plausible option for helping to ensure consistent application of SSA’s policy. This option could reduce or eliminate the need for SSA field office officials who receive sporadic requests from law enforcement to relearn SSA’s disclosure policy. SSA agreed with our recommendation that the Commissioner of SSA should provide law enforcement with information on SSA’s disclosure policy and procedures and SSA believes the agency has done so. However, SSA stated it would review its Web site and other public informational materials to see if additional material or formatting changes would be helpful. We acknowledged in our report that SSA’s policy can be found on the Internet, but noted that it is not easily found and does not clearly explain how law enforcement could obtain information. Although SSA officials told us that they provided limited discussion of the agency’s disclosure policy and procedures at law enforcement conferences, these officials did not indicate the number of conferences attended or whether these conferences involved federal, state, or local law enforcement. Some of the local law enforcement officials we spoke with were unfamiliar with how to obtain information from SSA. Therefore, we continue to believe that information that clearly defines SSA’s disclosure policy and procedures would be helpful to law enforcement. Further, we believe that our findings and recommendations are central to many concerns expressed by both SSA and law enforcement officials and we view the steps that SSA indicated that it plans to consider, or already has in process to ensure consistent application of its disclosure policy and law enforcement’s understanding of how to obtain information from SSA as appropriate steps toward correcting the concerns expressed. We are sending copies of this report to the Commissioner of Social Security; the Secretaries of Commerce, Treasury, and Homeland Security; the U.S. Attorney General; appropriate congressional committees; and other interested parties. We will also make copies of this report available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have questions about this report, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix IV. To attain our objectives for this assignment, we reviewed and compared the Social Security Administration’s (SSA) disclosure policy for law enforcement and the Privacy Act. We also compared SSA’s disclosure policy with that of the Internal Revenue Service (IRS) and the Bureau of the Census because SSA officials believe that these agencies are comparable with SSA. Additionally, we compared SSA’s disclosure policy with the general law enforcement disclosure policies for the other 23 Chief Financial Officers’ (CFO) Act agencies. To help determine how SSA’s disclosure policy affects information sharing with law enforcement, we conducted site visits and detailed interviews at SSA field offices and SSA’s Office of the Inspector General (OIG), as well as nearby field offices for federal, state, and local law enforcement agencies in Los Angeles, California; Chicago, Illinois; and Dallas, Texas. We also administered an electronic survey to all SSA OIG field offices and a stratified random sample of SSA field offices. We interviewed SSA officials in both headquarters and field offices and law enforcement officials at the federal, state, and local levels of government about their experiences with sharing individuals’ personal information. At the headquarters level, we interviewed SSA officials responsible for disclosure policy in the Office of General Counsel and the SSA OIG, Baltimore, Maryland. We interviewed law enforcement officials from the Departments of Justice and Treasury, including the Federal Bureau of Investigation (FBI); Bureau of Immigration and Customs Enforcement, formerly Immigration and Naturalization Service (INS) and Customs; Executive Office for United States’ Attorneys; Drug Enforcement Agency; United States Marshals Service; Secret Service; Internal Revenue Service (IRS); and Alcohol, Tobacco and Fire Arms, headquartered in Washington, D.C. During the course of our review, several of these law enforcement agencies merged into the Department of Homeland Security, or were otherwise reorganized. We also interviewed OIG officials for investigation at the Departments of Education and Housing and Urban Development in Washington, D.C. Our site visits included interviews with the Bureau of Immigration and Customs Enforcement, at Dallas, Texas, and law enforcement officials of the Arlington Police Department, Arlington, Virginia. We surveyed SSA offices in order to: (1) estimate the type and volume of law enforcement requests for personal information received by SSA; (2) determine the distribution of these requests across federal, state, and local law enforcement agencies; and (3) gain some understanding of the bases for the granting and denial of these requests. Our working definition of a personal information request is an instance for which a law enforcement agency requested the personal information of one or more individuals between fiscal years 1999 and 2002. For example, if a law enforcement agency requested addresses for two people in a single instance, this would count as one personal information request. We were specifically interested in law enforcement agencies’ requests for personal information, such as social security numbers, names, addresses, birth dates, and income. We designed an Internet-based survey and organized it into multiple sections that included the following areas: receipt of law enforcement requests, response time for fulfilling law enforcement requests, and methods for handling law enforcement requests. We selected a stratified random sample of 335 SSA field offices to participate in the survey. This number was based on an expected response rate as well as a precision level. The sample was stratified by 10 regional locations and taken from a listing of 1,286 field offices that SSA provided. The original list contained 1,336 locations. Fifty locations that are not considered field offices and, therefore, do not receive law enforcement agency requests were excluded from the sampling frame. All 31 SSA Inspector General offices were surveyed since these sites routinely accept law enforcement agencies’ requests for personal information. The survey was mailed electronically to the manager in charge at SSA and Inspector General field offices. Both office types received the same on-line survey. Survey data were collected between February 25, 2003, and March 21, 2003. The overall response rate was 90 percent; with 97 percent of the Inspector General’s field offices and 90 percent of SSA’s field offices responding. Regional response rates in the sample ranged from 86 percent to 95 percent across 10 regional locations. To provide some indication of the reliability of the survey results, standard errors were calculated. The sample was weighted in the analysis to statistically account for the sample design and nonresponse. We are 95 percent certain that the survey estimates provided in this report are within plus or minus 10 percentage points of those estimates that would have been obtained had all SSA offices been captured. To minimize some of the potential biases of other errors that could figure into the survey results, we conducted pretests that included both the SSA Inspector General and SSA field offices. Four pretest sites were SSA field offices located in Wheaton, Maryland; Washington, D.C. (Anacostia); Seattle, Washington; and Chicago, Illinois. One pretest site was an SSA Inspector General office located in Washington, D.C. The pretests were conducted either through teleconferences or face-to-face interviews, and were completed between December 2002 and January 2003. We conducted our audit work between August 2002 and July 2003 in accordance with generally accepted government auditing standards. Rule referencing Privacy Act disclosure General routine use exception of Privacy Act permits disclosure to law enforcementauthority 15 CFR 4.30(a)(5)(vii) 46 FR 63501 (12/31/81) 32 CFR 310 App. C 34 CFR 5b.9(b)(7) 34 CFR 5b. App. B 10 CFR 1008.17(b)(7) 45 CFR 5b.9(b)(7) 45 CFR 5b. App. B 24 CFR 16.11(a)(5) 43 CFR 2.56(b)(5) 67 FR 16816 (4/8/02) 49 CFR 10.35(a)(7) 31 CFR 1.24(a)(7) 38 CFR 1.576(b)(7) 67 FR 8246 (2/22/02) 14 CFR 1212.203(f)(7) 22 CFR 215.10(c)(7) 44 CFR 6.20(g) 67 FR 3193 (1/23/02) 41 CFR 105-64.201(g) 10 CFR 9.80(a)(7) 67 FR 63774 (10/15/02) 5 CFR 293.401(g) & 406 60 FR 63075 (12/8/95) Shelia Drake (202) 512-7172 (drakes@gao.gov) Jacqueline Harpp (202) 512-8380 (harppj@gao.gov) In addition to those named above, Margaret Armen, Richard Burkard, Malcolm Drewery, Kevin Jackson, Corinna Nicolaou, and David Plocher made key contributions to this report. Barbara Hills, Theresa Mechem, and Mimi Nguyen provided assistance with graphics.","Law enforcement agencies' efforts to investigate the events of September 11th increased awareness that federal agencies collect and maintain personal information on individuals such as name, social security number, and date of birth that could be useful to law enforcement. The Social Security Administration (SSA) is one of the country's primary custodians of personal information. Although the Privacy Act protects much of this information, generally, federal agencies can disclose information to law enforcement. However, determining when the need for disclosure takes priority over an individual's privacy is not clear. GAO was asked to describe (1) SSA's disclosure policy for law enforcement and how it compares with the Privacy Act and those of other federal agencies, (2) SSA's experience sharing information with law enforcement, and (3) law enforcement's experience obtaining information under SSA's policy. Although SSA's disclosure policy permits the sharing of information with law enforcement entities, it is more restrictive than the Privacy Act and the disclosure policies of most federal agencies. While the Privacy Act permits disclosures to law enforcement for any type of crime, SSA only allows disclosures under certain conditions. For example, for serious and violent crimes, SSA will disclose information to law enforcement if the individual whose information is sought has been indicted or convicted of that crime. Even when information is disclosed, it might be limited to results obtained from verifying a social security number and name unless the investigation concerns fraud in SSA or other federal benefit programs, then the agency can work with law enforcement officials as part of a task force or joint investigation. However, the disclosure policies for law enforcement of the Internal Revenue Service (IRS) and the Census Bureau, both of which have requirements prescribed in their statutes, are also more restrictive than the Privacy Act and the policies of most federal agencies. SSA officials consider SSA's disclosure policy integral to carrying out the agency's mission. The various restrictions in SSA's disclosure policy create a complex policy that is confusing and could cause inconsistent application across the agency's more than 1,300 field offices. This could result in uneven treatment of law enforcement requests. Because aggregated data were not available, GAO was unable to assess the extent to which SSA does not consistently apply its policy. However, GAO was told of instances in which SSA officials in some field offices did not give law enforcement information that appeared to be permitted under the policy as well as instances in which they gave them more than what appeared to be allowed. Generally, law enforcement officials find the limited information SSA shares useful to their investigation, but many law enforcement officials, particularly state and local law enforcement officials, are not familiar with the policy or the process for requesting information from SSA. Most law enforcement officials expressed a desire for more information than is currently permitted under SSA's policy, but SSA maintains that providing more information would hurt its ability to carry out its primary mission.",govreport
"The Resource Conservation and Recovery Act (RCRA), passed in 1976 and substantially amended in 1984, establishes a national policy that hazardous waste be generated, treated, stored, and disposed of so as to minimize present and future threats to human health and the environment. RCRA, among other things, governs the management of hazardous waste from its generation to its final disposal so as to prevent future contamination. According to many stakeholders, the law has accomplished this purpose. RCRA also contains provisions governing the identification and listing of hazardous waste. Under these provisions, EPA has established criteria for identifying waste that should be classified as hazardous. For example, EPA has listed in its regulations specific types of waste that are to be considered hazardous. Some types are listed by their source, that is, by the specific industrial processes that produce the waste, such as electroplating, which generates sludge from wastewater treatment. Other types are defined by certain characteristics that make the waste hazardous, such as whether it ignites easily. RCRA’s regulations govern all hazardous waste, regardless of where or how it is generated. Waste from both current and past industrial operations is regulated. The requirements apply to any waste that EPA has identified as hazardous or, under its “contained-in” policy, to any environmental medium, such as soil or groundwater, that has been mingled with an identified hazardous waste until the medium no longer contains the waste. As a result, waste associated with cleanups (often referred to as remediation waste) must be managed under RCRA if it contains a hazardous component. Thus, waste generated at a wide variety of cleanups, including those under RCRA, Superfund, and state enforcement and voluntary programs, must generally be managed under RCRA’s stringent requirements. Both the Congress and EPA have considered proposals to amend the application of RCRA’s requirements to remediation waste. Since 1995, several legislative proposals have been introduced that would exempt certain types of remediation waste from these requirements and give the states the authority to establish their own requirements for managing this waste. Likewise, in 1995, the administration, as part of its effort to reinvent government, tasked EPA with identifying for statutory reform any RCRA provision whose implementation incurred costs that far outweighed the environmental benefits achieved. Through meetings with stakeholders, EPA identified RCRA remediation waste as a key area. In April 1996, EPA proposed a comprehensive rule that would have provided alternative ways of managing remediation waste. However, in September 1997, the agency announced plans to withdraw its proposed rule because, among other things, stakeholders disagreed on many remediation waste issues. Instead, the agency plans to issue regulations covering four specific elements affecting remediation waste. To respond to this report’s objectives, we reviewed pertinent laws and regulations and EPA’s policies, guidance documents, and proposed regulations that discuss the application of RCRA’s requirements to the management of remediation waste during cleanups. We interviewed EPA headquarters managers responsible for both developing and implementing RCRA policy. We also interviewed officials in nine states who are responsible for administering the federal RCRA and Superfund programs and their own state enforcement or voluntary cleanup programs. We selected five of these states because they have the largest cleanup workloads and four additional states to achieve geographic diversity. Finally, we discussed the current requirements for managing remediation waste with various industry and environmental associations. (See app. I for a more detailed statement of our scope and methodology.) While many of RCRA’s requirements can negatively affect cleanups, according to EPA, cleanup managers most often cited three requirements as creating disincentives for industry to clean up previously contaminated sites. They believe that these requirements increase the cost and time of some cleanups and lead parties to select cleanup remedies that can be either too stringent or not stringent enough, given the health and environmental risks posed by the waste. Ultimately, these requirements can discourage the cleanup of some sites, particularly of sites being managed under state voluntary programs. Most of the cleanup managers we contacted identified land disposal restrictions, minimum technological requirements, and requirements for permits as the three most significant requirements under RCRA that unnecessarily add cost and time to some cleanups. The land disposal restrictions and minimum technological requirements primarily add costs because they set stringent standards for treating and disposing of hazardous waste, forcing parties to try to reduce contamination to concentrations that they believe are lower than necessary to be protective or to use cleanup technologies that were not designed to manage remediation waste. The requirements for permits can add time—months or even years—and costs to some cleanups. For example, one EPA estimate suggests that exempting contaminated soil at a Superfund site from these requirements could reduce the treatment costs by nearly 80 percent, from an average of about $341 per ton to an average of about $73 per ton. This exemption could reduce the overall treatment and disposal costs for such a site from about $12.2 million to about $4.1 million. Ultimately, applying the three requirements to remediation waste has led parties to base their choice of some cleanup remedies not on the risks posed by the waste, but on considerations of how to meet, minimize, or avoid the requirements, according to EPA and state cleanup officials. As a result, they pointed out, parties often choose less aggressive remedies, such as leaving remediation waste in place rather than managing or treating it. The 1984 RCRA amendments created land disposal restrictions that largely prohibit parties from disposing of hazardous waste on land (e.g., in a landfill unless they have treated the waste to minimize threats to human health and the environment. The law also requires EPA to establish treatment standards for hazardous waste that has been restricted from land disposal. Once EPA has set a treatment standard, parties must meet it for hazardous waste that they subsequently dispose of on land. Parties do not have to meet the treatment standard for hazardous waste placed on land before EPA established the standard unless they remove the waste and dispose of it again—for example, during a cleanup action. Complying with the land disposal restrictions and their associated treatment standards can be costly and complex for several reasons. First, the restrictions are costly to implement because they require that waste be treated to specific, stringent standards. Such treatment is especially costly for cleanups involving large volumes of waste. Treatment to meet these stringent standards may be appropriate when relatively high-risk materials, such as concentrated hazardous waste from old lagoons and landfills, are found during cleanups. However, much remediation waste is lightly contaminated. When relatively low-risk media are found, treatment to meet the standards may be more stringent than necessary to protect human health and the environment, according to EPA. EPA estimated that exempting relatively low-risk contaminated media from the treatment standards under the land disposal restrictions could reduce by about 80 percent the volume of contaminated media subject to these requirements, from about 8.1 to about 1.8 million tons per year. The agency also estimated that exempting relatively low-risk contaminated media could decrease cleanup costs nationwide by 50 percent, or about $1.2 billion per year, without sacrificing human health or environmental protection. Second, land disposal restrictions may drive some parties to use cleanup technologies that are more stringent and therefore more costly than necessary to be protective. Under RCRA, EPA is required to set treatment standards for hazardous waste that minimize any threats to human health and the environment. EPA has generally set its treatment standards at the concentration levels that could be attained if the best demonstrated available technology were used to treat the contamination. As a result, for some hazardous waste, the only way to achieve the standard is by incineration, even though other technologies, such as soil washing or bioremediation, can result in protective cleanups at a much lower cost.For example, incineration, which can typically address all the hazardous waste at a site, can cost as much as $1,200 per ton, according to EPA’s estimates. If the waste at a site can be treated to meet RCRA’s standards through a combination of other technologies, such as bioremediation, soil washing, and immobilization, each of which is effective for certain contaminants, the final cost is likely to be no more than about $300 per ton, according to EPA—much less than the cost of incineration. Finally, the land disposal restrictions and their associated treatment standards are costly because contamination may have come from a variety of sources or industrial processes that occurred at the site over time, and parties may have to use several treatment technologies to comply with all of the applicable standards. According to EPA, this issue is particularly relevant at sites with a long history of contamination. The issue was also raised by a cleanup manager from New Jersey, one of the five states with the largest volume of remediation waste. He said that remediation waste frequently contains mixtures of many types of waste and parties find it difficult to design treatment methods that will satisfy all of the applicable standards under the land disposal restrictions. EPA has acknowledged that its treatment standards under RCRA are not generally appropriate for much of the contaminated soil typically found at cleanups. However, even though EPA believes that in most cases, such soil would be more appropriately treated using other technologies, such as bioremediation, it does not have the research to demonstrate that these technologies can attain the stringent treatment levels required by RCRA. Some of the state cleanup managers we interviewed also discussed the problems they had encountered in treating soil to achieve the standards. New York officials, for example, told us that the owners of a site with soil contaminated with metals wanted to use a cleanup technology at the site that would have achieved 98 percent of the concentration level specified by the pertinent RCRA treatment standards. However, because the technology did not fully comply with the treatment standards, the owners instead had to excavate the waste and send it to a hazardous waste facility for treatment and disposal. Alternatively, efforts to avoid triggering the treatment standards under the land disposal restrictions can drive parties to use less aggressive and perhaps less effective cleanup methods, such as leaving contaminated soil in place and placing a waterproof cover over it rather than treating it. While most cleanup programs allow such remedies on a case-by-case basis, EPA believes they are not as protective over the long term as more aggressive remedies, such as excavating the waste to treat it. RCRA also establishes design and operating specifications, known as minimum technological requirements, for facilities, such as incinerators and landfills, that either treat or dispose of hazardous waste. For example, a hazardous waste landfill or surface impoundment must have (1) two or more liners, (2) a leachate collection system, and (3) a monitoring system to ensure that contamination is not moving into the groundwater. Complying with these requirements can be expensive. For example, one facility we visited spent $750,000 in 1987 to meet the minimum technological requirements for a 2.5-acre surface impoundment. Because these technological requirements were designed for facilities that manage waste from ongoing industrial operations (called process waste), they may be more stringent than necessary for some remediation waste, according to EPA and the majority of the state cleanup managers we interviewed. For example, a temporary waste pile must meet the same requirements as a pile where hazardous waste will be treated or stored for many years. As a result, these requirements can be counterproductive for some cleanups and unnecessarily increase their costs, according to EPA, most state officials, and the industry representatives we interviewed. Disposing of remediation waste, particularly lower-risk waste, in accordance with the minimum technological requirements may add unnecessary costs. For example, parties that want to dispose of waste that has already been treated to meet land disposal requirements must still use a landfill that meets the minimum technological requirements. EPA and several state cleanup officials we interviewed were doubtful that compliance with these requirements would be worth the cost, given the low level of risk that treated remediation waste poses. According to EPA, disposing of waste in a hazardous waste landfill can cost $200 per ton, compared with $50 per ton to dispose of it in a municipal or industrial landfill. Thus, for the average Superfund site with 34,000 tons of contaminated soil, it would cost about $6.8 million to dispose of the treated soil in a landfill that meets these technological requirements, compared with about $1.7 million to dispose of it in a municipal or industrial landfill. RCRA generally prohibits the treatment, storage, or disposal of hazardous waste without a permit. Because the process of obtaining a permit involves a step-by-step approach with substantial requirements for documentation and review, obtaining a permit can increase cleanup costs and cause delays. In addition, under RCRA, facilities that require a permit in order to clean up a portion of a site must also address cleanup requirements for the entire site. Consequently, parties may try to avoid triggering the permit requirement. The administrative cost of obtaining a RCRA permit can range from $80,000 for an on-site treatment unit, such as a tank, to $400,000 for an on-site incinerator, and up to $1 million for a landfill, according to EPA’s estimates. In addition to these costs, a party may incur other costs for tasks needed to obtain a permit, such as assessing a site’s conditions in order to design a groundwater monitoring system or conducting emissions testing and trial burns for an incinerator. The time required to obtain a permit can also be extensive, according to almost all of the state cleanup managers we interviewed. For example, Texas managers said that getting a permit can take 7 to 9 months for a simple treatment unit, such as a tank, and an additional 5 to 6 years for a more complicated unit, such as a landfill. Industry representatives we spoke with also estimated that getting a RCRA permit typically takes 5 to 6 years. In a 1990 analysis of RCRA, EPA reported that the permit process is cumbersome and causes significant delays. EPA and several state cleanup managers indicated that these costs, delays, and administrative issues are particularly significant for facilities that are not in the business of transporting, storing, or disposing of hazardous waste. Such facilities would not need a RCRA permit were it not for their cleanup activities. Even facilities that already have a RCRA permit to operate encounter costs and delays when trying to get EPA or the state to modify their permit to conduct cleanup activities. EPA’s most recent estimate (1992) of the cost to modify an existing permit is about $80,000. Washington State cleanup managers said that they have been working on a permit modification for one site for 2 years. They find that under RCRA, facilities have to request a permit modification for every technical change, whereas under other programs, such as their state enforcement program, the regulators and cleanup parties can meet and negotiate changes to cleanup plans. To avoid these problems, parties sometimes opt to send their remediation waste off-site to a commercial facility that already has a RCRA permit to treat, store, or dispose of hazardous waste; however, this option can be prohibitively expensive, according to EPA and some state cleanup managers. For example, Maine does not have any such commercial facilities; therefore, parties that want to send their waste off-site have to pay high transportation costs to ship it to another state that does. To avoid triggering RCRA’s requirements, property owners whose sites are not under a federal or state cleanup order may choose to let the waste remain in place without treatment and purchase land elsewhere for their plant expansion or other needs, according to EPA, as well as many state cleanup officials and industry representatives. EPA managers told us that leaving waste in place—especially “old waste,” such as sludge, that may still have relatively high concentrations of hazardous substances—may pose health or environmental risks. Furthermore, some state cleanup managers noted, the contaminated land is not placed back into productive use. Although cleaning up a site may offer economic benefits, such as relief from liability for contamination and increased property values, industry sometimes concludes that the costs of complying with RCRA can outweigh these benefits, according to EPA’s analysis. Cleanup program managers from several states echoed these concerns. For example, cleanup managers from Missouri believe that less restrictive requirements for remediation waste would lead to more voluntary cleanups. Officials from Pennsylvania concurred, saying that they believe RCRA’s requirements discourage parties from voluntarily stepping forward to clean sites, such as former steel mill sites near Pittsburgh. Likewise, cleanup managers from New York believe that economic factors are key to determining whether a voluntary cleanup will occur. If a property’s sale price or redevelopment value does not allow a party to recoup the expenses of complying with RCRA, such a cleanup will not take place, they contend. Illinois cleanup managers expressed similar concerns, saying that potential buyers are likely to lose interest in purchasing a property once they find out that it may be subject to RCRA’s requirements, especially the treatment standards under the land disposal restrictions. Since the late 1980s, EPA has incrementally modified RCRA’s application to remediation waste through an assortment of policy statements and regulatory alternatives, which have lessened but not solved the adverse effects identified. The state managers we interviewed have had varied experience in using these alternatives; some have found them burdensome and overly complicated. Furthermore, industry representatives were concerned that using the alternatives may result in cleanups that do not meet RCRA’s requirements and will thus require further action. To allay these concerns, in 1996, EPA proposed new rules to more comprehensively reform RCRA’s requirements as they apply to remediation waste. However, because technical and legal issues associated with the proposed rule remain unresolved, the reform of RCRA’s requirements that impede cleanups can best be addressed through legislation, according to EPA. The states have most frequently used six policy and regulatory alternatives that EPA has issued. Each alternative varies, however, in the degree to which it helps to solve the problems posed by RCRA’s requirements. EPA originally designed the “contained-in” policy in 1986 to clarify that the scope of the waste managed under RCRA includes any medium—for example, groundwater or soils—that contained a listed waste. In the 1990s, recognizing that at some concentration levels, contaminated media no longer pose a hazard to health or the environment, EPA has allowed its regions and states to exclude, or “contain out,” such media from RCRA’s regulation, on a case-by-case basis. EPA has not established definitive guidance on the specific concentration levels that justify a “contained-out” decision, but it has stated that the decision should be based on the risk posed to human health. Hence, according to EPA, this policy allows regulatory agencies to make their own decisions about when contaminated media no longer contain hazardous waste and therefore no longer need to be managed under RCRA. However, EPA has also reported that while the contained-out policy has increased flexibility and reduced cleanup delays, it has not been consistently applied throughout the nation. In addition, the policy applies only to contaminated media—soil and groundwater—and not to all remediation waste, such as sludge. Furthermore, in some cases, not all waste that has been contained out is exempt from all of RCRA’s requirements. For example, contaminated soil may still be subject to land disposal requirements if it was excavated and tested in order to obtain the contained-out decision. Finally, managers from one state told us they are reluctant to use this policy because EPA has not set national standards for making a contained-out decision. A 1986 amendment to the Superfund law exempts on-site cleanups from the requirement to obtain a RCRA permit because these cleanups receive close federal and state oversight. Some states have likewise adopted this waiver for the on-site cleanups they oversee under their own enforcement programs. Nevertheless, these cleanups must continue to meet RCRA’s other requirements, including the land disposal restrictions and minimum technological requirements. Permit waivers do not apply to RCRA or state voluntary cleanups. In 1988, EPA issued a regulation to help address problems in meeting the land disposal treatment standards for specific types of waste, such as contaminated soils. The regulation allows EPA to issue a site-specific variance from a given land disposal treatment standard under certain circumstances, such as when a given waste cannot be treated to the applicable concentration level. However, according to the Superfund program managers, the lengthy approval process, which includes obtaining public comments, discourages requests for these variances. Nonetheless, EPA has recently encouraged the regions to make greater use of the variances. In 1990, EPA established this policy for Superfund cleanups, and the states have extended it to cleanups in other programs. When beginning a cleanup, a party must make a good-faith effort to determine the source of the waste identified at the site. The source often determines whether the waste is a listed hazardous waste and, therefore, subject to RCRA’s requirements. The Superfund guidance provides that when no records exist to document the exact source of the waste—a common occurrence for older, abandoned Superfund sites—the lead regulatory agency can presume that the waste is not a listed hazardous waste and is therefore not subject to RCRA’s requirements. However, the parties conducting the cleanups are at risk if they have not taken adequate steps to identify the source of the waste. If additional information becomes available to prove that, because of its source, a waste is a listed hazardous waste, the responsible party could be forced by EPA to perform additional cleanup activities at the site in accordance with RCRA’s requirements. In this case, the responsible party could face liability for improperly managing and disposing of hazardous waste. Also originating within Superfund in 1990, this interpretation of the scope of land disposal restrictions allows cleanup managers to consolidate some remediation waste and treat it or leave it in place and cap it without triggering the treatment standards under the land disposal restrictions. However, the waste can be consolidated only if it lies within contiguous areas of contamination. In addition, cleanup managers must comply with all of RCRA’s requirements if the waste is moved from one area of contamination to another or is removed, treated, and then placed back into the area of contamination. In 1993, EPA issued the corrective action management unit (CAMU) rule that significantly expands upon the area of contamination policy. According to EPA officials, under this rule, parties conducting cleanups can dig up or move waste or can permanently treat, store, or dispose of it within a strictly defined area on-site if certain site-specific design and operating requirements are met. However, the waste would not be subject to RCRA’s land disposal restrictions or minimum technological requirements. Moreover, parties must obtain EPA’s approval to use a CAMU—usually by obtaining a permit. The use of CAMUs has been somewhat limited because in 1993, some stakeholders, including the Environmental Defense Fund (EDF), filed a lawsuit questioning, among other things, whether EPA has the authority to exempt hazardous waste disposed of in CAMUs from the land disposal restrictions and the minimum technological requirements. This legal question has not yet been resolved. While most of the state managers we interviewed described these alternatives, such as the CAMU rule, as useful during cleanups, some managers were not aware of or did not understand all of the alternatives, questioned whether they were legally defensible, or found them burdensome and inefficient. EPA is considering how to address these problems. Cleanup managers from all but one of the states we selected told us that they had used EPA’s alternatives for minimizing the impact of RCRA’s requirements on remediation waste cleanups. Generally, the state and other managers believed that the alternatives brought needed flexibility to RCRA’s rigid requirements. For example, the Department of Defense’s Deputy Under Secretary for Environmental Security attributed savings of between $500 million and $1 billion in cleanup costs to the use of a CAMU at the Department’s Rocky Mountain Arsenal site. However, those managers who had used the alternatives more extensively also said that they spend considerable time and resources to determine which alternatives to use and how to use them to work around the problems presented by RCRA’s requirements. They found that the alternatives were difficult to use and did not solve all of the problems at a particular site. In some instances, we found that cleanup managers were unfamiliar with some of the alternatives or were concerned about using them. For example, cleanup managers from one state told us that they were not familiar with EPA’s policy that provides for waivers to the administrative requirements for obtaining a permit. Managers from another state told us that they were reluctant to make use of the contained-out policy because EPA had not issued specific guidance on such determinations. Industry managers told us they were hesitant to propose new CAMUs because of the rule’s uncertain future. Several industry and state cleanup managers acknowledged that they are somewhat uncomfortable applying these alternatives for fear that EPA or a third party may view the cleanup as not being in full compliance with RCRA’s requirements and may initiate a legal challenge. For example, managers in one state were somewhat uncomfortable that they take full advantage of the flexibility provided by the source of contamination presumption. In the managers’ view, the state may not be requiring an extensive enough search to determine the source of the waste. Several EPA headquarters managers said that they are not surprised that state cleanup managers are unaware of or are inconsistently applying the alternative policies because the policies are difficult to understand and have been implemented piecemeal over the years. The EPA managers acknowledged that they may need to take additional steps to help the regions and states better use these options. Recognizing the need for more comprehensive reform of RCRA’s requirements for managing remediation waste, EPA in 1993 established a formal advisory committee of key stakeholders that developed the framework for a new regulatory approach that EPA proposed in April 1996, the Hazardous Waste Identification Rule for Contaminated Media (HWIR-Media). This proposal laid out several options that range from exempting some remediation waste from RCRA’s current requirements to exempting all such waste and giving the states the authority to define how to manage it. EPA estimated that these options could save parties conducting cleanups up to $2.1 billion in cleanup costs a year over the next few years. However, stakeholders still have significant disagreements over legal and technical issues. Therefore, EPA anticipates that any approach to comprehensive regulatory reform would result in prolonged legal battles that would delay cleanups. As result, the agency announced plans to withdraw its proposed rule and focus on four more narrow regulatory changes. EPA concluded that comprehensive reform can best be achieved by revising RCRA itself. EPA’s proposed rule laid out alternatives for waste management, ranging from the “bright line” to the “unitary” approach. The first was limited to making only contaminated media eligible for an exemption from RCRA’s stringent requirements while maintaining the requirements for more highly contaminated hazardous waste. To determine which media could be exempt, EPA would establish a concentration level, or “bright line,” for various contaminants. If the contaminants in a medium fall below the bright line, the medium would be eligible for an exemption from RCRA’s current hazardous waste management requirements and EPA and authorized states would have the authority to set site-specific waste management requirements. EPA estimates that about 80 percent of all contaminated media would be eligible for a RCRA exemption under this approach, saving $1.2 billion a year in cleanup costs over the next few years. In contrast, the unitary approach would exempt all remediation waste, including debris and sludge, from RCRA’s hazardous waste management requirements. Remediation waste would then be managed under a site-specific remediation plan which would be subject to public review and comment and approval by EPA or an authorized state. EPA estimated that this approach could save approximately $2.1 billion a year in cleanup costs over the next few years. According to the Association of State and Territorial Waste Management Officials, most states would prefer an approach that includes all remediation waste—similar to the unitary approach—because it would allow for efficient cleanups. Representatives from the departments of Defense and Energy, industry, and several associations that we contacted also said they would generally prefer the unitary approach for the same reason. Industry groups, in their comments on EPA’s proposal, raised concerns about the bright-line approach, particularly about the extent to which they would have to test and sample waste to determine whether each contaminant at a facility exceeds the line, potentially making some cleanups cost-prohibitive. Some of EPA’s program managers also said that if all remediation waste is not exempted from RCRA’s current requirements, the incentives to avoid cleanups or select less aggressive remedies will continue. Other stakeholders, including representatives of EDF, would generally prefer an approach that is conceptually similar to the bright-line approach. For example, EDF, in its comments on EPA’s proposed rule, stated that it strongly objects to any rule that does not provide national treatment standards for highly contaminated media. EDF contends that, in most cases, this material is as toxic as the process waste that is subject to RCRA’s requirements and therefore should be managed rigorously. EDF also asserts that EPA lacks any technical basis for setting different treatment standards for sludge managed during cleanups. EDF believes that there is no evidence that the sludge managed during a cleanup is physically or chemically different from process waste. Therefore, EDF is opposed to relaxing RCRA’s requirements for managing sludge. EDF was also critical of EPA’s methodology for establishing bright lines, stating that the agency did not adequately consider potential exposure to contaminated groundwater. Stakeholders also disagree on the extent to which the states should be authorized to manage remediation waste. Some stakeholders expressed concern that the states, if authorized, could set different standards for managing such waste, potentially creating problems with interstate transfer and disposal. Cleanup managers in one state were particularly concerned about whether they would have adequate resources to determine the hazard posed by waste shipped to their state from states with less stringent standards. Disagreements also arose on the process that should be used to determine whether a state has adequate laws, standards, and programs to manage exempted waste. Some stakeholders argue that the states have already demonstrated their ability to manage remediation waste through their state cleanup programs and should be allowed to certify themselves as authorized to do so. EDF, on the other hand, points out that since a large portion of remediation waste would be exempt from RCRA’s hazardous waste management requirements, the states could use their own systems for managing nonhazardous waste, such as municipal and industrial landfills, for remediation waste. EDF argues that some evaluations have raised questions about the adequacy of these state systems. EPA enforcement managers also added that community groups have expressed similar concerns. If EPA is to implement a state authorization process, all stakeholders seem to agree that the agency should not duplicate the process EPA uses to authorize states to implement RCRA because it is cumbersome and time-consuming. However, the stakeholders disagree on how to streamline the process so that EPA retains meaningful oversight and the public has adequate opportunities to participate in cleanup decisions and activities. EPA concluded that resolving all the technical and legal issues, including how to distinguish what waste poses a significant threat to human health and the environment and whether EPA can exempt this waste from RCRA’s land disposal restrictions, would be time-consuming and resource-intensive. The agency expected the resulting drawn out litigation and uncertainty would further discourage cleanups. Subsequently, the agency announced on September 11, 1997, that it plans to withdraw the HWIR-Media rule and, instead, pursue final rulemaking on four more narrow portions of the proposal by June 1998. The agency acknowledges that while these changes would help improve remediation waste management, they would not provide the needed flexibility to exempt such waste from RCRA’s rules. Therefore, EPA further concluded that comprehensive reform of the remediation waste issue can be best addressed through the legislative process. In anticipation that legislative proposals to address the issue could be reintroduced, EPA, in conjunction with the Council on Environmental Quality, hosted three meetings during the past year to assess stakeholders’ views on outstanding remediation waste issues and determine possible ways to address them. Three of RCRA’s hazardous waste management requirements, in particular—land disposal restrictions, minimum technological requirements, and requirements for permits—may be unduly stringent for a significant portion of the remediation waste that poses a lesser risk to human health and the environment. While stakeholders generally agree that comprehensive reform of remediation waste management is necessary, not everyone agrees on how to achieve this reform. EPA’s efforts to provide alternative policies to mitigate the impact of these requirements have resulted in confusion over the applicability of the policies to cleanups and some, such as the CAMU rule, have been legally challenged. EPA has concluded that because stakeholders disagree on the extent to which waste should be exempt from RCRA’s requirements, as well as on EPA’s legal authority under current law to exempt waste from the requirements, the agency could not easily achieve comprehensive reform through the regulatory process. It believes that such reform can best be achieved by revising the underlying law governing remediation waste management. EPA’s plan to withdraw proposed comprehensive regulatory reform increases the need for a legislative solution. We recommend that until comprehensive legislative reform is achieved to address RCRA’s disincentives to cleanups, the Administrator, EPA, take steps to ensure that regulators overseeing cleanups have a more consistent understanding of how to apply EPA’s existing policy and regulatory alternatives to RCRA’s requirements for managing remediation waste. These steps could include, for example, consolidating the policy and regulatory alternatives into one guidance document, training all cleanup managers in its appropriate use, and providing follow-up legal assistance for site-specific implementation questions. We provided copies of a draft of this report to EPA for its review and comment. We met with agency officials, including the Acting Director, Permits and State Programs Division, Office of Solid Waste, the division with responsibility for developing policies and procedures for managing remediation waste under RCRA. The agency generally agreed with the report’s findings. EPA suggested some technical revisions to the report, which we incorporated. The agency also identified two issues it believed needed further clarification. First, EPA agreed that we identified the three specific requirements under RCRA that, when applied to remediation waste, pose the most significant barriers to cleanups. However, the agency noted that reforming these individual requirements would not remove all of the barriers; RCRA’s entire hazardous waste management process, as it applies to remediation waste, poses problems and needs comprehensive reform. Second, the agency wanted to make sure that the report clearly indicated that RCRA’s requirements affect all remediation waste, including sludge, debris, and contaminated soil. EPA believes that reform must apply to all remediation waste. We made several changes in the report where appropriate to address these issues. Finally, while agreeing that our recommendation will help parties manage cleanups under RCRA’s current requirements, EPA believes that the benefits may be limited because the requirements will continue to pose barriers to cleanups until comprehensive reform is achieved. We reemphasized that reform, while necessary, may take some time to implement. Meanwhile, parties will have to accomplish cleanups under RCRA’s current requirements and should be able to take advantage of the policy and regulatory alternatives EPA has provided. However, given the concerns that state and industry cleanup managers have expressed about using these alternatives, we believe it is important that EPA take steps to ensure the alternatives are implemented correctly. The scope and methodology used for our work is discussed in appendix I. We performed our work from April through September 1997 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies to the appropriate congressional committees; the Administrator, EPA; and other interested parties. We will also make copies available to others on request. We hope this information will assist you as you consider legislation to reform RCRA as it applies to remediation waste. If you have any further questions, please call me at (202) 512-6111. Major contributors to this report are listed in appendix II. To provide information on the requirements of the Resource Conservation and Recovery Act (RCRA) that pose barriers to managing remediation waste and the policies that the Environmental Protection Agency (EPA) has developed to mitigate those barriers, we reviewed applicable laws and numerous EPA documents, policies, and regulations. We also interviewed managers in charge of hazardous waste cleanup programs in EPA, nine states, and industry to obtain their views both on RCRA’s requirements and on the actions EPA has taken to mitigate barriers presented by the requirements. We attended all three meetings co-sponsored by EPA and the Council on Environmental Quality to assess stakeholders’ concerns with reforming RCRA’s requirements for remediation waste; these meetings were held on June 5, August 6, and September 5, 1997. Additionally, we spoke with cleanup program managers in several other federal agencies and representatives of the primary environmental association involved in remediation waste issues to learn about their experiences and perspectives. Finally, we visited a hazardous waste facility at Cytec Industries’ Willow Island plant near Parkersburg, West Virginia. The officials and representatives we interviewed include the following: The Acting Director and environmental specialists from the Permits and State Programs Division, Office of Solid Waste. This division is responsible for developing environmental remediation policies and procedures under RCRA. Environmental specialists from the Office of Site Remediation Enforcement who oversee EPA’s enforcement of RCRA. Representatives from the Superfund program who specialize in complying with RCRA’s applicable requirements. Region III officials who manage hazardous waste activities at Cytec Industries’ Willow Island plant near Parkersburg, West Virginia. Program managers responsible for overseeing hazardous waste cleanups at the departments of Defense, Energy, and the Interior. A policy director from the Association of State and Territorial Solid Waste Management Officials. Managers of Superfund, RCRA, state enforcement, and voluntary cleanup programs in nine states. We selected five of these states—California, Illinois, New Jersey, New York, and Pennsylvania—because, according to EPA, they collectively generate, each year, about 35 percent of the nation’s contaminated environmental media managed off-site. We selected the four remaining states—Maine, Missouri, Texas, and Washington—for geographic diversity. Attorneys and consultants representing major corporate members of the National Environmental Development Association and the RCRA Corrective Action Project. These groups were organized to promote the reform of RCRA. Attorneys from the Environmental Technology Council. This group represents private waste managers. A spokesperson for the Solid Waste Association of North America. This group represents municipal landfill operators. Facility and corporate headquarters managers from Cytec Industries in charge of hazardous waste management activities at the Willow Island plant near Parkersburg, West Virginia. Attorneys from the Environmental Defense Fund. This organization is one of the primary environmental organizations taking an active position on various proposals to reform RCRA’s requirements for managing remediation waste. We performed our work from April through September 1997 in accordance with generally accepted government auditing standards. Richard P. Johnson, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO provided information on: (1) the ways, according to the Environmental Protection Agency (EPA) and selected state program managers and industry representatives, that the Resource Conservation and Recovery Act's (RCRA) requirements, when applied to waste from cleanups (often referred to as remediation waste), affect cleanups; and (2) the actions EPA has taken to address any impediments. GAO noted that: (1) three key requirements under RCRA that govern hazardous waste management--land disposal restrictions, minimum technological requirements, and requirements for permits--can have negative effects when they are applied to waste from cleanups; (2) the requirements have been successful at preventing further contamination from ongoing industrial operations, according to EPA cleanup managers; (3) however, when the requirements are applied to remediation waste, they can pose barriers to cleanups; (4) because much remediation waste does not pose a significant threat to human health and the environment, subjecting it to these three requirements in particular can compel parties to perform cleanups that are more stringent than EPA, the states, industry, or national environmental groups believe are necessary to address the level of risk; (5) consequently, EPA and state program managers and industry representatives maintain, parties often try to avoid triggering the requirements by containing waste in place or by abandoning cleanups entirely; (6) in the late 1980s, when establishing national Superfund guidance, EPA recognized that these three requirements would make some cleanups more difficult and began developing policy and regulatory alternatives to give parties more flexibility in dealing with the requirements; (7) however, these alternatives do not address all of the impediments to cleanups, and some state cleanup managers were not always aware of or did not fully understand the alternatives, while others found them cumbersome to use and inefficient; (8) industry representatives were also concerned that because of the ways that some states are using these alternatives, EPA or a third party may challenge whether the cleanup fully meets RCRA requirements; (9) to allay these concerns, in 1996, EPA proposed a new rule to comprehensively reform remediation waste requirements; (10) the rule included a range of options to exempt some or all remediation waste from hazardous waste management requirements and to give states more waste management authority; (11) EPA had estimated that these options could save up to $2.1 billion a year in cleanup costs; (12) however, EPA recently decided that because stakeholders disagree over whether the agency can exempt remediation waste from the requirements, the agency would face a prolonged legal battle over the new rule; and (13) although areas of disagreement may still need to be addressed, EPA has concluded that the best way to achieve comprehensive reform is to change the underlying cleanup law.",govreport
"Before 1996, Medicare program integrity activities were subsumed under Medicare’s general administrative budget and performed, along with general claims processing functions, by insurance companies under contract with CMS, which led to certain problems. The level of funding available for program integrity activities was constrained, not only by the need to fund ongoing Medicare program operations—such as the costs for processing medical claims, but also by budget procedures imposed under the Budget Enforcement Act of 1990. In the early and mid-1990s, we reported that such funding constraints had reduced Medicare contractors’ ability to conduct audits and review medical claims. HHS advocated for a dedicated and stable amount of program integrity funding outside of the annual appropriations process, so that CMS and its contractors could plan and manage the function on a multiyear basis. HHS also asserted that past fluctuations in funding had made it difficult for contractors to retain experienced staff who understood the complexities of, and could protect, the financial integrity of Medicare program spending. Beginning in fiscal year 1997, HIPAA established MIP and provided CMS with dedicated funding to conduct program integrity activities. HIPAA stipulated a range of funds available for these activities from the Medicare trust funds each year. For example, for fiscal year 1997, the law stipulated that at least $430 million and not more than $440 million should be used. The maximum amount of MIP funds rose from $440 million in fiscal year 1997 to $720 million in fiscal year 2003. For fiscal year 2003, and every year thereafter, the maximum amount that HIPAA stipulated for MIP was $720 million. (See app. II, table 2, for additional information on the MIP funding ranges.) As a result of the increases stipulated in HIPAA, from fiscal years 1997 through 2005, total MIP expenditures increased about 63 percent—from about $438 million to $714 million, as figure 1 shows. HIPAA authorized MIP funds to be used to enter into contracts to “promote the integrity of the Medicare program.” The statute also listed the various program integrity activities to be conducted by contractors. CMS allocates MIP funds primarily to support its contractors’ program integrity efforts for the traditional Medicare program, known as fee-for- service Medicare. Among these contractors are fiscal intermediaries (intermediaries), carriers, PSCs, and Medicare administrative contractors (MAC). MACs are a new type of contractor that will replace all intermediaries and carriers by October 2011, as required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). MMA required CMS to conduct full and open competition to select MACs. CMS refers to this change as contracting reform. CMS has contracted with intermediaries, carriers, and MACs to perform two types of activities—claims processing and program integrity. Their claims processing activities include receiving and paying claims. These activities are classified as program management and are funded through a program management budget. In addition, intermediaries and carriers have been charged with conducting some program integrity activities under MIP, including performing medical review of claims. The four MACs selected in January 2006 will not conduct medical review activities. CMS plans to assign responsibility for medical review of claims to the MAC selected in July 2006 and to the other MAC contracts to be awarded in the future. MIP provides funds to support these program safeguard efforts. In addition, CMS uses MIP funds to support the activities of PSCs, which perform medical review of claims and identify and investigate potential fraud cases; a coordination of benefits (COB) contractor, which determines whether Medicare or other insurance has primary responsibility for paying a beneficiary’s health care costs; the National Supplier Clearinghouse (NSC), which screens and enrolls suppliers in the Medicare program; and the data analysis and coding (DAC) contractor, which maintains and analyzes Medicare claims data for durable medical equipment (DME), prosthetics, orthotics, and supplies. Contractors receive MIP funds to perform one or more of the following five program integrity activities: Audits involve the review of cost reports from institutions, such as hospitals, nursing homes, and home health agencies. Cost reports play a role in determining the amount of providers’ Medicare reimbursement. Medical review includes both automated and manual prepayment and postpayment reviews of Medicare claims and is intended to identify claims for noncovered or medically unnecessary services. The secondary payer activity seeks to identify primary sources of payment--such as employer-sponsored health insurance, automobile liability insurance, and workers’ compensation insurance--that should be paying claims mistakenly billed to Medicare. Secondary payer activities also include recouping Medicare payments made for claims not first identified as the responsibility of other insurers. Benefit integrity involves efforts to identify, investigate, and refer potential cases of fraud or abuse to law enforcement agencies that prosecute fraud cases. Provider education communicates information related to Medicare coverage policies, billing practices, and issues related to fraud and abuse both to providers identified as having submitted claims that were improper, and to the general provider population. CMS also uses MIP to fund support for the five activities, such as certain information technology systems, fees for consultants, storage of CMS records, and postage and printing. The agency allocates the cost of this support to the five activities, depending on which of the activities is receiving support. Table 1 provides information on specific MIP activities performed by the contractors. Appendix III provides examples of key tasks performed by each of these contractors. For fiscal years 1997 through 2005, CMS generally increased the amount of funding for each of its five program integrity activities, but the amount of the funding provided and the percentage increase have varied among the activities. Provider education received the largest percentage increase in funds, while audit and medical review received the largest amount of funds overall. (See fig. 2.) CMS increased its allocation for provider education by about 590 percent from fiscal year 1997 through fiscal year 2005. This increase was due, in part, to CMS’s decision in fiscal year 2002 to use MIP funds for outreach activities to groups of like providers, which had not previously been funded through MIP. CMS will be able to further increase expenditures for program integrity in fiscal year 2006. In addition to the maximum of $720 million originally appropriated under HIPAA for fiscal year 2006, DRA increased the maximum by an additional $112 million, for a total of $832 million. CMS plans to use some of the $112 million to address potential fraud, waste, and abuse in the new Medicare prescription drug benefit. In each year from fiscal year 1997 through fiscal year 2005, CMS generally increased the amount of MIP funds spent for each of its five program integrity activities, as figure 2 shows. In addition to the increase in the amount of funding for provider education, the expenditures for audit increased 45 percent during the same period. As figure 3 shows, expenditures for medical review increased from fiscal year 1997 to fiscal year 2001 to almost $215 million—about 81 percent—and, since fiscal year 2001, decreased to about $166 million, or about 23 percent. Overall, expenditures for medical review increased 40 percent from fiscal year 1997 to fiscal year 2005. During this period, expenditures for secondary payer increased 49 percent, and for benefit integrity, expenditures increased 89 percent. (See fig. 3 for the amount of expenditures by activity in fiscal years 1997, 2001, and 2005 and app. II, table 3, for more detailed information on the amount of expenditures for each activity in each year.) Increased spending for provider education stemmed, in part, from provider concerns about an increased burden on them in the medical review process. In 2001, we reported that as CMS increasingly focused on ensuring program integrity, providers were concerned about what they considered to be inappropriate targeting of their claims for review. Further, providers asserted that they may have billed incorrectly because of their confusion about Medicare’s program rules. To address these concerns, CMS developed a more data-driven approach for conducting medical review and also increased its emphasis on provider education. CMS officials explained that medical review would help identify providers that were billing inappropriately, and provider education would focus on individuals’ specific billing errors to eliminate or prevent recurrence of the problems. In addition, beginning in fiscal year 2002, spending for the provider education activity increased significantly because CMS began to use MIP funds for what the agency called provider outreach. Provider outreach focuses on communicating with groups of providers about Medicare policies, initiatives, and significant programmatic changes that could affect their billing. This information is conveyed through seminars, workshops, articles, and Web site publications. Previously, provider outreach had been funded outside of MIP, as part of CMS’s program management budget. Provider education spending increased from $17 million in fiscal year 2001—before provider outreach was added to the provider education activity—to $53.5 million in fiscal year 2002. In fiscal year 2005, funding for the provider education activity reached $70 million. In comparing the share of funds spent on each program integrity activity, from fiscal year 1997 through fiscal year 2005, we found that CMS generally spent the largest share on audit, averaging about 31 percent, and on medical review, averaging about 27 percent. CMS spent less on secondary payer, averaging 21 percent, and benefit integrity, averaging 15 percent. In contrast, during this period, CMS spent the smallest percentage on provider education, which averaged about 6 percent of MIP expenditures. See figure 4 for information on the percentage of funds allocated to each activity. (For more detail, see table 4 in app. II.) CMS officials told us that they generally had allocated MIP funds to the five activities based predominantly on historical funding, but sometimes considered high-level priorities. However, this approach does not take into account data or information on the effectiveness of one activity over the other in ensuring the integrity of Medicare or allow CMS to determine if activities are yielding benefits that are commensurate with the amounts spent. For example, while CMS has noted that benefit integrity and provider education activities have intangible value, the agency has not routinely collected information to evaluate their comparative effectiveness. Furthermore, CMS has not fully assessed whether MIP funds are appropriately allocated within the audit, medical review, benefit integrity, and provider education activities. For example, audit’s role has changed as Medicare’s payment methods have changed in the last decade, but it continues to have the largest share of MIP funding. According to agency officials, CMS allocates funds for the five activities based primarily on an analysis of previous years’ spending and may also consider other information when developing the MIP budget, such as current expenditures by individual contractors. CMS officials told us that they may also consider the agency’s high-level priorities. For example, in fiscal year 2004, CMS began to increase funds to expand the scope of its annual study to estimate Medicare improper payment rates, and in fiscal year 2002, it increased its MIP allocation for provider education. CMS does not have a means to compare quantitative data or qualitative information on the relative effectiveness of MIP activities that it could use in allocating funds. Instead, it calculates the quantitative benefits for two, and assesses the qualitative benefits—which are not objectively measured—for the other three. In fiscal year 2005, for its medical review and secondary payer activities, CMS tracked dollars saved in relation to dollars spent—a quantitative measure that the agency calls a return on investment (ROI). Having an ROI figure is useful because it measures the effectiveness of an individual activity so that its value can be compared with that of another activity. As of fiscal year 2005, secondary payer had an ROI of $37 for every dollar spent on the activity, and medical review had an ROI of $21 for every dollar spent. CMS tracked the ROI for audit, but by fiscal year 2002, audit’s reported contribution to ROI fell to almost zero. (See fig. 5 and app. II, table 5, for additional ROI details.) CMS officials told us that the decrease in the ROI for audit was due to the implementation of prospective payment systems (PPS), under which Medicare pays institutional providers fixed, predetermined amounts that vary according to patients’ need for care. Until fiscal year 2001, audits had achieved an ROI that was generally $9 or more for every dollar spent conducting them, by disallowing payment for individual costs that should not have been paid by Medicare under the previous payment method. Under PPS, CMS’s methods for paying providers changed. However, the information system that had been used to track ROI began to incorrectly calculate the savings from audit because it had not been adjusted for the new payment method. According to agency officials, CMS is implementing a different way to track audit savings, and an overall ROI. It will focus on the savings from disallowing items that directly affect an individual provider’s payment under a PPS, such as bad debts and the number of low- income patients hospitals serve. It will track the amounts related to these add-on payments actually paid by Medicare to, or recouped from, the provider after an audit. The difference between the amount paid prior to the audit and the amount paid after the audit (assuming there has been an adjustment) would be the savings. However, all audit functions do not result in measurable savings. For example, in its written comments on a draft of this report, CMS noted that many audit functions funded by MIP do not have an ROI. CMS stated that these include processing cost reports for data collection purposes, correcting omissions on providers’ cost reports, implementing court decisions, and issuing notifications concerning Medicare payments. In addition, CMS stated that some of these activities are mandated by law, while others have significant value to the Medicare Payment Advisory Commission (MedPAC), which is an independent federal commission; providers; provider associations; and actuaries. From fiscal year 1997 through fiscal year 2005, CMS developed qualitative assessments of the impact of benefit integrity and provider education. According to CMS, the agency develops such assessments when the savings generated by MIP activities are impossible or difficult to identify. Nevertheless, CMS officials told us that these activities provide value to the program in helping to ensure proper Medicare payments. For example, CMS officials said that benefit integrity contributes to the work of federal law enforcement agencies, which investigate and prosecute Medicare fraud and abuse. CMS officials also noted that they consider benefit integrity to have a sentinel effect in discouraging entities that may be considering defrauding the Medicare program, but this effect is impossible to measure. CMS indicated that trying to measure the results of the contractors’ benefit integrity activities could create incentives that undermine the value of their work. For example, counting the number of cases referred to law enforcement for further investigation could lead the contractors to refer more cases that were less fully developed. However, other agencies that investigate or prosecute fraud, such as HHS and the Department of Justice, keep track of their successful cases, recoveries, and fines to demonstrate their results. Similarly, CMS could assess the degree to which each of its contractors had contributed to HHS and the Department of Justice’s successful investigations and prosecutions. In regard to educating providers on appropriate billing practices, CMS may be missing opportunities to evaluate its contractors’ performance. Provider education can help reduce billing errors, according to CMS. However, according to an OIG report, CMS has not evaluated the strategies used to modify the behavior of providers through education to determine if these strategies are achieving desired results. CMS has noted the intangible value inherent in benefit integrity and provider education activities, but the agency has not routinely collected information to evaluate their comparative effectiveness in ensuring program integrity. Further, as discussed earlier, correct information on audit’s effectiveness, based on an ROI, has not been available for the last several years. Consequently, CMS is not able to determine if some of the funds spent for benefit integrity, provider education, and audit—about $396 million, or 56 percent of MIP funds in fiscal year 2005—could be better directed to secondary payer or medical review. Nevertheless, CMS officials told us that they plan to decrease the allocation to medical review and increase the allocation to provider education. CMS officials stated that they are developing two initiatives that will give the agency objective measures of the results of the audit and provider education activities. As discussed earlier, CMS is implementing a revised methodology for calculating the ROI for audit. In addition, it is trying to develop information on the effectiveness of provider education. A CMS official explained that the agency is adding a provider education component to its program integrity management reporting system. This component will potentially allow CMS to develop an ROI figure for provider education by correlating educational efforts to a decrease in claim denials and provide a measure of the quantitative benefits of this activity. This component is scheduled to begin operating in the summer of 2006. After CMS has allocated funds to each of the five MIP activities, it must decide how to further distribute those funds to pay contractors that carry out each one. For example, in fiscal year 2004, after CMS allocated about $135 million for medical review to be conducted by intermediaries and carriers, it then distributed those funds to pay 28 intermediaries and 24 carriers that were conducting medical review at that time. However, given vulnerabilities for improper payment, contractor workload, and the relative effectiveness of activities performed, CMS has not always taken steps to ensure that it has allocated funds in an optimal way within its activities. Nevertheless, CMS has used information on relative savings to decide on funding allocations within the secondary payer activity. Medical review, provider education, and benefit integrity are activities for which allocation of MIP funds may not be optimal, because our analysis suggests that CMS has not allocated funds within these activities based on information concerning contractor vulnerabilities. Such vulnerabilities include the potential for fraudulent billing in different locations and the amount of potential benefit payments at risk in the contractor’s jurisdiction. For example, CMS estimated that the contractor that handled claims for DME, orthotics, prosthetics, and supplies in a jurisdiction that included Texas and Florida—two states experiencing high levels of fraudulent Medicare billing—improperly paid 11.5 percent of its 2004 claims—or $474.9 million—which was a higher improper payment rate than that of other contractors paying these types of claims. As we previously reported, our analysis indicated this contractor received almost a third less funds for medical review per $100 in submitted claims in fiscal year 2003 than the amount given to contractors in other regions with less risk of fraudulent billing. Our most recent analysis indicated that the imbalance in fund allocation did not change in fiscal years 2004 and 2005. We could not determine the rationale for this allocation beyond what was historically budgeted for this contractor. The amount of medical review funds allocated to individual contractors is not directly tied to the amount of benefits that they pay, which is a key measure of potential risk. For example, in fiscal year 2004, one contractor paid out $66 million in benefits and received about 28 cents in medical review funds for each $100 in benefits paid. In contrast, another contractor paid out considerably more in benefits—about $5 billion in fiscal year 2004—and received about 7 cents in medical review funds for each $100 in benefits paid. Further, CMS has not adjusted the amount of funding for individual contractors to educate providers based on their relative risks. A CMS official told us that the amount of provider education funding is generally aligned with the amount allocated for medical review, regardless of the value of the benefits that the contractor pays. Similarly, the amount of MIP funds provided to PSCs is not directly tied to the amount of benefits paid in jurisdictions for which they have responsibility for benefit integrity. For example, CMS spent about $75 million for work performed by PSCs under 13 benefit integrity task orders. The PSCs averaged about 3 cents for each $100 in paid claims in the jurisdictions for which they conducted benefit integrity tasks. However, the amount of MIP funding paid to the PSCs to conduct benefit integrity activities varied from about 1 cent to about 7 cents for each $100 in claims paid. Further, our analysis showed no clear relationship between funds provided to PSCs and their responsibilities for conducting benefit integrity activities in jurisdictions with high incidences of fraudulent Medicare billing. For example, one PSC received about 4 cents for conducting benefit integrity work for each $100 in paid claims for benefit integrity work in a jurisdiction that included Florida, which is at high risk for fraudulent billing. In contrast, PSCs received the same level of funding to conduct benefit integrity work in states at lower risk for fraudulent billing, including Iowa, Montana, Pennsylvania, and Wyoming. During the last decade, Medicare has significantly changed how it pays institutional providers—such as hospitals and nursing homes—that it audits. To align with the payment method changes, CMS has modified its audit focus to items in the cost report that can affect payments under a PPS. However, these audits can affect a much smaller proportion of Medicare’s payments under a PPS than audits of costs under the previous payment method. Given the magnitude of the payment method change, CMS has not evaluated whether funds within the audit activity should be further reallocated to potentially generate greater savings to the Medicare program by addressing the accuracy of reported costs that may be used to determine payment increases. CMS distributes funds to its contractors to conduct certain tasks, such as inputting data from; reviewing; and, if needed, auditing cost reports submitted by its institutional providers in order to settle, or agree upon, the reported costs. CMS’s audit contractors are also required to conduct wage index reviews and assist with intermediary hearings and appeals of settled cost reports. For several years, CMS has had a backlog of cost reports to settle, and the agency has made a priority of reducing the backlog. Other priorities include more closely scrutinizing those providers that are still paid based on their costs—such as critical access hospitals— and conducting required audits. For providers paid under a PPS, CMS has shifted its audit focus to the few items that could affect a provider’s payments if disallowed. These include bad debt, payments for graduate medical training, and the number of low- income patients that hospitals serve. CMS has also shifted more audit resources to hospitals because more items on their cost reports can affect calculations of a provider’s add-on payments. CMS does not know the amount of MIP funds that are associated with audits of different types of providers or specific issues, such as bad debt. However, in fiscal year 2004, CMS began to separately track some audit costs, such as those for desk reviews, audits, and wage index reviews. This provided some information on how audit funds were being spent. According to CMS officials, tracking the costs of individual audits at a provider or issue level would be difficult and costly because multiple issues are audited at the same time and the complexity of individual audits varies for the same provider type. Nevertheless, more detailed information on audit costs—such as at the provider level—than CMS currently tracks could provide it with a better understanding of the value of its current mix of tasks, particularly if it could associate the costs with the savings from the audits. This could provide CMS with information on whether it needs to change the balance of funding for those tasks—for example, whether it should focus more attention on bad debt or other areas of the cost report for specific types of providers. Further, CMS’s audit function continues to focus on verifying specific aspects of the provider’s cost report that affect its individual payment. This type of audit generally addresses a small portion of providers’ Medicare payments, while under a PPS, a much greater portion of the payments are based on overall industry costs. Each year, MedPAC advises the Congress on whether the Medicare PPS rates for institutional providers should increase, decrease, or remain constant. However, MedPAC generally does not have a set of audited cost reports that validate the information it uses in its assessments of providers, such as hospitals’ allocations of their costs. According to MedPAC, the current audit process reveals little about the accuracy of the Medicare cost information. For example, while CMS audits individual providers through full or partial audits, it does not allocate funds to audit a panel of providers, such as hospitals, which could provide a means to highlight areas where cost reporting accuracy is problematic. Without accurate information, CMS cannot ensure that payments to hospitals properly reflect their costs and provide reliable information that can be a factor in determining whether rates should change or remain constant. CMS might find it cost-effective to gather additional information because audits have the potential to give the Congress better information on hospitals’ costs. For example, by law, CMS is required to periodically conduct audits of end-stage renal disease (ESRD) facilities, which care for patients who must rely on dialysis treatments to compensate for kidney failure. CMS broadened its audit plan for these facilities to include a review not only of bad debts, but also to validate the costs of a selected number of items that are paid through PPS. CMS officials indicated that their audits of these facilities generated only limited savings, usually related to bad debts, so they did not consider these audits very valuable. However, as a result of these audits, MedPAC officials stated in 2005 that these facilities had a greater margin—or ratio of Medicare payments to costs—than their cost reports suggested. This information was factored into MedPAC’s recommendation about the amount of payment increase needed in calendar year 2007. Setting appropriate payment increases for hospitals is potentially more important to Medicare than for ESRD facilities because payments to participating inpatient hospitals represented about $116 billion, or about 40 percent of Medicare’s benefit payments in fiscal year 2004. CMS officials agreed that gathering this information might be valuable, but indicated that they did not currently have sufficient funding to conduct this data validation in addition to their current efforts funded as part of audit. In contrast to provider education and audit, CMS collects information on the relative savings from specific secondary payer functions and has used this information to decide on funding allocations within the secondary payer activity. CMS allocates funds to, and calculates savings for, about 16 secondary payer functions. Among these functions are (1) a data match that helps identify instances when a Medicare beneficiary was covered by other insurance and (2) the initial enrollment questionnaire, which gathers insurance information on beneficiaries before they become eligible for Medicare. Within secondary payer, for fiscal year 2005, savings for the 16 functions ranged from less than 1 percent to 49 percent of savings of over $5 billion for all of the functions. CMS officials told us that they have used relative savings information for secondary payer functions as one factor in determining whether to increase, decrease, or terminate funding for the functions within this activity. For example, according to CMS officials, in fiscal year 2005, savings for one secondary payer function—voluntary reporting of primary payer information to CMS by health insurance companies—increased by about 65 percent over fiscal year 2004. Further, savings from this effort continue to increase. CMS is planning to maintain or expand funding to it. However, CMS officials said that after confirming their relatively low savings, they had terminated certain other efforts to identify secondary payer claims. The terminated efforts included (1) a second questionnaire sent as follow-up to determine whether a beneficiary who is claiming Medicare benefits for the first time has other health insurance that would be responsible for paying the claim and (2) an effort to determine whether certain trauma codes contained in a claim could indicate that another insurer, such as worker’s compensation, could be the primary payer. The Medicare program is undergoing significant changes for which there is little precedent. These include the addition of the new Part D prescription drug benefit and the reform of Medicare contracting. Both will require CMS to make new choices in how it should allocate its MIP funds to best address its program integrity challenges. CMS’s current allocation approach—which agency officials characterized as primarily relying on previous fiscal year funding allocations for each activity, and to each contractor, to determine current allocations—will not be adequate to address emerging program integrity risks and ongoing programmatic changes. In addition, as contracting reform proceeds, CMS intends to increase its use of MIP funds to reward contractors to encourage superior performance. However, the usefulness of award payments as a tool to encourage contractors to perform MIP tasks effectively depends on how well CMS can develop, and consistently apply, performance measures to gauge differences in the quality of performance. CMS’s current allocation approach will not be adequate to address Medicare’s emerging program integrity risks related to the prescription drug benefit. Over the next 10 years, total expenditures for the prescription drug benefit, which was implemented in January 2006, are projected to be about $978 billion, while total expenditures for the Medicare program are projected to be about $6.1 trillion. CMS and others have stated that the prescription drug benefit is at risk for significant fraud and abuse. In December 2005, an assistant U.S. attorney noted that the Medicare prescription drug benefit would be vulnerable to a host of fraud and abuse schemes unless better detection systems are developed. According to CMS, the prescription drug benefit may be vulnerable to fraud and abuse in particular areas, including beneficiary eligibility, fraud by pharmacies, and kickbacks designed to encourage certain drugs to be included by the plans administering the benefit. To respond to these challenges, CMS has selected eight private organizations, called Medicare prescription drug integrity contractors (MEDIC), to support CMS’s benefit integrity and audit efforts. Because the Medicare prescription drug benefit is in the early stages of implementation, CMS does not yet have data to estimate the level of improper payments or information to determine the level of program integrity funds needed to address emerging vulnerabilities. As a result, it is not clear whether, in the future, CMS will need to shift funds from program integrity activities for Parts A and B to protect the Part D drug benefit from potential fraud and abuse. For fiscal year 2006, $112 million beyond the HIPAA limit of $720 million has been appropriated for CMS to support program integrity activities. The President’s Budget for fiscal year 2007 has also proposed additional funds for fiscal year 2007 and fiscal year 2008. CMS plans to use some of the additional funding provided under DRA for fiscal year 2006 to support Part D program integrity efforts. For example, CMS plans to spend $14 million over the next fiscal year to fund efforts by MEDICs to protect the prescription drug benefit by performing selected tasks, such as analyzing data to identify instances of potential fraud and abuse. In addition, CMS plans to spend about $33 million on Part D information technology systems to track data related to beneficiary eligibility and to collect, maintain, and process information on Medicare covered and noncovered drugs for Medicare beneficiaries participating in Part D. See appendix IV for more information. Another significant programmatic change that will affect future MIP funding allocations is Medicare contracting reform. MMA required CMS to transfer all claims administration work, which includes selected program integrity activities, to MACs by October 2011. CMS plans to transfer all work to the MACs by July 2009—about 2 years ahead of MMA’s specified time frame. Contracting reform will affect MIP funding allocations because of (1) changes in contractors’ responsibilities for program integrity activities and their jurisdictions, (2) the potential for operational efficiencies, and (3) increasing use of MIP funds for contractor award payments. The transition to MACs will change some contractors’ program integrity responsibilities and require reallocation of MIP funds among them. The new MACs will be responsible for paying claims that were previously processed by intermediaries and carriers, but CMS has decided that MACs will not be performing all of the MIP activities that they previously conducted. For example, PSCs performed medical reviews of claims in some contractors’ jurisdictions, but this activity will be performed by almost all of the MACs in the future. Further, contractors’ jurisdictions will change as 23 MACs assume the work previously performed by a total of 51 Medicare intermediaries and carriers, within the confines of 15 newly designated geographic jurisdictions. The PSCs conducting benefit integrity work will be aligned with the MACs in the 15 jurisdictions. In some cases, one PSC may be aligned with more than one MAC jurisdiction. According to CMS officials, Medicare contracting reform will lead to operational efficiencies and savings that would mostly be due to more effective medical review. For example, CMS anticipates that greater incentives for MACs to operate efficiently and adopt industry innovations in the automated medical review of claims will result in total estimated trust fund savings of $650 million for Medicare from fiscal year 2006 to fiscal year 2011. Having program integrity activities operate more effectively could give CMS additional flexibility to reallocate some funding while achieving reductions in improperly paid claims. However, we have not validated CMS’s estimate, and in our August 2005 report on CMS’s plan for implementing Medicare contracting reform, we raised concerns about the uncertainty of savings estimates, which were based on future developments that are difficult to predict. As part of contracting reform, CMS plans to increase its allocation of MIP funds that are used as award payments to encourage superior performance of program integrity activities by contractors. Award payments that are tied to appropriate performance measures could encourage contractors to conduct MIP activities effectively and introduce innovations, such as developing new analytical approaches to enhance the medical review process. Intermediaries and carriers, both of which conduct some program integrity activities, are currently paid on the basis of their costs, generally without financial incentives to encourage superior performance. In contrast, CMS currently offers award payments to other types of contractors that conduct program integrity activities, including four MACs that were selected in January 2006, PSCs, the COB contractor, NSC, and the DAC contractor. As early as 2009, or when all administrative work has been transferred to MACs, CMS will be offering the opportunity to be selected for award payments to all contractors that conduct program integrity activities. The usefulness of using MIP funding for award payments to encourage contractors to conduct program integrity tasks effectively depends on how well CMS can develop, and consistently apply, performance measures to gauge differences in the quality of performance. In 2004, CMS conducted a study to evaluate whether the agency could reduce improper payments by using award payments for contractors to lower their paid claims error rates, which represent the amount of claims contractors paid in error compared with their total fee-for-service payments. According to CMS, the outcome of that pilot was positive, and CMS plans to use award payments in the future as part of its strategy for reducing improper payments. However, as we reported in March 2006, CMS will need to refine its measure of contractor-specific improper payments, which would enhance its ability to evaluate their performance of medical review and provider education activities. Further, even when CMS has developed measures to assess the performance of contractors that conduct MIP activities, it has not always effectively or consistently applied them. For example, the OIG recently reviewed the extent and type of information provided in evaluation reports on PSCs’ performance in detecting and deterring fraud and abuse. The OIG found that although the evaluation reports were used as a basis to assess contractors’ overall performance, they did not consistently include quantitative information on the activities contractors performed or their effectiveness. We designated the Medicare program as high risk for fraud, waste, abuse, and mismanagement in 1990, and the program remains so today. To address this ongoing risk and reduce the program’s billions of dollars in improper payments, CMS must use Medicare’s program integrity funding as effectively as possible. Further, Medicare’s susceptibility to fraud is growing, as it addresses the challenges of adding a prescription drug benefit to the program. Despite Medicare’s increasing vulnerability, CMS has generally not changed its allocation approach for MIP funding. In 2006, a decade after MIP was established to support Medicare program integrity activities, CMS officials state that the primary basis for their allocation of funds is how they have been allocated in the past. However, programmatic changes for Medicare’s contractors and emerging risks for the Part D prescription drug benefit suggest that CMS needs to modify its approach for deciding on funding allocations for—and within—the five program integrity activities. Also supporting the need for CMS to assess its current allocation approach is that the agency’s funding decisions do not routinely take into account quantitative data or qualitative information on the relative effectiveness of its five program integrity activities or contractors’ vulnerabilities. Without considering information or data, CMS cannot judge whether funds are being spent as effectively as possible or if they should be reallocated. CMS is developing two new measures that may help the agency evaluate the relative effectiveness of provider education and the audit activity. Better information about MIP activities’ effectiveness should assist CMS in making more prudent management and funding allocation decisions. To better ensure that MIP funds are appropriately allocated among and within the five program integrity activities, we recommend that CMS develop a method of allocating funds based on the effectiveness of its program integrity activities, the contractors’ workloads, and risk. In its written comments on a draft of this report, CMS stated that it generally agreed with our recommendation to develop a method of allocating MIP funds based on the effectiveness of the agency’s program integrity activities, Medicare contractors’ workloads, and risk. However, the agency expressed concern that the report appeared to emphasize the use of ROI, a quantitative measure that tracks dollars saved in relation to dollars spent, as a way to allocate funds. CMS stated this quantitative measure can be an indicator of effectiveness, but noted that such a measure cannot serve as the sole basis for informing funding decisions. The agency stated that some of its MIP activities had benefits that could not be easily quantified. CMS agreed on the value of allocating funds based on risk and provided information on programmatic changes that would help it do so. The agency also noted the efforts it had recently made to strengthen program integrity. CMS expressed concern about our discussion in the draft report concerning the use of ROI as a way to quantitatively measure effectiveness and to allocate MIP funds. CMS stated that the agency cannot provide funding based exclusively on an ROI because some activities, including benefit integrity, do not lend themselves to an ROI measurement and others, such as audit, are governed by statutory requirements. CMS also stated that in allocating MIP funds, it is critical that it consider factors other than ROI, including historical funding, because MIP funding has not increased since 2003. Our report indicates that an ROI is an important factor that should be considered in allocating funds, but cannot be the sole consideration. Our conclusions reflect our support of an approach that takes into account the qualitative benefits of program integrity activities. Our report discusses agency officials’ views on the difficulty of developing quantitative measures for the benefit integrity activity. We also provide information on CMS officials’ qualitative assessments of the positive impact of benefit integrity and provider education. For example, our report notes that according to CMS officials, these benefits include discouraging entities that may be considering defrauding the Medicare program and helping to ensure proper Medicare payments. Both quantitative and qualitative assessments of effectiveness—to the extent they can be developed—could help CMS determine whether MIP funds are being wisely invested or if they should be reallocated. CMS also commented on the allocation of MIP funds to Medicare contractors based on workload and risk. CMS noted that contracting reform and the introduction of MACs will result in contractors’ workloads being more evenly distributed. In addition, CMS noted that it is developing award fee measures for contractors’ medical review activities, including establishing performance goals for the Comprehensive Error Rate Testing program contractor-specific error rate. CMS agreed with us that risk is a factor that should be considered in allocating funds. CMS stated that it is committed to identifying and investigating better approaches to allocate resources to support critical agency functions, including using its new contracting authority to introduce incentives for Medicare fee-for-service claims processing contracts and consolidating Medicare secondary payer activities. CMS also noted that it is using state- of-the-art systems and expertise to aggressively fight waste and abuse in the program, continues to work closely with its contractors to help ensure that providers receive appropriate education and guidance in areas where billing problems have been identified, and has expanded oversight of the new Medicare Part D prescription drug benefit. In addition, CMS discussed recent program integrity efforts and successes, including reducing the number of improper fee-for-service Medicare payments and addressing fraud across all provider types by coordinating the activities of CMS, law enforcement, and Medicare contactors in Los Angeles, California, and Miami, Florida. We have reprinted CMS’s letter in appendix V. CMS also provided us with technical comments, which we incorporated in the report where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies to the Secretary of HHS, the Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (312) 220-7600 or aronovitzl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are Sheila K. Avruch, Assistant Director; Hazel Bailey; Krister Friday; Sandra D. Gove; and Craig Winslow. To provide information on the amount of funds allocated to the five Medicare Integrity Program (MIP) activities over time, we interviewed officials from the Centers for Medicare & Medicaid Services (CMS). We obtained information concerning MIP funding allocations for audit, medical review, secondary payer, benefit integrity, and provider education for fiscal years 1997 through 2005. We also analyzed allocations within these activities. Further, we obtained and analyzed related financial information, including CMS’s planned and actual expenditures, savings, and return on investment (ROI) calculations for fiscal year 1997 through fiscal year 2005; CMS financial reports; and presidential and Department of Health and Human Service (HHS) budget proposals for fiscal years 2006 and 2007. Because most MIP expenditures are for activities related to the Medicare fee-for-service plan, our analyses focused on those expenditures. We reviewed relevant legislation, such as the Health Insurance Portability and Accountability Act of 1996 (HIPAA); the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA); and the Deficit Reduction Act of 2005 (DRA). We reviewed pertinent reports and congressional testimony, including our own and those of CMS and the HHS Office of Inspector General (OIG), related to program integrity requirements. To examine the approach that CMS uses to allocate MIP funds, we interviewed CMS officials regarding factors they consider when allocating MIP funds. We reviewed related documentation provided to us by CMS, including budget development guidelines; manuals, such as the Financial Management Manual; operating plans; and selected workload data. We also reviewed information on individual projects, such as information technology systems. We also reviewed pertinent GAO reports and testimony and Medicare Payment Advisory Commission reports. We did not independently examine the internal and automated data processing controls for CMS systems from which we obtained data used in our analyses. CMS subjects its data to limited reviews and periodic examinations and relies on the data obtained from these systems as evidence of Medicare expenditures and to support CMS’s management and budgetary decisions. Therefore, we considered these data to be reliable for the purposes of our review. In addition, we interviewed CMS officials regarding changes in the Medicare program that may affect MIP funding allocations, including CMS’s plans to support activities to detect fraud and improper billing for the new Part D prescription drug benefit and MIP activities to be performed by contractors in the future. We also interviewed CMS officials concerning performance measures and evaluations of contractors. We reviewed related documentation, including the statement of work for the Medicare prescription drug integrity contractors; plans for Medicare contracting reform; policies and procedures associated with CMS’s measurement of contractor performance; standards and performance measures, such as the Comprehensive Error Rate Testing program; various manuals, including the Medicare Program Integrity Manual; and an OIG report on performance evaluations of program safeguard contractors (PSC). We also reviewed CMS’s evaluations of contractor performance. We performed our work from August 2005 through August 2006 in accordance with generally accepted government auditing standards. The following tables contain details on MIP funding, expenditures, allocations, and ROI. Table 2 shows MIP funding ranges under HIPAA. Table 3 shows the amounts of MIP expenditures allocated to each of the program integrity activities. Table 4 shows the percentage of MIP funds allocated to the program integrity activities. Table 5 shows the ROI for three of the program integrity activities. Hospitals, nursing homes, home health agencies, and other institutional providers that are—or have been— paid on a cost reimbursement basis submit cost reports to CMS. Cost reports provide a detailed accounting of what costs have been incurred, what costs the provider is charging to the Medicare program, and how such costs are accounted for by the provider. Contractors review all or part of the cost report to assess whether costs have been properly allocated and charged to the Medicare program. Contractors determine if the cost report is acceptable or if it needs further review. In some instances, contractors may conduct on-site cost report audits, which include the review of financial records and related documentation supporting costs and charges. Contractors identify billing errors made by providers through analysis of claims data; take action to prevent errors, address identified errors, or both; and publish local coverage policies to provide guidance to the public and medical community concerning items and services that are eligible for Medicare payment. Most medical reviews do not require a manual review of medical records. Often contactors conduct medical reviews simply by examining the claim itself, usually using automated methods. Coordination of benefits (COB) contractor, intermediaries and carriers, and Medicare administrative contractors (MAC) The COB contractor collects, manages, and maintains information regarding health insurance coverage for Medicare beneficiaries. To gather information to properly adjudicate submitted claims, the COB contractor sends questionnaires to newly enrolled Medicare beneficiaries and employers to solicit information about beneficiaries’ health insurance coverage. The COB contractor also collects secondary payer data from providers, insurers, attorneys, and some state agencies. The COB contractor uses data match programs to identify claims that should have been paid by another insurer. When information indicates that a beneficiary has other health insurance, the COB contractor initiates a secondary payer claims investigation. Intermediaries and carriers also conduct secondary payer operations, including prepayment activities in conjunction with the COB contractor, and they recover erroneous secondary payer payments. Contractors are tasked with preventing, detecting, and deterring Medicare fraud. PSCs conduct medical reviews to support fraud investigations, analyze data to support medical reviews, process fraud complaints, develop fraud cases, conduct provider education related to fraud activities, and support law enforcement entities. Once a case is developed, PSCs refer it to the OIG or to law enforcement for prosecution. NSC reviews and processes applications from organizations and individuals seeking to become suppliers of medical equipment and supplies in the Medicare program. NSC verifies suppliers’ application information; conducts on-site visits to the prospective suppliers; issues supplier authorization numbers, which allow suppliers to bill Medicare; and maintains a central data repository of information concerning suppliers. NSC also periodically reenrolls active suppliers and uses data to assist with fraud and abuse research. The DAC contractor conducts ongoing data analysis and reporting of trends related to supplier billing for medical equipment and supplies and provides ongoing feedback to the PSCs. When billing problems are identified through medical reviews, contractors take a variety of steps to educate providers about Medicare coverage policies, billing practices, and issues related to fraud and abuse. Contractors may conduct group training sessions, including seminars and workshops; send informational letters to providers; arrange for teleconferences; conduct site visits; and provide information on their Web sites. For fiscal year 2006, DRA provided $112 million in MIP funds beyond the annual HIPAA limit of $720 million. Of this amount, DRA specified that $12 million was for the Medi-Medi program and $100 million was for MIP in general. Table 6 provides information on CMS’s planned spending of $100 million in general MIP funds provided by DRA, including spending related to the Part D prescription drug benefit.","Since 1990, GAO has considered Medicare at high risk for fraud, waste, abuse, and mismanagement. The Medicare Integrity Program (MIP) provides funds to the Centers for Medicare & Medicaid Services (CMS--the agency that administers Medicare--to safeguard over $300 billion in program payments made on behalf of its beneficiaries. CMS conducts five program integrity activities: audits; medical reviews of claims; determinations of whether Medicare or other insurance sources have primary responsibility for payment, called secondary payer; benefit integrity to address potential fraud cases; and provider education. In this report, GAO determined (1) the amount of MIP funds that CMS has allocated to the five program integrity activities over time, (2) the approach that CMS uses to allocate MIP funds, and (3) how major changes in the Medicare program may affect MIP funding allocations. For fiscal years 1997 through 2005, CMS's MIP expenditures generally increased for each of the five program integrity activities, but the amount of the increase differed by activity. Since fiscal year 1997, provider education has had the largest percentage increase in funding--about 590 percent, while audit and medical review had the largest amounts of funding allocated. In fiscal year 2006, funding for MIP will increase further to $832 million, which includes $112 million in funds that CMS plans to use, in part, to address potential fraud and abuse in the new Medicare prescription drug benefit. CMS officials told us that they have allocated MIP funds to the five program integrity activities based primarily on past allocation levels. Although CMS has quantitative measures of effectiveness for two of its activities--the savings that medical review and secondary payer generate compared to their costs--it does not have a means to determine the effectiveness of each of the five activities relative to the others to aid it in allocating funds. Further, CMS has generally not assessed whether MIP funds are distributed to the contractors conducting each program integrity activity to provide the greatest benefit to Medicare. Because of significant programmatic changes, such as the implementation of the Medicare prescription drug benefit and competitive selection of contractors responsible for claims administration and program integrity activities, the agency's current approach will not be adequate for making future allocation decisions. For example, CMS will need to allocate funds for program integrity activities to address emerging vulnerabilities that could affect the Medicare prescription drug benefit. Further, through contracting reform, CMS will task new contractors with performing a different mix of program integrity activities. However, the agency's funding approach is not geared to target MIP resources to the activities with the greatest impact on the program and to ensure that the contractors have funding commensurate with their relative workloads and risk of making improper payments.",govreport
"The performance of passenger and checked baggage screeners in detecting threat objects at the nation’s airports has been a long-standing concern. In 1978, screeners failed to detect 13 percent of the potentially dangerous objects that Federal Aviation Administration (FAA) agents carried through airport screening checkpoints during tests. In 1987, screeners did not detect 20 percent of the objects in similar tests. In tests conducted during the late 1990s, as the testing objects became more realistic, screeners’ abilities to detect dangerous objects declined further. In April 2004, we, along with the DHS Office of the Inspector General (OIG), testified that the performance of screeners continued to be a concern. More recent tests conducted by TSA’s Office of Internal Affairs and Program Review (OIAPR) also identified weaknesses in the ability of screeners to detect threat objects, and separate DHS OIG tests identified comparable screener performance weaknesses. In its July 2004 report, The National Commission on Terrorist Attacks Upon the United States, known widely as the 9/11 Commission, also identified the need to improve screener performance and to better understand the reasons for performance problems. After the terrorist attacks of September 11, 2001, the President signed the Aviation and Transportation Security Act (ATSA) into law on November 19, 2001, with the primary goal of strengthening the security of the nation’s aviation system. ATSA created TSA as an agency with responsibility for securing all modes of transportation, including aviation. As part of this responsibility, TSA oversees security operations at the nation’s more than 450 commercial airports, including passenger and checked baggage screening operations. Prior to the passage of ATSA, air carriers were responsible for screening passengers and checked baggage, and most used private security firms to perform this function. FAA was responsible for ensuring compliance with screening regulations. Today, TSA security activities at airports are overseen by FSDs. Each FSD is responsible for overseeing security activities, including passenger and checked baggage screening, at one or more commercial airports. TSA classifies the over 450 commercial airports in the United States into one of five security risk categories (X, I, II, III, and IV) based on various factors, such as the total number of takeoffs and landings annually, the extent to which passengers are screened at the airport, and other special security considerations. In general, category X airports have the largest number of passenger boardings and category IV airports have the smallest. TSA periodically reviews airports in each category and, if appropriate, updates airport categorizations to reflect current operations. Figure 1 shows the number of commercial airports by airport security category as of December 2003. In addition to establishing TSA and giving it responsibility for passenger and checked baggage screening operations, ATSA set forth specific enhancements to screening operations for TSA to implement, with deadlines for completing many of them. These requirements included assuming responsibility for screeners and screening operations at more than 450 commercial airports by November 19, 2002; establishing a basic screener training program composed of a minimum of 40 hours of classroom instruction and 60 hours of on-the-job training; conducting an annual proficiency review of all screeners; conducting operational testing of screeners; requiring remedial training for any screener who fails an operational test; and screening all checked baggage for explosives using explosives detection systems by December 31, 2002. Passenger screening is a process by which authorized TSA personnel inspect individuals and property to deter and prevent the carriage of any unauthorized explosive, incendiary, weapon, or other dangerous item aboard an aircraft or into a sterile area. Passenger screeners must inspect individuals for prohibited items at designated screening locations. The four passenger screening functions are: X-ray screening of property, walk-through metal detector screening of individuals, hand-wand or pat-down screening of individuals, and physical search of property and trace detection for explosives. Checked baggage screening is a process by which authorized security screening personnel inspect checked baggage to deter, detect, and prevent the carriage of any unauthorized explosive, incendiary, or weapon onboard an aircraft. Checked baggage screening is accomplished through the use of explosive detection systems (EDS) or explosive trace detection (ETD) systems, and through the use of alternative means, such as manual searches, K-9 teams, and positive passenger bag match, when EDS and ETD systems are unavailable on a temporary basis. Figure 2 provides an illustration of passenger and checked baggage screening operations. There are several positions within TSA for employees that perform and directly supervise passenger and checked baggage screening functions. Figure 3 provides a description of these positions. To prepare screeners to perform screening functions, to keep their skills current, and to address performance deficiencies, TSA provides three categories of required screener training. Table 1 provides a description of the required training. In September 2003, we reported on our preliminary observations of TSA’s efforts to ensure that screeners were effectively trained and supervised and to measure screener performance. We found that TSA had established and deployed a basic screener training program and required remedial training but had not fully developed or deployed a recurrent training program for screeners or supervisors. We also reported that TSA had collected limited data to measure screener performance. Specifically, TSA had conducted limited covert testing, the Threat Image Projection System was not fully operational, and TSA had not implemented the annual screener proficiency testing required by ATSA. In subsequent products, we reported progress TSA had made in these areas and challenges TSA continued to face in making training available to screeners and in measuring and enhancing screener performance. A summary of our specific findings is included in appendix I. TSA has taken a number of actions to enhance the training of screeners and Screening Supervisors but has encountered difficulties in providing access to recurrent training. TSA has enhanced basic training by, among other things, adding a dual-function (passenger and checked baggage) screening course for new employees. Furthermore, in response to the need for frequent and ongoing training, TSA has implemented an Online Learning Center with self-guided training courses available to employees over TSA’s intranet and the Internet and developed and deployed a number of hands-on training tools. Moreover, TSA now requires screeners to participate in 3 hours of recurrent training per week, averaged over each quarter year. TSA has also implemented leadership and technical training programs for Screening Supervisors. However, some FSDs, in response to open-ended survey questions, identified a desire for more training in specific areas, including leadership, communication, and supervision. Further, despite the progress TSA has made in enhancing and expanding screener and supervisory training, TSA has faced challenges in providing access to recurrent training. FSDs reported that insufficient staffing and a lack of high-speed Internet/intranet connectivity at some training facilities have made it difficult to fully utilize these programs and to meet training requirements. TSA has acknowledged that challenges exist in recurrent screener training delivery and is taking steps to address these challenges, including factoring training requirements into workforce planning efforts and distributing training through written materials and CD-ROMs until full Internet/intranet connectivity is achieved. However, TSA does not have a plan for prioritizing and scheduling the deployment of high-speed connectivity to all airport training facilities once funding is available. The absence of such a plan limits TSA’s ability to make prudent decisions about how to move forward with deploying connectivity to all airports to provide screeners access to online training. TSA has enhanced its basic screener training program by updating the training to reflect changes to standard operating procedures, deploying a new dual-function (passenger and checked baggage screening) basic training curriculum, and allowing the option of training delivery by local staff. As required by ATSA, TSA established a basic training program for screeners composed of a minimum of 40 hours of classroom instruction and 60 hours of on-the-job training. TSA also updated the initial basic screener training courses at the end of 2003 to incorporate changes to standard operating procedures and directives, which contain detailed information on how to perform TSA-approved screening methods. However, a recent study by the DHS OIG found that while incorporating the standard operating procedures into the curricula was a positive step, a number of screener job tasks were incompletely addressed in or were absent from the basic training courses. In addition to updates to the training curriculum, in April 2004, TSA developed and implemented a new basic screener training program, dual- function screener training that covers the technical aspects of both passenger and checked baggage screening. Initially, new hire basic training was performed by a contractor and provided a screener with training in either passenger or checked baggage screening functions. A screener could then receive basic training in the other function later, at the discretion of the FSD, but could not be trained in both functions immediately upon hire. The new dual-training program is modular in design. Thus, FSDs can chose whether newly hired screeners will receive instruction in one or both of the screening functions during the initial training. In addition, the individual modules can also be used to provide recurrent training, such as refreshing checked baggage screening skills for a screener who has worked predominately as a passenger screener. TSA officials stated that this new approach provides the optimum training solution based on the specific needs of each airport and reflects the fact that at some airports the FSD does not require all screeners to be fully trained in both passenger and checked baggage screening functions. Some FSDs, particularly those at smaller airports, have made use of the flexibility offered by the modular design of the new course to train screeners immediately upon hire in both passenger and checked baggage screening functions. Such training up front allows FSDs to use screeners for either the passenger or the checked baggage screening function, immediately upon completion of basic training. Figure 4 shows that 58 percent (3,324) of newly hired screeners trained between April 1, 2004, and September 1, 2004, had completed the dual-function training. In April 2004, TSA also provided FSDs with the flexibility to deliver basic screener training using local instructors. TSA’s Workforce Performance and Training Office developed basic screener training internally, and initially, contractors delivered all of the basic training. Since then, TSA has provided FSDs with the discretion to provide the training using local TSA employees or to use contractors. The flexibility to use local employees allows FSDs and members of the screener workforce to leverage their first-hand screening knowledge and experience and address situations unique to individual airports. As of December 10, 2004, TSA had trained 1,021 local FSD staff (representing 218 airports) in how to instruct the dual-function screener training course. TSA officials stated that they expect the use of TSA-approved instructors to increase over time. “Numerous interviews revealed concerns with training curriculum, communication, and coordination issues that directly affect security screening. Unsatisfied with the quantity and breadth of topics, many Training Coordinators have developed supplementary lectures on both security and non-security related topics. These additional lectures…have been very highly received by screeners.” In October 2003, TSA introduced the Online Learning Center to provide screeners with remote access to self-guided training courses. As of September 14, 2004, TSA had provided access to over 550 training courses via the Online Learning Center and made the system available via the Internet and its intranet. TSA also developed and deployed a number of hands-on training modules and associated training tools for screeners at airports nationwide. These training modules cover topics including hand- wanding and pat-down techniques, physical bag searches, X-ray images, prohibited items, and customer service. Additionally, TSA instituted another module for the Online Learning Center called Threat in the Spotlight, that, based on intelligence TSA receives, provides screeners with the latest in threat information regarding terrorist attempts to get threat objects past screening checkpoints. Appendix III provides a summary of the recurrent training tools TSA has deployed to airports and the modules currently under development. In December 2003, TSA issued a directive requiring screeners to receive 3 hours of recurrent training per week averaged over a quarter year. One hour is required to be devoted to X-ray image interpretation and the other 2 hours to screening techniques, review of standard operating procedures, or other mandatory administrative training, such as ethics and privacy act training. In January 2004, TSA provided FSDs with additional tools to facilitate and enhance screener training. Specifically, TSA provided airports with at least one modular bomb set (MBS II) kit—containing components of an improvised explosive device—and one weapons training kit, in part because screeners had consistently told TSA’s OIAPR inspectors that they would like more training with objects similar to ones used in covert testing. Although TSA has made progress with the implementation of recurrent training, some FSDs identified the need for several additional courses, including courses that address more realistic threats. TSA acknowledged that additional screener training is needed, and officials stated that the agency is in the process of developing new and improved screener training, including additional recurrent training modules (see app. III). TSA has arranged for leadership training for screening supervisors through the Department of Agriculture Graduate School and has developed leadership and technical training courses for screening supervisors. However, some FSDs reported the need for more training for Screening Supervisors and Lead Screeners. The quality of Screening Supervisors has been a long-standing concern. In testifying before the 9/11 Commission in May 2003, a former FAA Assistant Administrator for Civil Aviation Security stated that following a series of covert tests at screening checkpoints to determine which were strongest, which were weakest, and why, invariably the checkpoint seemed to be as strong or as weak as the supervisor who was running it. Similarly, TSA’s OIAPR identified a lack of supervisory training as a cause for screener covert testing failures. Further, in a July 2003 internal study of screener performance, TSA identified poor supervision at the screening checkpoints as a cause for screener performance problems. In particular, TSA acknowledged that many Lead Screeners, Screening Supervisors, and Screening Managers did not demonstrate supervisory and management skills (i.e., mentoring, coaching, and positive reinforcement) and provided little or no timely feedback to guide and improve screener performance. In addition, the internal study found that because of poor supervision at the checkpoint, supervisors or peers were not correcting incorrect procedures, optimal performance received little reinforcement, and not enough breaks were provided to screeners. A September 2004 report by the DHS OIG supported these findings, noting that Screening Supervisors and Screening Managers needed to be more attentive in identifying and correcting improper or inadequate screener performance. TSA recognizes the importance of Screener Supervisors and has established training programs to enhance their performance and effectiveness. In September 2003, we reported that TSA had begun working with the Department of Agriculture Graduate School to tailor the school’s off-the-shelf supervisory course to meet the specific needs of Screening Supervisors, and had started training the existing supervisors at that time through this course until the customized course was fielded. According to TSA’s training records, as of September 2004, about 3,800 Screening Supervisors had completed the course—approximately 92 percent of current Screening Supervisors. In response to our survey, one FSD noted that the supervisory training was long overdue because most of the supervisors had no prior federal service or, in some cases, no leadership experience. This FSD also noted that “leadership and supervisory skills should be continuously honed; thus, the development of our supervisors should be an extended and sequential program with numerous opportunities to develop skills—not just a one-time class.” In addition to the Department of Agriculture Graduate School course, TSA’s Online Learning Center includes over 60 supervisory courses designed to develop leadership and coaching skills. In April 2004, TSA included in the Online Learning Center a Web-based technical training course—required for all Lead Screeners and Screening Supervisors. This course covers technical issues, such as resolving alarms at screening checkpoints. TSA introduced this course to the field in March 2004, and although the course is a requirement, TSA officials stated that they have not set goals for when all Lead Screeners and Screening Supervisors should have completed the course. In June 2004, TSA training officials stated that a second supervisor technical course was planned for development and introduction later in 2004. However, in December 2004, the training officials stated that planned funding for supervisory training may be used to support other TSA initiatives. The officials acknowledged that this would reduce TSA’s ability to provide the desired type and level of supervisory training to its Lead Screener, Screening Supervisor, and Screening Manager staff. TSA plans to revise its plans to provide Lead Screener, Screening Supervisor, and Screening Manager training based on funding availability. Although TSA has developed leadership and technical courses for Screening Supervisors, many FSDs, in response to our general survey, identified additional types of training needed to enhance screener supervision. Table 2 provides a summary of the additional training needs that FSDs reported. TSA training officials stated that the Online Learning Center provides several courses that cover these topics. Such courses include Situation Leadership II; Communicating with Difficult People: Handling Difficult Co-Workers; Team Participation: Resolving Conflict in Teams; Employee Performance: Resolving Conflict; High Impact Hiring; Team Conflict: Overcoming Conflict with Communication; Correcting Performance Problems: Disciplining Employees; Team Conflict: Working in Diversified Teams; Correcting Performance Problems: Identifying Performance Problems; Resolving Interpersonal Skills; Grammar, Skills, Punctuation, Mechanics and Word Usage; and Crisis in Organizations: Managing Crisis Situations. TSA training officials acknowledged that for various reasons FSDs might not be aware that the supervisory and leadership training is available. For example, FSDs at airports without high-speed Internet/intranet access to the Online Learning Center might not have access to all of these courses. It is also possible that certain FSDs have not fully browsed the contents of the Online Learning Center and therefore are not aware that the training is available. Furthermore, officials stated that online learning is relatively new to government and senior field managers, and some of the FSDs may expect traditional instructor-led classes rather than online software. Some FSDs responded to our general survey that they faced challenges with screeners receiving recurrent training, including insufficient staffing to allow all screeners to complete training within normal duty hours and a lack of high-speed Internet/intranet connectivity at some training facilities. According to our guide for assessing training, to foster an environment conducive to effective training and development, agencies must take actions to provide sufficient time, space, and equipment to employees to complete required training. TSA has set a requirement for 3 hours of recurrent training per week averaged over a quarter year, for both full-time and part-time screeners. However, FSDs for about 18 percent (48 of 263) of the airports in our airport-specific survey reported that screeners received less than 9 to 12 hours of recurrent training per month. Additionally, FSDs for 48 percent (125 of 263) of the airports in the survey reported that there was not sufficient time for screeners to receive recurrent training within regular work hours. At 66 percent of those airports where the FSD reported that there was not sufficient time for screeners to receive recurrent training within regular work hours, the FSDs cited screener staffing shortages as the primary reason. We reported in February 2004 that FSDs at 11 of the 15 category X airports we visited reported that they were below their authorized staffing levels because of attrition and difficulties in hiring new staff. In addition, three of these FSDs noted that they had never been successful in hiring up to the authorized staffing levels. We also reported in February 2004 that FSDs stated that because of staffing shortages, they were unable to let screeners participate in training because it affected the FSD’s ability to provide adequate coverage at the checkpoints. In response to our survey, FSDs across all categories of airports reported that screeners must work overtime in order to participate in training. A September 2004 DHS OIG report recommended that TSA examine the workforce implications of the 3-hour training requirement and take steps to correct identified imbalances in future workforce planning to ensure that all screeners are able to meet the recurrent training standard. The 3-hours-per-week training standard represents a staff time commitment of 7.5 percent of full- time and between 9 and 15 percent of part-time screeners’ nonovertime working hours. TSA headquarters officials have stated that because the 3- hours-per-week requirement is averaged over a quarter, it provides flexibility to account for the operational constraints that exist at airports. However, TSA headquarters officials acknowledged that many airports are facing challenges in meeting the 3-hour recurrent training requirement. TSA data for the fourth quarter of fiscal year 2004 reported that 75 percent of airports were averaging less than 3 hours of recurrent training per week per screener. The current screener staffing model, which is used to determine the screener staffing allocations for each airport, does not take the 3-hours-per-week recurrent training requirement into account. However, TSA headquarters officials said that they are factoring this training requirement into their workforce planning efforts, including the staffing model currently under development. Another barrier to providing recurrent training is the lack of high-speed Internet/intranet access at some of TSA’s training locations. TSA officials acknowledged that many of the features of the Online Learning Center, including some portions of the training modules and some Online Learning Center course offerings, are difficult or impossible to use in the absence of high-speed Internet/intranet connectivity. As one FSD put it, “the delayed deployment of the high-speed Internet package limits the connectivity to TSA HQ for various online programs that are mandated for passenger screening operations including screener training.” One FSD for a category IV airport noted the lack of a high-speed connection for the one computer at an airport he oversees made the Online Learning Center “nearly useless.” TSA began deploying high-speed access to its training sites and checkpoints in May 2003 and has identified high-speed connectivity as necessary in order to deliver continuous training to screeners. TSA’s July 2003 Performance Improvement Study recommended accelerating high- speed Internet/intranet access in order to provide quick and systematic distribution of information and, thus, reduce uncertainty caused by the day-to-day changes in local and national procedures and policy. In October 2003, TSA reported plans to have an estimated 350 airports online with high-speed connectivity within 6 months. However, in June 2004, TSA reported that it did not have the resources to reach this goal. TSA records show that as of October 2004, TSA had provided high-speed access for training purposes to just 109 airports, where 1,726 training computers were fully connected. These 109 airports had an authorized staffing level of over 24,900 screeners, meaning that nearly 20,100 screeners (45 percent of TSA’s authorized screening workforce) still did not have high-speed Internet/intranet access to the Online Learning Center at their training facility. In October 2004, TSA officials stated that TSA’s Office of Information Technology had selected an additional 16 airport training facilities with a total of 205 training computers to receive high- speed connectivity by the end of December 2004. As of January 19, 2005, TSA was unable to confirm that these facilities had received high-speed connectivity. Additionally, they could not provide a time frame for when they expected to provide high-speed connectivity to all airport training facilities because of funding uncertainties. Furthermore, TSA does not have a plan for prioritizing and scheduling the deployment of high-speed connectivity to all airport training facilities once funding is available. Without a plan, TSA’s strategy and timeline for implementing connectivity to airport training facilities is unclear. The absence of such a plan limits TSA’s ability to make prudent decisions about how to move forward with deploying connectivity once funding is available. Figure 5 shows the percentage of airports reported to have high-speed connectivity for their training computers by category of airport as of October 2004. To mitigate airport connectivity issues in the interim, on April 1, 2004, TSA made the Online Learning Center courses accessible through public Internet connections, which enable screeners to log on to the Online Learning Center from home, a public library, or other locations. However, TSA officials stated that the vast majority of screeners who have used the Online Learning Center have logged in from airports with connectivity at their training facilities. TSA also distributes new required training products using multiple delivery channels, including written materials and CD-ROMs for those locations where access to the Online Learning Center is limited. Specifically, TSA officials stated that they provided airports without high-speed connectivity with CD-ROMs for the 50 most commonly used optional commercial courseware titles covering topics such as information technology skills, customer service, and teamwork. Additionally, officials stated that as technical courses are added to the Online Learning Center, they are also distributed via CD-ROM and that until full connectivity is achieved, TSA will continue to distribute new training products using multiple delivery channels. Because of a lack of internal controls, TSA cannot provide reasonable assurance that screeners are completing required training. First, TSA policy does not clearly define responsibility for ensuring that screeners have completed all required training. Additionally, TSA has no formally defined policies or procedures for documenting completion of remedial training, or a system designed to facilitate review of this documentation for purposes of monitoring. Further, TSA headquarters does not have formal policies and procedures for monitoring completion of basic training and lacks procedures for monitoring recurrent training. Finally, at airports without high-speed connectivity, training records must be entered manually, making it challenging for some airports to keep accurate and up- to-date training records. TSA’s current guidance for FSDs regarding the training of the screener workforce does not clearly identify responsibility for tracking and ensuring compliance with training requirements. In a good control environment, areas of authority and responsibility are clearly defined and appropriate lines of reporting are established. In addition, internal control standards also require that responsibilities be communicated within an organization. The Online Learning Center provides TSA with a standardized, centralized tool capable of maintaining all training records in one system. It replaces an ad hoc system previously used during initial rollout of federalized screeners in which contractors maintained training records. A February 2004 management directive states that FSDs are responsible for ensuring the completeness, accuracy, and timeliness of training records maintained in the Online Learning Center for their employees. For basic and recurrent training, information is to be entered into the Online Learning Center within 30 days of completion of the training activity. However, the directive does not clearly identify who is responsible for ensuring that employees comply with training requirements. Likewise, a December 2003 directive requiring that screeners complete 3 hours of training per week averaged over a quarter states that FSDs are responsible for ensuring that training records for each screener are maintained in the Online Learning Center. Although both directives include language that requires FSDs to ensure training records are maintained in the Online Learning Center, neither specifies whether FSDs or headquarters officials are responsible for ensuring compliance with the basic, recurrent, and remedial training requirements. Even so, TSA headquarters officials told us that FSDs are ultimately responsible for ensuring screeners receive required training. However, officials provided no documentation clearly defining this responsibility. Without a clear designation of responsibility for monitoring training completion, this function may not receive adequate attention, leaving TSA unable to provide reasonable assurance that its screening workforce receives required training. In April 2005, TSA officials responsible for training stated that they were updating the February 2004 management directive on training records to include a specific requirement for FSDs to ensure that screeners complete required training. They expect to release the revised directive in May 2005. TSA has not established and documented policies and procedures for monitoring completion of basic and recurrent training. Internal control standards advise that internal controls should be designed so that monitoring is ongoing and ingrained in agency operations. However, TSA headquarters officials stated that they have no formal policy for monitoring screeners’ completion of basic training. They also stated that they have neither informal nor formal procedures for monitoring the completion of screeners’ recurrent training requirements, and acknowledged that TSA policy does not address what is to occur if a screener does not meet the recurrent training requirement. Officials further stated that individual FSDs have the discretion to determine what action, if any, to take when screeners do not meet this requirement. In July 2004, TSA training officials stated that headquarters staff recently began running a report in the Online Learning Center to review training records to ensure that newly hired screeners had completed required basic training. In addition, they stated that in June 2004, they began generating summary-level quarterly reports from the Online Learning Center to quantify and analyze hours expended for recurrent screener training. Specifically, TSA training officials stated that reports showing airport-level compliance with the 3-hour recurrent requirement were generated for the third and fourth quarters of fiscal year 2004 and delivered to the Office of Aviation Operations for further analysis and sharing with the field. However, Aviation Operations officials stated that they did not use these reports to monitor the status of screener compliance with the 3-hour recurrent training requirement and do not provide them to the field unless requested by an FSD. TSA training officials said that while headquarters intends to review recurrent training activity on an ongoing basis at a national and airport level, they view FSDs and FSD training staff as responsible for ensuring that individuals receive all required training. Further, they acknowledged that weaknesses existed in the reporting capability of the Online Learning Center and stated that they plan to upgrade the Online Learning Center with improved reporting tools by the end of April 2005. Without clearly defined policies and procedures for monitoring the completion of training, TSA lacks a structure to support continuous assurance that screeners are meeting training requirements. TSA has not established clear policies and procedures for documenting completion of required remedial training. The Standards for Internal Control state that agencies should document all transactions and other significant events and should be able to make this documentation readily available for examination. A TSA training bulletin dated October 15, 2002, specifies that when remedial training is required, FSDs must ensure the training is provided and a remedial training reporting form is completed and maintained with the screener’s local records. However, when we asked to review these records, we found confusion as to how and where they were to be maintained. TSA officials stated that they are waiting for a decision regarding how to maintain these records because of their sensitive nature. In the meantime, where and by whom the records should be maintained remains unclear. In September 2004, officials from TSA’s OIAPR—responsible for conducting covert testing—stated that they maintain oversight to ensure screeners requiring remedial training receive required training by providing a list of screeners that failed covert testing and therefore need remedial training to TSA’s Office of Aviation Operations. Aviation Operations is then to confirm via memo that each of the screeners has received the necessary remedial training and report back to OIAPR. Accordingly, we asked TSA for all Aviation Operations memos confirming completion of remedial training, but we were only able to obtain 1 of the 12 memos. In addition, during our review, we asked to review the remedial training reporting forms at five airports to determine whether screeners received required training, but we encountered confusion about requirements for maintaining training records and inconsistency in record keeping on the part of local TSA officials. Because of the unclear policies and procedures for recording completion of remedial training, TSA does not have adequate assurance that screeners are receiving legislatively mandated remedial training. Although training computers with high-speed Internet/intranet connectivity automatically record completion of training in the Online Learning Center, airports without high-speed access at their training facility must have these records entered manually. The February 2004 management directive that describes responsibility for entering training records into the Online Learning Center also established that all TSA employees are required to have an official TSA training record in the Online Learning Center that includes information on all official training that is funded wholly or in part with government funds. Without high- speed access, TSA officials stated that it can be a challenge for airports to keep the Online Learning Center up to date with the most recent training records. TSA headquarters officials further stated that when they want to track compliance with mandatory training such as ethics or civil rights training, they provide the Training Coordinators with a spreadsheet on which to enter the data rather than relying on the Online Learning Center. As one FSD told us, without high-speed connectivity at several of the airports he oversees, “this is very time consuming and labor intensive and strains my limited resources.” The difficulty that airports encounter in maintaining accurate records when high-speed access is absent could compromise TSA’s ability to provide reasonable assurance that screeners are receiving mandated basic and remedial training. TSA has improved its efforts to measure and enhance screener performance. However, these efforts have primarily focused on passenger screening rather than checked baggage screening, and TSA has not yet finalized performance targets for several key performance measures. For example, TSA has increased the amount of covert testing it performs at airports. These tests have identified that, overall, weaknesses and vulnerabilities continue to exist in the passenger and checked baggage screening systems. TSA also enabled FSDs to conduct local covert testing, fully deployed the Threat Image Projection (TIP) system to passenger screening checkpoints at commercial airports nationwide, and completed the 2003/2004 annual screener recertification program for all eligible screeners. However, not all of these performance measurement and enhancement tools are available for checked baggage screening. Specifically, TIP is not currently operational at checked baggage screening checkpoints, and the recertification program does not include an image recognition component for checked baggage screeners. However, TSA is taking steps to address the overall imbalance in passenger and checked baggage screening performance data, including working toward implementing TIP for checked baggage screening and developing an image recognition module for checked baggage screener recertification. To enhance screener and screening system performance, TSA has also conducted a passenger screener performance improvement study and subsequently developed an improvement plan consisting of multiple action items, many of which TSA has completed. However, TSA has not conducted a similar study for checked baggage screeners. In addition, TSA has established over 20 performance measures for the passenger and checked baggage screening systems as well as two performance indexes (one for passenger and one for checked baggage screening). However, TSA has not established performance targets for each of the component indicators within the indexes, such as covert testing. According to The Office of Management and Budget, performance goals are target levels of performance expressed as a measurable objective, against which actual achievement can be compared. Performance goals should incorporate measures (indicators used to gauge performance); targets (characteristics that tell how well a program must accomplish the measure), and time frames. Without these targets, TSA’s performance management system, and these performance indexes, specifically, may not provide the agency with the complete information necessary to assess achievements and make decisions about where to direct performance improvement efforts. Although TSA has not yet established performance targets for each of the component indicators, TSA plans to finalize performance targets for the indicators by the end of fiscal year 2005. TSA headquarters has increased the amount of covert testing it performs and enabled FSDs to conduct additional local covert testing at passenger screening checkpoints. TSA’s OIAPR conducts unannounced covert tests of screeners to assess their ability to detect threat objects and to adhere to TSA-approved procedures. These tests, in which undercover OIAPR inspectors attempt to pass threat objects through passenger screening checkpoints and in checked baggage, are designed to measure vulnerabilities in passenger and checked baggage screening systems and to identify systematic problems affecting performance of screeners in the areas of training, policy, and technology. TSA considers its covert testing as a “snapshot” of a screener’s ability to detect threat objects at a particular point in time and as one of several indicators of system wide screener performance. OIAPR conducts tests at passenger screening checkpoints and checked baggage screening checkpoints. According to OIAPR, these tests are designed to approximate techniques terrorists might use. These covert test results are one source of data on screener performance in detecting threat objects as well as an important mechanism for identifying areas in passenger and checked baggage screening needing improvement. In testimony before the 9/11 Commission, the Department of Transportation Inspector General stated that emphasis must be placed on implementing an aggressive covert testing program to evaluate operational effectiveness of security systems and equipment. Between September 10, 2002, and September 30, 2004, OIAPR conducted a total of 3,238 covert tests at 279 different airports. In September 2003, we reported that OIAPR had conducted limited covert testing but planned to double the amount of tests it conducted during fiscal year 2004, based on an anticipated increase in its staff from about 100 full-time equivalents to about 200 full-time equivalents. TSA officials stated that based on budget constraints, OIAPR’s fiscal year 2004 staffing authorization was limited to 183 full-time-equivalents, of which about 60 are located in the field. Despite a smaller than expected staff increase, by the end of the second quarter of fiscal year 2004, OIAPR had already surpassed the number of tests it performed during fiscal year 2003, as shown in table 3. In October 2003, OIAPR committed to testing between 90 and 150 airports by April 2004 as part of TSA’s short-term screening performance improvement plan. OAIPR officials stated that this was a onetime goal to increase testing. This initiative accounts for the spike in testing for the second quarter of fiscal year 2004. OIAPR has created a testing schedule designed to test all airports at least once during a 3-year time frame. Specifically, the schedule calls for OIAPR to test all category X airports once a year, category I and II airports once every 2 years, and category III and IV airports at least once every 3 years. In September 2003 and April 2004, we reported that TSA covert testing results had identified weaknesses in screeners’ ability to detect threat objects. More recently, in April 2005, we, along with the DHS OIG, identified that screener performance continued to be a concern. Specifically, our analysis of TSA’s covert testing results for tests conducted between September 2002 and September 2004 identified that overall, weaknesses still existed in the ability of screeners to detect threat objects on passengers, in their carry-on bags, and in checked baggage. Covert testing results in this analysis cannot be generalized either to the airports where the tests were conducted or to airports nationwide. These weaknesses and vulnerabilities were identified at airports of all sizes, at airports with federal screeners, and airports with private-sector screeners. For the two-year period reviewed, overall failure rates for covert tests (passenger and checked baggage) conducted at airports using private- sector screeners were somewhat lower than failure rates for the same tests conducted at airports using federal screeners for the airports tested during this period. Since these test results cannot be generalized as discussed above, each airport’s test results should not be considered a comprehensive measurement of the airport’s performance or any individual screener’s performance in detecting threat objects, or in determining whether airports with private sector screeners performed better than airports with federal screeners. On the basis of testing data through September 30, 2004, we determined that OIAPR had performed covert testing at 61 percent of the nation’s commercial airports. TSA has until September 30, 2005, to test the additional 39 percent of airports and meet its goal of testing all airports within 3 years. Although officials stated that they have had to divert resources from airport testing to conduct testing of other modes and that testing for other modes of transportation may affect their ability to conduct airport testing, they still expect to meet the goal. In February 2004, TSA provided protocols to help FSDs conduct their own covert testing of local airport passenger screening activities—a practice that TSA had previously prohibited. Results of local testing using these protocols are to be entered into the Online Learning Center. This information, in conjunction with OAIPR covert test results and TIP threat detection results, is intended to assist TSA in identifying specific training and performance improvement efforts. In February 2005, TSA released a general procedures document for local covert testing at checked baggage screening locations. TSA officials said that they had not yet begun to use data from local covert testing to identify training and performance needs because of difficulties in ensuring that local covert testing is implemented consistently nationwide. These officials said that after a few months of collecting and assessing the data, they will have a better idea of how the data can be used. TSA has nearly completed the reactivation of the TIP system at airports nationwide and plans to use data it is collecting to improve the effectiveness of the passenger screening system. TIP is designed to test passenger screeners’ detection capabilities by projecting threat images, including guns, knives, and explosives, onto bags as they are screened during actual operations. Screeners are responsible for identifying the threat image and calling for the bag to be searched. Once prompted, TIP identifies to the screener whether the threat is real and then records the screener’s performance in a database that could be analyzed for performance trends. TSA is evaluating the possibility of developing an adaptive functionality to TIP. Specifically, as individual screeners become proficient in identifying certain threat images, such as guns or knives, they will receive fewer of those images and more images that they are less proficient at detecting, such as improvised explosive devices. TIP was activated by FAA in 1999 with about 200 threat images, but it was shut down immediately following the September 11 terrorist attacks because of concerns that it would result in screening delays and panic, as screeners might think that they were actually viewing threat objects. In October 2003, TSA began reactivating and expanding TIP. In April 2004, we reported that TSA was reactivating TIP with an expanded library of 2,400 images at all but one of the more than 1,800 checkpoint lanes nationwide. To further enhance screener training and performance, TSA also plans to develop at least an additional 50 images each month. Despite these improvements, TIP is not yet available for checked baggage screening. In April 2004, we reported that TSA officials stated that they were working to resolve technical challenges associated with using TIP for checked baggage screening on EDS machines and have started EDS TIP image development. The DHS OIG reported in September 2004 that TSA plans to implement TIP on all EDS machines at checked baggage stations nationwide in fiscal year 2005. However, in December 2004, TSA officials stated that because of severe budget reductions, TSA will be unable to begin implementing a TIP program for checked baggage in fiscal year 2005. They did not specify when such a program might begin. TSA plans to use TIP data to improve the passenger screening system in two ways. First, TIP data can be used to measure screener threat detection effectiveness by different threats. Second, TSA plans to use TIP results to help identify specific recurrent training needs within and across airports and to tailor screeners’ recurrent training to focus on threat category areas that indicate a need for improvement. TSA considers February 2004 as the first full month of TIP reporting with the new library of 2,400 images. TSA began collecting these data in early March 2004 and is using the data to determine more precisely how they can be used to measure screener performance in detecting threat objects and to determine what the data identify about screener performance. TSA does not currently plan to use TIP data as an indicator of individual screener performance because TSA does not believe that TIP by itself adequately reflects a screener’s performance. Nevertheless, in April 2004, TSA gave FSDs the capability to query and analyze TIP data in a number of ways, including by screener, checkpoint, and airport. FSDs for over 60 percent of the airports included in our airport-specific survey stated that they use or plan to use TIP data as a source of information in their evaluations of individual screener performance. Additionally, FSDs for 50 percent of the airports covered in our survey reported using data generated by TIP to identify specific training needs for individual screeners. In September 2004, the DHS OIG reported that TSA is assessing the cost and feasibility of modifying TIP so that it recognizes and responds to specific threat objects with which individual screeners are most and least competent in detecting, over time. This feature would increase the utility of TIP as a training tool. The DHS OIG also reported that TSA is considering linking TIP over a network, which would facilitate TSA’s collection, analysis, and information-sharing efforts around TIP user results. The report recommended that TSA continue to pursue each of these initiatives, and TSA agreed. However, in December 2004, TSA officials stated that the availability of funding will determine whether or not they pursue these efforts further. TSA has completed its first round of the screener recertification program, and the second round is now under way. However, TSA does not currently include an image recognition component in the test for checked baggage screener recertification. ATSA requires that each screener receive an annual proficiency review to ensure he or she continues to meet all qualifications and standards required to perform the screening function. In September 2003, we reported that TSA had not yet implemented this requirement. To meet this requirement, TSA established a recertification program, and it began recertification testing in October 2003 and completed the testing in March 2004. The first recertification program was composed of two assessment components, one of screeners’ performance and the other of screeners’ knowledge and skills. During the performance assessment component of the recertification program, screeners are rated on both organizational and individual goals, such as maintaining the nation’s air security, vigilantly carrying out duties with utmost attention to tasks that will prevent security threats, and demonstrating the highest levels of courtesy to travelers to maximize their levels of satisfaction with screening services. The knowledge and skills assessment component consists of three modules: (1) knowledge of standard operating procedures, (2) image recognition, and (3) practical demonstration of skills. Table 4 provides a summary of these three modules. To be recertified, screeners must have a rating of “met” or “exceeded” standards on their annual performance assessments and have passed each of the applicable knowledge and skills modules. Screeners that failed any of the three modules were to receive study time or remedial training as well as a second opportunity to take and pass the modules. Screeners who failed on their second attempt were to be removed from screening duties and subject to termination. Screeners could also be terminated for receiving a rating of below “met” standards. TSA completed its analysis of the recertification testing and performance evaluations in May 2004. TSA’s analysis shows that less than 1 percent of screeners subject to recertification failed to complete this requirement. Figure 6 shows the recertification results. Across all airports screeners performed well on the recertification testing. Over 97 percent of screeners passed the standard operating procedures test on their first attempt. Screeners faced the most difficulty on the practical demonstration of skills component. However, following remediation, 98.6 percent of the screeners who initially failed this component passed on their second attempt. Table 5 shows the results of the recertification testing by module. As shown in table 6, screeners hired as checked baggage screeners were not required to complete the image recognition module in the first round of the recertification testing. In addition, during the first year of recertification testing, which took place from October 2003 through May 2004, dual-function screeners who were actively working as both passenger and checked baggage screeners were required to take only the recertification test for passenger screeners. They were therefore not required to take the recertification testing modules required for checked baggage, even though they worked in that capacity. TSA began implementing the second annual recertification testing in October 2004 and plans to complete it no later than June 2005. This recertification program includes components for dual-function screeners. However, TSA still has not included an image recognition module for checked baggage screeners—which would include dual-function screeners performing checked baggage screening. TSA officials stated that a decision was made to not include an image recognition module for checked baggage screeners during this cycle because not all checked baggage screeners would have completed training on the onscreen resolution protocol by the time recertification testing was conducted at their airports. In December 2004, TSA officials stated that they plan on developing an image recognition module for checked baggage and dual- function screeners, and that this test should be available for next year’s recertification program. The development and implementation of the image recognition test will be contingent, they stated, upon the availability of funds. TSA has implemented a number of improvements designed to enhance screener performance, based on concerns it identified in a July 2003 Passenger Screener Performance Improvement Study and recommendations from OIAPR. To date, however, these efforts have primarily focused on the performance of passenger screeners, and TSA has not yet undertaken a comparable performance study for checked baggage screeners. The Passenger Screener Performance Improvement Study relied in part on the findings of OIAPR’s covert testing. At the time the study was issued, OIAPR had conducted fewer than 50 tests of checked baggage screeners. The July 2003 study focused on and included numerous recommendations for improving the performance of passenger screeners, but recommended waiting to analyze the performance of checked baggage screeners until some time after implementation of the recommendations, some of which TSA indicated, also applied to checked baggage screeners. TSA officials told us that this analysis has been postponed until they have reviewed the impact of implementing the recommendations on passenger screening performance. In October 2003, to address passenger screener performance deficiencies identified in the Screener Performance Improvement Study, TSA developed a Short-Term Screening Performance Improvement Plan. This plan included specific action items in nine broad categories—such as enhance training, increase covert testing, finish installing TIP, and expedite high-speed connectivity to checkpoints and training computers— that TSA planned to pursue to provide tangible improvements in passenger screener performance and security (see app. IV for additional information on the action items). In June 2004, TSA reported that it had completed 57 of the 62 specific actions. As of December 2004, two of these actions still had not been implemented—full deployment of high-speed connectivity and a time and attendance package—both of which continue to be deferred pending the identification of appropriate resources. In addition to the Performance Improvement Study and corresponding action plans, TSA’s OIAPR makes recommendations in its reports on covert testing results. These recommendations address deficiencies identified during testing and are intended to improve screening effectiveness. As of December 2004, OIAPR had issued 18 reports to TSA management on the results of its checkpoint and checked baggage covert testing. These reports include 14 distinct recommendations, some of which were included in TSA’s screener improvement action plan. All but two of these reports included recommendations on corrective actions needed to enhance the effectiveness of passenger and checked baggage screening. TSA has established performance measures, indexes, and targets for the passenger and checked baggage screening systems, but has not established targets for the various components of the screening indexes. The Government Performance and Results Act of 1993 provides, among other things, that federal agencies establish program performance measures, including the assessment of relevant outputs and outcomes of each program activity. Performance measures are meant to cover key aspects of performance and help decision makers to assess program accomplishments and improve program performance. A performance target is a desired level of performance expressed as a tangible, measurable objective, against which actual achievement will be compared. By analyzing the gap between target and actual levels of performance, management can target those processes that are most in need of improvement, set improvement goals, and identify appropriate process improvements or other actions. An April 2004 consultant study commissioned by TSA found that FSDs and FSD staffs generally believed the lack of key performance indicators available to monitor passenger and checked baggage screening performance represented a significant organizational weakness. Since then, TSA has established over 20 performance measures for the passenger and checked baggage screening systems. For example, TSA measures the percentage of screeners meeting a threshold score on the annual recertification testing on their first attempt, the percentage of screeners scoring above the national standard level on TIP performance, and the number of passengers screened, by airport category. TSA also has developed two performance indexes to measure the effectiveness of the passenger and checked baggage screening systems. These indexes measure overall performance through a composite of indicators and are derived by combining specific performance measures relating to passenger and checked baggage screening, respectively. Specifically, these indexes measure the effectiveness of the screening systems through machine probability of detection and covert testing results; efficiency through a calculation of dollars spent per passenger or bag screened; and customer satisfaction through a national poll, customer surveys, and customer complaints at both airports and TSA’s national call center. According to TSA officials, the agency has finalized targets for the two overall indexes, but these targets have not yet been communicated throughout the agency. Further, TSA plans to provide the FSDs with only the performance index score, not the value of each of the components, because the probabilities of detection are classified as secret and TSA is concerned that by releasing components, those probabilities could be deduced. Table 7 summarizes the components of the performance indexes developed by TSA. TSA has not yet established performance targets for the various components of the screening indexes, including performance targets for covert testing (person probability of detection). TSA’s strategic plan states that the agency will use the performance data it collects to make tactical decisions based on performance. The screening performance indexes developed by TSA can be a useful analysis tool, but without targets for each component of the index, TSA will have difficulty performing meaningful analyses of the parts that add up to the index. For example, without performance targets for covert testing, TSA will not have identified a desired level of performance related to screener detection of threat objects. Performance targets for covert testing would enable TSA to focus its improvement efforts on areas determined to be most critical, as 100 percent detection capability may not be attainable. In January 2005, TSA officials stated that the agency plans to track the performance of individual index components and establish performance targets against which to measure these components. They further stated that they are currently collecting and analyzing baseline data to establish these targets and plan to finalize them by the end of fiscal year 2005. It has been over 2 years since TSA assumed responsibility for passenger and checked baggage screening operations at the nation’s commercial airports. TSA has made significant accomplishments over this period in meeting congressional mandates related to establishing these screening operations. With the congressional mandates now largely met, TSA has turned its attention to assessing and enhancing the effectiveness of its passenger and checked baggage screening systems. An important tool in enhancing screener performance is ongoing training. As threats and technology change, the training and development of screeners to ensure they have the competencies—knowledge, skills, abilities, and behaviors— needed to successfully perform their screening functions become vital to strengthening aviation security. Without addressing the challenges to delivering ongoing training, including installing high-speed connectivity at airport training facilities, TSA may have difficulty maintaining a screening workforce that possesses the critical skills needed to perform at a desired level. In addition, without adequate internal controls designed to help ensure screeners receive required training that are also communicated throughout the agency, TSA cannot effectively provide reasonable assurances that screeners receive all required training. Given the importance of the Online Learning Center in both delivering training and serving as the means by which the completion of screener training is documented, TSA would benefit from having a clearly defined plan for prioritizing the deployment of high-speed Internet/intranet connectivity to all airport training facilities. Such a plan would help enable TSA to move forward quickly and effectively in deploying high-speed connectivity once funding is available. Additionally, history demonstrates that U.S. commercial aircraft have long been a target for terrorist attacks through the use of explosives carried in checked baggage, and covert testing conducted by TSA and DHS OIG have identified that weaknesses and vulnerabilities continue to exist in the passenger and checked baggage screening systems, including the ability of screeners to detect threat objects. While covert test results provide an indicator of screening performance, they cannot solely be used as a comprehensive measure of any airport’s screening performance or any individual screener’s performance, or in determining the overall performance of federal versus private-sector screening. Rather, these data should be considered in the larger context of additional performance data, such as TIP and recertification test results, when assessing screener performance. While TSA has undertaken efforts to measures and strengthen performance, these efforts have primarily focused on passenger screening and not on checked baggage screening. TSA’s plans for implementing TIP for checked baggage screening, and establishing an image recognition component for the checked baggage screeners recertification testing—plans made during the course of our review— represent significant steps forward in its efforts to strengthen checked baggage screening functions. Additionally, although TSA has developed passenger and checked baggage screening effectiveness measures, the agency has not yet established performance targets for the individual components of these measures. Until such targets are established, it will be difficult for TSA to draw more meaningful conclusions about its performance and how to most effectively direct its improvement efforts. For example, performance targets for covert testing would enable TSA to focus its improvement efforts on areas determined to be most critical, as 100 percent detection capability may not be attainable. We are encouraged by TSA’s recent plan to establish targets for the individual components of the performance indexes. This effort, along with the additional performance data TSA plans to collect on checked baggage screening operations, should assist TSA in measuring and enhancing screening performance and provide TSA with more complete information with which to prioritize and focus its screening improvement efforts. To help ensure that all screeners have timely and complete access to screener training available in the Online Learning Center and to help provide TSA management with reasonable assurance that all screeners are receiving required passenger and checked baggage screener training, we recommend that the Secretary of the Department of Homeland Security direct the Assistant Secretary, Transportation Security Administration, to take the following two actions: develop a plan that prioritizes and schedules the deployment of high-speed Internet/intranet connectivity to all TSA’s airport training facilities to help facilitate the delivery of screener training and the documentation of training completion, and develop internal controls, such as specific directives, clearly defining responsibilities for monitoring and documenting the completion of required training, and clearly communicate these responsibilities throughout the agency. We provided a draft of this report to DHS for review and comment. On February 4, 2005, we received written comments on the draft report, which are reproduced in full in appendix V. DHS generally concurred with the findings and recommendations in the report, and agreed that efforts to implement our recommendations are critical to successful passenger and checked baggage screening training and performance. With regard to our recommendation that TSA develop a plan that prioritizes and schedules the deployment of high-speed Internet/intranet connectivity to all TSA’s airport training facilities, DHS stated that TSA has developed such a plan. However, although we requested a copy of the plan several times during our review and after receiving written comments from DHS, TSA did not provide us with a copy of the plan. Therefore, we cannot assess the extent to which the plan DHS referenced in its written comments fulfills our recommendation. In addition, regarding our recommendation that TSA develop internal controls clearly defining responsibilities for monitoring and documenting the completion of required training, and clearly communicate those responsibilities throughout TSA, DHS stated that it is taking steps to define responsibility for monitoring the completion of required training and to insert this accountability into the performance plans of all TSA supervisors. TSA’s successful completion of these ongoing and planned activities should address the concerns we raised in this report. DHS has also provided technical comments on our draft report, which we incorporated where appropriate. As agreed with your office, we will send copies of this report to relevant congressional committees and subcommittees and to the Secretary of the Department of Homeland Security. We will also make copies available to others upon request. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report or wish to discuss it further, please contact me at (202) 512-8777. Key contributors to this report are listed in appendix VI. The Transportation Security Administration (TSA) had deployed a basic screener training program and required remedial training but had not fully developed or deployed a recurrent training program for screeners or supervisors. TSA had collected little information to measure screener performance in detecting threat objects. TSA’s Office of Internal Affairs and Program Review’s (OIAPR) covert testing was the primary source of information collected on screeners’ ability to detect threat objects. However, TSA did not consider the covert testing a measure of screener performance. TSA was not using the Threat Image Projection system (TIP) but planned to fully activate the system with significantly more threat images than previously used in October 2003. TSA had not yet implemented an annual proficiency review to ensure that screeners met all qualifications and standards required to perform their assigned screening functions. Although little data existed on the effectiveness of passenger screening, TSA was implementing several efforts to collect performance data. Aviation Security: Efforts to Measure Effectiveness and Address Challenges planned to double the number of tests it conducted during fiscal year 2004. TSA only recently began activating TIP on a wide-scale basis and expected it to be fully operational at every checkpoint at all airports by April 2004. TSA only recently began implementing the annual recertification program and did not expect to complete testing at all airports until March 2004. TSA was developing performance indexes for individual screeners and the screening system as a whole but had not fully established these indexes. TSA expected to have them in place by the end of fiscal year 2004. Aviation Security: Efforts to Measure Effectiveness and Strengthen Security Programs working with the U.S. Department of Agriculture’s Graduate School to tailor its off-the-shelf supervisory course to meet the specific training needs of screening supervisors. While TSA had taken steps to enhance its screener training programs, staffing imbalances, and lack of high-speed connectivity at airport training facilities had made it difficult for screeners at some airports to fully utilize these programs. Although TSA was making progress in measuring the performance of passenger screeners, it had collected limited performance data related to its checked baggage screening operations. However, TSA had begun collecting additional performance data related to its checked baggage screening operations and planned to increase these efforts in the future. As part of its efforts to develop performance indexes, TSA was developing baseline data for fiscal year 2004 and planned to report the indexes to DHS in fiscal year 2005. With the exception of covert testing and recent TIP data, data were not yet available to assess how well screeners were performing and what steps if any TSA needed to take to improve performance. Also, TSA was not using TIP as a formal indicator of screening performance, but instead was using it to identify individual screener training needs. To examine efforts by the Transportation Security Administration to enhance their passenger and checked baggage screening programs, we addressed the following questions: (1) What actions has TSA taken to enhance training for screeners and supervisors? (2) How does TSA monitor compliance with screener training requirements? (3) What is the status of TSA’s efforts to assess and enhance screener performance in detecting threat objects? To determine how TSA has enhanced training for screeners and supervisors and how TSA has monitored compliance with screener training requirements, we obtained and analyzed relevant legislation, as well as TSA’s training plans, guidance, and curriculum. We reviewed data from TSA’s Online Learning Center and assessed the reliability of the Online Learning Center database. We compared TSA’s procedures for ensuring that screeners receive required training according to Standards for Internal Controls in the Federal Government. We interviewed TSA officials from the Office of Workforce Performance and Training and the Office of Aviation Operations in Arlington, Virginia. At the airports we visited, we interviewed Federal Security Directors and their staffs, such as Training Coordinators. We also met with officials from four aviation associations—the American Association of Airport Executives, Airports Council International, the Air Transport Association, and the Regional Airline Association. We did not assess the methods used to develop TSA’s screener training program, nor did we analyze the contents of TSA’s curriculum. Although we could not independently verify the reliability of all of this information, we compared the information with other supporting documents, when available, to determine data consistency and reasonableness. We found the data to be sufficiently reliable for our purposes. To determine what efforts TSA has taken to assess and to enhance screener performance in detecting threat objects, we reviewed related reports from the Department of Transportation and the Department of Homeland Security (DHS) Inspector General, Congressional Research Service, and TSA, as well as prior GAO reports. We obtained and reviewed TSA’s covert test data and results of the annual recertification testing. (Results of the covert testing are classified and will be the subject of a separate classified GAO report.) We discussed methods for inputting, compiling, and maintaining the data with TSA officials. We also assessed the methodology of TSA’s covert tests and questioned OIAPR officials about the procedures used to ensure the reliability of the covert test data. When we found discrepancies between the data OIAPR maintained in spreadsheets and the data included in the hard copy reports we obtained from TSA, we worked with OIAPR to resolve the discrepancies. Further, we visited TSA headquarters to review TSA’s annual recertification testing modules and discuss TSA’s process for validating the recertification exams. As a result, we determined that the data provided by TSA were sufficiently reliable for the purposes of our review. We also reviewed TSA’s performance measures, targets, and indexes. Finally, we interviewed TSA headquarters officials from several offices in Arlington, Virginia, including Aviation Operations, Workforce Performance and Training, Strategic Management and Analysis, and Internal Affairs and Program Review. In addition, in accomplishing our objectives, we also conducted site visits at select airports nationwide to interview Federal Security Directors and their staffs and conducted two Web-based surveys of Federal Security Directors. Specifically, we conducted site visits at 29 airports (13 category X airports, 9 category I airports, 3 category II airports, 3 category III airports, and 1 category IV airport) to observe airport security screening procedures and discuss issues related to the screening process with TSA, airport, and airline officials. We chose these airports to obtain a cross- section of all airports by size and geographic distribution. In addition, we selected each of the five contract screening pilot airports. The results from our airport visits provide examples of screening operations and issues but cannot be generalized beyond the airports visited because we did not use statistical sampling techniques in selecting the airports. The category X airports we visited were Baltimore Washington International Airport, Boston Logan International Airport, Chicago O’Hare International Airport, Dallas/Fort Worth International Airport, Denver International Airport, Washington Dulles International Airport, John F. Kennedy International Airport, Los Angeles International Airport, Newark Liberty International Airport, Orlando International Airport, Ronald Reagan Washington National Airport, San Francisco International Airport, Seattle-Tacoma International Airport. The category I airports we visited were Burbank- Glendale-Pasadena Airport, John Wayne Airport, Chicago Midway International Airport, Dallas Love Field, Kansas City International Airport, Little Rock National Airport, Metropolitan Oakland International Airport, Portland International Airport, and Tampa International Airport. The category II airports we visited were Jackson International Airport, Dane County Regional Airport, and Greater Rochester International Airport. The category III airports we visited were Idaho Falls Regional Airport, Jackson Hole Airport, and Orlando Sanford International Airport. The category IV airport we visited was Tupelo Regional Airport. Further, we administered two Web-based surveys to all 155 Federal Security Directors who oversee security at each of the airports falling under TSA’s jurisdiction. One survey, the general survey, contained questions covering local and national efforts to train screeners and supervisors and the status of TSA’s efforts to evaluate screener performance, including the annual recertification program and TIP. The second survey attempted to gather more specific airport security information on an airport(s) under the Federal Security Director’s supervision. For the airport-specific survey, each Federal Security Director received one or two surveys to complete, depending on the number of airports they were responsible for. Where a Federal Security Director was responsible for more than two airports, we selected the first airport based on the Federal Security Director’s location and the second airport to obtain a cross-section of all airports by size and geographic distribution. In all, we requested information on 265 airports. However, two airports were dropped from our initial selection because the airlines serving these airports suspended operations and TSA employees were redeployed to other airports. As a result our sample size was reduced to 263 airports, which included all 21 category X, and 60, 49, 73, and 60 category I through IV airports respectively. In that we did not use probability sampling methods to select the sample of airports that were included in our airport-specific survey, we cannot generalize our findings beyond the selected airports. A GAO survey specialist designed the surveys in combination with other GAO staff knowledgeable about airport security issues. We conducted pretest interviews with six Federal Security Directors to ensure that the questions were clear, concise, and comprehensive. In addition, TSA managers and an independent GAO survey specialist reviewed the survey. We conducted these Web-based surveys from late March to mid-May 2004. We received completed general surveys from all 155 Federal Security Directors and completed airport-specific surveys for all 263 separate airports for which we sought information, for 100 percent response rates. The surveys’ results are not subject to sampling errors because all Federal Security Directors were asked to participate in the surveys and we did not use probability-sampling techniques to select specific airports. However, the practical difficulties of conducting any survey may introduce other errors, commonly referred to as nonsampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information that are available to respondents, or in how the data are entered into a database or were analyzed can introduce unwanted variability into the survey results. We took steps in the development of the surveys, the data collection, and the data editing and analysis to minimize these nonsampling errors. Also, in that these were Web-based surveys whereby respondents entered their responses directly into our database, there was little possibility of data entry or transcription error. In addition, all computer programs used to analyze the data were peer reviewed and verified to ensure that the syntax was written and executed correctly. We performed our work from May 2003 through April 2005 in accordance with generally accepted government auditing standards. Certain information we obtained and analyzed regarding screener training and performance are classified or are considered by TSA to be sensitive security information. Accordingly, the results of our review of this information are not included in this report. This tool allows screeners to touch actual improvised explosive device (IED) components and build their own devices. This experiential learning will enable screeners to more readily detect real IEDs during screening. These weapons are also used to assist in training by using them for live testing conducted by FSD staff. This tool allows screeners to touch actual firearms and begin to understand how they can be broken down into various parts. By understanding this and experiencing it, screeners are better able to see the components of a firearm during actual screening. These weapons are also used to assist in training by using them for live testing conducted by FSD staff. Deployed January 26, 2004 Maintain and enhance the screeners’ X-ray image operational skills. Deployed February 5, 2004 Provide a tool that includes about 14,000 image combinations to practice threat identification. These teams go into airports where data shows performance needs attention. The team offers a variety of services to assist in improving the performance, such as on-the-spot training and consulting services. Team visits can be initiated by FSDs, Internal Affairs reports, Quality Assurance trips, or MTAT Supervisors proactively visiting the airport and FSD. Site visits completed from October 2003 through December 3, 2004: North Central (37 visits) South Central (51 visits) Northeast (25 visits) Southeast (60 visits) Western (53 visits) Improve screener supervisors’ knowledge of federal government and TSA personnel rules and how to effectively coach and communicate with employees. Approximately 3,800 supervisors have been trained. Certification of screeners to perform supervisory maintenance tasks above and beyond operator training. Provide students with basic skills needed to verify the identity of flying armed law enforcement officers. This weekly product brings to light actual cases of weapons being found by law enforcement, with an explanation of how those weapons could be used to attack aviation. Provide interactive, performance based recurrent Web-based training modules for checked baggage explosive detection systems (EDS). Improve screener performance by providing an interactive tool complementary to Hand Held Metal Detector and Pat Down Video that allows the screener to practice proper techniques and receive immediate feedback. Reinforces TSA’s customer service principles and places the screener in various situations requiring effective customer service responses. Provide interactive, performance-based recurrent training modules for checkpoint and checked baggage operations. Physical Bag Search Video Maintain and enhance screeners’ explosive trace detection (ETD) and physical bag search skills for carry-on and checked baggage. Provide interactive recurrent Web-based training modules for ETD and physical bag search. Provide an interactive, performance-based training tool to enhance screener’s ability to identify prohibited items. Provide an informative and effective learning tool to maintain and enhance the skills of screeners in the areas of persons with prosthetics. Provide a tool to practice threat identification with about 10,000,000 image combinations. Sharing the X-Ray Tutor Version 2 library, this tool will allow screeners to practice finding threat items using the full capabilities of the TIP-ready X-ray machines. Provide an interactive, performance-based tool to convey how the supervisor is to handle screening situations, handed off by the screening, following standard operator procedures. Provide a Web-based training that will engage the student with 3- dimensional representations of the muscular frame, showing proper lifting techniques and the results of improper techniques. In addition to those named above, David Alexander, Leo Barbour, Lisa Brown, Elizabeth Curda, Kevin Dooley, Kathryn Godfrey, David Hooper, Christopher Jones, Stuart Kaufman, Kim Gianopoulos, Thomas Lombardi, Cady S. Panetta, Minette Richardson, Sidney Schwartz, Su Jin Yon, and Susan Zimmerman were key contributors to this report.","The screening of airport passengers and their checked baggage is a critical component in securing our nation's commercial aviation system. Since May 2003, GAO has issued six products related to screener training and performance. This report updates the information presented in the prior products and incorporates results from GAO's survey of 155 Federal Security Directors--the ranking Transportation Security Administration (TSA) authority responsible for the leadership and coordination of TSA security activities at the nation's commercial airports. Specifically, this report addresses (1) actions TSA has taken to enhance training for passenger and checked baggage screeners and screening supervisors, (2) how TSA ensures that screeners complete required training, and (3) actions TSA has taken to measure and enhance screener performance in detecting threat objects. TSA has initiated a number of actions designed to enhance screener training, such as updating the basic screener training course. TSA also established a recurrent training requirement and introduced the Online Learning Center, which makes self-guided training courses available over TSA's intranet and the Internet. Even with these efforts, Federal Security Directors reported that insufficient screener staffing and a lack of high-speed Internet/intranet connectivity at some training facilities have made it difficult to fully utilize training programs and to meet the recurrent training requirement of 3 hours per week, averaged over a quarter year, within regular duty hours. TSA acknowledged that challenges exist in recurrent training delivery and is taking steps to address these challenges, including factoring training into workforce planning efforts and distributing training through written materials and CD-ROMs. However, TSA has not established a plan prioritizing the deployment of high-speed Internet/intranet connectivity to all airport training facilities to facilitate screener access to training materials. TSA lacks adequate internal controls to provide reasonable assurance that screeners receive legislatively mandated basic and remedial training, and to monitor its recurrent training program. Specifically, TSA policy does not clearly specify the responsibility for ensuring that screeners have completed all required training. In addition, TSA officials have no formal policies or methods for monitoring the completion of required training and were unable to provide documentation identifying the completion of remedial training. TSA has implemented and strengthened efforts to measure and enhance screener performance. For example, TSA has increased the number of covert tests it conducts at airports, which test screeners' ability to detect threat objects on passengers, in their carry-on baggage, and in checked baggage. These tests identified that overall, weaknesses and vulnerabilities continue to exist in passenger and checked baggage screening systems at airports of all sizes, at airports with federal screeners, and at airports with private-sector screeners. While these test results are an indicator of performance, they cannot solely be used as a comprehensive measure of any airport's screening performance or any individual screener's performance. We also found that TSA's efforts to measure and enhance screener performance have primarily focused on passenger screening, not checked baggage screening. For example, TSA only uses threat image software on passenger screening X-ray machines, and the recertification testing program does not include an image recognition module for checked baggage screeners. TSA is taking steps to address the overall imbalance in passenger and checked baggage screening performance data. TSA also established performance indexes for the passenger and checked baggage screening systems, to identify an overall desired level of performance. However, TSA has not established performance targets for each of the component indicators that make up the performance indexes, including performance targets for covert testing. TSA plans to finalize these targets by the end of fiscal year 2005.",govreport
"IRS’ 10,000 customer service representatives are located at 25 call sites around the country. In 1999, IRS began operating this network as a single call center providing round-the-clock service. Managing the network in this way enabled IRS to route calls from three separate toll-free lines—one each for questions about tax law, account services, and refund status—to the sites with the shortest hold times among those customer service representatives assigned to answer questions concerning those issues. (Fig. 1 illustrates call routing within IRS’ toll-free network.) Before IRS began operating the network as a single call center, taxpayer calls were routed by area codes or by the percentage of staff the site had scheduled to work. Calls routed in this manner could not be easily rerouted when a site was experiencing frequent busy signals or lengthy hold times. Although individual call site operating hours and call handling responsibilities varied, IRS expanded its overall toll-free network coverage in January 1999—from 16 hours a day, 6 days a week, to 24 hours a day, 7 days a week. IRS’ call center network is controlled by the Operations Center. In general, the Operations Center is responsible for forecasting call demand—the numbers, types, and timing of calls IRS is expected to receive throughout the planning year on each of its three toll-free lines (tax law, accounts, and refunds); planning the routing of calls among call sites, based on each call site’s assigned toll-free line and subject coverage responsibilities; developing staffing requirements for each call site and monitoring site adherence to those requirements; and monitoring network call traffic status and, when necessary, rerouting calls among the sites to optimize service. The Operations Center develops call site staffing requirements weekly, with call site input and agreement. These requirements prescribe the numbers of trained customer service representatives that are to be available and ready each half-hour to take calls on each assigned subject category and toll-free line. The call sites, in turn, are expected to adhere to the staffing requirements prescribed by the Operations Center. They are generally responsible for recruiting, training, and assigning customer service representatives in sufficient numbers and skills to enable them to meet prescribed staffing requirements. Collectively, IRS call centers employed nearly 10,000 customer service representatives in October 2000. The top picture in figure 2 shows Operations Center officials monitoring network operations, while the picture on the right shows a representative handling a call at IRS’ call center in Atlanta. To address our objectives, we interviewed IRS officials involved in managing toll-free telephone operations, obtained supporting documentation, and reviewed related reports by the Treasury Inspector General for Tax Administration (TIGTA). Although we did not independently verify IRS officials’ responses to our questions, we reviewed them and related documentation for consistency. IRS’ use of other resources will be discussed in a forthcoming report on toll-free performance during the 2000 filing season. We used our human capital self-assessment checklist to obtain an understanding of human capital management, its importance in achieving federal agency operational goals, and the framework that we developed to assist agency leaders in evaluating their human capital management practices. Because people are a key resource for carrying out agencies’ missions, we also reviewed the Government Performance and Results Act’s requirements for agency strategic planning, goal-setting, and performance measurement. To identify human capital management practices used by other organizations in telephone customer service, we obtained information from several sources, including our August 2000 report on human capital management practices of public and private organizations;the 1995 National Performance Review report on best practices in telephone service; and literature on call center management, including Incoming Calls Management Institute information and reports. We did our work at IRS’ National Office in Washington, D.C.; the Office of the Chief Customer Service Field Operations in Atlanta; the Customer Service Operations Center in Atlanta; and six of IRS’ 25 call sites. As agreed with your office, we judgmentally selected the six sites to ensure geographic coverage and other characteristics and, therefore, cannot project our results to all 25 call sites. Because IRS began providing 24-hour coverage in 1999, we included the two call sites that operated 24 hours a day, 7 days a week and four sites operating fewer than 24 hours a day. Because some call sites were colocated with IRS service centers that had large labor pools from which the sites might recruit staff, the six sites included three that were colocated with service centers and three that were not. To understand human capital management practices within the context of IRS’ new organizational and operational structure, our sample includes three sites that were designated to serve taxpayers with incomes from wages and investments and three sites that were designated to serve small business and self-employed taxpayers. Since differences in site staffing levels could lead to differences in their human capital management practices, we selected two sites each from the low, middle, and high ranges of staffing levels among the 25 call sites—less than 200 staff, between 200 and 400, and more than 400, respectively. The characteristics of the six sites are shown in table 1. We performed our work between May 1999 and October 2000 in accordance with generally accepted government auditing standards. We obtained written comments on a draft of this report from the Commissioner of Internal Revenue. The comments are discussed near the end of this report and are reprinted in appendix II. IRS faces an annual challenge in determining the staffing level for its toll- free telephone customer service operations. IRS has not established a long-term, desired level-of-telephone-service goal based on the needs of taxpayers and the costs and benefits of meeting them, and then determined what staffing level is needed to achieve that service level. Rather, IRS annually determines the level of funding it will seek for its customer service workforce, based on its judgment of how to best balance its efforts to assist taxpayers and to ensure their compliance with tax laws, and then calculates the expected level of service that funding level will provide. IRS’ approach to setting this goal is inconsistent with federal guidance on strategic planning, which calls for agencies to develop strategic goals covering at least a 5-year period and to determine the staffing and other resources needed to achieve the goals. IRS’ approach is also inconsistent with industry practices, which base their goals and staffing on customer needs. Without a long-term level-of-service goal, as well as annual goals aimed at achieving the long-term goal over time, IRS lacks meaningful targets for strategically planning and managing call center performance and measuring improvement. In commenting on a draft of this report, the Commissioner stated that IRS planned to set strategic goals and staff to meet those goals. IInn the absence of a long-term goal, and multiyear plans for reaching it, IRS has estimated the service it could provide based on different staffing levels. For example, when formulating its fiscal year 2000 budget, IRS estimated that it would receive over 100 million calls on its three toll-free lines throughout the fiscal year and that its customer service representatives could handle an average of 5.6 calls per hour that they were available to take calls. These workload and productivity assumptions were the basis for calculating the expected levels of service IRS could provide with different staffing levels. Specifically, with customer service representative levels ranging from 8,291 to 10,800 full-time- equivalent staff, IRS estimated that it could achieve levels of service ranging from 58 to 80 percent, respectively. Because of the need to balance service and compliance activities within overall staffing budget limitations, IRS decided to request funding at the lower level, establishing a 58-percent level-of-service goal for fiscal year 2000 and a 60-percent level for fiscal year 2001. A long-term, results-oriented goal is important because its provides a meaningful sense of direction as well as a yardstick for measuring the results of operations and evaluating the extent of improvements resulting from changes in resources, new technology, or management of human capital. The Government Performance and Results Act of 1993 required executive branch agencies to develop multiyear, strategic plans covering at least a 5-year period; describe the human and other resources needed to achieve goals; update these plans at least every 3 years; prepare annual performance plans with annual performance goals; and measure and report annually on its progress toward meeting those set long-term, output- or results-oriented goals in these strategic plans; goals. Under the act, strategic plans are the starting point for agencies to set annual performance goals aimed at achieving their strategic goals over time. As part of the strategic planning process, agencies are required to consult with Congress and to solicit the views of other stakeholders who might be affected by the agencies’ activities. Unlike IRS, officials at all seven public and private call center operations we visited as part of our August 2000 report said that they determined staffing requirements based on their customers’ needs and clearly articulated service-level goals—that is, the percentage of calls to be answered within a given time frame. For example, the Social Security Administration (SSA)—an agency that is also subject to federal budget constraints, had a goal of 95 percent of its callers getting through on its toll-free line within 5 minutes of their first attempt. This goal was established with input and support from Congress and top SSA leadership as part of a government wide effort to improve customer service. According to an SSA associate deputy commissioner, the focus on improving telephone customer service followed a period of very poor service in the early and mid-1990s, when as many as 49 percent of callers got busy signals when they called the toll-free number. The associate deputy said that congressional stakeholders continue to monitor SSA’s toll-free telephone operations, resulting in continued support by SSA management to allocate the resources needed to meet established goals. Other studies have also documented the importance of setting service- level goals based on customers’ needs. One guide to call center management for practitioners that we reviewed underscored the importance of service-level goals. It described service level as “the core value” at the heart of effective call center management, without which, answers to many important questions, including “How many staff do you need?” would be left to chance. It said service-level goals should be realistic, understood by everyone in the organization, taken seriously, and funded adequately. While the guide also recommended benchmarking, formally or informally, with competitors or similar organizations, it stated each organization should determine an appropriate service level for its call centers, considering its unique circumstances. These considerations should include the labor and telephone equipment costs of answering the call, the value of the call to the organization, and how long callers are willing to hold for service. IRS recognizes the need to establish long-term goals and is considering adopting some of the measures used by other organizations and establishing goals for those measures. For fiscal year 2001, for example, IRS plans to measure the percentage of callers who reach IRS within 30 seconds. While IRS has not established a long-term goal for this measure, it has set an interim goal of 49 percent for fiscal year 2001. In commenting on a draft of this report, the Commissioner stated that IRS had instituted an agencywide strategic planning process in March 2000 that links the budget and available resources to its strategies and improvement projects. According to the Commissioner, IRS’ fiscal year 2002 Strategic Plan and Budget will include a 74 percent level-of-service goal, with a goal of reaching 85 to 90 percent by fiscal year 2003. Also, IRS had an initiative under way to improve workload planning to ensure that customer needs are considered during the planning and budgeting process. The six call sites we visited faced challenges in successfully recruiting, training, retaining, and scheduling customer service representatives. According to site officials, these challenges included difficulties recruiting representatives due to job characteristics, training representatives and keeping them proficient, retaining skilled representatives, and scheduling representatives to meet forecasted staffing requirements. Officials at five sites said they experienced some degree of difficulty in recruiting representatives because of job characteristics such as the seasonal nature of the positions, undesirable work hours, or the stressfulness of the work. Nevertheless, five of the sites were able to fill their vacant positions. One site was unable to fill its needs and had concerns about the suitability of the persons hired. According to officials at this latter site, due to the limited time between the date they were provided the number of positions to fill and the time that the new employees had to report for work, the officials did not have sufficient time to interview all applicants before hiring them. Officials at each IRS call site were responsible for hiring representatives for their location, including deciding what recruiting methods and applicant screening tools to use. All six sites used some combination of conventional recruiting methods, such as newspaper advertisements and college campus recruiting. To determine the suitability of applicants, beyond the basic qualifications for the position, officials at four sites interviewed applicants before hiring them, and most used interview techniques to determine how applicants might behave in typical work situations. Two of these four sites also administered a five-question, tax- related math test to assess a candidate’s basic math and analytical skills. In an effort to improve its recruiting for customer service representatives, IRS is in the early stages of developing a national recruiting strategy. As part of this plan, IRS is determining where it should target its recruiting efforts. IRS is identifying sites where IRS’ salary and benefits make it a competitive employer in the local job market and sites that have trouble recruiting and retaining suitable applicants. Officials believe this will help IRS determine which sites should be growth sites for hiring telephone customer service representatives. According to officials at the call sites we visited, the many obstacles that affected their ability to train customer service representatives and keep them proficient included the broad range of complex topics representatives must address, inadequate resources, the cyclical nature of taxpayer demand, reassignment of tax topics among representatives, and the lack of a formal mechanism to identify individual refresher training needs. Each year, IRS must train thousands of customer service representatives in a broad range of topics, and according to officials at the six sites we visited, they sometimes had to do so without adequate resources. Topics range from the status of refunds to more complicated issues such as capital gains or losses. In fiscal year 1999, the standard training curriculum provided by all sites generally included periods of classroom instruction, followed by periods of on-the-job training that were roughly half the length of the classroom instruction. This training was delivered incrementally over a 3-year period, between the busy filing seasons, during which IRS receives the bulk of its toll-free calls. The training program also included annual tax law/procedural update training. However, after customer service representatives received their initial training, they generally did not receive subsequent refresher training despite the cyclical nature of the work. Officials also cited a shortage of instructors, limited training time, and outdated training materials as other factors that affected their ability to effectively train customer service representatives. For example, officials at the one site that did not hire the number of representatives authorized said they did not have enough instructors to provide the necessary training. Officials at three sites said that they did not have sufficient time to fully train representatives before their peak season because they did not receive timely notice of when, and how many, they could hire. Officials at four sites also said that training materials provided by the National Office were frequently outdated. Keeping customer service representatives proficient was also a challenge for the sites due to the cyclical nature of taxpayer demand and changes to the topics representatives were expected to know. The frequency of the calls and the topics covered varied throughout the year. The bulk of the calls are generally received during the busy filing season. For example, more than 57.6 of the 79.6 million toll-free calls made to IRS in fiscal year 2000, or 72 percent were made from January through June. In addition, calls received from January through April predominantly involved tax law topics, while calls received after April mainly involved account- and refund-related topics. Consequently, customer service representatives could go long periods, such as months between filing seasons or even years since topic training was completed, without receiving calls to reinforce their experience on some of the topics for which they were trained. Moreover, this situation was compounded when IRS implemented centralized call routing in 1999. In conjunction with this change, IRS consolidated the number of subject categories, which ranged from 40 to 125 depending on the site, and reassigned representatives to a broader group of 31 categories. This was done without ensuring that they had adequate training or experience. According to a site official, inadequate training is one factor reducing the accuracy of IRS responses to tax law and account calls. From 1998 to 1999, for example, network accuracy for account calls decreased from 87.9 to 81.7 percent, according to IRS’ weekly customer service snapshot report dated September 30, 1999. Officials at the sites we visited also said that the lack of a formal mechanism to identify which representatives needed refresher training hindered their ability to keep their representatives proficient. Officials have records of specific training each representative has received, but they do not have a method for assessing individual competency gaps—i.e., between knowledge and skills needed to respond to calls and current proficiency—to quantify each representative’s refresher training needs. Although IRS had developed such a system and began using it in December 1998, a customer service training official said testing was not done consistently among the call sites, and refresher training was not provided to meet identified needs. The official also said a lack of funding and uncertainty of future organizational developments led IRS to discontinue the system in 1999. Because IRS does not have a system for assessing competency gaps to identify the specific refresher training needs of individual representatives, call sites waste scarce training resources trying to improve the performance of customer service representatives. For example, officials said they sometimes send groups of representatives to refresher training, knowing that some representatives will probably receive training they do not need. This happens because the course covers several subjects and each representative probably needs some of the training but most representatives probably do not need all of the training. Providing unnecessary training wastes resources that would otherwise be available for representatives who need additional training. “Fundamentally, we are attempting the impossible. We are expecting employees and our managers to be trained in areas that are far too broad to ever succeed, and our manuals and training courses are, therefore, unmanageable in scope and complexity…. The next step is to rethink what we should do at each site in order to achieve greater site specialization.” Because of the problems involved in attempting to provide the full range of training to all customer service representatives, in fiscal year 2000, IRS began refocusing its program to provide just-in-time training, targeted more to the specific types of questions taxpayers call about at different times throughout the year. In addition, as part of restructuring, IRS intends to further specialize training to serve specific taxpayer groups– those who receive income from wages and investments and those who receive income from small businesses or self-employment. IRS’ training related plans do not, however, address the need for identifying competency gaps to determine refresher training needs and target training accordingly. A National Office official informed us that IRS was working with the Office of Personnel Management to “develop competency models, document career paths, and develop assessment instruments for use in training, development, selection, etc., for all of the occupations within the IRS.” Due to the broad scope of this endeavor, however, the official could not say when IRS could expect to establish and implement a mechanism for assessing the refresher training needs of customer service representatives and ensuring that the training is provided. Despite its substantial investment in recruiting and training its network of 10,000 customer service representatives, and concern by National Office and some site officials that attrition was higher than it should be, IRS was not actively monitoring attrition and determining what steps, if any, were needed to address it. Officials do not track how many representatives leave, why they leave, or where they go—data that would be key to a strategy for decreasing attrition. A recent study of experiences at 186 call centers indicates that attrition is a major problem for the industry that is expected to worsen. Some of the organizations we contacted as part of our August 2000 report, however, were not as concerned about their attrition. They said most of their attrition was to other jobs within their organization and thus benefited the overall organization. None of the six sites we visited could provide attrition statistics for customer service representatives for 1998 or 1999. Officials at four sites provided estimates ranging from 13 to 19 percent per year; however, these estimates were just their opinions—they were not based on data collected by the site or the National Office. Although IRS did not monitor attrition, National Office officials and officials at three sites said that attrition was a problem. Only one of the six sites had collected data to determine the reasons why representatives left; officials at the remaining five sites and the National Office had opinions about why representatives left. In addition, IRS did not monitor whether the representatives who left obtained other jobs within or outside of IRS. Examples included the stressful nature of the work, seasonal employment, and better opportunities elsewhere. resources recruiting, hiring, and training representatives, only to lose them to other organizations. Some of the organizations included in our August 2000 report had high attrition, but officials said that attrition from their call centers was usually to other positions within their organizations. For example, at one company, officials noted that policies to promote from within and encourage employee mobility, allowed customer service representatives to move to more senior positions within the company. IRS faces challenges in effectively scheduling staff—that is, having the right number, with the right skills, at the right time, at each call site—due to inaccurate demand forecasting and a complicated staff scheduling process. During the first 6 months of fiscal year 2000, IRS data indicated that for 60 percent of the time call sites were overstaffed or understaffed compared to tolerances established by IRS. In addition, IRS’ method for measuring call sites’ adherence to their schedules was incomplete. Recognizing its problems with forecasting and scheduling, IRS was adapting an automated system similar to those used by other organizations. Inaccurate forecasting of the expected fiscal year 2000 toll-free call volume led to inefficient scheduling and use of staff at some sites. The Operations Center estimated that IRS would receive 100 million calls in fiscal year 2000, but IRS actually received about 80 million—20 percent less than forecasted. Because individual site staffing requirements were based on IRS’ forecasts of the expected numbers, types, and timing of calls, network and individual site work plans were also overstated, resulting in the underutilization of staff at some sites. For example, according to TIGTA’s March 2000 report, for the period December 5, 1998, through March 15, 1999, overstated call demand resulted in staff being scheduled and ready to take calls, but getting no calls, an average of 10 percent of their time at six sites for which data were available. Operations Center officials stated that IRS’ increased use of new routing technologies, combined with continuous organizational and procedural changes, made accurate forecasting difficult. Moreover, they believed the information that IRS had about historical demand was of limited value in predicting future demand for two reasons. First, the historical information was not based on operating 24 hours a day; and second, it was difficult to take into account the constantly changing environment (i.e., tax law changes and increased use of electronic filing and Web-based services). However, the Directors of Customer Account Services, whose staffs have responsibility for providing telephone customer service to wage and investment and small business and self-employed taxpayers, stated that demand forecasting should improve now that IRS has 2 years of information based on operating 24 hours a day. Managers at most of the sites we visited stated that the complicated scheduling process made it difficult to ensure that the appropriate staff were scheduled to work at the right times. They were also concerned about the amount of time they spent scheduling and rescheduling staff in attempting to ensure that they had scheduled the number of staff with the skills the Operations Center prescribed for each half-hour increment of service time. IRS management had not developed a standard system for the sites to use in helping them to develop their site schedules. As a result, each site we visited used its own system to track variables related to each customer service representative, such as the specific work schedule agreement, planned vacation and training, and skill level in answering certain types of calls. Site managers then used these variables to develop site schedules. Managers explained that the large number of variables to consider when doing so (e.g., more than 160 different work schedules at one site) complicated the scheduling process and made it difficult for them to optimize their day-to-day efforts to meet the staffing requirements prescribed by the Operations Center. IRS’ own statistics bear this out. At the times IRS measured, call centers were either understaffed or overstaffed, compared with the Operations Center’s prescribed staffing schedule, 60 percent of the time—24 percent and 36 percent, respectively, during the first 6 months of fiscal year 2000. In measuring site adherence to its prescribed staffing requirements, the Operations Center considers variances of more than 10 percent (of the total number required to be ready for each half-hour period) as overstaffing or understaffing. The Operations Center only partially measures each site’s ability to meet the prescribed staffing requirements. The current measurement system determines if each site had, on average, the required number of customer service representatives available to answer the telephone for each half- hour period. However, the Operations Center did not measure the extent to which sites provided representatives with the required skills. IRS is working with a contractor to refine a commercially available automated system to facilitate forecasting demand, scheduling staff, and tracking adherence to the schedule. The system is expected to use historical data to more accurately forecast call demand (volume, type, and timing of calls) and to centrally compare information on site staff resources (e.g., availability and skills) in relation to forecasted demand to help ensure that network staffing schedules make optimum use of available site staffing. This system is also expected to identify individual site staffing options for meeting network requirements, thus reducing the amount of time site managers spend on scheduling staff. According to Operations Center officials, the contractor was still refining the commercial version of the system because it was not designed to handle the size and complexity of IRS’ toll-free operations (e.g., the number of call sites and customer service representatives and the range of topics). According to the project leader responsible for this system, both system hardware and software were in place at all call centers prior to October 2000, but the software is not yet fully operational. Even though IRS now has 2 years of information based on operating 24 hours a day, it did not gather that data in a consistent format. The system’s forecasting and scheduling capability will not be usable until IRS has collected at least 1 year of call demand data in a consistent format. The project leader was not sure when IRS would have these data because data collection efforts were delayed in order to make changes that would allow IRS to capture more data than originally planned and in a reconfigured format. Also, the planned transfer of certain functions from the Philadelphia Service Center to the Operations Center was more than a year behind schedule in October 2000. Moreover, the project leader said IRS’ restructuring could cause further delays in achieving full system capability. Other organizations included in our August report used an automated system similar to the one IRS is implementing. For example, one company used an automated system to identify its short- and long-term staffing requirements. The system assisted call center managers in forecasting call demands and scheduling staff to meet the demands. Officials said the system also enabled the company to significantly reduce the time needed to perform these tasks. It forecasted call demand down to half-hour intervals, based on historical data trends. Considering various assumptions about call patterns and information such as the number of customer service representatives available to take calls, on leave, or in training, the system also generated a staffing schedule. The schedules were reviewed daily and adjusted as needed. IRS also faces challenges in evaluating its human capital management practices. According to our self-assessment checklist, all human capital policies should be designed, implemented, and assessed by the standard of how well they help the organization pursue its mission, goals, and objectives. While IRS evaluates its practices to make improvements in some areas, such as recruiting or training, the evaluations do not assess how individual or collective human capital policies and practices affect its ability to achieve level-of-service goals. Its evaluations also generally did not consider how improving practices in one area might affect other areas. Unlike IRS, some organizations consider how their human capital management practices affect their operational goals and how changing one practice may affect another. Without expanding its evaluations to include such analyses, IRS is unlikely to optimize the efficiency and effectiveness of its toll-free operations. Except for retention, IRS evaluated its human capital practices, to some extent, in most areas, including recruiting, training, and scheduling to improve those areas. These evaluations generally focused on how each practice could be improved for the next year. While these evaluations are useful for making short-term adjustments, they do not provide a basis for strategic planning because they do not assess how human capital management practices may need to be revised to support a long-term level-of-service goal. Additionally, IRS evaluations generally do not consider how making changes in one area affects other areas. For example, IRS evaluations of recruiting did not consider how improving retention practices might reduce attrition, decrease resources spent on recruiting and training new employees, or increase the resources available for improving the skills and productivity of existing employees. Unlike IRS, other organizations have evaluated the effects of changes in one human capital practice on other practices as well as on the overall results of their telephone assistance operations. For example, one company used training results to identify successful new hires. First, officials determined the characteristics that recruits who did well during training had in common. Then, the company changed its recruiting practices to identify and hire similar people. The Incoming Calls Management Institute recommended doing something similar—identify the personality traits and skills of top performing customer service representatives and use those traits to help assess persons applying for a representative position. IRS faces significant challenges in managing its human capital to provide telephone customer service to taxpayers. IRS has made or planned substantial improvements to help meet these challenges, but further improvements are needed. IRS will have difficulty improving its telephone service without setting a long-term, desired service-level goal that is based on the needs of taxpayers, as well as annual goals aimed at making progress toward reaching its long-term goal. As the Government Performance and Results Act and SSA experience suggest, IRS will also need support for its long- and short-term goals from congressional stakeholders. IRS’ telephone customer service workforce represents a substantial human capital investment in providing assistance to taxpayers. To get the most from this investment, IRS must be able to (1) target scarce training resources where they are most needed to optimize call center and network performance, (2) minimize turnover of trained and experienced customer service representatives to avoid unnecessary recruiting and training expenditures and enhance productivity, and (3) determine how its individual or collective human capital policies and practices affect its ability to achieve customer service goals and how changes in one or more human capital management practices will affect other practices. However, until IRS establishes a system for assessing competency gaps to identify the refresher training needs of individual customer service representatives, it cannot effectively target scarce training resources to meet individual training needs. Without a system for monitoring attrition, identifying its causes, and taking steps to address them, IRS cannot ensure that its recruiting and training resources are used efficiently. And, unless IRS considers its human capital management practices’ contribution to achieving overall service goals and considers the interrelationships among its toll-free service human capital practices, it lacks a good basis for assessing the soundness of those human capital practices. We are recommending that the Commissioner of Internal Revenue take several steps to improve IRS’ human capital management practices related to providing telephone customer service. Specifically, the Commissioner should establish a long-term, desired service-level goal based on taxpayers’ needs, together with annual goals designed to make progress toward reaching that long-term goal over time, and work with congressional and other stakeholders to obtain their support and the resources needed to reach those goals; establish a system for assessing customer service representatives’ competency gaps and meeting the refresher training needs identified by the assessments; develop a system for monitoring call center attrition and identifying its causes and use the information gathered from that system to develop, as appropriate, strategies for dealing with the attrition of customer service representatives; and ensure that IRS’ evaluations of human capital management practices consider the effects of those practices on its ability to achieve long- and short-term customer service goals and the interrelationships among human capital practices. The Commissioner of Internal Revenue provided written comments on a draft of this report in a January 12, 2001, letter, which is reprinted in appendix II. We also met with senior IRS officials on January 4, 2001, to discuss our draft report and to obtain updated information on IRS’ new toll-free measures and goals. The Commissioner agreed with our recommendations, which he said should improve performance in this critical area. In addition, he provided information summarizing IRS’ efforts relating to each recommendation and commented that IRS’ efforts reflected the constructive dialog between IRS and our staff. We incorporated the new information and modified the report, where appropriate, to reflect IRS efforts. The Commissioner’s letter stated that IRS had instituted an agencywide strategic planning process in March 2000 that links the budget and available resources to its strategies and improvement projects, but also recognized the need to strengthen that new process. Toward this end, the Commissioner stated that IRS’ fiscal year 2002 Strategic Plan and Budget reflects a 74-percent level-of-service goal, with a goal of reaching 85 to 90 percent by fiscal year 2003. This plan was not yet available as we were preparing this report. He also stated that an initiative was under way to improve workload planning to ensure that customer needs are considered during the planning and budgeting process. The Commissioner’s letter did not say how the cited workload planning initiative would identify and assess customer needs. Based on the Commissioner’s comments, significant efforts were under way or planned to help ensure that customer service representatives will have the competencies and training needed to respond to taxpayer calls. In addition to the targeted training and planned specialization discussed in this report, for example, IRS plans to establish competency-based recruiting and retention methods to help ensure that IRS recruits and retains individuals who are well-suited to telephone customer service work. The Commissioner’s comments also stated that IRS’ competency- based management plans include the use of “assessment instruments to identify training needs.” These initiatives seem to be promising and may form a basis for identifying individual refresher training needs and ensuring that these needs are met. The Commissioner’s comments also recognized the importance of retaining skilled representatives. His comments identified several efforts that focused on identifying employees that may be more likely to remain with IRS. He did not comment on monitoring why employees leave or on using this information to strengthen IRS’ efforts to retain skilled representatives. Regarding IRS’ evaluations of its human capital practices, the Commissioner’s comments did not respond directly to the primary point of our recommendation—that IRS evaluations should consider the effects of its practices on its ability to achieve its long- and short-term customer service goals. However, the Commissioner did say that IRS has embraced our Human Capital Self-Assessment Checklist for Agency Leaders. IRS had used it as a diagnostic tool in its recent review of its mid- and top-level management realignment process and planned to use it again in fiscal year 2001 to “conduct an overview of the status of human capital practices throughout the Service.” Our checklist provides a framework by which agency leaders can develop informed views of their agencies’ human capital policies and practices. The Commissioner also objected to our comparing IRS’ 1998 performance with performance in subsequent years, because of the many changes to IRS’ operating environment, such as enterprise call management and 24-hour operations. This report compared IRS’ reported tax law and account accuracy in 1998 and 1999. As stated in our evaluation of the Commissioner’s comments on our 2000 filing season report, we believe it is appropriate to compare IRS’ performance before and after the operational changes mentioned above. In reevaluating the examples we used, however, we decided to eliminate our reference to IRS’ reported tax law accuracy because we learned that the methods used to measure tax law accuracy changed in 1999, and thus, results may not be comparable. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Ranking Minority Member of the Subcommittee on Oversight; the Chairman and Ranking Minority Member, Committee on Ways and Means; the Secretary of the Treasury; the Commissioner of Internal Revenue; and Director, Office of Management and Budget. We will also send copies to others upon request. If you have any questions, please call me at (202) 512-9110 or Carl Harris at (404) 679-1900. Key contributors to this report are acknowledged in appendix III. Table 2 describes the organization, mission, and telephone center operations of the private and public organizations that were included in the scope of our August 2000 report. Customer Service: Human Capital Management at Selected Public and Private Call Centers (GAO/GGD-00-161, Aug. 22, 2000). Telephone customer service operation A telephone hotline that provided consumers with product information and responded to questions about repairs. The answer center, located in Louisville, KY, handled about 2 million calls each year. About 200 telephone customer service representatives responded to inquiries 24 hours a day, 7 days a week. Mission One of 11 core businesses of General Electric. Manufactures appliances, including refrigerators, ranges, dishwashers, microwave ovens, washing machines, dryers, water filtration systems, and heating systems. Also provides repair and maintenance services on appliances, operating a nationwide fleet of service vans. Designer, developer, and manufacturer of computer products, including personal computers, printers, computer workstations, and a range of hardware and software. The Hewlett-Packard Company Executive Customer Advocacy Group provided support for customers contacting Corporate Headquarters regarding issues or concerns with products and services. The hotline was located in Palo Alto, CA. It operated from 8 a.m. to 5 p.m., Monday through Friday, with a staff of about 22 full-time- equivalent employees who were Hewlett-Packard Company retirees in part-time positions. One call center in Springfield, IL, was staffed by 34 full- time telephone customer service representatives, who were assisted during busy times by cross-trained employees from other areas within the taxpayer assistance division. Toll-free telephone lines were open from 8 a.m. to 5 p.m., Monday through Friday, with extended weekday hours and one Saturday opening during filing season. Automated service was available 24 hours a day, 7 days a week. The call center provided taxpayers with help in completing their returns and answered questions about taxes, returns, bills, and notices that had been filed. In the Product Sales and Service Division, about 6,900 telephone customer service employees provided information on product sales and service. Call centers operated 24 hours a day, 7 days a week. Collects taxes for the state and its local governments, including income and business taxes on individuals and businesses, income and sales taxes, taxes on public utilities, tobacco and liquor, motor fuels and vehicles. The department also administers tax relief programs for the elderly and disabled and provides property assessments among the state’s counties. Designer, developer, and manufacturer of information technologies, including computer systems, software, networking systems, storage devices, and microelectronics. America’s largest not-for-profit health maintenance organization, serving over 8 million members in 17 states and the District of Columbia. An integrated health delivery system, Kaiser Permanente organizes and provides or coordinates members’ care, including preventive care, hospital and medical services, and pharmacy services. Kaiser Permanente had 17 call centers nationwide, with 12 centers located in California, the largest region. Regional call centers operated independently. The California region, where we visited, had 5.9 million members, while other regions had fewer than 1 million members each. The two largest call centers were located in Stockton and Corona, CA. Together, they employed about 475 telephone customer service representatives and about 80 management and support staff. Hours of operation were 7 a.m. to 7 p.m., 7 days a week. The member service call centers provided answers to questions on health plan- related topics, including benefits, copayments, claims, Medicare, eligibility, available services, and physician information. Mission Manages the nation’s social insurance program, consisting of retirement, survivors, and disability insurance and supplemental security income benefits for the aged, blind, and disabled. Also assigns Social Security Numbers to U.S. citizens and maintains earnings records for workers under these numbers. World’s largest package distribution company, it transports more than 3 billion parcels and documents annually. Telephone customer service operation Thirty-six call centers nationwide were staffed by 3,100 full-time, 700 part-time, and up to 60 percent of about 4,100 spike employees who were available to assist at busy times. Toll-free telephone lines were open from 7 a.m. to 7 p.m., Monday through Friday, to answer callers’ questions about Social Security benefits and programs. Coordinator of Utah taxes and fees, including taxes on income, sales, property, motor vehicles, fuel, beer, and cigarettes. Nine call centers nationwide were staffed by over 6,800 customer service representatives. Eight centers were open from 7 a.m. to 9 p.m., Monday through Friday. One center in San Antonio, TX, operated 24 hours a day, 7 days a week. Seven of the nine call centers were staffed by contract employees. The Newport News, VA, call center, which was a contract facility we visited, had 230 representatives who handled calls related to pick-up, tracking, and claims. Three call centers—a main call center, motor vehicle center, and collection center—operated weekdays from 8 a.m. to 5 p.m. with about 35 telephone customer service representatives. The call centers responded to about 15,000 to 20,000 inquiries a month dealing with a range of questions on programs administered by the Commission. For these organizations, we conducted a telephone interview in which we asked managers of telephone customer service operations several key semistructured interview questions. However, we did not have detailed discussions with officials and employees at various levels of the organizations. We judgmentally selected the organizations to visit and telephone by reviewing literature on innovations in human capital management and by obtaining opinions from experts on what organizations they thought provided noteworthy or innovative human capital management in their call center operations. We chose telephone customer service operations that dealt with tax questions or specific subjects, such as benefits, investments, and installation and operation of technical equipment, that were comparable in complexity to tax issues addressed by IRS customer service representatives. Specifically, the director for Workplace Quality at the U.S. Office of Personnel Management identified the SSA telephone customer service operation as a public sector organization that is known for effective human capital management. We visited the Illinois and California State tax agencies and telephoned the Utah State Tax Commission on the basis of recommendations of an official from the Federation of Tax Administrators. The Canada Customs and Revenue Agency was cited in literature as having an internationally recognized reputation for high- quality taxpayer service and had participated—along with IRS and the tax agencies of Australia and Japan, members of the Pacific Association of Tax Administrators, in a benchmarking study of customer service best practices. Two private sector companies we visited—Kaiser Permanente and Allstate Insurance—were selected in consultation with the executive director of the Private Sector Council. The Council, with membership including about 50 major U.S. corporations, seeks to improve the productivity, management, and efficiency of government through cooperation with the private sector. Members volunteer expertise to government agencies by participating with them in projects that are coordinated through the Council. The other private organization we visited, the United Parcel Service, was selected in follow-up to our participation in a congressional delegation and IRS visit to its Atlanta, GA, headquarters to discuss human capital and telephone customer service issues. The private call centers we telephoned—General Electric (GE) Answer Center, Hewlett-Packard Company Executive Customer Advocacy Group, and International Business Machines (IBM) Business Product Division, and/or their parent corporations—were cited in best practices literature for their effective human capital management. In addition to those named above, Robert Arcenia, Ronald Heisterkamp, Mary Jo Lewnard, and Shellee Soliday made key contributions to this report.","Each year, the Internal Revenue Service (IRS) determines the staffing level for its toll-free telephone customer service operations. GAO found that IRS lacks a long-term telephone customer service goal that reflects the needs of taxpayers and the costs and benefits of meeting that goal. Rather, IRS annually determines the level of funding it will seek for its customer service workforce, using its judgment of how to best balance service and compliance activities. IRS then calculates the level of service that funding levels will provide. This approach is inconsistent with the Government Performance and Results Act and the practice of selected public and private call centers that field questions. IRS recognizes the shortcomings of its personnel management and will include performance measures and goals in its 2002 strategic plan. According to IRS officials, the agency also faces challenges in recruiting, training, retaining, and scheduling customer service representatives. IRS is developing a strategy to address each of these issues.",govreport
"Mortgage lenders keep the loans they originate in the primary market or sell them in the secondary, or resale, markets. In turn, purchasers of mortgage loans in the secondary markets either hold the loans in their own portfolios or, most often, pool together a group of loans to back MBS that are sold to investors or held in the originator’s portfolio. Secondary loan markets benefit lenders, borrowers, and investors in a number of ways. First, they allow lenders to manage their liquidity needs, reduce interest rate risk, and generate funds for additional lending. Second, they increase the amount of credit available to borrowers and help lower interest rates by fostering competition among lenders. Finally, they allow investors to further diversify their risks and to sell their interests on active secondary markets to other willing investors. Ginnie Mae was created in 1968 through an amendment to the National Housing Act. Organizationally, Ginnie Mae operates as a unit of HUD, and its administrative, staffing, and budgetary decisions are coordinated with HUD’s. Ginnie Mae defines its mission as expanding affordable housing in America by linking capital markets to the nation’s housing markets, largely by serving as the dominant secondary market vehicle for government- backed loan programs. These programs, which insure or guarantee mortgage loans that are originated in the private sector, are administered by a variety of federal agencies, including FHA, VA, RHS, and PIH. The government backing provided by these programs expands opportunities for homeownership to borrowers who may have difficulty obtaining a conventional mortgage. Ginnie Mae does not buy or sell loans or issue mortgage-backed securities. Rather, it provides guarantees backed by the full faith and credit of the U.S. government that investors will receive timely payments of principal and interest on securities supported by pools of government-backed loans, regardless of whether the borrower makes the underlying mortgage payment or the issuer makes timely payments on the MBS. Figure 1 shows the process of Ginnie Mae securitization. All mortgages in the Ginnie Mae pool must be insured or guaranteed by a government agency and have eligible interest rates and maturities. Ginnie Mae has several different products. Ginnie Mae’s original MBS program, Ginnie Mae I, requires that all pools contain similar types of mortgages (e.g., single family) with similar maturities and the same interest rates. The Ginnie Mae II MBS program, which was introduced in 1983, permits pools to contain loans with more heterogeneous loans. For example, the underlying mortgages in a pool can have varying interest rates and a pool can be created using adjustable rate mortgages (ARM). Ginnie Mae’s Multiclass Securities Program, introduced in 1994, includes, among other things, Real Estate Mortgage Investment Conduits (REMIC) and Ginnie Mae Platinum Securities. REMICs are designed to tailor the prepayment and interest rate risks associated with MBS to investors with varying investment goals. These products direct principal and interest payments from underlying MBS to classes, or tranches, with different principal balances, interest rates, and other characteristics. Ginnie Mae Platinum Securities allow investors to aggregate MBS with relatively small remaining principal balances and similar characteristics into new, more liquid securities. Investors in Ginnie Mae MBS face prepayment risk—that is, the possibility that borrowers will pay off their mortgages early, reducing the amount of interest earned. However, investors do not face credit risk—the possibility of loss from unpaid mortgages—because the underlying mortgages backing the pools are federally insured or guaranteed and Ginnie Mae guarantees timely payment of principal and interest. FHA’s single-family loan program and PIH’s loan guarantee programs insure nearly 100 percent of the loan amount. VA guarantees the lender against losses, subject to a cap equal to 25 percent to 50 percent of the loan amount based on the size of the loan; RHS guarantees up to 90 percent of the loan value. Issuers are responsible for delinquent loans in pools. When a Ginnie Mae issuer defaults in making timely payments of principal and interest to investors, Ginnie Mae makes the payments and takes over the issuer’s entire portfolio of government- backed loans that stand behind the securities that Ginnie Mae has guaranteed. Ginnie Mae charges issuers a guarantee fee for providing its guarantee of timely payment. The fee varies depending on the product and is six basis points for securities backed by single-family loans, which represent the majority of Ginnie Mae MBS. Issuers also pay a commitment fee that gives them the authority to pool mortgages into Ginnie Mae MBS. Issuers of Ginnie Mae securities may also collect a fee to cover the cost of servicing the underlying mortgages (generally 44 basis points for Ginnie Mae I products and 19 to 69 basis points for the Ginnie Mae II). Ginnie Mae does not receive appropriations or borrow money to finance its credit operations. The agency’s revenues exceed its expenses, which reduces the federal budget deficit. Ginnie Mae securities finance the great majority of FHA and VA loans, suggesting that the agency is fulfilling its basic mission, and faces relatively little competition in the market for government-backed mortgage loans. However, Ginnie Mae’s share of the total MBS market has declined over the last 20 years, both in terms of new issuances and volume outstanding, largely because FHA and VA loan origination has not kept pace with growth in the overall mortgage market and because securitization of conventional mortgages has become far more prevalent. Historically, the vast majority of government-backed housing loans have been pooled to back MBS for which Ginnie Mae guarantees the timely payment—a trend that continues today. Ginnie Mae issued its first MBS in 1970, and since that time it has guaranteed a cumulative total of more than $2 trillion of MBS. According to Ginnie Mae, its securities historically have represented roughly 90 percent of the market for FHA and VA loans. For example, between fiscal years 1998 and 2004 Ginnie Mae securities financed between about 84 percent and 96 percent of FHA-insured single-family loans (see fig. 2). In fiscal year 2004, Ginnie Mae issued a total of $149.1 billion in MBS. These MBS financed 91 percent of all eligible loans insured or guaranteed by FHA and VA. Ginnie Mae securities also have financed about half of RHS-guaranteed single-family loans since 1999 and financed roughly 40 percent of PIH-backed loans in fiscal year 2004. In 2004, newly issued Ginnie Mae securities financed $83.8 billion in FHA-insured loans, $31.4 billion in VA-guaranteed loans, and $1.6 billion in loans guaranteed by RHS and PIH. As shown in figure 3, FHA and VA loans represented 72 percent and 27 percent, respectively, of Ginnie Mae’s portfolio of new issuances that year, with RHS and PIH representing about 1 percent. About 92 percent of the loans backing Ginnie Mae MBS were single-family loans; the remainder were multifamily loans. Because Ginnie Mae’s charter keeps it focused on a discrete portion of the MBS market—specifically, that of loans made under FHA, VA, RHS, and PIH programs—the volume of Ginnie Mae’s new MBS issuance is linked directly to the origination volume of these programs. Changes in Ginnie Mae’s market volume over the years are thus largely a reflection of changes in the volume of FHA and VA loans, which represent 99 percent of Ginnie Mae’s portfolio. Although Ginnie Mae securities finance the great majority of the government-backed loans it is authorized to support, it does face potential competition from other secondary market entities. Federally insured and guaranteed loans can be expected to appeal to conventional securitizers because these loans carry little to no credit risk. However, Ginnie Mae has consistently captured 90 percent or more of the market for FHA and VA loans. Market participants told us that Ginnie Mae captured most of the market because of the difficulty of competing with the government guarantee of timely payment. This guarantee helps Ginnie Mae securities command a higher price and, correspondingly, offer a lower yield than other MBS of government-backed loans. We spoke with a number of secondary market participants that have or could become active in the market for government-backed loans, including the Federal Home Loan Banks, Fannie Mae, Freddie Mac, state and local government agencies, and private label issuers. In general, they have had limited or no involvement in Ginnie Mae’s market. Moreover, for a variety of reasons, they do not appear to have plans to encroach on Ginnie Mae’s market to any substantial degree, as the following examples illustrate: The Federal Home Loan Banks (FHLBank) have mortgage programs under which they purchase pools of conventional and federally insured or guaranteed mortgage loans from member banks. First authorized in 1998, the programs go by the names of the Mortgage Partnership Finance® program and the Mortgage Purchase Program. The programs were attractive to lenders in part because lenders could use them to sell their mortgages without paying guarantee fees. In 2000, FHLBanks took over a significant amount of Ginnie Mae’s market share and purchased $12.7 billion in FHA and VA loans, representing about 11 percent of the combined market for those loans. However, the Federal Housing Finance Board, which oversees the FHLBanks, became concerned because the program was intended to focus on conventional rather than FHA loans. The board took measures to encourage the FHLBanks to limit their purchase of FHA loans to no more than one-third of their mortgage purchase program portfolio. After 2000, FHLBanks greatly reduced their purchases of FHA loans. From 2001 to 2003, they purchased loans representing about 4 percent to 5 percent of the FHA market, which then declined further to about 2 percent in 2004. In fiscal year 2004, Fannie Mae purchased 4 percent of all FHA and VA originations. Its share of FHA and VA originations has varied over time, ranging from 1 percent to 6 percent between 1990 and 2004, or just 0.3 percent to 3 percent of Fannie Mae’s total purchase activity. According to Fannie Mae officials, these purchases of government loans consist largely of repurchases of delinquent loans. A Fannie Mae official told us the company did not systematically purchase FHA loans and in its normal course of business did not consider itself a competitor with Ginnie Mae. Fannie Mae does not receive credit from HUD toward its affordable housing goals by purchasing government-backed loans. Freddie Mac has purchased less than 1 percent of the market of FHA and VA loans each year since 1990. Freddie Mac officials said that its competition with Ginnie Mae is largely indirect, by encouraging conventional lending to the most creditworthy low- and moderate- income borrowers who might otherwise receive a mortgage through FHA or VA. Freddie Mac officials also said they do not compete with Ginnie Mae in the secondary market directly because it is hard to compete with Ginnie Mae’s government guarantee. In addition, as with Fannie Mae, government-backed loans do not count toward Freddie Mac’s required affordable housing goals. Freddie Mac does purchase some mortgage revenue bonds that are collateralized by FHA and VA loans and directly purchases some FHA and VA loans that Ginnie Mae does not securitize. State and local government entities, including housing finance agencies, issue mortgage revenue bonds to raise funds in the capital markets for mortgage lending. Because these bonds are tax exempt, investors are willing to accept a lower interest rate for them. This interest savings is passed on through lenders to lower-income families in the form of loans with interest rates below the market average. These bonds often finance government-backed mortgages. As of 2003, 71 percent of the mortgages that revenue bonds financed were insured or guaranteed by a federal program—58 percent by FHA, 10 percent by RHS, and 3 percent by VA. The overall volume of mortgage revenue bonds issued was $10.7 billion in 2003. Private label issuers purchased an estimated 3 percent of FHA and VA loans in 2004. These issuers account for an increasingly large share of the overall MBS market, but most of their market consists of loans not offered by FHA and VA programs, such as jumbo nonconforming loans and home equity lines of credit. According to RHS officials, private label issuers do currently securitize the majority of Section 538 multifamily loans guaranteed by RHS, but these loans account for less than 1 percent of Ginnie Mae’s portfolio. Most of the competition for Ginnie Mae’s market share does not come directly—that is, secondary market participants are not seeking to purchase or securitize significant numbers of government-backed loans. Rather, lenders compete with Ginnie Mae indirectly by seeking greater market share at the origination level by making conventional loans to borrowers who might otherwise use FHA and VA loan programs. Fannie Mae and Freddie Mac have an incentive to serve this market because lower-income borrowers who might otherwise turn to a government- backed loan program can help them meet their housing goals established by HUD. In addition, subprime mortgage originations have grown dramatically in recent years, as many lenders market to less creditworthy borrowers who in the past may have received a government-backed loan. Although Ginnie Mae continues to finance the bulk of government-backed loans, its share of the overall MBS market has declined substantially over the past 20 years. As shown in figure 4, Ginnie Mae securities represented 42 percent of all new MBS issued in 1985, but only 7 percent in 2004. This drop in market share of new issuance is due not to a significant decline in Ginnie Mae’s MBS issuance, but rather to rapid growth in the rest of the market—Fannie Mae, Freddie Mac, and private label issuers, which we refer to as the “conventional” market for MBS. In 1985, Ginnie Mae MBS issuance was $46 billion, while the conventional market issued $64 billion. By 2004, Ginnie Mae issuance had grown to $127 billion, but issuance of conventional MBS had grown to $1.8 trillion. MBS issuance has risen among all segments of the conventional market. The rise in private label MBS issuance has been particularly steep in the last few years, rising from $136 billion in 2000 to $864 billion in 2004. Two factors have spurred the growth of the conventional MBS market: the increasing number of conventional mortgage originations and the growing proportion of these mortgages that are securitized. Mortgage lending in the conventional market has grown much more rapidly over the last 20 years than lending through FHA and VA programs. Conventional mortgage originations rose from an estimated $243 billion in 1985 to an estimated $2.8 trillion in 2004. In contrast, originations of FHA and VA loans rose from $42 billion to $129 billion during that period. In addition, the rate of securitization of conventional mortgages has risen rapidly over the last 20 years; by the end of 2004, almost half of outstanding mortgage debt was financed through securitization, according to the Bond Market Association. Ginnie Mae’s market share of outstanding MBS has also declined significantly over the last 20 years, falling from 54 percent in 1985 to 10 percent in 2004. Since 2000, Ginnie Mae’s volume of MBS outstanding has fallen from $612 billion to $453 billion in 2004, a drop of approximately 26 percent. The primary factor contributing to this decline has been the increase in borrowers who have refinanced out of FHA and VA loan programs into conventional loans. Falling interest rates and rising home prices have led to a boom in refinancing over the last 10 years, particularly from 1997 to 1999 and 2001 to 2004. At the peak of the refinancing boom in 2003, refinancings represented about 65 percent of mortgage originations. As some borrowers with mortgages insured by FHA and guaranteed by VA have built up equity in their homes, they have been able to refinance out of these programs into conventional loans that may offer more favorable and flexible terms and interest rates. This trend may have been facilitated to some extent by the increased availability of loans to borrowers who are less creditworthy. This has allowed some borrowers who would not otherwise have been able to borrow in the conventional market to do so rather than using FHA-insured and VA-guaranteed mortgage programs. The decline in the outstanding volume of FHA and VA loans has led to a corresponding decline in the outstanding volume of Ginnie Mae securities, which are mostly composed of those loans. To a lesser extent, lender repurchases of delinquent FHA-insured and VA-guaranteed loans in Ginnie Mae pools have also contributed to the decline in Ginnie Mae’s volume of outstanding MBS. Ginnie Mae’s policy prior to 2003 allowed lenders and servicers to repurchase loans that were in their Ginnie Mae pools if the borrower missed just one payment that remained unpaid for 4 consecutive months. According to Ginnie Mae, these loans often had a low risk of default; the loan may have had only one missed payment followed by resumption of loan servicing by the borrower. However, lenders were able to profit by repurchasing these loans for the remaining balance because, during an era of falling interest rates, the market value of the loans was more than the remaining balance. Data obtained from Ginnie Mae officials show that these repurchases of delinquent loans reached a peak in 2002, when they totaled $22 billion, and that they contributed to the decline in Ginnie Mae’s outstanding volume. To address this problem, Ginnie Mae announced a revision to its loan repurchase policy in November 2002. Under the new policy, for pools issued on or after January 1, 2003, servicers can repurchase delinquent loans only when no payment has been made for 3 consecutive months. Ginnie Mae officials as well as issuers we talked with said that these new policies appear to have curtailed repurchase activity. Ginnie Mae’s share of the government-backed mortgage market has been fairly constant. If other secondary market players substantially increased their market share of government-backed mortgages, borrowers would be unlikely to see higher interest rates or tighter credit immediately, because such players would need to offer products that were competitive with Ginnie Mae’s. However, a decline in the proportion of high-quality mortgages included in Ginnie Mae’s MBS could lower their overall credit quality, potentially raising the cost of servicing the underlying mortgages and thus interest rates paid by borrowers. In addition, any decline in the volume of Ginnie Mae’s MBS could potentially reduce their liquidity, although it is unclear whether reduced liquidity is likely to be a significant concern in the foreseeable future. Finally, declines in Ginnie Mae’s outstanding volume would reduce its fee revenue from its MBS programs. Because Ginnie Mae’s program income exceeds its expenses, a drop in income could affect its contribution to reducing the federal budget deficit. As noted earlier, Ginnie Mae has consistently guaranteed MBS for the great majority of FHA and VA loans, but its share of the total MBS market has declined significantly since 1985. Borrowers of government-backed loan programs have benefited from the Ginnie Mae guarantee because it helps make such loans more accessible and keep borrowers’ interest rates down. New issuance of Ginnie Mae MBS has remained fairly constant, generally ranging from $150 billion to $200 billion annually from 1998 to 2004. Ginnie Mae’s share of the MBS market for government-backed loans would likely decline only if other secondary market players such as the Federal Home Loan Banks, Fannie Mae, Freddie Mac, state and local government entities, and private label issuers chose to become more active in the securitization of these loans. In such a scenario, interest rates would probably not rise or credit tighten for borrowers because such players would need to offer products that were competitive with Ginnie Mae’s, thus benefiting borrowers to a similar degree. As noted earlier, however, such a scenario is unlikely in the near future, as other secondary market participants generally appear to have chosen not to directly compete with Ginnie Mae because of the government guarantee. As we have seen, Ginnie Mae’s outstanding volume of MBS has declined in recent years because the outstanding volume of FHA and VA loans has fallen as growing numbers of borrowers refinance in the conventional market. However, those FHA and VA borrowers who are able to take advantage of refinancing options are generally the most creditworthy of the programs’ borrowers. The result has been a decline in the overall credit quality of FHA and VA loans in recent years indicated by increased default and foreclosure rates in government mortgage insurance and guarantee programs. As a result, the loan quality underlying Ginnie Mae’s securities has declined. Thus far, investors have not been directly affected by this development because of the government guarantee. However, the cost of servicing the government-backed loans in Ginnie Mae’s pools could rise in such a scenario, since managing delinquencies and the foreclosure process is the most costly component of servicing. According to Ginnie Mae, the servicing fees issuers are allowed to charge are sufficient to cover any significant increase in servicing costs resulting from declines in credit quality. However, increased servicing costs could result in smaller profits for Ginnie Mae issuers, potentially reducing lenders’ willingness to make government-backed loans and increasing borrowers’ interest rates. In addition, any increase in prepayment rates due to borrower defaults could reduce the price investors are willing to pay for Ginnie Mae MBS, which could also act to raise interest rates for borrowers. A market is said to be liquid if the instruments it trades can be bought by investors or sold in the markets quickly and easily with little impact on market prices. Liquid assets have relatively lower yields and higher prices than illiquid assets. One key factor affecting the liquidity of MBS is the size of the market in which they are traded—all other things being equal, larger markets are generally more liquid than smaller markets. In addition, standardized pools—that is, pools of mortgages with similar interest rates and terms—are generally more liquid than pools of mixed mortgage products, which cannot be traded as readily because they are more difficult to value and thus riskier. For this reason, Ginnie Mae I securities are more liquid than Ginnie Mae II securities (whose pools consist of loans with more variability). Market participants we spoke with provided mixed opinions about the current liquidity of Ginnie Mae securities. Some dealers said that Ginnie Mae securities were quite liquid and traded easily, while others noted that they were less liquid than other MBS, such as those issued by Fannie Mae and Freddie Mac. One institutional investor told us that Ginnie Mae securities that are traded in smaller volumes—such as those backed by hybrid ARMs—could face liquidity issues. Another noted that the liquidity of Ginnie Mae securities could be a concern for very large trades, such as those of more than $1 billion. Any reduced liquidity resulting from a continued decline in Ginnie Mae’s market share could have some effect on the costs to borrowers of government-backed loans. However, it is not clear how significant the decline would have to be before liquidity became a significant concern that materially affected the pricing of Ginnie Mae securities and thus interest rates for borrowers of government-backed loans. Ginnie Mae officials told us that their securities had at least adequate liquidity. They noted, for example, that the bid-ask spread on Ginnie Mae securities was comparable with the spread for Fannie Mae securities, one indication that liquidity is not currently an issue. The officials said that if volume continued to decline, liquidity could become a significant concern in the future, although it is unknown at what levels of volume this would occur. Revenues from Ginnie Mae’s MBS guarantee programs exceed the cost of operating them. Since fiscal year 1985, the agency has not had to borrow from the U.S. government to finance its operations and its excess funds go into a receipt account held as capital reserves. As shown in table 1, in fiscal year 2004 Ginnie Mae had total revenues of $815.5 million and expenses of $77.8 million. The excess of its revenues over expenses, net of interest income, is invested in U.S. government securities and reduces the amount that the Treasury must borrow from the public to finance government programs—that is, it reduces the deficit. In fiscal year 2004, this amount was $295 million. Most of Ginnie Mae’s revenue comes from MBS program income, which totaled $372.8 million in fiscal year 2004. Ginnie Mae charges issuers a guarantee fee that is based on the aggregate principal balance of an issuer’s outstanding MBS, and collects commitment fees for the authority to pool mortgages into Ginnie Mae MBS. Ginnie Mae’s program income allows it to cover the expenses it incurs in carrying out its programs and initiatives, including the cost of hiring contractors, paying staff salaries and benefits, printing, and performing other administrative functions. Ginnie Mae also incurs credit-related expenses—for example, it must maintain reserves against losses and issuer defaults in order to ensure a ready source of funds to meet its guarantee of timely payment. At the end of fiscal year 2004, Ginnie Mae had reserves of about $10.4 billion. Ginnie Mae’s fee income is based on the principal balance of its securities portfolio, so the agency’s revenues largely depend on the volume of its outstanding securities. As we have seen, Ginnie Mae’s share of the MBS market has declined in the last 20 years. In fiscal years 2000 through 2004, Ginnie Mae’s principal balance outstanding also declined, falling from $603.4 billion to $453.4 billion and reducing program income from $408.2 million to $372.8 million (see fig. 5). As a result, during that period, the agency’s excess of revenues over expenses (net of interest), which reduces the federal budget deficit, declined from $347 million to $295 million. Ginnie Mae’s program income continues to exceed its expenses and, according to Ginnie Mae officials, is likely to do so for the foreseeable future. However, if its outstanding volume continued to decline, program income and excess revenues, which reduce the federal budget deficit, could also be expected to continue falling. Ginnie Mae faces challenges in a number of areas. First, it must respond to changes in the marketplace and meet the needs of its stakeholders. To meet this challenge, the agency has expanded its product offerings and taken other initiatives to maintain its viability. Second, Ginnie Mae must adequately disclose loan information that MBS investors need to assess prepayment risk. The agency has recently improved this disclosure, though these improvements are not yet complete. Third, Ginnie Mae must work within the limits of its commitment authority. In 1999, it instituted procedures to ration its commitment authority when the agency faced the possibility of reaching the limit of its authority by year’s end. To help prevent the problem from recurring, Congress changed Ginnie Mae’s commitment authority cycle from 1 year to 2 years and could consider further steps. Fourth, inconsistencies and inaccuracies exist in some aspects of Ginnie Mae’s data systems, although measures to improve these systems are under way. Finally, given Ginnie Mae’s small staff and reliance on contractors, the agency faces the challenge of ensuring that its capacity to plan, manage, and oversee contractors is adequate. Ginnie Mae has faced and continues to face the challenge of fulfilling its mission of supporting government-backed loan programs in a changing market environment. Among the significant market changes over the last 20 years have been the growing availability of private mortgage insurance and subprime loans, rapid development of the conventional secondary mortgage market, alterations in the volume and characteristics of government-backed loan programs, and the proliferation of new mortgage loan products, such as hybrid ARMs. Ginnie Mae recently completed or has under way several initiatives that are likely to help respond to the needs of its stakeholders in a changing marketplace, although additional efforts may be needed in some areas. Among the steps Ginnie Mae has taken are the following: As part of its Business Improvement Initiative, in October 2004 Ginnie Mae began a formal process of soliciting recommendations from business partners and other stakeholders to improve its MBS and Multiclass Securities programs. In March 2005, the agency publicly released the suggestions it had received, including, among others, changing technological processes and developing new securitization products. Ginnie Mae officials say they are currently in the process of evaluating the suggestions. Ginnie Mae played a role in developing FHA’s hybrid ARM products. Ginnie Mae and FHA officials say that they worked together to encourage Congress to permit FHA to insure hybrid ARMs, in large part because the agency wanted to remain competitive with conventional markets, in which such products had become increasingly popular. Ginnie Mae developed a securitization program, as Ginnie Mae II securities, for these products, and in 2004 FHA began offering 3-, 5-, 7-, and 10-year hybrid ARM products in addition to its standard 1-year ARM. In February 2005, Ginnie Mae began guaranteeing securities backed by RHS multifamily loans, which support affordable multifamily housing in rural areas. RHS officials told us that this created the first consistent secondary market for these loans and that Ginnie Mae’s involvement would increase access to these loans and would lower borrower costs by increasing lenders’ liquidity. The officials also noted that Ginnie Mae had actively supported RHS by ensuring that the multifamily loan program could be securitized as Ginnie Mae I securities. The Ginnie Mae II Program was created to provide issuers and investors with more flexibility in pooling different kinds of loans—such as adjustable rate mortgages—into Ginnie Mae securities. By their nature, Ginnie Mae II securities are less homogeneous than Ginnie Mae I securities. As a result, they are considered less predictable and investors demand a higher yield from these securities. In 2003, the Ginnie Mae II product was restructured to make it more competitive. Among other changes, the agency narrowed the spread on the note rates that could be included in the pools, so that the loans backing the securities would be more homogenous. In addition, the range of servicing fees that issuers could charge was widened to provide more flexibility. As a result, Ginnie Mae says there is now a smaller gap in pricing between Ginnie Mae I and Ginnie Mae II securities. But one broker-dealer we spoke with complained that to ensure sufficient loan volume for a Ginnie Mae II pool, issuers sometimes must include mortgages that would otherwise qualify for a Ginnie Mae I. In July 2004, Ginnie Mae expanded its Targeted Lending Initiative, which was created to provide financial incentives for lenders to increase loan volumes and raise homeownership levels in underserved areas. Under the program, which began in 1996, Ginnie Mae reduced its guarantee fee by up to 50 percent for approved issuers that originate or purchase eligible loans in designated communities and place them in Ginnie Mae pools. The expansion brought additional areas into the program, including “colonias” along the Southwest border region and additional Renewal Communities and Urban Enterprise Zones designated by HUD. In September 2005, Ginnie Mae announced it was temporarily expanding the Targeted Lending Initiative further to include counties in the states of Alabama, Louisiana, and Mississippi that were declared federal disaster areas as a result of Hurricane Katrina. Ginnie Mae still faces certain barriers to financing government-backed loan programs. For example, VA and Ginnie Mae officials have expressed concern that recently enacted changes in the law authorizing certain hybrid ARM products in VA’s loan guarantee program did not address a limitation that has made these products difficult to securitize. Although the Veterans Benefits Act of 2004 made certain modifications to the program’s provisions for adjusting interest rates for VA’s 5-, 7-, and 10-year hybrid ARM products, the act continued a restriction on annual rate adjustments (those made after the initial rate adjustment) to a maximum increase or decrease of 1 percentage point. While this restriction may benefit borrowers by limiting interest rate increases, Ginnie Mae and VA officials said that a 1 percentage point annual cap was inadequate to attract interest from investors who purchased such products. Further, the terms of VA’s hybrid ARM products are no longer the same as the corresponding hybrid ARMs offered by FHA, bifurcating the market and making securities containing these types of loans less liquid. According to Ginnie Mae, this lack of liquidity results in higher interest rates for veterans and nonveterans alike. VA officials said that the capital markets and Ginnie Mae may not have been sufficiently consulted on this adjustment during the legislative process to ensure that provisions in the VA hybrid ARM program were consistent with the requirements of Ginnie Mae and conventional secondary markets. A similar situation occurred with respect to an FHA single-family insured ARM product. The fiscal year 2002 VA/HUD appropriations bill limited annual interest rate adjustments on FHA’s hybrid ARMs to 1 percentage point if the initial interest rate term was fixed for 5 years or less and imposed a lifetime cap of 5 percentage points. These caps were intended to assist FHA borrowers, but lenders and capital market participants expressed concern that Ginnie Mae securities backed by these ARMs would be unattractive to investors—and thus lenders—since equivalent products in the conventional market typically included annual caps of 2 percent and lifetime caps of 6 percent. In response, an amendment to the authorizing legislation, enacted in December 2003, made the annual cap applicable only to loans having a fixed term for the first three or fewer years—a change that FHA said was needed to meet the needs of home buyers, lenders, and the secondary mortgage market. Following the 2003 amendment, FHA issued an interim final rule in March 2005 that raised the cap on adjustments to annual interest rates for 5-year ARMs from 1 to 2 percentage points and raised the lifetime cap on interest rate adjustments for those loans to 6 percentage points. Ginnie Mae officials noted that these problems could have been avoided had Congress initially consulted more closely with capital market participants. Investors in Ginnie Mae securities do not face credit risk, since the mortgages underlying these securities are federally insured or guaranteed and because Ginnie Mae guarantees timely payment of principal and interest. However, MBS investors do face prepayment risk, because they are purchasing cash flows that can stop when borrowers pay their loans in full early. Mortgage loans are prepaid for several reasons, most commonly when the house is refinanced, sold, or destroyed, or when the borrower goes into foreclosure. Prepayment rates tend to increase in periods of declining interest rates, when borrowers have the opportunity to lower their interest payments by refinancing. When mortgages are prepaid, voluntarily or involuntarily, investors receive their principal, but not further interest payments. In an environment of declining interest rates, prepayments may force investors to reinvest prematurely at a lower interest rate and to incur transaction costs. Historically, the rate of prepayment for Ginnie Mae securities has been lower than for other MBS because borrowers of government-backed mortgages are generally first-time or low- to moderate-income home buyers who are less likely to be able to incur the cost of refinancing or relocating. According to research by securities trading firms, between 1980 and 1990 Ginnie Mae securities consistently prepaid at lower rates than their conventional counterparts. However, since that time, prepayment rates for conventional MBS have changed relative to those for Ginnie Mae MBS. Since 1990, Ginnie Mae’s prepayment rates have been slower than those of their conventional equivalents in the initial 18 months to 2 years after loan origination. But after this initial period, as the loans seasoned, Ginnie Mae’s prepayment rates have generally risen compared with conventional MBS. Ginnie Mae securities backed by seasoned loans are currently prepaying at a much faster rate than did similar securities during the 1990s. Three factors in particular seem to have influenced the increase in Ginnie Mae’s rate of prepayment—refinancings, delinquencies, and repurchases. As explained earlier, expanded access to credit, rising home prices, and falling interest rates have allowed more FHA and VA borrowers to refinance into conventional loans. With the added equity built up in their homes, borrowers have been able to reduce their monthly costs by refinancing without paying the federal programs’ insurance premiums. In addition, delinquency and default rates for FHA and VA loans—which have traditionally been higher than those for conventional loans—have been steadily increasing in recent years. The delinquency rate on all FHA mortgages increased from 6.7 percent in 1990 to 12.2 percent in 2004. By contrast, the delinquency rate for conventional mortgages has remained relatively stable and stood at 1.6 percent in 2003. Finally, as noted earlier, before July 2003 Ginnie Mae’s policy allowed loan servicers to repurchase loans from Ginnie Mae’s pools if a borrower missed only one payment and left it unpaid for 4 months. These repurchases, which peaked in 2002, caused a temporary acceleration in the prepayment rates of Ginnie Mae’s MBS. Market participants we met with expressed concerns about the accelerated rate of prepayment on Ginnie Mae securities in recent years. Institutional investors often employ complex models—which rely in part on detailed information about the underlying loan pools—to forecast prepayment rates and help price MBS. Investors we spoke with noted that predicting prepayment risk on Ginnie Mae securities had become increasingly difficult because of rapid shifts in the marketplace, such as the expansion in the availability of conventional credit and increases in FHA and VA delinquencies, and uncertainty about future developments. In the past, the securities industry has also expressed concerns that developing models to predict prepayment of Ginnie Mae MBS has been particularly difficult because Ginnie Mae has not always provided the same degree of detail on its loans as conventional securitizers. In written comments to Ginnie Mae, the Bond Market Association—a trade association representing securities dealers—said that while Ginnie Mae had begun providing more information than ever before about the mortgages backing its securities, there was still “significant room for improvement.” One broker-dealer noted to us that information was particularly lacking on hybrid ARM products in Ginnie Mae pools. A second broker-dealer said that additional information on geography and occupancy rates for multifamily loans would help better estimate the risk of delinquency—and thus prepayment—of securities backing those loans. Market participants also noted that having information on borrower credit scores would be useful. To address concerns about its disclosures, in January 2004 Ginnie Mae began its MBS Disclosure Initiative, which was designed to provide investors with additional information that would allow them to better forecast prepayment rates. Prior to the initiative, Ginnie Mae’s disclosures on the loans underlying its securities included such things as the weighted average age of the loan, the number of loans in the pool, the unpaid principal balance, and the average original loan size. With the initiative, the agency began providing expanded disclosures—at issuance—of loan data that it was already collecting and began disclosing new data items about FHA and VA single-family loan pools, including original loan-to-value ratios, loan purpose, property type, average original loan size, and year of origination. In addition, in September 2004 Ginnie Mae began updating its MBS disclosures every month instead of quarterly. Ginnie Mae said that in December 2005 it would begin disclosing additional details on the reasons for prepayments of the loans backing Ginnie Mae MBS, including the number of loans that were paid off in full by borrowers, repurchased by issuers because of delinquency, and liquidated due to foreclosure. Ginnie Mae officials told us that the recent changes made disclosures on Ginnie Mae securities comparable with those for Fannie Mae’s and Freddie Mac’s. In developing its annual budget, Ginnie Mae officials told us they must estimate the amount of the agency’s commitment authority—the limit on the total dollar volume of securities that the agency can guarantee. The Office of Management and Budget reviews Ginnie Mae’s commitment authority estimates before they are finalized and included in the President’s budget request to Congress. Ginnie Mae estimates the amount of the commitment authority it will need for future years based on the actual authority used by the federal guarantee programs it served in the previous year. The agency also considers commitment authority allocations it actually made to issuers in the previous year and includes them as part of the estimate, adding an additional percentage to that estimate to cover unanticipated events in the marketplace. The Secretary of HUD is required by statute to notify Congress when Ginnie Mae has utilized 75 percent of its commitment authority and when HUD estimates that the agency will exhaust this authority before the end of a fiscal year. If Ginnie Mae exhausts the limit placed on its commitment authority, it must suspend issuance of new MBS until Congress provides additional authority. Under these circumstances, an issuer may either have its request returned or leave it with Ginnie Mae to be processed on a first-come, first-served basis after additional commitment authority is restored. In 1999, fearing it would reach the limit before the end of the year, Ginnie Mae instituted procedures to ration its commitment authority. It temporarily limited the approval of commitment requests to the amount estimated to cover issuer needs for no more than a 60-day period. According to industry participants we spoke with, this step was disruptive to lenders and issuers and caused concern that Ginnie Mae would not have the authority it needed to honor commitments it had already made. One trade association told us that that this situation had resulted in some loss of credibility for Ginnie Mae. According to Ginnie Mae, the agency had not adequately estimated the demand for its guarantee in 1999, in part because of unexpectedly high levels of new construction and mortgage refinancing activity that year. Since that time, the agency has taken steps to help ensure that it is no longer in danger of reaching the limit of its commitment authority. Since 2002, the commitment authority Ginnie Mae has received as part of HUD’s annual appropriations is available for 2 years. Congress annually provides commitment authority but the authority is available for two years. This means Ginnie Mae can use “carryover” authority from the prior year to make current year commitments. According to agency officials, this change from a 1- to a 2-year cycle has given Ginnie Mae more flexibility in planning how to use its commitment authority and should reduce the need to ration it again in the future. In addition, the actual commitment authority available to Ginnie Mae at any given time may be above the additional amount authorized annually, because since fiscal year 2002, the agency has carried over unused authority from the prior year. Thus, as shown in figure 6, although Ginnie Mae’s new commitment authority limit has been $200 billion each year since fiscal year 1999, the actual authority available for Ginnie Mae to use has been higher beginning in 2002. In fact, in fiscal year 2003, Ginnie Mae was able to meet program demands. Having the ability to rely on unused authority carried over from prior years has meant that the agency has not had to ration or suspend issuer commitments since 1999. Thus, if Ginnie Mae exceeds its annual commitment limit, for a particular year, it has the authority to do so but only to the extent of its carryover authority. However, given uncertainty of demand in the marketplace, carryover authority still may not be enough. Federal agencies often face difficulties estimating potential demand for loan guarantees, in part because the budget process requires them to forecast demand nearly 2 years in advance. Our 2005 report on the FHA and RHS loan guarantee programs discussed options that Congress could consider to prevent suspensions of those programs related to exhaustion of their commitment authority. Some of the options discussed in that report could be applicable to Ginnie Mae. For example, Congress could establish a higher limit on Ginnie Mae’s commitment authority, although such a step could increase the government’s exposure to risk. Congress could also require Ginnie Mae to provide more frequent updates on the amount of commitment authority it has used. This would involve little additional administrative burden and would provide additional and timelier information for determining whether to provide supplemental commitment authority before the end of a fiscal year. Because both of these options could have various implications, their specific impacts would depend on how the changes were structured and implemented. In November 2002, officials of First Beneficial Mortgage Corporation, one of Ginnie Mae’s approved issuers, were convicted of engaging in fraudulent pooling practices. According to information from HUD’s Office of the Inspector General (OIG) the company used forged documents to pool loans that were collateralized with nonexistent properties and that were not insured or guaranteed by a federal agency, as required of Ginnie Mae securities. Ginnie Mae declared First Beneficial in default and incurred a loss of approximately $20 million. HUD’s OIG, among others, investigated the First Beneficial case and subsequently audited Ginnie Mae’s internal controls, completing its report in March 2003. The investigation and audit identified inconsistencies and inaccuracies in Ginnie Mae’s data systems and other internal control weaknesses. Most notably, the OIG found that Ginnie Mae, its issuers, and the agencies it serves did not all use a single common and unique case number as the primary management control for identifying and tracking loans in the MBS pools. Instead, each entity assigned its own tracking number, making comparisons of loan data difficult and hindering efforts to ensure that the loans in Ginnie Mae’s pools were federally insured or guaranteed. The OIG’s report also found that Ginnie Mae did not have adequate controls in place to ensure the reliability of its data—for example, it could not ensure the accuracy of its data entry procedures, had not sufficiently verified all loans to ensure they were federally insured or guaranteed, and did not make sure that all issuers were in fact eligible to issue Ginnie Mae securities. As a result, Ginnie Mae potentially could not identify ineligible loans in its pools. Ginnie Mae has taken several measures to address many of the internal control and data weaknesses identified in the HUD OIG’s reports. For example, the agency has developed and implemented policies, controls, and training designed to make data entry more accurate and is working to better integrate its multiple data systems. Further, 99 percent of Ginnie Mae’s portfolio is made up of loans backed by FHA and VA, and the agency now matches the loans in its data systems against those in FHA’s and VA’s databases. However, Ginnie Mae, FHA, and VA still do not use the same case numbers, which would eliminate the need for time-consuming matching. Ginnie Mae officials told us that they are analyzing aligning case numbers as part of an ongoing Business Process Improvement Initiative. However, such a change would be difficult because it would require systems changes for both Ginnie Mae and its issuers. OIG officials told us that Ginnie Mae had largely addressed the deficiencies they had observed in the loan data and that that the OIG was generally satisfied with the agency’s efforts to address internal control weaknesses. However, we identified additional data integrity issues during our review. For example, Ginnie Mae was initially unable to provide us with a breakdown of loans in its portfolio—that is, percentages of FHA, VA, RHS, and PIH loans. This basic data could not be provided, the agency said, because a programming error had resulted in the underreporting of FHA loans and the overreporting of VA loans. Ginnie Mae officials acknowledged that their data systems should be improved and that they do not have easy access to as much of their information as they should. Ginnie Mae operates with a small staff—in fiscal year 2004, the agency had about 66 employees—and contracts out most of its transactional and support work. Ginnie Mae has stated that this centralized management model is designed to allow a relatively small group of agency employees to manage a large number of outsourced projects, improving the quality, timeliness, and consistency of their work. In fiscal year 2004, approximately 81 percent of Ginnie Mae’s activities were contracted out, including key operations such as accounting and technical support, Ginnie Mae servicing of defaulted loans, internal control reviews, preparation of assessment rating tools, issuer compliance reviews, and information systems management. Concerns about Ginnie Mae’s oversight of its contractors have existed for several years. Our 1993 review of Ginnie Mae’s staffing found that the agency was not adequately monitoring its contractors’ activities. At that time, the largest contractor told us the agency did not have the resources to adequately review its contractors’ work, and Ginnie Mae itself acknowledged that it did not. Similarly, in a 1997 review of HUD’s contracting activity, HUD’s OIG found that Ginnie Mae was not in compliance with contracting and procurement procedures. The review found that in some instances Ginnie Mae contractors were performing tasks that were inherently governmental functions and that aspects of the bidding process hindered competition. At that time, Ginnie Mae had its own contracting officer; however, as of January 1999, Ginnie Mae began using HUD’s contracting officer and its staff to award contracts. Internal control issues continue to be a potential concern at Ginnie Mae, as evidenced by losses due to fraud in the First Beneficial case, the HUD OIG’s 2003 report, and our own findings of problems with some aspects of the agency’s management information systems. Because Ginnie Mae has a small staff and contracts out most of its operations, appropriate contract management and oversight are inherently key components in improving the agency’s data systems and internal controls. Unlike the time of the 1997 OIG report, Ginnie Mae’s contracting staff are now supplemented by assistance from HUD’s contracting staff. In addition, the agency has initiatives under way to improve its information technology infrastructure and to streamline its business processes, some of which involve contract management. For example, Ginnie Mae officials told us that in 2002 the agency created the Procurement Management Division to more stringently oversee existing contracting and procurement procedures and to provide additional training for staff in contract planning and development. In addition, Ginnie Mae officials say they have built incentives into their performance rating system to increase staff accountability for contract planning and oversight and to provide incentives designed to foster effective contract planning and monitoring. Ginnie Mae’s staff of about 66 are responsible for performing inherently governmental functions and for overseeing the contractors that perform most of the agency’s operations. Based on a 2004 HUD resource management study that found that Ginnie Mae had sufficient staff to perform contract administration functions, Ginnie Mae officials told us they believe that their staffing levels are adequate. But given its reliance on contractors, Ginnie Mae should continue to focus on ensuring that staff have the training, qualifications, and capabilities they need to ensure that contracts are planned, monitored, and executed appropriately. Despite its declining share of the overall MBS market, Ginnie Mae continues to serve its key public policy goal of providing a strong secondary market outlet for federally insured and guaranteed housing programs, helping to improve their access and affordability for low- to moderate-income borrowers. The decline in Ginnie Mae’s share of the overall MBS market should not necessarily be a major source of concern, since it is largely a function of the rapid growth in the conventional MBS market. Unlike firms in the conventional market, however, Ginnie Mae has relatively little control over the volume of its securities, which depends on the volume of FHA and VA loan programs. Changes in the volume and market share of government-backed housing loans are largely the result of policies and decisions made by Congress and the agencies themselves. Improvements to Ginnie Mae’s product line benefit government-backed loan programs by making them more liquid, but the impact on these programs’ volume is relatively marginal. A further decline in Ginnie Mae’s volume could have certain implications related to credit quality, liquidity, and the agency’s contribution to offsetting the federal budget deficit. But just how much Ginnie Mae’s volume could decline in the near future is unclear, as is the magnitude of any potential effects on the market or federal budget. Ginnie Mae faces the challenge of adjusting its product mix and policies to address changes in the marketplace while continuing to meet the needs of both borrowers who rely on affordable housing programs and of industry stakeholders such as issuers and investors. Ginnie Mae has added a number of new products over the years, has made a serious effort to solicit feedback from its business partners, and has expanded its disclosures for investors. The agency has also expanded the types of loans that Ginnie Mae securities can finance, and RHS and PIH officials have commended Ginnie Mae’s proactive efforts to assist their loan programs. But some changes remain beyond its scope—for instance, conditions in FHA and VA hybrid ARM products that have limited investor interest. Closer consultation by lawmakers with Ginnie Mae and capital market participants could help ensure that congressionally mandated provisions of loan programs are consistent with Ginnie Mae and conventional secondary market requirements. Ginnie Mae also faces the challenge of avoiding the need to ration its commitment authority, which can cause disruption among secondary market participants and harm Ginnie Mae’s credibility. Beginning in 2002, Congress made the agency’s commitment authority available for 2 years rather than 1 year to provide more flexibility, but Ginnie Mae could again bump up against its commitment level cap in the future. Other options to address this problem include raising Ginnie Mae’s commitment authority or requiring the agency to notify Congress when it appears the agency may reach its cap. Each of these measures could have various implications that would need to be considered. Like any agency, Ginnie Mae faces challenges in managing its internal operations in an efficient and cost-effective manner, and in ensuring that appropriate internal controls are in place. This may be especially challenging for Ginnie Mae because it operates with a small staff of about 66 and contracts out most of its operations. Certain weaknesses in Ginnie Mae’s data integrity, along with losses resulting from fraudulent activity in the First Beneficial case, indicate the need for continued improvements in data systems and internal controls. Ginnie Mae has taken some important steps on these issues and has ongoing initiatives, such as its Business Process Improvement Plan. However, given certain data integrity issues we identified, the recency of the First Beneficial case, and that Ginnie Mae’s business plan was only recently approved, it is too early to assess the results of Ginnie Mae’s recent efforts. Finally, given its reliance on contractors to carry out most of its operations, Ginnie Mae will need to pay particular attention to ensuring that its staff have sufficient resources, training, and qualifications to ensure that the agency’s contracts are planned, monitored, and executed appropriately. On behalf of HUD, Ginnie Mae provided written comments on a draft of this report, which are reprinted in appendix II. Ginnie Mae agreed with the report’s analysis of the challenges it faces and with the report’s findings on initiatives Ginnie Mae has taken to address these challenges. It also agreed with our observations related to the importance of improving Ginnie Mae’s data systems and maintaining effective contract management. In addition, Ginnie Mae provided us with technical comments, which we have incorporated where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will send copies to the Secretary of Housing and Urban Development. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our report objectives were to evaluate (1) the state of Ginnie Mae’s market share and guarantee volume, (2) the potential implications of changes in Ginnie Mae’s market share and guarantee volume, and (3) challenges Ginnie Mae faces in fulfilling its mission and the steps that have been or could be taken to address these challenges. To assess the state of Ginnie Mae’s market share and guarantee volume, we obtained data on issued and outstanding mortgage-backed securities (MBS) from the agency’s Integrated Pool Management System and Portfolio Analysis Display System, which obtains its source data from Ginnie Mae’s Mortgage-Backed Securities Information System. We tested the reliability of these data by comparing them within the two data systems and with data from the 2005 Mortgage Market Statistical Annual and the Bond Market Association—sources used widely in the industry to analyze MBS activity. We also compared loan data provided by Ginnie Mae with data maintained by the Department of Veterans Affairs (VA), Rural Housing Service (RHS), and the Office of Public and Indian Housing (PIH) within the Department of Housing and Urban Development (HUD). Our initial comparisons showed significant discrepancies between Ginnie Mae’s source data and that of industry sources. Because Ginnie Mae’s MBS issuance and agency loan endorsement do not occur simultaneously, a lag exists between the date that the loan is endorsed and the date Ginnie Mae is recorded as guaranteeing its securitization. Thus, to provide accurate information on Ginnie Mae’s market share and volume for a given point in time, individual loans must be matched to the Ginnie Mae MBS in which they were pooled. When we began our review, no data for VA, RHS, or PIH loans had been matched with their pool, and data for Federal Housing Administration (FHA) loans had been matched only since 2001. At our request, Ginnie Mae completed the matching of FHA data from 1998 to 2004. Our initial comparison of the portion of Ginnie Mae’s MBS portfolio collateralized by each loan program—that is, by FHA, VA, RHS, and PIH— showed discrepancies as well. As previously discussed, Ginnie Mae could provide us only with estimated percentages because a programming error in the system resulted in the underreporting of FHA loans and the overreporting of VA loans. Because of our request, Ginnie Mae noticed the error and corrected it, and we were able to obtain accurate data on the percentage of loans from each program that were used to collateralize Ginnie Mae MBS. With the corrections Ginnie Mae made, we found the data to be reliable for our purposes. To address all of the objectives, we spoke with and gathered relevant documents from secondary market participants, including five Ginnie Mae- approved issuers and five dealers/institutional investors in Ginnie Mae securities. Among other things, we discussed with them their perceptions of Ginnie Mae and its products and their reasons for investing in or issuing Ginnie Mae securities rather than other MBS products. The issuers were judgmentally selected and represented more than 46 percent of the MBS Ginnie Mae issued in 2003. Three of the issuers focused on single-family FHA loans and the remaining two on multifamily and VA loans. Dealers/institutional investors were also judgmentally selected; among them were the largest broker-dealers of Ginnie Mae MBS, Real Estate Mortgage Investment Conduits, and Platinum securities. We also interviewed and obtained documentation from representatives of secondary market participants that may compete with Ginnie Mae, including Fannie Mae, Freddie Mac, the National Council for State Housing Finance Agencies, and the Federal Home Loan Banks of Chicago and Seattle. We also interviewed representatives of and reviewed documents from Ginnie Mae, HUD’s FHA and PIH programs and its Office of the Inspector General (OIG), VA, RHS, and the Federal Housing Finance Board. In addition, we spoke with relevant trade associations, including the Bond Market Association, National Association of Home Builders, Mortgage Bankers Association, and National Association of Realtors. We conducted a literature search and reviewed Ginnie Mae’s legislative history, relevant laws, regulations, budget documents, performance, and annual reports and guidance, and studies and reports by HUD’s OIG and others. We conducted our work in Washington, D.C., and Boston from October 2004 through September 2005 in accordance with generally accepted government auditing standards. In addition to the contact named above, Jason Bromberg, Assistant Director; Heather Atkins; Daniel Blair; Christine Bonham; Diane Brooks; Emily Chalmers; William Chatlos; Carlos Diz; Austin J. Kelly; Marc Molino; Mitchell B. Rachlis; Paul Thompson; and Franklyn Yao made key contributions to this report.","The Government National Mortgage Association, commonly known as Ginnie Mae, is a wholly owned government corporation that guarantees mortgage-backed securities (MBS) backed by pools of federally insured or guaranteed mortgage loans. The agency supports federal housing programs by facilitating the securitization of loans backed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Rural Housing Service, and the Office of Public and Indian Housing within the Department of Housing and Urban Development (HUD). Concerned that Ginnie Mae's share of the overall MBS market has declined significantly, Congress asked us to address (1) the state of Ginnie Mae's market share and guarantee volume, (2) the potential implications of changes in its share and volume, and (3) the challenges Ginnie Mae faces and steps it is taking and could take to address these challenges. Despite its declining share of the overall MBS market, Ginnie Mae continues to serve its key public policy goal of providing a strong secondary market outlet for federally insured and guaranteed housing loans. Ginnie Mae MBS financed more than 90 percent of new FHA-insured and VA-guaranteed loans in fiscal year 2004, and the agency appears to face relatively little competition in this market. Ginnie Mae's total volume has declined in recent years, however, and its share of the overall MBS market has fallen from 42 percent of new securities in 1985 to 7 percent in 2004. This drop is largely the result of the decline in the market share of the FHA and VA loan programs and the concurrent rise in the securitization of non-government-backed mortgages. Further declines in Ginnie Mae's volume could potentially have implications for borrowers, the liquidity of its securities, and federal revenues. For example, Ginnie Mae's securities could become less liquid, although it is unclear at what levels of volume this would occur. In addition, Ginnie Mae's program revenues could decline if its volume decreased. In fiscal year 2004, program revenues exceeded expenses by $295 million, which helped reduce the federal budget deficit. Ginnie Mae faces a number of challenges in responding to changes in the marketplace, meeting stakeholders' needs, and managing its operations, and the agency has been taking steps to address these challenges. For example, it has expanded its product mix to reach more borrowers and has begun disclosing more information on loans underlying its securities to help investors better predict risk. GAO and others have identified opportunities for improvement in Ginnie Mae's data integrity and internal controls. The agency has begun addressing these issues, but it contracts out most of its operations, so ensuring that it has sufficient staff capabilities to plan, monitor, and manage its contracts is essential.",govreport
"Our prior report recommended that DOD immediately reverse the $615 million of illegal and otherwise improper closed account adjustments identified in the report and determine the correct accounting for these adjustments after the reversal. Of the $615 million of illegal and otherwise improper adjustments, DOD has agreed that $592 million, or about 96 percent, of the adjustments should not have been made and has reversed the adjustments. However, because of DOD’s long-standing accounting accuracy problems, in many cases, reversing the transactions brought to light additional accounting problems that will require detailed reviews to determine the accounting actions necessary to correct the reversed transactions. As a result, neither DOD nor we can determine how much remains to be corrected as a result of reversing the adjustments. Table 1 provides additional details on DOD’s reversal of the $615 million fiscal year 2000 illegal and otherwise improper closed account adjustments. For the remaining $23 million that has not been reversed, DOD provided us with additional documentation indicating that $8 million of the adjustments were proper and do not need to be reversed. We still consider the remaining $15 million to be unnecessary or unsupported adjustments since DOD has not provided sufficient support to show otherwise. The $592 million of illegal and otherwise improper closed account adjustments discussed in our earlier report that have now been reversed involved 45 contracts. For 30 of the 45 contracts, the reversals identified additional accounting errors that must also be corrected. The 30 contracts include over $457 million (77 percent) of the $592 million in reversed transactions. Because of the complexity of the contracts and time it takes to conduct a complete reaudit, officials at the Defense Finance and Accounting Service’s (DFAS) Columbus Center estimate that it will take over 21,000 hours to correct the accounting for the 30 contracts. For example, for one contract we found that DFAS Columbus had made $210 million of closed account adjustments that should not have been made because the initial disbursement was recorded against the correct ACRN on the contract. The reason given for the adjustment was that DFAS Columbus could not pay a November 1999 invoice from a contractor for $685,000 because the cited ACRN on the invoice did not have sufficient funds. The inability to pay the invoice prompted DFAS to conduct an audit of the contract that resulted in over $590 million of adjustments to closed appropriation accounts. Our earlier audit found that of the $590 million of adjustments, $210 million were unnecessary and should not have been made because the actual disbursements—some of which were made over 10 years earlier—had been recorded correctly. The $210 million was part of the $615 million of illegal or otherwise improper transactions we identified in our earlier audit. In response to our recommendation that DOD reverse and correct the $210 million of unnecessary adjustments, DFAS Columbus reversed all $590 million of the closed account adjustments. According to DFAS officials, when reversing adjustments of this size, they generally have to reverse all the transactions involved with an adjustment not just the canceled ones. After the adjustments were reversed, other errors were created that must now be researched and corrected. For example, for this one contract, the reversal of the contract’s accounting records showed that 63 contract ACRNs had negative unliquidated obligations (NULO) totaling $85.4 million. DFAS Columbus estimates that it will take about 2,300 hours to reaudit and correct the contract. Our earlier review of another contract found that DFAS Columbus had recorded an adjustment that illegally moved $79 million of disbursement charges from fiscal years 1993 through 1995 research and development appropriations to charges against a canceled fiscal year 1992 research and development appropriation. According to the contract files, the adjustment was made to redistribute the disbursement charges in accordance with the “pay oldest funds first” payment terms specified in the contract. However, we found that the redistribution was illegal because it moved disbursement charges back to an appropriation account that had closed several months before the initial disbursement was made. For example, the initial $79 million disbursement occurred in February 1999, but the adjustment resulted in a charge against an appropriation that canceled 4 months earlier on September 30, 1998. DOD agreed that the adjustment was illegal and reversed the $79 million. The reversal identified other accounting errors on the contract that now must be corrected. According to DFAS contract accounting records, as of April 2002, the contract had NULOs totaling over $100 million that will need to be researched and corrected. DFAS Columbus officials estimate that a reaudit of this contract will take over 1,850 hours to complete. DOD officials told us they plan to complete all 30 reaudits to correct the fiscal year 2000 illegal and otherwise improper adjustments by September 30, 2002. In addition to DFAS’s reaudit of the contract, Air Force officials have also initiated an investigation into the circumstances surrounding the initial $79 million illegal adjustment to determine if personnel responsible for monitoring and administering the contract acted improperly, including the possibility that the adjustments may have resulted in Antideficiency Act violations. Air Force officials told us that they plan to complete the investigation and issue their report before the end of fiscal year 2002. We previously reported that the DFAS contract reconciliation system (CRS) and other controls necessary to ensure that adjustments to closed appropriation accounts were proper were not in place. We noted that DOD was in the process of upgrading CRS and correcting other control problems that significantly contributed to many of the illegal or otherwise improper adjustments to closed accounts. However, because DOD did not complete many of these actions until the end of fiscal year 2001, controls were not in place to ensure that the $1.9 billion of closed account adjustments made during fiscal year 2001 were legal and proper. Our evaluation of $291 million (15 percent) of DOD’s reported $1.9 billion fiscal year 2001 closed appropriation account adjustments found that $172 million (59 percent) were either illegal or otherwise improper. These adjustments should not have been made because the initial disbursements (1) occurred after the appropriation being charged had already canceled, (2) occurred before the appropriation charged was enacted, or (3) were charged to the correct appropriation in the first place and no adjustment was necessary. Also included in the $172 million of illegal or otherwise improper closed account adjustments were adjustments that were not sufficiently documented to establish that they were proper. These adjustments were considered improper because agencies must be able to provide documentation to show that the adjustments are legal and that they changed an incorrect charge to a correct one. Table 2 provides additional details on the $172 million of adjustments that should not have been made. DOD officials agreed to reverse and correct the $172 million of illegal and otherwise improper closed account adjustments. The remaining $119 million of the $291 million of adjustments was for adequately documented corrections of errors that DOD had made over the years and, therefore, were not in violation of appropriations law or otherwise improper. DOD officials told us they plan to review another $1.1 billion of fiscal year 2001 closed account adjustments in addition to the $291 million of closed account adjustments that we already reviewed. According to the officials, the additional $1.1 billion of adjustments were selected based on various factors including large dollar amounts or indications that the adjustments may be illegal. The officials noted that completion of the review of additional adjustments would result in detailed reviews of $1.4 billion (about 74 percent) of the total $1.9 billion of the closed account adjustments made during fiscal year 2001. According to the officials, they estimate that the additional reviews will involve several hundred contracts and about 1,000 closed account adjustments. They plan to have the additional reviews and reversals of any illegal or otherwise improper adjustments completed by December 31, 2002. However, the officials told us that because there are so many contracts that may have to be reaudited to correct the accounting, they do not plan to have the reaudits and corrections for fiscal year 2001 closed account adjustments completed until September 2004. In our July 2001 testimony and report, we pointed out that DOD did not have adequate systems, controls, and managerial attention to ensure that the $2.7 billion of fiscal year 2000 adjustments affecting closed appropriation accounts were legal and otherwise proper. Our review disclosed that CRS routinely processed billions of dollars of closed appropriation account adjustments without regard to the requirements of the 1990 account closing law. Further compounding this system deficiency was the lack of DOD oversight on how contract modifications were written and processed, which changed the payment terms of some contracts to improperly make available current and expired funds. As discussed earlier, our follow-on review of fiscal year 2001 closed account adjustments found little improvement over fiscal year 2000. As a result, DOD still could not ensure that closed account adjustments made during fiscal year 2001 were legal and otherwise proper. However, once the controls were fully implemented at the beginning of fiscal year 2002, we found that the first 6 months of fiscal year 2002 closed account adjustments dropped by about 80 percent to $200 million when compared with the same 6 months during fiscal year 2001. In May 2001, DOD began implementing CRS controls to identify and prevent illegal backward adjustments. This control compares the actual disbursement date with the appropriation involved in the adjustment to ensure that the adjustment does not result in moving disbursement charges back to an appropriation that had been canceled before the actual disbursement was made. In September 2001, DFAS upgraded CRS to identify and prevent illegal adjustments from moving disbursement charges forward to an appropriation that had not yet been enacted at the time the initial disbursement was made. In addition to upgrading CRS to identify and prevent illegal closed account adjustments, DOD also changed the CRS default reallocation of adjusting payments from oldest funds first to proration. Under the oldest funds first reallocation method, CRS would change disbursements charged to current and expired appropriation accounts to charges against older appropriation accounts even if the initial disbursement charges were correct. Because the DFAS contract payment system, commonly known as MOCAS (Mechanization of Contract Administration Services), prorated payments across various fund cites in the contract if no payment terms were specified in the contract, this change was intended to reduce errors by making both MOCAS and CRS payment allocation defaults the same. Previously, problems with payment reallocations arose during contract reconciliation when payments that MOCAS had initially allocated across various ACRNs on a pro rata basis were redistributed by CRS across ACRNs on an oldest funds first basis. When this occurred, the CRS payment redistributions would differ substantially from how MOCAS had originally applied the payments. As our previous audit showed, these situations created significant problems by moving payment charges from correct ACRNs to incorrect ACRNs on the contract. For example, in one case, DOD initiated a contract reconciliation because there were insufficient funds remaining on an ACRN to pay a $685,000 contractor invoice, and this redistribution process resulted in moving $210 million of correct payment charges to incorrect ACRNs. According to DFAS Columbus officials, supervisory personnel must now approve any deviation from the CRS default program before CRS controls can be overridden to reallocate disbursements in a manner other than proration. DOD’s reported closed account adjustments during the first 6 months of fiscal year 2002 totaled about $200 million, or about 80 percent less than the over $1 billion of closed account adjustments DOD reportedly made during the same 6-month period of fiscal year 2001. According to DFAS officials, they believe that the significant decline in closed account adjustments is a direct result of increased DOD management and employee emphasis on resolving the problems identified in our earlier report that contributed to illegal and otherwise improper closed account adjustments. While DFAS’s controls had greatly reduced closed account adjustments during the first 6 months of fiscal year 2002, our analysis of closed account transactions found that $253,212 of illegal closed account adjustments had been processed from October 1, 2001, through March 31, 2002. These illegal adjustments moved disbursement charges back to appropriations that had canceled before the initial disbursements occurred. We found these adjustments had processed through a DFAS Columbus computer terminal that did not properly identify and prevent these types of illegal adjustments. DFAS officials could not explain why the computer terminal was not operating properly but took immediate action to upgrade it with the appropriate controls. The officials agreed to reverse and correct the $253,212 of illegal adjustments. Our analysis of subsequent closed account adjustments reported after the upgrade did not identify any additional illegal closed account adjustments. Our earlier testimony and report pointed out that DOD’s illegal and otherwise improper closed account adjustments resulted from the lack of basic controls and managerial attention required to properly account for its disbursements consistent with the 1990 account closing law. We also noted that DOD had been aware since 1996 that one of its major systems allowed for disbursements to be charged in a way that was inconsistent with the law, but had done nothing to fix the problem. This lack of fundamental controls and management oversight fostered an atmosphere in which responsible DOD contracting and accounting personnel took it for granted that it was an acceptable practice to adjust the accounting records to use unspent canceled funds on a contract in order to maximize the use of appropriated funds—a process that we concluded, and DOD agreed, was illegal. We stated that DOD would need to effect changes to its systems, policies, procedures, and the overall weak control environment that fostered the $615 million of illegal and otherwise improper adjustments made during fiscal year 2000. To do this, we pointed out that DOD top management must clearly demonstrate its commitment to adhering to the account closing law and eliminate the abuses of appropriations law. The 80 percent reduction of closed account adjustments during the first 6 months of fiscal year 2002 is an indication that, in the short term, DOD policies, procedures, and management commitment aimed at reducing the amount of illegal and otherwise improper closed account adjustments are having the desired effect. However, DOD’s inability to accurately account for and report on disbursements overall are long-term, major problems that are pervasive and complex in nature. For example, for fiscal year 1999, DFAS data showed that almost $1 of every $3 in contract payment transactions was for adjustments to previously recorded payments— $51 billion of adjustments out of $157 billion in transactions. Some of the key causes of these adjustments—for both closed and unclosed accounts— relate to the complex accounting for contracts along with frequent changes in payment allocation terms. Over the years, we have issued numerous reports discussing DOD’s financial management problems, and we have designated DOD financial management as a high-risk area since 1995. The following discussion on DOD’s use of ACRNs and changes in contract payment allocations is illustrative of the convoluted process that contributes to the need to adjust accounting records to correct errors. Contracts can be assigned anywhere from 1 to over 1,000 ACRNs to accumulate appropriation, budget, and management information. Our review of fiscal years 2000 and 2001 closed account adjustments found that, in many cases, the contracts had large numbers of ACRNs. According to DFAS Columbus officials, numerous ACRNs and changes in payment allocations create payment problems by increasing the amount of data that must be entered and opportunities for errors. These problems also lead to costly and extensive contract reconciliations. For example, our review of fiscal year 2001 closed account adjustments on a Navy contract valued at about $38 million found that the contract contained 548 ACRNs and had been modified over 150 times. Also, according to DFAS Columbus’ reconciliation staff, the contract had received two reconciliations, one of which in 1998 produced 15,322 accounting adjustments. In total, we found about $3 million of fiscal year 2001 closed account adjustments for this contract were not adequately supported and, thus, should not have been made. In discussing the contract’s improper closed account adjustments with DFAS Columbus officials, they agreed that the adjustments were not proper and agreed to reverse and correct them. Because of the large number of ACRNs and contract modifications involved, they estimate that it will take over 9,000 hours to complete the contract audit. Our combined review of the 101 contracts included in our detailed review of fiscal years 2000 and 2001 closed account adjustments found that there were 7,440 ACRNs on the 101 contracts—an average of about 74 ACRNs per contract. As table 3 shows, 38 of the 101 contracts (38 percent) had 51 or more ACRNs. We did not determine for each of these contracts why and for what purpose the numerous ACRNs were being used. However, it is clear that simplified contract accounting will be a key element to reform DOD’s financial management. For example, as we pointed out in our July 2001 report, even a simple purchase could cause extensive and costly rework if assigned numerous ACRNs. We noted that a $1,209 Navy contract for children’s toys, candy, and holiday decorations for a child care center was written with most line items (e.g., bubble gum, tootsie rolls, and balloons) assigned separate ACRNs. A separate requisition number was generated for each item ordered, and a separate ACRN was assigned for each requisition. In total, the contract was assigned 46 ACRNs to account for contract obligations against a single appropriation. To record this payment against the one appropriation DFAS Columbus had to manually allocate the payment to all 46 ACRNs. In addition, the contract was modified three times—twice to correct funding data and once to delete (deobligate) the funding on the contract for out-of-stock items. The modification deleting funding did not cite all the affected ACRNs. DFAS Columbus made errors in both entering and allocating payment data, compounding errors made in the modification. Consequently, DFAS Columbus allocated payment for the toy jewelry line item to fruit chew, jump rope, and jack set ACRNs—all of which should have been deleted by modification. Contract delivery was completed in March 1995, but payment was delayed until October 1995. DFAS Columbus officials acknowledged that this payment consumed an excessive amount of time and effort when compared to the time to process a payment charged to only one ACRN. A single ACRN would also have significantly reduced the amount of data entered into the system and the opportunities for errors. Further compounding the problem of numerous ACRNs are changes in how payments are to be allocated across various ACRNs on a contract. For example, our review of an Air Force contract that had 50 ACRNs contained about $126 million of closed account adjustments of which we found that about $100 million (79 percent) were illegal or otherwise improper. Further, the contract had been modified 292 times for various reasons, including changes to how payments were to be allocated across the various ACRNs. For example, the following instructions were included in contract modifications to specify payment instructions for special ACRN XB—one of several special ACRNs on the contract. Contract modification 94 dated October 22, 1993, stated that, “During FY90 pay FY90 funds first until exhausted and during FY91 pay FY91 funds first until exhausted. After these funds are exhausted, pay from the oldest ACRNs first.” Two years later, contract modification 126 added additional payment terms for special ACRN XB as follows: “During FY90 pay FY90 funds first until exhausted and during FY91 pay FY91 funds first until exhausted. During FY94 pay FY88 funds first until exhausted. After these funds are exhausted, pay from oldest ACRNs first.” In June 2000, modification 160 provided more payment instructions for special ACRN XB. The modification noted that special ACRN XB consisted of funds from both the United States and North Atlantic Treaty Organization (NATO). The payment instructions specified that payments were to be made using the oldest U.S. funds before using NATO funds. According to a July 2000 Air Force memorandum from the Air Force Materiel Command’s Deputy Director of Contracting, the special ACRNs were not to be added to any existing contracts or used in new contracts. The Deputy Director noted that the Air Force still had over 1,300 special ACRNs in the system related to the older contracts, and that there was evidence that special ACRNs were still being created or used for new contract line items or subcontract line items. In discussing this memorandum with responsible Air Force contracting officials, we were told that the Air Force no longer uses special ACRNs and that once all the contracts that currently contain special ACRNs are closed out, errors or other accounting problems caused by this type of contract funding should no longer be a problem. DFAS Columbus officials acknowledged that the combination of numerous ACRNs and modifications that change contract payment allocation terms makes it difficult to maintain accurate payment records. They agreed that the $100 million of illegal and otherwise improper closed account adjustments for the Air Force contract discussed above should not have been made. They told us they plan to reverse and correct the illegal and otherwise improper closed account adjustments on the contract as part of their overall effort to correct fiscal year 2001 closed account adjustments. Because of the numerous ACRNs and contract modifications on the contract, DOD estimates that it will take over 1,500 hours to completely correct the accounting for this contract. In discussing the issues of payment errors caused by numerous ACRNs and changing contract payment allocation terms, military service contracting officials agreed that in the past their contracts contained numerous ACRNs and modifications to change payment allocations. They told us that during the last 2 or 3 years, they have started to write contracts to include more specific payment allocation terms, which should make it much easier for DFAS Columbus to pay contractors without making errors that require subsequent adjustments. Further, on October 1, 2001, the Under Secretary of Defense for Acquisition, Technology, and Logistics issued a memorandum in response to our recommendation that he issue a policy to prohibit the writing of contract modifications to change the payment terms of a contract if the change would result in illegal or otherwise improper adjustments. The memorandum instructed the military service secretaries and defense agency directors to make certain that all contracting activities have procedures in place that ensure compliance with the department’s financial management policies, which currently preclude the improper adjustments we identified in our report. It also required all contract modifications that include adjustments to closed appropriation accounts to be supported with contract file documentation sufficient to establish that the adjustments are legal and proper and received supervisory review. It further required that contract modifications involving closed accounts be approved in writing by the appropriate level comptroller or financial resource manager. DFAS Columbus officials acknowledged that the change in contract writing policies and procedures should result in fewer payment errors and adjustments. While we agree that the changes in contract writing procedures and additional policy requirements should help to reduce errors that require subsequent correcting, we found that there are still thousands of older contracts in MOCAS that have one or more closed accounts that will need to be monitored closely to ensure that illegal or otherwise improper adjustments do not occur. For example, at our request, DFAS Columbus analyzed the MOCAS database to identify contracts for which at least one of the appropriations was canceled. The results of the MOCAS inquiry showed that as of April 2002, there were 15,421 active contracts valued at $519 billion for which at least one appropriation had been canceled. DFAS officials told us that these older contracts may contain errors that will not be discovered until a contract is completed and final contract reconciliation is performed. As we have indicated, since we began our closed account work, and especially since our testimony and report on this issue in July 2001, DOD has taken actions to eliminate illegal or otherwise improper adjustments involving closed account records. As noted earlier in this report, these actions are beginning to produce positive short-term results while efforts to address the long-term problems are still ongoing. At the same time, given the severity of the existing problems and the long-term nature of DOD’s transformation efforts, you asked us to identify options the Congress could consider, including prohibiting some or all adjustments to closed accounts. We basically see two options—do nothing at this time or prohibit any adjustments immediately or shortly after an appropriation account is closed. These options are discussed in the context of our closed account work at DOD. However, options that change the account closing law would also apply to all federal agencies unless the Congress specifically limited them to DOD. One option is to take no legislative action at this time and to continue to allow DOD to adjust closed account records when appropriate to correct accounting errors. This would mean that DOD could make adjustments to closed account records when there is sufficient documentation to show that the (1) disbursement was made when the appropriation account to be charged was available to cover the disbursement, (2) agency either did not record the disbursement when it was made or charged it to the wrong appropriation account at the time, and (3) proposed adjustment will result in the disbursement being charged to the proper appropriation account. Given that DOD’s implementation of controls to identify and prevent illegal and otherwise improper adjustments seem to be having a positive effect based on 6 months of analysis, the Congress could postpone any decision to change the law in order to allow DOD additional time to monitor how its implementation of controls, policies, and procedures needed to eliminate illegal and otherwise improper closed account adjustments is working. However, given DOD’s weak overall control environment, unless DOD’s internal controls and management commitment to this problem are sustained, new ways may be developed to circumvent the controls recently put into place. Thus, there is a risk that, over time, illegal or otherwise improper closed account adjustments could reoccur. If the Congress finds in the future that DOD top management does not sustain its commitment to address its overall disbursement problems, the Congress could require a combination of oversight and reporting by DOD as to the validity of any closed account adjustments. The second option is to amend the account closing law to prohibit any adjustments to an appropriation account after it is closed. Under this option, accounting records of an appropriation account would be final when the account was closed. This option would eliminate adjustments to closed accounts as well as the substantial time and expense associated with making them. It would also provide an additional incentive for DOD to keep better records during the time the account is open since there would be no opportunity to correct the records once the account was closed. At the same time, this change would mean that known errors in accounting records could not be corrected once the account was closed and therefore accounting records would be permanently inaccurate. These inaccurate records could also affect DOD’s ability to promptly pay for goods and services. For example, assume that because of accounting errors associated with a closed appropriation account, the unspent balance of a currently available account was reduced to less than the amount needed to make a subsequent payment. If DOD could not correct the error, it would not be able to make the current payment. In another example, assume that because of accounting errors, the balance of a closed account was less than the amount needed to pay an obligation that had been charged to the closed account when it was open. Current law allows the payment to be made from current funds if the closed account balance exceeds the amount of the payment. Prohibiting all adjustments to closed accounts would make permanent the erroneously reduced balance and therefore the payment could not be made with current funds. In each of these examples, DOD would be unable to pay for the goods or services without obtaining an additional appropriation or other form of legislative relief, which could cause a hardship for the contractor. The Congress could also provide a variation of this option by allowing DOD a limited period, such as 6 months or 1 year, after an account is closed to adjust the accounting records for known errors. This option would provide for finality of records, but only after DOD has some additional opportunity to correct errors it detects immediately after the account is closed. This legislation, while not totally eliminating closed account adjustments, would provide some of the benefits discussed above while increasing the likelihood that DOD records relating to the closed account are more accurate. However, this option also presents some of the same payment and fund availability limitations discussed above. DOD has made significant improvements to its controls to identify and prevent illegal and otherwise improper closed account adjustments as evidenced by the 80 percent reduction of closed account adjustments during the first 6 months of fiscal year 2002. These short-term efforts serve as an example of what can be achieved when DOD takes prompt action to correct known problems through a strong top management commitment. At the same time, closed account adjustments are only a small fraction of the overall disbursement adjustments DOD makes each year as a result of its long-standing financial accounting and management problems. There are no quick fixes to the underlying problems, which must be dealt with over the long term. Nevertheless, there are some additional short-term actions that can be taken by focusing on simplifying accounting and contract payment allocation terms. Modernizing financial management systems, and improving the systems adherence to basic accounting requirements, will ultimately be key to DOD effectively resolving its financial management and contract payment problems. This will require a sustained commitment by DOD’s top management team over a number of years. We recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to direct the Director of the Defense Finance and Accounting Service to help ensure that DFAS Columbus completes its review and correction of the remaining fiscal year 2000 illegal and otherwise improper adjustments, reverse closed account adjustments made during fiscal year 2001 identified in this report as illegal or otherwise improper, determine the entries necessary to correct the accounting for reversed fiscal year 2001 transactions, help ensure that DFAS Columbus completes the review and correction of the additional $1.1 billion of fiscal year 2001 adjustments it has scheduled for detailed review, and continue with DFAS’s top-level management attention and monitoring of the program for future adjustments to closed appropriation accounts. We also recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to continue to monitor these adjustments so that any potential Antideficiency Act violations that may occur are promptly investigated and reported as required by the Antideficiency Act, 31 U.S.C. 1351, and implementing guidance. DOD agreed with our recommendations and outlined its ongoing and planned actions to identify, reverse, and correct illegal and otherwise improper fiscal year 2000 and 2001 closed appropriation account adjustments. DOD pointed out that this process may create adverse accounting conditions for a large number of contracts that will require either complete or partial reaudit to determine the correct accounting necessary to resolve the illegal or otherwise improper closed account adjustments we identified. For example, as we noted in our report, for one contract where DOD made a total of $590 million of closed account adjustments, we found that $210 million of the $590 million of adjustments were unnecessary and should not have been made because the actual disbursements had been recorded correctly. In order to reverse and correct the $210 million of unnecessary adjustments, DOD had to reverse the total $590 million in adjustments, which created other accounting errors that must now be researched and corrected. As our report noted, DOD estimates that it will take about 2,300 hours to resolve all the errors necessary to correct the $210 million of unnecessary adjustments we identified for this contract. DOD said it planned to have all its reaudits and corrective actions completed by September 30, 2004. DOD’s comments are reprinted in appendix II. We are sending copies of the report to interested congressional committees. We are also sending copies of this report to the Secretary of Defense; the Principal Deputy Under Secretary of Defense for Acquisition, Technology, and Logistics; the Secretaries of the Army, Navy, and Air Force; the Director of the Defense Finance and Accounting Service; the Secretary of the Treasury; and the Director of the Office of Management and Budget. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512-9505 or kutzg@gao.gov, or Larry W. Logsdon, Assistant Director, at (703) 695-7510 or logsdonl@gao.gov. Major contributors to this report are acknowledged in appendix III. To meet our first objective of monitoring DOD’s efforts to correct the problems we identified in our prior audit, we reviewed DFAS officials' corrective actions taken on 162 adjustments that we previously reported as $615 million of illegal or otherwise improper adjustments. As part of this review, we gathered vouchers that documented the reversal of the adjustments and analyzed financial information from DFAS Columbus’ records and reports, including contracts, contract modifications, shipping notices, invoices, payment vouchers, and schedules of adjustments. We identified and met with the DFAS Columbus officials knowledgeable about each reversed adjustment. We also identified the responsible DFAS or military service locations that maintained the official account records and obtained documentation to show how adjustments were reversed or corrected in the accounting records. To meet our second objective of determining if DOD experienced problems with adjustments to closed appropriation accounts in 2001 similar to the problems with the 2000 adjustments, we monitored DFAS Columbus’ review of $291 million of the $1.9 billion of closed account adjustments DOD reportedly made during fiscal year 2001. DFAS Columbus had already selected the $291 million of closed account adjustments for review at the time we began our audit. We took this approach rather than selecting a large number of adjustments for our own independent review because we knew that DOD had not fully implemented the controls necessary to identify and prevent fiscal year 2001 illegal and otherwise improper closed account adjustments. We reviewed the results of DFAS Columbus’ efforts and worked with staff members responsible for conducting the reviews to resolve any disagreements between DFAS and GAO on whether the documentation showed that the adjustments were legal and proper. As part of our analysis of DFAS Columbus’ reviews, we analyzed documentation supporting DFAS's detailed summaries for each adjustment to determine the reason for the adjustment and whether it was valid. For each adjustment, we reviewed the contract files for supporting hard copy documentation including modifications, invoices, payment vouchers, and MOCAS print screens. We also identified and met with the DFAS Columbus staff members who completed the reviews to discuss the reasons for the adjustments and resolve any differences of opinion between DFAS’s and our conclusions on whether the adjustments were legal and proper. To determine if DOD had implemented the effective system controls, which we identified in our prior report, to its contract reconciliation system to prevent illegal adjustments, we tested the CRS for two types of potentially illegal adjustments during a 6-month period. To do this, we independently analyzed the closed account adjustments included in the CRS database for the first 6 months of fiscal year 2002 to ascertain if CRS had processed any closed account adjustments that resulted in moving a disbursement charge (1) back to an appropriation that was canceled before the actual disbursement was made or (2) forward to an appropriation that had not yet been enacted at the time the actual disbursement was made. We met with responsible DFAS Columbus officials to discuss and resolve any transactions that our analysis identified as violations of either of these two measurements. In instances where there were violations, we met with DFAS Columbus personnel to determine why CRS controls had not prevented the transactions from processing and worked with DFAS’s staff to correct the system deficiencies. We did not validate the accuracy of the CRS database information pertaining to the disbursement dates or appropriations. To meet our third objective of determining why DOD makes so many adjustments to closed accounts, we reviewed the reconciliation summaries for the fiscal years 2000 and 2001 closed account adjustments that we reviewed in detail. We also met with the DFAS Columbus staff members who performed reconciliations to obtain their opinions on the primary reasons why errors occur. However, we did not determine the specific reasons why certain contracts have numerous ACRNs or how the detailed cost information was to be used. Finally, to determine options available to DOD and actions for the Congress to consider that would eliminate or reduce adjustments to closed appropriation accounts, we developed and presented options based on our reviews of fiscal year 2000 and 2001 closed account adjustments and discussions with DOD accounting and procurement officials. We performed our work primarily at the DFAS Center in Columbus, Ohio. We also obtained documentation from the following DFAS locations that were responsible for maintaining official accounting records: Cleveland, and Dayton, Ohio; Denver, Colorado; San Bernardino, California; and St. Louis, Missouri. Our review was conducted from June 2001 through April 2002 in accordance with U.S. generally accepted government auditing standards, except that we did not validate the accuracy of CRS information pertaining to the number of closed account adjustments and related dollar values. Staff members who made key contributions to this report were Bertram J. Berlin, Francine M. Delvecchio, Stephen P. Donahue, Dennis B. Fauber, Jeffrey A. Jacobson, Keith E. McDaniel, and Harold P. Santarelli. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily E-mail alert for newly released products” under the GAO Reports heading.","Congress changed the law governing the use of appropriation accounts in 1990 because it found that the Department of Defense (DOD) may have spent hundreds of millions of dollars for purposes that Congress had not approved. The 1990 law provided that, 5 years after the expiration of the period of availability of a fixed-term appropriation, the appropriation account be closed and all remaining balances canceled. After closing, the appropriation account could no longer be used for obligations or expenditures for any purpose. DOD has started the process of correcting the illegal or improper closed account adjustments made during fiscal year 2000. However, this will require substantial effort and, according to DOD, estimates will not be complete before the end of fiscal year 2002. DOD had upgraded its system control features by the end of fiscal year 2001 to preclude many of the wholesale adjustments that GAO had previously identified. Because its system enhancements were done in stages, including some near the end of fiscal year 2001, DOD continued to make large amounts of illegal and otherwise improper closed account adjustments during the year. However, given the intensity of staff efforts to address these issues, it did not expect to complete the correct accounting for transactions found to be in error until September 2004. A lack of fundamental controls and management oversight over the closed accounts was the primary reason DOD was making so many closed account adjustments. DOD's action to resolve its problems with closed account adjustments is beginning to produce positive short-term results. However, if DOD fails to sustain these positive results, Congress could require DOD to validate and report to the Congress all closed account adjustments.",govreport
"From its origins as a research project sponsored by the U.S. government, the Internet has grown increasingly important to American businesses and consumers, serving as the host for hundreds of billions of dollars of commerce each year. It is also a critical resource supporting vital services, such as power distribution, health care, law enforcement, and national defense. Similar growth has taken place in other parts of the world. The Internet relies upon a set of functions, called the domain name system, to ensure the uniqueness of each e-mail and Web site address. The rules that govern the domain name system determine which top-level domains (the string of text following the right-most period, such as .gov) are recognized by most computers connected to the Internet. The heart of this system is a set of 13 computers called “root servers,” which are responsible for coordinating the translation of domain names into Internet addresses. Appendix I provides more background on how this system works. The U.S. government supported the implementation of the domain name system for nearly a decade, largely through a Department of Defense contract. Following a 1997 presidential directive, the Department of Commerce began a process for transitioning the technical responsibility for the domain name system to the private sector. After requesting and reviewing public comments on how to implement this goal, in June 1998 the Department issued a general statement of policy, known as the “White Paper.” In this document, the Department stated that because the Internet was rapidly becoming an international medium for commerce, education, and communication, the traditional means of managing its technical functions needed to evolve as well. Moreover, the White Paper stated the U.S. government was committed to a transition that would allow the private sector to take leadership for the management of the domain name system. Accordingly the Department stated that the U.S. government was prepared to enter into an agreement to transition the Internet’s name and number process to a new not-for-profit organization. At the same time, the White Paper said that it would be irresponsible for the U.S. government to withdraw from its existing management role without taking steps to ensure the stability of the Internet during the transition. According to Department officials, the Department sees its role as the responsible steward of the transition process. Subsequently, the Department entered into an MOU with ICANN to guide the transition. ICANN has made significant progress in carrying out MOU tasks related to one of the guiding principles of the transition effort—increasing competition. However, progress has been much slower on activities designed to address the other guiding principles: increasing the stability and security of the Internet; ensuring representation of the Internet community in domain name policy-making; and using private, bottom-up coordination. Earlier this year, ICANN’s president concluded that ICANN faced serious problems in accomplishing the transition and needed fundamental reform. In response, ICANN’s Board established an internal committee to recommend options for reform. ICANN made important progress on several of its assigned tasks related to promoting competition. At the time the transition began, only one company, Network Solutions, was authorized to register names under the three publicly available top-level domains (.com, .net, and .org). In response to an MOU task calling for increased competition, ICANN successfully developed and implemented procedures under which other companies, known as registrars, could carry out this function. As a result, by early 2001, more than 180 registrars were certified by ICANN. The cost of securing these names has now dropped from $50 to $10 or less per year. Another MOU task called on ICANN to expand the pool of available domain names through the selection of new top-level domains. To test the feasibility of this idea, ICANN’s Board selected seven new top-level domains from 44 applications; by March 2002, it had approved agreements with all seven of the organizations chosen to manage the new domains. At a February 2001 hearing before a Subcommittee of the U.S. House of Representatives, witnesses presented differing views on whether the selection process was transparent and based on clear criteria. ICANN’s internal evaluation of this test was still ongoing when we finished our audit work in May 2002. Several efforts to address the White Paper’s guiding principle for improving the security and stability of the Internet are behind schedule. These include developing operational requirements and security policies to enhance the stability and security of the domain name system root servers, and formalizing relationships with other entities involved in running the domain name system. Recent reports by federally sponsored organizations have highlighted the importance of the domain name system to the stability and security of the entire Internet. A presidential advisory committee reported in 1999 that the domain name system is the only aspect of the Internet where a single vulnerability could be exploited to disrupt the entire Internet. More recently, the federal National Infrastructure Protection Center issued several warnings in 2001 stating that multiple vulnerabilities in commonly used domain name software present a serious threat to the Internet infrastructure. In recognition of the critical role that the domain name system plays for the Internet, the White Paper designated the stability and security of the Internet as the top priority of the transition. The MOU tasked ICANN and the Department with developing operational requirements and security policies to enhance the stability and security of the root servers—the computers at the heart of the domain name system. In June 1999, ICANN and the Department entered into a cooperative research and development agreement to guide the development of these enhancements, with a final report expected by September 2000. This deadline was subsequently extended to December 2001 and the MOU between ICANN and the Department was amended to require the development of a proposed enhanced architecture (or system design) for root server security, as well as a transition plan, procedures, and implementation schedule. An ICANN advisory committee, made up of the operators of the 13 root servers and representatives of the Department, is coordinating research on this topic. Although the chairman of the committee stated at ICANN’s November 2001 meeting that it would finish its report by February or March 2002, it had not completed the report as of May 2002. To further enhance the stability of the Internet, the White Paper identified the need to formalize the traditionally informal relationships among the parties involved in running the domain name system. The White Paper pointed out that many commercial interests, staking their future on the successful growth of the Internet, were calling for a more formal and robust management structure. In response, the MOU and its amendments included several tasks that called on ICANN to enter into formal agreements with the parties that traditionally supported the domain name system through voluntary efforts. However, as of May 2002, few such agreements had been signed. ICANN’s Board has approved a model agreement to formalize the relationship between the root server operators and ICANN, but no agreements had been reached with any of the operators as of May 2002. Similarly, there are roughly 240 country-code domains (2-letter top-level domains reserved mainly for national governments), such as .us for the United States. As with the root servers, responsibility for these domains was originally given by the Internet’s developers to individuals who served as volunteers. Although the amended MOU tasked ICANN with reaching contractual agreements with these operators, it has reached agreements with only 2 domain operators as of May 2002. Finally, the amended MOU tasked ICANN with reaching formal agreements with the Regional Internet Registries, each of which is responsible for allocating Internet protocol numbers to users in one of three regions of the world. The registries reported that progress was being made on these agreements, though none had been reached as of May 2002. Progress has also been slow regarding the other two guiding principles outlined in the White Paper, which call for the creation of processes to represent the functional and geographic diversity of the Internet, and for the use of private, bottom-up coordination in preference to government control. In order for the private sector organization to derive legitimacy from the participation of key Internet stakeholders, the White Paper suggested the idea of a board of directors that would balance the interests of various Internet constituencies, such as Internet service providers, domain name managers, technical bodies, and individual Internet users. The White Paper also suggested the use of councils to develop, recommend, and review policies related to their areas of expertise, but added that the board should have the final authority for making policy decisions. The Department reinforced the importance of a representative board in a 1998 letter responding to ICANN’s initial proposal. The Department’s letter cited public comments suggesting that without an open membership structure, ICANN would be unlikely to fulfill its goals of private, bottom-up coordination and representation. ICANN’s Board responded to the Department by amending its bylaws to make it clear that the Board has an “unconditional mandate” to create a membership structure that would elect at-large directors on the basis of nominations from Internet users and other participants. To implement these White Paper principles, the MOU between ICANN and the Department includes two tasks: one relating to developing mechanisms that ensure representation of the global and functional diversity of the Internet and its users, and one relating to allowing affected parties to participate in the formation of ICANN’s policies and procedures through a bottom-up coordination process. In response to these two tasks, ICANN adopted the overall structure suggested by the White Paper. First, ICANN created a policy-making Board of Directors. The initial Board consisted of ICANN’s president and 9 at-large members who were appointed at ICANN’s creation. ICANN planned to replace the appointed at-large Board members with 9 members elected by an open membership to reflect the diverse, worldwide Internet community. Second, ICANN organized a set of three supporting organizations to advise its Board on policies related to their areas of expertise. One supporting organization was created to address Internet numbering issues, one was created to address protocol development issues, and one was created to address domain name issues. Together these three supporting organizations selected 9 additional members of ICANN’s Board–3 from each organization. Thus, ICANN’s Board was initially designed to reflect the balance of interests described in the White Paper. Figure 1 illustrates the relationships among ICANN’s supporting organizations and its Board of Directors, as well as several advisory committees ICANN also created to provide input without formal representation on its Board. Despite considerable debate, ICANN has not resolved the question of how to fully implement this structure, especially the at-large Board members. Specifically, in March 2000, ICANN’s Board noted that extensive discussions had not produced a consensus regarding the appropriate method to select at-large representatives. The Board therefore approved a compromise under which 5 at-large members would be elected through regional, online elections. In October 2000, roughly 34,000 Internet users around the world voted in the at-large election. The 5 successful candidates joined ICANN’s Board in November 2000, replacing interim Board members. Four of the appointed interim Board members first nominated in ICANN’s initial proposal continue to serve on the Board. Parallel with the elections, the Board also initiated an internal study to evaluate options for selecting at-large Board members. In its November 2001 report, the committee formed to conduct this study recommended the creation of a new at-large supporting organization, which would select 6 Board members through regional elections. Overall, the number of at- large seats would be reduced from 9 to 6, and the seats designated for other supporting organizations would increase from 9 to 12. A competing, outside study by a committee made up of academic and nonprofit interests recommended continuing the initial policy of directly electing at-large Board members equal to the number selected by the supporting organizations. This committee also recommended strengthening the at- large participation mechanisms through staff support and a membership council similar to those used by the existing supporting organizations.Because of ongoing disagreement among Internet stakeholders about how individuals should participate in ICANN’s efforts, ICANN’s Board referred the question to a new Committee on ICANN Evolution and Reform. Under the current bylaws, the 9 current at-large Board seats will cease to exist after ICANN’s 2002 annual meeting, to be held later this year. Although the MOU calls on ICANN to design, develop, and test its procedures, the two tasks involving the adoption of the at-large membership process were removed from the MOU when it was amended in August 2000. However, as we have noted, this process was not fully implemented at the time of the amendment because the election did not take place until October 2000, and the evaluation committee did not release its final report until November 2001. When we discussed this amendment with Department officials, they said that they agreed to the removal of the tasks in August 2000 because ICANN had a process in place to complete them. Nearly 2 years later, however, the issue of how to structure ICANN’s Board to achieve broad representation continues to be unresolved and has been a highly contentious issue at ICANN’s recent public meetings. In addition, the amended MOU tasked ICANN with developing and testing an independent review process to address claims by members of the Internet community who were adversely affected by ICANN Board decisions that conflicted with ICANN’s bylaws. However, ICANN was unable to find qualified individuals to serve on a committee charged with implementing this policy. In March 2002, ICANN’s Board referred this unresolved matter to the Committee on ICANN Evolution and Reform for further consideration. In the summer of 2001, ICANN’s current president was generally optimistic about the corporation’s prospects for successfully completing the remaining transition tasks. However, in the face of continued slow progress on key aspects of the transition, such as reaching formal agreements with the root server and country-code domain operators, his assessment changed. In February 2002, he reported to ICANN’s Board that the corporation could not accomplish its assigned mission on its present course and needed a new and reformed structure. The president’s proposal for reform, which was presented to ICANN’s Board in February, focused on problems he perceived in three areas: (1) too little participation in ICANN by critical entities, such as national governments, business interests, and entities that share responsibility for the operation of the domain name system (such as root server operators and country- code domain operators); (2) too much focus on process and representation and not enough focus on achieving ICANN’s core mission; and (3) too little funding for ICANN to hire adequate staff and cover other expenditures. He added that in his opinion, there was little time left to make necessary reforms before the ICANN experiment came to “a grinding halt.” Several of his proposed reforms challenged some of the basic approaches for carrying out the transition. For example, the president concluded that a totally private sector management model had proved to be unworkable. He proposed instead a “well-balanced public-private partnership” that involved an increased role for national governments in ICANN, including having several voting members of ICANN’s Board selected by national governments. The president also proposed changes that would eliminate global elections of at-large Board members by the Internet community, reduce the number of Board members selected by ICANN’s supporting organizations, and have about a third of the board members selected through a nominating committee composed of Board members and others selected by the Board. He also proposed that ICANN’s funding sources be broadened to include national governments, as well as entities that had agreements with ICANN or received services from ICANN. In response, ICANN’s Board instructed an internal Committee on ICANN Evolution and Reform (made up of four ICANN Board members) to consider the president’s proposals, along with reactions and suggestions from the Internet community, and develop recommendations for the Board’s consideration on how ICANN could be reformed. The Committee reported back on May 31, 2002, with recommendations reflecting their views on how the reform should be implemented. For example, the committee built on the ICANN president’s earlier proposal to change the composition of the Board and have some members be selected through a nominating committee process, and to create an ombudsman to review complaints and criticisms about ICANN and report the results of these reviews to the Board. In other cases, the committee agreed with conclusions reached by the president (such as the need for increasing the involvement of national governments in ICANN and improving its funding), but did not offer specific recommendations for addressing these areas. The committee’s report, which is posted on ICANN’s public Web site, invited further comment on the issues and recommendations raised in preparation for ICANN’s June 2002 meeting in Bucharest, Romania. The committee recommended that the Board act in Bucharest to adopt a reform plan that would establish the broad outline of a reformed ICANN, so that the focus could be shifted to the details of implementation. The committee believed that this outline should be then be filled in as much as possible between the Bucharest meeting and ICANN’s meeting in Shanghai in late October 2002. As mentioned previously, the Department is responsible for general oversight of work done under the MOU, as well as the responsibility for determining when ICANN, the private sector entity chosen by the Department to carry out the transition, has demonstrated that it has the resources and capability to manage the domain name system. However, the Department’s public assessment of the status of the transition process has been limited in that its oversight of ICANN has been informal, it has not issued status reports, and it has not publicly commented on specific reform proposals being considered by ICANN. According to Department officials, the Department’s relationship with ICANN is limited to its agreements with the corporation, and its oversight is limited to determining whether the terms of these agreements are being met. They added that the Department does not involve itself in the internal governance of ICANN, is not involved in ICANN’s day-to-day operations, and would not intervene in ICANN’s activities unless the corporation’s actions were inconsistent with the terms of its agreements with the Department. Department officials emphasized that because the MOU defines a joint project, decisions regarding changes to the MOU are reached by mutual agreement between the Department and ICANN. In the event of a serious disagreement with ICANN, the Department would have recourse under the MOU to terminate the agreement. Department officials characterized its limited involvement in ICANN’s activities as being appropriate and consistent with the purpose of the project: to test ICANN’s ability to develop the resources and capability to manage the domain name system with minimal involvement of the U.S. government. Department officials said that they carry out their oversight of ICANN’s MOU-related activities mainly through ongoing informal discussions with ICANN officials. They told us that there is no formal record of these discussions. The Department has also retained authority to approve certain activities under its agreements with ICANN, such as reviewing and approving certain documents related to root server operations. This would include, for example, agreements between ICANN and the root server operators. In addition, the Department retains policy control over the root zone file, the “master file” of top-level domains shared among the 13 root servers. Changes to this file, such as implementing a new top-level domain, must first be authorized by the Department. In addition, the Department sends officials to attend ICANN’s public forums and open Board of Directors meetings, as do other countries and Internet interest groups. According to the Department, it does not participate in ICANN decision-making at these meetings but merely acts as an observer. The Department also represents the United States on ICANN’s Governmental Advisory Committee, which is made up of representatives of about 70 national governments and intergovernmental bodies, such as treaty organizations. The Committee’s purpose is to provide ICANN with nonbinding advice on ICANN activities that may relate to concerns of governments, particularly where there may be an interaction between ICANN’s policies and national laws or international agreements. The Department made a considerable effort at the beginning of the transition to create an open process that solicited and incorporated input from the public in formulating the guiding principles of the 1998 White Paper. However, since the original MOU, the Department’s public comments on the progress of the transition have been general in nature and infrequent, even though the transition is taking much longer than anticipated. The only report specifically called for under the MOU is a final joint project report to document the outcome of ICANN’s test of the policies and procedures designed and developed under the MOU. This approach was established at a time when it was expected that the project would be completed by September 2000. So far, there has been only one instance when the Department provided ICANN with a formal written assessment of the corporation’s progress on specific transition tasks. This occurred in June 1999, after ICANN took the initiative to provide the Department and the general public with a status report characterizing its progress on MOU activities. In a letter to ICANN, the Department stated that while ICANN had made progress, there was still important work to be done. For, example, the Department stated that ICANN’s “top priority” must be to complete the work necessary to put in place an elected Board of Directors on a timely basis, adding that the process of electing at-large directors should be complete by June 2000. ICANN made the Department’s letter, as well as its positive response, available to the Internet community on its public Web site. Although ICANN issued additional status reports in the summers of 2000 and 2001, the Department stated that it did not provide written views and recommendations regarding them, as it did in July 1999, because it agreed with ICANN’s belief that additional time was needed to complete the MOU tasks. Department officials added that they have been reluctant to comment on ICANN’s progress due to sensitivity to international concerns that the United States might be seen as directing ICANN’s actions. The officials stated that they did not plan to issue a status report at this time even though the transition is well behind schedule, but will revisit this decision as the September 2002 termination date for the MOU approaches. When we met with Department officials in February 2002, they told us that substantial progress had been made on the project, but they would not speculate on ICANN’s ability to complete its tasks by September 2002. The following week, ICANN’s president released his report stating that ICANN could not succeed without fundamental reform. In response, Department officials said that they welcomed the call for the reform of ICANN and would follow ICANN’s reform activities and process closely. When we asked for their views on the reform effort, Department officials stated that they did not wish to comment on specifics that could change as the reform process proceeds. To develop the Department’s position on the effort, they said that they are gathering the views of U.S. business and public interest groups, as well as other executive branch agencies, such as the Department of State; the Office of Management and Budget; the Federal Communications Commission; and components of the Department of Commerce, such as the Patent and Trademark Office. They also said that they have consulted other members of ICANN’s Governmental Advisory Committee to discuss with other governments how best to support the reform process. They noted that the Department is free to adjust its relationship with ICANN in view of any new mission statement or restructuring that might result from the reform effort. Department officials said that they would assess the necessity for such adjustments, or for any legislative or executive action, depending on the results of the reform process. In conclusion, Mr. Chairman, the effort to privatize the domain name system has reached a critical juncture, as evidenced by slow progress on key tasks and ICANN’s current initiative to reevaluate its mission and consider options for reforming its structure and operations. Until these issues are resolved, the timing and eventual outcome of the transition effort remain highly uncertain, and ICANN’s legitimacy and effectiveness as the private sector manager of the domain name system remain in question. In September 2002, the current MOU between the Department and ICANN will expire. The Department will be faced with deciding whether the MOU should be extended for a third time, and if so, what amendments to the MOU are needed, or whether some new arrangement with ICANN or some other organization is necessary. The Department sees itself as the responsible steward of the transition, and is responsible for gaining assurance that ICANN has the resources and capability to assume technical management of the Internet domain name system. Given the limited progress made so far and the unsettled state of ICANN, Internet stakeholders have a need to understand the Department’s position on the transition and the prospects for a successful outcome. In view of the critical importance of a stable and secure Internet domain name system to governments, business, and other interests, we recommend that the Secretary of Commerce issue a status report detailing the Department’s assessment of the progress that has been made on transition tasks, the work that remains to be done on the joint project, and the estimated timeframe for completing the transition. In addition, the status report should discuss any changes to the transition tasks or the Department’s relationship with ICANN that result from ICANN’s reform initiative. Subsequent status reports should be issued periodically by the Department until the transition is completed and the final project report is issued. This concludes my statement, Mr. Chairman. I will be pleased to answer any questions that you and other Members of the Subcommittee may have. For questions regarding this testimony, please contact Peter Guerrero at (202) 512-8022. Individuals making key contributions to this testimony included John P. Finedore; James R. Sweetman, Jr.; Mindi Weisenbloom; Keith Rhodes; Alan Belkin; and John Shumann. Although the U.S. government supported the development of the Internet, no single entity controls the entire Internet. In fact, the Internet is not a single network at all. Rather, it is a collection of networks located around the world that communicate via standardized rules called protocols. These rules can be considered voluntary because there is no formal institutional or governmental mechanism for enforcing them. However, if any computer deviates from accepted standards, it risks losing the ability to communicate with other computers that follow the standards. Thus, the rules are essentially self-enforcing. One critical set of rules, collectively known as the domain name system, links names like www.senate.gov with the underlying numerical addresses that computers use to communicate with each other. Among other things, the rules describe what can appear at the end of a domain name. The letters that appear at the far right of a domain name are called top-level domains (TLDs) and include a small number of generic names such as .com and .gov, as well as country-codes such as .us and .jp (for Japan). The next string of text to the left (“senate” in the www.senate.gov example) is called a second-level domain and is a subset of the top-level domain. Each top-level domain has a designated administrator, called a registry, which is the entity responsible for managing and setting policy for that domain. Figure 2 illustrates the hierarchical organization of domain names with examples, including a number of the original top-level domains and the country-code domain for the United States. The domain name system translates names into addresses and back again in a process transparent to the end user. This process relies on a system of servers, called domain name servers, which store data linking names with numbers. Each domain name server stores a limited set of names and numbers. They are linked by a series of 13 root servers, which coordinate the data and allow users to find the server that identifies the site they want to reach. They are referred to as root servers because they operate at the root level (also called the root zone), as depicted in figure 2. Domain name servers are organized into a hierarchy that parallels the organization of the domain names. For example, when someone wants to reach the Web site at www.senate.gov, his or her computer will ask one of the root servers for help. The root server will direct the query to a server that knows the location of names ending in the .gov top-level domain. If the address includes a sub-domain, the second server refers the query to a third server—in this case, one that knows the address for all names ending in senate.gov. This server will then respond to the request with an numerical address, which the original requester uses to establish a direct connection with the www.senate.gov site. Figure 3 illustrates this example. Within the root zone, one of the servers is designated the authoritative root (or the “A root” server). The authoritative root server maintains the master copy of the file that identifies all top-level domains, called the “root zone file,” and redistributes it to the other 12 servers. Currently, the authoritative root server is located in Herndon, Virginia. In total, 10 of the 13 root servers are located in the United States, including 3 operated by agencies of the U.S. government. ICANN does not fund the operation of the root servers. Instead, they are supported by the efforts of individual administrators and their sponsoring organizations. Table 1 lists the operator and location of each root server. Because much of the early research on internetworking was funded by the Department of Defense (DOD), many of the rules for connecting networks were developed and implemented under DOD sponsorship. For example, DOD funding supported the efforts of the late Dr. Jon Postel, an Internet pioneer working at the University of Southern California, to develop and coordinate the domain name system. Dr. Postel originally tracked the names and numbers assigned to each computer. He also oversaw the operation of the root servers, and edited and published the documents that tracked changes in Internet protocols. Collectively, these functions became known as the Internet Assigned Numbers Authority, commonly referred to as IANA. Federal support for the development of the Internet was also provided through the National Science Foundation, which funded a network designed for academic institutions. Two developments helped the Internet evolve from a small, text-based research network into the interactive medium we know today. First, in 1990, the development of the World Wide Web and associated programs called browsers made it easier to view text and graphics together, sparking interest of users outside of academia. Then, in 1992, the Congress enacted legislation for the National Science Foundation to allow commercial traffic on its network. Following these developments, the number of computers connected to the Internet grew dramatically. In response to the growth of commercial sites on the Internet, the National Science Foundation entered into a 5-year cooperative agreement in January 1993 with Network Solutions, Inc., to take over the jobs of registering new, nonmilitary domain names, including those ending in .com, .net, and .org, and running the authoritative root server. At first, the Foundation provided the funding to support these functions. As demand for domain names grew, the Foundation allowed Network Solutions to charge an annual fee of $50 for each name registered. Controversy surrounding this fee was one of the reasons the United States government began its efforts to privatize the management of the domain name system. Working under funding provided by the Department of Defense, a group led by Drs. Paul Mockapetris and Jon Postel creates the domain name system for locating networked computers by name instead of by number. Dr. Postel publishes specifications for the first six generic top-level domains (.com, .org, .edu, .mil, .gov, and .arpa). By July 1985, the .net domain was added. President Bush signs into law an act requiring the National Science Foundation to allow commercial activity on the network that became the Internet. Network Solutions, Inc., signs a 5-year cooperative agreement with the National Science Foundation to manage public registration of new, nonmilitary domain names, including those ending in .com, .net, or .org. President Clinton issues a presidential directive on electronic commerce, making the Department of Commerce the agency responsible for managing the U.S. government’s role in the domain name system. The Department of Commerce issues the “Green Paper,” which is a proposal to improve technical management of Internet names and addresses through privatization. Specifically, the Green Paper proposes a variety of issues for discussion, including the creation of a new nonprofit corporation to manage the domain name system. In response to comments on the Green Paper, the Department of Commerce issues a policy statement known as the “White Paper,” which states that the U.S. government is prepared to transition domain name system management to a private, nonprofit corporation. The paper includes the four guiding principles of privatization: stability; competition; representation; and private, bottom-up coordination. The Internet Corporation for Assigned Names and Numbers (ICANN) incorporates in California. ICANN’s by-laws call for a 19-member Board with 9 members elected “at-large.” The Department of Commerce and ICANN enter into an MOU that states the parties will jointly design, develop, and test the methods and procedures necessary to transfer domain name system management to ICANN. The MOU is set to expire in September 2000. ICANN issues its first status report, which lists ICANN’s progress to date and states that there are important issues that still must be addressed. ICANN and the Department of Commerce enter into a cooperative research and development agreement to study root server stability and security. The study is intended to result in a final report by September 2000. ICANN and the Department of Commerce approve MOU amendment 1 to reflect the roles of ICANN and Network Solutions, Inc. The Department of Commerce contracts with ICANN to perform certain technical management functions related to the domain name system, such as address allocation and root zone coordination. At a meeting in Cairo, Egypt, ICANN adopts a process for external review of its decisions that utilizes outside experts, who will be selected at an unspecified later date. ICANN also approves a compromise whereby 5 at- large Board members will be chosen in regional online elections. ICANN issues its second Status Report, which states that several of the tasks have been completed, but work on other tasks was still under way. At a meeting in Yokahama, Japan, ICANN’s Board approves a policy for the introduction of new top-level domains. The Department of Commerce and ICANN approve MOU amendment 2, which deleted tasks related to membership mechanisms, public information, and registry competition and extended the MOU until September 2001. They also agree to extend the cooperative research and development agreement on root server stability and security through September 2001. ICANN holds worldwide elections to replace 5 of the 9 interim Board members appointed at ICANN’s creation. At a meeting in California, ICANN selects 7 new top-level domain names: .biz (for use by businesses), .info (for general use), .pro (for use by professionals), .name (for use by individuals), .aero (for use by the air transport industry), .coop (for use by cooperatives), and .museum (for use by museums).","This testimony discusses privatizing the management of the Internet domain name system. This system is a vital aspect of the Internet that works like an automated telephone directory, allowing users to reach Web sites using easy-to-understand domain names like www.senate.gov , instead of the string of numbers that computers use when communicating with each other. The U.S. government supported the development of the domain name system, and, in 1997, the President charged the Department of Commerce with transitioning it to private management. The Department issued a policy statement, called the ""White Paper,"" that defined the four guiding principles for the privatization effort as stability, competition, representation, and private, bottom-up coordination. After reviewing several proposals from private sector organizations, the Department chose the Internet Corporation for Assigned Names and Numbers (ICANN), a not-for-profit corporation, to carry out the transition. In November 1998, the Department entered into an agreement with ICANN in the form of a Memorandum of Understanding (MOU) under which the two parties agreed to collaborate on a joint transition project. Progress on and completion of each task is assessed by the Department on a case-by-case basis, with input from ICANN. The timing and eventual outcome of the transition remains highly uncertain. ICANN has made significant progress in carrying out MOU tasks related to one of the guiding principles of the transition effort--increasing competition--but progress has been much slower in the areas of increasing the stability and security of the Internet; ensuring representation of the Internet community in domain name policy-making; and using private bottom-up coordination. Although the transition is well behind schedule, the Department's public assessment of the progress being made on the transition has been limited for several reasons. First, the Department carries out its oversight of ICANN's MOU-related activities mainly through informal discussions with ICANN officials. Second, although the transition is past its original September 2000 completion date, the Department has not provided a written assessment of ICANN's progress since mid-1999. Third, although the Department stated that it welcomed the call for the reform of ICANN, they have not yet taken public position on reforms being proposed.",govreport
"The federal government has held funds in trust for Indian tribes since 1820. Enacted in 1887, the General Allotment Act, also known as the Dawes Act, provided for the division of Indian tribal lands into allotments of up to 160 acres for individual tribal members and families. Subsequently, the Indian Reorganization Act, enacted in 1934 and also known as the Wheeler-Howard Act, ended the allotment of tribal lands and extended indefinitely the period that the federal government would hold allotted lands in trust. Many of these allotments remain in trust today, now jointly owned in common by hundreds and, in many cases, thousands of individual Indians, each with an undivided—or fractionated—interest in the whole parcel. As trustee for tribes and Indians, the Secretary of the Interior is required to account for the revenue generated by each interest (amounting, in some cases, to less than 1 cent per year), invest the trust funds, and provide other trust services to the beneficiaries. The Secretary also is responsible for maintaining official Indian land title and ownership records, managing natural resource assets, and probating estates. Much of this responsibility has been delegated to BIA, which has 12 regional offices and 85 agency offices that are located on or near reservations. Beginning in April 1997, Interior has issued several strategic plans for implementing trust reforms. Concerned that Interior had not achieved the desired improvement in trust management, the Secretary in January 2002 initiated an effort to develop a comprehensive, departmentwide approach for improving Indian trust management. On March 28, 2003, Interior issued the Comprehensive Trust Management Plan, which presented a strategic plan to guide the design and implementation of integrated trust reform efforts. Interior’s performance of fiduciary trust business practices nationwide was documented and reported in the As-Is Trust Business Model Report. The information contained in the Comprehensive Trust Management Plan and the As-Is Report is the foundation for the recommendations for reengineered business processes that appear in the To-Be Model—or Fiduciary Trust Model. The Fiduciary Trust Model contains implementation strategies for major business processes, and currently serves as Interior’s guide for trust reform. As a basis for revising the department’s approach for improving Indian trust management, Interior contracted with Electronic Data Systems in 2001 to determine how trust reforms were then being conducted and how they could be improved. The firm’s recommendations included both improvements in trust management and a reorganization of Interior’s agencies carrying out trust management and improvement. In response to these recommendations, the Secretary of the Interior reorganized BIA and OST in April 2003. The reorganization increased OST’s SES positions from 7 to 14 by (1) creating 6 OST regional trust administrators, located at OST’s Albuquerque headquarters, who are responsible for providing account holders with trust services and with overseeing fiduciary trust officers and other personnel in the field and (2) adding an SES position in realigning OST’s management structure by creating three divisions. As shown in table 1, OST’s budget has grown from $34.1 million in fiscal year 1997 to $222.8 million in fiscal year 2006. Similarly, OST’s full-time equivalent positions have increased from 245 employees in fiscal year 1997 to 590 employees in fiscal year 2006. While the growth in budget and staff mainly reflect OST’s efforts to implement reforms and its growing responsibility for trust fund management, OST’s funding also supports other Indian-related activities. For example, in fiscal year 2006, OST transferred (1) $54.4 million to the Office of Historical Trust Accounting, (2) $34.0 million for implementing the Indian Land Consolidation Act activities, (3) $7.6 million to the Office of Hearings and Appeals, (4) $5.6 million to the Interior Solicitor’s Office to cover costs associated with the Cobell v. Kempthorne lawsuit, (5) $1.3 million to BIA for tribal contract and compact appraisals, and (6) $300,000 to Interior’s Chief Information Officer. OST began funding the Office of Historical Trust Accounting in fiscal year 2001 and activities related to the Indian Land Consolidation Act in fiscal year 2000. Responsibility for Indian land appraisals was transferred from BIA to OST in 2002 and is currently managed by OST’s Office of Appraisal Services. In addition to its trust reform activities, OST is responsible for maintaining trust-related Indian records and developing trust investment strategies for beneficiaries. In 1999, OST created the Office of Trust Records to ensure that Indian records are maintained and safeguarded. In September 2003, Interior signed a Memorandum of Understanding with the National Archives and Records Administration to create a national repository for American Indian records, including fiduciary trust records, in Lenexa, Kansas. OST’s Division of Trust Funds Investment is responsible for managing and investing individual Indian and tribal assets. OST is allowed to invest trust funds only in securities backed by the federal government, including U.S. Treasuries and securities from government-sponsored agencies. OST has implemented several key trust fund management reforms, but OST has not prepared a timetable for completing its remaining trust reform activities or identified a date for its termination under the 1994 Act. OST estimates that almost all of the key reforms needed to develop an integrated trust management system and to provide improved trust services will be completed by November 2007, but OST believes some additional improvements are important to make. In particular, once the validation of BIA’s new trust asset and accounting management system (TAAMS) leasing information for Indian lands with recurring income is completed, BIA and OST plan to validate the leasing information for Indian lands that do not have recurring income. The Special Trustee expects these validation activities will be completed by December 2009. Despite the 1994 Act’s requirement, OST has not proposed a termination date for the office once trust reforms are completed. The Special Trustee noted that Interior will need OST’s staff to continue to perform their functions after trust reforms are completed, whether or not OST is terminated, because OST was given responsibility for managing trust fund operations and other trust-related activities after the 1994 Act was enacted. The Special Trustee also added that OST will reduce its expenditures once key trust reforms are completed by terminating contracts, but he believes that OST’s current staff is about the right size needed to manage OST’s operations after trust reforms are completed. However, because OST has not developed a workforce plan that reexamines the expenditures and staffing levels needed for trust fund operations once trust reforms are completed, additional opportunities may exist to further reduce expenditures and OST staff. OST has made important progress in implementing trust fund management reforms and plans to complete almost all of the key reforms by November 2007. Specifically, OST is responsible for trust reforms associated with the trust funds accounting system and the overall integration of the various trust reform automated systems. BIA and OST are responsible for trust reforms associated with its implementation of the TAAMS system for managing land title records and leasing activities for Indian lands. NBC is responsible for developing a management system for Indian land appraisals. OST is responsible for implementing the following trust reforms: Trust Funds Accounting System (TFAS). In March 1998, OST awarded a contract to SEI Investments to use a modified version of its commercial trust accounting system that provides basic collection, accounting, investing, disbursing, and reporting functions. TFAS replaced a module in BIA’s Integrated Records Management System and two OST systems, which could not fully perform trust accounting functions. TFAS was deployed in August 1998 and was fully operational in May 2000. OST continues to contract with SEI Investments at a cost of about $14 million per year for operations and general maintenance, which includes system upgrades twice annually. TFAS is an accounting and investment system that enables the automated production of account statements for individual Indians and tribal account holders. It also allows, for example, automated trade settlements, automated payments of financial asset income, daily securities pricing, and automated reconciliation. In addition, landownership and leasing accounts will be included in TFAS as part of BIA’s and OST’s TAAMS conversion project to ensure that both systems contain accurate and complete information. Trust Funds Receivable. In 2004, OST awarded a contract to Bank of America to centralize the collection of trust payments through a single remittance-processing center, also known as a lockbox, to minimize the risk of loss or theft. Under phase I of the new system, which became effective in October 2005, trust payments are sent to the processing center in Prescott, Arizona, for deposit into trust fund accounts. Previously, BIA and OST personnel in agencies for each of the 12 regions collected trust payments for trust fund account holders and then mailed or deposited the payments. Phase II of this project is to have all collections and distributions automated in TFAS. However, implementation requires the completion of the validation of the land title and leasing data in TAAMS. According to OST officials, full automation of all collections and distributions is scheduled for November 2007. OST officials said that two agencies in BIA’s Southern Plains region completed Phase II by the end of June 2005— the remaining agencies in BIA’s Southern Plains region and one agency in BIA’s Eastern Oklahoma region completed Phase II by the end of January 2006. Several agencies in BIA’s Great Plains region completed Phase II by the end of June 2006—the remaining agencies in BIA’s Great Plains region and several agencies in BIA’s Northwest region completed Phase II by the end of August 2006. BIA’s Rocky Mountain region completed Phase II by the end of July 2006, and BIA’s Navajo region and several agencies in BIA’s Western regions completed Phase II by the end of September 2006. In addition, OST has completed its desktop procedures for handling the receipt of trust funds, and BIA is completing its desktop standardization procedures, with some assistance from OST. Trust Beneficiary Call Center. In December 2004, OST established the Trust Beneficiary Call Center, a centralized call center in its headquarters office in Albuquerque, New Mexico. Through a toll-free telephone number, the call center provides timely responses to beneficiaries’ questions and allows them to access account information. In addition, the call center operators and staff have recently received training and access to TAAMS through OST’s trust portal to enable them to better answer questions about beneficiaries’ assets. If a beneficiary’s question cannot be answered, the call center operator is to refer the question to an OST Fiduciary Trust Officer, generally colocated at the BIA field agencies, to research and respond accordingly. The call center was fully operational by December 2005. In establishing the call center, calls were redirected from preexisting toll- free telephone numbers at BIA field agencies. OST officials told us that the Trust Beneficiary Call Center has helped to relieve some of the workload from OST and BIA staff in the field. OST data show that, as of July 2006, the call center had received over 135,000 calls from beneficiaries, with a first-line resolution rate of about 89 percent. Trust Portal. OST completed the implementation of its trust portal in May 2006. OST’s trust portal provides employees with a single point of access to applications and other resources, such as the trust funds receivable system and the intranet. Currently, the trust portal is available to OST employees and some BIA employees. According to an OST official, various contractors developed the trust portal and OST staff maintain it. Risk Management Program. Beginning in 1999, OST has contracted with CD&L to develop and refine the risk management program for establishing management controls to monitor and evaluate the effectiveness of Interior’s trust operations. The risk management program has evolved over the past few years—the original risk management product was a stand- alone compact disk application that provided an assessment tool to evaluate OST’s business operations. Since then, a Web-based risk management tool, the RM-Plus tool, has been developed to facilitate data collection and reporting for all Interior bureaus and offices with Indian trust responsibilities. OST implemented the RM-Plus in August 2004 and has contracted with Chickasaw Nation Industries (CNI) to operate and maintain the tool. BIA used the RM-Plus tool in 2006 to produce its financial assurance statement at the Southern Plains pilot location. OST officials said that additional revisions are being made to the RM-Plus tool in response to the new requirements in the Office of Management and Budget’s Circular A-123 for ensuring the accountability and cost- effectiveness of agency programs. The RM-Plus is currently being revised to incorporate the circular’s requirements and is scheduled to be completed by March 2007. If other Interior bureaus and offices with trust responsibilities decide to use the RM-Plus tool, OST will assist them by providing advice and access to the RM-Plus tool. BIA and OST are implementing the following trust reforms to develop centralized systems for managing land title records and leasing activities as well as managing and tracking probates for Indian lands: TAAMS. In December 1998, Interior awarded a contract to Artesia to develop TAAMS, a centralized system with two components for managing Indian trust assets: the TAAMS land title system and the leasing module. Over the years, Artesia was bought out by several contractors. Currently, the TAAMS contract is with CGI-AMS. BIA’s TAAMS land title system maintains both current and historical titles—some of these historical titles in the system date back to the original land grant. This system was completed in January 2006. The TAAMS leasing module tracks leases of Indian assets. BIA and OST are currently converting leasing data from BIA’s old legacy systems to TAAMS and integrating TAAMS with TFAS to ensure that both systems have accurate and complete title and leasing information. As a region’s system is converted, OST will provide beneficiaries with asset statements that identify the source of the funds and a listing of assets owned in that region and any active encumbrances, as required by the 1994 Act. Prior to the conversion, the statements that beneficiaries receive will only include information on account balances and account transactions. Before leasing data are converted into TAAMS, BIA’s Land Titles and Records Offices and OST—primarily through a contract with CNI—are implementing the data quality and integrity (DQ&I) project to verify the completeness and accuracy of the TAAMS title and leasing information for Indian lands. As part of the verification, the DQ&I teams compare the TAAMS information with the information contained in the BIA region’s legacy realty system for land tract allotments with recurring income. For each land tract allotment for which the owner(s) and the interest they own do not match, the DQ&I teams compare the TAAMS information against source documents to identify (1) conveyances of title through probate records, deeds, and gift conveyances and (2) active encumbrances, including lease permits, rights of way, and timber sale agreements. This verification is scheduled to be completed in all BIA regions by October 1, 2007, covering land tracts with recurring income for which the legacy lease and title systems do not match. OST also plans to verify the accuracy of the land and leasing records for which TAAMS and the legacy realty system have matching information by comparing the TAAMS information with source documents for a sample of these records. OST and BIA plan to verify title and leasing data for tracts of land without recurring income after October 2007, but a schedule for implementing and completing this work has not yet been developed. OST officials noted that the DQ&I project is labor-intensive. The land validation took about 1 hour per tract in BIA’s Southern Plains region because there are about 12 owners per tract. This validation requires more time in BIA’s Great Plains region, which has about 32 owners per tract, and in BIA’s Rocky Mountain region, which has over 100 owners for some tracts. Probate Case Management and Tracking System. BIA used a modified off-the-shelf software program to develop the probate case management and tracking system, also known as ProTrac, for use by BIA, OST, and Interior’s Office of Hearings and Appeals to manage and track probate cases from initiation to closing. BIA constructed the ProTrac database from manual records, spreadsheets, and trust fund records and, according to a BIA official, has verified its accuracy. BIA is currently developing a paperless version of ProTrac that is scheduled to be implemented by June 2007. NBC is implementing the following trust reform to improve the management of Indian land appraisals: Appraisal Management System. NBC is working with OST to adapt its appraisal request and review tracking system to develop the Indian trust appraisal request system. This new system will centralize the appraisal process and track appraisal requests across Indian country, including the period of time it takes to process a request. NBC and OST completed pilot testing the appraisal management system in the Western region in October 2006. OST estimates that the appraisal management system will be fully implemented by March 2007. OST and BIA managers have overseen the progress of each of the key trust reforms scheduled for implementation by November 2007. OST managers also plan to implement two additional trust reforms. First, the managers plan to verify the accuracy and completeness of TAAMS information for (1) a statistical sample of the tracts of land for which the data in TAAMS and the BIA regional legacy systems match and (2) tracts of Indian land without recurring income. The Special Trustee estimates that this work will be completed by the end of 2009. Second, the OST managers plan to work with BIA to replace the oil and gas distribution system within BIA’s Integrated Records Management System that tracks oil and gas revenue from Indian lands. The new system will, among other things, interface with TFAS and the Minerals Management Service’s system. This system is estimated to cost $2.5 million per year and to be implemented by December 2009. Furthermore, Interior is exploring the conversion of Land Title Mapper to the department’s National Integrated Lands System for standardization purposes. The Land Title Mapper uses satellite imagery and geographic information systems to link the data in the integrated computer system with the physical site. The Special Trustee said the mapper could be completed by 2009 or 2010 and noted that, while the mapper is not a component of the 1994 Act’s trust reforms, it would provide an important service to trust account beneficiaries. Additionally, as trust reforms are completed, OST will conduct employee training, promulgate trust-related regulations, prepare internal procedures, and prepare handbooks. The 1994 Act directed the Special Trustee, within 1 year of appointment, to provide the Congress with a comprehensive strategic plan that, among other things, identifies a timetable for implementing the plan’s trust reforms and a date for OST’s termination once reforms have been implemented. However, the Special Trustee has yet to provide the Congress with a timetable for completing the remaining trust reform activities and a date for OST’s termination, even though OST’s most recent strategic plan—the Comprehensive Trust Management Plan—issued in March 2003, stated that OST would be able to forecast a date for termination within the next 14 months. The lack of a timetable for completing the remaining trust reforms has hindered the ability of the Congress, tribal organizations, and the public to fully assess the status of OST’s trust reforms or to plan for trust fund operations once reforms are completed. The 1994 Act includes a sunset provision for OST but allows the Special Trustee to recommend to the Congress that OST continue operations if it is needed for the efficient discharge of Interior’s trust responsibilities. The Special Trustee told us that Interior will need OST’s staff to continue to perform their functions after trust reforms are completed, whether or not OST is terminated, because the Secretary of the Interior transferred additional staff and responsibilities to OST for managing tribal and individual Indian trust fund accounts and providing other trust services after the passage of the 1994 Act. Specifically, in response to direction in the conference report accompanying Interior’s fiscal year 1996 appropriations bill, Secretarial Order 3197 transferred the Office of Trust Funds Management and other financial trust services from BIA to OST. Subsequently, the Secretary transferred BIA’s land appraisal staff to OST. If OST is terminated, it is unclear where OST responsibilities—including trust fund management and accounting operations, beneficiary services, trust records management, and land appraisals—will be transferred. The Special Trustee told us that OST had decided to use contractors, rather than hire additional OST staff, to implement many of the trust reforms as a way to minimize the size of its permanent staff—the contracts will end once key trust reforms are completed. The Special Trustee also said OST’s SES positions will be reduced from 14 to 13 in the near future, and he noted that Interior is studying whether efficiencies might exist by combining the Chief Information Officer positions in BIA and OST (see fig. 1 for OST’s current organizational chart and SES positions). However, the Special Trustee believes the size of OST’s staff, including the number of SES positions, is about the right size needed to manage OST’s future operations. OST has not developed a workforce plan that reexamines the expenditures and staffing levels needed for trust fund operations—including managing and accounting for trust funds, providing trust services, maintaining trust records, and conducting land appraisals—once trust reforms are completed. The following opportunities may exist to realign or further reduce expenditures and staffing levels: The Trust Program Management Center, which is responsible for implementing trust reforms, currently has 23 staff whose work will be completed when trust reforms are implemented. However, one OST manager noted that, in some cases, the staff members responsible for implementing a given reform were then reassigned to the OST office with operational responsibilities to ensure continuous improvements are made. OST currently has 131 accounting technicians located in many of BIA’s field agencies whose responsibilities for processing the collections and disbursements of account funds will decrease once trust reforms are completed and accounting functions are automated. However, OST managers noted that it is important to have the accounting technicians in the field to perform account maintenance and research accounts. In addition, a BIA manager noted that many account technicians may still be needed to handle checks that might be given to a local BIA office instead of being mailed to OST’s lockbox facility in Prescott, Arizona. Regardless, no plans have been developed to determine either the appropriate number of the accounting technicians needed to carry out future operations or their roles and responsibilities. The Deputy Special Trustee for Field Operations, the six Regional Trust Administrators, and the Fiduciary Trust Officers have been actively involved in implementing trust reforms by coordinating DQ&I and other activities. It is unclear whether seven SES positions will continue to be needed to provide tribal and individual Indian account holders with trust services and to oversee field operations once trust reforms are completed; especially with OST’s 52 Fiduciary Trust Officers generally colocated in BIA’s field agencies and with the Trust Beneficiary Call Center now in place. However, the Special Trustee noted that each of the Regional Trust Administrators has trust banking or legal expertise for providing tribal and individual Indian account holders with important services, and the administrators will expand their outreach to trust account holders as the reforms are completed. Since its inception, OST has relied on contractors to perform many of its trust reform activities as a way to minimize the size of its permanent staff. In fiscal years 2004 and 2005, OST obligated nearly 21 percent of its appropriated funds to contracting. The trust reform activities performed and products provided by the nearly 350 firms with which OST has contracted vary widely. About 66 percent of contracting dollars from fiscal years 2004 and 2005 went to 2 firms. Since 2003, OST has relied primarily on NBC to award and manage contracts. In a May 2006 report, Interior’s Office of Inspector General found that senior OST managers had created an appearance of preferential treatment of a contractor in violation of the standards of ethical conduct. In response, the Special Trustee required that all OST employees in grades GS-12 and above complete a special 2- hour ethics training course, in addition to the annual mandatory ethics training. OST has relied extensively on contractors to perform many of its trust reform activities. During fiscal years 2004 and 2005, OST spent about $89.7 million, or nearly 21 percent, of its total appropriated funds on contracts. Because 48 percent of these appropriated funds was transferred to other offices, such as the Office of Historical Trust Accounting, the amount OST spent on contracting comprised nearly 40 percent of its available funding for these 2 years. During this period, OST paid about $58.8 million, or 66 percent, of these funds to 2 of the nearly 350 firms it used—CNI received $31.1 million and SEI Investments received $27.7 million. (See table 2 for OST’s obligations to its 10 leading contractors.) CNI provides a variety of trust reform work for OST, including risk management, trust data cleanup and encoding, and the development of policy and procedures manuals. Most of the contracting with CNI, an Indian-owned 8(a) small business, was based on an indefinite delivery, indefinite quantity contract. (See app. II for a description of the work that CNI performed under each task order.) An advantage of using this type of contract is that contract task orders can be awarded quickly because there is no requirement for competition. OST also pays SEI Investments about $14 million a year to operate and maintain a version of its commercial trust fund accounting system adapted to meet OST’s needs. Table 3 shows the 10 leading product or service types for which OST used contractors. Most of OST’s obligations to contractors, about $30.3 million, were for data processing and telecommunications services. For example, the DQ&I project for ensuring the accuracy and completeness of the TAAMS database focuses on (1) assisting BIA with document encoding into the trust systems, (2) validating and correcting critical data elements to their respective source documents, and (3) implementing postquality assurance processes. Other major data processing and telecommunications services include developing OST’s Trust Beneficiary Call Center, identifying the owners of whereabouts unknown accounts, and developing risk management processes. Another major service or product type for which contracting funds were allocated was for financial services, at about $28 million. About 99 percent of these funds went to SEI Investments to operate and maintain TFAS. Contractors also provided products and services to OST that were not directly related to trust reform, such as supplying office furniture or providing guard and security services. As trust reform activities are completed, OST plans to reduce funding for contracting accordingly. For example, OST’s fiscal year 2007 budget request proposed to reduce funding by about $4.9 million as a result of the completion of certain contract efforts, including the following reductions: $1,400,000 from the Office of Trust Accountability for contract costs related to defining, developing, facilitating, and delivering trust training programs; $1,050,000 from the Office of Trust Accountability for contract costs related to the development of policies and procedures and upgrades of systems for the reengineering of trust processes; $885,000 from the Office of Trust Accountability for contract costs related to the modeling of business practices for the purposes of risk management; $675,000 from the Office of Trust Review and Audit for contract costs related to the development of the Indian Trust Examiner certification; and $425,000 and $450,000 from the Offices of Field Operations and Trust Services, respectively, for contractors that were providing accounting services, such as data cleanup and encoding. Prior to 2001, OST relied on NBC to provide contracting services through an interagency agreement. However, at OST’s request, Interior delegated contracting authority to OST in January 2001. This delegation was conditioned on (1) the retention of authority by Interior’s Office of Acquisition and Property Management to oversee and approve specified actions and (2) a subsequent evaluation of OST’s operations. In March 2002, the Office of Acquisition and Property Management conducted an acquisition management review that found several problems with OST’s contracting operations. The review team said that many of the problems they found could easily be fixed, and noted that OST’s contracting office was not fully staffed and was still experiencing “growing pains.” The review team’s draft report, which had three broad recommendations, was provided to OST for comment and OST responded in June 2002. However, the report was never issued in final. Subsequently, in July 2003, OST conducted its own study to (1) evaluate the functioning of OST’s contracting office, (2) assess customer satisfaction with contracting services provided, and (3) determine the feasibility (including a cost/benefit and qualitative analysis) of outsourcing acquisition services to either NBC or another Interior office. The internal review found that, although the contracting office had made substantial improvements in response to the acquisition management review, the office still was not operating as effectively as it could. On the basis of proposals received from organizations that provide contracting services and a qualitative evaluation of these organizations, OST found that NBC’s branch in Denver, Colorado, offered the best value for providing contracting services for OST. As a result, OST signed a 5-year interagency agreement with NBC’s Denver branch to provide contracting services beginning on October 1, 2003. NBC’s headquarters conducted an acquisition management review of NBC Denver’s contracting practices in April 2005 and found that, overall, the office was highly effective in providing contracting services. In 2004, OST also began using NBC’s branch in Fort Huachuca, Arizona, because it is responsible for managing the indefinite delivery, indefinite quantity contract with CNI, as we previously discussed. The contract had been originally awarded to CNI on a sole-source basis, which is allowable under Small Business Administration regulations to provide special procurement advantages to businesses owned by Indian tribes that participate in the 8(a) program. OST has used the contract by placing task or delivery orders for implementing several of the trust reforms. In addition to funding contracts for their own trust reform activities, such as TAAMS, BIA also has administered contracts for OST. For example, since fiscal year 2005, BIA has served as the contracting office for a contract with CD&L for risk management. A BIA official stated that this contract is set to expire in December 2006. Finally, GovWorks, one of several federal government franchise funds designated by the Director, Office of Management and Budget, also has provided contracting services for OST. In July 2003, Interior’s Office of Inspector General received allegations that senior OST officials had given CD&L favorable treatment in awarding contract work. The Inspector General’s May 2006 report found that senior OST officials created an appearance of preferential treatment of CD&L, in violation of both the Standards of Ethical Conduct for Employees of the Executive Branch and an internal OST memorandum directing “Arms Length Dealings with Contractors.” The report documents that over several years, OST awarded and continued to extend, without competition, a contract with CD&L for trust fund accounting and risk management services; while at the same time, senior OST officials engaged in extensive outside social activity and exchanged gifts with CD&L executives. The report also stated that OST contract personnel felt pressured by these senior OST officials to continue to award work to CD&L. The Inspector General referred the matter to Interior to take appropriate administrative action and to review the performance of the CD&L contract. In response, the Special Trustee has required that all OST employees at grades GS-12 or above take a special 2-hour ethics training course. The Special Trustee stated that he was satisfied with CD&L’s trust accounting and risk management services. From January 2001 through September 2003, OST had procurement authority and in-house staff were servicing OST’s contracts. In February 2004, after the contracting function was turned over to NBC’s Denver branch, OST attempted to get a follow-on sole-source contract with CD&L for the risk management program. OST officials were anxious to get a follow-on contract to meet a court-ordered June 2004 deadline for implementing the risk management system for all agencies involved with trust records. However, due to a lack of documentation to support a valid justification and because of prior apparent improprieties, NBC officials refused to award a follow-on sole-source contract. Rather than wait 4 to 5 months to award a new contract under the competitive bidding process at NBC’s Denver branch, OST officials went to BIA and placed an order under the General Services Administration’s Mission Oriented Business Integrated Services program, which required a shorter time period to get a contract awarded. The order was placed with CNI in April 2004, and CNI subsequently hired CD&L as a subcontractor through September 2004 to continue the risk management design work. In January 2005, a competitive contract for additional risk management work was awarded to CNI and CD&L, with BIA as the contracting office. OST is in the final stages of implementing the trust fund management reforms that the 1994 Act required. However, the Special Trustee has not provided the Congress with a timetable for completing these reforms, as required by the act. Without a timetable, the Congress cannot readily oversee OST’s implementation of the trust reforms or plan for trust fund operations once reforms are completed. OST also has not developed a plan for future trust fund operations once reforms are completed. Whether or not OST is terminated, the Special Trustee believes that OST’s staff will need to continue to perform their functions after trust reforms are completed because, after the passage of the 1994 Act, the Secretary of the Interior transferred to OST the Office of Trust Funds Management and other offices and personnel responsible for trust fund operations. In addition, OST has not developed a workforce plan that reexamines the responsibilities and needs for trust fund operations. While the Special Trustee plans to reduce OST’s budget by terminating contracts as reforms are completed, he believes that OST’s current size is about right for trust fund operations once reforms are completed. However, a reexamination of OST’s workforce needs might identify opportunities for realigning or further reducing expenditures and staffing levels because, for example, certain job responsibilities may decrease once trust reforms are completed and accounting functions are automated. To improve congressional oversight of the trust reforms and ensure that trust fund accounting operations, once implemented, are economically staffed, we recommend that the Secretary of the Interior direct the Special Trustee to take the following three actions: Provide the Congress with a timetable for completing the trust fund management reforms. In anticipation of completing the trust reforms, provide the Congress with a plan for future trust fund operations, including, if the decision is made to terminate OST, a determination of where these operations will reside. As trust reforms are completed and contracts are terminated, develop a workforce plan that reexamines and proposes staffing levels and funding needs. We provided Interior with a draft of this report for its review and comment. In its written response, Interior agreed with our recommendations, stating that it expects to have a timetable by late-June 2007 for implementing the remaining trust reforms, including a date for the proposed termination or eventual disposition of OST. (See app. III.) However, Interior disagreed with the number of key reforms we identified and attached to its letter a list of 47 additional reforms that OST has completed. We reviewed the 47 reform efforts on Interior’s list and, while they are important activities for the implementation of OST’s trust reforms, we believe they are not key components of OST’s integrated information system that interfaces the trust funds accounting system with BIA’s land title records and asset management systems for Indian lands. Accordingly, we did not revise our report. In addition, Interior provided comments to improve the draft report’s technical accuracy, which we have incorporated as appropriate. To examine OST’s progress in implementing the American Indian Trust Fund Management Reform Act of 1994, we reviewed (1) the 1994 Act and its legislative history; (2) Interior’s appropriations legislation; and (3) relevant Interior documents, including secretarial orders and OST’s March 2003 Comprehensive Trust Management Plan and prior strategic plans that provide the basis for OST’s current reform efforts. We also reviewed various documents showing OST’s progress in implementing trust reforms and interviewed OST and BIA officials regarding the status of trust reform efforts. However, we did not analyze the adequacy of OST’s efforts to ensure that the reforms will result in an integrated computer system with complete and accurate information. In addition, to gain insight into the concerns that tribal organizations have expressed about OST’s trust reform performance, we interviewed executives of the Intertribal Monitoring Association on Indian Trust Funds, the National Congress of American Indians, the Great Plains Tribal Chairman’s Association, the United South and Eastern Tribes, and the Affiliated Tribes of Northwest Indians. Although the tribal organizations we selected reflect some variation in geography and their members include numerous individual Indian tribes, our selections were not intended to be representative of all tribes. To examine OST’s use of contractors in implementing its trust reforms, we obtained specific data elements for fiscal years 2004 and 2005 from the General Services Administration’s FPDS-NG database. These data elements include the amount obligated, the types of goods or services purchased, and various vendor characteristics. FPDS-NG does not include (1) assistance actions, such as grants and cooperative agreements; (2) imprest fund transactions, training authorizations, and micropurchases valued at $2,500 or less that were obtained through the use of a government purchase card; (3) interagency agreements with other federal agencies and organizations; or (4) actions involving transfer of supplies within and among agencies. Finally, total dollars for fiscal year 2006 are incomplete and were not included in this report. To ensure the completeness and accuracy of the FPDS-NG contracting data, we examined NBC contracting documents and interviewed contracting officers at BIA and NBC’s Denver and Fort Huachuca branches as well as selected contracting officer’s technical representatives at OST. We obtained data from FPDS-NG by searching on OST as the funding agency. However, because NBC officials told us this field was not always completed, we also obtained FPDS-NG data by searching on NBC’s contracting office and identifying, by the product or service description, contracts most likely associated with trust reform efforts. In addition, we compared these data with NBC’s procurement tracking system and made adjustments to the FPDS-NG data as necessary. Where discrepancies were found, we corrected the FPDS-NG data to ensure completeness of the data. On the basis of our testing and correction of FPDS-NG data, we are sufficiently confident of the reliability of the data we are reporting. Furthermore, we reviewed the report and associated workpapers of Interior’s Office of Inspector General regarding allegations that senior OST officials had given CD&L preferential treatment in contracting for risk management services. To assess the performance awards and retention allowances that SES officials at OST had received, we analyzed data for fiscal years 2001 through 2005 from the Office of Personnel Management’s Central Personnel Data File, which contains records for most federal employees and is the primary governmentwide source for information on federal employees. Specifically, we examined the number and dollar amount of performance awards and retention allowances provided to OST and compared them with those of other Interior bureaus and other federal agencies. In addition, we obtained documents from Interior’s Minerals Management Service, which is responsible for providing OST with human resources support services—including (1) processing performance awards and retention allowances provided to SES officials at OST and (2) ensuring compliance with the appropriate procedures for determining such awards and allowances. We conducted our review from February 2006 through October 2006 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will send copies to interested congressional committees, the Secretary of the Interior, the Special Trustee for American Indians, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available to others upon request. This report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or nazzaror@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. The Department of the Interior (Interior) has provided a retention allowance to one Senior Executive Service (SES) manager at the Office of the Special Trustee for American Indians (OST)—the Principal Deputy Special Trustee. In addition, 7 of the 13 SES managers currently at OST received at least two major awards in 2 years or more. However, from fiscal years 2001 to 2005, the average performance award amounts that SES managers received were generally lower than the average amounts provided to other bureaus and offices within Interior and other federal agencies. Interior’s Executive Resources Board (ERB), currently chaired by the Secretary of the Interior and comprising senior Interior managers, made the final determination on all performance awards and retention allowances provided to SES managers. Each calendar year from 1999 through 2005, Interior has provided OST’s Principal Deputy Special Trustee with a retention allowance because, according to agency justifications, her historical knowledge and managerial ability are needed to ensure Interior’s trust oversight and reform success. Specifically, from 1999 to 2005, Interior’s ERB has reviewed and approved the justification for the retention allowance, which raises the Principal Deputy Special Trustee’s total compensation to the maximum allowable for SES employees—excluding 1999 and 2005, when the Principal Deputy Special Trustee’s compensation was slightly under the total maximum allowable. According to officials of Interior’s Minerals Management Service, retention allowances are reserved for special talent and have been provided to only two Interior SES managers—the other SES manager received a retention allowance in 2002 and 2004. In each year, the Principal Deputy Special Trustee’s retention allowance was lower than the maximum amount provided to an SES manager at all other federal agencies (see table 4). The Special Trustee stated that as OST’s trust reforms are completed, the total compensation provided to the Principal Deputy Special Trustee will be reevaluated. Seven of OST’s SES managers received at least two major awards—a performance award, a special act award, an individual cash award, or a time-off award—in 2 years or more, as follows: The Principal Deputy Special Trustee, who has been in the SES since 1993, received three major awards from fiscal years 2000 to 2006. Specifically, the Principal Deputy Special Trustee received two time-off awards of 80 hours each in fiscal years 2000 and 2004 and a performance award of about $9,700 in fiscal year 2006. In addition to these major awards, the Principal Deputy Special Trustee received the Presidential Rank Award in 2002, one of the government’s most prestigious awards. While the Principal Deputy Special Trustee received cash with the award, the full cash amount could not be provided in 2002 because her total compensation was at the maximum allowable for a federal employee. As a result, she received part of the award in 2002 and the rest of the award in 2003. A manager, who has been in the SES since 1996, received eight major awards from fiscal years 1999 through 2006, including at least one award in 7 of the 8 years. Specifically, in fiscal years 1999 and 2000, this manager received three special act awards that ranged from $1,750 to $10,000. In fiscal years 2002 through 2006, this manager received either a performance award or an individual cash award in each year, ranging from $5,000 to $13,000. A manager, who has been in the SES since 2002, received six major awards from fiscal years 2003 through 2006, including at least one award in each year. Specifically, this manager received two special act awards of $5,000 and $10,000, two time-off awards of 40 hours each, an individual cash award of $5,000, and a performance award of about $7,200. A manager, who has been in the SES since 2002, received three major awards—one award per year from fiscal years 2004 through 2006. This manager received a performance award of $6,900 and two time-off awards of 40 hours and 80 hours. A manager, who has been in the SES since 2004, received two major awards—performance awards of about $12,000 in fiscal year 2005 and about $11,500 in fiscal year 2006. A manager, who has been in the SES since 2004, received two major awards—individual cash awards of $4,300 in fiscal year 2005 and $5,000 in fiscal year 2006. A manager, who has been in the SES since 2004, received two major awards—a performance award of about $8,900 in fiscal year 2005 and an individual cash award of $5,000 in fiscal year 2006. OST’s six other current SES managers have received, at most, one major award. In fiscal year 2005, about 54 percent of OST’s SES managers received at least one major award. In fiscal year 2006, about 69 percent of OST’s SES managers received at least one major award. Table 5 compares the average performance award amounts for SES managers at OST with the average amounts at other bureaus and offices within Interior and other federal agencies. The average performance award amount of OST’s SES performance awards was higher than the average amounts of other bureaus and offices within Interior and other federal agencies in fiscal year 2001—according to the Special Trustee, the performance awards recognized these managers’ many hours of efforts to validate data for the implementation of the trust funds accounting system in 2000. However, the average amounts of OST’s performance awards for fiscal years 2002 through 2005 were generally lower than the average amounts provided to other bureaus and offices within Interior and other federal agencies—excluding fiscal year 2003, when the average amount of OST’s performance awards was slightly higher than the average amount provided to other bureaus and offices within Interior. Interior’s ERB approved each of the major awards provided to OST’s SES managers. Minerals Management Service officials told us that ERB considers supporting documentation and recommendations provided by the Performance Review Board, which is an Interior board that reviews only performance awards, in making its final determination. Woods.","The American Indian Trust Fund Management Reform Act of 1994 established the Office of the Special Trustee for American Indians (OST), within the Department of the Interior, to oversee the implementation of management reforms for funds--derived primarily from Interior's leasing of Indian lands--that Interior holds in trust for many Indian tribes and individuals. Specifically, the act directs that an integrated information system be developed that interfaces the trust fund accounting system with the land title records and asset management systems maintained by Interior's Bureau of Indian Affairs (BIA). GAO examined (1) OST's progress in implementing the trust fund management reforms and (2) the extent to which OST has used contractors in implementing these reforms. GAO reviewed OST's strategic plans and contracting documents and interviewed OST and BIA managers. OST has implemented several key trust fund management reforms, but has not prepared a timetable for completing its remaining trust reform activities and a date for OST's termination, as required by the 1994 Act. OST estimates that almost all key reforms needed to develop an integrated trust management system and to provide improved trust services will be completed by November 2007. Specifically, OST implemented a new trust funds accounting system for processing trust account funds, and BIA and OST are currently validating data for the trust asset and accounting management system for managing Indian land title records and leases for land with recurring income. However, the Special Trustee estimates that data verification for leasing activities will not be completed for all Indian lands until December 2009. OST's most recent strategic plan, issued in 2003, did not include a timetable for implementing trust reforms or a date for OST's termination. The Special Trustee notes that many OST functions, including trust fund operations, trust records management, and appraisal services, need to be performed after reforms are completed. If OST is terminated, these responsibilities would have to be transferred to another Interior office. OST plans to reduce expenditures primarily by terminating contracts once trust reforms are completed. However, OST has not yet developed a workforce plan that reexamines the expenditures and staffing levels needed for trust fund operations once trust reforms are completed. OST has used contractors to perform many of its trust reform activities as a way to minimize the size of its permanent staff. In fiscal years 2004 and 2005, OST allocated $89.7 million, or nearly 21 percent, of its appropriated funds to contracting. About 66 percent of contracting dollars from these 2 fiscal years went to two firms. Over $31 million during this period went to the largest contractor, an Indian-owned 8(a) small business, by adding task orders through an existing contract. OST has primarily relied on Interior's National Business Center to award and manage contracts.",govreport
"In 1998, following a presidential call for VA and DOD to start developing a “comprehensive, life-long medical record for each service member,” the two departments began a joint course of action aimed at achieving the capability to share patient health information for active duty military personnel and veterans. Their first initiative, undertaken in that year, was the Government Computer-Based Patient Record (GCPR) project, whose goal was an electronic interface that would allow physicians and other authorized users at VA and DOD health facilities to access data from any of the other agency’s health information systems. The interface was expected to compile requested patient information in a virtual record that could be displayed on a user’s computer screen. In our reviews of the GCPR project, we determined that the lack of a lead entity, clear mission, and detailed planning to achieve that mission made it difficult to monitor progress, identify project risks, and develop appropriate contingency plans. In April 2001 and in June 2002, we made recommendations to help strengthen the management and oversight of the project. In 2001, we recommended that the participating agencies (1) designate a lead entity with final decision-making authority and establish a clear line of authority for the GCPR project and (2) create comprehensive and coordinated plans that included an agreed-upon mission and clear goals, objectives, and performance measures, to ensure that the agencies could share comprehensive, meaningful, accurate, and secure patient health care data. In 2002, we recommended that the participating agencies revise the original goals and objectives of the project to align with their current strategy, commit the executive support necessary to adequately manage the project, and ensure that it followed sound project management principles. VA and DOD took specific measures in response to our recommendations for enhancing overall management and accountability of the project. By July 2002, VA and DOD had revised their strategy and had made progress toward being able to electronically share patient health data. The two departments had refocused the project and named it the Federal Health Information Exchange (FHIE) program and, consistent with our prior recommendation, had finalized a memorandum of agreement designating VA as the lead entity for implementing the program. This agreement also established FHIE as a joint activity that would allow the exchange of health care information in two phases. ● The first phase, completed in mid-July 2002, enabled the one-way transfer of data from DOD’s existing health information system (the Composite Health Care System, CHCS) to a separate database that VA clinicians could access. ● A second phase, finalized in March 2004, completed VA’s and DOD’s efforts to add to the base of patient health information available to VA clinicians via this one-way sharing capability. According to the December 2004 VA/DOD Joint Executive Council Annual Report, FHIE was fully operational, and VA providers at all VA medical centers and clinics nationwide had access to data on separated service members. According to the report, the FHIE data repository at that time contained historical clinical health data on 2.3 million unique patients from 1989 on, and the repository made a significant contribution to the delivery and continuity of care and adjudication of disability claims of separated service members as they transitioned to veteran status. The departments reported total GCPR/FHIE costs of about $85 million through fiscal year 2003. In addition, officials stated that in December 2004, the departments began to use the FHIE framework to transfer pre- and postdeployment health assessment data from DOD to VA. According to these officials, VA has now received about 400,000 of these records. However, not all DOD medical information is captured in CHCS. For example, according to DOD officials, as of September 6, 2005, 1.7 million patient stay records were stored in the Clinical Information System (a commercial product customized for DOD). In addition, many Air Force facilities use a system called the Integrated Clinical Database for their medical information. The revised DOD/VA strategy also envisioned achieving a longer term, two-way exchange of health information between DOD and VA, which may also address systems outside of CHCS. Known as HealthePeople (Federal), this initiative is premised on the departments’ development of a common health information architecture comprising standardized data, communications, security, and high-performance health information systems. The joint effort is expected to result in the secured sharing of health data between the new systems that each department is currently developing and beginning to implement—VA’s HealtheVet VistA and DOD’s CHCS II. ● DOD began developing CHCS II in 1997 and had completed a key component for the planned electronic interface—its Clinical Data Repository. When we last reported in June 2004, the department expected to complete deployment of all of its major system capabilities by September 2008. DOD reported expenditures of about $600 million for the system through fiscal year 2004. ● VA began work on HealtheVet VistA and its associated Health Data Repository in 2001 and expected to complete all six initiatives comprising this system in 2012. VA reported spending about $270 million on initiatives that comprise HealtheVet VistA through fiscal year 2004. Under the HealthePeople (Federal) initiative, VA and DOD envision that, on entering military service, a health record for the service member would be created and stored in DOD’s Clinical Data Repository. The record would be updated as the service member receives medical care. When the individual separated from active duty and, if eligible, sought medical care at a VA facility, VA would then create a medical record for the individual, which would be stored in its Health Data Repository. On viewing the medical record, the VA clinician would be alerted and provided with access to the individual’s clinical information residing in DOD’s repository. In the same manner, when a veteran sought medical care at a military treatment facility, the attending DOD clinician would be alerted and provided with access to the health information in VA’s repository. According to the departments, this planned approach would make virtual medical records displaying all available patient health information from the two repositories accessible to both departments’ clinicians. To achieve this goal requires the departments to be able to exchange computable health information between the data repositories for their future health systems: that is, VA’s Health Data Repository (a component of HealtheVet VistA) and DOD’s Clinical Data Repository (a component of CHCS II). In March 2004, the departments began an effort to develop an interface linking these two repositories, known as CHDR (a name derived from the abbreviations for DOD’s Clinical Data Repository—CDR—and VA’s Health Data Repository—HDR). According to the departments, they planned to be able to exchange selected health information through CHDR by October 2005. Developing the two repositories, populating them with data, and linking them through the CHDR interface would be important steps toward the two departments’ long-term goals as envisioned in HealthePeople (Federal). Achieving these goals would then depend on completing the development and deployment of the associated health information systems—HealtheVet VistA and CHCS II. In our most recent review of the CHDR program, issued in June 2004, we reported that the efforts of DOD and VA in this area demonstrated a number of management weaknesses. Among these were the lack of a well-defined architecture for describing the interface for a common health information exchange; an established project management lead entity and structure to guide the investment in the interface and its implementation; and a project management plan defining the technical and managerial processes necessary to satisfy project requirements. With these critical components missing, VA and DOD increased the risk that they would not achieve their goals. Accordingly, we recommended that the departments ● develop an architecture for the electronic interface between their health systems that includes system requirements, design specifications, and software descriptions; ● select a lead entity with final decision-making authority for the ● establish a project management structure to provide day-to-day guidance of and accountability for their investments in and implementation of the interface capability; and ● create and implement a comprehensive and coordinated project management plan for the electronic interface that defines the technical and managerial processes necessary to satisfy project requirements and includes (1) the authority and responsibility of each organizational unit; (2) a work breakdown structure for all of the tasks to be performed in developing, testing, and implementing the software, along with schedules associated with the tasks; and (3) a security policy. Besides pursuing their long-term goals for future systems through the HealthePeople (Federal) strategy, the departments are working on two demonstration projects that focus on exchanging information between existing systems: (1) Bidirectional Health Information Exchange, a project to exchange health information on shared patients, and (2) Laboratory Data Sharing Interface, an application used to transfer laboratory work orders and results. These demonstration projects were planned in response to provisions of the Bob Stump National Defense Authorization Act of 2003, which mandated that VA and DOD conduct demonstration projects that included medical information and information technology systems to be used as a test for evaluating the feasibility, advantages, and disadvantages of measures and programs designed to improve the sharing and coordination of health care and health care resources between the departments. Figure 1 is a time line showing initiation points for the VA and DOD efforts discussed here, including strategies, major programs, and the recent demonstration projects. VA and DOD have begun to implement applications developed under two demonstration projects that focus on the exchange of electronic medical information. The first—the Bidirectional Health Information Exchange—has been implemented at five VA/DOD locations and the second—Laboratory Data Sharing Interface—has been implemented at six VA/DOD locations. According to a VA/DOD annual report and program officials, Bidirectional Health Information Exchange (BHIE) is an interim step in the departments’ overall strategy to create a two-way exchange of electronic medical records. BHIE builds on the architecture and framework of FHIE, the current application used to transfer health data on separated service members from DOD to VA. As discussed earlier, FHIE provides an interface between VA’s and DOD’s current health information systems that allows one-way transfers only, which do not occur in real time: VA clinicians do not have access to transferred information until about 6 weeks after separation. In contrast, BHIE focuses on the two-way, near-real-time exchange of information (text only) on shared patients (such as those at sites jointly occupied by VA and DOD facilities). This application exchanges data between VA’s VistA system and DOD’s CHCS system (and CHCS II where implemented). To date, the departments reported having spent $2.6 million on BHIE. The primary benefit of BHIE is the near-real-time access to patient medical information for both VA and DOD, which is not available through FHIE. During a site visit to a VA and DOD location in Puget Sound, we viewed a demonstration of this capability and were told by a VA clinician that the near-real-time access to medical information has been very beneficial in treating shared patients. As of August 2005, BHIE was tested and deployed at VA and DOD facilities in Puget Sound, Washington, and El Paso, Texas, where the exchange of demographic, outpatient pharmacy, radiology, laboratory, and allergy data (text only) has been achieved. The application has also been deployed to three other locations this month (see table 1). According to the program manager, a plan to export BHIE to additional locations has been approved. The additional locations were selected based on a number of factors, including the number and types of VA and DOD medical facilities in the area, FHIE usage, and retiree population at the locations. The program manager stated that implementation of BHIE requires training of staff from both departments. In addition, implementation at DOD facilities requires installation of a server; implementation at VA facilities requires installation of a software patch (downloaded from a VA computer center), but no additional equipment. As shown in table 1, five additional implementations are scheduled for the first quarter of fiscal year 2006. Additionally, because DOD stores electronic medical information in systems other than CHCS (such as the Clinical Information System and the Integrated Clinical Database), work is currently under way to allow BHIE to have the ability to exchange information with those systems. The Puget Sound Demonstration site is also working on sharing consultation reports stored in the VA and DOD systems. The Laboratory Data Sharing Interface (LDSI) initiative enables the two departments to share laboratory resources. Through LDSI, a VA provider can use VA’s health information system to write an order for laboratory tests, and that order is electronically transferred to DOD, which performs the test. The results of the laboratory tests are electronically transferred back to VA and included in the patient’s medical record. Similarly, a DOD provider can choose to use a VA lab for testing and receive the results electronically. Once LDSI is fully implemented at a facility, the only nonautomated action in performing laboratory tests is the transport of the specimens. Among the benefits of LDSI is increased speed in receiving laboratory results and decreased errors from multiple entry of orders. However, according to the LDSI project manager in San Antonio, a primary benefit of the project will be the time saved by eliminating the need to rekey orders at processing labs to input the information into the laboratories’ systems. Additionally, the San Antonio VA facility will no longer have to contract out some of its laboratory work to private companies, but instead use the DOD laboratory. To date, the departments reported having spent about $3.3 million on LDSI. An early version of what is now LDSI was originally tested and implemented at a joint VA and DOD medical facility in Hawaii in May 2003. The demonstration project built on this application and enhanced it; the resulting application was tested in San Antonio and El Paso. It has now been deployed to six sites in all. According to the departments, a plan to export LDSI to additional locations has been approved. Table 2 shows the locations at which it has been or is to be implemented. Besides the near-term initiatives just discussed, VA and DOD continue their efforts on the longer term goal: to achieve a virtual medical record based on the two-way exchange of computable data between the health information systems that each is currently developing. The cornerstone for this exchange is CHDR, the planned electronic interface between the data repositories for the new systems. The departments have taken important actions on the CHDR initiative. In September 2004 they successfully completed Phase I of CHDR by demonstrating the two-way exchange of pharmacy information with a prototype in a controlled laboratory environment. According to department officials, the pharmacy prototype provided invaluable insight into each other’s data repository systems, architecture, and the work that is necessary to support the exchange of computable information. These officials stated that lessons learned from the development of the prototype were documented and are being applied to Phase II of CHDR, the production phase, which is to implement the two-way exchange of patient health records between the departments’ data repositories. Further, the same DOD and VA teams that developed the prototype are now developing the production version. In addition, the departments developed an architecture for the CHDR electronic interface, as we recommended in June 2004. The architecture for CHDR includes major elements required in a complete architecture. For example, it defines system requirements and allows these to be traced to the functional requirements, it includes the design and control specifications for the interface design, and it includes design descriptions for the software. Also in response to our recommendations, the departments have established project accountability and implemented a joint project management structure. Specifically, the Health Executive Council has been established as the lead entity for the project. The joint project management structure consists of a Program Manager from VA and a Deputy Program Manager from DOD to provide day-to-day guidance for this initiative. Additionally, the Health Executive Council established the DOD/VA Information Management/Information Technology Working Group and the DOD/VA Health Architecture Interagency Group, to provide programmatic oversight and to facilitate interagency collaboration on sharing initiatives between DOD and VA. To build on these actions and successfully carry out the CHDR initiative, however, the departments still have a number of challenges to overcome. The success of CHDR will depend on the departments’ instituting a highly disciplined approach to the project’s management. Industry best practices and information technology project management principles stress the importance of accountability and sound planning for any project, particularly an interagency effort of the magnitude and complexity of this one. We recommended in 2004 that the departments develop a clearly defined project management plan that describes the technical and managerial processes necessary to satisfy project requirements and includes (1) the authority and responsibility of each organizational unit; (2) a work breakdown structure for all of the tasks to be performed in developing, testing, and implementing the software, along with schedules associated with the tasks; and (3) a security policy. Currently, the departments have an interagency project management plan that provides the program management principles and procedures to be followed by the project. However, the plan does not specify the authority and responsibility of organizational units for particular tasks; the work breakdown structure is at a high level and lacks detail on specific tasks and time frames; and security policy is still being drafted. Without a plan of sufficient detail, VA and DOD increase the risk that the CHDR project will not deliver the planned capabilities in the time and at the cost expected. In addition, officials now acknowledge that they will not meet a previously established milestone: by October 2005, the departments had planned to be able to exchange outpatient pharmacy data, laboratory results, allergy information, and patient demographic information on a limited basis. However, according to officials, the work required to implement standards for pharmacy and medication allergy data was more complex than originally anticipated and led to the delay. They stated that the schedule for CHDR is presently being revised. Development and data quality testing must be completed and the results reviewed. The new target date for medication allergy, outpatient pharmacy, and patient demographic data exchange is now February 2006. Finally, the health information currently in the data repositories has various limitations. ● Although DOD’s Clinical Data Repository includes data in the categories that were to be exchanged at the missed milestone described above: outpatient pharmacy data, laboratory results, allergy information, and patient demographic information, these data are not yet complete. First, the information in the Clinical Data Repository is limited to those locations that have implemented the first increment of CHCS II, DOD’s new health information system. As of September 9, 2005, according to DOD officials, 64 of 139 medical treatment facilities worldwide have implemented this increment. Second, at present, health information in systems other than CHCS (such as the Clinical Information System and the Integrated Clinical Database) is not yet being captured in the Clinical Data Repository. For example, according to DOD officials, as of September 9, 2005, the Clinical Information System contained 1.7 million patient stay records. ● The information in VA’s Health Data Repository is also limited: although all VA medical records are currently electronic, VA has to convert these into the interoperable format appropriate for the Health Data Repository. So far, the data in the Health Data Repository consist of patient demographics and vital signs records for the 6 million veterans who have electronic medical records in VA’s current system, VistA (this system contains all the department’s medical records in electronic form). VA officials told us that they plan next to sequentially convert allergy information, outpatient pharmacy data, and lab results for the limited exchange that is now planned for February 2006. In summary, developing an electronic interface that will enable VA and DOD to exchange computable patient medical records is a highly complex undertaking that could lead to substantial benefits— improving the quality of health care and disability claims processing for the nation’s military members and veterans. VA and DOD have made progress in the electronic sharing of patient health data in their limited, near-term demonstration projects, and have taken an important step toward their long-term goals by improving the management of the CHDR program. However, the departments face considerable work and significant challenges before they can achieve these long-term goals. While the departments have made progress in developing a project management plan defining the technical and managerial processes necessary to satisfy project requirements, this plan does not specify the authority and responsibility of organizational units for particular tasks, the work breakdown structure lacks detail on specific tasks and time frames, and security policy has not yet been finalized. Without a project management plan of sufficient specificity, the departments risk further delays in their schedule and continuing to invest in a capability that could fall short of expectations. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Committee may have at this time. For information about this testimony, please contact Linda D. Koontz, Director, Information Management Issues, at (202) 512-6240 or at koontzl@gao.gov. Other individuals making key contributions to this testimony include Nabajyoti Barkakati, Barbara S. Collier, Nancy E. Glover, James T. MacAulay, Barbara S. Oliver, J. Michael Resser, and Eric L. Trout. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","For the past 7 years, the Departments of Veterans Affairs (VA) and Defense (DOD) have been working to exchange patient health information electronically and ultimately to have interoperable electronic medical records. Sharing medical information helps (1) promote the seamless transition of active duty personnel to veteran status and (2) ensure that active duty military personnel and veterans receive high-quality health care and assistance in adjudicating their disability claims. This is especially critical in the face of current military responses to national and foreign crises. In testimony before the Veterans' Affairs Subcommittee on Oversight and Investigations in March and May 2004, GAO discussed the progress being made by the departments in this endeavor. In June 2004, at the Subcommittee's request, GAO reported on its review of the departments' progress toward the goal of an electronic two-way exchange of patient health records. GAO is providing an update on the departments' efforts, focusing on (1) the status of ongoing, near-term initiatives to exchange data between the agencies' existing systems and (2) progress in achieving the longer term goal of exchanging data between the departments' new systems. In the past year, VA and DOD have begun to implement applications that exchange limited electronic medical information between the departments' existing health information systems. These applications are (1) Bidirectional Health Information Exchange, a project to achieve the two-way exchange of health information on patients who receive care from both VA and DOD, and (2) Laboratory Data Sharing Interface, an application used to electronically transfer laboratory work orders and results between the departments. The Bidirectional Health Information Exchange application has been implemented at five sites, at which it is being used to rapidly exchange information such as pharmacy and allergy data. Also, the Laboratory Data Sharing Interface application has been implemented at six sites, at which it is being used for real-time entry of laboratory orders and retrieval of results. According to the departments, these systems enable lower costs and improved service to patients by saving time and avoiding errors. VA and DOD are continuing with activities to support their longer term goal of sharing health information between their systems, but the goal of two-way electronic exchange of patient records remains far from being realized. Each department is developing its own modern health information system--VA's HealtheVet VistA and DOD's Composite Health Care System II--and they have taken steps to respond to GAO's June 2004 recommendations regarding the program to develop an electronic interface that will enable these systems to share information. That is, they have developed an architecture for the interface, established project accountability, and implemented a joint project management structure. However, they have not yet developed a clearly defined project management plan to guide their efforts, as GAO previously recommended. Further, they have not yet fully populated the repositories that will store the data for their future health systems, and they have experienced delays in their efforts to begin a limited data exchange. Lacking a detailed project management plan increases the risk that the departments will encounter further delays and be unable to deliver the planned capabilities on time and at the cost expected.",govreport
"The Internal Revenue Manual (IRM) describes the desired outcome of an income tax audit as the determination of the correct taxable income and tax liability of the person or entity under audit. In making these determinations, the auditor has a responsibility to both the audited taxpayer and all other taxpayers to conduct a quality audit. IRS uses nine audit standards, which have evolved since the 1960s, to define audit quality. These standards address several issues, such as the scope, techniques, technical conclusions, reports, and time management of an audit, as well as workpaper preparation. Each standard has one or more key elements. (See table I.1 in app. I for a list of these standards and their associated key elements.) Workpapers provide documentation on the scope of the audit and the diligence with which it was completed. According to the IRM, audit workpapers (1) assist in planning the audit; (2) record the procedures applied, tests performed, and evidence gathered; (3) provide support for technical conclusions; and (4) provide the basis for review by management. Audit workpapers also provide the principal support for the auditor’s report, which is to be provided to the audited taxpayer, on findings and conclusions about the taxpayer’s correct tax liability. The primary tool used by IRS to control quality under the nine standards is the review of ongoing audit work. This review is the responsibility of IRS’ first-line supervisors, called group managers, who are responsible for the quality of audits done by the auditors they manage. By reviewing audit workpapers during the audit, group managers attempt to identify problems with audit quality and ensure that the problems are corrected. After an audit closes, IRS uses its Examination Quality Measurement System (EQMS) to collect information about the audit process, changes to the process, level of audit quality, and success of any efforts to improve the process and quality. EQMS staff are to review audit workpapers and assess the degree to which the auditor complied with the audit standards. To pass a standard, the audit must pass all of the key elements. Our observations about the adequacy of the audit workpapers and supervisory review during audits are based on our work during 1996 and 1997 on IRS’ use of financial status audit techniques. Among other things, this work relied on a random sample of individual tax returns that IRS had audited. This sample excluded audits that were unlikely to use financial status audit techniques because the audit did not look at individual taxpayers’ books and records. Such excluded audits involved those done at service centers and those that only passed through various types of tax adjustments from other activities (e.g., partnership audits and refund claims). This random sample included 354 audits from a population of about 421,000 audits that were opened from October 1994 through October 1995 and closed in fiscal years 1995 or 1996. Each audit covered one or more individual income tax returns. The sample of audits from our previous work focused on the frequency in which IRS auditors used financial status audit techniques, rather than on the adequacy of audit workpapers. Consequently, we did not do the work necessary to estimate the extent to which workpapers met IRS’ workpaper standard for the general population of audits. However, our work did identify several cases in which audit workpapers in our sample did not meet IRS’ workpaper standard. We held follow-up discussions about the workpaper and supervisory review requirements, as well as about our observations, with IRS Examination Division officials. On the basis of these discussions, we agreed to check for documentation of group manager involvement by examining employee performance files for nine of our sample audits conducted out of IRS’ Northern California District Office to get a better idea of how the group managers handle their audit inventories and ensure quality. According to IRS officials, these files may contain documentation on case reviews by group managers even though such documentation may not be in the workpapers. We requested comments on a draft of this report from the Commissioner of Internal Revenue. On March 27, 1998, we received written comments from IRS, which are summarized at the end of this letter and are reproduced in appendix II. These comments have been incorporated into the report where appropriate. We did our work at IRS headquarters in Washington, D.C., and at district offices and service centers in Fresno and Oakland, CA; Baltimore, MD; Philadelphia, PA; and Richmond, VA. Our work was done between January and March, 1998, in accordance with generally accepted government auditing standards. One of IRS’ audit standards covers audit workpapers. In general, IRS requires the audit workpapers to support the auditor’s conclusions that were reached during an audit. On the basis of our review of IRS’ audit workpapers, we found that IRS auditors did not always meet the requirements laid out under this workpaper standard. IRS’ workpaper standard requires that workpapers provide the principal support for the auditor’s report and document the procedures applied, tests performed, information obtained, and conclusions reached. The five key elements for this workpaper standard involve (1) fully disclosing the audit trail and techniques used; (2) being clear, concise, legible, and organized and ensuring that workpaper documents have been initialed, labeled, dated, and indexed; (3) ensuring that tax adjustments recorded in the workpapers agree with IRS Forms 4318 or 4700 and the audit report; (4) adequately documenting the audit activity records; and (5) appropriately protecting taxpayers’ rights to privacy and confidentiality. The following are examples of some of the problems we found during our review of IRS audit workpapers: Tax adjustments shown in the workpapers, summaries, and reports did not agree. For example, in one audit, the report sent to the taxpayer showed adjustments for dependent exemptions and Schedule A deductions. However, neither the workpaper summary nor the workpapers included these adjustments. In another audit, the workpaper summary showed adjustments of about $25,000 in unreported wages, but the report sent to the taxpayer showed adjustments of only about $9,000 to Schedule C expenses. Required documents or summaries were not always in the workpaper bundle. For example, we found instances of missing or incomplete activity records and missing workpaper summaries. Workpapers that were in the bundle were not always legible or complete. The required information that was missing included the workpaper number, tax year being audited, date of the workpaper, and auditor’s name or initials. Although we are unable to develop estimates of the overall quality of audit workpapers, IRS has historically found problems with the quality of its workpapers. This observation is supported by evaluations conducted as part of IRS’ EQMS, which during the past 6 years (1992-97) indicated that IRS auditors met all of the key elements of the workpaper standard in no more than 72 percent of the audits. Table 1 shows the percentage of audits reviewed under EQMS that met all the key elements of the workpaper standard. The success rate, as depicted in table 1, indicates whether all of the key elements within the standard were met. That is, if any one element is not met, the standard is not met. Another indicator of the quality of the audit workpapers is how often each element within a standard meets the criteria of that element. Table I.2 in appendix I shows this rate, which IRS calls the pass rate, for the key elements of the workpaper standard. Workpapers are an important part of the audit effort. They are a tool to use in formulating and documenting the auditor’s findings, conclusions, and recommended adjustments, if any. Workpapers are also used by third-party reviewers as quality control and measurement instruments. Documentation of the auditor’s methodology and support for the recommended tax adjustments are especially important when the taxpayer does not agree with the recommendations. In these cases, the workpapers are to be used to make decisions about how much additional tax is owed by the taxpayer. Inadequate workpapers may result in having the auditor do more work or even in having the recommended adjustment overturned. IRS’ primary quality control mechanism is supervisory review of the audit workpapers to ensure adherence to the audit standards. However, our review of the workpapers in the sampled audits uncovered limited documentation of supervisory review. As a result, the files lacked documentation that IRS group managers reviewed workpapers during the audits to help ensure that the recommended tax adjustments were supported and verified, and that the audits did not unnecessarily burden the audited taxpayers. The IRM requires that group managers review the audit work to assess quality and ensure that audit standards are being met, but it does not indicate how or when such reviews should be conducted. However, the IRM does not require that documentation of this review be maintained in the audit files. We found little documentation in the workpapers that group managers reviewed workpapers before sharing the audit results with the taxpayer. In analyzing the sampled audits, we recorded whether the workpapers contained documentation that a supervisor had reviewed the workpapers during the audit. We counted an audit as having documentation of being reviewed if the group manager made notations in the workpapers on the audit findings or results; we also counted audits in which the workpapers made some reference to a discussion with the group manager about the audit findings. On the basis of our analysis of the sampled audits closed during fiscal years 1995 and 1996, we estimated that about 6 percent of the workpapers in the sample population contained documentation of group manager review during the audits. In discussions about our estimate with IRS Examination Division officials, they noted that all unagreed audits (i.e., those audits in which the taxpayers do not agree with the tax adjustments) are to be reviewed by the group managers, and they pointed to the manager’s initials on the notice of deficiency as documentation of this review. We did not count reviews of these notices in our analysis because they occurred after IRS sent the original audit report to the taxpayer. If we assume that workpapers for all unagreed audits were reviewed, our estimate on the percentage of workpapers with documentation of being reviewed increases from 6 percent to about 26 percent. Further, we analyzed all unagreed audits in our sample to see how many had documentation of group manager review during the audit, rather than after the audit results were sent to the taxpayer; this would be the point at which the taxpayer either would agree or disagree with the results. We found documentation of such a review in 12 percent of the unagreed audits. The Examination Division officials also said that a group manager may review the workpapers without documentation of that review being recorded in the workpapers. Further, they said that group managers had limited time to review workpapers due to many other responsibilities. The officials also told us that group managers can be involved with audits through means other than review of the workpapers. They explained that these managers monitor their caseload through various processes, such as evaluations of auditors’ performance during or after an audit closes, monthly discussions with auditors about their inventory of audits, reviews of auditors’ time charges, reviews of audits that have been open the longest, and visits to auditors located outside of the district office. The Examination Division officials also noted that any time the audit is expanded, such as by selecting another of the taxpayer’s returns or adding a related taxpayer or return, this action must be approved by the group manager. According to these officials, these other processes may involve a review of audit workpapers, but not necessarily during the audit. We agreed that we would check for documentation of these other processes in our nine sample audits from IRS’ District Office located in Oakland. We found documentation of workload reviews for one of these nine sample audits. In these monthly workload reviews, supervisors are to monitor time charges to an audit. In one other audit, documentation showed that a special unit within the Examination Division reviewed and made changes to the form used to record data for input into IRS’ closed audits database. However, none of this documentation showed supervisory review of the audit workpapers. If any other forms of supervisory involvement with these audits had occurred, the documentation either had been removed from the employee performance file as part of IRS’ standard procedure or was not maintained in a way that we could relate it back to a specific taxpayer. As a result, we do not know how frequently these other processes for supervisory involvement occurred and whether substantive reviews of the audits were part of these processes. IRS is currently drafting changes to the IRM relating to workpapers. In the draft instructions, managers are required to document managerial involvement. This documentation may include signatures, notations in the activity record, or summaries of discussions in the workpapers. When completed, this section is to become part of the IRM’s section on examination of returns. According to an IRS official, comments from IRS’ field offices on the draft changes are not due into headquarters until May 1998. IRS audits tax returns to ensure that taxpayers pay the correct amount of tax. If auditors do quality work, IRS is more likely to meet this goal while minimizing the burden on taxpayers. Quality audits should also encourage taxpayers to comply voluntarily. Supervisory review during the audits is a primary tool in IRS’ efforts to control quality. IRS requires group managers to ensure the quality of the audits, leaving much discretion on the frequency and nature of their reviews during an audit. IRS officials noted that group managers are to review workpapers if taxpayers disagree with the auditor’s report on any recommended taxes. The IRM does not specifically require that all of these supervisory reviews be documented in the workpapers, even though generally accepted government auditing standards do require such documentation. However, recent draft changes to the IRM may address this issue by requiring such documentation. We found little documentation of such supervisory reviews, even though these reviews can help to avoid various problems. For example, supervisory review could identify areas that contribute to IRS’ continuing problems in creating audit workpapers that meet its standard for quality. Since fiscal year 1992, the quality of workpapers has been found wanting by IRS’ EQMS. Inadequately documented workpapers raise questions about whether supervisory review is controlling audit quality as intended. These questions cannot be answered conclusively, however, because the amount of supervisory review cannot be determined. The lack of documentation on workpaper review raises questions about the extent of supervisory involvement with the audits. Proposed changes to the IRM’s sections on examination of returns require documentation of management involvement in the audit process. We recommend that the IRS Commissioner require audit supervisors to document their review of audit workpapers as a control over the quality of audits and the associated workpapers. On March 25, 1998, we met with IRS officials to obtain comments on a draft of this report. These officials included the Acting Deputy Chief Compliance Officer, the Assistant Commissioner for Examination and members of his staff, and a representative from IRS’ Office of Legislative Affairs. IRS documented its comments in a March 27, 1998, letter from the IRS Commissioner, which we have reprinted in appendix II. In this letter, IRS agreed to make revisions to the IRM instructions for the purpose of implementing our recommendation by October 1998. The letter included an appendix outlining adoption plans. The IRS letter also expressed two concerns with our draft report. First, IRS said our conclusion about the lack of evidence of supervisory review of audit workpapers was somewhat misleading and pointed to examples of other managerial practices, such as on-the-job visitations, to provide oversight and involvement in cases. We do not believe our draft report was misleading. As IRS acknowledges in its letter, when discussing the lack of documentation of supervisory review, we also described these other managerial practices. Second, IRS was concerned that our draft report appeared to consider these other managerial practices insufficient. Our draft report did not discuss the sufficiency of these practices but focused on the lack of documentation of supervisory review, including these other managerial practices. We continue to believe that documentation of supervisory review of workpapers is needed to help ensure quality control over the workpapers and audits. At the March 25, 1998, meeting, IRS provided technical comments to clarify specific sections of the draft report that described IRS processes. IRS officials also discussed the distinction between supervisory review and documentation of that review. We have incorporated these comments into this report where appropriate. We are sending copies of this report to the Subcommittee’s Ranking Minority Member, the Chairmen and Ranking Minority Members of the House Ways and Means Committee and the Senate Committee on Finance, various other congressional committees, the Director of the Office of Management and Budget, the Secretary of the Treasury, the IRS Commissioner, and other interested parties. We will also make copies available to others upon request. Major contributors to this report are listed in appendix III. If you have any questions concerning this report, please contact me at (202) 512-9110. The Office of Compliance Specialization, within the Internal Revenue Service’s (IRS) Examination Division, has responsibility for Quality Measurement Staff operations and the Examination Quality Measurement System (EQMS). Among other uses, IRS uses EQMS to measure the quality of closed audits against nine IRS audit standards. The standards address the scope, audit techniques, technical conclusions, workpaper preparation, reports, and time management of an audit. Each standard includes additional key elements describing specific components of a quality audit. Table I.1 summarizes the standards and the associated key elements. Table I.1: Summary of IRS’ Examination Quality Measurement System Auditing Standards (as of Oct. 1996) Measures whether consideration was given to the large, unusual, or questionable items in both the precontact stage and during the course of the examination. This standard encompasses, but is not limited to, the following fundamental considerations: absolute dollar value, relative dollar value, multiyear comparisons, intent to mislead, industry/business practices, compliance impact, and so forth. Measures whether the steps taken verified that the proper amount of income was reported. Gross receipts were probed during the course of examination, regardless of whether the taxpayer maintained a double entry set of books. Consideration was given to responses to interview questions, the financial status analysis, tax return information, and the books and records in probing for unreported income. Measures whether consideration was given to filing and examination potential of all returns required by the taxpayer including those entities in taxpayer’s sphere of influence/responsibility. Required filing checks consist of the analysis of return information and, when warranted, the pick-up of related, prior and subsequent year returns. In accordance with Internal Revenue Manual 4034, examinations should include checks for filing information returns. (continued) Measures whether the issues examined were completed to the extent necessary to provide sufficient information to determine substantially correct tax. The depth of the examination was determined through inspection, inquiry, interviews, observation, and analysis of appropriate documents, ledgers, journals, oral testimony, third-party records, etc., to ensure full development of relevant facts concerning the issues of merit. Interviews provided information not available from documents to obtain an understanding of the taxpayer’s financial history, business operations, and accounting records in order to evaluate the accuracy of books/records. Specialists provided expertise to ensure proper development of unique or complex issues. Measures whether the conclusions reached were based on a correct application of tax law. This standard includes consideration of applicable law, regulations, court cases, revenue rulings, etc. to support technical/factual conclusions. Measures whether applicable penalties were considered and applied correctly. Consideration of the application of appropriate penalties during all examination is required. Measures the documentation of the examination’s audit trail and techniques used. Workpapers provided the principal support for the examiner’s report and documented the procedures applied, tests performed, information obtained, and the conclusions reached in the examination. Measures the presentation of the audit findings in terms of content, format, and accuracy. Addresses the written presentation of audit findings in terms of content, format, and accuracy. All necessary information is contained in the report, so that there is a clear understanding of the adjustments made and the reasons for those adjustments. Measures the utilization of time as it relates to the complete audit process. Time is an essential element of the Auditing Standards and is a proper consideration in analyses of the examination process. The process is considered as a whole and at examination initiation, examination activities, and case closing stages. (Table notes on next page) IRS uses the key element pass rate as one measure of audit quality. This measure computes the percentage of audits demonstrating the characteristics defined by the key element. According to IRS, the key element pass rate is the most sensitive measurement and is useful when describing how an audit is flawed, establishing a baseline for improvement, and identifying systemic changes. Table I.2 shows the pass rates for the key elements of the workpaper standard for fiscal years 1992 through 1997 for office and field audits. Table I.2: Key Element Pass Rate for EQMS Workpaper Standard for District Audits From Fiscal Years 1992-97 Key element pass rate by fiscal year1995 (10/94-3/95) 1995 (4/95-9/95) Legend: n/a = not applicable The key element “Disclosure” was added in the middle of fiscal year 1995. Kathleen E. Seymour, Evaluator-in-Charge Louis G. Roberts, Senior Evaluator Samuel H. Scrutchins, Senior Data Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","GAO reviewed the condition of the Internal Revenue Service's (IRS) audit workpapers, including the documentation of supervisory review. GAO noted that: (1) during its review of IRS' financial status audits, the workpapers did not always meet the requirements under IRS' workpaper standards; (2) standards not met in some audit workpapers included the expectation that: (a) the amount of tax adjustments recorded in the workpapers would be the same as the adjustment amounts shown in the auditor's workpaper summary and on the report sent to the taxpayer; and (b) the workpaper files would contain all required documents to support conclusions about tax liability that an auditor reached and reported to the taxpayer; (3) these shortcomings with the workpapers are not new; (4) GAO found documentation on supervisory review of workpapers prepared during the audits in an estimated 6 percent of the audits in GAO's sample; (5) in the remaining audits, GAO found no documentation that the group managers reviewed either the support for the tax adjustments or the report communicating such adjustments to the taxpayer; (6) IRS officials indicated that all audits in which the taxpayer does not agree with the recommended adjustments are to be reviewed by the group managers; (7) if done, this review would occur after the report on audit results was sent to the taxpayer; (8) even when GAO counts all such unagreed audits, those with documentation of supervisory review would be an estimated 26 percent of the audits in GAO's sample population; (9) GAO believes that supervisory reviews and documentation of such reviews are important because they are IRS' primary quality control process; (10) proper reviews done during the audit can help ensure that audits minimize burden on taxpayers and that any adjustments to taxpayers' liabilities are supported; (11) although Examination Division officials recognized the need for proper reviews, they said IRS group managers cannot review workpapers for all audits because of competing priorities; (12) these officials also said that group managers get involved in the audit process in ways that may not be documented in the workpapers; (13) they stated that these group managers monitor auditors' activities through other processes, such as by reviewing the time that auditors spent on an audit, conducting on-the-job visits, and talking to auditors about their cases and audit inventory; and (14) in these processes, however, the officials said that group managers usually were not reviewing workpapers or validating the calculations used to recommend adjustments before sending the audit results to the taxpayer.",govreport
"Congress authorized State’s ATA program in 1983 through the Foreign Assistance Act. According to the legislation the purpose of ATA is “(1) to enhance the antiterrorism skills of friendly countries by providing training and equipment to deter and counter terrorism; (2) to strengthen the bilateral ties of the United States with friendly governments by offering concrete assistance in this area of great mutual concern; and (3) to increase respect for human rights by sharing with foreign civil authorities modern, humane, and effective antiterrorism techniques.” ATA offers a wide range of counterterrorism assistance to partner nations, but most assistance consists of (1) training courses on tactical and strategic counterterrorism issues and (2) grants of counterterrorism equipment, such as small arms, bomb detection equipment, vehicles, and computers. ATA curricula and training focus on enhancing critical counterterrorism capabilities, which cover issues such as crisis management and response, cyberterrorism, dignitary protection, and related areas. According to DS/T/ATA, all its courses emphasize law enforcement under the rule of law and sound human rights practices. ATA is State’s largest counterterrorism program, and receives appropriations under the Nonproliferation, Anti-Terrorism, Demining, and Related Programs account. Fiscal year 2002 appropriations for ATA increased to about $158 million—over six times the level of funding appropriated in fiscal year 2000. Appropriations have fluctuated since fiscal year 2002, but increased to almost $171 million in fiscal year 2007. From fiscal years 2002 to 2007, program assistance for the top 10 recipients of ATA allocations ranged from about $11 million to about $78 million. The top 10 recipients represented about 57 percent of ATA funding allocated for training and training-related activities over the 6-year period. ATA funding for the other 89 partner nations that received assistance during this period ranged from $9,000 to about $10.7 million. The Coordinator for Counterterrorism, the head of S/CT, is statutorily charged with the overall supervision (including policy oversight of resources) and coordination of the U.S. government’s counterterrorism activities. The broadly mandated role of the Assistant Secretary for Diplomatic Security, the head of the Bureau of Diplomatic Security, includes implementing security programs to protect diplomatic personnel and advise chiefs of mission on security matters. Specific roles and responsibilities for S/CT and DS/T/ATA regarding ATA are described in a 1991 internal policy guidance memorandum, the Omnibus Diplomatic Security Act of 1986, and incorporated into State’s Foreign Affairs Manual. S/CT is responsible for leading the initial assessment of a partner nation’s counterterrorism needs, and DS/T/ATA is responsible for developing annual, country-specific plans. Under current program operations, DS/T/ATA conducts an initial assessment of a new participant nation’s counterterrorism capabilities, and conducts subsequent assessments— referred to as program reviews—every 2 to 3 years thereafter. In general, the needs assessments include input from the embassy teams, but the assessments themselves are conducted by technical experts contracted by DS/T/ATA. According to DS/T/ATA, the purpose of the needs assessment and program review process is to determine the forms of assistance for a partner nation to detect, deter, deny, and defeat terrorism; and to evaluate program effectiveness. S/CT provides minimal policy guidance to DS/T/ATA to help determine assistance priorities and ensure that it supports broader U.S. policy goals. In addition, S/CT and DS/T/ATA did not systematically use country- specific needs assessments and program reviews to plan what types of assistance to provide partner nations in accordance with State policy guidance. The assessments we reviewed had weaknesses and inconsistencies. According to State officials, S/CT places countries on a tiered list in one of four priority categories based on criteria that address several factors, including country-specific threats and the level and depth of diplomatic and political engagement in a country. State officials indicated that other factors also may be considered in determining whether and where a country is placed on the list, such as the presence of a U.S. military base or a planned international sporting or cultural event with U.S. participation. Since 2006, S/CT has reviewed and discussed the tiered list—including changes, additions, or deletions—with DS/T/ATA during quarterly meetings. In addition to the quarterly meetings, an S/CT official told us that they had established a series of regional roundtable discussions in 2006 between S/CT regional subject experts and DS/T/ATA counterparts. According to the S/CT official, the roundtables were intended as a means of identifying priority countries and their counterterrorism needs for purposes of developing budget requests. S/CT provides little guidance to DS/T/ATA beyond the tiered list, although the 1991 State policy guidance memorandum states that S/CT’s written policy guidance for the program should include suggested country training priorities. While S/CT provides some additional guidance to DS/T/ATA during quarterly meetings and on other occasions, DS/T/ATA officials in headquarters and the field stated they received little or no guidance from S/CT beyond the tiered list. As a result, neither S/CT nor DS/T/ATA could ensure that program assistance provided to specific countries supports broader U.S. antiterrorism policy goals. Other factors beyond S/CT’s tiered list of countries, such as unforeseen events or new governmental initiatives, also influence which countries receive program assistance. We found that 10 countries on the tiered list did not receive ATA assistance in fiscal year 2007, while 13 countries not on the tiered list received approximately $3.2 million. S/CT and DS/T/ATA officials stated that assistance does not always align with the tiered list because U.S. foreign policy objectives sometimes cause State, in consultation with the President’s National Security Council, to provide assistance to a non-tiered-list country. According to the 1991 State policy guidance memorandum and DS/T/ATA standard operations procedures, ATA country-specific needs assessments and program reviews are intended to guide program management and planning. However, S/CT and DS/T/ATA did not systematically use the assessments to determine what types of assistance to provide to partner nations or develop ATA country-specific plans. Although the 1991 State policy memorandum states that S/CT should lead the assessment efforts, a senior S/CT official stated that S/CT lacks the capacity to do so. As a result, DS/T/ATA has led interagency assessment teams in recent years, but the assessments and recommendations for types of assistance to be provided may not fully reflect S/CT policy guidance concerning overall U.S. counterterrorism priorities. DS/T/ATA officials responsible for five of the top six recipients of ATA support—Colombia, Kenya, Indonesia, Pakistan, and the Philippines—did not consistently use ATA country needs assessments and program reviews in making program decisions or to create annual country assistance plans. In some instances, DS/T/ATA officials responsible for in-country programs had not seen the latest assessments for their respective countries, and some said that the assessments they had reviewed were either not useful or that they were used for informational purposes only. The Regional Security Officer, Deputy Regional Security Officer, and DS/T/ATA Program Manager for Kenya had not seen any of the assessments that had been conducted for the country since 2000. Although the in-country program manager for Kenya was familiar with the assessments from her work in a previous position with DS/T/ATA, she stated that in general, the assessments were not very useful for determining what type of assistance to provide. She said that the initial needs assessment for Kenya failed to adequately consider local needs and capacity. The Regional Security Officer and Assistant Regional Security Officer for Indonesia stated they had not seen the latest assessment for the country. The DS/T/ATA program manager for Indonesia said that he recalled using one of the assessments as a “frame of reference” in making program and resource decisions. The in-country program manager also recalled seeing one of the assessments, but stated that he did not find the assessment useful given the changing terrorist landscape; therefore, he did not share it with his staff. The DS/T/ATA Program Manager for Pakistan stated that decisions on the types of assistance to provide in Pakistan were based primarily on the knowledge and experience of in-country staff regarding partner nation needs, rather than the needs assessments or program reviews. He added that he did not find the assessments useful, as the issues identified in the latest (2004) assessment for the country were outdated. We reviewed 12 of the 21 ATA country-specific needs assessments and program reviews that, according to ATA annual reports, DS/T/ATA conducted between 2000 and 2007 for five of the six in-country programs. The assessments and reviews generally included a range of recommendations for counterterrorism assistance, but did not prioritize assistance to be provided or include specific timeframes for implementation. Consequently, the assessments did not consistently provide a basis for targeting program assistance to the areas of a partner nation’s greatest counterterrorism assistance need. Only two of the assessments—a 2000 needs assessment for Indonesia and a 2003 assessment for Kenya—prioritized the recommendations, although a 2004 assessment for Pakistan and a 2005 assessment for the Philippines listed one or two recommendations as priority ATA efforts. In addition, the information included in the assessments was not consistent and varied in linking recommendations to capabilities. Of the 12 assessments we reviewed: Nine included narrative on a range of counterterrorism capabilities, such as border security and explosives detection, but the number of capabilities assessed ranged from 5 to 25. Only four of the assessments that assessed more than one capability linked recommendations provided to the relevant capabilities. Six included capability ratings, but the types of ratings used varied. For example, a 2003 assessment for Colombia rated eight capabilities from 1 through 5, but the 2004 assessment rated 24 capabilities, using poor, low, fair, or good. Two used a format that DS/T/ATA began implementing in 2001. The assessments following the new format generally included consistent types of information and clearly linked recommendations provided to an assessment of 25 counterterrorism capabilities. However, they did not prioritize recommendations or include specific timeframes for implementing the recommendations. Although the 1991 State policy memorandum states that DS/T/ATA should create annual country assistance plans that specify training objectives and assistance to be provided based upon the needs assessments and program reviews, we found that S/CT and DS/T/ATA did not systematically use the assessments to create annual plans for the five in-country programs. DS/T/ATA officials we interviewed regarding the five in-country programs stated that in lieu of relying on the assessments or country assistance plans, program and resource decisions were primarily made by DS/T/ATA officials in the field based on their knowledge and experience regarding partner nation needs. Some DS/T/ATA officials said they did not find the country assistance plans useful. The program manager for Pakistan stated that he used the country assistance plan as a guide, but found that it did not respond to changing needs in the country. The ATA program manager for Kenya said that he had not seen a country assistance plan for that country. We requested ATA country assistance plans conducted during fiscal years 2000-2006 for the five in-country programs included in our review, but S/CT and DS/T/ATA only provided three plans completed for three of the five countries. Of these, we found that the plans did not link planned activities to recommendations provided in the needs assessments and program reviews. For example, the plan for the Philippines included a brief reference to a 2005 needs assessment, but the plan did not identify which recommendations from the 2005 assessment were intended to be addressed by current or planned efforts. S/CT has mechanisms to coordinate the ATA program with other U.S. government international counterterrorism training assistance and to help avoid duplication of efforts. S/CT chairs biweekly interagency working group meetings of the Counterterrorism Security Group’s Training Assistance Subgroup to provide a forum for high-level information sharing and discussion among U.S. agencies implementing international counterterrorism efforts. S/CT also established the Regional Strategic Initiative in 2006 to coordinate regional counterterrorism efforts and strategy. S/CT described the Regional Strategic Initiative as a series of regionally based, interagency meetings hosted by U.S. embassies to identify key regional counterterrorism issues and develop a strategic approach to addressing them, among other goals. In the four countries we visited, we did not find any significant duplication or overlap among U.S. agencies’ country-specific training programs aimed at combating terrorism. Officials we met with in each of these countries noted that they participated in various embassy working group meetings, such as Counterterrorism Working Group and Law Enforcement Working Group meetings, during which relevant agencies shared information regarding operations and activities at post. DS/T/ATA officials also coordinated ATA with other counterterrorism efforts through daily informal communication among cognizant officials in the countries we visited. In response to concerns that ATA lacked elements of adequate strategic planning and performance measurement, State took action to define goals and measures related to the program’s mandated objectives. S/CT and DS/T/ATA, however, did not systematically assess sustainability—that is, the extent to which assistance has enabled partner nations to achieve and maintain advanced counterterrorism capabilities. S/CT and DS/T/ATA lacked clear measures and processes for assessing sustainability, and program managers did not consistently include sustainability in ATA planning. State did not have measurable performance goals and outcomes related to the mandated objectives for ATA prior to fiscal year 2003, but has recently made some progress to address the deficiency, which had been noted in reports by State’s Office of Inspector General. Similarly, State developed specific goals and measures for each of the program’s mandated objectives in response to a 2003 Office of Management and Budget assessment. Since fiscal year 2006, State planning documents, including department and bureau-level performance plans, have stated that enabling partner nations to achieve advanced and sustainable counterterrorism capabilities is a key outcome. S/CT and DS/T/ATA officials further confirmed that sustainability is the principal intended outcome and focus of program assistance. In support of these efforts, DS/T/ATA appointed a Sustainment Manager in November 2006 to, among other things, coordinate with other DS/T/ATA divisions to develop recommendations and plans to assist partner nations in developing sustainable counterterrorism capabilities. Despite progress towards establishing goals and intended outcomes, State had not developed clear measures and a process for assessing sustainability and had not integrated the concept into program planning. The Government Performance and Results Act of 1993 requires agencies in charge of U.S. government programs and activities to identify goals and report on the degree to which goals are met. S/CT and DS/T/ATA officials noted the difficulty in developing direct quantitative measures of ATA outcomes related to partner nations’ counterterrorism capabilities. Our past work also has stressed the importance of establishing program goals, objectives, priorities, milestones, and measures to use in monitoring performance and assessing outcomes as critical elements of program management and effective resource allocation. We found that the measure for ATA’s principal intended program outcome of sustainability is not clear. In its fiscal year 2007 Joint Performance Summary, State reported results and future year targets for the number of countries that had achieved an advanced, sustainable level of counterterrorism capability. According to the document, partner nations that achieve a sustainable level of counterterrorism would graduate from the program and no longer receive program assistance. However, program officials in S/CT and DS/T/ATA directly responsible for overseeing ATA were not aware that the Joint Performance Summary listed numerical targets and past results for the number of partner nations that had achieved sustainability, and could not provide an explanation of how State assessed the results. DS/T/ATA’s Sustainment Manager also could not explain how State established and assessed the numerical targets in the reports. The Sustainment Manager further noted that, to his knowledge, S/CT and DS/T/ATA had not yet developed systematic measures of sustainability. DS/T/ATA’s mechanism for evaluating partner nation capabilities did not include guidance or specific measures to assess sustainability. According to program guidance and DS/T/ATA officials, needs assessments and program reviews are intended to establish a baseline of a partner nation’s counterterrorism capabilities and quantify progress through subsequent reviews. DS/T/ATA officials also asserted that the process is intended to measure the results of program assistance. However, the process did not explicitly address sustainability, and provided no specific information or instruction regarding how reviewers are to assess sustainability. Moreover, the process focused on assessing a partner nation’s overall counterterrorism capabilities, but did not specifically measure the results of program assistance. DS/T/ATA had not systematically integrated sustainability into country- specific assistance plans, and we found a lack of consensus among program officials about how to address the issue. In-country program managers, embassy officials, instructors, and partner nation officials we interviewed held disparate views on how to define sustainability across all ATA participant countries, and many were not aware that sustainability was the intended outcome. Several program officials stated that graduating a country and withdrawing or significantly reducing program assistance could result in a rapid decline in the partner nation’s counterterrorism capabilities, and could undermine other program objectives, such as improving bilateral relations. Further, although State has listed sustainability in State-level planning documents since 2006, S/CT and DS/T/ATA had not issued guidance on incorporating sustainability into country-specific planning, and none of the country assistance plans we reviewed consistently addressed the outcome. As a result, the plans did not include measurable annual objectives targeted at enabling the partner nation to achieve sustainability. For example, Colombia’s assistance plan listed transferring responsibility for the antikidnapping training to the Colombian government and described planned activities to achieve that goal. However, the plan did not include measurable objectives to determine whether activities achieved intended results. Since 1996, State has not complied with a congressional mandate to report to Congress on U.S. international counterterrorism assistance. Additionally, State’s annual reports on ATA contained inaccurate data regarding basic program information, did not provide systematic assessments of program results, and lacked other information necessary to evaluate program effectiveness. In 1985, Congress amended the Foreign Assistance Act requiring the Secretary of State to report on all assistance related to international terrorism provided by the U.S. government during the preceding fiscal year. Since 1996, State has submitted ATA annual reports rather than the broader report required by the statute. A S/CT official noted confusion within State over what the statute required and he asserted that the ATA annual report, which is prepared by DS/T/ATA, and State’s annual “Patterns of Global Terrorism” report were sufficiently responsive to congressional needs. He further noted that, in his view, it would be extremely difficult for State to compile and report on all U.S. government terrorism assistance activities, especially given the significant growth of agencies’ programs since 2001. Officials in State’s Bureau of Legislative Affairs indicated that, to their knowledge, they had never received an inquiry from congressional staff about the missing reports. Recent ATA annual reports have contained inaccurate data relating to basic program information on numbers of students trained and courses offered. For example, Afghanistan. According to annual reports for fiscal years 2002 to 2005, 15 Afghan students were trained as part of a single training event over the 4-year period. DS/T/ATA subsequently provided us data for fiscal year 2005, which corrected the participation total in that year from 15 participants in 1 training event to 1,516 participants in 12 training events. Pakistan. According to the fiscal year 2005 ATA annual report, ATA delivered 17 courses to 335 participants in Pakistan. Supporting tables in the same report listed 13 courses provided to 283 participants, and a summary report provided to us by DS/T/ATA reported 13 courses provided to 250 course participants. DS/T/ATA officials acknowledged the discrepancies and noted that similar inaccuracies could be presumed for prior years and for other partner nations. The officials indicated that inaccuracies and omissions in reports of the training participants and events were due to a lack of internal policies and procedures for recording and reporting program data. In the absence of documented policies and procedures, staff developed various individual processes for collecting the information that resulted in flawed data reporting. Additionally, DS/T/ATA officials told us that its inadequate information management system and a lack of consistent data collection procedures also contributed to inaccurate reporting. We reviewed ATA annual reports for fiscal years 1997 through 2005, and found that the reports varied widely in terms of content, scope, and format. Moreover, the annual reports did not contain systematic assessments of program performance or consistent information on program activity, such as number and type of courses delivered, types of equipment provided, and budget activity associated with program operations. In general, the reports contained varying levels of detail on program activity, and provided only anecdotal examples of program successes, from a variety of sources, including U.S. embassy officials, ATA instructors, and partner nation officials. DS/T/ATA program officials charged with compiling the annual reports for the past 3 fiscal years noted that DS/T/ATA did not have guidance on the scope, content, or format for the reports. Although ATA plays a central role in State’s broader effort to fight international terrorism, deficiencies in how the program is guided, managed, implemented, and assessed could limit the program’s effectiveness. Specifically, minimal guidance from S/CT makes it difficult to determine the extent to which program assistance directly supports broader U.S. counterterrorism policy goals. Additionally, deficiencies with DS/T/ATA’s needs assessments and program reviews may limit their utility as a tool for planning assistance and prioritizing among several partner nations’ counterterrorism needs. As a result, the assessments and reviews are not systematically linked to resource allocation decisions, which may limit the program’s ability to improve partner nation’s counterterrorism capabilities. Although State has made some progress in attempting to evaluate and quantitatively measure program performance, ATA still lacks a clearly defined, systematic assessment and reporting of outcomes, which makes it difficult to determine the overall effectiveness of the program. This deficiency, along with State’s noncompliance with mandated reporting requirements, has resulted in Congress having limited and incomplete information on U.S. international counterterrorism assistance and ATA efforts. Such information is necessary to determine the most effective types of assistance the U.S. government can provide to partner nations in support of the U.S. national security goal of countering terrorism abroad. In our February 2008 report, we suggested that Congress should reconsider the requirement that the Secretary of State provide an annual report on the nature and amount of U.S. government counterterrorism assistance provided abroad, given the broad changes in the scope and nature of U.S. counterterrorism assistance abroad in conjunction with the fact that the report has not been submitted since 1996. We also recommended that the Secretary of State take the following four actions: 1. Revisit and revise internal guidance (the 1991 State policy memorandum and Foreign Affairs Manual, in particular) to ensure that the roles and responsibilities for S/CT and DS/T/ATA are still relevant and better enable State to determine which countries should receive assistance and what type, and allocate limited ATA resources. 2. Ensure that needs assessments and program reviews are both useful and linked to ATA resource decisions and development of country- specific assistance plans. 3. Establish clearer measures of sustainability, and refocus the process for assessing the sustainability of partner nations’ counterterrorism capabilities. The revised evaluation process should include not only an overall assessment of partner nation counterterrorism capabilities, but also provide guidance for assessing the specific outcomes of ATA. 4. Comply with the congressional mandate to report to Congress on U.S. international counterterrorism assistance. In commenting on our report, State agreed overall with our principal findings and recommendations to improve its ATA program guidance, the needs assessment and program review process, and its assessments of ATA program outcomes. State noted that the report highlighted the difficulties in assessing the benefits of developing and improving long-term antiterrorism and law enforcement relationships with foreign governments. State also outlined a number of ongoing and planned initiatives to address our recommendations. As noted in our report, we will follow up with State to ensure that these initiatives have been completed, as planned. Although State supported the matter we suggested for congressional consideration, it did not specifically address our recommendation that it comply with the congressional mandate to report on U.S. counterterrorism assistance. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I will be happy to answer any questions you may have. For questions regarding this testimony, please contact Charles Michael Johnson, Jr. (202) 512-7331 or johnsoncm@gao.gov. Albert H. Huntington, III, Assistant Director; Matthew E. Helm; Elisabeth R. Helmer; and Emily Rachman made key contributions in preparing this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","The Department of State's (State) Antiterrorism Assistance (ATA) program's objectives are to provide partner nations with counterterrorism training and equipment, improve bilateral ties, and increase respect for human rights. State's Office of the Coordinator for Counterterrorism (S/CT) provides policy guidance and its Bureau of Diplomatic Security, Office of Antiterrorism, Assistance (DS/T/ATA), manages program operations. GAO assessed (1) State's guidance for determining ATA priorities, (2) how State coordinates ATA with other counterterrorism programs, (3) the extent State established ATA program goals and measures, and (4) State's reporting on U.S. counterterrorism assistance. This statement is based on a February 2008, GAO report titled Combating Terrorism: State Department's Antiterrorism Program Needs Improved Guidance and More Systematic Assessments of Outcomes, GAO-08-336 (Washington, D.C.: Feb. 29, 2008). S/CT provides minimal guidance to help prioritize ATA program recipients, and S/CT and DS/T/ATA did not systematically align ATA assistance with U.S. assessments of foreign partner counterterrorism needs. S/CT provided policy guidance to DS/T/ATA through quarterly meetings and a tiered list of priority countries, but the list did not provide guidance on country counterterrorism-related program goals, objectives, or training priorities. S/CT and DS/T/ATA also did not consistently use country-specific needs assessments and program reviews to plan assistance. S/CT had established mechanisms to coordinate the ATA program with other U.S. international efforts to combat terrorism. S/CT held interagency meetings with officials from the Department of State, Defense, Justice, and Treasury and other agencies as well as ambassador-level regional strategic coordinating meetings. GAO did not find any significant duplication or overlap among the various U.S. international counterterrorism efforts. State had made progress in establishing goals and intended outcomes for the ATA program, but S/CT and DS/T/ATA did not systematically assess the outcomes and, as a result, could not determine the effectiveness of program assistance. For example, although sustainability is a principal focus, S/CT and DS/T/ATA had not set clear measures of sustainability or integrated sustainability into program planning. State reporting on U.S. counterterrorism assistance abroad was incomplete and inaccurate. S/CT had not provided a congressionally mandated annual report to Congress on U.S. government-wide assistance related to combating international terrorism since 1996. After 1996, S/CT has only submitted to Congress annual reports on the ATA program, such as the number of students trained and courses offered. Moreover, these reports contained inaccurate program information. Additionally, the reports lacked comprehensive information of the results on program assistance that would be useful to Congress.",govreport
"There are two approaches for reorganizing or terminating a large financial company. Large financial companies may be reorganized or liquidated under a judicial bankruptcy process or resolved under special legal and regulatory resolution regimes that have been created to address insolvent financial entities such as insured depository institutions and insurance companies. Bankruptcy is a federal court procedure, the goal of which is to help individuals and businesses eliminate or restructure debts they cannot repay and help creditors receive some payment in an equitable manner. Generally the filing of a bankruptcy petition operates as an automatic stay; that is, it stops most lawsuits, foreclosures, and other collection activities against the debtor. Equitable treatment of creditors means all creditors with substantially similar claims are classified similarly and receive the same treatment. For example, a class of secured creditors— those with liens or other secured claims against the debtor’s property— will receive similar treatment as to their secured claims. Business debtors may seek liquidation, governed primarily by Chapter 7 of the Code, or reorganization, governed by Chapter 11. Proceedings under Chapters 7 and 11 can be voluntary (initiated by the debtor) or involuntary (generally initiated by at least three creditors holding at least a certain minimum amount of claims against the debtor). In an involuntary proceeding, the debtor can defend against the proceeding, including presenting objections. The judge subsequently decides whether to grant the creditors’ request and permit the bankruptcy to proceed, dismiss the request, or enter any other appropriate order. A Chapter 7 proceeding is a court-supervised procedure by which a trustee takes over the assets of the debtor’s estate subject to limited exemptions, reduces them to cash, and makes distributions to creditors, subject to the rights of secured creditors to the collateral securing their loans to the debtor. A reorganization proceeding under Chapter 11 allows debtors to continue some or all of their operations subject to court supervision as a way to satisfy creditor claims. The debtor typically remains in control of its assets, and is called a debtor-in-possession (DIP). Under certain circumstances, the court can direct the U.S. Trustee to appoint a Chapter 11 trustee to take over the affairs of the debtor. As shown in figure 1, a firm going through a Chapter 11 bankruptcy generally will pass through several stages. Among these are: First-day motions. The most common first-day motions relate to the continued operation of the debtor’s business and involve matters such as requests to use cash collateral—liquid assets on which secured creditors have a lien or claim—and obtaining financing, if any. Disclosure. The disclosure statement must include information on the debtor’s assets, liabilities, and business affairs sufficient to enable creditors to make informed judgments about how to vote on the debtor’s reorganization plan and must be approved by the bankruptcy court. Plan of reorganization. A debtor has an exclusive right to file a plan of reorganization within the first 120 days of bankruptcy. The plan describes how the debtor intends to reorganize and treat its creditors. The plan divides claims against the debtor into separate classes and specifies the treatment each class will receive. The court may confirm the plan if, among other things, each class of allowed creditors has accepted the plan or the class is not impaired by the plan. If not all classes of impaired creditors vote to accept the plan, the court can still confirm the plan if it is shown that it is fair to all impaired creditors. Reorganization. Possible outcomes, which can be used in combination, include (1) distribution under a plan of the proceeds of a pre-plan sale of the assets of the company (in whole or in part), sometimes called a section 363 sale. Section 363 of the Code permits sales that are free and clear of creditor claims of property of the estate; (2) liquidation of the company’s assets with approval of the court, through means other than a 363 sale; and (3) reorganization of the company, in which it emerges from bankruptcy with new contractual rights and obligations that replace or supersede those it had before filing for bankruptcy protection. The debtor, creditors, trustee, or other interested parties may initiate adversary proceedings—in effect, a lawsuit within the bankruptcy case to preserve or recover money or property, to subordinate a claim of another creditor to their own claims, or for similar reasons. Furthermore, the The U.S. bankruptcy system involves multiple federal entities. Bankruptcy courts are located in 90 federal judicial districts; however, as we reported in 2011, the Southern District of New York and the District of Delaware adjudicate a majority of larger corporate or business bankruptcy cases. The Judicial Conference of the United States serves as the judiciary’s principal policymaking body and recommends national policies on all aspects of federal judicial administration. In addition, AOUSC serves as the central administrative support entity for the Judicial Conference and the federal courts, including bankruptcy courts. The Federal Judicial Center is the education and research agency for the federal courts and assists bankruptcy courts with reports and assessments relating to the administration and management of bankruptcy cases. Finally, the Department of Justice’s U.S. Trustee Program and the judiciary’s Bankruptcy Administrator Program oversee bankruptcy trustees and promote integrity and efficiency in the bankruptcy system by overseeing the administration of bankruptcy estates. A preference action can be asserted for payments made to an insider within a year prior to the bankruptcy filing. Large, complex financial companies that are eligible to file for bankruptcy generally file under Chapter 11 of the Code. Such companies operating in the United States engage in a range of financial services activities. Many are organized under both U.S. and foreign laws. The U.S. legal structure is frequently premised on a parent holding company owning regulated subsidiaries (such as depository institutions, insurance companies, broker-dealers, and commodity brokers) and nonregulated subsidiaries that engage in financial activities. Certain financial institutions may not file as debtors under the Code and other entities face special restrictions in using the Code: Insured depository institutions. Under the Federal Deposit Insurance Act, FDIC serves as the conservator or receiver for insured depository institutions placed into conservatorship or receivership under applicable law. Insurance companies. Insurers generally are subject to oversight by state insurance commissioners, who have the authority to place them into conservatorship, rehabilitation, or receivership. Broker-dealers. Broker-dealers can be liquidated under the Securities Investor Protection Act (SIPA) or under a special subchapter of Chapter 7 of the Code. However, broker-dealers may not file for reorganization under Chapter 11. Commodity brokers. Commodity brokers, which include futures commission merchants, foreign futures commission merchants, clearing organizations, and certain other entities in the derivatives industry, can only use a special subchapter of Chapter 7 for bankruptcy relief. Regulators often play a role in financial company bankruptcies. With the exception of CFTC and SEC, the Code does not explicitly name federal financial regulators as a party of interest with a right to be heard before the court. In practice, regulators frequently appear before the court in financial company bankruptcies. For example, as receiver of failed insured depository institutions, FDIC’s role in bankruptcies of bank holding companies is typically limited to that of creditor. CFTC has the express right to be heard and raise any issues in a case under Chapter 7. SEC has the same rights in a case under Chapter 11. SEC may become involved in a bankruptcy particularly if there are issues related to disclosure or the issuance of new securities. SEC and CFTC are, in particular, involved in Chapter 7 bankruptcies of broker-dealers and commodity brokers. In the event of a broker-dealer liquidation, pursuant to SIPA the bankruptcy court retains jurisdiction over the case and a trustee, selected by the Securities Investor Protection Corporation (SIPC), typically administers the case. SEC may participate in any SIPA proceeding as a party. The Code does not restrict the federal government from providing DIP financing to a firm in bankruptcy, and in certain cases it has provided such funding—for example, financing under the Troubled Asset Relief Program (TARP) in the bankruptcies of General Motors and Chrysler. The authority to make new financial commitments under TARP terminated on October 3, 2010. In July 2010, the Dodd-Frank Act amended section 13(3) of the Federal Reserve Act to prohibit the establishment of an emergency lending program or facility for the purpose of assisting a single and specific company to avoid bankruptcy. Nevertheless, the Federal Reserve may design emergency lending programs or facilities for the purpose of providing liquidity to the financial system. Although the automatic stay generally preserves assets and prevents creditors from taking company assets in payment of debts before a case is resolved and assets are systematically distributed, the stay is subject to exceptions, one of which can be particularly important in a financial institution bankruptcy. These exceptions—commonly referred to as the “safe harbor provisions”—pertain to certain financial and derivative contracts, often referred to as qualified financial contracts (QFC). The types of contracts eligible for the safe harbors are defined in the Code. They include derivative financial products, such as forward contracts and swap agreements that financial companies (and certain individuals and nonfinancial companies) use to hedge against losses from other transactions or speculate on the likelihood of future economic developments. Repurchase agreements, which are collateralized instruments that provide short-term financing for financial companies and others, also generally receive safe-harbor treatment. Under the safe-harbor provisions, most counterparties that entered into a qualifying transaction with the debtor may exercise certain contractual rights even if doing so otherwise would violate the automatic stay. In the event of insolvency or the commencement of bankruptcy proceedings, the nondefaulting party in a QFC may liquidate, terminate, or accelerate the contract, and may offset (net) any termination value, payment amount, or other transfer obligation arising under the contract when the debtor files for bankruptcy. That is, generally nondefaulting counterparties subtract what they owe the bankrupt counterparty from what that counterparty owes them (netting), often across multiple contracts. If the result is positive, the nondefaulting counterparties can sell any collateral they are holding to offset what the bankrupt entity owes them. If that does not fully settle what they are owed, the nondefaulting counterparties are treated as unsecured creditors in any final liquidation or reorganization. OLA gives FDIC the authority, subject to certain constraints, to resolve large financial companies, including a bank holding company or a nonbank financial company designated for supervision by the Federal Reserve, outside of the bankruptcy process. This regulatory resolution authority allows for FDIC to be appointed receiver for a financial company if the Secretary of the Treasury, in consultation with the President, determines, upon the recommendation of two-thirds of the Board of Governors of the Federal Reserve and (depending on the nature of the financial firm) FDIC, SEC, or the Director of the Federal Insurance Office, among other things, that the firm’s failure and its resolution under applicable law, including bankruptcy, would have serious adverse effects on U.S. financial stability and no viable private-sector alternative is available to prevent the default. In December 2013, FDIC released for public comment a notice detailing a proposed single-point-of-entry (SPOE) approach to resolving a systemically important financial institution under OLA. Under the SPOE approach, as outlined, FDIC would be appointed receiver of the top-tier U.S. parent holding company of a covered financial company determined to be in default or in danger of default pursuant to the appointment process set forth in the Dodd-Frank Act. Immediately after placing the parent holding company into receivership, FDIC would transfer assets (primarily the equity and investments in subsidiaries) from the receivership estate to a bridge financial company. By allowing FDIC to take control of the firm at the parent holding company level, this approach could allow subsidiaries (domestic and foreign) carrying out critical services to remain open and operating. In a SPOE resolution, at the parent holding company level, shareholders would be wiped out, and unsecured debt holders would have their claims written down to reflect any losses that shareholders cannot cover. The resolution of globally active large financial firms is often associated with complex international, legal, and operational challenges. The resolution of failed financial companies is subject to different national frameworks. During the recent financial crisis, these structural challenges led to government rescues or disorderly liquidations of systemic firms. Insolvency laws vary widely across countries. The legal authorities of some countries are not designed to resolve problems in financial groups operating through multiple legal entities that span borders. Some resolution authorities may not encourage cooperative solutions with foreign resolution authorities. Regulatory and legal regimes may conflict. Depositor preference, wholesale funding arrangements, derivatives, and repurchase agreements are often treated differently among countries when a firm enters bankruptcy. Some resolution authorities may lack the legal tools or authority to share information with relevant foreign authorities about the financial group as a whole or subsidiaries or branches. Country resolution authorities may have as their first responsibility the protection of domestic financial stability and minimization of any risk to public funds. For instance, if foreign authorities did not have full confidence that national and local interests would be protected, the assets of affiliates or branches of a U.S.-based financial institution chartered in other countries could be ring fenced or isolated and wound down separately under the insolvency laws of other countries thus complicating home-country resolution efforts. In 2005, the United States adopted Chapter 15 of the U.S. Bankruptcy Code. Chapter 15 is based on the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (UNCITRAL). The model law is intended to promote coordination between courts in different countries during insolvencies and has been adopted in 21 jurisdictions. More than 450 Chapter 15 cases have been filed since its adoption, with more than half filed in the Southern District of New York and the District of Delaware. Among the stated objectives of Chapter 15 are promoting cooperation between U.S. and foreign parties involved in a cross-border insolvency case, providing for a fair process that protects all creditors, and facilitating the rescue of a distressed firm. In pursuit of these goals, Chapter 15 authorizes several types of coordination, including U.S. case trustees or other authorized entities operating in foreign countries on behalf of a U.S. bankruptcy estate; foreign representatives having direct access to U.S. courts, including the right to commence a proceeding or seek recognition of a foreign proceeding; and U.S. courts communicating information they deem important, coordinating the oversight of debtors’ activities, and coordinating proceedings. Chapter 15 excludes the same financial institutions that are generally not eligible to file as debtors under the Code (such as insured depository institutions and U.S. insurance companies), with the exception of foreign insurance companies. It also excludes broker-dealers that can be liquidated under SIPA or a special provision of Chapter 7 of the Code and commodity brokers that can be liquidated under a different special provision of Chapter 7. Based on the UNCITRAL model law, Chapter 15 contains a public policy exception that allows a U.S. court to refuse cooperation and coordination if doing so would be “manifestly contrary to the public policy of the United States.” Since we last reported on financial company bankruptcies in July 2013, no changes have been made to Chapters 7, 11, or 15 of the Bankruptcy Code relating to large financial companies, although two bills were introduced in the 113th Congress that would have attempted to address challenges associated with the reorganization of large financial firms as governed by Chapter 11 of the Code. Neither bill was signed into law nor re-introduced in the current Congress, as of March 12, 2015. The Taxpayer Protection and Responsible Resolution Act (S. 1861) was introduced in the Senate on December 19, 2013. The bill would have added a new chapter to the Code—”Chapter 14: Liquidation, Reorganization, or Recapitalization of a Covered Financial Corporation”— that would have generally applied to bank holding companies or corporations predominantly engaged in activities that the Federal Reserve Board has determined are financial in nature. Its provisions would have made changes to the role of regulators, changed the treatment of QFCs, and specifically designated judges to hear Chapter 14 cases, as the following examples illustrate. The proposal would have repealed the regulatory resolution regime in Title II of the Dodd-Frank Act—revoking FDIC’s role as a receiver of a failed or failing financial company under OLA—and returned all laws changed by Title II to their pre-Title II state. The proposal would have allowed the Federal Reserve Board to commence an involuntary bankruptcy and granted the Federal Reserve Board the right to be heard before the court. The proposal would have allowed the court to transfer assets of the estate to a bridge company (on request of the Federal Reserve Board or the trustee and after notice and hearing and not less than 24 hours after the start of the case). The court would have been able to order transfer of assets to a bridge company only under certain conditions (including that a preponderance of evidence indicated the transfer was necessary to prevent imminent substantial harm to U.S. financial stability). FDIC also would have been granted the right to be heard before the court on matters related to the transfer of property to the bridge company. However, this proposal would have explicitly prohibited the Federal Reserve Board from providing DIP financing to a company in bankruptcy or to a bridge company and provided no specific alternative non-market source of funding. The Taxpayer Protection and Responsible Resolution Act (S. 1861) also would have changed the treatment of QFCs in bankruptcy. The rights to liquidate, terminate, offset, or net QFCs would have been stayed for up to 48 hours after bankruptcy filing (or the approval of the petition from the Federal Reserve Board). During the stay, the trustee would have been able to perform all payment and delivery obligations under the QFC that became due after the case commenced. The stay would have been terminated if the trustee failed to perform any payment or delivery obligation. Furthermore, QFCs would not have been able to be transferred to the bridge company unless the bridge assumed all contracts with a counterparty. If transferred to the bridge company, the QFCs could not have been terminated or modified for certain reasons, including the fact that a bankruptcy filing occurred. Aside from the limited exceptions, QFC counterparties would have been free to exercise all of their pre-existing contractual rights, including termination. Finally, the Taxpayer Protection and Responsible Resolution Act (S. 1861) would have required the Chief Justice to designate no fewer than 10 bankruptcy judges with expertise in cases under Title 11 in which a financial institution is a debtor to be available to hear a Chapter 14 case. Additionally, the Chief Justice would have been required to designate at least one district judge from each circuit to hear bankruptcy appeals under Title 11 concerning a covered financial corporation. A second bankruptcy reform proposal, the Financial Institution Bankruptcy Act of 2014 (H.R. 5421), was passed by voice vote by the House of Representatives on December 1, 2014, and would have added a new Subchapter V under Chapter 11. Generally, the proposed subchapter would have applied to bank holding companies or corporations with $50 billion or greater in total assets and whose activities, along with its subsidiaries, are primarily financial in nature. The Financial Institution Bankruptcy Act (H.R. 5421) contained provisions similar or identical to those in the Taxpayer Protection and Responsible Resolution Act (S. 1861) that would have affected the role of regulators, treatment of QFCs, and designation of judges. For example, this proposal would have allowed an involuntary bankruptcy to be commenced by the Federal Reserve Board and allowed for the creation of a bridge company to which assets of the debtor holding company could be transferred. This proposal also would have granted the Federal Reserve Board and FDIC the right to be heard before the court, as well as the Office of the Comptroller of the Currency and SEC (which are not granted this right under the Taxpayer Protection and Responsible Resolution Act). The changes to the treatment of QFCs under this proposal were substantively similar to those under the Taxpayer Protection and Responsible Resolution Act (S. 1861). In addition, the Financial Institution Bankruptcy Act (H.R. 5421) would have required that the Chief Justice would designate no fewer than 10 bankruptcy judges to be available to hear a Subchapter V case. The Chief Justice also would have been required to designate not fewer than three judges of the court of appeals in not fewer than four circuits to serve on an appellate panel. Although the two bills have similarities, there are significant differences. For example, the Financial Institution Bankruptcy Act (H.R. 5421) would not have repealed Title II of the Dodd-Frank Act. Instead, Title II would have remained an alternative to resolving a firm under the Bankruptcy Code. Also, the Financial Institution Bankruptcy Act (H.R. 5421) would not have restricted the Federal Reserve Board from providing DIP financing to a financial firm under the proposed subchapter. Furthermore, the Financial Institution Bankruptcy Act (H.R. 5421) would have given the court broad power in the confirmation of the bankruptcy plan to consider the serious adverse effect that any decision in connection with Subchapter V might have on financial stability in the United States. By contrast, the Taxpayer Protection and Responsible Resolution Act (S. 1861) mentioned financial stability as a consideration in specific circumstances, such as whether the Federal Reserve Board could initiate an involuntary bankruptcy under Chapter 14, or whether the court could order a transfer of the debtor’s property to the bridge company. Certain provisions in these bills resembled those in OLA and may have facilitated a resolution strategy similar to FDIC’s SPOE strategy under OLA. For example, each of the bankruptcy reform bills and FDIC’s SPOE strategy under OLA would have allowed for the creation of a bridge company, in which assets, financial contracts, and some legal entities of the holding company would have been transferred, allowing certain subsidiaries to have maintained operations. In addition, OLA, like the bills, included a temporary stay for QFCs. OLA uses a regulatory approach to resolution, while the bankruptcy reform bills in the 113th Congress would have maintained a judicial approach to resolution. Some experts have expressed concern that a regulatory resolution may not adequately ensure the creditors’ rights to due process. For example, experts attending GAO’s 2013 bankruptcy reform roundtables noted that if preferences were given to some counterparties or creditors during a temporary stay, other counterparties or creditors would have the right to take action to recover value later in the process, as opposed to having a judge consider the views of all of the parties prior to making any decisions. However, as we reported in July 2013, other experts have stated that the judicial process of bankruptcy does not contemplate systemic risk, or have some of the tools available for minimizing the systemic risk associated with the failure of a systemically important financial institution. For example, to act quickly in cases involving large and complex financial companies, courts might need to shorten notice periods and limit parties’ right to be heard, which could compromise due process and creditor rights. In the United States, the judicial process under bankruptcy remains the presumptive method for resolving financial institutions, even those designated as systemically important. A third proposal would have more narrowly amended the Code. The 21st Century Glass-Steagall Act of 2013 (S. 1282 in the Senate and H.R. 3711 in the House) contained a provision that would have repealed all safe- harbor provisions for QFCs. This legislative proposal was neither signed into law nor re-introduced in the current Congress, as of March 12, 2015. Some experts have identified the safe-harbor treatment of QFCs under the Code as a challenge to an orderly resolution in bankruptcy. For example, safe-harbor treatment can create significant losses to the debtor’s estate, particularly for financial institution debtors that often are principal users of these financial products. As we previously reported in July 2011, some experts we interviewed suggested that modifying the safe harbor provisions might help to avoid or mitigate the precipitous decline of the asset values typical in financial institution bankruptcies. For example, these experts suggested that the treatment of QFCs in the Lehman bankruptcy contributed to a significant and rapid loss of asset values to the estate. Other experts we spoke with in 2011 suggested that safe-harbor treatment might lessen market discipline. Because counterparties entered into QFCs may close out their contracts even if doing so would otherwise violate the automatic stay, the incentive to monitor the risk of each other could be reduced. Additionally, as we reported in July 2013, attendees of our roundtable discussions on bankruptcy reform noted that the safe harbors lead to a larger derivatives market and greater reliance on short-term funding because QFCs would not be subject to a stay, which could increase systemic risk in the financial system. However, others argue that a repeal of the safe-harbor provisions could have adverse effects. As we previously reported in July 2011, these experts assert that subjecting any QFCs to the automatic stay in bankruptcy would freeze many assets of the counterparties of the failed financial institution, causing a chain reaction and a subsequent systemic financial crisis. In January 2011, regulatory officials we spoke with also told us that the safe harbor provisions uphold market discipline through margin, capital, and collateral requirements. They said that the requirement for posting collateral limits the amount of risk counterparties are willing to undertake. In addition, during the 2013 expert roundtable on financial company bankruptcies, one expert noted that one of the goals of safe harbors is to limit market turmoil during a bankruptcy—that is, they are to prevent the insolvency of one firm from spreading to other firms. In the United States the presumptive mechanism to resolve a failed cross- border large financial company continues to be through the judicial bankruptcy process, though no statutory changes have been made to Chapter 15 of the Code or the U.S. judicial bankruptcy process to address impediments to an orderly resolution of a large, multinational financial institution. However, while some structural challenges discussed earlier remain, others, such as conflicting regulatory regimes and the treatment of cross-border derivatives, are being addressed through various efforts. For example, the Federal Reserve and FDIC have taken certain regulatory actions mandated by the Dodd-Frank Act authorities toward facilitating orderly resolution, including efforts that could contribute to cross-border coordination. Specifically, certain large financial companies must provide the Federal Reserve and FDIC with periodic reports of their plans for rapid and orderly resolution in the event of material financial distress or failure under the Code. The resolution plans or living wills are to demonstrate how a company could be resolved in a rapid manner under the Code. FDIC and the Federal Reserve have said that the plans were expected to address potential obstacles to global cooperation, among others. In 2014, FDIC and the Federal Reserve sent letters to a number of large financial companies identifying specific shortcomings with the resolution plans that those firms will need to address in their 2015 submissions, due on or before July 1, 2015, for the first group of filers. International bodies have also focused on strengthening their regulatory structures to enable the orderly resolution of a failing large financial firm and have taken additional actions to facilitate cross-border resolutions. In October 2011, the Financial Stability Board (FSB)—an international body that monitors and makes recommendations about the global financial system—issued a set of principles to guide the development of resolution regimes for financial firms active in multiple countries. For example, each jurisdiction should have the authority to exercise resolution powers over firms, jurisdictions should have policies in place so that authorities are not reliant on public bailout funds, and statutory mandates should encourage a cooperative solution with foreign authorities. In addition, in December 2013 the European Parliament and European Council reached agreement on the European Union’s (EU) Bank Recovery and Resolution Directive, which establishes requirements for national resolution frameworks for all EU member states and provides for resolution powers and tools. For example, member states are to appoint a resolution authority, institutions must prepare and maintain recovery plans, resolution authorities are to assess the extent to which firms are resolvable without the assumption of extraordinary financial support, and authorities are to cooperate effectively when dealing with the failure of cross-border banks. Unlike the United States, EU and FSB do not direct resolution authorities to use the bankruptcy process developed for corporate insolvency situations. In a letter to the International Swaps and Derivatives Association (ISDA) in 2013, FDIC, the Bank of England, BaFin in Germany, and the Swiss Financial Market Supervisory Authority called for changes in the exercise of termination rights and other remedies in derivatives contracts following commencement of an insolvency or resolution action. In October 2014, 18 major global financial firms agreed to sign a new ISDA Resolution Stay Protocol to facilitate the cross-border resolution of a large, complex institution. This protocol was published and these 18 financial firms agreed to it on November 12, 2014, and certain provisions of which became effective in January 2015. Generally, parties adhering to this protocol have agreed to be bound by certain limitations on their termination rights and other remedies in the event one of them becomes subject to certain resolution proceedings, including OLA. These stays are intended to give resolution authorities and insolvency administrators time to facilitate an orderly resolution of a troubled financial firm. The Protocol also incorporates certain restrictions on creditor contractual rights that would apply when a U.S. financial holding company becomes subject to U.S. bankruptcy proceedings, including a stay on cross-default rights that would restrict the counterparty of a non-bankrupt affiliate of an insolvent U.S. financial holding company from immediately terminating its derivatives contracts with that affiliate. Finally, a United Nations working group (tasked with furthering adoption of the UNCITRAL Model Law) included the insolvency of large and complex financial institutions as part of its focus on cross-border insolvency. In 2010, Switzerland proposed that the working group study the feasibility of developing an international instrument for the cross- border resolution of large and complex financial institutions. The working group has acknowledged and has been monitoring the work undertaken by FSB, Basel Committee on Banking Supervision, the International Monetary Fund, and EU. We provided a draft of this report to AOUSC, CFTC, Departments of Justice and the Treasury, FDIC, Federal Reserve, and SEC for review and comment. The agencies did not provide written comments. We received technical comments from the Department of the Treasury, FDIC, Federal Reserve, and SEC, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, Director of the Administrative Office of the U.S. Courts, the Chairman of the Commodity Futures Trading Commission, Attorney General, the Secretary of the Treasury, the Chairman of the Federal Deposit Insurance Corporation, the Director of the Federal Judicial Center, the Chair of the Board of Governors of the Federal Reserve System, the Chair of the Securities and Exchange Commission, and other interested parties. The report also is available at no charge on the GAO web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact Cindy Brown Barnes at (202) 512-8678 or brownbarnesc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix III. In our July 2011 and July 2012 reports on the bankruptcy of financial companies, we reported on the status of the bankruptcy proceedings of, among other financial companies, Lehman Brothers Holdings Inc., MF Global, and Washington Mutual. In the 2011 report, we found that comprehensive data on the number of financial companies in bankruptcies were not readily available. We collected information to update the status of the bankruptcy proceedings for Lehman Brothers Holdings Inc., MF Global, and Washington Mutual. Since we last reported in July 2012, in each case, additional payments to creditors have been distributed and litigation with various parties is ongoing. Lehman Brothers Holdings Inc. (Lehman) was an investment banking institution that offered equity, fixed-income, trading, asset management, and other financial services. In 2008, Lehman was the fourth largest U.S. investment bank and had been in operation since 1850. It had 209 registered subsidiaries in 21 countries. On September 15, 2008, Lehman filed Chapter 11 cases in the U.S. Bankruptcy Court. Its affiliates filed for bankruptcy over subsequent months. Some of Lehman’s affiliates also filed bankruptcy or insolvency proceedings in foreign jurisdictions. There are three different legal proceedings involving (1) the holding company or LBHI, (2) the U.S. broker dealer or LBI, and (3) the U.K. broker dealer or LBIE. On September 19, 2008, Lehman’s broker-dealer was placed into liquidation under the Securities Investor Protection Act (SIPA). The bankruptcy court approved the sale of LBI’s assets to Barclays PLC on September 20, 2008—5 days after the filing of the LBHI Chapter 11 case. In March 2010, LBHI debtors filed their proposed Chapter 11 plan. In December 2010, a group of senior creditors filed an alternative plan. Since then, various plan amendments and counter plans were filed. In December 2011, the U.S. Bankruptcy Court for the Southern District of New York confirmed a reorganization plan for LBHI and the plan took effect in March 2012. LBHI had more than 100,000 creditors. As of October 2, 2014, some $8.6 billion had been distributed to LBHI creditors in the nonpriority unsecured claims class. The Trustee of LBI has distributed more than $106 billion to 111,000 customers. As of September 2014, £34 billion has been distributed by the LBIE Administrator to counterparties in the House Estate (general unsecured estate) and the Trust Estate (Client Assets, Client Money and Omnibus Trust). In February 2015, the bankruptcy court approved a second interim distribution of $2.2 billion to general unsecured creditors with allowed claims. This would bring the total distributions to allowed general unsecured creditors to approximately 27 percent. There is ongoing litigation involving a breach of a swap with Giants Stadium, the payment of creditor committee members’ legal fees, and transactions with foreign entities, according to an official of the U.S. Trustees Program. Litigation concerning issues surrounding the sale of LBI assets to Barclays PLC also continues. On December 15, 2014, the SIPA Trustee filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the lower court rulings that awarded $4 billion of margin cash assets to Barclay’s. MF Global Holdings Ltd. (MFGH) was one of the world’s leading brokers in markets for commodities and listed derivatives. The firm was based in the United States and had operations in Australia, Canada, Hong Kong, India, Japan, Singapore, and the U.K. On October 31, 2011, MFGH and one of its affiliates filed Chapter 11 cases in the U.S. Bankruptcy Court for the Southern District of New York. In the months following four other affiliates filed for relief in Bankruptcy Court. Also, on October 31, 2011, the Securities Investor Protection Corporation (SIPC) commenced a SIPA case against MF Global’s broker-dealer subsidiary (MFGI). The SIPA trustee has been liquidating the firm’s assets and distributing payments to its customers on a rolling basis pursuant to a claims resolution procedure approved by the bankruptcy court overseeing the case. MFGI was required to pay $1.2 billion in restitution to its customers as well as a $100 million penalty. In December 2014, CFTC obtained a federal court consent order against MFGH requiring it to pay $1.2 billion or the amount necessary in restitution to ensure the claims of MFGI are paid in full. The bankruptcy court confirmed a liquidation plan for MFGH on April 22, 2013, which became effective in June 2013. As of the end of 2013, the SIPA trustee reported the probability of a 100 percent recovery of allowed net equity claims for all commodities and securities customers of MFGI. As of mid-December 2014, 100 percent of the distributions through the SIPA trustee have been completed to substantially all categories of commodities and securities customers and 39 percent of the first interim distribution on allowed unsecured claims. The trustee started to make $551 million in distributions to general creditors on October 30, 2014. An interim payment of $518.7 million went to unsecured general claimants and covered 39 percent of their allowed claims. A reserve fund of $289.8 million was to be held for unresolved unsecured claims and a reserve fund of $9.9 million will be held for unresolved priority claims. In April 2014, the SIPA trustee began final distributions to all public customers. With this distribution a total of $6.7 billion was to have been returned to over 26,000 securities and commodities futures customers. General creditor claims totaling more than $23 billion in asserted amounts, as substantial unliquidated claims, were filed in this proceeding as of the end of June 2014. As of December 2014, the SIPA trustee reports that of 7,687 general creditor claims asserted or reclassified from customer status, only 23 claims remain unresolved. Current litigation surrounds a malpractice complaint against PricewaterhouseCoopers (the company’s former auditor) and an investigation of the officers, according to an official of the U.S. Trustees Program. Washington Mutual Inc. was a thrift holding company that had 133 subsidiaries. Its subsidiary Washington Mutual Bank was the largest savings and loan association in the United State prior to its failure. In the 9 days prior to receivership by the Federal Deposit Insurance Corporation (FDIC), there were more than $16.7 billion in depositor withdrawals. At the time of its filing, Washington Mutual had about $32.9 billion in total assets and total debt of about $8.1 billion. Its failure was the largest bank failure in U.S. history. On September 25, 2008, the Office of Thrift Supervision found Washington Mutual Bank to be unsafe and unsound, closed the bank, and appointed FDIC as the receiver. FDIC as receiver then took possession of the bank’s assets and liabilities and transferred substantially all the assets and liabilities to JPMorgan Chase for $1.9 billion. On September 26, 2008, Washington Mutual and its subsidiary WMI Investment Corporation filed Chapter 11 cases in U.S. Bankruptcy Court for the District of Delaware. On March 12, 2010, Washington Mutual, FDIC, and JPMorgan Chase announced that they had reached a settlement on disputed property and claims. This was called the global settlement. On July 28, 2010, the bankruptcy court approved the appointment of an examiner, selected by the U.S. Trustee’s office, to investigate the claims of various parties addressed by the global settlement. The seventh amended plan was confirmed by the court on February 24, 2012. The plan established a liquidating trust—the Washington Mutual Liquidating Trust (WMILT)—to make subsequent distributions to creditors on account of their allowed claims. Upon the effective date of the plan, Washington Mutual became a newly reorganized company, WMI Holdings Corp. consisting primarily of its subsidiary WMI Mortgage Reinsurance Company, Inc. In 2012, there was an initial distribution of $6.5 billion. Since that initial distribution, an additional $660 million has been distributed to creditors, according to officials at the U.S. Trustees Program, including a distribution of $78.4 million paid on August 1, 2014. In August 2013, WMILT, pursuant to an order by the U.S. Bankruptcy Court for the District of Delaware, filed a declaratory judgment in the U.S. District Court for the Western District of Washington against FDIC, the Board of Governors of the Federal Reserve System (Federal Reserve), and 90 former employees who were also claimants in the bankruptcy proceeding. Certain employee claimants have asserted cross-claims against FDIC and the Federal Reserve, contending that the banking agencies are without authority to assert limits on payment from troubled institutions that are contingent on termination of a person’s employment over WMILT, because WMILT is a liquidating trust. After the case was transferred to the U.S. Bankruptcy Court for the District of Delaware in July 2014 and all pending motions terminated, most of the parties stipulated to withdraw the reference to the bankruptcy court. FDIC moved to dismiss the complaint on September 5, 2014. The proposed order to withdraw the reference and the briefing on the motion to dismiss remains pending. Section 202(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act) mandated that we report on the orderliness and efficiency of financial company bankruptcies every year for 3 years after passage of the act, in the fifth year, and every 5 years thereafter. This report, the fourth in the series, examines (1) recent changes to the U.S. Bankruptcy Code (Code) and (2) efforts to improve cross-border coordination to facilitate the liquidation and reorganization of failed large financial companies under bankruptcy. For each of our objectives, we reviewed relevant regulations and laws, including the Code and the Dodd-Frank Act as well as GAO reports that addressed bankruptcy issues and financial institution failures. We specifically reviewed the reports we issued during the first 3 years of the mandate as well as reports written under the same or similar mandates by the Administrative Office of the United States Courts (AOUSC) and the Board of Governors of the Federal Reserve System (Federal Reserve). We interviewed officials from the following federal agencies due to their role in financial regulation and bankruptcy proceedings: AOUSC; the Commodity Futures Trading Commission (CFTC); Federal Deposit Insurance Corporation (FDIC); Department of Justice; Department of the Treasury (Treasury), including officials who support the Financial Stability Oversight Council (FSOC); Federal Reserve; and Securities and Exchange Commission (SEC). We also updated our review of published economic and legal research on the financial company bankruptcies that we had originally completed during the first year of the mandate (see appendix I). For the original search, we relied on Internet search databases (including EconLit and Proquest) to identify studies published or issued after 2000 through 2010. To address our first objective, we reviewed Chapters 7, 11, or 15 of the Bankruptcy Code for any changes. In addition, we reviewed legislation proposed in the 113th Congress that would change the Code for financial company bankruptcies. We also reviewed academic literature on financial company bankruptcies and regulatory resolution, transcripts of congressional hearings on bankruptcy reform, and transcripts from expert roundtables on bankruptcy reform that were hosted by GAO in 2013. To address our second objective, we reviewed Chapter 15 of the Bankruptcy Code, which relates to coordination between U.S. and foreign jurisdictions in bankruptcy cases in which the debtor is a company with foreign operations, for any changes. In addition, we sought information on U.S. and international efforts to improve coordination of cross-border resolutions from the federal agencies we interviewed. We also reviewed and analyzed documentary information from the Bank of England, Basel Committee on Banking Supervision, European Union, the Financial Stability Board, BaFin in Germany, International Monetary Fund, Swiss Financial Market Supervisory Authority, and the United Nations. To update the three bankruptcy cases of Lehman Brothers Holdings, Inc.; MF Global Holdings, Ltd.; and Washington Mutual, Inc. discussed in our July 2011 and July 2012 reports, we sought available information—for example, trustee reports and reorganization plans—on these cases from CFTC, FDIC, Federal Reserve, and SEC; AOUSC, the Department of Justice, and Treasury. In addition, we collected information from prior GAO reports, bankruptcy court documents, and the trustees in each case. To determine whether there were new bankruptcy filings of large financial companies such as those in our case studies, we inquired of AOUSC, CFTC, FDIC, Department of Justice, Treasury, Federal Reserve, and SEC. We also conducted a literature review, which did not show evidence of any new bankruptcy cases filed by large financial companies. We conducted this performance audit from June 2014 to March 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Karen Tremba, Assistant Director; Nancy S. Barry; Patrick Dynes; Risto Laboski; Marc Molino; Barbara Roesmann; Jessica Sandler; and Jason Wildhagen made key contributions to this report. Technical assistance was provided by JoAnna Berry.","The challenges associated with the bankruptcies of large financial companies during the 2007-2009 financial crisis raised questions about the effectiveness of the U.S. Bankruptcy Code and international coordination for resolving complex financial institutions with cross-border activities. The Dodd-Frank Act mandates that GAO report on an ongoing basis on ways to make the U.S. Bankruptcy Code more effective in resolving certain failed financial companies. GAO has issued three reports on this issue. This fourth report addresses (1) recent changes to the U.S. Bankruptcy Code and (2) efforts to improve cross-border coordination to facilitate the liquidation or reorganization of failed large financial companies under bankruptcy. GAO reviewed laws, court documents, regulations, prior GAO reports, and academic literature on financial company bankruptcies and regulatory resolution. GAO also reviewed documentation from foreign financial regulators and international bodies such as the Financial Stability Board. GAO interviewed officials from the Administrative Office of the United States Courts, Department of Justice, Department of the Treasury, and financial regulators with a role in bankruptcy proceedings. GAO makes no recommendations in this report. The Department of the Treasury, Federal Reserve, FDIC, and the Securities and Exchange Commission provided technical comments on a draft of the report that GAO incorporated as appropriate. The U.S. Bankruptcy Code (Code) chapters dealing with the liquidation or reorganization of a financial company have not been changed since GAO last reported on financial company bankruptcies in July 2013. However, bills introduced in the previous Congress would, if re-introduced and passed, make broad changes to the Code relevant to financial company bankruptcies. The Financial Institution Bankruptcy Act of 2014 (H.R. 5421) and Taxpayer Protection and Responsible Resolution Act (S.1861) would have expanded to varying degrees the powers of the Board of Governors of the Federal Reserve System (Federal Reserve) and Federal Deposit Insurance Corporation (FDIC) and would have imposed a temporary stay on financial derivatives (securities whose value is based on one or more underlying assets) that are exempt from the automatic stay under the Code. That stay would prohibit a creditor from seizing or taking other action to collect what the creditor is owed under the financial derivative. The bills also would have added to the Code processes for the resolution of large, complex financial companies similar in some ways to provisions currently in the Orderly Liquidation Authority (OLA) in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which grants FDIC the authority to resolve failed systemically important financial institutions under its receivership. For example, each bill would have allowed for the creation of a bridge company, in which certain assets and financial contracts of the holding-company would be transferred, allowing certain subsidiaries to continue their operations. The 21st Century Glass-Steagall Act of 2013—a bill introduced in the House of Representatives (H.R. 3711) and the Senate (S. 1282)—would have repealed safe-harbor provisions that allow most counterparties in a qualifying transaction with the debtor to exercise certain contractual rights even if doing so would otherwise violate the automatic stay. As of March 12, 2015, these legislative proposals had not been re-introduced in Congress. In the United States, the presumptive mechanism to resolve a failed large financial company with cross-border operations is through the judicial bankruptcy process. Since GAO's 2013 report, no changes have been made to the chapter of the Code that relates to coordination between U.S. and foreign jurisdictions in bankruptcy cases in which the debtor has foreign operations. Some structural challenges remain, such as conflicting regulatory regimes related to the treatment of financial contracts between parties in different countries when a firm enters bankruptcy, but efforts are underway to address them. Regulators have implemented a Dodd-Frank Act provision that requires certain large financial firms to submit a resolution plan to assist with an orderly bankruptcy process, which regulators expect to help address potential problems with international cooperation, among others. However, in 2014, FDIC and the Federal Reserve identified shortcomings with the plans for a number of large financial companies that those firms are to address in their 2015 submissions. Further, international bodies, such as the Financial Stability Board—an international body that monitors and makes recommendations about the global financial system—have focused on having countries adopt a regulatory approach to resolutions. Other recent actions include a January 2015 stay protocol for derivatives contracts developed by the International Swaps and Derivatives Association that is intended to give regulators time to facilitate an orderly resolution of a troubled firm.",govreport
"The electricity industry, as shown in figure 1, is composed of four distinct functions: generation, transmission, distribution, and system operations. Once electricity is generated—whether by burning fossil fuels; through nuclear fission; or by harnessing wind, solar, geothermal, or hydro energy—it is generally sent through high-voltage, high-capacity transmission lines to local electricity distributors. Once there, electricity is transformed into a lower voltage and sent through local distribution lines for consumption by industrial plants, businesses, and residential consumers. Because electric energy is generated and consumed almost instantaneously, the operation of an electric power system requires that a system operator constantly balance the generation and consumption of power. Utilities and others own and operate electricity assets, which may include generation plants, transmission lines, distribution lines, and substations— structures often seen in residential and commercial areas that contain technical equipment such as switches and transformers to ensure smooth, safe flow of current and regulate voltage. Utilities may be owned by investors, municipalities, and individuals (as in cooperative utilities). System operators—sometimes affiliated with a particular utility or sometimes independent and responsible for multiple utility areas— manage the electricity flows. These system operators manage and control the generation, transmission, and distribution of electric power using control systems—IT- and network-based systems that monitor and control sensitive processes and physical functions, including opening and closing circuit breakers. As we have previously reported, the effective functioning of the electricity industry is highly dependent on these control systems. Nevertheless, for many years, aspects of the electricity network lacked (1) technologies— such as sensors—to allow system operators to monitor how much electricity was flowing on distribution lines, (2) communications networks to further integrate parts of the electricity grid with control centers, and (3) computerized control devices to automate system management and recovery. As the electricity industry has matured and technology has advanced, utilities have begun taking steps to update the electricity grid—the transmission and distribution systems—by integrating new technologies and additional IT systems and networks. Though utilities have regularly taken such steps in the past, industry and government stakeholders have begun to articulate a broader, more integrated vision for transforming the electricity grid into one that is more reliable and efficient; facilitates alternative forms of generation, including renewable energy; and gives consumers real-time information about fluctuating energy costs. This vision—the smart grid—would increase the use of IT systems and networks and two-way communication to automate actions that system operators formerly had to make manually. Electricity grid modernization is an ongoing process, and initiatives have commonly involved installing advanced metering infrastructure (smart meters) on homes and commercial buildings that enable two-way communication between the utility and customer. Other initiatives include adding “smart” components to provide the system operator with more detailed data on the conditions of the transmission and distribution systems and better tools to observe the overall condition of the grid (referred to as “wide-area situational awareness”). These include advanced, smart switches on the distribution system to reroute electricity around a troubled line and high-resolution, time-synchronized monitors—called phasor measurement units—on the transmission system. The use of smart grid systems may have a number of benefits, including improved reliability with fewer and shorter outages, downward pressure on electricity rates resulting from the ability to shift peak demand, an improved ability to more efficiently use alternative sources of energy, and an improved ability to detect and respond to potential attacks on the grid. Both the federal government and state governments have authority for overseeing the electricity industry. For example, the Federal Energy Regulatory Commission (FERC) regulates rates for wholesale electricity sales and transmission of electricity in interstate commerce. This includes approving whether to allow utilities to recover the costs of investments they make to the transmission system, such as some smart grid investments. Meanwhile, local distribution and retail sales of electricity are generally subject to regulation by state public utility commissions. State and federal authorities also play key roles in overseeing the reliability of the electric grid. State regulators generally have authority to oversee the reliability of the local distribution system. The North American Electric Reliability Corporation (NERC) is the federally designated U.S. Electric Reliability Organization, and is overseen by FERC. NERC has responsibility for conducting reliability assessments and developing and enforcing mandatory standards to ensure the reliability of the bulk power system—i.e., facilities and control systems necessary for operating the transmission network and certain generation facilities needed for reliability. NERC develops reliability standards collaboratively through a deliberative process involving utilities and others in the industry, which are then sent to FERC for approval. These standards include critical infrastructure protection standards for protecting electric utility-critical and cyber-critical assets. FERC has responsibility for reviewing and approving the reliability standards or directing NERC to modify them. In addition, the Energy Independence and Security Act of 2007 established federal policy to support the modernization of the electricity grid and required actions by a number of federal agencies, including the National Institute of Standards and Technology (NIST), FERC, and the Department of Energy. With regard to cybersecurity, the act required NIST and FERC to take the following actions: NIST was to coordinate development of a framework that includes protocols and model standards for information management to achieve interoperability of smart grid devices and systems. As part of its efforts to accomplish this, NIST identified cybersecurity standards for these systems and the need to develop guidelines for organizations such as electric companies on how to securely implement smart grid systems. In January 2011, we reported that NIST had identified 11 standards involving cybersecurity that support smart grid interoperability and had issued the first version of a cybersecurity guideline. In February 2012, NIST issued the 2.0 version of the framework that, according to NIST documents, added 22 standards, specifications, and guidelines to the 75 standards NIST recommended as being applicable to the smart grid in the 1.0 version from January 2010. In September 2014, NIST issued the first revision of the cybersecurity guidelines. FERC was to adopt standards resulting from NIST’s efforts that it deemed necessary to ensure smart grid functionality and interoperability. However, according to FERC officials, the statute did not provide specific additional authority to allow FERC to require utilities or manufacturers of smart grid technologies to follow these standards. As a result, any standards identified and developed through the NIST-led process are voluntary unless regulators use other authorities to indirectly compel utilities and manufacturers to follow them. Like threats affecting other critical infrastructures, threats to the electricity industry and its transmission and distribution systems are evolving and growing and can come from a wide array of sources. Risks to cyber- based assets can originate from unintentional or intentional threats. Unintentional threats can be caused by, among other things, natural disasters, defective computer or network equipment, software coding errors, and careless or poorly trained employees. Intentional threats include both targeted and untargeted attacks from a variety of sources, including criminal groups, hackers, disgruntled insiders, foreign nations engaged in espionage and information warfare, and terrorists. These adversaries vary in terms of their capabilities, willingness to act, and motives, which can include seeking monetary gain or pursuing a political, economic, or military advantage. For example, adversaries possessing sophisticated levels of expertise and significant resources to pursue their objectives—sometimes referred to as “advanced persistent threats”—pose increasing risks. They make use of various techniques— or exploits—that may adversely affect federal information, computers, software, networks, and operations, such as a denial of service, which prevents or impairs the authorized use of networks, systems, or applications. The potential impact of these threats is amplified by the connections between industrial control systems, supervisory control and data acquisition (or SCADA) systems, information systems, the Internet, and other infrastructures, which create opportunities for attackers to disrupt critical services, including electrical power. The increased reliance on IT systems and networks also exposes the electric grid to potential and known cybersecurity vulnerabilities. These include an increased number of entry points and paths that can be exploited; the introduction of new, unknown vulnerabilities resulting from an increased use of new system and network technologies; wider access to systems and networks due to increased connectivity; an increased amount of customer information being collected and transmitted, which creates a tempting target for potential attackers. We and others have also reported that smart grid and related systems have known cyber vulnerabilities. For example, cybersecurity experts have demonstrated that certain smart meters can be successfully attacked, possibly resulting in disruption to the electricity grid. In addition, we have reported that control systems used in industrial settings such as electricity generation have vulnerabilities that could result in serious damages and disruption if exploited. Further, in 2007, the Department of Homeland Security, in cooperation with the Department of Energy, ran a test that demonstrated that a vulnerability commonly referred to as “Aurora” had the potential to allow unauthorized users to remotely control, misuse, and cause damage to a small commercial electric generator. Moreover, in 2008, the Central Intelligence Agency reported that malicious activities against IT systems and networks have caused disruption of electric power capabilities in multiple regions overseas, including a case that resulted in a multicity power outage. In January 2014, the Director of National Intelligence testified that industrial control systems and SCADA systems used in electrical power distribution and other industries provided an enticing target to malicious actors and that, although newer architectures provide flexibility, functionality, and resilience, large segments remain vulnerable to attack, which might cause significant economic or human impact. Further, in 2015 the Director testified that studies asserted that foreign cyber actors were developing means to access industrial control systems remotely, including those that manage critical infrastructures such as electric power grids. As government, private sector, and personal activities continue to move to networked operations, the threat will continue to grow. Cyber incidents continue to affect the electric industry. For example, the Department of Homeland Security’s Industrial Control Systems Cyber Emergency Response Team noted that the number of reported cyber incidents affecting control systems of companies in the electricity subsector increased from 3 in 2009 to 25 in 2011. The response team reported that the energy sector, which includes the electricity subsector, led all others in fiscal year 2014 with 79 reported incidents. Reported incidents affecting the electricity subsector have had a variety of impacts, including hacks into smart meters to steal power, failure in control systems devices requiring power plants to be shut down, and malicious software disabling safety monitoring systems. As we have previously reported, multiple entities have taken steps to help secure the electricity grid, including NERC, NIST, FERC, and the Departments of Homeland Security and Energy. For example, NERC developed critical infrastructure standards for protecting electric utility– critical and cyber-critical assets. These standards established requirements for key cybersecurity-related controls: the identification of critical cyber assets, security management, personnel and training, electronic “security perimeters,” physical security of critical cyber assets, systems security management, incident reporting and response planning, and recovery plans for critical cyber assets. In December 2011 we reported that NERC’s cybersecurity standards, along with supplementary guidance, were substantially similar to NIST guidance applicable at the time to federal agencies. NERC had also published security guidelines for companies to consider for protecting electric infrastructure systems, although these guidelines were voluntary and typically not checked for compliance. For example, some of this guidance was intended to assist entities in identifying and developing a list of critical cyber assets. As of October 2015, NERC listed about 30 critical infrastructure protection standards for cybersecurity, some of which were subject to enforcement, some which were subject to future enforcement, and some which were pending regulatory filing or approval. NERC also had enforced compliance with mandatory cybersecurity standards through its Compliance Monitoring and Enforcement Program, including assessing monetary penalties for violations. NIST, in accordance with its responsibilities under the Energy Independence and Security Act of 2007, has identified cybersecurity standards for smart grid systems. Specifically, in August 2010 NIST had identified 11 such standards and issued the first version of a cybersecurity guideline. As we reported in January 2011, NIST’s guidelines largely addressed key cybersecurity elements, with the exception of the risk of attacks using both cyber and physical means—an element essential to securing smart grid systems. We recommended that NIST finalize its plan and schedule for incorporating the missing elements into its guidelines. In 2014, NIST issued updated guidelines, which address the relationship of smart grid cybersecurity to cyber-physical attacks and cybersecurity testing and certification. In addition, the updated guidelines describe the relationship of smart grid cybersecurity to NIST’s cybersecurity framework that was issued in February 2014. This framework, which was developed in accordance with Executive Order 13636, is to enable organizations—regardless of size, degree of cybersecurity risk, or cybersecurity sophistication—to apply the principles and best practices of risk management to improving the cybersecurity and resilience of critical infrastructure. FERC had also taken several actions, including reviewing and approving NERC’s critical infrastructure protection standards in 2008. It had also directed NERC to make changes to the standards to improve cybersecurity protections. However, in 2012 the FERC Chairman stated that many of the outstanding directives had not been incorporated into the standards. We also noted in our January 2011 report that FERC had begun reviewing smart grid standards identified by NIST, but declined to adopt them due to insufficient consensus. The Department of Homeland Security, in its capacity as the lead federal agency for cyber-critical infrastructure protection, had issued recommended practices to reduce risks to industrial control systems in critical infrastructure sectors, including the electricity subsector. The department has also provided on-site support to respond to and analyze security incidents and shared actionable intelligence, vulnerability information, and threat analysis with companies in the electricity subsector. In addition, the department, in accordance with Executive Order 13636, established a program to promote the adoption of the NIST cybersecurity framework. As the lead agency responsible for critical infrastructure protection efforts in the energy sector, the Department of Energy, as we reported in December 2011, was involved in efforts to assist the electricity subsector in the development, assessment, and sharing of cybersecurity standards, according to department officials. In addition, the department has created sector-specific guidance to assist the sector in implementing the NIST cybersecurity framework. The guidance includes sections that explain framework concepts for its application, identify example resources that may support framework use, provide a general approach to framework implementation, and identify an example of a tool-specific approach to implementing the framework. In our January 2011 report we identified a number of key challenges that industry and government stakeholders faced in securing the systems and networks supporting the electricity grid. Monitoring implementation of cybersecurity standards. Best practices for information security call for monitoring the extent to which security controls have been implemented. In our report, we noted that FERC had not developed an approach coordinated with other regulators to monitor, at a high level, the extent to which industry follows the voluntary smart grid standards it adopts. We recommended that FERC, in coordination with state regulators and groups that represent utilities subject to less FERC and state regulation, periodically evaluate the extent to which utilities and manufacturers are following voluntary interoperability and cybersecurity standards and develop strategies for addressing any gaps in compliance with standards that are identified as a result of this evaluation. However, FERC has not implemented this recommendation. While FERC reported that it has taken steps to collaborate with stakeholders, it has not taken steps to determine the extent to which the voluntary standards have been integrated into products or whether they are effective. Monitoring such efforts would help FERC and other regulators know if their approach to standards setting is effective or if changes are needed. Clarifying regulatory responsibilities. Experts we spoke with during the course of our review in 2011 expressed concern that there was a lack of clarity about the division of responsibility between federal and state regulators, particularly regarding cybersecurity. While jurisdictional responsibility has historically been determined by whether a technology is located on the transmission or distribution system, experts raised concerns that smart grid technology may blur these lines because, for example, devices deployed on parts of the grid traditionally subject to state jurisdiction could, in the aggregate, affect the reliability of the transmission system, which falls under federal jurisdiction. Experts also noted concern about the ability of regulatory bodies to respond quickly to evolving cybersecurity threats. Clarifying these responsibilities could help improve the effectiveness of efforts to protect smart grid technology from cyber threats. Taking a comprehensive approach to cybersecurity. To secure their systems and information, entities should adopt an integrated, organization-wide program for managing information security risk. Such an approach helps ensure that risk management decisions are aligned strategically with the organization’s mission and security controls are effectively implemented. However, as we reported in 2011, experts told us that the existing federal and state regulatory environment had created a culture within the utility industry of focusing on compliance with regulatory requirements instead of one focused on achieving comprehensive and effective cybersecurity. By taking such a comprehensive approach, utilities could better mitigate cybersecurity risk. Ensuring that smart grid systems have built-in security features. Information systems should be securely configured, including having the ability to record events that take place on networks to allow for detecting and analyzing potential attacks. Nonetheless, experts told us that certain currently available smart meters had not been designed with a strong security architecture and lacked important security features, such as event logging. By ensuring that smart grid systems are securely designed, utilities could enhance their ability to detect and analyze attacks, reducing the risk that attacks will succeed and helping to prevent them from recurring. Effectively sharing cybersecurity information. Information sharing is a key element in the model established by federal policy for protecting critical infrastructure. However, the electric industry lacked an effective mechanism to disclose information about cybersecurity vulnerabilities, incidents, threats, lessons learned, and best practices. For example, experts we spoke with stated that while the industry had an information-sharing center, it did not fully address these information needs. Establishing quality processes for information sharing will help provide utilities with the information needed to adequately protect cyber assets against attackers. Establishing metrics for evaluating cybersecurity. Metrics are important for comparing the effectiveness of competing cybersecurity solutions and determining what mix of solutions will make the most secure system. The electric industry, however, was challenged by a lack of cybersecurity metrics, making it difficult to determine the extent to which investments in cybersecurity improve the security of smart grid systems. Developing such metrics could provide utilities with key information for making informed and cost-effective decisions on cybersecurity investments. In our January 2011 report, we recommended that FERC, working with NERC as appropriate, assess whether any cybersecurity challenges identified in our report should be addressed in commission cybersecurity efforts. Since that time, FERC took the following actions. First, in 2011, it began evaluating whether cybersecurity challenges, including those identified in our report, should be addressed under the agency’s existing cyber security authority and efforts. As a part of this effort, the commission directed NERC to revise the electricity industry’s critical infrastructure protection (CIP) standards with the aim of addressing, among other things, cybersecurity challenges identified in our report. In November 2013, NERC issued updated CIP standards to address these and other cybersecurity challenges. Second, the commission held a technical conference in 2011 in which it solicited feedback from industry stakeholders to help inform the agency’s cybersecurity efforts. Third, in September 2012, the commission established an Office of Energy Infrastructure Security, which is to, among other things, help mitigate cybersecurity threats to electricity industry facilities, and to improve cybersecurity information sharing. In summary, as they become increasingly reliant on computerized technologies, the electricity industry’s systems and networks are susceptible to an evolving array of cyber-based threats. Key entities, including NERC and FERC, are critical to approving and disseminating cybersecurity guidance and standards, while NIST, DHS, and the Department of Energy have additional roles to play in providing guidance and providing other forms of support for protecting the sector against cyber threats. Moreover, without monitoring the implementation of voluntary cybersecurity standards in the industry, FERC does not know the extent to which such standards have been adopted or whether they are effective. Given the increasing use of information and communications technology in the electricity subsector and the evolving nature of cyber threats, continued attention can help mitigate the risk these threats pose to the electricity grid. Chairman Weber, Chairwoman Comstock, Ranking Members Grayson and Lipinski, and Members of the Subcommittees, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. If you or your staffs have any questions about this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or wilshuseng@gao.gov. Other staff who contributed to this statement include Franklin J. Rusco, Director; Michael W. Gilmore; Bradley W. Becker; Kenneth A. Johnson; Jon R. Ludwigson; Lee McCracken; Jonathan Wall; and Jeffrey W. Woodward. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","The electric power industry—including transmission and distribution systems—increasingly uses information and communications technology systems to automate actions with the aim of improving the electric grid's reliability and efficiency. However, these “smart grid” technologies may be vulnerable to cyber-based attacks and other threats that could disrupt the nation's electricity infrastructure. Several federal entities have responsibilities for overseeing and helping to secure the electricity grid. Because of the proliferation of cyber threats, since 2003 GAO has designated protecting the systems supporting U.S. critical infrastructure (which includes the electricity grid) as a high-risk area. GAO was asked to provide a statement on opportunities to improve cybersecurity for the electricity grid. In preparing this statement, GAO relied on previous work on efforts to address cybersecurity of the electric sector. GAO reported in 2011 that several entities—the North American Electric Reliability Corporation (NERC), the National Institute of Standards and Technology (NIST), the Federal Energy Regulatory Commission (FERC), the Department of Homeland Security (DHS), and the Department of Energy (DOE)—had taken steps to help secure the electric grid. These included developing cybersecurity standards and other guidance to reduce risks. While these were important efforts, GAO at that time also identified a number of challenges to securing the electricity grid against cyber threats: Monitoring implementation of cybersecurity standards : GAO found that FERC had not developed an approach, coordinated with other regulatory entities, to monitor the extent to which the electricity industry was following voluntary smart grid standards, including cybersecurity standards. Clarifying regulatory responsibilities: The nature of smart grid technology can blur traditional lines between the portions of the grid that are subject to federal or state regulation. In addition, regulators may be challenged in responding quickly to evolving cybersecurity threats. Taking a comprehensive approach to cybersecurity: Entities in the electricity industry (e.g., utilities) often focused on complying with regulations rather than taking a holistic and effective approach to cybersecurity. Ensuring that smart grid systems have built-in security features: Smart grid devices (e.g., meters) did not always have key security features such as the ability to record activity on systems or networks, which is important for detecting and analyzing attacks. Effectively sharing cybersecurity information: The electricity industry did not have a forum for effectively sharing information on cybersecurity vulnerabilities, incidents, threats, and best practices. Establishing cybersecurity metrics: The electricity industry lacked sufficient metrics for determining the extent to which investments in cybersecurity improved the security of smart grid systems. Since 2011, additional efforts have been taken to improve cybersecurity in the sector. For example, in 2013, NERC issued updated standards to address these and other cybersecurity challenges. NIST also updated its smart grid cybersecurity standards in 2014. It has also developed a cybersecurity framework for critical infrastructure, and DHS and DOE have efforts under way to promote its adoption. In addition, FERC assessed whether these and other challenges should be addressed in its ongoing cybersecurity efforts. However, FERC did not coordinate with other regulators to identify strategies for monitoring compliance with voluntary cybersecurity standards in the industry, as GAO had recommended. As a result, FERC does not know the extent to which such standards have been adopted or whether they are effective. Given the increasing use of information and communications technology in the electricity subsector and the evolving nature of cyber threats, continued attention can help mitigate the risk these threats pose to the electricity grid. In its 2011 report, GAO recommended that (1) NIST improve its cybersecurity standards, (2) FERC assess whether challenges identified by GAO should be addressed in ongoing cybersecurity efforts, and (3) FERC coordinate with other regulators to identify strategies for monitoring compliance with voluntary standards. The agencies agreed with the recommendations, but FERC has not taken steps to monitor compliance with voluntary standards.",govreport
"As we reported earlier this year, mission-critical skills gaps within the federal workforce pose a high risk to the nation. Regardless of whether the shortfalls are in such government-wide occupations as cybersecurity and acquisitions, or in agency-specific occupations such as nurses at the Veterans Health Administration, skills gaps impede the federal government from cost-effectively serving the public and achieving results. Agencies can have skills gaps for different reasons: they may have an insufficient number of people or their people may not have the appropriate skills or abilities to accomplish mission-critical work. Moreover, current budget and long-term fiscal pressures, the changing nature of federal work, and a potential wave of employee retirements that could produce gaps in leadership and institutional knowledge, threaten to aggravate the problems created by existing skills gaps. According to our analysis of OPM data, government-wide more than 34 percent of federal employees on-board by the end of fiscal year 2015 will be eligible to retire by 2020 (see figure 1). Some agencies, such as the Department of Housing and Urban Development, will have particularly high eligibility levels by 2020. Various factors can affect when individuals actually retire, and some amount of retirement and other forms of attrition can be beneficial because it creates opportunities to bring fresh skills on board and it allows organizations to restructure themselves to better meet program goals and fiscal realities. But if turnover is not strategically monitored and managed, gaps can develop in an organization’s institutional knowledge and leadership. While numerous tools are available to help agencies address their talent needs, our past work has identified problems across a range of personnel systems and functions. For example: Classification system: The GS system has not kept pace with the government’s evolving requirements. Recruiting and hiring: Federal agencies need a hiring process that is applicant friendly, flexible, and meets policy requirements. Pay system: Employees are compensated through an outmoded system that (1) rewards length of service rather than individual performance and contributions, and (2) automatically provides across- the-board annual pay increases, even to poor performers. Performance management: Developing modern, credible, and effective employee performance management systems and dealing with poor performers have been long-standing challenges for federal agencies. Employee engagement: Additional analysis and sharing of promising practices could improve employee engagement and performance. As we reported in 2012, Congress’s policy calls for federal workers’ pay under the GS system to be aligned with comparable nonfederal workers’ pay. Across-the-board pay adjustments are to be based on private sector salary growth. Locality adjustments are designed to reduce the gap between federal and nonfederal pay in each locality to no more than 5 percent. The President’s Pay Agent is the entity charged with determining the disparities between federal and nonfederal pay in each locality; it measures federal pay based on OPM records that identify GS employees by occupation and grade level, and nonfederal pay based on U.S. Bureau of Labor Statistics data (BLS). In 2012, the Pay Agent has recommended that the underlying model and methodology for estimating pay gaps be reexamined to ensure that private sector and federal sector pay comparisons are as accurate as possible. As of December 2016, no such reexamination has taken place. The across-the-board and locality pay increases may be made every year, and are not linked to performance. Pay increases and monetary awards that are linked to performance ratings as determined by the agencies’ performance appraisal systems include within-grade increases, ratings-based cash awards, and quality step increases, and are available to GS employees. Within-grade increases are the least strongly linked to performance, ratings-based cash awards are more strongly linked to performance depending on the rating system the agency uses, and quality step increases are also more strongly linked to performance. The composition of the federal workforce has changed over the past 30 years, with the need for clerical and blue collar roles diminishing and professional, administrative, and technical roles increasing. As a result, today’s federal jobs require more advanced skills at higher grade levels than in years past. Additionally, we have found that federal jobs, on average, require more advanced skills and degrees than private sector jobs. This is because a higher proportion of federal jobs than nonfederal are in skilled occupations such as science, engineering, and program management, while a lower proportion of federal jobs than nonfederal are in occupations such as manufacturing, construction, and service work. The result is that the federal workforce is on average more highly educated than the private sector workforce. As we reported in 2014, a key federal human capital management challenge is how best to balance the size and composition of the federal workforce so that it is able to deliver the high quality services that taxpayers demand, within the budgetary realities of what the nation can afford. Recognizing that the federal government’s pay system does not align well with modern compensation principles (where pay decisions are based on the skills, knowledge, and performance of employees as well as the local labor market), Congress has provided various agencies with exemptions from the current system to give them more flexibility in setting pay. Thus, a long-standing federal human capital management question is how to update the entire federal compensation system to be more market based and performance oriented. This type of system is a critical component of a larger effort to improve organizational performance. Our 2005 work showed that implementing a more market-based and more performance-oriented pay system is both doable and desirable. However, we also found that it is not easy. For one thing, agencies should have effective performance management systems that link individual expectations to organizational results. Moreover, representatives of public, private, and nonprofit organizations, in discussing the successes and challenges they have experienced in designing and implementing their own results-oriented pay systems, told us at the time they had to shift from a culture where compensation is based on position and longevity to one that is performance-oriented, affordable and sustainable. As we have reported in the past, these organizations’ experiences with their own market-based and performance-oriented pay systems provide useful lessons learned that will be important to consider to the extent the federal government moves toward a more results-oriented pay system. Lessons learned identified in our 2005 report include the following: 1. Focus on a set of values and objectives to guide the pay system. Values represent an organization’s beliefs and boundaries, and objectives articulate the strategy to implement the system. 2. Examine the value of employees’ total compensation to remain competitive in the labor market. Organizations consider a mix of base pay plus other monetary incentives, benefits and deferred compensation, such as retirement pay, as part of a competitive compensation system. 3. Build in safeguards to enhance the transparency and ensure the fairness of pay decisions. Safeguards are the precondition to linking pay systems with employee knowledge, skills, and contributions to results. 4. Devolve decision-making on pay to appropriate levels. When devolving such decision making, overall core processes help ensure reasonable consistency in how the system is implemented. 5. Provide training on leadership, management, and interpersonal skills to facilitate effective communication. Such skills as setting expectations, linking individual performance to organizational results, and giving and receiving feedback need renewed emphasis to make such systems succeed. 6. Build consensus to gain ownership and acceptance for pay reforms. Employee and stakeholder involvement needs to be meaningful and not pro forma. 7. Monitor and refine the implementation of the pay system. While changes are usually inevitable, listening to employee views and using metrics helps identify and correct problems over time. Our prior work has found that across a range of human capital functions, while in some cases statutory changes may be needed to advance reforms, in many instances improvements are within the control of federal agencies. These improvements include such actions as improving the coordination of hiring specialists and hiring managers on developing recruitment strategies and up-to-date position descriptions in vacancy announcements. Indeed, Congress has already provided agencies with a number of tools and flexibilities to help them build and maintain a high- performing workforce. Going forward, it will be important for agencies to make effective use of those tools and for Congress to hold agencies accountable for doing so. Among other things, our work has shown that the tone starts at the top. Agency leaders and managers should set an example that human capital is important and is directly linked to performance—it is not a transactional function. As we noted in our 2017 high-risk update, agencies can drive improvements to their high risk areas—including strategic human capital management—through such steps as: Sustained leadership commitment, including developing long-term priorities and goals, and providing continuing oversight and accountability; Ensuring agencies have adequate capacity to address their personnel issues, including collaborating with other agencies and stakeholders as appropriate; Identifying root causes of problems and developing action plans to address them, including establishing goals and performance measures; Monitoring actions by, for example, tracking performance measures and progress against goals; and Demonstrating progress by showing issues are being effectively managed and root causes are being addressed. Our list of leading human capital management practices may be helpful as well. Covering such activities as strategic workforce planning, recruitment and hiring, workforce development, and employee engagement, among others, agencies can use this information to strengthen how they recruit, retain, and develop their employees and Congress can hold agencies accountable for using them. OPM has taken some important steps as well. For example, in December 2016, OPM finalized revisions to its strategic human capital management regulation that include the new Human Capital Framework. This framework is to be used in 2017 by agencies to plan, implement, evaluate, and improve human capital policies and programs. Our recent work on federal hiring, classification, addressing poor performance, and the capacity of federal human resource functions are illustrative of some of the areas in need of attention. To help ensure agencies have the talent they need to meet their missions, we have found that federal agencies should have a hiring process that is simultaneously applicant friendly, sufficiently flexible to enable agencies to meet their needs, and consistent with statutory requirements, such as hiring on the basis of merit. Key to achieving this is the hiring authority used to bring applicants onboard. Congress and the President have created a number of hiring authorities to expedite the hiring process or to achieve certain public policy goals, such as facilitating the entrance of certain groups into the civil service. As we reported in 2016, we found that of the 105 hiring authorities used in fiscal year 2014, agencies relied on 20 of those authorities for 91 percent of the 196,226 new appointments made that year. OPM officials said at the time they did not know if agencies relied on a small number of authorities because agencies are unfamiliar with other authorities, or if they have found other authorities to be less effective. Although OPM tracks such data as agency time-to-hire, we found this information was not used by OPM or agencies to analyze the effectiveness of hiring authorities. As a result, OPM and agencies did not know if authorities were meeting their intended purposes. By analyzing hiring authorities, OPM and agencies could identify opportunities to refine authorities, expand access to specific authorities found to be highly efficient and effective, and eliminate those found to be less effective. We recommended that OPM, working with agencies, strengthen hiring efforts by (1) analyzing the extent to which federal hiring authorities are meeting agencies’ needs, and (2) using this information to explore opportunities to refine, eliminate, or expand authorities as needed, among other recommendations. OPM concurred with our recommendations, and reported it had reviewed hiring authorities related to the entry-level Pathways Program and for hiring seasonal employees. The GS classification system is a mechanism for organizing federal white- collar work—notably for the purpose of determining pay—based on a position’s duties, responsibilities, and difficulty, among other things. A guiding principle of the GS classification system is that employees should earn equal pay for substantially equal work. We and others have found that the work of the federal government has become more highly skilled and specialized than the GS classification system was designed to address when it was created in 1949 when most of the federal workforce was engaged in clerical work. While there is no one right way to design a classification system, in 2014, we identified eight key attributes that are important for a modern, effective classification system. Collectively, these attributes provide a useful framework for considering refinements or reforms to the current system. These key attributes are described in table 1. We concluded in 2014 that the inherent tension between some of these attributes, and the values policymakers and stakeholders emphasize could have large implications for pay, the ability to recruit and retain mission critical employees, and other aspects of personnel management. This is one reason why—despite past proposals—changes to the current system have been few, as finding the optimal mix of attributes that is acceptable to all stakeholders is difficult. In 2014, we recommended that OPM (1) work with stakeholders to examine ways to modernize the classification system, (2) develop a strategy to track and prioritize occupations for review and updates, and (3) develop cost-effective methods to ensure agencies are classifying correctly. OPM partially concurred with the first and third recommendation but did not concur with the second recommendation. Instead, OPM officials said they already tracked and prioritized occupations for updates. However, they were unable to provide documentation of their actions. In April 2017, OPM officials said they meet regularly with the interagency classification policy forum to inform classification implementation and had reviewed and canceled 21 occupational series that were minimally used by agencies. In our 2015 report, we noted how federal agencies’ ability to address poor performance has been a long-standing issue. Employees and agency leaders share a perception that more needs to be done to address poor performance, as even a small number of poor performers can affect agencies’ capacity to meet their missions. More generally, without effective performance management, agencies risk losing (or failing to utilize) the skills of top talent. They also may miss the opportunity to observe and correct poor performance. Among other things, we found effective performance management helps agencies establish a clear “line of sight” between individual performance and organizational success and using core competencies helps to reinforce organizational objectives. Agencies should also make meaningful distinctions in employee performance levels. However, we found that 99 percent of permanent, non-senior executive service employees in 2013 received a rating at or above fully successful, with around 61 percent rated as “outstanding” or “exceeds fully successful.” Importantly, in 2015 we found that good supervisors are key to the success of any performance management system. Supervisors provide the day-to-day performance management activities that can help sustain and improve the performance of more talented staff and can help marginal performers to become better. As a result, agencies should promote people into supervisory positions because of their supervisory skills (in addition to their technical skills) and ensure that new supervisors receive sufficient training in performance management. Likewise, a cultural shift might be needed among agencies and employees to acknowledge that a rating of “fully successful” is already a high bar and should be valued and rewarded and that “outstanding” is a difficult level to achieve. Further, in 2015 we found that probationary periods for new employees provide supervisors with an opportunity to evaluate an individual’s performance to determine if an appointment to the civil service should become final. However, some Chief Human Capital Officers (CHCO) said supervisors often do not use this time to make performance-related decisions about an employee’s performance because they may not know that the probationary period is ending or they have not had time to observe performance in all critical areas. In our prior work, we recommended that OPM educate agencies on ways to notify supervisors that an individual’s probationary period is ending and that the supervisor needs to make a decision about the individual’s performance and also to determine whether there are occupations in which the probationary period should extend beyond 1-year to provide supervisors with sufficient time to assess an individual’s performance. OPM concurred with the first recommendation and partially concurred with the second. In January 2017, OPM issued guidance to agency about supervisors notification of a probationary period ending, but officials said OPM had not taken action on extending the probationary period. In 2014, we found that many agency CHCO said their offices did not have the capacity to lead strategic human capital management activities such as talent management, workforce planning, and promoting high performance and a results-oriented culture. Instead, these offices remained focused on transactional human resource activities like benefits and processing personnel actions. As a result, officials said agency decision makers often did not seek out and draw upon the expertise of human capital experts to inform their deliberations. Perhaps further reflecting the varying capabilities of agency human capital offices across government, some CHCOs at the time said that agency leaders did not fully understand the potential for strategic human capital management and had not elevated the role of the human capital office to better support an agency’s operations and mission. The human resources specialist occupation continues to be one of six government-wide, mission-critical skills gap areas identified by OPM. Our recent work on the Veterans Health Administration (VHA) demonstrates how capacity shortfalls in an agency’s personnel office can adversely impact an organization’s mission. Among other things, we found that the recruitment and retention challenges VHA is experiencing with its clinical workforce are due, in part to attrition among its human resource employees and unmet staffing targets within medical center personnel offices. We concluded that until VHA strengthens its human resource capacity, it will not be positioned to effectively support its mission to serve veterans’ healthcare needs. We made 12 recommendations to Veterans Affairs (VA) to improve the human resource capacity and oversight of human resource functions at its medical centers; develop a modern, credible employee performance management system; and establish clear accountability for efforts to improve employee engagement. VA concurred with nine recommendations and partially concurred with three recommendations to improve VHA’s performance management system. Under OPM’s leadership, several steps have been taken as part of a cross agency group focused on improving the capacity of human resource specialists. For example, OPM reported that it increased registration in its Human Resources University and validated career path guides for classification, recruitment and hiring policy, and employee relations. As part of our ongoing oversight of OPM’s and agencies’ efforts to close government-wide mission critical skill gaps, we will continue to assess the progress being made in improving the human capital infrastructure within agencies needed to better support agencies’ planning and programmatic functions. In conclusion, given the long-term fiscal challenges facing the nation and ongoing operational and accountability issues across government, agencies must identify options to meet their missions with fewer resources. The federal compensation system should allow the government to cost-effectively attract, motivate, and retain a high- performing, agile workforce necessary to meet those missions. At the same time, our work has shown that agencies already have a number of tools and flexibilities available to them that can significantly improve executive branch personnel management and do so sooner, rather than later. Going forward, it will be important to hold agencies accountable for fully leveraging those resources. Chairman Chaffetz, Ranking Member Cummings, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff have any questions about this statement, please contact Robert Goldenkoff at (202) 512-2757 or e-mail at goldenkoffr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony include Chelsa Gurkin, Assistant Director; Dewi Djunaidy, Analyst-in-Charge; Ann Czapiewski; Karin Fangman; Krista Loose; Susan Sato; Cynthia Saunders; and Stewart W. Small. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","A careful consideration of federal pay is an essential part of fiscal stewardship and is necessary to support the recruitment and retention of a talented, agile, and high-performing federal workforce. High-performing organizations have found that the life-cycle of human capital management activities—including workforce planning, recruitment, on-boarding, compensation, engagement, succession planning, and retirement programs—need to be aligned for the cost-effective achievement of an organization's mission. However, despite some improvements, strategic human capital management—and more specifically, skills gaps in mission critical occupations—continues to be a GAO high-risk area. This testimony is based on a body of GAO work primarily issued between June 2012 and March 2017. It focuses on (1) lessons learned in creating a more market driven, results-oriented approach to federal pay, and (2) opportunities, in addition to pay and benefits, that OPM and agencies could use to be more competitive in the labor market and address skills gaps. GAO's prior work has shown that implementing a market-based and more performance-oriented federal pay system is both doable and desirable, and should be part of a broader strategy of change management and performance improvement initiatives. In 2005, GAO identified the following key themes that highlight the leadership and management strategies high-performing organizations collectively considered in designing and managing a pay system that is performance oriented, affordable, and sustainable. Specifically, they: 1. Focus on a set of values and objectives to guide the pay system. 2. Examine the value of employees' total compensation to remain competitive in the labor market. 3. Build in safeguards to enhance the transparency and ensure the fairness of pay decisions. 4. Devolve decision-making on pay to appropriate levels. 5. Provide clear and consistent communication so that employees at all levels can understand how compensation reforms are implemented. 6. Build consensus to gain ownership and acceptance for pay reforms. 7. Monitor and refine the implementation of the pay system. While the federal compensation system may need to be re-examined, Congress has already provided agencies with tools and flexibilities to build and maintain a high-performing workforce. They include, for example: Hiring process GAO reported in 2016 that the Office of Personnel Management (OPM) and selected agencies had not evaluated the effectiveness of hiring authorities. By evaluating them, of which over 100 were used in 2014, OPM and agencies could identify ways to expand access to those found to be more effective, and eliminate those found to be less effective. General Schedule (GS) classification system The federal government has become more highly skilled and specialized than the GS classification system was designed to address at its inception in 1949. OPM and stakeholders should examine ways to make the classification system consistent with attributes GAO identified of a modern, effective classification system, such as internal and external equity. Performance management Credible and effective performance management systems are a strategic tool to achieve organizational results. These systems should emphasize “a line a sight” between individual performance and organizational success, and use core competencies to reinforce organizational objectives, among other things. Human resources capacity The human resources specialist occupation is a mission critical skills gap area. Chief Human Capital Officers have reported that human resources specialists do not have the skills to lead strategic human capital management activities. Strengthening this capacity could help agencies better meet their missions. Over the years, GAO has made recommendations to agencies and OPM to improve their strategic human capital management efforts. OPM and agencies generally concurred. This testimony discusses actions taken to implement key recommendations to improve federal hiring and classification.",govreport
"About 90 percent of the costs associated with GWOT fall into two accounts—military personnel and operation and maintenance. Military personnel funds provided to support GWOT cover the pay and allowances of mobilized reservists as well as special payments or allowances for all qualifying military personnel, both active and reserve, such as Imminent Danger Pay and Family Separation Allowance. Operation and maintenance funds provided to support GWOT are used for a variety of purposes, including transportation of personnel, goods, and equipment; unit operating support costs; and intelligence, communications, and logistics support. We have reported on several occasions, including in 1999 and 2003, that estimating the cost of ongoing military operations is difficult. This is because operational requirements can differ substantially during the fiscal year from what was assumed in preparing budget estimates. The result can be that operations can cost more or less than originally estimated. If operations cost more than originally estimated, DOD may use a number of authorities provided to it, including transferring and reprogramming funds and reducing or deferring planned spending for peacetime operations, to meet its needs. DOD uses “transfer authority” to shift funds between appropriation accounts, for example, between military personnel and operation and maintenance. Transfer authority is granted by the Congress to DOD usually pursuant to specific provisions in authorization or appropriation acts. The ability to shift funds within a specific appropriation account, like operation and maintenance, is referred to as “reprogramming.” In general, DOD does not need statutory authority to reprogram funds within an account as long as the funds to be spent would be used for the same general purpose of the appropriation and the reprogramming does not violate any other specific statutory requirements or limitations. For example, DOD could reprogram operation and maintenance funds originally appropriated for training to cover increased fuel costs because both uses meet the general purpose of the operation and maintenance account, as long as the shift does not violate any other specific statutory prohibition or limitation. In fiscal years 2004 and 2005, the military services received about $52.4 billion and about $62.1 billion, respectively, in supplemental appropriations for GWOT military personnel and operation and maintenance expenses. The Army, Air Force, and Navy also received funds for GWOT through their annual appropriations. However, DOD and the military services have lost visibility over these funds provided through annual appropriations, including knowing how much, if any, was used to support GWOT in fiscal years 2004 and 2005. As shown in table 1, DOD received funding through supplemental appropriations to support GWOT in both fiscal years 2004 and 2005. To pay for the military personnel and operation and maintenance costs of GWOT in fiscal year 2004, the Congress appropriated about $52.4 billion to DOD. Of the $52.4 billion, the Congress provided the military services about $50.4 billion in the Emergency Supplemental Appropriations Act for Defense and for the Reconstruction of Iraq and Afghanistan, 2004. In addition, the services used $120 million of the funds provided in late fiscal year 2004 through Title IX of the Department of Defense Appropriations Act, 2005. DOD also transferred about $1.9 billion from funds originally appropriated to the Iraqi Freedom Fund. The Iraqi Freedom Fund provides 2-year funds that can be transferred to the services’ accounts for additional expenses for ongoing military operations in Iraq, operations authorized by the Authorization for Use of Military Force, and other operations and related activities in support of GWOT. Of the $1.9 billion, about $860 million was provided through the Emergency Wartime Supplemental Appropriations Act, 2003, while about $1.1 billion was provided through the Emergency Supplemental Appropriations Act for Defense and for the Reconstruction of Iraq and Afghanistan, 2004. For fiscal year 2005, the military services had about $62.1 billion available to pay for the military personnel and operation and maintenance costs of GWOT. Of this, the Congress appropriated about $44.5 billion through the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami Relief, 2005. The military services also had the remaining balance—about $17.3 billion—that was provided through Title IX of the Department of Defense Appropriations Act, 2005, and was available for obligation in fiscal year 2005 to help pay for the military personnel and operation and maintenance costs of GWOT. In addition, as of July 2005, DOD had transferred about $348 million from funds originally appropriated to the Iraqi Freedom Fund. In addition to funds DOD received through supplemental appropriations for GWOT, beginning in fiscal year 2003, the administration increased DOD’s annual appropriation request by more than $10 billion per year. DOD described these funds as being intended to support GWOT. According to a representative from the Office of the Under Secretary of Defense (Comptroller), in December 2001 the President directed that his annual budget submission for DOD be increased by about $10 billion annually to support GWOT. Consequently, Program Budget Decision 736, entitled Continuing the War on Terrorism and dated January 31, 2002, was approved by the Under Secretary of Defense (Comptroller). Program Budget Decision 736 provided for increasing DOD’s annual budget request in the amount of more than $10 billion per year plus inflation in fiscal years 2003 through 2007 to enhance the department’s efforts to respond to, or protect against, acts or threatened acts of terrorism against the United States. According to a DOD representative, unless action is taken to reduce these funds in future budgets, Program Budget Decision 736 provides for a permanent increase of about $10 billion per year plus inflation to DOD’s annual budget request to support military operations in the war on terrorism. As shown in table 2, in fiscal years 2004 and 2005, the Army, Air Force, and Navy received additional funds in their annual appropriations—a total of about $7.9 billion in fiscal year 2004 and about $7.6 billion in fiscal year 2005—which DOD described as for support of military operations in the war on terrorism. According to DOD representatives, the Marine Corps did not receive an increase to its annual appropriation through Program Budget Decision 736. Under Program Budget Decision 736, a number of DOD programs were to receive increases in their proposed annual budgets in both fiscal years 2004 and 2005. For example, in fiscal year 2004, Program Budget Decision 736 indicates that about $2.1 billion was for counterterrorism and force protection efforts, about $1.2 billion for combat air patrols over U.S. cities, and about $600 million for such things as depot maintenance and spare parts. Program Budget Decision 736 indicates funds were to be provided to these programs and others in fiscal years 2005 through 2007 as well. According to representatives of the Office of the Under Secretary of Defense (Comptroller), some of the funds in Program Budget Decision 736 were intended to cover costs associated with Operation Noble Eagle while others were intended to cover costs associated with Operation Enduring Freedom. For fiscal years 2004 and 2005, an Office of the Under Secretary of Defense (Comptroller) representative stated the additional funds provided through Program Budget Decision 736 were in the military services’ various appropriations accounts. However, the Office of the Under Secretary of Defense (Comptroller) has no specific information about which programs or activities actually received the funds or how they were eventually expended, including whether they were used in support of GWOT. Once the services received these additional funds, they allocated them to their appropriations accounts based on their judgment of where the funds were most needed. DOD’s accounting systems do not separately identify which appropriations accounts received these funds, and there are no reporting requirements for DOD to identify to which appropriation accounts the funds were allocated. While the military services also stated they received their share of the Program Budget Decision 736 funds as part of their fiscal year 2004 and fiscal year 2005 annual appropriations and that some of the funds were used for war-related expenses, they too could not identify which programs or activities received the funds and could not document what portion of these funds were used for war-related expenses. As a result, although DOD requested these funds to support GWOT, DOD and the military services cannot be certain that they were actually used to support GWOT-related activities. In developing the fiscal year 2005 request for supplemental appropriations to support GWOT, DOD took steps to adjust the request to reflect the receipt of funds provided through Program Budget Decision 736. In a November 2004 memorandum requesting that all DOD components provide their GWOT supplemental appropriations estimates for fiscal year 2005, the Office of the Under Secretary of Defense (Comptroller) stated the following with respect to funds that had already been provided through Program Budget Decision 736: Funding for GWOT missions previously added to the baseline budget (e.g., Program Budget Decision 736, Continuing the War on Terrorism) should be explicitly identified as a reduction to funding requests in those areas, as appropriate. Component requests must consider that that some funding is already in the baseline accounts. Program Budget Decision 736 provided funds for antiterrorism, continental United States combat air patrols, and force protection. The components’ submissions should show the total requirement and note the level of funding already in the baseline for this purpose. The supplemental request will net out the available funding. In the November 2004 memorandum the Office of the Under Secretary of Defense (Comptroller) further stated that the emergency supplemental appropriations request will address the incremental costs above the baseline funding needed to support specific forces and capabilities required to execute Operation Iraqi Freedom, Operation Enduring Freedom, and portions (to be determined) of Operation Noble Eagle. DOD described Operation Noble Eagle as including defending the United States from airborne attacks and maintaining U.S. air sovereignty. This operation had been included in the supplemental appropriations request for fiscal year 2004. None of the military services provided the information requested in the November 2004 memorandum and instead the services requested funds for Operation Noble Eagle. Service budget representatives told us that Program Budget Decision 736 funds were considered as base program (e.g., annual appropriations) issues and not supplemental candidates. According to service budget representatives, they requested funds for Operation Noble Eagle in fiscal year 2005 that were in addition to the funds provided through Program Budget Decision 736. For example, the Navy requested $53.3 million for incremental requirements above its baseline request. The Army requested more than $1 billion in incremental requirements above its baseline. However, in preparing the fiscal year 2005 supplemental appropriations budget request, the Office of Management and Budget did not include Operation Noble Eagle in the President’s budget request because funds had already been included in DOD’s annual appropriation, as described in Program Budget Decision 736. In fiscal year 2004, the difference between supplemental appropriations available to the military services for GWOT military personnel and operation and maintenance expenses compared to reported obligations varied by service. For military personnel, the Navy and Marine Corps reported more in obligations than they received in supplemental appropriations, while for operation and maintenance each of the military services reported more in obligations than it received in supplemental appropriations. To cover the differences (gaps), DOD and the military services took several actions, including transferring funds and reducing or deferring planned spending for peacetime operations. In the case of the Army and Air Force, which each received supplemental appropriations that exceeded its reported obligations for military personnel, this included transferring $801 million and $113 million, respectively, to cover their GWOT operation and maintenance expenses. In some instances, these actions reduced DOD’s flexibility to cover potential gaps in fiscal year 2005. DOD did not explicitly take into account the GWOT funds provided through its annual appropriation that DOD requested for GWOT to help cover the gaps. If it had taken these funds into account it could have reduced the Army’s GWOT gap, eliminated the GWOT gaps of the Air Force and Navy, and been able to defer fewer activities. Within the military personnel accounts, as shown in table 3, the Navy and Marine Corps reported more obligations in support of GWOT than they received in supplemental appropriations. However, these reported gaps were a relatively small portion of the services’ annual military personnel appropriations. For example, the Navy’s reported gap of $40.4 million represents less than 1 percent of its annual military personnel appropriation. In fiscal year 2004, both the Army and Air Force received supplemental appropriations that exceeded their reported obligations for military personnel. The Army and Air Force used these funds to cover operation and maintenance expenses related to GWOT, as discussed below. Within the operation and maintenance accounts, as shown in table 4, in fiscal year 2004 each of the military services reported more in GWOT obligations than it received in supplemental appropriations. The Army reported the largest gap, about $4.3 billion, while the Air Force and Navy reported gaps of $579 million and about $618 million, respectively. The Marine Corps reported the smallest gap, about $195 million. To cover the military services’ gaps between reported fiscal year 2004 obligations and supplemental appropriations, the Office of the Under Secretary of Defense (Comptroller) and the military services used a number of authorities provided to them, including transferring funds and reducing or deferring planned spending for peacetime operations. While involving hundreds of millions or sometimes billions of dollars, in discussing the actions taken to cover the gaps, some service representatives noted that the gaps represented a small percentage of their annual appropriations. Within the services’ annual operation and maintenance accounts we found that the gaps varied by service, ranging from a low of 1.7 percent of the Air Force’s annual operation and maintenance appropriation to a high of 13.7 percent of the Army’s annual operation and maintenance appropriation. In the services’ annual military personnel accounts, all the gaps were less than 1 percent of their annual military personnel appropriations. However, DOD did not explicitly take into account the funds provided through its annual appropriations that it intended for support of GWOT. As discussed earlier, since DOD’s accounting systems do not separately identify the portion of the department’s annual appropriations that were described as having been requested to support GWOT and there are no reporting requirements for DOD to identify to which appropriation accounts the funds were allocated, the military services have lost visibility over these funds and do not know the extent to which they are being used to support GWOT. Consequently, despite having asked for the increase, DOD is not explicitly counting these additional funds when considering funding for GWOT and alternatively took actions that affected its peacetime operations, which may create spending pressures in fiscal year 2005 and later. Each of the military services projected a gap between reported obligations and supplemental appropriations at its midyear budget review. Service representatives told us these projected gaps were reduced over the course of fiscal year 2004 by reviewing their GWOT requirements and, in some instances, seeking to reduce or defer planned spending. With respect to the GWOT gaps faced by the services in fiscal year 2004, we were told the following: For fiscal year 2004, the Army’s reported obligations in its operation and maintenance account exceeded its supplemental appropriations by about $4.3 billion, substantially less than the $10.9 billion it had projected in the account at its midyear budget review. To cover the $4.3 billion, DOD and the Army took a number of actions, including using internal resources and passing the remaining amount on to the Army’s major commands to be absorbed by reducing or deferring planned peacetime spending to meet its GWOT needs. More specifically, to cover the Army’s gap, the Under Secretary of Defense (Comptroller) transferred about $3 billion from the working capital funds of the Army, Air Force, and Navy—including $1.3 billion from the Army, about $1.5 billion from the Air Force, and $200 million from the Navy. In addition, about $801 million was transferred from the Army’s military personnel account to help cover the gap in the Army’s operation and maintenance account, while about $500 million was transferred from other DOD-wide accounts. The major Army commands absorbed the remainder. For example, to cover its portion of the gap, the Army Materiel Command reprioritized or deferred about $184 million in depot maintenance until fiscal year 2005 for such programs as the Patriot and Hellfire missile systems. It also reduced or deferred the number of available training hours for some of its nondeployed units. However, Army Materiel Command representatives told us that in some instances, the training hours they deferred to help cover the fiscal year 2004 gap were deferred until fiscal year 2006. The Air Force’s gap in its operation and maintenance account of about $579 million was substantially less than the $1.5 billion it had projected in the two accounts at its midyear budget review. To cover the $579 million gap, the Air Force took a number of actions, including transferring $113 million in funds available in its overall military personnel appropriation account, decreasing peacetime flying hours, reducing depot maintenance, and deferring facility sustainment restoration and modernization projects until fiscal year 2005. The Air Force’s major commands also absorbed a portion of the gap. For example, the Air Combat Command absorbed its share of the GWOT gap, about $92 million, by reducing or deferring its fiscal year 2004 peacetime spending. Approximately $46 million, or half of the Air Combat Command’s $92 million share of the gap, was covered by reducing its peacetime flying hour program by about 6,800 hours. While reducing its peacetime flying hours helped the Air Combat Command cover its portion of the gap, Air Combat Command representatives told us the reduced training opportunities created a training backlog, which could affect pilot readiness for future combat missions. The Navy’s combined gap for fiscal year 2004 of about $659 million in its military personnel and operation and maintenance accounts was less than its midyear projection of $931 million. To cover the $659 million gap, the Navy canceled some peacetime spending, including various nonreadiness operation and maintenance spending and various infrastructure projects. Of the Navy’s major commands, the Atlantic Fleet and Pacific Fleet absorbed the largest share of the gap for fiscal year 2004. For example, the Atlantic Fleet absorbed about $110 million by reducing air operations and ship depot maintenance activities. Navy budget representatives noted that the gap represented about 1 percent of the total baseline funding available for aircraft operations and ship depot maintenance for the Navy in that fiscal year. In addition, the Navy canceled or deferred procurement actions for the MH-60R Seahawk helicopter, V-22 Osprey, F/A-18 Hornet, and Joint Tactical Radio System. The Marine Corps’ combined gap in its military personnel and operation and maintenance appropriations accounts of about $225 million for GWOT in fiscal year 2004 was also less than the $446 million projected at its midyear budget review. To cover the $225 million gap, the Marine Corps reduced or deferred spending in noncritical areas, such as facility improvements. The Navy provided the Marine Corps with funds from its base operating support and facilities sustainment restoration and modernization appropriations accounts and with $121 million that was transferred to the Navy from the U.S. Transportation Command’s Working Capital Fund. According to Marine Corps representatives, a portion of the gap was also absorbed by the Marine Corps’ annual military personnel and operation and maintenance appropriations accounts. The Navy provided us a detailed discussion of the process used in addressing gaps. A Navy budget representative said that the Navy analyzed its entire $116.8 billion in baseline funding (which includes both the original $114 billion baseline and the added $2.8 billion for Program Budget Decision 736 initiatives) as potential financing sources for its GWOT needs. According to the Navy representative the Navy’s internal analysis first looked at funding flexibility in baseline programs resulting from changes in current year execution. For example, certain baseline program requirements change from year to year as a result of development issues, schedule and implementation delays, manufacturing problems, changes in requirements or inventory levels, and labor disputes. The accumulated value of those changes in a given execution year, such as fiscal year 2004, may have made any financial resources excess to fiscal year 2004 requirements available to fund GWOT needs. Although their specific identification as such would be lacking, they stated that previously baselined Program Budget Decision 736 requirements could have been included, by implication, as part of those deliberations. For example, by the end of fiscal year 2004, based on delayed execution, about $136 million was reallocated from base infrastructure support, maintenance, and repair to fund Operation Iraqi Freedom costs. If insufficient funding sources were identified as part of an execution analysis, then it would be necessary to make affirmative decisions about reducing baseline programs to fund the balance of the GWOT needs. Those reductions, for the most part, had subsequent programmatic and financial impacts. Those changes required to support the increased GWOT needs were monitored and approved by the Office of the Under Secretary of Defense (Comptroller) staff during their annual budget and execution reviews. Some of the changes were recoverable (such as specific procurement and depot maintenance items considered deferrable and that could be funded with a subsequent year's money) and some changes were nonrecoverable (items considered nondeferrable current expenses, where the performance period has lapsed, but for which a subsequent year's funding is now available to fully meet that year’s requirements). For example, of the Navy and Marine Corps’ approximately $1.6 billion in absorbed costs in all appropriation accounts for the Department of the Navy ($1.4 billion was for Navy items, $200 million was for Marine Corps items), nearly 40 percent of the fiscal year 2004 requirements were considered recoverable with subsequent year’s funding. This included $200 million for drawing down the Navy Working Capital Fund, which was included in the Navy’s fiscal year 2005 supplemental appropriations request. As previously discussed, DOD used the military services’ working capital funds as a source of cash to provide funds for GWOT expenditures in fiscal year 2004. DOD’s working capital funds finance the operations of two fundamentally different types of support organizations: stock fund activities, which provide spare parts and other items to military units and other customers, and industrial activities, which provide depot maintenance, research and development, and other services, such as those provided by the Defense Financial Accounting Service, Defense Information Systems Agency, Defense Commissary Agency, and U.S. Transportation Command. In fiscal year 2004, DOD transferred about $3 billion from the military services’ working capital funds to help cover the Army’s gap between reported obligations and supplemental appropriations. While such transfers from the services’ working capital funds helped DOD cover its fiscal year 2004 gap, the transfers have left few working capital funds available to be used in fiscal year 2005. For example, to help cover the Army’s operation and maintenance gap, about $980 million was transferred from the U.S. Transportation Command’s Transportation Working Capital Fund during fiscal year 2004. This transfer was made possible due to a surplus of transportation charges collected from the military services by the U.S. Transportation Command during the year. However, a U.S. Transportation Command representative told us the transfers have left the fund’s balance below the minimum goal of $517 million. Specifically, with the transfer of almost $1 billion in fiscal year 2004 to help cover the Army’s operation and maintenance gap, as of July 2005, there was only $168 million remaining in the fund, well below the minimum goal for the year. Further, the representative stated that the projected fund balance for the end of fiscal year 2005 is about $231 million, still below the minimum goal. In determining how to cover the gaps between the services’ supplemental appropriations and reported GWOT obligations for military personnel and operation and maintenance expenses, DOD did not explicitly take into account the almost $7.9 billion in funds the Army, Air Force, and Navy received in their annual appropriations through Program Budget Decision 736 to help fund GWOT. This includes $1.3 billion received by the Army, $3.5 billion received by the Air Force, and $3 billion received by the Navy. If counted in fiscal year 2004 and applied to the services’ military personnel and operation and maintenance accounts, these amounts could have reduced the Army’s need to transfer funds from other activities and eliminated the GWOT gaps for the Air Force and the Navy, as shown in table 5. However, the services acknowledge that they have lost visibility over the Program Budget Decision 736 funds after fiscal year 2003 and do not know whether any of the funds were used in support of GWOT. We discussed our analysis with DOD representatives at each of the services’ budget offices, who disagreed with our depiction of Program Budget Decision 736. These representatives believed that our analysis should take into account the fact that the funds provided through Program Budget Decision 736 were included in DOD’s baseline budget and therefore were already taken into account when considering funds available for GWOT. Service budget representatives made the following observations regarding the Program Budget Decision 736 funds: Once merged into those baseline budgets, full justification for funding is provided in the annual President’s budget request. For example, increased funding for additional security personnel and physical security equipment were merged with existing program lines and not subsequently separately identified as to how they were initially funded or sustained over the years. Once the Program Budget Decision 736 funds were in the baseline budget, they were not in support of specific contingency operations, for which the Department of Defense Financial Management Regulation, Volume 12, Chapter 23, Contingency Operations, requires separate documentation and execution tracking, and no such requirement exists for “baselined” funds, other than the annual justification exhibits. That is, Chapter 23 only requires reporting incremental costs (costs not already in the baseline), and not total costs. Subsequent to Program Budget Decision 736 additional requirements were placed on the services fiscal year 2004-2009 spending program without accompanying funds. To meet these requirements service budget representatives said that they looked in part to the funds provided in Program Budget Decision 736. We recognize that DOD’s annual budget submissions include justification for all the department’s activities, including those funded through Program Budget Decision 736. However, the funds provided through Program Budget Decision 736 were identified as being in support of GWOT. While service budget representatives noted that the documentation and tracking requirements contained in the Department of Defense Financial Management Regulation, Volume 12, Chapter 23, Contingency Operations, do not apply to the funds provided through Program Budget Decision 736, we believe that DOD should have been tracking these funds in light of their connection to GWOT. While the services’ budget representatives told us that they took the funds provided through Program Budget Decision 736 into account in addressing GWOT funding needs, we note that once these funds were merged into the services’ baseline budgets visibility was lost so there is no assurance as to how the funds were taken into account or used. Our analysis of the military services’ reported obligations for the first 8 months of fiscal year 2005 and the military services’ forecasts as of June 2005 of full fiscal year 2005 costs suggest the services’ military personnel and operation and maintenance GWOT obligations could exceed available supplemental appropriations for the war in some accounts. Our projections of reported GWOT obligations through May 2005 suggest the services should have sufficient supplemental appropriations for military personnel expenses in fiscal year 2005 but that there could be gaps for operation and maintenance expenses for the Army and the Marine Corps. The services’ more detailed forecasts suggest a gap for military personnel expenses for the Air Force of about $500 million, and gaps for operation and maintenance expenses for the Army and Air Force of about $2.7 billion and about $1 billion, respectively. The Marine Corps expects its supplemental appropriations will be sufficient to cover its GWOT costs. To cover any gaps and meet its GWOT needs, DOD and the services plan to take a variety of actions, including reprogramming funds from annual appropriations and reducing or deferring planned spending for peacetime operations. Our assessment of reported obligations in fiscal year 2005 through May 2005 suggests that the military services should have sufficient supplemental appropriations for military personnel expenses in fiscal year 2005. As figure 1 shows, with 8 months, or about 67 percent, of the fiscal year gone, the Marine Corps has obligated 46 percent of its available supplemental appropriations; the Army 54 percent; and the Air Force and Navy 58 percent each. Our assessment of reported obligations within the military services’ operation and maintenance accounts through May 2005 suggests that the supplemental appropriations provided to the services for GWOT should be sufficient for the Air Force and Navy but not for the Army and Marine Corps. As shown in figure 2, the percentage of available supplemental appropriations obligated in the services’ operation and maintenance accounts as of May 2005, ranged from 49 percent for the Navy and 52 percent for the Air Force to 71 percent for the Army and the Marine Corps. We recognize that funds are not obligated equally each month throughout the fiscal year. However, we believe that the further into the fiscal year the closer to 100 percent obligations should be relative to appropriations if all appropriated funds are likely to be obligated. Consequently, given these obligation rates, we believe that if the Army and Marine Corps continue to obligate funds at the current rate or higher, their reported obligations within the operation and maintenance accounts could exceed available supplemental appropriations in fiscal year 2005, requiring them to use other authorities provided to them to cover the difference. However, as discussed below, the Air Force believes it will have an operation and maintenance gap, while the Marine Corps believes it will have sufficient funds for operation and maintenance. Each of the military services completed a midyear budget review for the Office of the Under Secretary of Defense (Comptroller), including a forecast of its full fiscal year 2005 GWOT needs. The Army concluded that it would not have sufficient supplemental appropriations to cover its projected GWOT operation and maintenance obligations, while the Air Force indicated its combined military personnel and operation and maintenance obligations would exceed available supplemental appropriations. With respect to the Army’s and Air Force’s midyear budget review projections: The Army forecast a GWOT gap of about $2.7 billion in its operation and maintenance account, of which a large component—about $1 billion—is attributed to higher fuel costs due to, among other things, the increase in June 2005 of DOD’s composite fuel rate from $56.28 per barrel to $73.08. Other components of the forecasted gap include support of the Army’s modular force initiative; higher spending in the second half of fiscal year 2005 as compared to the first half, resulting from deferred spending early in the fiscal year; and higher spending on recruiting and retention efforts, primarily for the Army Reserve. According to the Army, the modular force initiative and its reconstitution and reset efforts are being treated as GWOT costs in fiscal year 2005. The Air Force forecast a GWOT gap of about $500 million in its military personnel account and about $1 billion in its operation and maintenance account, for a total gap of about $1.5 billion. Air Force representatives attributed the gap in its military personnel account primarily to having higher-than-anticipated end-strength levels, and stated that the $1 billion gap in its operation and maintenance account is to replenish the Transportation Working Capital Fund, which was drawn down last year to help cover the Army’s fiscal year 2004 GWOT gap. Regarding the projected military personnel gap, Air Force representatives stated that funds were subsequently transferred to pay for prior obligations at higher-than-anticipated end-strength levels. Since then, the Air Force has corrected the end-strength imbalance and expects to be within end strength for GWOT during the remainder of the fiscal year. As a result of these actions, Air Force representatives no longer project a military personnel gap for GWOT in fiscal year 2005. The Navy projected a small gap of about $36 million for GWOT at the time of its midyear budget review, which it has since covered with cost savings from shifting the bulk of its transportation of equipment and supplies from air to sea. The Marine Corps indicated that its supplemental appropriations should be sufficient to cover reported GWOT obligations for fiscal year 2005. In considering the services’ midyear budget reviews, our analysis of the Navy and Marine Corps GWOT obligations indicates substantial under execution in the Navy’s operation and maintenance account and the Marine Corps’s military personnel account. In response, the Navy stated that it expects its rate of obligating GWOT funds to increase toward the end of fiscal year 2005 due to, among other things, providing additional support in theatre and on the ground in Iraq as part of Joint Sourcing. According to a Navy representative, the Navy had about 5,000 personnel stationed on the ground in Kuwait, Iraq, and Afghanistan at the end of fiscal year 2004. By the end of fiscal year 2005, the Navy plans to have about 8,500 personnel in theatre with the additional personnel having begun to deploy in May 2005. The Marine Corps stated it expects to obligate an additional $220 million in military personnel funds due to the new death gratuity benefit, while another $265 million in military personnel funds will be used to replenish the Marine Corps’s annual appropriation for funds reprogrammed earlier in the fiscal year to buy additional body-armor and other equipment to counter the use of improvised explosive devices in Iraq. To cover the forecasted GWOT needs for fiscal year 2005, DOD, the Army, and the Air Force have identified a number of steps they plan to take. These include exercising a number of authorities provided to them, such as transferring and reprogramming funds from annual appropriations and reducing or deferring planned spending for peacetime operations. The Army, the service with the largest forecasted gap in its operation and maintenance account, plans to take a variety of actions to meet its fiscal year 2005 GWOT funding needs. Some actions include taking steps to transfer or reprogram funds. For example, DOD reprogrammed more than $800 million in funds in May 2005 from the military personnel accounts of the Air Force, Navy, Marine Corps, and Army National Guard, and $250 million from the Army’s Working Capital Fund, to the Army to meet urgent GWOT needs. Other actions the Army plans to take to help fund GWOT in fiscal year 2005 involve reducing or deferring current costs. For example, the Army reports that it has been able to reduce its fiscal year 2005 Logistics Civil Augmentation Program (LOGCAP) contract costs by about $890 million by reviewing and reducing current LOGCAP requirements. In discussing its plans to meet its fiscal year 2005 GWOT needs, the Army plans to use any surplus funds in its working capital fund to help cover any fiscal year 2005 GWOT gaps. However, due to the transfers from the services’ working capital funds to cover the fiscal year 2004 gaps, as discussed above, few assets remain elsewhere to cover the Army’s fiscal year 2005 GWOT gap. Should the Army’s GWOT gap be larger than forecasted, the Army may have to absorb the difference in its annual appropriation. The Air Force also plans to take a variety of actions to address the gap between its supplemental appropriations and reported operation and maintenance obligations for GWOT. These include decreasing peacetime flying hours by $700 million, reducing or deferring depot maintenance activities by $400 million, and freezing activities involving facility sustainment and restoration modernization projects. Other areas that could be targeted for cost reductions or deferments include noncritical travel and other supplies and equipment. To meet its GWOT needs in fiscal year 2005, DOD is again not explicitly considering the Program Budget Decision 736 funds to support GWOT that were provided to the military services through their annual appropriations. However, as discussed earlier, unlike in fiscal year 2004, in fiscal year 2005 some of the funds provided in Program Budget Decision 736 are being used to fund Operation Noble Eagle, which had previously been funded as part of GWOT through supplemental appropriations. In fiscal year 2004 DOD had included $2.2 billion in its budget request for Operation Noble Eagle. Adjusting for Operation Noble Eagle at the fiscal year 2004 funding level would result in more than $5.4 billion in funds included in Program Budget Decision 736 in support of GWOT for the military services remaining available in fiscal year 2005. If counted in fiscal year 2005, the amounts potentially could reduce the need for reprogrammings from other activities and could reduce the Army’s and eliminate the Air Force’s GWOT gaps. Instead, as in fiscal year 2004, the Office of the Under Secretary of Defense (Comptroller) and the military services will again meet those needs by taking actions that may affect DOD’s peacetime operations, such as reducing or deferring planned spending. In some instances, these funding reductions and deferments could add to future spending pressures in fiscal year 2006 or potentially in later years and run the risk of producing a large “bow wave” of requirements. This can have both short-term and long-term impacts. In the short term, deferring spending can lead to higher costs than expected later in the current fiscal year, which may need to be covered by additional transfers and reprogrammings. In the long term, continued deferments can lead to higher costs. The extent to which one considers that GWOT funding has been sufficient depends on whether one counts both funding provided through supplemental appropriations and funding included in DOD’s annual appropriation, which DOD requested for GWOT. The administration increased DOD’s annual appropriation request by more than $10 billion annually beginning in fiscal year 2003 to support GWOT, with the military services receiving about $7.9 billion of that amount in fiscal year 2004 and about $7.6 billion in fiscal year 2005. The military services absorbed the increase into their annual appropriations and allocated it based on their judgment of where the funds were most needed. Since DOD’s accounting systems do not separately identify these additional appropriations and there are no reporting requirements for DOD to identify to which appropriation accounts the funds were allocated, the military services have lost visibility over these funds and do not know the extent to which they are being used to support GWOT. Consequently, despite having asked for the increase, DOD is not explicitly counting the more than $10 billion when considering funding for GWOT. In fiscal year 2004, the military services reported obligations in support of GWOT that were above the supplemental funds appropriated by the Congress. In response, DOD used authorities granted to it, including transferring funds and reducing or deferring planned spending for peacetime operations, to cover the gaps. However, if the additional funds that were included in DOD’s annual appropriation to help fund the war are included in the analysis, those funds could potentially have reduced the Army’s gap and eliminated the gap for the Air Force and Navy in fiscal year 2004. In fiscal year 2005, the Army and the Air Force are again projecting obligations for the war above their supplemental appropriations, and DOD is taking steps to cover the gaps. As was the case in fiscal year 2004, the additional funds that were included in DOD’s annual appropriation to help fund the war potentially could reduce or eliminate the projected gaps for the Army and Air Force. With military operations in Iraq and Afghanistan ongoing, and the likely need for DOD to request additional funds to support GWOT, it is important that DOD fulfill its role as a steward of taxpayer funds by taking steps to account for all the funds it receives for the war. To improve the visibility and accountability of DOD’s use of funds for GWOT, we recommend that the Secretary of Defense, in future requests for supplemental appropriations, adjust such requests to reflect the additional funds DOD requested and received in its annual appropriations to support GWOT and provide the Congress with an explanation of these adjustments. We further recommend that in addressing any future GWOT funding needs the Secretary consider the additional GWOT funds provided through the department’s annual appropriation when assessing how to cover expenses for the war and document its decisions. Because DOD did not concur with our recommendation to adjust its future supplemental appropriations requests to reflect the additional funds the department requested and received in its annual appropriations to support GWOT and explain these adjustments to the Congress, we have no confidence that the Congress will receive the information that we believe the Congress needs to properly assess DOD’s requests for supplemental appropriations to support the war. Further, because the amount of funds DOD is receiving to support GWOT through its annual appropriations is substantial—more than $10 billion annually—the Congress should consider directing DOD, when it submits future supplemental appropriations requests, to provide an explanation of how such requests reflect the funds DOD requested and already received in its annual appropriations to support GWOT. DOD provided written comments on a draft of this report. Its comments are discussed below and are reprinted in appendix II. DOD did not concur with our recommendations. DOD further commented that the report confuses a Program Budget Decision, which is an internal document, with the President’s budget, which is the official explanation of DOD’s budget request, and that funds are not appropriated in accordance with a Program Budget Decision. In addition, DOD commented that the report’s focus on the Program Budget Decision results in the inaccurate conclusion that if DOD had considered these funds it could have reduced the Army’s GWOT gap and eliminated the GWOT gaps of the Air Force and Navy. In that regard, DOD stated that the only resources available to the department are those appropriated by the Congress and these funds were considered when determining the needs and expenses of the war. We recognize that a Program Budget Decision is an internal document and that the President’s budget is the official explanation of DOD’s budget request and that funds appropriated are determined by the Congress—not by either a Program Budget Decision or the President’s budget. In our report, we refer to Program Budget Decision 736 and the President’s budget not to establish how much money the Congress appropriated to support GWOT, but to establish how much money DOD intended for GWOT. As stated in our report, according to a representative from the Office of the Under Secretary of Defense (Comptroller), in December 2001 the President directed that his annual budget submission for DOD be increased by about $10 billion annually to support GWOT. Consequently, Program Budget Decision 736, entitled Continuing the War on Terrorism and dated January 31, 2002, was approved by the Under Secretary of Defense (Comptroller). Program Budget Decision 736 provided for increasing DOD’s annual budget request in the amount of more than $10 billion per year plus inflation in fiscal years 2003 through 2007 to enhance the department’s efforts to respond to, or protect against, acts or threatened acts of terrorism against the United States. We therefore believe that since the funds referenced in Program Budget Decision 736 were specifically identified as being requested in support of GWOT, DOD should maintain visibility over how these funds were used to support GWOT. We believe that if DOD asks for a significant increase in appropriations and explains that the increase is needed to support GWOT, DOD should be able to show that it actually used those funds for GWOT. DOD did not concur with our recommendations that the Secretary of Defense (1) adjust future supplemental appropriations requests to reflect the additional funds DOD received in its annual appropriations to support GWOT and explain these adjustments to the Congress and (2) also consider the additional GWOT funds provided through DOD’s annual appropriations in addressing any future GWOT funding needs. In commenting on our first recommendation, DOD stated that the department’s supplemental appropriations request accounts for all relevant adjustments to the annual appropriation bill. DOD also commented that it builds and submits supplemental appropriations requests based on the incremental cost of the operation, which it described as those additional costs to the DOD component conducting the operation that are not covered in their existing budgets and would not have been incurred had they not been supporting the contingency. It is not apparent, however, that DOD’s request for supplemental appropriations for fiscal year 2004 in fact reflected amounts already appropriated. The President’s fiscal year 2005 supplemental appropriations request did reflect amounts already enacted, but only because the Office of Management and Budget, not DOD, made the adjustments. As we discuss in this report, DOD included a $10 billion increase in its fiscal year 2004 annual appropriations in order to support GWOT. In its Program Budget Decision 736, DOD stated that $1.2 billion of that amount would be used for combat air patrols over U.S. cities, which is part of Operation Noble Eagle. At the same time, in its fiscal year 2004 supplemental appropriations request for GWOT, DOD included funding for Operation Noble Eagle, but without explaining why it needed amounts in addition to those that the Congress already provided. In addition, although DOD stated that the department’s supplemental appropriations request accounts for all relevant adjustments to the annual appropriation bill, as stated in our report, in a November 2004 memorandum issued by the Office of the Under Secretary of Defense (Comptroller) the Comptroller’s office sought to adjust DOD’s supplemental appropriations request for fiscal year 2005 to reflect funds already provided. In that memorandum, the Office of the Under Secretary of Defense (Comptroller) stated that funding in fiscal year 2005 for GWOT missions previously added to the baseline budget (e.g., Program Budget Decision 736, Continuing the War on Terrorism) should be explicitly identified as a reduction to funding requests in those areas, as appropriate. The memorandum further requested that the components’ submissions should show the total requirement and note the level of funding already in the baseline for this purpose. The memorandum directed that the services’ supplemental appropriations requests net out the available funding and address the incremental costs above the baseline funding needed to support specific forces and capabilities required to execute Operation Iraqi Freedom, Operation Enduring Freedom, and portions (to be determined) of Operation Noble Eagle. However, as stated in our report, none of the military services provided the information requested in the November 2004 memorandum and instead the military services requested supplemental appropriations for Operation Noble Eagle. Nevertheless, in preparing the fiscal year 2005 supplemental appropriations request, the Office of Management and Budget did not include Operation Noble Eagle in the President’s budget request because funds had already been included in DOD’s annual appropriation, pursuant to DOD’s request, as described in Program Budget Decision 736. We believe that our recommendation has merit and have retained it. In addition, since DOD does not agree with the recommendation and the amount of funds at issue is substantial—more than $10 billion annually— we have added a matter for congressional consideration. Specifically, the Congress should direct DOD, when it submits future supplemental appropriations requests, to provide an explanation of how such requests reflect the additional funds that were addressed in Program Budget Decision 736 and which DOD requested and received in its annual appropriations to support GWOT. With respect to our second recommendation, DOD commented that it considers all funds provided through the department’s annual appropriation when addressing how to cover expenses for the war. We recognize that DOD reviews all funds when determining how to cover its GWOT needs. However, DOD, as it explained in Program Budget Decision 736, intended increased annual appropriations to support GWOT, but then lost visibility of the funds requested. There is no documentation, therefore, regarding how the department took the funds that it requested into account or whether it was applying the entire amount to cover its GWOT needs. We believe that since DOD stated that the additional annual funds were needed to support GWOT, and DOD continues to include this funding in its request for annual appropriations, to fulfill its role as a steward of taxpayer funds DOD should explicitly maintain visibility over how these funds are used to support GWOT and consider the entire amount to be available for GWOT. We therefore continue to believe our recommendation has merit and have retained it, including expanding it to recommend that DOD also document its decisions. We are sending copies of this report to other interested congressional committees; the Secretary of Defense; the Under Secretary of Defense (Comptroller); and the Director, Office of Management and Budget. Copies of this report will also be made available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-9619 or pickups@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Principal contributors to this report were Steve Sternlieb, Assistant Director; Richard K. Geiger; Wesley A. Johnson; James Nelson; and David Mayfield. To identify funding for the Global War on Terrorism (GWOT), we reviewed applicable annual and supplemental Department of Defense (DOD) appropriations in fiscal years 2004 and 2005. We also reviewed DOD reports on the transfer of funds from the Iraqi Freedom Fund to support GWOT activities, and DOD reports on the transfer or reprogramming of funds among various appropriation accounts or budget activities to support GWOT. In addition, we reviewed material related to the decision to add funds to DOD’s annual appropriation to support GWOT, specifically Program Budget Decision 736, entitled Continuing the War on Terrorism, dated January 31, 2002, and approved by the Under Secretary of Defense (Comptroller). To assess the extent of differences between supplemental appropriations and reported obligations for GWOT, we compared supplemental appropriations provided to the military services to reported obligations in fiscal year 2004 and reported obligations through May 2005 and assessed obligations through May 2005 for fiscal year 2005. Specifically, we identified applicable supplemental appropriations in fiscal years 2004 and 2005 and compared them to the reported amounts obligated by each service in DOD’s Supplemental and Cost of War Execution Reports. We limited our review to the obligation of funds appropriated for military personnel and operation and maintenance for the Army, Air Force, Navy, and Marine Corps, for both active and reserve forces, because they represented the majority of the funds obligated in fiscal years 2004 and 2005, about 90 percent in each year. We excluded classified programs from our review, because obligations for those programs are not reported in DOD’s Supplemental and Cost of War Execution Reports. We did not review the obligation of funds for investment, which are used for procurement; military construction; and research, development, test, and evaluation. In addition, for fiscal year 2005, we reviewed the latest available obligation data and held discussions with the military services on the results of their midyear budget reviews. We compared the services’ reported military personnel and operation and maintenance obligations through May 2005, the latest available obligation data at the time of our review, to the supplemental appropriations provided to calculate the proportion of funds obligated through May. We then compared those proportions to the proportion of the fiscal year that has elapsed through May—which represents 67 percent of the fiscal year—to assess whether based on obligations through May funding is likely to be adequate. We recognize that funds are not obligated equally each month throughout the fiscal year. However, we believe that the further into the fiscal year the closer to 100 percent obligations should be relative to appropriations if all appropriated funds are likely to be obligated. GWOT obligations provided in this report are DOD’s claimed obligations as reported in the Supplemental and Cost of War Execution Reports. In related work, we have reported these data to be of questionable reliability. For example, we found financial management systems with acknowledged weaknesses, a lack of systematic processes to ensure accurate data entry, failure to use actual data when it was available, and improperly categorized costs. Therefore, we are unable to ensure that DOD’s reported obligations for GWOT are complete, reliable, and accurate. Consequently, the gaps we identify between supplemental appropriations and DOD’s reported obligations may not reliably reflect true differences between supplemental appropriations and obligations and therefore should be considered approximations. Despite the uncertainty about the obligation data, we are reporting the information because it is the only data available on overall GWOT costs and the only way to approach an estimate of the costs of the war. Also, despite the uncertainty surrounding the true dollar figure for obligations, these data are used to advise the Congress on the cost of the war. As such, obligation data provided in this report reflect DOD reported obligations, however unreliable those reports may be. To determine actions taken by DOD and the services to cover any identified gaps between reported obligations and supplemental appropriations for GWOT, we held discussions with DOD representatives from the Office of the Under Secretary of Defense (Comptroller) and the Army, Air Force, Navy, and Marine Corps. At the major command level, we discussed with service representatives any actions taken to cover gaps and the impacts of actions taken to cover those gaps on their budgeted peacetime operations. We interviewed DOD representatives regarding GWOT obligations and funding for fiscal years 2004 and 2005 in the following locations: Office of the Under Secretary of Defense (Comptroller), Washington, D.C. Department of the Army, Headquarters, Washington, D.C. Army Forces Command and Headquarters, Third Army, Fort McPherson, Georgia. Army Installation Management Agency, Arlington, Virginia. Army Materiel Command, Fort Belvoir, Virginia. Army Pacific Command, Fort Shafter, Hawaii. Department of the Air Force, Headquarters, Washington, D.C. Air Force Air Combat Command, Langley Air Force Base, Virginia. Air Force Air Mobility Command, and Headquarters, U.S. Transportation Command, Scott Air Force Base, Illinois. Department of the Navy, Headquarters, Washington, D.C. Navy Atlantic Fleet Command, Norfolk Naval Base, Virginia. Navy Pacific Fleet Command, Pearl Harbor, Hawaii. Marine Corps, Headquarters, Washington, D.C. Marine Corps Forces, Pacific, Camp Smith, Hawaii. We performed our work from November 2004 through August 2005 in accordance with generally accepted government auditing standards.","To assist the Congress in its oversight role, GAO is undertaking a series of reviews on the costs of operations in support of the Global War on Terrorism (GWOT). In related work, GAO is raising concerns about the reliability of the Department of Defense's (DOD) reported cost data and therefore is unable to ensure that DOD's reported obligations for GWOT are complete, reliable, and accurate. In this report, GAO (1) identified funding for GWOT in fiscal years 2004 and 2005, (2) compared supplemental appropriations for GWOT in fiscal year 2004 to the military services' reported obligations, and (3) compared supplemental appropriations for GWOT in fiscal year 2005 to the military services' projected obligations. In fiscal years 2004 and 2005, DOD received funding for GWOT through both funds included in its annual appropriation and supplemental appropriations. In fiscal years 2004 and 2005, the military services received about $52.4 billion and $62.1 billion, respectively, in supplemental appropriations for GWOT (1) military personnel and (2) operation and maintenance expenses. The Army, Air Force, and Navy also received in their annual appropriations a combined $7.9 billion in fiscal year 2004 and a combined $7.6 billion in fiscal year 2005, which DOD described as being intended to support GWOT. The military services absorbed the increase into their annual appropriations and allocated it based on their judgment of where the funds were most needed. DOD's accounting systems, however, do not separately identify these additional appropriations, and there are no reporting requirements for DOD to identify to which appropriation accounts the funds were allocated; consequently, the military services have lost visibility over these funds and do not know the extent to which they are being used to support GWOT. Despite having asked for the increase to support GWOT, DOD is not explicitly counting these additional funds when considering the amount of funding available to cover GWOT expenses. For fiscal year 2004, regarding supplemental appropriations for GWOT military personnel expenses, the Navy and Marine Corps reported more in obligations than they received in supplemental appropriations, while the Army and Air Force received more in supplemental appropriations than their reported obligations. Each of the services reported more in GWOT operation and maintenance obligations than it received in supplemental appropriations. To cover the differences (gaps), DOD and the services exercised a number of authorities provided them, including transferring funds and reducing or deferring planned spending for peacetime operations. However, in considering the amount of funding available to cover the gaps, DOD did not explicitly take into account the funds provided through its annual appropriation that as previously noted it described as for the support of GWOT. If DOD had considered these funds, it could have reduced the Army's GWOT gap and eliminated the GWOT gaps of the Air Force and Navy. For fiscal year 2005, the services' forecasts of GWOT obligations for the full fiscal year as of June 2005 suggest a potential gap of $500 million for military personnel for the Air Force and potential gaps of about $2.7 billion and about $1 billion, respectively, for operation and maintenance for the Army and Air Force. To cover expenses, DOD and the services again plan to take a variety of actions, including reprogramming funds and reducing or deferring planned spending. However, DOD is again not explicitly considering the funds provided through its annual appropriation, which it described as for the support of GWOT. If counted in fiscal year 2005, the amounts potentially could reduce the Army's and eliminate the Air Force's GWOT gaps and eliminate the need for reprogramming funds and reducing or deferring planned spending.",govreport
"As the economy begins to recover from the financial crisis, the extraordinary government interventions taken to stabilize the financial system will need to be withdrawn. The consequences of financial crises— specifically systemic bank-based crises—on economic activity have been well documented. As a result, governments and monetary authorities typically undertake interventions, even though the resulting actions raise concerns about moral hazard and can come at a significant expense to taxpayers. Given its severity and systemic nature, the recent global financial crisis prompted substantial interventions starting as early as September 2007, after the first signs of serious trouble in the subprime mortgage market surfaced (see app. II). In the early stages of the financial crisis, the observable policy responses were a Department of Housing and Urban Development (HUD)-initiated foreclosure prevention program, a Federal Reserve lending facility for depository institutions, and currency swap arrangements with various foreign central banks. As the crisis intensified, additional lending facilities were created, followed by separate actions by the Federal Reserve, Treasury, and others that dealt with financial sector issues on a case-by-case basis. These actions included facilitating JPMorgan Chase & Co.’s purchase of Bear Stearns Companies, Inc.; addressing problems at Fannie Mae and Freddie Mac by placing them into conservatorship; working with market participants to prepare for the failure of Lehman Brothers; and lending to American International Group (AIG) to allow it to sell some of its assets in an orderly manner. Although Treasury had begun to take a number of broader steps, including establishing a temporary guarantee program for money market funds in the United States, it decided that additional and comprehensive action was needed to address the root causes of the financial system’s stresses. The passage of EESA and authorization of TARP provided Treasury with the framework it needed to begin its more comprehensive and coordinated course of action that ultimately resulted in several programs. Some TARP funds were utilized to launch joint programs or to support efforts principally led by other regulators. Concurrent with the announcement of the first TARP program, the Federal Reserve and FDIC also announced other actions that were intended to stabilize financial markets and increase confidence in the U.S. financial system. This system-wide approach was also coordinated with a number of foreign governments as part of a global effort. The various initiatives under TARP are detailed below. Capital Purchase Program (CPP). CPP was intended to restore confidence in the banking system by increasing the amount of capital in the system. Treasury provided capital to qualifying financial institutions by purchasing preferred shares and warrants or subordinated debentures. Capital Assistance Program (CAP). CAP was designed to further improve confidence in the banking system by helping ensure that the nation’s largest banking institutions had sufficient capital to cushion themselves against larger than expected future losses, as determined by the Supervisory Capital Assessment Program (SCAP)—or “stress test”— conducted by federal regulators. Consumer & Business Lending Initiative (CBLI). CBLI was designed to support new securitizations in consumer and business credit markets, especially for auto, student, and small business loans; credit cards; and new and legacy securitizations of commercial mortgages to increase credit availability in these markets and now includes small business lending programs as well. A portion of the CBLI funds were used to support the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF). Under TALF, the Federal Reserve provided loans to private investors who pledged securitizations as collateral and Treasury provided a government backstop against certain losses. Public Private Investment Program (PPIP). PPIP was designed to facilitate the purchase of “legacy assets” as part of Treasury’s efforts to facilitate price discovery in markets for these assets, repair balance sheets throughout the financial system, and increase the availability of credit to households and businesses. The legacy securities program, or “S-PPIP,” partnered Treasury and private sector equity funding leveraged by Treasury loans to purchase and hold legacy residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). In the original plan, PPIP was to also include a partnership between Treasury and FDIC to purchase and hold legacy loans, through the legacy loans program, or “L-PPIP,” but it was never implemented as a joint venture using TARP funds. Making Home Affordable Program (MHA). MHA was launched to offer assistance to homeowners through a loss-sharing arrangement with mortgage investors and an incentive-based system for borrowers and servicers in order to prevent avoidable foreclosures. Under MHA, Treasury developed the Home Affordable Modification Program (HAMP) as its cornerstone effort to meet EESA’s goal of protecting home values and preserving homeownership by helping at-risk homeowners avoid potential foreclosure, primarily by reducing their monthly mortgage payments. Targeted Investment Program (TIP). The stated purpose of TIP was to foster market stability and thereby strengthen the economy by making case-by-case investments in institutions that Treasury deemed critical to the functioning of the financial system. TIP was designed to prevent a loss of confidence in financial institutions that could (1) result in significant market disruptions, (2) threaten the financial strength of similarly situated financial institutions, (3) impair broader financial markets, and (4) undermine the overall economy. The AIG Investment Program. Formerly the Systemically Significant Failing Institutions program, the goal of the AIG Investment Program was to provide stability in financial markets and avoid disruptions to the markets from the failure of a systemically significant institution. Treasury has purchased preferred shares and warrants in AIG and provided a facility for additional investment as needed up to a limit. Asset Guarantee Program (AGP). AGP provided government assurances for certain assets held by financial institutions that are viewed as critical to the functioning of the nation’s financial system. The goal of AGP was to encourage investors to keep funds in the institutions. According to Treasury, placing guarantees, or assurances, against distressed or illiquid assets was viewed as another way to help stabilize the financial system. Automotive Industry Financing Program (AIFP). The goal of AIFP was to help stabilize the American automotive industry and avoid disruptions that would pose systemic risk to the nation’s economy. Under this program, Treasury has authorized TARP funds to help support automakers, automotive suppliers, consumers, and automobile finance companies. A sizeable amount of funding has been to support the restructuring of Chrysler Group LLC (Chrysler) and General Motors Company (GM). Taken together, the concerted actions by Treasury and others have been credited by many market observers with averting a more severe financial crisis, although there are critics who believe that markets would have recovered without government support. Particular programs have been reported to have had the desired effects, especially if stabilizing the financial system and restoring confidence was considered to be the principal goal of the intervention. In our October 2009 and February 2010 reports we noted that some of the anticipated effects on credit markets and the economy had materialized while some securitization markets had experienced a tentative recovery. Yet, experience with past financial crises, coupled with analysis of the specifics of the current situation, has led the Congressional Budget Office to predict a modest recovery that will not be robust enough to appreciably improve weak labor markets through 2011. Full recovery will likely take some time given years of excesses, including imprudent use of leverage at financial institutions, overvalued asset prices, and major imbalances in the fiscal and household sectors. Negative shocks like the recent turmoil in international capital markets stemming from European sovereign debt issues have the potential to delay the recovery as well. Because markets have stabilized, private markets have reopened, and economic growth has resumed, the federal government has begun to move into the exit phase of its financial stabilization initiatives. The winding down of government support is made more pressing by the need to exit market distorting interventions as quickly as possible and to begin shifting focus from the financial crisis to stabilizing the government debt-to-gross domestic product ratio. Crisis-driven interventions are designed to be temporary because they distort the normal functioning of markets and involve public capital when, under normal conditions, private capital is more desirable. Moreover, as we have pointed out in previous reports, the U.S. government faces an unsustainable long-term fiscal path. While these fiscal imbalances predate the financial crisis, the government’s response to the crisis has exacerbated an already challenging fiscal environment. As a result, even as some programs have ramped up to address specific issues, many others have either expired or are already winding down— including those utilizing TARP funds (see app. II). Many programs were designed to wind down naturally, force financial institutions to raise private capital, or become unattractive to participants once markets recovered. Treasury’s authority under EESA to purchase, commit to purchase, or commit to guarantee troubled assets was set to expire on December 31, 2009, unless the Secretary submitted a written certification to Congress extending these authorities. In anticipation of the upcoming decisions on the future of TARP, the need to unwind the extraordinary federa l support across the board, and the fragile state of the economy we made recommendations to Treasury in our October 2009 report. Specifically, we suggested that any decision to extend TARP be made in coordination with relevant policymakers. We also suggested that Treasury make use of quantitative analysis wherever possible to support the rationale and communicate its determinations to Congress and the American peo noted that without a robust analytic framework, Treasury may be challenged in effectively carrying out the next stages of its programs. Treasury responded that in deciding whether to extend TARP auth beyond December 31, 2009, the Secretary would “coordinate with appropriate officials to ensure that the determination is considered in a broad market context that takes account of relevant objectives, cos measures” and would communicate the rationale for the decision. On December 9, 2009, the Secretary announced that he was extending Treasury’s authority under EESA to purchase, commit to purchase, or commit to guarantee troubled assets until October 3, 2010 (TARP expiration date). After the expiration date, no TARP funds can be committed, but there may be expenditures to fund commitments entered into prior to the expiration date. The extension of TARP permits Treasury to reallocate existing commitments and make additional funds available for some programs. As is shown in table 1, according to Treasury, new commitments through October 3, 2010, will be limited to MHA and small business lending programs through CBLI. The funds allocated to MHA have not been increased beyond the initial $50 billion Treasury estimated would be committed under the TARP-funded program. At time of the decision to extend, Treasury had committed $40 billion under existing MHA programs; however, according to Treasury, they had always contemplated additional MHA programs, such as programs to address negative equity. Treasury indicated that the extension of TARP gave them more time and flexibility to build out those programs as well as more time to decide how best to allocate the remaining $10 billion in order to prevent avoidable foreclosures. All other programs, including TIP, have closed or will close by June 30, 2010, and no additional funds will be committed under those programs. However, additional expenditures, which have already been apportioned and accounted for, could occur after the TARP termination date for TALF, PPIP, and the AIG Investment Program to fund commitments made prior to December 2009, and investments acquired through a variety of TARP actions remain under Treasury’s management. Nevertheless, the extension has formally moved TARP from a program with a heavy focus on capitalizing institutions and stabilizing securitization markets to one focused primarily on mitigating preventable foreclosures and improving financial conditions for small banks and small businesses. Treasury estimates that new commitments under MHA and CBLI could increase the costs of TARP by $25 billion. Even with these additional costs, Treasury expects that TARP will ultimately cost taxpayers $105.4 billion, more than $200 billon less than initially estimated. The Secretary also notified Congress that Treasury expected to use no more than $550 billion of the approximately $700 billion authorized by EESA but reserved the authority to use the remaining funds to respond “to an immediate and substantial” threat to the economy “stemming from financial instability.” In the absence of such threats, Treasury indicated that those resources would be used to pay down the federal debt over time. In his letter to Congress communicating the decision, the Secretary also expressed a desire to expedite both the liquidation of the equity investments and the repayment of funds extended to TARP recipients. As of June 7, 2010, total TARP repayments were roughly $195 billion. Pending legislation, if enacted, would require the Secretary to use any amounts repaid by financial institutions for debt reduction. The decision to extend TARP followed months of deliberation and internal discussions that began in August 2009. Treasury officials told us that while the decision to extend TARP could have been made earlier, it was not made until December to be certain that extension was necessary and so that the Secretary would be able to consider what conditions to place on the extension to balance the need to minimize the cost to taxpayers while ensuring that the program met its core objectives. According to Treasury officials, this decision was made at the highest levels within the agency. Discussions centered on how to phase out TARP and other government programs adopted in response to the financial crisis generally, as well as what limits to place on an extension, and what programs would not need to be continued beyond the original expiration date of December 31, 2009. Treasury officials indicated this discussion generally did not take place at the program level, but included a range of officials from various Treasury offices. Internal memos and briefing documents suggest considerable deliberation took place on the effectiveness of existing government actions as well as the likely effectiveness of potential policy options to address remaining threats to financial stability. Other programs operated by Treasury and other government agencies were important parts of these deliberations. According to Treasury, the modest pace of the economic recovery and concern about exiting TARP prematurely meant that the likelihood of not extending was low, but programs that were no longer needed were to be terminated. In addition, Treasury believed that while the decision could have been made at an earlier date, officials decided it was better to wait until closer to the certification deadline in order to have a more targeted response. Treasury also considered not extending TARP and instead making up front commitments to problem areas based on available information, but ultimately decided that the additional flexibility and better information that would come from the extension would be preferable. As part of a robust analytic framework for decision making, we recommended that the Secretary coordinate with the Federal Reserve and FDIC to help ensure that the decision to extend or terminate TARP was considered in a broader market context. Treasury officials said that it had external discussions and consultations in the months prior to the decision to help ensure that the decision-making process incorporated the actions of key financial regulators. Treasury officials also said that the Secretary had discussions with the Chairmen of the Federal Reserve and the FDIC regarding TARP and the status of crisis programs instituted at each respective agency. Treasury officials noted that EESA required additional coordination with the Federal Reserve because it required the Secretary to consult with the Chairman of the Federal Reserve in order to purchase financial instruments other than those related to residential and commercial real estate. This consultation, which included communication among principals and staff of the two agencies, is represented in several letters by the Chairman to the Secretary reflecting the required consultations prior to the initiation of several TARP programs unrelated to residential and commercial real estate. In addition, Federal Reserve officials stated that the Chairman and Vice Chairman of the Federal Reserve were broadly supportive of the decision to extend TARP. The officials said that the Chairman was consulted by the Secretary on multiple occasions. The Federal Reserve noted that there was consistent coordination at the staff level regarding the TALF program, primarily due to the joint nature of the program. Another forum for coordination around the decision to extend TARP was FinSOB. FinSOB meeting minutes detailed discussions of the decision to extend TARP and the general economic situation. While there was discussion of the decision, FinSOB did not, nor was it required to, authorize or approve the Secretary’s action. The Secretary also discussed the extension of TARP with the Chairman of FDIC. In particular, both agencies told us that they discussed the timing of FDIC’s exit from programs designed to support the banking system. According to Treasury officials, Treasury took into consideration the winding down of FDIC’s Temporary Liquidity Guarantee Program (TLGP), which was designed to support bank debt and transaction accounts, in deciding to extend TARP. At the time Treasury made the decision to extend TARP, TLGP was scheduled to end June 30, 2010. FDIC subsequently extended TLGP to December 31, 2010. As Treasury shifts into the exit phase of TARP, it faces upcoming decisions that would benefit from continued collaboration and communication with other agencies including: decisions about allocating any additional funds to MHA and CBLI, decisions about scaling back various programs, and ongoing decisions related to the general exit strategy, including unwinding the equity investments held as a result of actions taken under TARP. Similar to the need for a coordinated course of action to stabilize the financial system and re-establish investor confidence, the general exit from the government interventions will require coordination to develop a unified disengagement strategy. As mentioned previously, TARP is one of many programs and activities the federal government has put in place over the past year to respond to the financial crisis (see also app. II). In general, the extent of coordination with the Federal Reserve was consistent with our recommendation and represented the type of collaboration necessary for the next stage of the government response to the crisis. However, the extent of Treasury’s coordination with FDIC, while sufficient for the decision to extend TARP, should be enhanced and formalized for any upcoming decisions that would benefit from interagency collaboration. FinSOB, which was established to help oversee TARP and other emergency authorities and facilities granted to the Secretary under EESA, is composed of the Secretary, the Chairman of the Board of Governors of the Federal Reserve, the Director of FHFA, the Chairman of the Securities Exchange Commission, and the Secretary of HUD. Therefore many of the regulators who led the federal response to the financial crisis are already part of a collaborative body. As a result, FinSOB has been a vehicle for formal consultations over TARP decisions among the agencies that are represented on FINSOB under EESA. By adding future program decisions to the agenda, including decisions on future TARP commitments, FinSOB can continue to serve a role in the next phase of the TARP program as well as in the consideration of exit strategies. Because FINSOB membership is set by statute, Treasury should seek to conduct similar consultations with other agencies that are not represented on FinSOB, such as the FDIC, or these agencies could be invited occasionally to discuss specific issues. Treasury considered a number of qualitative and quantitative factors for key decisions associated with the TARP extension. Important factors considered for the extension of TARP centered on ongoing weaknesses in key areas of the economy. Treasury officials noted that housing market indicators, despite previously announced initiatives, and financial conditions for small businesses necessitated further commitments under MHA and small business lending programs. Treasury underscored that while analysis was possible on the need for or success of individual programs, the fragile state of the economy and remaining downside risks were an ongoing source of uncertainty. Considering this uncertainty, Treasury wanted to extend TARP through October 2010 in order to retain resources to respond to financial instability. On the other hand, Treasury noted that some programs had accomplished their goals and would be terminated. Treasury cited renewed ability of banks to access capital markets, improvements in securitization markets, and stabilization of certain legacy asset prices as motivating the closing of bank capital programs, TALF, and PPIP, respectively. Treasury could strengthen its analytical framework by identifying clear objectives for small business programs and explaining how relevant indicators motivated TARP program decisions. Treasury officials identified four documents that were central to its efforts to describe and communicate to Congress and the public the framework it used to make decisions related to the extension of TARP, the expansion of some efforts, and the termination of others. Those four documents were (1) the September 2009 report “The Next Phase of Government Financial Stabilization and Rehabilitation Policies”; (2) the December 9, 2009, letter to Congressional leadership certifying the extension of TARP; (3) Secretary Geithner’s December 10, 2009, testimony to the Congressional Oversight Panel; and (4) the “Management Discussion and Analysis” portion of the fiscal year 2009 Office of Financial Stability Agency Financial Report. Based on our analysis of these documents and interviews with Treasury officials, table 2 summarizes the key factors that contributed to Treasury’s program-level decisions associated with the extension of TARP. In addition, we note a number of quantitative indicators identified by Treasury that to some extent measure the key factors that influenced the decisions. We elaborate on the nature of these decisions and the indicators below. AGP, TIP, AIFP, and the AIG Investment Program amounted to exceptional assistance to key institutions on a case-by-case basis, and therefore, the expectation was that these targeted programs would be exited as soon as practical and would not be considered for additional commitments. Housing. Rather than allow the program to expire with $10 billion of the original $50 billion allocated to MHA remaining uncommitted, Treasury extended the program so that those funds could be used to address continued weaknesses in housing markets and roll out several additional programs that Treasury had not yet had the opportunity to design and implement. Treasury officials noted that various metrics they were monitoring indicated that the recovery had not successfully reached particular areas of the economy (see table 3). Specifically, housing market indicators, such as foreclosures and mortgage delinquencies, remained elevated around the time the decision to extend TARP was made, despite initiatives—like MHA—that were designed to preserve homeownership by directly modifying mortgages for qualified homeowners. The percentage of loans in foreclosure (foreclosure inventory) reached 4.58 percent at the end of the fourth quarter of 2009 and continued to increase to an unprecedented high of 4.63 percent in the first quarter of 2010 (see fig. 1). Over the same period the serious delinquency rate—defined as the percentage of mortgages 90 days or more past due plus those in foreclosure—fell only slightly from 9.67 to 9.54 percent. Although not shown, the serious delinquency rate for subprime loans exceeded 30 percent in the most recent two quarters, indicating the large proportion of subprime loans in trouble. Foreclosure starts, which reflect new foreclosures filings, peaked at 1.42 percent in the third quarter of 2009 before declining over the next two periods to roughly 1.2 percent. By any measure however, foreclosure and delinquency statistics for housing remain well above their historical averages. Moreover, although not explicitly mentioned by Treasury, a comparison of trends in delinquent mortgages and new foreclosure starts indicate that more foreclosures are looming. While the foreclosure start rate grew 36 percent from the last quarter of 2007 to the last quarter of 2009, the rate for delinquencies of 90 days or more grew by 222 percent over the same period (see fig. 1). This suggests mortgages are not rolling from delinquency to foreclosure as expected and that lenders are not initiating foreclosures on many loans normally subject to such actions. To the extent that foreclosure mitigation programs are ineffective, or a large number of the trial modifications represent unavoidable foreclosures, the resulting foreclosures will continue to weigh on the housing market. Treasury also noted that extending TARP provides the flexibility to modify MHA to respond to the changing dynamics of the foreclosure crisis. Treasury noted early in the crisis that many foreclosures were the result of subprime, predatory, and fraudulent lending activity; however, as the financial crisis progressed, Treasury has modified and expanded its efforts because unemployment and negative equity have become the primary drivers of foreclosures, calling for a different approach to homeownership preservation. Treasury has modified MHA to deal with these issues by allowing more borrowers to qualify for modification—including borrowers with Federal Housing Administration (FHA) loans, who are currently in bankruptcy proceedings or who owe more than the current value of their home. Moreover, Treasury also plans to increase the incentives provided to servicers for writing down mortgage debt, and has included incentives for writing down second liens. Treasury is also implementing programs in addition to existing MHA programs that will address these issues, such as the HFA Hardest-Hit fund and a refinance program with FHA, and expects to use the full $50 billion for all these combined efforts. Treasury officials acknowledged that the consequences of interventions may prevent the housing market from fully correcting and may also increase moral hazard by writing down mortgages for borrowers with negative equity. However, Treasury officials and others have identified reducing the number of unnecessary foreclosures as critical to the economic recovery. Because not all homeowners are expected to qualify for a HAMP modification or other mortgage relief programs under MHA, enhancements to the program are to include relocation assistance to some borrowers that use foreclosure alternatives such as a short sale or a deed-in-lieu of foreclosure. In addition to continued weakness in the housing markets and the need for flexibility, Treasury noted that when the decision to extend the program was made, HAMP had only recently been implemented and needed time to ramp up to its full potential and build out all program components. In our July 2009 report and March 2010 testimony on HAMP, we noted that the program faced implementation challenges and that Treasury’s projection that three to four million borrowers could be helped by offering loan modifications was based on several uncertain assumptions and might be overly optimistic. Treasury cited the slow pace of conversions of homeowners from trial modifications to permanent modifications as an important reason to extend its ability to have funds available for commitments related to foreclosure mitigation and housing market stabilization. Total trials versus permanent modifications continued to track the initial slow pace (see fig. 2). In October 2009, permanent modifications started totaled an estimated 2 percent of the total cumulative government-sponsored enterprise (GSE) and non-GSE HAMP trials started, before increasing to just 4 percent and 7 percent for November and December 2009, respectively. Treasury believed that the extension would allow the program the necessary time to reach its full potential by providing more time to complete the significant backlog of modifications, as well as giving the servicers the opportunity to build up their capacity, and finally allowing the public and investors time to better understand the requirements and opportunity presented by the HAMP process. The latest trial-to-permanent modification conversion rate has now reached an estimated 28 percent of total cumulative HAMP trials (see fig. 2). It should be noted that there is a 3-month wait time during the trial period. Therefore, contemporaneous comparison of trial versus permanent modifications is not the most meaningful, since trials entered into within the last 3 months are not eligible for conversion into payments. Our June 2010 report on Treasury’s implementation of HAMP is an update of our prior July 2009 report and March 2010 testimony findings. Specifically, it addressed (1) the extent to which HAMP servicers have treated borrowers consistently and (2) the actions that Treasury has taken to address certain challenges, including the conversion of trial modifications, negative equity, redefaults, and program stability. While one of Treasury’s stated goals for HAMP was to standardize the loan modification process across the servicing industry, we found inconsistencies in how servicers were treating borrowers under HAMP that could lead to inequitable treatment. Specifically, the servicers we contacted varied in the timing of HAMP outreach to delinquent borrowers, the criteria used to determine if borrowers were in imminent danger of default, and the tracking of borrower complaints about servicer’s implementation of HAMP. Additionally we found that while Treasury had taken some steps to address the challenges we had previously reported on, it urgently needed to finalize and implement remaining program components and ensure the transparency and accountability of these efforts. In particular, we reported that Treasury had been slow to implement previously announced programs it identified as needed to address the housing problems hindering the current economic recovery, including its second-lien modification and foreclosure alternatives programs. We noted that Treasury recently announced additional HAMP components to help deal with the high number of foreclosures such as programs to help borrowers with high levels of negative equity and unemployed borrowers, which needed to be prudently designed and implemented as expeditiously as possible. Going forward, as Treasury continues to design and implement new HAMP-funded programs, we reported that it will be important that Treasury develop sufficient capacity—including staffing resources—to plan and implement programs, establish meaningful performance measures, and make appropriate risk assessments. Treasury indicated that it plans to track performance measures of the number of HAMP modifications (trial and permanent) entered into, the redefault rate, and the change in average borrower payments to evaluate the program going forward. However, foreclosure and delinquency data used to motivate the decision to allocate the full budgeted resources to MHA and other housing programs, although also influenced by general market forces such as falling housing prices and unemployment, should provide an indication of the effectiveness of these efforts. Small business lending. Treasury decided to allocate new resources to small business lending based on the contraction in bank lending and other indicators of small business credit conditions. However, Treasury has yet to set explicit objectives for its small business lending programs. Treasury wants to support lending to creditworthy small businesses by providing capital to small banks. A drop in the volume of lending could be explained by a combination of reduced demand for loans, higher credit standards, or banks’ lack of capital to make new loans. Demand for business loans, including small business loans, has dropped considerably since 2008, and credit standards have risen, according to Federal Reserve data. At the time of the extension, Treasury set aside $30 billion for programs to support small business lending. Since that time, Treasury has decided to try to create a Small Business Lending Fund through legislation outside of TARP, due to concerns that many banks would not participate in a TARP program. In addition, Treasury expects to make up to $1 billion in new capital investments in community development financial institutions (CDFI) and purchase up to $1 billion in Small Business Administration loan securitizations, to improve access to credit for small businesses. Relative to larger corporations, small businesses generally have difficulty directly accessing capital markets as an alternative source of financing and are therefore largely reliant on bank lending. While Treasury has stated that bank lending has contracted, Treasury refers to data on outstanding bank loans (loan balances) of all sizes that reflect a number of economic conditions that may not be related to new lending and may not capture potentially divergent conditions for large and small firms. We found in previous work that changes in loan balances may not be a good proxy for new lending. In particular, while outstanding commercial and industrial loans and commercial real estate loans have fallen, losses on a loan portfolio and loan repayments may help explain this drop. For firms of all sizes, lack of comprehensive data on new lending makes assessing business credit conditions particularly difficult. For example, interest rates, on their own, may not be a good indicator of the availability of credit. Specifically, financial institutions may ration credit based on the quality of the borrower, rather than continuing to lend, but charging a wider distribution of interest rates to customers of varying credit quality. As a result, the volume of new lending (loan originations) would be a valuable indicator of credit availability; however, only limited data on loan originations exist. For example, origination data exist only for certain kinds of loans (e.g., mortgages) or only for a small subset of banks (e.g., the largest CPP participants). Moreover, there are no consistent historical data on lending to small businesses. Treasury officials and others have acknowledged the limitations of data in this area, which Treasury officials have noted, making determining when enough has been done difficult. While the availability of small business credit is difficult to quantify definitively, Treasury officials noted that a number of indicators of small business lending point to reduced access to credit. Officials identified the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) and the National Federation of Independent Business (NFIB) survey, among other sources. Taken together, these indicators, although imperfect, generally point to a tight credit environment for small firms. SLOOS surveys loan officers on, among other things, lending standards for commercial and industrial loans, and features responses by borrower size (small versus large and medium). The survey responses show significant tightening of lending standards for firms of all sizes, although conditions have tightened more in the last year for small firms than for larger firms. The NFIB Small Business Economic Trends survey contains a number of questions on access to credit. Respondents are NFIB members, with nearly half of all respondents from firms with five or fewer employees. A question on borrowing needs (“During the last three months, was your firm able to satisfy its borrowing needs?”) may be indicative of changes in access to credit for firms of this size. We compared responses to this question to interest rate spreads for loans of less than $1 million (a proxy for loans to small businesses) from the Federal Reserve’s Survey of Terms of Business Lending. These spreads are premiums over the federal funds rate and indicate the risk banks perceive in making small loans. We found that the percentage of respondents reporting that their borrowing needs had not been satisfied showed the same broad pattern as spreads for loans of less than $1 million (see figure 3). In particular, both show a spike in recent years, with increases in risk premiums for small loans and the proportion of small businesses reporting that their borrowing needs had not been met. Because the economy was still fragile and downside risks remained, Treasury identified the need to retain resources to respond to threats to financial stability as an important consideration in deciding to extend TARP. According to Treasury officials, if the economic recovery were in jeopardy, the TARP extension gave Treasury the capability to react should financial markets need further assistance. Treasury noted several continued areas of weakness that supported the need to retain resources, without making them available for commitment under specific programs. Areas of weakness included the elevated pace of bank failures, high unemployment, and commercial real estate losses. Although banks in the United States had made progress in raising capital and recognizing losses on legacy assets and loans, substantial asset deterioration is expected across some loan classes, such as commercial real estate and consumer and corporate loans. Because banks will likely continue to take steps to reduce leverage, credit conditions are expected to remain tight while high unemployment continues to weigh on residential real estate markets and consumer spending. As indicated above, uncommitted funds up to the total amount authorized by EESA could be used to respond to financial instability or growing weakness that would threaten the recovery. As of June 7, 2010, this amount is roughly $163 billion and remains available for commitment, assuming repayments are not deployed in other efforts. Treasury noted that, among other reasons, it extended TARP to maintain the capacity to respond to unforeseen threats or unanticipated shocks. Federal Reserve officials similarly noted that unanticipated events, not foreshadowed by market data, have been the hallmark of the crisis. The failure, or near failure, of a systemically important financial institution would be a critical threat to financial stability. Treasury, FDIC and the Federal Reserve responded to the failure, or near failure, of large financial institutions during the crisis with programs to provide assistance, such as guarantees and capital, to keep institutions solvent, including AGP for Citigroup and AIG Financial Assistance. According to Federal Reserve officials, one of the reasons they supported the extension of TARP was the inadequacy of available statutory tools to deal with threats to financial stability, such as the failure of a large financial institution. One proposed tool is an authority for the orderly resolution of large, nonbank financial institutions. In previous work, we have noted that some interventions to support failing institutions can undermine market discipline and increase moral hazard. For example, in the presence of a government back-stop, firms anticipate government assistance in the future and thus have less incentive to properly manage risk. Regulatory reforms that enhance oversight and capital requirements at large financial institutions—in essence making it more costly to be a large financial institution—would help to counter some erosion of market discipline. Similarly, an effective resolution authority could impose losses on managers, shareholders, and some creditors, but must also properly balance the need to encourage market discipline with the need to maintain financial stability. Treasury officials noted the importance of having financial regulatory reform in place before TARP expires in October 2010. Bank capital programs. Treasury has ended broad programs, such as CPP and CAP, established to improve the solvency of financial institutions to support their ability to lend, based on banks’ renewed ability to access private capital markets and issue new equity. Treasury has stated that by building capital, CPP was expected to increase lending to U.S. businesses and consumers. Treasury has disbursed more than $200 billion for the CPP, and has received $142 billion in repayments as of May 28, 2010. CAP was designed to help ensure that certain large financial institutions had sufficient capital to withstand severe economic challenges. It was supported by SCAP which assessed capital needs at the 19 largest bank holding companies in the United States. Banks that needed additional capital as a result of SCAP raised $80 billion from private sources, while GMAC received additional capital from Treasury under AIFP. No CAP investments were made as a result and the program closed on November 9, 2009. Treasury has indicated that the renewed ability of banks to raise capital on private markets was a key measure of success for CPP and CAP and a key consideration in ending these programs. From 2000 to 2007, banks largely did not need to raise capital by issuing common equity, averaging only $1.3 billion per quarter. Banks and thrifts raised significant amounts of common equity in 2008, averaging $56 billion per quarter, before issuance dropped precipitously in the first quarter of 2009 to $200 million—a 99 percent drop from the previous quarter and a 63 percent drop from the year before. Banks and thrifts raised $63 billion in common equity in the second quarter of 2009, an increase of 28,000 percent from the previous quarter and 236 percent over the year before (see fig. 4). Banks’ renewed ability to raise capital on private markets reflects improvements in perceptions of the financial condition of banks. The 3- month TED spread—the premium of the London interbank offered rate (LIBOR) over the Treasury interest rate of comparable maturity—indicates the perceived risk of lending among banks. The TED spread peaked at more than 450 basis points in October 2008 before falling to less than 15 basis points at the end of the third quarter of 2009 (see fig. 5). In previous work, we found that the decline in perceptions of risk in the interbank market could be attributed in part to several federal programs aimed at stabilizing markets that were announced on October 14, 2008, including CPP. Nevertheless, the associated improvement in the TED spread cannot be attributed solely to TARP because the announcement of CPP was a joint announcement that also introduced the Federal Reserve’s Commercial Paper Funding Facility program and FDIC’s TLGP. Financial stress re-emerged in the interbank market in May 2010, highlighting the fragile nature of the recovery in the financial system. The TED spread has increased moderately from a low of less than 10 basis points in March 2010 to more than 40 basis points as of mid-June 2010, as concerns about sovereign debt in the European Union has increased. U.S. banks’ exposure to credit risk in Europe and the sensitivity to the global economy has heightened risk premiums among banks lending to each other. While fluctuations in perceived risk in the banking system are natural, and necessary, if risk is to be priced and allocated efficiently, this re-emergence of risk offers some support for Treasury’s decision to retain resources to combat financial instability, especially in light of the limitations of the current financial regulatory system. The impact of CPP on lending is difficult to determine because data on loan originations are limited, and how much lending would have occurred in the absence of CPP is not known. We have noted in previous reports that some tension exists between the goals of improving banks’ capital positions and promoting lending—that is, the more capital banks use for lending, the less their overall capital positions will improve. Treasury collects data monthly on new lending from the largest participants in CPP, which included for a time as many as 22 institutions. As a result, more is known about recent loan originations by large banks than small banks. Ten institutions that repaid CPP in June 2009 stopped submitting data after November 2009. New lending by the largest CPP recipients was $244 billion in November 2009, up 2 percent from the prior month and 17 percent from the year before. However, lending in the third quarter of 2009 quarter of 2009 was down 12 percent from the second quarter (see fig. 6). was down 12 percent from the second quarter (see fig. 6). Support to securitization markets through TALF. With underwriters finding increasing success in bringing issuances to the ABS market and decreasing their utilization of TALF, Federal Reserve and Treasury decided not to extend TALF further. TALF expired on March 31, 2010, for loans backed by ABS and legacy CMBS, and is scheduled to terminate at the end of June 2010 for loans backed by newly-issued CMBS. The program was designed to increase liquidity and reopen the asset-backed securitization markets in an effort to improve access to credit for consumers and small businesses after the decrease in issuances and the refusal of market participants to purchase potential offerings at rates that were acceptable to issuers. TALF-assisted issuances began in March 2009 after an initial announcement in late 2008. Officials from the Federal Reserve and Treasury highlighted that TALF was designed to attract investors when market conditions were stressful, but lose its appeal as conditions improved and spreads tightened to the point that the rate on ABS bonds were lower than the cost of borrowing from the program. Federal Reserve and Treasury officials have also cited declining asset spreads in the ABS market as justification for not making new commitments under TALF (see fig. 7). While not at precrisis levels, spreads have tightened significantly from their heights at the beginning of 2009. Considering the excesses during the recent credit expansion, the desirability of a return to precrisis levels in many areas of the securitization markets is debatable. However, for most TALF-eligible assets, spreads have tightened significantly. For instance, average auto ABS spreads peaked at more than 400 basis points over the benchmark in late 2009, but have since returned to less than 100 basis points over the benchmark in early 2010. Private student loans ABS, however, have maintained spreads above precrisis levels. According to Federal Reserve officials this is partly due to the performance of the underlying student loans and because some of the securities were not structured well. Nevertheless, the contraction in spreads for most TALF-eligible ABS can be seen as normalization of the securitization markets as participants view new and existing issuances as less risky. Some of the decline in spreads and the perceptions of risk in recent securitizations may be attributable to the products themselves. Since the crisis, new securitizations have generally been structured with more credit protections through enhancements such as greater levels of subordination and overcollateralization. The Federal Reserve structured TALF to reduce the rate of utilization of the facility as the market returned to normalcy through relatively high pricing of TALF loans. As we noted in a previous GAO report, during 2009, returns generally decreased for select classes of TALF-eligible collateral between the first TALF operation in March 2009 and the latter part of the year, with limited exceptions. The report notes that as these returns generally became increasingly negative through the year, participants would have essentially locked in losses with certain issuances. To avoid this, many participants instead chose to forego TALF financing for these issuances and instead finance their own investments. ABS markets began to show signs of health as 2009 quarterly issuances were above their lows in 2008 and utilization of TALF began decreasing in mid-2009. ABS issuances experienced a significant decline in 2008, but stabilized in 2009 (see fig. 8). TALF issuance dollar volume peaked in the third quarter of 2009, but by the fourth quarter TALF volume decreased significantly and at a faster rate than the total decrease in ABS volume. Further, there has been one CMBS new issuance that utilized TALF financing although the commercial real estate market continues to experience stresses and there has been little activity in the sector as a whole. Partly as a result of the continuing difficulties in this market, TALF loans backed by newly issued CMBS will be allowed through June 2010 even though the rest of the program closed at the end of March. Addressing “troubled” (legacy) securities through PPIP. Initially announced at up to $100 billion, Treasury reduced the amount available for commitment under PPIP based on improvements in the prices for certain legacy assets. Announced in March 2009, Treasury offered equity and debt financing to nine private fund managers, however, no further commitments to new funds are planned. The Legacy Securities Public- Private Investment Program (S-PPIP) is a program whereby Treasury and private sector fund managers and investors partnered to purchase eligible securities from banks, insurance companies, mutual funds, pension funds, and other sellers defined as eligible under EESA. Treasury indicated that this process was designed to allow financial institutions to repair their balance sheets by removing troubled assets and allow for renewed lending to households. Treasury participates by providing matching equity financing and debt financing up to 100 percent of the total equity of the fund. A related program, L-PPIP, was also announced at the same time by Treasury and FDIC but never operated as a TARP program. This program, however, suspended its planned sale of legacy assets held by banks in order to focus its use in the sale of receivership assets in bank failures. Treasury did not include PPIP in its plans for new commitments in 2010, but has tracked the performance of each individual fund since inception. Treasury stated that a recovery in asset prices in the RMBS and CMBS markets was one indicator that PPIP was effective and achieved its stated purpose. The return of market confidence can be seen in the general recovery or stabilization of asset prices. PPIP and the TARP programs to support bank capital were both intended to improve bank balance sheets. As we noted previously, banks have already been able to raise large amounts of private capital and perceptions of risk in the banking system have declined markedly since the onset of the crisis. PPIP and various other programs and initiatives may have to some extent addressed concerns about bank balance sheets. An indication of the reduction in perceptions of risk is the general recovery in prices of legacy securities is the pricing of Jumbo and Alt-A RMBS securities (see fig. 9). Highly-rated CMBS prices also confirm that parts of the ABS and MBS markets have stabilized since PPIP was announced. Specifically, highly- rated CMBS prices have rebounded from their lows in late-2008, and we note that average spreads have also tightened in the same time period (see fig. 10). This, however, does not reflect the continuing troubles in the broader commercial real estate market as delinquencies have continued to increase. Treasury could strengthen its analytical framework by identifying clear objectives for small business programs and explaining how relevant indicators motivated TARP program decisions. As noted above, Treasury identified four public documents that represented its rationale and decision-making process for the decision to extend TARP. Our understanding of Treasury’s decision-making process was also informed by reading FinSOB quarterly reports and through our interviews with Treasury and other officials. Treasury often directly or indirectly linked program decisions to a variety of quantitative indicators, including surveys, financial market prices and quantities, and measures of program utilization, among others. As discussed previously, all of these factors played an important role in the decision to extend TARP, expand some programs, and end others. As noted in our October 2009 report, indicators are an important step toward providing a credible foundation for TARP decision making. However, how the performance of an indicator affected a program decision, or if and when that indicator would signal a program had or had not met its goals was not always clear. Balancing the costs and benefits of TARP programs effectively will require making objectives explicit, assessing the impact of any commitments under TARP programs, and accounting for the fiscal and other costs of continuing to support markets. Again, a set of indicators, although imperfect, might inform the proper timing for winding down the remaining programs and liquidating of investments. Treasury has yet to identify clear program objectives for small business lending, which raises questions about when Treasury will know that government assistance can be removed. Without a strong analytic framework that includes clear objectives and meaningful measures, Treasury will be challenged in determining whether the program is achieving its desired goals. Given the scale of TARP and importance of the government’s entry and exit from financial market interventions, decisions to allocate remaining resources should be subject to rigorous analysis. Because Treasury may decide to commit additional resources to problem areas before the expiration of TARP, or scale back commitments in others, it needs to be able to estimate the effect of program resources on meeting its objectives. Wherever possible Treasury should use quantitative factors in its decision making, but we recognize that qualitative factors are also important. While HAMP continues to face implementation challenges, the small business initiatives are challenged by a lack of data needed to clarify the root of the problem which may limit Treasury’s ability to effectively address it. For example, without data and analysis to determine the extent to which access to small business credit is being restricted by limited capital at institutions engaged in small business lending, Treasury will not have a sufficient basis to address the underlying issues that may be affecting small business lending. With a better understanding of the problem, Treasury can set clear, achievable goals to address it. The crisis and consequent interventions temporarily changed the U.S. financial system from one primarily reliant on markets and market discipline to one more reliant on government assistance and public capital. With the recovery underway, financial regulators in the United States have begun to shift focus from stabilizing the economy to exiting from crisis- driven interventions and transferring risk back into the hands of the private sector. Many TARP recipients have repaid loans and repurchased shares and warrants. A recent Federal Open Market Committee meeting focused on how the Federal Reserve should sell off assets acquired during the financial crisis. However, weaknesses in residential housing, commercial real estate, and labor markets, as well as risk from more global economic forces, limit the ability to withdraw rapidly and completely. For example, the Federal Reserve dollar liquidity swap lines were re-established with some central banks in response to the re- emergence of strains in short-term U.S. dollar funding markets as a result of European debt and currency issues. While the Secretary, in consultation with the Federal Reserve and FDIC, elected to extend TARP to address perceived weaknesses in the economy and respond to unanticipated shocks, Treasury still faces remaining decisions about allocating any additional funds to MHA and CBLI before its ability to take actions authorized by EESA expires on October 3, 2010. Moreover, ongoing decisions will need to be made related to the general exit strategy, including unwinding the equity investments and scaling back commitments in an environment where (1) other regulators are unwinding their programs, (2) the economy is still coping with the legacy of the crisis, (3) market distortion and moral hazard concerns are pressing, and (4) the long-term fiscal challenges facing the United States have become more urgent. While the level of consultation with the Federal Reserve was generally robust, broad coordination could be enhanced and formalized for future judgments. Similarly, decisions to allocate remaining resources and the timing of exits should be subject to rigorous analysis. By strengthening its framework for decision making, Treasury can better ensure that competing priorities are properly weighed and the next phase of the program is effectively executed. Although the economy is still fragile, a key priority will be to develop, coordinate, and communicate exit strategies to unwind the remaining programs and investments resulting from the extraordinary crisis-driven interventions. Because TARP will be unwinding concurrently with other important interventions by federal regulators, decisions about the sequencing of the exits from various federal programs will require bringing a larger body of regulators to the table to plan and sequence the continued unwinding of federal support. Similar to the need for a coordinated course of action to stabilize the financial system and re-establish investor confidence, the general exit from the government interventions will require careful coordination to avoid upsetting the recovery and help ensure the proper sequencing of the exits. Beyond the immediate costs of financial crises, these episodes can have longer term consequences for fiscal balances and government debt especially if the policy responses exacerbate the situation, lack coherency and effectiveness, or the exit strategy undermines the recovery because it occurs too soon or not soon enough. Moreover, as we discussed earlier in this report, the financial crisis and response has contributed to an already challenging fiscal legacy. As a result, the administration and Congress will need to apply the same level of intensity to the nation’s long-term fiscal challenge as they have to the recent economic and financial market issues. Coherent and effectively carried out exit strategies are the first step in beginning to address these challenges. We are making two recommendations to the Secretary of the Treasury: 1. To effectively conduct a coordinated exit from TARP and other government financial assistance, we recommend that the Secretary of Treasury formalize and document coordination with the Chairman of the FDIC for decisions associated with the expiration of TARP (1) by including the Chairman at relevant FinSOB meetings, (2) through formal bilateral meetings, or (3) by utilizing other forums that accommodate more structured dialogue. 2. To improve the transparency and analytical basis for program decisions made before TARP’s expiration, we recommend that the Secretary of the Treasury publicly identify clear program objectives, the expected impact of programs, and the level of additional resources needed to meet those objectives. In particular, Treasury should set quantitative program objectives for its small business lending programs and identify any additional data needed to make program decisions. We provided a draft of this report to Treasury for its review and comment. We also provided the draft report to the Federal Reserve and FDIC for their review. Treasury provided written comments that we have reprinted in appendix III. Treasury, the Federal Reserve, and the FDIC also provided technical comments that have been incorporated as appropriate. In its comments, Treasury generally agreed with our recommendations and noted that it would continue to consult extensively with the Federal Reserve and FDIC. Treasury agreed that publicly identifying clear program objectives was important and pledged to continue its efforts to do so. In commenting, the Federal Reserve questioned the use of FinSOB as a coordination mechanism for the next phase of the TARP program. We have amended our recommendation to clarify that we are not advocating an expansion of FinSOB membership or to otherwise change its structure or purpose. We continue to believe FinSOB is a potential forum for more formal interaction between agencies by including nonmembers at relevant meetings, not by expanding membership. Moreover, leveraging FinSOB is just one option for formalizing and documenting coordination between Treasury and FDIC. Bilateral meetings or using other forums that accommodate structured dialogue would be consistent with our recommendation. We are sending copies of this report to the Congressional Oversight Panel, Financial Stability Oversight Board, Special Inspector General for TARP, interested congressional committees and members, Treasury, the federal banking regulators, and others. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov; Thomas J. McCool at (202) 512-2642 or mccoolt@gao.gov; or Orice Williams Brown at (202) 512-8678 or williamso@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. The objectives of this report are to determine (1) the process the Department of the Treasury (Treasury) used to decide to extend the Troubled Asset Relief Program (TARP) and the extent of coordination with relevant agencies and (2) the analytical framework and quantitative indicators Treasury used to decide to extend TARP. To determine the process Treasury used to decide to extend TARP and the extent of coordination with relevant agencies, we interviewed officials from Treasury and the Board of Governors of the Federal Reserve System (Federal Reserve), and received official responses to our questions from the Federal Deposit Insurance Corporation (FDIC). In addition, we reviewed Treasury documents and analyses, Financial Stability Oversight Board (FinSOB) reports, and previous GAO reports. In particular, we reviewed four public documents Treasury identified as central to its efforts to describe and communicate the framework it used to make decisions related to the extension of TARP to Congress and the public (1) the September 2009 report “The Next Phase of Government Financial Stabilization and Rehabilitation Policies”; (2) the December 9, 2009, letter to Congressional leadership certifying the extension of TARP; (3) Secretary Geithner’s December 10 testimony to the Congressional Oversight Panel; and (4) the “Management Discussion and Analysis” portion of the fiscal year 2009 Office Financial Stability Agency Financial Report. To determine the analytical framework and quantitative indicators Treasury used to decide to extend TARP, we similarly interviewed Treasury and the Federal Reserve and received official responses to our questions from FDIC. We also reviewed Treasury documents and analyses, FinSOB reports, and previous GAO reports. Based on the four key documents that Treasury identified and interviews with Treasury officials, we determined the key factors that motivated Treasury’s program-specific decisions associated with the extension of TARP and quantitative indicators that to some extent captured those factors. We furthermore analyzed data from Thomson Reuters, Treasury, the Federal Reserve, the National Federation of Independent Businesses, SNL Financial, and a broker-dealer to assess the state of the economy and financial markets. These data may also be suggestive of the performance and effectiveness of TARP. We believe that these data, considered as a whole, are sufficiently reliable for the purpose of summarizing TARP activity and Treasury’s decision-making process, and presenting and analyzing trends in the economy and financial markets. We identified some limitations of the data on credit conditions for small businesses, including the fact that the National Federation of Independent Business survey over- represents certain industries, and therefore may not represent the credit experiences of all small firms. Moreover, there are no consistent historical data on lending to small businesses. In addition, the data from Treasury’s survey of lending by the largest Capital Purchase Program (CPP) recipients (as of November 30, 2009, the last month in which all of the largest CPP recipients participated) are based on internal reporting from participating institutions, and the definitions of loan categories may vary across banks. Because these data are unique, we are not able to benchmark the origination levels against historical lending or seasonal patterns at the institutions. We conducted our audit from March 2010 through June 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The financial crisis prompted an extraordinary response from financial regulators in the United States. As table 3 shows, the crisis-driven interventions—both within and outside of TARP—can be roughly categorized into programs that: 1) provided capital directly to financial institutions, 2) enhanced financial institution’s access to liquid assets through collateralized lending or other credit facilities to 3) purchased nonperforming or illiquid assets, 4) guaranteed liabilities, 5) intervened in specific financial markets, and 6) mitigated home foreclosures. Some programs involved exceptional assistance to particular institutions, such as American International Group (AIG), because of its systemic importance or supported particular markets while others involved assistance to individuals through refinance or loan modification programs. Table 3 does not include interventions or programs that existed prior to the financial crisis, such as the Federal Reserve’s loan program through the discount window, FDIC receivership of failed banks, or interventions that did not expose the intervening bodies to risks or involve federal outlays such as the Securities and Exchange Commission’s temporary ban on short selling in financial stocks. In addition to the contacts named above, Lawrance Evans Jr. (lead Assistant Director), Benjamin Bolitzer, Timothy Carr, Emily Chalmers, William Chatlos, Rachel DeMarcus, Michael Hoffman, Steven Koons, Matthew Keeler, Robert Lee, Matt McDonald, Sarah McGrath, Harry Medina, Marc Molino, Joseph O’Neill, Jose Oyola, Rhiannon Patterson, Omyra Ramsingh, Matt Scire, Karen Tremba, and Winnie Tsen have made significant contributions to this report.","The Department of the Treasury's (Treasury) authority to purchase, commit to purchase, or commit to guarantee troubled assets was set to expire on December 31, 2009. This important authority has allowed Treasury to undertake a number of programs to help stabilize the financial system. In December 2009, the Secretary of the Treasury extended the authority to October 3, 2010. In our October 2009 report on the Troubled Asset Relief Program (TARP), GAO suggested as part of a framework for decision making that Treasury should coordinate with relevant federal agencies, communicate with Congress and the public, and link the decisions related to the next phase of the TARP program to quantitative analysis. This report discusses (1) the process Treasury used to decide to extend TARP and the extent of coordination with relevant agencies and (2) the analytical framework and quantitative indicators Treasury used to decide to extend TARP. To meet the report objectives, GAO reviewed key documents related to the decision to extend TARP, interviewed agency officials and analyzed financial data. The extension of TARP involved winding down programs while extending others, transforming the program to one focused primarily on preserving homeownership, and improving financial conditions for small banks and businesses. While the extension of TARP was solely the Treasury's decision, it was taken after significant deliberation and involved interagency coordination. Although sufficient for the decision to extend, the extent of coordination could be enhanced and formalized for any upcoming decisions that would benefit from interagency collaboration, especially with the Federal Deposit Insurance Corporation (FDIC). Treasury considered a number qualitative and quantitative factors for key decisions associated with the TARP extension. Important factors considered for the extension of new commitments centered on ongoing weaknesses in key areas of the economy. Treasury underscored that while analysis was possible on the needs or success of individual programs, the fragile state of the economy and remaining downside risks were difficult to know with certainty. Considering this uncertainty, Treasury wanted to extend TARP through October 2010 in order to retain resources to respond to financial instability. Going forward, Treasury could strengthen its current analytical framework by identifying clear objectives for small business programs and providing explicit linkages between TARP program decisions and the quantitative analysis or indicators used to motivate those decisions. GAO recommends that the Secretary of the Treasury (1) formalize coordination with FDIC for future TARP decisions and (2) improve the transparency and analytical basis for TARP program decisions. Treasury generally agreed with our recommendations.",govreport
"Under the Federal Meat Inspection Act, the Poultry Products Inspection Act, and the Egg Products Inspection Act, USDA, through FSIS, is responsible for ensuring the safety of meat, poultry, and certain egg products. Under the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act, FDA is responsible for all other foods, including fruits and vegetables; dairy products; seafood; and certain canned, frozen, and packaged foods. The food-processing sector is generally described as the middle segment of the farm-to-table continuum—it extends from the time livestock and crops leave the farm for slaughter and processing into food until it reaches retail establishments. FDA and FSIS work to ensure the safety of food products processed in the United States through a regulatory system of preventive controls that identifies hazards early in the production process to minimize the risk of contamination. Known as the Hazard Analysis and Critical Control Point (HACCP) system, it makes food-processing facilities responsible for developing a plan that identifies harmful microbiological, chemical, and physical hazards that are reasonably likely to occur and establishes critical control points to prevent or reduce contamination. Through their inspection programs, FDA and FSIS verify that food processors are implementing their HACCP plans. FDA inspects over 57,000 food facilities every 5 years on average, and USDA inspects over 6,000 meat and poultry slaughter and processing facilities daily. Individual states also conduct yearly inspections of about 300,000 food-processing facilities, including small firms with fewer than 10 employees and large corporations with thousands of employees and multiple processing plants located in many states. Both FDA and FSIS have the authority to take enforcement actions as necessary to ensure that facilities meet the agencies’ safety and sanitation regulatory requirements. As we reported in 2001, in fiscal year 1999, the latest year for which such information was available, FDA, FSIS, and the states spent a total of about $1.3 billion on food safety activities. Following the events of September 11, 2001, the federal government intensified its efforts to address the potential for deliberate contamination of agriculture and food products. On October 8, 2001, the President issued an executive order establishing the Office of Homeland Security, which added the agriculture and food industries to the list of critical infrastructure systems needing protection from terrorist attack. In addition, the Congress provided FDA and USDA with emergency funding to prevent, prepare for, and respond to potential bioterrorist attacks through the Department of Defense Appropriation Act of 2002: $97 million for FDA and $15 million for FSIS. For the most part, FDA has used the emergency funds to enhance the security of imported food by hiring new inspectors and increasing inspections at U.S. ports of entry. FSIS has used its emergency funds to support its food security activities, which include, among other things, providing educational and specialized training. FDA’s fiscal year 2003 budget builds upon funding received from the fiscal year 2002 appropriation plus the fiscal year 2002 emergency supplemental funding of $97 million to counter terrorism. FDA plans to seek additional funding in the future for food safety activities and security activities related to terrorism. FSIS is asking for an additional $28 million. The Congress also enacted the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which contains numerous provisions designed to enhance the safety and security of the food, drug, and water industries. In addition, both FDA and USDA have taken many actions to better protect the food supply against deliberate contamination. For example, FDA has hired 655 new food safety investigators and laboratory personnel in the field. In addition, it has participated in several exercises at the federal and state levels to enhance emergency response procedures. Furthermore, FDA is working with CDC to initiate and implement a nationwide Laboratory Response Network for foods to identify laboratory capacity for testing agents that could be used to deliberately contaminate food. It has also provided additional laboratory training for food safety personnel and sought stakeholders’ input to develop regulations that are required by the new bioterrorism legislation. Moreover, FDA worked with the Office of the Surgeon General, U.S. Air Force, to adapt a version of the Operational Risk Management approach to examine the relative risks of intentional contamination during various stages of food production and distribution. Within the Department of Health and Human Services, both FDA and CDC have worked closely with federal, state, and local agencies to enhance their surveillance of diseases caused by foodborne pathogens. FDA’s efforts to reduce food security risks also include working with other federal agencies, trade associations, and the Alliance for Food Security. USDA has formed a Homeland Security Council to develop a Department- wide plan to coordinate efforts between all USDA agencies and offices. The Department has also established the FSIS Office of Food Security and Emergency Preparedness to centralize the Department’s work on security matters. USDA has also coordinated with other government agencies, such as the Office of Homeland Security, the Federal Bureau of Investigation (FBI), and FDA, to develop prevention, detection, and response procedures to better protect the nation’s food supply. USDA will be increasing the number of import inspectors by 20. These inspectors will place special emphasis on food security in addition to their traditional food safety role. In addition, USDA has participated in several exercises at the federal and state levels to enhance response procedures and has conducted risk assessments for domestic and imported food. Since this review began, USDA has conducted three simulation exercises at the Department and agency level to test the Department’s response to a terrorist attack and is planning three additional simulations for the spring of 2003. USDA has also conducted preparedness-training sessions for veterinarians and circuit supervisors. (Circuit supervisors supervise the work of in-plant inspection personnel and discuss the security guidelines with them.) Experts from government and academia generally agree that terrorists could use food products as a vehicle for introducing harmful agents into the food supply. Just recently, the National Academies reported that terrorists could use toxic chemicals or infectious agents to contaminate food production facilities and that, although much attention has been paid to ensuring safety and purity throughout the various stages of processing and distribution, protecting the food supply from intentional contamination has not been a major focus of federal agencies. Among other things, the report says that FDA should act promptly to extend its HACCP methodology so that it could be used to deal effectively with the deliberate contamination of the food supply. In February 2002, CDC reported that although the food and water systems in the United States are among the safest in the world, the nationwide outbreaks due to unintentional food or water contamination demonstrate the ongoing need for vigilance in protecting food and water supplies. All of the bioterrorism experts whom we consulted from academia agreed that the food supply is at risk. The food safety statutes do not specifically authorize FDA or USDA to require food processors to implement any type of security measures designed to prevent the intentional contamination of the foods they produce. While these agencies’ food safety statutes can be interpreted to provide authority to impose certain security requirements, as opposed to food safety requirements, neither agency believes it has the authority to regulate all aspects of security. Counsel in the Department of Health and Human Service’s Office of the Assistant Secretary for Legislation advised that FDA’s authorities under the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act provide FDA with tools to adopt measures to control insanitary preparation, packing, and holding conditions that could lead to unsafe food; detect contamination of food; and control contaminated food. However, Counsel also advised that FDA’s food safety authorities do not extend to the regulation of physical facility security measures. FDA’s counsel provided a similar assessment, telling us that, to the extent that food safety and security overlap, FDA might be able to require the industry to take precautionary steps to improve security but observed that there is little overlap between safety and security. One area where safety and security do overlap is in the handling of hazardous materials. FDA’s existing safety regulations specify that hazardous chemicals should be stored so that they cannot contaminate food products. This requirement overlaps with FDA’s food security guidelines advising that hazardous chemicals be stored in a secure area and that access to them be limited. USDA, on the other hand, has a somewhat more expansive view of the extent to which its statutory authority allows it to require food processors to adopt certain security measures. USDA’s general counsel concluded that to the extent that security precautions pertain to activities closely related to sanitary conditions in the food preparation process, FSIS has the authority to require food processors to implement certain security measures. The general counsel concluded that FSIS could require facilities to develop and maintain a food security management plan concerning their response to an actual threat involving product tampering, since this is directly related to food adulteration. Such a plan could be added to a current HACCP plan or it could be entirely separate. USDA also believes that FSIS has authority to mandate its “inside security” guidelines, such as controlling or restricting access to certain areas, monitoring the operation of equipment to prevent tampering, and keeping accurate inventories of restricted ingredients and hazardous chemicals. Similarly, USDA believes that many of its security measures that address shipping and receiving food products or protecting water and ice used in processing products also could be made mandatory. These measures include putting tamper-proof seals on incoming and outgoing shipments and controlling access to water lines and ice storage. On the other hand, USDA believes that the “outside security” measures included in its guidelines, such as securing plant boundaries and providing guards, alarms, and outside lighting, have little to do with sanitation in the facility or the immediate food-processing environment and, therefore, could not be made mandatory under existing authorities. With respect to the guidelines’ personnel security measures, USDA noted that FSIS has limited authority over personnel matters at food-processing facilities and could not require facilities to perform personnel background checks before hiring. In response to the nation’s growing concerns regarding the potential for deliberate contamination of the food supply, FDA and USDA issued guidelines to the food-processing industry suggesting measures to enhance security at their facilities. Among other things, the guidelines suggests conducting a risk assessment, developing a plan to address security risks at plants, and adopting a wide range of security measures inside and outside the premises. Food-processing facilities are not required to adopt any of the security measures but are encouraged to adopt those that they feel are best suited for their operations. Although both agencies have alerted their field inspection personnel to be vigilant about security issues, they have also told the inspectors that they are not authorized to enforce these measures and have instructed them not to document their observations regarding security because of the possible release of this information under the Freedom of Information Act and the potential for the misuse of this information. As a result, FDA and USDA currently do not know the extent to which food security measures are being implemented at food-processing facilities. In contrast, the Congress directed medium-size and large-size community water systems, which are privately or publicly owned, to assess their vulnerability to terrorist attacks and to develop an emergency response plan to prepare for such an event. The act also authorized funding to be used for basic security enhancements, such as the installation of fencing, gating, lighting, or security cameras. This approach enables the Environmental Protection Agency (EPA) to monitor the water industry’s security efforts and could be a possible model for the food safety agencies. In 2002, FDA and FSIS each issued voluntary security guidelines to the food-processing industry to help federal- and state-inspected plants identify ways to enhance their security. The agencies encouraged food processors, among others, to review their current operations and adopt those security measures suggested in the guidelines that they believed would be best suited for their facilities. Officials from both FDA and FSIS told us that there was little or no coordination between the two agencies in developing these guidelines. The FDA guidance contains over 100 recommended security measures covering seven areas of plant operation, such as managing food security, physical (outside) security, and computer security. FSIS’s guidelines contain 68 security measures and cover seven areas of plant operation. Figure 1 summarizes key aspects of both agencies’ voluntary security guidelines for industry. FDA and FSIS have made the guidelines available on the Internet. These guidelines are very similar—one difference is that FSIS’s contain security measures for slaughter facilities. Some state governments have also acted to protect food products from deliberate contamination. We learned from 11 state auditing offices that food safety regulatory officials from most of these states are providing industry or state inspectors with guidelines, either in the form of the FDA and FSIS guidelines or guidelines developed by the state officials themselves. In addition, three states have enacted new legislation or regulations addressing the security of food products. Although FDA and FSIS do not assess the extent to which food processors are implementing security measures, the agencies have asked their field inspection personnel to be on heightened alert and to discuss, but not interpret, the security guidance with facility officials during their routine food safety inspections. However, both FDA and USDA have instructed their field inspection personnel to refrain from enforcing any aspects of the security guidelines because the agencies generally believe that they lack such authority. They have also instructed their field personnel not to document plants’ security measures because they are concerned that such information would be subject to Freedom of Information Act requests. More specifically, FDA’s instructions to its field personnel specify that they should neither perform a comprehensive food security audit of the establishment nor conduct extensive interviews to determine the extent to which preventive measures suggested in the guidelines have been adopted. The goals, according to FDA, are to heighten industry’s awareness of food security practices, facilitate an exchange of information between FDA and industry on the subject of food security, and encourage plant management to voluntarily implement those preventive measures that they believe are most appropriate for their operation. In short, FDA inspectors are encouraged to discuss food security concerns with plant management and to provide them with copies of the guidelines. Although the exact details of such discussions are not to be recorded, inspectors are required to document in their inspection reports that such discussions took place and that they gave a copy of the guidelines to facility management. Similarly, FSIS has informed its field inspectors that they have no regulatory duties regarding the enforcement of the guidelines. Initially, the agency instructed its inspectors to refer any questions from facility managers to USDA’s Technical Service Center in Omaha, Nebraska. Recently the agency modified its position regarding direct discussions of food security and now allows inspectors to discuss, but not interpret, security with facility management. Inspectors are still instructed not to document these conversations or enforce the adoption of any security measure. Officials from both agencies expressed concerns about gathering security information from facilities because it could be subject to public disclosure through Freedom of Information Act requests. If terrorists gained access to this information, it could give them a road map to target the most vulnerable areas in a food-processing plant. Recent congressional efforts to better protect the nation’s drinking water from terrorist acts may offer a model for FDA and USDA to help monitor security measures adopted at food-processing facilities as well as to identify any security gaps that may exist at these facilities. Although there are differences in how the government regulates drinking water and food, food and water are essential daily consumption elements, and both are regulated to ensure their safety. In June 2002, the Congress enacted the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which, among other things, amended the Safe Drinking Water Act. The Bioterrorism Act requires medium-size and large-size community water systems (those serving over 3,300 people), which are privately and publicly owned, to certify to EPA that they have assessed their vulnerability to a terrorist attack and developed emergency plans to prepare for and respond to such an attack. These water systems serve 91 percent of the United States’ population. Each community’s water system is required to conduct a vulnerability assessment and submit a copy of the assessment to EPA. The act specifies that the vulnerability assessment is exempt from disclosure under the Freedom of Information Act, except for the identity of the community water system and the date on which it certifies compliance. Community water systems are also required to prepare an emergency response plan that incorporates the results of their vulnerability assessments. In addition, the act authorizes funding for financial assistance to community water systems to support the purchasing of security equipment, such as fencing, gating, lighting, or security cameras. FDA and FSIS lack comprehensive information on the extent to which food-processing companies are adopting security measures. However, officials from the majority of the food trade associations that we contacted believe that their members are implementing a range of measures to enhance security at their facilities. We found that the five food-processing facilities we visited in various geographic regions around the country are also implementing an array of security measures that range from developing risk assessment plans to hiring security contractors. Furthermore, our survey of FDA and FSIS inspectors indicates that, generally, food-processing facilities are implementing a range of security measures. The survey responses indicate, however, that the inspectors were more aware of those security measures that were the most visible to them during the course of their regular food safety inspections. According to trade association officials, food processors are voluntarily taking steps to prevent the deliberate contamination of their products, including adopting many of the measures suggested by FDA and FSIS, such as installing fences, requiring that employees wear identification, and restricting access to certain plant areas. Association officials told us that most large food-processing facilities already have ample security plans that include many of the recommendations made by FDA and FSIS. One trade association recently conducted a survey of its members and asked for their opinions about FSIS’s Guidelines. Most of the respondents indicated that they were aware of the guidelines; they believed the guidelines were for the most part practical and workable; and they used them in their security plans. However, these officials were unable to provide data on the extent to which the food-processing industry is implementing security measures to prevent or mitigate the potential deliberate contamination of food products. Trade association officials also said that they provided FDA and FSIS with comments on the voluntary guidelines and, in some cases, have also issued their own food security guidelines to their members. Although the officials generally believe that the agencies’ guidelines are reasonable, they do not want the government to regulate food security. They also feel that some companies, especially small facilities with limited resources, are unable to implement all the measures in the guidelines. Therefore, these officials believe it is important for the guidelines to remain voluntary. The industry is involved in improving food security in other ways as well. For example, the food industry associations formed the Alliance for Food Security to facilitate the exchange of information about food security issues. The Alliance is composed of trade associations representing the food chain, from commodity production through processing, packaging, distribution, and retail sale, as well as government agencies responsible for food and water safety, public health, and law enforcement. Similarly, led by the Food Marketing Institute, the food industry and FBI established the Information Sharing and Analysis Center (ISAC), which serves as a contact point for gathering, analyzing, and disseminating information among companies and the multiagency National Infrastructure Protection Center based at FBI headquarters. Through ISAC, FBI officials have notified food manufacturers of warnings and threats that the Center deems to be credible. ISAC also provides a voluntary mechanism for reporting suspicious activity in a confidential manner and for developing solutions. We visited five food-processing facilities, including a slaughter plant and facilities that produce beverages and ready-to-eat products. Although these facilities are not in any way representative of all food-processing plants nationwide, they provide some information about the types of security measures that some facilities are implementing. All five facilities had conducted risk analyses and, on the basis of the results, had implemented a number of security measures similar to those suggested in the FDA and FSIS guidelines. For example, all five facilities limited access to the facility through such means as requiring visitors to enter through a guard shack and to provide identification. In addition, employees at three of the facilities could enter the facility only by using magnetic cards. However, managers at the five facilities offered differing opinions about personnel security. Although all of the facilities we visited performed background checks on their employees that included verification of social security numbers, only some verified prior work experience, criminal history, and level of education. One company also required that its contractors, such as construction companies working in the facility, perform employment, education, and criminal checks of their own employees. The facilities also used different protocols for employee access to different areas within the plant. For example, at four of the facilities, employees were limited to those areas of the plant in which they worked. While the managers at these facilities generally complimented FDA’s and USDA’s security guidelines, they said that they do not want the agencies to regulate security. Rather, they believe that the agencies should develop a nonprescriptive framework or strategy for industry and then leave them to decide how to meet their individual requirements. One manager believes that food security responsibilities should be moved to the Department of Homeland Security. Finally, our discussions with trade association officials and food- processing industry officials revealed that the industry is very concerned about sharing security information with federal agencies because of the possibility that it could provide a road map for terrorist groups if it were released under the Freedom of Information Act. Although the act exempts from public release certain national security, trade secret, and commercial or financial information, industry officials are generally skeptical about the government’s ability to prevent the release of sensitive security information at food-processing facilities. FBI officials told us that they have cited these exemptions when assuring ISAC members that security information shared with them will be protected from public release. These officials explained that the courts have generally ruled that the commercial information exemption protects those who voluntarily provide the government with information if the information is of a kind that the provider would not ordinarily release to the public. However, the FBI officials we interviewed believe that the government should find some way of assuring industry that sensitive security information is protected from public release. FDA and FSIS survey respondents observed a range of security measures being implemented at food-processing facilities, although both FDA and FSIS respondents were able to provide more information about those security measures that were most visible during the course of their normal inspection duties. Figure 2 shows selected categories of security measures recommended in the FDA and FSIS security guidelines that were most visible to inspectors. The majority of the FDA survey respondents said they were able to observe security measures, such as fencing around the plants’ perimeter, limiting access to restricted areas, securing hazardous materials, and providing adequate interior and exterior lighting. Likewise, most of FSIS’s circuit supervisors were able to observe outside security measures including alarmed emergency exits, plant perimeter protection, positive employee identification, and the inspection of incoming and outgoing vehicles. Survey respondents provided fewer observations regarding other types of security measures included in the FDA and FSIS guidelines—in some instances because these measures were less visible to them. For example, FDA respondents were less able to comment on whether they noticed or knew of the presence of security measures designed to account for missing stock or for other finished product irregularities. (See fig. 3.) Similarly, FSIS respondents were less unable to comment on the extent to which facilities were performing background checks on new employees or implementing proper mail-handling practices. More than half of FSIS’s survey respondents stated that large plants— those with at least 500 employees—had implemented a range of security measures, including the areas of outside security, storage, slaughter and processing, and personnel security. Fewer of these respondents observed these security measures at smaller plants. Some FDA and FSIS respondents provided additional comments that the very small firms typically lack the financial resources to implement many of the security measures suggested in the government guidelines. Similarly, some respondents commented that many of the security measures might not be necessary at smaller establishments. Additionally, most of the FDA respondents reported that they had not received training on food security; while nearly all of the FSIS respondents reported that they had recently received such training. Some of the FSIS respondents further stated that although they had received food security training, further training was greatly needed in the field. Such training would be beneficial because field personnel are encouraged to discuss security measures with managers at the facilities they inspect. Finally, responses to our survey showed that FDA and FSIS respondents have different levels of “satisfaction” with or “confidence” in the efforts of the processing facilities they inspect to ensure the protection of food from acts of deliberate contamination. While nearly half of the FSIS respondents said they were somewhat or very confident of the efforts made by the food processors they inspect, slightly over one-fourth of the FDA respondents were satisfied or very satisfied with the efforts made by the food processors they inspect. Thirty-seven food regulatory officials interviewed by state auditors in 11 states provided opinions on their overall level of satisfaction with federal, state, and industry efforts to protect food from intentional contamination. Table 1 shows that nearly half of the state regulatory officials interviewed expressed satisfaction with the efforts made by federal, state, and industry to safeguard food products—though these results cannot be generalized to all state regulatory officials. Finally, most of the state officials interviewed by state auditors believed it was either “important” or “very important” for states to monitor whether companies have adopted security measures to prevent acts of deliberate contamination; 3 of the 11 states are already requiring their inspectors to do so. The vulnerability of the food supply to potential acts of deliberate contamination is a national concern. The President addressed this concern in the October 8, 2001, executive order establishing the Office of Homeland Security and adding the agriculture and food industries to the list of critical infrastructure systems needing protection from terrorist attack. The National Academies have also concluded in a recently released report that infectious agents and toxic chemicals could be used by terrorists to contaminate food-processing facilities. Among other things, the report says that FDA should act promptly to extend its Hazard Analysis and Critical Control Point methodology so it might be used to deal effectively with deliberate contamination of the food supply. The Centers for Disease Control and Prevention also reported recently on the need to better protect our nation’s food and water supplies. These assessments underscore the need to enhance security at food- processing facilities. Although FDA and FSIS recognize that need and have taken action to encourage food processors to voluntarily adopt security measures, these actions may be insufficient. Because the agencies believe that they generally lack authority to mandate security measures and are concerned that such information would be subject to Freedom of Information Act requests, they do not collect information on industry’s voluntary implementation of security measures. The agencies are, therefore, unable to determine the extent to which food processors have voluntarily implemented such measures. Both FDA and USDA have completed risk assessments. However, without the ability to require food- processing facilities to provide information on their security measures, these federal agencies cannot fully assess industry’s efforts to prevent or reduce the vulnerability of the nation’s food supply to deliberate contamination. Similarly, they cannot advise processors on needed security enhancements. Furthermore, lacking baseline information on the facilities’ security condition, the agencies would be unprepared to advise food-processing facilities on any additional actions needed if the federal government were to go to a higher threat alert. Finally, the lack of security training for FDA food inspectors on the voluntary security guidelines issued for food processors and the limited number of FSIS inspectors that have so far received training on the voluntary security guidelines hamper the inspectors’ ability to conduct informed discussions regarding security measures with facility personnel as they are currently instructed to do. In order to reduce the risk of deliberate contamination of food products, we are recommending that the Secretary of Health and Human Services and the Secretary of Agriculture study their agencies’ existing statutes and identify what additional authorities they may need relating to security measures at food-processing facilities. On the basis of the results of these studies, the agencies should seek additional authority from the Congress, as needed. To increase field inspectors’ knowledge and understanding of food security issues and facilitate their discussions about the voluntary security guidelines with plant personnel, we are also recommending that the Secretary of Health and Human Services and the Secretary of Agriculture provide training for their agencies’ field staff on the security measures discussed in the voluntary guidelines. We provided FDA and USDA with a draft of this report for their review and comment. We received written and clarifying oral comments from each agency. The agencies also provided technical comments, which we incorporated into the report as appropriate. FDA agreed with our recommendation that it provide all food inspection personnel with training on security measures. Subsequently, FDA officials told us that the agency did not have an opinion on our recommendation that it study what additional authorities it may need relating to security measures at food- processing facilities. In its written comments, FDA stated that the report is factual and describes accurately the events and actions that FDA has taken on food security. FDA also commented that one of the goals of its voluntary guidance to industry is to heighten awareness of food security practices and that the role of its investigators is first and foremost food safety. FDA also said that it does not have sufficient security expertise to provide industry with consultation in this area. FDA further commented that although HACCP and other preventive controls are appropriate measures to enhance food safety, HACCP does not afford similar advantages for addressing deliberate contamination, tampering, and/or terrorist actions related to the food supply. Our report underscores that the role of FDA’s investigators is primarily one of food safety. Nevertheless, we believe that it is also crucial for cognizant agencies to have information about industry’s security efforts so that they can assess the extent to which the risk of deliberate contamination is being mitigated. We also believe that possessing such information is important if it becomes necessary to advise food processors on needed security enhancements. With regard to HACCP, our report does not take a position on the feasibility of using HACCP as a means to control deliberate contamination; instead, we report on the opinion of the National Academies. FDA’s comments are presented in appendix V. In its written comments, USDA agreed with the contents of our report. Subsequently, USDA’s food safety officials confirmed that the agency also agrees with the report’s recommendations. In its letter, USDA commented that it has already conducted a comprehensive risk assessment of the food supply without plant security information and that knowing whether a plant employed one or several security measures was not needed to assess the risk. Our report acknowledges that USDA has conducted a comprehensive risk assessment, but we believe that it is crucial for cognizant agencies to have information about industry’s security efforts so that they can assess the extent to which the risk of deliberate contamination is being mitigated. USDA’s comments are presented in appendix IV. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Agriculture and Health and Human Services; the Director of the Federal Bureau of Investigation; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact Maria Cristina Gobin or me at (202) 512-3841. Key contributors to this report are listed in appendix VI. To determine the extent to which the current federal food safety statutes can be effectively used to regulate security at food-processing facilities, we analyzed the Food and Drug Administration’s (FDA) and the U.S. Department of Agriculture’s (USDA) existing statutory authorities. We discussed these authorities with FDA and USDA counsel and requested a legal opinion to determine the extent to which each agency believes its existing authorities allow it to regulate food security. We then independently reviewed these authorities to draw our own conclusions. To describe the actions that FDA and USDA have taken to help food processors prevent or reduce the risk of deliberate food contamination, we met with staff from FDA and FSIS to review the voluntary guidelines issued by each agency. To better understand the provisions of the guidelines, we met with agency program staff responsible for issuing the guidelines and for receiving industry comments on it. To learn how the guidelines would be implemented, we met with FDA and USDA’s Food Safety and Inspection Service (FSIS) officials responsible for field operations and with staff from field offices in Atlanta, Georgia, and Beltsville, Maryland. Finally, to gather additional information about the vulnerability of the food supply to acts of deliberate contamination, we contacted nine experts from academia, including experts in food safety and in bioterrorism. To describe how the government is determining the extent to which food- processing companies are implementing security procedures, we asked FDA and FSIS program officials about the nature of the information they are collecting about industry security measures. We also conducted surveys of agency field personnel to obtain their observations about and knowledge of food security measures taken at facilities they regularly inspect for food safety. Our FDA survey, which was Web-based, was administered to all 150 field investigators who recorded 465 or more hours for domestic food inspection from June 1, 2001 to May 31, 2002. Our survey of FSIS staff was a telephone survey of a randomly selected stratified sample of 50 circuit supervisors. Our response rate for these surveys was higher than 85 percent for FDA and 90 percent for FSIS, and respondents included participants from all the agencies’ geographic regions. Before administering the surveys, we discussed with and obtained input from FDA and FSIS program officials. We also pretested the surveys at field locations to ensure that our questions were valid, clear, and precise and that responding to the survey did not place an undue burden on the respondents. In addition, we contacted state audit offices in all 50 states to collect information about state government actions designed to prevent the deliberate contamination of food products. Of the 50 state audit offices we contacted, only 11 agreed to help us collect this information: Arizona, Florida, Maryland, Michigan, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Tennessee, and Texas. To determine the extent to which the food-processing industry is implementing security measures to better protect its products against deliberate contamination, we contacted officials from 13 trade associations representing, among others, the meat and poultry, dairy, egg, and fruits and vegetables industries and the food-processing industry. We discussed the guidelines that their organizations have issued, and they described what actions their constituents are taking to protect their products. We also visited five food-processing facilities in various geographic regions to ask corporate and plant officials about the actions they have taken to protect their products and facilities against intentional contamination. These facilities included a slaughter plant as well as facilities that produce beverages and ready-to-eat products. We recognize that the efforts of these five facilities are not necessarily representative of the whole food-processing industry. To identify the concerns that the industry has about sharing sensitive information with federal agencies, we spoke with industry representatives as well as officials from the Federal Bureau of Investigation’s National Infrastructure Protection Center. We conducted our review from February through December 2002 in accordance with generally accepted government auditing standards. In addition to those named above, John Johnson, John Nicholson, Jr., Stuart Ryba, and Margaret Skiba made key contributions to this report. Nancy Crothers, Doreen S. Feldman, Oliver Easterwood, Evan Gilman, and Ronald La Due Lake also made important contributions.","The events of September 11, 2001, have placed added emphasis on ensuring the security of the nation's food supply. GAO examined (1) whether FDA and USDA have sufficient authority under current statutes to require that food processors adopt security measures, (2) what security guidelines FDA and USDA have provided to industry, and (3) what security measures food processors have adopted. Federal food safety statutes give the Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA) broad authority to regulate the safety of the U.S. food supply but do not specifically authorize them to impose security requirements at food-processing facilities. However, these agencies' food safety statutes can be interpreted to provide authority to impose certain security measures. FDA believes that its statutes authorize it to regulate food security to the extent that food security and safety overlap but observes that there is little overlap between security and safety. USDA believes that it could require food processors to adopt certain security measures that are closely related to sanitary conditions inside the facility. USDA also believes that the statutes, however, cannot be interpreted to authorize the regulation of security measures that are not associated with the immediate food-processing environment, such as requiring fences, alarms, and outside lighting. Neither agency believes that it has the authority to regulate all aspects of security at food-processing facilities. Both FDA and USDA issued voluntary security guidelines to help food processors identify measures to prevent or mitigate the risk of deliberate contamination. Because these guidelines are voluntary, neither agency enforces, monitors, or documents their implementation. Both FDA and USDA have asked their inspectors to be vigilant and to discuss security with managers at food-processing facilities, but the agencies have stressed that inspectors should not enforce the implementation of security measures or document any observations because of the possible release of this information under the Freedom of Information Act and the potential for the misuse of this information. Since FDA and USDA do not monitor and document food processors' implementation of security guidelines, the extent of the industry's adoption of security measures is unknown. According to officials of trade associations and the five facilities we visited, however, food processors are implementing a range of security measures. In addition, the FDA and USDA field inspectors we surveyed indicated that most facilities have implemented some security measures, such as installing fences. However, the inspectors were less able to comment on security measures that were not as obvious, such as accounting for missing stock and implementing proper mail-handling practices. The inspectors also noted that while USDA has provided some of its field supervisory personnel with security training on the voluntary security guidelines it issued, it has not provided most of its inspectors with such training. FDA has not provided its staff with any training on the security guidelines. Without training on the security guidelines, inspectors are limited in their ability to conduct informed discussions regarding security with managers at food-processing facilities.",govreport
"The largest of the interagency contracting vehicles is the MAS program (also known as the Federal Supply Schedule or the schedules program). GSA directs and manages the MAS program. MACs and GWACs are also interagency contracts. Government buyers usually pay a fee for using other agencies’ GWACs, MACs, and schedule contracts. These fees are usually a percentage of the value of the procurement, which are paid to the sponsoring agency and are expected to cover the costs of administering the contract. Along with using interagency contracts to leverage their buying power, a number of large departments—DOD and DHS in particular—are turning to enterprisewide contracts as well to acquire goods and services. Enterprisewide contracts are similar to interagency contracts in that they can leverage the purchasing power of the federal agency but generally do not allow purchases from the contract outside of the original acquiring activity. Enterprisewide contracting programs can be used to reduce contracting administrative overhead, provide information on agency spending, support strategic sourcing initiatives, and avoid the fees charged for using interagency contracts. All of these contracts are indefinite delivery/indefinite quantity (ID/IQ) contracts. ID/IQ contracts are established to buy goods and services when the exact times and exact quantities of future deliveries are not known at the time of award. Once the times and quantities are known, agencies place task and delivery orders against the contracts for goods and services. In fiscal year 2008, federal agencies spent at least $60 billion through GWACs, MACs, the MAS program, and enterprisewide contracts to buy goods and services to support their operations: about $46.8 billion was spent on the MAS program; about $5.3 billion was spent on GWACs; at least $2.5 billion was spent on MACs although the actual amount could be much higher; and at least $4.8 billion was spent on the three enterprisewide contracts we reviewed, although, like MACs, the actual amount spent on all enterprisewide contracts could be higher. Sales under the MAS program have been relatively flat in recent years, and obligations under GWACs have declined slightly in recent years. However, the total amount of money spent in fiscal year 2008 using the three enterprisewide contracting programs included in our review is approaching the amount spent for GWACs during the same period. In addition, as OMB recently reported, numerous agencies are planning to increase their use of enterprisewide contracts as a means of addressing the administration’s goal of reducing the amount agencies spend on contracting by 7 percent through fiscal year 2011. Nevertheless, GSA’s MAS program is still the primary governmentwide buying program aimed at helping the federal government leverage its significant buying power when buying commercial goods and services. As the largest interagency contracting program, the MAS program provides advantages to both federal agencies and vendors. Agencies, using the simplified methods of procurement of the schedules, can avoid the time, expenditures, and administrative costs of other methods. And vendors receive wider exposure for their commercial products and expend less effort in selling these products. Interagency and enterprisewide contracts should provide an advantage to government agencies when buying billions of dollars worth of goods and services, yet OMB and agencies lack reliable and comprehensive data to effectively leverage, manage, and oversee these contracts. More specifically, The total number of MACs and enterprisewide contracts currently approved and in use by agencies is unknown because the federal government’s official procurement database is not sufficient or reliable for identifying these contracts, Departments and agencies cite a variety of reasons to establish, justify, and use their own MACs and enterprisewide contracts rather than use other established interagency contracts—reasons that include avoiding fees paid for the use of other agencies’ contracts, gaining more control over procurements made by organizational components, and allowing for the use of cost reimbursement contracts, Concerns remain about contract duplication—vendors and agency officials expressed concerns about duplication of effort among these contracts, and in our review we found many of the same vendors provided similar products and services on many different contract vehicles. This could be resulting in duplication of products and services being offered, increased costs to both the vendor and the government, and missed opportunities to leverage the government’s buying power, Limited governmentwide policy is in place for establishing and overseeing MACs and enterprisewide contracts. Recent legislation and OFPP initiatives are expected to strengthen oversight and management of MACs, but no similar initiatives are underway to strengthen oversight of enterprisewide contracts. In April 2010, we made five recommendations to OMB to improve data, strengthen policy, and better coordinate agencies’ awards of MACs and enterprisewide contracts, and OMB concurred with all of our recommendations. Prior attempts by the acquisition community to identify interagency and enterprisewide contracts have not resulted in a reliable database useful for identifying or providing governmentwide oversight on those contracts. In 2006, OFPP started the Interagency Contracting Data Collection Initiative to identify and list the available GWACs, MACs, and enterprisewide contracts. However, the initiative was a one-time effort and has not been updated since. In conducting our review, we were not able to identify the universe of MACs and enterprisewide contracts because the data available in the official government contracting data system, the Federal Procurement Data System-Next Generation (FPDS-NG), were insufficient and unreliable. For instance, FPDS-NG includes a data field that is intended to identify GWACs but we found a number of instances where known GWACs were coded incorrectly. We also searched the system by contract number for MACs that we were aware of and found similar issues, with some contracts coded properly as MACs and some not. Despite its critical role, we have consistently reported on problems with FPDS-NG data quality over a number of years. Most of the senior procurement executives, acquisition officials, and vendors we spoke with as part of our review believed a publicly available source of information on these contracts is necessary. For example, senior procurement executives from DHS and DOD stressed the usefulness of a governmentwide clearinghouse of information on existing contracts. Agency officials we spoke with said that if agencies could easily find an existing contract, which they cannot do, they would avoid unnecessary administrative time to enter into a new contract, which they said could be significant. The report of the Acquisition Advisory Panel—often referred to as the SARA panel— previously noted some of these concerns, stating that too many choices without information related to the performance and management of these contracts make the cost-benefit analysis and market research needed to select an appropriate acquisition vehicle impossible. To improve the transparency of and data available on these contracts, we made three recommendations to OFPP: 1. Survey departments and agencies to update its 2006 data collection initiative to identify the universe of MACs and enterprisewide contracts in use and assess their utility for maximizing procurement resources across agencies. 2. Ensure that departments and agencies use the survey data to accurately record these contracts in FPDS-NG. 3. Assess the feasibility of establishing and maintaining a centralized database to provide sufficient information on GWACs, MACs, and enterprisewide contracts for contracting officers to use to conduct market research and make informed decisions on the availability of using existing contracts to meet agencies’ requirements. Agencies cited several reasons for establishing their own MACs and enterprisewide contracts including cost avoidance through lower prices, fewer fees compared to other vehicles, mission specific requirements, and better control over the management of contracts. For example: The Army cited several reasons for establishing their MACs for information technology hardware and services in 2005 and 2006. The Army wanted to standardize its information technology contracts so each contract would include the required Army and DOD security parameters. According to the Army, GSA contracts do not automatically include these security requirements and using a GSA contract would require adding these terms to every order. The Army also cited timeliness concerns with GSA contracts and GSA fees as reasons for establishing their own contracting vehicles. In 2005, DHS established the EAGLE and FirstSource contracting programs. Both involve enterprisewide contracts used for information technology products and services. Officials stated the main reason these programs were established was to avoid the fees associated with using other contract vehicles and save money through volume pricing. In addition, the programs centralized procurements for a wide array of mission needs among DHS’ many agencies. Furthermore, DHS officials stated they wanted to be able to coordinate the people managing the contracts, which did not happen when using GSA contracts. We found the same vendors on many different contract vehicles providing information technology goods or services, which may be resulting in duplication of goods and services being offered. Table 1 below shows that the top 10 GWAC vendors, based on sales to the government, offer their goods and services on a variety of government contracts that all provide information technology goods and services. For example, of the 13 different contract vehicles listed in Table 1, 5 of the 10 vendors were on 10 or more of these. Vendors and agency officials we met with expressed concerns about duplication of effort among the MACs, GWACs, and enterprisewide contracts across government. A number of vendors we spoke with told us they offer similar products and services on multiple contract vehicles and that the effort required to be on multiple contracts results in extra costs to the vendor, which they pass to the government through the prices they offer. The vendors stated that the additional cost of being on multiple contract vehicles ranged from $10,000 to $1,000,000 due to increased bid and proposal and administrative costs. Interestingly, we found one vendor offering the exact same goods and services on both their GSA schedule and the NASA’s GWAC and offering lower prices on the GWAC. Another vendor stated that getting on multiple contract vehicles can be cost-prohibitive for small businesses and forces them to not bid on a proposal or to collaborate with a larger business in order to be on a contract vehicle. Government procurement officials expressed additional concerns. For example, an official from OFPP has stated that such duplication of effort only complicates the problem of an already strained acquisition workforce. The GSA Federal Acquisition Service Deputy Commissioner stated that while the agencies cite GSA fees as a reason for creating their own vehicles, agencies fail to consider the duplication of effort and cost of doing these procurements. Federal agencies operate with limited governmentwide policy that addresses the establishment and use of MACs and enterprisewide contracts. Federal regulations generally provide that an agency should consider existing contracts to determine if they might meet its needs. The six federal agencies and the three military departments we reviewed have policies that require approval and review for acquisition planning involving large dollar amount contracts which would generally include the establishment of MACs and enterprisewide contracts. The review process varies from agency to agency. For example, an official from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics told us that any new DOD contract estimated at over $100 million would be required to go through a review process to ensure that no other contract exists that could fulfill the new requirement. As another example, DHS requires that the senior procurement executive approve the establishment of each enterprisewide contract. In contrast, GWAC creation and management have governmentwide oversight, as OFPP exercises statutory approval authority regarding establishment of a GWAC. The senior procurement executives we spoke with had mixed views on the proper role of OFPP in providing clarification and oversight to agencies establishing their own contract vehicles. For example, Army senior acquisition officials representing the senior procurement official told us that the policy on interagency contracting is not cohesive. In their view, OFPP should provide policy and guidance that agencies would be required to follow. In contrast, the Senior Procurement Executive for the Department of the Navy pointed to agency-specific circumstances or requirements that create uncertainty about the utility of broad OFPP guidance. Furthermore, agencies have issued guidance encouraging the use of enterprisewide contracts rather than using interagency contracts. For example, DOD guidance advises that contracting officers consider the use of internal DOD contract vehicles to satisfy requirements for services prior to placing an order against another agency’s contract vehicle. Moreover, OMB recently reported that 20 of the 24 largest procuring activities are planning on reducing procurement spending by using enterprise contracting to leverage their buying power, as part of the administration’s goal of reducing contract spending by 7 percent over the next 2 years. To provide a more coordinated approach in awarding MACs and enterprisewide contracts, we recommended that OFPP take steps to establish a policy and procedural framework in conjunction with agencies for establishing, approving, and reporting on new MACs and enterprisewide contracts on an ongoing basis. The framework should stress the need for a consistent approach to leveraging governmentwide buying power while allowing agencies to continue to use their statutory authorities for buying goods and services. Recent legislation and OFPP initiatives are expected to strengthen oversight and management of MACs, but these initiatives do not address enterprisewide contracts. The 2009 National Defense Authorization Act required, 1 year after its enactment, that the FAR be amended to require that any MAC entered into by an executive agency after the amendment’s effective date be supported by a business case analysis. The business case is to include an analysis of all direct and indirect costs to the federal government of awarding and administering a contract and the impact it would have on the ability of the federal government to leverage its buying power. However, the Act is silent on what steps an agency should take to examine the effect a new contract will have on the ability of the government to leverage its buying power. Additionally, the Act does not address similar requirements for enterprisewide contracts. Under the Act, the pending FAR rule relating to this legislation was required to be issued by October 15, 2009; however, the rule was still in progress as of June 11, 2010. A business case analysis approach for MACs has the potential to provide a consistent governmentwide approach to awarding MACs as was pointed out by the SARA panel. The panel noted that the OFPP review and approval process for GWACs could serve as a good business model for approving MACs. Using the GWAC process as a model, the full business case analysis as described by the SARA panel would need to include measures to track direct and indirect costs associated with operating a MAC. It would also include a discussion about the purpose and scope, and the amount and source of demand. Further, the business case would need to identify the benefit to the government along with metrics to measure this benefit. We recommended that as OFPP develops the pending FAR rule to implement the business case analysis requirement above, it ensures that departments and agencies complete a comprehensive business case analysis as described by the SARA panel, and include a requirement to address potential duplication with existing contracts, before new MACs and enterprisewide contracts are established. Our work identified a number of challenges GSA faces in effectively managing the MAS program, the federal government’s largest interagency contracting program. More specifically, GSA Lacks transactional data about its customers’ use of MAS contracts, which would provide GSA insight to facilitate more effective management of the program; Makes limited use of selected pricing tools that make it difficult for GSA to determine whether the program achieves its goal of obtaining the best prices for customers and taxpayers; Uses a decentralized management structure for the MAS program in conjunction with deficient program assessment tools, which create obstacles for effective program management. In April 2010, we made a number of recommendations to GSA to improve MAS program management and pricing, with which GSA concurred. GSA lacks data about the use of the MAS program by customer agencies that it could use to determine how well the MAS program meets its customers’ needs and to help its customers obtain the best prices in using MAS contracts. GSA officials told us that because agency customers generally bypass GSA and place their orders directly with MAS vendors, they lack data on the orders placed under MAS contracts; as a result, GSA also lacks data on the actual prices paid relative to the MAS contract prices. While GSA does have a spend analysis reporting tool through its GSA Advantage system that provides agencies with sales and statistical data on their orders, it accounts for a very small percentage of overall MAS program sales, thus restricting the amount of data available. There are two drawbacks to the lack of available transactional data on the goods and services ordered under the MAS program and the prices paid: The lack of data hinders GSA’s ability to evaluate program performance and manage the program strategically. Several GSA officials acknowledged that it is difficult for GSA to know whether the MAS program meets their customers’ needs without data on who uses MAS contracts and what they are buying. The GSA Inspector General has recommended that GSA take steps to collect these data to use in evaluating customer buying patterns and competition at the order level in order to adopt a more strategic management approach. We have made similar observations in prior reports going back several decades. The lack of data could limit the ability of GSA and its customers to achieve the best prices through the MAS program. Some GSA officials informed us that they could possibly use transactional data to negotiate better prices on MAS contracts. Several agency contracting officers we spoke with cited benefits of having additional transactional data on MAS orders to improve their negotiating position when buying goods and services, and increasing visibility over the purchases their respective agency makes. In addition, a number of the senior acquisition officials at agencies in our review said that they considered the prices on MAS contracts to be too high, and without additional data from GSA, it was difficult to see the value in the MAS program and the prices that GSA negotiates. GSA officials told us that they have initiated a process improvement initiative to collect more transactional data in the future, as they make improvements to information systems that support the MAS program. However, this initiative is currently in its early stages. We recommended that GSA take steps to collect transactional data on MAS orders and prices paid and provide this information to contract negotiators and customer agencies, potentially through the expanded use of existing electronic tools or through a pilot data collection initiative for selected schedules. GSA uses several tools and controls in the contract award and administration process to obtain and maintain best prices for its contracts. These tools include: pre-award audits of MAS contracts by the GSA Inspector General, clearance panel reviews of contract negotiation objectives, and Procurement Management Reviews. However, it applies these tools to a small number of contracts, which hinders GSA’s ability to determine whether it achieves the program’s goal of obtaining best prices. For example, the GSA Inspector General performs pre-award audits of MAS contracts, which enable contract negotiators to verify that vendor- supplied pricing information is accurate, complete, and current before contract award. These audits can also result in lower prices for MAS customers by identifying opportunities for GSA to negotiate more favorable price discounts prior to award. From fiscal year 2004 through 2008, the GSA Inspector General identified almost $4 billion in potential cost avoidance through pre-award audits. However, we found that GSA could be missing additional opportunities for cost savings on MAS contracts by not targeting for review more contracts that are eligible for audit. While GSA guidance instructs contract negotiators to request audit assistance for new contract offers and extensions as appropriate when a contract’s estimated sales exceed $25 million for the 5-year contract period, more than 250 contracts that exceeded this threshold were not selected for audit for the 2-year period of 2009 through 2011 due to resource constraints. In addition, the 145 contracts that were selected for audit represent only 2 percent of the total award dollars for all MAS contracts. GSA uses other tools to improve the quality of contract negotiations, but we found that their effectiveness was limited by incomplete implementation and a narrow scope. GSA established a prenegotiation clearance panel process to ensure the quality of GSA’s most significant contract negotiations by reviewing the contract’s negotiation objectives with an emphasis on pricing, prior to contract award for contracts that meet certain defined dollar thresholds. However, we found several instances where clearance panel reviews were not held for contracts that met these thresholds, and GSA officials said that they do not check whether contracts that met the appropriate threshold received a panel review, thus limiting the effectiveness of this tool. GSA has begun the process of updating its prenegotiation clearance panel guidance to address this issue. GSA also conducts Procurement Management Reviews to assess contracts’ compliance with statutory requirements and internal policy and guidance. However, GSA only selects a small number of contracts for review and at the time of our fieldwork did not use a risk-based selection methodology, which does not permit GSA to derive any trends based on the review findings. A subsequent update to GSA’s PMR methodology to focus on attempting to select a statistical sample of contracts for review could address this issue. We recommended that GSA, in coordination with its Inspector General, target the use of pre-award audits to cover more contracts that meet the audit threshold. In addition, we recommended that GSA fully implement the process that has been initiated to ensure that vendors who require a prenegotiation clearance panel receive a panel review. The decentralized management structure for the MAS program and shortcomings in assessment tools also create MAS program management challenges. GSA established the MAS Program Office in July 2008 to provide a structure for consistent implementation of the MAS program. The program office’s charter provides it broad responsibility for MAS program policies and strategy. Responsibility, however, for managing the operation of individual schedules resides with nine different acquisition centers under three business portfolios. None of these business portfolios or the MAS acquisition centers that award and manage MAS contracts are under the direct management of the MAS Program Office. In addition, the program office’s charter does not specifically provide it with direct oversight of the business portfolios’ and acquisition centers’ implementation of the MAS program. GSA officials and program stakeholders we spoke with had varying opinions about this management structure, with some noting that the program is still not managed in a coordinated way and that there is a lack of communication and consistency among MAS acquisition centers which impairs the consistent implementation of policies across the program and the sharing of information between business portfolios. The GSA Inspector General has expressed similar concerns, noting in a recent report that a lack of clearly defined responsibilities within the new FAS organization has harmed national oversight of the MAS program and may have affected the sharing of best practices between acquisition centers. We also found that performance measures were inconsistent across the GSA organizations that manage MAS contracts, including inconsistent emphasis on competitiveness of pricing, making it difficult to have a programwide perspective of MAS program performance. Finally, GSA’s MAS customer satisfaction survey has had a response rate of one percent or less in recent years that limits its utility as a means for evaluating program performance. We recommended that GSA clarify and strengthen the MAS Program Office’s charter and authority so that it has clear roles and responsibilities to consistently implement guidance, policies, and best practices across GSA’s acquisition centers , establish more consistent performance measures across the MAS program to include measures for pricing, and take steps to increase the MAS customer survey response rate. Billions of taxpayer dollars flow through interagency and enterprisewide contracts; however, the federal government does not have a clear and comprehensive view of who is using these contracts and if they are being used in an efficient and effective manner—one that minimizes duplication and advantages the government’s buying power by taking a more strategic approach to buying goods and services. Long-standing problems with the quality of FPDS-NG data on these contracts and the lack of consistent governmentwide policy on the creation, use, and costs of awarding and administering some of these contracts are hampering the government’s ability to realize the strategic value of using these contracts. Furthermore, departments and agencies may be unknowingly contracting for the same goods and services across a myriad of contracts—MACs, GWACs, the MAS program, and enterprisewide contracts. In addition, GSA’s shortcomings in data, program assessment tools, and use of pricing tools create oversight challenges that prevent GSA from managing the MAS program more strategically and knowing whether the MAS program provides best prices. In agreeing with our recommendations, OMB and GSA recognize the importance of addressing these problems, but until they are resolved, we believe the government will continue to miss opportunities to minimize duplication and take advantage of the government’s buying power through more efficient and more strategic contracting. Madam Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or the other members of the subcommittee may have at this time. For further information regarding this testimony, please contact John Needham at (202) 512-4841 or needhamjk1@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this product. Individuals making key contributions to this statement were James Fuquay (Assistant Director); Marie Ahearn; Lauren Heft; and Russ Reiter. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","Agencies can use several different types of contracts to leverage the government's buying power for goods and services. These include interagency contracts--where one agency uses another's contract for its own needs--such as the General Services Administration (GSA) and the Department of Veterans Affairs multiple award schedule (MAS) contracts, multiagency contracts (MAC) for a wide range of goods and services, and governmentwide acquisition contracts (GWAC) for information technology. Agencies spent at least $60 billion in fiscal year 2008 through these contracts and similar single-agency enterprisewide contracts. GAO was asked to testify on the management and oversight of interagency contracts, and how the government can ensure that interagency contracting is efficient and transparent. GAO's testimony is based on its recent report, Contracting Strategies: Data and Oversight Problems Hamper Opportunities to Leverage Value of Interagency and Enterprisewide Contracts ( GAO-10-367 , April 2010). In that report, GAO made recommendations to the Office of Management and Budget (OMB) to strengthen policy, improve data, and better coordinate agencies' awards of MACs and enterprisewide contracts, and to GSA to improve MAS program pricing and management. Both agencies concurred with GAO's recommendations. Interagency and enterprisewide contracts should provide an advantage to government agencies when buying billions of dollars worth of goods and services, yet OMB and agencies lack reliable and comprehensive data to effectively leverage, manage, and oversee these contracts. More specifically, the total number of MACs and enterprisewide contracts currently approved and in use by agencies is unknown because the federal government's official procurement database is not sufficient or reliable for identifying these contracts. Departments and agencies cite a variety of reasons to establish, justify, and use their own MACs and enterprisewide contracts rather than use other established interagency contracts--reasons that include avoiding fees paid for the use of other agencies' contracts, gaining more control over procurements made by organizational components, and allowing for the use of cost reimbursement contracts. However, concerns remain about contract duplication--under these conditions, many of the same vendors provided similar products and services on multiple contracts, which increases costs to both the vendor and the government and can result in missed opportunities to leverage the government's buying power. Furthermore, limited governmentwide policy is in place for establishing and overseeing MACs and enterprisewide contracts. Recent legislation and OMB's Office of Federal Procurement Policy initiatives are expected to strengthen oversight and management of MACs, but no initiatives are underway to strengthen approval and oversight of enterprisewide contracts. GSA faces a number of challenges in effectively managing the MAS program, the federal government's largest interagency contracting program. GSA lacks data on orders placed under MAS contracts that it could use to help determine how well the MAS program meets its customers' needs and help its customers obtain the best prices in using MAS contracts. In addition, GSA makes limited use of selected pricing tools, such as pre-award audits of MAS contracts, which make it difficult for GSA to determine whether the program achieves its goal of obtaining the best prices for customers and taxpayers. In 2008, GSA established a program office with broad responsibility for MAS program policy and strategy, but the program continues to operate under a decentralized management structure that some program stakeholders are concerned has impaired the consistent implementation of policies across the program and the sharing of information among the business portfolios. In addition, performance measures were inconsistent across the GSA organizations that manage MAS contracts, including inconsistent emphasis on pricing, making it difficult to have a programwide perspective of MAS program performance. Finally, GSA's MAS customer satisfaction survey has had a response rate of 1 percent or less in recent years that limits its utility as a means for evaluating program performance.",govreport
"Investments in IT can enrich people’s lives and improve organizational performance. During the last two decades the Internet has matured from being a means for academics and scientists to communicate with each other to a national resource where citizens can interact with their government in many ways, such as by receiving services, supplying and obtaining information, asking questions, and providing comments on proposed rules. However, while these investments have the potential to improve lives and organizations, some federally funded IT projects can—and have— become risky, costly, unproductive mistakes. We have previously testified that the federal government has spent billions of dollars on failed and troubled IT investments, such as the Office of Personnel Management’s Retirement Systems Modernization program, which was canceled in February 2011, after spending approximately $231 million on the agency’s third attempt to automate the processing of federal employee retirement claims; the tri-agency National Polar-orbiting Operational Environmental Satellite System, which was stopped in February 2010 by the White House’s Office of Science and Technology Policy after the program spent 16 years and almost $5 billion; the Department of Veterans Affairs’ Scheduling Replacement Project, which was terminated in September 2009 after spending an estimated $127 million over 9 years; and the Department of Health and Human Services’ (HHS) Healthcare.gov website and its supporting systems, which were to facilitate the establishment of a health insurance marketplace by January 2014, encountered significant cost increases, schedule slips, and delayed functionality. In a series of reports we identified numerous planning, oversight, security, and system development challenges faced by this program and made recommendations to address them. In light of these failures and other challenges, last year we introduced a new government-wide high-risk area, Improving the Management of IT Acquisitions and Operations. 18F and USDS were formed in 2014 to help address the federal government’s troubled IT efforts. Both programs have similar missions of improving public-facing federal digital services. 18F was created in March 2014 by GSA with the mission of transforming the way the federal government builds and buys digital services. Agencies across the federal government have access to 18F services. Work is largely initiated by agencies seeking assistance from 18F and then the program decides how and if it will provide assistance. According to GSA, 18F seeks to accomplish its mission by providing a team of expert designers, developers, technologists, researchers, and product specialists to help rapidly deploy tools and online services that are reusable, less costly, and easier for people and businesses to use. In addition, 18F has several guiding principles, to include the use of open source development, user-centered design, and agile software development. 18F is an office within the Technology Transformation Service within GSA that was recently formed in May 2016. 18F is led by the Deputy Commissioner for the Technology Transformation Service, who reports to the service’s Commissioner. Prior to May 2016, 18F was located within the Office of Citizen Services and Innovative Technologies and reported to the Associate Administrator for Citizen Services and Innovative Technologies. In March 2016 GSA created a new organizational structure for 18F that centers around five business units. Custom Partner Solutions. Provides agencies with custom application solutions. Products and Platforms. Provides agencies with access to tools that address common government-wide needs. Transformation Services. Aims to improve how agencies acquire and manage IT by providing them with consulting services, to include new management models, modern software development practices, and hiring processes. Acquisition Services. Provides acquisition services and solutions to support digital service delivery, including access to vendors specializing in agile software development, and request for proposal development consultation. Learn. Provides agencies with education, workshops, outreach, and communication tools on developing and managing digital services. To provide the products and services offered by each business unit, 18F relied on 173 staff to carry out its mission, as of March 2016. The staff are assigned to different projects that are managed by the business units. According to18F officials, the program used special hiring authorities for the vast majority of its staff: Schedule A excepted service authorities were used to hire 162 staff. These authorities permit the appointment of qualified personnel without the use of a competitive examination process. GSA has appointed its staff to terms that are not to exceed 2 years. According to the Director of the 18F Talent division, after the initial appointment has ended, GSA has the option of appointing staff to an additional term not to exceed 2 years. GSA funds 18F through the Acquisition Services Fund—a revolving fund, which operates on the revenue generated from its business units rather than an appropriation received from Congress. The Federal Acquisition Service is responsible for managing this fund and uses it to invest in the development of 18F products and services that will be used by other organizations. 18F is to recover costs through the Acquisition Services Fund reimbursement authority for work related to acquisitions and the Economy Act reimbursement authority for all other projects. According to the memorandum of agreement between 18F and the Federal Acquisition Service, 18F, like all programs funded by the Acquisition Services Fund, is required to have a plan to achieve full cost recovery. In order to recover its costs, 18F is to establish interagency agreements with partner agencies and charges them for actual time and material costs, as well as a fixed overhead amount. Table 1 describes 18F’s revenue, expenses, and net revenue for fiscal years 2014 and 2015. Table 2 describes 18F’s projected revenue, expenses, and net revenue for fiscal years 2016 through 2019. As shown in table 2, according to its projections, 18F plans to generate revenue that meets or exceeds operating expenses and cost of goods sold beginning in fiscal year 2019. In May 2016, the GSA Inspector General reported on an information security weakness pertaining to 18F. Specifically, according to the report, 18F misconfigured a messaging and collaboration application, which resulted in the potential exposure of personally identifiable information (PII). 18F officials told us that, based on the preliminary results of their ongoing review, information such as individual’s first names, last names, e-mail addresses, and phone numbers were made available on the messaging and collaboration platform’s databases, which are managed by that application’s vendor. Those officials also stated that based on the preliminary results of their ongoing review, more sensitive PII, such as Social Security numbers and protected health information, were not exposed. They added that they are continuing a detailed review, in coordination with the GSA IT organization, to confirm that more sensitive PII were not made available. According to the Administration, in 2013 it initiated an effort that brought together a group of digital and technology experts from the private sector that helped fix Healthcare.gov. In an effort to apply similar resources to additional projects, in August 2014 the Administration announced the launch of USDS, to be led by an Administrator and Deputy Federal CIO who reports to the Federal CIO. According to OMB, USDS’s mission is to transform the most important digital services for citizens. USDS selects which projects it will apply resources to and generally initiates its effort with agencies. To accomplish its mission, USDS aims to recruit private sector experts (e.g., IT engineers and designers) and partner them with government agencies. With the help of these experts, OMB states that USDS applies best practices in product design and engineering to improve the usefulness, user experience, and reliability of the most important public- facing federal digital services. As of November 2015, USDS staff totaled about 98 individuals. Similar to 18F, USDS assigns individuals directly to projects aimed at achieving its mission. USDS has used special hiring authorities for the vast majority of it staff. Specifically: Schedule A excepted service. According to USDS, as of November 2015, 52 USDS staff members were hired using the schedule A excepted service hiring authority. According to the USDS Administrator, appointments made using this authority are not to exceed 2 years. At the end of that period, staff can be appointed for an additional term of no more than 2 years. Intermittent consultants. According to USDS, as of November 2015, 39 USDS staff members were intermittent consultants—that is, individuals hired through a noncompetitive process to serve as consultants on an intermittent basis or without a regular tour of duty. The USDS Administrator explained that some of these staff are eventually converted to temporary appointments under the Schedule A authority. According to its Administrator, USDS does not generally make permanent appointments for its staff because it allows the program to continuously bring in new staff and ensure that its ideas are continually evolving. USDS reported spending $318,778 during fiscal year 2014 and approximately $4.7 million during fiscal year 2015. For fiscal year 2016, USDS plans to spend approximately $14 million, and the President’s fiscal year 2017 budget estimated obligations of $18 million for USDS. In an effort to make improvements to critical IT services throughout the federal government, the Presidents’ Budget for fiscal year 2016 proposed funding for the 24 Chief Financial Officers Act agencies, as well as the National Archives and Records Administration, to establish digital services teams. USDS policy calls for these agencies to, among other things, hire or designate an executive for managing their digital services teams. According to USDS policy, the digital service team leader is to report directly to the head of the agency or the deputy. Additionally, USDS has established a hiring pipeline for digital service experts—that is, a unified process managed by USDS for accepting and reviewing applications, performing initial interviews, and providing agencies with candidates for their digital service teams. According to OMB, before using this service, agencies must agree to a charter with the USDS Administrator. Over the last three decades, several laws have been enacted to assist federal agencies in managing IT investments. For example, the Paperwork Reduction Act of 1995 requires that OMB develop and oversee policies, principles, standards, and guidelines for federal agency IT functions, including periodic evaluations of major information systems. In addition, the Clinger-Cohen Act of 1996, among other things, requires agency heads to appoint CIOs and specifies many of their responsibilities. With regard to IT management, CIOs are responsible for implementing and enforcing applicable government-wide and agency IT management principles, standards, and guidelines; assuming responsibility and accountability for IT investments; and monitoring the performance of IT programs and advising the agency head whether to continue, modify, or terminate such programs. Most recently, in December 2014, IT reform legislation (commonly referred to as Federal Information Technology Acquisition Reform Act or FITARA) was enacted, which required most major executive branch agencies to ensure that the CIO had a significant role in the decision process for IT budgeting, as well as the management, governance, and oversight processes related to IT. The law also required that CIOs review and approve (1) all contracts for IT services prior to executing them and (2) the appointment of any other employee with the title of CIO, or who functions in the capacity of a CIO, for any component organization within the agency. OMB also released guidance in June 2015 that reinforces the importance of agency CIOs and describes how agencies are to implement the law. OMB plays a key role in helping federal agencies address these laws and manage their investments by working with them to better plan, justify, and determine how much they need to spend on projects and how to manage approved projects. Within OMB, the Office of E-Government and Information Technology, headed by the Federal CIO, directs the policy and strategic planning of federal IT investments and is responsible for oversight of federal technology spending. As part of our ongoing work, we determined that 18F and USDS have provided a variety of development and consulting services to agencies to support their technology efforts. Specifically, between March 2014 and August 2015, 18F staff helped 18 agencies with 32 projects and generally provided six types of services to the agencies, the majority of which related to development work. In addition, between August 2014 and August 2015, USDS provided assistance on 13 projects at 11 agencies and provided seven types of consulting services. Further, agencies were generally satisfied with the services they received from 18F and USDS. Specifically, of the 26 18F survey respondents, 23 were very satisfied or moderately satisfied and 3 were moderately dissatisfied. For USDS, all 9 survey respondents were very satisfied or moderately satisfied. Between March 2014 and August 2015, GSA’s 18F staff helped 18 agencies with 32 projects, and generally provided services relating to its five business units: Custom Partner Solutions, Products and Platforms, Transformation Services, Acquisition Services, and Learn. In addition, 18F also provided agency digital service team candidate qualification reviews in support of USDS. Custom Partner Solutions. 18F helped 11 agencies with a total of 19 projects relating to developing custom software solutions. Out of the 19 projects, 12 were related to website design and development. For example, regarding GSA’s Pulse project—a website that displays data about the extent to which federal websites are adopting best practices, such as hypertext transfer protocol over Secure Sockets Layer (SSL)/ Transport Layer Security (TLS) (HTTPS)—18F designed, developed, and delivered the first iteration of Pulse within 6 weeks of the project kick-off. According to the GSA office responsible for managing the project, the first iteration has led to positive outcomes for government-wide adoption of best practices; for example, between June 2015 and January 2016, the percentage of federal websites using https increased from 27 percent to 38 percent. As another example, officials from the Department of Education’s college choice project stated that 18F helped develop the College Scorecard website, which the public can use to search among colleges to find schools that meet their needs (e.g., degrees offered, location, size, graduation rate, average salary after graduation).44 18F also helped two agencies, HHS and the Department of Defense, on two projects to develop application programming interfaces—sets of routines, protocols, and tools for building software applications that specify how software components should interact. https://collegescorecard.ed.gov/. Acquisition Services. 18F helped seven agencies on seven projects relating to acquisition services consulting. For example, 18F provided the Department of State’s Bureau of International Information Programs with cloud computing services offered under a GSA blanket purchase agreement (BPA)—specifically, cloud management services (e.g., developers, testing and quality assurance, cloud architect) and infrastructure-as-a-service. According to the Department of State, the department was able to deploy its instance of the infrastructure service only 1 month after it executed an interagency agreement with 18F. According to Social Security Administration officials, 18F helped the agency to incorporate agile software development practices into their requests for proposals for their Disability Case Processing System. Learn. 18F provided services to four agencies on four projects regarding training, such as educating agency officials on agile software development. For example, 18F conducted training workshops on agile software development techniques with the Social Security Administration and Small Business Administration. In addition, according to the Department of Labor’s Wage and Hour Division officials, 18F conducted a 3-day workshop on IT modernization. Transformation Services. 18F assisted two agencies on two projects to help acquire the people, processes, and technology needed to successfully deliver digital services. For example, 18F assisted the Environmental Protection Agency on an agency-wide technology transformation. According to an official within the office of the CIO, 18F assisted the agency with e-Manifest—a system used to track toxic waste shipments. The official noted that 18F provided user-centered design, agile coaching, prototype development services, and agile and modular acquisition services. Further, the official stated that 18F helped turn around the project and significantly decreased the time of delivery for e-Manifest. Products and Platforms. 18F helped two agencies on two projects related to developing software solutions that can potentially be reused at other federal agencies. For example, according to GSA officials responsible for managing GSA’s Communicart project, 18F provided the agency with an e-mail-based tool for approving office supply purchases. Agency digital service team candidate qualification review. 18F worked with USDS to recruit and hire team members for agency digital service teams. According to 18F officials, it provided USDS with subject matter experts to review qualifications of candidates for agency digital service teams. Of the 32 projects, 6 are associated with major IT investments. Cumulatively, the federal government plans to spend $853 million on these investments in fiscal year 2016. Additionally, risk evaluations performed by CIOs that were obtained from the IT Dashboard showed that three of these investments were rated as low or moderately low risk and three investments were rated medium risk. Table 3 describes the associated investments, including their primary functional areas, planned fiscal year 2016 spending, and CIO rating as of May 2016. 18F is also developing products and services—including an agile delivery service blanket purchase agreement (BPA), cloud.gov, and a shared authentication platform: Agile delivery service BPA. 18F established this project in order to support its need for agile delivery services, including agile software development. In August and September 2015, GSA awarded BPAs to 17 vendors. The BPAs are for 5 years and allow GSA to place orders against them for up to 13 specific labor categories relating to agile software development (e.g., product manager, backend web developer, agile coach) at fixed unit prices. The BPAs do not obligate any funds; rather, they enable participating vendors to compete for follow-on task orders from GSA. In cases where 18F determines that it should use the agile BPA to provide services to partner agencies, GSA anticipates that 18F will work with that agency to develop a request for quotations and the other documents needed for a competition with agile BPA vendors. In March 2016 18F released its first request for quotations under the agile BPA for a task order relating to building a web-based dashboard that would describe the status of vendors in the certification process for FedRAMP—a government-wide program, managed by GSA, to provide joint authorizations and continuous security monitoring services for cloud computing services for all federal agencies. GSA anticipates that the time required to complete the process from releasing a request for quotations to task order issuance will typically take between 4 to 8 weeks. The initial BPAs were established under the first of three anticipated award pools—all of which are part of the “alpha” component of the Agile BPA project. 18F officials stated that they planned to establish BPAs for the other two pools in June 2016. They also anticipate a future beta version of the project that could potentially allow federal agencies beyond 18F to issue task orders directly to vendors. Officials stated that they expect to have a plan for the next steps of the beta version of this project by December of 2017. 18F officials have also expressed interest in creating additional marketplaces, such as those relating to data management, developer productivity tools, cybersecurity, and health IT. As of March 2016, 18F did not have time frames for when it planned to develop these additional marketplaces. Cloud.gov.18F also developed cloud.gov service, which is an open source platform-as-a-service that agencies can use to manage and deploy applications. 18F initially built cloud.gov in order to enable the group to use applications it developed for partner agencies. In creating the service, 18F decided to offer the service to other agencies because, according to 18F officials, cloud.gov offers a developer-friendly, secure platform, with tools that agencies can use to accelerate the process of assessing information security controls and authorizing systems to operate. According to 18F, the goal of cloud.gov is to provide government developers and their contractor partners the ability to easily deploy systems to a cloud infrastructure with better efficiency, effectiveness, and security than current alternatives. According to a roadmap for cloud.gov, 18F plans to receive full FedRAMP Joint Authorization Board approval for this service by August 2016. Once available, the group anticipates requiring agencies to pay for this service through an interagency agreement with 18F. Shared authentication platform. In May 2016, 18F announced that it was initiating an effort to create a platform for users who need to log into federal websites for government services. According to 18F, this system is designed to be each citizen’s “one account” with the government and allow the public to verify an identity, log into government websites, and if necessary, recover an account. As of May 2016, 18F plans to conduct prototyping activities through September 2016 and did not have plans beyond that time frame. In addition to developing future products and services, 18F created a variety of guides and standards for use internally as well by agency digital service teams. These guides address topics such as accessibility, application programming interfaces, and agile software development. From August 2014 through August 2015, USDS provided assistance on 13 projects across 11 agencies. The group generally provided seven types of consulting services: quality assurance, problem identification and recommendations, website consultation, system stabilization, information security assessment, software engineering, and data management. Quality assurance. Three of the 13 projects related to providing quality assurance services. For example, regarding the Social Security Administration’s Disability Case Processing System, USDS reviewed the quality of the software and made recommendations that, according to the agency, resulted in costs savings. Additionally, for the Departments of Veterans Affairs and Defense Service Treatment Record project, USDS provided engineers who identified and resolved errors in the process of exchanging records between the two departments, according to the Department of Veterans Affairs. Further, for the HHS Healthcare.gov system, the group performed services aimed at optimizing the reliability of the system, according to HHS. Problem identification and recommendations. USDS identified problems and made recommendations for three projects. For all three projects, it performed a discovery sprint—a quick (typically 2 week) review of an agency’s challenges, which is to culminate in a clear understanding of the problems and recommendations for how to address the issues. For example, it performed a discovery sprint for the Department of the Treasury Internal Revenue Service that focused on three areas: authentication of taxpayers, modernizing systems through event-driven architecture, and redesigning the agency’s website. USDS delivered a report to the Internal Revenue Service with recommendations and also suggested that work initially focus on taxpayer authentication. Consistent with these recommendations, the group and the agency decided to initially focus on authentication, to include re-opening of the online application GetTranscript. For the Department of Justice Federal Bureau of Investigation’s National Incident Based Reporting System, according to USDS, the program performed a discovery sprint and made several recommendations for accelerating deployment of the system. Website consultation. USDS provided consultation services for three agency website projects. For example, for the Office of the U.S. Trade Representative’s Trans-Pacific Partnership Trade Agreements website, USDS provided website design advice and confirmed that the agency had the necessary scalability to support the number of anticipated visitors. Additionally, it consulted with the Office of Personnel and Management (OPM) on the design, implementation, and development of a website for providing information on reported data breaches. System stabilization. For the Department of State’s Consular Consolidated Database, according to USDS, it helped stabilize the system and return it to operational service after a multi-week outage in June 2015. Information security assessment. USDS helped with an information security assessment regarding Electronic Questionnaires for Investigations Processing, which encompasses the electronic applications used to process federal background check investigations. Software engineering. For the Department of Homeland Security U.S. Citizenship and Immigration Services Transformation project, USDS’s software engineering advisors provided guidance on private sector best practices in delivering modern digital services. According to the department, the group’s work has supported accomplishments such as increasing the frequency of software releases and improving adoption of agile development best practices. Data management. For the Department of Homeland Security Office of Immigration Statistics, USDS helped to develop monthly reports on immigration enforcement priority statistics. According to the department, USDS supported the development of processes for obtaining data from other offices within the department and generating the monthly reports. According to the department, after 7 weeks of working with USDS, it was able to develop a proof of concept that reduced the report generating process from a month to 1 day. Seven of the 13 projects are associated with major IT investments. Cumulatively, the federal government plans to spend over $1.24 billion on these investments in fiscal year 2016. Three investments were rated by their CIOs as low or moderately low risk and four investments were rated as being medium risk. Table 4 describes the associated investments, including their primary functional areas planned fiscal year 2016 spending, and CIO rating as of May 2016. In addition to helping agencies improve IT services, USDS has developed guidance for agencies. For example, it developed the Digital Services Playbook to provide government-wide recommendations on practices for building digital services. The group also created the TechFAR Handbook to explain how agencies can use the Digital Services Playbook in ways that are consistent with the Federal Acquisition Regulation. Further, USDS, in collaboration with 18F, developed the draft version of U.S. Web Design Standards, which includes a visual style guide and a collection of common user interface components. With this guide, USDS aims to improve government website consistency and accessibility. In addition to developing guidance, USDS, in collaboration with OMB’s Office of Federal Procurement Policy, used challenge.gov to incentivize the public to create a digital service training program for federal contract professionals. The challenge winner received $250,000 to develop and pilot a training program. Additionally, the Deputy Administrator for USDS stated that 30 federal contract professionals from more than 10 agencies completed this pilot program in March 2016. According to OMB, the program is being revised and transitioned to the Federal Acquisition Institute, where it will be included as part of a certification for digital service contracting officers. In response to a satisfaction survey we administered to agency managers of selected 18F and USDS projects, a majority of managers were satisfied with the services they received from the groups. Specifically, the average score for services provided by 18F was 4.38 (on a 5-point satisfaction scale, where 1 is very dissatisfied and 5 is very satisfied) and the average score for the services provided by USDS was 4.67. Table 5 describes the survey results for 18F and USDS. In addition to providing scores, the survey respondents also provided written comments. Regarding 18F, five factors were cited by two or more respondents as contributing to their satisfaction with the services the program provided: delivering quality products and services, providing good customer service, completing tasks in a timely manner, employing staff with valuable knowledge and skills, and providing valuable education to agencies. For example, one respondent stated that 18F has an expert staff that helped the team understand agile software development and incorporate user-centered design into the agency’s development process. With respect to USDS, four factors were cited by two or more respondents as contributing to their satisfaction with its services: delivering quality services, providing good customer service, completing tasks in a timely manner, and employing staff with valuable knowledge and skills. For instance, one respondent stated that USDS responded to the agency’s request in a matter of hours, quickly developed an understanding of the agency’s IT system, and pushed to improve the system, even in areas beyond the scope of USDS’s responsibility. Although the majority of agencies were satisfied, a minority of respondents provided written comments describing their dissatisfaction with services provided by 18F. For example, six respondents cited poor customer service, four respondents cited higher than expected costs, and one respondent stated that 18F’s use of open source code may not meet the agency’s information security requirements. In a written response to these comments, 18F stated that it has received a variety of feedback from its partners and had modified and updated its processes continuously over the past 2 years. For example, with respect to higher than expected costs, 18F stated that project costs sometimes needed to be adjusted mid-project to address, among other things, higher than expected infrastructure usage or unexpected delays. To address this issue, 18F stated that it uses the assistance of subject matter experts to estimate project costs, and wrote a guide to assist with, among other things, better managing the budgets of ongoing projects. Regarding 18F’s use of open source code, it stated that it has worked with its partners to discuss the use of open source software and information security practices. To assess actual results, prioritize limited resources, and ensure that the most critical projects receive attention, entities that provide IT services, such as USDS and 18F, should establish and implement the following key practices. Define outcome-oriented goals and measure performance. Our previous work and federal law stress the importance of focusing on outcome-oriented goals and performance measures to assess the actual results, effects, or impact of a program or activity compared to its intended purpose. Goals should be used to elaborate on a program’s mission statement and should be aligned with performance measures. In turn, performance measures should be tied to program goals and demonstrate the degree to which the desired results were achieved. To do so, performance measures should have targets to help assess whether goals were achieved by comparing projected performance and actual results. Finally, goals and performance measures should be outcome-oriented—that is, they should address the results of products and services. Establish and implement procedures for prioritizing IT projects. We have reported that establishing and implementing procedures, to include criteria, for prioritizing projects can help organizations consistently select projects based on their contributions to the strategic goals of the organization. Doing so will better position agencies to effectively prioritize projects and use the best mix of limited resources to move toward its goals. In our draft report, we determined that 18F has developed several outcome-orientated goals, performance measures, and procedures for prioritizing projects, which it has largely implemented. However, not all of its goals are outcome-oriented and it has not yet measured program performance. Define Outcome-Oriented Goals and Measure Performance At the conclusion of our review in May 2016, 18F provided 5 goals and 17 associated performance measures that the organization aims to achieve by September 2016 (see table 6). To 18F’s credit, several of its goals and performance measures appear to be outcome-oriented. For example, the goal of delivering two government-wide platform services and the associated performance measures are outcome-oriented in that they address results—that is, delivering services to partner agencies. However, not all of the goals and performance measures appear to be outcome-oriented. For example, the goal of growing 18F to 215 staff while sustaining a healthy culture and its associated measure of hiring 47 staff do not focus on results of products or services. Further, not all of the performance measures have targets. For example, seven of the performance measures state that 18F will establish performance indicators, but 18F has yet to do so. Moreover, 18F does not have goals and associated measures that describe how it plans to achieve its mission after September 2016. In addition, although 18F is required to have a plan to achieve full cost recovery, it has yet to recover costs and its projections for when this will occur have slipped over time. Specifically, in June 2015, 18F projected that it would fully recover its costs for an entire fiscal year beginning in 2016; however, in May 2016, 18F provided revised projections indicating that it would recover costs beginning in fiscal year 2019. Those projections also indicated that, in the worst case, it would not do so through 2022, the final year of its projections. Establishing performance measures and targets that are tied to achieving full cost recovery would help management gauge whether the program is on track to meet its projections. However, 18F has not established such performance measures and targets. Finally, 18F has yet to fully assess the actual results of its activities. Specifically, the group has not assessed its performance in accordance with the 17 performance measures it developed. 18F’s then-parent organization assessed its own performance quarterly beginning in the 4th quarter of fiscal year 2015, including for measures that 18F was responsible for. However, this review process did not include or make reference to the 17 measures developed to gauge 18F’s performance, and thus do not provide insight into how well it is achieving its own mission. In a written response, GSA stated that 18F performance is measured as part of the Technology Transformation Service’s goals and measures and that these goals and measures should form the basis for our review. However, the Technology Transformation Service’s goals and measures do not describe how GSA aims to achieve the specific mission of 18F. Until it establishes goals and performance measures beyond September 2016, ensures that all of its goals and performance measures are outcome-oriented, and that its performance measures have targets, 18F will not have clear definition of what it wants to accomplish. Additionally, without developing performance measures and targets tied to achieving full cost recovery, GSA will lack a fully defined approach to begin recovering all costs in fiscal year 2019. Further, until 18F fully measures actual results, it will not be positioned to assess the status of its activities and determine the areas that need improvement. Establish and Implement Procedures for Prioritizing IT Projects 18F has developed procedures, including criteria, for prioritizing projects and largely implemented its procedures. Specifically, according to the Director of Business Strategy, potential projects are discussed during weekly intake meetings. As part of these meetings, 18F discusses project decision documents, which outline the business, technical and design elements, as well as the schedule, scope, and resources needed to fulfill the client’s needs. Using these documents, 18F determines whether proposed projects meet, among other things, the following criteria: (1) the project is aligned with the products and services offered by 18F, (2) it can be completed in a time frame that meets the agency’s needs and at a cost that fits the agency’s budget, and (3) the project’s government transformation potential (e.g., impact on the public, cost savings). These documents are used by the business unit leads to make a final decision about whether to accept the projects. 18F has largely implemented its procedures. To its credit, with respect to the 14 projects that 18F selected since establishing its prioritization and selection process, 18F developed a decision document for 12 of the 14 projects. However, 18F did not develop a decision document for the 2 remaining projects—the Nuclear Regulatory Commission Master Data Management project and GSA’s labs.usa.gov project. With respect to the Nuclear Regulatory Commission Master Data Management project, 18F officials explained that this project only required staff from one division; as such, that division was able to independently prioritize and select this project. Additionally, regarding the GSA labs.usa.gov project, 18F officials said the Associate Administrator for Office of Citizen Services and Innovative Technologies directed 18F to provide assistance. If 18F consistently follows its process for prioritizing projects, it will be better positioned to apply resources to IT projects with the greatest need of improvement. As part of our ongoing work, we determined that while USDS has developed a process for prioritizing projects and program goals, it has not fully implemented important program management practices. Define Outcome-Oriented Goals and Measure Performance In response to our inquiry, in November 2015 USDS developed four goals to be achieved by December 2017: (1) recruit and place over 200 digital service experts in strategic roles at agencies and cultivate a continually growing pipeline of quality technical talent through USDS, (2) measurably improve five to eight of the government’s most important services, (3) begin the implementation of at least one outstanding common platform, and (4) increase the quality and quantity of technical vendors working with government and cultivate better buyers within government. Additionally, USDS established a performance measure with a target for one of its goals. Specifically, it has a measure for its first goal as it plans to measure the extent to which it will hire 200 digital service experts by December 2017. To its credit, several of the goals appear to be outcome-oriented. For example, improving five to eight services is outcome-oriented in that it addresses results. However, USDS has not established performance measures or targets for its other goals. In addition, the program’s first goal—recruit and place over 200 digital service experts in strategic roles at agencies and cultivate a continually growing pipeline of quality technical talent through USDS—does not appear to be outcome-oriented. Further, USDS has only measured actual results for one of its goals. Specifically, for the goal of placing digital service experts at agencies, as of May 2016, USDS officials stated that they had 152 digital service experts. However, USDS has not measured actual results for the other three goals. USDS officials provided examples of how they informally measure performance for the other three goals. For example, for the goal of measurably improving five to eight of the government’s most important services, the USDS Administrator stated that approximately 1 million visitors viewed the Department of Education’s College Scorecard website in the initial days after it was deployed. However, USDS has not documented these measures or the associated results to date. Until USDS ensures that all of its goals are outcome- oriented and establishes performance measures and targets for each goal, it will be difficult to hold the program accountable for results. Additionally, without an assessment of actual results, it is unclear what impact USDS’s actions are having relative to its mission and whether investments in agency digital service teams are justified. Establish and Implement Procedures for Prioritizing Projects USDS has developed procedures and criteria for prioritizing projects. To identify projects to be considered, USDS is to use, among other sources, a June 2015 OMB report to Congress that identifies the 10 highest-priority federal IT projects in development. To prioritize projects USDS has the following three criteria, which are listed in their order of importance (1) What will do the greatest good for the greatest number of people in the greatest need? (2) How cost-efficient will the USDS investment be? and (3) What potential exists to use or reuse a technological solution across the government? Using these criteria, USDS intends to create a list of all potential projects, to include their descriptions and information on resources needs. This list is to be used by USDS leadership to make decisions about which projects to pursue. To its credit, USDS created a list of all potential, ongoing, and completed projects, which included project descriptions and resource needs. Additionally, USDS has engaged with 6 of the 10 priority IT projects identified in the June 2015 report, including the Department of Health and Human Services’ healthcare.gov project and the Department of Homeland Security’s U.S. Citizenship and Immigration Services Transformation. Additionally, according to a USDS staff member, USDS considered the remaining 4 projects and decided not to engage with them to date. However, USDS has yet to develop a quarterly report on the 10 high priority programs, which it was directed by Congress to develop. Specifically, in December 2015, Congress modified its direction for the Executive Office of the President to develop the reports regarding the top 10 high priority programs and specifically called for USDS to do so on a quarterly basis. According to a USDS staff member, a second top 10 high priority investment report has been drafted and will be finalized prior to the issuance of our report. However, the second top 10 report will address the former congressional direction for the Executive Office of the President to develop reports and OMB did not have a time frame for when USDS would begin to develop reports that address the modified congressional direction. Until USDS develops a time frame for the report on the top 10 programs, develops the report within that time frame and on a quarterly basis thereafter, and considers the programs identified in these reports as part of its prioritization process, USDS has less assurance that it will apply resources to the IT projects with the greatest need of improvement. To help agencies effectively deliver digital services, the President’s Budget for fiscal year 2016 proposed funding for digital service teams at 25 agencies—the 24 Chief Financial Officers Act agencies, as well as the National Archives and Records Administration. According to USDS policy, agencies are to, among other things, hire or designate an executive for managing their digital services teams. In addition, USDS has called for the deputy head of these agencies (or equivalent) to, among other things, agree to a charter with the USDS Administrator. After agreeing to a charter, according to USDS, agencies can use USDS’s hiring pipeline for digital service experts. Of the 25 agencies that requested funding to establish teams, OMB has established charters with 6 agencies for their digital service teams—the Departments of Defense, Health and Human Services, Homeland Security, the Treasury, State, and Veterans Affairs. The charters establish the executives for managing digital service teams and describe the reporting relationships between the team leaders and agency leadership. In addition, according to the Deputy USDS Administrator, USDS plans to establish charters with an additional 3 agencies by the end of the fiscal year—the Department of Education, the Social Security Administration, and Small Business Administration. For the remaining 16 agencies, as of April 2016, 8 agencies reported that they plan to establish digital service teams but have yet to establish charters with USDS—the Department of Housing and Urban Development, Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, National Archives and Records Administration, National Science Foundation, Nuclear Regulatory Commission, and Office of Personnel Management. The other 8 agencies reported that they do not plan to establish digital service teams by September 2016 because they did not receive requested funding—the Departments of Agriculture, Commerce, Energy, the Interior, Justice, Labor, and Transportation; and the U.S. Agency for International Development. Table 7 summarizes agency and OMB efforts to establish digital service teams. Congress has recognized the importance of having a strong agency CIO. In 1996, the Clinger-Cohen Act established the position of agency CIO and, among other things, gave these officials responsibility for IT investments, including IT acquisitions, monitoring the performance of IT programs, and advising the agency head whether to continue, modify, or terminate such programs. More recently, in December 2014, FITARA was enacted into law. It required most major executive branch agencies to ensure that the CIO has a significant role in the decision process for IT budgeting, as well as the management, governance, and oversight processes related to IT. The law also required that CIOs review and approve (1) all contracts for IT services associated with major IT investments prior to executing them and (2) the appointment of CIOs for any component within the agency. OMB also released guidance in June 2015 that reinforces the importance of agency CIOs and describes how agencies are to implement FITARA. Further, according to our prior work, leading organizations clearly define responsibilities and authorities governing the relationships between the CIO and other agency components that use IT. Only one of the four agencies we selected for review—the Department of Homeland Security—defined the relationship between the executive for managing the digital services team and the agency CIO. Specifically, the Department of Homeland Security established a charter for its digital services team, signed by both the Administrator of USDS and the Deputy Secretary, which outlines the reporting structure and authorities for the digital services executive, including the relationship with the CIO. For example, according to the charter, the digital services executive will report on a day-to-day basis to the CIO, but will also report directly to the Deputy Secretary. However, the other three agencies we reviewed—the Departments of Defense, State, and Veterans Affairs—have not defined the role of agency CIOs with regard to these teams. Although they have established charters for these teams, which describe the reporting structure between the digital services executive and senior agency leadership, the charters do not describe the role of the agencies’ CIOs and they have not documented this information elsewhere. The Department of Defense CIO and the Department of Veterans Affairs Principal Deputy Assistant Secretary for the Office of Information and Technology told us that they work closely with their agency digital service team. However, while these officials have coordinated with the agency digital service teams, the roles and responsibilities governing these relationships should be described to ensure that CIOs can carry out their statutory responsibilities. In contrast to the Departments of Defense and Veterans Affairs, the State CIO told us that he has had limited involvement in the department’s digital services team. He added that he believes it will be important for CIOs to be involved in agency digital services teams in order to sustain their efforts. In written comments, OMB acknowledged that the Department of State’s charter does not describe the role of the CIO, but stated that the Departments of Defense and Veterans Affairs digital service team charters at least partially address the relationship between digital service teams and agency CIOs. Specifically, with respect to the Department of Defense, OMB stated that the charter calls for senior leadership, including the department’s CIO, to ensure that digital service team projects proceed without delay. Additionally, according to OMB, the charter for the Veterans Affairs digital service team calls for the team to be located in and supported by VA’s CIO organization. However, these requirements do not address the specific responsibilities or authorities of the Veterans Affairs’ CIO with regard to the digital service team. The lack of defined relationships is due, in large part, to the fact that USDS policy on digital service teams does not describe the expected relationship between agency CIOs and these teams. As previously mentioned, USDS policy calls for the digital service team leader to report directly to the head of the agency or its deputy; however, it does not describe the expected responsibilities and authorities governing the relationship of the CIO. Until OMB updates the USDS policy to clearly define the responsibilities and authorities governing the relationships between CIOs and digital services teams and ensures that existing agency digital service team charters or other documentation reflect this policy, agency CIOs may not be effectively involved in the digital service teams. This is inconsistent with long-standing law, as well as the recently enacted FITARA, and OMB’s guidance on CIO responsibilities, and may hinder the ability for CIOs to carry out their responsibilities for IT management of the projects undertaken by the digital service teams. In summary, by hiring technology and software development experts and using leading software development practices, both 18F and USDS have provided a variety of useful services to federal agencies. Most surveyed agency project managers that partnered with 18F and USDS were satisfied with the services provided. It is important for USDS and 18F to establish outcome-oriented goals, measure performance, and prioritize projects, particularly since these are valuable management tools that could aid in the transfer of knowledge when critical temporary staff leave these organizations and are replaced. To their credit, both 18F and USDS have developed several outcome- orientated goals and procedures for prioritizing projects. However, the goals and associated performance measures and targets were not always outcome-oriented. Additionally, they have not fully measured program performance. As a result, it will be difficult to hold the programs accountable for results. Moreover, without documented measures and results for USDS, it is unclear whether investments in agency digital service teams are justified. Further, by delaying the date for when it projects to fully recover its costs and not having associated performance measures, 18F is at risk of not having the information necessary for GSA leadership to determine whether to continue using the Acquisition Services Fund for 18F operations. Finally, USDS has yet to develop a quarterly report on the 10 high priority programs, meaning that it may be applying resources to investments that are not in the most need of their assistance. Although OMB has called for agencies to establish digital service teams, USDS policy does not require agencies to define the expected responsibilities and authorities governing the relationships between CIOs and digital service teams. To fulfill their statutory responsibilities, including as most recently enacted in FITARA and reinforced in OMB guidance, and ensure that CIOs have a significant role in the decision making process for projects undertaken by the digital service teams, such defined relationships are essential. Accordingly, our draft report contains two planned recommendations to GSA and four to OMB. Specifically, the report recommends that GSA: ensure that goals and associated performance measures are outcome-oriented and that performance measures have targets, including performance measures and targets tied to fully recovering goals, performance measures, and targets for how the program will achieve its mission after September 2016; and assess actual results for each performance measure. The draft report also includes recommendations for OMB to: ensure that all goals and associated performance measures are outcome-oriented and that performance measures have targets; assess actual results for each performance measure; establish a time frame for developing the report identifying the highest priority projects, develop the report within that established time frame and on a quarterly basis thereafter, and consider the highest priority IT projects as part of the established process for prioritizing projects; and update USDS policy to clearly define the responsibilities and authorities governing the relationships between CIOs and the digital services teams and require existing agency digital service teams to address this policy. In doing so, the Federal Chief Information Officer should ensure that this policy is aligned with relevant federal law and OMB guidance on CIO responsibilities and authorities. If GSA implements our recommendations, it will be better positioned to effectively measure performance. Additionally, OMB’s implementation of our recommendations will position it to effectively measure performance, prioritize USDS resources, and ensure that CIOs play an integral role in agency digital service teams. Chairmen Meadows and Hurd, Ranking Members Connolly and Kelly, and Members of the Committees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you have any questions on matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or at pownerd@gao.gov. Other key contributors include Nick Marinos (Assistant Director), Kavita Daitnarayan, Rebecca Eyler, Kaelin Kuhn, Jamelyn Payan, and Tina Torabi. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","In an effort to improve IT across the federal government, in March 2014 GSA established a team, known as 18F that provides IT services to agencies. In addition, in August 2014 the Administration established USDS, which aims to improve the federal IT services provided to citizens. OMB also required agencies to establish their own digital service teams. GAO was asked to summarize its draft report that (1) describes 18F and USDS efforts to address problems with IT projects and agencies' views of services provided, (2) assesses these programs' efforts against practices for performance measurement and project prioritization, and (3) assesses agency plans to establish their own digital service teams. In preparing the draft report on which this testimony is based, GAO reviewed 32 18F projects and 13 USDS projects that were underway or completed as of August 2015 and surveyed agencies about these projects; reviewed 18F and USDS in key performance measurement and project prioritization practices; reviewed 25 agencies' efforts to establish digital service teams; and reviewed documentation from four agencies, which were chosen based on their progress made in establishing digital service teams. In a draft report, GAO determined that the General Service Administration's (GSA) 18F and Office of Management and Budget's (OMB) U.S. Digital Service (USDS) have provided a variety of services to agencies supporting their information technology (IT) efforts. Specifically, 18F staff helped 18 agencies with 32 projects and generally provided development and consulting services, including software development solutions and acquisition consulting. In addition, USDS provided assistance on 13 projects across 11 agencies and generally provided consulting services, including quality assurance, problem identification and recommendations, and software engineering. Further, according to GAO's survey, managers were generally satisfied with the services they received from 18F and USDS on these projects (see table). Both 18F and USDS have partially implemented practices to identify and help agencies address problems with IT projects. Specifically, 18F has developed several outcome-oriented goals and related performance measures, as well as procedures for prioritizing projects; however, not all of its goals are outcome-oriented and it has not yet fully measured program performance. Similarly, USDS has developed goals, but they are not all outcome-oriented and it has established performance measures for only one of its goals. USDS has also measured progress for just one goal. Further, it has not fully implemented its procedures for prioritizing projects. Until 18F and USDS fully implement these practices, it will be difficult to hold the programs accountable for results. Agencies are beginning to establish digital service teams. Of the 25 agencies that requested funding for these teams, OMB has established charters with 6 agencies for their digital service teams. In addition, according to the USDS Deputy Administrator, USDS plans to establish charters with an additional 3 agencies by the end of the fiscal year—the Department of Education, as well as the Social Security Administration and Small Business Administration. For the remaining 16 agencies, as of April 2016, 8 agencies reported that they plan to establish digital service teams but have yet to establish charters with USDS. The other 8 agencies reported that they do not plan to establish digital service teams by September 2016 because they did not receive requested funding. Further, of the four agencies GAO selected to review, only one has defined the relationship between its digital service team and the agency Chief Information Officer (CIO). This is due, in part, to the fact that USDS policy does not describe the expected relationship between CIOs and these teams. Until OMB updates its policy and ensures that the responsibilities between the CIOs and digital services teams are clearly defined, it is unclear whether CIOs will be able to fulfill their statutory responsibilities with respect to IT management of the projects undertaken by the digital service teams. GAO's draft report includes two recommendations to GSA and three recommendations to OMB to improve goals and performance measurement. In addition, GAO's draft report is recommending that OMB update USDS policy to define the relationships between CIOs and digital services teams.",govreport
"The maturation of the baby boom generation (persons born between 1946 and 1964) has progressed to the point where boomers will soon begin moving from the traditional working ages to the ages when many people start to retire. The first wave of the baby boom generation will start to turn age 65 in 2011 and the last of the boomers will be 65 in 2029. This development will lead to significant changes in the ratio of the working age population (defined as age 20 to 64) to the population age 65 or older. This ratio, called the “aged dependency ratio” because it provides an estimate of how many workers will be available to support each retiree, was 21 percent in 2000, or 5 working-age individuals for every person over age 65. As the baby boom generation ages, the aged dependency ratio will rise. By 2030, it will reach 35 percent, meaning that there will be fewer than three persons of traditional working age for every person age 65 or over. The increase in the aged dependency ratio is not only occurring because of the growing numbers of older persons. It is also due to the slowing growth of the labor force of younger workers over the last decade, a trend that is expected to continue. From 1950 to 1990, the labor force under 55 grew at an average annual rate of 1.9 percent. From 1990 to 2000, the average annual growth rate for this group was 1.0 percent, and BLS projects that from 2000 to 2025 labor force growth will slow to an annual rate of 0.3 percent. Several recent changes in Social Security retirement policy could strengthen incentives to work longer. Social Security provides monthly benefits to qualified retired and disabled workers and their dependents, and to survivors of insured workers. These benefits are the primary source of income (more than 50 percent) for nearly 57 percent of the population age 65 and older. In April 2000, the practice of reducing Social Security benefits when a beneficiary has earnings and has reached the normal retirement age (currently 65 years and 4 months) was eliminated, at least in part to remove the disincentive to work. Also, the delayed retirement credit for persons who first claim benefits after the normal retirement age is steadily being increased until it reaches 8 percent per year in 2008. Prior to these increases, those who chose to work beyond normal retirement age might receive less Social Security over their lifetime because the start of their benefit receipt was delayed. Some members of Congress have also put forward proposals that would raise normal retirement age for benefits beyond the current schedule of increases, as well as proposals that increase the early retirement age of 62. Other federal laws also attempt to make work and the workplace more hospitable for older individuals. The Age Discrimination in Employment Act of 1967 (ADEA) promotes the employment of older persons based upon their ability rather than age and prohibits age discrimination in employment. The Equal Employment Opportunity Commission (EEOC) enforces ADEA as well other federal statutes prohibiting employment discrimination. ADEA applies only to firms with 20 or more employees, thus excluding a not insignificant segment of the labor force. While some states have their own laws protecting older workers in small businesses, these laws still may exclude some small businesses. As pension benefits are a key source of retirement income for many workers, they can also influence the work decisions of older individuals. To encourage employers to establish and maintain pension plans for their employees, the federal government provides preferential tax treatment under the Internal Revenue Code (IRC) for plans that meet certain requirements. In exchange for preferential tax treatment, an employer is required to design the pension plan within legal limits that are intended to improve the equitable distribution and security of pension benefits. The Internal Revenue Service (IRS) administers policies on pension distributions that are set by the Congress in the IRC to ensure that the benefits of all tax-qualified plans are apportioned in a nondiscriminatory manner. Many pension plans have features that encourage employees to retire at or before age 65. Pension laws relating to defined benefit plans allow benefits earned after the normal retirement age (generally, age 65) to accrue at a lower rate. Furthermore, many defined benefit plans subsidize early retirement benefits which tends to discourage employment after becoming eligible for these benefits. ERISA establishes certain minimum standards for private employee pension plans. This law also created the ERISA Advisory Council to advise the Secretary of Labor with respect to carrying out responsibilities under ERISA. The Advisory Council has made recommendations to the Secretary of Labor to consult and work with appropriate government agencies on pension and welfare plan reforms that could help employers establish phased retirement programs. The number of older workers will grow substantially over the next two decades and they will become an increasingly significant proportion of all workers. This expected increase is a result of the aging of the baby boom generation and a general trend in greater labor force participation among older persons. Older workers are employed in a diverse group of occupations but are a growing proportion of the workers in white-collar occupations. In addition, our projections show that older workers may make relatively greater gains in earnings than their younger counterparts between 2000 and 2008. The number of older workers will grow rapidly over the next two decades. According to the BLS, in 2000, 18.4 million persons over age 55, or about one-third of the over-55 population, were in the labor force. (See Fig. 2.) BLS estimates that there will be 31.8 million older labor force participants in 2015, an average annual increase of 4.0 percent from 2000. However, this rapid growth is expected to level off by the mid-2020s. BLS estimates that 33.3 million older persons will be in the labor force in 2025, an average annual increase of only 0.5 percent from 2015. This expected increase is a result of the aging of the baby boom generation and a general trend in greater labor force participation among older persons. The oldest baby boomers are currently 55 years old, and the youngest will turn 55 in 2019. The percentage of older persons who participate in the labor force has been growing, especially among females age 55-64, a trend that is expected to continue. (See Fig. 3.) Currently, 30 percent of all persons 55 and older participate in the labor force, a number that is expected to grow to 37 percent by 2015, according to projections by BLS. This increase in labor force participation among older workers is primarily driven by the growth in the number of older women and their labor force participation rates. Labor force participation rates of women between the ages of 55 and 64 have been steadily increasing from 42 percent in the mid- 1980s to 52 percent in 2000. A further increase in the participation rate to 61 percent is expected to occur by 2015, according to BLS. The labor force participation rate of women age 65 and older is currently 9 percent. This is up from the low point of slightly more than 7 percent in the mid-1980s but is lower than the 10 percent levels of the 1950s. BLS projects the growth in the participation rate in this age group to grow to 10 percent by 2015. The labor force participation rates of males over age 55 have been stable for several years and are projected to increase in the future. Older male labor force participation hit a low point in the mid-1990s that was part of a downward trend that had been occurring for several decades. Since then, the labor force participation rates of males between the ages of 55 and 64 have held steady at approximately 67 percent; BLS projects an increase to 69 percent in 2015. Labor force participation rates of males 65 and older also held steady at about 17 percent during the 1990s and are projected to rise to nearly 20 percent by 2015. As the number of older workers grows, older workers will also become a larger percentage of all workers. In 1950 and 1960, older workers comprised 17 percent and 18 percent of the labor force, respectively. (See Fig. 1.) As the relatively large baby boom generation entered the workforce between 1960 and 1990, the proportion of older workers fell to 12 percent of the total as the number of workers under age 55 swelled. Older workers now represent 13 percent of the total workforce, and BLS estimates that by 2015 they will be about 20 percent of the total workforce. Older workers hold jobs in a wide range of occupations that are somewhat reflective of the occupations occupied by younger workers. (see table 1.) Nearly the same percentage of workers in the age categories of 40 to 54, 55 to 64, and 65 to 74 are employed in white collar occupations (approximately 62 percent). The slight difference in the employment distribution among these age groups is found in blue-collar and service occupations. Nearly 15 percent of workers age 65 to 74 are employed in service occupations compared with 11 percent of workers age 40 to 54. Blue-collar work accounts for 26 percent of employment among workers age 40 to 54 and 23 percent for workers age 65 to 74. The general shift in the economy away from physically demanding jobs is present among workers of all ages, but is far more pronounced among older workers as they age. Workers age 55 to 64 constitute a significant proportion of many occupations as they are nearly 13.9 million members (11 percent) of the total workforce. (See table 2.) The highest absolute numbers of older workers age 55 to 64 are in executive/manager occupations (2.4 million or 12 percent of the total occupation) and professional occupations (2.3 million or 11 percent of the total occupation). Workers age 65 to 74 comprise much smaller percentages of occupations since most persons in this age group have exited the labor force. Workers age 65 to 74 constitute less than 4 percent of the all major occupational categories with the exception of farming, fishing, and forestry. Between 2000 and 2008, the number and percentage of workers over age 55 will increase in all major occupational categories, according to our projections. (See Figs. 4 and 5.) The largest change should occur in white- collar occupations. Among executives/managers, the percentage of workers in this occupation who are over 55 is projected to grow from 15 percent to 23 percent. The percentage of the workforce that is over age 55 in professional occupations should also grow substantially from 14 percent to 19 percent. The smallest change should occur in employment in service occupations as the percentage of the workforce older than age 55 employed in the service sector grows from 13 percent to 14 percent. In line with these major occupational changes, certain specific occupations will increasingly rely on older workers. For example, from 2000 to 2008, the percent of teachers older than age 55 will increase from 13 percent to 19 percent, and the percent of nurses and related occupations older than age 55 will increase from 12 percent to 18 percent. (See app. I.) As workers age, their occupational composition moves towards white- collar and service occupations and away from physically demanding occupations. According to our projections, the composition of the older workforce will shift further from blue-collar to white-collar occupations in the near future. Between 2000 and 2008, the proportion of workers age 55 to 74 in managerial/administrative and professional/technical occupations will increase by 2.9 percent and 1.6 percent, respectively, while the proportion in blue collar and service occupations will decrease. (see app. I.) The change in the occupational composition of older workers into less physically demanding occupations is supported by an analysis of changes in occupations of related age groups, as shown in table 3. Group I consists of individuals age 45 to 54 in 1990 and individuals age 55 to 64 in 2000. Group II consists of individuals of age 55 to 64 in 1990 and 65 to 74 in 2000. In 2000, both groups I and II had fewer individuals in the more physically demanding occupations of production, craft and repair, machine operation, and assembly; they also had a greater number of older workers in the white-collar and service occupations in 2000. Part of this shift likely occurred because as workers age they can experience health problems that make their jobs more difficult to perform and, therefore, they choose to move into less physically demanding jobs. Also, the composition of the labor force changes because of differential retirement rates and those who continue to work to older ages are more likely to be white-collar workers. The shift toward white-collar occupations is also partially explained by differences in educational attainment among the baby boom generation and the cohort proceeding them. (See Fig. 6.) Fifty-seven percent of persons who are age 40 to 54 have at least some college education (29 percent have a college degree) compared with 42 percent of individuals age 55 to 74 (21 percent have a college degree). Moreover, only 11 percent of individuals age 40 to 54 lack a high school diploma compared with 22 percent of persons age 55 to 74. The greater level of educational attainment among the baby boomers may lead to more employment opportunities as they age. They may have a broader diversification of jobs available to them compared to the current generation of older workers. Between 1989 and 1999, older workers experienced larger percentage gains in median earnings than younger workers. (See Fig. 7.) Adjusted for inflation, workers between the ages of 55 and 64 and workers between 65 and 74 had median earnings increases of 9 percent and 19 percent, respectively, for the 10-year period—compared with increases of 2 percent and 4 percent for workers age 40 to 54 and 30 to 39, respectively. These earnings increases were primarily driven by a greater number of older workers working full-time instead of part-time (57 percent in 1989 versus 63 percent in 1999) and a movement in the occupational composition toward higher paying white-collar jobs (See tables 3 and app. I). Improvements in the economy during the last 15 years likely offered older workers the opportunity to move into full-time employment as labor shortages increased the demand for their services. During the economic expansion of the mid- to late-1980s, the unemployment rate declined from 7 percent in 1985 to 5 percent in 1989; by comparison, in the mid- to late- 1990s the unemployment rate declined from 6 percent to 4 percent. According to our projections, workers between the ages of 55 and 74 will continue to make gains in their earnings that exceed those of their counterparts who fall between the ages of 40 and 54. Currently, workers age 55 to 64 and workers age 65 to 74 earn 93 percent and 46 percent, respectively, of what workers age 40 to 54 earn. We project these numbers to rise to 111 percent and 67 percent, respectively, by 2008. These relative gains are tied to the change in the composition of the older workforce to higher paid white-collar occupations, while younger workers’ occupational composition is projected to change to more blue-collar and service occupations. While older workers are less likely than younger workers to lose a job, older workers who do lose a job are somewhat less likely than younger workers to return to work. Older workers and younger workers tend to lose their jobs for similar reasons. However, many older workers who lose their jobs choose to retire following the job loss. Some older workers who have not yet fully retired do seek transitional or “bridge” employment. But once fully retired, relatively few are interested in returning to work. The desire to return to work among fully retired older persons who have lost a job varies according to education and race. Although small in percentage terms (1.3 percent), it is fairly large numerically. In 2000, there were more than three-quarters of a million persons age 55 to 74 who were either unemployed and looking for work or fully retired and wanting a job. According to data from the Displaced Workers Supplement (DWS) to the CPS, older workers were somewhat less likely than younger workers to lose their jobs between 1997 and 1999. (See table 4.) However, older workers who did lose their jobs were significantly less likely than younger workers to be re-employed. Thirty-nine percent of persons age 55 to 74 who lost their jobs were not re-employed as of February 2000, compared with 19 percent of persons between age 40 and 54. Those who did seek re- employment and found jobs reported job search times that were somewhat comparable to their younger counterparts. The median job search times for workers age 40 to 54 and 55 to 74 was four weeks. However, the average 12 weeks time workers age 55 to 74 needed to search for new employment was 3.6 weeks longer than for workers age 19 to 39 and 1.3 weeks longer than for workers age 40 to 54. This indicates that there is a segment of the older workforce that incurs more prolonged job searches relative to younger persons. Older workers and younger workers tend to lose their jobs for similar reasons. According to data from the DWS, older workers are somewhat more likely than younger workers to lose their jobs due to plant closures or plant relocation (31 percent compared with 24 percent, respectively) and somewhat less likely to lose their jobs due to insufficient work (17 percent compared with 22 percent). (See Fig. 8.) The DWS asks respondents whether they lost their jobs due to their position or shift being abolished, completion of a seasonal job, failure of a self-operating business, or another reason. The responses of older and younger workers were not significantly different. Though older workers are not more likely to lose a job, a job loss potentially has more severe consequences for older workers. Older workers tend to have greater tenures in their jobs and may experience a larger loss in earnings upon re-employment, compared with younger workers. Moreover, the potential loss of health care benefits following a job loss could be more problematic for older workers because of the positive correlation between greater health problems and aging. For older workers, the likelihood of being hired by a new employer varies according to several factors—the compensation level, mix of wages and benefits, skill requirements, working conditions, and hours of work— associated with the new employer and job. For example, a firm whose wages are highly correlated with firm-specific experience will hire fewer older workers. Firms with these types of compensation structures usually require that skills be developed internally on the job. Moreover, these types of firms tend to encourage earlier exits of older workers through their payments of pension benefits. Occupations that require extensive computer use also tend to hire fewer older workers possibly due to perceptions that older persons have difficulty adapting to new technologies. Finally, jobs that require night and evening shifts hire fewer older workers. According to the March 2000 CPS, 768,000 persons age 55 to 74 were either unemployed and seeking a job (520,000 persons), or fully retired and said they wanted a job (248,000 persons). Unemployment rates for most groups of older workers are low and vary somewhat by educational level and by race. In 2000, the unemployment rate for all workers over age 55 was 2.8 percent. However, non-high school graduates had an unemployment rate of 5 percent, which was more than three times as high as college graduates. (See table 5.) The unemployment rate for blacks was 4.1 percent and for Hispanics and other ethnic groups 5.3 percent, compared with an unemployment rate of 2.5 percent among whites. Furthermore, once older Americans fully retire, most do not want to return to work. About 45 percent (or 18.4 million persons) of all persons between age 55 to 74 were fully retired. These individuals are not doing any work for pay and have categorized themselves as “retired.” When questioned about whether they wanted a full-time or part-time job, only 1.3 percent responded “yes.” Public and private employers are using an array of arrangements— including rehiring retirees, reduced work schedules, and allowing job- sharing—to retain and extend the careers of older workers. However, survey data and interviews with employers suggest that few of these arrangements are widespread among private employers or involve large numbers of workers at individual firms even though the majority of older workers are interested in them. Employers cite several reasons for not implementing programs, but the most prevalent is that they simply have not considered doing so. While acknowledging the importance of the issue, union officials we spoke with said that they have not addressed these issues broadly in collective bargaining agreements due to a lack of interest on the part of employers generally and difficulties in establishing flexible schedules in many manufacturing settings. Public employers appear to be experimenting more with these programs than private employers. For example, large efforts to retain older workers are being made in some states in response to teacher shortages. These efforts primarily involve pension incentives that make work financially attractive for older employees. Some employers and employees are experimenting with flexible employment arrangements that would allow older workers to continue to work. We found that flexible employment arrangements come in many different forms, including part-time work, seasonal or part-year work, consulting or contracting for limited periods of time, or a reduction of job responsibilities. (See table 6.) For example, a large retail drug store chain accommodates older workers by offering them part-time or part- year schedules and allows them to work in multiple locations throughout the country. Under this approach, an older worker can work in New York during the spring and summer and in Florida during the fall and winter. A large chemical manufacturer has established an in-house Retiree Resource Corps that serves as a clearinghouse for matching retirees’ skills and the company’s employment needs for retirees who wish to work on a temporary basis. Retirees must separate from the company for 6 months prior to entry into the program and are limited to less than 1,000 hours of work per year. Employees who work more than the maximum have their pension benefits ceased and must terminate from the program to have their benefits reinstated. A large fruit canning employer hires older workers on a part-year basis to work in their canning factory that operates from July to mid-September. The employer says that older workers are more likely to be available for the part-year work than younger workers who are more interested in full-time jobs. A needle manufacturer has been successful in recruiting older workers by allowing them to choose the days they want to work. Though they exist, flexible employment arrangements are not yet widespread in the private sector. According to our interviews with experts, consultants, and employers, in many instances these arrangements or programs are provided on only an ad hoc basis and to limited groups of employees. The employees involved in these arrangements tend to be skilled workers with an expertise for which an employer has a special need. While these programs can be expensive, some firms have shown they are willing to pay to retain the more highly skilled employees who are hardest to replace. Survey data on the extent and nature of flexible employment arrangements -- at least in large private sector firms -- also supports our finding that such programs are often limited in scope and not widespread. According to a study by Watson Wyatt, a large human capital consulting services firm, 16 percent of employers participating in their survey offer some type of flexible employment arrangement. However, they defined such an arrangement as any type of accommodation that was being made to an older worker either on a programmatic or individual basis. The American Association of Retired Persons (AARP) and the Society for Human Resource Management (SHRM) also conducted a study of flexible employment programs and estimated that about 2 percent of employers offer such arrangements to older workers. Neither of these studies is nationally representative. While acknowledging the importance of the issue, unions we spoke with have not yet addressed flexible employment programs broadly in collective bargaining agreements due to a lack of interest on the part of employers generally and difficulties in establishing flexible schedules in many manufacturing settings. We spoke with officials from unions representing workers in the telecommunications industry and manufacturing industries like automobiles and aerospace, who said that flexible employment programs for older workers are not yet a major issue for many unions. A union official in the manufacturing industry said flexible employment programs may be difficult to establish because for many production processes, the work environment tends to require team production from employees on full-time schedules. A union official in the telecommunications industry said that unions have proposed some flexible employment arrangements in bargaining, but they say employers have not shown an interest because they do not yet see worker retention as an important issue. Evidence suggests that at least some middle- and large-sized employers currently do not see a need for flexible employment programs, although this could change in the future. According to the Watson Wyatt survey, 70 percent of companies do not offer phased retirement programs to older workers because they simply have not considered it. Other reasons given for not offering programs were the programs’ incompatibility with corporate culture (16 percent), restrictions on in-service distributions (14 percent), employment costs (13 percent), and productivity concerns (9 percent). However, 28 percent of the employers who do not offer phased retirement indicated that they have a moderate to high interest in doing so over the next 2 to 3 years. Moreover, 70 percent of the employers surveyed said that phased retirement programs may be a solution to labor shortages brought on by demographic and economic change. The hesitancy on the part of employers to offer flexible employment programs appears to be at odds with the desire of older employees to have the option of participating in such programs, and thus possibly extending their work lives. According to 1996 data from the Health and Retirement Survey, 56 percent of persons age 55 to 65 would prefer to gradually reduce their hours of work as they age, but only 16 percent of full-time workers in this age group said their employers would be willing to allow them to reduce their hours. Another survey of workers age 54 to 74 who were employed in their career occupations found that 48 percent of workers wanted to work significantly fewer hours—citing workload and job demands (41 percent) and financial factors (28 percent) as their reasons for working more hours than they would prefer. A reduction in work hours seems to be a fairly common desire: 71 percent of retirees who have returned to work said the reason they initially retired was due to a lack of a more flexible work schedule. Furthermore, this option seems to be less available to rank and file workers, with managers and professionals more likely to believe a reduction in hours was possible (64 percent) than were workers in service and production occupations (31 percent). Some public sector employers have been very active in initiating broad programs that provide incentives for older workers to stay on the job. Driven in large part by teacher shortages in many public school districts, state and local government employers have implemented programs that provide incentives for older employees to remain on the job. In many instances, these incentives were created by redesigning their state-defined benefit pension plans to include Deferred Retirement Option Plan (DROP) features that allow a pension participant at an eligible retirement age to have pension benefits start even though he or she continues to work.These programs also include other pension plan revisions as well. At the state level, Arkansas, California, Louisiana, and Ohio have all adopted incentives for older teachers to stay on the job rather than retire. A growing number of state and local public employers have implemented, or are considering implementing, DROP pension features as incentives to encourage older employees to remain on the job. Although employers have used these for other public employees like firefighters or law enforcement personnel, many have focused on the retention of elementary and secondary public school teachers. For example, Arkansas has a DROP program in which all teachers who meet length-of-service requirements can have 70 percent of their monthly pension payments deposited into an account that is payable as a lump sum along with other options for payment. Teachers can stay in the DROP program for up to 10 years. The state also allows teachers who are eligible for retirement to draw their full pension and a full salary if they work in one of four subject areas deemed to have a critical shortage of teachers (math, science, foreign language, and special education) and if they separate from employment for 30 days. Louisiana has a variety of programs to encourage older teachers to stay on the job, and 4,300 teachers participated in them last year. The DROP program has been popular among the teachers because they can earn a lump sum in the range of $70,000 to $80,000 in 3 years. Two-thirds of eligible teachers participate in the DROP program and may participate for up to 3 years, after which they can continue working and will resume earning pension credits in their defined benefit system. The myriad of other Louisiana programs established to retain or attract retired teachers are being phased out and replaced with one program that allows retired teachers to earn their full pension while continuing to teach after a 12- month break in service. Some public employers are using other pension incentives to retain teachers. For example, facing a projected shortfall of 300,000 teachers over the next decade, the California legislature enacted several measures modifying the state teacher pension plan to encourage older teachers to continue to work. Starting in 2001, teachers who retire and then separate from employment for 1 year can return to teaching and earn a full salary while continuing to receive full pension payments. In addition, pension benefits have been enhanced in 3 ways: a longevity bonus of up to $400 per month has been added for 30 to 32 years of service; a 0.2 percent addition to the pension benefit has been granted for each year beyond 30 years of service; and 2 percent of salary is paid into a supplemental retirement account which is then payable as a lump sum. Nearly 10 percent (17,000 teachers) of Ohio’s teaching workforce consists of rehired retirees. Ohio teachers can draw a full salary and full pension benefits after a 2-month break in service. This provision also applies to other Ohio public employees in the event of a future shortage of employees. Internal Revenue Code requirements regarding pensions may discourage private employers from adopting DROP plans and other programs that could encourage workers to extend their employment after retirement eligibility. In 2000, the ERISA Advisory Council identified current ERISA and IRC regulations that could constrain private employers in implementing flexible employment arrangements, including regulations prohibiting in-service distributions of defined benefit pension benefits and rules governing nondiscrimination. Pension regulations prohibiting in-service pension benefit distributions can discourage the employer’s formation of DROP programs. Defined benefit pension plans sponsored by private employers are not allowed to pay pension benefits to older workers who become eligible for retirement income before the plan’s normal retirement age. Therefore, it would be difficult, if not impossible, for a private sector employer to provide a defined benefit DROP plan to workers who are younger than the pension plan’s normal retirement age. To address this issue, the Council recommended relaxing the IRS rules on in-service distributions to facilitate the formation of phased retirement plans, although concern was expressed by some witnesses that workers might outlive their retirement savings by beginning benefits at an earlier but lower rate. The ERISA Advisory Council also found that federal regulations governing nondiscrimination in pension benefits or contributions can restrict employers from offering phased retirement programs. For example, some employers reported to the Council that they did not establish flexible employment programs because of concerns with violating federal pension regulations governing nondiscrimination in benefits or contributions. The concerns are based on the likelihood that a higher percentage of highly compensated employees would be participating in the programs because their skills are more desirable. To the extent that older workers are more likely to be owners or highly compensated employees than younger workers, a DROP plan could disproportionately include the employer’s highest paid employees. In such a case, the employer’s pension plan could be deemed as discriminatory and potentially lose its tax-qualified status. To alleviate these concerns, the Council recommended that the IRS relax its rules on nondiscrimination if the intent of the plan amendment was clearly not to be discriminatory. Recognizing the complexity of this issue, the ERISA Advisory Council also suggested that the Secretary of Labor organize a task force to focus on the obstacles within ERISA and other relevant federal laws that inhibit private employers from instituting DROPs. A variety of factors contribute to discouraging the continued labor force participation of workers after a certain age. These factors include the following: Some employers may have negative perceptions of older workers and discriminate. Past surveys have found that some managers possess negative perceptions about the productivity of older workers. For example, managers have expressed a perception that age reduces workers’ physical stamina and ability to learn new skills. Under the ADEA, it is illegal to discriminate in employment on the basis of age, but evidence suggests that such discrimination does still occur. In 2000, the EEOC received 16,000 complaints of age discrimination, with nearly 3,000 merit resolutions and cumulative monetary damages of $45 million. Because some employers might seek to avoid hiring older workers because of potential litigation, the ERISA Advisory Council proposed that an interagency task force be convened to determine if any of the laws dealing with older workers’ pension benefits, including the ADEA, the IRC, and ERISA, need to be amended in order to encourage the continued development of flexible retirement alternatives for older workers. Employers perceive higher costs associated with hiring older workers. Employers may feel that it is more difficult to recoup the costs of hiring and training older workers. The shorter potential length of time an older worker may remain with an employer, compared with a younger worker, implies that these up-front fixed costs are greater for older workers because of the shorter time period for employers to recoup their investment. Moreover, all other things being equal, older workers can raise an employer’s cost of providing health coverage. To address these issues, the ERISA Advisory Council recommended that legislation be developed that would extend Medicare to workers between the ages of 55 and 64. Older workers have more health problems that inhibit work. According to CPS data on self-reported health status, 17 percent of persons age 55-64 have a work-limiting health problem compared with 9 percent of persons age 40-54 and 5 percent of persons age 30-39. Older workers play a key role in the labor market and their importance will only grow in the years to come. By 2008, 1 out of every 6 workers in the American labor force will be over age 55, and this ratio is estimated to reach over 1 out of 5 by 2025. Older workers will comprise a progressively larger number of our nation’s managers, supervisors, and executives. Employers will have to rely more heavily on this segment of the labor force, as their experience and “institutional knowledge” become an increasingly valuable resource. Thus, older workers will become a critical labor force component in maintaining future productivity and economic growth, particularly if, as projected, labor force growth continues to slow. Yet, employers have taken little action so far to prepare for this demographic transition. We identified few employers with well established, formalized programs to encourage older employees to work longer. Some private employers have indicated an awareness of the need to retain older workers and are experimenting with different options to extend the work lives of their older employees. However, these programs remain small and are often administered on an ad hoc basis. Flexible employment programs also remain to be addressed by employers and workers in the collective bargaining context. Public employer efforts to retain or rehire older workers have been broader and somewhat more common, largely in response to localized labor shortages in skilled occupations like teaching. Part of this inaction may be because these demographic changes, while inevitable, remain largely on the horizon. Most employers are not yet facing labor shortages or other economic pressures requiring them to consider phased retirement or related programs. For this reason, time is available to develop sound policies, programs, and practices to respond to this demographic challenge. Some public discussion on this matter is already taking place. For example, Labor’s ERISA Advisory Council has received testimony from employers and other interested parties as to how federal policy and laws should be changed to address phased retirement, and the older worker issue generally. From this testimony, the Advisory Council has made recommendations to the Secretary of Labor, particularly with regard to current pension law and policy. The ERISA Advisory Council has already urged that the Secretary of Labor convene a task force that would focus on issues concerning the extension of DROP plans to private employers. However, many of the recommendations suggested by the Advisory Council are beyond the purview of the Labor Department and would require action by other agencies or the Congress for implementation, as well as raising cost implications. Additional expert assessment and input from those agencies charged with administering the affected laws and regulations would help ensure that these recommendations are both carefully crafted and represent sound policy, particularly those calling for far reaching legislative changes. Expertise and input from outside agencies could also help to identify any unintended consequences of the actions that could be taken. For example, amending the ADEA to facilitate the expansion of phased retirement programs might result in some older workers losing legal protection against age discrimination in ways not previously recognized or understood. It also raises the risk that workers might outlive their retirement savings by beginning benefits too early. Finally, greater input from other agencies could help to identify other aspects of the issues already explored and additional recommendations not addressed by the Advisory Council. This is particularly important given that the diversity among firms and industries suggests a need for a range of solutions. For example, what may work for public employers—creating incentives to extend employment through alterations in the design of their defined benefit pension plans—may not be helpful for private employers who do not have such plans or could not afford such redesign. The challenge of how to extend the work lives of older employees in a manner that balances the competitive imperative of business with the life realities of older workers presents many opportunities. By focusing on the development of the policies, programs, and employment arrangements necessary to extend the work life of the growing numbers of older employees, the nation can ensure future supplies of skilled workers, bolster economic growth, and help secure retirement income adequacy for many working Americans. To address the potentially serious implications of the aging of the U.S. labor force and avoid possibly acute occupational labor shortages in the future, the relevant government agencies should work together to identify sound policies to extend the worklife of older Americans, including those legal changes that would foster creative solutions to extending workers’ careers. Specifically, we recommend that the Secretary of Labor convene an interagency task force to develop legislative and regulatory proposals addressing the issues raised by the aging of the labor force. This task force would include representatives from Labor, and other agencies that have either regulatory jurisdiction or a clear policy interest, bringing together the expertise necessary to consider fully the implications of each proposal. It would solicit input from employers, unions, and other interested parties and carefully balance the concerns of older workers, employers, and the general public. The task force would also serve as a clearinghouse of information about employer or collectively bargained programs to extend the work life of older workers. We provided the EEOC, Labor, Treasury, and the Social Security Administration the opportunity to comment on the draft report. EEOC provided us with written comments, which appear in their entirety in appendix II. EEOC agreed with our findings, strongly supporting the goal of encouraging older workers to remain in the labor force and endorsing our recommendation for the convention of an interagency task force. The agency also provided us with several technical comments, which we incorporated as appropriate. Labor, Treasury and the Social Security Administration provided us with technical comments, which we incorporated as appropriate. We are providing copies of this report to the Secretary of Labor, the Secretary of the Treasury, the Commissioner of Social Security, and the Commissioners of the Equal Employment Opportunity Commission. Copies will be made available to others upon request. Please contact me at (202) 512-7215, Charlie Jeszeck at (202) 512-7036, or Jeff Petersen at (415) 904- 2175, if you have any questions about this report. Other major contributors to this report are listed in appendix IV. Age 65-74 54 53 41 30 41 54 52 30 43 45 43 44 2008 (Projected percent) Most of the survey data used in this report are from the March Current Population Surveys (CPS). The annual March CPS is a source of income estimates for the United States and also includes employment and demographic data. We used the CPS because of its large sample size, its inclusion of detailed information on the economic and demographic characteristics of labor force participants, the timeliness of its data, and its collection frequency and consistency, which allows the opportunity to show trends over time and construct projections. We used CPS Basic Monthly Survey data from 1983 through 2000, March supplement data from 1989 through 2000, and February supplement data on displaced workers and job tenure and occupational mobility from 1996, 1998, and 2000. The Health and Retirement Survey (HRS) is composed of persons born between 1931 and 1941, and the respondents are questioned every 2 years. The first wave of questions was conducted in 1992. We used HRS data from Wave III that was conducted in 1996. The sampling errors for the estimated percentages used in this report from CPS data are less than plus or minus 1 percentage point at the 95 percent confidence level. This sampling error does not apply to our projections of occupational distributions or wages. Although widely used and a rich source of detailed data, CPS and other surveys that are based on self- reported data are subject to several sources of nonsampling error, including the following: inability to get information about all sample cases; difficulties of definition; differences in the interpretation of questions; respondents’ inability or unwillingness to provide correct information; and errors made in collecting, recording, coding, and processing data. These nonsampling errors can influence the accuracy of information presented in the report, although the magnitude of their effect is not known. Data were grouped into the age categories of 30-39, 40-54, 55-64, and 65-74 when the sample size was large enough to make calculations based upon these age groups. When the sample size was too small to support these age categories, we chose to group the data by over 55 and under 55. We based our occupational projections to the year 2008 on methods developed by the U.S. Department of Labor, Bureau of Labor Statistics. In order to do occupational projections by age group, we used 5-year age cohorts from 1988-93 and 1994-98 CPS Basic Monthly Survey data, calculating net replacement needs for 5-year intervals to 2003 and 2008. We made adjustments for the irregular size of bottom and top age groups. To compensate for missing historical data to project the younger age cohorts to 2008, we used BLS projections of the civilian labor force in 2008 for the 16-24 and 25-34 age groups and then we subtracted the percent unemployed as of 2000 for these age groups. We then distributed the projected employed by the percentage of those age groups in each occupational group in 2000. The accuracy of our model was checked by running projections from earlier data to the year 2000 and comparing the 2000 projections with actual 2000 data. We also adjusted our projected labor force numbers for 2008 by BLS’ labor force projections for 2008. To project earnings to 2008 for age groups over 40, we calculated mean earnings by occupation, age group, and year from 1989 to 1999. We then inserted a variable to control for the business cycle, projected the earnings by occupation and age group to 2008, and merged the projected earnings with our age group specific 2008 occupational projections. A potential shortcoming of our projections is that the cohort effects (e.g., the baby boomers are different from older generations) cannot be separated from age effects (e.g., the baby boomers labor force behavior will change as they pass from middle to old age) using cross-sectional data. We identified companies with flexible employment programs for older workers through interviews with experts and reviewing literature on the subject. We then interviewed officials from 13 companies who were knowledgeable about the programs. Public employers were identified and interviewed on the same basis. Other contributors to this report include Don Porteous, Roger Thomas, and Howard Wial.","The impending retirement of the ""baby boom"" generation is receiving considerable attention. The number of older workers will grow substantially during the next two decades, and they will become an increasingly significant share of the U.S. workforce. Although older workers are less likely than younger workers to lose a job, when they do lose a job, they are less likely than younger workers to find other employment. To retain older workers and extend their careers, some public and a few private employers are providing options, including flexible hours and financial benefits, reduced workloads through the use of part-time or part-year schedules, and job-sharing. Most employers are not yet facing labor shortages or other economic pressures that would require them to consider flexible employment arrangements because the retirement of the baby boom generation will occur gradually during the next several decades.",govreport
"The Immigration Reform and Control Act of 1986 created the VWP as a pilot program, and the Visa Waiver Permanent Program Act permanently established the program in October 2000. The program’s purpose is to facilitate the legitimate travel of visitors for business or tourism. By providing visa-free travel to the United States, the program is intended to boost international business and tourism, as well as airline revenues, and create substantial economic benefits to the United States. Moreover, the program allows State to allocate more resources to visa-issuing posts in countries with higher risk applicant pools. In November 2002, Congress passed the Homeland Security Act of 2002, which established DHS and gave it responsibility for establishing visa policy, including policy for the VWP. Previously, Justice had overall responsibility for managing the program. In July 2004, DHS created the Visa Waiver Program Oversight Unit within the Office of International Enforcement and directed that unit to oversee VWP activities and monitor participating VWP countries’ adherence to the program’s statutory and policy requirements. In September 2007, the office was renamed the Visa Waiver Program Office. To help fulfill its responsibilities, DHS established an interagency working group comprising representatives from State, Justice, and several DHS component agencies and offices, including U.S. Customs and Border Protection (CBP) and U.S. Immigration and Customs Enforcement. Since the attacks on the United States on September 11, 2001, Congress has passed several other laws to strengthen border security policies and procedures. For example, the Enhanced Border Security and Visa Entry Reform Act of 2002 increased the frequency—from once every 5 years to at least once every 2 years—of mandated assessments of the effect of each country’s continued participation in the VWP on U.S. security, law enforcement, and immigration interests. The 9/11 Act also added security requirements for all VWP countries, such as the requirement that countries enter into an agreement with the United States to share information on whether citizens and nationals of that country traveling to the United States represent a threat to the security or welfare of the United States or U.S. citizens. When the Visa Waiver Pilot Program was established in 1986, participation was limited to eight countries. Since then, the VWP has expanded to 36 countries. Figure 1 shows the locations of the current member countries. To qualify for the VWP a country must offer reciprocal visa-free travel privileges to U.S. citizens; have had a refusal rate of less than 3 percent for the previous fiscal year for its nationals who apply for business and tourism visas; issue machine-readable passports to its citizens; enter into an agreement with the United States to report or make available through Interpol or other means as designated by the Secretary of Homeland Security information about the theft or loss of passports; accept the repatriation of any citizen, former citizen, or national against whom a final order of removal is issued no later than 3 weeks after the order is issued; enter into an agreement with the United States to share information regarding whether citizens and nationals of that country traveling to the United States represents a threat to U.S. security or welfare; and be determined not to compromise the law enforcement (including immigration enforcement) or security interests of the United States by its inclusion in the program. In addition, all passports issued after October 26, 2005, must contain a digital photograph in the document for travel to the United States under the program, and passports issued after October 26, 2006, must be e-passports that are tamper-resistant and incorporate a biometric identifier. Nationals from countries that have joined the VWP since 2008 must use e-passports in order to travel under the VWP. Effective July 1, 2009, all emergency or temporary passports must be e-passports as well for use under the VWP. To be eligible to travel without a visa under the program, nationals of VWP countries must have received an authorization to travel under the VWP through ESTA; have a valid passport issued by the participating country and be a national seek entry for 90 days or less as a temporary visitor for business or have been determined by CBP at the U.S. port of entry to represent no threat to the welfare, health, safety, or security of the United States; have complied with conditions of any previous admission under the program (for example, individuals must not have overstayed the 90-day limit during prior visits under the VWP); if entering by air or sea, possess a return trip ticket to any foreign destination issued by a carrier that has signed an agreement with the U.S. government to participate in the program, and must have arrived in the United States aboard such a carrier; and if entering by land, have proof of financial solvency and a domicile abroad to which they intend to return. Travelers who do not meet these requirements are required to obtain a visa from a U.S. embassy or consulate overseas before traveling to the United States. Unlike visa holders, VWP travelers generally may not apply for a change in status or an extension of the allowed period of stay. Individuals who have been refused admission to the United States previously must also apply for a visa. VWP travelers waive their right to review or appeal a CBP officer’s decision regarding their admissibility at the port of entry or to contest any action for removal, other than on the basis of an application for asylum. DHS has implemented ESTA to meet the 9/11 Act requirement intended to enhance program security and has taken steps to minimize the burden on travelers to the United States added by the new requirement, but it has not fully analyzed the risks of carrier and passenger noncompliance with the requirement. DHS developed ESTA to collect passenger data and complete security checks on the data before passengers board a U.S. bound carrier. In developing and implementing ESTA, DHS took several steps to minimize the burden associated with ESTA use. For example, ESTA reduced the requirement that passengers provide biographical information to DHS officials from every trip to once every 2 years. In addition, because of ESTA, DHS has informed passengers who do not qualify for VWP travel that they need to apply for a visa before they travel to the United States. Moreover, most travel industry officials we interviewed in six VWP countries praised DHS’s widespread ESTA outreach efforts, reasonable implementation time frames, and responsiveness to feedback but expressed dissatisfaction over ESTA fees. Also, although carriers complied with the ESTA requirement to verify ESTA approval for almost 98 percent of VWP passengers before boarding them in 2010, DHS does not have a target completion date for a review to identify potential security risks associated with the small percentage of cases of traveler and carrier noncompliance with the ESTA requirement. Pursuant to the 9/11 Act, DHS implemented ESTA, an automated, Web- based system, to assist in assessing passengers’ eligibility to travel to the United States under the VWP by air or sea before they board a U.S. bound carrier. DHS announced ESTA as a new requirement for travelers entering the United States under the VWP on June 9, 2008, and began accepting ESTA applications on a voluntary basis in August 2008. Beginning January 12, 2009, DHS required all VWP travelers to apply for ESTA approval prior to travel to the United States. DHS began enforcing compliance with ESTA requirements in March 2010, exercising the right to fine a carrier or rescind its VWP signatory status for failure to comply with the ESTA requirement. Although passengers may apply for ESTA approval anytime before they board a plane or ship bound for the United States, DHS recommends that travelers apply when they begin preparing travel plans. Prior to ESTA’s implementation, all travelers from VWP countries manually completed a form—the I-94W—en route to the United States, supplying biographical information and answering questions to determine eligibility for the VWP. DHS officials collected the forms from VWP passengers at U.S. ports of entry and used the information on the forms to qualify or disqualify the passengers for entry into the United States without a visa. DHS uses ESTA to electronically collect VWP applicants’ biographical information and responses to eligibility questions. The ESTA application requires the same information collected through the I-94W forms. When an applicant submits an ESTA application, DHS systems evaluate the applicant’s biographical information and responses to VWP eligibility questions. (See table 1.) If the DHS evaluation results in a denial of the application, the applicant is directed to apply for a U.S. visa. For all other applications, if this review process locates no information requiring further analysis, DHS notifies the applicant that the application is approved; if the process locates such information, DHS notifies the applicant that the application is pending, and DHS performs a manual check on the information. For example, if an applicant reports that a previous U.S. visa application was denied, DHS deems the ESTA application pending and performs additional review. If on further review of any pending application DHS determines that information disqualifies the applicant from VWP travel, the application is denied, and the individual is directed to apply for a visa; otherwise the applicant is approved. Figure 2 illustrates the ESTA application review process. (See app. II for information on how to apply for ESTA.) According to DHS data, the number of individuals submitting ESTA applications increased from about 180,000 per month in 2008, when applying was voluntary, to more than 1.15 million per month in 2009 and 2010 after DHS made ESTA mandatory. DHS approved over 99 percent of the almost 28.6 million ESTA applications submitted from August 2008 through December 2010, but it also denied the applications of thousands of individuals it deemed ineligible to travel to the United States under the VWP. The denial rate has decreased slightly from 0.42 percent in 2008 to 0.24 percent in 2010. (See fig. 3.) DHS data show that DHS denied 77,132 of the almost 28.6 million applications for VWP travel submitted through ESTA from 2008 through 2010. Reasons for denials included applicants’ responses to the eligibility questions, as well as DHS’s discovery of other information that disqualified applicants from travel under the VWP. Examples are as follows: DHS denied 19,871 applications because of applicant responses to the eligibility questions. DHS denied 36,744 pending applications because of the results of manual reviews of passenger data. DHS denied 15,078 applications because the applicants had unresolved cases of a lost or stolen passport that DHS decided warranted an in-person visa interview with a State consular officer. In addition, ESTA applications are regularly reevaluated as new information becomes available to DHS, potentially changing applicants’ ESTA status. In developing and implementing ESTA, DHS has taken steps to minimize the burden associated with ESTA’s use. Less frequent applications. ESTA approval for program participants generally remains valid for 2 years. Prior to ESTA implementation, passengers traveling under the program were required to complete the I- 94W form to determine their program eligibility each time they boarded a carrier to the United States. When DHS implemented ESTA, the burden on passengers increased because DHS also required ESTA applicants to complete an I-94W form. However, on June 29, 2010, DHS eliminated the I- 94W requirement for most air and sea travelers who had been approved by ESTA. According to travel industry officials in the six VWP countries we visited, this change has simplified travel for many travelers, especially business travelers who travel several times each year. DHS officials said the change also eliminated the problems of deciphering sometimes illegible handwriting on the I-94W forms. Earlier notice of ineligibility. ESTA notifies passengers of program ineligibility, and therefore of the need to apply for a visa, before they embark for the United States. Prior to ESTA implementation, passengers from VWP countries did not learn until reaching the U.S. port of entry whether they were eligible to enter under the VWP or would be required to obtain a visa. Because DHS received passengers’ completed I-94W forms at the port of entry, DHS officials did not recommend that carriers prevent passengers from VWP countries from boarding a U.S. bound carrier without a visa unless they were deemed ineligible based on other limited preboarding information provided by carriers. Widespread U.S. government outreach. VWP country government and travel industry officials praised widespread U.S. government efforts to provide information about the ESTA requirements. After announcing ESTA, DHS began an outreach campaign in VWP countries and for foreign government embassy staff in the United States, with the assistance of other U.S. agencies, to publicize the requirement. DHS officials said they spent $4.5 million on ESTA outreach efforts. Although none of the six embassies we visited tracked the costs associated with outreach, each embassy provided documentation of their use of many types of outreach efforts listed in table 2. VWP country government officials and travel industry officials we met said that although they were initially concerned that ESTA implementation would be difficult and negatively affect airlines and many VWP passengers, implementation went more smoothly than expected. Reasonable implementation time frames. Most of the VWP country airline officials with whom we met said that the ESTA implementation time frames set by DHS were reasonable. In 2008, DHS introduced ESTA and made compliance voluntary. The following year, DHS made ESTA mandatory but did not levy fines if airlines did not verify passengers’ ESTA approval before boarding them. This allowed the U.S. government more time to publicize the requirement, according to DHS officials. Enforcement began in March 2010. According to most of the officials we interviewed from 17 airlines in the six VWP countries we visited, the phased-in compliance generally allowed passengers sufficient time to learn about the ESTA requirement and allowed most airlines sufficient time to update their systems to meet the requirement. ESTA officials said that the phased- in compliance also provided time to fix problems with the system before enforcing airline and passenger compliance. DHS responsiveness to travel industry feedback. VWP travel industry officials said that DHS officials’ efforts to adapt ESTA in response to feedback have clarified the application process. Since initial implementation of ESTA in 2008, DHS has issued updates to the system on 21 occasions. According to DHS officials, many of these changes addressed parts of the application that were unclear to applicants. For example, DHS learned from some travel industry officials that many applicants did not know how to answer a question on the application about whether they had committed a crime of moral turpitude because they did not know the definition of “moral turpitude.” In September 2010, DHS released an updated ESTA application that included a definition of the term directly under the question. Further, updates have made the ESTA application available in 22 languages instead of only English. DHS also made it possible for denied applicants to reapply and be approved if they mistakenly answered “yes” to select eligibility questions. Although travel industry officials we met with in six VWP countries said there are still ways ESTA should be improved, they said that DHS’s responsiveness in amending the ESTA application had made the system more user friendly. Shorter reported passenger processing times. According to a study commissioned by DHS and conducted at three U.S. ports of entry, ESTA has reduced the average time DHS takes to process a VWP passenger before deciding whether to admit them into the United States by a range of between 17.8 and 54 percent. The study attributed this time savings to factors such as the reduction in number of documents DHS officers needed to handle and evaluate and the reduction in data entry needed at the port of entry. Although DHS took steps to minimize the burden imposed by ESTA implementation, almost all government and travel industry officials we met in six VWP countries expressed dissatisfaction over the Travel Promotion Act of 2009 (TPA) fee collected as part of the ESTA application. In September 2010, the U.S. government began to charge ESTA applicants a $14 fee when they applied for ESTA approval, including $10 for the creation of a corporation to promote travel to the United States and $4 to fund ESTA operations. According to many of the VWP country government and travel industry officials with whom we met, the TPA fee is unfair because it burdens those traveling to the United States with an added fee to encourage others to travel to the United States. Some of the officials pointed out that it was unrelated to VWP travel and that it runs counter to the program objective of simplifying travel for VWP participants. DHS officials said that many government and travel industry officials from VWP countries view the fee as a step away from visa-free travel and consider ESTA with the fee “visa-lite.” By comparison, a nonimmigrant visitor visa costs over $100 but is generally valid for five times as long as ESTA approval. Several foreign officials said they expected that the fee amount would continue to rise over time. DHS officials stated that they cannot control the TPA portion of the ESTA fee because it was mandated by law. In addition, some airline officials expressed concern that the ESTA requirement was one of many requirements imposed by DHS that required the carriers to bear the cost of system updates. DHS officials said that the ESTA requirement did impose a new cost to carriers, but that it was necessary to strengthen the security of the VWP. According to DHS, air and sea carriers are required to verify that each passenger they board has ESTA approval before boarding them. Carriers’ compliance with the requirement has increased since DHS made ESTA mandatory and has exceeded 99 percent in recent months. DHS data show the following: 2008. In 2008, when VWP passenger and carrier compliance was voluntary, airlines and sea carriers verified ESTA approval for about 5.4 percent of passengers boarded under the VWP. According to DHS officials, carriers needed time to update their systems to receive passengers’ ESTA status, and DHS needed time to publicize the new travel requirement. 2009. ESTA became mandatory in January 2009, and carriers verified ESTA approval for about 88 percent of passengers boarded under the VWP that year. 2010. In March 2010, DHS began enforcing carrier compliance. In that year, carriers verified ESTA approval for almost 98 percent of VWP passengers. As of January 2011, DHS had imposed fines on VWP carriers for 5 of the passengers who had been allowed to board without ESTA approval. Figure 4 shows the percentage of VWP passengers boarded by carriers who had verified the passengers’ ESTA approval. In addition, from September 2010 through January 2011, carrier compliance each month exceeded 99 percent. Although carriers verified ESTA approval for almost 98 percent of VWP passengers before boarding them for VWP travel in 2010, DHS has not fully analyzed the potential risks posed by cases where carriers boarded passengers for VWP travel without verifying that they had ESTA approval. In 2010, about 2 percent—364,086 VWP passengers—were boarded without verified ESTA approval. For most of these passengers—363,438, or about 99.8 percent—no ESTA application had been recorded. The remainder without ESTA approval—648, or about 0.2 percent—were passengers whose ESTA applications had been denied. DHS officials told us that, although there is no official agency plan for monitoring and oversight of ESTA, the ESTA office is undertaking a review of each case of a carrier’s boarding a VWP traveler without an approved ESTA application; however, DHS has not established a target date for completing this review. In its review of these cases, DHS officials said they expect to determine why the carrier boarded the passengers, whether and why DHS admitted these individuals into the United States, and whether the airline or sea carrier should be fined for noncompliance. DHS tracks some data on passengers that travel under the VWP without verified ESTA approval but does not track other data that would help officials know the extent to which noncompliance poses a risk to the program. For example, although DHS officials said that about 180 VWP travelers who arrive at a U.S. port of entry without ESTA approval are admitted to the United States each day, they have not tracked how many, if any, of those passengers had been denied by ESTA. DHS also reported that 6,486 VWP passengers were refused entry into the United States at the port of entry in 2010, but that number includes VWP passengers for whom carriers had verified ESTA approval. Officials did not track how many of those had been boarded without verified ESTA approval. DHS also did not know how many passengers without verified ESTA approval were boarded with DHS approval after system outages precluded timely verification of ESTA approval. Without a completed analysis of noncompliance with ESTA requirements, DHS is unable to determine the level of risk that noncompliance poses to VWP security and to identify improvements needed to minimize noncompliance. In addition, without analysis of data on travelers who were admitted to the United States without a visa after being denied by ESTA, DHS cannot determine the extent to which ESTA is accurately identifying individuals who should be denied travel under the program. Although DHS and partners at State and Justice have made progress in negotiating information-sharing agreements with VWP countries, required by the 9/11 Act, only half of the countries have entered into all required agreements. In addition, many of the agreements entered into have not been implemented. The 9/11 Act does not establish an explicit deadline for compliance, but DHS with support from State and Justice has produced a completion schedule that requires agreements to be entered into by the end of each country’s current or next biennial review cycle, the last of which will be completed by June 2012. In coordination with State and Justice, DHS also outlined measures short of termination that may be applied to VWP countries not meeting their compliance date. The 9/11 Act specifies that each VWP country must enter into agreements with the United States to share information regarding whether citizens and nationals of that country traveling to the United States represent a threat to the security or welfare of the United States and to report lost or stolen passports. DHS, in consultation with other agencies, has determined that VWP countries can satisfy the requirement by entering into the following three bilateral agreements: Homeland Security Presidential Directive 6 (HSPD-6), Preventing and Combating Serious Crime (PCSC), and Lost and Stolen Passports (LASP). According to DHS officials, countries joining the VWP after the 9/11 Act entered into force are required to enter into HSPD-6 and PCSC agreements with the United States as a condition of admission into the program. In addition, prior to joining the VWP, such countries are required to enter into agreements containing specific arrangements for information sharing on lost and stolen passports. As illustrated in table 3 below, DHS, State, and Justice have made some progress with VWP countries in entering into the agreements. All VWP countries and the United States share some information with one another on some level, but the existence of a formal agreement improves information sharing, according to DHS officials. As opposed to informal case-by-case information sharing, formal agreements expand the pool of information to which the United States has systematic access. They can draw attention to and provide information on individuals of whom the United States would not otherwise be aware. According to officials, formal agreements generally expedite the sharing of information by laying out specific terms that can be easily referred to when requesting data. DHS officials observed that timely access to information is especially important for CBP officials at ports of entry. HSPD-6 agreements establish a procedure between the United States and partner countries to share watchlist information about known or suspected terrorists. As of January 2011, 19 of the 36 VWP countries had signed HSPD-6 agreements, and 13 have begun sharing information according to the signed agreements. (See table 3.) Justice’s Terrorist Screening Center (TSC) and State have the primary responsibility to negotiate and conclude these information-sharing agreements. An interagency working group, co-led by TSC and State that also includes representatives from U.S. law enforcement, intelligence, and policy communities, addresses issues with the exchange of information and coordinates efforts to enhance information exchange. While the agreements are based on a template that officials use as a starting point for negotiations, according to TSC officials, the terms of each HSPD-6 agreement are unique, prescribing levels of information sharing that reflect the laws, political will, and domestic policies of each partner country. TSC officials said most HSPD-6 agreements are legally nonbinding. Officials said that this allows more flexibility in information-sharing procedures and simplifies negotiations with officials from partner countries. The TSC officials noted that the nonbinding nature of the agreements may allow some VWP countries to avoid bureaucratic and political hurdles. Noting that State and TSC continue to negotiate HSPD-6 agreements with VWP countries, officials cited concerns regarding privacy and data protection expressed by many VWP countries as reasons for the delayed progress. According to these officials, in some cases, domestic laws of VWP countries limit their ability to commit to sharing some information, thereby complicating and slowing the negotiation process. The terms of HSPD-6 agreements are also extremely sensitive, TSC officials noted, and therefore many HSPD-6 agreements are classified. Officials expressed concern that disclosure of the agreements themselves might either (1) cause countries that had already signed agreements to become less cooperative in sharing data on known or suspected terrorists and reduce the exchange of information or (2) cause countries in negotiation to become less willing to sign agreements or insist on terms prescribing less information sharing. The value and quality of information received through HSPD-6 agreements vary, and some partnerships are more useful than others, according to TSC officials. The officials stated that some partner countries were more willing than others to share data on known or suspected terrorists. For example, according to TSC officials, some countries do not share data on individuals suspected of terrorist activity but only on those already convicted. In other cases, TSC officials stated that some partner countries did not have the technical capacity to provide all information typically obtained through HSPD-6 agreements. For example, terrorist watchlist data include at least the name and date of birth of the suspect and may also include biometric information such as fingerprints or photographs. According to DHS officials, some member countries do not have the legal or technical ability to store such information. TSC has evidence that information is being shared as a result of HSPD-6 agreements. They provided the number of encounters with known or suspected terrorists generated through sharing watchlist information with foreign governments. TSC officials noted that they viewed these data as one measure of the relevance of the program, but not as comprehensive performance indicators. Although TSC records the number of encounters, HSPD-6 agreements do not contain terms requiring partner countries to reveal the results of these encounters, and there is no case management system to track and close them out, according to TSC officials. The PCSC agreements establish the framework for law enforcement cooperation by providing each party automated access to the other’s criminal databases that contain biographical, biometric, and criminal history data. (See table 3.) As of January 2011, 18 of the 36 VWP countries had met the PCSC information-sharing agreement requirement, but the networking modifications and system upgrades required to enable this information sharing to take place have not been completed for any VWP countries. The language of the PCSC agreements varies slightly because, according to agency officials, partner countries have different legal definitions of what constitutes a serious crime or felony, as well as varying demands regarding data protection provisions. Achieving greater progress negotiating PCSC agreements has been difficult, according to DHS officials, because the agreements require lengthy and intensive face-to-face discussions with foreign governments. Justice and DHS, with assistance from State, negotiate the agreements with officials from partner countries that can include representatives from their law enforcement and justice ministries, as well as their diplomatic corps. Further, sharing sensitive personal information with the United States is publicly unpopular in many VWP countries, even if the countries’ law enforcement agencies have no reluctance to share information. Officials in some VWP countries told us that efforts to overcome political barriers have caused further delays. Though officials expect to complete networking modifications necessary to allow queries of Spain’s and Germany’s criminal databases in 2011, the process is a legally and technically complex one that has not yet been completed for any of the VWP countries. According to officials, DHS is frequently not in a position to influence the speed of PCSC implementation for a number of reasons. For example, according to DHS officials, some VWP countries require parliamentary ratification before implementation can begin. Also U.S. and partner country officials must develop a common information technology architecture to allow queries between databases. In a 2006 GAO report, we found that not all VWP countries were consistently reporting data on lost and stolen passports. We recommended that DHS develop clear standard operating procedures for such reporting, including a definition of timely reporting. As of January 2011, all VWP countries were sharing lost and stolen passport information with the United States, and 34 of the 36 VWP countries had entered into LASP agreements. (See table 3.) The 9/11 Act requires VWP countries to enter into an agreement with the United States to report, or make available to the United States through Interpol or other means as designated by the Secretary of Homeland Security information about the theft or loss of passports. According to DHS officials, other international mandates have helped the United States to obtain LASP information. Since 2005, all European Union countries have been mandated to send data on lost and stolen passports to Interpol for its Stolen and Lost Travel Documents database. In addition, Australia and New Zealand have agreements to share lost and stolen passport information through the Regional Movement Alert System. According to officials, in fiscal year 2004, more than 700 fraudulent passports from VWP countries were intercepted at U.S. ports of entry; however, by fiscal year 2010, this number had decreased to 64. DHS officials attributed the decrease in the use of fraudulent passports in part to better LASP reporting to Interpol. More complete data has allowed DHS to identify more individuals attempting VWP travel with a passport that has been reported lost or stolen before they begin travel. Although the 9/11 Act does not establish an explicit deadline, DHS, with the support of partners at State and Justice, has produced a compliance schedule that requires agreements to be entered into by the end of each country’s current or next biennial review cycle, the last of which will be completed by June 2012. In March 2010, State sent a cable to posts in all VWP countries that instructed the appropriate posts to communicate the particular compliance date to the government of each noncompliant VWP country. However, DHS officials expressed concern that some VWP countries may not have entered into all agreements by the specified compliance dates. According to DHS officials, termination from the VWP is one potential consequence for VWP countries that do not enter into information-sharing agreements. However, U.S. officials described termination as undesirable, saying that it would significantly impact diplomatic relations and would weaken any informal exchange of information. Further, termination would require all citizens from the country to obtain visas before traveling to the United States. According to officials, particularly in the larger VWP countries, this step would overwhelm consular offices and discourage travel to the United States, thereby damaging trade and tourism. U.S. embassy officials in France told us that when the United States required only a small portion of the French traveling population—those without machine-readable passports—to obtain visas, U.S. embassy officials logged many overtime hours, while long lines of applicants extended into the embassy courtyard. DHS helped write a classified strategy document that outlines a contingency plan listing possible measures short of termination from the VWP that may be taken if a VWP country does not meet its specified compliance date for entering into information-sharing agreements. The strategy document provides steps that would need to be taken prior to selecting and implementing one of these measures. According to officials, DHS plans to decide which measures to apply on a case-by-case basis. DHS conducts reviews to determine whether issues of security, law enforcement, or immigration affect VWP country participation in the program; however, the agency has not completed half of the mandated biennial reports resulting from these reviews in a timely manner. In 2002, Congress mandated that, at least once every 2 years, DHS evaluate the effect of each country’s continued participation in the program on the security, law enforcement, and immigration interests of the United States. The mandate also directed DHS to determine based on the evaluation whether each VWP country’s designation should continue or be terminated and to submit a written report on that determination to select congressional committees. To fulfill this requirement, DHS conducts reviews of VWP countries that examine and document, among other things, counterterrorism and law enforcement capabilities, border control and immigration programs and policies, and security procedures. To document its findings, DHS composes a report on each VWP country reviewed and a brief summary of the report to submit to congressional committees. In conjunction with DHS’s reviews, the Director of National Intelligence (DNI) produces intelligence assessments that DHS reviews prior to finalizing its VWP country biennial reports. According to VWP officials, they visited 12 program countries in fiscal year 2009 and 10 countries in fiscal year 2010 to gather the data needed to complete these reports. As of February 2011, the Visa Waiver Program Office had completed 3 country visits and anticipated conducting 10 more for fiscal year 2011. If issues of concern are identified during the VWP country review process, DHS drafts an engagement strategy documenting the issues of concern and suggesting recommendations for addressing the issues. According to VWP officials, they also regularly monitor VWP country efforts to stay informed about any emerging issues that may affect the countries’ VWP status. In 2006, we found that DHS had not completed the required biennial reviews in a timely fashion, and we recommended that DHS establish protocols including deadlines for biennial report completion. DHS established protocols in 2007 that include timely completion of biennial reports as a goal. Our current review shows that DHS has not completed the latest biennial reports for 50 percent, or 18 of the 36 VWP countries in a timely manner. Also, over half of those reports are more than 1 year overdue. In the case of two countries, DHS was unable to demonstrate that they had completed reports in over 4 years. Further, according to the evidence supplied by DHS, of the 17 reports completed since the beginning of 2009, over 25 percent were transmitted to Congress 3 or more months after report completion, and 2 of those after more than 6 months. DHS cited a number of reasons for the reporting delays, including a lack of resources needed to complete timely reports. In addition, DHS officials said that they sometimes intentionally delayed report completion for two reasons: (1) because they frequently did not receive DNI intelligence assessments in a timely manner and needed to review these before completing VWP country biennial reports or (2) in order to incorporate anticipated developments in the status of information-sharing agreement negotiations with a VWP country. Further, DHS officials cited lengthy internal review as the primary reason for delays in submitting the formal summary reports to Congress. Without timely reports, it is not clear to Congress whether vulnerabilities exist that jeopardize continued participation in the VWP. The VWP facilitates travel for nationals from qualifying countries, removing the requirement that they apply in-person at a U.S. embassy for a nonimmigrant visa for business or pleasure travel of 90 days or less. In an attempt to facilitate visa-free travel without sacrificing travel security, Congress has mandated security measures such as ESTA, information- sharing requirements, and VWP country biennial reviews. While ESTA has added a fee and a new pretravel requirement that place additional burdens on the VWP traveler, it has reduced the burden on VWP travelers in several other ways. DHS does not fully know the extent to which ESTA has mitigated VWP risks, however, because its review of cases of passengers being permitted to travel without verified ESTA approval is not yet complete. Although the percentage of VWP travelers without verified ESTA approval is very small, DHS oversight of noncompliant travelers may reduce the risk that an individual that poses a security risk to the United States could board a plane or ship traveling to the United States. Even if DHS has authority to deny individuals entry to the United States in such cases, ESTA was designed to screen such individuals before they embark on travel to the United States. Moreover, with only half of the countries participating in the VWP in full compliance with the requirement to enter into information-sharing agreements with the United States, DHS may not have sufficient information to deny participation in the VWP to individuals who pose a security risk to the United States. In addition, the congressional mandate requiring VWP country biennial reports provides important information to Congress on security measures in place in VWP countries but also on potential vulnerabilities that could affect the countries’ future participation in the program. Because DHS has not consistently submitted the reports in a timely manner since the legal requirement was imposed in 2002, Congress does not have the assurance that DHS efforts to require program countries to minimize vulnerabilities and its recommendations for continued status in the VWP are based on up- to-date assessments. To ensure that DHS can identify and mitigate potential security risks associated with the VWP, we recommend that the Secretary of Homeland Security take the following two actions: establish time frames for the regular review and documentation of cases of VWP passengers traveling to a U.S. port of entry without verified ESTA approval, and take steps to address delays in the biennial country review process so that the mandated country reports can be completed on time. DHS provided written comments on a draft of this report. These comments are reprinted in appendix III. DHS, State, and Justice provided technical comments that we have incorporated into this report, as appropriate. In commenting on the draft, DHS stated that it concurred with GAO’s recommendations and expects to be able to implement them. DHS provided additional information on its efforts to ensure that VWP countries remain compliant with program requirements and to monitor and assess issues that may pose a risk to U.S. interests. DHS also provided information on actions it is taking to resolve the issues identified in the audit. For example, DHS stated it will have established procedures by the end of May 2011 to perform quarterly reviews of a representative sample of VWP passengers who do not comply with the ESTA requirement. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Homeland Security, the Secretary of State, the Attorney General, and other interested parties. The report also will be available on the GAO Web site at no charge at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-4268 or fordj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors are listed in appendix IV. To assess the implementation of the Electronic System for Travel Authorization (ESTA), we reviewed relevant documentation, including 2006 and 2008 GAO reports evaluating the Visa Waiver Program (VWP) and statistics on program applicants and travelers. Between June and September 2010, we interviewed consular, public diplomacy, and law enforcement officials at U.S. embassies in six VWP countries: France, Ireland, Japan, South Korea, Spain, and the United Kingdom. We also interviewed political and commercial officers at embassies in five of these countries. While the results of our site visits are not generalizable, they provided perspectives on VWP and ESTA implementation. We met with travel industry officials, including airline representatives, and foreign government officials in the six countries we visited to discuss ESTA implementation. We selected the countries we visited so that we could interview officials from VWP countries in diverse geographic regions that varied in terms of information-sharing signature status, number of travelers to the United States, and the existence in-country of potential program security risks. We met with officials from the Department of Homeland Security (DHS) in Washington, D.C. We used data provided by DHS from the ESTA database to assess the usage of the program and airline compliance with the ESTA requirements and determined that the data was sufficiently reliable for our purposes. To evaluate the status of information sharing, we analyzed data regarding which countries had signed the agreements and interviewed DHS, Department of State (State), and Department of Justice (Justice) officials in Washington, D.C., and International Criminal Police Organization (Interpol) officials in Lyon, France. We reviewed the Implementing Recommendations of the 9/11 Commission Act of 2007, which contained the information-sharing requirement. We received and reviewed copies of many Preventing and Combating Serious Crime and Lost and Stolen Passport agreements. While conducting our fieldwork, we confirmed the status of the agreements in each of the countries we visited. We determined that the data on the status of information sharing were sufficiently reliable for our purposes. However, we were unable to view the signed Homeland Security Presidential Directive 6 agreements, because Justice’s Terrorist Screening Center declined to provide us requested access to the agreements. We also met with foreign government officials from agencies involved with VWP information-sharing agreement negotiations in the six countries we visited to discuss their views regarding VWP information-sharing negotiations with U.S. officials. In addition, with Interpol officials in France, we discussed the status of the sharing of information on lost and stolen passports. Interpol officials were unable to provide country-specific statistics regarding sharing of lost and stolen passport information due to its data privacy policy. To assess DHS efforts to complete timely biennial reviews of each VWP country, we reviewed DHS documents, as well as the links to completed reviews on the DHS intranet Web site to determine whether the reviews were completed in a timely manner. We also reviewed a 2006 GAO report that recommended improvements to the timeliness of DHS’s biennial reporting process. We conducted this performance audit from January 2010 to May 2011, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The official ESTA application can be completed online at https://esta.cbp.dhs.gov/esta/. (See fig 5.) DHS officials told us they actively publicize the official Web site, because many unofficial Web sites exist that charge an additional fee to fill out an application for an individual. They said the unofficial Web sites are not fraudulent if they do not use the official DHS or ESTA logos and provide the service they promise. In addition to the individual named above, Anthony Moran, Assistant Director; Jeffrey Baldwin-Bott; Mattias Fenton; Reid Lowe; and John F. Miller made key contributions to this report. Martin DeAlteriis, Joyce Evans, Etana Finkler, Richard Hung, Mary Moutsos, Jena Sinkfield, and Cynthia S. Taylor also provided technical assistance.","The Visa Waiver Program (VWP) allows eligible nationals from 36 member countries to travel to the United States for tourism or business for 90 days or less without a visa. In 2007, Congress required the Secretary of Homeland Security, in consultation with the Secretary of State, to implement an automated electronic travel authorization system to determine, prior to travel, applicants' eligibility to travel to the United States under the VWP. Congress also required all VWP member countries to enter into an agreement with the United States to share information on whether citizens and nationals of that country traveling to the United States represent a security threat. In 2002, Congress mandated that the Department of Homeland Security (DHS) review, at least every 2 years, the security risks posed by each VWP country's participation in the program. In this report, GAO evaluates (1) DHS's implementation of an electronic system for travel authorization; (2) U.S. agencies' progress in negotiating informationsharing agreements; and (3) DHS's timeliness in issuing biennial reports. GAO reviewed relevant documents and interviewed U.S., foreign government, and travel industry officials in six VWP countries. DHS has implemented the Electronic System for Travel Authorization (ESTA) and has taken steps to minimize the burden associated with the new program requirement. However, DHS has not fully evaluated security risks related to the small percentage of VWP travelers without verified ESTA approval. DHS requires applicants for VWP travel to submit biographical information and answers to eligibility questions through ESTA prior to travel. Travelers whose ESTA applications are denied can apply for a U.S. visa. In developing and implementing ESTA, DHS has made efforts to minimize the burden imposed by the new requirement. For example, although travelers formerly filled out a VWP application form for each journey to the United States, ESTA approval is generally valid for 2 years. Most travel industry officials GAO interviewed in six VWP countries praised DHS's widespread ESTA outreach efforts, reasonable implementation time frames, and responsiveness to feedback, but expressed dissatisfaction with the costs associated with ESTA. In 2010, airlines complied with the requirement to verify ESTA approval for almost 98 percent of VWP passengers prior to boarding, but the remaining 2 percent-- about 364,000 travelers--traveled under the VWP without verified ESTA approval. DHS has not yet completed a review of these cases to know to what extent they pose a risk to the program. To meet the legislative requirement, DHS requires that VWP countries enter into three information-sharing agreements with the United States; however, only half of the countries have fully complied with this requirement and many of the signed agreements have not been implemented. Half of the countries have entered into agreements to share watchlist information about known or suspected terrorists and to provide access to biographical, biometric, and criminal history data. By contrast, almost all of the 36 VWP countries have entered into an agreement to report lost and stolen passports. DHS, with the support of interagency partners, has established a compliance schedule requiring the last of the VWP countries to finalize these agreements by June 2012. Although termination from the VWP is one potential consequence for countries not complying with the information-sharing agreement requirement, U.S. officials have described it as undesirable. DHS, in coordination with State and Justice, has developed measures short of termination that could be applied to countries not meeting their compliance date. DHS has not completed half of the most recent biennial reports on VWP countries' security risks in a timely manner. According to officials, DHS assesses, among other things, counterterrorism capabilities and immigration programs. However, DHS has not completed the latest biennial reports for 18 of the 36 VWP countries in a timely manner, and over half of these reports are more than 1 year overdue. Further, in the case of two countries, DHS was unable to demonstrate that it had completed reports in the last 4 years. DHS cited a number of reasons for the reporting delays. For example, DHS officials said that they intentionally delayed report completion because they frequently did not receive mandated intelligence assessments in a timely manner and needed to review these before completing VWP country biennial reports. GAO recommends that DHS establish time frames for the regular review of cases of ESTA noncompliance and take steps to address delays in the biennial review process. DHS concurred with the report's recommendations.",govreport
"State child welfare systems consist of a complicated network of policies and programs designed to protect children. With growing caseloads over the past decade, the systems’ ability to keep pace with the needs of troubled children and their families has been greatly taxed. From fiscal year 1984 through 1995, the foster care population grew from an estimated 276,000 children to 494,000. In 1995, about 261,000 of these children were supported by federal funds through title IV-E of the Social Security Act. The federal government plays an important role in financing foster care and establishes minimum procedural requirements for the placement process. As required by the Adoption Assistance and Child Welfare Act of 1980 (P.L. 96-272), states must make reasonable efforts to prevent or eliminate the need for removing children from their homes. Once a child is removed from the home, the state must also provide services to the family and the child with the goal of reuniting them. If reunification is not possible, the state is to find permanent placement for the child outside the family home. To guide the permanency planning process by which a state is to find permanent placements for foster children, the act also requires that the state develop a case plan for each child. Each case plan must be reviewed at least every 6 months and, within 18 months, a permanency hearing must be held to determine the future status of the child. If a final decision is not made at this hearing, federal law provides that additional hearings must be held at least every 12 months. Options for the child’s future status can include, but are not limited to, reuniting the child with his or her family, placing the child for adoption, continuing temporary foster care, or continuing foster care permanently or long term because of the child’s special needs or circumstances. Increasingly, children are being placed with their own relatives, who then may sometimes receive foster care subsidies. The prolonged stays of children in foster care have prompted 26 states to enact laws or policies to shorten to less than the federally allowed 18 months the time between entering foster care and the first permanency hearing. Twenty-three of these states have enacted such laws, while three others have done so by administrative policy. A majority of these states require the hearing within 12 months. In two states, the shorter time frame applies only to younger children. Colorado requires that the permanency hearing be held within 6 months for children under age 6, and Washington requires the hearing to be held within 12 months for children aged 10 or younger. The remaining 24 states and the District of Columbia have statutes consistent with the federal requirement of 18 months. (For a description of the 26 state statutes, policies, and time requirements, see app. I.) The state laws, like federal law, do not require that a final decision be made at the first hearing. Ohio and Minnesota, however, do require that a permanency decision be determined after a limited extension period. Ohio, for example, requires a permanency hearing to be held within 12 months, with a maximum of two 6-month extensions. At the end of that time, a permanent placement decision must be made. According to officials in Ohio’s Office of Child Care and Family Services, the requirement for earlier permanency hearings was made to expedite the permanent placement process and reduce the time children spend in foster care. State officials also believed, however, that this requirement may have unintentionally resulted in increasing the number of children placed in long-term foster care because other placement options could not be developed. State data, in part, confirmed this observation. While long-term foster care placements for children supported with state funds dropped from 1,301 in 1990 to 779 in 1995, long-term placements for children from low-income families who are supported in part with federal funds rose from 1,657 to 2,057 in the same period. Although the states we reviewed did not systematically evaluate the impacts of their initiatives, they have implemented a variety of operational and procedural changes to expedite and improve the permanency process. The states reported that these actions have improved the lives of some children by (1) reuniting them with their families more quickly; (2) expediting the termination of parental rights when reunification is not feasible, making it possible for child welfare agencies to begin looking for an adoptive home sooner; or (3) reducing the number of different foster care placements in which children live. Some states implemented low-cost, creative methods for financing and providing services that address specific barriers to reuniting families. Arizona’s Housing Assistance Program focused on families in which the major barrier to reunification was inadequate housing for the family. According to reports and data from the Arizona Department of Economic Security, between 1991 and 1995, as the result of the program, 939 children were reunited with their families, representing almost 12 percent of the children reunified during this period. State officials estimated that this program saved the state over $1 million in foster care-related costs between 1991 and 1995. Arizona and Kentucky placed special emphasis on expediting the process by which parental rights could be terminated. Arizona’s Severance Project focused on cases in which termination of parental rights was likely or reunification services were not warranted and for which a backlog of cases had developed. In April 1986, the state enacted a law providing funds for hiring severance specialists and legal staff to work on termination cases. The following year, in 1987, the state implemented the Arizona State Adoption Project, which focused on identifying additional adoptive homes, including recruiting adoptive parents for specific children and contracting for adoptive home recruitment services. State officials reported that the Adoption Project resulted in a 54-percent increase in the number of new homes added to the state registry in late 1987 and 1988. In addition, they noted that the Severance Project contributed to a more than 32-percent reduction in the average length of stay between entering care and the filing of the termination petition for fiscal years 1991 through 1995. children available for adoption rose, the state was forced to focus its efforts on identifying potential adoptive homes and shifted its emphasis to strategies to better inform the public about the availability of adoptive children. Some states are experimenting with concurrent planning. Under this approach, child welfare officials work toward reuniting a family while developing an alternate plan for permanently removing the child if reunification efforts fail. By working on the two plans simultaneously, caseworkers reduce the time needed to prepare the paperwork for terminating parental rights if reunification efforts fail. Under a concurrent planning approach, caseworkers emphasize to the parents that if they do not adhere to the requirements set forth in their case plan, parental rights can be terminated. Some state officials attributed obtaining quicker permanent placements in part to parents making more concerted efforts to make the changes needed to have their children returned home. Colorado began using concurrent planning formally in 1994 for children under age 6 in conjunction with the implementation of the law requiring that for children under age 6, the permanency hearing must be held within 6 months of the child’s entering care. The program has been implemented in five counties. Preliminary data from an ongoing evaluation in Jefferson County shows that 65 out of 78 children, or 87 percent, achieved permanent placement within 1 year of initial placement as compared with 50 of 71 children, or 70 percent, in a control group. State Department of Human Services officials told us that concurrent planning was a key factor that contributed to the success of children’s being placed more quickly in permanent homes. All decisions regarding both the temporary and final placement of foster children come through states’ court systems. Therefore, Hamilton County, Ohio, juvenile court officials focused attention on the court’s involvement in achieving permanency more quickly by developing new procedures to expedite case processing. To do so, in 1985, they revised court procedures by (1) designating lawyers specially trained in foster care issues as magistrates to hear cases; (2) assigning one magistrate to each case for the life of that case to achieve continuity; and (3) agreeing at the end of every hearing—with all participants present—to the date for the next hearing. According to court officials, the county saved thousands of dollars because it could operate three magistrates’ courtrooms for about the cost of one judge’s courtroom. Also, a report on court activities indicated that because of these changes, between 1986 and 1990, the number of children (1) placed in four or more different foster care placements decreased by 11 percent and (2) the percentage of children leaving temporary and long-term foster care in 2 years or less increased from 37 to 75 percent. Our efforts to assess the overall impact of these initiatives were hampered by the absence of evaluation data. We found that the states generally did not conduct systematic evaluations of their programs, and outcome information was often limited to state reports and the observations of state officials. Although many of these efforts reported improvements, for example, in speeding the termination of parental rights once this goal was established, the lack of comparison groups or quality data from the period before the initiative made it difficult to reach definitive conclusions about the initiatives’ effectiveness. States increased their chances of successfully developing and implementing initiatives when certain key factors were a part of the process. When contemplating changes, state officials had to take into consideration the intricacies of the foster care process, the inherent difficulty that caseworkers and court officials face when deciding whether a child should be returned home, and the need, in some cases, for caseworkers and judges to recognize that termination of parental rights should be pursued. When Kentucky officials, for example, initiated a project to shorten the process for terminating parental rights, they faced the challenge of changing the way caseworkers and members of the legal system had viewed termination of parental rights. Many caseworkers saw the termination of parental rights as a failure on their part because they were not able to reunify the family. As a result, they seldom pursued termination and instead kept the children in foster care. In addition, judges and lawyers were often not sufficiently informed of the negative effects on children who do not have permanent homes. Thus, as part of this project, newsletters and training were provided about the effects on children of delaying termination of parental rights. Officials in the states we reviewed recognized that improving the permanency planning process requires concerted time and effort, coordination, and resources. These officials identified several critical, often interrelated factors required to meet these challenges. These included (1) long-term involvement of officials in leadership positions; (2) involvement of key stakeholders in developing consensus and obtaining buy-in about the problem and its solution; and (3) the availability of resources to plan, implement, and sustain the project. With the expected rise in foster care caseloads through the start of the next century further straining state and federal child welfare budgets, increasing pressure will be placed on states to develop initiatives to move children into permanent homes more quickly. Many of these initiatives will need to address the difficult issues of deciding under what circumstances to pursue reunification and what time period is appropriate before seeking the termination of parental rights. We found promising initiatives for changing parts of the permanency process so that children can be moved from foster care into permanent placements more quickly. Developing and successfully implementing these innovative approaches takes time and often challenges long-standing beliefs. To succeed, these initiatives must look to local leadership involvement, consensus building, and sustained resources. As these initiatives become a part of the complex child welfare system, however, they can also create unintended consequences. Identifying appropriate cases for the expeditious termination of parental rights and processing them faster—thereby making more children available for possible adoption—can create difficulties if efforts to develop more adoptive homes have not received equal emphasis. We also observed that a critical feature of these initiatives was often absent: Many of them lacked evaluations designed to assess the impact of the effort. The availability of evaluation information from these initiatives would not only point to the relative success or failure of an effort but also help identify unintended outcomes. The lack of program and evaluation data will continue to hinder the ability of program officials and policymakers to fully understand the overall impact of these initiatives. Mr. Chairman, this concludes my formal remarks. I will be happy to answer any questions you or other members of the Subcommittee may have. For more information on this testimony, please call Gale C. Harris, Assistant Director, at (202) 512-7235. Other major contributors are David D. Bellis, Social Science Analyst; Shellee S. Soliday and Octavia V. Parks, Senior Evaluators; Julian Klazkin, Senior Attorney; and Rathi Bose, Evaluator. Ariz. Rev. Stat. Ann., Section 8-515.C.(West Supp. 1996) Colo. Rev. Stat., Section 19-3-702(1)(Supp. 1996) Conn. Gen. Stat. Ann., Section 46b-129(d),(e) (West 1995) Ga. Code Ann., Section 15-11-419 (j),(k)(1996) 705 Ill. Comp. Stat. Ann., 405/2-22(5)(West Supp. 1996) Ind. Code Ann., Section 31-6-4-19(c)(Michie Supp. 1996) Iowa Code Ann., Section 232.104 (West 1994) Kan. Stat. Ann., Section 38-1565(b),(c)(1995) La. Ch. Code Ann., Arts. 702,710(West 1995) Mich. Stat. Ann., Section 27.3178(598.19a) (Law Co-op Supp. 1996) Minn. Stat. Ann., Section 260.191 Subd. 3b(West Supp. 1997) Miss. Code Ann., Section 43-21-613 (3)(1993) New Hampshire Court Rules Annotated, Abuse and Neglect, Guideline 39 (Permanency Planning Review) N.Y. Jud. Law, Section 1055(b)(McKinney Supp. 1997) Ohio Rev. Code Ann., Sections 2151.353(F) 2151.415 9 (A) (Anderson 1994) 42 Pa. Cons. Stat. Ann., Section 6351(e-g)(West Supp. 1996) (continued) R.I. Gen. Laws, Section 40-11-12.1(1990) S.C. Code Ann., Section 20-7-766(Law. Co-op. Supp. 1996) Utah Code Ann., Section 78-3a-312, (1996) Va. Code Ann., Section 16.1-282(Michie 1996) Wash. Rev. Code Ann., Section 13.34.145(3)(4) (West Supp. 1997) W. Va. Code Sections 49-6-5, 49-6-8(1996) Wis. Stat. Ann., Sections 48.355(4); 48.38; 48.365(5)(West 1987) Wyo. Stat. Ann., Section 14-6-229 (k)(Michie Supp. 1996) Michigan’s time frame to hold the permanency hearing was calculated by adding the days needed to conduct the preliminary hearing, trial, dispositional hearing, and the permanency hearing. Virginia’s time frame to hold the permanency hearing was calculated by adding the number of months required to file the petition to hold the permanency hearing plus the number of days within which the court is required to schedule the hearing. Child Welfare: Complex Needs Strain Capacity to Provide Services (GAO/HEHS-95-208, Sept. 26, 1995). Child Welfare: Opportunities to Further Enhance Family Preservation and Support (GAO/HEHS-95-112, June 15, 1995). Foster Care: Health Needs of Many Young Children Unknown and Unmet (GAO/HEHS-95-114, May 26, 1995). Foster Care: Parental Drug Abuse Has Alarming Impact on Young Children (GAO/HEHS-94-89, Apr. 4, 1994). Residential Care: Some High-Risk Youth Benefit, But More Study Needed (GAO/HEHS-94-56, Jan. 28, 1994). Foster Care: Services to Prevent Out-of-Home Placements Are Limited by Funding Barriers (GAO/HRD-93-76, June 29, 1993). Foster Care: State Agencies Other Than Child Welfare Can Access Title IV-E Funds (GAO/HRD-93-6, Feb. 9, 1993). Foster Care: Children’s Experiences Linked to Various Factors; Better Data Need (GAO/HRD-91-64, Sept. 11, 1991). Child Welfare: Monitoring Out-of-State Placements (GAO/HRD-91-107BR, Sept. 3, 1991). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","GAO discussed: (1) state efforts to reduce the time frames within which hearings must be held to determine permanent placements for foster children; (2) state initiatives designed to expedite permanent placements for foster children and the effectiveness of these initiatives; and (3) key factors that facilitate changes in this part of the child welfare system. GAO noted that: (1) signaling the importance of permanent placement to the well-being of children, 26 states have established more stringent requirements on the timing of the first permanency hearing than has federal law, which requires a hearing within 18 months; (2) in addition, the states it reviewed undertook operational and procedural initiatives to expedite the permanent placement process as well as make well-informed permanent placement decisions; (3) although most of these states did not systematically evaluate their initiatives, they reported that many of the initiatives have contributed to reducing the time spent in foster care or decreasing the total number of foster placements made for a child; (4) state officials reported that the key factors in successfully implementing these initiatives were the long-term involvement of key officials, an extended commitment of resources, and the need for a change in perspective of case workers and judges in order to recognize that, in some cases, termination of parental rights is the best solution for the child's future.",govreport
"Signed into law on May 9, 2014, the DATA Act expanded on previous federal transparency legislation by requiring the disclosure of federal agency expenditures and linking agency spending information to federal program activities so that both policymakers and the public can more effectively track federal spending. The DATA Act requires government- wide reporting on a greater variety of federal funds, such as budget and financial information, as well as tracking of these funds at multiple points in the federal spending lifecycle. To improve the quality of these data, the act requires that agency-reported award and financial information comply with new data standards established by OMB and Treasury. These standards specify the items to be reported under the DATA Act and define and describe what is to be included in each element with the aim of ensuring that information will be consistent and comparable. The act identifies OMB and Treasury as the two agencies responsible for leading government-wide implementation. Two key components of ensuring the accuracy, completeness, and consistency of federal spending data are OMB releasing policy guidance and Treasury developing technical guidance for the agency submissions and publication of the data required under the act. Toward that end, OMB has taken a number of steps to help agencies meet their reporting requirements, including establishing 57 standardized data element definitions for reporting federal spending information, issuing guidance to operationalize selected standards and clarify agency reporting requirements, and meeting with agencies to assess their readiness to meet the reporting requirements under the act. Specific actions include the following: In May 2015, OMB issued initial guidance to federal agencies on reporting requirements pursuant to the Federal Funding Accountability and Transparency Act (FFATA) as well as the new requirements that agencies must employ pursuant to the DATA Act. The guidance also directs agencies to (1) implement data definition standards for collecting and reporting agency-level and award-level data by May 9, 2017; (2) implement a standard data exchange format for providing data to Treasury to be displayed on USASpending.gov or a successor site; and (3) link agency financial systems with award systems by continuing to use specified unique identification numbers for financial assistance awards and contracts. In May 2016, OMB released guidance on reporting financial and award information required under the act. This guidance addresses (1) reporting financial and award level data, (2) linking agency award and financial systems using a unique award identifier, and (3) assuring that data submitted to Treasury for publication on USASpending.gov are sufficiently valid and reliable. In November 2016, OMB issued additional guidance in response to questions and concerns reported by agencies. This guidance specifies DATA Act reporting responsibilities for intragovernmental transactions, explains how to report financial assistance awards with personally identifiable information, and clarifies the senior accountable official (SAO) assurance process over the data submitted to the DATA Act broker, a system to standardize data formatting and assist reporting agencies in validating their data prior to submission. The May and November 2016 guidance also directs agency SAOs to leverage existing data quality and management controls established in statute, regulations, or federal policy when submitting their assurance over the data. In addition to issuing policy guidance to help agencies meet their reporting requirements under the act, OMB’s Controller and Treasury’s Fiscal Assistant Secretary conducted a series of meetings with CFO Act agencies to obtain information on any challenges that could impede effective implementation and assess agencies’ readiness to report required spending data in May 2017. Treasury also led efforts to develop the technical guidance and reporting systems to facilitate agency reporting. In April 2016, Treasury released the DATA Act Information Model Schema (DAIMS), or schema version 1.0, which provides information on how to standardize the way financial assistance awards, contracts and other financial and non-financial data will be collected and reported under the DATA Act. A key component of the reporting framework laid out in the schema is the DATA Act broker. According to Treasury guidance documents, agencies are expected to submit three files sourced from their financial management systems to the broker. The broker is also expected to extract award and sub-award information from existing award reporting systems that currently supply award data (covering federal assistance including grants and loans, as well as procurements) to USASpending.gov. These award reporting systems—including the Federal Procurement Data System-Next Generation (FPDS-NG), System for Award Management (SAM), the Award Submission Portal (ASP), and the FFATA Subaward Reporting System (FSRS)—compile information submitted by agencies and award recipients to report, among other things, procurement and financial assistance award information required under FFATA. A more detailed discussion of the broker and the agency file submission process can be found in our August 2016 correspondence. In addition to developing the schema version 1.0 and the broker, Treasury also issued an implementation playbook that outlines 8 steps and a recommended timeline for agency implementation, and hosted multiple meetings, including weekly office hour calls and monthly technical workshops, to help agencies prepare and test their data for submission to the broker. To help improve the quality of the data, the act also requires agencies’ IGs and GAO to assess and report on the completeness, timeliness, quality, and accuracy of spending data submitted by federal agencies. The first IG reports were due to Congress in November 2016. However, agencies are not required to submit spending data in compliance with the act until May 2017. As a result, the IGs did not report on the spending data in November 2016. The Council of the Inspectors General on Integrity and Efficiency (CIGIE) developed an approach to address what it describes as the IG reporting date anomaly and maintain early IG engagement with the agencies. CIGIE encouraged but did not require the IGs to undertake assessments of their respective agencies’ readiness to submit spending data in accordance with DATA Act requirements and delayed issuance of the mandated audit reports to November 2017. The Federal Audit Executive Council DATA Act Working Group—established by CIGIE to assist the IG community in understanding and meeting its DATA Act oversight requirements—issued the DATA Act Readiness Review Guide (version 2.0) on June 2, 2016, to guide IGs in conducting their readiness reviews. According to the review guide, the main objectives of the IG readiness reviews are to assess whether an agency’s DATA Act implementation plan or process is “on track to meet the requirements of the DATA Act,” and to provide, as needed, recommendations or suggestions on how to improve the agency’s likelihood of compliance with the requirements of the DATA Act. As of February 2017, 22 of the 24 CFO Act agencies had issued annual financial reports for fiscal year 2016 and 19 of the 22 CFO Act agencies’ auditors reported material weaknesses and/or significant deficiencies in internal control over financial reporting in their audit reports that may affect the quality of information reported under the DATA Act. In addition, as of February 2017, 20 of the 24 CFO Act agencies’ IGs had issued readiness review reports. Of these, 16 IGs identified a range of issues and challenges which may affect agencies’ abilities to produce quality data for submission to Treasury as part of the DATA Act reporting requirements. Further, 9 of the 22 CFO Act agencies’ auditors reported agencies’ financial management systems did not substantially comply with Section 803(a) of FFMIA, which may limit an agency’s ability to provide reliable and timely financial information for managing day-to-day operations and to produce reliable financial statements, maintain effective internal control, and comply with legal and regulatory requirements, including the DATA Act. Our analysis of material weaknesses, significant deficiencies, and other challenges reported in agency annual financial reports and agency IGs’ DATA Act readiness reviews identified data quality issues and challenges in three broad areas that increase the risk agencies may not be able to report complete, timely, and accurate data as required under the DATA Act by May 2017. These issues and challenges relate to internal controls over financial reporting and financial management operations, properly recorded and reconciled accounting balances and transactions, and other issues related to the proper use of accounting practices in accordance with U.S. generally accepted accounting principles. Fourteen of the 22 CFO Act agencies’ auditor’s reports noted material weaknesses and significant deficiencies, and 14 of the 20 IG readiness reviews reported issues or challenges related to accounting and financial management. See appendix III for a list of agencies that had deficiencies in this area. According to some of the auditor’s reports, issues in this area could result in misstatements in budgetary balances, obligations, and undelivered orders—which are part of the information to be posted on USASpending.gov. Some examples include the following: One agency’s auditor reported a material weakness in controls over financial management related to the maintenance of accounting records, recording obligations at the transaction level, and accounting and internal controls over obligations and undelivered orders. The auditor also reported a significant deficiency related to ineffective monitoring and reviewing, and inappropriate certification as to the validity of obligation balances, which resulted in invalid obligations remaining open. According to the auditor, these deficiencies restrict the availability of funding authority, and increase the risk of misstating obligation balances as of year-end. These types of issues increase the risk that quarterly obligation amounts reported by agencies under DATA Act requirements may be inaccurate or incomplete. Another agency’s IG readiness review reported that the various layers of data validation and reconciliation involved in the agency’s DATA Act implementation are complex and require coordination with each reporting bureau. According to the agency’s IG, the complexities of performing reconciliations of reported data to source systems presents a challenge to the agency’s ability to ensure the quality and validity of data reported. This set of issues included longstanding challenges with disparate or antiquated financial management systems that affect financial reporting. These challenges include system infrastructure and integration issues such as systems that do not consolidate transaction level financial data or do not capture required data elements such as award identifiers used to link financial and non-financial data. Five of the 22 CFO Act agencies’ auditors’ reports noted material weaknesses and significant deficiencies, and 14 of the 20 IG readiness reviews reported issues or challenges related to financial management systems. See appendix III for a list of agencies that had deficiencies in this area. According to the auditors’ reports, issues in this area may cause ineffective application of controls used to identify and resolve differences in financial information with source systems to help ensure complete, accurate, and timely financial information for DATA Act reporting. Also, according to the IG readiness reviews, issues with agency financial management systems resulted in test file submissions being rejected by the DATA Act broker due to validation errors. Only data that have passed the broker validation and been approved by the SAO is included in USASpending.gov. Data that have not passed the broker validation will not be included, therefore increasing the risk of incomplete or misleading information. Some examples include the following: One agency’s annual financial audit report stated that the agency had not enabled the full functionality of its accounting systems to capture all budgetary accounting events and to automate budgetary reporting procedures. As a result, the agency made numerous manual adjustments related to budgetary resources amounts that were not supported and not properly recorded to the correct general ledger accounts. According to the auditor, manual adjustments increase the risk (1) that budgetary adjustments were unsupported or inconsistently recorded, and (2) of the likelihood of errors in the financial statements. These deficiencies increase the risk that budgetary information that will be submitted to USASpending.gov may be incomplete and inaccurate. Another agency’s IG readiness review reported that the agency faced challenges due to legacy and current financial systems using different technologies and data elements. Limited resources, such as lack of financial resources and human capital necessary to implement the act’s requirements, was also cited as a challenge. The IG also reported that the agency had been unable to resolve data quality issues that have impeded the complete and accurate reporting of departmental contract, grant, loan, and other financial assistance awards in USASpending.gov. Finally, according to the auditor’s reports, 9 of the 22 CFO Act agencies’ auditors reported agencies’ financial management systems did not substantially comply with 1 or more of the 3 requirements found in section 803(a) of FFMIA. Section 803(a) of FFMIA requires: (1) federal financial management systems requirements; (2) applicable federal accounting standards; and (3) the U.S. Standard General Ledger (USSGL) at the transaction level. Eight of 22 agencies did not comply with federal financial management system requirements, which consist of reliable financial reporting; effective, efficient, and cost effective financial operations; safeguarding resources; and internal controls over financial reporting and financial system security. Four of 22 agencies did not comply with federal accounting standards, which provide guidance to improve federal financial reporting and are essential for public accountability and the effective and efficient functioning of government. Five of 22 agencies did not comply with the USSGL at the transaction level which means that each time an approved transaction is recorded in the financial management system it will generate the appropriate general ledger accounts for posting the transaction in accordance with the rules defined in USSGL guidance. By not implementing effective internal controls over financial management systems and not adequately implementing requirements in section 803(a) of FFMIA, agencies will be challenged to provide consistent financial and non-financial information across component entities and functions, which increases the risk that agencies may not be able to submit quality data for DATA Act reporting. The third area consists of issues involving security over information technology (IT) systems; improper access controls to limit users to systems and functions needed for their work; and system configurations such as outdated system software, patch management, and lack of compliance with internal policies. Issues involving IT security and ineffective controls could limit management’s ability to provide assurance over the completeness and accuracy of recorded transactions. Eighteen of the 22 CFO Act agencies’ auditors’ reports noted material weaknesses and significant deficiencies related to IT security and controls. See appendix III for a list of agencies that had deficiencies in this area. The IG readiness reviews, which primarily focused on other steps taken by agencies to implement the DATA Act, did not specifically mention challenges or issues related to IT security and controls. According to the auditors’ reports, issues in this area increase the risk that unauthorized and/or inappropriate changes made either accidentally or intentionally to financial IT systems may go undetected by management, increasing the risk of misstatement due to fraud and disruption of critical financial operations, as well as increasing the risk that the reliability and integrity of agencies’ data could be compromised and adversely affect the agencies’ ability to provide complete, accurate, and timely information for DATA Act reporting. One example iss the following: One agency’s annual financial audit report stated that controls over access to programs and data and audit logs were not designed properly, consistently implemented, or fully effective. The auditor found that database and operating system patches were not documented, authorized or tested prior to implementation into the production environment, a complete and accurate listing of operating system patches could not be generated, and a feeder system was configured incorrectly to assign incorrect invoice acceptance date data, among other things. According to the auditor, these deficiencies increase the risk that unscrupulous, unauthorized, or inappropriate activity could be performed and not detected, which could lead to a compromise and/or security risk to the confidentiality, integrity, and availability of the data and systems. These issues also increase the risk that financial and non-financial information that will be submitted to USASpending.gov may be incomplete, inaccurate, and untimely. We have previously reported weaknesses, issues, and other challenges in key DATA Act award systems which increase the risk that the data that will be submitted to USASpending.gov may not be complete, accurate, and timely. The DATA Act broker is expected to extract award and sub- award information related to federal spending, such as federal assistance—including grants, loans, and procurements—directly from four award systems. The four award systems and related issues that we have previously identified are described below. Unlike the data submitted by agencies directly from their financial systems to the DATA Act broker, the award and sub-award information extracted from these four systems are not subject to any validations in the broker. Since 1978, FPDS-NG has been the primary government-wide central repository for procurement data, and feeds certain data to USASpending.gov—a searchable database of information on federal contracts and other government assistance such as grants and cooperative agreements. Individuals and entities awarded contracts over the micro-purchase threshold must submit detailed contract information to FPDS-NG. FPDS-NG includes information about the product or service, agency and vendor information, contract start and expiration dates, and location of contract performance, among other elements. According to Treasury officials, the DATA Act broker will extract procurement award and awardee information such as award description, amount, and awardee unique identifier from FPDS-NG to be reported on USASpending.gov. In our past work, we found that FPDS-NG often contains inaccurate or incomplete data as agencies do not always input or document required information. For example, in September 2016, our review of the Department of Veterans Affairs (VA) contracting policies and procedures found that total obligations balances reflected in VA’s subsidiary accounting records did not match what was recorded in FPDS-NG. We also identified inaccurate data in FPDS-NG such as misclassified 8(a) firms and incorrect obligations balances in our March 2016 review of the Small Business Administration’s (SBA) 8(a) Business Development Program. Further, our prior work on FPDS-NG also found data limitations with the system’s inability to identify more than one type of service purchased for each contract action. According to some of the IG reports we reviewed, these data quality issues were the result of human error, the lack of departmental internal controls to reasonably assure required procurement information is properly recorded in departmental systems and FPDS-NG, and limitations with the FPDS-NG functionality such as the inability to change incorrect data identified in FPDS-NG. These issues increase the risk that data reported from FPDS-NG to the Treasury data store will not be complete, accurate, and timely. SAM is the primary U.S. government repository for prospective federal awardee and federal awardee information, and the centralized Government system for certain contracts and grants. All entities that wish to do business with the government are to maintain an active registration in SAM unless exempt. As part of this registration, awardees register a name, unique identifier, address, and executive compensation information—all of which are required DATA Act standardized data elements. SAM also populates the entity name and address (street, city, state, congressional district, ZIP Code, and country) in FPDS-NG and certain executive compensation and other sub-awardee information is prepopulated from SAM to FSRS prior to the prime awardee’s reporting. We have previously identified data limitations with SAM that may affect DATA Act reporting. For example, in January 2017, we found that SAM did not contain information on lessors that listed physical or mailing addresses in China. Our work also found that certain information disclosed in SAM is not validated. If the addresses for foreign awardees are not recorded in SAM, then they will not be displayed in USASpending.gov for access by the public, resulting in incomplete and inaccurate awardee data for DATA Act reporting. We further noted that prior to November 1, 2014, the General Services Administration (GSA) was not required to collect certain information from lessors through SAM, such as the parent, subsidiary, or successor entities to the lessor. In addition, our June 2014 review of USASpending.gov found that ZIP Code information for awardees—which is provided by SAM—was one of the data elements that were significantly inconsistent with information in agency records. In that report, we recommended clarified guidance on agency maintenance of authoritative records adequate to verify the accuracy of required data reported for use by USASpending.gov to improve the completeness and accuracy of data submissions. Although some progress has been made by the related agencies, the recommendations related to this report remain unresolved. These data limitations increase the risk that federal agencies may not submit quality awardee data for DATA Act reporting. ASP is the system used by federal agencies to report financial assistance data (e.g., grants) to USASpending.gov. According to Treasury, the DATA Act broker will extract financial assistance award information from the ASP—including awardee unique identifier, award characteristics, awards amount, awardee legal identify name, and address for financial assistance—all of which are required by the DATA Act to be reported. In December 2016, we reported that the DATA Act broker will not validate the accuracy of data extracted from the ASP and that according to Treasury officials ASP does apply some validation checks to the data submitted by federal agencies. In addition, ASP rejects individual records that fail 10 percent of the validation requirements. ASP also rejects entire file submissions if more than 10 percent of the records in the file submission fail validation checks. However, ASP partially accepts the file submission if less than 10 percent of the records in a file submission fail validation checks. The effectiveness of this validation process to prevent the submission of erroneous records raises concerns regarding the quality of awardee data that can be submitted for DATA Act reporting. FSRS allows prime grant award and prime contract recipients to report sub-award activity including executive compensation, and provides data on first-tier sub-awards reported by prime recipients. FSRS was created as a result of FFATA and became active in July 2010. Prime awardees must register and report sub-award information for first-tier sub-awardees, including award and entity information, such as Data Universal Numbering System (DUNS) identification numbers. FSRS contains the small business status of some subcontractors, but only for limited types of small businesses. The sub-awardee provides all of the information required for reporting to the prime awardee. This includes sub-awardee entity information, sub-awardee unique identifier, and relevant executive compensation data, if applicable. These are also DATA Act standardized data elements required to be reported. In June 2014, we reported that we could not verify the subcontract data in FSRS as agencies frequently do not maintain the records necessary to verify the information reported by the awardees. We also found inconsistencies in the reporting of 20 of 21 data elements caused by errors in data entry, missing data, or lack of clear guidance. In our report, we recommended clarified guidance on agency maintenance of authoritative records adequate to verify the accuracy of required data reported for use by USASpending.gov. Our recommendation on this issue remains unresolved. These issues increase the risk that federal agencies may not submit complete, accurate, and timely sub-award data for DATA Act reporting. As agencies prepare to submit required financial and award information in May 2017, they have identified a number of reporting challenges that will affect the quality of data posted on USASpending.gov. Both OMB and Treasury acknowledged that these challenges are unlikely to be resolved before the first statutory deadline when data are collected in compliance with the act. Included in these challenges is how agencies are to report certain intragovernmental transactions that result from financial activities between federal government agencies. Specifically, in order to properly present the financial balances and activities of the federal government, the reciprocating balances and activities between the agencies should be offset and result in a zero balance. Reconciling intragovernmental transactions for financial reporting purposes is a longstanding and government-wide challenge. Federal accounting standards, laws, regulations, and policies govern the accounting, reporting, and business rules for each of the categories and subcategories of intragovernmental transactions. Our annual audits of the U.S. government’s consolidated financial statements have identified the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal entities as an impediment that has prevented us from rendering an opinion on the federal government’s accrual-based consolidated financial statements for many years. Our most recent audit found that the amount of unmatched funds from intragovernmental transactions amounted to hundreds of billions of dollars. In response to our previous recommendations, Treasury has continued to actively work with federal agencies and improve its processes to resolve intragovernmental transactions. However, the guidance OMB developed on how agencies are to report intragovernmental transactions does not appear to leverage the existing processes that Treasury has put in place to resolve on a quarterly basis the differences in intragovernmental transactions between federal agencies. Treasury has implemented a new initiative for identifying and monitoring systemic root causes of intragovernmental differences, in addition to other enhancements to its processes for reporting various aspects of agencies intragovernmental differences between agencies, including the composition of the differences by agency and category of intragovernmental transaction. USDA officials (one of our case example agencies) expressed concern about OMB’s guidance on intragovernmental transactions. Specifically, they told us that without a standard approach for reporting intragovernmental transactions—meaning whether the funding or awarding agency reports them—it is not appropriate for a funding agency to certify award data maintained in an awarding agency’s systems, a DATA Act reporting method allowed after the first data submission. HHS officials (our other case example agency) also expressed concern, and told us that although they will be prepared to report in a manner consistent with the current OMB guidance, they believe that OMB should revisit the guidance because it differs from other reporting requirements. Treasury officials told us that they are aware of these challenges, but they do not expect that these issues will be resolved before the May 2017 reporting deadline. These officials also told us that efforts to address longstanding challenges related to reporting intragovernmental transactions are under way, and that they plan to communicate data quality limitations to the public on USASpending.gov. The officials could not provide us with specifics on how they would communicate the limitations but indicated that it would likely be part of the SAO assurance process. OMB officials told us in January 2017 that they are unaware of any outstanding issues on this topic that would require an OMB policy response, and therefore OMB has no plans to issue additional implementation guidance at this time. Another reporting challenge identified by agencies involves missing or incorrect ZIP+4 information. OMB guidance requires agencies to validate federal assistance recipient information, including the recipient’s address and ZIP code, against the information in the System for Award Management (SAM) before they submit it to the DATA Act broker. This guidance requires agencies to ensure that award-level data in their systems for financial assistance recipients matches the recipients’ information in SAM. Consistent with OMB guidance, financial assistance recipients are required to register in SAM prior to submitting an application for an award, and OMB staff told us recipients are also required to provide accurate information as part of the terms and conditions of their award agreements. However, according to agency officials, because SAM does not enforce the use of ZIP+4 and agencies’ eligibility procedures may not flag incorrect or missing ZIP+4 information, some recipient records are incomplete or incorrect. In addition, some rural communities do not have ZIP+4 because the U.S. Postal Service (USPS) only assigns 5-digit ZIP codes in those areas. As a result of the requirement that ZIP+4 information be consistent with the USPS address database, Treasury officials told us some agencies are unable to validate their financial assistance award information in the DATA Act broker. For example, USDA officials told us in January 2017 that instituting the ZIP+4 validation rule in the broker as a fatal error rather than just a warning would cause a large number of their financial assistance records to fail and ultimately not be included in data that are displayed on USASpending.gov. In February 2017, Treasury implemented the ZIP+4 validation rule as a fatal error. Treasury officials told us that this was done in an effort to enforce existing requirements and improve data quality. Treasury officials said that they examined the scope and seriousness of the problem and determined that it is not significant enough at this time to warrant the policy change that would be required to address it prior to May 2017. According to a Treasury analysis, SAM records that are missing ZIP+4 information represent about 1 percent of the total dollar value of all the awards in SAM. In addition, according to Treasury, SAM records that are missing ZIP+4 because the address has not been assigned a ZIP+4 by USPS represent less than 0.5 percent of the total dollar value of all the awards in SAM. Treasury officials acknowledged that missing or invalid ZIP+4 information is a longstanding data quality issue with agency records, but believe that it is one best addressed at the agency level. In March 2017, Treasury officials told us that although they planned to continue to enforce the ZIP+4 requirement through the DATA Act broker, they were developing a workaround for agencies encountering problems. Agencies have also reported challenges linking their financial and award data using the unique award identifier. OMB guidance requires agencies to link their agency financial and award data using the unique award identifier. As our work in 2016 showed, agencies continue to report challenges related to integrating their financial and award systems to report under the DATA Act. Some agencies, according to OMB staff, are unable to record unique award identifiers in their financial systems, and may not be able to link financial and award data. This linkage should help policymakers and the public track spending more effectively—one of the objectives of the DATA Act. HHS and USDA officials reported in their DATA Act implementation plan updates and confirmed with us that they are using short-term solutions to link their financial and award data to generate and submit a required file by May 2017. They both confirmed they will link their financial and award systems with the unique award identifier when they implement long-term system solutions. OMB staff told us that five agencies—the Departments of Defense, Housing and Urban Development, the Interior, and Veterans Affairs, and the Environmental Protection Agency—indicated that they will not fully meet the May 2017 reporting requirements, in part because some of their components have been unable to record unique award identifiers in their financial systems. OMB staff told us that these agencies would be able to report some data, but not all of the award financial information required for agency submissions. Treasury officials told us that they are aware of this issue and have structured the broker so that after providing a warning it will accept agency data submissions, even if they contain significant gaps. OMB staff and Treasury officials told us they are creating a mechanism in the broker that will allow agencies to explain reporting anomalies in their data displayed on USASpending.gov. According to Treasury officials, the broker will include a text box for agencies to explain any reporting anomalies related to the data they are submitting and certifying before it is displayed on USASpending.gov. In addition, OMB staff told us they plan to provide agencies with standard language to explain certain reporting discrepancies, such as data that are not aligned as a result of the time it takes between when an agency completes a transaction and when it is recorded in its financial system. OMB staff explained that the purpose of the text boxes is not to provide qualifications about data quality, but to communicate what they believe are legitimate data discrepancies that could be perceived as data quality issues by the public. One of the purposes of the DATA Act is to provide consistent, reliable, and searchable government-wide spending data that are displayed accurately for taxpayers and policymakers on USASpending.gov (or a successor system). Longstanding issues related to agency financial information, systems and internal controls, and reporting challenges related to agency DATA Act report submissions underscore the need for OMB to address our open recommendation to provide additional guidance to address potential clarity, consistency, or data quality issues and for OMB to implement a process for communicating data quality limitations to the public. Information Quality Act (IQA) standards specify that data should have full, accurate, and transparent documentation where appropriate and should identify and disclose data quality issues. Similarly, OMB’s Policies for Federal Agency Public Websites and Digital Services requires that agencies be transparent about the quality of the information that they disseminate and take reasonable steps where practicable to inform users about the quality of disseminated content. We will continue to monitor the implementation of the DATA Act and how OMB, Treasury, and agencies communicate reporting anomalies and data quality limitations. Another area of risk to data quality is the agency senior accountable official (SAO) assurance process that leverages assurance processes of existing source systems with known data quality challenges. OMB guidance directs agency SAOs to leverage existing processes when providing assurances over required data submissions. However, during this review we have identified a number of concerns related to the effectiveness of some of these processes. OMB guidance directs agencies to match the procurement award data generated in the broker with data in the agency procurement award systems. The guidance also directs agencies to leverage the assurances provided in their annual Federal Procurement Data System- Next Generation (FPDS-NG) Data Verification and Validation reports submitted to OMB. Despite the requirement for agencies to conduct annual verification and validation reviews of the data contained in FPDS- NG, our prior work found that some award data reported on USASpending.gov contained information that was not fully consistent with agency records or was unverifiable due to gaps in agency records. OMB guidance also directs agencies to match financial assistance award data generated in the broker against data in their financial assistance award management systems for all award-level data and in SAM for prime awardee information (i.e., subrecipient executive compensation data). Although OMB guidance directs agencies to leverage existing assurance processes for other file submissions, there is no certification or assurance processes for the financial data submitted to the ASP. OMB guidance specifies that OMB is reviewing opportunities to enhance assurances over these data. However, as of March 2017, OMB has not established a timetable for this activity, so it is unclear whether new procedures will be in place in time for agencies to leverage these assurances for their May 2017 report submissions. GSA has posted on its website an assurance statement that provides assurance that the risk to federal agency operations, data, and assets resulting from the operation of the common controls of SAM and FSRS information systems are acceptable and meet all the security controls required for DATA Act reporting. According to OMB staff, agencies can rely on data from SAM and FSRS for DATA Act reporting. However, our review of the assurance statement posted on GSA’s website found that the statement focuses on security controls rather than data quality and appears to apply specifically to procurement management. The extent to which this assurance statement will be used by SAOs to provide assurances over the quality of the data for both procurement and financial assistance award information is uncertain. We will continue to monitor this issue moving forward. HHS officials told us they are still assessing the GSA assurance statement and its alignment to HHS’s overarching SAO certification. Since the requirements for SAM and FSRS are driven by both the FAR and Title 2 of the Code of Federal Regulations, officials said that HHS is interested in having GSA confirm that the assurance statement covers both procurement and financial assistance. OMB staff told us that agencies should leverage this assurance when certifying their data from these source systems. OMB staff also noted that the agencies are ultimately responsible for the quality of their data submissions. Furthermore, these staff stated that the quality of the information reported directly by awardees to SAM and FSRS is the responsibility of the awardee in accordance with the terms and conditions of their award agreements. The extent to which the GSA assurance statement regarding data integrity in SAM and FSRS will be used by agency SAOs when assuring the quality of their data submissions for May 2017 is unclear since some SAOs were still in the process of making that determination in March 2017. We will revisit this issue after May 2017 once agencies have made their determinations and will examine potential effects for data quality. OMB staff explained that the intent of OMB guidance on the SAO assurance process is to hold agency SAOs accountable for the reliability and validity of the data they submit. As discussed in OMB guidance, the SAO assurance process is also intended to leverage existing controls, processes, and procedures outlined in existing policies, regulations, and statutes, such as the internal control requirements outlined in OMB Circular A-123. However, questions regarding these assurance processes raise concerns about whether they will be effective in preventing or detecting data quality issues. They also increase the risk that SAO assurances over agency data quality will be unreliable. OMB staff told us that they are aware of these issues and are still finalizing the SAO assurance process, which they expect to do in time for the May 2017 reporting deadline. Accordingly, we are not making a recommendation at this time but will assess the quality of the assurance process in our future work. OMB has taken some actions to improve its data governance framework, but efforts to establish a fully functioning data governance structure are at an early stage with many specifics yet to be worked out. In July 2015, we reported that OMB and Treasury had begun standardizing data elements, but had not established a clear set of institutionalized policies and processes for enforcing data standards or adjudicating necessary changes to existing standards. Establishing a formal framework for providing data governance throughout the lifecycle of developing and implementing standards is key for ensuring that the integrity of data standards is maintained over time. In that report, we recommended that OMB, in collaboration with Treasury, establish a set of clear policies and procedures for developing and maintaining data standards that are consistent with leading practices. OMB and Treasury generally agreed with our recommendation. However, the recommendation remains open. In September 2016, OMB established a Data Standards Committee to focus on clarifying existing data element definitions and identifying the need for new standards. OMB approved a charter for this committee in November 2016. According to the charter, the committee will make recommendations on these topics to OMB, the DATA Act Executive Steering Committee, and federal communities such as the Chief Acquisition Officers Council and the Chief Information Officers Council. The charter states that the committee is an advisory body that is not responsible for approving or operationalizing the data standards. The committee’s membership includes representatives of OMB, Treasury, GSA’s Integrated Award Environment Program Management Office, and federal communities and councils representing various areas of responsibility and expertise. OMB staff told us that the Data Standards Committee will be solely focused on maintaining and updating data standards, including standards used by federal communities but not specifically required under the DATA Act. According to OMB staff, the Data Standards Committee has held several meetings and plans to produce operating procedures to guide its work but has not yet done so. OMB staff told us that although the committee has reviewed specific data standards, the committee has not made any recommendations regarding these standards, nor has it produced a work plan or timetable for addressing known challenges related to any data standards. While these staff also said that the committee has begun to develop processes and procedures to guide its reviews of data standards, no details or documentation were available beyond the six-page charter. Although the charter states that the committee will seek to promote transparency by making information on the topics of its proceedings and resulting outcomes available to the public, it has not yet done so. As we have previously reported, one component of good data governance involves establishing a process for consulting with and obtaining agreement from stakeholders, including non-federal stakeholders potentially affected by changes in data standards. Moreover, standards for internal control in the federal government state that management should communicate quality information to external parties so that these parties can help the entity achieve its objectives and address related risks. The DATA Act requires that OMB and Treasury consult with public and private stakeholders in establishing data standards. The charter states that the committee is to make publicly available both the topics of its proceedings and the resulting outcomes. Doing so could allow public and private stakeholders not represented on the committee to provide better informed opinions on new data standards or revisions. Without publicly available information about the committee, these stakeholders may not be able to direct their input toward standards that are under review. OMB staff told us that the committee has not kept records and therefore has no information about its proceedings available to release. Keeping records of the Data Standards Committee’s activities and releasing them publicly could facilitate consultation with stakeholders. Actions beyond recordkeeping and public release of information about the committee are needed to address our 2015 recommendation that OMB and Treasury establish a data governance structure consistent with leading practices. The Data Standards Committee may provide a useful forum for collecting stakeholder input. However, additional steps need to be taken to build a data governance structure that fully reflects leading practices. Across the federal government, agencies are making final preparations to submit the data required by the DATA Act’s May 2017 deadline. This represents the culmination of almost 3 years of effort by OMB, Treasury, and federal agencies to address the many policy and technical challenges presented by the act’s requirements including the need to standardize data elements across the entire federal government, link data contained in agencies’ financial and award management systems, and expand the type and amount of data to be reported. Their submissions will provide an important initial test of the efficacy of this endeavor. Looking forward, attention will increasingly focus on another critical goal of the act—improving the quality of the data being produced and the mechanisms and assurances needed to communicate such information to users. An important component of this will be the first round of mandated reviews agency IGs will conduct later this year, which will include sampling and testing of data quality. However, prior audits and reviews have already identified much about the challenges agencies face in producing quality data. These reviews have identified material weaknesses and significant deficiencies reported in agencies’ financial audits and identified several widespread and longstanding issues that present risks to agencies’ ability to submit quality data for DATA Act reporting. In addition, specific challenges related to the operationalization of the act’s requirements also represent potential risks to data quality. Because of this, it is especially important for the quality assurance and data governance frameworks established by OMB to be robust, transparent, and effective. Users will need such mechanisms to make informed decisions about the nature and limitations of the data being reported. This is essential to the full implementation of the DATA Act and its promise of improving the usefulness of those financial data to Congress, federal managers, and the American people. To promote transparency in the development and management of data standards for reporting federal spending, the Director of the Office of Management and Budget should ensure that the Data Standards Committee makes information about the topics of the committee’s proceedings and any resulting outcomes available to the public. We provided a draft of this report to the Secretaries of the Departments of Agriculture, Health and Human Services, and Treasury, and the Director of the Office of Management and Budget for review and comment. OMB generally agreed with our recommendation. In addition, OMB, USDA, and Treasury provided technical comments which we incorporated as appropriate. HHS had no comments on the draft report. We are sending copies of this report to the Secretaries of the Departments of Agriculture, Health and Human Services, and Treasury, and the Director of the Office of Management and Budget, as well as interested congressional committees and other interested parties. This report will be available at no charge on our website at http://www.gao.gov. If you or your staff has any questions about this report, please contact J. Christopher Mihm at (202) 512-6806 or Mihmj@gao.gov or Paula M. Rascona at (202) 512-9816 or Rasconap@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of our report. Key contributors to this report are listed in appendix IV. This review is part of our ongoing effort to provide reports on the progress being made in implementing the Digital Accountability and Transparency Act of 2014 (DATA Act). This review focuses on what is already known about existing challenges that affect the quality of agency financial data as well as issues that will affect data quality as agencies begin to report under the act. More specifically, it addresses the following: (1) risks to data quality related to known material weaknesses and other deficiencies, including internal controls over financial reporting, that have been identified in selected previous audits, reviews, and reports conducted by GAO, inspectors general (IG), and external auditors; (2) risks to data quality related to challenges in operationalizing DATA Act policy and technical guidance; (3) approaches that agencies will use to assure the quality of their data submissions and any associated limitations; and (4) efforts taken to establish a data governance structure. We also update the current status of the Office of Management and Budget’s (OMB) and the Department of the Treasury’s (Treasury) efforts to address our open recommendations related to DATA Act implementation in appendix II. To assess potential risks to data quality related to known material weaknesses and other significant deficiencies, including internal controls over financial reporting, that have been identified in selected previous audits, reviews, and reports conducted by us, IGs, and external auditors, we examined: (1) the extent to which agencies’ independent auditors have reported material weaknesses, significant deficiencies, and other challenges, and (2) the extent to which we previously reported issues with government-wide systems. To describe the extent to which agencies’ independent auditors have disclosed material weaknesses, significant deficiencies, and other challenges, we reviewed 22 of the 24 Chief Financial Officers Act of 1990 (CFO Act) agencies’ Performance and Accountability Reports (PAR) or Agency Financial Reports (AFR) for fiscal year 2016 to identify material weaknesses and significant deficiencies reported by independent auditors. Two agencies had not issued a PAR or AFR prior to our cutoff date of February 28, 2017, and therefore were not included in our review. We categorized the material weaknesses and significant deficiencies reported by the independent auditors that could affect the quality of the data submitted by agencies under the DATA Act. We also reviewed these agency reports for any auditor-identified noncompliance with the Federal Financial Management Improvement Act of 1996 (FFMIA) to identify factors that may increase the risk to reporting quality data. In addition, because the DATA Act requires IGs and GAO to assess and report on the completeness, timeliness, quality, and accuracy of data submitted by federal agencies, we reviewed readiness reviews issued by IGs to identify reported issues and challenges that could affect the quality of spending data reported under the DATA Act. Four agency IGs did not conduct a readiness review or their reports were not issued prior to our cutoff date of February 28, 2017, and therefore were not included in our review. To ensure we had a comprehensive understanding of these material weaknesses, significant deficiencies, and other challenges, we analyzed these reported issues to determine the extent to which they may hinder the entities’ abilities to submit complete and accurate spending data and categorized them. In our analysis of agencies’ material weaknesses, significant deficiencies, and other challenges reported by independent auditors, we identified three overall categories that could affect data quality: (1) Accounting and Financial Management, (2) Financial Management Systems, and (3) Information Technology (IT) Security and Controls. We reviewed the auditor reports, PARs, AFRs, and readiness reviews using a data collection instrument to document our assessment of the extent to which the issues identified in these reports fit into the aforementioned categories. To describe the extent to which independent auditors have reported issues with government-wide systems, we reviewed our previous reports to identify reported deficiencies in government-wide systems that could affect the quality of spending data submitted to USASpending.gov. According to Treasury, the source systems include: (1) the Federal Procurement Data System-Next Generation, (2) System for Award Management, (3) the Award Submission Portal, and (4) the Federal Funding Accountability and Transparency Act Subaward Reporting System. Although the conditions observed in these reports may not be present in all federal agencies and systems, they illustrate conditions that increase the risks and effects to agency data quality. To assess the risks to data quality related challenges in operationalizing DATA Act policy and technical guidance during implementation of the act we examined (1) the extent to which selected agencies have been able to submit, validate, and certify their data submissions to the DATA Act broker and any challenges they reported, and the (2) the steps OMB and Treasury have taken to address known reporting challenges. To understand the extent to which agencies have been able to submit, validate, and certify their data submissions we reviewed technical documentation; reviewed experiences at two agencies; interviewed knowledgeable officials from OMB, Treasury, and selected federal agencies; and reviewed past GAO reports to identify data quality issues related to DATA Act implementation. The review of technical documentation included material related to the schema version 1.01 to understand reporting structure, and the broker to understand its functionality and validation processes. We obtained technical documentation from the Federal Spending Transparency public website. For the examination of experiences at agencies, we selected two agencies based on whether they were in compliance with existing federal requirements for federal financial management systems; the type of federal funding provided (such as grants, loans, or procurements); and their status as federal shared service providers for financial management. Based on these selection factors, we chose the U.S. Department of Health and Human Services (HHS), and the U.S. Department of Agriculture (USDA). Although the agencies’ experiences are not generalizable, they illustrate different conditions and challenges under which agencies are implementing the act. These two agencies were also selected for our January and December 2016 reports. To understand the steps OMB and Treasury have taken to address known reporting challenges, we reviewed OMB policy guidance intended to facilitate agency reporting. We also interviewed OMB staff and Treasury officials to obtain information about steps they have taken to respond to previously identified challenges, agency requests for clarification on reporting requirements, and any plans for additional guidance. We also met with OMB staff and Treasury officials to obtain information on the status of efforts to address our previous recommendations related to providing policy and technical guidance. To assess the approach that agencies will use to assure the quality of their data submissions and any associated limitations we (1) reviewed relevant OMB policy guidance; (2) spoke with relevant agency officials; and (3) examined experiences at our two case study agencies, HHS and USDA. We reviewed OMB policy guidance to understand the assurance process agency senior accountable officials (SAO) should follow, including the authoritative sources for each file to be submitted in the DATA Act reporting process. We spoke with OMB staff and Treasury officials to understand the purpose and rationale of parts of the assurance process, and asked about plans for additional guidance. We spoke with HHS and USDA officials, and requested and reviewed documentation where applicable, to understand any concerns they have or challenges they are facing or expect to face during the assurance process. To determine the current status of OMB’s and Treasury’s efforts to implement a data governance structure for the DATA Act, we met with OMB staff and Treasury officials to obtain information on the status of their efforts to address our previous recommendation that they establish such a structure. We reviewed documents provided by OMB, including policy memorandums and the charter of the Data Standards Committee, an advisory body established by OMB as part of its data governance efforts. We also met with representatives of organizations with expertise in data governance to review the key practices we described in our December 2016 report and obtain additional information about how these key practices have been implemented in data governance frameworks. We conducted this performance audit from January 2017 to April 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Recommendations 1. To improve the completeness and accuracy of data submissions to the USASpending.gov website, the Director of the Office of Management and Budget (OMB), in collaboration with the Department of the Treasury's (Treasury) Fiscal Service, should clarify guidance on (1) agency responsibilities for reporting awards funded by non-annual appropriations; (2) the applicability of USASpending.gov reporting requirements to non-classified awards associated with intelligence operations; (3) the requirement that award titles describe the award's purpose (consistent with our prior recommendation); and (4) agency maintenance of authoritative records adequate to verify the accuracy of required data reported for use by USASpending.gov. Implementation Status Open. OMB and Treasury are working to implement the Digital Accountability and Transparency Act of 2014 (DATA Act), which includes several provisions that may address these recommendations once fully implemented. 1) OMB staff said they continue to agree with GAO that additional guidance is needed regarding agency responsibilities for reporting awards funded by non-annual appropriations but have not yet developed this guidance. 2) OMB staff stated that they believe a memorandum issued in November 2016 (M-17-04) addresses the applicability of USASpending.gov reporting requirements to non-classified awards associated with intelligence operations. We reviewed the memorandum and determined that additional guidance is still needed to ensure complete reporting of unclassified awards as required by FFATA. 3) OMB staff have agreed that it will be important to clarify guidance on how agencies can report on award titles to appropriately describe the award’s purposes and noted that they are working on providing additional guidance to agencies as part of their larger DATA Act implementation efforts. 4) OMB released policy guidance in May 2016 (Management Procedures Memorandum (MPM) No. 2016-03) and November 2016 (M-17-04) that identifies the authoritative sources for reporting procurement and award data. However, our review of this policy guidance determined that it does not address the underlying source that can be used to verify the accuracy of non- financial procurement data or any source for data on assistance awards. This recommendation was included in priority recommendation letters sent to OMB by the Comptroller General in July 2016 and Spring 2017. Recommendations 2. To improve the completeness and accuracy of data submissions to the USASpending.gov website, the Director of OMB, in collaboration with Treasury's Fiscal Service, should develop and implement a government-wide oversight process to regularly assess the consistency of information reported by federal agencies to the website other than the award amount. Implementation Status Open. As part of their DATA Act implementation efforts, OMB issued policy guidance in May 2016 (MPM 2016-03) and November 2016 (M-17-04) that identifies authoritative systems to validate agency spending information. The guidance also directs the DATA Act senior accountable officials (SAO) to provide quarterly assurance over the data reported to USASpending.gov and specifies that this assurance should leverage data quality and management controls established in statute, regulation, and federal government-wide policy and be aligned with the internal control and risk management strategies in Circular A-123. In addition, the DATA Act broker will provide a set of validation rules to further ensure the proper formatting of data submitted to USASpending.gov. In addition, OMB staff stated that they have reviewed reports from agency inspectors general (IG) on DATA Act implementation and plan to use future IG reports on data quality as part of a government-wide monitoring plan. However, OMB has not documented this monitoring plan. OMB staff noted that OMB and Treasury had prioritized linking financial data to award data as a means of addressing the issue of unreported awards we previously identified. We agree that linking financial and award data can help agencies identify gaps in reporting. However, other than citing agencies’ responsibility to certify the accuracy of their data, OMB did not identify any new or revised processes aimed at addressing the accuracy concerns we addressed. This recommendation was included in priority recommendation letters sent to OMB by the Comptroller General in December 2015, July 2016, and Spring 2017. 1. To ensure that federal program spending data are provided to the public in a transparent, useful, and timely manner, the Director of OMB should accelerate efforts to determine how best to merge DATA Act purposes and requirements with the GPRAMA requirement to produce a federal program inventory. Open. OMB staff told us that they do not expect to be able to identify programs for the purposes of DATA Act reporting until sometime after May 2017. However, they said that they are studying a program definition and alignment to identify a more consistent framework for defining federal agency programs with the aim of improving government-wide comparability and tying programs to spending. The effort is supported by a working group comprised of representatives from the Chief Financial Officers (CFO) community and other federal communities. OMB staff stated that they are incorporating ongoing feedback from this group into OMB’s efforts to identify a framework for defining federal agency programs. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB in December 2015, July 2016, and Spring 2017. Recommendations 2. To ensure that the integrity of data standards is maintained over time, the Director of OMB, in collaboration with the Secretary of the Treasury, should establish a set of clear policies and processes for developing and maintaining data standards that are consistent with leading practices for data governance. 1. To help ensure that agencies report consistent and comparable data on federal spending, we recommend that the Director of OMB, in collaboration with the Secretary of the Treasury, provide agencies with additional guidance to address potential clarity, consistency, or quality issues with the definitions for specific data elements including Award Description and Primary Place of Performance and that they clearly document and communicate these actions to agencies providing this data as well as to end-users. Implementation Status Open. OMB and Treasury have taken some initial steps to build a data governance structure including conducting interviews with key stakeholders and developing a set of recommendations for decision-making authority. In September 2016, OMB and Treasury took another step toward establishing a data governance structure by creating a new Data Standards Committee that will be responsible for advising OMB and Treasury on new data elements and revisions to established standards. According to OMB staff, the committee has held several meetings but has not yet provided recommendations to OMB. However, more remains to be done. As part of our ongoing feedback to OMB, we shared five key practices that we believe should inform their plans to develop a data governance framework moving forward. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB in December 2015 and to the Director of OMB and the Secretary of the Treasury in July 2016 and Spring 2017. Open. In May 2016, OMB issued additional guidance for implementing the DATA Act entitled Implementing the Data- Centric Approach for Reporting Federal Spending Information (Management Procedures Memorandum No. 2016-03). This memorandum provided guidance on new federal prime award reporting requirements, agency assurances, and authoritative sources for reporting. In November 2016, OMB followed this with additional guidance intended to provide clarification on how agencies should: (1) report financial information for awards involving Intragovernmental Transfers (IGTs); (2) report financial assistance award records containing personally identifiable information (PII); and (3) provide agency SAO assurance regarding quarterly submissions to USASpending.gov. OMB staff also stated that they sent an email announcement to agency senior accountable officials to clarify that information submitted to USASpending.gov is subject to plain language requirements. Despite these positive steps, additional guidance is needed to facilitate agency implementation of certain data definitions (such as ""primary place of performance"" and ""award description"") in order to produce consistent and comparable information. We continue to have concerns about whether the guidance provides sufficient detail in areas such as the process for providing assurance on data submissions. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB and the Secretary of the Treasury in July 2016 and Spring 2017. Recommendations 2. To ensure that federal agencies are able to meet their reporting requirements and timelines, we recommend that the Director of OMB, in collaboration with the Secretary of the Treasury, take steps to align the release of finalized technical guidance, including the DATA Act schema and broker, to the implementation time frames specified in the DATA Act Implementation Playbook. 1. To enable the development of effective recommendations for reducing reporting burden for contractors, the Director of OMB should ensure that the procurement portion of the pilot reflects leading practices for pilot design. Implementation Status Closed–Implemented. OMB and Treasury issued the finalized technical guidance (DATA Act Information Model Schema, version 1.0) in April 2016 intended to provide a stable base for agencies and enterprise resource planning (ERP) vendors to develop data submission plans. Treasury also released an alpha version of the broker in April 2016 and a beta version of the broker in June 2016. On September 30, 2016, Treasury released its latest version of the broker, which it stated was fully capable of performing the key functions of extracting and validating agency data. Following this release, Treasury continued to release broker updates approximately every 2 weeks. The software patches developed by ERP vendors, intended to help agencies submit required data to the broker, were all released by the end of December 2016. This was identified as a high priority recommendation in letters sent from the Comptroller General to the Director of OMB and the Secretary of the Treasury in July 2016. Closed-implemented. Our review of the revised design for the procurement portion of the Section 5 Pilot updated in January 2017 found that it largely reflected all 5 leading practices for effective pilot design. For example, in the revised design OMB provides additional details regarding its assessment methodology, includes a data analysis plan to evaluate pilot results, describes a strategy for two-way stakeholder outreach, and includes additional details on scalability of the pilot design. As a result we are closing this recommendation as implemented. Recommendations 1. To help ensure effective government- wide implementation and that complete and consistent spending data will be reported as required by the DATA Act, the Director of OMB, in collaboration with the Secretary of the Treasury, should establish or leverage existing processes and controls to determine the complete population of agencies that are required to report spending data under the DATA Act and make the results of those determinations publicly available. 2. To help ensure effective government- wide implementation and that complete and consistent spending data will be reported as required by the DATA Act, the Director of OMB, in collaboration with the Secretary of the Treasury, should reassess, on a periodic basis, which agencies are required to report spending data under the DATA Act and make appropriate notifications to affected agencies. Implementation Status Open. As we previously reported, OMB stated that each agency is responsible for determining whether it is subject to the DATA Act. To help agencies make that determination, OMB published guidance in the form of frequently asked questions and stated that the agencies may consult with OMB for additional counsel. In response to our recommendation, OMB staff told us they have reached out to federal agencies to identify which agencies have determined that they are exempt from reporting under the DATA Act and prepared a list of such agencies. However, OMB has not provided us the list or the procedures for reviewing agency determinations and compiling the results. In addition, OMB has not established procedures for ensuring non-exempt agencies are reporting spending data as required. Finally, OMB has not stated whether it will make the results of the determinations publicly available. Further, additional clarification would improve the usefulness of the frequently asked questions. For example, they state “Any Federal agency submitting data that OMB posts on its SF 133 Report on Budget Execution and Budgetary Resources is required to comply with DATA Act reporting.” However, the SF 133 Report for the third quarter of 2016 includes entities such as the Postal Service which are not required by the DATA Act to report financial and payment information. In explaining the frequently asked questions to us, OMB officials clarified that they meant that an entity is required to report if its data appears on the SF 133 and it meets the applicable statutory definition of agency. The frequently asked questions document does not clearly communicate this two-prong approach. Additionally, OMB’s verbal clarification when meeting with us does not account for those entities that meet the statutory definition of agency and are required by the DATA Act to report financial and payment information but do not appear on the SF 133. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Open. OMB does not have plans to reassess, on a periodic basis, which agencies are required to report spending data under the DATA Act. We continue to believe action on this recommendation is important to effectively implement the DATA Act. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Recommendations 3. To help ensure effective implementation of the DATA Act by the agencies and facilitate the further establishment of overall government- wide governance, the Director of OMB, in collaboration with the Secretary of the Treasury, should request that non-Chief Financial Officers Act of 1990 (CFO Act) agencies required to report federal spending data under the DATA Act submit updated implementation plans, including updated timelines and milestones, cost estimates, and risks, to address new technical requirements. 4. To help ensure effective implementation of the DATA Act by the agencies and facilitate the further establishment of overall government- wide governance, the Director of OMB, in collaboration with the Secretary of the Treasury, should assess whether information or plan elements missing from agency implementation plans are needed and ensure that all key implementation plan elements are included in updated implementation plans. Implementation Status Open. On June 15, 2016, OMB directed CFO Act agencies to update key components of their implementation plans by August 12, 2016. The requirement did not extend to non-CFO Act agencies. OMB stated that it is monitoring non-CFO Act agencies by providing feedback to non-CFO Act agencies through workshops instead of requesting updated implementation plan information. According to OMB officials, OMB has not followed-up with non-CFO Act agencies or requested updated implementation plan information because they are working with the CFO Act agencies which comprise approximately 90 percent of federal spending. In addition to these outreach efforts, OMB has worked with Treasury to engage with small and independent agencies through weekly phone calls and other forms of communication. However, the DATA Act applies to most federal agencies, and we believe that it is important to monitor smaller agencies’ implementation plans as well as large agencies. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Closed–Implemented. On December 8, 2016, OMB testified that OMB had reviewed implementation plan updates from the 24 CFO Act agencies, which enabled them to track and assess agency progress toward successful implementation and identify areas where subsequent action was needed. OMB also conducted in-person follow-up meetings with nine agencies that reported significant issues to better understand their challenges. We determined that these actions meet the intent of our recommendation. Recommendations 1. Implementation Status Closed–implemented. In response to our recommendation, OMB has made some revisions to the procurement portion of the pilot design including adding additional explanatory language. Our review of the revised design for the procurement portion of the Section 5 Pilot updated in January 2017 found that it largely reflected all 5 leading practices for effective pilot design. As a result we are closing this recommendation as implemented. In order to ensure that the procurement portion of the Section 5 Pilot better reflects leading practices for effective pilot design, the Director of OMB should clearly document in the pilot's design how data collected through the centralized certified payroll reporting portal will be used to test hypotheses related to reducing reporting burden involving other procurement reporting requirements. This should include documenting the extent to which recommendations based on data collected for certified payroll reporting would be scalable to other Federal Acquisition Regulation- required reporting and providing additional details about the methodology that would be used to assess this expanded capability in the future. OMB and the Secretary of the Treasury establish mechanisms to assess the results of independent audits and reviews of agencies’ compliance with the DATA Act requirements, including those of agency Offices of Inspectors General, to help inform full implementation of the act’s requirements across government. Open. OMB stated that it generally concurred with our recommendation, but noted that OIG readiness reviews are just one of its agency engagement efforts, which also includes reviewing agency implementation plans, holding numerous meetings with the agencies, and requesting regular progress updates on the agencies’ implementation efforts. We recognize that OMB’s efforts to engage regularly with agencies are helpful for monitoring agencies’ implementation. However, it is also important to use information in independent audits and reviews to validate agencies’ progress. This was identified as a high priority recommendation in a letter sent from the Comptroller General to the Director of OMB in Spring 2017. Legend: — = not applicable. = Significant deficiency or material weakness identified in deficiency category. Agency auditor determined noncompliance with Section 803(a) of the Federal Financial Management Improvement Act of 1996 (FFMIA). Agency did not issue its performance and accountability report or agency financial report by February 28, 2017, therefore it was not included in our review. Auditors did not report any material weaknesses or significant deficiencies relevant to Digital Accountability and Transparency Act of 2014 (DATA Act) reporting. In addition to the above contacts, Peter Del Toro (Assistant Director), Michael LaForge (Assistant Director), Kathleen Drennan (Analyst-in- Charge), Theodore Alexander, Maria C. Belaval, Thomas Hackney, Charles Jones, Kirsten Leikem, Robert L. Gebhart, Carroll M. Warfield, Jr., James Skornicki, Sophie Geyer, Mark Canter, James Sweetman, Jr., Andrew J. Stephens, Carl Ramirez and Jenny Chanley made major contributions to this report. Additional members of GAO’s DATA Act Internal Working Group also contributed to the development of this report. DATA Act: Office of Inspector General Reports Help Identify Agencies’ Implementation Challenges. GAO-17-460. Washington, D.C.: April 26, 2017. DATA Act: Implementation Progresses but Challenges Remain. GAO-17-282T. Washington, D.C.: December 8, 2016. DATA Act: OMB and Treasury Have Issued Additional Guidance and Have Improved Pilot Design but Implementation Challenges Remain. GAO-17-156. Washington, D.C.: December 8, 2016. DATA Act: Initial Observations on Technical Implementation. GAO-16-824R. Washington, D.C.: August 3, 2016. DATA ACT: Improvements Needed in Reviewing Agency Implementation Plans and Monitoring Progress. GAO-16-698. Washington, D.C.: July 29, 2016. DATA Act: Section 5 Pilot Design Issues Need to Be Addressed to Meet Goal of Reducing Recipient Reporting Burden. GAO-16-438. Washington, D.C.: April 19, 2016. DATA Act: Progress Made but Significant Challenges Must Be Addressed to Ensure Full and Effective Implementation. GAO-16-556T. Washington, D.C.: April 19, 2016. DATA Act: Data Standards Established, but More Complete and Timely Guidance Is Needed to Ensure Effective Implementation. GAO-16-261. Washington, D.C.: January 29, 2016. Federal Spending Accountability: Preserving Capabilities of Recovery Operations Center Could Help Sustain Oversight of Federal Expenditures. GAO-15-814. Washington, D.C.: September 14, 2015. DATA Act: Progress Made in Initial Implementation but Challenges Must be Addressed as Efforts Proceed. GAO-15-752T. Washington, D.C.: July 29, 2015. Federal Data Transparency: Effective Implementation of the DATA Act Would Help Address Government-wide Management Challenges and Improve Oversight. GAO-15-241T. Washington, D.C.: December 3, 2014. Government Efficiency and Effectiveness: Inconsistent Definitions and Information Limit the Usefulness of Federal Program Inventories. GAO-15-83. Washington, D.C.: October 31, 2014. Data Transparency: Oversight Needed to Address Underreporting and Inconsistencies on Federal Award Website. GAO-14-476. Washington, D.C.: June 30, 2014. Federal Data Transparency: Opportunities Remain to Incorporate Lessons Learned as Availability of Spending Data Increases. GAO-13-758. Washington, D.C.: September 12, 2013. Government Transparency: Efforts to Improve Information on Federal Spending. GAO-12-913T. Washington, D.C.: July 18, 2012. Electronic Government: Implementation of the Federal Funding Accountability and Transparency Act of 2006. GAO-10-365. Washington, D.C.: March 12, 2010.","Across the federal government, agencies are making final preparations to submit the required data by the DATA Act's May 2017 deadline. This represents the culmination of almost 3 years of effort by OMB, Treasury, and federal agencies to address many policy and technical challenges. Moving forward, attention will increasingly focus on another critical goal of the act: improving the quality of the data produced. Consistent with GAO's mandate under the act, this is the latest in a series of reports reviewing the act's implementation. This report examines (1) risks to data quality related to known material weaknesses and other deficiencies previously identified by GAO, IGs, and external auditors; (2) risks to data quality related to challenges in operationalizing policy and technical guidance; (3) agencies' assurances of the quality of their data submissions; and (4) efforts taken to establish a data governance structure. GAO reviewed DATA Act implementation documents and auditors' reports on known challenges and interviewed staff at OMB, Treasury, and other agencies. Internal control weaknesses and other challenges pose risks to data quality. Material weaknesses and significant deficiencies reported in agencies' financial audits and other challenges reported in Inspectors General (IG) readiness review reports show several widespread and longstanding issues that present risks to agencies' abilities to submit quality data as required by the Digital Accountability and Transparency Act of 2014 (DATA Act). These issues fall into three categories: (1) accounting and financial management, (2) financial management systems, and (3) information technology security and controls. GAO has also reported weaknesses and challenges in government-wide financial management systems used for DATA Act reporting. Challenges with guidance will impact data quality. Challenges related to how agencies report certain intragovernmental transactions, reconcile recipient address information, and align required DATA Act files with missing data continue to present risks to the quality of data displayed on USASpending.gov. The Office of Management and Budget (OMB) and the Department of the Treasury (Treasury) have stated that they do not expect to resolve these challenges before the May 2017 reporting deadline. Unresolved challenges affecting data quality could lead policymakers and the public to draw inaccurate conclusions from the data. This challenge underscores the need for OMB to address GAO's open recommendation that it provide agencies with additional guidance to address data quality issues. GAO will continue to assess how OMB, Treasury, and agencies address data quality issues moving forward. Limitations exist with data quality assurance processes. OMB guidance directs senior accountable officials at each agency to rely on existing assurance processes when they certify that their agencies' DATA Act submissions are valid and reliable. However, GAO identified concerns regarding some existing assurance processes. For example, OMB directed agencies to use a General Services Administration assurance statement attesting to the quality of data in two source systems, but the assurance statement focuses on data security rather than data quality, and it is unclear whether it applies to both procurement and financial assistance data. OMB is aware of these issues and expects to finalize the assurance process in time for the May 2017 reporting deadline. Accordingly, GAO is not making a recommendation at this time but will assess the quality of the assurance process in future work. Efforts to establish a data governance structure are still at an early stage. OMB has taken some actions to improve its data governance framework, but efforts to establish a fully functioning data governance structure are at an early stage with many specifics yet to be worked out. OMB formally chartered the Data Standards Committee as an advisory body in November 2016 to focus on clarifying existing data element definitions and identifying needs for new standards. The charter states that the committee will promote transparency by making the topics and outcomes of its proceedings public, but OMB has not kept records of the committee's meetings nor has the committee produced a work plan for moving forward. Public information about the committee's activities and outcomes would facilitate consultation with stakeholders, as required by the act. GAO recommends that the Director of OMB ensures that the Data Standards Committee publicly releases information about the topics of its proceedings and any resulting outcomes. OMB generally agreed with GAO's recommendation.",govreport
"OSC, which does not have in-house contracting staff, has an agreement with ARC, an office within Treasury’s Bureau of the Public Debt, to provide contracting support for a fee. As a member of the Treasury franchise fund, ARC does not receive direct appropriated funds, but instead relies on revenue from its federal agency customers to pay organizational expenses. Franchise funds are government-run, self-supporting, business-like enterprises that provide a variety of common administrative services, such as payroll processing, information technology support, and contracting. The agreement between ARC and OSC is a mechanism for interagency contracting. This type of fee-for-service procurement process generally involves three parties: the agency requiring a good or service, the agency placing the order or awarding the contract, and the contractors that provide the goods and services. The requiring agency officials determine the goods or services needed and, if applicable, prepare a statement of work, sometimes with the assistance of the ordering agency. The contracting officer at the ordering agency ensures that the contract or order is properly awarded or issued (including any required competition) and administered under applicable regulations and agency requirements. If contract performance will be ongoing, a contracting officer’s representative—generally an official at the requiring agency with relevant technical expertise—is normally designated by the contracting officer to monitor the contractor’s performance and serve as the liaison between the contracting officer and the contractor. While interagency contracting can offer the benefits of improved efficiency and timeliness, this approach needs to be effectively managed. Due to the challenges associated with interagency contracts, we recently designated interagency contracting as a governmentwide high-risk area. As authorized by OSC’s appropriation, OSC may use 5 U.S.C. § 3109 to hire intermittent consultants. Section 3109 permits agencies, when authorized by an appropriation or other statute, to acquire the temporary or intermittent services of experts or consultants. Under the statute, appointments of experts and consultants may be made without regard to competitive service provisions and classification and pay requirements. Individuals appointed under this authority may not be paid in excess of the highest rate payable for a GS-15 unless a higher rate is expressly provided for by statute or an appropriation. Under section 3109, OPM is responsible for prescribing criteria governing circumstances in which it is appropriate to employ an expert or consultant and for prescribing criteria for setting pay. Section 3109 of title 5 and OPM’s implementing regulations in 5 C.F.R. Part 304 provide for broad discretion in the appointment of experts and consultants. In promulgating its regulations, OPM recognized that agencies need to obtain outside opinion and expertise to improve federal programs, operations, and services and that by bringing in the talent and insights of experts and consultants, agencies can work more economically and effectively. OSC’s primary mission is to protect federal employees from prohibited personnel practices. It carries out this mission by conducting investigations, attempting informal resolution through discussions with the agency during the investigation phase (or by offering mediation), and, when necessary, prosecuting corrective and disciplinary actions before the MSPB. An individual may also request that the Special Counsel go before the MSPB to seek to delay an adverse personnel action, such as a termination, pending an OSC investigation. If an agency fails to remedy a prohibited personnel practice upon request by OSC, corrective action may be obtained through litigation before the MSPB. OSC may also seek disciplinary action against an employee believed to be responsible for committing a prohibited personnel practice by filing a complaint with the MSPB. However, when the disciplinary action involves presidential appointees (subject to Senate confirmation), OSC forwards its complaint against the appointee, a statement of supporting facts, and any response of the appointee to the President for appropriate action. Obtaining the assistance of OSC may be an individual’s only recourse with regard to an alleged prohibited personnel practice, unless the individual can pursue the matter with the MSPB or through the discrimination complaint process. Only employees who have been subject to an adverse action, such as a termination, demotion, or suspension beyond 14 days, may appeal to the MSPB and argue that such adverse action was the result of a prohibited personnel practice. An employee would not be able to go directly to the MSPB to complain that a geographic relocation was the result of a prohibited personnel practice. Even when an employee alleges that he or she was retaliated against for whistleblowing, he or she must first go to OSC and wait 120 days before filing directly with the MSPB, unless that employee was subject to an adverse action as noted above. An employee may also pursue resolution of a prohibited personnel practice through the federal equal employment opportunity (EEO) process if the prohibited practice relates to discrimination covered under the antidiscrimination laws enforced by the EEOC. In contracting with MPRI for the organizational assessment, several required steps were not taken: competition was not sought among Schedule vendors, and there was no convincing demonstration of why a sole-source order was necessary, the determination of the reasonableness of MPRI’s price was not OSC officials performed duties normally done by contracting officer’s representatives without authorization or training and, further, performed other duties that should have been reserved for the contracting officer. Contracting officers are generally required by the Competition in Contracting Act to promote and provide for full and open competition in soliciting offers and awarding government contracts. Use of GSA’s Schedule program is considered a competitive procedure as long as the procedures established for the program are followed. In this instance, GSA’s procedures required ordering offices to prepare a request for quotes and evaluate contractor catalogs and price lists, transmit the request to at least three contractors, and after evaluating the responses, place the order with the Schedule contractor that represented the best value. GSA’s Schedule for Management, Organizational and Business Improvement Services (MOBIS), under which the MPRI task order was issued, includes these special ordering procedures. At the time the MPRI order was placed (April 2004), neither the FAR nor GSA’s ordering procedures explicitly provided for sole-source orders under GSA Schedule contracts. However, ordering offices could meet competition requirements by properly justifying such an order. Rather than follow the required GSA special ordering procedures by placing the task order competitively on behalf of OSC, ARC approved a written sole-source justification prepared by OSC. The justification stipulated that the required services were available from only one responsible source—MPRI—and no other contractor could satisfy agency requirements. When supplies or services are available from only one responsible source and no other type of supplies or services will satisfy agency requirements, full and open competition need not be provided for. However, the justification merely asserted that “no other contractor except MPRI, Inc. has the experience and background in this type of sensitive assessment.” It did not contain sufficient facts and rationale to justify a sole-source order and did not provide the minimum required information. For example, the justification did not demonstrate that the proposed contractor’s unique qualifications or the nature of the acquisition required an exception to full and open competition, describe efforts made to ensure that offers were solicited from as many potential sources as practicable, determine that the anticipated cost would be fair and reasonable, or describe the market research conducted and the results. The only support in OSC’s justification for the statement that MPRI was uniquely qualified for the task is a statement that “an informal market survey reveals that only MPRI has the demonstrated past performance in bringing together the required unbiased and highly ethical subject matter experts to complete this type of assessment in the time allocated.” However, the cited market survey does not provide a credible foundation for the conclusion that only MPRI could perform the work. The Special Counsel and his Deputy asked three vendors, including MPRI, for presentations. OSC officials could not recall how these three vendors were selected, and no documentation was available—such as a request for quotes—that set forth the requirement to which the vendors were responding. Rather, the request was communicated orally to the vendors. OSC provided us with proposals submitted by two of the vendors and stated that MPRI submitted a statement of work as its proposal. This statement of work subsequently became part of ARC’s official contract file. We found that the summary statement of OSC’s requirement and the scope of work differ among the three proposals. OSC officials explained that the two vendors’ proposals were not well-matched to what the Special Counsel had communicated to them as OSC’s requirements and that MPRI offered a “no-frills” approach that met OSC’s needs. Nevertheless, in the absence of a documented request for quotes or other solicitation tool, it is not possible to determine whether MPRI and the other vendors were responding to the same set of requirements. Further, our recent search of GSA’s Web site revealed that 1,668 vendors (1,163 of them small businesses) had contracts under GSA’s MOBIS schedule, many of which could have potentially performed the required services. The sole-source justification listed other factors as well. It stated that “there is insufficient time and no contractor’s currently have the expertise to meet Government’s requirements given the required budget limitations.” There is no explanation in the justification as to why only this contractor could perform the task within the required time frame. In fact, despite the reference to urgency, 3 days before the period of performance was to end, OSC asked ARC to change the required completion date, almost doubling the time frame from 3 to 5-½ months (with no increase in price). While acknowledging that the final, written report was a contract deliverable in the statement of work, OSC officials explained that MPRI met their needs within the 3-month period by providing a briefing on its findings that enabled OSC to begin addressing the problems that had been identified. Further, contracting without providing for full and open competition cannot be justified on the basis of concerns related to the amount of funds available. Thus, the justification’s reference to budget constraints necessitating a sole-source order is not a valid rationale. ARC contracting officials did not question or validate OSC’s justification, but told us they relied to a great extent on OSC’s input in justifying the sole- source order. They said that they are now paying closer attention to requests from customer agencies, including OSC, for sole-source orders. OSC officials told us that, because ARC did not raise questions about the justification, they assumed it was adequate. A sole-source justification is required to document a determination by the contracting officer that the anticipated cost to the government will be fair and reasonable. Neither ARC, which was responsible for doing so, nor OSC adequately documented that MPRI’s price was reasonable. Although vendors’ GSA Schedule labor rates have already been determined by GSA to be fair and reasonable, ordering agencies are required to evaluate the contractor’s price for orders requiring a statement of work. The contractor’s price is based on the labor rates in the Schedule contract, the mix of labor categories, and the level of effort required to perform the services. Normally, when ordering services from GSA Schedules that require a statement of work, the ordering office is responsible for evaluating the contractor’s level of effort and mix of labor proposed to perform the specific tasks being ordered and for making a determination as to whether the price is reasonable. ARC officials told us that they relied on OSC to conduct the price reasonableness assessment by reviewing a breakout of MPRI’s price by skill mix, number of hours, and rates for each labor category. They maintain that the minimum requirements for price reasonableness documentation were met. However, we found no documentation demonstrating that the required price evaluation had been performed. OSC officials stated that the informal market survey was adequate to determine MPRI’s price as reasonable because MPRI’s price—which the Deputy Special Counsel negotiated with the vendor—was lower than the other vendors’ prices. However, the absence of a solicitation instrument that would show all three vendors responded to the same requirement, and the disparities in the vendors’ proposed scopes of work, do not support OSC’s assertion. One of the contracting officer’s key responsibilities is ensuring that the government monitors the contractor’s performance. The contracting officer, in this case ARC, may designate a contracting officer’s representative in the requiring agency, in this case OSC, to act as the contracting officer’s technical expert and representative in the monitoring and administration of a contract or task order. ARC’s standard designation letter to contracting officer’s representatives outlines the scope of these responsibilities, including such things as monitoring the contractor’s performance, representing the government in meetings with the contractor, keeping the contracting officer informed, and reviewing the contractor’s invoices. ARC follows Treasury’s training program for contracting officer’s representatives, which consists of a basic acquisition course of at least 24 hours that includes pre-award, post-award, and procurement ethics training. ARC contracting staff named OSC’s former human resource chief, who had taken the required training, as the contracting officer’s representative for the MPRI task order. However, two other OSC officials not named by ARC, the Special Assistant and Director of Management and Budget and the Deputy Special Counsel, who had not received the training, effectively acted in the role of contracting officer’s representatives on the MPRI order. In an April 20, 2004, e-mail to OSC staff, the Special Counsel named the Special Assistant as the liaison between the agency and the contractor. The statement of work names this official as the “governing authority” for the effort and as responsible for coordinating with the contractor on “any other direct costs” and certain travel requirements. Also, the Deputy Special Counsel was responsible for approving MPRI’s contract execution plan and the contract deliverables. Further, ARC’s delegation letter to contracting officer’s representatives prohibits the delegation of or responsibility for certain duties, such as soliciting proposals, making commitments or promises to a contractor relating to the award of a contract, and negotiating the price with the contractor. The Special Counsel and Deputy Special Counsel, as discussed above, solicited proposals from three vendors, and the Deputy negotiated the final price with MPRI, functions that should have been performed by the ARC contracting officer. ARC contracting staff were not aware that the OSC officials had performed these duties until we informed them. They said that only the former human resource chief had received the training and authorization to act as a contracting officer’s representative. OSC officials said that ARC, as their contracting office, never told them they were not following proper contracting practices. The tasks specified in the statement of work for the consultant that OSC hired on March 17, 2004, and that he completed before his departure were consistent with OPM criteria for appropriate uses of expert and consultant appointments. The employee, who was employed on an intermittent basis, was tasked with two major lines of work related to efficiency and curriculum development. OSC management expressed confidence in his qualifications and used its discretion to both hire him and set his compensation rate. OPM regulations permit agency heads to establish expert or consultant pay rates, but in doing so to consider specified factors, including level of difficulty of the work, qualifications of the expert or consultant, and pay rates of individuals performing comparable work. At the suggestion of the Special Counsel, OSC officials hired Alan J. Hicks as an intermittent employee on March 17, 2004, using the appointment authority under 5 U.S.C. § 3109. According to the appointment paperwork, Mr. Hicks’s appointment was to last from March 17, 2004, until March 16, 2005, and he was to work an intermittent schedule. His pay rate was set slightly below the highest rate for a GS-15. Mr. Hicks resigned his appointment effective October 24, 2004. During the 7 months Mr. Hicks was employed by OSC, he worked a total of 123 hours for a total of $6,621.09 in pay. Before hiring Mr. Hicks, the Special Counsel identified him as a possible consultant based on prior knowledge of Mr. Hicks’s work as the headmaster of a private secondary school. The Deputy Special Counsel told us that he justified Mr. Hicks’s pay on the basis of his qualifications— specifically, his experience as headmaster and his educational level. He also noted that the Special Counsel had worked with Mr. Hicks and respected his opinion and judgment. According to Mr. Hicks’s resume, during the 10 years of his headmaster position, he was responsible for a number of administrative functions, including designing and writing student curricula, recruiting and training faculty and staff, establishing financial and organizational structures of the school, hiring and management decisions, as well as teaching history, logic, and biology. According to his resume, Mr. Hicks had also taught at the college level. OPM regulations provide that agencies may appoint qualified experts or consultants to an expert or consultant position that requires only intermittent and/or temporary employment. While OPM regulations do not establish specific criteria for determining qualifications, they do generally describe the expectations for such positions and what constitutes appropriate tasks for experts and consultants to perform. For example, the regulations describe a consultant as a person who can provide valuable and pertinent advice generally drawn from a high degree of broad administrative, professional, or technical knowledge or experience. Furthermore, a consultant position is one that requires providing advice, views, opinions, alternatives, or recommendations on a temporary or intermittent basis on issues, problems, or questions presented by a federal official. The regulations also provide examples of inappropriate uses of expert/consultant appointments, including work performed by the agency’s regular employees. Mr. Hicks’s tasks were related to addressing OSC’s backlog that we identified in our March 2004 report. Specifically, an OSC official noted that his experience in curricula development at the boarding school was viewed as key to cross-train employees in different units so those employees could be utilized in a number of ways to address workload. According to the OSC official, Mr. Hicks’s efforts would complement those of MPRI. The official said he was confident that Mr. Hicks was fully qualified to do the work, and that OSC used management discretion to approve the appointment. Another official observed that Mr. Hicks provided both an outside perspective and experience that regular OSC staff did not have. Officials also said that although Mr. Hicks only worked at OSC for a short time, the agency was pleased with the value he added. Both the duties set out in Mr. Hicks’s statement of work, as well as those duties he actually performed, were consistent with OPM regulations. According to the statement of work prepared by the human resource chief at the Deputy Special Counsel’s direction, Mr. Hicks was to (1) review and analyze OSC program policies and procedures for efficiency and make recommendations and develop written revisions to these policies and procedures and (2) develop a long-term training curriculum and deliver training. Shortly before he terminated his consultant work for OSC, Mr. Hicks submitted a report outlining the work that he performed. In his report, Mr. Hicks made a number of observations on his concurrence with MPRI’s conclusions. The report also said he was involved in a number of other tasks, including examining operational training manuals, meeting with staff concerning the procedures for handling assisting with and attending the Special Counsel’s testimony before a preparing a paper for presentation at a staff retreat on philosophical matters related to work, meeting with MPRI to discuss its assessments and to share his observations based on his work, and having numerous conversations with the Special Counsel concerning the assessment team, his recommendations for curriculum and training, and the need for streamlined procedures. While most of the tasks that Mr. Hicks actually performed were consistent with those enumerated in his statement of work, Mr. Hicks also worked on whistleblower disclosure cases. According to an OSC official, Mr. Hicks spent approximately 25 percent of his time working through 50 disclosure case files. The OSC official stated that Mr. Hicks was not provided disclosure case files that contained sensitive information for which a security clearance would have been required. While Mr. Hicks noted in his report that this work on the disclosure cases “served the dual purpose of analysis of procedures and a reduction of backlog,” an OSC official stated that Mr. Hicks’s efforts were related to an analysis of the process of handling disclosures and not the type of efforts OSC’s disclosure unit employees perform in handling such cases. According to the OSC official, while Mr. Hicks contacted some of the whistleblowers directly, it was for the purpose of determining those individuals’ impressions about the process. This official stated that these activities were performed at the initiative of the Special Counsel and his senior staff, in order for Mr. Hicks to gain a better understanding of those processes and procedures specified in the statement of work. This official stated that prior to Mr. Hicks’s arrival at OSC, the Special Counsel forwarded to Mr. Hicks statutory provisions on OSC’s duties relating to disclosures from whistleblowers, including the obligation of OSC to maintain the confidentiality of a whistleblower’s identity. Although OSC employees, like other federal employees, can seek redress for alleged prohibited personnel practices through OSC, this may be unworkable for OSC employees in certain circumstances. Two other agencies with redress roles, MSPB and EEOC, have acknowledged the need to avoid conflicts when their employees have complaints and have taken steps to avoid such conflicts when their employees use their agency’s respective redress processes. Title 5 of the United States Code protects federal employees, including OSC employees, from prohibited personnel practices. OSC employees who believe that a prohibited personnel practice has occurred may seek redress from OSC. OSC employees may also seek redress through appealing adverse actions to the MSPB and filing EEO complaints. According to OSC officials, there are two ways in which an OSC employee could bring a prohibited personnel practice allegation within OSC. First, OSC employees may use the agency’s administrative grievance system. If fact-finding is needed for a complaint filed against OSC staff, an OSC employee who has not been involved in the matter being grieved and, when possible, does not occupy a position subordinate to any official involved in the matter being grieved, is selected to conduct a review and prepare a report. Ideally, that employee is also located in a different geographic area; for example, an OSC employee in Dallas could be assigned to a complaint filed in Washington, D.C. OSC officials stated that this would ensure objectivity and independence in the processing of the complaint. Fact- finding is conducted informally and includes the collection of documents and statements of witnesses, as necessary. The grievant’s second-level supervisor would render a decision based upon the fact-finder’s report and any comments on the report provided by the grievant. The grievant may appeal this decision to the Deputy Special Counsel, or, if the matter was grieved to the Deputy Special Counsel in the first instance, to the Special Counsel. Both current and former OSC officials stated that this process could be successfully used when the prohibited personnel practice allegation relates to the actions of an official below the Deputy Special Counsel level. However, if the administrative grievance system were to be used to address grievances against the Special Counsel or the Deputy Special Counsel, there would be a conflict of interest since the final decision maker in this process is the Special Counsel. Second, OSC officials stated that OSC employees who believe a prohibited personnel practice has occurred can file a complaint with OSC in the same fashion as an individual from outside OSC. However, OSC employees do not have an outside agency to represent them in an independent manner— the role that OSC plays for non-OSC employees in cases involving prohibited personnel practices. When an employee raises a prohibited personnel practice allegation against the Special Counsel, addressing such an allegation within OSC becomes unworkable because, OSC officials stated, all OSC employees ultimately report to the Special Counsel. OSC officials also stated that there cannot be an independent review when the employee performing the investigation reports to the individual being investigated. According to former and current OSC officials, the difficulty also extends to allegations against the Deputy Special Counsel because the Deputy Special Counsel, who is typically a noncareer senior executive, has a confidential relationship with the Special Counsel. According to the previous Special Counsel, an effort among senior staff to establish procedures for handling OSC employee allegations of prohibited personnel practices against senior OSC officers, including the Special Counsel, was initiated during her tenure. However, the effort was not completed, she said, noting that OSC staff did not reach a consensus over what the alternative process should be for handling complaints against the Special Counsel. The previous Special Counsel and current OSC officials who were involved in this effort told us that one of the options being considered was to have the matter investigated by an outside inspector general. At the time, however, concern was expressed about allowing inspectors general, who were subject to OSC’s investigative and prosecutorial authority, to investigate the Special Counsel. The potential difficulties described above were recently illustrated when a complaint was filed anonymously against the Special Counsel on behalf of a number of OSC employees. The complainants requested that the complaint be referred to the chairman of the PCIE for an independent investigation, including a recommendation for corrective or disciplinary action. The PCIE is an interagency council, including presidentially appointed inspectors general, charged with promoting integrity and efficiency in federal programs. The complaint stated that OSC could not investigate these allegations because the Special Counsel could not oversee an investigation of which he is the subject and that all OSC staff are his subordinates. The complaint further observed that the complainants’ ability to remain anonymous would be jeopardized if any OSC staff were assigned to work on the investigation. As discussed above, current OSC policy and procedures do not provide for special handling of complaints against the Special Counsel or the Deputy Special Counsel. The Deputy Special Counsel told us that he and the Special Counsel agreed that OSC should not handle the complaint, and subsequently forwarded it to the PCIE’s Integrity Committee and notified the chair of the PCIE. In mid- October, 2005, the chair assigned OPM’s inspector general to conduct the investigation. Two other agencies in the executive branch with major roles in ensuring the protection of employee rights, the MSPB and EEOC, have taken steps to address potential conflicts of interest when their own employees use their agencies’ respective redress processes. The MSPB is an independent quasi-judicial agency established to protect federal merit systems against prohibited personnel practices and to ensure adequate protection for employees against abuses by agency management. MSPB carries out this mission, in part, by adjudicating federal employee appeals of adverse personnel actions. The MSPB has developed regulations which state that MSPB employee appeals are not to be heard by board-employed administrative judges who hear appeals from employees of other federal agencies, but instead are to be heard by administrative law judges (ALJ). According to the MSPB General Counsel, MSPB does not employ its own ALJs; rather, MSPB has a memorandum of understanding with the National Labor Relations Board to use its ALJs for MSPB employee appeals and other matters, including whistleblower retaliation cases brought by OSC. MSPB regulations further provide that the board’s policy is to insulate the adjudication of its own employees’ appeals from agency involvement as much as possible. The regulations provide that if an initial decision rendered by the ALJ is appealed to the board, the initial decision will not be altered unless there has been “harmful procedural irregularity” in the proceedings or there is a clear error of law. According to the MSPB General Counsel, this provides the board with very limited review authority. Finally, the regulations state what procedures are to be followed if a board member must recuse himself or herself from a specific case. The EEOC is responsible for enforcing the federal sector employment discrimination prohibitions contained in the federal antidiscrimination statutes, including Title VII of the Civil Rights Act of 1964, as amended. As part of this responsibility, EEOC provides for the adjudication of complaints and hearing of appeals. As is the case for all individuals who file a formal complaint of discrimination, EEOC employees may either request a hearing before an administrative judge or a final decision by the agency itself. However, according to EEOC officials, when EEOC employees request a hearing over their complaint of discrimination, such hearings are not to be conducted by the administrative judges employed by EEOC, but rather through contract administrative judges. EEOC officials state that using contract administrative judges is necessary to preserve the neutrality of the process, since EEOC’s administrative judges are coworkers of any EEOC complainant. EEOC officials also told us that if an employee of its Office of Equal Opportunity (OEO), EEOC’s own EEO office, raises an allegation of discrimination, the matter is sent outside the agency to another agency’s EEO office for informal counseling, investigation, and/or mediation to guard against potential conflicts of interest within the OEO. Steps can be taken to ensure that OSC employees have alternative avenues of recourse when their prohibited personnel practice allegations involve the Special Counsel or the Deputy Special Counsel. Potential options are discussed below. However, unlike the MSPB and the EEOC, which have taken steps to address potential conflicts of interest when their own employees use their respective redress processes, OSC would need explicit authority for implementing such options. OSC employees could be afforded an external investigation of their prohibited personnel practice allegations against the Special Counsel or Deputy Special Counsel through an independent entity. Most of the current and former OSC officials we spoke with acknowledged that the option of such an external investigation is warranted. If such an external investigation were authorized, it may be desirable to also provide the results of the investigation to the President, who has the authority to take appropriate corrective action. However, OSC would need specific authority to implement this option since OSC does not have the mechanism to provide for such investigations. OSC employees could be afforded expanded rights to appeal directly to MSPB that would specifically encompass prohibited personnel actions involving the Special Counsel or the Deputy Special Counsel. As discussed above, OSC employees, as is the case with other federal employees, can take allegations of prohibited personnel practices to the MSPB only when certain adverse actions have been taken against those employees. One OSC official observed that care should be taken in expanding jurisdiction so as to prevent minor personnel actions from being appealable to the board. Since the MSPB appeals process is in statute, this option would require legislation for implementation. OSC employees who believe a prohibited personnel practice has occurred can file a complaint with OSC in the same fashion as an individual from outside the agency. However, OSC employees do not have an external, independent agency like OSC to represent them. This becomes particularly important when the complaint is filed against the Special Counsel or the Deputy Special Counsel. When an employee raises a prohibited personnel practice allegation against the Special Counsel, addressing such an allegation within OSC becomes unworkable because OSC employees ultimately report to the Special Counsel, including the complainant and any staff who would conduct an internal investigation. This difficulty extends to allegations against the Deputy Special Counsel because this individual has a confidential relationship with the Special Counsel. Steps could be taken to ensure that OSC employees, who cannot effectively obtain the services of OSC in addressing allegations of prohibited personnel practices, have alternative avenues of redress. Adequate management oversight is critical to ensuring that, in an interagency contracting environment, the requiring agency and the agency ordering the services on its behalf work together to follow proper contracting procedures. In agreeing to issue the sole-source order for the organizational assessment despite the flawed justification, and in being uninvolved in and unaware of the pre- and post-award activities conducted by OSC officials, ARC contracting officials neglected to fulfill their responsibilities. For their part, OSC officials demonstrated a lack of awareness of their responsibilities in the process of engaging MPRI and overseeing the contractor’s work. Due to the unique nature of OSC and the difficulties involved when a prohibited personnel practice allegation is made against the Special Counsel or the Deputy Special Counsel, Congress should consider affording OSC employees (and former employees and applicants for employment) alternative means of addressing prohibited personnel practice allegations other than going through OSC. These means could include establishing (1) a right to an external investigation through an independent entity, where the entity would forward its findings to the President, who would decide the appropriate action, as is done when OSC handles allegations of prohibited personnel practices against Senate- confirmed presidential appointees; or (2) an expansion of the personnel actions that could be the basis for an appeal directly to the MSPB. We recommend that the Director of ARC’s Division of Procurement take the following two actions to ensure that (1) documents prepared by program offices requesting contracting assistance—such as statements of work and sole-source justifications—are carefully reviewed for compliance with competition requirements and (2) ARC contracting staff, through regular communication with the program offices they support, ensure that only authorized program officials act as contracting officer’s representatives. We also recommend that the Special Counsel put in place procedures to ensure that only those officials who have taken the required training and been designated as contracting officer’s representatives act in that role and that program staff do not exceed their authority in interacting with contractors. On September 23, 2005, we provided a draft of this report to OSC and to ARC for review and comment. OSC’s written response is included in appendix I, and ARC’s written response is included in appendix II. OSC and ARC agreed with our recommendations. However, OSC suggested several wording changes to the report and expressed concern about the tone of the section on the sole-source order with MPRI. While we clarified our wording in several places, we did not make other changes suggested by OSC in its comment letter for the reasons discussed below. OSC recommended we add a paragraph that, in addition to making reference to our earlier report on case backlogs at OSC (which is discussed in the first paragraph of our current report), would make other points that are already addressed in our report. Thus, we did not include OSC’s suggested language. OSC pointed out that ARC, as the contracting office, did not question the sole-source justification and that, if it had done so, another approach could have been taken for the procurement. Our report already clearly reflects the fact that this was ARC’s responsibility and that ARC contracting personnel did not question the validity of the sole-source justification but, rather, relied on OSC’s rationale. OSC suggested we revise the wording in our report to state that program staff participated in negotiations with MPRI, rather than state that the Deputy Special Counsel negotiated the price with the company. Our discussions with OSC officials—including one with the Deputy himself— support our finding that the Deputy negotiated the final price with MPRI, and we have added the word “final” to make that clear. There is no evidence that ARC “set the final price,” as OSC suggests; rather, ARC issued a task order using the final price provided to it by OSC. OSC also took exception to our statements that the Deputy Special Counsel was responsible for approving MPRI’s contract execution plan and contract deliverables and suggested we change the wording to “Also, OSC program officials were included in the approval process for MPRI’s contract execution plan and contract deliverables.” Again, the evidence supports our finding as stated in the report. In fact, the contract’s statement of work names the Deputy as the contracting officer’s representative, as the official responsible for approving MPRI’s contract execution plan, and as the recipient of the contractor’s monthly reports. Further, the contract execution plan is addressed to the Deputy and it identifies him as the contracting officer’s representative. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies of this report to OSC, the Bureau of the Public Debt, and interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. If you or your staff have questions about this report, please call me at (202) 512-9490. Key contributors to this report included Kimberly Gianopoulos, Karin Fangman, Sharon Hogan, Michele Mackin, and Adam Vodraska.","In January 2005, the U.S. Office of Special Counsel (OSC) implemented a plan, in part, to address a backlog of pending cases. This report discusses actions related to the development of this plan, including whether required practices and procedures were followed in contracting for the services of a management consulting company and in hiring an intermittent employee as a consultant. Also, the report identifies avenues of redress available to OSC employees for filing prohibited personnel practice allegations against OSC, and other redress options that could be made available. At OSC's request, the Administrative Resource Center (ARC), an office within the U.S. Department of the Treasury's Bureau of the Public Debt which provides OSC with contracting support for a fee, issued a $140,000 sole-source task order for an organizational assessment to a consulting firm, Military Professional Resources, Inc. (MPRI). In doing so, several required steps were not taken: competition was not sought among Schedule vendors and there was no convincing demonstration of why a sole-source order was necessary; the determination of the reasonableness of MPRI's price was not documented; and OSC officials performed duties normally done by contracting officer's representatives without authorization or training and, further, performed other duties that should have been reserved for the contracting officer. ARC officials told us they relied largely on OSC's input in justifying the sole-source order and determining MPRI's price to be reasonable and that they were unaware that the OSC officials had performed contracting-related duties. They told us that they are now paying particular attention to requests from their customers, including OSC, for sole-source orders. OSC officials said that they relied on ARC's expertise, as their contracting office, to ensure that proper contracting procedures were followed. The tasks specified in the statement of work for the consultant that OSC hired as an intermittent employee and that he completed before his departure were consistent with Office of Personnel Management criteria for appropriate uses of expert and consultant appointments. The intermittent employee was tasked with two major lines of work related to efficiency and curriculum development. OSC management expressed confidence in the individual's qualifications and was within its discretion to both hire him and set his level of compensation. While OSC employees, like other federal employees, are protected against prohibited personnel practices and may seek redress from OSC in making such allegations, this option becomes unworkable because of potential conflicts of interest when an OSC employee raises such an allegation of a prohibited personnel practice against either of the two top OSC officials. Two other federal agencies with redress roles, the Merit Systems Protection Board (MSPB) and the Equal Employment Opportunity Commission, have taken steps to address potential conflicts of interest when their own employees use their agency's respective redress processes. Steps could be taken to ensure that OSC employees have alternative avenues of recourse; for example, they could have an external investigation conducted through an independent body or broader appeal rights to the MSPB. OSC could not independently implement these options, and would need to be given authority to do so.",govreport
"VA’s mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring that they receive medical care, benefits, social support, and lasting memorials. It is the second largest federal department and, in addition to its central office located in Washington, D.C., has field offices throughout the United States, as well as the U.S. territories and the Philippines. The department’s three major components—the Veterans Benefits Administration (VBA), the Veterans Health Administration (VHA), and the National Cemetery Administration (NCA)—are primarily responsible for carrying out its mission. More specifically, VBA provides a variety of benefits to veterans and their families including disability compensation, educational opportunities, assistance with home ownership, and life insurance. VHA provides health care services, including primary care and specialized care, and it performs research and development to improve veterans’ needs. Lastly, NCA provides burial and memorial benefits to veterans and their families. Collectively, the three components rely on approximately 340,000 employees to provide services and benefits. These employees work in 167 VA medical centers, approximately 800 community-based outpatient clinics, 300 veterans centers, 56 regional offices, and 131 national and 90 state or tribal cemeteries situated throughout the nation. The use of IT is critically important to VA’s efforts to provide benefits and services to veterans. As such, the department operates and maintains an IT infrastructure that is intended to provide the backbone necessary to meet the day-to-day operational needs of its medical centers, veteran- facing systems, benefits delivery systems, memorial services, and all other IT systems supporting the department’s mission. The infrastructure is to provide for data storage, transmission, and communications requirements necessary to ensure the delivery of reliable, available, and responsive support to all VA staff offices and administration customers, as well as veterans. Toward this end, the department operates approximately 240 information systems, manages 314,000 desktop computers and 30,000 laptops, and administers nearly 460,000 network user accounts for employees and contractors to facilitate providing benefits and health care to veterans. These systems are used for the determination of benefits, benefits claims processing, patient admission to hospitals and clinics, and access to health records, among other services. For example, VBA relies on VBMS to collect and store information such as military service records, medical examinations, and treatment records from VA, DOD, and private medical service providers. IT also is widely used and critically important to supporting the department in delivering health care to veterans. VHA’s systems provide capabilities to establish and maintain electronic health records that health care providers and other clinical staff use to view patient information in inpatient, outpatient, and long-term care settings. Specifically, the Veterans Health Information Systems and Technology Architecture, known as VistA, consists of many computer applications and modules that collect, among other things, information about a veteran’s demographics, allergies, procedures, immunizations, and medical diagnoses. However, a number of VA’s systems are old. For example, our recent report on legacy systems used by federal agencies identified 2 of the department’s systems as being over 50 years old and among the 10 oldest investments and/or systems that were reported by 12 selected agencies. Personnel and Accounting Integrated Data (PAID)—This 53-year old system automates time and attendance for employees, timekeepers, payroll, and supervisors. It is written in Common Business Oriented Language (COBOL), a programming language developed in the late 1950s and early 1960s, and runs on IBM mainframes. VA plans to replace PAID with a project called Human Resources Information System Shared Service Center in 2017. Benefits Delivery Network (BDN)—This 51-year old system tracks claims filed by veterans for benefits, eligibility, and dates of death. It is a suite of COBOL mainframe applications. VA has general plans to roll the capabilities of BDN into another system, but there is no firm date associated with this transition. To address these obsolete systems that are in need of modernization or replacement, we recommended that the Secretary of Veterans Affairs direct the department’s Chief Information Officer (CIO) to identify and plan to modernize or replace legacy systems, as needed, and consistent with draft OMB guidance, including time frames, activities to be performed, and functions to be replaced or enhanced. VA concurred with our recommendation and stated that it is planning to retire PAID and BDN in 2017 and 2018, respectively. In 2014, VA issued its 6-year strategic plan, which emphasizes the department’s goal of increasing veterans’ access to benefits and services, eliminating the disability claims backlog, and ending veteran homelessness. According to the plan, the department intends to improve access to benefits and services through the use of improved technology to provide veterans with access to more effective care management. The plan also calls for VA to eliminate the disability claims backlog by fully implementing an electronic claims process that is intended to reduce processing time and increase accuracy. Further, the department has an initiative under way that provides services, such as health care, housing assistance, and job training, to end veteran homelessness. Toward this end, VA is working with other agencies, such as the Department of Health and Human Services, to implement more coordinated data entry systems to streamline and facilitate access to appropriate housing and services. VA reported spending about $3.9 billion to improve and maintain its IT resources in fiscal year 2015. Specifically, the department reported spending approximately $548 million on new systems development efforts, approximately $2.3 billion on maintaining existing systems, and approximately $1 billion on payroll and administration. For fiscal year 2016, the department received appropriations of about $4.1 billion for IT. Further, for fiscal year 2017, the department’s budget request included nearly $4.3 billion for IT. The department requested approximately $471 million for new systems development efforts, approximately $2.5 billion for maintaining existing systems, and approximately $1.3 billion for payroll and administration. In addition, in its 2017 budget submission, the department requested appropriations to make improvements in a number of areas, including: veterans’ access to health care, to include enhancing health care- related systems, standardizing immunization data, and expanding telehealth services ($186.7 million); veterans’ access to benefits by modernizing systems supporting benefits delivery, such as VBMS and the Veterans Services Network ($236.3 million); veterans’ experiences with VA by focusing on integrated service delivery and streamlined identification processes ($171.3 million); VA employees’ experiences by enhancing internal IT systems ($13 information security, including implementing strong authentication, ensuring repeatable processes and procedures, adopting modern technology, and enhancing the detection of cyber vulnerabilities and protection from cyber threats ($370.1 million). VA’s CIO has recently initiated an effort to transform the focus and functions of the Office of Information and Technology (OI&T), in response to the Secretary’s goal of achieving a more veteran-focused organization. The CIO’s transformation strategy, initiated in January 2016, calls for OI&T to focus on stabilizing and streamlining processes, mitigating weaknesses highlighted in GAO assessments, and improving outcomes by institutionalizing a new set of IT management capabilities. As part of this transformation, the CIO began transitioning the oversight and accountability of IT projects to a new project management process called the Veteran-focused Integration Process in January 2016, in an effort to streamline systems development and the delivery of new IT capabilities. The CIO also intends to establish five new functions within OI&T: The enterprise program management office is to serve as OI&T’s portfolio management and project tracking organization. The account management function is to be responsible for managing the IT needs of VA’s major components. The quality and compliance function is to be responsible for establishing policy governance and standards and ensuring adherence to them. The data management organization is expected to improve both service delivery and the veteran experience by engaging with data stewards to ensure the accuracy and security of the information collected by VA. The strategic sourcing function is to be responsible for establishing an approach to fulfilling the agency’s requirements with vendors that provide solutions to those requirements, managing vendor selection, tracking vendor performance and contract deliverables, and sharing insights on new technologies and capabilities to improve the workforce knowledge base. According to the CIO, the transformation strategy is expected to be completed by the first quarter of fiscal year 2017, although the vast majority of the plan, including establishing the five new functions, is to be executed by the end of fiscal year 2016. In February 2015, we designated VA health care as a high-risk area. Among the five broad areas contributing to our determination was the department’s IT challenges. Of particular concern was the failed modernization of a system, suspended development of another system, and the extent of system interoperability—the ability to exchange information—with DOD, which present risks to the timeliness, quality, and safety of VA health care. We have reported on the department’s failed attempts to modernize its outpatient appointment scheduling system, which is about 30 years old. Among the problems cited by VA staff responsible for scheduling appointments are that the system requires them to use commands requiring many keystrokes and that it does not allow them to view multiple screens at once. Schedulers must open and close multiple screens to check a provider’s or a clinic’s full availability when scheduling a medical appointment, which is time-consuming and can lead to errors. In addition, we reported in May 2010 that after spending an estimated $127 million over 9 years on its outpatient scheduling system project, VA had not implemented any of the planned system’s capabilities and was essentially starting over by beginning a new initiative to build or purchase another scheduling system. We also noted that VA had not developed a project plan or schedule for the new initiative, stating that it intended to do so after determining whether to build or purchase the new application. We recommended that the department take six actions to improve key systems development and acquisition processes essential to the second outpatient scheduling system effort. The department generally concurred with our recommendations, but as of May 2016, had not addressed four of the six recommendations. Further, in January 2014, we reported that the inability to electronically share data across facilities had led VA to suspend the development of a system that would have allowed it to electronically store and retrieve information about surgical implants (including tissue products) and the veterans who receive them nationwide. Having this capability would be particularly important in the event that a manufacturer or the Food and Drug Administration ordered a recall on a medical device or tissue product because of safety concerns. In the absence of a centralized system, at the time of our report, VA clinicians tracked information about implanted items using stand-alone systems or spreadsheets that were not shared across VA facilities, which made it difficult for the department to quickly determine which patients may have received an implant that was subject to a safety recall. Additionally, we reported in February 2014 that VA and DOD lacked electronic health record systems that permit the efficient electronic exchange of patient health information as military service members transition from DOD to VA health care systems. Since 1998, VA and DOD have undertaken a patchwork of initiatives intended to allow their health information systems to exchange information and increase interoperability. Among others, these have included initiatives to share viewable data in existing (legacy) systems, link and share computable data between the departments’ updated heath data repositories, and jointly develop a single integrated system. In March 2011, the secretaries of the two departments announced that they would develop a new, joint integrated electronic health record system (referred to as iEHR). This was intended to replace the departments’ separate systems with a single common system, thus sidestepping many of the challenges they had previously encountered in trying to achieve interoperability. However, in February 2013, about 2 years after initiating iEHR, the secretaries announced that the departments were abandoning plans to develop a joint system, due to concerns about the program’s cost, schedule, and ability to meet deadlines. The Interagency Program Office (IPO) reported spending about $564 million on iEHR between October 2011 and June 2013. In place of the iEHR initiative, VA stated that it would modernize VistA, while DOD planned to buy a commercially available system. The departments stated that they would ensure interoperability between these updated systems, as well as with other public and private health care providers. Our February 2014 report noted that the departments did not substantiate their claims that it would be less expensive and faster than developing a single, joint system. We have also noted that the departments’ plans to modernize their two separate systems were duplicative and stressed that their decisions should be justified by comparing the costs and schedules of alternate approaches. We therefore recommended that the departments should develop cost and schedule estimates that would include all elements of their approach (i.e., modernizing both departments’ health information systems and establishing interoperability between them) and compare them with estimates of the cost and schedule for the single-system approach. If the planned approach were projected to cost more or take longer, we recommended that they provide a rationale for pursuing such an approach. VA and DOD agreed with our prior recommendations and stated that initial comparison indicated that the current approach would be more cost effective. However, as of June 2016, the departments have not provided us with a comparison of the estimated costs of their current and previous approaches. Moreover, with respect to their assertions that separate systems could be achieved faster, both departments have developed schedules that indicate their separate modernizations are not expected to be completed until after the 2017 planned completion date for the previous single-system approach. To further highlight the department’s IT challenges, our most recent report in August 2015 on VA’s efforts to achieve electronic health record interoperability with DOD noted that the departments have engaged in several near-term efforts focused on expanding interoperability between their existing electronic health record systems. For example, the departments analyzed data related to 25 “domains” identified by the Interagency Clinical Informatics Board and mapped health data in their existing systems to standards identified by the IPO. The departments also expanded the functionality of their Joint Legacy Viewer—a tool that allows clinicians to view certain health care data from both departments in a single interface. In addition, VA and DOD have moved forward with plans to modernize their respective electronic health record systems. For its part, VA has developed a number of plans for its VistA modernization effort (known as VistA Evolution), including an interoperability plan and a road map describing functional capabilities to be deployed through fiscal year 2018. According to the road map, the first set of capabilities was to be delivered in September 2014, and was to include access to the Joint Legacy Viewer, among other things. VA’s CIO has asserted that the department has continued to improve VistA. However, the CIO also recently indicated that the department is taking a step back in reconsidering how best to meet VA’s future electronic health record system needs and has not determined whether to modernize VistA or to replace it with an off-the- shelf system. Nevertheless, a significant concern that we identified is that VA (and DOD) had not identified outcome-oriented goals and metrics that would more clearly define what they aim to achieve from their interoperability efforts and the value and benefits these efforts are intended to yield. As we have stressed in our prior work, assessing the performance of a program should include measuring its outcomes in terms of the results of products or services. In this case, such outcomes could include improvements in the quality of health care or clinician satisfaction. Establishing outcome-oriented goals and metrics is essential to determining whether a program is delivering value. In our August 2015 report, we stressed that using an effective outcome- based approach could provide VA with a more accurate picture of its progress toward achieving interoperability with DOD and the value and benefits generated. Accordingly, we recommended that the departments, working with the IPO, establish a time frame for identifying outcome- oriented metrics, define related goals as a basis for determining the extent to which the departments’ modernized electronic health record systems are achieving interoperability, and update IPO guidance accordingly. VA concurred with our recommendations and has told us that it has initiated actions in response to them. In September 2015, we reported that VBA had made progress in developing and implementing VBMS, its system that is to be used for processing disability benefit claims. Specifically, it had deployed the initial version of the system to all of its regional offices as of June 2013. Further, after initial deployment, VBA continued developing and implementing additional system functionality and enhancements to support the electronic processing of disability compensation claims. As a result, 95 percent of records related to veterans’ disability claims are electronic and reside in the system. Nevertheless, we found that VBMS was not able to fully support disability and pension claims, as well as appeals processing. Specifically, while the Under Secretary for Benefits stated in March 2013 that the development of the system was expected to be completed in 2015, implementation of functionality to fully support electronic claims processing was delayed beyond 2015. In addition, VBA had not produced a plan that identified when the system will be completed. Accordingly, holding VA management accountable for meeting a time frame and for demonstrating progress was difficult. As VA continues its efforts to complete the development and implementation of VBMS, we reported in September 2015 that three areas could benefit from increased management attention. Cost estimating: The program office did not have a reliable estimate of the cost for completing the system. Without such an estimate, VA management and the department’s stakeholders had a limited view of the system’s future resource needs, and the program risked not having sufficient funding to complete development and implementation of the system. System availability: Although VBA had improved its performance regarding system availability to users, it had not established system response time goals. Without such goals, users did not have an expectation of the system response times they could anticipate and management did not have an indication of how well the system performs relative to performance goals. System defects: While the program had actively managed system defects, a recent system release included unresolved defects that impacted system performance and users’ experiences. Continuing to deploy releases with large numbers of defects that reduce system functionality could adversely affect users’ ability to process disability claims in an efficient manner. We also found in our September 2015 report that VA had not conducted a customer satisfaction survey that would allow the department to compile data on how users view the system’s performance, and ultimately, to develop goals for improving the system. GAO’s 2014 survey of VBMS users found that a majority of them were satisfied with the system, but decision review officers were considerably less satisfied. Although the results of our survey provided VBA with data about users’ satisfaction with VBMS, the absence of user satisfaction goals limited the utility of survey results. Specifically, without having established goals to define user satisfaction, VBA did not have a basis for gauging the success of its efforts to promote satisfaction with the system, or for identifying areas where its efforts to complete development and implementation of the system might need attention. In our September 2015 report, we recommended that VA develop a plan with a time frame and a reliable cost estimate for completing VBMS, establish goals for system response time, minimize the incidence of high and medium severity system defects for future VBMS releases, assess user satisfaction, and establish satisfaction goals to promote improvement. As we stressed in our report, attention to these issues can improve VA’s efforts to effectively complete the development and implementation of VBMS. Fully addressing our recommendations, as VA agreed to do, should help the department give appropriate attention to these issues. As we reported in May 2016, VA’s expenditures for its care in the community programs, the number of veterans for whom VA has purchased care, and the number of claims processed by VHA have all grown considerably in recent years. The substantial increase in utilization of VA care in the community programs poses staffing and workload challenges for VHA, which has had ongoing difficulty processing claims from community providers in a timely manner. VHA officials and staff at three of the four claims processing locations we visited told us that limitations of the existing IT systems, including the Fee Basis Claims System (FBCS) that VHA uses for claims processing, have delayed processing and payment of claims for VA care in the community services. Officials at the sites we visited described the following limitations. VHA cannot accept medical documentation electronically. Authorizations for VA care in the community services are not always readily available in FBCS. FBCS cannot automatically adjudicate claims. System weaknesses have delayed claims payments. The officials we interviewed said that if the agency is to dramatically improve its claims processing timeliness, comprehensive and technologically advanced solutions must be developed and implemented, such as modernizing and upgrading VHA’s existing claims processing system or contracting out the claims processing function. In October 2015, VHA submitted a plan to address these issues as part of a broader effort to consolidate VA care in the community programs. The agency estimated that it would take at least 2 years to implement solutions that would fully address all of the challenges now faced by its claims processing staff and by providers of VA care in the community services. However, VHA has not yet provided to Congress or other external stakeholders a plan for modernizing its claims processing system. In particular, VHA has not provided (1) a detailed schedule for developing and implementing each aspect of its new claims processing system; (2) the estimated costs for developing and implementing each aspect of the system; and (3) performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency’s progress in modernizing its claims processing system. That VHA has not yet provided a detailed plan but has stated that it expects to deploy a modernized claims processing system as early as fiscal year 2018 is cause for concern. Thus, to help provide reasonable assurance that VHA achieves its long-term goal of modernizing its claims processing system, we recommended in May 2016 that the Secretary of Veterans Affairs direct the Under Secretary for Health to ensure that the agency develops a sound written plan that includes: a detailed schedule for when VHA intends to complete development and implementation of each major aspect of its new claims processing system; the estimated costs for implementing each major aspect of the system; and the performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency’s progress in modernizing its claims processing system. The department concurred with our recommendation and said that VHA plans to address the recommendation when the agency develops an implementation strategy for the future consolidation of its VA care in the community programs. In conclusion, effective IT management is critical to the performance of VA’s mission. The department faces challenges in key areas, including the development of new systems, modernization of existing systems, and increasing interoperability with DOD. While we recognize that the transformation of VA’s IT organization is intended, among other things, to mitigate the IT weaknesses we have identified, sustained management attention and organizational commitment will be essential to ensuring that the transformation is successful and that the weaknesses are fully addressed. Chairman Isakson, Ranking Member Blumenthal, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have. If you or your staff have any questions about this testimony, please contact Valerie C. Melvin at (202) 512-6304 or melvinv@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony statement. GAO staff who made key contributions to this statement are Mark T. Bird (Assistant Director), Jennifer Stavros-Turner (Analyst in Charge), Kara Epperson, Rebecca Eyler, and Jacqueline Mai. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","VA relies on IT to meet its mission and effectively serve the nation's veterans. Over the past several years, the department has expended billions of dollars to manage and modernize its information systems. However, VA has experienced challenges in managing its IT, raising questions about the effectiveness of its IT operations. GAO has previously reported on a number of the department's IT initiatives. This statement summarizes results from key GAO reports issued between 2010 and 2014 highlighting IT challenges that have contributed to GAO's designation of VA health care as a high risk area. It also describes additional challenges that GAO more recently identified in 2015 and 2016 that are related to increasing the electronic exchange of VA's health records with those of DOD, development and use of VBMS, and the department's modernization of its health care claims processing system. In February 2015, GAO designated Veterans Affairs (VA) health care as a high-risk area based on its concerns about the department's ability to ensure the quality and safety of veterans' health care in five broad areas, one of which was information technology (IT) challenges. Of particular concern at that time was the failed modernization of an outpatient appointment scheduling system, suspended development of a system that was to electronically store and retrieve information about surgical implants, and the extent of system interoperability—the ability to exchange information—with the Department of Defense (DOD), which present risks to the timeliness, quality, and safety of VA health care. Subsequent to the designation of VA health care as high risk, GAO completed evaluations that identified additional IT management challenges at VA. In August 2015, GAO reported on VA's efforts to achieve electronic health record interoperability with DOD and noted that (1) the two departments had engaged in several near-term efforts to expand interoperability and (2) VA and DOD had moved forward with plans to separately modernize their electronic health record systems. However, of significant concern was that VA (and DOD) had not identified outcome-oriented goals and metrics that would clearly define what it aims to achieve from its efforts. GAO recommended that VA develop goals and metrics, among other things. VA concurred with the recommendations and stated that it has initiated actions in response. VA had made progress in developing and implementing its Veterans Benefits Management System (VBMS), with deployment of the initial version of the system. However, in September 2015, GAO reported that the development and implementation of the system was ongoing and noted three areas that could benefit from increased management attention: cost estimating, system availability, and system defects. The report also noted that VA had neither conducted a customer satisfaction survey nor developed goals for improving the system. GAO recommended that VA develop a plan with a time frame and a reliable cost estimate for completing VBMS, establish goals for system response time, minimize the incidences of high and medium severity system defects for future VBMS releases, assess user satisfaction, and establish satisfaction goals to promote improvement. VA agreed with the recommendations and noted steps it was taking to address them. Due to recent increases in utilization of VA care in the community, the department has had difficulty processing claims in a timely manner. In May 2016, GAO reported that VA officials and claims processing staff indicated that IT limitations, manual processes, and staffing challenges had delayed claims processing. The department had implemented interim measures to address some of the system's challenges, but did not expect to deploy solutions to address all challenges, including those related to IT, until fiscal year 2018 or later. Further, VA did not have a sound plan for modernizing its claims processing system, which GAO recommended it develop. The department concurred with this recommendation and stated that it intended to address the recommendation through the planned consolidation of its care in the community programs. GAO has made numerous recommendations to VA to improve the modernization of its IT systems. Among other things, GAO has recommended that VA address challenges associated with its efforts to modernize its electronic health record system to increase interoperability with DOD, develop goals and metrics as a basis for determining the extent to which VA's and DOD's modernized electronic health records systems are achieving interoperability, address shortcomings with VBMS planning and implementation, and develop a sound written plan for deploying its modernized claims processing system. VA has concurred with these recommendations and has some actions ongoing.",govreport
"The size and nature of the Medicare program make HCFA unique in authority and responsibility among health care payers. Fee-for-service Medicare serves about 33 million beneficiaries and processes a high volume of claims—an estimated 900 million in fiscal year 1997—from hundreds of thousands of providers, such as physicians, hospitals, skilled nursing facilities, home health agencies, and medical equipment suppliers. HCFA is also responsible for paying and monitoring more than 400 managed care health plans that serve more than 5 million beneficiaries. Enrollment in these plans has been growing by about 85,000 beneficiaries monthly. The Medicare statute divides benefits into two parts: (1) “hospital insurance,” or part A, which covers inpatient hospital, skilled nursing facility, hospice, and certain home health care services, and (2) “supplementary medical insurance,” or part B, which covers physician and outpatient hospital services, diagnostic tests, and ambulance and other medical services and supplies. In fiscal year 1997, part A covered an estimated 39 million aged and disabled beneficiaries, while a slightly smaller number were covered by part B, which requires payment of a monthly premium. currently consists mostly of risk contract health maintenance organizations (HMO). Medicare pays these HMOs a monthly amount, fixed in advance, for all the services provided to each beneficiary enrolled. HCFA, an agency within HHS, has slightly less than 4,000 full-time employees, 65 percent of whom work in the agency’s headquarters offices; the rest work in the agency’s 10 regional offices across the country. In addition to the agency’s workforce, HCFA oversees more than 60 claims processing contractors that are insurance companies—like Blue Cross and Blue Shield plans, Mutual of Omaha, and CIGNA. In fiscal year 1997, the contractors employed an estimated 22,200 people to perform Medicare claims processing and review functions. Two recent acts grant HCFA substantial authority and responsibility to reform Medicare. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), P.L. 104-191, provides the opportunity to enhance Medicare’s anti-fraud-and-abuse activities. The Balanced Budget Act of 1997 (BBA), P.L. 105-33, introduces new health plan options and major payment reforms. In correspondence to this Subcommittee last October, we noted that these two pieces of legislation addressed in large measure our concerns and those of the HHS Inspector General regarding the tools needed to combat fraud and abuse. They also address many of the weaknesses discussed in our High-Risk Series report on Medicare. network to perform payment safeguard functions while avoiding conflicts of interest. HIPAA also adds new civil and criminal penalties to heretofore little-used enforcement powers. BBA provides for a dramatic expansion of health plan choices available to Medicare beneficiaries and makes reforms to payment methods in traditional fee-for-service Medicare and managed care. Under the act’s new Medicare+Choice program, beneficiaries will have new health plan options, including preferred provider organizations (PPO), provider sponsored organizations (PSO), and private fee-for-service plans. Medicare+Choice introduces new consumer information and protection provisions, including a requirement to disseminate comparative information on Medicare+Choice plans in beneficiaries’ communities and a requirement that all Medicare+Choice plans obtain external review from an independent quality assurance organization. These provisions address problems we have worked to correct with this committee and others in the Congress. BBA also provided for revamping many of Medicare’s decades-old payment systems to contain the unbridled growth in certain program components. Specifically, the act mandated prospective payment systems for services provided by about 1,100 inpatient rehabilitation facilities, 14,000 skilled nursing facilities, 5,000 hospital outpatient departments, and 8,900 home health agencies. In addition, it made changes to the payment methods for hospitals, including payments for direct and indirect medical education costs. It also adjusted fee schedule payments for physicians and durable medical equipment and authorized the conversion of the remaining reasonable charge payment systems to fee schedules. Finally, the act granted the authority to conduct demonstrations on the cost-effectiveness of purchasing items and services through competitive bids from suppliers and providers. While legislative reforms are dramatically reshaping Medicare, other changes are occurring, thus compounding difficult management challenges. For example, HCFA is rethinking its strategy to develop, modernize, or otherwise improve the agency’s multiple automated claims processing and other information systems. This will involve preparing systems for the year 2000, repairing the deteriorating managed care enrollment systems, and making the necessary modifications to existing systems. HCFA plans to make these changes as an interim measure until, consistent with the Information Technology Management Reform Act of 1996 (P.L. 104-106), comprehensive reengineering can take place, such as making claims processing systems and payment mechanisms more efficient, programming BBA payment changes, and modernizing the anti-fraud-and-abuse system software. HCFA is also confronting transition problems resulting from the recent loss of large-volume claims processing contractors and the need for remaining contractors to absorb the workload. Finally, HCFA recently restructured its organizational units to better focus on its mission and is experiencing the kind of disruptions common to organizational transitions. Against this backdrop, the themes that emerged from our individual interviews and focus groups with HCFA managers centered on (1) distribution of agency resources, (2) need for specialized expertise, (3) loss of institutional experience, and (4) reorganization issues. “Robbing Peter to pay Paul” was the expression used to characterize one of the major themes from our focus groups. Specifically, managers were concerned that because of the concentrated efforts to implement BBA and solve computer problems that could arise in the year 2000, the quality of other work might be compromised or tasks might be neglected altogether. However, managers also noted that whereas some BBA-related tasks are completely new—such as conducting an open enrollment period for Medicare+Choice plans—and therefore add to the workload, others merely formalize work that was already underway but impose deadlines for completion, such as developing prospective payment methods for reimbursing several types of health care providers. staff members dedicated to contractor oversight currently has two; the others, they said, had been reassigned to work on managed care issues. This concerns us in light of our work on Medicare program management. Over the past several years, we have reported that HCFA has not adequately ensured that contractors are paying only medically necessary or otherwise appropriate claims. Similarly, the HHS Inspector General’s fiscal year 1996 financial audit found contractor oversight weaknesses. For example, some contractors selected for audit could not readily verify total Medicare expenditures, including paid claim amounts, to ensure that amounts were accurate, supported, and properly classified; did not adequately document accounts receivable; and did not have adequate internal controls over the receipt and disbursement of cash. Further, HCFA does not have a method for estimating the amount of improper Medicare payments; for fiscal year 1996, the Inspector General estimated that HCFA made about $23 billion in inappropriate payments. Managers also expressed a common concern about the staff’s mix and level of skills. They noted that HCFA’s traditional approach of hiring generalist staff and training them largely on the job is no longer well suited to the agency’s need to implement recent reforms expeditiously. Instead, managers are beginning to identify the need for staff with specialized technical expertise, such as computer system analysts, survey statisticians, data analysts, market researchers, information management specialists, managed care experts, and health educators. In our discussions, several managers placed “appropriate skill sets” at the top of their wish lists. As an illustration, the Medicare+Choice program introduces new health plan types and requires the dissemination of information about the plans to beneficiaries in 1998. Called the Medicare+Choice Information Fair, this nationwide educational and publicity campaign will be the first effort of its kind for HCFA. Managers were concerned that staff without prior experience will need to pull together information that describes and evaluates the merits of various plans. data systems. They also cited the need for specialists in contracting, facilities management, and telecommunications. Many senior and midlevel managers and experienced technical staff have retired in recent years or are eligible to retire soon. Almost 40 percent of the organization has turned over in the past 5 years. Many were said to have spent their entire careers focused on a particular aspect of the Medicare program. A common concern in our discussions was the erosion of experienced staff to perform a variety of tasks, such as writing regulations and developing payment systems. Managers cited the loss of experienced staff as a problem for developing and implementing the various prospective payment systems mandated by BBA. They also noted that developing one new payment system would have been manageable, but losses of expert staff make it difficult to implement multiple new payment systems concurrently. For example, experienced staff are needed to perform such technical tasks as those we mentioned in our October statement before this Subcommittee, including collecting reliable cost and utilization data to compute the new prospective payment rates, developing case mix adjusters, auditing cost reports to avoid incorporating inflated costs into the base rates, and monitoring to guard against providers’ skimping on services to increase profits. Our focus group participants emphasized that it will be difficult to replace its experienced staff in the short term. Although HCFA is planning to hire new people, the time typically needed for recruiting, hiring, and orienting new employees is considerable. Managers commented that new employees, although highly educated and motivated, sometimes need extensive on-the-job training to replace lost expertise. In July 1997, HCFA restructured its entire organization. The new design reflected the agency’s intent to, among other things, (1) combine activities to redirect additional resources to the growing managed care side of the program, (2) acknowledge a shift from HCFA’s traditional role as claims payer to a more active role as purchaser of health care services, and (3) establish three components focused on beneficiaries, health plans and providers, and Medicaid and other activities conducted at the state level. It also established technical and support offices to assist these components. (See HCFA’s organization chart in app. I.) In announcing the planned reorganization, the Administrator explained that as Medicare has evolved over the years, new programs and projects were layered onto existing structures. Over time, he noted, this became cumbersome and confusing. Many managers we spoke with considered the reorganization to be theoretically sound. Some also told us that it was long overdue, because HCFA’s structure encouraged work on narrow issues within self-contained groups—an approach that did not benefit from the expertise existing across the agency. However, a consensus of focus group participants and high-level officials believed that the timing of the reorganization’s implementation is unfortunate. They explained that they are currently facing full agendas with tight deadlines, which add to the stresses associated with any organizational change. Managers described their difficulties in establishing new communication and coordination links within units as well as across the agency. For some, new efforts to coordinate have proved time-consuming to the point of being counterproductive. Managers commented that sign-off sheets formalizing coordination have enough names to take on the appearance of a staff roster. They noted that the situation was particularly acute in light of the fact that people have not yet moved to the actual location of their new units. Managers in one division said staff were scattered in as many as seven places around HCFA’s building. HCFA now hopes to have staff relocated by late spring, although this plan appears to be optimistic. We observed that managers appeared to be clear on top management’s expectations for completing BBA-related activities and for making sure that contractors’ claims processing systems would comply with the millennium changes. They were less certain, however, about the agency’s strategy for meeting other mission-related work. of its workload that would enable the agency’s senior decisionmakers to consider whether resources are, in fact, adequate or properly distributed and which activities could be at risk of being neglected. One example that came to our attention concerned the legislative mandates for reporting to the Congress on specific activities and programs. Currently, neither top management nor the Office of Legislation compiles a list of reports due and their deadlines. Unit managers are concerned because, although they are aware that certain reports for which they are responsible will be late, there is no systematic way to keep top management informed. Top management, in turn, cannot decide to heighten the priority for a particular report or develop a strategy to mitigate the consequences of others being late. The illustration above and our discussions with agency officials suggest that while HCFA may be ready to assert its BBA-related resource needs, it is not likely to be in a position to adequately justify the resources it seeks to carry out its other Medicare program objectives. This observation calls to mind our July 1997 report on the adequacy of HHS’s draft strategic plan under the Government Performance and Results Act. We noted that the plan failed to address certain major management challenges, including Medicare-related problems. Specifically, the plan did not address long-standing concerns about Medicare’s existing claims processing systems or HCFA’s efforts to acquire a billion-dollar integrated database system. In addition, it did not address the issue of information security that was identified in the fiscal year 1996 financial statement audit of HCFA, specifying that systems weaknesses created the risk of unauthorized access to sensitive medical history and claims data. HCFA is an agency facing many challenges. Even before BBA made major changes, Medicare was a vast and complex program. Volumes of reports by us and others demonstrate, in numerous areas, HCFA’s need to address program vulnerabilities. Because of the risks associated with a program of Medicare’s magnitude, the need for HCFA to be vigilant cannot be overstated. struggling to carry out Medicare’s numerous and challenging activities. In addition, they assert that the loss of experienced staff has further diminished HCFA’s capacity. Nevertheless, senior managers do not appear to be adequately informed about the status of the full range of Medicare activities or associated resource needs. Under these circumstances, HCFA seems to be focusing most of its energy on important deadlines and pressures, but other critical functions may be receiving back-burner attention. We have work underway to assess the status of HCFA’s efforts to implement aspects of HIPAA and BBA and modernize the agency’s information systems. We will also continue to monitor the progress of HCFA’s reorganization efforts. Mr. Chairman, this concludes my statement. I will be happy to answer your questions. Medicare: Effective Implementation of New Legislation Is Key to Reducing Fraud and Abuse (GAO/HEHS-98-59R, Dec. 3, 1997). Medicare Fraud and Abuse: Summary and Analysis of Reforms in the Health Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct. 9, 1997) and related testimony entitled Recent Legislation to Minimize Fraud and Abuse Requires Effective Implementation (GAO/T-HEHS-98-9, Oct. 9, 1997). Medicare Automated Systems: Weaknesses in Managing Information Technology Hinder Fight Against Fraud and Abuse (GAO/T-AIMD-97-176, Sept. 29, 1997). Medicare Home Health Agencies: Certification Process Is Ineffective in Excluding Problem Agencies (GAO/T-HEHS-97-180, July 28, 1997). Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997). Medicare Managed Care: HMO Rates, Other Factors Create Uneven Availability of Benefits (GAO/HEHS-97-133, May 19, 1997). Medicare (GAO/HR-97-10) and related testimony entitled Medicare: Inherent Program Risks and Management Challenges Require Continued Federal Attention (GAO/T-HEHS-97-89, Mar. 4, 1997). Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO Performance (GAO/HEHS-97-23, Oct. 22, 1996). Medicare: Millions Can Be Saved by Screening Claims for Overused Services (GAO/HEHS-96-49, Jan. 30, 1996). Medicare: Excessive Payments for Medical Supplies Continue Despite Improvements (GAO/HEHS-95-171, Aug. 8, 1995). Medicare: Increased HMO Oversight Could Improve Quality and Access to Care (GAO/HEHS-95-155, Aug. 3, 1995). Medicare: Inadequate Review of Claims Payments Limits Ability to Control Spending (GAO/HEHS-94-42, Apr. 28, 1994). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO discussed the Health Care Financing Administration's (HCFA) ability to meet growing program management challenges, focusing on: (1) HCFA's new authorities under recent Medicare legislation; (2) HCFA managers' views on the agency's capacity to carry out various Medicare-related functions; and (3) the actions HCFA needs to take to accomplish its objectives over the next several years. GAO noted that: (1) substantial program growth and greater responsibilities appear to be outstripping HCFA's capacity to manage its existing workload; (2) legislative reforms have increased HCFA's authority to manage the Medicare program; (3) simultaneously, however, other factors have increased the challenges HCFA faces, including the need to make year 2000 computer adjustments and develop a new, comprehensive information management strategy; manage transitions in its network of claims processing contractors; and implement a major agency reorganization; (4) in addition, officials report that the expertise to carry out HCFA's new functions is not yet in place and that HCFA has experienced a loss of institutional knowledge through attrition; (5) in this environment, agency managers are concerned that some of their responsibilities might be compromised or neglected altogether because of higher-priority work; (6) HCFA's approach for dealing with its considerable workload is incomplete; (7) heretofore, the agency lacked an approach--consistent with the requirement of the Government Performance and Results Act of 1993 to develop a strategic plan--that specified the full range of program objectives to be accomplished; (8) HCFA has developed a schedule for responding to recent legislative reforms but is still in the process of detailing the staffing and skill levels required to meet reform implementation deadlines; and (9) while addressing new mandates, the agency also needs to specify how it will continue to carry out its ongoing critical functions.",govreport
"Although there have been fluctuations in its funding sources, FAA is primarily supported by the Trust Fund (82 percent), which receives revenues from a series of excise taxes paid by users of the NAS. These excise taxes are associated with purchases of airline tickets and aviation fuel, as well as the shipment of cargo. These Trust Fund revenues are then available for use subject to appropriations. In addition to these revenues, in most years, General Fund revenues have been used to fund FAA. About $2.6 billion was appropriated for fiscal year 2006 from the General Fund for FAA’s operations. This amount represents about 18 percent of FAA’s total appropriation. The Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to help fund the development of a nationwide airport and airway system. The Trust Fund provides funding for FAA’s two capital accounts—the Airport Improvement Program (AIP) and the Facilities and Equipment (F&E) account—which provide grants to airports and funds for modernizing the air traffic control system, respectively. The Trust Fund also provides funding for the Research, Engineering, and Development (RE&D) account and supports part of FAA’s Operations account. To fund these accounts, the Trust Fund is credited with revenues collected from system users through the dedicated excise taxes. In fiscal year 2005, the ticket tax was the largest single source of Trust Fund revenue, followed by the international departure and arrival tax, the passenger segment tax, and fuel taxes (see table 1 for a description of current taxes). The administration’s reauthorization proposal would change FAA’s financing system from one based mainly on excise taxes to one based more on cost-based charges. Under the proposed system, funding for ATO would come primarily from user charges on commercial aircraft and fuel taxes on general aviation aircraft. In addition, contributions from the General Fund would be appropriated to FAA to cover ATO costs of providing services to military and other public aircraft, flight service stations, and a few other services. Funding for AIP, EAS, and part of RE&D would come from an equal fuel tax on both general and commercial aviation and a tax on arriving and departing international passengers. Funding for Safety and Operations would include some fees, but mostly General Fund contributions. The reauthorization proposal would also create an advisory board and give FAA limited borrowing authority. Table 1 compares elements of the current and proposed funding structure for FAA. The administration’s proposal also calls for changing FAA’s budget structure by establishing two new budget accounts—(1) Air Traffic Organization and (2) Safety and Operations—to align with FAA’s lines of business and proposed funding. These two new accounts would replace the Operations and F&E accounts. The proposal retains the AIP and RE&D accounts. See table 2 for a comparison of the current and proposed FAA budget structure. In January 2007, FAA released a new cost allocation study. This report sets forth a methodology for assigning air traffic costs to user groups on the basis of aircraft type. The two principal user groups are the high- performance group, which includes all fixed-wing turbine engine aircraft operations, and the piston aircraft group, which includes piston engine fixed-wing aircraft operations and helicopters. According to FAA, this cost allocation methodology is based on the assumption that high-performance users generally compete for the same air traffic control resources and their operations are more time-sensitive than piston aircraft operations, requiring more complex air traffic equipment and procedures. Piston aircraft operations, on the other hand, tend to be less time-sensitive and typically rely on less complex equipment. Differences in the speed and cruising altitudes of the two aircraft types also affect their en route costs. The current funding structure, with some modifications to the excise taxes and tax rates and changes in the levels of General Fund contributions, has successfully funded a growing FAA budget. Trust Fund revenues are projected to increase substantially at current excise tax rates. If, to fund the additional costs of NextGen or for other reasons, Congress chooses to increase spending on aviation beyond what can be paid for at current excise tax rates, it can obtain additional revenue through the current funding structure by increasing excise tax rates, the General Fund contribution, or both, although the nation’s fiscal imbalance could make such an increase difficult. Nonetheless, because some factors that drive tax revenues, such as ticket prices, are not well linked to FAA’s workload and costs, FAA has been concerned about the long-run revenue adequacy, equity, and efficiency of its funding. Some of the administration’s proposed changes for funding FAA, such as establishing direct user charges for commercial aviation and substantially increasing fuel taxes for general aviation are intended to link FAA’s revenues more closely with its costs. For other elements of FAA’s budget, however, it is not possible to establish a direct link between revenues and costs. For example, because AIP expenditures are not the direct result of costs imposed by users of the NAS, the proposal to fund AIP through equal fuel taxes on all aircraft operators can best be evaluated on equity grounds. Better alignment of FAA’s revenues and costs can address some of the concerns about the current funding system that derive from the lack of connection between some key drivers of current FAA revenues, such as ticket prices, and FAA’s workload and costs. However, the effectiveness of the proposed funding structure in linking costs with revenues depends critically on how well FAA’s new cost allocation method assigns costs to users and on how closely the proposed funding structure adheres to the principle of cost-based funding, and questions remain about both considerations. Furthermore, FAA’s method for estimating the fuel tax rates needed to collect its intended level of fuel tax revenue may have underestimated the tax rates needed by not accounting for possible reductions in fuel consumption due to the higher tax rates. The implications of some of the other proposed changes, including one creating an advisory board that can make recommendations on fee setting and another authorizing limited authority for FAA to use debt financing, are uncertain. Congress has used the current funding structure—excise taxes plus a General Fund contribution—to fund FAA for many years. As the number of air travelers has grown, so have excise tax revenues. Even though revenues fell during the early years of this decade as the demand for air travel fell, they began to rise again in fiscal year 2004, and FAA estimates that if the current taxes remain in effect at their current rates, revenues will continue to increase. While retaining the basic structure for funding FAA, Congress has at times changed the mix of excise taxes and some of the tax rates. For example, when the taxes were most recently reauthorized in 1997, Congress added the passenger segment tax while reducing the passenger ticket tax rate from 10 percent to 7.5 percent. Congress has also appropriated varying amounts of General Fund revenues for FAA during the past 25 years, ranging from 0 to 59 percent of FAA’s budget and averaging around 20 percent since fiscal year 1997. The fluctuation in the amount of the General Fund contribution occurs because the contribution is based on the incoming Trust Fund revenues that are available to fund the Operations account after revenues have been allocated to fund the F&E, AIP, RE&D accounts. Therefore, fluctuations in the Trust Fund revenues and FAA expenditures require different levels of General Fund contributions. As air traffic grows and FAA embarks on modernization through NextGen, Congress may appropriate additional funds to FAA to fund new investment and to maintain a safe and efficient airspace system, although there is considerable uncertainty about how much NextGen will cost. FAA estimates that NextGen will cost between $15 billion to $22 billion through 2025. However, funding NextGen does not mean that the current funding structure needs to be changed. According to projections prepared by the Congressional Budget Office (CBO), revenues obtained from the existing funding structure are projected to increase substantially. Assuming that the General Fund provides about 19 percent of FAA’s budget, CBO estimates that through 2016 the Trust Fund can support about $19 billion in additional spending over the baseline FAA spending levels CBO has calculated for FAA (the 2006 funding level, growing with inflation) provided that most of that spending occurs after 2010. How far this money will go to fund modernization is subject to a number of uncertainties— including the future cost of NextGen investments, the volume of air traffic, the future costs of operating the NAS, and the levels of future appropriations for AIP, all of which may influence funding for FAA. However, if the desired level of spending exceeded what was likely to be available from the Trust Fund at current tax rates, Congress could make further changes within the current structure that would provide FAA with additional revenue if Congress believed that larger FAA appropriations were appropriate—for example, if FAA experienced increased workload demands as a result of increased demand for air traffic services. Congress could raise more revenue from airspace system users for NAS modernization or for other purposes by raising the rates on one or more of the current excise taxes. Congress could also provide more General Fund revenues for FAA, although the nation’s fiscal imbalance may make a larger contribution from this source difficult. Thus, it is necessary to look at factors other than a need for more revenues to justify a major change in FAA’s funding structure. FAA has expressed concern that revenues from the current funding structure depend heavily on factors, such as ticket prices, that are not connected to FAA’s workload and costs. According to FAA, under the current structure, increases in the agency’s workload may not be accompanied by revenue increases because users are not directly charged for the costs that they impose on FAA for their use of the NAS. Revenues collected from excise taxes are primarily dependent on the price of tickets and the number of passengers on planes, while workload is driven by flight control and safety activities. This disconnect raises three key concerns about the current funding structure—its long-term revenue adequacy, equity, and efficiency. Moreover, these three concerns are supported by long-term industry trends and FAA forecasts of declines in inflation- adjusted air fares, the growing use of smaller aircraft, and FAA’s 2007 cost allocation study. The administration has used these concerns as its rationale for proposing major changes in FAA’s funding. Many of the proposed changes for funding FAA contained in the administration’s reauthorization proposal are intended to address the concerns about revenue adequacy, equity, and efficiency by linking FAA’s revenues more closely with its costs. The proposal calls for a combination of methods for funding FAA, which we previously reported might best address concerns with the current system by providing a better link between revenues and costs than any option used separately. For example, the proposal would eliminate all the excise taxes except the taxes on fuel and the tax on arriving and departing international passengers. The ATO, the largest part of FAA’s budget, would then be funded by direct user charges on commercial aircraft—including air taxis, fractionally owned aircraft, and aircraft providing charter service—that use the NAS, fuel taxes paid by general aviation users of the NAS (both turbine and piston), and General Fund revenues to cover the costs of exempt aircraft such as military and other state aircraft and flight service stations. The proposal would also allow FAA to establish a fee for all aircraft using the nation’s most congested airports. Based on the time of day or day of the week, the fee would be designed to increase efficient use of the NAS by discouraging peak-period traffic at congested airports and, thus, reducing delays. Under such a fee, cargo carriers could pay lower fees by operating at night than they would pay by operating at peak periods of the day, creating an incentive for some cargo carriers to switch daytime operations to nighttime. The fee could also create incentives for general aviation aircraft flying to and from metropolitan areas with congested airports to use other nearby airports instead. The shares of ATO costs to be recovered from commercial and general aviation aircraft, respectively, and the General Fund contribution to cover the costs of exempt aircraft would be based on the results of FAA’s cost allocation study. In addition, the proposal would authorize FAA to impose fees to pay for costs related to certain aircraft certification and registration activities that it conducts. Basing cost recovery for ATO only on cost allocation is a policy choice. In many other countries, cost recovery is based in part on cost allocation and in part on other principles, such as ability to pay. For example, some countries charge a fee for en route services based on weight and distance; weight is included as a factor in charging formulas because many believe that it reflects an aircraft operator’s ability to pay. Using additional principles for cost recovery could result in different distributions of the funding burden among user groups. For one large area of FAA’s budget, AIP, it is not possible to establish a direct link between revenues and costs because AIP expenditures are not the direct result of costs imposed by users of the NAS. FAA distributes AIP grants on the basis of congressional priorities established in authorizations and appropriations. Accordingly, equity would appear to be the best criterion to use in evaluating the administration’s proposal to fund AIP through a fuel tax of 13.6 cents per gallon on commercial and general aviation operators and a tax of $6.39 per passenger on the use of international travel facilities. According to an FAA official, the decision to establish equal tax rates for commercial and general aviation operators was made to achieve fairness and simplicity. One way to evaluate the fairness or equity of funding AIP in this way would be to compare the distribution of the funding burden among user groups with the distribution of the grants funded by AIP. With all aircraft being charged the same fuel tax rate, according to FAA forecasts for fiscal year 2009, commercial aircraft operators would pay about 88 percent of the fuel tax revenues collected primarily to fund AIP, while general aviation operators would pay 12 percent. However, under the current AIP program, about one-third of AIP grants would go to airports with no commercial service, and some additional grants would go to airports where general aviation traffic makes up a substantial share of the aircraft operations. Thus, under the administration’s proposal, commercial aviation users would appear to be paying for a large share of the benefits that come from capital spending at general aviation airports. This result is no different from what happens today; commercial aviation users currently pay for a large share of these benefits, since the largest share of the Trust Fund comes from passenger ticket taxes. Some portion of these benefits may accrue to commercial aviation users if capital spending at general aviation airports keeps general aviation traffic from using congested commercial airports. However, most of the benefits from capital spending at general aviation airports would likely go to users of those airports or their surrounding communities—or to the general public to the extent a national system of airports that includes general aviation airports creates public benefits. In that case, funding those benefits by fuel taxes paid by commercial aircraft may raise equity issues. An alternative approach that would be consistent with a policy choice to charge general aviation users less than the cost of the benefits they receive from AIP grants would be to use General Fund revenues to fund part of AIP. A better alignment of FAA’s revenues and costs can address revenue adequacy, equity and efficiency concerns, but the ability of the proposed funding structure to link revenues and costs to address these concerns depends critically on two things—first, the soundness of FAA’s cost allocation system in allocating costs to users and, second, how closely the proposed funding structure adheres to the principle of cost-based funding. FAA’s new cost allocation study was released at the end of January, so we and others have had only a short time to review it. However, we, as well as industry stakeholders, have raised a number of concerns about the study and its cost allocation methodology. For example, FAA divides NAS users into two groups: high-performance aircraft, such as jets and turboprop aircraft, and piston aircraft. According to FAA, dividing users this way creates two principal groups whose flights impose substantially different costs on FAA. High-performance aircraft which fly at higher altitudes and speeds, and normally use Instrument Flight Rules, are “controlled” through en route airspace and for landings and takeoffs by air traffic controllers. Therefore, they impose higher costs on FAA than piston aircraft which fly at lower altitudes and often use Visual Flight Rules, under which they are not “controlled” through en route airspace but can use air traffic control services for landings and takeoffs. However, FAA did not conduct a statistical cost analysis to determine whether high-performance aircraft of different types might impose sufficiently different costs on the system to warrant dividing NAS users into more than two groups. For example, differences in aircraft weight could affect terminal airspace costs even though they may not affect en route costs. Although there may be no effect of aircraft weight on en route costs, FAA officials told us that the administration’s reauthorization proposal requests authority to set terminal airspace user fees based in part on weight because they believe that larger aircraft require greater separation, thus imposing greater terminal airspace costs. Under FAA’s cost allocation methodology, fixed costs are assigned to the group that is the primary user of the air traffic control services that generate those costs. Accordingly, it might be more consistent to divide high-performance aircraft into subgroups before FAA allocated the fixed costs of air traffic control services used by aircraft in all groups to the group that is the primary user of that service. Creating only two principal groups resulted in the allocation of some portion of the fixed costs to general aviation jet aircraft, because the high- performance group, which FAA defines to include general aviation jet aircraft, is the primary user of services that are responsible for most fixed costs. If instead, for example, FAA had created three principal aircraft groups—piston, heavy high-performance, and light high-performance— and if the heavy high-performance group was the primary user of services that are responsible for most fixed costs, then the fixed costs would have been allocated only to that group. The effect of this change in methodology would likely have been that general aviation turbine users would have been allocated a smaller share of total ATO costs and a lower fuel tax rate would have been needed to collect their share of FAA’s revenues. Because a sound cost allocation methodology is central to the successful application of cost-based funding, more time may be needed for FAA to further analyze the differences among aircraft types that lead to differences in the costs they impose on the NAS. More time may also be needed for a fuller analysis and discussion of FAA’s cost allocation methodology, after which, perhaps, a wider consensus might be reached on FAA’s cost allocation methodology. At the request of this Committee, we are continuing to review FAA’s cost allocation methodology. In addition to our concerns about the cost allocation methodology, we have identified some instances in which the reauthorization proposal does not strictly adhere to the principle of cost-based funding. For example, FAA has made what it terms a policy decision to not apply the congestion charge for using terminal airspace near large, busy airports to all aircraft that fly through that airspace. Aircraft flying near busy airports and using the same airspace but not taking off or landing at these airports would not be charged, even though such flights would use air traffic control services provided by the same approach control centers. FAA officials told us that they made this decision because the approach control centers would not exist if they were not serving traffic at the busy airports. In addition, they said, FAA wanted to create incentives for general aviation aircraft to avoid flying to or from the busy airports and to use other nearby airports instead. Although that rationale could provide a justification for allocating the fixed costs of such centers to users of the busy airports, allocating all of the variable costs to users at those airports is a deviation from a cost- based approach. While such policy decisions on pricing may be appropriate in some instances for various reasons, but they create deviations from the principle of cost-based funding that may limit the ability of the administration’s proposal to address concerns about the disconnect between revenues and costs associated with the current funding structure. The proposed fuel tax rates, although much higher than current rates, may not yield the revenue that FAA expects to collect from fuel taxes. FAA estimated the tax rates necessary to collect from general aviation operators the share of ATO costs allocated to them and from both commercial and general aviation operators the revenue needed to fund the proposed level of $2.75 billion for AIP, EAS, and the portion of the RE&D account to be funded through fuel taxes (less the share paid by international passengers). FAA officials confirmed for us that in performing these estimates they did not take into account possible reductions in fuel purchases due to the increase in the tax rates. Although we do not know by how much such purchases would decline, conventional economic reasoning, supported by the opinions of industry stakeholders, suggests that some decline would take place. Therefore, the tax rate should be set taking into consideration effects on use and the resulting impact on revenue. FAA officials told us that they believe that these effects would be small because the increased tax burden is a small share of aircraft operating costs and therefore there was no need to take its impact into account. Representatives of general aviation, however, have said that the impact could be more substantial. Even if there is no change in fuel purchases due to higher tax rates, FAA’s forecasts suggest that fuel tax revenues might be less than the proposed spending to be funded by those tax revenues. Furthermore, we observe that the administration’s proposed spending for AIP is substantially below the levels at which Congress funded the program in recent years. If Congress were to adopt the proposed funding structure but fund AIP at the same level as this year, fuel tax rates would need to be raised above the proposed level to obtain enough revenue to fully fund AIP without resorting to alternative funding sources, such as the General Fund or drawing down the Trust Fund balance. The proposed creation of an advisory board raises questions about the influence that NAS users would have on fee setting and the impact that such a board would have on congressional oversight. According to the reauthorization proposal, the advisory board would be able to recommend user fee amounts to the FAA Administrator, who would have the final decision in setting fees. If the advisory board objected to the fee, the Administrator would be required to publish a written explanation in the Federal Register. Aviation stakeholders could appeal the fee to the Secretary of Transportation but there would be no judicial review of the Secretary’s appeal decision. According to a recent report by the Congressional Research Service, the FAA Administrator would have substantial discretion in how much to use the advisory board’s expertise. Congress would have no role in setting fees, whereas under the current system, Congress sets the tax rates. The combination of these elements raises the issue of how to ensure the appropriate level of congressional oversight. With a user fee, Congress would set the total amount to collect and spend from the fees through the appropriations process. The authorization of limited borrowing authority (up to $5 billion) for FAA in the administration’s proposal seems unlikely to have a major effect on FAA’s ability to pay for capital investment associated with moving to NextGen, because the payback period is relatively short. With a maximum payback period of 5 years, the advantage of matching the time period for paying for a capital investment with the time period in which the benefits of that investment are realized is unlikely to be achieved. As a result, the advantage of this type of borrowing compared to appropriations also funded by Treasury debt is less clear. In either case, user fee collections could offset the borrowing. However, it is possible that having FAA borrow from the Treasury with a relatively short time period for repayment could serve as a way to tighten and make more explicit the link between the borrowing and the fees that are the source of repayment— and could ensure that the fees were set at a level sufficient to provide the needed funds. Limiting FAA’s authority to borrow from the Treasury and collecting revenue from user fees, as proposed, is preferable to giving FAA direct access to capital markets or repaying debt with appropriations or new borrowing. The Treasury can borrow at lower interest rates than FAA could achieve by going to the capital markets because Treasury securities are considered risk-free, since they are backed by the federal government. We have recommended that only those agencies that would be able to repay their borrowing through revenue collections be granted authority to borrow. In addition, we have reported that debt financing raises issues about borrowing costs that are particularly important in light of the federal government’s long-term structural fiscal imbalance. Mandatory federal commitments to health and retirement programs will consume an ever- increasing share of the nation’s gross domestic product and federal budgetary resources. Accordingly, any program or policy change that may increase costs requires sound justification and careful consideration before adoption. The reauthorization proposal to align FAA’s budget accounts with FAA’s lines of business has advantages and disadvantages. Such a restructuring is consistent with FAA’s emphasis on aligning revenues and costs and could allow FAA to more specifically distinguish those funding options that provide a better links between costs and revenues. For example, an ATO account dedicated to the operation, maintenance, and upgrade of the NAS could better enable the agency to charge for direct usage of the NAS. In addition, such a system could show the costs attributable to each line of business, thereby supporting the agency’s internal financial management. However, some FAA activities may not be clearly divisible into discrete categories. For example, one new account—the Safety and Operations account—includes safety-related activities. Nonetheless, there could be some ambiguity in how safety activities are defined and in how their costs should be allocated between aviation users which benefit directly from a safe air traffic control system and the public which receives general safety benefits. Linking the General Fund contribution to FAA’s budget, as the administration is proposing, would explicitly recognize that users of the system are not the only beneficiaries of it. Such an approach allows for a “bottom up” calculation of the General Fund contribution that is based on the different public benefits that FAA provides, such as safety and use of the NAS by federal agencies. This approach is different from the current one, which bases the General Fund contribution on how much money is left in the Trust Fund to fund the Operations account after Trust Fund revenues for that particular year have been allocated to fund the F&E, AIP, and RE&D accounts. An approach that links a General Fund contribution to public benefits is consistent with the principle of public finance that public benefits should come from the General Fund and not from user contributions. This should not, however, be viewed as a precise determination. Some aviation activities, such as safety, benefit both users and the nonuser public. Others, such as a national airport system that includes small airports that receive federal grants, may be seen as a benefit solely to the users of those airports, to their communities, or to the broader public. In addition, such a change in the method of determining the General Fund contribution may result in an increase or a decrease in that contribution, which would have implications for how aviation activities are funded. The administration has introduced a complex proposal for funding FAA, and we believe that it deserves serious and thoughtful consideration. Adopting this proposal is not necessary to provide more money to FAA if Congress thinks that additional spending on aviation is needed to address air traffic increases and new investment demands, including NextGen, because additional funding can be provided within the current structure. However, given the current federal fiscal imbalance, appropriating additional funds to aviation may be difficult. Furthermore, the proposal may address some of the concerns that FAA and other stakeholders have raised with the current funding structure, such as equity, but only if the cost allocation from which the cost-based funding is derived is sound. FAA’s cost allocation methodology is new and has raised issues, suggesting that further analysis and more time may be needed to reach a consensus as to whether it is sufficiently sound to support a cost-based funding structure for FAA. In the meantime, the taxes that currently provide most of the revenue for FAA are scheduled to expire at the end of the current fiscal year. Given the relatively low uncommitted balance in the Trust Fund, a lapse in tax revenues could affect the funding of most FAA activities. Thus, timely reauthorization of the current tax revenues to avoid a tax lapse is critical even if Congress chooses to continue its consideration of the administration’s proposal or other alternatives for funding FAA beyond this fiscal year. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the subcommittee might have. For further information about this testimony, please contact Gerald L. Dillingham at (202) 512-2834. Other key contributors to this testimony include Jay Cherlow, Ed Laughlin, Maureen Luna-Long, Maren McAvoy, Jennifer Kim, and Elizabeth Eisenstadt. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","Recently, the administration submitted a proposal for reauthorizing the Federal Aviation Administration (FAA) and the excise taxes that fund most of its budget. FAA's current authorization expires in 6 months. The proposal calls for major changes to FAA's funding and budget structure that are intended to address concerns about the long-term revenue adequacy, equity, and efficiency of FAA's current funding structure and to provide a more stable, reliable basis for funding a new air traffic control system that FAA is developing (at an estimated cost of $15 billion to 22 billion through 2025) to meet forecasted increases in air travel demand. The proposal would introduce cost-based charges for commercial users of air traffic control services, eliminate many current taxes, substantially raise fuel taxes for general aviation users, charge commercial and general aviation users a fuel tax to pay primarily for airport capital improvements, modify FAA's budget accounts to align with specific FAA activities, and link the portion of FAA's budget that comes from the Treasury's General Fund with public benefits FAA provides. This statement offers GAO's observations on the proposed changes in FAA's (1) funding and (2) budget structure and is based on GAO's analysis of FAA's proposal and a recent GAO report on FAA funding options. Funding Structure: The current funding structure has supported FAA as FAA's budget has grown, and it can continue to do so to fund planned modernization. Excise tax revenues are forecasted to increase if the current taxes are reauthorized without change and thus could support additional spending. If necessary, Congress can obtain more revenue by increasing the excise tax rates or the General Fund contribution to FAA's budget, although the nation's fiscal imbalance could make such an increase difficult. FAA is concerned because revenues from the current funding structure depend primarily on ticket prices and passenger numbers, which are not well linked to FAA's workload and costs. The proposed new funding structure would link revenues more closely with costs to ensure that revenues rise with increases in FAA's air traffic control and safety activities. According to FAA, cost-based user charges would also be more equitable and could create incentives for more efficient use of the system by aircraft operators. How well FAA's proposed funding structure, if enacted, would achieve these goals is uncertain because it depends on two unknowns--the soundness of a new FAA cost allocation methodology and the extent to which the proposed structure links revenues to costs. Also uncertain are the adequacy of FAA's proposed fuel tax rate to collect anticipated revenues, the implications of a proposed advisory board, and the impact of a proposal to give FAA limited debt-financing authority. Furthermore, GAO notes, user charges would reduce Congress's role in setting revenues. Budget Structure: Modifying FAA's budget accounts is consistent with FAA's emphasis on aligning revenues and costs, but may present implementation issues, in that some FAA activities may be difficult to categorize. More specifically, the proposed restructuring could allow FAA to better identify funding options that link revenues and costs and may improve transparency by showing how much is being spent on specific FAA activities. However, some activities, such as those related to safety, may not lend themselves to placement in discrete categories. Linking the General Fund contribution to public benefits is appropriate, but since some activities may provide both public and private benefits, judgment rather than a precise calculation may determine the contribution. Concluding Observations: The administration has introduced a complex proposal for funding FAA that GAO believes deserves serious and thoughtful consideration. While not necessary to provide more money for FAA, the proposed structure may address some of the concerns raised by the current structure if its cost allocation is sound. Because FAA's cost allocation model is new, further analysis and more time may be needed to determine whether it can adequately support a cost-based funding structure for FAA. Timely reauthorization of funding for FAA for at least the next year is, however, critical to prevent a lapse in funding for most FAA activities, regardless of the action taken on the proposed changes.",govreport
"According to GSA, its Federal Technology Service, in conjunction with the IMC, is responsible for ensuring that federal agencies have access to the telecommunications services and solutions needed to meet mission requirements. Its current program to provide long- distance telecommunications services—FTS2001—has two goals: to ensure the best service and price for the government, and to maximize competition for services. In implementing this program strategy, GSA awarded two contracts for long-distance services—one to Sprint in December 1998 and one to MCI WorldCom in January 1999. Under the terms of these contracts, each firm was guaranteed minimum revenues of $750 million over the life of the contracts, which run for four base years and have four 1-year-extension options. If all contract options are exercised, those contracts will expire in December 2006 and January 2007, respectively. According to GSA, federal agencies spent approximately $614 million on FTS2001 services during fiscal year 2003 alone. Related governmentwide telecommunications services are provided by other GSA contracts: the Federal Wireless Telecommunications Service contract and the FTS Satellite Service contracts. The wireless contract was awarded in 1996 to provide wireless telecommunications products and services to all federal agencies, authorized federal contractors, and other users. The satellite services contracts are a series of contracts for a variety of commercial off-the-shelf satellite communications products and services, including mobile, fixed, and broadcast services. According to GSA, these contracts will expire in late 2004 and in 2007, respectively. We have periodically reviewed the development and implementation of the FTS2001 program and assessed its progress. In March 2001 we reported to you on the delays encountered during the government’s efforts to transition from the previous FTS 2000 to the FTS2001 contracts, the reasons for those delays, and the effects of the delays on meeting FTS2001 program goals of maximizing competition for services and ensuring best service and price. We recommended that GSA take numerous actions to facilitate those transition efforts. In April 2001 in testimony before you, we reiterated those recommendations and noted that the process of planning and managing future telecommunications service acquisition would benefit from an accurate and robust inventory of existing telecommunications services. Ultimately, GSA acted on our recommendations and the transitions were successfully completed. GSA is now planning its FTS Networx acquisition program, including the awarding of new governmentwide contracts for a broad range of long distance and international voice and data communications services, wireless services, and satellite telecommunications services. These contracts are intended to replace the existing FTS2001, Federal Wireless Telecommunications Service, and FTS Satellite Service contracts. GSA and the IMC has identified five goals for the Networx acquisition program: Meet agency needs for a comprehensive acquisition that provides continuity of current telecommunications services and solutions. Obtain best value (lowest prices while maintaining quality of service levels) for all services and solutions. Encourage strong competition for the initial contract award(s), and ensure continuous competition throughout the life of the program. Respond to the changing marketplace by providing agency access to a broad range of services and service providers. Provide expanded opportunities for small businesses. To achieve those goals, the program calls for two acquisitions—Networx Universal and Networx Select. The Networx Universal contracts are expected to satisfy requirements for a full range of national and international network services. According to GSA, Networx Universal seeks to ensure the continuity of services and prices found under expiring contracts that provide broad-ranging service with global geographic coverage. GSA expects all Networx Universal offerors to provide a full range of voice and data network services, managed networking services and solutions, and network access, wireless, and satellite communications services. This acquisition is expected to result in multiple contract awards to relatively few offerors because few are expected to be able to satisfy the geographic coverage and comprehensive service requirements. GSA also intends to apply competitive incentives to obtain best value for its customer agencies, although those incentives are not yet defined. Further, GSA expects to establish minimum revenue guarantees for these contracts. In contrast, GSA plans to award multiple contracts for a more geographically limited set of services under Network Select. GSA generally describes these Select contracts as providing agencies with leading edge services and solutions with less extensive geographic and service coverage than that required by Networx Universal; specific Networx Select service requirements have not yet, however, been defined. Details of pricing structures and Select service delivery mechanisms are planned to be provided in the Networx Select request for proposals, which GSA intends to release in the summer of 2005. GSA anticipates awarding both the Networx Universal and the Networx Select contracts well before the expiration of the FTS2001 contracts. Notwithstanding the acquisition planning activities completed by GSA and the IMC to date, these entities face significant challenges in finalizing their program strategy to ensure that Networx is appropriately defined, structured, and managed to deliver those telecommunications services and solutions that will enable federal agencies to most efficiently and effectively meet their mission needs. Specifically, these challenges include: Ensuring that adequate inventory information is available to planners to provide an informed understanding of governmentwide requirements. Establishing measures of success to aid acquisition decision-making and enable effective program management. Structuring and scheduling the Networx contracts to ensure that federal agencies have available to them the competitively priced telecommunications services they need to support their mission objectives. Initiating the implementation planning actions needed to ensure a smooth transition from current contracts to Networx. It is important that GSA and its customer agencies have a clear understanding of agency service requirements in order to make properly informed acquisition planning decisions. According to our ongoing research on best practices in telecommunications acquisition and management, clear understanding comes at least in part from having an accurate baseline inventory of existing services and assets. More specifically, an inventory allows planners to make informed judgments based on an accurate analysis of current requirements and capabilities, emerging needs that must be considered, and the current cost of services. Although leading organizations acknowledge that establishing and maintaining such an inventory may be difficult, they view this baseline as an essential first step to high-quality telecommunications requirements analysis, and subsequent sourcing decisions associated with meeting those requirements. Despite this importance, it is not clear whether GSA and federal agencies have yet established the comprehensive, accurate inventories needed to support Networx planning. Mr. Chairman, you followed up on this issue in your December 17, 2003, letter to GSA asking to what extent such detailed inventories were currently being maintained and kept accurate and up-to- date for use both in acquisition planning and future contract transitions. In his response, the Administrator of General Services identified sources of information provided by GSA and the FTS2001 vendors—for example, monthly billing information—that would be helpful to agencies in developing inventories of existing services. In addition, the Administrator noted that GSA is examining methods of incorporating better billing and inventory data into the Networx program where practical. However, the Administrator did not provide specific information on the extent to which these inventories exist, or whether agencies are periodically validating that information to ensure that it is accurate and complete. Further, the Administrator acknowledged that the accuracy and completeness of telecommunications service inventories varies among agencies. As a result, without a clear understanding by GSA and its customer agencies of the FTS2001 services used today and the applications they support, it is unclear how properly informed Networx acquisition planning decisions can be made. Our research into recommended program and project measurement practices, which we affirmed in discussions with private-sector telecommunications managers, highlights the importance of establishing clear measures of success to aid acquisition decision making as well as to provide the foundation for accountable program management. Such measures define what must be done for a project to be acceptable to the stakeholders and users affected by it, and in so doing enables measurement of progress and effectiveness in meeting objectives. Although GSA has established program goals, it has not yet defined a comprehensive set of corresponding performance measures for the Networx acquisition program. According to GSA’s Assistant Commissioner for Service Delivery/Development, one of the criteria for measuring Networx success will be identical to that used for FTS2001—that is, savings as measured by contract service costs compared with best commercial pricing. Further, according to this official, this was the sole measure reported to the Office of Management and Budget for FTS2001. While low pricing is an important criterion reflected in program goals, GSA has not yet defined measures about how well its final acquisition plan will deliver the value (service plus price) that agencies need to improve their operations and meet their mission needs. For example, GSA’s Networx environmental assessment indicates that agencies want this program to support network planning and optimization, include simple and understandable fees, provide management of contracts and contractors on the agencies’ behalf, and include other elements of value. GSA’s Assistant Commissioner for Service Delivery/Development recognizes the importance of having such measures, and told us that GSA would be establishing such measures coincident with its actions to finalize the Networx Universal RFP in the coming months. It will be important that GSA follow through on this commitment to establish that appropriate set of measures to evaluate the intended business value of the Networx program and enable the effective management of this significant program over time. Once agency requirements are adequately understood and measures of success defined, structuring and scheduling the Networx contracts to successfully encourage industry competition to obtain low prices and high-quality, innovative services becomes the next challenge. The varying views of industry representatives commenting on the request for information raised fundamental questions about the soundness of the proposed acquisition approach for accomplishing this. For example, large, interexchange carriers, like those that hold the current FTS2001 contracts, generally agreed with the broad scope of the Universal contracts. They further suggested that services offered under Networx Select and Universal should be mutually exclusive, and that all carriers should be allowed to compete for both. In contrast, other carriers criticized the approach. These carriers asserted that some major telecommunications providers might be precluded from bidding on the Networx Universal contracts because of the broad service and ubiquitous geographic coverage requirements described in the request for information. For example, one vendor stated that it was quite possible that only traditional long distance carriers could effectively bid for Universal, thus denying many players in the industry a realistic chance to compete for major portions of the federal long distance business. One carrier noted that, based on the procurement timetable, the timing of the award for the Select contracts would minimize the opportunity to compete for long-distance telecommunications services. Because of the 9-month lag between the Universal and Select acquisitions indicated in the proposed acquisition schedule, agencies could be asked to make decisions regarding their use of awarded Universal service contracts before information is available regarding Select leading edge services and solutions that may be more suitable for their needs. Defining an acquisition strategy that appropriately balances the need to ensure the continuation of existing telecommunications services in all current government locations with encouraging strong competition to obtain best value is a daunting challenge. However, proceeding from a clear understanding of requirements and measures of success—as I previously discussed—should aid in meeting this challenge by providing guideposts for a decision that strikes an appropriate balance on contract scope, program structure, and acquisition schedules that can deliver to agencies competitively priced solutions that meet their mission needs. Further, continuing to solicit and effectively implement feedback from stakeholders should help GSA achieve this goal. As we reported to you in March 2001, the current FTS2001 contracts got off to a rocky start as significant delays in transitioning to the new contracts hindered timely achievement of program goals. Factors contributing to those delays included a lack of data needed to accurately measure and effectively manage the transitions, inadequate resources, and other process and procedural issues. Ultimately, GSA did take action on all of our recommendations and the transition to the FTS2001 contracts was finally completed. In subsequent testimony before you in April 2001 we noted the importance of incorporating the lessons learned from this transition into future procurements. Specifically, we stated that “the process of planning and managing future telecommunications service acquisitions—both by GSA and by the agencies themselves—will benefit from an accurate and robust inventory of current telecommunications services. Further, the value of this critical program to customer agencies will be improved through the application of lessons learned in streamlining and prioritizing the contract modification process, in effectively and expeditiously resolving billing problems, and in holding contractors accountable for meeting agency requirements in a timely manner.” Those in industry who commented on the Networx request for information also noted the need for strong and comprehensive program management to ensure successful transition, including not only the availability of accurate inventories but also defined contractor and government responsibilities. While GSA recognizes the importance of transition planning, it has not yet fully addressed these issues. GSA has emphasized that its development of the Networx program included an analysis of lessons learned from existing programs and previous acquisitions. Further, in his February 11 letter in response to your inquiry about agency inventories, the Administrator outlined the proactive steps GSA plans to take, including actions to establish a working group and to improve the availability of accurate inventory information to support the transition. According to the GSA’s Associate Commissioner Service Delivery/Development, these actions will also include developing processes and procedures, identifying funding needs, and training agency personnel in order to support a smooth contract transition. As acquisition plans are finalized in the coming months, it will be important that GSA follow through on these initial steps to ensure that the transition to the new contracts proceeds efficiently and seamlessly, and that a repeat of the FTS2001 transition difficulties is avoided. In summary, Mr. Chairman, Networx represents a critical opportunity to leverage the strength and creativity of the telecommunications marketplace to make the vision of delivering to agencies the telecommunications business solutions they need to perform their missions better and more cost-effectively a reality, and in so doing to carry the federal government forward well into the 21st century. To accomplish this, however, GSA will need to overcome significant challenges and demonstrate solid leadership. Likewise critical will be stakeholder commitment. Actions taken and decisions reached in the coming months to more fully define the Networx program and finalize an appropriate acquisition strategy will significantly influence the telecommunications choices federal agencies will have for the next several years. Unless GSA follows through to resolve the challenges outlined today, the potential of Networx may well not be realized. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee may have at this time. Should you have any questions about this testimony, please contact me by e-mail at koontzl@gao.gov or Kevin Conway, Assistant Director, at conwayk@gao.gov. We can also be reached at (202) 512-6240 and (202) 512-6340, respectively. Another major contributor to this testimony was Michael P. Fruitman. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","The Genera1 Services Administration (GSA) has initiated planning for its next-generation telecommunications acquisition program, known as Networx, which will replace the current Federal Telecommunications System (FTS) 2001 for longdistance and international services. It will also replace contracts for wireless and satellite communications products and services. Planning for this acquisition is occurring within an environment of tremendous change--in the industry, in underlying services and technology, and potentially in the regulatory environment. In this context, Networx can offer a significant opportunity for the federal government to flexibly acquire telecommunications services at competitive rates and apply innovative solutions to improving agency operations. At the request of the Chairman of the House Committee on Government Reform, GAO is providing an overview of acquisition planning steps completed to date, along with its assessment of challenges facing GSA and federal agencies as this acquisition proceeds. Over the past year, GSA has acted to ensure that all interested parties-- including industry and agency users--have had a chance to comment on the development of the successor to FTS2001 and associated contracts. In its planning for the Networx acquisition, GSA cited five goals for the program: (1) continuity of telecommunications services, (2) best value, (3) strong competition, (4) a broad range of services and providers in a changing marketplace, and (5) expanded opportunities for small businesses. To achieve this, GSA plans two acquisitions: Networx Universal--broadranging services with global coverage, and Networx Select--leading-edge services but more geographically limited. To take full advantage of the opportunities offered in these new contracts, GSA will need to address four key challenges: (1) ensuring that an adequate inventory of information about existing telecommunications services and assets is available, to give planners an informed understanding of governmentwide requirements; (2) establishing specific measures of success to aid acquisition decision making and effective program management; (3) structuring and scheduling the contracts to ensure timely delivery of competitively priced telecommunications services that meet agency mission needs; and (4) ensuring a smooth transition from the current contracts by initiating appropriate implementation planning actions. Both leadership from GSA and commitment from stakeholders in resolving these issues will be essential to establishing efficient, cost-effective, and secure telecommunications services. If this can be achieved, the Networx contracts will be optimally positioned to leverage the power and creativity of today's telecommunications marketplace to carry the federal government forward well into the 21st century.",govreport
"FSA manages and administers student financial assistance programs authorized under title IV of the Higher Education Act of 1965 (HEA), as amended. These postsecondary programs include the William D. Ford Federal Direct Loan Program (often referred to as the “Direct Loan”), the Federal Family Education Loan Program (often referred to as the “Guaranteed Loan”), the Federal Pell Grant Program, and campus-based programs. Annually, these programs provide more than $50 billion in student aid to approximately 8 million students and their families. As a consequence, the student financial aid environment is large and complex. It involves about 5,300 schools authorized to participate in the title IV program, 4,100 lenders, and 36 guaranty agencies. Currently, FSA oversees or directly manages approximately $200 billion in outstanding loans representing about 100 million borrowers. Congress has recognized the need to make federal agencies more results- oriented by shifting from a focus on adherence to required processes to a focus on achieving program results and customer satisfaction. Toward this end, Congress established PBOs, which are discrete management units remaining in their current department under the policy guidance of the department secretary. PBOs are to commit to clear management objectives and specific targets for improved performance. These clearly defined performance goals, coupled with flexibility in managing operations and direct ties between the achievement of performance goals and the pay and tenure of the head of the PBO and other senior managers are intended to lead to improved performance. In October 1998, Congress established FSA as the government’s first PBO. As defined in the legislation, the specific purposes of the PBO are to improve service in the student financial assistance programs; reduce costs of administering the programs; increase accountability of officials; provide a greater flexibility in management; integrate information systems; implement an open, common, integrated delivery system; and develop and maintain a system containing complete, accurate and timely data to ensure program integrity. FSA’s enabling legislation also, among other things, requires the appointment of a chief operating officer; requires the development of 5-year and annual performance plans; requires the PBO, through the secretary, to report annually on the performance of the PBO; requires the PBO to have performance agreements for the COO and other senior managers; requires the COO in consultation with the secretary to appoint a student loan ombudsman; allows for the payment of performance bonuses to the COO and other senior managers; allows FSA to make use of certain personnel and procurement flexibilities. We have reported on selected agencies’ use of performance agreements, including FSA, the Department of Transportation, and the Veterans Health Administration. Although these three agencies developed and implemented agreements that reflected their specific organizational priorities, structures and cultures, we identified five common emerging benefits from each agency’s use of the agreements. These emerging benefits include: strengthened alignments of results-oriented goals with daily operations, collaboration across organizational boundaries, enhanced opportunities to discuss and routinely use performance information to make program improvements, results-oriented basis for individual accountability, and continuity of program goals during leadership transitions. In addition to FSA, other PBOs include the U.S. Patent and Trademark Office (USPTO), established as a PBO in March 2000, and the Federal Aviation Administration’s Air Traffic Organization (ATO), in December 2000. Similar to FSA, USPTO, and ATO are subject to the policy direction of their parent departments and are to have the flexibility and independence to operate more like a business, with greater autonomy over their budget, hiring, and procurements in carrying out their functions. Further, USPTO and ATO are also required to designate an individual responsible for operational improvements, develop multiyear and annual performance plans, implement performance agreements, and provide for performance bonuses. The British Next Steps initiative was used as a model in crafting the PBO concept in the United States. The Next Steps agencies—now known as executive agencies—are still the predominant form of service delivery in the United Kingdom. As of December 2001, there were over 130 executive agencies covering more than three-quarters of the British civil service. FSA has taken several steps toward developing and implementing a strategic direction—its plan for achieving the purposes Congress specified for it in the PBO legislation—but, even though these efforts have shown promising results, additional actions are needed. FSA’s performance plan discusses its three strategic goals—increase customer and employee satisfaction while decreasing unit cost—and the annual goals and strategies it will use to accomplish these three goals. The performance plan, however, could be more useful to congressional decision makers with respect to systems integration and program integrity. FSA has also begun to implement a balanced scorecard—a report that links employees’ day-to-day activities with the organization’s progress toward its strategic goals, but even with the scorecard, some employees have found it difficult to make this link. Finally, FSA and the department have not met its requirement to report annually to Congress on its progress in meeting the goals laid out in its performance plan, along with other requirements specified in the PBO legislation. FSA’s performance plan discusses strategic goals for increasing customer and employee satisfaction and reducing unit costs. In addition, it includes measures for gauging FSA progress in meeting each of these strategic goals. (See table 1.) FSA’s management uses these goals and associated performance measures to determine areas for quality improvement, monitor changes in customer perceptions, and evaluate the success of ongoing quality improvement efforts in its student aid delivery. To measure customer and employee satisfaction, FSA uses the American Customer Satisfaction Index (ACSI) and the Gallup Q12, respectively. Both measures are used by the private sector and other government entities, and, as a result, FSA can compare its own scores with those of others. FSA’s scores on both the ACSI and Gallup Q12 increased from fiscal year 1999 through fiscal year 2001, suggesting improvement in both areas. Indeed, comments from representatives from several higher education associations we interviewed and who work closely with FSA also suggest that customer satisfaction has improved. For example, an association official noted the willingness of FSA managers to listen and learn from students, schools, and lending institutions. To track reductions in costs, FSA has developed a unit cost measure. FSA uses the measure to demonstrate how it is reducing the cost of administering the student aid programs. However, FSA’s current calculation has some limitations in this regard. First, in calculating unit cost, FSA divides budget obligations (an obligation reserves funds for an eventual cash payment for goods and services) by the total number of people who received aid. This means that FSA’s unit cost does not measure costs, per se. Further, the unit cost calculation does not include obligations FSA sees as beyond its control—obligations for services shared with the department (e.g., telecommunications) and obligations associated with loan consolidation, which is influenced by demand, for example. Obligations FSA considers as fully under its control include those for salaries and benefits, operations and modernization contracts, and general operations, such as travel, training, printing, and equipment. This means that unit cost does not measure total obligations per person receiving aid. Second, the way FSA currently calculates unit cost is a change from the way it calculated it in the past. This change makes comparing unit cost across years difficult. In 1998 through 2000, FSA calculated unit cost by dividing the actual cost (those it considered under its control) of administering student aid (instead of budget obligations) by the total number of people who had received aid. According to FSA officials, FSA changed the calculation of unit cost to make it more useful as a management tool, in part because actual costs for a particular year are sometimes not known until well into the next fiscal year and because managers are more accustomed to using budget obligations, in part because of their experience in using obligations in budget formulation and execution. Using actual cost in the calculation, the unit cost in fiscal year 2000 was $19.08. When FSA recalculated unit cost for fiscal year 2000 using budget obligations instead, the amount changed to $20.14. FSA officials told us that they believe the unit cost measure is a useful tool for internal management information purposes, allowing managers to gauge the efficiency of their operations and to highlight, for its employees, the importance of reducing costs. Although these are important objectives, FSA’s unit cost measure is less useful to congressional decision makers because, among other things, FSA does not include all program obligations in the measure nor explain the basis of its measure in reporting on its performance. According to the Federal Accounting Standards Advisory Board (FASAB), decision makers in Congress as well as the public should be provided with information on the full costs of programs and their outputs. The FASAB has also stated that agencies should develop and report cost information on consistent bases and that using different accounting bases and measurement methods can confuse users of cost information. Because FSA does not relate its unit cost measures to total program costs and because it has changed its method for calculating it, it is difficult to discern whether changes in the measure are indicative of changes in total program costs. In addressing systems integration and program integrity, FSA’s performance plan has several limitations. It is not always obvious how the goals and strategies included in the plan relate to systems integration, or how FSA can effectively assess systems integration by relying on measures for its strategic goals. Moreover, the performance plan provides only limited information regarding FSA’s strategies for achieving program integrity. Congress designated FSA as a PBO, in part, to encourage the integration of the many, disparate information systems used to deliver student financial aid. In 1997, we reported that Education would likely be unable to correct longstanding problems resulting from a lack of integration across its student financial aid systems until a sound systems architecture was established and effectively implemented. FSA subsequently devised an enterprise-wide systems architecture in response to our conclusion that such an architecture was needed, and in response to our related recommendations. As part of its continuing systems integration efforts, FSA recently initiated a new approach, commonly referred to as middleware, to provide users with a more complete and integrated view of information contained in multiple databases. We recently reported that in selecting middleware, FSA adopted a viable, industry-accepted means for integrating and using its existing data on student loans and grants. FSA’s implementation of the middleware technology remains in its early stages. FSA now needs to properly implement and manage its strategy. If implemented and managed properly, this new technology should help ameliorate FSA’s longstanding database integration problems. While FSA’s strategy for integrating its many computer systems shows promise, both we and Education’s IG have found that neither its performance plans nor its subsequent annual reports readily provide information about its progress in integrating systems. As a step toward providing this information, the IG recommended that FSA include an overall systems integration goal that was objective, quantifiable, and measurable. The IG stated that an overall systems integration goal would help to inform Congress and others of FSA’s progress in integrating systems. However, FSA’s COO disagreed with this recommendation, arguing that FSA could not achieve its strategic goals without integrating its systems and therefore a distinct systems integration goal was unnecessary. While FSA’s performance plans included numerous goals and strategies, it is not always obvious how they relate to systems integration. For example, the performance plan identifies one of FSA’s strategies as “create the data mart.” However, what the data mart is or how completing it would bring FSA closer toward integrating its systems is never explained. Similarly, in an earlier performance plan, FSA referred readers to its Modernization Blueprint— its plan for integrating and modernizing its student aid information systems—for additional information on its goals and strategies. However, Education’s IG characterized the Modernization Blueprint as lengthy, complex and lacking clear performance goals and measures. FSA relies on the measures for its strategic goals to reflect the results of its system integration effort, even though they were not specifically designed to do so. Many factors unrelated to FSA’s systems integration efforts influence these measures. FSA’s technical assistance activities, for example, may result in increased customer satisfaction even though these activities do not involve systems integration. On the other hand, FSA could make technological progress in integrating its systems that would not be evident to the customer. For example, before implementing systems to integrate databases, FSA spends considerable time developing the databases. Measures of customer satisfaction would not capture these initial efforts. As a result, FSA’s customer satisfaction measure may not fully reflect progress made or lack of progress with regard to systems integration. Another goal Congress prescribed for FSA was to enhance program integrity. FSA had no strategic goal for program integrity in its fiscal year 2001 and earlier performance plans, but draft documents FSA provided to us suggest that its fiscal year 2002 plan may include such a goal. It is unclear from these draft documents, however, how FSA will define measurable outcomes to demonstrate its progress in enhancing program integrity. FSA works to ensure program integrity in many ways, including providing technical assistance to schools to increase compliance with regulations, working to prevent defaults, and collecting on defaulted loans. FSA’s draft fiscal year 2002 performance plan reflects its increasing reliance on providing technical assistance to schools as a way to ensure their compliance with financial aid rules and regulations. In the past, FSA relied much more extensively on conducting on-site program reviews to assess schools’ compliance with rules and regulations. The following list, taken from FSA’s fiscal year 2002 performance plan, shows the technical assistance strategies FSA plans to implement during fiscal year 2002: Develop and deliver a series of services to new schools, which includes assistance during the first 12 months of their participation in Title IV programs. Identify trends in risk areas and provide targeted technical assistance to schools. Conduct at least three national conferences for schools. Develop a “How To” guide with our oversight partners on processing school closures that focuses on reducing the impact to students. Promote the Title IV schools’ quality performance by providing them with tools for understanding and improving management practices, program requirements, and verification outcomes. Identify areas for improving compliance effectiveness and take the appropriate steps to fix them. While FSA has developed strategies intended to improve schools’ regulatory compliance, it is not clear how FSA will know whether its strategies are effective. First, FSA has not developed an indicator of schools’ compliance. Second, while FSA’s fiscal year 2002 performance plan defines success for the strategies shown above, the definitions may not be appropriate. For example, FSA plans to conduct at least three national conferences for schools to disseminate information about student financial aid programs and processes including program integrity. FSA states that high scores on participant evaluations of these national conferences will indicate its success in disseminating this information. While participant evaluations may reflect the quality of presentations, they will not indicate whether the information helped institutions comply with applicable laws, regulations, and procedures. Another way that FSA ensures program integrity is through its efforts to collect and prevent defaulted student loans. FSA’s draft fiscal year 2002 performance plan specifies the goals it has for default management; however, it includes only limited information about the strategies it will use to achieve those goals. For example, in its fiscal year 2002 plan, FSA includes the following goals for default management: increase the fiscal year 2002 default recovery rate to 15 percent, ensure that the defaults recovered exceed the total default claims for the fiscal year, demonstrate the pursuit of improved default management and prevention strategies, and keep the default rate under 8 percent. FSA’s plan, however, only includes one strategy to address these goals—expand the use of the National Directory of New Hires—a database matching program—to recover $200 million in defaulted student loans. As the result of not giving details on its strategies for default recovery and prevention, it is not clear how FSA will achieve its goals relating to default management and how its efforts help ensure program integrity. In order to help employees connect the work of individual teams to the FSA-wide strategic goals, FSA’s management has adopted the “balanced scorecard.” The scorecard is intended to provide a simple, one-page presentation of FSA’s performance on its three strategic goals. The scorecard also reports on team-specific contributions towards achieving the three strategic goals. Because the balanced scorecard approach is a new initiative (about one quarter of FSA’s teams are using it), FSA has not yet resolved some of the difficulties that staff have in linking scorecard results to their work. Some staff reported that it was difficult to understand how they could influence scores for customer satisfaction and unit cost measures. For example, one FSA manager told us that she thought the ACSI data was too complicated and at too high a level for it to be useful to front-line staff while others said their staff did not understand the unit cost calculation and how they could affect it. The PBO’s enabling legislation requires the COO, through the secretary, to report annually on the performance of the PBO to Congress based on its previous year’s performance plan. For fiscal year 2000, although FSA prepared an annual report, it was not submitted to Congress as required by the legislation. FSA submitted a draft fiscal year 2000 report to the department in March 2001; however, the draft was incomplete and not in compliance with the PBO legislation, according to a senior Education official. Despite attempts to finalize the report, Education, in a subsequent review of the draft late in the year, still found that the report did not comply with statutory requirements. Given the late date and in light of the fact that the subsequent year’s performance report would soon be due, Education decided not to submit the fiscal year 2000 report at that time. Instead, according to the official, Education and FSA plan to issue a combined report for fiscal years 2000 and 2001. The department has not yet received the combined report from FSA. In transmitting the report through the secretary, FSA is required to submit specific information related to the performance of the PBO, but FSA’s reports have been incomplete. The annual report must include, among other things, the evaluation rating of the performance of the COO and other senior managers including the amounts of bonus compensation awarded to these individuals, and recommendations for legislative and regulatory changes to improve service to students and their families, and to improve program efficiency and integrity. In the documents FSA submitted for fiscal year 1999 and in its draft report for fiscal year 2000, did not include required information such as recommendations for legislative and regulatory changes. In addition, while FSA included information about the amounts of bonus awarded to the COO and senior managers, it did not include the evaluation rating for them as required. FSA has begun to better organize its services and manage its employees, but gaps exist in its human capital strategy and it has not yet implemented performance management initiatives to fully develop and assess its employees. To better serve its customers and improve employee performance, FSA reorganized its operations, hired senior managers accountable for specific strategic goals, and encouraged accountability among all employees. However, FSA’s human capital senior manager has not been an active participant in setting FSA’s strategic direction. Also, FSA still faces challenges in planning for the succession, deployment, and training of staff. Moreover, FSA has not yet implemented a performance management system though its enabling legislation requires it to do so. Sound human capital principles state that organizations should be structured on the basis of their strategic goals, have a strategic vision, and ensure accountability for commitment to those goals and vision. FSA has taken steps to adopt these practices. Since being established as a PBO, FSA has restructured itself into three customer-oriented “channels”—one for students, schools, and financial partners (guaranty agencies and lenders)—-each led by a channel general manager. According to FSA officials, the realignment was intended to improve the organization’s performance and increase coordination of mission-critical activities. FSA also created a number of “enterprise” units to support the channels by focusing on internal customer or stakeholder needs. These units, each with its own enterprise director, focus on activities such as analysis, communications, and human resources. The operations of the chief financial officer (CFO) and chief information officer (CIO) are considered support organizations responsible for technical and financial management practices and infrastructure. Figure 1 shows how FSA’s total workforce of about 1,200 employees is organized and how the COO positioned his office in the middle of FSA’s official organization chart to stress the importance of the three customer-oriented channels. In addition to changing the way its staff is organized, FSA also created a management council to steer the organization strategically and ensure communication among the channels. The council is comprised of the COO, CIO, CFO, each of the channel general managers, and representatives from FSA’s primary contractors responsible for modernizing information systems. To hold FSA accountable for achieving results, FSA’s enabling legislation requires the COO and each senior manager to enter into an annual performance agreement that sets forth measurable organizational and individual goals. According to FSA officials, the organization’s annual performance plan serves as the basis of these agreements. The annual goals and strategies for which each manager has responsibility serve as his or her agreement. Since the annual goals and strategies contribute to one or more of FSA’s three strategic goals, the performance agreements ensure that managers are responsible for contributing to the organization’s overall performance. For example, a channel manager may be responsible for increasing the number of aid applications filed electronically and, in so doing, help FSA achieve its strategic goals of increasing employee and customer satisfaction and reducing unit cost. Each fall, senior managers submit to the COO a document indicating how their work over the prior year has led to the accomplishment of the annual goals and strategies in their performance agreements. If they achieve their goals, they are awarded bonuses—50 percent of the bonus is based on the COO’s evaluation of the managers’ overall contribution; the remaining 50 percent is based on the extent to which FSA reached its three strategic goals. The COO is also eligible for a bonus based on the secretary’s evaluation of the COO’s performance. The COO and FSA senior managers who have performance agreements with the COO are also subject to removal for failing to achieve sufficient progress toward performance goals. In fiscal year 2001, the COO received a bonus of $60,165 and 17 other senior managers received bonuses ranging from $10,277 to $30,082. FSA has also tried to encourage and reward high performance throughout the organization by awarding bonuses to all staff based on the COO’s assessment of FSA’s success in meeting its strategic goals. For fiscal year 2001, staff received a bonus equivalent to 90 percent of their pay for one biweekly period. An FSA employee making $1,000 per biweekly period would receive a bonus of $900, for example. FSA has taken important steps towards developing its human capital, but gaps remain in its overall human capital approach. In its fiscal year 2002 performance plan and human capital plan FSA laid out its human capital priorities, such as seeking to implement employee incentive and recognition programs, but it did not discuss its strategy for using its human capital resources to drive the organization toward achievement of its three strategic goals. Our work on human capital management has shown that sound human capital practices require agencies to transform their traditional human resources function from a support office to a partner in setting the organization’s strategic direction, preparing for future needs by identifying pending retirements and anticipating hiring needs, and linking training and development activities to employee skill sets and expectations for job performance. FSA’s efforts in these areas, however, have fallen short because it has not fully addressed these critical elements of human capital management. The position of human resources unit director—the designated human capital senior manager—was not permanently staffed until May 2000—in part, because it was thought of as “second tier,” according to one official. Further, the existing human resources director does not have an active role on FSA’s Management Council. While some of the members of the Management Council may have human capital responsibilities for their particular offices, no one person on the council has overall responsibility for FSA’s human capital planning and management. The strategic role of human capital staff is vital if FSA is to increase the effectiveness of its current human capital management practices. However, nothing in the performance plan or FSA’s recently proposed human capital plan suggests that the human capital function will be elevated in stature within FSA and hold “a place at the table” among senior management in decision making. In the high-performing organizations that we studied, human capital staff participated as full members of management teams and ensured that those teams proactively addressed human capital issues. For example, several organizations we studied told us that they involved their human capital staff as decisionmakers and internal consultants by having leaders of their human capital staff serve on senior executive planning committees similar to FSA’s Management Council. In addition, while FSA, in its draft human capital plan, has proposed expanding the role of its human capital unit to include serving as a liaison to the department in carrying out agency-wide programs and policies, and overseeing specific human capital initiatives within FSA, it proposed a similarly expanded role in a September 2000 plan that was never approved by the department. As of September 2001, about 38 percent of FSA’s workforce was eligible for retirement, yet FSA does not have a formal plan to address pending retirements. Should those eligible to retire do so, FSA will be faced with a substantial loss of institutional knowledge. FSA’s draft human capital plan begins to address attrition by discussing how it will work to retain and reward top performers, get rid of poor performers, use contractors to complete appropriate business functions, but FSA has no hiring plans that address such factors as how many staff are needed and the skills they should possess. Having a plan that addresses such factors is important even though FSA cannot immediately hire individuals for key positions due to departmental hiring restrictions. According to several FSA officials, hiring has been problematic in light of special departmental procedures that have affected FSA’s ability to fill about 300 vacancies. These procedures—effective since January 24, 2001—restrict certain personnel selections, reassignments, and promotions at FSA and a number of other offices within the department. Currently, FSA can only reassign or detail its staff within the PBO, and it must request exemptions to these procedures for all other decisions related to hiring, promoting, or detailing staff. Decisions related to posting employment opportunities and extending employment offers, for example, must first be approved by the department. Between February 7 and December 7, 2001, FSA requested 73 exemptions to these procedures. Of these, 33 were approved, while the remaining have been denied or have not yet been acted upon. We found that concerns over hiring and the deployment of existing staff were particularly prominent in the Case Management and Oversight (CMO) unit in the schools channel, which performs functions critical to ensuring the integrity of FSA’s financial aid programs. Among other things, CMO staff certify schools’ eligibility to participate in student aid programs and enforce programmatic requirements. To more effectively use its staff and fulfill its responsibilities, CMO has instituted a variety of strategies. For example, CMO has recently implemented an assessment tool to identify schools with the greatest likelihood of noncompliance with financial aid regulations. Using this tool, CMO believes it can better target its staff’s enforcement activities. However, in three of the five regional offices we visited, CMO officials told us that these efforts were not enough. These officials expressed concern that, without sufficient staff, institutional oversight and technical assistance activities could decrease, potentially compromising the integrity of the financial aid programs. FSA has expanded the training opportunities available to its staff since its PBO designation. Table 2 provides a description of current training programs. Even though FSA has expanded the courses it offers, it has yet to implement tools that would allow it to assess its employees’ training needs. FSA has proposed what it calls the “performance development process” (PDP). The PDP has two core components—improving employee performance by introducing Individual Development Plans (IDP) to the workforce and documenting employee skills through a comprehensive skills catalogue—intended to identify employees’ training needs. IDPs would allow all staff to link their professional goals to the goals of FSA by developing work plans in collaboration with their supervisors. FSA managers would appraise employees’ job performance by determining whether they’ve met, exceeded, or failed to reach the goals they have self- assigned in their IDP. The second part of the PDP, the skills catalogue, will attempt to allow FSA managers to identify employees’ training needs by ascertaining the skills they already have. FSA proposed the PDP not only as a sound human capital management tool, but also in order to meet legislative requirements. The PBO legislation requires FSA to establish a performance management system that creates goals for the performance of employees, groups, and the organization consistent with the PBO’s performance plan. Despite the steps discussed above, FSA’s relationship with its union has made implementation of many of these initiatives difficult. Both FSA and union officials have had difficulty negotiating on related proposals. According to its collective bargaining agreement, the union has the opportunity to review actions affecting any aspect of employee working conditions, including those related to training, development, and appraisals. According to an FSA official, because FSA and the union could not reach agreement on the proposed PDP, due to unresolved differences regarding the appraisal component of the PDP, FSA has recently withdrawn the proposal from negotiations, leaving the status of an integral component of its human capital plans undecided. Education continues to take steps to clarify FSA’s level of independence and its relationship with other Education offices. The legislation establishing FSA as a PBO provided that, subject to the secretary’s direction, FSA would exercise independent control with respect to certain functions. To address this issue, Education and FSA, under the previous administration, developed and signed memorandums of understanding (MOU) to specify the authorities provided to FSA and procedures concerning how FSA would interact with other Education offices. With the arrival of the current administration in January 2001, Education established special interim procedures for all its department units, including FSA, that were intended to ensure that personnel and financial resources are managed effectively and efficiently throughout the department while long term management plans are being developed. As a result of the interim procedures, Education now provides greater direction and oversight of FSA than did the previous administration. Education is currently reviewing FSA’s role and responsibilities as part of that overall departmentwide management planning effort. The results of this planning effort will be used to make future decisions concerning FSA’s level of independence and its relationship to other Education offices, according to Education officials. The legislation establishing FSA as a PBO provided that, subject to the secretary’s direction, FSA would exercise independent control with respect to certain functions. In addition, the secretary in agreement with the COO, is authorized to allocate to the PBO such other functions that they determine necessary to achieve the purposes of the PBO. Interviews with FSA and former Education officials indicated that together they struggled with balancing the PBO’s independence and identifying how the organization fit into the structure of the department. For example, issues of service duplication with other Education offices in areas like human resources and information technology had to be balanced with FSA’s desire to mold these functions to meet its mission. To address such issues, the department and FSA, under the previous administration, developed and signed memorandums of understanding (MOUs) for human resource management, acquisition and contracting, and information technology. These documents delegated certain authorities to the COO and set out policies and guidelines to be followed because FSA’s operations in these areas interacted with the rest of the department. For example, in the area of human resources, the MOU delegated authority for, among other things, establishing the performance management system and hiring to FSA. Because some of these human capital functions required union involvement to complete, the MOU required FSA to work in consultation with the department to finalize any changes that impact the terms of the department’s collective bargaining agreement. Since the change in administration in January 2001, the department has been reassessing the MOUs and FSA’s relationship with the department. In contrast to the past, FSA is currently subject to special interim procedures established by the department for all of its units in January 2001 and updated in September 2001. According to a departmental memo, the special procedures were put into place to allow the department to manage its personnel and financial resources in the most effective and efficient ways possible and in accordance with the President’s Management Agenda. An overall strategy for improving the management and performance of the federal government, the Agenda specifically includes taking actions that result in FSA’s student financial aid programs no longer being designated as high risk by GAO. The special procedures, for principal offices with senior political appointees in place, require prior departmental approval to (1) advertise and fill positions at the senior level, (2) reassign employees, (3) hire or continue the services of any consultant, or (4) award any new contracts above $100,000. The special procedures pertaining to FSA are stricter and the same as those applicable to principal offices with vacancies at the senior political level. These procedures require department-level officials to review and act on all administrative, management, and policy issues. As a result of these changes, FSA’s independence has lessened. As previously discussed, for example, hiring has been problematic in light of the special departmental procedures and has affected FSA’s ability to fill about 300 vacancies, according to several FSA officials. Education responded to the President’s Management Agenda by developing its Blueprint for Management Excellence. The Blueprint specifies the steps it will take to have GAO’s high-risk designation removed from its student financial aid programs and addresses other longstanding management challenges facing the department. As noted in its Blueprint, the department is reviewing the prior MOUs to “determine what is and is not working as intended.” The Blueprint also provides that after consultation with the community and members of Congress, the department will resolve relationship issues between FSA and other department offices. To help develop comprehensive strategies to implement its Blueprint, the department is currently working with the National Academy of Public Administration (NAPA) and the Private Sector Council(PSC). According to Education officials, decisions concerning FSA as well as plans to address departmental management challenges will be based on the results of these efforts. Education expects its work with NAPA and PSC to result in a final report, scheduled to be issued in June 2002. Congress established FSA as a PBO in hopes that doing so would result in long sought operational changes in its programs. As we have discussed, elements of PBO reform include an expectation for results in exchange for flexibility. Although established as a PBO for a relatively short time, FSA has made important progress in undertaking reforms and its performance to date, as reflected in gains in customer and employee satisfaction, shows promise. Despite these gains, FSA needs to make additional improvements. As a PBO, FSA must ensure that it meets its obligation to report the progress it is making towards the goals Congress established for it. Key to reporting results is submitting complete, useful, and timely information to Congress. Because of the longstanding concerns over FSA’s lack of the financial and management information needed to ensure the integrity of the student financial aid programs, FSA needs to clearly inform Congress and the public of its progress in addressing this issue. In particular, FSA needs to improve its reporting of the progress it is making with regard to implementing its plans for integrating its student financial aid data systems and enhancing the integrity of its student loan and grant programs. In addition, in light of the complexity of FSA’s unit cost calculation as well as recent changes in how it calculates costs, it will be important for FSA to disclose these issues in future performance plans and reports. FSA also needs to ensure it makes human capital management an integral part of its strategic approach for accomplishing its mission. Without doing so, FSA cannot ensure that its workforce is adequately prepared to meet future challenges and accomplish its mission. In particular, FSA needs to address critical issues including workforce planning and development. To ensure that congressional decision makers and the public understand the measure FSA uses to gauge its performance with respect to the costs of administering student financial aid programs, we recommend that the secretary of education direct FSA’s COO to fully disclose in its performance plans and subsequent performance reports the bases of its unit cost calculation and to clarify what costs are included and excluded from the calculation. To ensure accountability for making continued progress toward its legislative mandate to integrate systems, we recommend that the secretary of education direct FSA’s COO, in collaboration with the secretary, to develop and include clear goals, strategies, and measures to better demonstrate in FSA’s performance plans and subsequent performance reports its progress in implementing plans for integrating its financial aid systems. To ensure accountability for enhancing the integrity of its programs, we recommend that the secretary of education direct FSA’s COO, in collaboration with the secretary, to develop performance strategies and measures that better demonstrate in its performance plans and subsequent performance reports its progress in enhancing the integrity of its student loan and grant programs. In particular, FSA should develop measures that better demonstrate whether its technical assistance activities result in improved compliance among schools and additional strategies for achieving its default management goals. To inform Congress about FSA’s performance and to comply with statutory requirements, we recommend that the secretary of education and FSA’s COO work collaboratively to take the steps necessary to ensure that complete and timely annual performance reports are submitted to Congress. To ensure that FSA’s workforce is adequately prepared to meet future challenges and accomplish its mission, we recommend that the secretary of education and FSA’s COO coordinate closely to develop and implement a comprehensive human capital strategy that incorporates succession planning and addresses staff development. In written comments on our draft report, Education agreed with our reported findings and recommendations and discussed its efforts to address longer term and structural issues that hinder the efficient and effective performance of FSA and the department. In response to our recommendation regarding FSA’s unit cost calculation, Education told us that it is in the process of working with FSA senior management to refine the measure and will stop using the current measure in the mid-year amendment to the FSA 2002 performance plan. In addition, Education said that it would include a detailed explanation of how unit costs are calculated in the upcoming annual performance report. Moreover, FSA’s performance plan will be revised to establish measurable goals and milestones for systems integration efforts to provide both direction to FSA and enhance its accountability. In response to our recommendation regarding program integrity issues, Education said that it is examining new performance measures that focus on compliance and risk. Also, Education said that it is working with FSA to finalize the 2000-2001 annual performance report and told us that it will submit a report that meets all statutory requirements to Congress soon. Finally, Education said that it is developing comprehensive strategies integrating human capital management, competitive sourcing, and restructuring for the entire Department. As part of this effort, Education said that it would direct FSA’s COO to implement and execute the steps in these strategies that are applicable to FSA’s goals and objectives. Education also provided technical clarification, which we incorporated when appropriate. Education’s written comments appear in appendix I. We are sending copies of this report to the secretary of education and other interested parties. We will also make copies available to others upon request. This report is available at GAO’s homepage, http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-8403 or Jeff Appel at (202) 512-9915. Other contacts and acknowledgments are listed in appendix II. In addition to those named above, the following people made significant contributions to this report: Jonathan Barker, Patricia Bundy, Patrick DiBattista, Joy Gambino, Simin Ho, and Judith Kordahl.","The Department of Education's Office of Federal Student Aid (FSA) administers more than $53 billion in financial aid for more than 8.1 million students. Since 1990, GAO has included student financial aid on its high-risk list. To address these and other long-standing management weaknesses, Congress established FSA as a performance-based organization (PBO) within Education in 1998. To develop and implement a strategic direction, FSA set three strategic goals, created indicators to measure progress toward these goals, and developed a tool to link employees' day-to-day activities to these goals. The goals are to (1) increase customer satisfaction, (2) increase employee satisfaction, and (3) reduce unit cost. FSA's efforts have generally improved customer and employee satisfaction scores. FSA has begun to implement some human capital practices to better organize its services and manage its employees. But gaps exist, and FSA has not yet implemented performance management initiatives to develop and assess its employees. To better serve customers, FSA reorganized to reflect its different customers--students, schools, and financial partners. To encourage accountability, FSA is linking staff bonuses to FSA's strategic goals. Education continues to clarify FSA's level of independence and is now reviewing FSA's role and responsibilities as part of the departmentwide management planning effort.",govreport
"As of September 30, 2010—the end of the 2 fiscal years during which Recovery Act awards were made—NIH made more than 21,500 grant awards using Recovery Act funds. In August 2010, we reported that NIH used standard review processes—peer review or administrative review— and standard criteria to award extramural scientific research grants with Recovery Act funding. These NIH Recovery Act grant awards were made to three grant categories. The grants varied in award size, geographic distribution, award duration, and research methods, consistent with scientific research grants funded with annual appropriations. The act required that these funds be obligated by NIH within a 2-year window—specifically, in fiscal years 2009 and 2010, though the activities funded by the grant may occur after fiscal year 2010. OMB guidance requires recipients of Recovery Act funding—including NIH Recovery Act grantees—to report on the number of jobs supported by the Recovery Act on a quarterly basis to the nationwide data collection system. OMB developed recipient reporting guidance and deployed a nationwide data collection system at www.federalreporting.gov. According to OMB guidance, a grantee’s estimate of the number of jobs supported by the Recovery Act each quarter must be expressed in terms of FTEs, which are calculated as the total number of hours worked and funded by the Recovery Act within a reporting quarter divided by the quarterly hours in a full-time schedule, as defined by the recipient. According to the OMB guidance, federal agencies that award Recovery Act funds should establish internal controls to ensure data quality, completeness, accuracy, and timely reports to the www.federalreporting.gov Web site. In reviewing a selection of the reports submitted to www.federalreporting.gov by grantees of agencies across the Department of Health and Human Services (HHS), the HHS Office of Inspector General found that HHS had processes in place for reporting the use of Recovery Act funds. NIH officials also reported that HHS assesses the quality of reports filed by NIH Recovery Act grantees. For example, using data assessments performed by NIH, HHS assesses the quality of the data reported by Recovery Act grantees. NIH and NIH Recovery Act grantees collect information about the FTEs supported by NIH Recovery Act funding as well as information on the other impacts of this funding from a variety of sources. Specifically, NIH collects information about FTEs supported by the Recovery Act from the www.federalreporting.gov Web site. NIH grantees, including NIH Recovery Act grantees, also submit annual progress reports to NIH that include information such as the goals and progress of their research. NIH is also participating in the development of a multiagency collaboration (called Star Metrics) to track the employment, scientific, and economic impacts of its funded research projects—including Recovery Act grants. In addition, NIH gathers information from principal investigators working on priority research areas and prepares publicly available reports (known as Investment Reports) about the potential scientific impacts of NIH- funded research. NIH Institutes and Centers (IC) select the topics featured in these reports based on (1) the importance of the topic area within the body of research funded by the IC, (2) the level of funding provided by the IC to the topic area, and (3) the level of public interest in the topic area. NIH grantees also collect information about the jobs as well as other impacts of NIH grants, including those funded by the Recovery Act, using payroll records, and effort reporting systems—such as time cards, other internal accounting records, and publications. Data reported by all NIH Recovery Act grantee institutions to the nationwide data collection system and available to NIH indicate that the number of FTEs supported by NIH Recovery Act funds generally increased from December 2009 through September 2010, then generally remained steady from December 2010 through June 2011—the most recent quarters for which data are available. As shown in figure 1, the number of FTEs supported by NIH Recovery Act funding ranged from about 12,000 in the reporting quarter ending December 2009 to about 21,000 in the quarter ending in June 2011. According to NIH officials, Recovery Act funds could eventually support a total of approximately 54,000 FTEs. This figure represents NIH’s estimated total of FTEs that could be supported throughout the Recovery Act. According to NIH officials, this estimate is projected based on the quarterly expenditure of funds reported by grantee institutions and the projected number of FTEs that NIH expects that these funds could support over the life of the Recovery Act. NIH expects that the Star Metrics program will provide additional information about the number and types of jobs funded by the Recovery Act. NIH officials reported that the Star Metrics program is an ongoing initiative and that the program is expected to release preliminary results regarding jobs in 2012. Like other NIH Recovery Act grantee institutions, data reported by our five grantee institutions also showed a general increase in FTEs. Specifically, the five institutions combined reported almost 1,000 FTEs in the quarter ending in December 2009, increasing to almost 2,000 supported FTEs in the most recent quarter for which data are available that ended in June 2011. (See fig. 2). Through responses to our data collection instrument 50 selected principal investigators at five grantee institutions provided additional information explaining how the Recovery Act funding supported FTEs. Nearly 30 percent of the 50 selected principal investigators reported that the NIH funding they received supported new positions, and about half of the principal investigators reported that the funding they received allowed them to avoid reductions in the number of employees at their institution or avoid a reduction in the number of hours worked by current employees. For example, according to the selected principal investigators, 29 percent of the jobs supported by NIH Recovery Act funding at the five grantee institutions were new employees hired by the institution using Recovery Act funding, and 54 percent were current employees. One principal investigator reported using NIH Recovery Act funding to hire more than 10 employees, many of whom had recently been laid off or had been out of work for several months. According to selected principal investigators, a majority (54 percent) of the job positions supported by NIH Recovery Act funds were parttime and the mean number of hours worked per week for all supported positions was about 20, including for example, a mean of 9 hours per week for professors and 35 hours per week for students pursuing postgraduate degrees. (See app. II for more descriptive information about the FTEs supported by NIH Recovery Act funding.) NIH officials currently receive some information reported by NIH grantees about other impacts of NIH’s Recovery Act funding, and NIH is participating in a program that NIH officials expect could help track these other impacts. In response to our data collection instrument, two-thirds of our 50 selected principal investigators—who direct research at the grantee institutions—reported that the Recovery Act funding received in fiscal years 2009 and 2010 was used to purchase research supplies and equipment and lab testing services. In addition, the majority of our 50 selected principal investigators and NIH also reported preliminary results from research projects funded by the Recovery Act. NIH officials we interviewed said that principal investigators—who direct research at the grantee institutions—including those which received Recovery Act funding—currently report some information to NIH about the other impacts of NIH-funded research. This information generally includes purchases made by the principal investigators, as well as preliminary research results submitted to NIH in their annual progress reports. NIH is participating in the Star Metrics program—a multiagency collaboration currently involving about 77 grantee institutions—to track, among other things, the scientific and nonscientific impacts of its funded research grants, including social and workforce outcomes and economic growth. NIH officials expect that the Star Metrics program could provide more information about these other impacts. Officials told us that Star Metrics is currently developing an approach to capture this information, and that they expect to pilot the approach in 2012. However, at this time there is no expected completion date for reporting this information. In their responses to our data collection instrument, many of our 50 selected principal investigators reported that they used the Recovery Act funding they received from fiscal years 2009 through 2010 to purchase supplies, equipment, and testing services used in research. Some of the principal investigators also reported that in the course of conducting some of their Recovery Act-funded research, they were able to provide scientific training to health care professionals. The selected principal investigators provided anecdotal information about the other impacts of the selected grants. Recipients of Recovery Act funding, such as grantee institutions, do not systematically track these other impacts; however, they are not required by the Recovery Act to do so. In previous work on the Recovery Act, GAO identified difficulties in assessing other impacts, particularly in instances when data on the other impacts are not readily available. (See app. III for more details of the other impacts of NIH Recovery Act funding as reported by selected principal investigators.) Purchasing Supplies and Equipment. In their responses to our data collection instrument, two-thirds of our 50 selected principal investigators reported that they used the Recovery Act funding they received from NIH to purchase or lease laboratory equipment and supplies needed to conduct research. These transactions, which we corroborated by conducting a selected review of NIH Annual Progress Reports and Recovery Act recipient reports, could translate into additional sales and revenues for the vendors. According to the principal investigators, their transactions included biomedical equipment and supplies, office supplies, computer equipment, and software licenses. For example, one principal investigator reported purchasing highly specialized imaging equipment for $27,000, as well as other medical, laboratory, and office supplies. Purchasing Specialized Services. Over a quarter of our 50 selected principal investigators reported that they used NIH’s Recovery Act funding to purchase certain laboratory testing services—such as genetic sequencing—from other research facilities that were better equipped to perform the testing and analyses. For example, one principal investigator reported contracting with a small local research company to perform specialized DNA analysis needed to determine the causes of immune deficiency disorders. In addition, a couple of principal investigators reported that they used NIH’s Recovery Act funding to contract for consultations services, such as statistical analyses and the design of models needed for their research. Some principal investigators also purchased ancillary services that they said were needed to support clinical trials, such as services providing patient transportation, recruitment, and care. Scientific Training for Health Care Professionals. Nine of our 50 selected principal investigators also reported in our data collection instrument that in the course of conducting their Recovery Act-funded research they were able to provide scientific training to health care professionals. Some of these principal investigators cited the importance of exposing current and future physicians to research-based approaches for diagnosing and treating patients. For example, one principal investigator reported that while researching how to select treatments for cancer patients, new oncology researchers—fellows and junior faculty—were trained about the effects of human genetics on care delivery for cancer patients. According to this principal investigator, understanding the effects of genetics on cancer allows physicians to personalize the treatment options they offer to patients. The principal investigator also noted that the next generation of physicians needs to be knowledgeable about genomic approaches to cancer care, while developing the foundation for their research careers. According to another principal investigator, as part of research to determine why certain genes contribute to Alzheimer’s disease, health care professionals were trained to analyze complex genetic datasets and to develop software packages needed to efficiently perform the analysis. In responses to our data collection instrument, a majority of our 50 selected principal investigators who direct research at the grantee institutions reported on the preliminary results from their research projects supported with Recovery Act funds. According to the majority of our selected principal investigators these preliminary results could contribute to future scientific developments in preventive medicine, the early detection of diseases, and medical therapies. Additionally, one principal investigator reported that some of the results of their research could lead to the development of research capabilities to be used by other researchers. A few principal investigators, however, stated that it was premature to report any preliminary results from their NIH Recovery Act- funded research, because they were still conducting clinical trials and analyzing data. In general, scientific research—including NIH-funded projects—can be lengthy and complex, and take years to obtain results. Grantee institutions and principal investigators in our review and NIH officials we interviewed reported that they track the scientific impact of NIH research—including preliminary results from research funded through the Recovery Act—primarily through peer-reviewed publications. NIH officials also reported that they track certain priority research areas and communicate potential scientific impacts through its Investment Reports. According to NIH, when a sufficiently large body of research results have accumulated the agency plans to prepare reports (similar to its Investment Reports) that highlight the impact of its Recovery Act- funded research. Other metrics used to track scientific impacts—including for Recovery Act-funded research—as reported by principal investigators in our review include the filing and approval of patent applications, the ability to secure future grant funding, presentations at professional meetings, utilization of products produced from their research, and changes to health care policies and clinical practices implemented as a result of their research. As noted earlier, the majority of our selected principal investigators provided preliminary results from their research projects supported with Recovery Act funds. The following are examples of these preliminary results:  Prevention of Diseases. One principal investigator reported that their Recovery Act-supported research on coronary heart disease indicated that high levels of calcified and noncalcified plaque, which can clog arteries and contribute to heart disease, is present in young healthy people who have a family history of premature coronary disease. According to this principal investigator, the results of this research could be used to identify persons who would benefit from heart imaging tests and preventative therapy for coronary heart disease.  Early Detection of Diseases. One principal investigator reported that their Recovery Act-supported research resulted in the identification of several hundred proteins that are associated with chronic pancreatitis. According to this principal investigator, this research could contribute towards creating new blood tests for detecting chronic pancreatitis. Another principal investigator reported identifying the symptoms that are the most important and efficient for making a diagnosis of autism in young children. Improvements in Medical Therapies. One principal investigator reported that data collected for their Recovery Act grant has yielded results in developing personalized therapeutic approaches for patients with idiopathic pulmonary fibrosis, a fatal disorder. This principal investigator noted that these results could help to simplify decision making regarding therapeutic interventions, such as for patients undergoing an organ transplant. Another principal investigator cited progress toward overcoming the resistance of colon cancer to existing treatment therapies, and another assessed two alternative therapies for coronary heart disease. A principal investigator also reported that their Recovery Act-supported research contributed to the development of a kidney dialysis monitoring device that could be less invasive and more cost-effective than the current surgically implanted monitoring systems. Improved Research Capabilities. One principal investigator reported that their Recovery Act-supported research contributed to the development of a new approach that is being utilized by other researchers studying the connections between different genes and traits, such as those that may lead to heart disease. A draft of this report was provided to HHS for review and comment. HHS provided technical comments that were incorporated as appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to other interested congressional committees, the Secretary of Health and Human Services, and the Director of the National Institutes of Health. This report will also be available on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact Linda T. Kohn at (202) 512-7114 or kohnl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. To obtain the information National Institutes of Health (NIH) and selected NIH Recovery Act grantees have on the jobs supported with NIH Recovery Act funding, we interviewed NIH officials about the information they have on the full-time-equivalents (FTE) supported by the Recovery Act, and reviewed (1) NIH data containing information reported by grantee institutions to a nationwide data collection system at www.federalreporting.gov on the FTEs supported by NIH Recovery Act funding, (2) annual progress reports for fiscal year 2010 that NIH Recovery Act grantees are required to submit to NIH, and (3) other jobs information that NIH gathers from other sources. To assess the reliability of the data provided by NIH, we obtained information from agency officials knowledgeable about (1) NIH grant award data, (2) NIH Recovery Act grantee recipient reports, and (3) the jobs information that NIH gathers from other sources. We also performed data quality checks to assess the reliability of the Recovery Act grants data file received from NIH. These data quality checks involved an assessment to identify incorrect and erroneous entries or outliers. Based on the information we obtained and analyses we conducted, we determined that the data were sufficiently reliable for the purposes of this report. In addition, we selected five grantee institutions, which were universities that employ principal investigators who received NIH Recovery Act funding. The five selected grantee institutions met the following criteria: (1) received the largest portion of Recovery Act funds from NIH, (2) received the largest number of grants, and (3) reported the highest number of FTEs supported by NIH Recovery Act funds. The selected institutions were Johns Hopkins University, University of Michigan, University of Washington, University of Pennsylvania, and Duke University. The selected grantee institutions are not representative of all institutions that received Recovery Act funding. (See table 1 for more information about the five selected grantee institutions.) To gather more specific information about individual grants, we created a Web-based data collection instrument (DCI) and disseminated it to 50 selected principal investigators—10 principal investigators at each of the same five grantee institutions. The Web-based DCI contained questions about the types and number of jobs supported by the Recovery Act funding received from NIH. The selected principal investigators received grant awards that met the following criteria: (1) the grant was a new grant award and not a supplement to an existing grant, (2) the grant award was for $500,000 or greater (see table 2 for more details), and (3) the grant award was made on or before December 1, 2009. We reviewed the abstracts for all the grants that met the above criteria and made a judgmental selection of the final 50 grants—making sure to include a variety of grant types such as Challenge grants and Grand Opportunity (GO) grants that were developed for the Recovery Act. The 50 selected grant awards ranged in size from $500,000 to about $11,000,000. The principal investigators for these selected grants are not representative of all principal investigators who received NIH Recovery Act funding. To gather information about the grants from an institutional perspective, we also created a second Web-based DCI and disseminated it to an official involved in coordinating Recovery Act reporting at each of the five selected grantee institutions. We performed follow-up information gathering from selected principal investigators and administrators at grantee institutions that completed the DCI to supplement the information provided in the DCI. We also obtained and reviewed information reported by grantee institutions to the nationwide data collection system at www.federalreporting.gov about the number of jobs supported by the Recovery Act. The information on the number of FTEs supported by NIH Recovery Act funding reported to the nationwide data collection system by recipients of Recovery Act funding has certain limitations. First, the Office of Management and Budget (OMB) guidance requires FTE numbers to be reported quarterly and FTEs should not be added across quarters to obtain a cumulative number of FTEs. In addition, the calculation of FTEs may reflect full-time and/or multiple part-time jobs, therefore FTEs cannot be used to determine the total number of individual jobs. Moreover, because of a change in OMB’s reporting guidelines, FTE data for the first reporting quarter may not be comparable to the data reported for subsequent reporting quarters. The number of FTEs represents only the jobs directly supported by the Recovery Act but does not capture the jobs indirectly supported by the act or other impacts of the spending. To identify the information NIH and selected grantee institutions and principal investigators have on the other impacts of the NIH Recovery Act funding they received, we utilized the Web-based DCI disseminated to the same 50 principal investigators—10 principal investigators at each of the five selected grantee institutions—noted earlier, and interviewed NIH officials. We asked the grantee institution and principal investigators to identify other impacts such as scientific impacts, impacts in the local community, and impacts on the grantee institution and principal investigators. We also asked NIH and principal investigators to identify the metrics they use to measure and track these other impacts. We contacted the State Recovery Act representative in two of the states in which our selected universities are located (North Carolina and Pennsylvania) to identify information on the other impacts of NIH Recovery Act funding in their jurisdictions. Finally, we reviewed relevant NIH Recovery Act grant guidance as well as OMB’s Recovery Act guidance to identify Recovery Act grantee requirements for reporting information on FTEs and on the impacts of the Recovery Act grants to NIH and the nationwide data collection system at www.federalreporting.gov. We disseminated a Web-based data collection instrument (DCI) to a total of 50 selected principal investigators (10 principal investigators at each of five selected grantee institutions). The data collection instrument included questions about the jobs supported by NIH Recovery Act funding. Detailed results from selected questions in our data collection instrument related to the jobs supported by Recovery Act funding cited in this report are listed below in tables 3-6. For example, information about (1) the number of supported positions that existed before the Recovery Act and (2) the average number of hours worked by each supported job category. Not all totals add to 100 percent because respondents were given multiple answers and asked to check all that apply. We disseminated a Web-based data collection instrument to a total of 50 selected principal investigators (10 principal investigators at each of five selected grantee institutions). The data collection instrument included questions about the other impacts of NIH Recovery Act funding. Detailed results from selected questions in our data collection instrument related to the other impacts of Recovery Act funding cited in this report are listed in tables 7-10. For example, information about (1) the types of nonscientific impacts reported by selected principal investigators, and (2) the metrics used to track and measure scientific impacts. In addition to the contact named above, Will Simerl, Assistant Director; N. Rotimi Adebonojo; Leonard Brown; Carolyn Garvey; Krister Friday; Daniel S. Ries; and Monica Perez-Nelson made key contributions to this report.","The American Recovery and Reinvestment Act of 2009 (Recovery Act) included $8.2 billion in funding for the National Institutes of Health (NIH) to be used to support additional scientific research-including extramural grants at universities and other research institutions. In 2009, the Acting Director of NIH testified that each extramural grant awarded with Recovery Act funding had the potential of supporting employment--full- or part-time scientific jobs--in addition to other impacts, such as contributing to advances in improving public health. GAO was asked to examine the use of Recovery Act funds by NIH grantees. Specifically, GAO addresses the information available from NIH and its grantees about the extent to which NIH Recovery Act funding (1) supported jobs, and (2) had other impacts. To obtain information on job impacts, GAO reviewed a database containing information NIH Recovery Act grantees reported to the national data collection system and interviewed NIH officials. To obtain more specific jobs information about individual grants, GAO administered a Web-based data collection instrument to 50 selected principal investigators who direct research at grantee institutions--10 principal investigators at each of five selected grantee institutions. The selected principal investigators had generally received awards of $500,000 or more. To obtain information on other Recovery Act impacts, GAO used information from the data collection instrument and interviewed NIH officials. Data reported by all of NIH's Recovery Act grantee institutions to the national data collection system at www.federalreporting.gov and available to NIH indicate that the number of full-time equivalent (FTEs) jobs supported by NIH Recovery Act funds increased from December 2009 through September 2010, and then remained steady from December 2010 through June 2011--the most recent quarter for which data are available. The number of FTEs supported by NIH Recovery Act funds increased from about 12,000 in the reporting quarter ending December 2009 to about 21,000 in the quarter ending in June 2011. The 50 selected principal investigators who direct research at the grantee institutions in GAO's review provided additional information explaining how the Recovery Act funding supported FTEs. Nearly one-third of the selected principal investigators reported that the NIH Recovery Act funding they received supported new positions, and about half of the principal investigators reported that the funding they received allowed them to avoid reductions in jobs or avoid a reduction in the number of hours worked by current employees. The selected principal investigators also reported that the Recovery Act funding they received primarily supported scientists and other faculty. NIH officials we interviewed reported that they receive some information from principal investigators about the other impacts of NIH-funded research, such as preliminary research results included in annual progress reports. NIH is also participating in the Star Metrics program--a multiagency venture to monitor the scientific, social, and economic impacts of federally funded science--which NIH officials expect could provide more information about these impacts. While Star Metrics is currently developing an approach to capture information about the other impacts of NIH grant funding, there is no expected completion date for reporting this information. In response to GAO's data collection instrument, selected principal investigators who direct research at the grantee institutions in GAO's review reported that the use of Recovery Act funds resulted in purchases of research supplies, equipment, laboratory testing services, and scientific training of health care professionals. The majority of the 50 selected principal investigators in GAO's review also reported preliminary results from their Recovery Act-funded research that could contribute to future scientific developments in prevention and early detection of disease, improvements in medical therapies, and improved research capabilities. The principal investigators in GAO's review and NIH officials GAO interviewed reported that they track the scientific impact of NIH research--including the impact of research funded through the Recovery Act--primarily through peer-reviewed publications, but also through other metrics such as the filing and approval of patent applications. According to NIH officials, when a sufficiently large body of research results has accumulated, NIH plans to prepare reports--similar to its existing publicly available Investment Reports--that will highlight the impact of its Recovery Act-funded research. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate.",govreport
"As we have previously found, there is no single definition of transit- oriented development; however, research generally describes such a development as a compact, mixed-use, and “walkable” neighborhood located near transit. Transit-oriented developments are typically located up to a half-mile from a transit station (usually a fixed guideway rail station), can encompass multiple city blocks, and have pedestrian-friendly environments. Transit-oriented developments can range in both size and scope, with some located in major urban centers while others are located in suburban neighborhoods. Transportation experts believe that transit- oriented development can increase access to employment, educational, cultural, and other opportunities by promoting transportation options to households, resulting in increased transit ridership and reduced road congestion. Figure 1 provides a graphic representation of common features of a notional transit-oriented development. A number of stakeholders play important roles in the planning and implementation of a transit-oriented development. These roles are summarized below. Local transit agencies: These agencies, such as transit authorities or transit operators, are generally responsible for building, maintaining, and operating transit systems. These transit systems can include fixed guideway transit systems—such as rail or bus rapid transit—ferry systems, paratransit services, and local bus service. State and local departments of transportation and metropolitan- planning organizations (MPO):organizations develop transportation plans and improvement programs; they also build, maintain, and operate transportation infrastructure and services. Local governments and regional councils: City and county governments have planning departments with control over land use planning, which includes zoning policies and growth management policies. These entities are also generally responsible for reviewing, engaging local residents on, and granting entitlements for new development projects. Regional councils develop land use plans used by metropolitan-planning organizations for transportation planning. Private developers: Private developers decide on and create developments and build and manage housing units and commercial developments. Lenders: Banks and other financial institutions finance developers to design and construct transit-oriented development projects. Business improvement districts: These districts—and other entities that coordinate local economic interests—have input on community infrastructure upgrades. Although FTA provides funds for transit projects that may spur transit- oriented development, it does not have a discrete program for transit- oriented development. However, the agency has been expanding its role in transit-oriented development in recent years by: Funding transit-oriented development research. Coordinating with the Department of Housing and Urban Development and the Environmental Protection Agency on the Sustainable Communities Partnership. This partnership was formed in 2009 with the goal of coordinating federal housing, transportation, water, and other infrastructure investments to support communities’ development in more environmentally and economically sustainable ways, including transit-oriented development. Implementing a transit-oriented development planning pilot program that is to provide grants to state or local governments for advance planning efforts that support transit-oriented development. FTA plans to distribute $19.98 million in grant funding to state and local agencies in 2015. Since the early 1970s, the federal government has provided a large share of the nation’s transit capital investment through the Capital Investment Grant program. Projects eligible for the program include new fixed- guideway transit lines, extensions to fixed-guideways, and projects that improve core capacity on an existing fixed-guideway system. As we recently reported,Grant projects, local transit agencies typically serve as project sponsors, although FTA provides funding for Capital Investment and design and implement these projects. The project sponsors often coordinate with local MPOs in designing and implementing these projects, and FTA awards funding to project sponsors upon completion of the pre- construction development process. This process includes a range of local policy-development and decision-making activities, including identifying the specific transit corridor and project, refining the project design, and obtaining the necessary funding commitments from state and local partners. Once a project sponsor decides to seek Capital Investment Grant funding, FTA is required by law to rate a project considering a number of evaluation criteria, before it can recommend the project to Congress for funding. While these criteria have changed over time, there are currently six individual criteria: mobility improvements, environmental benefits, congestion relief, cost-effectiveness, economic development, and land use. In addition, FTA considers the availability of federal funds; consideration of project readiness, including sufficient engineering and design to produce a reliable scope, cost figure, and schedule; and sufficient technical capacity of the project sponsor to undertake a major construction project. FTA is also required to evaluate and rate the local financial commitment and the transit agency’s ability to operate the project and continue to operate the existing transit system. See fig. 2. We found a wide range in the amount of new transit-oriented development since transit operations began for our six case study transit lines. Stakeholders in these cities attributed the amount of transit-oriented development to the influence of a variety of factors including conditions that support of transit-oriented development such as a demand for real estate, challenges that hinder transit-oriented development such as high associated construction costs, and local government policies that encourage transit-oriented development, such as transit supportive zoning. During our case study visits, we found a wide range in the amount of transit-oriented development that occurred since the implementation of a federally funded transit project. For each project, we found at least a minimal amount of transit-oriented development near at least one station; however, for each project we also found examples of stations that have had little or no transit-oriented development. For example, in Baltimore, MD, local officials told us that there has been very little development around light rail stations—except near downtown Baltimore’s Penn Station, which also services commuter rail and Amtrak—despite more than 20 years of operations and a significant upgrade in service in 2006. In contrast, local stakeholders in Charlotte, NC, told us that the South End portion of the light rail line has been largely successful in attracting transit-oriented development—although one of these stakeholders acknowledge that stations further down the transit line in Charlotte are more auto-oriented and have generated little transit-oriented development. A more detailed description of examples of our findings from each case study can be found in figures 3 to 8. Stakeholders from across our case studies identified key conditions that can support transit-oriented development, including: demand for real estate, available land for development, supportive local residents, and a transit line that efficiently connects to established job and activity centers. Specifically, we found that the following conditions support transit- oriented development: Market demand for real estate: Market demand for real estate is needed to support transit-oriented development. According to the literature we reviewed and stakeholders we spoke to, demand for real estate is driven in part by the strength of the local economy so cities with strong local economies are more likely to support transit-oriented development. One study has also shown that market demand is the primary factor developers consider when determining whether to build a transit-oriented development. For example, a developer that has built mixed-use development projects in both Washington, DC, and Baltimore told us that developers consider anticipated price growth and existing housing supply when determining locations for new development. This developer told us that consideration of these factors has led to a pipeline of about 30,000 units in Washington, while Baltimore only has a few thousand. Further, we observed many new developments along the light rail in San Francisco, which had the fastest real economic growth of the 10 largest metropolitan areas in 2012, according to the Bureau of Economic Analysis. While a strong economy and demand for real estate are necessary to support transit- oriented development, they may not always be sufficient to lead to transit-oriented development. For example, Houston had a 23 percent job growth rate from 2003 through 2013, according to the Bureau of Labor Statistics. While the United States had a 5 percent job growth rate during the same period, we observed very little transit-oriented development in Houston due to factors such as land speculation and deed restrictions placed on land around transit. Large parcels of land available for development: The availability of large amounts of land such as surface parking lots near transit stations or underutilized industrial land can also support transit- oriented development. We have previously found that many transit agencies view converting surface parking lots at transit stations into a transit-oriented development as an opportunity to accomplish multiple goals, including promoting transit-supportive land use near stations and increasing ridership. In addition, as we have previously found, research has shownincrease with proximity to a transit station. Underutilized industrial land also presents an opportunity for transit-oriented development due to the large size of industrial land parcels and the lack of neighbors to oppose new development. For example, we visited sites in both Charlotte and San Francisco where developers took advantage of large parcels of previously industrial land to build transit-oriented development. that land and housing values generally tend to Resident support for transit and transit-oriented development: Among our case study cities, San Francisco and Washington, DC, have the highest transit ridership—among the top five in the nation according to the 2009 American Community Survey—and both cities also have historically dense development patterns. As noted above, we observed many new developments near transit in both cities. In addition, according to stakeholders, cities with a high concentration of people 18 to 34 years old tend to be more supportive of transit- oriented development than other age cohorts. For example, stakeholders from Houston; Washington, DC; San Francisco; and Charlotte told us younger residents’ desire for neighborhoods close to amenities and their support for transit are signs that this age cohort is supportive of transit-oriented development. These comments conform to a national survey by the Urban Land Institute that found that the majority of this age cohort prefers a shorter commute over a larger home; is attracted to living in neighborhoods close to public transit, with a mix of shops, restaurants, and offices; and shows a preference for living in a neighborhood with a mix of housing types and a mix of incomes. Efficient access to jobs and centers of activity: Transit that efficiently connects people to established job and activity centers provides potential for transit-oriented development. According to planning and transit officials in Santa Clara County, to attract people to transit, transit routes need to move from residential areas to job centers as directly as possible. Specifically, the extent to which transit connects people to anchor institutions,and existing mixed-use neighborhoods supports transit-oriented development. Stakeholders cited Washington, DC’s Metrorail system as an efficient system that has been successful in supporting transit- oriented development because riders can reach a number of job and activity centers (such as downtown Washington, DC; Rosslyn, VA; and the Courthouse district in Arlington, VA). In San Francisco, the first segment of the T-Third Light Rail is close to Caltrain Commuter rail, which provides access to nearby areas with a high concentration of technology-industry jobs. Stakeholders from our case studies identified several factors that can hinder transit-oriented development including: (1) the higher construction cost of transit-oriented developments; (2) lenders’ reluctance to finance transit-oriented developments in some cities; (3) lengthy or discretionary local-development approval processes; (4) an unsupportive local population; and (5) land around transit stations that is unattractive for development. Specifically, we found that the following challenges can hinder transit-oriented development: Construction costs can be higher: Construction of transit-oriented developments can be more costly than for traditional, single-use developments because of the cost of mixed-use buildings and parking garages. According to literature we reviewed and stakeholders we spoke with, aspects of transit-oriented developments such as multiple stories or a mix of uses can make transit-oriented developments more costly to build than traditional developments. For example, one study found that “different functions, appearance, access, and security levels of entrances and exits for different uses can become costly features in mixed-use projects.” A national stakeholder group also told us that the higher construction costs associated with mixed-use buildings can inhibit small construction firms from pursuing mixed-use projects. Some developers, transit, and planning officials noted that transit-oriented joint development on surface parking lots at transit stations could be hindered by the high cost of constructing replacement parking garages. Typically, when transit agencies enter into agreements with developers to use existing surface parking lots for transit-oriented joint development projects, they ask developers to pay for all or for part of a parking garage to replace the surface parking spaces used for the development. In some cases, the cost of constructing a replacement parking garage may hinder the implementation of projects. For example, according to a 2012 study of parking-garage costs in the San Francisco Bay Area, a replacement parking garage may cost about $28,000 per space, or more than $14 million for a 500-space garage. In addition, a developer told us that transit agencies could have design specifications for parking garages that double the cost per parking spot compared to what he would normally construct, cost that exacerbates the challenge of providing replacement parking. Lenders may be reluctant to finance transit-oriented development: According to the transit-oriented development literature we reviewed and developers and others we spoke with, some lenders are reluctant to finance transit-oriented developments because of a perception that transit-oriented developments are riskier than more traditional developments due to higher market risk associated with mixed-use buildings. This reluctance may be heightened in areas with few or no successful transit-oriented development projects. Mixed-use developments can face market challenges because each use must have sufficient market demand to make the project as a whole profitable. For example, a national interest group told us that mixing retail use with residential use adds risk to a project because the market for retail real estate tends to be more volatile than the market for residential use. In areas with no successful examples of transit-oriented development, lenders may view these projects as additionally risky, because lenders do not know if there is local consumer demand for transit-oriented development. Local approval processes may add requirements or delays: Another challenge that can hinder transit-oriented development is a lengthy or discretionary local approval process. For example, two national stakeholders said that developers face higher risk and more uncertainty in developing projects when transit-oriented developments are not in line with the zoning code for the area. In these cases, a zoning variance is typically required from local officials, a requirement that can make the entitlement process lengthier and more discretionary. These stakeholders also said that when entitlement processes are dependent on the discretion of the local officials, developers might be unable to predict when projects will get approved or what requirements local officials will attach to projects as conditions of approval. Three developers in San Francisco and Charlotte told us that if they are uncertain of the length or outcome of the entitlement process, they might choose not to pursue projects. Local residents may not support transit or dense development: Stakeholders in every city we visited told us that transit-oriented development could face challenges when the local population is not in favor of transit or dense residential development. Transit officials in Baltimore and Houston reported that negative perceptions of transit affect transit ridership and consumer demand for transit-oriented development. Stakeholders in Baltimore told us that a social stigma associated with public transit results in low ridership on the light rail system. The Houston transit agency and a local developer told us that Houston’s “car culture”—wherein residents generally prefer to independently travel in their own car rather than on transit—is a factor that can inhibit the appeal of transit and demand for dense living near transit stations. Stakeholders in the San Francisco Bay Area reported that local residents may oppose new development out of concern about issues such as the height of buildings for dense development or perceived decreases in quality of life due to increases in population, traffic, and demand for parking. Physical features surrounding a transit station may be undesirable for development: Stakeholders in all of our case study areas reported that physical features such as highways, vast areas of vacant land, blank walls, driveway entrances, or a lack of pedestrian crossings at streets could hinder transit-oriented development. For example, local officials in Houston told us that many stations along the light rail system have challenges with the last 100 feet. Specifically, there are many areas where sidewalk and ramp improvements are needed to help better access the station. These improvements could increase walkability and make transit-oriented development more attractive. Unsupportive land uses: Land uses around transit stations that are not supportive of high-density, mixed-use development can also hinder transit-oriented development. For example, as discussed previously, vacant industrial parcels of land can support transit- oriented development. However, developers, planning officials, and other stakeholders told us that aspects of this type of land can hinder transit-oriented development if: there is still operating “legacy” industry nearby that would be noxious to residential use; the land requires environmental clean-up; the land requires significant physical-infrastructure investment such as adding sidewalks or upgrading sewer capacity; or the area lacks community infrastructure such as schools and parks. Local governments can use a variety of policies to encourage transit- oriented development including zoning regulations, station area planning, targeted infrastructure investments, and tax incentives. Stakeholders told us that these tools most successfully support transit-oriented development when they align with the local residents’ preferences and market demand for development. The following are examples of local government actions to support transit-oriented development near the projects we selected: Creating zoning and regulations supportive of elements of transit-oriented development: Local governments can support transit-oriented development by designing zoning or other regulations to facilitate more certainty for developers proposing projects near transit stations. According to two stakeholder organizations we spoke with, local governments can help improve developer certainty by developing zoning codes that specifically allow aspects of new developments that are consistent with transit-oriented development. According to a report we reviewed, transit-oriented development zoning districts that allow buildings of greater unit density or fewer parking spaces can facilitate developer certainty because the entitlement process will likely be shorter and projects will not be subject to a discretionary entitlement process. A developer in Charlotte told us that the transit-oriented development district zone made him confident that he would get his project entitled and that absent the zone, he would not have proceeded with the project. In some cases, policies supportive of transit-oriented development can make projects more economically feasible. For example, cities can allow greater height or density and require fewer parking spaces to allow developers to increase revenue or to help offset the property value premium that transit can generate. The City of Houston does not have zoning, which results in a unique regulatory environment in which the City cannot regulate land use or other building features like most cities can. The City allows a reduction in required parking and has implemented an optional transit-corridor ordinance that reduces the legal setback from the street, but few developers have used either option to date. Developing area plans that provide guidance and resolve contentious issues: Local governments can also support transit- oriented development through neighborhood-scale land-use planning activities. Among our case studies, most local governments use some form of these plans to provide detailed direction on land use, transportation, housing, parks and economic growth for the development of city blocks, corridors, or neighborhoods around transit stations. These plans typically identify gaps in city services and resources deployed at the neighborhood level and shape capital investment priorities, among other things. In San Francisco, planning officials told us they not only use neighborhood plans to guide neighborhood growth but also to create a blanket Environmental Impact Review (EIR) that is applicable for the entire neighborhood. According to these officials, this can reduce the cost of EIRs for each development and also manages public participation in the EIR process, which traditionally accounted for much of the entitlement process delay. They noted that the Area Plan also resolves a number of topics that can be contentious (such as density, height, parking, and traffic congestion issues), before developers come in with specific project plans. Developers told us that, as a result, development has concentrated in neighborhoods with Area Plans and entitlement processes for projects in these areas are shorter. According to planning and transit officials in Baltimore, Washington, DC and Charlotte, policies designed to encourage transit-oriented development are most successful when they are tailored to local circumstances such as local residents’ preferences and market demand. The following are examples of such policies in our case studies: Responsiveness to local residents’ preferences: Planning and transit officials in Baltimore, Washington, DC, and Charlotte told us that aligning local policies such as transit-oriented development districts and Area Plans with the scale of the existing community may ensure a higher level of local residents’ support for transit-oriented development. In addition, incorporating input from local residents on issues like land use, parking, density and building height may also help ensure their support. For example, a Baltimore planning official told us that the City of Baltimore held numerous public meetings while drafting their new zoning code. Due to public input, the City changed its plans to have two transit-oriented development districts of different densities and similar uses and instead developed four different transit- oriented development districts with varying density and use. Responsiveness to market demand: Planning and transit officials in Charlotte also told us that it was important for transit-oriented development districts and local government policies to conform to market demand. For example, some local governments would like to cap parking in transit-oriented zones in order to encourage transit- ridership, but city-mandated parking requirements do not always align with consumer demand for parking and therefore the requirements can hinder transit-oriented development. Some local governments would like to encourage mixed-use developments near transit by requiring retail, but two developers told us that setting aside a minimum amount of retail space in residential buildings may not align with demand for retail in that area because encouraging new retail areas is very difficult. For example, a developer in San Francisco built a mixed-use residential and retail development and the retail space remained empty for fifteen years, until it was converted into a live/work loft space. Beyond planning and zoning, local governments can also play a role in improving connections to transit and helping mitigate environmental challenges to transit-oriented development. Actions in these areas may include the following, among others: Targeted investments in infrastructure: Local governments’ efforts to support transit-oriented development through zoning and planning are enhanced when local governments make targeted investments in infrastructure around transit stations. To increase the attractiveness of transit and transit-oriented development, local governments can support the integration of multi-modal transportation choices to take riders to and from the transit stations. Stakeholders in San Francisco reported that shuttle service, car-sharing, bicycle-sharing programs, bicycle lanes, and pedestrian amenities can help move people in and around the transit station area, thus supporting ridership and making transit more attractive (see fig. 9). Tax credits for developers: In order to mitigate some of the challenges associated with transit-oriented development on vacant industrial land, some state governments have created programs that provide tax credits to help developers ameliorate clean-up costs and reduce legal liability. Stakeholders in both Baltimore and Charlotte reported that programs in which developers receive tax credits and reduced legal liability in exchange for providing a certain amount of environmental clean-up on their parcels has made development on vacant industrial land more feasible. FTA assesses several factors that can support transit-oriented development when reviewing transit projects for potential New Starts funding; however, these factors make up only a small percentage of all the factors considered. As mentioned earlier, proposed New Starts projects are evaluated and rated according to criteria set forth in law. In addition to rating the local government’s financial commitment, FTA evaluates and rates a proposed project according to six statutory project justification criteria including mobility improvements, environmental benefits, congestion relief, economic development effects, land use, and cost-effectiveness. Two of the six project-justification criteria—economic development effects and land use—require documentation from project sponsors related to whether current and future land use is supportive of transit. To assign ratings for these criteria, FTA evaluates many of the same factors that we found help support transit-oriented development. The land use criterion includes evaluation of factors such as the development, character (including amenities such as short building setbacks and active facades), pedestrian facilities, parking supply, and the percentage of affordable housing in the existing corridor and station areas compared to the percentage in the surrounding counties. Many of the elements that support high ratings for this criterion are similar to the elements that stakeholders we spoke with identified as supportive of transit-oriented development. Specifically, to receive a higher rating, project sponsors need to show, among other things, that the existing project corridor serves a significant number of employees and densely populated areas; has development with infrastructure such as sidewalks, trees, crosswalks, and other pedestrian amenities; a mix of residential, retail and professional uses; and minimal parking and thereby costly parking (more expensive parking tends to support ridership). The economic development criterion includes evaluation of several factors relating to local government policies. FTA evaluates three sub- factors within the criterion: transit-supportive plans and policies, performance and impacts of policies, and tools to maintain or increase the share of affordable housing in the project corridor. To assign ratings, FTA considers many of the same plans and policies that stakeholders told us can help support transit-oriented development. For example, FTA considers plans and policies to enhance the transit-friendly character of station areas, plans to improve pedestrian facilities, parking policies, zoning ordinances that increase development density and allow for reduced parking, and outreach and efforts to engage the development community in station area planning. FTA also considers whether proposed station areas have land available for development and demonstrated cases of development affected by transit-supportive policies and plans, policies, or incentives the local governments have in place to maintain or increase the share of affordable housing. These two criteria account for one-third of the summary-project justification rating and one-sixth of the project’s overall rating. The remaining two-thirds of the summary project-justification rating are based on four other criteria. While these four criteria could be affected by future transit-oriented development, they do not directly relate to the potential for a project to support transit-oriented development: Mobility Improvements—The total number of “linked trips” using the proposed project, with a weight of two given to trips that transit- dependent persons would make with the project. Environmental Benefits—Based upon the dollar value of the anticipated direct and indirect benefits to human health, safety, energy, and the air-quality environment scaled by the annualized capital and operating cost of the project. FTA computes these benefits based on the change in vehicle miles travelled that would result from implementation of the proposed project. Cost-Effectiveness—For New Starts projects cost-effectiveness is measured by the annual capital and operating and maintenance cost per trip on the project. The number of trips on the project is not an incremental measure but simply total estimated trips on the project. Congestion Relief—A new criterion introduced in MAP-21. Until FTA undertakes a rulemaking process, FTA plans to assign a medium rating to this criterion for all projects seeking New Starts funds. FTA uses either estimated ridership or the change in vehicle miles traveled resulting from a transit project as part of the calculation for mobility improvements, environmental benefits, and cost-effectiveness. As discussed above, the calculation for the congestion relief criterion is not yet defined. Transit ridership can be generated in a number of ways. Riders can approach a transit station by car and park at the station, a feeder bus system, or by walking from transit-oriented development or other location near transit. These ridership forecasts may take into account growth in population and employment in the region. While transit-oriented development may be part of the reason for this growth, growth could also come from broader development in the region. Benefits and high ratings for these criteria could be driven by transit-oriented development, but could also be driven by more auto-oriented uses. While FTA evaluates many of the factors or local policies that we identified that support or hinder transit-oriented development, there are inherent limitations in the extent to which some factors can be fully evaluated. For example, local officials and a developer told us that the strength of the real estate market is critical for transit-oriented development. FTA evaluates real estate market conditions as part of the economic development criterion; however, real estate markets for residential, retail, and office space are cyclical and the life cycle of a transit project planning spans many years into the future. Market conditions could change significantly between FTA’s assessment and the beginning of transit operations. According to a transit official, FTA evaluations are based on a snapshot of a specific moment in time that may not necessarily be predictive of future economic or political cycles. Similarly, development patterns and acceptance for dense, urban living may be influenced by cultural factors that influence local resident support for transit-oriented development. Factors such as Houston’s “car culture” and housing preferences of millennials can be challenging to quantify and evaluate. Among our case studies that were assessed for New Starts funding, we found that the amount of transit-oriented development realized—and the factors that local stakeholders told us supported or hindered transit- oriented development—are generally consistent with FTA’s pre- construction evaluation and rating of factors related to transit-oriented development. For example, we included two light-rail projects as case studies that FTA assessed as high or medium-high for land use and economic development. Both the Charlotte South Corridor light rail and the Third Street light rail in San Francisco were rated highly for transit- supportive land use.projects are now surrounded by several new transit-oriented developments (see figs. 4 and 6). For the Charlotte South Corridor light rail project, in support of the medium-high rating, FTA cited local policies such as the regional centers and corridors’ growth strategy, the transit overlay district, and the 2025 Integrated Land Use/Transit plan. In addition, FTA noted that changes to policies and zoning in the South End neighborhood had led to new buildings’ being built. We observed other transit-oriented development activity, such as new residential and retail establishments oriented towards the light rail (see fig. 10). Among projects we visited, the actual ridership performance of the transit lines when compared to ridership expectations or historical ridership varies. Our case studies provide several examples where ridership has grown over time. For example, when the Columbia Heights Metrorail station in Washington, DC, opened in 1999, several vacant or underutilized lots surrounded it. Ridership at the station in 2000—the first full year it was open—averaged about 4,000 riders per day. Since 2000, many new developments were constructed on the vacant or underutilized lots near the Columbia Heights station. Over the past 10 years, ridership has grown about 93% to more than 12,000 riders per day. The percentage gain in ridership for Columbia Heights has exceeded percentage gains for the other five Green Line stations that also opened in 1999 or 2001. Of the four stations in this group located in Prince George’s county—where local officials told us there has been little or no development—three have lost ridership in the past 10 years (see fig. 11). Similarly, in Charlotte, the projected opening-year average ridership for the Charlotte Light Rail system was about 9,100 riders per day. In 2008, the first full year of operations for the system, ridership averaged 11,678 per weekday, exceeding the opening-year ridership target by about 2,500 riders (28%). As development has occurred along the line, ridership has grown 30% to more than 15,000 riders per average weekday. Other projects, particularly those projects that have not been surrounded by new development, are generally not on track to meet the ridership forecasts specified in the New Stats project’s documentation, specifically: Ridership on the Houston North Corridor light rail averaged about 4,500 passengers per weekday from February to July 2014,than one-third of the expected opening year ridership of 17,400. (see fig. 12). The Baltimore Central Corridor light-rail system attracted an average of 26,647 riders per weekday in 2013. The ridership forecast for 2020 is 44,000 riders per average weekday (see fig. 12). Average weekday ridership at stations built as part of the West Tasman Light Rail Extension in Santa Clara County was 3,125 from July 2012 through January 2013. The ridership forecast for this segment was estimated to be 7,500 by 2005. (see fig. 12). In San Francisco, ridership on the T-Third Light Rail is also below expectations despite the new development project that has been built in Mission Bay. For operating purposes, the T-Third is actually part of the K Ingleside/T-Third Route that runs through downtown San Francisco and into another part of the city. San Francisco Municipal Transportation Agency does not break out ridership on the T-Third, but estimated that in fiscal year 2013 the entire route had about 34,000 riders per average weekday. This is short of the more than 80,000 daily boardings estimated for 2015 during the preliminary engineering phase of the project. However, the average weekday ridership at the nearby San Francisco Caltrain rail station has increased by 58 percent from February 2007 to February 2014. We provided DOT with a draft of this report for review and comment. In its comments DOT stated that the report highlights the multiple challenges faced by local governments in guiding development around transit. DOT reiterated FTA’s long-standing commitment to encourage local land use actions near major transit capital investment. DOT also stated that authorizing statutes have increased the prominence of land use and economic development for the FTA’s Capital Investment Grant evaluation process and that FTA has long believed transit supportive land use plans and policies indicate good regional planning. We are sending copies of this report to interested congressional committees and the Secretary of the Department of Transportation. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions or would like to discuss this work, please contact me at (202) 512-2834 or wised@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report are listed in appendix II. In this we report we identify: (1) the extent to which transit-oriented development has occurred near select transit lines that received federal funds and which factors or local government policies support transit- oriented development and which factors hinder transit-oriented development, and (2) the extent to which FTA considers factors related to the potential for transit-oriented development when assessing proposed projects, and the extent to which FTA’s assessment of these factors is consistent with the factors that local stakeholders told us affect project’s results. To respond to both of our objectives, we selected six transit lines that received federal funds to serve as illustrative case studies. We selected these cases based on the existence of previously implemented and planned or in-construction federally funded transit lines in the same city or county; diversity in the existence of state and local programs and grants supportive of transit-oriented development; diversity in the current strength of the local real estate market; and geographical breadth. The results of these six case studies are not generalizable to all federally funded transit lines. While we focused on a specific transit line in each city, we discussed the greater city’s experience with transit and transit- oriented development with local officials to provide context for our cases. The case studies we selected were: Central Corridor Light Rail in Baltimore, MD; South Corridor Light Rail in Charlotte, NC; North Corridor Light Rail in Houston; TX; Third Street Light Rail, Phase 1 in San Francisco, CA; Tasman West Light Rail Extension in Santa Clara County, CA; and Green Line Metrorail Extensions in Washington, DC, and Prince George’s County, MD. To determine the extent to which transit-oriented development has occurred near these transit projects, we analyzed local land-use data, physically observed development, if any, along these transit lines, and interviewed local planning officials, developers, and other local stakeholders. To identify factors that support or hinder transit-oriented development, we conducted site visits to all of the transit lines and some nearby transit-oriented developments and interviewed a variety of stakeholders. In total, we interviewed with 66 different stakeholders including: twenty-six planning officials from eight local and regional planning entities, sixteen transit officials from eight local and regional transit agencies, fifteen representatives from both national and local-interest non-profit and research organizations with knowledge of transit-oriented development, and nine developers from seven different firms. To identify policies that local governments can use to support transit- oriented development, we reviewed state and local planning regulations, and analyzed relevant land use and transit ridership data from 2005 to 2014. Finally, we reviewed literature on transit-oriented development published within the past 5 years as well as our past reports related to FTA’s Capital Investment Grant Program and transit-oriented development. We assessed the reliability of the land use and by reviewing relevant documentation and either discussing reliability with agency officials or comparing data to corroborating information. We assessed the reliability of transit ridership data by reviewing documentation on the methods used to collect and maintain the data. We deemed the data on land use and transit ridership we collected reliable for the purposes of this report. To determine the extent to which FTA considers factors related to potential transit-oriented development when assessing proposed projects, we reviewed and analyzed relevant laws including Moving Ahead for Progress in the 21st Century Act (MAP-21) and the preceding funding authorization laws. We also reviewed FTA’s Annual Report on Funding Recommendations and New Starts policy guidance. For projects that were assessed for New Starts funding, to determine the extent to which FTA’s assessment is consistent with future land use changes, if any, we reviewed FTA’s project assessments and materials used to support project recommendations. We then compared these assessments with information gathered from our site visits. To determine the extent to which these projects have met ridership projections included in the information provided for New Starts funding assessment, we gathered ridership data from transit agencies and compared this data to the original ridership forecasts. We also interviewed FTA officials. We conducted this performance audit from February 2014 through November 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, John W. Shumann (Assistant Director); Melissa J. Bodeau; Mark Braza; Leia Dickerson; Kathleen Donovan; Terence Lam; Matthew LaTour; Hannah Laufe; Cheryl Peterson; and Kelly Rubin contributed to this report.","From 2004 to 2014, FTA allocated $18.9 billion to build new or expanded transit systems through the Capital Investment Grant program. One of the key goals for many local governments when planning major capital-transit projects is to encourage transit-oriented development as a way to focus future regional population growth along transit corridors. Transit-oriented development is generally described as a compact and “walkable” neighborhood near transit with a mix of residential and commercial uses. GAO was asked to examine transit-oriented development. This report addresses (1) the extent to which transit-oriented development has occurred near select transit lines that received federal funds and the factors and local policies that affect transit-oriented development, and (2) the extent to which FTA considers factors related to the potential for transit-oriented development when assessing proposed projects and the extent to which FTA's assessment of these factors is consistent with the factors that local stakeholders told GAO affect a project's results. To address these issues, GAO reviewed relevant literature and visited six federally funded case study transit projects in Baltimore, MD; Washington, DC; Charlotte, NC; Santa Clara County, CA; San Francisco, CA; and Houston, TX, selected for diversity in local programs, markets, and geography. During these visits, GAO met with stakeholders, such as local officials and developers. GAO also interviewed FTA officials. In commenting on a draft of this report, DOT noted FTA's long-standing commitment to encourage transit-oriented development. GAO found a wide range in the extent of new transit-oriented development that has occurred since transit operations began for GAO's six federally funded case-study transit projects. There are many examples of new transit-oriented development in San Francisco, CA; Washington, DC; and Charlotte, NC, that local officials attribute—at least in part—to transit in the area. However, in other cities GAO visited, local officials said that there has been very little development around transit stations—or that development took as long as 10 years. Stakeholders in these cities attributed transit-oriented development, or lack thereof, near the projects selected to the influence of several factors, including: conditions that support transit-oriented development, such as demand for nearby real estate, land available to develop, residents' support, and a transit system that provides a direct and efficient connection to jobs; challenges that hinder transit-oriented development, such as high associated costs, difficulty in obtaining financing, a difficult local-government review and approval process, an unsupportive local population, and a physical configuration around transit stations unattractive for development; and local government policies that support transit-oriented development, such as supportive zoning, planning, infrastructure investments, and tax incentives. The Federal Transit Administration (FTA) assesses projects for potential New Starts funding by evaluating several of the factors and local government policies GAO identified as supporting transit-oriented development on a five-point scale ranging from low to high. FTA evaluates access to jobs, available land, and transit-supportive plans and polices—among other things—in assessing each project for economic development and land use, which are two evaluation criteria FTA uses to determine whether a project will be funded. Among four case study projects GAO visited that were assessed by FTA for New Starts, two scored medium-high or better, while two scored medium-low or lower. GAO found that many of the factors or local government policies that supported or hindered transit-oriented development are generally consistent with FTA's summary assessment for economic development and land use. Further, GAO found two projects where transit-oriented development resulted in increased ridership, while projects with less transit-oriented development have fewer riders than expected.",govreport
"Since the Social Security Act became law in 1935, workers have had the right to review their earnings records on file at SSA to ensure that they are correct. In 1988, SSA introduced the PEBES to better enable workers who requested such information to review their earnings records and obtain benefit estimates. According to SSA, fewer than 2 percent of the workers who pay Social Security taxes request these statements each year. The PEBES legislation requires SSA to begin sending the PEBES to eligible workers who have not requested a statement according to the schedule that appears in table 1. SSA plans to mail some statements even sooner than required and, by fiscal year 2000, will have mailed statements automatically to over 70 million workers. By providing these statements, SSA’s goals are to (1) better inform the public of benefits available under SSA’s programs, (2) assist workers in planning for their financial future, and (3) better ensure that Social Security earnings records are complete and accurate. Accurate earnings records are important because a worker’s eligibility for Social Security benefits and the size of the benefit itself depend on the worker’s earnings record. Early identification and correction of errors in earnings records can benefit both SSA and the public by reducing the time and cost required to correct earnings records years later when an individual files for retirement benefits. Issuing the PEBES is a significant initiative for SSA. The projected cost of $80 million in fiscal year 2000 includes $56 million for production costs, such as printing and mailing the statement, and $24 million for personnel costs. SSA estimates that 608 staff-years will be required to handle the PEBES workload in fiscal year 2000: SSA staff are needed to prepare the statements, investigate discrepancies in workers’ earnings records, and respond to public inquiries (when individuals receive a PEBES, they are instructed to call SSA if they have questions or find errors in the earnings record contained in the statement). The benefit estimates provided in the PEBES are intended to help workers plan for their financial future. To estimate retirement benefits, SSA makes certain assumptions about an individual’s future employment and earnings. SSA assumes, for example, that individuals will continue to work until they retire and that individuals’ future earnings will remain about the same as their most recent earnings. SSA chose this overall approach to calculating benefit estimates because it is consistent with approaches used by private and public pension plan sponsors to prepare benefit estimates, according to SSA officials. The experts we talked with generally agreed that SSA’s approach for estimating future retirement benefits is reasonable. In estimating retirement benefits, SSA does not, however, vary its methodology to take into consideration certain special circumstances that could affect a worker’s actual retirement benefit. As a result, while the PEBES estimates are reasonable for most workers, they may over- or understate benefits for certain individuals. For example, the PEBES estimate is overstated for federal workers who are eligible for both Civil Service Retirement System and Social Security benefits. For these workers, the law requires a reduction in their Social Security retirement or disability benefits according to a specific formula. In 1996, this reduction may be as much as $219 per month; however, the PEBES benefit estimates do not reflect this reduction. SSA officials told us that it would be too difficult and costly to take such special circumstances into consideration when estimating benefits. Rather, SSA has included in the statements descriptions of certain circumstances that may result in workers’ receiving Social Security benefits that are greater or less than the estimated amount. Our work shows that it would be very difficult for SSA to modify its PEBES benefit estimates to reflect these circumstances. Since the PEBES was first developed, SSA has conducted several small-scale and national surveys to assess the general public’s reaction to receiving an unsolicited PEBES. In addition, SSA has conducted a series of focus groups with the public and SSA employees to elicit their opinions of the statement and to determine what parts of it they did and did not understand. In response to this feedback, SSA revised the statement. For example, early statements routinely provided benefit estimates for age 65, the earliest age at which workers could retire and receive their full Social Security retirement benefit, and for delayed retirement at age 70. When SSA learned that many people were interested in the effect of early retirement on their benefits, SSA added an estimate for retirement at age 62. In addition, as it revised the statement, SSA applied a computerized readability formula to it and concluded that the PEBES could be understood by those who read at a seventh grade level, which is consistent with SSA’s standard for agency notices. Overall public reaction to receiving an unsolicited PEBES has been consistently favorable. In a nationally representative survey conducted during a 1994 pilot test, the majority of the respondents indicated they were glad to receive their statements. In addition, 95 percent of the respondents said the information provided was helpful to their families. Overall, older individuals reacted more favorably to receiving a PEBES than did younger individuals. In addition, SSA representatives who answer the toll-free telephone calls from the public have stated that most callers say they are pleased that they received a PEBES and that the information is useful to them for financial planning. Although SSA has taken steps to improve the PEBES, we found that the current statement still provides too much information, which may overwhelm the reader, and it presents the information in a way that undermines its usefulness. These weaknesses are attributable, in part, to the process SSA used to develop the PEBES. Additional information and expanded explanations have made the statement longer, but some explanations still confuse readers. Moreover, SSA has not collected detailed information from its front-line workers on the public’s response to the PEBES. Research suggests that, in general, people find forms, notices, and statements difficult to use and understand. For this reason, many people may approach a PEBES-like statement “with fear, frustration, insecurity, and hesitation.” To overcome this challenge, the design expert we consulted suggested that such statements include the following: An obvious purpose: Readers need to know immediately why they received the statement, what information it contains, and what they are expected to do with the information. An attractive and functional design and organization: The statement should look easy to read, the sections should be clearly labeled, and the organization should be evident at a glance. When readers need explanations to understand complex information, the explanations should appear with the information. Easy-to-understand explanations: Readers need explanations of complex programs and benefits in the simplest and most straightforward language possible. In the 1996 PEBES, the message from the Commissioner of Social Security does not clearly explain why SSA is providing the statement. Although the message does include information on the statement’s contents and the need for individuals to review the earnings recorded by SSA, its presentation is uninviting, according to the design expert we consulted. More specifically, the type is too dense; the lines are too long; white space is lacking; and the key points are not highlighted. On the basis of these findings, SSA officials told us they have revised the Commissioner’s message for the 1997 PEBES to make it shorter and less complex. “The Social Security Board of Trustees projects that the system will continue to have adequate resources to pay benefits in full for more than 30 years. This means that there is time for the Congress to make changes needed to safeguard the program’s financial future. I am confident these actions will result in the continuation of the American public’s widespread support for Social Security.” Some participants in SSA focus groups, however, thought the message suggested that the resources would not necessarily be there after 30 years. For example, one participant in a 1994 focus group who reviewed a similar Commissioner’s message said, “... first thing I think about when I read the message is, is not going to be there for me.” The focus group results suggest that the future solvency of the Social Security system may be too complex a topic to address adequately in the PEBES. Comments from SSA’s public focus groups, SSA employees, and benefit experts indicate that the statement contains too much information and is too complex. In a 1994 focus group summary, for example, SSA reported that younger workers aged 25 to 35 wanted “a much simplified form—a single page—with estimated benefits and how much in taxes they paid into the system with the remainder of the information put in a pamphlet for future reference.” Moreover, given the length and complexity of the current statement, some focus group participants and benefit experts suggested that SSA add an index or a table of contents to help readers navigate the statement. SSA has not used the best layout and design to help the reader identify the most important points and move easily from one section to the next. The structure of the statement is not clear at a glance. Readers cannot immediately grasp what the sections of the statement are and in which order they should read them, according to the design expert with whom we consulted. The statement lacks effective use of features such as bulleting and highlighting, which would make it more user friendly. In addition, the PEBES is disorganized: information does not appear where needed. The statement has a patchwork of explanations scattered throughout, requiring readers to flip from one page to another to find needed information. For example, page two begins by referring the reader to page four, and page three contains six references to information on other pages. Furthermore, to understand how the benefit estimates were developed and any limitations to these estimates, a PEBES recipient must read explanations spread over five pages. SSA representatives who answer the PEBES toll-free telephone number told us that callers frequently fail to realize that the answers to their questions can be found within the document. In fact, we observed the representatives telling callers to turn to a certain page in the statement to answer their questions. With benefit estimate explanations spread over several pages, individuals may miss important information. For example, the PEBES benefit estimate appears on page three; the explanation that the benefit estimate may be overstated for certain federal workers is not found until the bottom of page five. Without fully reviewing this additional information, a reader may not realize that the PEBES benefit estimate could be overstated. In addition, some of the explanations needed to fully understand information in the PEBES are located within the answer to a question that the PEBES recipient may not read. For example, the statement explains that the retirement benefit is reflected in today’s dollars. This explanation, however, is located in the answer to the following question: “When I requested a statement like this several years ago, my retirement benefit was higher. What happened?” Readers skipping the answer to this question would not know key information about the value of their estimate in today’s economy. Because the PEBES addresses complex programs and issues, explaining these points in simple, straightforward language is challenging. Although SSA made changes to improve the explanation of work credits, for example, many people still do not understand what these credits are, the relevance of the credits to their benefits, and how the credits are accumulated. The public also frequently asks questions about the PEBES’ explanation of family benefits. Family benefits are difficult to calculate and explain because their amounts are dependent on a number of factors, such as the age of the spouse and the spouse’s eligibility for benefits on his or her own work record. Informing the public about family benefits, however, is especially important: a 1995 survey revealed that as much as 40 percent of the public is unaware of these benefits. A team of representatives from a cross section of SSA offices governs SSA’s decisions on the PEBES’ development, testing, and implementation. The team has revised and expanded the statement in response to feedback on individual problems. The design expert we consulted observed that the current statement “appears to have been the result of too many authors, without a designated person to review the entire piece from the eyes of the readers. It seems to have developed over time, piecemeal . . ..” Although SSA officials have obtained the public’s feedback, they have missed some key opportunities along the way to improve the statement. While SSA conducted tests to ensure that the PEBES could be read at a seventh grade level, it has not conducted formal comprehension tests.For example, SSA could have administered either oral or written tests to a sample of readers to determine whether they actually understood SSA’s explanations of certain complex issues. These tests would have provided SSA with quantifiable, objective information to use in revising the statement. SSA has also failed to take advantage of information from its workers who answer the public’s questions about the PEBES every day. SSA currently has front-line workers record the reason people call, but the information collected does not provide sufficient detail for SSA to understand the problems people are having with the PEBES. Although the public and benefit experts agree that the current statement contains too much information, a standard benefit statement model does not exist within the public or private sector, and there is no clear consensus on how best to present benefit information. The Canadian government chose to use a two-part document when it began sending out benefit statements in 1985. The Canada Pension Plan’s one-page statement provides specific individual information, including the earnings record and benefit estimates. A separate brochure details the program explanations. The first time the Plan mails the statement, it sends both the one-page individual information and the detailed brochure; subsequent mailings contain only the single page with the individual information. Although some focus group participants and benefit experts prefer a two-part format, others believe that all the information should remain in a single document, fearing that statement recipients will lose or might not read the separate explanations. SSA has twice tested the public’s reaction to receiving two separate documents. On the basis of a 1987 focus group test, SSA concluded that it needed to either redesign the explanatory brochure or incorporate the information into one document. SSA chose the latter approach. In a 1994 test, people indicated that they preferred receiving one document; however, the single document SSA used in the test contained less information and had a more readable format than the current PEBES. SSA, through the Government Printing Office, has awarded a 2-year contract for printing the statements for fiscal years 1997 and 1998. These statements will have the same format as the current PEBES with only a few wording changes. SSA is considering a more extensive redesign of the PEBES for the fiscal year 1999 mailings, which it will implement only if it will save money on printing costs. By focusing on reduced printing costs as the main reason for redesigning the PEBES, SSA is overlooking the hidden costs of the statement’s existing weaknesses. For example, if people do not understand why they got the statement or have questions about information provided in the statement, they may call or visit SSA, creating more work for SSA staff. Furthermore, if the PEBES frustrates or confuses people, it could undermine public confidence in SSA and its programs. Our work suggests, and experts agree, that the PEBES’ value could be enhanced by several changes. Yet SSA’s redesign team is focusing on reducing printing costs without considering all of the factors that would ensure that the PEBES is a cost-effective document. The PEBES initiative is an important step toward better informing the public about SSA’s programs and benefits. However, extensive revisions to the PEBES are needed to ensure that the statement communicates effectively. To best convey information to the public about SSA’s programs and benefits, the PEBES needs an improved layout and design, as well as simplified explanations. SSA will need to start now to complete these changes before its 1999 redesign target date, because revising the PEBES will involve time to collect data and to develop and test alternatives. SSA can help ensure that the changes target the most significant weaknesses by systematically obtaining more detailed feedback from front-line workers. SSA can also ensure that the changes clarify the statement by conducting formal comprehension tests with a sample of future PEBES recipients. In addition, SSA could evaluate alternative formats for communicating the information presented in PEBES. For example, SSA could present the Commissioner’s message in a separate cover letter accompanying the statement; alternatively, SSA could consider a two-part option, similar to the approach of the Canada Pension Plan. To select the most cost-effective option, SSA needs to collect and assess additional cost information on available options and test different PEBES formats. Our work suggests that improving the PEBES will require attention from SSA’s senior leadership. For example, how best to balance the public’s need for information with the problems resulting from providing too much information warrants senior management involvement. In order for the PEBES to better convey information to the public about SSA’s programs and benefits, we recommend that SSA revise the current statement to improve its layout and design and to simplify explanations. We also recommend that SSA evaluate and test alternative formats for communicating the information presented in the PEBES and the accompanying Commissioner’s message. We obtained comments on a draft of this report from SSA. SSA officials agreed with our conclusions and recommendations and provided specific information on the steps they plan to take to improve the PEBES (see app. II). We are sending copies of this report to the Commissioner of Social Security and other interested parties. Copies will also be made available to others on request. If you or your staff have any questions concerning this report, please call me on (202) 512-7215 or Cynthia Fagnoni, Assistant Director, on (202) 512-7202. Other major contributors to this report include Kay Brown, Evaluator-in-Charge; Hans Bredfeldt, Senior Evaluator; and Nora Landgraf and Elizabeth Jones, Evaluators. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed the Social Security Administration's (SSA) overall progress in issuing the Personal Earnings and Benefits Estimate Statement (PEBES), focusing on: (1) whether the PEBES benefit estimates are reasonable; (2) what SSA has done to improve the statement; (3) the extent to which the statement communicates its goals and information clearly; (4) SSA plans to revise the statement further; and (5) actions that GAO believes will improve the statement. GAO found that: (1) the methods and assumptions used by SSA for estimating future retirement benefits are consistent with those used by private and public pension plan sponsors; (2) the public feels that the PEBES can be a valuable tool for retirement planning; (3) although SSA has taken steps to improve PEBES, it fails to communicate clearly the complex information readers need to understand SSA programs and benefits, partly because the design and organization of the statement make it difficult for the reader to locate and understand important information; (4) readers are confused by several important explanations, such as who in their family is eligible for benefits; (5) SSA is considering redesigning PEBES, but only if the redesign results in reduced printing costs; (6) this approach overlooks hidden costs, such as the workload generated by public inquiries when people do not understand the statement, and the possibility that a poorly designed statement will undermine, rather than improve, public confidence; and (7) active leadership from SSA senior managers will be needed to ensure the success of this important initiative.",govreport
"SSA administers two programs that provide benefits for individuals who are unable to work because of disability. Although they differ with respect to program purpose and requirements for entitlement, both DI and SSI use the same definition of disability for initial entitlement. Specifically, in order to be found disabled, an individual must have a medically determinable physical or mental impairment that (1) has lasted or is expected to last at least one year or result in death and (2) prevents an individual from engaging in substantial gainful activity. DI was established in 1956 as an insurance program to help replace earnings lost because of disability. To be eligible for benefits, individuals with disabilities must have a specified number of recent work credits under Social Security based on age as of onset of disability. Individuals may also be able to qualify on the work record of a deceased, retired, or disabled parent or a deceased spouse. Benefits are financed by payroll taxes paid by covered workers and their employers, and are linked to the worker’s earnings history. In most cases, individuals who have been entitled to DI benefits for 24 months qualify for Medicare. The SSI program was established in 1972 to provide a standard minimum level of income for individuals with disabilities, as well as aged individuals, who have limited income and assets. Eligibility does not require a past work history. Benefits are paid from general revenues and, in general, most beneficiaries are eligible for the same benefit amount. However, other income counts against this benefit amount, usually resulting in a reduction in that amount. In most states, entitlement to SSI means automatic entitlement to Medicaid. Most beneficiaries qualify for either one program or the other; however, receipt of benefits under one program does not necessarily preclude entitlement under the other program. Beneficiaries who are receiving one benefit may transition to the other benefit or they may receive both benefits concurrently. Receiving an SSI benefit has no bearing on continuing entitlement to DI benefits. However, because SSI is a means- tested program, the amount of the DI benefit must be considered in determining whether an individual with a disability also qualifies for SSI. If the amount of the DI benefit is low and all other income and resource factors are met, a DI beneficiary may also receive an SSI benefit. Concurrent beneficiaries who are covered by Medicaid and who have been entitled to DI long enough to qualify for Medicare may also be eligible for payment of their Medicare premiums and co-payments by their state. The minimum value of these payments would be $54.00 a month. Both programs feature work incentive provisions that are intended to encourage beneficiaries to return to work. However, the provisions of the two programs differ significantly, providing different levels of safeguards for continuing eligibility, income, and medical coverage for DI and SSI beneficiaries. For example, earnings, regardless of the amount, do not affect a DI beneficiary’s cash benefit for a period of time known as the trial work period. However, benefits will eventually stop completely after this period if earnings exceed a specified level. In contrast, earnings can affect an SSI beneficiary’s cash benefit immediately but the reduction in benefits is gradual with a reduction in benefits of $1 for every $2 earned over the first $65. Table 1 highlights each program’s work incentive provisions in effect at the time the Ticket to Work and Work Incentives Improvement Act of 1999 called for this study. Even with the work incentive provisions in the two programs, relatively few disability beneficiaries work and no more than 1 percent leave the DI and SSI beneficiary rolls each year because of their work. DI and SSI beneficiaries who do return to work are responsible for reporting their work activity to SSA as soon as it occurs. SSA has no specific provisions for adjusting benefits for concurrent beneficiaries who work and must apply the work incentive provisions of the two programs independently to determine whether an individual remains entitled to DI and SSI and, if so, the amount of each benefit. Most concurrent beneficiaries interact with SSA through its network of nearly 1,300 field offices. To cope with the complexity of its programs, most of these field offices use employees who specialize in either the Social Security programs, including the DI program, or the SSI program. The remaining offices use generalist employees who are trained in both programs. To supplement the information provided by its staff, SSA also publishes several pamphlets that explain the provisions of the DI and SSI programs. Two of these publications, Red Book on Employment Support and Working While Disabled—How We Can Help, provide information about the effect of work on DI and SSI benefits. Concurrent beneficiaries, who comprised about 14 percent of SSA’s disability population, were likely to have mental impairments and be female. In addition, their average age was 45. About 11 percent of concurrent beneficiaries worked and had a median earned income of about $250 a month. More than three-quarters of those who worked have mental impairments—mental illness and mental retardation. Individuals with mental retardation worked at twice the rate of beneficiaries with mental illness, but earned much less. The median earnings of beneficiaries with mental retardation were nearly half those of beneficiaries with mental illness. Of the more than 6 million working-age adults receiving disability benefits under the DI program and the more than 3.5 million working-age adults receiving SSI, our analysis of the February 2002 SSA data indicates that, approximately 1.2 million—14 percent—received benefits from both programs. These beneficiaries were an average age of 45, with fewer than 15 percent between the ages of 17 and 30. In addition, 53 percent were female. Concurrent beneficiaries received an average DI payment of about $430 per month and an SSI payment of about $150 per month. The majority of concurrent beneficiaries qualified for DI benefits on the basis of their work record. The remainder received benefits on the basis of the work history of a deceased, disabled, or retired parent (25 percent); or their deceased spouse (3 percent). Over half of concurrent beneficiaries had a mental impairment—a third had mental illness and about a quarter had mental retardation. Approximately one-ninth of concurrent beneficiaries had an impairment related to their muscular or skeletal system. The remaining beneficiaries had one of a wide range of impairments as their primary impairment. Of the approximately 142,000 concurrent beneficiaries who worked, almost 80 percent had a mental impairment. Concurrent beneficiaries who worked were more likely to have mental retardation, tended to be younger, and male. As shown in figure 1, while individuals with mental retardation made up only a quarter of the concurrent population, they accounted for over half of the concurrent beneficiaries who worked. Moreover, nearly half may not have had a significant work history. Instead, they qualified for benefits on the basis of the work history of a parent or spouse. Most concurrent beneficiaries who worked earned low wages, but earnings levels varied by impairment categories. While the median earned income of all working concurrent beneficiaries was approximately $250 per month, more than one-quarter earned $65 per month or less. Workers with mental retardation had median monthly earnings of about $200, compared with about $400 for concurrent beneficiaries with mental illness. However, the median earned income for concurrent beneficiaries eligible for DI benefits on the basis of the work history of a deceased, disabled, or retired parent was only $85 per month. A higher proportion of concurrent beneficiaries worked than SSI beneficiaries, but they earned much less. Fewer than 8 percent of SSI beneficiaries worked, but they had median earnings of $400, compared with about $250 for concurrent beneficiaries. More than one-quarter of SSI beneficiaries earned $1,000 per month or more, greater than three times the percentage of concurrent beneficiaries with earnings at that level. Table 2 provides the percentage of concurrent and SSI beneficiaries that were earning at the levels listed. The difference in earnings may be explained, in part, by the higher proportion of working concurrent beneficiaries with mental retardation as compared with SSI beneficiaries. However, this higher incidence of beneficiaries with mental retardation does not completely explain the difference in earnings since the earnings for SSI beneficiaries with mental retardation were higher than those for concurrent beneficiaries with mental retardation. For example, median monthly earnings for SSI beneficiaries with mental retardation were $250 compared with $200 for concurrent beneficiaries with the same impairment. Our analysis of data available on the use of work incentives indicated that, while 11 percent of concurrent beneficiaries worked, they did not take advantage of most of the work incentives available to them under the SSI and/or DI programs. Most concurrent beneficiaries who worked used the earned income exclusion under the SSI program that reduces cash benefits by $1 for every $2 earned, but the other incentives were not widely used. The next most frequently used work incentive was the Impairment Related Work Expenses provision, which allows beneficiaries to exclude the costs of certain impairment-related items and services needed to work. It was used by fewer than 3 percent of concurrent beneficiaries who worked. Concurrent beneficiaries’ use of work incentives was comparable to that of SSI beneficiaries. Because beneficiaries may not meet all the eligibility requirements for work incentives, it may be difficult to determine whether the low rates of use of work incentives were attributable to the inability to meet eligibility factors or lack of understanding of the provisions. There is little coordination between SSI and DI program rules, especially for concurrent beneficiaries who work and, as a result, SSA must apply the complex provisions of the two programs independently. The specialization of most SSA field office staff in either the DI or SSI program makes it difficult to serve concurrent beneficiaries effectively. Specialists in one program lack integrated guidance to readily determine the effect of work on the benefits in the other program. Moreover, because the guidance does not adequately cross reference the DI and SSI rules that pertain to concurrent beneficiaries, these specialists may not recognize the need to communicate information about work to the other program as required by SSA guidance. In addition, SSA has not established formal operating procedures that ensure that this information is collected and communicated nor has it established a monitoring system to ensure that appropriate actions are taken. Because information on the work activities of concurrent beneficiaries may not be exchanged between the two programs or acted on in a timely manner, SSA may be overpaying benefits. SSA took steps recently that have the potential for improving service to concurrent beneficiaries and increasing the accuracy of their payments by better coordinating the administrative process related to work activity. For example, SSA officials have created a new position and new software to handle work-related issues for all beneficiaries, which could provide better integrated service to concurrent beneficiaries. Because these initiatives are still being tested and evaluated, it is too early to know whether they will have the intended effect if implemented nationwide. SSA’s guidance for administering the DI and SSI programs may contribute to the difficulty encountered by staff that specialize in one program but are required to collect information about both programs for concurrent beneficiaries. SSA’s written guidance for both programs is contained in a voluminous document of about 35,000 pages divided into multiple parts. A DI specialist collecting work activity information from a concurrent beneficiary may find it challenging to use the multi-part guidance for DI benefits and even more challenging to use the guidance for SSI that would also be needed for a concurrent beneficiary. SSA guidance does not provide integrated instructions for processing work information reported for concurrent beneficiaries or an integrated explanation of the effect of work on both DI and SSI benefits. Available guidance usually segregates information by program and provides little cross-referencing to issues that may be common to both programs. In addition, the cross-referencing that is provided does not always direct specialists to the specific procedures to follow for the other program. For example, the guidance for dealing with a DI beneficiary who returns to work contains a single cross-reference to an 81 page section of SSI policy and procedural statements. However, this 81 page section does not explain the basic effect of work on benefits. To determine the specific procedures and how work affects the person’s SSI benefits, the DI specialist would need to go to yet another section of SSI guidance without the benefit of a cross-reference to find it. The need for efficient and accessible guidance is particularly important in field offices where heavy workloads and changing priorities often compete for employee attention. The lack of integrated guidance may contribute to SSA not collecting all the required information on concurrent work beneficiaries. In some offices, concurrent beneficiaries report their work activity to either a DI or SSI specialist who collects the information he or she believes necessary to determine the amount of benefits that should be paid under both programs. Some specialists reported that they did not always know when an individual was a concurrent beneficiary and did not always know what information to collect about the other program. In other offices, a concurrent beneficiary reported to a specialist in each program. If the beneficiary is unable to meet with both specialists, SSA may not collect all the information needed to adjust benefits correctly. Even if the information is collected, some field offices lack standard procedures for ensuring that information about the work activity is shared between programs. Some field offices have established local procedures for sharing this information, but these procedures may not always be adequate. For example, in one field office we visited, the SSI specialists who usually collected information about work activity from concurrent beneficiaries would copy and share the information with one designated supervisor who was responsible for taking the actions necessary to adjust DI benefits. Even with this procedure in place, the supervisor told us she was not confident that she was receiving all the information that was being reported by concurrent beneficiaries. SSA’s procedures for determining the appropriate DI benefit amount when concurrent beneficiaries work make it difficult to adjust benefits in a timely manner. When a concurrent beneficiary reports work, the field office handling the case can adjust the SSI benefit, when warranted. In contrast, in most cases, field office employees cannot take immediate actions to adjust DI benefits because they cannot be adjusted until the beneficiary has completed a 9 month trial work period. At the beginning of the trial work period, SSA procedures direct the field office to transfer DI cases to one of seven program service centers (PSC) for documenting the start of this period. At the end of this period, the PSC is supposed to return the case to the field office, which then determines whether the beneficiary will continue to be entitled to benefits. However, SSA does not routinely monitor or have a comprehensive system that tracks actions on cases as they move between SSA components and automatically identifies the cases may be nearing the completion of the trial work period. As a result, the field offices may not be notified immediately upon the completion of a trial work period and, therefore, may not know whether or not to terminate DI benefits. Employees in several field offices told us that they often do not receive the cases back from the PSCs in a timely manner. Their estimates of the time it took the PSC to return these cases for further action ranged from 1 to 10 years. SSA officials could not verify these delays because they told us that they did not systematically collect information about these time frames. These problems occur not only when administering the trial work period for concurrent beneficiaries, but for all DI beneficiaries who return to work. Untimely actions may also occur because the tasks related to adjusting benefits after the end of the trial work period are given a lower priority than other workloads. Several SSA officials told us that many tasks associated with adjusting benefits to account for work activity do not receive workload credits that help maintain or increase field office staffing levels. For this reason, field office managers generally give a higher priority to tasks that do, such as processing initial claims for benefits. However, an SSA headquarters official recently told us that SSA will focus greater attention on the post trial work period workload as it implements the Ticket to Work program. Because SSA employees do not always evaluate and take action related to the work activity in a timely manner, some DI beneficiaries continue to receive benefits that they are no longer due. When DI beneficiaries earn more than a specified amount in any month after completing the trial work period, as of that month, SSA no longer considers the person disabled and should end their DI benefits 2 months later. However, several SSA officials told us about a one-time analysis of SSA disability overpayments based on cessation of disability in calendar year 2000 that revealed that about one-half of the overpayment dollars were made to people who should not have received benefits because of their earnings. Given this analysis, failure to take timely actions when DI beneficiaries work may account for about $350 million dollars in overpayments for calendar year 2001. SSA established a temporary new position in July 2000, the employment support representative, which has the potential to address the challenges it faces in serving concurrent beneficiaries. SSA developed the position, in part, to concentrate on the needs of disability beneficiaries who work and tested it with 32 SSA employees who had responsibility for 54 field offices. These representatives received extensive training in the work incentive provisions of both the DI and SSI programs. This training prepared them to take the necessary actions for both programs without the need to rely on unfamiliar program guidance. Moreover, funneling all work activity cases through a single employee would allow this individual to develop a level of expertise that was not possible in the traditional field structure. Further, combining all duties related to disability beneficiaries who return to work into a single position could eliminate the problem of specialists in one program failing to share information with the other program. In addition, since these representatives do not share responsibility for handling the case with the PSC, they could take actions to adjust DI benefits in a timelier manner. It is unclear whether SSA will make this position permanent, and to what degree. In a November 2001 report, an SSA workgroup recommended that the position be implemented permanently in as many of its 1,300 service locations as feasible. While the 32 employment support representatives continue to perform the duties of this position, the agency has not announced decisions about the ultimate fate of this position. As of July 2002, SSA officials were still evaluating the resource implications of implementing this position in most of its field offices. Without additional resources, some field office managers told us they would have to divert existing staff from their current positions to assume the employment support representative role. SSA has not evaluated the timeliness of actions taken by the employment support representatives to adjust benefits. However, the employment support representatives with whom we spoke thought that the additional costs associated with the new position could be offset by the reduction in overpaid DI benefits from their more timely actions. In addition to testing the employment support representative position, SSA is developing a new computer system that may potentially help to improve the timeliness of actions in response to the work activity of DI beneficiaries. Scheduled for release at the end of calendar year 2002, the new program will allow SSA for the first time, to collect information about the monthly earnings of all DI beneficiaries who are working. This information should provide the basis for a systematic method for SSA to determine whether additional action is needed to determine continuing eligibility for of DI benefits. However, SSA is still deciding what additional information the new system should include and what reports it should produce to monitor all the actions needed to account for the work activity of DI beneficiaries and to adjust benefits in a timely way. Just as SSA has no special procedures for administering the rules for concurrent beneficiaries, it does not provide concurrent beneficiaries with any integrated explanation of the effects of work on both DI and SSI benefits through its public information materials. The numerous publications that SSA has issued explain how work affects one benefit or the other. SSA extends this practice of not integrating their explanations of the effects on benefits by sending beneficiaries two separate letters, one to explain changes in DI benefits and another to explain SSI benefits. In addition, SSA field office specialist employees that lack expertise about both programs may provide incomplete or incorrect information about these effects. While it may be difficult to communicate, it is important for concurrent beneficiaries to understand that work activity affects their benefits at different levels of earnings and at different times, depending on the program. For example, concurrent beneficiaries with relatively low earnings may be able to maintain both benefits while increasing their total income. However, as earnings increase, so does the probability that they will eventually lose one or both benefits. Figure 2 illustrates these effects of work activity at three earnings levels on the DI and SSI benefits. At low earnings, a beneficiary receiving the average DI benefit who starts working in February 2002 retains DI and SSI benefits throughout the 13 month period shown. In contrast, a beneficiary with high earnings—higher than substantial gainful activity—will lose both benefits during the same period. Because the work incentive provisions of the two programs are designed to encourage beneficiaries to test their ability to work without losing their benefits, concurrent beneficiaries who understand the rules of both programs can make decisions that best support their priorities for income, services, and self-sufficiency. Concurrent beneficiaries who wished to become self-sufficient would need to understand that, to maintain an equivalent of their level of benefits and services, they would need to earn enough to make up for the eventual loss of cash benefits and health insurance and benefits and services from other sources. Concurrent beneficiaries who are uncertain about their ability to sustain work can focus on working at a level that preserves enough benefits to support them while they test their ability to work. In determining what level of work they can pursue, these beneficiaries would have to weigh the value of non cash benefits that depend on income and assets such as housing or social services compared with the earnings from increased work activity. For example, a service provider told us about one concurrent beneficiary who was receiving in-home support services from his county that allowed him to live independently. However, he returned to work and was then earning too much to continue to qualify for these services. He determined that he could continue to qualify for the support services by working 1 hour less per week and he negotiated the change with his employer. Concurrent beneficiaries who do not understand the programs’ provisions may make decisions about work that will make them worse off financially. Some concurrent beneficiaries do not work at all because they are afraid of losing their benefits. For example, two social service providers with whom we spoke indicated that some of their clients with mental retardation and the family members who helped them make decisions would avoid any work activity. Even though some earnings would not significantly affect benefits, they feared the loss of any benefit and health insurance and decided to forego the additional income they could have earned. At the other extreme, beneficiaries may inadvertently lose the benefits and health insurance they need by earning more than the allowable limits under one or both of the programs. Concurrent beneficiaries who do not understand the full range of work incentives may not pursue provisions that might ease their transitions to work. For example, one young concurrent beneficiary who was working part-time and attending college told us that SSA employees had never explained two SSI work incentive provisions that would have allowed her to exclude more of her earned income from the total used to determine her benefit. This would have allowed her to have more money for her tuition. Another concurrent beneficiary said that, even though she had expressed a strong desire to work and had returned to work for a short time, SSA had never explained that she could deduct from her countable earnings the cost of any items or services related to her impairments that were necessary for her to continue working. To assist beneficiaries in making better decisions about work activity, as authorized by the Ticket to Work and Work Incentives Improvement Act of 1999, SSA has provided funding since 2000 to community-based organizations. These organizations are funded to provide work incentives planning and assistance to beneficiaries and conduct outreach to individuals who are potentially eligible to participate in work incentive programs. In fiscal year 2002, SSA awarded a total of about $20 million to more than 100 organizations for these activities. The 2001 annual report of this program indicates that, through the end of that calendar year, more than 100 organizations receiving funding provided intensive benefit support services to more than 4,500 beneficiaries, most of whom were working or considering a return to work. In addition, more than 5,000 beneficiaries received less intensive services, such as information and referral. Some disability advocates have recommended making the work incentive rules similar in both the DI and SSI programs to help beneficiaries better understand the effect of work on benefits. They frequently suggest eliminating the 9 month trial work period for DI and replacing it with a gradual reduction in benefits in response to increased earnings, similar to the SSI program. Such a change would require legislative action. The Ticket to Work and Work Incentives Improvement Act requires SSA to conduct a demonstration project to test whether a reduction of $1 in DI benefits for every $2 earned would remove disincentives to return to work. SSA is still in the planning stages for this demonstration, and it is unclear when data will be available. The DI and SSI programs were designed as two separate programs to serve two distinct categories of disability beneficiaries. However, a third category, concurrent beneficiaries—those who qualify for both DI and SSI benefits–has emerged as a sizable disability population. Failure to properly administer the program for this special population could result in benefit overpayments and underpayments and less-than-ideal beneficiary decisions about work. Without taking additional steps, it will be more difficult for SSA to effectively administer the disability program and serve concurrent beneficiaries under the current program. Without improved guidance and procedures, staff that have knowledge only about SSI or DI program rules may not collect and share information needed to make accurate determinations about concurrent beneficiaries’ benefit payments. In addition, without a monitoring system to ensure information about concurrent beneficiaries’ work activity is shared across program components and acted upon within a timely manner, SSA faces an increased risk that concurrent beneficiaries, as well as all DI beneficiaries who return to work, will be overpaid. Moreover, without public information materials that clearly explain the complex interaction of the two programs, the possibility that beneficiaries would make decisions about working that are not in their best interest could increase. Further, a lack of understanding of the work incentive provisions could create a disincentive to work. SSA needs to undertake the necessary steps to ensure it adequately serves concurrent beneficiaries and exercises its stewardship over program funds by avoiding overpayments. We recommend that the Commissioner of SSA: Develop procedures and integrated guidance to ensure information about work activity is collected and shared between the DI and SSI programs. One option would be to improve the cross-references used in its program guidance to more specifically target needed information to take actions to adjust benefits for both programs. Another option would be to require that some staff are knowledgeable about both programs and that they collect and act on work activity information for both programs. Regardless of the option selected, SSA should also consider adding to its guidance explanations and examples of the effect of work activity for individuals receiving both DI and SSI benefits. Develop comprehensive systems to monitor the progress of DI cases as they move between SSA components and set timeliness goals for the entire process for each action and component. In addition, use this information to help ensure timely actions and minimize overpayments of DI benefits when individuals return to work. Develop public information materials targeted to concurrent beneficiaries that explain the complex interaction of the two programs in language that beneficiaries can understand. SSA may wish to consider revising its publication, Working While Disabled—How We Can Help, to include a basic explanation of the effects of work when an individual receives both DI and SSI benefits and examples that illustrate these effects. For more detailed explanations, SSA could direct beneficiaries to contact an SSA representative knowledgeable of both programs. In its comments on a draft of this report, SSA agreed with our conclusions and highlighted the initiatives it has underway or planned that it believes will address our recommendations (see app. II). Concerning our first recommendation, SSA stated that it is developing training for fall 2002 to enhance field office employees’ technical proficiency in both the DI and SSI programs. It is also developing and refining its supportive software systems to print referral forms for use in routing program information. We believe additional training should help to improve the technical proficiency of field office employees in both programs. However, SSA may need to consider the time field employees will need to develop proficiency after completing the training. Reliable, user-friendly program guidance could help reinforce this training as well as be a reference to these and future employees. Therefore, we continue to believe that program guidance should be modified to more completely explain the interactions of the two programs when concurrent beneficiaries work. Further, while the enhancements to software should provide SSA with an additional tool for sharing information between programs, SSA may wish to consider developing procedures to ensure that such available tools are being used appropriately to share information. Concerning our second recommendation, SSA said that the systems it now has under development and scheduled for release in November 2002 will provide the necessary management information capabilities needed to ensure actions related to beneficiaries working are taken on a timely basis. As acknowledged in our report, the new system under development has the potential for improving the timeliness of actions in concurrent cases. However, because the system is still under development, we are unable to determine how effective it will be in identifying and controlling work activity. For example, we cannot confirm at this time whether the databases being developed will contain information about all working beneficiaries nationwide that can be accessed by all field offices or local databases that can only be accessed by the employees in one office, similar to those being tested in a number of field offices. Concerning our third recommendation, SSA stated that it would develop a fact sheet for concurrent beneficiaries that explains the interaction of the two programs in language they can understand. The agency will also modify another publication to make it clear that beneficiaries should contact the agency for an explanation because the interaction of work activity with the two programs is so complex that it requires individualized explanations. We believe a fact sheet that explains the interactions of the DI and SSI programs should be useful for concurrent beneficiaries. In addition, we agree that the interaction of work with DI and SSI benefits is complex and that individualized explanations may provide concurrent beneficiaries with the most complete information. In relying on individualized explanations provided by SSA employees, SSA may wish to consider developing methods to ensure that concurrent beneficiaries have access to employees who are knowledgeable in both programs regardless of the method of contact. For example, given that many beneficiaries may contact SSA through its 800 number teleservice centers, SSA could either deploy knowledgeable staff in the teleservice centers or establish procedures to ensure that these calls are referred to staff who are knowledgeable in both programs. SSA also provided technical comments, which we have incorporated as appropriate. We are sending copies of this report to the Commissioner of Social Security, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-7215 or Shelia Drake at (202) 512-7172. Key contributors to this report were Beverly Crawford, Amy Bevan, Patrick DiBattista, and Vanessa Taylor. To determine the number and characteristics of concurrent beneficiaries, we used data from the Social Security Administration’s (SSA) monthly 10 Percent Characteristic Extract Record file of the Supplemental Security Record, which contains data from a 10 percent simple random sample of the records of all Supplemental Security Income (SSI) applicants and beneficiaries. We used data from the September 2001 extract to test our analysis and used the February 2002 extract for the final analysis. We first determined the number of working age beneficiaries (both concurrent and SSI only). To do this, we deleted from the sample universe all records that were not active (those that did not have a Record Identification Code of G); showed a date of death in a month prior to the month of the file; showed a master file type other than disabled or blind; showed that the beneficiary was under age 18 or over age 64 as of the month of the file; showed that the claim was denied and no payments had been made on that record; showed entitlement for a veteran under title VIII of the Social Security Act; and showed that the beneficiary was not receiving SSI because of excess income, except for those beneficiaries who continued to be eligible for Medicaid under section 1619b of the Social Security Act and who would be eligible for SSI payments if it were not for their earnings. We then determined which beneficiaries received Disability Insurance (DI) income as well as SSI income—concurrent beneficiaries. To do this, for the records that remained, we identified concurrent beneficiaries as individuals who were currently receiving type A unearned income. Type A unearned income is any Social Security benefit. The remaining records were identified as beneficiaries who received SSI but not DI. We did not eliminate the remaining records for which benefits were suspended, but were not terminated as of February 2002, because, in many cases, these suspensions are temporary and the beneficiary will return to payment status within a relatively short period of time. In addition, our methodology did not allow us to discern whether concurrent beneficiaries ages 62 through 64 were receiving Social Security benefits on the basis of disability or retirement. As a result, we may be slightly overstating the size of the concurrent beneficiary population. All estimates have sampling errors of +/- 5 percent or less of the value of the point estimates offered. We employed standard and widely accepted social science and statistical methods. We did not independently verify the accuracy or completeness of the data provided to us by the SSA. To assess the extent to which SSA coordinates the DI and SSI program rules when individuals are working and receiving benefits from both programs, we reviewed the relevant sections of the Social Security Act, regulations, and SSA policy and procedural guidance to its employees. We also interviewed SSA officials at the headquarters in Baltimore, Maryland, and at several field offices. We visited two SSA field offices each in metropolitan Los Angeles, California; and Chicago, Illinois, and one each in Alexandria, Virginia; Wilmington, Delaware; and Towson, Maryland. We judgmentally selected the locations on the basis of geographic diversity, the presence or absence of an employment support representative pilot, and the use of generalist or specialist claims representatives. To determine the potential effect of applying both DI and SSI program rules on concurrent beneficiaries’ decisions to work and on their benefits, we relied on our review of SSA law, regulations, and policy and procedural guidance as well as our interviews with SSA officials at headquarters and in field offices. We also reviewed the public information materials that SSA developed and used to communicate information about its programs to beneficiaries and other interested parties. In addition, we interviewed academic researchers, advocates for people with disabilities, social service providers for individuals with disabilities, and a small number of concurrent beneficiaries.","In calendar year 2001, the Social Security Administration (SSA) paid cash benefits of $60 billion to more than six million working-age adults with disabilities and eligible family members under its Social Security Disability Insurance (DI) program, and $20 billion to more than 3.5 million working-age adults with disabilities under the Supplemental Security Income (SSI) program. Some beneficiaries, known as concurrent beneficiaries, receive cash and medical benefits from both programs. Concurrent beneficiaries comprised about 14 percent of SSA's disability population; 58 percent have mental impairments, and about 53 percent are female. Eleven percent of concurrent beneficiaries worked and earned a median income of approximately $250 per month. There is little coordination between SSI and DI program rules for individuals who work and receive benefits from both programs concurrently. Because most field office staff specialize in one program, they may not be sufficiently knowledgeable of the procedures for the other program to ensure that concurrent beneficiaries who work are paid the appropriate benefit amount under both programs. Applying both SSI and DI program rules to concurrent beneficiaries may make it difficult for them to make informed decisions about attempting work and could result in an increase or decrease in overall income, depending on the amount of earnings. Concurrent beneficiaries may not receive adequate explanations from SSA staff or published materials about the complete effect work has on their disability benefits. However, because the rules are complex and may be difficult to understand even with a detailed explanation, beneficiaries who do not understand them could possibly make decisions about work that would not meet their needs or improve their situation.",govreport
"On August 29, 2005, Hurricane Katrina devastated the Gulf Coast region, causing human casualties and billions of dollars in damage. During major disasters such as this, the Stafford Act authorizes the federal government to assist in saving lives, reducing human suffering, mitigating the effects of lost income, and helping repair or rebuild certain damaged facilities. As of June 2006, nearly $88 billion was appropriated by the Congress through four emergency supplemental appropriations for relief and recovery efforts related to the recent Gulf Coast hurricanes. FEMA, the DHS component statutorily charged with administering the provisions of the Stafford Act, uses appropriations made to the Stafford Act’s Disaster Relief Fund to assist relief and recovery efforts. Initially, in September 2005, the Congress appropriated $62.3 billion for the response and recovery effort related to Hurricane Katrina in two emergency supplemental appropriations acts. Of that amount, (1) FEMA received $60 billion for the Disaster Relief Fund, (2) DOD received $1.9 billion, and (3) the Army Corps of Engineers (COE), a DOD agency, received $400 million. As of late December 2005, FEMA reported that it had obligated about $25 billion, or 42 percent, of the $60 billion it had received. In December 2005, the Congress provided additional funds for the recovery effort related to the 2005 Gulf Coast hurricanes through a third emergency supplemental appropriation act. This legislation provided approximately $29 billion to 20 federal agencies and also rescinded approximately $23.4 billion from the $60 billion appropriated to FEMA’s Disaster Relief Fund in September 2005. The third emergency supplemental appropriation resulted in a net increase of about $5.5 billion in total direct federal funding for hurricane relief and recovery and the fourth resulted in a net increase of approximately $20.1 billion. Table 1 shows the agencies that received direct funding through the four emergency supplemental appropriations acts. FEMA has authority under the Stafford Act to issue an order, called a mission assignment, to other federal agencies. A mission assignment is a tasking issued by FEMA that directs other federal agencies and components of DHS, or “performing agencies,” to support overall federal operations pursuant to, or in anticipation of, a Stafford Act declaration. Once the mission assignment is issued and approved, the mission assignment document is FEMA’s basis for obligating the portion of FEMA’s funds allocated to the assigned relief and recovery effort. From a federal agency standpoint, the mission assignment provides the recipient agency reimbursable budgetary authority, not the actual transfer of funds, to perform the agreed upon work. Among other things, mission assignments include a description of work, an estimate of the dollar amount of work to be performed, completion date for the work, and authorizing signatures. Mission assignments may be issued for a variety of tasks, such as search and rescue missions or debris removal, depending on the performing agencies’ areas of expertise. After the agencies perform work under a mission assignment (e.g., perform directly or pay a contractor), the agencies bill FEMA, and FEMA reimburses them for the work performed using the Intra-Governmental Payment and Collection (IPAC) system. In the case of an IPAC payment to a performing agency, the IPAC funds transfer occurs immediately upon request by the agency seeking reimbursement. After the IPAC is made, FEMA requires that performing agencies provide it documentation supporting the costs incurred while performing the work under the mission assignment. FEMA can also reverse or “charge-back” the payment if it believes the agency did not provide sufficient supporting documentation. The funding and reimbursement process related to mission assignments is shown in figure 1. The federal government is not adequately tracking and reporting on the use of the $88 billion in hurricane relief and recovery funds provided thus far to 23 federal agencies in the four emergency supplemental appropriations acts. First, FEMA does not have mechanisms in place to collect and report on information from the other agencies that are performing work on its behalf through mission assignments. As a result, FEMA’s required weekly reports to the Congress have limited usefulness from a governmentwide perspective. Second, also from a governmentwide perspective, the federal government does not currently have a framework or mechanisms in place to collect and consolidate information from the 22 federal agencies in addition to FEMA that have directly received funding thus far for hurricane relief efforts and report on this information. Although each federal agency is responsible for tracking the funds it received, obligations incurred, and funds expended through it own internal tracking systems, no mechanisms are in place to consolidate this information. Therefore, it will be difficult for decision makers to determine how much federal funding has been spent and by whom, whether more may be needed, or whether too much was provided. FEMA is required to report weekly to the Appropriations Committees on the use of funds it received; however, these reports do not provide timely information from a governmentwide perspective because FEMA does not have a mechanism in place to collect and report on information from other agencies which perform work on its behalf. Specifically, when FEMA tasks another agency through a mission assignment, which is similar to an interagency agreement for goods and services, FEMA records the entire amount upfront as an obligation on its reports to the Congress. The agency performing the task for FEMA does not record an obligation until a later date when it has actually obligated funds to carry out its mission, thereby overstating reported governmentwide obligations. The opposite is true for expenditures. The agency expends the funds, but then has to bill FEMA for reimbursement. This may happen months after the actual payment is made. FEMA does not record the expenditure on its reports to the Congress until it has received the bill from the performing agency, reviewed it, and recorded the expenditure in its accounting system, thereby understating reported governmentwide expenditures. FEMA’s weekly report as of March 29, 2006, shows that of the $36.6 billion received as of that date, it had incurred obligations totaling $29.7 billion and had made expenditures of $15.9 billion related to Hurricanes Katrina, Rita, and Wilma. Of the $29.7 billion in obligations, FEMA issued mission assignments to federal agencies totaling $8.5 billion, or 28.6 percent. The other $21.2 billion includes, for example, obligations that FEMA made for areas such as the individual and household program ($7.0 billion) and manufactured housing ($4.7 billion), which are being reviewed in some respects by other auditors. As of March 29, 2006, FEMA reported approximately $8.5 billion of obligations for mission assignments and approximately $661 million of expenditures for Hurricanes Katrina, Rita, and Wilma as shown in table 2. While FEMA reports obligations based on the dollar amount of the mission assignments it has placed with other federal agencies when they are assigned, these obligation amounts do not represent the amount of funds that the agencies have, in turn, actually obligated to perform disaster relief work on behalf of FEMA. In some cases, the agencies have obligated tens or hundreds of millions of dollars less than the amount reported by FEMA. Our analysis of FEMA’s reported mission assignments to other federal agencies to perform work on behalf of FEMA in the amount of $8.5 billion identified two types of reporting problems, both of which resulted in FEMA’s obligations being overstated from a governmentwide perspective. First, some federal agencies recorded obligations in their internal tracking systems that were much less than the amount of obligations reported by FEMA. This occurred because FEMA’s recorded obligations are based on the dollar amount of the entire mission assignment. In contrast, the amount of obligations recorded by federal agencies is the amount of funds they actually obligated to perform disaster relief work. The performing agency does not incur obligations until it actually performs or contracts for the work. Four examples of this reporting problem follow: On September 28, 2005, FEMA’s report showed that obligations on mission assignments issued to DOD related to Hurricane Katrina totaled about $2.2 billion. As of March 2006, this amount had been substantially reduced twice. On November 3, 2005, FEMA amended the mission assignment and reduced the amount to about $1.7 billion, and it reduced the amount again on March 15, 2006, to about $1.1 billion. While FEMA was reporting obligations as high as $2.2 billion during this 6-month period, DOD’s reports show that it incurred only $481 million of actual obligations as of April 5, 2006—hundreds of millions of dollars less than what FEMA reported over the same 6-month period. According to a DOD official, it is currently reviewing the mission assignments and will be returning obligational authority that was not used to FEMA. On September 28, 2005, FEMA’s report showed that obligations on mission assignments issued to COE related to Hurricane Katrina were about $3.3 billion. Since then, this amount has increased. On October 20, 2005, FEMA amended and increased the mission assignment amounts to about $3.7 billion and on April 5, 2006, to about $4 billion. However, according to COE’s internal records as of April 7, 2006, it had actually obligated about $3 billion for Hurricane Katrina work, a difference of over $1 billion. Based on information provided by the Coast Guard, FEMA had recorded mission assignment obligations related to Hurricanes Katrina and Rita in the amount of nearly $192 million as of April 2006. However, at that time, the Coast Guard had only actually incurred about $85 million in obligations. Thus, the difference between what FEMA reported to the Congress and what Coast Guard information showed it had actually obligated is approximately $107 million. Based on information provided by the Department of Housing and Urban Development (HUD), at the end of March 2006, FEMA had obligated and reported approximately $83 million for HUD mission assignments related to Hurricane Katrina. However, HUD had only incurred about $47 million in obligations for work to be done under mission assignments. While HUD may eventually utilize the full amount obligated by FEMA, at that time, there was an approximately $36 million difference between the amounts FEMA reported as obligated for HUD and what HUD had actually obligated. HUD expects final reconciliation to be completed by December 2006. Second, at least three federal agencies we interviewed did not have mission assignments recorded in their internal tracking systems that were recorded in FEMA’s system. According to the officials from certain federal agencies, this occurred because the agency’s financial management office was not informed of the mission assignments. FEMA officials informed us that this problem likely occurred because, while the agencies’ program offices appropriately received mission assignment information from FEMA, those agencies’ program offices did not properly provide the information to their agencies’ financial management offices. Two examples of this reporting problem follow: At the Department of Health and Human Services, we noted $90 million in mission assignment obligations related to Hurricane Katrina or amendments to those obligations that were reported by FEMA as of January 18, 2006, but not recorded by the department’s financial management office as of February 24, 2006. The department told us that these mission assignments or amendments had been issued by FEMA, but had not been received by the department’s program or financial management offices. After we pointed out the discrepancies, the two agencies reconciled the differences. In another case, the Environmental Protection Agency had a similar situation involving $11.5 million in mission assignments and amendments related to Hurricane Katrina for which it did not record obligations as of March 2006 because the financial management office was unaware the mission assignments had been made by FEMA. According to the Environmental Protection Agency, for $10 million of the $11.5 million in mission assignments, not only was the financial management office unaware but the agency had never been informed that the mission assignment had been issued by FEMA. A different set of issues arises with regard to expenditure data. Because of the nature and timing of payments FEMA makes to performing agencies, FEMA’s reported expenditures from the Disaster Relief Fund do not present an accurate status of federal spending for hurricane relief and recovery from a governmentwide perspective. This is explained in part by problems with the timeliness and adequacy of billings to FEMA by other agencies. As previously explained, FEMA reimburses performing agencies for work they perform on behalf of FEMA in accordance with the mission assignment agreements. FEMA requires that performing agencies (1) bill it within 90 days after completion or upon termination of a mission assignment, and (2) provide a certain level of documentation for its review in order for the billings to be approved. FEMA does not recognize reimbursements to other agencies as expenditures in its accounting system (and therefore in its reports to the Congress) until this approval has occurred. From a governmentwide perspective, this process results in FEMA’s expenditures being understated. As of March 29, 2006, FEMA reported about $661 million of expenditures to agencies performing mission assignments for Hurricanes Katrina, Rita, and Wilma (see table 2). However, performing agencies’ internal tracking systems showed a significantly higher level of expenditures on their mission assignments. The process FEMA uses for reimbursing performing agencies creates timing differences between FEMA’s and the performing agencies’ records. As a result, FEMA’s reported expenditures are less than actual expenditures performing agencies have made in support of FEMA’s hurricane relief and recovery efforts. In the case of a mission assignment, a performing agency would recognize an expenditure when that agency pays costs (liquidates obligations) to employees, contractors, or other outside entities for work performed. However, FEMA does not recognize the reimbursement of these costs as an expenditure until it has reviewed and approved a bill from the performing agency. With the exception of COE, reimbursements to the performing agencies are made using the IPAC system. While the IPAC funds transfer occurs immediately upon request by the agency seeking reimbursement, in FEMA’s accounting records the IPAC transaction would be reflected as a suspense account transaction until FEMA has received and approved the supporting documentation for the IPAC billing. Therefore, by virtue of the timing delays, FEMA’s reported expenditures would be less than expenditures made and reported by performing agencies and a user of FEMA’s report could incorrectly infer that a particular agency has received tasks from FEMA but has not spent any of the funds. Thus, the cost of actual work performed is better reflected by the performing agencies. Two examples follow: FEMA’s report as of March 29, 2006, showed that approved mission assignment expenditures (cash reimbursements) related to Hurricane Katrina were about $210 million for DOD. However, DOD’s report as of April 5, 2006, showed that it had already received $324 million in reimbursement from FEMA for mission assignments related to Hurricane Katrina. The U.S. Forest Service had not billed FEMA for any of its work done under mission assignments even though the agency reported that it had made close to $170 million in expenditures related to its Hurricane Katrina mission assignments as of January 31, 2006. Accordingly, FEMA reported no expenditures for this agency in its weekly report since FEMA had not yet approved any billings. FEMA’s billing instructions state that reimbursement requests can be forwarded to FEMA monthly, regardless of the amount. Also, agencies should submit the final bill no later than 90 days after completion or upon termination of the mission assignment. The Forest Service, however, was not doing this, and as a result, FEMA did not report any expenditures for mission assignment work performed by the Forest Service as of March 29, 2006, even though the Forest Service had spent about $170 million. The Forest Service explained that it billed FEMA in March and June 2006 and planned to issue additional bills in August and September 2006. We noted that there had been some billing activity reported by FEMA subsequent to March 29, 2006. Aside from the timing issues discussed above, some performing agencies have not provided billing documentation that meets FEMA’s requirements to support their reimbursements for work performed on mission assignments. Although performing agencies using the IPAC system receive funds immediately upon requesting reimbursement, if upon review of supporting reimbursement documents, FEMA officials determine that some amounts are incorrect or unsupported, FEMA may retrieve or “charge back” the monies from these agencies through the IPAC system. For example, travel charges should be supported by a breakdown by object class with names, period of performance dates, and amounts. Failure to submit this documentation may result in FEMA charging back the agency for the related mission assignment billing. FEMA’s records as of May 15, 2006, showed that FEMA had “charged back” about $267 million from performing agencies for costs billed to FEMA for mission assignments related to Hurricanes Katrina, Rita, and Wilma. About $260 million, or over 97 percent, of these charge-backs involved five agencies: the Department of Transportation ($102 million), DOD ($57 million), the Environmental Protection Agency ($45 million), the Federal Protective Service within DHS ($32 million), and the Department of Health and Human Services ($24 million). Consistent with its practice of only reporting approved expenditures, these amounts were not recognized as expenditures by FEMA, even though the performing agencies claim they have expended those amounts. In addition, until FEMA requested the charge-backs, the billings would have been in a FEMA suspense account, and would have temporarily depleted monies from the Disaster Relief Fund since the agencies had already received reimbursement through the IPAC system. At least one agency, DOD, has indicated that it is trying to gather additional supporting documentation for the $57 million that FEMA charged back. Therefore, at least part of these charged back funds may be reported as expenditures by FEMA at some point in the future. If the agency cannot provide FEMA the needed supporting documentation, the agency may not be reimbursed and thus will be required to use its own appropriations. FEMA is also experiencing billing problems with COE, which does not use the IPAC system. According to FEMA personnel, COE had billing and documentation problems in the past and was not permitted to use the IPAC system for transactions with DHS. While COE was working on gaining access to using the IPAC system prior to Hurricane Katrina, this process was put on hold, and instead COE must manually submit supporting documentation before FEMA reimburses its mission assignment costs. This allows for a thorough review by FEMA, but has also led to payment delays. As of February 6, 2006, COE’s internal accounts receivable report showed that it had not received reimbursement for about $1.2 billion of bills submitted to FEMA for Hurricane Katrina mission assignments even though COE officials stated that they had sent documentation supporting the majority of the bills. Of that amount, about $610 million, or over half of the total, was over 60 days old. According to FEMA officials, as of April 7, 2006, it had not received documentation supporting about $800 million of the $1.2 billion of outstanding accounts receivable on COE’s records. None of the $1.2 billion has been reported as expenditures by FEMA, although COE reports these amounts as expenditures. From a governmentwide perspective, since Hurricane Katrina made landfall, about $88 billion through four emergency supplemental appropriations has been appropriated to 23 federal agencies. We found that no one agency or central collection point exists to compile and report on how these funds are being spent. Without a framework and mechanisms in place to collect and consolidate information from these agencies and report on a periodic basis, decision makers will not have complete and consistent information on the uses of the funding that has been provided thus far. Information on the amount of obligations and expenditures made on the actual relief and recovery effort would provide decision makers information they can use to determine, for example, if (1) additional funds should be provided for the relief and recovery work, (2) the funds already provided could be deemed excess and used for other disaster relief and recovery work, (3) funds should be rescinded, or (4) duplicate programs are providing similar assistance. As a result, in order to have governmentwide information on actual obligations incurred and expenditures made on the relief and recovery effort, the agencies would have to use their own internal tracking systems to extract this information and provide the information to a central point, where the data could be consolidated and reported. The ability to separately track and report on these funds is important to help ensure better accountability and clearly identify the status of funding provided in direct response to these hurricanes at both the individual federal agency level as well as the governmentwide level and to provide additional transparency so that hurricane victims, affected states, as well as American taxpayers, know how the government is spending these funds. At the same time, we recognize the substantial challenge in balancing the need to get money out quickly to those who are actually in need and sustaining public confidence in disaster programs by taking all possible steps to minimize fraud and abuse. Although each federal agency is responsible for tracking the funds it received, obligations incurred, and funds expended through its own internal tracking systems, no mechanisms are in place to consolidate and report on this information. Of the approximately $88 billion provided as of June 2006, FEMA received about $42.6 billion ($66 billion appropriated less the $23.4 billion rescinded) for the Disaster Relief Fund and 22 other agencies received the remaining $45.4 billion. Once these funds are appropriated, they are merged into, and commingled with existing appropriation accounts. OMB Circular No. A-11 requires agencies to report obligations and outlays on a quarterly basis at the appropriation level; however, those reports on budget execution and budgetary resources do not call for separately identifying amounts on a programmatic basis, such as hurricane relief and recovery efforts. Thus, reporting under this Circular will not provide the information needed to monitor the status of hurricane-related funding. Although FEMA was required to provide weekly reports to the Congress on obligation and expenditure information on the $42.6 billion it received (although with limited usefulness as discussed previously), most of the other 22 agencies that received over $45 billion would only be responsible for tracking this information internally. While there are some reporting requirements included in the emergency supplemental appropriation acts, overall reporting requirements differ greatly. Also, the reporting requirements do not call for consolidating information on obligations and expenditures on a governmentwide basis and, therefore, do not facilitate governmentwide reporting on hurricane- related spending. The reporting requirements that were included for the various agencies ranged from very detailed reporting to no reporting at all. For example, while FEMA was required to report obligations and expenditures, 16 other federal agencies did not have any reporting requirements. See appendix II for more information on the reporting requirements included in the first four emergency supplemental appropriations acts. Given that consolidated governmentwide reporting will require that financial information be compiled from 23 different agencies, an entity that regularly collects and compiles information from different agencies, such as OMB or the Department of the Treasury, would likely be in the best position for requesting this information and preparing consolidated governmentwide reporting on hurricane-related funding. Other options would be for either FEMA or the Office of the Federal Coordinator for Gulf Coast Rebuilding to compile this information. Success in the rebuilding efforts of the Gulf Coast area is critical. The federal government has already invested billions of dollars for this effort with more likely to come. Although FEMA is required to report on obligations and expenditures, these reports do not provide timely information from a governmentwide perspective. In addition, there is no framework or mechanisms in place to collect and consolidate information, and to report on the $88 billion in hurricane relief and recovery funds provided thus far to 23 federal agencies in the four emergency supplemental appropriations acts on a governmentwide basis. The government’s progress in the rebuilding efforts will be difficult to measure if decision makers do not know how much has been spent, what for, how much has been obligated but not yet spent, and how much more is still available. Without consistent, reliable, and timely governmentwide information on the use of this funding, the agencies and the Congress could lose visibility over these funds and not know the extent to which they are being used to support hurricane relief and recovery efforts. With rebuilding efforts likely to take many years, it is important that the federal government fulfill its role as steward of taxpayer funds and provide transparency to the affected states and victims, and account for and report on all funds received for the hurricane-related efforts. To improve the information on the status of hurricane relief and recovery funds provided in FEMA’s weekly reports to the Appropriations Committees from a governmentwide perspective, we recommend that the Secretary of Homeland Security direct the Director of FEMA to take the following four actions: Explain in the weekly reports how FEMA’s reported obligations and expenditures for mission assignments do not reflect the status from a governmentwide perspective. On an established basis (e.g., monthly or quarterly), request and include actual obligation and expenditure data from agencies performing mission assignments. Include in the weekly report amounts reimbursed to other agencies that are in suspense because FEMA has not yet reviewed and approved the documentation supporting the expenditures. Reiterate to agencies performing mission assignments its policies on (1) the detailed information required in supporting documentation for reimbursements, and (2) the timeliness of agency billings. To help ensure better accountability, provide additional transparency, and clearly identify the status of the hurricane-related funding provided by emergency supplemental appropriations at both the individual federal agency level as well as the governmentwide level, we recommend that the Director, Office of Management and Budget, establish a framework for governmentwide reporting on the status of the hurricane-related funding. OMB could either collect and consolidate this information itself or designate another appropriate agency, such as the Department of the Treasury, to do so and report to the Appropriations Committees on a periodic basis. We requested comments on a draft of this report from the Secretary of Homeland Security and the Director of OMB. These comments are reprinted in appendixes III and IV, respectively. While DHS concurred with our recommendations, it also stated that it believes our recommendation to periodically request and include actual obligation and expenditure data from agencies performing mission assignments is subsumed by our recommendation to OMB to establish a framework for governmentwide reporting on the status of hurricane-related funding. We believe our recommendation is still valid for FEMA since, as stated in the agency’s response, its mission assignments are a significant component in the establishment of a framework for governmentwide reporting on the status of hurricane-related funding. However, as the intent of our recommendation is to help ensure the Congress is receiving complete, timely, useful, and reliable reports, we agree that other alternatives could be considered to achieve the same objectives. OMB agreed that there should be clear accountability and transparency on the spending of emergency funds for hurricane relief and indicated it will fully consider our recommendation to establish a new framework for governmentwide reporting on the status of disaster-related funding. We also provided excerpts of the report to those agencies cited in examples for their review. They provided technical comments, and we made revisions as appropriate. We are sending copies of this report to other interested congressional committees and to affected federal agencies. Copies will be made available to others upon request. In addition, this report will also be available at no charge on GAO’s home page at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-9095 or at williamsm1@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix V. To determine whether the federal government was tracking and reporting on the use of funding provided in the four emergency supplemental appropriations acts, we obtained and analyzed the four emergency supplemental appropriation documents and conference reports. We also obtained the reports prepared by the Federal Emergency Management Agency (FEMA) and the Army Corps of Engineers (COE) in response to the second emergency supplemental appropriation act. We did not obtain the reports required by the third or fourth emergency supplemental appropriations acts since this was a new requirement for the federal agencies. In addition, we obtained and analyzed guidance on reporting of estimates of hurricane-related funding budget authority, outlays, and receipts, issued by the Office of Management and Budget (OMB) in 2005 and discussed this guidance with officials from OMB. To determine whether FEMA’s reports to the Appropriations Committees required by the second emergency supplemental appropriation act provided timely and useful information, we obtained and analyzed the weekly reports prepared by FEMA, specifically focusing on the obligations and expenditures reported for mission assignments to agencies performing disaster relief work related to Hurricane Katrina on behalf of FEMA because they have governmentwide implications. We met with FEMA officials to discuss (1) the definitions of the terms obligations and expenditures used in the report, (2) the process of FEMA issuing mission assignments to agencies and the obligation of FEMA’s funds related to the mission assignments, and (3) the process of agencies seeking reimbursement for goods and services provided in response to the disaster relief work including FEMA’s billing procedures. We also obtained and analyzed certain federal agencies’ reports that provide information on mission assignments, obligations incurred and expenditures made in performing disaster relief work on behalf of FEMA, amount of bills submitted to FEMA, and amount of bills paid by FEMA. Because the majority of FEMA’s mission assignment obligations related to Hurricane Katrina, we focused our review at the agencies on the Hurricane Katrina mission assignments. We met with officials from certain federal agencies to discuss the information contained in these reports. In performing our work, we obtained information from the OMB, Department of the Treasury, FEMA, Department of Defense, COE, Department of Transportation, Environmental Protection Agency, Department of Health and Human Services, U.S. Forest Service, General Services Administration, and Department of Housing and Urban Development. To assess the reliability of the data, we interviewed officials knowledgeable about the data and determined that the data were sufficiently reliable for the purposes of this report. We conducted our work from October 2005 through June 2006 in accordance with generally accepted government auditing standards. We provided a draft of this report to the Department of Homeland Security (DHS) and OMB for comment. DHS and OMB provided written comments, which are presented in the Agency Comments and Our Evaluation section of this report and are reprinted in appendixes III and IV, respectively. We also provided excerpts of the report to those agencies cited in examples for their review. They provided technical comments, and we made revisions as appropriate. The four emergency supplemental appropriations acts enacted as of June 2006 provided funds to 23 federal agencies for the hurricane relief and recovery effort and included different reporting requirements. In addition, of the 23 agencies receiving appropriations in the four emergency supplemental appropriations acts, 16 agencies did not have any reporting requirements. The first two emergency supplemental appropriations acts provided funding to the Federal Emergency Management Agency (FEMA), Department of Defense (DOD), and Army Corps of Engineers (COE), and included the following reporting requirements: The first emergency supplemental appropriation act did not contain any requirements for FEMA to report on the $10 billion it received. The second emergency supplemental appropriation act required the Secretary of Homeland Security to provide, at a minimum, a weekly report to the Appropriations Committees detailing the allocation and obligation of the $50 billion in appropriated funds it received for Hurricane Katrina in the second emergency supplemental appropriation act. The fiscal year 2006 Department of Homeland Security Appropriations Act further explained that this weekly report was to include other information such as obligations, allocations, and expenditures, categorized by agency and state. COE was not provided any funding in the first emergency supplemental appropriation. The second emergency supplemental appropriation act required COE to provide a weekly report to the Appropriations Committees detailing the allocation and obligation of $400 million in appropriated funds it received under that act. There was no requirement for DOD to report on the $1.9 billion it received in the first and second emergency supplemental appropriations acts. The third emergency supplemental appropriation act provided $29 billion directly to 20 individual federal agencies and rescinded approximately $23.4 billion from the amount initially appropriated to FEMA’s Disaster Relief Fund in September 2005. The third emergency supplemental appropriation act included differing reporting requirements for each of the 20 federal agencies ranging from none to very detailed. Illustrative examples from the third emergency supplemental appropriation act and the conference report accompanying this legislation include the following specific reporting requirements: The third emergency supplemental appropriation act required each state receiving monies through the Community Development Fund from the Department of Housing and Urban Development (HUD) to report quarterly to the Appropriations Committees for all awards and uses of funds. The supplemental appropriation language also required some additional reporting from HUD, such as reporting quarterly to the Appropriations Committees with regard to all steps taken to prevent fraud and abuse of funds made available. The conference report accompanying the third emergency supplemental appropriation act directed the Secretary of Defense to submit quarterly reports to the congressional defense committees including, among other things, the expenditures of funds it received for hurricane relief and recovery operations. This did not include retroactive requirements for the first and second emergency supplemental appropriations. The conference report also directed the Secretary of Agriculture to provide quarterly reports including, among other things, the expenditures of funds received for hurricane relief. It also requested the Department of Education to submit a report by March 1, 2006, on the obligation and allocation of funds it received for hurricane relief and provided to assist college students under the Higher Education Act. The reporting requirements for some agencies were more detailed than others. Also, these reporting requirements do not cover funding authority of approximately $8.5 billion that agencies received through FEMA’s mission assignment process for Hurricanes Katrina, Rita, and Wilma as of March 29, 2006. The fourth emergency supplemental appropriation act provided approximately $20.1 billion directly to 22 individual federal agencies. This legislation did not include any new reporting requirements for the agencies receiving funding; however, the act contained reporting requirements for HUD that were consistent with the requirements outlined in the third emergency supplemental appropriation act. In addition to the contact named above, the following individuals also made significant contributions to this report: Christine Bonham, Richard Cambosos, Thomas Dawson, Francine DelVecchio, Heather Dunahoo, Abe Dymond, Gabrielle Fagan, Casey Keplinger, Stephen Lawrence, Greg Pugnetti, Lori Ryza, and Natalie Schneider. Other contributions were made by Felicia Brooks, Eric Essig, Lauren Fassler, Barry Grinnell, John Hong, James Maziasz, Patrick McCray, Shalin Pathak, and Chanetta Reed.","Hurricane Katrina devastated the Gulf Coast region of the United States and caused billions of dollars in damage. Hurricanes Rita and Wilma further exacerbated damage to the region. The Federal Emergency Management Agency (FEMA), within the Department of Homeland Security (DHS), was tasked with the primary role of managing the federal relief and recovery efforts. This review was performed under the Comptroller General's authority because of widespread congressional interest in the response to this disaster. GAO examined whether the federal government was adequately tracking and reporting on the use of the funding provided in the four emergency supplemental appropriations acts enacted as of June 2006. GAO analyzed the emergency supplemental appropriations acts and conference reports, reviewed FEMA's required weekly reports, and interviewed federal agency officials. FEMA's required weekly reports to the Appropriations Committees on the use of funds it received do not provide timely information from a governmentwide perspective because FEMA does not have a mechanism to report on the financial activity of the agencies performing work on its behalf. Specifically, when FEMA tasks another federal agency through a mission assignment, FEMA records the entire amount upfront as an obligation, whereas the performing agency does not record an obligation until a later date, thereby overstating reported governmentwide obligations. The opposite is true for expenditures. The performing agency expends the funds, but then bills FEMA for reimbursement. FEMA does not record the expenditure until it has received the bill and reviewed it, thereby understating reported governmentwide expenditures. As a result, while FEMA is reporting as required, from a governmentwide perspective, FEMA's reported obligations are overstated and expenditures are understated. The federal government also does not have a governmentwide framework or mechanisms in place to collect and consolidate information from the individual federal agencies that received emergency supplemental appropriations for hurricane relief and recovery efforts and report on this information. About $88 billion has been appropriated to 23 different federal agencies through four emergency supplemental appropriations acts; however, no one agency or central collection point exists to compile and report on how these funds are being spent. Decision makers need this consolidated information to determine how much federal funding has been spent and by whom, whether more may be needed, or whether too much has been provided. The ability to separately track and report on these funds is important to help ensure better accountability and clearly identify the status of funding provided in direct response to these hurricanes at both the individual federal agency level as well as the governmentwide level. Also, it is important to provide additional transparency so that hurricane victims, affected states, as well as American taxpayers, know how these funds are being spent.",govreport
"FAA has authority to authorize all UAS operations in the national airspace—military; public (academic institutions and federal, state, and local governments including law enforcement organizations); and civil (non-government including commercial). Currently, since a final rulemaking is not completed, FAA only allows UAS access to the national airspace on a case-by-case basis. FAA provides access to the airspace through three different means: Certificates of Waiver or Authorization (COA): Public entities including FAA-designated test sites may apply for COA. A COA is an authorization, generally for up to 2 years, issued by the FAA to a public operator for a specific UAS activity. Between January 1, 2014 and March 19, 2015 FAA had approved 674 public COAs. Special Airworthiness Certificates in the Experimental Category (Experimental Certificate): Civil entities, including commercial interests, may apply for experimental certificates, which may be used for research and development, training, or demonstrations by manufactures. Section 333 exemptions: Since September 2014, commercial entities may apply to FAA for issued exemptions under section 333 of the 2012 Act, Special Rules for Certain Unmanned Aircraft Systems. This exemption requires the Secretary of Transportation to determine if certain UASs may operate safely in the national airspace system prior to the completion of UAS rulemakings. FAA has granted such exemptions to 48 of 684 total applications (7 percent) from companies or other entities applying under section 333. These companies may apply to fly at their own designated sites or the test sites. While limited operations continue through these means of FAA approval, FAA has been planning for further integration. In response to requirements of the 2012 Act, FAA issued the UAS Comprehensive Plan and the UAS Integration Roadmap, which broadly map the responsibilities and plans for the introduction of UAS into the national airspace system. These plans provide a broad framework to guide UAS integration efforts. The UAS Comprehensive Plan described the overarching, interagency goals, and approach and identified six high- level strategic goals for integrating UAS into the national airspace. The FAA Roadmap identified a broad three-phase approach to FAA’s UAS integration plans—Accommodation, Integration, and Evolution—with associated priorities for each phase that provide additional insight into how FAA plans to integrate UAS into the national airspace system. This phased approach has been supported by both academics and industry. FAA plans to use this approach to facilitate further incremental steps toward its goal of seamlessly integrating UAS flight into the national airspace. Accommodation phase: According to the Roadmap, in the accommodation phase, FAA will apply special mitigations and procedures to safely facilitate limited UAS access to the national airspace system in the near-term. Accommodation is to predominate in the near-term with appropriate restrictions and constraints to mitigate any performance shortfalls. UAS operations in the national airspace system are considered on a case-by-case basis. During the near-term, R&D is to continue to identify challenges, validate advanced mitigation strategies, and explore opportunities to progress UAS integration into the national airspace system. Integration phase: The primary objective of the integration phase is establishing performance requirements for UAS that would increase access to the NAS. During the mid- to far-term, FAA is to establish new or revised regulations, policies, procedures, guidance material, training, and understanding of systems and operations to support routine NAS operations. FAA plans for the integration phase to begin in the near- to mid-term with the implementation of the small UAS rule and is to expand the phase further over time (mid- and far-term) to consider wider integration of a broader field of UASs. Evolution phase: In the evolution phase, FAA is to work to routinely update all required policy, regulations, procedures, guidance material, technologies, and training to support UAS operations in the NAS operational environment as it evolves over time. According to the Roadmap, it is important that the UAS community maintains the understanding that the NAS environment is not static and that many improvements are planned for the NAS over the next 13—15 years. To avoid obsolescence, UAS developers are to maintain a dual focus: integration into today’s NAS while maintaining cognizance of how the NAS is evolving. In February 2015, FAA issued a Notice for Proposed Rulemaking for the operations of small UASs—those weighing less than 55 pounds—that could, once finalized, allow greater access to the national airspace. To mitigate risk, the proposed rule would limit small UASs to daylight-only operations, confined areas of operation, and visual-line-of-sight operations. FAAs release of this proposed rule for small UAS operations started the process of addressing additional requirements of the 2012 Act. See table 1 for a summary of the rule’s major provisions. FAA has also met additional requirements outlined in the 2012 Act pertaining to the creation of UAS test sites. In December 2013, FAA selected six UAS test ranges. According to FAA, these sites were chosen based on a number of factors including geography, climate, airspace use, and a proposed research portfolio that was part of the application. All UAS operations at a test site must be authorized by FAA through either the use of a COA or an experimental certificate. In addition, there is no funding from FAA to support the test sites. Thus, these sites rely upon revenue generated from entities, such as those in the UAS industry, using the sites for UAS flights. Foreign countries are also experiencing an increase in UAS use, and some have begun to allow commercial entities to fly UASs under limited circumstances. According to industry stakeholders, easier access to testing in these countries’ airspace has drawn the attention of some U.S. companies that wish to test their UASs without needing to adhere to FAA’s administrative requirements for flying UASs at one of the domestically located test sites, or obtaining an FAA COA. It has also led at least one test site to partner with a foreign country where, according to the test site operator, UAS test flights can be approved in 10 days. Since being named in December 2013, the six designated test sites have become operational, applying for and receiving authorization from FAA to conduct test flights. From April 2014 through August 2014, as we were conducting our ongoing work, each of the six test sites became operational and signed an Other Transaction Agreement with FAA. All flights at a test site must be authorized under the authority of a COA or under the authority of an experimental certificate approved by FAA. Since becoming operational in 2014 until March 2015, five of the six test sites received 48 COAs and one experimental certificate in support of UAS operations resulting in over 195 UAS flights across the five test sites. These flights provide operations and safety data to FAA in support of UAS integration. While there are only a few contracts with industry thus far, according to test site operators these are important if the test sites are to remain operational. Table 2 provides an overview of test-site activity since the sites became operational. FAA officials and some test sites told us that progress has been made in part because of FAA’s and sites’ efforts to work together. Test site officials meet every two weeks with FAA officials to discuss current issues, challenges, and progress. According to meeting minutes, these meetings have been used to discuss many issues from training for designated airworthiness representatives to processing of COAs. In addition, test sites have developed operational and safety processes that have been reviewed by FAA. Thus, while FAA has no funding directed to the test sites to specifically support research and development activities, FAA dedicates time and resources to supporting the test sites, and FAA staff we spoke to believe test sites are a benefit to the integration process and worth this investment. According to FAA, its role is to ensure each test site sets up a safe-testing environment and to provide oversight that guarantees each test site operates under strict safety standards. FAA views the test sites as a location for industry to safely access the airspace. FAA told us it expects to collect data obtained from the users of the test ranges that will contribute to the continued development of standards for the safe and routine integration of UASs. The Other Transaction Agreement between FAA and the test sites defines the purpose of the test sites as research and testing in support of safe UAS integration into the national airspace. FAA and the test sites have worked together to define the role of the test sites and see that both the FAA and the test sites are effectively supporting each other and the goal of the test sites, we will continue to examine this progress and will report our final results late this year. As part of our ongoing work, we identified a number of countries that allow commercial UAS operations and have done so for years. In Canada and Australia, regulations pertaining to UAS have been in place since 1996 and 2002, respectively. According to a MITRE study, the types of commercial operations allowed vary by country. For example, as of December 2014, Australia had issued over 180 UAS operating certificates to businesses engaged in aerial surveying, photography, and other lines of business. In Japan, the agriculture industry has used UASs to apply fertilizer and pesticide for over 10 years. Furthermore, several European countries have granted operating licenses to more than 1,000 operators to use UASs for safety inspections of infrastructure, such as rail tracks, or to support the agriculture industry. The MITRE study reported that the speed of change can vary based on a number of factors, including the complexity and size of the airspace and the supporting infrastructure. In addition, according to FAA, the legal and regulatory structures are different and may allow easier access to the airspace in other countries for UAS operations. While UAS commercial operations can occur in some countries, there are restrictions controlling their use. We studied the UAS regulations of Australia, Canada, France, and the United Kingdom and found these countries impose similar types of requirements and restrictions on commercial UAS operations. For example, all these countries except Canada require government-issued certification documents before UASs can operate commercially. In November 2014, Canada issued new rules creating exemptions for commercial use of small UASs weighing 4.4 pounds or less and from 4.4 pounds to 55 pounds. UASs in these categories can commercially operate without a government-issued certification but must still follow operational restrictions, such as a height restriction and a requirement to operate within line of sight. Transport Canada officials told us this arrangement allows them to use scarce resources to regulate situations of relatively high risk. In addition, each country requires that UAS operators document how they ensure safety during flights and that their UAS regulations go into significant detail on subjects such as remote pilot training and licensing requirements. For example, the United Kingdom has established “national qualified entities” that conduct assessments of operators and make recommendations to the Civil Aviation Authority as to whether to approve that operator. If UASs were to begin flying today in the national airspace system under the provisions of FAA’s proposed rules, their operating restrictions would be similar to regulations in these other four countries. However, there would be some differences in the details. For example, FAA proposes altitude restrictions of below 500 feet, while Australia, Canada, and the United Kingdom restrict operations to similar altitudes. Other proposed regulations require that FAA certify UAS pilots prior to commencing operations, while Canada and France do not require pilot certification. Table 3 shows how FAA’s proposed rules compare with the regulations of Australia, Canada, France, and the United Kingdom. While regulations in these countries require UAS operations remain within the pilot’s visual line of sight, some countries are moving toward allowing limited operations beyond the pilot’s visual line of sight. For example, according to Australian civil aviation officials, they are developing a new UAS regulation that would allow operators to request a certificate allowing beyond line-of-sight operations. However, use would be very limited and allowed only on a case-by-case basis. Similarly, according to a French civil aviation official, France approves on a case-by-case basis, very limited beyond line-of-sight operations. Finally, in the United States, there have been beyond line-of-sight operations in the Arctic, and, NASA, FAA and the industry have successfully demonstrated detect-and-avoid technology, which is necessary for beyond line-of-sight operations. In March 2015, the European Aviation Safety Agency (EASA) issued a proposal for UAS regulations that creates three categories of UAS operations—open, specific, and certified. Generally, the open category would not require authorization from an aviation authority but would have basic restrictions including altitude and distance from people. The specific category would require a risk assessment of the proposed operation and an approval to operate under restrictions specific to the operation. The final proposed category, certified operations, would be required for those higher-risk operations, specifically when the risk rises to a level comparable to manned operations. This category goes beyond FAA’s proposed rules by proposing regulations for large UAS operations and operations beyond the pilot’s visual line-of-sight. As other countries work toward integration standards organizations from Europe and the United States are coordinating to try and ensure harmonized standards. Specifically, RTCA and the European Organization for Civil Aviation Equipment (EUROCAE) have joint committees focused on harmonization of UAS standards. We found during our ongoing work that FAA faces some critical steps to keeping the UAS integration process moving forward, as described below: Issue final rule for small UASs: As we previously discussed, the NPRM for small UAS was issued in February 2015. However, FAA plans to process comments it receives on the NPRM and then issue a final rule for small UAS operations. FAA told us that it is expecting to receive tens of thousands of comments on the NPRM. Responding to these comments could extend the time to issue a final rule. According to FAA, its goal is to issue the final rule 16 months after the NPRM, but it may take longer. If this goal is met, the final rule would be issued in late 2016 or early 2017, about 2 years after the 2012 Act required. FAA officials told us that it has taken a number of steps to develop a framework to efficiently process the comments it expects to receive. Specifically, the officials said that FAA has a team of employees assigned to lead the effort with contractor support to track and categorize the comments as soon as they are received. According to FAA officials, the challenge of addressing comments could be somewhat mitigated if industry groups consolidated comments, thus reducing the total number of comments that FAA must address. Implementation plan: The Comprehensive Plan and Roadmap provide broad plans for integration, but some have pointed out that FAA needs a detailed implementation plan to predict with any certainty when full integration will occur and what resources will be needed. The UAS Aviation Rulemaking Committee developed a detailed implementation plan to help FAA and others focus on the tasks needed to integrate UAS into the national airspace.need for an implementation plan that would identify the means, necessary resources, and schedule to safely and expeditiously integrate civil UASs into the national airspace. The proposed implementation plan contains several hundred tasks and other activities needed to complete the UAS integration process. FAA stated it used this proposed plan and the associated tasks and activities when developing its Roadmap. However, unlike the Roadmap, an implementation plan would include specific resources and time frames to meet the near-term goals that FAA has outlined in its Roadmap. An internal FAA report from August 2014 discussed the importance for incremental expansion of UAS operations. While this report did not specifically propose an implementation plan, it suggested that for each incremental expansion of operations, FAA identify the tasks necessary, responsibilities, resources, and expected time frames. Thus, the internal report suggested FAA develop plans to account for all the key components of an implementation plan. The Department of Transportation’s – Inspector General issued a report in June 2014 that contained a recommendation that FAA develop such a plan. The FAA mentioned concerns regarding the augmentation of appropriations and limitations on accepting voluntary services. As a general proposition, an agency may not augment its appropriations from outside sources without specific statutory authority. The Antideficiency Act prohibits federal officers and employees from, among other things, accepting voluntary services except for emergencies involving the safety of human life or the protection of property. 31 U.S.C. § 1342. operations conducted by the test sites must have a COA.requires the test sites to provide safety and operations data collected for each flight. Test site operators have told us incentives are needed to encourage greater UAS operations at the test sites. The operators explained that industry has been reluctant to operate at the test sites because under the current COA process, a UAS operator has to lease its UAS to the test site, thus potentially exposing proprietary technology. With a special airworthiness certificate in the experimental category, the UAS operator would not have to lease its UAS to the test site, therefore protecting any proprietary technology. FAA is, however, working on providing additional flexibility to the test sites to encourage greater use by industry. Specifically, FAA is willing to train designated airworthiness representatives for each test site. These individuals could then approve UASs for a special airworthiness certificate in the experimental category for operation at a test site. As previously indicated, three test sites had designated airworthiness representatives aligned with the test site, but only one experimental certificate had been approved. More broadly, we were told that FAA could do more to make the test sites accessible. According to FAA and some test site operators, FAA is working on creating a broad area COA that would allow easier access to the test site’s airspace for research and development. Such a COA would allow the test sites to conduct the airworthiness certification, typically performed by FAA, and then allow access to the test site’s airspace. As previously stated, one test site received 4 broad area COAs that were aircraft specific. Officials from test sites we spoke with during our ongoing work were seeking broad area COAs that were aircraft “agnostic”—meaning any aircraft could operate under the authority of that COA. According to FAA officials, in an effort to make test sites more accessible, they are working to expand the number of test ranges associated with the test sites, but not increasing the number of test sites. Currently, test sites have ranges in 14 states. Public education program: UAS industry stakeholders and FAA have begun an educational campaign that provides prospective users with information and guidance on flying safely and responsibly. The public education campaign on allowed and safe UAS operations in the national airspace may ease public concerns about privacy and support a safer national airspace in the future. UASs’ operating without FAA approval or model aircraft operating outside of the safety code established by the Academy of Model Aeronautics potentially presents a danger to others operating in the national airspace. To address these safety issues, FAA has teamed up with industry to increase public awareness and inform those wishing to operate UAS how to do so safely. For example, three UAS industry stakeholders and FAA teamed up to launch an informational website for UAS operators. UASs are increasingly available online and on store shelves. Prospective operators—from consumers to businesses—want to fly and fly safely, but many do not realize that, just because you can easily acquire a UAS, that does not mean you can fly it anywhere, or for any purpose. “Know Before You Fly” is an educational campaign that provides prospective users with information and guidance on flying safely and responsibly (see table 4). UAS and air traffic management: As FAA and others continue to address the challenges to UAS integration they are confronted with accounting for expected changes to the operations of the national airspace system as a FAA part of the Next Generation Air Transportation System (NextGen)has stated that the safe integration of UAS into the national airspace will be facilitated by new technologies being deployed. However, according to one stakeholder, UASs present a number of challenges that the existing national airspace is not set up to accommodate. For example, unlike manned aircraft, UASs that currently operate under COAs do not typically follow a civil aircraft flight plan where an aircraft takes off, flies to a destination, and then lands. Such flights require special accommodation by air-traffic controllers. Additionally, the air-traffic-control system uses navigational waypoints for manned aircraft, while UASs use Global Positioning System coordinates. Finally, if a UAS loses contact with its ground-control station, the air traffic controller might not know what the UAS will do to recover and how that may affect other aircraft in the vicinity. NextGen technologies, according to FAA, are continually being developed, tested, and deployed at the FAA Technical Center, and the FAA officials are working closely with MITRE to leverage all available technology for UAS integration. Chairman Ayotte, Ranking Member Cantwell, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D., at (202)512-2834 or dillinghamg@gao.gov. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Brandon Haller, Assistant Director; Daniel Hoy; Eric Hudson; Bonnie Pignatiello Leer; and Amy Rosewarne. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","UAS—often called drones—are aircraft that do not carry a pilot but instead operate on pre-programmed routes or are manually controlled. Currently, UAS only operate in the United States with FAA approval on a case-by-case basis. However, in the absence of regulations, unauthorized UAS operations have, in some instances, compromised safety. The FAA Modernization and Reform Act of 2012 emphasized the need to integrate UAS into the national airspace by requiring that FAA establish requirements governing them. In response, FAA has taken a number of steps, most notably, issuing an NPRM for small UAS operations, and designating six UAS test sites which became operational in 2014 and have begun to conduct test flights. Other countries have started to integrate UAS as well, and many currently allow commercial operations. This testimony provides preliminary observations on 1) status of FAA's test sites, 2) how other countries have progressed integrating UAS for commercial purposes, and 3) critical steps for FAA going forward. This testimony is based on GAO's ongoing study examining issues related to UAS integration into the national airspace system for UAS operations. To conduct this work, GAO reviewed documents and met with officials from test sites, FAA, and industry stakeholders. Since becoming operational in 2014, the Federal Aviation Administration's (FAA) unmanned aerial systems (UAS) test sites have conducted over 195 flights across five of the six test sites. These flights provide operations and safety data that FAA can use in support of integrating UAS into the national airspace. FAA has not provided funding to the test sites in support of research and development activities but has provided staff time through, for example bi-weekly meetings to discuss ongoing issues with test site officials. FAA staff said that the sites are a benefit to the integration process and worth this investment. GAO's preliminary observations found that other countries have progressed toward UAS integration and allow commercial use. GAO studied the UAS regulations in Australia, Canada, France, and the United Kingdom and found these countries have similar rules and restrictions on commercial UAS operations, such as allowing line of sight operations only. In November 2014, Canada issued new rules creating exemptions for UAS operations based on size and relative risk. In addition, as of December 2014, Australia had issued over 180 UAS operating certificates to businesses engaged in aerial surveying, photography, and other lines of business. Under the provisions of FAA's proposed rules, operating restrictions would be similar to regulations in these other four countries. For example, all countries have UAS altitude restrictions of 500 feet or below.",govreport
"Afghanistan is a unique country with different development, security, and infrastructure issues and needs than Iraq. As a result, CERP efforts in Afghanistan are frequently focused on development and construction whereas in Iraq the focus of CERP is reconstruction of neglected or damaged infrastructure. The program has evolved over time in terms of the cost and complexity of projects, and the number of projects costing more than $500,000 in Afghanistan has reportedly increased from 9 in fiscal year 2004 to 129 in fiscal year 2008. As the program has matured, projects have become more complex, evolving from building small-scale projects such as wells that cost several thousand dollars to a boys’ dormitory construction project that cost several hundred thousand dollars to building roads that cost several million dollars. For example, of the $486 million that DOD obligated on CERP projects in fiscal year 2008, about $281 million was for transportation, which was largely for roads. CJTF-101 guidance identifies the individuals authorized to approve CERP projects based on the estimated cost of the project (see table 1). As shown in the table, 90 percent of the CERP projects executed in Afghanistan in fiscal year 2008 cost $200,000 or less. Management and execution of the CERP program is the responsibility of officials at CJTF-101 headquarters, the brigades and the PRTs. CJTF-101 personnel include the CERP manager who has the primary day-to-day responsibility for the program, a staff attorney responsible for reviewing all projects with a value of $200,000 or more, and a resource manager responsible for, among other things, maintaining CERP training records and tracking CERP obligations and expenditures. In addition, CJTF-101 guidance assigns responsibilities to the various staff sections such as engineering, medical, and contracting when specific projects require it. For example, the command engineering section is tasked with reviewing construction projects over $200,000, including reviewing plans for construction and project quality-assurance plans, and with participating in the CERP review boards. Similarly, the command’s surgeon general is responsible for coordinating all plans for construction, refurbishment, or equipping of health facilities with the Afghanistan Minister of Health and evaluating all project nominations over $200,000 that relate directly to healthcare or the healthcare field. Brigade commanders are responsible for the overall execution of CERP in their areas of responsibilities and are tasked with a number of responsibilities including identifying and approving CERP projects, appointing project purchasing officers, and paying agents and ensuring that proper management, reporting, and fiscal controls are established to account for CERP funds. In addition, the brigade commander is responsible for ensuring that project purchasing officers and paying agents receive training and ensuring that all personnel comply with CERP guidance. Additional personnel in the brigade are tasked with specific day- to-day management of the CERP program for the brigade commander. Table 2 details the activities of key individuals tasked with executing and managing CERP at the brigade level. In addition to those tasked with day-to-day responsibility, others at the brigade have a role in the CERP process. For example, the brigade attorney is responsible for reviewing project nominations to ensure that they are legally sufficient and in compliance with CERP guidelines, and the brigade engineer is tasked with providing engineering expertise, including reviewing projects and assisting with oversight. DOD is statutorily required to provide Congress with quarterly reports on the source, allocation and use of CERP funds. The reports are compiled based on information about the projects that is entered by unit officials into the Combined Information Data Network Exchange, a classified DOD database that not only captures operations and intelligence information, but also tracks information on CERP projects such as project status, project start and completion date, and dollars committed, obligated, and disbursed. This database is the third database that DOD has used since 2006 to track CERP projects in Afghanistan. According to a military official, some historical data on past projects were lost during the transfer of this information from previous database systems. CERP information is now available in an unclassified format to members of PRTs and others who have access to a network that can be used to share sensitive but unclassified information. U. S. efforts to enhance Afghanistan’s development is costly and requires some complex projects, underscoring the need to effectively manage and oversee the CERP program, including effectively managing and overseeing contracting as well as contractor efforts. During our review, we identified problems with the availability of personnel to manage and oversee CERP, as well as the sufficiency of training on CERP. Although DOD has used CERP funds to construct roads, schools, and other projects that commanders believe have provided benefits to the Afghan people, DOD faces significant challenges in providing adequate management and oversight of CERP because of an insufficient number of trained personnel to execute and manage the program. We have frequently reported on several long-standing problems facing DOD as it uses contractors in contingency operations including inadequate numbers of trained management and oversight personnel. Our previous work has shown that high-performing organizations routinely use current, valid, and reliable data to make informed decisions about current and future workforce needs, including data on the appropriate number of employees, key competencies, and skill mix needed for mission accomplishment, and appropriate deployment of staff across the organization. DOD has not conducted a workforce assessment of CERP to identify how many military personnel are needed to effectively and efficiently execute and oversee the program. Rather, commanders determine how many personnel will manage and execute CERP. Personnel at all levels, including headquarters and unit personnel that we interviewed after they returned from Afghanistan or were in Afghanistan in November 2008, expressed a need for more personnel to perform CERP program management and oversight functions. Due to a lack of personnel, key duties such as performing headquarters staff assistance visits to help units to improve contracting procedures and site visits to monitor project status and contractor performance were either not performed or not consistently performed. At the headquarters level, at the time of our review, CJTF-101 had designated one person to manage the day-to-day operations of CERP. Among many other tasks outlined in the CJTF-101 CERP guidance, the CJTF-101 CERP manager was responsible for conducting training for PPOs and PAs, providing oversight of all projects, ensuring proper coordination for all projects with the government of Afghanistan, validating performance metrics, ensuring that all project information is updated monthly in the command’s electronic database and conducting staff assistance visits semiannually or as requested by brigades. Staff assistance visits are conducted to assist units by identifying any additional training or guidance that may be required to ensure consistency in program execution. According to documents we reviewed, staff assistance visits conducted in the past have uncovered problems with project documentation, adhering to project guidelines, and project tracking, among others. The CJTF-101 CERP manager we interviewed during our visit to Afghanistan stated that he spent most of his time managing the headquarters review process of projects costing more than $200,000 and was unable to carry out his full spectrum of responsibilities, including conducting staff assistance visits. After our November 2008 visit to Afghanistan, CJTF-101 added additional personnel to manage CERP on a full-time basis. Headquarters and brigade level personnel responsible for CERP also expressed a need for additional personnel at brigades to perform essential functions from program management to project execution. For example: CJTF-101 guidance assigns a number of responsibilities for executing CERP, including project monitoring and oversight, to military personnel; however, according to unit officials we spoke with, tasks such as completing project oversight and collecting metrics on completed projects are often not accomplished due to a lack of personnel. In a July 2008 memorandum to CENTCOM, the CJTF-101 commanding general noted that in some provinces, units have repositioned or are unable to do quality- assurance and quality-control checks due to competing missions and security risks. Furthermore, according to military officials from units that had deployed to Afghanistan, project oversight is frequently not provided because units lack the personnel needed to conduct site visits and ensure compliance with CERP contracts. For example, according to one CERP manager we spoke with, his unit was not able to provide oversight of 20 of the 27 CERP projects because it was often difficult to put together a team to conduct site visits due to competing demands for forces. Similarly, the competing demands for forces made it difficult for units to visit completed projects and determine the effectiveness of the projects as required by CERP guidance. CJTF-101 guidance also requires units to consult subject-matter experts, such as engineers, when required. However, military officials stated that there is a lack of subject-matter experts to consult on some projects. For example, military personnel stated that agriculture experts are needed to assist on agriculture projects. Moreover, more public health officials are needed. A commander from one task force stated that his soldiers were not qualified to monitor and assess clinics because they did not have the proper training. Furthermore, several officials we spoke with, including officials at the CJTF-101 headquarters, noted that they needed additional civil/military affairs personnel to do project assessments both before projects are selected to determine which projects would be most appropriate and after projects are completed to measure the effectiveness of those projects. We recently reported that the lack of subject-matter experts puts DOD at risk of being unable to identify and correct poor contractor performance, which could affect the cost, completion, and sustainability of CERP projects. According to DOD policy, members of the Department of Defense shall receive, to the maximum extent possible, timely and effective, individual, collective, and staff training, conducted in a safe manner, to enable performance to standard during operations. CERP familiarization wever, training may be provided to Army personnel before deployment; ho according to several Army officials, units frequently do not know who will be responsible for managing the CERP program until after they arrive in Afghanistan so task-specific training is generally not included in predeployment training. Others, such as PPOs, receive training after they arrived in Afghanistan. However, personnel assigned to manage and execute CERP had little or no training on their duties and responsibilities, and personnel we spoke with in Afghanistan and those who had recently returned from Afghanistan believed they needed more quality training in order to perform their missions effectively. For example: One of the attorneys responsible for reviewing and approving CERP projects received no CERP training before deploying. Unsure of how to interpret the guidance, the attorney sought clarification from higher headquarters, which delayed project approval. Personnel from a U.S. Marine Corps unit that deployed to Afghanistan reported that they received no training on CERP prior to deployment and believed that such training would have been helpful to ensure that projects they selected would provide long-term benefits to the population in their area of operation. Army training on CERP consisted of briefing slides that focused on the authorized and unauthorized uses of CERP but did not discuss how to complete specific CERP responsibilities such as project selection, developing a statement of work, selecting the appropriate contract type, or providing the appropriate types and levels of contract oversight. Additionally, according to officials from brigades we spoke with in Afghanistan, they received little or no training on their CERP responsibilities after arriving in-theater. Military officials from PRTs also noted that they received little training on CERP prior to deploying to Afghanistan and felt that additional training was needed so that they could more easily perform their CERP duties. In some cases, personnel told us that working with their predecessors during unit rotations provided them with sufficient training. However not all personnel have that opportunity. Our reports as well as recent reports from others have highlighted the difficulties associated with contracting in contingency operations particularly for those personnel with little contracting experience. DOD’s Financial Management Regulation allows contracting officers to delegate the authority to PPOs to obligate funds for CERP contracts for projects valued at less than $500,000. Additionally, PPOs are involved in other activities such as writing the statement of work for each project, ensuring that the project is completed to contract specifications, and completing contract close out. During our visit to Afghanistan, we observed PPO training provided by the principal assistant responsible for contracting in Afghanistan. The training consisted of a 1-hour briefing, which included a detailed discussion of CERP guidance but did not provide detailed information on the duties of the PPO. For example, according to CJTF-101 guidance, contracts are to be supported by accurate cost estimates; however, the PPO briefing does not provide training on how to develop these estimates. All of the contracting officers we spoke with believe that the training brief provided is insufficient and noted that unlike PPOs, who have less training but more authority under CERP, warranted contracting officers have at least 1 year of experience and are required to take a significant amount of classroom training before they are allowed to award any contracts. Moreover, some PPOs we spoke with stated that they needed more training. Military officials at both the brigade and CJTF-101 level told us that inadequate training has led to some common mistakes in CERP contracts and CERP project files. For example, officials from PRTs, brigades, and the CJTF-101 level noted that statements of work often are missing key contract clauses or include clauses that are not appropriate and require revision. A training document provided by the principal assistant responsible for contracting identified several important clauses that are commonly omitted by PPOs including termination clauses, progress schedule clauses, and supervision and quality control clauses. As we have reported in the past, poorly written contracts and statements of work can increase the department’s cost risk and could result in the department paying for projects that do not meet project goals or objectives. Additionally, several officials at CJTF-101 with responsibilities for CERP also noted that project packages sent to the headquarters for review were often incomplete or incorrect, thereby, slowing down the CERP project approval process and increasing the workload of the CERP staff at both the headquarters and unit level. For example, the CJTF-101 official responsible for reviewing all projects valued at $200,000 or more noted that most of the project packets he reviewed had to be returned to the brigades because the packets lacked key documents, signatures, or other required information. Finally, the lack of training affects the quality of the oversight provided and can increase the risk of fraud. To illustrate, the Principal Deputy Inspector General Department of Defense testified in February 2009, that contingency contracting, specifically the Commander’s Emergency Response Program, is highly vulnerable to fraud and corruption due to a lack of oversight. He went on to state “it would appear that even a small amount of contract training provided through command channels and some basic ground-level oversight that does not impinge on the CERP’s objective would lower the risk in this susceptible area.” DOD and USAID participate in various mechanisms to facilitate coordination, but lack information that would provide greater visibility on all U.S. government development projects in Afghanistan. Teams have been formed in Afghanistan that integrate U.S. government civilians and military personnel to enhance coordination among U.S. agencies executing development projects in Afghanistan. For example, for projects involving roads, DOD and USAID officials have set up working groups to coordinate road construction and both agencies agreed that coordination on roads was generally occurring. Additionally, a USAID member is part of the PRT and sits regularly with military colleagues to coordinate and plan programming, according to USAID officials. Those same officials stated that this has resulted in joint programming and unity of effort, marrying CERP and USAID resources. Military officials we spoke with from several brigades also stated that coordination with the PRTs was good. Further, a USAID representative is located at the CJTF-101 headquarters and acts as a liaison to help coordinate projects costing $200,000 or more. Also, in November 2008, the Integrated Civilian-Military Action Group which consists of representatives from the Department of State, USAID, and U.S. Forces-Afghanistan was established at the U.S. Embassy in Kabul, to help unify U.S. efforts in Afghanistan through coordinated planning and execution, according to a document provided by USAID. The role of the Integrated Civilian-Military Action Group, which is expected to meet every 3 weeks, is to establish priorities and identify roles and responsibilities for both long-term and short-term development. Any decisions made by this group are then presented to the Executive Working Group-a group of senior military, State Department, and USAID officials-for approval. According to USAID officials, the Executive Working Group is empowered by the participating organizations to engage in coordinated planning and execution, provide guidance that synchronizes civilian and military efforts, convene interagency groups as appropriate, monitor and assess implementation and impact of integrated efforts, and recommend course changes to achieve U.S. government goals in support of the Government of the Islamic Republic of Afghanistan and of achieving stability in Afghanistan. Despite these interagency teams, military and USAID officials lack a common database that would promote information sharing and facilitate greater visibility of all development projects in Afghanistan. At the time of our review, development projects in Afghanistan were not tracked in a single database that was accessible by all parties conducting development in the country. For example, the military uses a classified database— Combined Information Data Network Exchange—to track CERP projects and other information. In early 2009, USAID officials were granted access to an unclassified portion of this database, providing them with information on the military’s CERP projects including project title, project location, project description, and name of the unit executing the project, among other information. On the other hand, USAID officials use a database called GEOBASE to track their development projects, and there are a myriad of other databases used to track individual development efforts. USAID officials stated that they did not believe military officials had access to GEOBASE. However, in our 2008 review of Afghanistan road projects, we reported that there was a DOD requirement to provide CERP project information to USAID via the GEOBASE system to provide a common operating picture of reconstruction projects for U.S. funded efforts. We found that this was not being done for the CERP-funded road projects and recommended that DOD do so, to which DOD concurred. At the time of our review, the requirement to input CERP project information into that database was not included in the most recent version of the CJTF-101 standard operating procedure. In a memorandum to CENTCOM, the commanding general of CJTF-101 noted that data on various development projects in Afghanistan are maintained in a wide range of formats making CERP data the only reliable data for the PRTs. In January 2009, USAID initiated a project to develop a unified database to capture reliable and verified data for all development projects in Afghanistan and make it accessible to all agencies engaging in development activities in the country. The goal for the database is to create visibility of development projects for all entities executing projects in Afghanistan in a single place. However, plans are preliminary and a number of questions remain including how the database will be populated and how the database development will be funded. USAID officials told us that they have been coordinating with CJTF-101 civil affairs officials about the development of the database and plan to hold a meeting in April 2009 to discuss recommendations for its development and to obtain input about the database from other U.S. government agencies. While USAID officials have conducted some assessments for the development of the centralized database, as of yet no specific milestones have been established for when that database will be complete. Without clear goals and a method to judge the progress of this initiative it is unclear how long this project might take or if it will ever be completed. The expected surge in troops and expected increase in funding for Afghanistan heightens the need for an adequate number of trained personnel to execute and oversee CERP. With about $1 billion worth of CERP funds already spent to develop Afghanistan, it is crucial that individuals administering and executing the program are properly trained to manage all aspects of the program including management and oversight of the contractors used. If effective oversight is not conducted, DOD is at risk of being unable to verify the quality of contractor performance, track project status, or ensure that the program is being conducted in a manner consistent with guidance. Without such assurances, DOD runs the risk of wasting taxpayer dollars, squandering opportunities to positively influence the Afghan population and diminishing the effectiveness of a key program in the battle against extremist groups including the Taliban. Although coordination mechanisms are in place to help increase visibility, eliminate project redundancy, and maximize the return on U.S. investments, the U.S. government lacks an easily accessible mechanism to identify previous and ongoing development projects. Without a mechanism to improve the visibility of individual development projects, the U.S. government may not be in a position to fully leverage the resources available to develop Afghanistan and risks duplicating efforts and wasting taxpayer dollars. We recommend that the Secretary of Defense direct the commander of U.S. Central Command to evaluate workforce requirements and ensure adequate staff to administer establish training requirements for CERP personnel administering the program, to include specific information on how to complete their duties and responsibilities . We further recommend that the Secretary of Defense and Administrator of USAID; collaborate to create a centralized project-development database for use by U.S. government agencies in Afghanistan, including establishing specific milestones for its development and implementation. In written comments to a draft of this report, DOD partially concurred with two of our recommendations and concurred with one. These comments are reprinted in appendix II. DOD partially concurred with our recommendation to require U.S. Central Command to evaluate workforce requirements and ensure adequate staff to administer the Commander’s Emergency Response Program (CERP). DOD acknowledged the need to ensure adequate staff to administer CERP and noted that since our visit, U.S. Forces-Afghanistan had added personnel to manage the program on a full-time basis. Because of the actions already being taken, DOD believed that no further action is warranted at this time, but stated it would monitor the situation and respond as required. Although steps have been taken to improve management and oversight of CERP in Afghanistan, we still believe that CENTCOM should conduct a workforce assessment to identify the number of personnel needed to effectively manage and oversee the program. As we described in the report, in the absence of such an assessment, commanders determine how many personnel will manage and execute CERP. As commanders rotate in and out of Afghanistan, the number of people they assign to administer and oversee CERP could vary. Therefore, to ensure consistency, we continue to believe that CENTCOM, rather than individual commanders, should assess and determine the workforce needs for the program. DOD partially concurred with our recommendation to establish training requirements for CERP personnel administering the program to include specific information on how to complete their duties and responsibilities. DOD acknowledged the need for training for CERP personnel administering the program and stated that since our visit, U.S. Forces- Afghanistan has begun work on implementing instructions to enhance selection processes and training programs for personnel administering the program and handling funding. Based on these efforts, DOD believed that no further action is warranted at this time but said it would monitor the situation and respond as required. However, the efforts outlined by DOD appear to be focused on training after personnel arrive in Afghanistan. Because our work also identified limitations in training prior to deployment, we believe that additional action is required, on the part of CENTCOM, to fully implement our recommendation. DOD concurred with our recommendation to collaborate with USAID to create a centralized project-development database for use by U.S. government agencies in Afghanistan, including establishing specific milestones for its development and implementation. USAID officials were given an opportunity to comment on the draft report. However, officials stated that they had no comments on the draft. We are sending copies of this report to other interested congressional committees and the Secretary of Defense and Administrator of USAID. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions on the matters discussed in this report, please contact me at (202) 512-9619 or at pickups@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To determine the extent to which the Department of Defense (DOD) has the capacity to provide adequate management and oversight of the CERP in Afghanistan, we reviewed guidance from DOD, Combined Joint Task Force-101 (CJTF-101), and Combined Joint Task Force-82 (CJTF-82) to identify roles and responsibilities of CERP personnel, how personnel are assigned to the CERP, the nature and extent of the workload related to managing and executing the CERP, and the training curriculum provided to familiarize personnel with the CERP. We traveled to Afghanistan and interviewed officials at higher command, including those responsible for the overall management of CERP at CJTF-101, as well as commanders, staff judge advocates, project purchasing officers, engineers, and CERP managers about how they administered, monitored, and provided oversight to the program, what training they received, and how personnel assigned to administer and manage the program were chosen. We also interviewed personnel at all levels to obtain their perspective on their ability to execute their assigned workload and sufficiency of training they received prior to deployment and upon arrival in Afghanistan and attended a training session that was provided to Project Purchasing Officers (PPO). Additionally, we interviewed officials at the Office of the Secretary of Defense (Comptroller) and the Office of the Assistant Secretary of the Army (Financial Management and Comptroller), as well as Marine Corps and Army units that had returned from Afghanistan about the type of management and oversight that exists for CERP and the quality of that oversight. We selected these units (1) based on Afghanistan deployment and redeployment dates; (2) to ensure that we obtained information from officials at the division, brigade, and Provincial Reconstruction Team (PRT) levels who had direct experience with CERP; and (3) because unit officials had not yet been transferred to other locations within the United States or abroad. In order to determine the extent to which commanders coordinate CERP projects with USAID, we reviewed and analyzed DOD, CJTF-101, and CJTF-82 guidance to determine what coordination, if any, was required. We also interviewed military officials at the headquarters, brigade, and PRT levels that had redeployed from Afghanistan between July 2008 and April 2009 to determine the extent of their coordination with USAID officials. We also met with USAID officials in Washington, D.C., as well as traveled to Afghanistan and interviewed officials at the CJTF-101 headquarters, brigade, PRT, as well as, USAID about their coordination efforts. We spoke with military officials about the database they use to track CERP projects-Combined Information Data Network Exchange (CIDNE)—and learned that some historical data on past projects was lost during the transfer of information from a previous database to CIDNE. However, the information is in the project files and had already been included in the quarterly reports to Congress. Therefore, we analyzed the reported obligations in the quarterly CERP reports to Congress for fiscal year 2004 to fiscal year 2008 and interviewed officials about information contained in the reports. Based on interviews with officials, we determined that these data are sufficiently reliable for the purpose of this report. United States Agency for International Development, Washington, D.C. United States Agency for International Development, Kabul, Afghanistan Department of State, Washington, D.C. We conducted this performance audit from July 2008 to April 2009 in accordance with generally accepted government accounting standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Carole Coffey, Assistant Director; Susan Ditto, Rodney Fair, Karen Nicole Harms, Ron La Due Lake, Marcus Oliver, and Sonja Ware made key contributions to this report. Defense Management: Actions Needed to Overcome Long-standing Challenges with Weapon Systems Acquisition and Service Contract Management. GAO-09-362T. Washington, D.C: February 12, 2009. Iraq and Afghanistan: Availability of Forces, Equipment, and Infrastructure Should Be Considered in Developing U.S. Strategy and Plans. GAO-09-380T. Washington, D.C: February 11, 2009. Provincial Reconstruction Teams in Afghanistan and Iraq. GAO-09-86R. Washington, D.C.: October 1, 2008. Military Operations: DOD Needs to Address Contract Oversight and Quality Assurance Issues for Contracts Used to Support Contingency Operations. GAO-08-1087. Washington, D.C.: September 26, 2008. Afghanistan Reconstruction: Progress Made in Constructing Roads, but Assessments for Determining Impact and a Sustainable Maintenance Program Are Needed. GAO-08-689. Washington, D.C.: July 8, 2008. Securing, Stabilizing, and Rebuilding Iraq: Progress Report: Some Gains Made, Updated Strategy Needed. GAO-08-1021T. Washington, D.C: July 23, 2008. Military Operations: Actions Needed to Better Guide Project Selection for Commander’s Emergency Response Program and Improve Oversight in Iraq. GAO-08-736R. Washington, D.C.: June 23, 2008. Stabilizing and Rebuilding Iraq: Actions Needed to Address Inadequate Accountability over U.S. Efforts and Investments. GAO-08-568T. Washington, D.C.: March 11, 2008. Defense Logistics: The Army Needs to Implement Effective Management and Oversight Plan for the Equipment Maintenance Contract in Kuwait. GAO-08-316R. Washington, D.C.: January 22, 2008. Stabilization and Reconstruction: Actions Needed to Improve Governmentwide Planning and Capabilities for Future Operations. GAO-08-228T. Washington, D.C.: October 30, 2007. Securing, Stabilizing, and Reconstructing Afghanistan. GAO-07-801SP. Washington, D.C.: May 24, 2007. Military Operations: The Department of Defense’s Use of Solatia and Condolence Payments in Iraq and Afghanistan. GAO-07-699. Washington, D.C: May 23, 2007. Military Operations: High-Level DOD Action Needed to Address Long- standing Problems with Management and Oversight of Contractors Supporting Deployed Forces. GAO-07-145. Washington, D.C: December 18, 2006. Rebuilding Iraq: More Comprehensive National Strategy Needed to Help Achieve U.S. Goals. GAO-06-788. Washington, D.C.: July 2006. Afghanistan Reconstruction: Despite Some Progress, Deteriorating Security and Other Obstacles Continue to Threaten Achievement of U.S. Goals. GAO-05-742. Washington, D.C.: July 28, 2005. Afghanistan Reconstruction: Deteriorating Security and Limited Resources Have Impeded Progress; Improvements in U.S. Strategy Needed. GAO-04-403. Washington, D.C.: June 2, 2004.","U.S. government agencies, including the Department of Defense (DOD) and the United States Agency for International Development (USAID) have spent billions of dollars to develop Afghanistan. From fiscal years 2004 to 2008, DOD has reported obligations of about $1 billion for its Commander's Emergency Response Program (CERP), which enables commanders to respond to urgent humanitarian and reconstruction needs. As troop levels increase, DOD officials expect the program to expand. Under the authority of the Comptroller General, GAO assessed DOD's (1) capacity to manage and oversee the CERP in Afghanistan and (2) coordination of projects with USAID. Accordingly, GAO interviewed DOD and USAID officials, and examined program documents to identify workload, staffing, training, and coordination requirements. In Afghanistan, GAO interviewed key military personnel on the sufficiency of training, and their ability to execute assigned duties. Although DOD has used CERP to fund projects that it believes significantly benefit the Afghan people, it faces significant challenges in providing adequate management and oversight because of an insufficient number of trained personnel. GAO has frequently reported that inadequate numbers of management and oversight personnel hinders DOD's use of contractors in contingency operations. GAO's work also shows that high-performing organizations use data to make informed decisions about current and future workforce needs. DOD has not conducted an overall workforce assessment to identify how many personnel are needed to effectively execute CERP. Rather, individual commanders determine how many personnel will manage and execute CERP. Personnel at all levels, including headquarters and unit personnel that GAO interviewed after they returned from Afghanistan or who were in Afghanistan in November 2008, expressed a need for more personnel to perform CERP program management and oversight functions. Due to a lack of personnel, key duties such as performing headquarters staff assistance visits to help units improve contracting procedures and visiting sites to monitor project status and contractor performance were either not performed or inconsistently performed. Per DOD policy, DOD personnel should receive timely and effective training to enable performance to standard during operations. However, key CERP personnel at headquarters, units, and provincial reconstruction teams received little or no training prior to deployment which commanders believed made it more difficult to properly execute and oversee the program. Also, most personnel responsible for awarding and overseeing CERP contracts valued at $500,000 or less received little or no training prior to deployment and, once deployed, received a 1-hour briefing, which did not provide detailed information on the individual's duties. As a result, frequent mistakes occurred, such as the omission of key clauses from contracts, which slowed the project approval process. As GAO has reported in the past, poorly written contracts and statements of work can increase DOD's cost risk and could result in payment for projects that do not meet project goals or objectives. While mechanisms exist to facilitate coordination, DOD and USAID lack information that would provide greater visibility on all U.S. government development projects. DOD and USAID generally coordinate projects at the headquarters and unit level as well as through military-led provincial reconstruction teams which include USAID representatives. In addition, in November 2008, USAID, DOD and the Department of State began participating in an interagency group composed of senior U.S. government civilians and DOD personnel in Afghanistan to enhance planning and coordination of development plans and related projects. However, complete project information is lacking, because DOD and USAID use different databases. USAID has been tasked to develop a common database and is coordinating with DOD to do so, but development is in the early stages and goals and milestones have not been established. Without clear goals and milestones, it is unclear how progress will be measured or when it will be completed",govreport
"Solar energy can be used to heat, cool, and power homes and businesses with a variety of technologies that convert sunlight into usable energy. Examples of solar energy technologies include photovoltaics, concentrated solar power, and solar hot water. Solar cells, also known as photovoltaic cells, convert sunlight directly into electricity. Photovoltaic technologies are used in a variety of applications. They can be found on residential and commercial rooftops to power homes and businesses; utility companies use them for large power stations, and they power space satellites, calculators, and watches. Concentrated solar power uses mirrors or lenses to concentrate sunlight and produce intense heat, which is used to generate electricity via a thermal energy conversion process; for example, by using concentrated sunlight to heat a fluid, boil water with the heated fluid, and channel the resulting steam through a turbine to produce electricity. Most concentrated solar power technologies are designed for utility-scale operations and are connected to the electricity-transmission system. Solar hot water technologies use a collector to absorb and transfer heat from the sun to water, which is stored in a tank until needed. Solar hot water systems can be found in residential and industrial buildings. Innovation in solar energy technology takes place across a spectrum of activities, which we refer to as technology advancement activities, and which include basic research, applied research, demonstration, and commercialization. For purposes of this report, we defined basic research to include efforts to explore and define scientific or engineering concepts or is conducted to investigate the nature of a subject without targeting any specific technology; applied research includes efforts to develop new scientific or engineering knowledge to create new and improved technologies; demonstration activities include efforts to operate new or improved technologies to collect information on their performance and assess readiness for widespread use; and commercialization efforts transition technologies to commercial applications by bridging the gap between research and demonstration activities and venture capital funding and marketing activities. Congressional Budget Office, Federal Financial Support for the Development and Production of Fuels and Energy Technologies (Washington, D.C.: March 2012). as a whole but not necessarily for the firms that invested in the activities. For example, basic research can create general scientific knowledge that is not itself subject to commercialization but that can lead to multiple applications that private companies can produce and sell. As activities get closer to the commercialization stage, the private sector may increase its support because its return on investment increases. We identified 65 solar-related initiatives with a variety of key characteristics at six federal agencies. Over half of the 65 initiatives supported solar projects exclusively; the remaining initiatives supported solar energy technologies in addition to other renewable energy technologies. The initiatives demonstrated a variety of key characteristics, including focusing on different types of solar technologies and supporting a range of technology advancement activities from basic research to commercialization, with an emphasis on applied research and demonstration activities. Additionally, the initiatives supported several types of funding recipients including universities, industry, nonprofit organizations, and federal labs and researchers, primarily through grants and contracts. Agency officials reported that they obligated around $2.6 billion for the solar projects in these initiatives in fiscal years 2010 and 2011. In fiscal years 2010 and 2011, six federal agencies—DOD, DOE, EPA, NASA, NSF, and USDA—undertook 65 initiatives that supported solar energy technology, at least in part. (See app. II for a full list of the initiatives). Of these initiatives, 35 of 65 (54 percent) supported solar projects exclusively and 30 (46 percent) also supported projects that were not solar. For example, in fiscal years 2010 and 2011, DOE’s Solar Energy Technologies Program—Photovoltaic Research and Development initiative, had 263 projects, all of which focused on solar energy. In contrast, in fiscal years 2010 and 2011, DOE’s Hydrogen and Fuel Research and Development initiative—which supports wind and other renewable sources that could be used to produce hydrogen—had 209 projects, 26 of which were solar projects. Although initiatives support solar energy technologies, in a given year, they might not support any solar projects. For example, NSF officials noted that the agency funds research across all fields and disciplines of science and engineering and that individual initiatives invite proposals for projects across a broad field of research, which includes solar-related research in addition to other renewable energy research. However, in any given year, NSF may not fund proposals that address solar energy because either no solar proposals were submitted or the submitted solar-related proposals were not deemed meritorious for funding based upon competitive, merit-based reviews. Although more than half of the agencies’ initiatives supported solar energy projects exclusively, the majority of projects supported by all 65 initiatives were not focused on solar. As shown in table 1, of the 4,996 total projects active in fiscal years 2010 and 2011 under the 65 initiatives, 1,506 (30 percent) were solar projects, and 3,490 (70 percent) were not solar projects. Agencies’ solar-related initiatives supported different types of solar energy technologies. According to agency officials responding to our questionnaire, 47 of the 65 initiatives supported photovoltaic technologies, and 18 supported concentrated solar power; some initiatives supported both of these technologies or other solar technologies. For example, NSF’s CHE-DMR-DMS Solar Energy Initiative (SOLAR) supports both photovoltaic and concentrated solar power technologies, including a project that is developing hybrid organic/inorganic materials to create ultra-low-cost photovoltaic devices and to advance solar concentrating technologies. These initiatives supported solar energy technologies through multiple technology advancement activities, ranging from basic research to commercialization. As shown in figure 1, five of the six agencies supported at least three of the four technology advancement activities we examined, and four of the six supported all four. Our analysis showed that of the 65 initiatives, 20 initiatives (31 percent) supported a single type of technology advancement activity; 45 of the initiatives (69 percent) supported more than one type of technology advancement activity; and 4 of those 45 initiatives (6 percent) supported all four. For example, NASA’s Solar Probe Plus Technology Development initiative—which tests the performance of solar cells in elevated temperature and radiation environments such as near the sun— supported applied research exclusively. In contrast, NASA’s Small Business Innovations Research/Small Business Technology Transfer Research initiative—which seeks high-technology companies to participate in government-sponsored research and development efforts critical to NASA’s mission—supported all four technology advancement activities. The technology advancement activities supported by the initiatives were applied research (47 initiatives), demonstration (41 initiatives), basic research (27 initiatives), and commercialization (17 initiatives). The initiatives supported these technology advancement activities by providing funding to four types of recipients: universities, industry, nonprofit organizations, and federal laboratories and researchers. The initiatives most often supported universities and industry. In many cases, initiatives provided funding to more than one type of recipient. Specifically, our analysis showed that of the 65 initiatives, 23 of the initiatives (35 percent) supported one type of recipient; 21 of the initiatives (32 percent) provided funding to at least two types of recipients; 17 initiatives (26 percent) supported three types; and 4 initiatives (6 percent) supported all four. In two cases, agency officials reported that their initiatives supported “other” types of recipients, which included college students and military installations. Initiatives often supported a variety of recipient types, but individual agencies more often supported one or two types. As shown in figure 2, DOE’s initiatives most often supported federal laboratories and researchers; DOD’s most often supported industry recipients; NASA’s supported federal laboratories and industry equally; NSF’s supported universities exclusively. For example, NASA’s Small Business Innovations Research/Small Business Technology Transfer Research initiative provided contracts to industry to participate in government- sponsored research and development for advanced photovoltaic technologies to improve efficiency and reliability of solar power for space exploration missions. NSF’s Emerging Frontiers in Research and Innovation initiative provided grants to universities for, among other purposes, promoting breakthroughs in computational tools and intelligent systems for large-scale energy storage suitable for renewable energy sources such as solar energy. Federal solar-related initiatives provided funding to these recipients through multiple mechanisms, often using more than one mechanism per initiative. As shown in figure 3, the initiatives primarily used grants and contracts. Of the 65 initiatives, 27 awarded grants, and 36 awarded contracts; many awarded both. Agency officials also reported funding solar projects via cooperative agreements, loans, and other mechanisms. Agency officials reported that the 65 initiatives as a group used multiple funding mechanisms, but we found that individual agencies tended to use primarily one or two funding mechanisms. For example, USDA exclusively used grants, while DOD tended to use contracts. DOE reported using grants and cooperative agreements almost equally. For example, DOE’s Solar ADEPT initiative, an acronym for “Solar Agile Delivery of Electrical Power Technology,” awards cooperative agreements to universities, industry, nonprofit organizations, and federal laboratories and researchers. Through a cooperative agreement, the initiative supported a project at the University of Colorado at Boulder that is developing advanced power conversion components that can be integrated into individual solar panels to improve energy yields. According to the project description, the power conversion devices will be designed for use on any type of solar panel. The University of Colorado at Boulder is partnering with industry and DOE’s National Renewable Energy Laboratory on this project. In responding to our questionnaire, officials from the six agencies reported that they obligated around $2.6 billion for the 1,506 solar projects in fiscal years 2010 and 2011. These obligations data represented a mix of actual obligations and estimates. Actual obligations were provided for both years for 51 of 65 initiatives. Officials provided estimated obligations for 12 initiatives for at least 1 of the 2 years, and officials from another 2 initiatives were unable to provide any obligations data. Those officials who provided estimates or were unable to provide obligations data noted that the accuracy or the availability of the obligations data was limited because isolating the solar activities from the overall initiative obligations can be difficult. (See app. II for a full list of the initiatives and their related obligations.) As shown in table 2, over 90 percent of the funds (about $2.3 billion of $2.6 billion) were obligated by DOE. The majority of DOE’s obligations (approximately $1.7 billion) were obligated as credit subsidy costs—the government’s estimated net long-term cost, in present value terms, of the loans—as part of Title XVII Section 1705 Loan Guarantee Program from funds appropriated by Congress under the American Recovery and Reinvestment Act (Recovery Act). Even excluding the Loan Guarantee Program funds, DOE obligated $661 million, which is more than was obligated by the other five agencies combined. The 65 solar-related initiatives are fragmented across six agencies and many overlap to some degree, but agency officials reported a number of coordination activities to avoid duplication. We found that many initiatives overlapped in the key characteristics of technology advancement activities, types of technologies, types of funding recipients, or broad goals; however, these areas of overlap do not necessarily lead to duplication of efforts because the initiatives sometimes differ in meaningful ways or leverage the efforts of other initiatives, and we did not find clear evidence of duplication among initiatives. Officials from most initiatives reported that they engage in a variety of coordination activities with other solar-related initiatives, at times specifically to avoid duplication. The 65 solar-related initiatives are fragmented in that they are implemented by various offices across six agencies and address the same broad area of national need. In March 2011, we reported that fragmentation has the potential to result in duplication of resources. However, such fragmentation is, by itself, not an indication that unnecessary duplication of efforts or activities exists. For example, in our March 2011 report, we stated that there can be advantages to having multiple federal agencies involved in a broad area of national need— agencies can tailor initiatives to suit their specific missions and needs, among other things. In particular, DOD is able to focus its efforts on solar energy technologies that serve its energy security mission, among other things, and NASA is able to focus its efforts on solar energy technologies that aid in aeronautics and space exploration, among other things. As table 3 illustrates, we found that many initiatives overlap because they support similar technology advancement activities and types of funding recipients. For example, initiatives that support basic and applied research most often fund universities, and those initiatives that support demonstration and commercialization activities most often fund industry. Almost all of the initiatives overlapped to some degree with at least one other initiative in that they support broadly similar technology advancement activities, types of technologies, and eligible funding recipients. Twenty-seven initiatives support applied research for photovoltaic technologies by universities. For example, NSF’s Engineering Research Center for Quantum Energy and Sustainable Solar Technologies at Arizona State University pursues cost-competitive photovoltaic technologies with sustained market growth. The Air Force’s Space Propulsion and Power Generation Research initiative partners with various universities to develop improved methods for powering spacecraft, including solar cell technologies. Sixteen initiatives support demonstration activities focused on photovoltaic technologies by federal laboratories and researchers. For example, NASA’s High-Efficiency Space Power Systems initiative conducts activities at NASA’s Glenn Research Center to develop technologies to provide low cost and abundant power for deep space missions, such as highly reliable solar arrays, to enable a crewed mission to explore a near Earth asteroid. DOE’s Solar Energy Technologies Program (SETP), which includes the Photovoltaic Research and Development initiative, works with national laboratories such as the National Renewable Energy Laboratory, Sandia National Laboratories, Brookhaven National Laboratory, and Oak Ridge Laboratory to advance a variety of photovoltaic technologies to enable solar energy to be as cost competitive as traditional energy sources by 2015. Seven initiatives supported applied research on concentrated solar power technologies by industry. For example, DOE’s SETP Concentrated Solar Power subprogram, which focuses on reducing the cost of and increasing the use of solar power in the United States, funded a company to develop the hard coat on reflective mirrors that is now being used in concentrated solar power applications. In addition, DOD’s Fast Access Spacecraft Testbed Program, which concluded in March 2011, funded industry to demonstrate a suite of critical technologies including high-efficiency solar cells, sunlight concentrating arrays, large deployable structures, and ultra- lightweight solar arrays. Additionally, 40 of the 65 initiatives overlap with at least one other initiative in that they supported similar broad goals, types of technologies, and technology advancement activities. Providing lightweight, portable energy sources. Officials from several initiatives within DOD reported that their initiatives supported demonstration activities with the broad goal of providing lightweight, portable energy sources for military applications. For example, the goal of the Department of the Army’s Basic Solar Power Generation Research initiative is to determine the feasibility and applicability of lightweight flexible, foldable solar panels for remote site power generation in tactical battlefield applications. Similarly, the goal of the Office of the Secretary of Defense’s Engineered Bio-Molecular Nano- Devices and Systems initiative is to provide a low-cost, lightweight, portable photovoltaic device to reduce the footprint and logistical burden on the warfighter. Artificial photosynthesis. Several initiatives at DOE and NSF reported having the broad goal of supporting artificial photosynthesis, which converts sunlight, carbon dioxide, and water into a fuel, such as hydrogen. For example, one of DOE’s Energy Innovation Hubs, the Fuels from Sunlight Hub, supports basic research to develop an artificial photosynthesis system with the specific goals of (1) understanding and designing catalytic complexes or solids that generate chemical fuel from carbon dioxide and/or water; (2) integrating all essential elements, from light capture to fuel formation components, into an effective system; and (3) providing a pragmatic evaluation of the system under development. NSF’s Catalysis and Biocatalysis initiative has a specific goal of developing new materials that will be catalysts for converting sunlight into usable energy for direct use, or for conversion into electricity, or into fuel for use in fuel cell applications. Integrating solar energy into the grid. Officials from several initiatives reported focusing on demonstration activities for technologies with the broad goal of integrating solar or renewable energies into the grid or onto military bases. For example, DOE’s Smart Grid Research and Development initiative has a goal of developing smart grid technologies, particularly those that help match supply and demand in real time, to enable the integration of renewable energies, including solar energy, into the grid by helping stabilize variability and facilitate the safe and cost-effective operation by utilities and consumers. The goal of this initiative is to achieve a 20 percent improvement in the ratio of the average power supplied to the maximum demand for power during a specified period by 2020. DOD’s Installation Energy Research initiative has a goal of developing better ways to integrate solar energy into a grid system, thereby optimizing the benefit of renewable energy sources. Some initiatives may overlap on key characteristics such as technology advancement activities, types of technologies, types of recipients, or broad goals, but they also differ in meaningful ways that could result in specific and complementary research efforts, which may not be apparent when analyzing the characteristics. For example, an Army official told us that both the Army and Marine Corps were interested in developing a flexible solar substrate, which is a photovoltaic panel laminated onto fabric that can be rolled up and carried in a backpack. The Army developed technology that included a battery through its initiative, while the Marine Corps, through a separate initiative, altered the Army’s technology to create a flexible solar substrate without a battery. Other initiatives may also overlap on key characteristics, but the efforts undertaken by their respective projects may complement each other rather than result in duplication. For example, DOE officials told us that one solar company may receive funding from multiple federal initiatives for different components of a larger project, thus simultaneously supporting a common goal without providing duplicative support. While we did not find clear instances of duplicative initiatives, it is possible that there are duplicative activities among the initiatives that could be consolidated or resolved through enhanced coordination across agencies and at the initiative level. Also, it is possible that there are instances in which recipients receive funding from more than one federal source or that initiatives may fund some activities that would have otherwise sought and received private funding. Because it was beyond the scope of this work to look at the vast number of activities and individual awards that are encompassed in the initiatives we evaluated, we were unable to rule out the existence of any such duplication of activities or funding. Officials from 57 of the 65 initiatives (88 percent) reported coordinating with other solar-related initiatives. Coordination is important because, as we have previously reported, a lack of coordination can waste scarce funds and limit the overall effectiveness of the federal effort. We have also previously reported that coordination across programs may help address fragmentation, overlap, and duplication. Officials from nearly all initiatives that we identified as overlapping in their broad goals, types of technologies, and technology advancement activities, reported coordinating with other solar-related initiatives. In October 2005, we identified key practices that can help enhance and sustain federal agency coordination, such as (1) establishing joint strategies, which help align activities, core processes, and resources to accomplish a common outcome; (2) developing mechanisms to evaluate and report on the progress of achieving results, which allow agencies to identify areas for improvement; (3) leveraging resources, which helps obtain additional benefits that would not be available if agencies or offices were working separately; and (4) defining a common outcome, which helps overcome differences in missions, cultures, and established ways of doing business. Agency officials at solar-related initiatives reported coordination activities that are consistent with these key practices, as described below. Some agency officials reported undertaking formal activities within their own agency to coordinate the efforts of multiple initiatives. For example: Establishing a joint strategy. NSF initiatives reported participating in an Energy Working Group, which includes initiatives in the agency’s Directorates for Mathematical and Physical Sciences and for Engineering. Officials from initiatives we identified as overlapping reported participating in the Energy Working Group. NSF formed this group to initiate coordination of energy-related efforts between the two directorates, including solar efforts, and tasked it with establishing a uniform clean, sustainable energy strategy and implementation plan for the agency. Developing mechanisms to monitor, evaluate, and report results. DOD officials from initiatives in the Army, Marine Corps, and Navy that we identified as overlapping reported they participated in the agency’s Energy and Power Community of Interest. The goal of this group is to coordinate the R&D activities within DOD. The group is scheduled to meet every quarter, but an Army official told us the group has been meeting every 3 to 4 weeks recently to produce R&D road maps and to identify any gaps in energy and power R&D efforts that need to be addressed. Because of the information sharing that occurs during these meetings, the official said the risk of such duplication of efforts across initiatives within DOD is minimized. In responding to our questionnaire, agency officials also reported engaging in formal activities across agencies to coordinate the efforts of multiple initiatives. For example: Leveraging resources. The Interagency Advanced Power Group (IAPG), which includes the Central Intelligence Agency, DOD, DOE, NASA, and the National Institute of Standards and Technology, is a federal membership organization that was established in the 1950s to streamline energy efforts across the government and to avoid duplicating research efforts. A number of smaller working groups were formed as part of this effort, including the Renewable Energy Conversion Working Group, which includes the coordination of solar efforts. The working groups are to meet at least once each year, but according to a DOD official, working group members often meet more often than that in conjunction with outside conferences and workshops. The purpose of the meetings is to present each agency’s portfolio of research efforts and to inform and ultimately leverage resources across the participating agencies. According to IAPG documents, group activities allow agencies to identify and avoid duplication of efforts. Several of the initiatives that we identified as overlapping also reported participating in the IAPG. Leveraging resources and defining a common outcome. DOE’s SETP in the Office of Energy Efficiency and Renewable Energy (EERE) coordinates with DOE’s Office of Science and the Advanced Research Projects Agency-Energy (ARPA-E) through the SunShot Initiative, which according to SunShot officials, was established expressly to prevent duplication of efforts while maximizing agencywide impact on solar energy technologies. The goal of the SunShot Initiative is to reduce the total installed cost of solar energy systems by 75 percent. SunShot officials said program managers from all three offices participate on the SunShot management team, which holds “brain-storming” meetings to discuss ideas for upcoming funding announcements and subsequently vote on proposed funding announcements. Officials from other DOE offices and other federal agencies are invited to participate, with coordination occurring as funding opportunities arise in order to leverage resources. Officials said meetings may include as few as 25 or as many as 85 attendees, depending on the type of project and the expertise required of the attending officials. Additionally, DOE and NSF coordinate through the SunShot Initiative on the Foundational Program to Advance Cell Efficiency (F-PACE), which identifies and funds solar device physics and photovoltaic technology research and development that will improve photovoltaic cell performance and reduce module cost for grid-scale commercial applications. The initiatives that reported participating in SunShot activities also included many that we found to be overlapping. Developing joint strategies; developing mechanisms to monitor, evaluate, and report results; and defining a common outcome. The National Nanotechnology Initiative (NNI) an interagency program, which includes DOD, DOE, NASA, NSF, and USDA, among others, was established to coordinate the nanotechnology-related activities across federal agencies that fund nanoscale research or have a stake in the outcome of this research. The NNI is directed to (1) establish goals, priorities, and metrics for evaluation for federal nanotechnology research, development, and other activities; (2) invest in federal R&D programs in nanotechnology and related sciences to achieve these goals; and (3) provide for interagency coordination of federal nanotechnology research, development, and other activities. The NNI implementation plan states that the NNI will maximize the federal investment in nanotechnology and avoid unnecessary duplication of efforts. NNI includes a subgroup that focuses on nanotechnology for solar energy collection and conversion. Specifically, this subgroup is to (1) improve photovoltaic solar electricity generation with nanotechnology, (2) improve solar thermal energy generation and conversion with nanotechnology, and (3) improve solar-to-fuel conversions with nanotechnology. In addition to the coordination efforts above, officials reported through our questionnaire that their agencies coordinate through discussions with other agency officials or as part of the program and project management and review processes. Some officials said such discussions and reviews among officials occur explicitly to determine whether there is duplication of funding occurring. For example, SETP projects include technical merit reviews, which include peer reviewers from outside of the federal government, as well as a federal review panel composed of officials from several agencies. Officials from SETP also participate in the technical merit reviews of other DOE offices’ projects. ARPA-E initiatives also go through a review process that includes federal officials and independent experts. DOE officials told us that an ARPA-E High Energy Advanced Thermal Storage review meeting, an instance of potential duplicative funding was found with an SETP project. Funding of the project through SETP was subsequently removed because of the ARPA-E review process, and no duplicative funds were expended. In addition to coordinating to avoid duplication, officials from 59 of the 65 initiatives (91 percent) reported that they determine whether applicants have received other sources of federal funding for the project for which they are applying. Twenty-one of the 65 initiatives (32 percent) further reported that they have policies that either prohibit or permit recipients from receiving other sources of federal funding for projects. Some respondents to our questionnaire said it is part of their project management process to follow up with funding recipients on a regular basis to determine whether they have subsequently received other sources of funding. For example, DOE’s ARPA-E prohibits recipients from receiving duplicative funding from either public or private sources, and requires disclosure of other sources of funding both at the time of application, as well as on a quarterly basis throughout the performance of the award. Even if an agency requires that such funding information be disclosed on applications, applicants may choose not to disclose it. In fact, it was recently discovered that a university researcher did not identify other sources of funding on his federal applications as was required and accepted funding for the same research on solar conversion of carbon dioxide into hydrocarbons from both NSF and DOE. Ultimately, the professor was charged with and pleaded guilty to wire fraud, false statements, and money laundering in connection with the federal research grant. We provided DOD, DOE, EPA, NASA, NSF, and USDA with a draft of this report for review and comment. USDA generally agreed with the overall findings of the report. NASA and NSF provided technical or clarifying comments, which we incorporated as appropriate. DOD, DOE, and EPA indicated that they had no comments on the report. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Agriculture, Defense, and Energy; the Administrators of EPA and NASA; the Director of NSF; the appropriate congressional committees; and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. The objectives of our report were to identify (1) solar-related initiatives supported by federal agencies in fiscal years 2010 and 2011 and key characteristics of those initiatives and (2) the extent of fragmentation, overlap, and duplication, if any, among federal solar-related initiatives, as well as the extent of coordination among these initiatives. To inform our objectives, we reviewed a February 2012 GAO report that was conducted to identify federal agencies’ renewable energy initiatives, which included solar-related initiatives, and examine the federal roles the agencies’ initiatives support. The GAO report on renewable energy- related initiatives identified nearly 700 initiatives that were implemented in fiscal year 2010 across the federal government, of which 345 initiatives supported solar energy. For purposes of this report, we only included those solar-related initiatives that we determined were focused on research and development (R&D), and commercialization, which we defined as follows: Research and development. Efforts ranging from defining scientific concepts to those applying and demonstrating new and improved technologies. Commercialization. Efforts to bridge the gap between research and development activities and the marketplace by transitioning technologies to commercial applications. We did not include those initiatives that focused solely on deployment activities, which include efforts to facilitate or achieve widespread use of existing technologies either in the commercial market or for nonmarket uses such as defense, through their construction, operation, or use. Initiatives that focus on deployment activities include a variety of tax incentives. We also narrowed our list to only those initiatives that focused research on advancing or developing new and innovative solar technologies. Next, we shared our list with agency officials and provided our definitions of R&D and commercialization. We asked officials to determine whether the list was complete and accurate for fiscal year 2010 initiatives that met our criteria, whether those initiatives were still active in fiscal year 2011, and whether there were any new initiatives in fiscal year 2011. If officials wanted to remove an initiative from our list, we asked for additional information to support the removal. In total, we determined that there were 65 initiatives that met our criteria. To identify and describe the key characteristics of solar-related initiatives implemented by federal agencies, we developed a questionnaire to collect information from officials of those 65 federal solar energy-related initiatives. The questionnaire was prepopulated with information that was obtained from the agencies for GAO’s renewable energy report including program descriptions, type of solar technology supported, funding mechanisms, and type of funding recipients. Questions included the type of technology advancement activities, obligations for solar activities in fiscal years 2010 and 2011, initiative-wide and solar-specific goals, and coordination efforts with other solar-related initiatives. We conducted pretests with officials of three different initiatives at three different agencies to check that (1) the questions were clear and unambiguous, (2) terminology was used correctly, (3) the questionnaire did not place an undue burden on agency officials, (4) the information could feasibly be obtained, and (5) the questionnaire was comprehensive and unbiased. An independent GAO reviewer also reviewed a draft of the questionnaire prior to its administration. On the basis of feedback from these pretests and independent review, we revised the survey in order to improve its clarity. After completing the pretests, we administered the questionnaire. We sent questionnaires to the appropriate agency liaisons in an attached Microsoft Word form, who in turn sent the questionnaires to the appropriate officials. We received questionnaire responses for each initiative and, thus, had a response rate of 100 percent. After reviewing the responses, we conducted follow-up e-mail exchanges or telephone discussions with agency officials when responses were unclear or conflicting. When necessary, we used the clarifying information provided by agency officials to update answers to questions to improve the accuracy and completeness of the data. Because this effort was not a sample survey, it has no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in interpreting a particular question, sources of information available to respondents, or entering data into a database or analyzing them can introduce unwanted variability into the survey results. However, we took steps to minimize such nonsampling errors in developing the questionnaire—including using a social science survey specialist for design and pretesting the questionnaire. We also minimized the nonsampling errors when collecting and analyzing the data, including using a computer program for analysis, and using an independent analyst to review the computer program. Finally, we verified the accuracy of a small sample of keypunched records by comparing them with their corresponding questionnaires, and we corrected the errors we found. Less than 0.5 percent of the data items we checked had random keypunch errors that would not have been corrected during data processing. To conduct our analysis, a technologist compared all of the initiatives and identified overlapping initiatives as those sharing at least one common technology advancement activity, one common technology, and having similar goals. A second technologist then completed the same analysis, and the two then compared their findings and, where they differed, came to a joint decision as to which initiatives broadly overlapped on their technology advancement activities, technologies, and broad goals. If the two technologists could not come to an agreement, a third technologist determined whether there was overlap. To assess the reliability of obligations data, we asked officials of initiatives that comprised over 90 percent of the total obligations follow-up questions on the data systems used to generate that data. While we did not verify all responses, on the basis of our application of recognized survey design practices and follow-up procedures, we determined that the data used in this report were of sufficient quality for our purposes. We conducted this performance audit from September 2011 to August 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Tables 4, 5, 6, 7, 8, and 9 provide descriptions, by agency, of the 65 initiatives that support solar energy technologies and the obligations for those initiatives’ solar activities in fiscal years 2010 and 2011. In addition to the individual named above, key contributors to this report included Karla Springer (Assistant Director), Tanya Doriss, Cindy Gilbert, Jessica Lemke, Cynthia Norris, Jerome Sandau, Holly Sasso, Maria Stattel, and Barbara Timmerman.","The United States has abundant solar energy resources and solar, along with wind, offers the greatest energy and power potential among all currently available domestic renewable resources. In February 2012, GAO reported that 23 federal agencies had implemented nearly 700 renewable energy initiatives in fiscal year 2010-- including initiatives that supported solar energy technologies (GAO-12-260). The existence of such initiatives at multiple agencies raised questions about the potential for duplication, which can occur when multiple initiatives support the same technology advancement activities and technologies, direct funding to the same recipients, and have the same goals. GAO was asked to identify (1) solar- related initiatives supported by federal agencies in fiscal years 2010 and 2011 and key characteristics of those initiatives and (2) the extent of fragmentation, overlap, and duplication, if any, of federal solar- related initiatives, as well as the extent of any coordination among these initiatives. GAO reviewed its previous work and interviewed officials at each of the agencies identified as having federal solar initiatives active in fiscal years 2010 and 2011. GAO developed a questionnaire and administered it to officials involved in each initiative to collect information on: initiative goals, technology advancement activities, funding obligations, number of projects, and coordination activities. This report contains no recommendations. In response to the draft report, USDA generally agreed with the findings, while the other agencies had no comments. Sixty-five solar-related initiatives with a variety of key characteristics were supported by six federal agencies. Over half of these 65 initiatives supported solar projects exclusively; the remaining initiatives supported solar and other renewable energy technologies. The 65 initiatives exhibited a variety of key characteristics, including multiple technology advancement activities ranging from basic research to commercialization by providing funding to various types of recipients including universities, industry, and federal laboratories and researchers, primarily through grants and contracts. Agency officials reported that they obligated about $2.6 billion for the solar projects in these initiatives in fiscal years 2010 and 2011, an amount higher than in previous years, in part, because of additional funding from the 2009 American Recovery and Reinvestment Act. The 65 solar-related initiatives are fragmented across six agencies and overlap to some degree in their key characteristics, but most agency officials reported coordination efforts to avoid duplication. The initiatives are fragmented in that they are implemented by various offices across the six agencies and address the same broad areas of national need. However, the agencies tailor their initiatives to meet their specific missions, such as DOD's energy security mission and NASA's space exploration mission. Many of the initiatives overlapped with at least one other initiative in the technology advancement activity, technology type, funding recipient, or goal. However, GAO found no clear instances of duplicative initiatives. Furthermore, officials at 57 of the 65 initiatives (88 percent) indicated that they coordinated in some way with other solar-related initiatives, including both within their own agencies and with other agencies. Such coordination may reduce the risk of duplication. Moreover, 59 of the 65 initiatives (91 percent) require applicants to disclose other federal sources of funding on their applications to help ensure that they do not receive duplicative funding.",govreport
"DOD may be unable to prevent an attack using chemical or biological weapons. Therefore, DOD has determined that servicemembers must be protected to survive and conduct effective military operations. Consequently, DOD supplies servicemembers with a protective ensemble consisting of a suit, mask with breathing filter, rubber boots, butyl gloves, and hoods as required. Figure 1 displays the components that comprise a protective ensemble. During Operation Desert Shield/Desert Storm, DOD noted that most of this equipment (1) could cause unacceptable heat stress to the wearer, (2) could limit freedom of movement and impair job performance, (3) is bulky, and (4) is not fully interoperable across the services. Furthermore, most of the existing suits (1) are no longer manufactured, (2) can be used for up to 14 years from the date of manufacture, and (3) will expire by 2007. To address these issues, DOD developed new, lightweight individual protective equipment such as the Joint Service Lightweight Integrated Suit Technology (JSLIST) trousers and coat to replace the current protective suits. DOD began procuring the JSLIST suits in 1997. An improved multipurpose overboot is in procurement and new protective gloves are under development to improve manual dexterity and/or reduce heat stress on the wearer. Similarly, since the existing masks may cause some breathing difficulty, DOD is developing a new mask but does not expect to begin procurement until fiscal year 2006. During fiscal years 2002 through 2007, DOD plans to spend about $5.7 billion on planning for chemical and biological defense, acquisition of defense equipment, facilities construction, and research and development. In 1999, we recommended that DOD develop a performance plan guided by outcome-oriented management principles embodied in the Government Performance and Results Act of 1993 (Pub. L. 103-62). DOD created a plan; however, performance goals and measures were being developed at the time of our review. DOD’s assessment process for determining the risk to military operations is unreliable, and, as a result, the Department’s current determination that the risk is generally low is inaccurate. Although the Department uses the Chemical and Biological Defense Program Annual Report to Congress to indicate its readiness for operations in a chemically and biologically contaminated environment, the 2000 report contains erroneous inventory data and understates equipment requirements. More important, the methodology for assessing the risk is flawed because it is not based on the number of complete ensembles needed and it obscures military service readiness by combining service data and reporting the results jointly. DOD’s criteria for assessing the risk of wartime shortages is to determine the numbers of protective suits, masks, breathing filters, gloves, boots, and hoods it has on hand, compare them against the requirements for those individual items, and then assign risk. (See table 1) In the draft fiscal year 2001 annual report to Congress provided to us in June 2001, DOD reported that it was generally at low risk for suits.However, the risk assessment process was flawed in part because DOD used erroneous data on protective suits. For example DOD made computational errors in comparing the older suits and JSLIST suits against a combined total suit requirement, the Air Force overreported its suit requirement by 801,167 suits, DOD reported it had 1,229,935 JSLIST suits on hand as of September 30, 2000, but overcounted its inventory by 782,232 JSLIST suits, the Navy included about 117,000 suits that had passed their expiration dates and were therefore unusable, and the Army underreported its suit stocks by an estimated 231,050 suits. These errors occurred in large part as the result of problems in DOD’s systems for managing protective suit inventories. We believe that the services collectively had no more than 4,348,999 suits of all types on hand as of September 30, 2000. When we included all the suits for wartime use and adjusted the numbers to account for the errors and miscounts, the risk category changed to high for suits, as shown in table 2. In February 2001, the military services informed the Joint Nuclear, Biological, and Chemical Defense Board that equipment requirements were actually much higher than those reported to Congress and included in the fiscal year 2001 Logistics Support Plan. The board subsequently accepted the new requirements. Based on these new requirements, the risk remained high for suits; changed to high for filters, boots, and hoods; and remained low for gloves and masks, as shown by comparing the risk level columns in tables 2 and 3. DOD has inaccurately assessed the risk to military operations by determining the number of individual items of equipment it has on hand and by combining the services’ inventories of individual items. Service guidance specifies that a total of 1,573,866 active and reserve servicemembers need protection to meet current operations plan requirements. DOD provides each deploying servicemember with up to four ensembles either at deployment or held in war reserve and distributed to theater operating forces when needed. The ensembles consist of five components: (1) four protective suits, (2) between four and eight pairs of gloves and boots, (3) between four and eight hoods, (4) up to four breathing filters, and (5) one mask. Because DOD does not report each service’s readiness based on the equipment it has on hand, but rather provides a joint assessment, critical service shortages or opportunities for cross-service assistance tend to be obscured. In fact, each service reported shortages of one component of the ensemble. Specifically, the Army reported critical shortages of hoods; the Air Force reported shortages of gloves; the Navy, shortages of suits; the Marine Corps, shortages of boots. When we compared the number of ensembles required by each service’s guidance and applied the DOD risk criteria, the risk was high for all four services. As a result, DOD cannot provide all the required ensembles for 682,331 servicemembers scheduled for wartime deployment, as shown in table 4. The risk posed by suit shortages is likely to worsen through 2007 due to increasing rates of older suits’ expiration and DOD’s plan not to replace all of them. As of October 1, 2000, DOD reported a shortage of about 1.7 million protective suits; it believes about 3.3 million, or 75 percent, of the current suit inventory will expire by 2006. JSLIST suits cost about $203 each compared to about $80 each for most of the existing suits, and DOD plans to buy only about 2.8 million JSLIST suits as replacements. Therefore, the shortage will increase to about 2.2 million suits by 2006. DOD’s plan to buy fewer new suits is also influenced by expiration of the suits and budgetary considerations. By replacing suits at a rate slower than the expiration rate, DOD plans to spread future suit purchases over more years to avoid a disproportionately large amount of suits expiring in any one year. This tactic allows greater dispersion of future suit expirations and replacement costs but is likely to also increase the short-term risk of wartime shortages. DOD is attempting to mitigate some of the shortages. For example, the Army plans to procure more than 500,000 hoods through fiscal year 2002, and the Defense Logistics Agency was procuring more of the existing generation of boots at the time of our report. Some opportunities also exist for one service to assist another. For example, the Army and Marine Corps reported significantly more gloves on hand than required and could transfer some to the Air Force to offset Air Force shortfalls since all the services use the same gloves. However, other available equipment is not interoperable and cannot be easily shared. For example, the Navy and Marine Corps suits are hooded, so they do not have separate hoods and therefore cannot help alleviate the Army’s shortage. If all goes according to plan, such interoperability problems should ease after fiscal year 2006, as all four services begin using the JSLIST suit and new joint masks, gloves, and boots. Shortcomings in DOD’s inventory management of chemical and biological protective equipment adversely affect the Department’s ability to accurately assess the readiness of the services to meet requirements for the equipment and mitigate the risk of shortages. DOD’s current inventory information on chemical and biological equipment is unreliable for making an accurate risk assessment because DOD and the services cannot easily link inventory records; lack data on suit expiration dates; cannot easily identify, track, and locate defective suits; and have miscalculated the requirements and the number of suits available. These shortcomings are consistent with long-term problems in DOD’s inventory management that we have consistently identified since 1990 as a high-risk area due to a variety of problems, including ineffective and wasteful management systems and procedures. The Defense Logistics Agency and the military services store war reserve inventories of chemical and biological protective suits and other equipment at a variety of depots, warehouses, and storage facilities and as noted earlier, use at least nine different inventory systems to manage the inventories. However, because these systems are not linked, DOD-wide oversight of the inventories is restricted, and the systems are not used to directly support the inventory data in the annual report to Congress and the Logistics Support Plan. Instead, DOD makes an additional effort to collect data theoretically already in the systems. The data collection requires units and depots that store the chemical protective equipment to provide separate data on the equipment annually and relies heavily on government and contractor personnel to manually compile the data. Although DOD has at least nine major inventory management systems, it cannot accurately determine the expiration rate of most of the older suits used by the Air Force and Army. These account for about 3.3 million of the current suit inventory and can be used for up to 14 years from the date of manufacture after which testing has determined that the suits cannot be used in a contaminated environment. Therefore, knowing the date the suits were manufactured is critical to estimating the suits’ expiration rate and the rate at which the suits must be replaced with JSLIST suits. However, neither DOD nor we can accurately determine the expiration rate of the old suits because the Defense Logistics Agency, the buyer of the suits, was unable to locate most of the relevant procurement records. Moreover, many of the inventory systems cannot be used to locate the actual expired suits in specific depots because the systems do not record equipment expiration dates or the manufacturers’ contract or lot numbers. Two examples or illustrations follow: The Army does not record suit expiration information in its primary inventory management system. To compensate, the Army has assumed an annual 20-percent expiration rate of its inventory through fiscal year 2005 and expects that all suits will expire by 2005. However, the Army’s assumption may be inaccurate. Records from a depot in Kentucky indicate that almost 80,000 suits would be serviceable after 2005 and some as late as 2008. The Navy does not know when its suits will expire because, according to the Naval Sea Systems Command, the Navy does not require inventory managers to include the expiration date in inventory records. Nonetheless, in June 2001, the Navy estimated that of 178,000 suits that it had on hand, only about 61,000 were actually serviceable because the rest had passed their expiration date. Our review of 19 Military Sealift Command ships, which help to sustain deployed U.S. forces, showed that most had severe suit shortages, due mostly to expirations. We found additional problems in 48 ships in the Atlantic and Pacific fleets. These ships currently report that they are missing one or more components of their ensembles and consequently cannot provide a complete ensemble for a single crewmember. The Air Force and Marine Corps use different inventory management systems that include contract, lot, and expiration information. Consequently, these two services can estimate suit expiration rates to manage their inventories effectively. Nonetheless, neither system is compatible with the other DOD systems. The majority of DOD’s and the services’ inventory systems cannot be used to identify, track, and locate defective suits that may be in current inventories because contract and lot numbers needed for the purpose are not always included in the inventory records. In September 1999, officials from one manufacturer pleaded guilty to selling 778,924 defective suits to the government. Since these defective suits were distributed to DOD war reserve and various other inventories, it was imperative that the suits be found. In May 2000, DOD directed units and depots to locate the defective suits and issue them for training use only. At the conclusion of our review, DOD had not found about 250,000 of these suits and did not know whether they had been used, were still in supply, or were sent for disposal. Finding the suits was difficult even when the storage depot was known. For example, the Defense Logistics Agency inventory system does not link the contract and lot number with the box or pallet number to allow ease in locating specific items. Consequently, during our review, the Agency resorted to using 19 reservists for up to 34 days to physically inspect all pallets and boxes containing about 1.3 million protective suits at its depot in Albany, GA. The reservists found about 347,000 defective suits. Figure 2 displays some of the boxes of these suits. Despite the problem in finding defective suits, the Defense Logistics Agency’s supply system remained unchanged at the time of our review. Agency officials acknowledged that they would have to physically reinspect depot stocks if specific lots of other suits need to be removed from the inventory before the end of their normal 14-year shelf life. Several questionable inventory management practices and related actions have further contributed to the generation of the inaccurate inventory data, which in turn affects the accuracy of DOD’s risk assessment process. These include miscalculating suit requirements, failing to count parts of the suit inventory, and counting suits as part of the inventory long before they are actually delivered from manufacturers. Some specifics regarding these counts are as follows: The Air Force double-counted a portion of its suit requirement by reporting a requirement for both 801,167 of the older suits and the same number of replacement JSLIST suits. The Army asked units that store suits to report the numbers being stored, but it did not tell them to include desert pattern suits, which are generally reserved for use in desert climates. As a result, units did not always include desert pattern suits in their reported inventories, and the Army believes it consequently underreported its desert pattern suit inventory by 10 percent of the total, or 231,050 suits. In the fiscal year 2001 Logistics Support Plan and draft Annual Report to Congress, the services reported they had 1,229,935 JSLIST suits on hand on September 30, 2000, but that included 782,232 suits not yet delivered. DOD procedures for compiling inventory data for these reports allow reporting suits expected to be delivered during the year as on hand. In March 2001, the Marine Corps Systems Command, which manages JSLIST suit distribution, acknowledged that DOD did not have 1,229,935 JSLIST suits on hand on September 30, 2000 but might reach that quantity a year later on September 30, 2001. Moreover, in the same two reports, DOD projected that it would reach 1.5 million suits by September 30, 2001, again overestimating JSLIST production. DOD’s inventory management practices tend to affect the suit inventory count. This count in turn can significantly affect the results of the risk assessment process, which is a comparison of requirements against the inventory on hand. Because the Department of Defense’s risk assessment process is flawed and unreliable, DOD inaccurately assessed the risk to servicemembers’ lives and military operations from potential wartime shortages of protective equipment as low. The Department underestimated the risk by analyzing requirements based on individual equipment items and not ensembles. Furthermore, DOD combined this service data into a consolidated DOD inventory position, which obscured service-specific shortages. As we discovered, the risk is currently higher than reported by DOD. Inadequate inventory management has contributed to increased risk. Because the Department has no integrated inventory system for managing protective equipment, it has no effective way to (1) gather the data needed for the annual report to Congress and Logistics Support plan, (2) determine the expiration dates of protective equipment, and (3) ensure that its data is correct. To further compound the problem, the services have counted equipment as on hand before it has been delivered, adding to the overcounting of equipment that they had in the inventory. Inaccurate risk assessment and inadequate inventory management could adversely affect readiness and prevent informed acquisition decisions that could undermine risk mitigation. To improve the Department of Defense’s ability to accurately assess the level of risk and readiness for operations in a contaminated environment, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to issue and implement guidance requiring each service to evaluate its risk on the basis of current inventory numbers of complete ensembles against wartime requirements; implement a fully integrated inventory management system to manage chemical and biological defense equipment and use it to prepare (1) the required annual report to Congress and (2) the annual Logistics Support Plan on chemical and biological defense; establish data fields in the inventory management system to show the contract, lot number, and expiration date of shelf life items; and cease counting equipment as on hand before delivery from the contractor. DOD provided written comments on a draft of our report and generally concurred with our recommendations. DOD partially concurred with our recommendation to conduct risk assessments on the basis of ensembles required in wartime and not just components of the ensemble and stated that the department will issue implementing guidance. DOD concurred with comment with our recommendations to (1) establish an integrated inventory management system; (2) include item contract, lot number, and expiration date information in the new inventory system; and (3) cease counting equipment as on hand before it is delivered and explained its plan to implement the recommendations. In addition, DOD provided technical comments, which we incorporated into our report as appropriate. DOD’s comments are printed in their entirety in appendix II along with our evaluation of their comments. We discuss our scope and methodology in detail in appendix I. We conducted our review from August 2000 to April 2001 in accordance with generally accepted government auditing standards. We will send copies of this report to interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Director of the Office of Management and Budget. If you or your staff have any questions about this report, please contact me at (202) 512-6020. Additional contact and staff acknowledgments are listed in appendix III. We determined (1) whether DOD’s process for assessing the risk to military operations on the basis of wartime equipment requirements is reliable and (2) how DOD’s inventory management of chemical and biological protective gear has affected the risk level. We included in our scope chemical and biological protective suits, masks and breathing filters, gloves, boots, and hoods. To understand the process DOD uses to assess the risk, we determined how DOD performs risk assessments. We examined DOD’s fiscal years 1999, 2000, and 2001 Chemical and Biological Defense: Annual Report to Congress and Joint Service Nuclear, Biological, and Chemical Defense Logistics Support Plan: Readiness and Sustainment Status and service input to these reports. To understand equipment requirements, we interviewed an official from the Office of the Deputy Assistant to the Secretary of Defense, Chemical and Biological Defense; the Joint Nuclear, Biological, and Chemical Defense Board; the Joint Staff; and other organizations and obtained documents showing how many suits, masks, breathing filters, gloves, boots, and hoods are needed to support operations. We also obtained the Center for Army Analysis’ Joint Service Chemical Defense Equipment Consumption Rates IV, Volume II; briefing slides; guidance; directives; memorandums; cables; and other documents that specify requirements. We also used service guidance to determine the number of servicemembers scheduled for deployment who need protection. We did not evaluate the validity of the requirements. To calculate on-hand stocks, we obtained inventory records from war reserve or other depots in the United States, Japan, the Republic of Korea, the Netherlands, elsewhere in Europe, and aboard prepositioned ships in Guam to determine the size of the stockpile. As a result of the national security reviews under way at the time of our review, requirements for chemical defense equipment could change. If so, current risk assessments would need revision. To determine how DOD’s inventory management practices affected risk, we tried to verify the accuracy of inventory data reported by the services. We did this by (1) interviewing officials and obtaining documents showing how the inventory data were collected and verified, (2) obtaining Navy documents showing the number of suits still in the inventory that had not expired and comparing that number to the reported inventory, and (3) obtaining JSLIST suit production data. We also tried to determine how many of the older chemical protective suits DOD had bought and when, but the Defense Logistics Agency could not find most of its records documenting suit procurement. To determine the compatibility of the nine major supply systems, we interviewed the responsible DOD officials, compared system inventory procedures, checked records against physical inventories, and obtained relevant documents. To determine how long shelf life items can be used and to estimate equipment expiration rates, we interviewed officials from the Army’s Soldier Biological and Chemical Command in Maryland; Natick Soldier Center in Massachusetts; and Rock Island Arsenal in Illinois; the Naval Sea Systems Command in Virginia; the Air Force Headquarters Directorate of Supply in Washington, D.C.; and the Marine Corps’ Combat Development Command in Virginia and Materiel Command in Georgia. We also interviewed officials and obtained documents from the Defense Logistics Agency offices in Pennsylvania showing planned or actual procurement of JSLIST suits and other equipment. To determine how the services and depots identify which items will expire and need replacement, we inspected or inventoried chemical protective suits stored at the Bluegrass Army Depot in Richmond, KY; the Defense Logistics Agency’s war reserve depot in Albany, GA; the Air Force’s Mobility Bag Center in Avon Park and MacDill Air Force Base, FL; and aboard ships at the Norfolk Navy Base, Norfolk, VA. At these locations, we met with officials and obtained supply records and suit and other equipment expiration data. The following is our response to the Department of Defense letter dated September 18, 2001. 1. While DOD presents the data in the cited Annual Report to Congress and Logistics Support Plan annexes, the data is presented on an item-by- item basis and not an ensemble basis. Consequently, the information as presented does not give a fully reliable risk assessment. DOD acknowledges that it has scarce resources and must manage risk within those resource constraints. Consequently, DOD also indicated in its comments that it will rely on industrial surge capacity to make up any shortfall in required ensemble components. Nonetheless, the Department’s risk assessment is based on having 120 days of supply at the units or in war reserve. If the Department now plans to stock fewer than 120 days of supply and rely on industrial surge to make up the difference in a crisis, the risk level would be higher because the continuing shortages would be greater. 2. The Air Force has developed, and the Marine Corps is developing inventory systems, both of which include contract, lot number, and expiration date of equipment on hand. Adopting one of these systems DOD-wide could reduce or eliminate development costs associated with the Business System Modernization program, assure interoperability across the services, and meet the intent of our third recommendation. In addition to the contact named above, Brian J. Lepore, Raymond G. Bickert, Tracy M. Brown, and Sally L. Newman made key contributions to this report. Major Management Challenges and Program Risks: Department of Defense (GAO-01-244, Jan. 2001). Chemical and Biological Defense: Units Better Equipped but Training and Readiness Reporting Problems Remain (GAO-01-27, Nov. 2000). Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework (GAO/T-NSIAD-00-180, May 2000). Chemical and Biological Defense: Observations on Nonmedical Chemical and Biological R&D Programs (GAO/T-NSIAD-00-130, Mar. 2000). Chemical and Biological Defense: Chemical Stockpile Emergency Preparedness Program for Oregon and Washington (GAO/NSIAD-00-13, Oct. 1999). Chemical and Biological Defense: Observations on Actions Taken to Protect Military Forces (GAO/T-NSIAD-00-49, Oct. 1999). Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework (GAO/NSIAD-99-159, Aug. 1999). Chemical and Biological Defense: Coordination of Nonmedical Chemical and Biological R&D Programs (GAO/NSIAD-99-160, Aug. 1999). Chemical and Biological Defense: DOD’s Evaluation of Improved Garment Materials (GAO/NSIAD-98-214, Aug. 1998). Chemical and Biological Defense: Observations on DOD’s Plans to Protect U.S. Forces (GAO/T-NSIAD-98-83, Mar. 1998). Assuring Condition and Inventory Accountability of Chemical Protective Suits (D-2000-086, Feb. 25, 2000). M41 Protection Assessment Test System Capabilities (99-061, Dec. 24, 1998). Unit Chemical and Biological Defense Readiness Training (98-174, July 17, 1998). Inventory Accuracy at the Defense Depot, Columbus, Ohio (97-102, Feb. 27, 1997). Army Protective Mask Requirements (95-224, June 8, 1995).","The Department of Defense (DOD) believes it is increasingly likely that an adversary will use chemical or biological weapons against U.S. forces to degrade superior U.S. conventional warfare capabilities, placing servicemembers' lives and effective military operations at risk. To reduce the effects of such an attack on military personnel, DOD has determined the quantity of chemical and biological protective suits, masks, breathing filters, gloves, boots, and hoods that are needed based on projected wartime requirements. DOD's assessment process is unreliable for determining the risk to military operations. DOD's 2000 report is inaccurate because it includes erroneous inventory data and wartime requirements. Inadequate inventory management is an additional risk factor because readiness can be compromised by DOD's inventory management practices, which prevent an accurate accounting of the availability or adequacy of its protective equipment.",govreport
"Program evaluations are systematic studies that use research methods to address specific questions about program performance. Evaluation is closely related to performance measurement and reporting. Whereas performance measurement entails the ongoing monitoring and reporting of program progress toward preestablished goals, program evaluation typically assesses the achievement of a program’s objectives and other aspects of performance in the context in which the program operates. In particular, evaluations can be designed to better isolate the causal impact of programs from other external economic or environmental conditions in order to assess a program’s effectiveness. Thus, an evaluation study can provide a valuable supplement to ongoing performance reporting by measuring results that are too difficult or expensive to assess annually, explaining the reasons why performance goals were not met, or assessing whether one approach is more effective than another. Evaluation can be key in program planning, management, and oversight by providing feedback on both program design and execution to program managers, legislative and executive branch policy officials, and the public. In our 2013 survey of a stratified random sample of federal managers, we found that most federal managers reported lacking recent evaluations of their programs. Although only about a third had recent evaluations of their programs or projects, the majority of those who had evaluations reported that they contributed to understanding program performance, assessing program effectiveness or value, making changes to improve program management or performance, and sharing what works with others. Those who had evaluations cited most often a lack of resources as a barrier to implementing evaluation findings. Agency evaluators noted that it takes a number of studies rather than just one study to influence change in programs or policies. Experienced evaluators identified three strategies to facilitate evaluation influence: leadership support of evaluation, building a strong body of evidence, and engaging stakeholders throughout the evaluation process. Our previous literature review found that the key elements of national or organizational capacity to conduct and use evaluation in decision making include an enabling environment that has leadership support for using evidence in decision making; organizational resources to support the supply and use of credible evaluations; and the robust, transparent availability of evaluation results. Our 2014 survey of PIOs on the presence of these elements in their agencies found uneven levels of evaluation expertise, organizational support within and outside the organization, and use across the government. About half the 24 agencies reported committing resources to obtain credible evaluation by establishing a central office responsible for evaluation, yet those agencies with centralized leadership reported greater evaluation coverage and use of the results in decision making. Only six of these agencies reported having stable funding or agency-wide evaluation plans. GPRAMA established an expectation that evidence would have a greater role in agency decision making. The act changed agency performance management roles, planning and review processes, and reporting to ensure that agencies use performance information in decision making and are held accountable for achieving results and improving government performance. The act required the 24 CFO Act agencies and OMB to establish agency priority goals and government-wide cross-agency priority goals, review progress on the goals quarterly, and report publicly on their progress and strategies to improve performance on a government performance website. In addition, GPRAMA, along with OMB guidance, established and defined performance management responsibilities for agency officials in key management roles. In particular, the PIO was given a central role in promoting the agencies’ use of evaluation and other evidence to improve program performance. The act charged the Performance Improvement Council, which includes PIOs from all 24 CFO Act agencies, to facilitate agencies’ exchange of successful practices and the development of tips and tools to strengthen agency performance management. OMB’s guidance implementing GPRAMA also directed agencies to conduct strategic reviews of annual progress toward each strategic objective in their strategic plans to inform agency strategic decision making, budget formulation, and preparation of annual performance plans and reports. Guided by the PIO, agencies are to consider a wide range of evidence (including research, evaluation, and performance indicators) in these reviews and identify areas where additional evaluations or analyses of performance data are needed. Further, GPRAMA is part of a government-wide focus on the crucial role of evidence for improving the effectiveness of federal programs. Since 2009, OMB has issued several memorandums urging efforts to strengthen the use of rigorous impact evaluation, designate a high-level official responsible for evaluation to develop and manage a research agenda, and demonstrate the use of evidence and evaluation in budget submissions, strategic plans, and performance plans. A 2013 OMB memorandum urged agencies to develop an evidence and innovation agenda to exploit existing administrative data to conduct low-cost experiments and implement outcome-focused grant designs and research clearinghouses to catalyze innovation and learning. OMB staff have also established several interagency workgroups to promote sharing evaluation expertise and have organized a series of workshops and interagency collaborations. For example, in 2016 we recommended that OMB establish a formal means for agencies to collaborate on tiered evidence grants, a new grant design in which funding is based on the level of evidence available on the effectiveness of the grantee’s service delivery model. OMB’s Evidence Team convened an interagency working group on tiered evidence grants that meets quarterly and established a website for the group to share resources. This team also co-chairs the Interagency Council on Evaluation Policy, a group of 10 agency evaluation offices that have collaborated on developing common policies and conducting workshops. The Trump Administration’s 2018 Budget proposal endorses a continued commitment to agencies building a portfolio of evidence on what works and how to improve results, investing in evidence infrastructure and capacity, and acting on a strong body of evidence to obtain results. In 2016, the Congress enacted and the President signed two pieces of legislation encouraging federal agency evaluation. The Evidence-Based Policymaking Commission Act of 2016 created the Commission and charged it with conducting a comprehensive study of the data inventory, data infrastructure, database security, and statistical protocols related to federal policy making and the agencies responsible for maintaining that data. This study was to include a determination of the optimal arrangement for which administrative data on federal programs and tax expenditures, survey data, and related statistical data series may be integrated and made available to facilitate program evaluation, continuous improvement, policy-relevant research, and cost-benefit analyses, while considering the privacy of personally identifiable information. In its September 2017 report, the Commission made 22 recommendations to improve secure, private, and confidential access by researchers to government data; modernize data privacy protections; implement a National Secure Data Service to manage secure record linkage and data access for evidence building; and strengthen federal agency evidence- building capacity. In particular, the Commission recommended that each federal department should identify a Chief Evaluation Officer and develop a multi-year learning agenda of high priority research and policy questions to address. The Foreign Aid Transparency and Accountability Act of 2016 (FATAA) requires the President to set guidelines for monitoring and evaluating federal foreign assistance by January 2018. The guidelines are to provide direction to the several federal agencies that administer foreign assistance on how to, for example, establish annual monitoring and evaluation plans, quality assurance procedures, and public dissemination of findings and lessons learned. In 2017, we surveyed federal managers asking the same questions as those we asked in 2013 about managers’ access to evaluation and their use in decision making. Our 2017 survey found no change government- wide in managers’ access to evaluations since 2013. We estimate that 40 percent of federal managers reported having access to recent evaluations of their programs, while another 39 percent reported that they did not know if an evaluation had been conducted. About half the managers who had evaluations once again reported that they contributed to a great or very great extent to improving program management or performance and assessing program effectiveness (54 and 48 percent, respectively), while fewer reported that they contributed to allocating program resources or informing the public (35 and 22 percent, respectively). In 2017, an estimated 40 percent of federal managers reported that an evaluation had been completed within the past 5 years for any of the programs, operations, or projects they were involved in—statistically unchanged from the 2013 survey (37 percent). As in 2013, Senior Executive Service (SES) managers reported having evaluations statistically significantly more often than non-SES managers did (56 percent versus 39 percent in 2017; 54 percent versus 36 percent in 2013).This should be expected, since SES managers are likely to oversee a range of programs broader than that of non-SES managers, any one of whose programs might have been evaluated. An estimated 18 percent of managers reported not having any evaluations, while twice as many managers (an estimated 39 percent) reported that they did not know if an evaluation had been conducted. We believe this may reflect midlevel managers’ lack of familiarity with activities outside their programs. As in 2013, non-SES managers reported twice as often as SES managers that they did not know whether an evaluation had been performed (40 percent versus 19 percent in 2017; 41 percent versus 24 percent in 2013). And in other questions in our survey about GPRAMA provisions, non-SES managers reported significantly more often than SES managers that they were not familiar with cross- agency priority goals (42 versus 22 percent), one or more of their agency’s priority goals (21 versus 9 percent), or their agency’s quarterly performance reviews (61 versus 44 percent). Because these goals and their related reviews apply only to a subset of an agency’s goals, midlevel managers are less likely to be directly involved in them. Of the estimated 40 percent of managers who reported having evaluations, most (86 percent) reported that the agency itself primarily conducted or contracted for these evaluations. Many of these managers also reported that studies were completed by their Inspector General (49 percent), GAO (38 percent), or others such as the National Academy of Sciences and independent boards (17 percent). Because of variation in the responsibilities of managers, we cannot deduce from these results how many programs have been evaluated. However, even if additional evaluations had been conducted by others within or outside the agency, if managers were unaware of them, their results would not have been available for use. Because evaluations are designed to meet decision makers’ information needs, our survey asked federal managers who had recent evaluations to what extent those evaluations contributed to 11 different activities. For the 40 percent of managers who reported having evaluations, the results are very similar to the results of our 2013 survey: federal managers with evaluations credited them with contributing to a great or very great extent to assessing program effectiveness or implementing changes to improve program management or performance (48 and 54 percent, respectively), with no statistically significant changes since 2013. Managers reported less frequently that evaluations contributed greatly to allocating program resources or informing the public (figure 1). Consistent with the 2013 survey results, many managers who reported having evaluations reported that they contributed to a great or very great extent to direct efforts to improve programs such as: implementing changes to improve program management or performance (an estimated 54 percent in 2017), developing or revising performance goals (45 percent), sharing what works or other lessons learned with others (44 percent), and designing or supporting program reforms (39 percent). Evaluations vary in their scope and complexity and may address questions about program implementation as well as program effectiveness, so any resulting recommendations may point to simple corrections or broad re-thinking of a policy’s relevance or effectiveness. In a previous study, evaluators told us that it usually takes a number of studies, rather than just one, to influence change in programs or policies. As one evaluator put it, “the process by which evaluation influences change is iterative, messy, and complex. Policy changes do not occur as a direct result of an answer to an evaluation question; rather, a body of evaluation results, research, and other evidence influences policy and practice over time.” Moreover, designing and approving major program reforms typically involves a number of stakeholders outside the agency. Sharing what works with others is often the most direct action federal managers can take in decentralized programs in which they do not have direct control of program activities conducted by others at the state and local levels. To address this, federal agencies use a variety of methods to disseminate evaluation findings to local decision makers, such as establishing searchable evaluation clearinghouses online or disseminating findings through electronic listservs, through webinars, or at research and evaluation conferences. Fewer managers reported that evaluations contributed to streamlining programs to reduce duplicative activities to a great or very great extent (an estimated 27 percent). We have issued several reports outlining numerous areas of potential duplication, overlap, and fragmentation in federal programs. In these reviews, we identified the need for improved coordination and collaboration as well as better evaluation of these programs’ performance and results to help inform decisions about how to better manage these programs. Evaluation studies, if carefully designed, can address specific questions about the extent of fragmentation, overlap, and duplication as well as the individual and joint effectiveness of related programs. A broad review of evidence on related programs and the relationships among them can clarify the extent of and reveal opportunities for reducing or better managing fragmentation, overlap, and duplication. Managers who reported having access to evaluations reported that evaluations contributed to a great or very great extent to improving their understanding of program performance, such as by assessing program effectiveness, value, or worth (an estimated 48 increasing understanding about the program or topic (48 percent); and supplementing or explaining performance results (44 percent). The primary purpose of program and policy evaluations is to provide systematic evidence on how well a program is working, whether it is operating as intended or achieving its intended results. They can be especially useful for helping improve program performance when they help identify for whom or under what conditions a program or approach is effective or ineffective or the reasons for change (or lack of change) in program performance. We have also reported that evaluations can help measure more complex or costly forms of performance than can be obtained routinely, such as by following up on high school students’ success in college. Similar to the 2013 survey results, fewer managers found that evaluations contributed to a great or very great extent to allocating resources within the program (35 percent), or supporting program budget requests (33 percent), than to improving program management or understanding (54 and 48 percent, respectively). This result is not surprising because many factors and priorities influence the budget process and need to be considered when deciding how to allocate limited resources among competing needs. Evaluators told us that high-stakes decisions such as funding are taken rarely on the basis of a single study but, rather, on the basis of a body of evidence. Our 2014 survey of the PIOs at the 24 CFO Act agencies provided a mixed picture of evaluation use in allocating resources. Almost half (10) reported that their agencies had increased their use of evaluation in supporting budget requests and allocating resources within programs since 2010; while 5 PIOs either provided no opinion or reported little or no agency use of evaluation evidence to support budget or policy changes as part of their agency’s annual budget process. Similar to the 2013 survey results, less than half the federal managers who reported having evaluations also reported that evaluations contributed to informing the public about how programs are performing to a great or very great extent (an estimated 22 percent). In fact, similar to 2013, 20 percent of these managers reported no basis to judge whether these evaluations informed the public. As we noted in our 2013 report, federal managers’ use of evaluation appears to be oriented more internally than externally, and they may think that they are not in a position to know whether the public reads their reports. This does not mean that agencies do not make their evaluation reports public. In our 2014 survey of the 24 PIOs, half reported that their agencies posted evaluation reports in a searchable database on their websites, and a third reported disseminating evaluation reports by electronic mailing lists. Simply having program evaluations does not ensure that managers will use their results in management or policy making. As we noted above, our reviews of the research and policy literature have found that organizational and national capacity to conduct and use evaluation in decision making relies on leadership support for using evidence in decision making, organizational resources, and the availability of evaluation results. In addition, the nature of study results can influence evaluation use; mixed or inconclusive results may not suggest a clear path of action. To help understand the relative importance of these factors for evaluation use, our survey asked federal managers who had recent evaluations of any of their programs, operations, or projects to what extent specific factors regarding leadership support, policy context, staff capabilities, or evaluation characteristics hindered or facilitated using evaluations in their agencies. Managers’ views of which factors facilitate or hinder evaluation use have changed little since our 2013 survey. Managers who reported having evaluations once again most often reported that lack of resources to implement results was a barrier to evaluation use (an estimated 29 percent). They most often identified leadership support for evaluation (38 percent), and the evaluation’s relevance to decision makers (36 percent) as facilitators of evaluation use. While 19 percent perceived lack of staff knowledgeable in evaluation as a barrier, 35 percent reported that staff involvement facilitated use. As in our 2013 survey, many agency managers (35 percent) reported they had no basis to judge the influence of the presence or absence of congressional support for evaluation. In our 2014 survey, the PIOs generally identified the same factors facilitating evaluation use. Managers who reported having access to recent evaluations of their programs rated lack of resources to implement evaluation findings more often than any other potential barrier (see figure 2). They also reported modest concerns related to program context and agency capacity or support for evaluation as barriers to evaluation use more often than potential problems with study quality. For the estimated 40 percent of managers who reported having evaluations, the factor that they most often reported hindering the use of program evaluations to a great or very great extent was a lack of resources to implement evaluation findings (29 percent), which was also the most commonly reported factor in 2013 (33 percent, difference not statistically significant). This is not surprising given today’s constrained federal budget resources. In a climate of budget reductions, agencies are hard-pressed to argue for expanding or creating new programs. But agencies may also lack resources to undertake corrective action within existing programs, such as providing additional staff training or increasing oversight or enforcement efforts. Few federal managers who reported having evaluations cited factors related to agency and policy context as barriers that hinder the use of evaluations to a great or very great extent, such as: difficulty resolving differences of opinion among internal or external stakeholders (an estimated 18 percent), difficulty distinguishing between the results produced by the program and results caused by other factors (17 percent), and concern that the evaluation did not address issues of relevance to decision makers (15 percent). The wide range of stakeholders for federal programs can include the Congress, executive branch officials, nonfederal program partners (state and local agencies and community-based organizations), program beneficiaries, regulated entities, and the policy research community. Their perspectives on evaluation results may differ because of differences in their policy opinions or the complexity of evaluation findings. For programs with broad goals, stakeholders may differ in their perception of a program’s purpose and how program “success” should be defined. Disagreements about what to do next can occur when evaluation findings are not wholly positive or negative. Some federal managers who reported having evaluations also reported that difficulty distinguishing between results produced by the program and results caused by other factors was a great or very great barrier to evaluation use (18 percent). Across the federal government, programs aim to achieve outcomes that they do not control, that are influenced by other programs or external social, economic, or environmental factors, complicating the task of assessing program effectiveness. Typically, this challenge is met by conducting a net impact evaluation that compares what occurred with an estimate of what would have occurred in the absence of the program. However, these studies can be difficult to conduct, may have unexpected or contradictory findings, and need to be considered in the context of the larger body of evidence. Some managers (an estimated 15 percent) rated concern about the relevance of an evaluation’s issues to decision makers as hindering use to a great or very great extent, but three times as many managers (47 percent) reported that this was a small or insignificant barrier. Our previous literature review found that collaboration with program stakeholders in evaluation planning is a widely recognized element of evaluation capacity. We also described in a previous report how experienced agency evaluation offices reach out to key program stakeholders to identify important policy and program management questions, vet initial ideas with the evaluations’ intended users, and then scrutinize the proposed portfolio of studies for relevance and feasibility within available resources. The resulting evaluation agenda aims to provide timely, credible answers to important policy and program management questions. This can help ensure that their evaluations will be used effectively in management and legislative oversight. More recently, OMB, in the President’s proposed budget for fiscal year 2018, encouraged agencies to expand on this practice by adopting a “learning agenda” in which they collaboratively identify the critical questions that, when answered, will help their programs be more effective. A learning agenda would then identify the most appropriate tools and methods (for example, research, evaluation, analytics, or performance measures) to answer each question. OMB noted that the selected questions should reflect the priorities and needs of a wide array of stakeholders involved in program and policy decision making: Administration and agency officials, program offices and program partners, researchers, and the Congress. As we noted above, in 2017, the Commission on Evidence-Based Policymaking also recommended that departments create learning agendas. Two infrequently reported barriers related to agency evaluation resources at both the staff and executive levels, at about the same levels as in 2013, are: lack of staff knowledgeable about interpreting or analyzing program evaluation results (an estimated 19 percent rated great or very great extent), and lack of ongoing top executive commitment or support for using program evaluation to make program or funding decisions (17 percent). In contrast, almost half of agency managers who reported having evaluations reported that these two issues hindered evaluation use to a small extent or not at all (an estimated 46 to 47 percent, respectively). The research literature has clearly established leadership support for using evidence in decision making as important for evaluation use. However, it is likely that most managers who have evaluations also have at least some leadership support for evaluation. Our 2014 survey of 24 PIOs found that the 9 agencies who reported having independent, centralized evaluation authority reported greater evaluation use in management and policy making. Program evaluations–-especially net impact evaluations that attempt to isolate a program’s effects from the effects of other factors-–typically employ more complex analytic techniques than performance monitoring, so their results may be unfamiliar to staff without training in research and statistics. Evaluation expertise is needed to plan, conduct, or procure evaluation studies, but program staff also need sufficient knowledge to understand and translate evaluation results into steps toward program improvement. Our 2014 survey of 24 PIOs found that about half the agencies reported increases in hiring staff with research and evaluation expertise and in training staff in research and analysis skills since 2011, but 7 acknowledged additional training was needed to a great or very great extent in data management and statistical analysis, performance measurement and monitoring, and translating evaluation results into actionable recommendations. In both the 2013 and 2017 surveys, the agency managers with evaluations agreed that factors related to study limitations were not serious barriers; approximately half reported that they hindered evaluation use to a small extent or not at all: difficulty determining how to use evaluation findings to improve the program (an estimated 50 percent rated a small extent or not at all), difficulty obtaining study results in time to be useful (51 percent), concern about the credibility (validity or reliability) of study results (55 percent), difficulty generalizing the results to other persons or localities (56 difficulty accepting findings that do not conform to expectations (58 percent). We have reported that an effective evaluation design aims to provide credible, timely answers to the intended users’ questions. Even with the best planning, however, an evaluation might not meet decision makers’ needs. First, the pace of policy making is much quicker than the time it takes to conduct an evaluation. Second, there is no guarantee that study results will point to a clear path of action. We previously reported that, to manage these uncertainties, experienced evaluators recommended building a strong body of evidence and engaging stakeholders throughout the process. A body of evidence—including various forms of evidence—is considered more valuable than a single study because having multiple studies with similar results strengthens confidence in the conclusions, and a body of information can yield answers to a variety of different questions, whenever stakeholders pose them. Comparing results obtained under different conditions can help explain what might be driving seemingly contradictory results. Evaluators pointed out that they rarely based decisions on a single study. Individual evaluation studies typically do not simply identify whether a program works but, rather, they assess the effects of an individual program or intervention on specific domains for the specific populations or conditions studied. Developing a body of evidence is also a strategy for ensuring that information is available for input to fast-breaking policy discussions. Engaging stakeholders throughout the evaluation process permits targeting the evaluation’s questions and timing to decision makers’ needs, gaining their buy-in to the study’s credibility and relevance, and providing stakeholders with interim results or lessons learned about program changes that they can implement right away. Few agency managers who reported having evaluations viewed lack of ongoing congressional commitment or support for using program evaluation to make program or funding decisions as a barrier to use to a great or very great extent (an estimated 16 percent). However, twice as many managers (35 percent) reported they had no basis for determining whether congressional commitment was a barrier. We found this same phenomenon in 2013 as well (18 percent and 39 percent, respectively), most likely reflecting midlevel managers’ lack of direct contact with congressional members and staff. This is also consistent with responses to a parallel question included in our survey of federal managers about congressional commitment or support for using performance information to make program or funding decisions. About a third of the full sample of federal managers reported that they had no basis to judge whether lack of congressional support for using performance information hindered its use. Congressional committees have a number of opportunities to communicate their support for evaluation, such as: consulting with agencies as they revise their strategic plans and agency priority goals (APG); requesting agency evaluations to address specific questions about policy or program implementation or results; conducting oversight hearings on agency performance; and reviewing agency evaluation plans to ensure that they address issues of congressional interest. While the Congress holds numerous oversight hearings and requests studies from GAO, it is not clear whether it regularly requests agencies to conduct evaluations. In our 2014 survey, fewer than half the PIOs (10) reported having congressional mandates to evaluate specific programs. Despite GPRAMA’s requirement that agencies consult with the Congress in developing their strategic plans and priority goals, we found their communication to be one-directional, resembling reporting more than dialogue. In our 2013 interviews with evaluators, one evaluator explained that, for the most part, they conduct formal briefings for the Congress in a tense, high-stakes environment; they lack the opportunity for informal discussion of their results. In 2013 we recommended that OMB ensure that agencies adhere to OMB’s guidance for website updates to provide a description of how congressional consultations were incorporated in each APG. Our analysis of the sections on the 2016—2017 APGs on Performance.gov in October 2016 generally found that agencies either did not include information about congressional input or had not updated Performance.gov to reflect the most recent round of stakeholder engagement. As of June 2017, Performance.gov has been archived as agencies develop updated goals and objectives for release in February 2018 with the President’s next Budget submission to the Congress. To learn what factors facilitate evaluations’ use in decision making, we added a new question to our survey of federal managers with evaluations on the extent to which 12 factors facilitate their use (see figure 3). We selected these factors to parallel factors found in our 2013 survey to hinder use as well as others that were found to facilitate use in our previous interviews with evaluators and in our 2014 survey of the PIOs. In 2017, federal managers who reported having evaluations most frequently reported that agency leadership support for evaluation, staff involvement, and evaluation relevance to decision makers facilitated evaluation use. Although neither the survey respondents nor the survey questions are directly comparable, the PIOs we surveyed in 2014 reported similar factors as facilitating evaluation use. These groups differed in their views on the importance of quarterly performance reviews, possibly reflecting their different responsibilities and levels of involvement. Both the federal managers and the senior agency officials reported limited knowledge of congressional requests for or interest in evaluation. Consistent with the literature on factors supporting evaluation use, about one-third of agency managers who reported having evaluations rated top executive commitment or support for using program evaluation to make program or funding decisions the most often of the factors presented (an estimated 38 percent to a great or very great extent). About twice as many managers reported this factor as facilitating evaluation use as those who rated its absence as hindering evaluation use to a great or very great extent (17 percent). This may be because, as we noted above, these respondents have evaluations and thus probably already have some leadership support for evaluation; lack of leadership support was not much of a problem for them. While our 2014 survey did not ask the PIOs to what extent top leadership support for using evaluations in decision making facilitated its use, many reported that their agencies’ senior leadership demonstrated commitment to using evidence (of various types) in management and policy making through guidance (17 of 22) or internal agency memorandums (12 of 22). Some PIOs also rated holding goal leaders accountable for progress on APGs—another form of leadership support—very useful for improving their agencies’ capacity to use evaluations in decision making (8 of 23 PIOs). GAO and others have commented that for evaluation results to be acted on, not only must decision makers generally support using evidence to inform decisions but also the studies themselves must be seen as relevant and credible. About one-third of agency managers with evaluations in 2017 rated importance of an evaluation’s issues to agency decision makers as facilitating use to a great or very great extent (an estimated 36 percent). This is about twice as many as the managers who said the absence of relevance hindered evaluation use to a great or very great extent (15 percent). We interpret this to mean that the managers perceived their evaluations as generally addressing relevant issues and that the evaluations’ relevance contributed to their use in agency decision making. Despite managers’ high regard for top management’s support for evaluation, it is notable that few managers reported that consideration of evaluation findings in agency quarterly performance reviews facilitated their use in decision making. GPRAMA introduced these reviews to encourage the use of performance information in agency decision making by requiring agencies to review progress on their APGs quarterly and to report publicly on their progress and strategies to improve performance, as needed. Although about a quarter of the PIOs reported in 2014 (6 of 23) that these reviews were very useful in improving agencies’ capacity to use evaluations, the managers surveyed in 2017 were not as sanguine. About a third of the managers with evaluations reported that they had no basis to judge whether these reviews facilitated use (35 percent), and few (14 percent) rated them as facilitating use to a great or very great extent. It may be that few middle managers participated in these reviews; they are only required for APGs, a small subset of an agency’s performance goals (generally 2—8 goals at each agency). Sixty-one percent of the total sample of managers reported that they were not at all familiar with these reviews. Alternatively, evaluations might contribute more effectively to the annual strategic reviews, which aim for a comprehensive assessment of progress on the results the agency aims to achieve. OMB’s guidance for these reviews directs agencies to consider a broad array of evidence and external influences on their objectives, identify any gaps in their evidence and areas where additional evaluations or other analyses are needed, and thus focus their limited evaluation resources to inform the strategic decisions facing the agency. Our 2017 survey did not ask federal managers about these strategic reviews; thus, we do not know whether midlevel managers were aware of or involved in these reviews. Experienced evaluators have told us that engaging staff throughout the evaluation process can gain their buy-in on the relevance and credibility of evaluation findings. In addition, providing program staff with interim results or lessons learned from early program implementation can ensure timely data for program decisions. In 2017, one-third of agency managers with evaluations rated program staff involvement in planning or conducting evaluation studies as greatly or very greatly facilitating use (an estimated 35 percent). This is consistent with our 2014 survey, in which about half the PIOs also rated staff involvement in planning and conducting evaluation studies as very useful for improving agency capacity to use evaluations in decision making (11 of 23). Evaluations may use complex analytic techniques with which program staff are unfamiliar, thus inhibiting staff’s involvement and their ability to interpret the findings. However, only an estimated 19 percent of managers rated lack of staff who are knowledgeable about interpreting or analyzing program evaluation results as greatly or very greatly hindering use. A quarter of managers (25 percent) reported that one possible response—providing program staff and grantees with technical assistance on evaluation and its use–-facilitated evaluation use to a great or very great extent. In 2014, about half the surveyed PIOs agreed; 11 of 23 rated this strategy as very useful for improving agency capacity to use evaluations. Other factors that managers in the 2017 survey rated often as facilitating use were parallel to factors that they rated often as barriers. About a quarter of managers (an estimated 29 percent) reported that agency staff ability to make recommended program changes facilitated use to a great to very great extent. This factor is parallel to the most frequently rated factor to hinder use—lack of resources to implement the evaluation findings—that a similar number identified (29 percent great to very great extent). As we noted above, midlevel managers may not have the authority or resources to implement a study’s recommendations. In addition, the positive characteristics of a study may influence its use. About a third of agency managers who reported having evaluations reported that clear implications of results for improving program design or management (31 percent) facilitated use to a great to very great extent. The absence of such clarity is one of the factors that an evaluator previously told us could lead to disagreements, and such disagreements may lead to inaction. Mixed results or the absence of a clear explanation for disappointing program results can impede consensus on an evaluation’s lessons for program improvement. A strong evaluation design can help prevent message muddling by testing alternative explanations, but it cannot ensure that an evaluation will provide clear implications because the results of an evaluation, like a research study, are inherently uncertain. Written evaluation policies and standards help provide benchmarks for ensuring the quality of an organization’s processes and products. The American Evaluation Association (AEA) publishes a guide for developing and implementing U.S. government evaluation programs that recommends that agencies, among other things, develop written evaluation policies and quality standards, consult with program stakeholders, and prepare annual and long-term evaluation plans to support future decision making. In our 2014 survey of PIOs, about a quarter of the 24 PIOs surveyed reported that their agencies had written agency-wide policies or guidance for key issues contained in that guide: selecting and prioritizing evaluation topics, consulting program staff and subject matter experts, ensuring internal and external evaluator independence and objectivity, selecting evaluation approaches and methods, ensuring completeness and transparency of evaluation reports, timely public dissemination of evaluation findings and recommendations, or tracking implementation of evaluation findings. A few more PIOs (10 of 24) reported having agency-wide policies on ensuring the quality of data collection and analysis. In our 2017 survey, we estimate that 28 percent of managers who reported having evaluations reported that agency policies and procedures to ensure evaluation quality facilitated use to a great or very great extent. Our survey did not ask which types of policies they had, so we do not know whether they included all of the topics listed above. Only a small number of managers—13 percent—reported having no basis to judge their policies’ influence, suggesting that most agencies have evaluation policies, although those policies may not apply agency-wide. The reported positive influence of such policies on evaluation quality is also consistent with the fact that about half the managers with evaluations reported that various factors regarding study limitations did not significantly hinder evaluation use in decision making, as discussed above. Experienced evaluators consult with stakeholders in developing their evaluation or learning agenda to help ensure their evaluations’ credibility and relevance to current management and policy issues. In the 2017 survey, managers with evaluations rated consultation with stakeholders on the agency’s evaluation agenda high for facilitating evaluation use (28 percent to a great or very great extent), although 22 percent responded they had no basis to judge. In our 2014 survey of PIOs, only 7 reported having an agency-wide evaluation agenda. The Congress is a prominent member of federal program stakeholders but congressional interest in and requests for evaluation were not widely reported by the PIOs we surveyed in 2014. Congressional mandates are requirements in statute for an agency (including GAO) to conduct a study, usually specifying the topic and a reporting date. GAO is often requested to report on the progress and success of new programs or program provisions. In our 2014 survey, fewer than half the PIOs (10 of 23) reported that they had any congressional mandate to evaluate a specific program in their agency. Consistent with this low reporting of congressional requests for evaluation, about one-third of managers who reported having evaluations in our 2017 survey reported that they had no basis to judge whether congressional requests or mandates facilitated evaluation use (31 percent). However, 23 percent reported that such requests facilitated use to a great or very great extent. Thus, while congressional evaluation requests are not widely reported among PIOs, they appear to be influential among some federal managers. For several years, OMB has encouraged agencies to use program evaluations and other forms of evidence to learn what works and what does not, and how to improve results. Yet, agencies appear not to have expanded their capacity to conduct or use evaluation in decision making since 2013. Because the majority of agency managers who reported having evaluations also reported that they contributed to improving program performance (54 percent), this lack of evaluation capacity constitutes a lost opportunity to improve the efficiency and effectiveness of limited government resources. The survey results reinforce lessons from our previous reports: involving agency staff and executives in planning and conducting evaluations helps ensure that those evaluations are relevant, credible, and used in agency decision making. Agency managers who reported having evaluations also reported top executive support for using evaluations to make decisions, the importance of the evaluation’s issues to decision makers, and involving agency staff in planning or conducting evaluation studies, most often among factors facilitating evaluation use. GAO, as well as OMB, AEA, and the Commission on Evidence-Based Policymaking, has noted that it is important to develop an evaluation plan or agenda to ensure that even an agency’s scarce research and evaluation resources are targeted to its most important issues and can shape budget and policy priorities and management practices. Although only some agencies have developed agency-wide evaluation agendas, evaluators who have them have found that consulting with stakeholders on their evaluation agendas helps ensure evaluation credibility and relevance, and facilitates the use of evaluation results. Congressional support—through either authorization or appropriation of funds—is often needed for agencies to implement desired program reforms. Although 28 percent of federal managers with evaluations reported that consulting with external stakeholders on their evaluation agendas greatly contributes to their use, we saw limited knowledge of congressional consultation. Congressional consultation on agency evaluation plans could increase the studies’ credibility and relevance for those audiences. Although evaluations were generally not reported as contributing greatly to quarterly performance reviews of progress on agency priority goals, they might contribute more effectively to an agency’s annual strategic review. OMB’s guidance envisions strategic reviews as a more comprehensive assessment of a broad range of evidence on and factors influencing progress on an agency’s desired results. Agencies are also directed to identify any gaps in their evidence and take steps to address them in these reviews; thus, the strategic review could produce an evaluation agenda that is targeted to the agency’s management, budget, and policy priorities. To help ensure that federal agencies obtain the evidence needed to address the most important questions to improve program implementation and performance, we recommend that the Director of the Office of Management and Budget direct each of the 24 Chief Financial Officer Act agencies to prepare an annual agency-wide evaluation plan that describes the key questions for each significant evaluation study that the agency plans to begin in the next fiscal year, and congressional committees; federal, state and local program partners; researchers; and other stakeholders that were consulted in preparing their plan. (Recommendation 1) We requested comments on a draft of this report from the Director of the Office of Management and Budget. In an email response, an OMB staff member commented that it would be more appropriate and effective to encourage agencies to create an annual evaluation plan, rather than require or direct them to do so. Because OMB has encouraged agencies to conduct and use evaluations in decision making for several years with mixed success, we believe that a more directive approach is needed. We are sending copies of this report to the Director of the Office of Management and Budget, and to appropriate congressional committees. This report is also available at no cost on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2700 or kingsburyn@gao.gov. Contact points for our Office of Congressional Relations and Office of Public Affairs may be found on the last page of the report. Staff who made key contributions to the report are listed in appendix II. We administered a web-based questionnaire on organizational performance and management issues to a stratified random sample of 4,395 from a population of approximately 153,779 mid-level and upper- level civilian managers and supervisors working in the 24 executive branch agencies covered by the Chief Financial Officers Act of 1990 (CFO Act), as amended. The sample was drawn from the Office of Personnel Management’s (OPM) Enterprise Human Resources Integration database as of September 2015, using file designators for performance of managerial and supervisory functions. The sample was stratified by agency and by whether the manager or supervisor was a member of the Senior Executive Service (SES). The management levels covered general schedule (GS) or equivalent schedules in other pay plans at levels comparable to GS-13 through GS- 15 and career SES or equivalent. In reporting the questionnaire data, we use “government-wide” or “across the federal government” to refer to these 24 CFO Act executive branch agencies, and “federal managers” and “managers” to refer to both managers and supervisors. We designed the questionnaire to obtain the observations and perceptions of respondents on various aspects of such results-oriented management topics as the presence and use of performance information, agency climate, and program evaluation use. In addition, to address the implementation of GPRA Modernization Act of 2010 (GPRAMA), the questionnaire included a section requesting respondents’ views on its various provisions including cross-agency priority goals, agency priority goals, and quarterly performance reviews. This survey is similar to surveys we have conducted five times previously at the 24 CFO Act agencies—in 1997, 2000, 2003, 2007, and 2013. The questions on GPRAMA provisions and program evaluation use were new in 2013. The 2017 questionnaire includes new questions on the use of performance information and factors that facilitate the use of program evaluation. Several components of the new evaluation question were drawn from our 2014 survey of Performance Improvement Officers (PIOs) on their agencies’ evaluation capacity resources and activities, discussed below, and interviews with agency officials. Before administering the survey, GAO subject matter experts, survey specialists, and a research methodologist reviewed new questions. We also conducted pretests of the new questions with federal managers in several of the 24 CFO Act agencies and based revisions on the feedback we received. The objectives of this report address whether agency managers reported change in their access to and use of program evaluations since 2013 and their views about factors that facilitate or hinder the use of program evaluation. Therefore, this report analyzes results on a subset of survey questions concerning those topics. It then compares these results, when appropriate, to results previously obtained in the 2013 survey of federal managers, as well as the results of our 2014 PIO survey. For the 2014 PIO survey, we administered a web-based questionnaire to the PIOs or their deputies at the 24 CFO Act agencies about agencies’ evaluation resources, policies, and activities and the activities and resources they found useful in building their evaluation capacity. GAO subject matter experts, a survey specialist, and research methodologist also reviewed this survey’s questions. In addition we pretested the questionnaire in person with PIOs at three federal agencies. Because this was not a sample survey, it has no sampling errors but may be subject to nonsampling errors that stem from differences in how a question is interpreted. The survey of PIOs is not directly comparable to the survey of federal managers because the questions about factors influencing evaluation use are not exactly the same, and the PIOs, as senior officials typically reporting to the agency Chief Operating Officer, have very different responsibilities from the population of midlevel and upper-level managers and supervisors responding to the Federal Managers Survey. Most of the items on the 2017 Federal Managers Survey were closed- ended, meaning that depending on the particular item, respondents could choose one or more response categories or rate the strength of their perception on a 5-point “extent” scale ranging from “to no extent” at the low end of the scale to “to a very great extent” at the high end. On most items, respondents also had an option of choosing the response category “no basis to judge/not applicable.” A few items gave respondents “yes,” “no,” or “do not know” options. To administer the survey, we sent an e-mail to managers in the sample that notified them of the survey’s availability on the GAO website and included instructions on how to access and complete the survey. Managers in the sample who did not respond to the initial notice received multiple e-mail reminders and follow-up phone calls asking them to participate in the survey. We administered the survey to all 24 CFO Act agencies from November 2016 through March 2017. For additional details on the survey methodology, see our report summarizing our body of work on GPRAMA’s implementation. From the 4,395 managers selected for the 2017 survey, we found that 388 of the sampled managers had left the agency, were on detail, or had some other reason that excluded them from the population of interest. We received usable questionnaires from 2,726 sample respondents. The response rate across the 24 CFO Act agencies ranged from 36 percent to 82 percent, with a weighted response rate of 67 percent for the entire sample. An estimated 40 percent of respondents reported that an evaluation had been completed within the past 5 years for any of the programs, operations, or projects with which they had been involved. The overall survey results can be generalized government-wide to the population of managers as described above at each of the 24 CFO Act agencies. The responses of each eligible sample member who provided a useable questionnaire were weighted in the analysis to account statistically for all members of the population. All results are subject to some uncertainty or sampling error as well as nonsampling error. The government-wide percentage estimates based on our sample from 2017 presented in this report have 95 percent confidence intervals within plus or minus 4 percentage points of the estimate itself for the initial question about whether an evaluation had been completed and within plus or minus 7 percentage points for subsequent questions posed to those who reported having evaluations. Online supplemental materials show all the questions asked on the survey along with the percentage estimates and associated 95 percent confidence intervals for each question for each agency and government-wide. In addition to the contact named above, Stephanie Shipman (Assistant Director), Valerie Caracelli (Analyst in Charge), Pille Anvelt, Timothy Guinane, Jill Lacey, Benjamin Licht, Krista Loose, Anna Maria Ortiz, Penny Pickett, and Steven Putansu made key contributions to this report. Managing for Results: Further Progress Made in Implementing the GPRA Modernization Act, but Additional Actions Needed to Address Pressing Governance Challenges. GAO-17-775. Washington, D.C.: September 29, 2017. Supplemental Material for GAO-17-775: 2017 Survey of Federal Managers on Organizational Performance and Management Issues. GAO-17-776SP. Washington, D.C.: September 29, 2017. 2017 Annual Report: Additional Opportunities to Reduce Fragmentation, Overlap, and Duplication and Achieve Other Financial Benefits. GAO-17-491SP. Washington, D.C.: April 26, 2017. Tiered Evidence Grants: Opportunities Exist to Share Lessons from Early Implementation and Inform Future Federal Efforts. GAO-16-818. Washington, D.C.: September 21, 2016. Fragmentation, Overlap, and Duplication: An Evaluation and Management Guide. GAO-15-49SP. Washington, D.C.: April 14, 2015. Program Evaluation: Some Agencies Reported that Networking, Hiring, and Involving Program Staff Help Build Capacity. GAO-15-25. Washington, D.C.: November 13, 2014. Managing for Results: Executive Branch Should More Fully Implement the GPRA Modernization Act to Address Pressing Governance Challenges. GAO-13-518. Washington, D.C.: June 26, 2013. Managing for Results: 2013 Federal Managers Survey on Organizational Performance and Management Issues. GAO-13-519SP. Washington, D.C.: June 2013. Program Evaluation: Strategies to Facilitate Agencies’ Use of Evaluation in Program Management and Policy Making. GAO-13-570. Washington, D.C.: June 26, 2013. Managing for Results: Agencies Should More Fully Develop Priority Goals under the GPRA Modernization Act. GAO-13-174. Washington, D.C.: April 19, 2013. Designing Evaluations: 2012 Revision. GAO-12-208G. Washington, D.C.: January 2012. Program Evaluation: Experienced Agencies Follow a Similar Model for Prioritizing Research. GAO-11-176. Washington, D.C.: January 14, 2011. Government Performance: Lessons Learned for the Next Administration on Using Performance Information to Improve Results. GAO-08-1026T. Washington, D.C.: July 24, 2008. Program Evaluation: Studies Helped Agencies Measure or Explain Program Performance. GAO/GGD-00-204. Washington, D.C.: September 29, 2000.","GPRAMA aims to ensure that agencies use performance information in decision making to achieve results and improve government performance. GPRAMA requires GAO to evaluate the act's implementation; this report is one in a series on its implementation. GAO examined the extent of agencies' use of program evaluations—a particular form of performance information—and factors that may hinder or facilitate their use in program management and policy making. GAO surveyed a stratified random sample of 4,395 federal civilian managers and supervisors to obtain their perspectives on several results-oriented management topics, including the extent of and factors influencing evaluation use. GAO compared the results to those of a similar GAO survey of federal managers in 2013 and a GAO survey of Performance Improvement Officers in 2014. GAO also interviewed OMB staff and reviewed guidance on using evaluation in decision making. In a 2017 government-wide survey, GAO found that most federal managers lack recent evaluations of their programs. Forty percent reported that an evaluation had been completed within the past 5 years of any program, operation, or project they were involved in. Another 39 percent of managers reported that they did not know if an evaluation had been completed, and 18 percent reported having none. Managers who reported having evaluations also reported that those evaluations contributed to a great or very great extent to improving program management or performance (54 percent) and to assessing program effectiveness or value (48 percent). These figures are not statistically different from the results of GAO's 2013 survey. Of the 40 percent of managers who reported having evaluations, the factor most often rated as having hindered use to a great or very great extent, as in 2013, was lack of resources to implement the evaluation findings (29 percent). Managers reported limited knowledge of congressional support for using their results; 35 percent were not able to judge whether lack of support was a barrier. Federal managers who reported having evaluations most frequently reported that agency leadership support for evaluation, staff involvement, and an evaluation's relevance to decision makers facilitated evaluation use. GAO previously reported that involving agency staff in planning and conducting evaluations helps to ensure they are relevant, credible, and used in decision making. The Office of Management and Budget (OMB) encouraged agencies to use the annual strategic reviews the GPRA Modernization Act of 2010 (GPRAMA) requires to assess evidence gaps and inform their strategic decisions and budget making. GAO and OMB have noted the importance of developing an evaluation plan or agenda to ensure that an agency's scarce research and evaluation resources are targeted to its most important issues. While 28 percent of managers with evaluations rated consultation with stakeholders high for facilitating use, another 22 percent reported having no basis to judge. GAO previously noted limited knowledge of agency consultation with the Congress. While 23 percent of managers with evaluations reported congressional requests or mandates facilitated evaluation use, more (31 percent) reported having no basis to judge. GAO concludes that Agencies' continued lack of evaluations may be the greatest barrier to their informing managers and policy makers and constitutes a lost opportunity to improve the efficiency and effectiveness of limited government resources. Although only some agencies have developed agency-wide evaluation plans, evaluators who have them found that obtaining stakeholder input helped ensure evaluation relevance and facilitate use of their results. Congressional consultation on agency evaluation plans could increase the studies' credibility with those whose support is needed to implement program reforms. An agency's annual strategic review provides a good opportunity to help target its evaluation agenda to its management, budget, and policy priorities. To help ensure that agencies obtain the evidence needed to address important questions to improve program implementation and performance, GAO recommends that the Director of OMB direct federal agencies to prepare an annual agency-wide evaluation plan that describes the congressional and other stakeholders that were consulted. OMB staff stated that agencies should be encouraged, rather than directed, to create an annual evaluation plan. Because OMB has already been encouraging evaluation, GAO believes a more directive approach is needed.",govreport
"Under the Rehabilitation Act, a person is considered to have a disability if the individual has a physical or mental impairment that substantially limits one or more major life activities. Existing federal efforts are intended to promote the employment of individuals with disabilities in the federal workforce and help agencies carry out their responsibilities under the Rehabilitation Act. For example, federal statutes and regulations provide special hiring authorities for people with disabilities. These include Schedule A excepted service hiring authority—which permits the noncompetitive appointment of qualified individuals with intellectual, severe physical, or psychiatric disabilities without posting and publicizing the position—and appointments and noncompetitive conversion for veterans who are 30 percent or more disabled. To qualify for a Schedule A appointment, an applicant must generally provide proof of disability and a certification of job readiness. Proof of disability can come from a number of sources, including a licensed medical professional, or a state agency that issues or provides disability benefits. The proof of disability document does not need to detail the applicant’s medical history or need for an accommodation. Executive Order 13548 committed the federal government to many of the goals of an executive order issued a decade earlier, but went further by requiring federal agencies to take certain actions. For example, Executive Order 13548 requires federal agencies to develop plans for hiring and retaining employees with disabilities and to designate a senior-level official to be accountable for meeting the goals of the order and to develop and implement the agency’s plan. In addition, OPM and Labor have oversight responsibilities to ensure the successful implementation of the executive order (see table 1). For the purposes of determining agency progress in the employment of people with disabilities and setting targeted goals, the federal government tracks the number of individuals with disabilities in the workforce through OPM’s Standard Form 256, Self-Disclosure of Disability (SF-256). Federal employees voluntarily submit this form to disclose that they have a disability, as defined by the Rehabilitation Act. For reporting purposes, disabilities are separated into two major categories: Targeted and Other Disabilities. Targeted disabilities, generally considered to be more severe, include such conditions as total deafness, complete paralysis, and psychiatric disabilities. Other disabilities include such conditions as partial hearing or vision loss, gastrointestinal disorders, and learning disabilities. Further, Labor is given responsibilities in the executive order to improve efforts to help employees who sustain work-related injuries and illnesses return to work. In July 2010, the Protecting Our Workers and Ensuring Reemployment (POWER) Initiative was established, led by Labor. This initiative aims to improve agency return-to-work outcomes by setting performance targets, collecting and analyzing injury and illness data, and prioritizing safety and health management programs that have proven effective in the past. 5 U.S.C. §8101, et seq. Workers’ Compensation Programs (OWCP) reviews FECA claims and makes decisions on eligibility and payments. We have completed a number of reviews that have identified steps that agencies could take to provide equal employment opportunity to qualified individuals with disabilities in the federal workforce. In July 2010, we held a forum that identified barriers to the federal employment of people with disabilities and leading practices to overcome these barriers. Participants said that the most significant barrier keeping people with disabilities from the workplace is attitudinal and identified eight leading practices that agencies could implement to help the federal government become a model employer: (1) top leadership commitment; (2) accountability, including goals to help guide and sustain efforts; (3) regular surveying of the workforce on disability issues; (4) better coordination within and across agencies; (5) training for staff at all levels to disseminate leading practices (6) career development opportunities inclusive of people with (7) a flexible work environment; and (8) centralized funding at the agency level for reasonable accommodations. GAO, Highlights of a Forum: Participant-Identified Leading Practices that Could Increase the Employment of Individuals with Disabilities in the Federal Workforce, GAO-11-81SP (Washington, D.C.: Oct. 5, 2010). OPM, in consultation with EEOC, OMB, and Labor, issued a memorandum in November 2010 to heads of executive departments and agencies outlining the key requirements of the executive order and what elements must be included in agency disability hiring plans. These elements include listing the name of the senior-level official to be held accountable for meeting the goals of the executive order and describing how the agency will hire individuals with disabilities at all grade levels and in various job occupations. The memorandum also described strategies that agencies could take to become model employers of people with disabilities, such as reviewing all recruitment materials to ensure accessibility for people with disabilities. To help implement the strategies, OPM contracted in December 2010 with a private firm to recruit and to manage a list of Schedule A-certified individuals from which federal agencies can hire. OPM received 66 agency plans for promoting the employment of individuals with disabilities, representing over 99 percent of the federal civilian executive branch workforce. OPM officials reviewed all the plans, recording whether they met criteria developed by OPM based on the executive order and its model strategies memorandum. OPM also identified and informed agencies about innovative ideas included in plans. In reviewing the plans, OPM found that many agency plans did not meet one or more of its review criteria (see fig. 1). For example, OPM’s review found that 29 of the 66 agency plans did not include numerical goals for the hiring of people with disabilities. OPM also found that 9 of the 66 agency plans did not identify a senior-level official responsible for the development and implementation of the plan. Finally, only 7 of the 66 plans met all of the criteria; over half of the plans met 8 or fewer of the 13 criteria. However, OPM expected agencies to begin implementing their plans immediately, regardless of any unaddressed deficiencies. Agencies met some criteria more successfully than others. For example, OPM found that 40 of the 66 agency plans included a process for increasing the use of Schedule A to increase the hiring of people with disabilities. In contrast, 29 of the 66 agency plans provided for the quarterly monitoring of the rate at which employees injured on the job successfully return to work. OPM provided agencies with written feedback on plan deficiencies and strongly encouraged agencies to address them numerous times beginning in June 2011. However, 32 out of the 59 agencies with deficiencies in their plans had not addressed them as of April 2012. Specifically, in June 2011, OPM provided agencies with access to reviews of their plans, which identified deficiencies, through OMB’s Max Information System (MAX). According to OPM, in July 2011, a White House official told agency senior executives that they were required to address deficiencies in their plans. In October and November 2011, OPM provided agencies with a list of the deficiencies identified in their plans, and asked agencies to determine how their plans could be improved. In December 2011, OPM again told agencies they were strongly encouraged to review and address plan deficiencies and provided agencies with several examples of plans that met all of the criteria. Though the executive order does not specifically authorize OPM to require agencies to address plan deficiencies, it calls for OPM to regularly report on agencies’ progress in implementing their plans to the White House and others. In response to the executive order’s reporting requirement, OPM officials told us that they had briefed White House officials on issues related to agencies’ implementation of the executive order, but did not provide information on the deficiencies in all of the agency plans. In addition, OPM does not think that the federal government is on target to achieve the goals set in the executive order. While the executive order did not provide additional detail as to what information should be reported, providing information on the extent to which agencies’ plans have met OPM’s criteria would better enable the White House to hold agencies accountable for addressing plan deficiencies. In addition to reviewing agency plans, the executive order required OPM to develop mandatory training programs on the employment of people with disabilities for both human resources personnel and hiring managers, within 60 days of the executive order date. We have previously reported that training at all staff levels, in particular training on hiring, reasonable accommodations, and diversity awareness, can help disseminate leading practices throughout an agency and communicate expectations for implementation of policies and procedures related to improving employment of people with disabilities. Such policies and procedures could be communicated across the federal government with training on topics such as how to access and efficiently use the list of Schedule A- certified individuals, the availability of internships and fellowships, such as Labor’s Workforce Recruitment Program, and online communities of practice established to help officials share best practices on hiring people with disabilities, such as eFedlink. In its November 2010 model strategies memorandum to heads of executive agencies, OPM stated that, in consultation with Labor, EEOC, and OMB, it was developing the mandatory training programs required by the executive order and that further information would be forthcoming. OPM officials told us in March 2012 that they are working with federal Chief Human Capital Officers (CHCO) to develop modules on topics such as using special hiring authority that will be available through HR University. Officials explained that they need to ensure that the training is uniform to ensure all personnel receive consistent information, and they expect the training modules to be ready by August 2012. Although it has yet to fully develop mandatory training programs, OPM has taken steps to train and inform federal officials about tools available to them. For example, OPM partnered with Labor, EEOC, and other agencies to provide elective training courses for federal officials involved in implementing the executive order on topics including: the executive order, model recruitment strategies, guidance on developing disability hiring plans, and return-to-work strategies. OPM also conducted training on implementation of the executive order in July 2011 specifically for senior executives accountable for their agencies’ plans. It also offers short online videos for hiring managers on topics such as Schedule A hiring authority. Further, other governmentwide training on employing people with disabilities exists. For example, Labor’s Job Accommodation Network offers online training on relevant issues like applying the Americans with Disabilities Amendments Act and providing reasonable accommodations. Moreover, the Department of Defense’s Computer/Electronic Accommodations Program offers online training modules to help federal employees understand the benefits of hiring people with disabilities. Nevertheless, agency officials we interviewed told us that they would like to have more comprehensive training on strategies for hiring and retaining individuals with disabilities, confirming the need for OPM to complete the development of the training programs required by the executive order. For example, officials from one agency said that more training on the relationship between return-to-work efforts and providing reasonable accommodations is needed, while officials from another agency identified a need for increased awareness of the Schedule A hiring process. Executive Order 13548 requires OPM to implement a system for reporting regularly to the president, heads of agencies, and the public on agencies’ progress in implementing the objectives of the executive order. OPM is also to compile, and post on its website, governmentwide statistics on the hiring of individuals with disabilities. This is important because effectively measuring workforce demographics requires reliable data to inform decisions and to allow for individual and agencywide accountability. To measure and assess their progress towards achieving the goals of the executive order, agencies and OPM use data about disability status that employees voluntarily self-report on the SF-256. OPM’s guidance to agencies for implementing the executive order explained that the data gathered from the SF-256 is crucial for agencies to determine whether they are achieving their disability hiring goals. Agencies also report these data to EEOC in an effort to identify and develop strategies to eliminate potential barriers to equal employment opportunities. According to the form, the data are used to develop reports to bring to light agency specific or governmentwide deficiencies in the hiring, placement, and advancement of individuals with disabilities. The information is confidential and cannot be used to affect an employee in any way. Only staff who record the data in an agency’s or OPM’s personnel systems have access to the information. According to draft data from OPM, as stated earlier, the government hired approximately 20,000 employees with disabilities during fiscal years 2010 and 2011. However, according to officials at OPM, EEOC, VA, Education, and SSA, accurately measuring the number of current and newly hired employees with disabilities is an ongoing challenge. While the accuracy of the SF- 256 data is unknown, agency officials and advocates for people with disabilities believe there is an undercount of employees with disabilities. For example, despite the safeguards in place explaining the confidentiality of the data, agency officials and advocates for people with disabilities told us that some individuals with disabilities may not disclose their disability status out of concern that they will be subjected to discrimination. Similarly, EEOC reported that some persons with disabilities are reluctant to self-identify because they are concerned that such disclosure will preclude them from advancement. Additionally, some individuals may develop disabilities during federal employment and may not know how to or why they should update their disability status. We have reported that regularly encouraging employees to update their disability status allows agencies to be aware of any changes in their workforce. EEOC guidance recommends that agencies request that employees update their disability status every 2 to 4 years. As previously noted, disabled veterans with a compensable service-connected disability of 30 percent or more may be noncompetitively appointed and converted to a career appointment under 5 U.S.C. § 3112. agency’s ability to establish appropriate policies and goals, and assess progress towards those goals. Labor has taken several steps toward meeting the requirements of the executive order to improve return-to-work outcomes for employees injured on the job, including pursuing overall reform of the FECA system. Specifically, Labor developed new measures and targets to hold federal agencies accountable for improving their return-to-work outcomes within a 2-year period. Agencies were expected to improve return-to-work outcomes by 1 percent for fiscal year 2011 and an additional 2 percent in each of the following 3 years over the 2009 baseline. In fiscal year 2011, the federal government had a cumulative return-to-work rate of 91.6 percent, almost 5 percent better than the target rate of 86.7 percent. Goals such as these are useful tools to help agencies improve performance. Labor is also researching strategies that agencies can use to increase the successful return-to-work of employees who have sustained disabilities as a result of workplace injuries or illnesses. The results of this study are expected to be released in September 2012. Another Labor initiative is aimed at helping the federal government rehire injured federal workers who are not able to return to the job at which they were injured. OWCP initiated a 6-month pilot project in May 2011 to explore how Schedule A noncompetitive hiring authority might be used to rehire injured federal workers under FECA. As part of the project, OWCP provided guidance to claims staff, rehabilitation specialists, rehabilitation counselors, and employing agencies on the process of Schedule A certification and the steps it will take to facilitate Schedule A placements. According to Labor, the pilot identified obstacles to reemployment and provided input needed to determine whether such an effort can be expanded to other federal agencies. Identified obstacles included unanticipated questions from potential workers, such as if acceptance of a Schedule A designation would require a “probationary” period, and what impact acceptance of a Schedule A position would have on their retirement benefits. Of the 48 individuals Labor screened for Schedule A certification, 45 obtained certification, of whom 5 have been placed into federal employment. Each of the four agencies we reviewed submitted a plan for implementing the executive order as required. Only VA’s plan, as initially submitted, met all of OPM’s criteria for satisfying the requirements of the executive order (see table 2). Education and SSA revised their plans based on feedback from OPM. Specifically, Education’s revised plan states that Education will hire individuals with disabilities in all occupations and across all job series and grades. Education also clarified its commitment to coordinate with Labor to improve return-to-work outcomes through the POWER Initiative, and to engage and train managers on Schedule A hiring authority. Further, Education increased its goals for the percentage of job opportunity announcements that include information related to individuals with disabilities. SSA revised its plan to include goals and planned activities under the POWER Initiative, including quarterly monitoring of return-to-work successes under the program and a strategy for identifying injured employees who would benefit from reasonable accommodations and reassignment. OMB submitted its plan in March 2012 but, according to OMB officials, the agency has not received feedback from OPM. Agencies had positive views about the executive order’s requirement that they develop written plans to increase the number of federal employees with disabilities. In particular, Education, SSA, and VA said that the executive order provided an opportunity to further develop the written plans they already had in place for hiring and retaining employees with disabilities. Agencies were supportive of the goal of increasing the hiring and retention of federal employees with disabilities, and reported few challenges in implementing their plans to achieve this goal. Officials at all of the agencies we interviewed cited funding constraints as a potential obstacle to hiring more employees with disabilities. OMB officials also said that it was a challenge to identify individuals with the right skills and experience to fill their positions. For example, officials said that many of the candidates on OPM’s list of Schedule A-certified individuals have entry level skills and not the more advanced skills and experience that are required for positions at OMB. Agency officials cited no special challenges with respect to retaining employees with disabilities at their agencies. In October 2010, we reported on eight leading practices that could help the federal government become a model employer for individuals with disabilities. These practices, which are consistent with the executive order’s goal of increasing the number of individuals with disabilities in the federal government, have been implemented to varying degrees by the four agencies we contacted for this review. Top leadership commitment: Involvement of top agency leadership is necessary to overcome the resistance to change that agencies could face when trying to address attitudinal barriers to hiring individuals with disabilities. When leaders communicate their commitment throughout the organization, they send a clear message about the seriousness and business relevance of diversity management. Leaders at the agencies we talked with have, to varying degrees, communicated their commitment to hiring and retaining individuals with disabilities to their employees. Education has issued annual policy statements to its employees ensuring equal employment opportunity for all applicants and employees, including those with targeted disabilities, and officials told us that they routinely host events that address issues related to hiring and promoting equal employment opportunity. For example, in October 2008, Education hosted an event to encourage hiring individuals with disabilities and distributed a written guide about using Schedule A hiring authority to facilitate hiring individuals with targeted or severe disabilities, as well as disabled veterans. OMB officials said that it is briefing managers on the requirements of the executive order and that it planned to communicate the agency’s commitment to implementing the executive order to all staff in May 2012. SSA’s Commissioner announced his support for employing individuals with disabilities and encouraged employees to continue efforts to hire and promote these individuals in a March 2009 broadcast to all employees. VA said that the Secretary regularly communicates his commitment to hiring and retaining employees with disabilities through memorandums to all employees. In a September 2010 memorandum, the Secretary announced the agency’s goal of increasing the percentage of individuals with targeted disabilities that it hires and employs to 2 percent in fiscal year 2011. Accountability: Accountability is critical to ensuring the success of an agency’s efforts to implement leading practices and improve the employment of individuals with disabilities. To ensure accountability, agencies should set goals, determine measures to assess progress toward goals, evaluate staff and agency success in helping meet goals, and report results publicly. Education, SSA and VA’s disability hiring plans all include goals that will allow them to measure their progress toward meeting the goals of the executive order. Prior to the executive order, Education issued a Disability Employment Program Strategic Plan for fiscal years 2011-2013 that established goals related to reasonable accommodations, and recruitment and retention, and offered strategies for meeting these goals, as well as ways to track and measure agency progress. At SSA, accountability for results related to the executive order is included in the performance plan of the senior-level official responsible for implementing it. VA specifically holds senior executives accountable for meeting agency numerical goals by including these goals in their contracts. Additionally, VA senior executives’ contracts include a performance element for meeting hiring goals for individuals with targeted disabilities. OMB has not yet developed such goals. Regular surveying of the workforce on disability issues: Regularly surveying their workforces allows agencies to have more information about potential barriers to employment for people with disabilities, the effectiveness of their reasonable accommodation practices, and the extent to which employees with disabilities find the work environment friendly. To collect this information, agencies should survey their workforces at all stages of their employment, including asking employees to complete the SF-256 when they are hired, and asking relevant questions on employee feedback surveys and in exit interviews. VA officials said that they encourage new employees to complete the SF- 256, and SSA reminds all employees to annually review their human resource records and update or correct information, including disability data. In addition, all of the agencies we contacted survey employees to solicit feedback on a range of topics. However, only SSA and VA include a question on disability status or reasonable accommodations on these surveys. In addition, Education and SSA said that they routinely conduct exit surveys to solicit information from employees who separate from service about their reasons for leaving. While VA has an exit survey, officials said it is not consistently administered to all employees who separate. Education officials said that they have additional means of obtaining information about barriers for employees with disabilities. For example, senior managers hold open forums with staff, and employees can submit feedback to management through the agency’s Intranet. Education officials also reported that employees with disabilities have formed their own group to address access to assistive technology, which has helped Education to obtain improved technology, such as videophones. OMB officials said that their Diversity Council and Personnel Advisory Board provide forums for employees to discuss diversity issues, including those related to disabilities, and share them with senior leadership. Better coordination of roles and responsibilities: Often the responsibilities related to employment of people with disabilities are dispersed, which can create barriers to hiring if agency staff defer taking action, thinking that it is someone else’s responsibility. Coordination across agencies can encourage agencies with special expertise in addressing employment obstacles for individuals with disabilities to share their knowledge with agencies that have not yet developed this expertise. All of the agencies we interviewed had, to some extent, coordinated within and across agencies to improve their recruitment and retention efforts. Specifically, each agency has a designated section 508 coordinator who assists the agency in ensuring that, as required by section 508 of the Rehabilitation Act, employees with disabilities have access to information and data that are comparable to that provided to those without disabilities. In addition, each agency has a single office or primary point of contact that is responsible for overseeing activities related to hiring and retaining employees with disabilities. Officials at all of the agencies we talked to said their agencies engaged in one or more interagency efforts to address disability issues. All of these agencies participate in the CHCO Council, which facilitates sharing of best practices and challenges related to human capital issues, including those related to employees with disabilities. In addition, Education, OMB and SSA officials said that they work with state vocational rehabilitation agencies, which can help them identify accommodations that may be needed for new hires with disabilities. Education and SSA also participate in the Federal Disability Workforce Consortium, an interagency partnership working to improve recruitment, hiring, retention, and advancement of individuals with disabilities by sharing information on disability employment issues across government. SSA and VA have also participated in the Workforce Recruitment Program for College Students VA and Education have also worked together to assist with Disabilities; disabled veterans by providing unpaid work experience at Education, which may lead to permanent employment. Managed by Labor’s Office of Disability Employment Policy and the Department of Defense’s Office of Diversity Management and Equal Opportunity, this program is a recruitment and referral effort that connects federal sector employers nationwide with highly motivated college students and recent graduates with disabilities. said that the site is useful for seeing what other agencies are doing, and that they have also shared their own practices on the site. Training for staff at all levels: Agencies can leverage training to communicate expectations about implementation of policies and procedures related to improving employment of people with disabilities, and help disseminate leading practices that can help improve outcomes. All of the selected agencies provide some training for staff at all levels on the importance of workforce diversity. They also require managers and supervisors to take training on hiring procedures related to individuals with disabilities, and the use of Schedule A hiring authority. In addition, VA requires employees at all levels to take training specifically devoted to the legal rights of individuals with disabilities. At Education, this training is required for managers and supervisors, while at SSA it is available but optional for all employees. Career development opportunities: Opportunities for employees with disabilities to participate in work details, rotational assignments, and mentoring programs can lead to increased retention and improved employee satisfaction, and improve employment outcomes by helping managers identify employees with high potential. All of the agencies we interviewed provided special work details or rotational assignments for all employees; one reported having a program exclusively for those with disabilities. Specifically, Education uses Project SEARCH to provide internships for students with disabilities to help them become ready to work through on-the-job training. Education officials reported that some of these internships have led to permanent employment at Education. A flexible work environment: Flexible work schedules, telework, and other types of reasonable accommodations are valuable tools for the recruitment and retention of employees, regardless of disability status. Such arrangements can make it easier for employees with health impairments to successfully function in the work environment or facilitate an injured employee’s return to work. All of the agencies we interviewed provide flexible work arrangements, including flexible work schedules and teleworking. These agencies also make assistive technologies, such as screen reader software, available for employees with disabilities, which can facilitate their ability to take advantage of flexible work arrangements. Education, OMB, and SSA also offer all employees opportunities for job sharing. Centralized funding for reasonable accommodations: Having a central budget at the highest level of the agency can help ensure that employees with disabilities have access to reasonable accommodations by removing these expenses from local operational budgets and thus reducing managers’ concerns about their costs. Education, SSA, and VA use centralized funding accounts to pay for reasonable accommodations for employees with disabilities. At Education, a centralized fund is usually used to cover expenses related to providing readers, interpreters, and personal attendants. However, in cases where these services are needed on a daily basis, Education may require the operating unit to hire someone full-time and pay for this from their unit budget. OMB provides funding from its own budget to pay for reasonable accommodations, rather than receiving funding from the Executive Office of the President. OMB officials also told us that they also have been able to rely on the Department of Defense’s Computer/Electronic Accommodations Program to help provide reasonable accommodations for some of the employees. This program facilitates access to assistive technology and services to people with disabilities, federal managers, supervisors, and information technology professionals by providing a single point of access for executive branch agencies. As the nation’s largest employer, the federal government has the opportunity to be a model for the employment of people with disabilities. Consistent with the July 2010 executive order, OPM, Labor, and other agencies have helped provide the framework for federal agencies to take proactive steps to improve the hiring and retention of persons with disabilities. However, nearly 2 years after the executive order was signed, the federal government is not on track to achieve the executive order’s goals. Although federal agencies have taken the first step by submitting action plans to OPM for review, many agency plans do not meet the criteria identified by OPM as essential to becoming a model employer of people with disabilities. Though the executive order does not specifically authorize OPM to require agencies to address deficiencies, regularly reporting to the president and others on agency progress in addressing these deficiencies may compel agencies to address them and better position the federal government to reach the goals of the executive order. Further, officials responsible for hiring at federal agencies need to acquire the necessary knowledge and skills to proactively recruit, hire, and retain individuals with disabilities. Agency officials we spoke with said more comprehensive training on the tools available to them, including the requirements of Schedule A hiring authority, is needed. While the mandatory training program remains in development, until it is fully developed and communicated to agencies, opportunities to better inform relevant agency officials on how to increase the employment of individuals with disabilities may be missed. Finally, concerns have been raised by stakeholders, including EEOC, OPM, and advocates for people with disabilities, about the reliability of government statistics on the number of individuals with disabilities in the federal government. Most of the concerns focus on the likelihood of underreporting given the reliance on voluntary disclosure, but the extent of the underreporting is unknown. Unreliable data hinder OPM’s ability to measure the population of federal workers with disabilities and may prevent the federal government from developing needed policies and procedures that support efforts to become a model employer of people with disabilities. Determining the accuracy of SF-256 data, for example, by examining the extent to which employees voluntarily disclose their disability status and reasons for nondisclosure, is an essential step for ensuring that OPM can measure progress towards the executive order’s goals. To ensure that the federal government is well positioned to become a model employer of individuals with disabilities, we recommend that the Director of OPM take the following three actions: 1. Incorporate information about plan deficiencies into its regular reporting to the president on agencies’ progress in implementing their plans, and inform agencies about this process to better ensure that the plan deficiencies are addressed. 2. Expedite the development of the mandatory training programs for hiring managers and human resource personnel on the employment of individuals with disabilities, as required by the executive order. 3. Assess the extent to which the SF-256 accurately measures progress toward the executive order’s goal and explore options for improving the accuracy of SF-256 reporting, if needed, including strategies for encouraging employees to voluntarily disclose their disability status. Any such strategies must comply with legal standards governing disability-related inquiries, including ensuring that employee rights to voluntarily disclose a disability are not infringed upon. We provided a draft of this report to Education, EEOC, Labor, OMB, OPM, SSA, and VA for review and comment. In written comments, OPM agreed with findings and recommendations identified in the report, and described actions being implemented in an effort to address them. To better ensure agencies address deficiencies identified in their disability hiring plans, OPM has begun notifying agencies that it plans to report remaining deficiencies to the president and on the OPM website by August 2012. With regard to the need to expedite the development of the mandatory training program, OPM, in coordination with partner agencies has identified training for hiring managers and supervisors, and Human Resource personnel. Finally, OPM stated that it is engaged in discussions with the White House and stakeholder agencies to better define questions on the SF-256 to increase response rates. OPM also said it plans to work with EEOC and Labor to develop guidance for agencies to encourage voluntary self-disclosure through annual re-surveying of the workforce and providing employees with the option to complete the SF-256 when they request a reasonable accommodation. OPM expects to complete these efforts by January 2013. While these actions may help improve the accuracy of the SF-256 data, we think taking steps to assess the accuracy of the data will enhance OPM’s efforts. For example, understanding the extent to which employees do not voluntarily self- disclose their disability status and the reasons why may help target the messages agencies can use to encourage voluntary self-disclosure. Without such an understanding, OPM and agencies may miss opportunities to increase the accuracy of the data collected on the SF- 256. Education, EEOC, OMB, OPM, and SSA provided technical comments, which have been incorporated into the report as appropriate. Labor and VA had no comments. We are sending copies of this report to Education, EEOC, Labor, OMB, OPM, SSA, and VA and to the appropriate congressional committees and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Yvonne Jones at (202) 512-2717 or JonesY@gao.gov, or Daniel Bertoni at (202) 512-7215 or BertoniD@gao.gov. Contact information for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. Daniel Bertoni, (202) 512-7215, bertonid@gao.gov. Yvonne D. Jones, (202) 512-2717, jonesy@gao.gov. In addition to the contacts named above, Neil Pinney, Assistant Director; Debra Prescott, Assistant Director; Charlesetta Bailey; Benjamin Crawford; Catherine Croake; Karin Fangman; David Forgosh; Robert Gebhart; Michele Grgich; Amy Radovich; Terry Richardson; and Regina Santucci made key contributions to this report. Federal Employees’ Compensation Act: Preliminary Observations on Fraud-Prevention Controls. GAO-12-402. Washington, D.C.: January 25, 2012. Coast Guard: Continued Improvements Needed to Address Potential Barriers to Equal Employment Opportunity. GAO-12-135. Washington, D.C.: December 6, 2011. Federal Workforce: Practices to Increase the Employment of Individuals with Disabilities. GAO-11-351T. Washington, D.C.: February 16, 2011. Highlights of a Forum: Participant-Identified Leading Practices That Could Increase the Employment of Individuals with Disabilities in the Federal Workforce. GAO-11-81SP. Washington, D.C.: October 5, 2010. Highlights of a Forum: Actions that Could Increase Work Participation for Adults with Disabilities. GAO-10-812SP. Washington, D.C.: July 29, 2010. Federal Disability Programs: Coordination Could Facilitate Better Data Collection to Assess the Status of People with Disabilities. GAO-08-872T. Washington, D.C.: June 4, 2008. Federal Disability Programs: More Strategic Coordination Could Help Overcome Challenges to Needed Transformation. GAO-08-635. Washington, D.C.: May 20, 2008. Highlights of a Forum: Modernizing Federal Disability Policy. GAO-07-934SP. Washington, D.C.: August 3, 2007. Equal Employment Opportunity: Improved Coordination Needed between EEOC and OPM in Leading Federal Workplace EEO. GAO-06-214. Washington, D.C.: June 16, 2006. Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies. GAO-06-15. Washington, D.C.: October 21, 2005.","In July 2010, the president signed Executive Order 13548 committing the federal government to become a model employer of individuals with disabilities and assigned primary oversight responsibilities to OPM and Labor. According to OPM, the federal government is not on track to meet the goals of the executive order, which committed the federal government to hire 100,000 workers with disabilities over the next 5 years. GAO was asked to examine the efforts that (1) OPM and Labor have made in overseeing federal efforts to implement the executive order; and (2) selected agencies have taken to implement the executive order and to adopt leading practices for hiring and retaining employees with disabilities. To conduct this work, GAO reviewed relevant agency documents and interviewed appropriate agency officials. GAO conducted case studies at Education, SSA, VA, and OMB. The Office of Personnel Management (OPM) and the Department of Labor (Labor) have taken steps to implement the executive order and help agencies recruit, hire, and retain more employees with disabilities. OPM provided guidance to help agencies develop disability hiring plans and reviewed the 66 plans submitted. OPM identified deficiencies in most of the plans. For example, though 40 of 66 agencies included a process for increasing the use of a special hiring authority to increase the hiring of people with disabilities, 59 agencies did not meet all of OPM’s review criteria, and 32 agencies had not addressed plan deficiencies as of April 2012. In response to executive order reporting requirements, OPM officials said they had briefed the White House on issues related to implementation, but they did not provide information on deficiencies in all plans. While the order does not specify what information these reports should include beyond addressing progress, providing information on deficiencies would enable the White House to hold agencies accountable. OPM is still developing the mandatory training programs for officials on the employment of individuals with disabilities, as required by the executive order. Several elective training efforts exist to help agencies hire and retain employees with disabilities, but agency officials said that more information would help them better use available tools. To track and measure progress towards meeting the executive order’s goals, OPM relies on employees to voluntarily disclose a disability. Yet, agency officials, including OPM’s, are concerned about the quality of the data. For example, agency officials noted that people may not disclose their disability due to concerns about how the information may be used. Without quality data, agencies may be challenged to effectively implement and assess the impact of their disability hiring plans. The Department of Education (Education), Social Security Administration (SSA), Office of Management and Budget (OMB), and Department of Veterans Affairs (VA) submitted disability hiring plans, and have taken steps to implement leading practices for increasing employment of individuals with disabilities, such as demonstrating top leadership commitment. The executive order provided SSA, VA, and Education an opportunity to further develop existing written plans. However, officials at these agencies cited funding constraints as a potential obstacle to hiring more employees with disabilities. In terms of leading practices, all four agencies have communicated their commitment to hiring and retaining individuals with disabilities and coordinated within or across other agencies to improve their recruitment and retention efforts. For example, each agency has a single point of contact to help ensure that employees with disabilities have access to information that is comparable to that provided to those without disabilities, and for overseeing activities related to hiring and retaining employees with disabilities. In addition, VA holds senior managers accountable for meeting hiring goals by including targets in their contracts. Each agency requires training for managers and supervisors on procedures for hiring individuals with disabilities, and VA further requires that all employees receive training on the legal rights of individuals with disabilities. Education, SSA, and VA rely on centralized funding accounts to pay for reasonable accommodations. GAO recommends that OPM: (1) incorporate information about plan deficiencies into its required regular reporting to the president on implementing the executive order and inform agencies about this process; (2) expedite the development of the mandatory training programs required by the executive order; and (3) assess the accuracy of the data used to measure progress toward the executive order’s goals and, if needed, explore options for improving its ability to measure the population of federal employees with disabilities, including strategies for encouraging employees to voluntarily disclose disability status. OPM agreed with GAO’s recommendations.",govreport
"BLM’s mission is to manage public lands and resources to best serve the needs of the American people. The Bureau, which is part of the Department of the Interior (DOI), has 210 state, district, and resource area offices that manage about 270 million acres of public lands located in 28 states, primarily in the West and Alaska (see figure 1). BLM’s offices also manage another 300 million acres of subsurface mineral resources that underlie lands administered by other government agencies or are owned by private interests. BLM’s fiscal year 1995 appropriation totaled $1.24 billion. In fulfilling its mission, BLM develops land-use plans to balance multiple uses and competing demands, including ecosystem management, timber harvesting, mining, oil and gas production, watershed management, wildlife management, and recreation. It also designates and maintains land of critical environmental concern and is responsible for a major section of the National Spatial Data Infrastructure. In performing these functions, BLM maintains over 1 billion documents, including land surveys and surveyor notes, tract books, land patents, mining claims, oil and gas leases, and land and mineral case files. According to BLM, many of these paper documents are deteriorating, and some are illegible. Most of the documents are manually maintained and stored in a number of locations, although some have been entered into various databases since the 1970s. During the early 1980s, BLM found it could not handle the case processing workload associated with a peak in the number of applications for oil and gas leases. BLM recognized that to keep up with the increased demand it needed to automate its manual records and case processing activities. Thus, the Bureau began planning to acquire an automated land and mineral case processing system (ALMRS). At that time, BLM estimated the life-cycle cost of such a case processing system would be about $240 million. In 1988, BLM expanded the scope of ALMRS to include a land information system (LIS). This system was to provide automated information systems and geographic information systems technology (GIS) support for other land management functions, such as land use and resource planning. BLM then combined the LIS with a project to modernize the Bureau’s computer and telecommunications equipment. BLM estimated the total life-cycle cost of this combined project to be $880 million. According to DOI and ALMRS project officials, the Office of Management and Budget (OMB) directed BLM to scale down the combined project in 1989 because of the projected high cost. The project, which was renamed ALMRS/Modernization, was reduced to three major components—the ALMRS Initial Operating Capability (ALMRS IOC), Geographic Coordinate Data Base (GCDB), and modernization of BLM’s computer and telecommunications infrastructure and rehost of selected management and administrative systems. Estimated life-cycle costs were cut to $575 million. In 1993, BLM reduced the ALMRS/Modernization 10-year life-cycle cost estimate from $575 million to $403 million, after the system development and deployment contract was awarded at a lower cost than had been anticipated. BLM has designated the ALMRS/Modernization project as a mission-critical system to (1) automate land and mineral records and case processing activities and (2) provide information to support land and resource management activities. The project is a large-scale effort that is expected to provide an efficient means to record, maintain, and retrieve land description, ownership, and use information to support BLM, other federal programs, and interested parties. It is to accomplish this by (1) establishing a common information technology platform,(2) increasing public access to BLM records through the Internet, (3) integrating multiple databases into a single geographically referenced database, (4) shortening the time to complete case processing activities, and (5) replacing costly manual records with automated records. Appendix II provides an overview of the planned ALMRS/Modernization architecture. As noted above, the ALMRS/Modernization consists of three components—ALMRS IOC, GCDB, and technology modernization and rehost of selected systems. The ALMRS IOC component is to provide (1) support for case processing activities, including recording valid mining claims, processing mineral patents, and granting rights-of-way for roads and power corridors and (2) information for land and resource management activities, including timber sales and grazing leases. The GCDB component is the database that will contain geographic coordinates and survey information for land parcels. Other databases, such as those containing land and mineral records, will be integrated with GCDB. The information technology modernization and rehost component consists of installing computer and telecommunications equipment and converting selected management and administrative systems to a relational database system that will be used throughout the Bureau. Between fiscal years 1983 and 1995, about $296.2 million had been appropriated for ALMRS/Modernization. According to project officials, obligations for ALMRS/Modernization totaled $262.8 million from 1983 through April 30, 1995. They expect obligations to equal appropriations by September 30, 1995. In 1993, OMB and BLM agreed to annual funding limits for ALMRS/Modernization through fiscal year 2002. As agreed, total spending was not to exceed $403 million for fiscal years 1983 through 2002. However, to stay within the limit for fiscal year 1995, BLM delayed the initial hardware installation for the Alaska and Wyoming state, district, and resource area offices. Also, BLM estimates that it will exceed the fiscal year 1996 limit of $69.5 million by $25.2 million. BLM expects to obtain the $25.2 million from other parts of its operations. According to ALMRS/Modernization project officials, the increase is attributable to several factors, but primarily because of requirements that were added after contract award. These requirements include system engineering studies for system architecture and system security issues, a requirement to integrate BLM’s remaining older personal computers and local area networks with the new ALMRS/Modernization systems, changes to more easily accommodate land record automation requirements of other Interior bureaus and federal agencies, and more training for users and technical staff. In addition, the ALMRS/Modernization project office now believes that operations and maintenance costs in fiscal years 1997 through 2002 will be more than the OMB and BLM funding agreement for that category. BLM is currently working on a new operations and maintenance estimate. BLM has completed most of the initial installation of computer and telecommunications equipment and has met most of its ALMRS IOC, GCDB, and rehost milestones thus far. As the ALMRS IOC development nears completion over the next several months, tasks will become more complex as the system is integrated and tested. BLM has taken action to maintain its tight development schedule, but slippages could still occur because there is little schedule time available to correct unanticipated problems. Also, BLM has recently taken action to obtain an independent assessment of the ALMRS IOC to help ensure that its requirements are met. BLM has been meeting most of its schedule milestones for the initial installation of ALMRS IOC and modernization computer and telecommunications hardware. Thus far, BLM has installed (1) a mix of ALMRS IOC, office automation, E-mail, GIS servers, and telecommunications equipment primarily in eight state offices and their subordinate district and resource area offices and (2) about 4,400 of the planned 6,073 workstations in these offices. The Bureau plans to install 730 more workstations and other equipment in fiscal year 1995 at the Idaho and Utah state offices, their subordinate offices, and a support office. However, initial hardware installation for Alaska and Wyoming state and subordinate offices has been delayed because of a shortage of hardware funds in fiscal year 1995, according to ALMRS/Modernization project officials. BLM recently rescheduled the installation of servers and 951 workstations for these locations to fiscal year 1996. The collection and validation of land and mineral data for ALMRS IOC are on schedule for all ten state offices. The land and mineral data files are to be converted to INFORMIX after the installation and testing of final hardware upgrades and ALMRS IOC software. The development of ALMRS IOC software, which BLM divided into three phases or “builds,” is currently on schedule. Build 1, which consists of about 46,000 lines of code, was developed and successfully tested on time. BLM and the prime contractor have been working on about 124,000 lines of code for build 2. They expect to complete the software integration test for build 2 on September 12, 1995. BLM and the prime contractor estimate that about 120,000 lines of code will be developed in build 3 to complete the ALMRS IOC software. The software produced in builds 1, 2, and 3 will be integrated to form ALMRS IOC. As to the GCDB component, nine state offices are meeting or are ahead of the data collection milestones set in 1993. One state office, Montana, is behind schedule. The final test of the software to convert existing data files to INFORMIX is scheduled to be completed by January 12, 1996. BLM plans to convert the GCDB data files when ALMRS IOC is deployed in each state office. Finally, the administrative systems rehost effort is on schedule with all 13 of the planned software applications and related databases converted from COBOL to INFORMIX. Three of these applications have been rehosted to the ALMRS/ Modernization equipment and are operational, one is in the process of being rehosted, six have been tested and accepted and will be rehosted, and three have undergone testing and are expected to be accepted soon. According to the Deputy Project Manager, BLM plans to update the systems before deploying them to satisfy users’ change requests that were held in abeyance while the systems were being converted to INFORMIX. Figure 2 shows future milestones for the software integration tests of builds 2 and 3, qualification test for ALMRS IOC (functionality and integration), acceptance of ALMRS IOC, and final installation of ALMRS IOC hardware upgrades and software. As the ALMRS/Modernization nears the final testing and implementation stages, the project work will become more complex and the schedule more demanding. The final tests will include assessing the ALMRS IOC software to determine whether it meets design specifications, software units properly interface with other units, software responds correctly and consistently to users, and hardware and software operate as expected at pilot sites and under various levels of workload. As with all development efforts, the actual performance of the new software systems will not be known until they are completed, fully tested, and deployed. Developing realistic project schedules is critical to managing the successful development of large software systems. The General Services Administration has found that setting realistic project schedules is one of the ten most important factors in successfully developing large, complex federal computer systems. ALMRS/Modernization project officials and an Interior Senior Technical Analyst stated that the milestones were not based on an assessment of the time and resources needed, but instead were based on the need to complete the project by the end of fiscal year 1996—the deadline established in the OMB and BLM agreement. Nevertheless, project officials said they have been committed to completing the development and deployment of ALMRS as scheduled. Our analysis of the project schedule showed that several critical milestones are very close together with little recovery time available to deal with unanticipated problems that may be encountered. Therefore, slippages in the ALMRS/Modernization development and testing schedule could occur and impact project cost and completion plans. Similarly, slippages in the deployment of ALMRS IOC and database conversions could also impact project costs and completion plans because of the short installation periods scheduled for each state. As shown in table 1, BLM was allowing only 15 to 20 working days to perform the final installation of ALMRS IOC and convert databases in each state. ALMRS/Modernization project officials and an Interior Senior Technical Analyst agreed that both the development and testing milestones and deployment and database conversion milestones are very tight with little tolerance for slippages. Interior and BLM have been taking a number of actions to closely monitor the project status and schedule to avoid slippages. Interior Information Resources Management (IRM) officials have been conducting periodic oversight reviews and have required project officials to address project schedule issues. BLM has also established a consolidated project schedule that includes BLM’s and the prime contractor’s tasks to estimate and monitor the entire project schedule. Finally, BLM advanced the date for the software integration test for build 2 to provide additional time to deal with any unexpected problems. BLM recently revised the installation schedule because of an anticipated reduction in funding for fiscal year 1996. Specifically, the Bureau rescheduled the final ALMRS IOC installation and database conversions from fiscal year 1996 to 1997. Verification and validation of software is widely accepted and advocated by Federal Information Processing Standards Publication 132. Verification and validation is a formal process to assess the products of each system’s life-cycle phase, including concept, requirements, design, testing, implementation and installation, and operations and maintenance. Typically, the assessments are performed by someone not involved in developing the software to help ensure that the software meets the organization’s requirements, that software development and maintenance costs will not escalate unexpectedly, and that software quality is acceptable. Recently, project officials decided to obtain an independent verification and validation of ALMRS IOC software in response to direction from the House Committee on Appropriations. This action should help ensure that the software meets BLM’s stated requirements and provides the support expected from this mission-critical system. Stress testing automated systems before deploying them is a common industry practice. Such testing is done to ensure that the entire system will successfully process workloads expected during peak operating periods and determine the point at which major system resources (e.g., servers, workstations, storage devices, and local and wide area networks) will be exhausted. BLM plans to perform a 30-day acceptance test of the ALMRS IOC at pilot sites to assess functionality and performance in an operational setting. During this period, BLM also plans to stress test the ALMRS IOC (i.e., state and district office ALMRS IOC servers, terminals, and workstations) in a network environment. If ALMRS IOC performs successfully at the end of the test, BLM will accept and install it throughout all of its offices. However, BLM’s stress-test plans cover only the ALMRS IOC. The plans do not examine how the entire ALMRS/Modernization—including ALMRS IOC, office automation, E-mail, administrative systems, and various departmental, state, and district applications in a network environment—will perform under peak workload conditions. While ALMRS IOC is the largest and most significant component in the initial deployment of BLM’s modernization effort, other systems and applications are expected to place considerable demand on the ALMRS/Modernization computer systems and communications networks. By limiting the stress testing to ALMRS IOC, BLM will deploy the ALMRS/Modernization nationwide without knowing whether it can perform as intended during peak workloads. To date, the Bureau has been completing most of the project tasks according to the schedule milestones established in 1993. However, the project schedule could slip because there is little time available to deal with unexpected problems. Further, over the next several months, BLM and the prime contractor will be working on the more difficult tasks of completing, integrating, and testing ALMRS IOC. BLM’s recent action to obtain independent verification and validation of ALMRS IOC software should help ensure that BLM’s requirements are met. However, the Bureau’s plan to stress test the ALMRS IOC portion of the modernized system is not sufficient. Stress testing only a portion of the modernized system will not provide assurance that all of the systems and technology to be deployed can successfully process the workloads expected during peak operating periods. We recommend that the Director, BLM, ensure that the entire ALMRS/Modernization is thoroughly stress tested before it is deployed throughout the Bureau. In commenting on a draft of this report, BLM stated that it agreed with our conclusions and recommendation. The Bureau said it now plans to stress test the entire ALMRS/ Modernization to ensure that all systems and technology can process the workloads expected during peak operating conditions. As previously noted, the Bureau said it has contracted for an independent verification and validation of the ALMRS IOC software in response to direction by the House Committee on Appropriations to perform a verification and validation test. BLM also suggested some clarifications and provided additional information for our report. We have incorporated these suggestions and information as appropriate. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will provide copies to the Secretary of the Interior; the Director, Bureau of Land Management; the Director, Office of Management and Budget; and interested congressional committees. We will also make copies available to others upon request. Please call me at (202) 512-6253 if you or your staff have any questions concerning this report. Other major contributors are listed in appendix III. To ascertain BLM’s progress in developing and implementing the ALMRS/Modernization, we reviewed ALMRS/Modernization project documents, DOI reports, a Department of the Treasury report, BLM studies on ALMRS/Modernization project development, General Services Administration IRM publications, Federal Information Processing Standards Publication 132, OMB Circular A-130, and GAO reports on large-scale systems development projects. We also attended departmental project reviews at the ALMRS/Modernization project office in Lakewood, Colorado, and reviewed the minutes of four prior project reviews. We discussed the planned capabilities of the system, technical complexity, and development progress with prime contractor officials, a DOI Senior Technical Analyst, and ALMRS/Modernization project officials responsible for systems engineering, software development, and project management. We also discussed with ALMRS/Modernization project officials and BLM Headquarters officials the planning and development history of ALMRS/Modernization, testing plans, and efforts to follow industry practices. We analyzed project milestones against current progress, and reviewed the remaining tasks for their complexity. We reviewed and analyzed ALMRS/Modernization project estimates and fiscal year 1996 budget justifications and documentation. We also compared BLM’s fiscal year 1996 budget request for the ALMRS/Modernization with its cost estimate for fiscal year 1996. We reviewed BLM’s options paper for ALMRS/Modernization operations and maintenance funding through fiscal year 2001 and discussed it with the ALMRS/Modernization Deputy Project Manager and the project budget analyst. We interviewed ALMRS/Modernization project officials and a Department Senior Technical Analyst on ALMRS/Modernization total project budget and milestones. Budget estimates were collected from the ALMRS/Modernization Deputy Project Manager, budget analysts, and other BLM Headquarters representatives. These estimates were confirmed by the Department’s IRM office; however, we did not independently verify the accuracy of the estimates. Our work was performed between March 1995 and August 1995, in accordance with generally accepted government auditing standards. We performed our work at the Department’s IRM headquarters and BLM headquarters in Washington, D.C., and at the ALMRS/Modernization Project Office and prime contractor’s office in Lakewood, Colorado. We requested comments on a draft of this report from the Director, Bureau of Land Management. In response, we received comments from the Chief, Office of Information Resources Management/Modernization, Bureau of Land Management. We have incorporated these comments as appropriate. The ALMRS/Modernization system—slated for deployment at approximately 200 BLM sites around the country—is to be implemented on a common information technology platform. The platform will be composed of servers, terminals, workstations, switching hubs, multiplexers, modems, and firewalls interconnected via local, state, and national-level networks. As planned, the ALMRS environment will initially support existing automated systems, including legacy local area networks and microcomputers. BLM expects that a typical state office installation will consist of several servers supporting major application groups—ALMRS IOC and related databases, office automation applications, GIS applications and related GCDB databases, and E-mail. A typical state office is to provide land and mineral resource data through the state ALMRS IOC server to district and resource area offices. State offices are to be interconnected via a Department of the Interior network. Each district or resource area office is to have its own GIS and office automation servers. BLM users are to access applications via terminals and workstations interconnected through the local, state, and DOI networks. The public is to have access to selected ALMRS information in public access rooms equipped with stand-alone ALMRS IOC servers and terminals. The public access systems are expected to be isolated from the state and district office ALMRS IOC systems for security purposes. BLM is also planning to provide connections to the Internet. The Bureau plans to protect each state office with a firewall system—a security device designed to protect the BLM systems from intrusion by hackers. Figure II.1 shows a high-level overview of the ALMRS/Modernization environment. Accounting and Information Management Division, Washington, D.C. David G. Gill, Assistant Director Mirko J. Dolak, Technical Assistant Director Marcia C. Washington, Senior Information Systems Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed the Bureau of Land Management's (BLM) modernization of its Automated Land and Mineral Record System (ALMRS), focusing on: (1) BLM progress in developing and implementing ALMRS modernization; and (2) potential modernization risks. GAO found that: (1) although BLM initiated ALMRS planning in the early 1980s, it did not award the modernization contract until 1993 because of numerous changes in the project's concept and scope; (2) BLM has installed most of its initial computer and telecommunications equipment and has met most of its schedule milestones, but it is deferring some equipment deployment until fiscal year (FY) 1996 and FY 1997 because of a lack of funds; (3) project costs are expected to exceed the FY 1996 spending limit by $25.5 million due to added system requirements; (4) schedule slippages may occur because ALMRS modernization is becoming more complicated and BLM has allocated little time to deal with unanticipated problems; and (5) although BLM has recently obtained independent verification and validation of new ALMRS software to ensure that it meets BLM needs, BLM does not plan to stress test the entire ALMRS modernization project to access its ability to meet anticipated peak workloads.",govreport
"IAEA is an independent organization affiliated with the United Nations. Its governing bodies include the General Conference, composed of representatives of the 138 IAEA member states, and the 35-member Board of Governors, which provides overall policy direction and oversight. The Secretariat, headed by the Director General, is responsible for implementing the policies and programs of the General Conference and Board of Governors. The United States is a permanent member of the Board of Governors. IAEA derives its authority to establish and administer safeguards from its statute, the Treaty on the Non-proliferation of Nuclear Weapons and regional nonproliferation treaties, bilateral commitments between states, and project agreements with states. Since the NPT came into force in 1970, it has been subject to review by signatory states every 5 years. The 1995 NPT Review and Extension conference extended the life of the treaty indefinitely, and the latest review conference occurred in May 2005. Article III of the NPT binds each of the treaty’s 184 signatory states that had not manufactured and exploded a nuclear device prior to January 1, 1967 (referred to in the treaty as non-nuclear weapon states) to conclude an agreement with IAEA that applies safeguards to all source and special nuclear material in all peaceful nuclear activities within the state’s territory, under its jurisdiction, or carried out anywhere under its control. The five nuclear weapons states that are parties to the NPT—China, France, the Russian Federation, the United Kingdom, and the United States—are not obligated by the NPT to accept IAEA safeguards. However, each nuclear weapons state has voluntarily entered into legally binding safeguards agreements with IAEA, and has submitted designated nuclear materials and facilities to IAEA safeguards to demonstrate to the non- nuclear weapon states their willingness to share in the administrative and commercial costs of safeguards. (App. I lists states that are subject to safeguards, as of August 2006.) India, Israel, and Pakistan are not parties to the NPT or other regional nonproliferation treaties. India and Pakistan are known to have nuclear weapons programs and to have detonated several nuclear devices during May 1998. Israel is also believed to have produced nuclear weapons. Additionally, North Korea joined the NPT in 1985 and briefly accepted safeguards in 1992 and 1993, but expelled inspectors and threatened to withdraw from the NPT when IAEA inspections uncovered evidence of undeclared plutonium production. North Korea announced its withdrawal from the NPT in early 2003, which under the terms of the treaty, terminated its comprehensive safeguards agreement. IAEA’s safeguards objectives, as traditionally applied under comprehensive safeguards agreements, are to account for the amount of a specific type of material necessary to produce a nuclear weapon, and the time it would take a state to divert this material from peaceful use and produce a nuclear weapon. IAEA attempts to meet these objectives by using a set of activities by which it seeks to verify that nuclear material subject to safeguards is not diverted to nuclear weapons or other proscribed purposes. For example, IAEA inspectors visit a facility at certain intervals to ensure that any diversion of nuclear material is detected before a state has had time to produce a nuclear weapon. IAEA also uses material-accounting measures to verify quantities of nuclear material declared to the agency and any changes in the quantities over time. Additionally, containment measures are used to control access to and the movement of nuclear material. Finally, IAEA deploys surveillance devices, such as video cameras, to detect the movements of nuclear material and discourage tampering with IAEA’s containment measures. The Nuclear Suppliers Group was established in 1975 after India tested a nuclear explosive device. In 1978, the Suppliers Group published its first set of guidelines governing the exports of nuclear materials and equipment. These guidelines established several requirements for Suppliers Group members, including the acceptance of IAEA safeguards at facilities using controlled nuclear-related items. In 1992, the Suppliers Group broadened its guidelines by requiring countries receiving nuclear exports to agree to IAEA’s safeguards as a condition of supply. As of August 2006, the Nuclear Suppliers Group had 45 members, including the United States. (See app. II for a list of signatory countries.) IAEA has taken steps to strengthen safeguards by more aggressively seeking assurances that a country is not pursuing a clandestine nuclear program. In a radical departure from past practices of only verifying the peaceful use of a country’s declared nuclear material at declared facilities, IAEA has begun to develop the capability to independently evaluate all aspects of a country’s nuclear activities. The first strengthened safeguards steps, which began in the early 1990s, increased the agency’s ability to monitor declared and undeclared activities at nuclear facilities. These measures were implemented under the agency’s existing legal authority under comprehensive safeguards agreements and include (1) conducting short notice and unannounced inspections, (2) collecting and analyzing environmental samples to detect traces of nuclear material, and (3) using measurement and surveillance systems that operate unattended and can be used to transmit data about the status of nuclear materials directly to IAEA headquarters. The second series of steps began in 1997 when IAEA’s Board of Governors approved the Additional Protocol. Under the Additional Protocol, IAEA has the right, among other things, to (1) receive more comprehensive information about a country’s nuclear activities, such as research and development activities, and (2) conduct “complementary access,” which enables IAEA to expand its inspection rights for the purpose of ensuring the absence of undeclared nuclear material and activities. Because the Additional Protocol broadens IAEA’s authority and the requirements on countries under existing safeguards agreements, each country must take certain actions to bring it into force. For each country with a safeguards agreement, IAEA independently evaluates all information available about the country’s nuclear activities and draws conclusions regarding a country’s compliance with its safeguards commitments. A major source of information available to the agency is data submitted by countries to IAEA under their safeguards agreements, referred to as state declarations. Countries are required to provide an expanded declaration of their nuclear activities within 180 days of bringing the Additional Protocol into force. Examples of information provided in an Additional Protocol declaration include the manufacturing of key nuclear-related equipment; research and development activities related to the nuclear fuel cycle; the use and contents of buildings on a nuclear site; and the location and operational status of uranium mines. The agency uses the state declarations as a starting point to determine if the information provided by the country is consistent and accurate with all other information available based on its own review. IAEA uses various types of information to verify the state declaration. Inspections of nuclear facilities and other locations with nuclear material are the cornerstone of the agency’s data collection efforts. Under the Additional Protocol, IAEA has the authority to conduct complementary access at any place on a site or other location with nuclear material in order to ensure the absence of undeclared nuclear material and activities, confirm the decommissioned status of facilities where nuclear material was used or stored, and resolve questions or inconsistencies related to the correctness and completeness of the information provided by a country on activities at other declared or undeclared locations. During complementary access, IAEA inspectors may carry out a number of activities, including (1) making visual observations, (2) collecting environmental samples, (3) using radiation detection equipment and measurement devices, and (4) applying seals. In 2004, IAEA conducted 124 complementary access in 27 countries. In addition to its verification activities, IAEA uses other sources of information to evaluate countries’ declarations. These sources include information from the agency’s internal databases, open sources, satellite imagery, and outside groups. The agency established two new offices within the Department of Safeguards to focus primarily on open source and satellite imagery data collection. Analysts use Internet searches to acquire information generally available to the public from open sources, such as scientific literature, trade and export publications, commercial companies, and the news media. In addition, the agency uses commercially available satellite imagery to supplement the information it receives through its open source information. Satellite imagery is used to monitor the status and condition of declared nuclear facilities and verify state declarations of certain sites. The agency also uses its own databases, such as those for nuclear safety, nuclear waste, and technical cooperation, to expand its general knowledge about countries’ nuclear and nuclear- related activities. In some cases, IAEA receives information from third parties, including other countries. Department of State and IAEA officials told us that strengthened safeguards measures have successfully revealed previously undisclosed nuclear activities in Iran, South Korea, and Egypt. Specifically, IAEA and Department of State officials noted that strengthened safeguards measures, such as collecting and analyzing environmental samples, helped the agency verify some of Iran’s nuclear activities. The measures also allowed IAEA to conclude in September 2005 that Iran was not complying with its safeguards obligations because it failed to report all of its nuclear activities to IAEA. As a result, in July 2006, Iran was referred to the U.N. Security Council, which in turn demanded that Iran suspend its uranium enrichment activities or face possible diplomatic and economic sanctions. In August 2004, as a result of preparations to submit its initial declaration under the Additional Protocol, South Korea notified IAEA that it had not previously disclosed nuclear experiments involving the enrichment of uranium and plutonium separation. IAEA sent a team of inspectors to South Korea to investigate this case. In November 2004, IAEA’s Director General reported to the Board of Governors that although the quantities of nuclear material involved were not significant, the nature of the activities and South Korea’s failure to report these activities in a timely manner posed a serious concern. IAEA is continuing to verify the correctness and completeness of South Korea’s declarations. IAEA inspectors have investigated evidence of past undeclared nuclear activities in Egypt based on the agency’s review of open source information that had been published by current and former Egyptian nuclear officials. Specifically, in late 2004, the agency found evidence that Egypt had engaged in undeclared activities at least 20 years ago by using small amounts of nuclear material to conduct experiments related to producing plutonium and highly enriched uranium. In January 2005, the Egyptian government announced that it was fully cooperating with IAEA and that the matter was limited in scope. IAEA inspectors have made several visits to Egypt to investigate this matter. IAEA’s Secretariat reported these activities to its Board of Governors. Despite these successes, a group of safeguards experts recently cautioned that a determined country can still conceal a nuclear weapons program. IAEA faces a number of limitations that impact its ability to draw conclusions—with absolute assurance—about whether a country is developing a clandestine nuclear weapons program. For example, IAEA does not have unfettered inspection rights and cannot make visits to suspected sites anywhere at any time. According to the Additional Protocol, complementary access to resolve questions related to the correctness and completeness of the information provided by the country or to resolve inconsistencies must usually be arranged with at least 24- hours advanced notice. Complementary access to buildings on sites where IAEA inspectors are already present are usually conducted with a 2-hour advanced notice. Furthermore, IAEA officials told us that there are practical problems that restrict access. For example, inspectors must be issued a visa to visit certain countries, a process which cannot normally be completed in less than 24 hours. In some cases, nuclear sites are in remote locations and IAEA inspectors need to make travel arrangements, such as helicopter transportation, in advance, which requires that the country be notified prior to the visit. A November 2004 study by a group of safeguards experts appointed by IAEA’s Director General evaluated the agency’s safeguards program to examine how effectively and efficiently strengthened safeguards measures were being implemented. Specifically, the group’s mission was to evaluate the progress, effectiveness, and impact of implementing measures to enhance the agency’s ability to draw conclusions about the non-diversion of nuclear material placed under safeguards and, for relevant countries, the absence of undeclared nuclear material and activities. The group concluded that generally IAEA had done a very good job implementing strengthened safeguards despite budgetary and other constraints. However, the group noted that IAEA’s ability to detect undeclared activities remains largely untested. If a country decides to divert nuclear material or conduct undeclared activities, it will deliberately work to prevent IAEA from discovering this. Furthermore, IAEA and member states should be clear that the conclusions drawn by the agency cannot be regarded as absolute. This view has been reinforced by the former Deputy Director General for Safeguards who has stated that even for countries with strengthened safeguards in force, there are limitations on the types of information and locations accessible to IAEA inspectors. There are a number of weaknesses that hamper IAEA’s ability to effectively implement strengthened safeguards. IAEA has only limited information about the nuclear activities of 4 key countries that are not members of the NPT—India, Israel, North Korea, and Pakistan. India, Israel, and Pakistan have special agreements with IAEA that limit the agency’s activities to monitoring only specific material, equipment, and facilities. However, since these countries are not signatories to the NPT, they do not have comprehensive safeguards agreements with IAEA, and are not required to declare all of their nuclear material to the agency. In addition, these countries are only required to declare exports of nuclear material previously declared to IAEA. With the recent revelations of the illicit international trade in nuclear material and equipment, IAEA officials stated that they need more information on these countries’ nuclear exports. For North Korea, IAEA has even less information, since the country expelled IAEA inspectors and removed surveillance equipment at nuclear facilities in December 2002 and withdrew from the NPT in January 2003. These actions have raised widespread concern that North Korea diverted some of its nuclear material to produce nuclear weapons. Another major weakness is that more than half, or 111 out of 189, of the NPT signatories have not yet brought the Additional Protocol into force, as of August 2006. (App. I lists the status of countries’ safeguards agreements with IAEA). Without the Additional Protocol, IAEA must limit its inspection efforts to declared nuclear material and facilities, making it harder to detect clandestine nuclear programs. Of the 111 countries that have not adopted the Additional Protocol, 21 are engaged in significant nuclear activities, including Egypt, North Korea, and Syria. In addition, safeguards are significantly limited or not applied in about 60 percent, or 112 out of 189, of the NPT signatory countries—either because they have an agreement (known as a small quantities protocol) with IAEA, and are not subject to most safeguards measures, or because they have not concluded a comprehensive safeguards agreement with IAEA. Countries with small quantities of nuclear material make up about 41 percent of the NPT signatories and about one-third of the countries that have the Additional Protocol in force. Since 1971, IAEA’s Board of Governors has authorized the Director General to conclude an agreement, known as a small quantities protocol, with 90 countries and, as of August 2006, 78 of these agreements were in force. IAEA’s Board of Governors has approved the protocols for these countries without having IAEA verify that they met the requirements for it. Even if these countries bring the Additional Protocol into force, IAEA does not have the right to conduct inspections or install surveillance equipment at certain nuclear facilities. According to IAEA and Department of State officials, this is a weakness in the agency’s ability to detect clandestine nuclear activities or transshipments of nuclear material and equipment through the country. In September 2005, the Board of Governors directed IAEA to negotiate with countries to make changes to the protocols, including reinstating the agency’s right to conduct inspections. As of August 2006, IAEA amended the protocols for 4 countries—Ecuador, Mali, Palau, and Tajikistan. The application of safeguards is further limited because 31 countries that have signed the NPT have not brought into force a comprehensive safeguards agreement with IAEA. The NPT requires non-nuclear weapons states to conclude comprehensive safeguards agreements with IAEA within 18 months of becoming a party to the Treaty. However, IAEA’s Director General has stated that these 31 countries have failed to fulfill their legal obligations. Moreover, 27 of the 31 have not yet brought comprehensive safeguards agreements into force more than 10 years after becoming party to the NPT, including Chad, Kenya, and Saudi Arabia. Last, IAEA is facing a looming human capital crisis that may hamper the agency’s ability to meet its safeguards mission. In 2005, we reported that about 51 percent, or 38 out of 75, of IAEA’s senior safeguards inspectors and high-level management officials, such as the head of the Department of Safeguards and the directors responsible for overseeing all inspection activities of nuclear programs, are retiring in the next 5 years. According to U.S. officials, this significant loss of knowledge and expertise could compromise the quality of analysis of countries’ nuclear programs. For example, several inspectors with expertise in uranium enrichment techniques, which is a primary means to produce nuclear weapons material, are retiring at a time when demand for their skills in detecting clandestine nuclear activities is growing. While IAEA has taken a number of steps to address these human capital issues, officials from the Department of State and the U.S. Mission to the U.N. System Organizations in Vienna have expressed concern that IAEA is not adequately planning to replace staff with critical skills needed to fulfill its strengthened safeguards mission. The Nuclear Suppliers Group, along with other multilateral export control groups, has helped stop, slow, or raise the costs of nuclear proliferation, according to nonproliferation experts. For example, as we reported in 2002, the Suppliers Group helped convince Argentina and Brazil to accept IAEA safeguards on their nuclear programs in exchange for expanded access to international cooperation for peaceful nuclear purposes. The Suppliers Group, along with other multilateral export control groups, has significantly reduced the availability of technology and equipment available to countries of concern, according to a State Department official. Moreover, nuclear export controls have made it more difficult, more costly, and more time consuming for proliferators to obtain the expertise and material needed to advance their nuclear program. The Nuclear Suppliers Group has also helped IAEA verify compliance with the NPT. In 1978, the Suppliers Group published the first guidelines governing exports of nuclear materials and equipment. These guidelines established several member requirements, including the requirement that members adhere to IAEA safeguards standards at facilities using controlled nuclear-related items. Subsequently, in 1992, the Nuclear Suppliers Group broadened its guidelines by requiring that members insist that non-member states have IAEA safeguards on all nuclear material and facilities as a condition of supply for their nuclear exports. With the revelation of Iraq’s nuclear weapons program, the Suppliers Group also created an export control system for dual-use items that established new controls for items that did not automatically fall under IAEA safeguards requirements. Despite these benefits, there are a number of weaknesses that could limit the Nuclear Suppliers Group’s ability to curb nuclear proliferation. Members of the Suppliers Group do not share complete export licensing information. Specifically, members do not always share information about licenses they have approved or denied for the sale of controversial items to nonmember states. Without this shared information, a member country could inadvertently license a controversial item to a country that has already been denied a license from another Suppliers Group member state. Furthermore, Suppliers Group members did not promptly review and agree upon common lists of items to control and approaches to controlling them. Each member must make changes to its national export control policies after members agree to change items on the control list. If agreed- upon changes to control lists are not adopted at the same time by all members, proliferators could exploit these time lags to obtain sensitive technologies by focusing on members that are slowest to incorporate the changes and sensitive items may still be traded to countries of concern. In addition, there are a number of obstacles to efforts aimed at strengthening the Nuclear Suppliers Group and other multilateral export control regimes. First, efforts to strengthen export controls have been hampered by a requirement that all members reach consensus about every decision made. Under the current process, a single member can block new reforms. U.S. and foreign government officials and nonproliferation experts all stressed that the regimes are consensus-based organizations and depend on the like-mindedness or cohesion of their members to be effective. However, members have found it especially difficult to reach consensus on such issues as making changes to procedures and control lists. The Suppliers Group reliance on consensus decision making will be tested by the United States request to exempt India from the Suppliers Group requirements to accept IAEA safeguards at all nuclear facilities. Second, since membership with the Suppliers Group is voluntary and nonbinding, there are no means to enforce compliance with members’ nonproliferation commitments. For example, the Suppliers Group has no direct means to impede Russia’s export of nuclear fuel to India, an act that the U.S. government said violated Russia’s commitment. Third, the rapid pace of nuclear technological change and the growing trade of sensitive items among proliferators complicate efforts to keep control lists current because these lists need to be updated more frequently. To help strengthen these regimes, GAO recommended in October 2002, that the Secretary of State establish a strategy that includes ways for Nuclear Suppliers Group members to improve information sharing, implement changes to export controls more consistently, and identify organizational changes that could help reform its activities. As of June 2006, the Nuclear Suppliers Group announced that it has revised its guidelines to improve information sharing. However, despite our recommendation, it has not yet agreed to share greater and more detailed information on approved exports of sensitive transfers to nonmember countries. Nevertheless, the Suppliers Group is examining changes to its procedures that assist IAEA’s efforts to strengthen safeguards. For example, at the 2005 Nuclear Suppliers Group plenary meeting, members discussed changing the requirements for exporting nuclear material and equipment by requiring nonmember countries to adopt IAEA’s Additional Protocol as a condition of supply. If approved by the Suppliers Group, the action would complement IAEA’s efforts to verify compliance with the NPT. Reducing the formidable proliferation risks posed by former Soviet weapons of mass destruction (WMD) assets is a U.S. national security interest. Since the fall of the Soviet Union, the United States, through a variety of programs, managed by the Departments of Energy, Defense (DOD), and State, has helped Russia and other former Soviet countries to secure nuclear material and warheads, detect illicitly trafficked nuclear material, eliminate excess stockpiles of weapons-usable nuclear material, and halt the continued production of weapons-grade plutonium. From fiscal year 1992 through fiscal year 2006, the Congress appropriated about $7 billion for nuclear nonproliferation efforts. However, U.S. assistance programs have faced a number of challenges, such as a lack of access to key sites and corruption of foreign officials, which could compromise the effectiveness of U.S. assistance. DOE’s Material Protection, Control, and Accounting (MPC&A) program has worked with Russia and other former Soviet countries since 1994 to provide enhanced physical protection systems at sites with weapons- usable nuclear material and warheads, implement material control and accounting upgrades to help keep track of the quantities of nuclear materials at sites, and consolidate material into fewer, more secure buildings. GAO last reported on the MPC&A program in 2003. At that time, a lack of access to many sites in Russia’s nuclear weapons complex had significantly impeded DOE’s progress in helping Russia to secure its nuclear material. We reported that DOE had completed work at only a limited number of buildings in Russia’s nuclear weapons complex, a network of sites involved in the construction of nuclear weapons where most of the nuclear material in Russia is stored. According to DOE, by the end of September 2006, the agency will have helped to secure 175 buildings with weapons-usable nuclear material in Russia and the former Soviet Union and 39 Russian Navy nuclear warhead sites. GAO is currently re-examining DOE’s efforts, including the progress DOE has made since 2003 in securing nuclear material and warheads in Russia and other countries and the challenges DOE faces in completing its work. While securing nuclear materials and warheads where they are stored is considered to be the first layer of defense against nuclear theft, there is no guarantee that such items will not be stolen or lost. Recognizing this fact, DOE, DOD, and State, through seven different programs, have provided radiation detection equipment since 1994 to 36 countries, including many countries of the former Soviet Union. These programs seek to combat nuclear smuggling and are seen as a second line of defense against nuclear theft. The largest and most successful of these efforts is DOE’s Second Line of Defense program (SLD). We reported in March 2006 that, through the SLD program, DOE had provided radiation detection equipment and training at 83 sites in Russia, Greece, and Lithuania since 1998. However, we also noted that U.S. radiation detection assistance efforts faced challenges, including corruption of some foreign border security officials, technical limitations of some radiation detection equipment, and inadequate maintenance of some equipment. To address these challenges, U.S. agencies plan to take a number of steps, including combating corruption by installing communications links between individual border sites and national command centers so that detection alarm data can be simultaneously evaluated by multiple officials. The United States is also helping Russia to eliminate excess stockpiles of nuclear material (highly enriched uranium and plutonium). In February 1993, the United States agreed to purchase from Russia 500 metric tons of highly enriched uranium (HEU) extracted from dismantled Russian nuclear weapons over a 20-year period. Russia agreed to dilute, or blend- down, the material into low enriched uranium (LEU), which is of significantly less proliferation risk, so that it could be made into fuel for commercial nuclear power reactors before shipping it to the United States. As of June 27, 2006, 276 metric tons of Russian HEU—derived from more than 11,000 dismantled nuclear weapons—have been downblended into LEU for use in U.S. commercial nuclear reactors. Similarly, in 2000, the United States and Russia committed to the transparent disposition of 34 metric tons each of weapon-grade plutonium. The plutonium will be converted into a more proliferation-resistant form called mixed-oxide (MOX) fuel that will be used in commercial nuclear power plants. In addition to constructing a MOX fuel fabrication plant at its Savannah River Site, DOE is also assisting Russia in constructing a similar facility for the Russian plutonium. Russia’s continued operation of three plutonium production reactors poses a serious proliferation threat. These reactors produce about 1.2 metric tons of plutonium each year—enough for about 300 nuclear weapons. DOE’s Elimination of Weapons-Grade Plutonium Production program seeks to facilitate the reactors’ closure by building or refurbishing two fossil fuel plants that will replace the heat and electricity that will be lost with the shutdown of Russia’s three plutonium production reactors. DOE plans to complete the first of the two replacement plants in 2008 and the second in 2011. When we reported on this program in June 2004, we noted that DOE faced challenges in implementing its program, including ensuring Russia’s commitment to shutting down the reactors, the rising cost of building the replacement fossil fuel plants, and concerns about the thousands of Russian nuclear workers who will lose their jobs when the reactors are shut down. We made a number of recommendations, which DOE has implemented, including reaching agreement with Russia on the specific steps to be taken to shut down the reactors and development of a plan to work with other U.S. government programs to assist Russia in finding alternate employment for the skilled nuclear workers who will lose their jobs when the reactors are shut down. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have at this time. For future contacts regarding this testimony, please contact Gene Aloise at (202) 512-3841 or Joseph Christoff at (202) 512-8979. R. Stockton Butler, Miriam A. Carroll, Leland Cogliani, Lynn Cothern, Muriel J. Forster, Jeffrey Phillips, and Jim Shafer made key contributions to this testimony. Beth Hoffman León, Stephen Lord, Audrey Solis, and Pierre Toureille provided technical assistance. Although North Korea concluded a comprehensive safeguards agreement with IAEA in 1992, it announced its withdrawal from the NPT in January 2003. Secures radiological sources no longer needed in the U.S. and locates, identifies, recovers, consolidates, and enhances the security of radioactive materials outside the U.S. Global Nuclear Material Threat Reduction Eliminates Russia’s use of highly enriched uranium (HEU) in civilian nuclear facilities; returns U.S. and Russian-origin HEU and spent nuclear fuel from research reactors around the world; secures plutonium-bearing spent nuclear fuel from reactors in Kazakhstan; and addresses nuclear and radiological materials at vulnerable locations throughout the world. Provides replacement fossil-fuel energy that will allow Russia to shutdown its three remaining weapons-grade plutonium production reactors. Develops and delivers technology applications to strengthen capabilities to detect and verify undeclared nuclear programs; enhances the physical protection and proper accounting of nuclear material; and assists foreign national partners to meet safeguards commitments. Provides meaningful employment for former weapons of mass destruction weapons scientists. Provides material protection, control, and accounting upgrades to enhance the security of Navy HEU fuel and nuclear material. Provides material protection, control, and accounting upgrades to nuclear weapons, uranium enrichment, and material processing and storage sites. Enhances the security of proliferation-attractive nuclear material in Russia by supporting material protection, control, and accounting upgrade projects at Russian civilian nuclear facilities. Develops national and regional resources in the Russian Federation to help establish and sustain effective operation of upgraded nuclear material protection, control and accounting systems. Negotiates cooperative efforts with the Russian Federation and other key countries to strengthen the capability of enforcement officials to detect and deter illicit trafficking of nuclear and radiological material across international borders. This is accomplished through the detection, location and identification of nuclear and nuclear related materials, the development of response procedures and capabilities, and the establishment of required infrastructure elements to support the control of these materials. HEU Transparency Implementation project Monitors Russia to ensure that low enriched uranium (LEU) sold to the U.S. for civilian nuclear power plants is derived from weapons-usable HEU removed from dismantled Russian nuclear weapons. Disposes of surplus domestic HEU by down-blending it. Surplus U.S. Plutonium Disposition project Disposes of surplus domestic plutonium by fabricating it into mixed oxide (MOX) fuel for irradiation in existing, commercial nuclear reactors. Supports Russia’s efforts to dispose of its weapons-grade plutonium by working with the international community to help pay for Russia’s program. Provides training and equipment to assist Russia in determining the reliability of its guard forces. Enhances the safety and security of Russian nuclear weapons storage sites through the use of vulnerability assessments to determine specific requirements for upgrades. DOD will develop security designs to address those vulnerabilities and install equipment necessary to bring security standards consistent with those at U.S. nuclear weapons storage facilities. Nuclear Weapons Transportation Assists Russia in shipping nuclear warheads to more secure sites or dismantlement locations. Assists Russia in maintaining nuclear weapons cargo railcars. Funds maintenance of railcars until no longer feasible, then purchases replacement railcars to maintain 100 cars in service. DOD will procure 15 guard railcars to replace those retired from service. Guard railcars will be capable of monitoring security systems in the cargo railcars and transporting security force personnel. Provides emergency response vehicles containing hydraulic cutting tools, pneumatic jacks, and safety gear to enhance Russia’s ability to respond to possible accidents in transporting nuclear weapons. Meteorological, radiation detection and monitoring, and communications equipment is also included. Combating Nuclear Smuggling: Challenges Facing U.S. Efforts to Deploy Radiation Detection Equipment in Other Countries and in the United States. GAO-06-558T. Washington, D.C.: March 28, 2006. Combating Nuclear Smuggling: Corruption, Maintenance, and Coordination Problems Challenge U.S. Efforts to Provide Radiation Detection Equipment to Other Countries. GAO-06-311. Washington, D.C.: March 14, 2006. Nuclear Nonproliferation: IAEA Has Strengthened Its Safeguards and Nuclear Security Programs, but Weaknesses Need to Be Addressed. GAO- 06-93. Washington, D.C.: October 7, 2005. Preventing Nuclear Smuggling: DOE Has Made Limited Progress in Installing Radiation Detection Equipment at Highest Priority Foreign Seaports. GAO-05-375. Washington, D.C.: March 31, 2005. Nuclear Nonproliferation: DOE’s Effort to Close Russia’s Plutonium Production Reactors Faces Challenges, and Final Shutdown is Uncertain. GAO-04-662. Washington, D.C.: June 4, 2004. Weapons of Mass Destruction: Additional Russian Cooperation Needed to Facilitate U.S. Efforts to Improve Security at Russian Sites. GAO-03- 482. Washington, D.C.: March 24, 2003. Nonproliferation: Strategy Needed to Strengthen Multilateral Export Control Regimes. GAO-03-43. Washington, D.C.: October 25, 2002. Nuclear Nonproliferation: U.S. Efforts to Help Other Countries Combat Nuclear Smuggling Need Strengthened Coordination and Planning. GAO-02-426. Washington, D.C.: May 16, 2002. Nuclear Nonproliferation: Implications of the U.S. Purchase of Russian Highly Enriched Uranium. GAO-01-148. Washington, D.C.: December 15, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","The International Atomic Energy Agency's (IAEA) safeguards system has been a cornerstone of U.S. efforts to prevent nuclear weapons proliferation since the Treaty on the Non-Proliferation of Nuclear Weapons (NPT) was adopted in 1970. Safeguards allow IAEA to verify countries' compliance with the NPT. Since the discovery in 1991 of a clandestine nuclear weapons program in Iraq, IAEA has strengthened its safeguards system. In addition to IAEA's strengthened safeguards program, there are other U.S. and international efforts that have helped stem the spread of nuclear materials and technology that could be used for nuclear weapons programs. This testimony is based on GAO's report on IAEA safeguards issued in October 2005 (Nuclear Nonproliferation: IAEA Has Strengthened Its Safeguards and Nuclear Security Programs, but Weaknesses Need to Be Addressed, GAO-06-93 [Washington, D.C.: Oct. 7, 2005]). This testimony is also based on previous GAO work related to the Nuclear Suppliers Group--a group of more than 40 countries that have pledged to limit trade in nuclear materials, equipment, and technology to only countries that are engaged in peaceful nuclear activities--and U.S. assistance to Russia and other countries of the former Soviet Union for the destruction, protection, and detection of nuclear material and weapons. IAEA has taken steps to strengthen safeguards, including conducting more intrusive inspections, to seek assurances that countries are not developing clandestine weapons programs. IAEA has begun to develop the capability to independently evaluate all aspects of a country's nuclear activities. This is a radical departure from the past practice of only verifying the peaceful use of a country's declared nuclear material. However, despite successes in uncovering some countries' undeclared nuclear activities, safeguards experts cautioned that a determined country can still conceal a nuclear weapons program. In addition, there are a number of weaknesses that limit IAEA's ability to implement strengthened safeguards. First, IAEA has a limited ability to assess the nuclear activities of 4 key countries that are not NPT members--India, Israel, North Korea, and Pakistan. Second, more than half of the NPT signatories have not yet brought the Additional Protocol, which is designed to give IAEA new authority to search for clandestine nuclear activities, into force. Third, safeguards are significantly limited or not applied to about 60 percent of NPT signatories because they possess small quantities of nuclear material, and are exempt from inspections, or they have not concluded a comprehensive safeguards agreement. Finally, IAEA faces a looming human capital crisis caused by the large number of inspectors and safeguards management personnel expected to retire in the next 5 years. In addition to IAEA's strengthened safeguards program, there are other U.S. and international efforts that have helped stem the spread of nuclear materials and technology. The Nuclear Suppliers Group has helped to constrain trade in nuclear material and technology that could be used to develop nuclear weapons. However, there are a number of weaknesses that could limit the Nuclear Suppliers Group's ability to curb proliferation. For example, members of the Suppliers Group do not always share information about licenses they have approved or denied for the sale of controversial items to nonmember states. Without this shared information, a member country could inadvertently license a controversial item to a country that has already been denied a license from another member state. Since the early 1990s, U.S. nonproliferation programs have helped Russia and other former Soviet countries to, among other things, secure nuclear material and warheads, detect illicitly trafficked nuclear material, and eliminate excess stockpiles of weapons-usable nuclear material. However, these programs face a number of challenges which could compromise their ongoing effectiveness. For example, a lack of access to many sites in Russia's nuclear weapons complex has significantly impeded the Department of Energy's progress in helping Russia secure its nuclear material. U.S. radiation detection assistance efforts also face challenges, including corruption of some foreign border security officials, technical limitations of some radiation detection equipment, and inadequate maintenance of some equipment.",govreport
"The public faces a high risk that critical services provided by the government and the private sector could be severely disrupted by the Year 2000 computing crisis. Financial transactions could be delayed, flights grounded, power lost, and national defense affected. Moreover, America’s infrastructures are a complex array of public and private enterprises with many interdependencies at all levels. These many interdependencies among governments and within key economic sectors could cause a single failure to have adverse repercussions. Key economic sectors that could be seriously affected if their systems are not Year 2000 compliant include information and telecommunications; banking and finance; health, safety, and emergency services; transportation; power and water; and manufacturing and small business. The information and telecommunications sector is especially important. In testimony in June, we reported that the Year 2000 readiness of the telecommunications sector is one of the most crucial concerns to our nation because telecommunications are critical to the operations of nearly every public-sector and private-sector organization. For example, the information and telecommunications sector (1) enables the electronic transfer of funds, the distribution of electrical power, and the control of gas and oil pipeline systems, (2) is essential to the service economy, manufacturing, and efficient delivery of raw materials and finished goods, and (3) is basic to responsive emergency services. Reliable telecommunications services are made possible by a complex web of highly interconnected networks supported by national and local carriers and service providers, equipment manufacturers and suppliers, and customers. In addition to the risks associated with the nation’s key economic sectors, one of the largest, and largely unknown, risks relates to the global nature of the problem. With the advent of electronic communication and international commerce, the United States and the rest of the world have become critically dependent on computers. However, there are indications of Year 2000 readiness problems in the international arena. For example, a June 1998 informal World Bank survey of foreign readiness found that only 18 of 127 countries (14 percent) had a national Year 2000 program, 28 countries (22 percent) reported working on the problem, and 16 countries (13 percent) reported only awareness of the problem. No conclusive data were received from the remaining 65 countries surveyed (51 percent). In addition, a survey of 15,000 companies in 87 countries by the Gartner Group found that the United States, Canada, the Netherlands, Belgium, Australia, and Sweden were the Year 2000 leaders, while nations including Germany, India, Japan, and Russia were 12 months or more behind the United States. The Gartner Group’s survey also found that 23 percent of all companies (80 percent of which were small companies) had not started a Year 2000 effort. Moreover, according to the Gartner Group, the “insurance, investment services and banking are industries furthest ahead. Healthcare, education, semiconductor, chemical processing, agriculture, food processing, medical and law practices, construction and government agencies are furthest behind. Telecom, power, gas and water, software, shipbuilding and transportation are laggards barely ahead of furthest-behind efforts.” The following are examples of some of the major disruptions the public and private sectors could experience if the Year 2000 problem is not corrected. Unless the Federal Aviation Administration (FAA) takes much more decisive action, there could be grounded or delayed flights, degraded safety, customer inconvenience, and increased airline costs. Aircraft and other military equipment could be grounded because the computer systems used to schedule maintenance and track supplies may not work. Further, the Department of Defense (DOD) could incur shortages of vital items needed to sustain military operations and readiness. Medical devices and scientific laboratory equipment may experience problems beginning January 1, 2000, if the computer systems, software applications, or embedded chips used in these devices contain two-digit fields for year representation. According to the Basle Committee on Banking Supervision—an international committee of banking supervisory authorities—failure to address the Year 2000 issue would cause banking institutions to experience operational problems or even bankruptcy. Recognizing the seriousness of the Year 2000 problem, on February 4, 1998, the President signed an executive order that established the President’s Council on Year 2000 Conversion led by an Assistant to the President and composed of one representative from each of the executive departments and from other federal agencies as may be determined by the Chair. The Chair of the Council was tasked with the following Year 2000 roles: (1) overseeing the activities of agencies, (2) acting as chief spokesperson in national and international forums, (3) providing policy coordination of executive branch activities with state, local, and tribal governments, and (4) promoting appropriate federal roles with respect to private-sector activities. Addressing the Year 2000 problem in time will be a tremendous challenge for the federal government. Many of the federal government’s computer systems were originally designed and developed 20 to 25 years ago, are poorly documented, and use a wide variety of computer languages, many of which are obsolete. Some applications include thousands, tens of thousands, or even millions of lines of code, each of which must be examined for date-format problems. The federal government also depends on the telecommunications infrastructure to deliver a wide range of services. For example, the route of an electronic Medicare payment may traverse several networks—those operated by the Department of Health and Human Services, the Department of the Treasury’s computer systems and networks, and the Federal Reserve’s Fedwire electronic funds transfer system. In addition, the year 2000 could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations. For example, building security systems, elevators, and air conditioning and heating equipment could malfunction or cease to operate. Agencies cannot afford to neglect any of these issues. If they do, the impact of Year 2000 failures could be widespread, costly, and potentially disruptive to vital government operations worldwide. Nevertheless, overall, the government’s 24 major departments and agencies are making slow progress in fixing their systems. In May 1997, the Office of Management and Budget (OMB) reported that about 21 percent of the mission-critical systems (1,598 of 7,649) for these departments and agencies were Year 2000 compliant. A year later, in May 1998, these departments and agencies reported that 2,914 of the 7,336 mission-critical systems in their current inventories, or about 40 percent, were compliant. However, unless agency progress improved dramatically, a substantial number of mission-critical systems will not be compliant in time. In addition to slow governmentwide progress in fixing systems, our reviews of federal agency Year 2000 programs have found uneven progress. Some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time. Other agencies have made progress, although risks continue and a great deal of work remains. The following are examples of the results of some of our recent reviews. Last month, we testified about FAA’s progress in implementing a series of recommendations we had made earlier this year to assist FAA in completing overdue awareness and assessment activities. These recommendations included assessing how the major FAA components and the aviation industry would be affected if Year 2000 problems were not corrected in time and completing inventories of all information systems, including data interfaces. Officials at both FAA and the Department of Transportation agreed with these recommendations, and the agency has made progress in implementing them. In our August testimony, we reported that FAA had made progress in managing its Year 2000 problem and had completed critical steps in defining which systems needed to be corrected and how to accomplish this. However, with less than 17 months to go, FAA must still correct, test, and implement many of its mission-critical systems. It is doubtful that FAA can adequately do all of this in the time remaining. Accordingly, FAA must determine how to ensure continuity of critical operations in the likely event of some systems’ failures. In October 1997, we reported that while the Social Security Administration (SSA) had made significant progress in assessing and renovating mission-critical mainframe software, certain areas of risk in its Year 2000 program remained. Accordingly, we made several recommendations to address these risk areas, which included the Year 2000 compliance of the systems used by the 54 state Disability Determination Services that help administer the disability programs. SSA agreed with these recommendations and, in July 1998, we reported that actions to implement these recommendations had either been taken or were underway.Further, we found that SSA has maintained its place as a federal leader in addressing Year 2000 issues and has made significant progress in achieving systems compliance. However, essential tasks remain. For example, many of the states’ Disability Determination Service systems still had to be renovated, tested, and deemed Year 2000 compliant. Our work has shown that much likewise remains to be done in DOD and the military services. For example, our recent report on the Navy found that while positive actions have been taken, remediation progress had been slow and the Navy was behind schedule in completing the early phases of its Year 2000 program. Further, the Navy had not been effectively overseeing and managing its Year 2000 efforts and lacked complete and reliable information on its systems and on the status and cost of its remediation activities. We have recommended improvements to DOD’s and the military services’ Year 2000 programs with which they have concurred. In addition to these examples, our reviews have shown that many agencies had not adequately acted to establish priorities, solidify data exchange agreements, or develop contingency plans. Likewise, more attention needs to be devoted to (1) ensuring that the government has a complete and accurate picture of Year 2000 progress, (2) setting governmentwide priorities, (3) ensuring that the government’s critical core business processes are adequately tested, (4) recruiting and retaining information technology personnel with the appropriate skills for Year 2000-related work, and (5) assessing the nation’s Year 2000 risks, including those posed by key economic sectors. I would like to highlight some of these vulnerabilities, and our recommendations made in April 1998 for addressing them. First, governmentwide priorities in fixing systems have not yet been established. These governmentwide priorities need to be based on such criteria as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences. Further, while individual agencies have been identifying mission-critical systems, this has not always been done on the basis of a determination of the agency’s most critical operations. If priorities are not clearly set, the government may well end up wasting limited time and resources in fixing systems that have little bearing on the most vital government operations. Other entities have recognized the need to set priorities. For example, Canada has established 48 national priorities covering areas such as national defense, food production, safety, and income security. Second, business continuity and contingency planning across the government has been inadequate. In their May 1998 quarterly reports to OMB, only four agencies reported that they had drafted contingency plans for their core business processes. Without such plans, when unpredicted failures occur, agencies will not have well-defined responses and may not have enough time to develop and test alternatives. Federal agencies depend on data provided by their business partners as well as services provided by the public infrastructure (e.g., power, water, transportation, and voice and data telecommunications). One weak link anywhere in the chain of critical dependencies can cause major disruptions to business operations. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. Our recently issued guidance aims to help agencies ensure such continuity of operations through contingency planning. Third, OMB’s assessment of the current status of federal Year 2000 progress is predominantly based on agency reports that have not been consistently reviewed or verified. Without independent reviews, OMB and the President’s Council on Year 2000 Conversion have little assurance that they are receiving accurate information. In fact, we have found cases in which agencies’ systems compliance status as reported to OMB has been inaccurate. For example, the DOD Inspector General estimated that almost three quarters of DOD’s mission-critical systems reported as compliant in November 1997 had not been certified as compliant by DOD components.In May 1998, the Department of Agriculture (USDA) reported 15 systems as compliant, even though these were replacement systems that were still under development or were planned for development. (The department removed these systems from compliant status in its August 1998 quarterly report.) Fourth, end-to-end testing responsibilities have not yet been defined. To ensure that their mission-critical systems can reliably exchange data with other systems and that they are protected from errors that can be introduced by external systems, agencies must perform end-to-end testing for their critical core business processes. The purpose of end-to-end testing is to verify that a defined set of interrelated systems, which collectively support an organizational core business area or function, will work as intended in an operational environment. In the case of the year 2000, many systems in the end-to-end chain will have been modified or replaced. As a result, the scope and complexity of testing—and its importance—is dramatically increased, as is the difficulty of isolating, identifying, and correcting problems. Consequently, agencies must work early and continually with their data exchange partners to plan and execute effective end-to-end tests. So far, lead agencies have not been designated to take responsibility for ensuring that end-to-end testing of processes and supporting systems is performed across boundaries, and that independent verification and validation of such testing is ensured. We have set forth a structured approach to testing in our recently released exposure draft. In our April 1998 report on governmentwide Year 2000 progress, we made a number of recommendations to the Chair of the President’s Council on Year 2000 Conversion aimed at addressing these problems. These included establishing governmentwide priorities and ensuring that agencies set developing a comprehensive picture of the nation’s Year 2000 readiness, requiring agencies to develop contingency plans for all critical core requiring agencies to develop an independent verification strategy to involve inspectors general or other independent organizations in reviewing Year 2000 progress, and designating lead agencies responsible for ensuring that end-to-end operational testing of processes and supporting systems is performed. We are encouraged by actions the Council is taking in response to some of our recommendations. For example, OMB and the Chief Information Officers Council adopted our guide providing information on business continuity and contingency planning issues common to most large enterprises as a model for federal agencies. However, as we recently testified before this Subcommittee, some actions have not been fully addressed—principally with respect to setting national priorities and end-to-end testing. State and local governments also face a major risk of Year 2000-induced failures to the many vital services—such as benefits payments, transportation, and public safety—that they provide. For example, food stamps and other types of payments may not be made or could be made for incorrect amounts; date-dependent signal timing patterns could be incorrectly implemented at highway intersections, and safety severely compromised, if traffic signal systems run by state and local governments do not process four-digit years correctly; and criminal records (i.e., prisoner release or parole eligibility determinations) may be adversely affected by the Year 2000 problem. Recent surveys of state Year 2000 efforts have indicated that much remains to be completed. For example, a July 1998 survey of state Year 2000 readiness conducted by the National Association of State Information Resource Executives, Inc., found that only about one-third of the states reported that 50 percent or more of their critical systems had been completely assessed, remediated, and tested. In a June 1998 survey conducted by the USDA’s Food and Nutrition Service, only 3 and 14 states, respectively, reported that the software, hardware, and telecommunications that support the Food Stamp Program, and the Women, Infants, and Children program, were Year 2000 compliant. Although all but one of the states reported that they would be Year 2000 compliant by January 1, 2000, many of the states reported that their systems are not due to be compliant until after March 1999 (the federal government’s Year 2000 implementation goal). Indeed, 4 and 5 states, respectively, reported that the software, hardware, and telecommunications supporting the Food Stamp Program, and the Women, Infants, and Children program would not be Year 2000 compliant until the last quarter of calendar year 1999, which puts them at high risk of failure due to the need for extensive testing. State audit organizations have identified other significant Year 2000 concerns. For example, (1) Illinois’ Office of the Auditor General reported that significant future efforts were needed to ensure that the year 2000 would not adversely affect state government operations, (2) Vermont’s Office of Auditor of Accounts reported that the state faces the risk that critical portions of its Year 2000 compliance efforts could fail, (3) Texas’ Office of the State Auditor reported that many state entities had not finished their embedded systems inventories and, therefore, it is not likely that they will complete their embedded systems repairs before the year 2000, and (4) Florida’s Auditor General has issued several reports detailing the need for additional Year 2000 planning at various district school boards and community colleges. State audit offices have also made recommendations, including the need for increased oversight, Year 2000 project plans, contingency plans, and personnel recruitment and retention strategies. In the course of these field hearings, states and municipalities have testified about Year 2000 practices that could be adopted by others. For example: New York established a “top 40” list of priority systems having a direct impact on public health, safety, and welfare, such as systems that support child welfare, state aid to schools, criminal history, inmate population management, and tax processing. According to New York, “the Top 40 systems must be compliant, no matter what.” The city of Lubbock, Texas, is planning a Year 2000 “drill” this month. To prepare for the drill, Lubbock is developing scenarios of possible Year 2000-induced failures, as well as more normal problems (such as inclement weather) that could occur at the change of century. Louisiana established a $5 million Year 2000 funding pool to assist agencies experiencing emergency circumstances in mission-critical applications and that are unable to correct the problems with existing resources. Regarding Illinois, according to the state’s Year 2000 Internet World Wide Web site, it had created a repository of information on vendor claims regarding the Year 2000 compliance of software packages in use by various state agencies. In addition, Illinois’ Treasurer’s Office announced in July 1998 the creation of a Year 2000 Initiative task force composed of public and private officials from 10 regions in the state. This task force is charged with monitoring the progress of all financial vendors doing business with Illinois. To fully address the Year 2000 risks that states and the federal government face, data exchanges must also be confronted—a monumental issue. As computers play an ever-increasing role in our society, exchanging data electronically has become a common method of transferring information among federal, state, and local governments. For example, SSA exchanges data files with the states to determine the eligibility of disabled persons for disability benefits. In another example, the National Highway Traffic Safety Administration provides states with information needed for driver registrations. As computer systems are converted to process Year 2000 dates, the associated data exchanges must also be made Year 2000 compliant. If the data exchanges are not Year 2000 compliant, data will not be exchanged or invalid data could cause the receiving computer systems to malfunction or produce inaccurate computations. Our recent report on actions that have been taken to address Year 2000 issues for electronic data exchanges revealed that federal agencies and the states use thousands of such exchanges to communicate with each other and other entities. For example, federal agencies reported that their mission-critical systems have almost 500,000 data exchanges with other federal agencies, states, local governments, and the private sector. To successfully remediate their data exchanges, federal agencies and the states must (1) assess information systems to identify data exchanges that are not Year 2000 compliant, (2) contact exchange partners and reach agreement on the date format to be used in the exchange, (3) determine if data bridges and filters are needed and, if so, reach agreement on their development, (4) develop and test such bridges and filters, (5) test and implement new exchange formats, and (6) develop contingency plans and procedures for data exchanges. At the time of our review, much work remained to ensure that federal and state data exchanges will be Year 2000 compliant. About half of the federal agencies reported during the first quarter of 1998 that they had not yet finished assessing their data exchanges. Moreover, almost half of the federal agencies reported that they had reached agreements on 10 percent or fewer of their exchanges, few federal agencies reported having installed bridges or filters, and only 38 percent of the agencies reported that they had developed contingency plans for data exchanges. Further, the status of the data exchange efforts of 15 of the 39 state-level organizations that responded to our survey was not discernable because they were not able to provide us with information on their total number of exchanges and the number assessed. Of the 24 state-level organizations that provided actual or estimated data, they reported, on average, that 47 percent of the exchanges had not been assessed. In addition, similar to the federal agencies, state-level organizations reported having made limited progress in reaching agreements with exchange partners, installing bridges and filters, and developing contingency plans. However, we could draw only limited conclusions on the status of the states’ actions because data were provided on only a small portion of states’ data exchanges. To strengthen efforts to address data exchanges, we made several recommendations to OMB. In response, OMB agreed that it needed to increase its efforts in this area. For example, OMB noted that federal agencies had provided the General Services Administration with a list of their data exchanges with the states. In addition, as a result of an agreement reached at an April 1998 federal/state data exchange meeting,the states were supposed to verify the accuracy of these initial lists by June 1, 1998. OMB also noted that the General Services Administration is planning to collect and post information on its Internet World Wide Web site on the progress of federal agencies and states in implementing Year 2000 compliant data exchanges. In summary, federal, state, and local efforts must increase substantially to ensure that major service disruptions do not occur. Greater leadership and partnerships are essential if government programs are to meet the needs of the public at the turn of the century. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. FAA Systems: Serious Challenges Remain in Resolving Year 2000 and Computer Security Problems (GAO/T-AIMD-98-251, August 6, 1998). Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, August 1998). Internal Revenue Service: Impact of the IRS Restructuring and Reform Act on Year 2000 Efforts (GAO/GGD-98-158R, August 4, 1998). Social Security Administration: Subcommittee Questions Concerning Information Technology Challenges Facing the Commissioner (GAO/AIMD-98-235R, July 10, 1998). Year 2000 Computing Crisis: Actions Needed on Electronic Data Exchanges (GAO/AIMD-98-124, July 1, 1998). Defense Computers: Year 2000 Computer Problems Put Navy Operations at Risk (GAO/AIMD-98-150, June 30, 1998). Year 2000 Computing Crisis: A Testing Guide (GAO/AIMD-10.1.21, Exposure Draft, June 1998). Year 2000 Computing Crisis: Testing and Other Challenges Confronting Federal Agencies (GAO/T-AIMD-98-218, June 22, 1998). Year 2000 Computing Crisis: Telecommunications Readiness Critical, Yet Overall Status Largely Unknown (GAO/T-AIMD-98-212, June 16, 1998). GAO Views on Year 2000 Testing Metrics (GAO/AIMD-98-217R, June 16, 1998). IRS’ Year 2000 Efforts: Business Continuity Planning Needed for Potential Year 2000 System Failures (GAO/GGD-98-138, June 15, 1998). Year 2000 Computing Crisis: Actions Must Be Taken Now to Address Slow Pace of Federal Progress (GAO/T-AIMD-98-205, June 10, 1998). Defense Computers: Army Needs to Greatly Strengthen Its Year 2000 Program (GAO/AIMD-98-53, May 29, 1998). Year 2000 Computing Crisis: USDA Faces Tremendous Challenges in Ensuring That Vital Public Services Are Not Disrupted (GAO/T-AIMD-98-167, May 14, 1998). Securities Pricing: Actions Needed for Conversion to Decimals (GAO/T-GGD-98-121, May 8, 1998). Year 2000 Computing Crisis: Continuing Risks of Disruption to Social Security, Medicare, and Treasury Programs (GAO/T-AIMD-98-161, May 7, 1998). IRS’ Year 2000 Efforts: Status and Risks (GAO/T-GGD-98-123, May 7, 1998). Air Traffic Control: FAA Plans to Replace Its Host Computer System Because Future Availability Cannot Be Assured (GAO/AIMD-98-138R, May 1, 1998). Year 2000 Computing Crisis: Potential for Widespread Disruption Calls for Strong Leadership and Partnerships (GAO/AIMD-98-85, April 30, 1998). Defense Computers: Year 2000 Computer Problems Threaten DOD Operations (GAO/AIMD-98-72, April 30, 1998). Department of the Interior: Year 2000 Computing Crisis Presents Risk of Disruption to Key Operations (GAO/T-AIMD-98-149, April 22, 1998). Tax Administration: IRS’ Fiscal Year 1999 Budget Request and Fiscal Year 1998 Filing Season (GAO/T-GGD/AIMD-98-114, March 31, 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AIMD-98-117, March 24, 1998). Year 2000 Computing Crisis: Federal Regulatory Efforts to Ensure Financial Institution Systems Are Year 2000 Compliant (GAO/T-AIMD-98-116, March 24, 1998). Year 2000 Computing Crisis: Office of Thrift Supervision’s Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation’s Year 2000 (Y2K) Preparedness (AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC’s Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation’s Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems’ Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration’s Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time Is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computer Systems: Risks of VBA’s Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","GAO discussed the year 2000 computer system risks facing the nation, focusing on: (1) GAO's major concerns with the federal government's progress in correcting its systems; (2) state and local government year 2000 issues; and (3) critical year 2000 data exchange issues. GAO noted that: (1) the public faces a high risk that critical services provided by the government and the private sector could be severely disrupted by the year 2000 computing crisis; (2) the year 2000 could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations; (3) overall, the government's 24 major departments and agencies are making slow progress in fixing their systems; (4) in May 1997, the Office of Management and Budget (OMB) reported that about 21 percent of the mission-critical systems for these departments and agencies were year 2000 compliant; (5) in May 1998, these departments reported that 40 percent of the mission-critical systems were year 2000 compliant; (6) unless progress improves dramatically, a substantial number of mission-critical systems will not be compliant in time; (7) in addition to slow governmentwide progress in fixing systems, GAO's reviews of federal agency year 2000 programs have found uneven progress; (8) some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time; (9) other agencies have made progress, although risks continue and a great deal of work remains; (10) governmentwide priorities in fixing systems have not yet been established; (11) these governmentwide priorities need to be based on such criteria as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences; (12) business continuity and contingency planning across the government has been inadequate; (13) in their May 1998 quarterly reports to OMB, only four agencies reported that they had drafted contingency plans for their core business processes; (14) OMB's assessment of the status of federal year 2000 progress is predominantly based on agency reports that have not been consistently reviewed or verified; (15) GAO found cases in which agencies' systems compliance status as reported to OMB had been inaccurate; (16) end-to-end testing responsibilities have not yet been identified; (17) state and local governments also face a major risk of year 2000-induced failures to the many vital services that they provide; (18) recent surveys of state year 2000 efforts have indicated that much remains to be completed; and (19) at the time of GAO's review, much work remained to ensure that federal and state data exchanges will be year 2000 compliant.",govreport
"IQA consists of two major elements. The first element of IQA required OMB by the end of fiscal year 2001 to develop and issue guidelines that provide policy and procedure guidance for federal agencies to use for “ensuring and maximizing quality, objectivity, utility, and integrity of information, including statistical information,” that they disseminate. The second element required federal agencies covered by the Paperwork Reduction Act to develop IQA guidelines by the end of fiscal year 2002, establish administrative mechanisms allowing “affected persons” to seek and obtain correction of information maintained and disseminated by the agencies, as well as periodically report to the Director of OMB about the number and nature of IQA complaints and how they handled such complaints. IQA builds on previous federal efforts to improve the quality of information, including OMB Circular A-130 and the Paperwork Reduction Act of 1980, as amended. For example, two of the purposes of the Paperwork Reduction Act were to “improve quality and use of federal information … and provide for the dissemination of public information … in a manner that promotes the utility of the information to the public and makes effective use of information technology.” IQA requires, among other things, that executive branch agencies manage their information resources to “improve the integrity, quality, and utility of information to all users within and outside an agency.”7, 8 OIRA, which develops and oversees the implementation of governmentwide policies in the areas of information technology, privacy, and statistics, had responsibility for developing the governmentwide IQA guidelines and helping agencies to meet the act’s requirement that they develop their own guidelines. In an October 2002 memorandum describing the implementation of IQA guidelines, OIRA’s then administrator stated he considered the IQA guidelines a continuation of the executive branch’s decades-long focus on improving the quality of information federal agencies collect and disseminate. The memorandum added that agencies’ implementation “of the Information Quality Law represented the first time that the executive branch has developed a governmentwide set of information quality guidelines, including agency-specific guidelines tailored to each agency’s unique programs and information.” Agencies’ guidelines, which were to follow OMB’s model, were to include administrative mechanisms that allow “affected parties”—as defined by the agencies—to request correction of information that they did not consider correct. 44 U.S.C. § 3506(b)(1)(C). No hearings or debates were held or committee reports filed before IQA was enacted as part of the Treasury and General Government Appropriations Act for Fiscal Year 2001. OMB set up a framework for federal agencies to follow in implementing IQA, including providing assistance and direction to agencies in developing agency IQA guidelines and requiring them to post IQA information on their Web sites. However, we were not able to locate any IQA information on about half of the independent agencies’ Web sites that we examined, nor could we find Federal Register notices about IQA guidelines for them. According to OMB officials and OIRA’s then administrator, OIRA concentrated its communication and other outreach efforts on cabinet- level and regulatory agencies. In written comments on a draft of our report, OIRA noted that in working with agencies to develop and implement information quality measures, it will consider the needed resources for and the potential benefits of such measures. Further, in a number of cases where IQA information was posted online, locating the information was difficult. Agency IQA officials with whom we met noted that their IQA correction mechanism is a formal process and one of a number of correction mechanisms available to the public for having information errors corrected. OMB set up a framework for agencies to follow in implementing IQA and provided assistance and direction to agencies in developing their guidelines. As required by IQA, OMB issued the basic set of governmentwide IQA guidelines that agencies used as the basis for developing their own guidelines. These guidelines explained what agencies were to do to help ensure the development and public dissemination of quality information. In developing these guidelines, OIRA espoused three underlying principles that agencies were to reflect in their guidelines: The guidelines are to apply to a wide variety of government information dissemination activities that may vary in importance and scope. Agencies are to meet basic information quality standards, noting that the more important the information, “the higher the quality standards to which it should be held,” but that “agencies should weigh the costs … and the benefits of higher information quality in the development of information.” Agencies are to apply the guidelines in “a common-sense and workable manner,” meaning that agency guidelines are not to “impose unnecessary administrative burdens that would inhibit the agencies from continuing to take advantage of the Internet and other technologies to disseminate information that can be of great benefit and value to the public.” The guidelines, in elaborating on this last principle, explained that “OMB encourages agencies to incorporate the standards and procedures required by these guidelines into their existing … administrative practices rather than create new and potentially duplicative or contradictory processes.” The guidelines also noted that they were written to provide agencies with flexibility as they developed their own guidelines. Moreover, the guidelines defined four key concepts related to the dissemination of information—quality, objectivity, utility, and integrity— and described how quality was the outcome of the other three components. These guidelines further explained that agencies were to mirror these principles and actions in establishing their own guidelines and to include an administrative mechanism that data users who find mistakes in any agency’s public data or information can use to petition for correction. This mechanism was to include an appeals process, which allows a petitioner to request that an agency reconsider its initial decision about the correction request. The guidelines’ wording about the administrative correction mechanism allowed agencies to avoid duplicating the public comment process required by the rulemaking procedures under the Administrative Procedure Act, in which interested persons are given the opportunity to comment on proposed rules. In addition to writing the governmentwide IQA guidelines, OIRA took other steps to help agencies implement the principles and standards of IQA. As part of helping agencies to develop their guidelines, OIRA offered them assistance, including outreach to agencies such as conducting workshops on drafting guidelines, and reviewed their guidelines. IQA officials from a number of agencies, including the Departments of Defense and Justice, told us they considered this assistance beneficial. OIRA officials also issued memorandums to clarify how agencies were to satisfy the law and otherwise implement IQA, including requiring agencies to post IQA guidelines and related information on their Web sites. Further, OIRA put in place the mechanism for agencies to provide OMB with their annual IQA reports on their implementation of IQA, the number of IQA requests and appeals, and their status. According to OIRA staff and officials and agency memorandums, OIRA monitored IQA correction requests received by agencies and assisted them in developing their responses. Agency officials told us that OMB’s revisions consisted of comments that ranged from editorial to significant and primarily involved IQA requests pertaining to substantive issues. For example, agency officials and OMB staff explained that OMB at times asked for more detailed explanations, including references to other relevant information, in agency responses to correction requests. According to these officials, OMB’s review did not cause changes that would have substantially changed the agencies’ ultimate decision. We found no indication that OMB’s involvement substantially changed agencies responses when we examined nine specific IQA requests from four agencies. As described in figure 1, agencies covered by IQA were to have their guidelines and the correction and appeals mechanism in place by the start of fiscal year 2003 (October 1, 2002). The figure also shows that in April 2004, OMB reported to Congress in response to a mandate that OMB report on the first year—fiscal year 2003—of the implementation of the act. That report included information about the characteristics of the correction requests as well as the sources of the requests, and commented on a number of common perceptions and concerns about the act. OMB, of its own volition, in December 2005, updated this information and included it in a chapter in its report to Congress on the costs and benefits of federal regulations. In this report, OMB provided information on the implementation of IQA in fiscal year 2004 and compared fiscal years 2003 and 2004 IQA information. According to OMB and OIRA staff and officials and OIRA’s then administrator, OIRA concentrated its efforts to implement IQA on cabinet- level and regulatory agencies. In addition to working with the cabinet agencies to create IQA guidelines, OIRA staff stated they also focused their attention on regulatory agencies and commissions, including EPA. OIRA did not clarify for many independent agencies—especially smaller, nonregulatory ones—whether the law applied to them or generally follow up with them to help them meet the act’s provisions. By the fiscal year 2002 deadline, 14 of the 15 cabinet-level agencies had guidelines in place (see table 1). Further, following the flurry of activities to help agencies develop their IQA guidelines by October 1, 2002, OIRA shifted its emphasis away from helping agencies develop their IQA guidelines to helping agencies that already had guidelines to address IQA correction requests. According to OIRA staff, since November 2002 OIRA has not promulgated additional guidance regarding the development of IQA guidelines to agencies. Only one cabinet-level agency, DHS, the newest and one of the largest federal agencies, has no department-level IQA guidelines covering its 22 agencies, which issue a wide array of information used by the public. Because DHS was not created until January 2003—after IQA was enacted and IQA deadlines had passed—OMB began working with DHS officials to develop department-level guidelines after the other cabinet-level and independent agencies had their guidelines in place, according to OMB’s April 2004 report to Congress. As of March 2006, however, DHS did not have its IQA guidelines in place and officials did not have a deadline for establishing them. Also, while 5 DHS component agencies had IQA guidelines before they became part of DHS, the guidelines of 4 of the 5 component agencies—the Coast Guard, Customs and Border Protection, FEMA, and Secret Service—are still linked to their previous parent departments or otherwise have not been updated by DHS. For example, the IQA guidelines for the Coast Guard, which was previously part of the Department of Transportation (DOT), instructed information users submitting IQA requests to file via DOT’s Docket Management System, the administrative mechanism that DOT directs the public to use to file correction requests. Additionally, FEMA has not updated its guidelines since becoming part of DHS. DHS officials told us that the component agencies may update their guidelines after DHS has its departmentwide guidelines in place. Until that occurs, it is unclear what appeals process the public would follow and how DHS agencies will make final decisions about IQA correction requests. Moreover, when we checked the Web sites of 91 independent agencies, we did not find IQA guidelines posted on the Web sites of 44 of those agencies. (See app. II for the list of independent agencies and the status of their guidelines at the end of May 2006.) These 44 commissions, agencies, and other independent entities gave no indication of any IQA guidelines or IQA reports, nor any mention of IQA on their Web sites or on OMB’s Web site of agencies’ IQA guidelines. We also could not find these agencies’ Federal Register notices announcing the establishment of their IQA guidelines, although OMB required these notices. Also, OIRA staff did not have copies of the guidelines and said that they had focused their attention on cabinet agencies and regulatory agencies. These 44 agencies represented a broad spectrum of entities—including fact-finding agencies, such as the U.S. Civil Rights Commission; research organizations, such as the Smithsonian Institution; and others, such as the U.S. Trade and Development Agency— that produce a wide range of publicly disseminated information. In commenting on this report, the acting OIRA administrator noted that OIRA will take into account the resources that would be needed and the potential benefits that would be realized in working with agencies “to develop and implement information quality measures.” Even when agencies posted IQA information on their Web sites as OMB required, such information was hard to access, making it difficult for information users to know whether agencies have IQA guidelines or how to request correction of agency information. As part of the governmentwide IQA guidelines, OIRA required agencies to post their draft agency-specific IQA guidelines online by September 30, 2002, and to inform the public about them and solicit comments. However, we found it difficult to locate IQA information on agency Web sites. In addition to the difficulties of trying to find whether the independent agencies’ Web sites contained IQA guidelines, we had problems finding IQA guidelines on the Web sites of the 14 cabinet-level and 5 independent agencies that we knew had those guidelines. Of these 19 cabinet-level and independent agencies with IQA guidelines that we reviewed, only 4 agencies—the Departments of Agriculture, Commerce, Energy, and the Interior—provided a direct IQA “information quality” link on their home pages, which likely would be relatively easy for the public to use to access IQA information. In the case of the 15 other agencies, we found that accessing IQA information on their Web sites was difficult because these agencies provided no discernable link to IQA information on their home pages; provided access to their guidelines and other information through “contact us,” “policies,” or other less-than-obvious links, such as “resources”; or required multiple searches using various terms related to IQA, as was the case with the Department of Defense and the Department of State. Although OIRA directed agencies to post IQA information online, OIRA’s guidance is not specific about how agencies should provide access to online IQA information. Moreover, agency IQA officials told us that OMB did not provide guidance about where to place IQA information on their Web sites or what kind of access— or transparency—to provide. Agency IQA officials from a number of agencies stated that access to their Web-based IQA information was not “user-friendly” and said they were working to make IQA information more transparent and easily accessible. OMB is aware of the need to improve the public’s access to IQA information. In its April 2004 report to Congress, OIRA acknowledged the need for agencies to improve the transparency of IQA information and recommended that agencies include on their public Web sites IQA correction requests, appeals, and agency responses to them, as well as the agencies’ annual IQA reports to OMB. OMB and OIRA subsequently issued additional directives to facilitate the public’s ability to access government information and the process to request correction of erroneous public information. For example, in August 2004, responding to “inconsistent practices regarding the public availability of correspondence regarding information quality requests,” OIRA’s administrator issued a memorandum instructing each agency to post its IQA documents online by December 1, 2004. From fiscal year 2003 to fiscal year 2004, three agencies shifted to using IQA to address primarily substantive requests—those dealing with the underlying scientific, environmental, or other complex information—which declined from 42 to 38. The total number of all IQA requests dropped from over 24,000 in fiscal year 2003 to 62 in fiscal year 2004. The overwhelming cause for this decline was that in fiscal year 2004 FEMA no longer classified requests to correct flood insurance rate maps as IQA requests or addressed them through IQA. The decline in the number of IQA requests does not indicate that there was a corresponding decrease in agency workloads. In fiscal year 2003, agencies reported having received over 24,600 IQA correction requests, with FEMA’s 24,433 requests accounting for over 99 percent of the year’s total. FEMA’s requests were all related to flood insurance rate maps. Eighteen other agencies accounted for the balance of the year’s requests (183), 54 of which resulted in changes in information, including clarifying language. In fiscal year 2004, FEMA, with OMB’s approval, no longer classified flood insurance rate map correction as IQA requests. Instead, FEMA addressed flood insurance rate map correction requests by using a correction process it had implemented prior to the enactment of IQA. Largely as a result of this change and a similar change by two other agencies—the Department of Labor’s Occupational Safety and Health Administration (OSHA) and DOT’s Federal Motor Carrier Safety Administration—in fiscal year 2004, 15 agencies reported a total of 62 IQA correction requests to OMB. Of these, 26 requests resulted in changes. As shown in table 2, from fiscal year 2003 to fiscal year 2004, the number of substantive requests declined in terms of their total numbers, decreasing from 42 in fiscal year 2003 to 38 in fiscal year 2004. As shown in table 2, during fiscal years 2003 and 2004, over half of the substantive IQA correction requests originated from businesses, trade groups, or other profit-oriented organizations, and over one-quarter were generated by nonprofit or other advocacy organizations. (For a list of these requesters, see app. III.) Substantive requests generated by individual citizens declined from about 1 in 7 of substantive requests to about 1 in 10. Substantive requests in fiscal year 2004 represented a greater proportion of IQA correction requests than in fiscal year 2003, excluding FEMA flood insurance rate map correction requests. Out of 183 non-FEMA requests in fiscal year 2003, 42—or almost one-fourth—were substantive in nature. Addressing these substantive requests required considerably more time and staff resources than simple or administrative requests. OMB and agency officials considered the other 141 requests—over three-fourths—to be of a simple or administrative nature—for example, requests to correct errors in photo captions, personal information, or Internet addresses. Agencies were able to quickly correct these simple or administrative requests—correcting 17 requests took 7 or fewer days from the date the agencies received them. In fiscal year 2004, of 62 total IQA requests, 38 requests—almost two-thirds—were considered to be substantive. Table 3 shows the 80 substantive requests for fiscal years 2003 and 2004 by category of petitioner, agency, and status of requests, as of May 2006. One reason that substantive requests in fiscal year 2004 represented an increased percentage of total IQA correction requests compared with fiscal year 2003 is that in fiscal year 2004 some agencies decided to exclude simple or administrative errors from IQA correction mechanisms. Specifically, according to agency IQA documents and OMB’s December 2005 report, in fiscal 2004, FEMA, the Department of Justice, the Federal Motor Carrier Safety Administration, and OSHA no longer classified and addressed most simple or administrative types of errors as IQA correction requests. As a result, the majority of the correction requests that remained to be processed through IQA were substantive requests. For example, in fiscal year 2004, the Department of Health and Human Services’ (HHS) National Institutes of Health received a request related to information about smokeless tobacco; EPA received a request challenging information related to the water conservation benefits of water utility billing systems of multifamily housing; and the Department of the Interior’s Fish and Wildlife Service received a request that challenged information used to protect the Florida panther. We also found that no one agency dominated or accounted for the majority of fiscal year 2004 requests. In fact, in fiscal year 2004 the distribution of requests was more broadly spread across agencies than in fiscal year 2003, with EPA and the National Archives and Records Administration (NARA) each reporting 12 correction requests, and HHS reporting 9 requests to OMB. A few agencies did not experience a decrease in the total number of IQA requests because they did not shift simple requests away from IQA or otherwise change how they processed such requests during the 2-year period. For example, according to OMB and NARA IQA documents, NARA’s IQA requests—8 in fiscal 2003 and 12 in fiscal 2004—continued to be simple in nature and came primarily from individuals in both years. For the same 2 years, EPA’s 25 requests and HHS’s 19 requests were nearly all substantive and mainly came from businesses or profit-oriented organizations as well as nonprofits or advocacy groups. In fiscal years 2003 and 2004, the simpler and more administrative the initial request, the more likely an agency was to correct the information without appeal. For example, during the 2-year period, NARA corrected or clarified information for 16 of the 20 IQA correction requests it received, which were all considered to be simple in nature. Conversely, the more significant the correction request, the lower the likelihood of a change. HHS, for example, addressed 19 IQA requests that were substantive but changed information for only 5 based on the initial request or an appeal. Regardless of the complexity of the request, agency IQA documents showed that agencies addressed all requests filed during the 2-year period. Substantial requests were less likely to result in an initial information change but more likely to be appealed than simple or administrative requests. Few petitioners appealed agency decisions regarding simple or administrative requests. None of 131 “simple or administrative” fiscal year 2003 IQA requests from the Departments of Transportation, Labor, and the Treasury and NARA was appealed. By comparison, of the 80 substantive requests over the 2-year period, petitioners appealed 39 (almost half) of the agencies’ decisions. Of the 39 requests that were appealed, 25 were denied and 8 appeals resulted in information changes. Table 4 shows the outcome or status of the appeals filed during fiscal years 2003 and 2004, as of the end of March 2006. Two of the 39 appeals still have outcomes pending after more than 2 years, demonstrating that although the number of appeals may be considered small, the impact on agency operations may be significant, depending on the complexity of the specific issue. For example, in table 4, the EPA appeal pending—filed by the U.S. Chamber of Commerce in April 2005—affects 16 EPA databases that deal with such issues as wastewater treatment and the bioaccumulation of organic chemicals. This case has been ongoing for over 2 years, and could have effects on assessments regarding human health risks, other environmental impacts, and cleanup decisions. Also listed in table 3 is another IQA appeal filed in October 2003 by a private individual. The initial request for correction was filed in January 2003 before the DOT’s Federal Aviation Administration (FAA) challenging the analytical basis for its “age 60 rule” that forces air carrier pilots out of service at age 60. FAA upheld its “age 60 rule” in September 2003, but the complainant filed an appeal in October 2003 and filed additional amendments thereafter. The request was still pending at the time we completed our study, more than 3-½ years after the initial IQA request was made and almost 3 years after the appeal. As for the source of appeals, businesses, trade groups, and other profit- oriented organizations filed more appeals than other types of organizations or individuals. Businesses and profit-oriented organizations accounted for 25 of the 39 appeals of IQA requests filed during fiscal years 2003 and 2004. Of these 25 appeals, 4 resulted in changes. Appeals from advocacy/nonprofit groups resulted in 1 change from 5 appeals. Appeals from private citizens resulted in 3 changes from 7 appeals. The most appeals—25, or almost two-thirds of them—were filed with EPA, HHS, and the Department of the Interior. Those agencies also received nearly two- thirds of the requests that were classified as substantive. The impact of IQA on agencies could not be determined because agencies and OMB do not have mechanisms in place to track the effects of implementing IQA. Agencies and OMB do not capture IQA workloads or cost data, nor do they track the impact of IQA requests or resulting information changes. However, evidence indicates that in at least some cases, addressing IQA requests and appeals can take agencies 2 years or longer to resolve and requires a wide range of staff, particularly if IQA correction requests center on substantive matters. More specifically, none of the agencies we visited had information about the actual workload, the number of staff days, or other costs, with one exception. Agency IQA officials told us they do not collect such data. They explained that their agencies did not capture specific workload or cost data related to establishing IQA guidelines, nor do they track workload or cost data involved in responding to IQA requests or have mechanisms to measure any impact IQA information changes have on operations or the quality of information. Officials at two agencies—the National Aeronautics and Space Administration and the Department of the Interior’s Fish and Wildlife Service—considered developing systems to track IQA costs but did not. Fish and Wildlife Service officials told us they decided against implementing an IQA cost tracking system because of the declining number of requests they have received since fiscal years 2003 and 2004 and the high cost and administrative complexities of setting up such a system. Additionally, IQA officials told us that addressing IQA requests is considered to be part of their agencies’ day-to-day business, and because of the multifaceted nature of some requests, allocating time and resources to one specific issue or linking work exclusively to IQA requests would be difficult. For example, Fish and Wildlife Service officials stated that when agency biologists work on IQA requests, they are also frequently working on broad biological, environmental, and related issues that go beyond a given request and relate to other agency work, so it would be difficult to allocate the biologists’ time among various codes. In their view, selecting a specific code would be somewhat arbitrary, and time or other codes would not necessarily accurately reflect the cross-cutting nature of the biologists’ work. Moreover, according to agency officials and OMB staff, neither the agencies nor OMB have mechanisms in place to track the effects of implementing the law. Agency IQA officials and OIRA staff and officials told us that administering IQA has not been overly burdensome and that it has not adversely affected agencies’ overall operations to date. Agencies IQA officials told us they gave IQA responsibilities to various staff within their agencies—generally in offices already responsible for information-related issues—and that no staff are dedicated exclusively to administering IQA. For example, most agencies have folded responsibilities for IQA, including setting up guidelines, into the office of the chief information officer or their public affairs unit. In addition, although they track the status of IQA correction requests, they do not track changes resulting from IQA requests or appeals. Although there is a lack of comprehensive IQA-related cost or resource data, evidence suggests that certain program staff or units involved in creating IQA guidelines, including the correction mechanism, and addressing IQA correction requests have seen their workloads increase without any corresponding increase in resources. For example, officials at the Fish and Wildlife Service, HHS’s National Institutes of Health, the Department of Commerce’s National Oceanic and Atmospheric Administration, and the Department of Defense’s Army Corps of Engineers estimate the costs of addressing IQA requests are “many thousands of dollars” because of the number of high salary professional staff, such as biologists, toxicologists, engineers, and managers, who review and respond to substantive requests and appeals and the extensive time involved. According to agency IQA officials and OMB staff, agencies did not receive funds for IQA, and the act did not specify any funds for implementing IQA. Moreover, our analysis of IQA requests shows that agencies have taken from 1 month to more than 1 year to produce a final decision on substantive IQA requests and appeals, while 2 appeals made during fiscal years 2003 and 2004 are still ongoing after 2 years or longer. However, evidence does not exist showing the resources allotted to those appeals over the 2-year period in question. The following IQA requests illustrate the length of time it can take to address an IQA correction, regardless of the final outcome. On March 10, 2004, a group of trade associations and organizations primarily representing the residential and commercial properties sector submitted an IQA request to EPA challenging the accuracy of an EPA statement that water allocation (submetering) billing systems in apartment buildings and other multifamily housing did not encourage water conservation. This statement was in a Federal Register notice regarding the applicability of the Safe Drinking Water Act to submetered properties. The group did not consider the statement to be correct regarding one type of allocation system in particular—Ratio Utility Billing Systems. According to EPA documents and officials, EPA’s response to the request and subsequent appeal involved a number of EPA staff, including senior executives, scientists, and others in the Office of Water and other headquarters units. The appeal itself was reviewed by a three-member panel of senior executives. EPA took a total of almost 5 months (146 days) to respond to the initial correction request, well over the 90-day goal stated in EPA’s IQA guidelines, and almost 11 months (323 days) more to decide on the appeal, over three times longer than the 90-day appeals goal in EPA’s guidelines, according to our analysis of EPA IQA requests. The nearly 15-month total response time was not unusual compared to other EPA processing times for IQA requests. The lengthy response time was in part due to EPA waiting for the completion of a related study—under way at the time of the correction request—before making a final decision about revising its submetering policy. On September 28, 2005, EPA ultimately denied the appeal and did not change its statement, citing the results of the study as not showing that Ratio Utility Billing Systems encouraged water conservation. On May 4, 2004, a nonprofit organization representing public sector employees involved in the environment and an individual federal employee submitted an IQA request to the Fish and Wildlife Service about alleged errors in agency documents, including the Multi-Species Recovery Plan and the draft Landscape Conservation Strategy, which are intended to protect the endangered Florida panther. The request and subsequent appeal involved previously identified errors in peer- reviewed research associated with the definition of panther habitat, as well as estimates of panther population and models used to determine strategies to help the panther species survive and recover in Florida. Fish and Wildlife Service staff who evaluated and responded to the initial request and to the appeal included senior executives, attorneys, field biologists, and other professional staff from a number of offices within headquarters, including the program offices, the Solicitor’s Office, the External Affairs Office, and the Director’s Office, as well as field offices in Vero Beach and Jacksonville, Florida, and the regional office in Atlanta. The administrative appeals panel for the correction request consisted of executives from Fish and Wildlife Service headquarters and its Northwest Regional Office and Interior’s U.S. Geological Survey. Although the service responded to the initial request 2 months after its receipt, it took more than 7-½ months (over 230 calendar days) to respond to the appeal. While the initial response was consistent with the Service’s 45-business day response time stated in the guidelines, the appeal took over 6 months more than the guideline’s 15- business day appeal time frame, according to our analysis. The nearly 300-day total response time was not unusual compared to other Fish and Wildlife Service processing times for IQA requests. On March 16, 2005, the Fish and Wildlife Service suspended the draft conservation strategy for the panther, corrected other key documents, posted notices on the regional and Vero Beach agency field office Web sites about these actions, and revised and published for public comment the panther section of the agency’s recovery plan. According to OMB staff and agency IQA officials, IQA correction requests have not adversely affected agency rulemaking procedures to date, partly because agencies handled most IQA requests related to rulemaking as public comments to proposed rules under the Administrative Procedure Act rather than as IQA requests. This approach, described in a number of agencies’ IQA guidelines, including EPA’s and the Department of Agriculture’s, was followed to avoid duplicating the rulemaking comment process and diverting resources away from the rulemaking process. It should be recognized that IQA correction requests could affect rulemaking outside of the formal rulemaking process. For example, IQA correction requests that are filed before an agency’s formal rulemaking process begins could affect when or if an agency initiates a rulemaking. We found 16 requests for corrections submitted during fiscal years 2003 and 2004 to be related to agency rulemaking. According to our analysis of IQA requests, annual IQA reports sent to OMB, and OMB’s own reports, and as later confirmed by OMB, five agencies reported having received 16 IQA requests related to rulemaking for the 2-year period. These five agencies were EPA, the Fish & Wildlife Service, the Department of Agriculture’s Forest Service, the Department of the Treasury’s Alcohol and Tobacco Tax and Trade Bureau, and DOT. These 16 requests—touching on a diverse range of issues, such as air safety, alcohol, chemicals, and the environment—accounted for almost 1 in 5 substantive requests for the 2 years. The Fish and Wildlife Service received the largest number of rulemaking-related IQA requests out of the 16 requests related to regulations or rules during fiscal years 2003 and 2004. Seven of the Service’s 11 requests were related to proposed rulemaking. These 7 requests represented 44 percent of all rulemaking-related IQA requests received by all agencies during the 2 years. The agencies treated 10 of the 16 requests that they received during the 2-year period as comments to proposed rules rather than processing them as IQA requests, and the agencies so informed the IQA petitioner. For example, the Alcohol and Tobacco Tax and Trade Bureau considered an IQA request regarding flavored malt beverages and related proposals as comments to a proposed rule. The bureau informed the IQA petitioner that it was handling the request as a public comment under the procedures of the Administrative Procedure Act, rather than as an IQA correction request. Agencies similarly processed the other nine requests related to regulations or rulemaking. As for the other six IQA requests related to rulemaking or regulations, agencies rejected two, are developing responses to two, and were—as of the end of March 2006—awaiting additional information or court decisions before responding to the remaining two. OMB’s governmentwide IQA guidelines provide agencies with flexibility to develop their own guidelines to suit their missions. Having executive branch agencies use the Internet to inform the public about the existence of their IQA guidelines, including the IQA correction mechanism, is a step toward improving the transparency of how agencies develop and disseminate information and address information errors, as well as how information users can seek correction of information. Given the current status of IQA at agencies, OMB has before it additional opportunities to build on its efforts in implementing IQA so far, a mission on which it embarked a few years ago. For example, it could draw from its experience of working with cabinet and many independent agencies to put additional agency-specific guidelines in place. Likewise, OMB could apply the knowledge from the lessons it and agencies have learned about posting accessible, user-oriented information on agency Web sites. By working with agencies and tapping into public input, OMB could enhance agencies’ and the public’s involvement in promoting high-quality agency information as well as increasing the public’s access to and confidence in that information, thereby helping to further the goal of disseminating quality information. To help ensure that all agencies covered by IQA fulfill their requirements, including implementing IQA guidelines and helping to promote easier public access to IQA information on agency Web sites, we recommend that the Director of OMB take the following three actions: work with DHS to help ensure it fulfills IQA requirements and set a deadline for doing so; identify other agencies that do not have IQA guidelines and work with them to develop and implement IQA requirements; and clarify guidance to agencies on improving the public’s access to online IQA information, including suggestions about clearer linkages to that information, where appropriate. In written comments on a draft of this report, the Acting Administrator of OMB's OIRA responded to our recommendations. Regarding our draft report's recommendation to OMB to work with DHS and other agencies not meeting IQA requirements, the Acting Administrator stated that OMB fully supports our recommendation that DHS develop IQA guidelines and that OMB would continue to work with DHS to that end. In our draft report, we had one recommendation for OMB to work with DHS and other agencies to develop IQA guidelines. Based on OIRA's comments, in our final report we made two separate recommendations regarding DHS and the other agencies developing IQA guidelines. Further, we believe that as OIRA continues to work with DHS—which has 22 component agencies—setting a deadline for DHS to implement IQA guidelines is important. As for the other agencies (many of which are small) without IQA guidelines, OIRA stated it would work with them as they develop and implement information quality measures. OIRA stated that in those efforts, it would consider the resources that would be needed and the potential benefits that would be achieved by having IQA guidelines in place. Regarding our recommendation about public access to online IQA information, OIRA noted it shares GAO's interest in improving public access and will continue to work with agencies to improve dissemination of IQA information. OIRA also provided separate technical corrections and suggestions to the draft of our report, which we have incorporated as appropriate. The written comments are reprinted in appendix IV. As agreed with your offices, unless you release its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time we will send copies to other interested congressional committees and the Acting Administrator of OIRA. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me on (202) 512-6806 or by e-mail at farrellb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report were Robert Goldenkoff, Assistant Director; Ernie Hazera, Assistant Director; Andrea Levine; Keith Steck; and Margit Willems Whitaker. To assess the Office of Management and Budget’s (OMB) role in implementing the Information Quality Act (IQA), we reviewed OMB’s IQA documents, including memorandums sent to agencies, and interviewed Office of Information and Regulatory Affairs (OIRA) staff involved with IQA. In addition, we reviewed IQA documents—including guidelines, requests and appeals, agency decisions, and related documents—and interviewed IQA and other knowledgeable officials at the 17 federal agencies identified in table 5. While we reviewed IQA guidelines at all cabinet-level agencies, we conducted interviews at 5 independent agencies and 12 of the 15 federal cabinet agencies and at least one component of each, as shown in table 5. We selected these agencies to obtain a cross section of agencies that reflect the diverse range of government activities. We made our selection to cover a wide range of criteria, including the organization’s size (number of employees in fiscal year 2004); its mission (regulatory versus statistical, for example); and the nature of issues covered by the agency—such as the environment, health, and safety. We discussed with agency officials the development of their IQA guidelines, whether they had received requests for correction of information and how they addressed them, and what role OMB played in all of this. To further evaluate OMB’s role in the implementation of IQA, we reviewed OMB and agency IQA documents for all 15 cabinet agencies and the 5 independent agencies we contacted. These documents included online information, such as OMB memorandums and agency IQA guidelines, related IQA information, and OMB and agency IQA Web sites. Additionally, we reviewed the Web sites of 86 other independent agencies, including commissions, boards, and other entities, covered by the Paperwork Reduction Act to determine whether they had IQA guidelines online, but we did not survey them. Further, we reviewed the Federal Register for notices about these agencies’ IQA guidelines, as OMB required. We did not contact these 86 individual agencies or survey users of their Web sites, as this was beyond the scope of our review. Regarding the second objective of determining the number, type, and source of IQA requests, including who submitted them, for fiscal years 2003 and 2004, we contacted agency IQA officials and OMB staff and obtained relevant information from them. We also reviewed OIRA’s two reports to Congress to validate data collected through other sources. To the extent the information was available online, we reviewed IQA requests on agency Web sites. To supplement and verify the accuracy and completeness of this information, we interviewed agency and OMB IQA staff and officials. In addition, to categorize the sources of the requests by type of entity, such as business, trade group, or nonprofit advocacy organization, we relied on information from the sources and agency descriptions. We made our determination when information was contradictory or not available. Moreover, to determine the final status of IQA requests and any appeals, we reviewed related agency documents, including agency notification letters, and spoke with agency IQA officials about their status. We determined that OMB and agency data were sufficiently reliable for the purposes of this review. The results of our analysis differ from information in OMB’s two reports to Congress discussing IQA because of (1) differences between report information about IQA requests and information on agency Web sites and (2) minor report errors, including errors reported by agencies to OMB—such as IQA requests reported for calendar year 2003 instead of fiscal year 2003—that OMB repeated. In addition, we tracked the status of appeals to the end of March 2006 to provide current information, going beyond the end of fiscal year 2004, which is the date OMB used as the cutoff for appeal information in its December 2005 report. Regarding the third objective of examining whether the implementation of IQA has adversely affected agencies’ or overall operations in general and the rulemaking process in particular, we contacted agency IQA and other knowledgeable officials and OMB staff. We also attempted to determine the resources that OMB and agencies committed to implementing IQA by obtaining IQA cost and staff allocation data, but agency officials told us they do not track such information, although the Department of Labor had cost information on setting up a system on the status of IQA requests. In addition, we reviewed the annual IQA reports submitted to OMB by the cabinet-level agencies and the 5 independent agencies with guidelines where we conducted interviews. Moreover, to better understand specific aspects of IQA requests and how agencies addressed them, as well as to illustrate specific points, we reviewed in detail selected IQA requests at four agencies—the Environmental Protection Agency, the Department of Health and Human Services’ National Institutes of Health, the Department of Agriculture’s Forest Service, and the Department of the Interior’s Fish and Wildlife Service. Because OMB was still developing its IQA peer review policies at the time of our review, we did not discuss with agency officials their plans for carrying out these future requirements. In addition, although agencies have other mechanisms to correct information, we evaluated only the IQA information correction mechanism. We conducted our work in Washington, D.C., from March 2005 through July 2006 in accordance with generally accepted government auditing standards. and on Web site? Advisory Council on Historic Preservation AMTRAK (National Railroad Passenger Corporation) 10 Armed Forces Retirement Home 11 Broadcasting Board of Governors 13 Chemical Safety and Hazard Investigation Board 14 Christopher Columbus Fellowship Foundation 15 Commission Regarding Weapons of Mass Destruction 16 Commission on International Religious Freedom 17 Commission on Ocean Policy 18 Commodities Futures Trading Commission 19 Consumer Product Safety Commission 20 Corporation for National and Community Service 21 Court Services and Offender Supervision Agency 22 Defense Nuclear Facilities Safety Board 25 Equal Employment Opportunity Commission 26 Export-Import Bank of the United States Farm Credit System Insurance Corporation Federal Mediation and Conciliation Service Federal Mine Safety and Health Review Commission Federal Retirement Thrift Investment Board Federal Energy Regulatory Commission (Continued From Previous Page) and on Web site? Institute of Museum and Library Services 45 Merit Systems Protection Board 46 Migratory Bird Conservation Commission 49 National Aeronautics and Space Administration 50 National Archives and Records Administration 51 National Commission on Libraries and Information 52 National Capital Planning Commission 53 National Council on Disability 54 National Credit Union Administration 55 National Endowment for the Arts 56 National Endowment for the Humanities 57 National Indian Gaming Commission 58 National Labor Relations Board 61 National Transportation Safety Board 62 Northwest Power Planning Council 64 Nuclear Waste Technical Review Board 65 Occupational Safety and Health Review Commission 66 Office of Navajo and Hopi Indian Relocation 67 Office of Federal Housing Enterprise Oversight 68 Office of Government Ethics 69 Office of Personnel Management (Continued From Previous Page) and on Web site? W.K. Olsen and Associates, LLC Earth Island Institute, etc. (2) Sierra Club, etc. Center for Regulatory Effectiveness—same as Department of Health and Human Services filing Alliance for the Wild Rockies Competitive Enterprise Institute—same as Office of Science and Technology Policy filing Atlantic Salmon of Maine—same as Department of the Interior filing Associated Fisheries of Maine, Inc., etc. Center for Regulatory Effectiveness, et al. Public Employees for Environmental Responsibility Public Interest Group (identity not provided) National Wrestling Coaches Association, etc. Department of Health and Human Services Center for Regulatory Effectiveness, etc. (3)— one same as Department of Agriculture filing Animal Health Institute (2) SafeBlood Technologies, etc. Chemical Products Corporation (2) Styrene Information and Research Center, Inc. Salt Institute, etc. McNeil Consumer and Specialty Products National Legal and Policy Center American Chemistry Council (2) (Continued From Previous Page) Atlantic Salmon of Maine—same as Department of Commerce filing Chilton Ranch and Cattle Company Public Employees for Environmental Responsibility (2) National Association of Home Builders National Coalition for Asian Pacific American Community Development Diageo North America, Inc. Competitive Enterprise Institute (2) Association of Home Appliance Manufacturers McDowell Owings Engineering, Inc. Office of Science and Technology Policy (Executive Office of the President) Competitive Enterprise Institute—same as Department of Commerce filing Center for Regulatory Effectiveness, etc. (2) Friends of Massachusetts Military Reservation Morgan, Lewis & Bockius, LLP Geronimo Creek Observatory (4) Perchlorate Study Group (Continued From Previous Page) National Multi-Housing Council, etc. National Paint and Coatings Association, etc. National Association of Home Builders NPC Services, Inc.","The importance and widespread use of federal information makes its accuracy imperative. The Information Quality Act (IQA) required that the Office of Management and Budget (OMB) issue guidelines to ensure the quality of information disseminated by federal agencies by fiscal year 2003. GAO was asked to (1) assess OMB's role in helping agencies implement IQA; (2) identify the number, type, and source of IQA correction requests agencies received; and (3) examine if IQA has adversely affected agencies' overall operations and, in particular, rulemaking processes. In response, GAO interviewed OMB and agency officials and reviewed agency IQA guidelines, related documents, and Web sites. OMB issued governmentwide guidelines that were the basis for other agencies' own IQA guidelines and required agencies to post guidelines and other IQA information to their Web sites. It also reviewed draft guidelines and undertook other efforts. OMB officials said that OMB primarily concentrated on cabinet-level and regulatory agencies, and 14 of the 15 cabinet-level agencies have guidelines. The Department of Homeland Security (DHS) does not have department-level guidelines covering its 22 component agencies. Also, although the Environmental Protection Agency and 4 other independent agencies posted IQA guidelines and other information to their Web sites, 44 of 86 additional independent agencies that GAO examined have not posted their guidelines and may not have them in place. As a result, users of information from these agencies may not know whether agencies have guidelines or know how to request correction of agency information. OMB also has not clarified guidance to agencies about posting IQA-related information, including guidelines, to make that information more accessible. Of the 19 cabinet and independent agencies with guidelines, 4 had ""information quality"" links on their home pages, but others' IQA information online was difficult to locate. From fiscal years 2003 to 2004, three agencies shifted to using IQA to address substantive requests--those dealing with the underlying scientific, environmental, or other complex information--which declined from 42 to 38. In fiscal year 2003, the Federal Emergency Management Agency and two other agencies used IQA to address flood insurance rate maps, Web site addresses, photo captions, and other simple or administrative matters. But, in fiscal year 2004, these agencies changed their classification of these requests from being IQA requests and instead processed them using other correction mechanisms. As a result, the total number of all IQA requests dropped from over 24,000 in fiscal year 2003 to 62 in fiscal year 2004. Also, of the 80 substantive requests that agencies received during the 2-year period--over 50 percent of which came from businesses, trade groups, or other profit-oriented organizations--almost half (39) of the initial agency decisions of these 80 were appealed, with 8 appeals resulting in changes. The impact of IQA on agencies' operations could not be determined because neither agencies nor OMB have mechanisms to determine the costs or impacts of IQA on agency operations. However, GAO analysis of requests shows that agencies can take from a month to more than 2 years to resolve IQA requests on substantive matters. According to agency IQA officials, IQA duties were added into existing staff responsibilities and administering IQA requests has not been overly burdensome nor has it adversely affected agencies' operations, although there are no supporting data. But evidence suggests that certain program staff or units addressing IQA requests have seen their workloads increase without a related increase in resources. As for rulemaking, agencies addressed 16 correction requests related to rulemaking under the Administrative Procedure Act, not IQA.",govreport
"Both mutual fund companies and banks are financial intermediaries, that is, they raise funds from savers and channel these funds back to the economy by investing them. Banks generally use their deposits either to make loans or to invest in certain debt securities, principally government bonds. Mutual funds do not make loans, but they do invest in securities, primarily bonds and stocks. Money from these funds, in turn, flows either directly (through primary securities markets) or indirectly (through secondary securities markets) to the issuers of such securities. Long before the recent mutual fund boom, the relative importance of bank loans as a source of finance had been declining. As early as the 1960s, some large businesses had been replacing their usage of bank loans by issuing short-term securities called commercial paper. Subsequently, more companies found ways to tap the securities markets for their financial needs, lessening their dependence on bank loans. For example, corporations’ reliance on bank loans as a percentage of their credit market debt declined from 28 percent in 1970 to 20 percent in 1994. The household sector (generally residential and consumer borrowers) also has become less dependent on bank loans for the ultimate source of financing. Beginning in the mid-1970s, and to a much greater extent since the early 1980s, major portions of home mortgage portfolios have been sold by banks and thrifts to financial intermediaries who use them as collateral for marketable securities and then sell the securities to investors. More recently, significant amounts of consumers’ credit card debt and automobile loans have been similarly financed by securities instead of bank credit. Through securitization, banks and thrifts provide the initial financing for these mortgage, credit card, and automobile loans. However, once the loans are sold, it is the securities market that is the ultimate source of financing. More broadly, the term securitization describes a process through which securities issuance supplants bank credit as a source of finance, even if the borrower originally received funds from a bank. In addition, the relative importance of bank loans has been further diminished by the increased provision of direct loans by nonbank financial intermediaries, including securities firms, insurance companies, and finance companies. In this report, discussion of the “impact of mutual funds on deposits” or of the “movement of money from deposits to mutual funds” refers not merely to direct withdrawal of deposits by customers for the sake of investing in mutual fund shares but also to customers’ diversion into mutual funds of new receipts that otherwise might have been placed in deposits. To assess the impact of mutual funds on deposits, we examined and compared available data published by industry sources and the bank regulators. Data on deposits in banks are routinely reported to and published by the bank regulators. Data on mutual funds are gathered and published by an industry association, the Investment Company Institute (ICI). Moreover, the Federal Reserve maintains and publishes the Flow of Funds Accounts, which is an attempt to capture the entire framework of financial transactions in the economy, including all major groupings of participants and instruments. This publication includes the bank data and mutual funds data that we used (the Federal Reserve obtains the mutual fund data from ICI). In the Flow of Funds Accounts, the Federal Reserve presents statistics on (1) the amounts outstanding at the end of each quarter and each year and (2) the net flows during each quarter and each year. For bank deposit information, the change of the level from one period to the next is used to determine the net flows into or out of deposits during that period. The same method is used for money market mutual funds, where the funds’ managers intend to maintain the value of a share constant at one dollar on a daily basis. For longer-term mutual funds, however, the period-to-period change in the fund’s value generally does not equal the net flows during the period because the value fluctuates with (1) the flows of customer money, (2) the changing prices of the stocks and bonds held by the mutual funds, and (3) the reinvestment of dividends and interest in the fund. In the Flow of Funds Accounts, the net flows into mutual funds are calculated from industry data on changes in amounts outstanding and adjusted for movements of security-price averages. To assess the impact of mutual funds’ growth on the total supply of loanable and investable funds, we examined the Flow of Funds Accounts data on the sources of finance for the economy. In addition, we did a literature search for research articles examining (1) how residential, consumer, and business borrowers obtain financing, not only from bank loans or securities issuance but also from other sources and (2) how lenders, including banks as well as nonbank providers such as finance companies, funded the financing they provided and whether they sold or securitized their finance. We supplemented our search of the statistical sources with other material. We used research articles published by the Federal Reserve and documents published by securities industry sources over the last 5 years. In addition, we interviewed Federal Reserve experts on the previously mentioned topics. We also drew upon information gathered from banks and mutual fund specialists who were interviewed for an ongoing related GAO assignment. The Federal Reserve provided written comments on a draft of this report. These comments are discussed on page 15. We did our review in Washington, D.C., from March 1994 to November 1994 in accordance with generally accepted government auditing standards. The Federal Reserve and the Securities Industry Association (SIA) agreed that the flow of funds into mutual funds has had a significant impact on bank deposits. Although some observers dispute the magnitude of this impact, the evidence we reviewed supports the view that mutual funds have attracted sizable amounts of money that otherwise might have been placed in bank deposits. At year-end 1994, the amount of money in mutual funds ($2,172 billion) was considerably less than that in bank deposits ($3,462 billion). The mutual fund total, however, had risen by almost $1.2 trillion since year-end 1989, most of it from net new inflows, while the deposit total was $89 billion less than at year-end 1989. Despite these data, some observers maintain that deposits have not been a major source of the flow of money into mutual funds in recent years. For example, one study by a securities firm claims that “mutual fund inflows do not depend on outflows from the banking system,” arguing that “net new savings” are more important. ICI, a mutual funds industry association, stated that “CD proceeds play minor role as source for investment in stock and bond mutual funds,” and that “current income” and “the proceeds from other investments” were far more important. Nonetheless, most observers whose studies we reviewed agree that mutual funds have had a significant effect on bank deposits. Federal Reserve publications state that there has been a movement from deposits into mutual funds. The same view is propounded by SIA. Moreover, in a 1994 survey of 205 bank chief executives, nearly half said that their banks had started selling mutual funds in order to retain customers. We did not find any reliable quantification of the full impact of mutual funds on deposits, including both the direct withdrawals and customers’ diversion of new receipts that otherwise might have been placed in deposits. We assessed two quantitative approaches: (1) the total net flows into mutual funds and (2) ICI’s estimate of the impact on deposits. Because both approaches were incomplete, we examined a third alternative: the relationship between deposits and overall economic activity. This third approach also has limitations because there are a variety of factors that affect the relationship between deposits and gross domestic product (GDP). Nonetheless, it provided a more comprehensive look than the other approaches. Using the ratio of deposits to GDP as a benchmark, we estimated that—for the period 1990 through 1994—the total impact of mutual funds on deposits may have been sizable, but probably less than $700 billion. The total net flows into mutual funds from all sources during 1990 through 1994 were $1,067 billion. (See table 1.) The impact on deposits had to be less than this amount because the evidence indicated there were also flows into mutual funds from nondeposit sources. For example, some of the money placed in mutual funds by the household sector probably derived from the sales of stocks and bonds since, in 1991 and 1993, the household sector sold more individual securities than it bought. (See table 2.) Another possible source of flows into mutual funds was the frequent occurrence of sizable lump-sum distributions to individuals from retirement plans and job-termination arrangements. According to both the Federal Reserve and SIA, much of this money was placed in mutual funds by the recipients. SIA’s estimate of the impact of mutual funds on deposits was incomplete because it dealt only with the direct impact, i.e., the withdrawal of existing deposits for the sake of investing in mutual funds. Even this estimate of the direct impact was incomplete because it was primarily based on net withdrawals of banks’ time deposits, rather than total deposits. Using time deposits as a measure, SIA stated that the flow from deposits into mutual funds could have been about $200 billion in 1992 and 1993 combined. In fact, during this period declines in time deposits were largely offset by increases in demand deposits. Since there is no reporting of either the destinations of deposit withdrawals or of the origins of deposit placements, we cannot be certain whether time deposit withdrawals went into mutual funds or if part of them went into demand deposits. In any event, we found no estimates of the indirect effects, i.e., the diversion of new receipts into mutual funds rather than into deposits. Such a measure is more important in a growing economy because, even if deposits are growing, they may not be growing as fast as they would absent the diversion to mutual funds. We attempted to derive a reasonable estimate of the combined direct and indirect impact of mutual funds on deposits by examining the relationship of deposits to total economic activity, as measured by GDP. In figure 1, the solid line shows that the relationship of deposits to GDP remained fairly stable for most of the last 30 years. With only one exception, it stayed within a band of 63 percent to 73 percent every year from 1963 through 1990. Large flows into mutual funds in the 1980s (shown in figure 1 by the gap between the solid line and the dotted line) did not push the deposit-to-GDP ratio outside this band. However, in the early 1990s the deposit-to-GDP ratio moved significantly below the band, dropping to 51 percent in 1994. The ratio of mutual funds to GDP has been rising since the early 1980s, but only since the late 1980s has the rise in mutual funds-to-GDP ratio been roughly equal to the decline in the deposit-to-GDP ratio. This apparent substitution or movement of money into mutual funds rather than bank deposits has been, at least in part, the result of historically low interest rates paid on bank deposits compared to expected risk-adjusted returns on mutual fund investments. If the gap between deposit rates of return and expected mutual fund rates of return narrows, this movement of funds out of deposits could slow or even reverse itself. We calculated what the deposit volumes would have been had the deposit-to-GDP ratio stayed at the lower end of its previous band, i.e., 63 percent. Using this benchmark, total deposits would have grown $695 billion during 1990 through 1994. Because deposits actually declined by $89 billion, this indicates a potential impact of $784 billion. Comparing actual deposits with the low end of the previous band is conservative. A deposit-to-GDP ratio nearer the middle of the band would indicate a larger shortfall. Nonetheless, it must be stressed that the deposit-to-GDP ratio has been pushed down by a number of factors in addition to a movement of deposits into mutual funds. These factors include a dramatic downsizing of the savings-institution industry, a decline in loans at commercial banks, and a shift by banks into greater use of nondeposit funding sources. We were unable to determine exactly how much of the decline in the deposits-to-GDP ratio can be attributed to the impact of mutual funds. Nonetheless, on the basis of the above analysis, we concluded that a reasonable estimate of the impact was sizable but probably less than $700 billion. The movement of money from bank deposits to mutual funds should have little if any effect on the total supply of loanable and investable funds available to the economy, even though this movement may have shifted the intermediaries through which finance flows. Both types of intermediaries (banks and mutual fund companies) generally invest a substantial portion of the funds they receive. As noted earlier, the share of bank loans in total finance was being reduced by securitization of assets long before mutual funds surged to prominence as competitors for customers’ dollars. Mutual funds have further advanced this securitization process. Both mutual funds and banks generally invest a substantial portion of the funds they receive, with the mutual funds investing mainly in securities and the banks investing in loans and certain kinds of securities. Thus, at the same time that a sizable amount of customer money went from bank deposits to mutual funds, the funds’ purchases of securities became a greater source of new finance to the economy than bank lending. In 1992 and 1993, about two-fifths of the net new funds flowing to the domestic nonfinancial sectors of the economy came via mutual funds, while the share that flowed via banks was about one-fourth of the net new funds. By and large, it was not possible to determine who “receives” the mutual funds’ investments. Unlike bank lending, where the money goes directly from the lending bank to the borrower, mutual funds’ investments largely flow through the securities markets, since most of the funds’ purchases are of tradable securities. (A relatively small but interesting exception occurs with so-called “prime-rate” mutual funds, which purchase securitized bank loans.) As large amounts of customers’ money flowed into mutual funds in the early 1990s, the funds’ investments in securities added liquidity to the securities markets generally. This liquidity not only improved conditions for existing issuers desiring to raise additional money but also may have made it easier for a broader range of borrowers to tap the securities-issuance markets. Availability of finance for the three different borrower sectors—residential, consumer, and business—could be disproportionally affected by the movement of funds out of bank deposits and into mutual funds, even when the total supply of loanable and investable funds is not affected. Because mutual funds invest mainly in securities, it is possible that those who issue securities might increase their access to finance at the expense of those who do not. Unfortunately, there is no way to measure the extent to which this has occurred from the statistical information available. All three sectors obtain some of their financing through the securities markets, either through their own issues or via the intermediaries from which they obtain credit. Because significant amounts of finance flow through the latter intermediaries, we were unable to determine to what extent, or even whether, any of these sectors may face more difficulty in obtaining finance than they had previously experienced. However, we were able to determine that all three sectors increased their access to finance raised in the securities markets, although the degree varies by sector. In addition, we can describe the indirect channels through which securitization affects the availability of credit for these sectors, even though these indirect effects cannot be quantified. Residential finance has been extensively securitized. Although individual homeowners go to banks, thrifts, or mortgage companies for their mortgages, most residential mortgages are written in a way to facilitate their subsequent securitization. By the end of 1994, only 34 percent of the total value of home mortgages outstanding was directly held by commercial banks and thrifts, down from a two-thirds share in 1980 (see table 3). Nonetheless, banks and thrifts are now also providing indirect financing to homeowners: in addition to their (reduced) direct holdings of mortgages, they invest in mortgage-backed securities. Consumer credit is still largely provided by commercial banks. As of year-end 1994, 63 percent of consumer debt (nonmortgage) was held by depository institutions. Banks continue to actively originate consumer credit. Since the late 1980s, however, banks and other providers of consumer finance have securitized some of their automobile loans and credit card receivables, resulting in the securitized portion of consumer debt rising from zero in 1985 to 14 percent in 1994. (See table 4.) Moreover, consumers have another avenue of indirect access to the securities markets: borrowing from finance companies. These companies obtain two-thirds of their funds by issuing their own securities. We examined the supply of finance to the corporate sector for the years 1990 through 1994, when the greatest inflow into mutual funds occurred and when deposit growth was small or negative. During the first 4 years of this period, the amount of outstanding bank credit to nonfinancial corporations declined every year. (See table 5.) Not all corporations reduced their bank loans, of course, but the declines outweighed the increases. In 1994, for the first time during this period, there was an increase in outstanding bank credit to nonfinancial corporations. In the first year of this period, 1990, the corporate sector did not offset declining bank loans by increased issuance of securities. In fact, the sector redeemed more securities than it issued. Thereafter, however, corporations far surpassed previous records for raising new funds on the securities markets. Net issuance averaged $100 billion annually in 1991 through 1993, compared with a previous single-year record of $55 billion. In 1994 there was a sharp falloff of net securities issuance by the corporate sector along with renewed growth in bank loans. The flow of liquidity from mutual funds into the securities markets enhanced the capacity of the securities markets to absorb these new issues. From 1990 through 1994, mutual funds made net purchases of corporate securities averaging $104 billion annually. Mutual funds not only purchased the securities of large corporations. They also were major purchasers of shares of smaller companies issuing stock for the first time as well as major purchasers of bonds issued by companies whose debt was not highly rated (so-called junk bonds). For those business borrowers who are unable to issue securities, there are indirect ways in which funding from the securities markets can flow to them. For example, just as finance companies channel funds from the securities markets to consumers, it is common for finance companies to lend to middle-sized companies that otherwise would borrow from banks. Even in the “noncorporate, nonfarm business sector,” where the borrowers tend to be quite small, finance companies supply about a fifth of total market debt. As another example, some business financing is funded by certain mutual funds that invest primarily in business loans bought from the originating banks. There is a possibility that those small businesses that are primarily dependent on small banks for their loans could experience reduced credit availability if their banks lost deposits to mutual funds. This could happen if neither these businesses nor their banks could readily obtain financing from other credit suppliers or from the capital markets. Available evidence shows that small businesses are more dependent on bank loans than large businesses. Whereas bank loans comprise about one-eighth of the debt of the corporate sector as a whole, a 1989 survey cited by the Federal Reserve suggested that small businesses get almost half of their debt financing from banks. Nonetheless, by implication, the average small business gets about half of its debt financing from nonbank sources. Some small businesses raise money by issuing securities. According to the Federal Reserve, many of these firms probably benefitted from the more receptive conditions in the markets in recent years. However, small businesses with less than $100 million in annual sales generally would not be able to sell securities. Nonetheless, small businesses can be indirect beneficiaries of mutual funds’ investments, via the securities issued by finance companies that extend credit to small businesses. As another conduit, one securities firm has extended about $1 billion in credit lines to small businesses. Regarding the access of small businesses to bank loans, the movement of money out of deposits and into mutual funds does not necessarily mean that the availability of bank loans will be reduced. If the lenders are regional banks or larger, they may be losing some of their loan volume to securitization either because they are securitizing their own assets or because their corporate customers are turning to securities issuance. In this case, more of the remaining deposits of these banks should be available for lending to small businesses. Nonetheless, presumably there is some portion of small businesses that is solely or heavily dependent on small banks for their credit. These borrowers might be affected if their banks lose deposits to mutual funds. Because some small banks’ borrower base is concentrated in small business, their clientele is not likely to reduce loans by switching to securities issuance. Thus, a cutback of these banks’ funding sources would probably not be accompanied by a reduction of loan demand. Therefore, some small banks might have to respond to a loss of deposits by cutting back on loans outstanding. However, such cutbacks are only a hypothetical possibility. Recently, banks with $250 million or less in assets have had ample liquidity in the form of their holdings of bonds and other securities in their investment accounts. The ratio of securities to total assets averaged over 33 percent in 1993 and 1994 compared with an average of about 28 percent for much of the 1980s. If faced with a loss of deposits, a number of small banks presumably could fund existing and new loans by selling these securities. In sum, the channels of financing are quite varied; for the most part, a shift of customers’ money from deposits into mutual funds need not reduce credit availability for any group of borrowers. There remains the possibility that some borrowers from small banks might face credit availability constraints in certain circumstances, but it is not clear whether those circumstances currently exist. We received written comments on a draft of this report from the Federal Reserve. In its letter, the Federal Reserve stated that the report provides a timely review of the flow of funds between mutual funds and bank deposits and the effect of these flows on credit availability. The Federal Reserve said it had no further comment regarding the report or its content because the report made no recommendations to the Federal Reserve. We are sending copies of this report to the Chairman of the Board of Governors of the Federal Reserve System and other interested parties. We will also make copies available to others upon request. The major contributors to this report were John Treanor, Banking Specialist, Stephen Swaim, Assistant Director, and Robert Pollard, Economist. If you have any questions, please contact me at (202) 512-8678. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO examined whether the movement of funds from bank deposits into mutual funds affects the availability of credit for residential, consumer, or commercial purposes. GAO found that: (1) the amount of money in mutual funds grew from $994 billion at year-end 1989 to $2,172 billion at year-end 1994, mainly due to an increase of net customer inflows; (2) during the same period, bank deposits declined from $3.55 billion to $3.46 billion; (3) as much as $700 billion of the growth in mutual funds may have come at the expense of bank deposits between 1990 and 1994; (4) the movement of money into mutual funds has resulted partly from the relatively lower interest rates paid on bank deposits, but this should have little effect on the total supply of loanable and investable funds, since mutual funds also lend or invest a major portion of the funds they receive; (5) there was insufficient data on whether the different categories of borrowers were affected by the shift of money from bank deposits to mutual funds; (6) all categories of borrowers have recently increased their access to financing obtained through the securities markets; and (7) flows of deposits out of smaller banks could reduce the availability of finance for small businesses whose primary source of finance is loans from such banks.",govreport
"On June 12, 2002, Congress passed the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which requires specific activities related to bioterrorism preparedness and response. For example, it calls for steps to improve the nation’s preparedness for bioterrorism and other public health emergencies by increasing coordination and planning for such events; developing priority countermeasures; and improving state, local, and hospital preparedness and response. The Secretary of HHS is required to provide for the establishment of an integrated system or systems of public health alert communications and surveillance networks among (1) federal, state, and local public health officials; (2) public and private health-related laboratories, hospitals, and other health care facilities; and (3) any other entities that the Secretary determines are appropriate. These networks are to allow for secure and timely sharing and discussion of essential information concerning bioterrorism and other public health emergencies, as well as recommended methods for responding to such an attack or emergency. In addition, no later than 1 year after the enactment of the law, the Secretary, in cooperation with health care providers and state and local public health officials, was to establish any additional technical and reporting standards, including those for network interoperability. Since fiscal year 2002, HHS has funded over $2.7 billion for public health preparedness efforts through grants administered by CDC and just over $1 billion for hospital preparedness grants administered by the Health Resources and Services Administration. To encourage the integration of health care system response plans with public health department plans, HHS has incorporated both public health preparedness and hospital performance goals into the agreements that the department uses to fund state and local public health preparedness improvements. The funding guidance provided by HHS to state and local governments calls for improvements in seven key areas: preparedness planning and readiness assessment, surveillance and epidemiology capacity, laboratory capacity for handling biological agents, laboratory capacity for handling chemical agents, health alert network/communication and IT, risk communication and health information dissemination, and education and training. Over the past year, federal actions to encourage the use of IT for health care delivery and public health have been accelerated. In April 2004, the President established the goal that health records for most Americans should be electronic within 10 years and issued an executive order to “provide leadership for the development and nationwide implementation of an interoperable health information technology infrastructure to improve the quality and efficiency of health care.” As part of this effort, the President tasked the Secretary of HHS to appoint a National Coordinator for Health Information Technology—which he subsequently did 1 week later. The President’s executive order called for the Coordinator to develop a strategic plan to guide the implementation of interoperable health IT in the public and private health care sectors. In July 2004, HHS issued a framework for strategic action that includes four broad goals; goal four of that framework is directed at improvements in public health. Further, DHS released the National Response Plan this past January, under which HHS is to continue to lead the federal government in providing public health and medical services during major disasters and emergencies. In this role, HHS is to coordinate all federal resources related to public health and medical services that are made available to assist state, local, and tribal officials during a major disaster or emergency. As we reported in May 2003, IT can play an essential role in supporting federal, state, local, and tribal governments in public health preparedness and response. Development of IT can build upon the existing systems capabilities of state and local public health agencies, not only to provide routine public health functions, but also to support public health emergencies, including bioterrorism. In addition, according to the Institute of Medicine, the rapid development of new IT offers the potential for greatly improved surveillance capacity. Finally, for public health emergencies in particular, the ability to quickly exchange data between providers and public health agencies—or among providers—is crucial in detecting and responding to naturally occurring or intentional disease outbreaks. Because of the dynamic and unpredictable nature of public health emergencies, various types of IT systems may be used during the course of an event. These include surveillance systems, which facilitate the performance of ongoing collection, analysis, and interpretation of disease-related and environmental data so that responders and decision makers can plan, implement, and evaluate public health actions (these systems include devices to collect and identify biological agents from environmental samples, and they make use of IT to record and transmit data); and communications systems, which facilitate the secure and timely exchange of information to the relevant responders and decision makers so that appropriate action can be taken. Other types of IT may also be used, such as diagnostic systems, which identify particular pathogens and those that include data from food, water, and animal testing, but such systems are not among the major federal public health IT initiatives. Although state health departments have primary responsibility for disease surveillance in the United States, total responsibility for surveillance is shared among health care providers: more than 3,000 local county, city, and tribal health departments; 59 state and territorial health departments; more than 180,000 public and private laboratories; and public health officials from multiple federal agencies. In addition, the United States is a member of the World Health Organization, which is responsible for coordinating international disease surveillance and response actions. While health care providers are responsible for the medical diagnosis and treatment of their individual patients, they also have a responsibility to protect public health—a responsibility that includes helping to identify and prevent the spread of infectious diseases. Because health care providers are typically the first health officials to encounter cases of infectious diseases—and have the opportunity to diagnose them—these professionals play an important role in disease surveillance. Generally, state laws or regulations require health care providers to report confirmed or suspected cases of notifiable diseases to their state or local health department. States publish lists of the diseases they consider notifiable and therefore subject to reporting requirements. According to the Institute of Medicine, most states also require health care providers to report any unusual illnesses or deaths, especially those for which a cause cannot be readily established. However, according to CDC, despite state laws requiring the reporting of notifiable diseases, a significant proportion of these cases are not reported, which is a major challenge in public health surveillance. Health care providers rely on a variety of public and private laboratories to help them diagnose cases of notifiable diseases. In some cases, only laboratory results can definitively identify pathogens. Every state has at least one public health laboratory to support its infectious diseases surveillance activities and other public health programs. State laboratories conduct testing for routine surveillance or as part of clinical or epidemiologic studies. For rare or unusual pathogens, these laboratories provide diagnostic tests that are not always available in commercial laboratories. State public health laboratories also provide specialized testing for low-incidence but high-risk diseases such as tuberculosis and botulism. Results from state public health laboratories are used by epidemiologists to document trends and identify events that may indicate an emerging problem. Upon diagnosing a case involving a notifiable disease, local health care providers are required to send the reports to state health departments through state and local disease-reporting systems, which range from paper-based reporting to secure, Internet-based systems. States, through their state and local health departments, have principal responsibility for protecting the public’s health and therefore take the lead in conducting disease surveillance and supporting response efforts. Generally, local health departments are responsible for conducting initial investigations into reports of infectious diseases, employing epidemiologists, physicians, nurses, and other professionals. Local health departments are also responsible for sharing information that they obtain from providers or other sources with the state department of health. State health departments are responsible for collecting surveillance information statewide, coordinating investigations and response activities, and voluntarily sharing surveillance data with CDC and others. States vary in their requirements governing who should report notifiable diseases; in addition, the deadlines for reporting these diseases after they have been diagnosed vary by disease. State health officials conduct their own analyses of disease data to verify cases, monitor the incidence of diseases, and identify possible outbreaks. In reporting their notifiable disease data to CDC, states use multiple and sometimes duplicative systems. States are not legally required to report information on notifiable diseases to CDC, but CDC officials explained that the agency makes such reporting from the states a prerequisite for receiving certain types of CDC funding. Generally, the federal government’s role in disease surveillance is to collect and analyze national disease surveillance data and maintain disease surveillance systems. Federal agencies investigate the causes of infectious diseases and maintain their own laboratory facilities. They also use communications systems to share disease surveillance information. In addition, federal agencies provide funding and technical expertise to support disease surveillance at the state, local, and international levels. Federal agencies such as CDC, the Food and Drug Administration, and DOD conduct disease surveillance using systems that gather data from various locations throughout the country to monitor the incidence of infectious diseases. In addition to using surveillance systems to collect and analyze notifiable disease data reported by states, federal agencies use other surveillance systems to collect data on different diseases or from other sources (e.g., international sources). These systems supplement the state data on notifiable diseases by monitoring surveillance information that states do not collect. In general, surveillance systems are distinguished from one another by the types of infectious diseases or syndromes they monitor and the sources from which they collect data. Some disease surveillance systems rely on groups of selected health care providers who have agreed to routinely supply information from clinical settings on targeted diseases. A relatively new type of surveillance system, known as a syndromic surveillance system, monitors the frequency and distribution of health-related symptoms—or syndromes—among people within a specific geographic area. These syndromic surveillance systems are designed to detect anomalous increases in certain syndromes, such as skin rashes, that may indicate the beginning of an infectious disease outbreak. Some monitor data from hospital and emergency room admissions or data from over-the- counter drug sales. Other data sources may include poison control centers, health plan medical records, first-aid stations, emergency medical service data, insurer claims, and discharge diagnosis information. For syndromic data to be analyzed effectively, information must be timely, and the analysis must take into account the context of the locality from which the data were generated. Because syndromic surveillance systems monitor symptoms and other signs of disease outbreaks instead of waiting for clinically confirmed reports or diagnoses of a disease, some experts believe that syndromic surveillance systems could help public health officials increase the speed with which they may identify outbreaks. However, as we reported last September, syndromic surveillance systems are relatively costly to maintain compared with other types of disease surveillance and are still largely untested. Two federal agencies are involved in major public health IT initiatives that focus on disease surveillance and communications. CDC, one of HHS’s divisions, has primary responsibility for conducting national disease surveillance and developing epidemiological and laboratory tools to enhance surveillance of disease, including public health emergencies. It also provides an array of technical and financial support for state infectious disease surveillance. DHS’s mission involves, among other things, protecting the United States against terrorist attacks, including bioterrorism. Its Science and Technology (S&T) Directorate serves as the department’s primary research and development arm. Its focus is on catastrophic terrorism— threats to the security of the United States that could result in large- scale loss of life and major economic impact. S&T’s work is designed to counter those threats, both by improvements to current technological capabilities and development of new ones. (Other federal agencies’ roles in public health are described in app. II.) CDC’s major IT initiative, known as PHIN, is a national initiative to implement a multiorganizational business and technical architecture for public health information systems. After the 2001 anthrax incidents, CDC was mandated to increase national preparedness and capabilities to respond to naturally occurring diseases and conditions and the deliberate use of all threats, including biological, chemical, and radiological agents. CDC sees PHIN as an essential part of its strategy to achieve this mandate. According to CDC, the PHIN architecture defines and documents the systems needed to support public health identifies the industry standards that are necessary to make these develops the specifications necessary to make these standards do the work of public health; defines integration points for systems to work together to meet the establishes tools and components that support standards-based supports the certification process necessary to establish interoperability. To help achieve its goals, PHIN is also intended to integrate and coordinate existing systems, and CDC makes PHIN software available for optional use by state and local public health agencies. PHIN has substantial size and scope, because it is intended to serve as a comprehensive architecture, information exchange network, and set of services that will integrate existing capabilities and advance the ways in which IT can support public health. It is intended to improve public health systems and networks and to provide a means for exchanging data with other federal agencies, state and local government agencies, the private health care sector, and others. As part of PHIN, CDC has established the PHIN Preparedness initiative, which it describes as striving to accelerate the pace at which jurisdictions acquire or acquire access to public health preparedness systems. This initiative focuses on the near-term aspects of PHIN. According to CDC, the agency and its public health partners have identified a set of functional requirements defining the core capabilities for preparedness systems; these are categorized into six broad functional areas: Early event detection: The early identification of bioterrorism and naturally occurring health events in communities. Outbreak management: The capture and management of information associated with the investigation and containment of a disease outbreak or public health emergency. Connection of laboratory systems: The development and adoption of common specifications and processes to enable public health laboratories to electronically exchange information with public health agencies. Countermeasure and response administration: The management and tracking of measures taken to contain an outbreak or event and to provide protection against a possible outbreak or event. Partner communications and alerting: The development of a nationwide network of integrated communications systems capable of rapid distribution of health alerts and secure communications among public health professionals involved in an outbreak or event. Cross-functional components: Technical capabilities, or components, common across functional areas that are necessary to fully support PHIN Preparedness requirements. CDC officials stated that by September 2005, the agency will expect states to meet PHIN Preparedness requirements in these areas as a condition for receiving public health preparedness funding; CDC expects that this condition on funding will promote a wider adoption of PHIN standards. Table 1 presents communications and surveillance applications that are part of the PHIN initiative (some of which are significant system development efforts in themselves), along with the PHIN Preparedness functional areas that they support. Many of these applications are associated with larger initiatives that predated PHIN (see table 2), which are now incorporated under the PHIN umbrella. For example, the origins of NEDSS date to 1995, when CDC co- authored a report that documented the problems of fragmentation and incompatibility in the nation’s disease surveillance systems. The recommendations in this report led CDC to develop the NEDSS initiative, which was begun in October 1999 and incorporated into PHIN in 2002. As part of its mission to protect the nation against terrorist attacks (including possible bioterrorism), DHS is also pursuing major public health IT initiatives. These initiatives and associated programs, which are primarily focused on signal interpretation and biosurveillance, are described in table 3. Figure 1 illustrates a simplified flow of existing surveillance information and health alerts among local, state, and federal agencies. This diagram does not show all flows of information that would occur in the case of an outbreak. For example, local health agencies may send alerts to health care providers. According to CDC, costs for its PHIN initiatives and applications for fiscal years 2002 through 2005, totaling almost $362 million, are summarized in table 4. Most of these costs support local, state, and federal public health activities. According to DHS, IT costs for its biosurveillance initiatives for fiscal years 2003 through 2005 total about $45 million; these are summarized in table 5. This table does not reflect the total costs for the programs supporting these IT initiatives. CDC and DHS have made progress on federal public health IT initiatives, including CDC’s PHIN initiative, which is intended to provide the nation with integrated public health information systems to counter national civilian public health threats, and two major initiatives at DHS—primarily focused on signal interpretation and biosurveillance—one of which is associated with three other programs. However, while progress has been made, more work remains, particularly in surveillance and data exchange. PHIN communications systems are being used, and improvements to surveillance systems (disease, syndromic, and environmental monitoring) are still being developed. Other PHIN applications are available for optional use by state and local public health officials, but they are not widely used because of system limitations. DHS’s two major biosurveillance IT initiatives are still in the development stage, and one of the associated programs—BioWatch—is operational. However, as initially deployed, BioWatch required modification, because its three IT components did not communicate with each other, requiring redundant data entry. According to DHS, it has developed a solution to this interoperability problem and implemented it at two locations; DHS plans to install that solution in the remaining BioWatch locations. Table 6 briefly describes the status of CDC’s PHIN applications, including operational status, number of installations or users, and future plans. Of the various PHIN applications, one is still in the planning process, two are partially operational, and five are operational. Figure 2 shows the time frames for the planning, development, and implementation of the PHIN applications; these applications vary considerably both in complexity and in time needed to complete implementation. Health Alerting. The Health Alerting application, which is used to broadcast e-mail alerts to state and local public health officials about disease outbreaks, became operational in October 2000. This application provides full-time (24 hours a day, 7 days a week) Internet access and broadcast e-mail and fax capabilities. The Health Alerting application is part of the Health Alert Network initiative, which provides grant funding to states and local public health agencies for enhancement of their IT infrastructures. Using these funds, states and localities have either built their own Health Alert Networks or acquired commercial systems for alerting state and local officials. Some state Health Alert Networks use more sophisticated applications than the CDC Health Alerting application, providing various kinds of alerts based on user profiles and allowing document sharing. Epi-X. Epi-X, which is designed to be a secure, Web-based communications system through which public health professionals share information on public health emergencies, was implemented in December 2000 and is being used by state and local public health officials. Epi-X includes multiple mechanisms for alerting; secure, moderated communications and discussion about disease outbreaks and other acute health events as they evolve; and a searchable report database. Most of the state and local health officials with whom we spoke were satisfied with the system. However, some officials questioned the need for both Health Alerting and Epi-X, since both applications have similar functionality and are used by some of the same public health officials. According to CDC, it is planning to create a common platform for use by both applications. The National Electronic Disease Surveillance System (NEDSS). The NEDSS initiative promotes the use of data and information systems standards for the development of interoperable surveillance systems at federal, state, and local levels. It is intended to minimize the problems of fragmented, disease-specific surveillance systems; however, this goal is still years away from being achieved. A primary goal of NEDSS is the ongoing, automatic capture and analysis of data that are already available electronically. Its system architecture is designed to integrate and replace several current CDC surveillance systems, including the National Electronic Telecommunications System for Surveillance, the HIV/AIDS reporting system, and the systems for vaccine preventable diseases, tuberculosis, and other infectious diseases. In previous fiscal years, CDC funded 50 states and 7 localities. These states and localities can use CDC’s NEDSS Base System or build systems compatible with NEDSS/PHIN standards. The initiative includes an architecture to guide states and CDC as they build NEDSS-compatible systems, which can be either commercial or custom developed. The initiative is also intended to promote the use of data standards to advance the development of interoperable disease surveillance systems at federal, state, and local levels. Besides providing a secure, accurate, and efficient way to collect, process, and transmit data to CDC, the NEDSS Base System is intended to provide a platform upon which program area modules can be built to meet state and program area data needs. (Programs may be focused on specific diseases, populations, or other areas—such as smoking or obesity.) Program area modules are critical to eventually reducing the many program-specific surveillance systems that CDC currently maintains by consolidating the data collection of the various programmatic disease surveillance activities that are currently in place. Although CDC has been developing the NEDSS Base System since 2000, it is still only partially deployed. There are no clear milestones and plans for when the Base System will become fully deployed, although multiple versions of the Base System have been developed and deployed in several states. According to CDC, the NEDSS Base System has been deployed in 5 states since December 2004, and it expects implementation to continue with the 11 remaining states that are planning to use the Base System, but the implementation time frames will depend on when these states are ready to accept the system. Table 7 summarizes the status of NEDSS system implementation across the nation, which shows that about half of the states and localities have operational NEDSS systems. In addition, four NEDSS program area modules are being used, and six are in the process of being developed. Additional program area modules will be developed for other disease-specific areas in the coming years. BioSense. CDC’s BioSense, which the agency describes as an early event detection system, is designed to provide near real-time event detection by using data (without patient names or medical numbers) from existing health-related databases. Although CDC began using BioSense data in late 2003, the BioSense application was implemented for state and local use in May 2004. BioSense is continuously being updated, and current plans for phase two of BioSense development call for enhancements to begin in May 2005. BioSense is a Web-based application that currently provides CDC and state and local users with the ability to view syndromic and prediagnostic data: specifically, Defense and Veterans Affairs ambulatory care data, BioWatch laboratory results, and national clinical labs data. Initially, CDC also provided data on sales of over-the-counter medication, but these were later discontinued. BioSense data are provided in the form of data reports displayed in various ways, rather than as raw data that can be input to analytical systems. Although CDC uses BioSense for a number of federal bioterrorism preparedness activities, BioSense is not extensively used by the state and local public health officials with whom we spoke, primarily because of limitations in the data and its presentation. These officials stated that the DOD and VA data were not useful to them, either because they were in locations without large military or veteran populations, or because they could get similar data elsewhere. For instance, many of these officials have access to local syndromic surveillance systems, which better fit their needs because the systems have better capabilities or because they provide data that are more timely than BioSense data. Some of these officials stated that they would prefer CDC to provide data for them to conduct their own analyses, especially data from national sources such as clinical laboratories, rather than displaying the data on the BioSense Web site. According to CDC officials, they will provide raw data to public health agencies upon request, have increased the number of data sets available, and have expanded the scope of user support by (1) increasing communications with state and local public health departments in the use of and response to daily surveillance data patterns, (2) monitoring data during special events (e.g., a presidential inauguration and sporting events) at state and local request, and (3) contracting with John Hopkins University for development of a standard operating procedure for monitoring and using early event detection. National Environmental Public Health Tracking Network (NEPHTN). Initiated in 2001, NEPHTN is still in the planning stage. CDC is planning to begin development of the network in 2006 and implementation of phase one in 2008. This initiative involves intra- and interagency collaboration among CDC and other federal agencies. CDC established a memorandum of understanding in 2003 with the Environmental Protection Agency (EPA) to coordinate activities relating to EPA’s National Environmental Information Exchange Network and CDC’s National Environmental Public Health Tracking Network. To date, three collaborative projects have been initiated: (1) a demonstration project in the Atlanta metropolitan area to test data linkage methods and utility of linked data; (2) a project to evaluate how different types of air quality characterization data can be used to link environmental and public health data; and (3) a project in New York to examine specific technical interoperability issues that would affect data exchange between EPA’s and CDC’s networks. As envisioned, NEPHTN will be a distributed, secure, Web-based network that will provide access to environmental and health data that are collected by a wide variety of agencies, such as individual state networks. Once established, it should also provide access to environmental, health, and linked environmental-health data from both centralized and decentralized data stores and repositories, implementing a common data vocabulary to support electronic data exchanges within states, and across state, regions, and nationally. Outbreak Management System. The Outbreak Management System is an application designed for case tracking during the investigation of disease outbreaks. Initially developed for use by CDC, the system is now available for use by state and local public health agencies. The project began as the Bioterrorism Field Response Application and was scoped to include only requirements related to bioterrorism response by CDC-deployed field teams. Since its inception in 2002, the scope has been broadened to include any epidemiologic investigation where standard data collection and data sharing would be advantageous. However, although the system is in use at CDC, none of the state and local public health officials with whom we spoke use the system—either because it cannot exchange data with other software applications, or because these agencies have their own capability for tracing cases of infectious diseases. According to CDC officials, the use of the Outbreak Management System is provided as an option for state and local public health agencies. Although only CDC and one state agency have used the application in support of outbreaks, four state agencies and one federal entity have evaluated the software for potential use and may implement it in the future. LRN Results Messenger. CDC’s LRN Results Messenger utility is used by DHS’s BioWatch initiative for transmitting data to CDC; however, it is burdensome to use, according to the BioWatch cities included in our review (BioWatch is discussed in more detail in the next section of this report). According to CDC, it anticipates releasing the next version of the LRN Results Messenger in September 2005, which should address the usability issues. PHIN Messaging System. The PHIN Messaging System is available for use, but only CDC and a few states and local public health agencies use it. As of March 1, 2005, 51 organizations used it, according to CDC. As yet, only BioWatch, the NEDSS Base System, and the Laboratory Response Network use PHIN Messaging; according to CDC, these are the major systems that support preparedness needs, and it is focusing on these systems first. DHS is also pursuing two major biosurveillance IT initiatives—the National Biosurveillance Integration System and the Biological Warning and Incident Characterization System (BWICS). The BWICS initiative, in addition, is associated with three other biosurveillance programs. Of these five, one is operational, but it has interoperability and other limitations, one is a demonstration project, and three are in development. All five were initially under the oversight of DHS’s S&T Directorate; one is now the responsibility of the directorate for Information Analysis and Infrastructure Protection. Table 8 briefly describes the status and plans of DHS’s biosurveillance IT initiatives for the current fiscal year. Most of DHS’s biosurveillance IT initiatives are still being planned or developed. Figure 3 shows time lines for the five DHS IT initiatives. The one DHS surveillance initiative that is operational—BioWatch—is an environmental monitoring system that was developed and implemented within a 3-month period, according to DHS officials. DHS originally intended for local public health agencies to process and analyze all BioWatch data; however, at CDC’s request, DHS agreed to share data with CDC for inclusion in BioSense. BioWatch consists of three IT components: One component of BioWatch tracks the environmental samples as they are collected; it was developed by the Department of Energy’s Los Alamos National Laboratory. A second component performs sample testing and reports the results; this is a commercial product. The third component, CDC’s LRN Results Messenger, transmits the test results from the laboratory that processes the samples to CDC for analysis. As deployed, none of these three components could exchange data electronically, so that redundant, manual data entry has been required to transfer data among the three systems. State and local public health officials in BioWatch locations told us that they were dissatisfied with the deployment of BioWatch because of this need for repetitive data entry and because they were not involved in the system’s planning and implementation. DHS hired a contractor to resolve BioWatch’s interoperability problem, and DHS officials now report that they have begun implementing the resulting technical improvements in BioWatch laboratories. Additionally, EPA’s Inspector General’s Office recently reported that the agency did not provide adequate oversight of sampling operations for BioWatch to ensure that quality assurance guidance was adhered to, potentially affecting the quality of the samples taken; DHS officials state that this oversight issue has now been resolved. In the broader context of environmental monitoring, questions exist about detection capabilities for environmental surveillance. As we reported in May 2003, real-time detection and measurement of biological agents in the environment is challenging because of the number of potential agents to be identified, the complex nature of the agents themselves, the countless number of similar micro-organisms that are a constant presence in the environment, and the minute quantities of pathogen that can initiate infection. In May 2004, the Department of Defense reported that the capability for real-time detection of biological agents is currently unavailable and is unlikely to be achieved in the near to medium term. A second initiative, the BioWatch Signal Interpretation and Integration Program (BWSIIP), was established to respond to user needs regarding BioWatch. According to DHS, the initiative is intended to develop a system that will help BioWatch jurisdictions to better understand the public health or national security implications of a confirmed positive result for a biological agent from BioWatch, as well as to respond appropriately. BWSIIP is to be implemented by a consortium, initiated in 2004, that includes Carnegie Mellon University, the University of Pittsburgh, and the John Hopkins University Applied Physics Laboratory. The current BWSIIP pilot is scheduled for completion in fiscal year 2006. After DHS transitions BWSIIP to the BWICS initiative, local public health agencies will use locally available applications or tools provided by DHS for that function. For the two remaining major biosurveillance IT initiatives, DHS is still developing requirements (lessons learned from its one demonstration project, BioNet, are being incorporated into BWICS). BWICS, is to integrate data from environmental monitoring and health surveillance systems, and the pilot is expected to be completed in fiscal year 2006, according to DHS officials. DHS did not complete requirements development in the two pilot cities as scheduled, and it recently changed one of the original pilot cities, requiring a new start in requirements development in the new location. After the pilot, DHS is planning to expand BWICS beyond the two pilot cities to other BioWatch locations. The National Biosurveillance Integration System is intended to connect the various federal surveillance systems to DHS’s Homeland Security Operations Center. DHS S&T developed the system requirements and design and transferred the initiative to the Directorate for Information Analysis and Infrastructure Protection in December 2004 for implementation. Despite federal, state, and local government efforts to strengthen the public health infrastructure and improve the nation’s ability to detect, prevent, and respond to public health emergencies, important challenges continue to constrain progress. First, the national health care IT strategy and federal health architecture are still being developed; CDC and DHS will face challenges in integrating their public health IT initiatives into these ongoing efforts. Second, although federal efforts continue to promote the adoption of data standards, developing such standards and then implementing them are challenges for the health care community. Third, these initiatives involve the need to coordinate among federal, state, and local public health agencies, but establishing effective coordination among the large number of disparate agencies is a major undertaking. Finally, CDC and DHS face challenges in addressing specific weaknesses in IT planning and management that may hinder progress in developing and deploying public health IT initiatives. In May 2003, we recommended that the Secretary of HHS, in coordination with other key stakeholders, establish a national IT strategy for public health preparedness and response that should identify steps toward improving the nation’s ability to use IT in support of the public health infrastructure. Among other things, we stated that HHS should set priorities for information systems, supporting technologies, and other IT initiatives. Since then, HHS appointed a National Coordinator for Health IT in May 2004 and issued a framework for strategic action in July 2004. This framework is a first step in the development of a national health IT strategy. Goal four of the framework is directed at improvements in public health and states that these improvements require the collection of timely, accurate, and detailed clinical information to allow for the evaluation of health care delivery and the reporting of critical findings to public health officials. Two of the strategies outlined by HHS are aimed at achieving this goal: (1) unifying public health surveillance architectures to allow for the exchange of information among health care organizations, organizations they contract with, and state and federal agencies and (2) streamlining quality and health status monitoring to allow for a more complete look at quality and other issues in real time and at the point of care. The framework for strategic action states that the key challenge in harmonizing surveillance architectures is to identify solutions that meet the reporting needs of each surveillance function, yet work in a single integrated, cost- effective architecture. Like the national health care IT strategy, the federal health architecture is still evolving, according to HHS officials in the Office of the National Coordinator for Health IT. Initially targeting standards for enabling interoperability, the federal health architecture is intended to provide a structure for bringing HHS’s divisions and other federal agencies together. As part of achieving HHS’s public health goal of unifying public health surveillance architectures, the federal health architecture program established a work group on public health surveillance that is responsible for recommending a target architecture related to disease surveillance to serve as the framework within the federal sector for developing and implementing public health surveillance systems. The newly formed work group, chaired by CDC and the Department of Veterans Affairs, met for the first time in December 2004. Because the new work group is so recently formed, plans are still being developed to address how CDC’s PHIN initiative and DHS’s IT initiatives will integrate with the national health IT strategy, such as plans to establish regional health information organizations. In the absence of a completed strategy for public health surveillance efforts, state and local public health officials have raised concerns about duplication of effort across federal agencies. Some of the surveillance initiatives in our review address similar functionality and may duplicate ongoing efforts at other federal, state, and local agencies: for example, the use and development of syndromic surveillance systems. CDC is implementing BioSense at the national level, DHS is assisting local public health agencies in implementing local syndromic surveillance systems such as ESSENCE or RODS as part of its biosurveillance initiatives, and many state and local public health agencies have their own ongoing syndromic surveillance systems. As we have reported, syndromic surveillance systems are relatively costly to maintain compared with other types of disease surveillance and are still largely untested. According to HHS, with regard to BioSense, the agency is taking steps to mitigate costs and risk. State and local public health officials also expressed concern about the federal government’s ability to conduct syndromic surveillance, because they see this type of surveillance as an inherently local function. Furthermore, last year the Council of State and Territorial Epidemiologists reported that while state health departments are given some guidance and leeway to use federal funding to enhance and develop their own disease surveillance activities, no focused mechanism has been established for states to share ideas and experiences with each other and with CDC to determine what has or has not worked, and what efforts are feasible and worth expanding. The Council recommended that to enhance bioterrorism-related surveillance objectives, HHS and CDC form a bioterrorism surveillance initiative steering committee to review current federal surveillance initiatives affecting state and local health departments; to review state-developed surveillance systems; and to recommend surveillance priorities for continuation of funding, further development, or implementation. HHS and CDC have taken steps to respond to these recommendations, but according to the Council, it is not yet satisfied that HHS and CDC have fully addressed its concerns. While HHS and other key federal agencies are organizing themselves to develop a strategy for public health surveillance and interoperability, decisions regarding development and implementation are being made now without the benefit of an accepted national health IT strategy that integrates public health surveillance-related initiatives. In the case of BioSense, these decisions affect the spending of about $50 million this fiscal year and an unknown amount in future years. Until a strategy and accompanying architecture are developed, major public health IT initiatives will continue to be developed without an overall, coordinated plan and are at risk of being duplicative, lacking interoperability, and exceeding cost and schedule estimates. In May 2003, we recommended that the Secretary of HHS, as part of his efforts to develop a national strategy, (1) define activities for ensuring that the various standards-setting organizations coordinate their work and reach further consensus on the definition and use of standards, (2) establish milestones for defining and implementing all standards, and (3) create a mechanism to monitor the implementation of standards throughout the health care industry. To support the compatibility, interoperability, and security of federal agencies’ many planned and operational IT systems, the identification and implementation of data, communications, and security standards for health care delivery and public health are essential. As we testified in July 2004, HHS has made progress in identifying standards. While federal action to promote the adoption of these standards continues, the identification and implementation of these standards are an ongoing process. Despite progress in defining health care IT standards, several implementation challenges remain to be worked out, including the establishment of milestones. Currently, no formal mechanisms are in place to ensure coordination and consensus among these initiatives at the national level. HHS officials agree that leadership and direction are still needed to coordinate the various standards-setting initiatives and to ensure consistent implementation of standards for health care delivery and public health. Within the federal health architecture structure, the Consolidated Health Informatics initiative is focused on the adoption of data and communication standards to be used by federal agencies to achieve interoperability of IT within health IT initiatives. In March 2003, the Consolidated Health Informatics initiative announced the adoption of 5 standards, and in May 2004, it announced the adoption of another 15 standards. Some of these standards are included as PHIN standards. As of March 1, 2005, CDC has adopted several industry standards and published specifications for PHIN; these standards are grouped by type in table 9. CDC has also initiated a PHIN certification process for its partners (e.g., state and local public health agencies), which is intended to establish whether state and local systems can meet standards for the PHIN preparedness functional areas. In the future, CDC plans to require system owners to first perform self-assessment reviews to ensure that systems meet PHIN standards, followed by reviews by CDC certification teams to confirm PHIN compatibility. To be functionally compatible, systems must be capable of supporting the standards outlined for each PHIN functional area; accordingly, partners must demonstrate that their systems have this capability. In general, state and local public health officials consider the PHIN initiative to be a good framework for organizing the necessary standards for public health interoperability. Most of the state and local officials we spoke with agreed that CDC has done a commendable job of adopting and promoting standards for IT in selected programs. In addition, they agreed that CDC should continue to take a leadership role in pressing for industry standards and providing guidance to states and local entities. However, several officials stated that CDC should focus more of its attention on setting standards and less on developing software applications, which generally do not meet their needs and are not compatible with their specific IT environments. CDC officials say that it is important both to promote the use of industry standards and to develop software applications, especially for state and local public health agencies that have limited IT resources. Although federal efforts to promote the adoption of these standards continue, their identification and implementation are an ongoing process. Several implementation challenges remain, including coordination of the various efforts to ensure consensus on standards and establishment of milestones. Until these challenges are addressed, federal agencies will not be able to ensure that their systems can exchange data with other systems when needed. In defining system requirements, federal agencies are challenged by the need to involve such key stakeholders as state and local public health agencies, which are expected to use these systems for reporting data to the federal government. For example, most participating local government agencies and state public health laboratories were told to implement the BioWatch initiative in their metropolitan areas and were given the procedures and software to use for sample management and data collection. According to some public health officials, BioWatch was implemented without a plan for how states and localities would respond to a positive test result, and they were left to develop a response plan after BioWatch had been deployed. One metropolitan area did not implement BioWatch for a year after it became operational, because officials did not have a response plan in place and did not want to be responsible for responding to a potential incident without a plan for handling positive test results. According to DHS officials, since local officials had received funds for emergency preparedness, it was their understanding that BioWatch locations had response plans in place; DHS officials have since developed a methodology to target funds for specific purposes, such as response plans. CDC has been challenged by the need to coordinate with a diverse range of state and local public health agencies. For example, CDC has found that it is difficult to implement “standard” systems that would address the full range of different needs and levels of IT resources available at the state level. HHS officials told us that the agency strives to address this challenge by developing applications that are based on industry standards. It also provides the standards and specifications to state and local agencies so that they can build or purchase their own systems that can conform to PHIN standards. Nonetheless, there was consensus among many of the state and local officials in our review that federal agencies did not obtain adequate input from state and local officials. A few state officials with whom we spoke said that CDC does not appropriately consider their need to comply with existing state IT architectures. In addition, in an informal e-mail survey, a small group of state chief information officers agreed that federal agencies do not take into consideration state IT architectures. According to the Council of State and Territorial Epidemiologists, no mechanism has yet been established for state and federal partners to collaboratively review initiatives developed over the past 3 years and plan for the future. Instead, the approach to system design and implementation remains top-down, mainly focused on expanding federally designed syndromic surveillance for early outbreak detection without critical review of its usefulness and cost and without systematic review of state-originated systems and needs. The result is that public health responders may not buy in to and use the federally designed systems, potentially constructive state- originated ideas may not get recognition and wider application, and national bioterrorism-related surveillance will be suboptimal. According to CDC, as part of its efforts to obtain state and local input, it hosts an annual PHIN conference and holds meetings with business partner organizations, such as a recent series of meetings on PHIN preparedness requirements with selected state and local officials. In addition, under CDC’s new organizational structure, the new National Center for Public Health Informatics has a division for communications and collaboration with its partners. Further, CDC and DHS have coordinated with each other on specific projects, but that coordination has not been optimal, according to officials from both agencies. According to DHS officials, federal agencies are planning to meet within the next few months to discuss this issue. When asked about their experiences with coordination between CDC and DHS on public health IT initiatives, some of the state and local public health officials included in our review expressed concerns about coordination between the two agencies; one expressed confusion about their roles. Until CDC and DHS establish close coordination on federal public health IT, and state and local public health agencies are more actively involved in the definition and coordination of federal efforts, the effectiveness of the information systems intended to improve disease surveillance and communications may be inadequate. A challenge that both HHS and DHS face in implementing public health IT initiatives is ensuring their effective planning and management. This requires mature, repeatable systems development and acquisition processes to increase the likelihood that projects will be delivered on time and within budget. Key elements of information and technology management include (1) IT investment management and (2) systems development and acquisition management. To help federal agencies address these key elements, we and the Office of Management and Budget have developed guidance that provides a framework on the use of rigorous and disciplined processes for planning, managing, and controlling IT resources. We have previously reported on specific weaknesses at both HHS and DHS, including the lack of robust processes for IT investment management and immature systems development and acquisition practices. We made recommendations to HHS and DHS aimed at improving these practices. HHS and CDC have recently taken steps to improve their control over IT projects, which is an important aspect of IT investment management. Because PHIN and some of its initiatives (i.e., BioSense, NEDSS, the Health Alert Network, and NEPHTN) are considered major investments for fiscal year 2006, they required review by HHS. The HHS IT Investment Review Board conducted budgetary reviews for these applications in June 2004 and recommended that the projects move forward as major IT investments; however, there is no documentation that additional HHS reviews were conducted on PHIN and its major applications until this past February, when HHS began implementing procedures for better monitoring of system development projects. In January 2004, CDC announced its intention to provide greater executive level oversight of IT investments, but it had been reorganizing and did not begin conducting control reviews for major PHIN investments until recently. In May 2004, CDC announced its new center for public health informatics to better coordinate IT projects; this center was formally recognized as operational as of mid-April 2005 when Congress approved CDC’s reorganization. Until CDC and HHS management provides a systematic method for IT investment reviews, they will have difficulty minimizing risks while maximizing returns on these critical public health investments. Regarding CDC’s systems development and acquisition practices, we observed weaknesses in project management that may hinder progress toward achieving PHIN objectives. For some of the projects in this review, we received limited documentation of project managers’ tracking actual dates against baseline schedules, and it appeared that a number of projects had missed internal schedule dates. In November 2004, CDC started requiring project managers to provide status reports to its program management activity office on a biweekly basis. These reports are now required for five of the systems in our review. CDC officials acknowledged that project dates had to be rebaselined; after the rebaselining, CDC officials stated that their projects met official release dates. Early last year, CDC recognized the need for more direct executive involvement in IT governance and management. This fiscal year, CDC began implementing a project management office to oversee public health informatics projects. Establishing this office and institutionalizing its processes while managing new and ongoing IT projects will be a challenge. The new office has initiated new processes to manage project interdependencies, document and track milestones for projects, and formalize project change requests. For example, the office is beginning to track projects biweekly—asking project managers to report on upcoming milestones, their confidence that those milestones will be met, issues for executive attention, staffing problems, and other potential problems. CDC is also implementing a process to standardize project management across the agency. This process is designed to incorporate, among other things, program and project management, capital planning, security certification and accreditation, and system development life-cycle processes. DHS has been operational for just over 2 years, and the department has made progress in establishing key information and technology disciplines. However, as we have reported, these disciplines are not yet fully established and operational. For example, DHS has established an IT investment management process, but this process is still maturing. DHS has also had problems consistently employing rigorous systems development and acquisition practices. DHS did not provide documentation of its oversight of its public health IT investments. According to DHS officials, they plan to submit a capital asset plan and business case for the BWICS initiative this year for review and approval by the DHS IT review board. However, until DHS follows through on its initial actions to address its management, programmatic, and partnering challenges, its IT investments remain at risk. The federal government has made progress on major public health IT initiatives, but significant work remains to be done. CDC’s PHIN initiative includes applications at various stages of implementation; as a whole, however, it remains years away from fully achieving its planned improvement to the public health IT infrastructure. In addition, DHS’s initiatives are still in such early stages that it is uncertain how they will improve public health preparedness. Federal agencies face many challenges in improving the public health infrastructure. CDC and DHS are pursuing related initiatives, but there is little integration among them, and until the national health IT strategy is completed, it is unknown how their integration will be addressed. Implementing health data standards across the health care community is still a work in progress, and until these standards are implemented, information sharing challenges will remain. In addition, state and local public health agencies report that their coordination with federal initiatives is often limited. Until state and local public health agencies are more actively involved in coordination with their federal counterparts, disease surveillance systems will remain fragmented and their effectiveness will be impeded. Finally, the development of robust practices for IT investment management and for systems development and acquisition is a continuing challenge for HHS and DHS, about which we have previously made recommendations. Until agencies address all these challenges, progress toward building a stronger public health infrastructure will be limited, as will the ability to share essential information concerning public health emergencies and bioterrorism. In order to improve the development and implementation of major public health IT initiatives, we recommend that the Secretary of Health and Human Services take the following two actions: ensure that the federal initiatives are (1) aligned with the national health IT strategy, the federal health architecture, and ongoing public health IT initiatives and (2) coordinated with state and local public health initiatives and ensure federal actions to encourage the development, adoption, and implementation of health care data and communication standards across the health care industry to address interoperability challenges associated with the exchange of public health information. We also recommend that the Secretary of Homeland Security align existing and planned DHS IT initiatives with other ongoing public health IT initiatives at HHS, including adoption of data and communications standards. We received written comments on a draft of this report from the Acting Inspector General at HHS and Director of the Departmental GAO/OIG Liaison at DHS (these comments are reproduced in app. III and IV). HHS generally concurred with our recommendations, while DHS did not comment specifically on the recommendations. Both agencies provided additional contextual information and technical comments, which we have incorporated in this report as appropriate. We provided DOD officials with the opportunity to comment on a draft of this report, which they declined. Among its comments, HHS officials stated that this report does not adequately represent the department’s accomplishments in implementing standards and specifications for health IT or the benefits of pursuing a standards-based approach. We concur with HHS on the importance of standards for health information technology and have been calling for federal leadership in expediting standards since 1993. Page 61 lists GAO reports on health IT, several of which address the benefits of standards and the need for a national health IT strategy. In response to HHS’s comment that we suggest that early event detection is duplicative or irrelevant at the federal level, neither we nor the state and local public health officials suggest that early event detection at the federal level is irrelevant. Rather, we are reporting the concerns of state and local public health officials regarding the federal government’s role, which merits further discussion and more involvement of state and local health officials. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of the report to other congressional committees. We will also send copies to the Secretaries of Health and Human Services, Homeland Security, Defense, and Energy. In addition, copies will be sent to the state and local public health agencies that were included in our review. Copies will also be made available at no charge on our Web site at www.gao.gov. If you have any questions on matters discussed in this report, please contact me at 202-512-9286 or by e- mail at pownerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The objectives of our review were to assess the progress of major federal information technology (IT) initiatives designed to strengthen the effectiveness of the public health infrastructure and describe the key IT challenges facing federal agencies responsible for improving the public health infrastructure. To address these objectives, we conducted our work at Health and Human Services (HHS), Department of Homeland Security (DHS), and Department of Defense (DOD) offices in Washington, D.C., and the Centers for Disease Control and Prevention (CDC) in Atlanta. We selected specific IT initiatives to review from systems we identified in previous work, focusing on major public health IT initiatives in surveillance and communication systems. We excluded food safety systems and DOD disease surveillance systems that did not include civilian populations. We discussed our selection with federal officials to help ensure that we were addressing the most relevant major initiatives. To assess the progress of major federal IT initiatives designed to strengthen the effectiveness of the public health infrastructure, we analyzed agency documents such as Office of Management and Budget’s Exhibit 300s, minutes of executive council meetings, and system development documents, including project plans, functional requirements, and cost-benefit analyses. We supplemented our evaluation of agency documents with interviews of federal officials. Through interviews with these officials and with state and local public health officials, we also assessed CDC’s and DHS’s interaction and coordination with each other on their IT initiatives. Because these federal initiatives affect state and local public health agencies, we supplemented our analysis of agency documentation by interviewing officials from six state and six local public health agencies on progress being achieved by CDC and DHS. We conducted our work at the San Diego County Health and Human Services Agency; the California Department of Health Services in Sacramento; the Thurston County Public Health and Social Services and the Washington State Department of Health in Olympia; the Austin/Travis County Health and Human Services Department and the Texas Department of State Health Services in Austin; the Milwaukee City Health Department; the Wisconsin Department of Health and Family Services in Madison, Wisconsin; the Boston Public Health Commission and the Commonwealth of Massachusetts Department of Public Health in Boston; the New York State Department of Health in Albany; and the New York City Department of Health and Mental Hygiene. The states and local public health agencies were selected because they were actively involved in implementing at least one of CDC’s Public Health Information Network IT applications. We interviewed them on the impact of federal IT initiatives on state and local public health operations and lessons they learned from integrating federal IT initiatives into their local public health infrastructure. If they had systems similar to the federal systems in our review, we discussed how their systems compared with the federal initiatives. We also interviewed representatives of several public health professional organizations, which CDC considers its partners, such as the National Association of County and City Health Officials, the Association of State and Territorial Health Officials, the Council for State and Territorial Epidemiologists and the Association of Public Health Laboratories. We also had a discussion with the National Association of State Chief Information Officers. To identify key IT challenges facing federal agencies responsible for improving the public health infrastructure, we analyzed published GAO reports, agency documents, and other information obtained during interviews and site visits. We summarized the results of our evaluation and identified the key challenges that CDC and DHS have consistently encountered as they implement the IT initiatives included in our review. Our work was performed from July 2004 through April 2005 in accordance with generally accepted government auditing standards. The Department of Health and Human Services (HHS) has primary responsibility for coordinating the nation’s response to public health emergencies, including bioterrorism. HHS divisions responsible for bioterrorism preparedness and response, and their primary responsibilities, include the following: The Office of the Assistant Secretary for Public Health Emergency Preparedness coordinates the department’s work to oversee and protect public health, including cooperative agreements with states and local governments. States and local governments can apply for funding to upgrade public health infrastructure and health care systems to better prepare for and respond to bioterrorism and other public health emergencies. The office maintains a command center where it can coordinate the response to public health emergencies from one centralized location. This center is equipped with satellite teleconferencing capacity, broadband Internet hookups, and analysis and tracking software. The Centers for Disease Control and Prevention (CDC) has primary responsibility for nationwide disease surveillance for specific biological agents, developing epidemiological and laboratory tools to enhance disease surveillance, and providing an array of scientific and financial support for state infectious disease surveillance, prevention, and control. CDC has an emergency operations center to organize and manage all of its emergency operations, allowing for immediate communication with HHS, the Department of Homeland Security, federal intelligence and emergency response officials, and state and local public health officials. CDC also provides testing services and consultation that are not available at the state level; training on infectious diseases and laboratory topics, such as testing methods and outbreak investigations; and grants to help states conduct disease surveillance. In addition, CDC provides state and local health departments with a wide range of technical, financial, and staff resources to help maintain or improve their ability to detect and respond to disease threats. The Food and Drug Administration is responsible for safeguarding the food supply, ensuring that new vaccines and drugs are safe and effective, and conducting research on diagnostic tools and treatment of disease outbreaks. It is increasing its food safety responsibilities by improving its laboratory preparedness and food monitoring inspections. The Agency for Healthcare Research and Quality is responsible for supporting research designed to improve the outcomes and quality of health care, reduce its costs, address safety and medical errors, and broaden access to effective services, including antibioterrorism research. It has initiated several major projects and activities designed to assess and enhance linkages between the clinical care delivery system and the public health infrastructure. Research focuses on emergency preparedness of hospitals and health care systems for bioterrorism and other public health events; technologies and methods to improve the linkages among the personal health care system, emergency response networks, and public health agencies; and training and information needed to prepare clinicians to recognize the symptoms of bioterrorist agents and manage patients appropriately. The National Institutes of Health is responsible, among other things, for conducting medical research in its own laboratories and for supporting the research of nonfederal scientists in universities, medical schools, hospitals, and research institutions throughout the United States and abroad. Its National Institute of Allergy and Infectious Diseases has a program to support research related to organisms that are likely to be used as biological weapons. The Health Resources Services Administration is responsible for improving the nation’s health by ensuring equal access to comprehensive, culturally competent, quality health care. Its Bioterrorism Hospital Preparedness program administers cooperative agreements to state and local governments to support hospitals’ efforts toward bioterrorism preparedness and response. The Department of Homeland Security (DHS) is responsible for, among other things, protecting the United States against terrorist attacks. One activity undertaken by DHS is coordination of surveillance activities of federal agencies related to national security. The Science and Technology Directorate serves as the primary research and development arm of DHS, using our nation’s scientific and technological resources to provide federal, state, and local officials with the technology and capabilities to protect the nation. The focus is on catastrophic terrorism—threats to the security of our homeland that could result in large-scale loss of life and major economic impact. The directorate’s work is designed to counter those threats, both by improvements to current technological capabilities and development of new, revolutionary technological capabilities. The Information Analysis and Infrastructure Protection Directorate is responsible for helping to deter, prevent, and mitigate acts of terrorism by assessing vulnerabilities in the context of continuously changing threats. It strengthens the nation’s protective posture and disseminates timely and accurate information to federal, state, local, private, and international partners. The Emergency Preparedness and Response Directorate is responsible for the National Incident Management System, which establishes standardized incident management processes, protocols, and procedures that all responders—federal, state, local and tribal—will use to coordinate and conduct response actions. The Department of Defense, while primarily responsible for the health and protection of its service members, contributes to global disease surveillance, training, research, and response to emerging infectious disease threats. The Defense Threat Reduction Agency provides technical expertise and capabilities in combat support, technology development, threat control and threat reduction, including chemical and biological defense. The United States Army Medical Research Institute of Infectious Diseases conducts biological research dealing with militarily relevant infectious diseases and biological agents. It also provides professional expertise on issues related to technologies and other tools to support readiness for a bioterrorist incident. The Department of Energy is developing new capabilities to counter chemical and biological threats. It expects the results of its research to be public and possibly lead to the development of commercial products in the domestic market. The Chemical and Biological National Security Program has conducted research on biological detection, modeling and prediction, and biological foundations to support efforts in advanced detection, attribution, and medical countermeasures. The national research laboratories (e.g., Lawrence Livermore, Los Alamos, and Sandia) are developing new capabilities for countering chemical and biological threats, including biological detection, modeling, and prediction. The Department of Agriculture (USDA) is responsible for protecting and improving the health and marketability of animals and animal products in the United States by preventing, controlling, and eliminating animal diseases. USDA’s disease surveillance and response activities are intended to protect U.S. livestock and ensure the safety of international trade. In addition, USDA is responsible for ensuring that meat, poultry, and certain processed egg products are safe and properly labeled and packaged. USDA establishes quality standards and conducts inspections of processing facilities in order to safeguard certain animal food products against infectious diseases that pose a risk to humans. The Agricultural Research Service conducts research to improve onsite rapid detection of biological agents in animals, plants, and food and has improved its detection capability for diseases and toxins that could affect animals and humans. The Food Safety Inspection Service provides emergency preparedness for foodborne incidents, including bioterrorism. The Animal and Plant Health Inspection Service has a role in responding to biological agents that cause zoonotic diseases (i.e., diseases transmitted from animals to humans). It also has veterinary epidemiologists to trace the source of animal exposures to diseases. The Environmental Protection Agency (EPA) has responsibilities to prepare for and respond to emergencies, including those related to biological materials. EPA can be involved in detection of agents by environmental monitoring and sampling. It is also responsible for protecting the nation’s water supply from terrorist attack and for prevention and control of indoor air pollution. The Department of Veterans Affairs (VA) manages one of the nation’s largest health care systems and is the nation’s largest drug purchaser. The department purchases pharmaceuticals and medical supplies for the Strategic National Stockpile and the National Medical Response Team stockpile. The VA Emergency Preparedness Act of 2002 directed VA to establish at least four medical emergency preparedness centers to (1) carry out research and develop methods of detection, diagnosis, prevention, and treatment for biological and other public health and safety threats; (2) provide education, training, and advice to health care professionals inside and outside VA; and (3) provide laboratory and other assistance to local health care authorities in the event of a national emergency. The following are GAO’s comments on the Department of Health and Human Services letter dated June 3, 2005. 1. We agree with HHS that the cost benefits of a standards-based approach to public health systems are potentially considerable. However, as we have reported before, the Center for Information Technology Leadership acknowledges that their cost estimates are based on a number of assumptions and inhibited by limited data that are neither complete nor precise. 2. We agree with HHS that standards-based systems provide important benefits. In our May 2003 report, we made several recommendations regarding the establishment and use of standards that are highlighted in this report. We also state that to support the compatibility, interoperability, and security of federal agencies’ many planned and operational IT systems, the identification and implementation of data, communications, and security standards for health care delivery and public health are essential. 3. HHS states that our report does not mention a number of activities related to the Federal Health Architecture and the Consolidated Health Informatics initiative. We described the status of workgroup efforts specific to public health surveillance. In terms of the standards adopted by the Consolidated Health Informatics initiative, we presented the relevant standards in our table of industry standards used by the Public Health Information Network. We disagree with HHS that the paragraph needs to be revised. While the development of standards and policies is a key component of progress toward the implementation of a national health IT strategy, the development of a national strategy and corresponding federal architecture is equally important. 4. We disagree with HHS that we should delete our discussion of the concerns of state and local public health officials regarding duplication of effort across federal agencies. Neither we nor the state and local public health officials suggest that early event detection at the federal level is irrelevant. Rather, we are reporting the concerns of state and local public health officials regarding the federal government’s role, which merits further discussion and more involvement of state and local health officials. 5. We have adjusted our report to indicate that fiscal year 2006 costs for BioSense are unknown. 6. HHS comments that not moving forward with its technology initiatives presents greater risk than waiting for a completed national health IT strategy. We are not suggesting that HHS stop its ongoing activities; we only point out the risks associated with developing and implementing major IT initiatives without a coordinated strategy in place. The following is GAO’s comment on the Department of Homeland Security’s letter dated June 3, 2005. 1. We disagree with DHS’s statement that we erroneously categorize its initiatives as still in the early states. The initiatives that we are referring to as being in the early stages are the Biological Warning and Incident Characterization System and the National Biosurveillance Integration System, which according to DHS officials are considered their two major IT initiatives. DHS categorized them as being in development. In addition to those named above, Barbara S. Collier, Neil J. Doherty, Amanda C. Gill, M. Saad Khan, Gay Hee Lee, Mary Beth McClanahan, M. Yvonne Sanchez, and Morgan Walts made key contributions to this report. Health Information Technology: HHS Is Taking Steps to Develop a National Strategy. GAO-05-628. Washington, D.C.: May 27, 2005. Health and Human Services’ Estimate of Health Care Cost Savings Resulting from the Use of Information Technology. GAO-05-309R. Washington, D.C.: February 17, 2005. HHS’s Efforts to Promote Health Information Technology and Legal Barriers to its Adoption. GAO-04-991R. Washington, D.C.: August 13, 2004. Health Care: National Strategy Needed to Accelerate the Implementation of Information Technology. GAO-04-947T. Washington, D.C.: July 14, 2004. Information Technology: Benefits Realized for Selected Health Care Functions. GAO-04-224. Washington, D.C.: October 31, 2003. Bioterrorism: Information Technology Strategy Could Strengthen Federal Agencies’ Abilities to Respond to Public Health Emergencies. GAO-03-139. Washington, D.C.: May 30, 2003. Automated Medical Records: Leadership Needed to Expedite Standards Development. GAO/IMTEC-93-17. Washington, D.C.: April 30, 1993.","It has been almost 4 years since the anthrax events of October 2001 highlighted the weaknesses in our nation's public health infrastructure. Since that time, emerging infectious diseases have appeared--such as Severe Acute Respiratory Syndrome and human monkeypox--that have made our readiness for public health emergencies even more critical. Information technology (IT) is central to strengthening the public health infrastructure through the implementation of systems to aid in the detection, preparation for, and response to bioterrorism and other public health emergencies. Congress asked us to review the current status of major federal IT initiatives aimed at strengthening the ability of government at all levels to respond to public health emergencies. Specifically, our objectives were to assess the progress of major federal IT initiatives designed to strengthen the effectiveness of the public health infrastructure and describe the key IT challenges facing federal agencies responsible for improving the public health infrastructure. Federal agencies have made progress on major public health IT initiatives, although significant work remains to be done. These initiatives include one broad initiative at CDC--the Public Health Information Network (PHIN) initiative--which is intended to provide the nation with integrated public health information systems to counter national civilian public health threats, and two major initiatives at the Department of Homeland Security (DHS), which are primarily focused on biosurveillance. CDC's broad PHIN initiative encompasses a number of applications and initiatives, which show varied progress. Currently, PHIN's basic communications systems are in place, but it is unclear when its surveillance systems and data exchange applications will become fully deployed. Further, the overall implementation of PHIN does not yet provide the desired functionality, and so some applications are not widely used by state and local public health officials. For example, CDC's BioSense application, which is aimed at detecting early signs of disease outbreaks, is available to state and local public health agencies, but according to the state and local officials with whom we spoke, it is not widely used, primarily because of limitations in the data it currently collects. DHS is also pursuing two major public health IT initiatives--the National Biosurveillance Integration System and the Biological Warning and Incident Characterization System (BWICS). Both of these initiatives are still in development. The BWICS initiative, in addition, is associated with three other programs, one of which--BioWatch--is operational. This early- warning environmental monitoring system was developed for detecting trace amounts of biological materials and has been deployed in over 30 locations across the United States. Until recently, its three IT components were not interoperable and required redundant data entry in order to communicate with each other. As federal agencies work with state and local public health agencies to improve the public health infrastructure, they face several challenges. First, the national health IT strategy and federal health architecture are still being developed; CDC and DHS will face challenges in integrating their public health IT initiatives into these ongoing efforts. Second, although federal efforts continue to promote the adoption of data standards, developing such standards and then implementing them are challenges for the health care community. Third, these initiatives involve the need to coordinate among federal, state, and local public health agencies, but establishing effective coordination among the large number of disparate agencies is a major undertaking. Finally, CDC and DHS face challenges in addressing specific weaknesses in IT planning and management that may hinder progress in developing and deploying public health IT initiatives. Until all these challenges are addressed, progress toward building a stronger public health infrastructure will be impeded, as will the ability to share essential information concerning public health emergencies and bioterrorism.",govreport
"Our survey of the largest sponsors of DB pension plans reveals that they have made a number of revisions to their benefit offerings over approximately the last 10 years or so. Generally, respondents reported that they revised benefit formulas, converted some plans to hybrid plans (such as cash balance plans), or froze some of their plans. For example, 81 percent of responding sponsors reported that they modified the formulas of one or more of their DB plans. Respondents were asked to report changes for plans or benefits that covered only nonbargaining employees, as well as to report on plans or benefits that covered bargaining unit employees. Fifty-eight percent of respondents who reported on plans for collective- bargaining employees indicated they had generally increased the generosity of their DB plan formulas between January 1997 and the time of their response (see app. I, slide 12). In contrast, 48 percent of respondents reporting on plans for their nonbargaining employees had generally decreased the generosity of their DB plan formulas since 1997. “Unpredictability or volatility of DB plan funding requirements” was the key reason cited for having changed the benefit formulas of plans covering nonbargaining employees (see app. I, slide 14). “Global or domestic competitive pressures” in their industry was the key reason cited for the changes to the plans covering collectively bargained employees (see app. I, slide 13). With regard to plans for bargaining employees, however, a number of the sponsors who offered reasons for changes to bargaining unit plans also volunteered an additional reason for having modified their plans covering bargaining employees. Specifically, these sponsors wrote that inflation or a cost-of- living adjustment was a key reason for their increase to the formula. This suggests that such plans were flat-benefit plans that may have a benefit structure that was increased annually as part of a bargaining agreement. Meanwhile, sponsors were far more likely to report that they had converted a DB plan covering nonbargaining unit employees to a hybrid plan design than to have converted DB plans covering collectively bargained employees. For example, 52 percent of respondents who reported on plans for nonbargaining unit employees had converted one or more of their traditional plans to a cash balance or other hybrid arrangement (see app. I, slide 15). Many cited “trends in employee demographics” as the top reason for doing so (see app. I, slide 16). Among respondents who answered the cash balance conversion question for their collectively bargained plans, 21 percent reported converting one or more of their traditional plans to a cash balance plan. Regarding plan freezes, 62 percent of the responding firms reported a freeze, or a plan amendment to limit some or all future pension accruals for some or all plan participants, for one or more of their plans (see app. I, slide 18). Looking at the respondent’s plans in total, 8 percent of the plans were described as hard frozen, meaning that all current employees who participate in the plan receive no additional benefit accruals after the effective date of the freeze, and that employees hired after the freeze are ineligible to participate in the plan. Twenty percent of respondents’ plans were described as being under a soft freeze, partial freeze, or “other” freeze. Although not statistically generalizable, the prevalence of freezes among the large sponsor plans in this survey is generally consistent with the prevalence of plan freezes found among large sponsors through a previous GAO survey that was statistically representative. The vast majority of respondents (90 percent) to our most recent survey also reported on their 401(k)-type DC plans. At the time of this survey, very few respondents reported having reduced employer or employee contribution rates for these plans. The vast majority reported either an increase or no change to the employer or employee contribution rates, with generally as many reporting increases to contributions as reporting no change (see app. I, slide 21). The differences reported in contributions by bargaining status of the covered employees were not pronounced. Many (67 percent) of responding firms plan to implement or have already implemented an automatic enrollment feature to one or more of their DC plans. According to an analysis by the Congressional Research Service, many DC plans require that workers voluntarily enroll and elect contribution levels, but a growing number of DC plans automatically enroll workers. Additionally, certain DC plans with an automatic enrollment feature may gradually escalate the amount of the workers’ contributions on a recurring basis. However, the Pension Protection Act of 2006 (PPA) provided incentives to initiate automatic enrollment for those plan sponsors that may not have already adopted an automatic enrollment feature. Seventy- two percent of respondents reported that they were using or planning to use automatic enrollment for their 401(k) plans covering nonbargaining employees, while 46 percent indicated that they were currently doing so or planning to do so for their plans covering collective-bargaining employees (see app. I, slide 22). The difference in automatic enrollment adoption by bargaining status may be due to the fact that nonbargaining employees may have greater dependence on DC benefits. That is, a few sponsors noted they currently automatically enroll employees who may no longer receive a DB plan. Alternatively, automatic enrollment policies for plans covering collective-bargaining employees may not yet have been adopted, as that plan feature may be subject to later bargaining. Health benefits are a large component of employer offered benefits. As changes to the employee benefits package may not be limited to pensions, we examined the provision of health benefits to active workers, as well as to current and future retirees. We asked firms to report selected nonwage compensation costs or postemployment benefit expenses for the year 2006 as a percentage of base pay. Averaging these costs among all those respondents reporting such costs, we found that health care comprised the single largest benefit cost. Active employee health plans and retiree health plans combined to represent 15 percent of base pay (see app. I, slide 24). DB and DC pension costs were also significant, representing about 14 percent of base pay. All of the respondents reporting on health benefits offered a health care plan to active employees and contributed to at least a portion of the cost. Additionally, all of these respondents provided health benefits to some current retirees, and nearly all were providing health benefits to retirees under the age of 65 and to retirees aged 65 and older. Eighty percent of respondents offered retiree health benefits to at least some future retirees (current employees who could eventually become eligible for retiree benefits), although 20 percent of respondents offered retiree health benefits that were fully paid by the retiree. Further, it appears that, for new employees among the firms in our survey, a retiree health benefit may be an increasingly unlikely offering in the future, as 46 percent of responding firms reported that retiree health care was no longer to be offered to employees hired after a certain date (see app. I, slide 25). We asked respondents to report on how an employer’s share of providing retiree health benefits had changed over the last 10 years or so for current retirees. Results among respondents generally did not vary by the bargaining status of the covered employees (app. I, slide 27). However, 27 percent of respondents reporting on their retiree health benefits for plans covering nonbargaining retirees reported increasing an employer’s share of costs, while only 13 percent of respondents reporting on their retiree health benefits for retirees from collective-bargaining units indicated such an increase. Among those respondents with health benefits covering nonbargained retirees, they listed “large increases in the cost of health insurance coverage for retirees” as a major reason for increasing an employer’s share—not surprisingly. This top reason was the same for all of these respondents, as well as just those respondents reporting a decrease in the cost of an employer’s share. Additionally, a number of respondents who mentioned “other” reasons for the decrease in costs for employers cited the implementation of predefined cost caps. Our survey also asked respondents to report on their changes to retiree health offerings for future retirees or current workers who may eventually qualify for postretirement health benefits. As noted earlier, 46 percent of respondents reported they currently offered no retiree health benefits to active employees (i.e., current workers) hired after a certain date. Reporting on changes for the last decade, 54 percent of respondents describing their health plans for nonbargaining future retirees indicated that they had decreased or eliminated the firm’s share of the cost of providing health benefits (see app. I, slide 30). A smaller percentage (41 percent) of respondents reporting on their health benefits for collectively bargained future retirees indicated a decrease or elimination of benefits. The need to “match or maintain parity with competitor’s benefits package” was the key reason for making the retiree health benefit change for future retirees among respondents reporting on their collective-bargaining employees (app. I, slide 32). We asked respondents to report their total, future liability (i.e., present value in dollars) for retiree health as of 2004. As of the end of the 2004 plan year, 29 respondents reported a total retiree health liability of $68 billion. The retiree health liability reported by our survey respondents represents 40 percent of the $174 billion in DB liabilities that we estimate for these respondents’ DB plans as of 2004. According to our estimates, the DB liabilities for respondents reporting a retiree health liability were supported with $180 billion in assets as of 2004. We did not ask respondents about the assets underlying the reported $68 billion in retiree health liabilities. Nevertheless, these liabilities are unlikely to have much in the way of prefunding or supporting assets, due in large part to certain tax consequences. Although we did not ask sponsors about the relative sustainability of retiree health plans given the possible difference in the funding of these plans relative to DB plans, we did ask respondents to report the importance of offering a retiree health plan for purposes of firm recruitment and retention. Specifically, we asked about the importance of making a retiree health plan available relative to making a DB or DC pension plan available. Only a few respondents reported that offering DB or DC plans was less (or much less) important than offering a retiree health plan. Responding before October 2008—before the increasingly severe downturns in the national economy—most survey respondents reported they had no plan to revise benefit formulas or freeze or terminate plans, or had any intention to convert to hybrid plans before 2012. Survey respondents were asked to consider how their firms might change specific employee benefit actions between 2007 and 2012 for all employees. The specific benefit actions they were asked about were a change in the formula for calculating the rates of benefit accrual provided by their DB plan, a freeze of at least one DB plan, the conversion of traditional DB plans to cash balance or other hybrid designs, and the termination of at least one DB plan. For each possibility, between 60 percent and 80 percent of respondents said their firm was not planning to make the prospective change (see app I, slide 34). When asked about how much they had been or were likely to be influenced by recent legislation or account rule changes, such as PPA or the adoption of Financial Accounting Standards Board (FASB) requirements to fully recognize obligations for postretirement plans in financial statements, responding firms generally indicated these were not significant factors in their decisions on benefit offerings. Despite these legislative and regulatory changes to the pension environment, most survey respondents indicated that it was unlikely or very unlikely that their firms would use assets from DB plans to fund qualified health plans; increase their employer match for DC plans; terminate at least one DB plan; amend at least one DB plan to change (either increase or decrease) rates of future benefit accruals; convert a DB plan to a cash balance or hybrid design plan, or replace a DB plan with a 401(k)-style DC plan. Additionally, most respondents indicated “no role” when asked whether PPA, FASB, or pension law and regulation prior to PPA had been a factor in their decision (see app 1, slide 35). Though the majority of these responses indicated a trend of limited action related to PPA and FASB, it is interesting to note that, among the minority of firms that reported they were likely to freeze at least one DB plan for new participants only, most indicated that PPA played a role in this decision. Similarly, while only a few firms indicated that it was likely they would replace a DB plan with a 401(k)-style DC plan, most of these firms also indicated that both PPA and FASB played a role in that decision. There were two prospective changes that a significant number of respondents believed would be likely or very likely implemented in the future. Fifty percent of respondents indicated that adding or expanding automatic enrollment features to 401(k)-type DC plans was likely or very likely, and 43 percent indicated that PPA played a major role in this decision. This is not surprising, as PPA includes provisions aimed at encouraging automatic enrollment and was expected to increase the use of this feature. Forty-five percent of respondents indicated that changing the investment policy for at least one DB plan to increase the portion of the plan’s portfolio invested in fixed income assets was likely or very likely—with 21 percent indicating that PPA and 29 percent indicating that FASB played a major or moderate role in this decision (see app 1, slide 36). Our survey did not ask about the timing of this portfolio change, so we cannot determine the extent of any reallocation that may have occurred prior to the decline in the financial markets in the last quarter of 2008. Finally, responding sponsors did not appear to be optimistic about the future of the DB system, as the majority stated there were no conditions under which they would consider forming a new DB plan. For the 26 percent of respondents that said they would consider forming a new DB plan, some indicated they could be induced by such changes as a greater scope in accounting for DB plans on corporate balance sheets and reduced unpredictability or volatility of plan funding requirements (see app I, slides 38). Conditions less likely to cause respondents to consider a new DB plan included increased regulatory requirements of DC plans and reduced PBGC premiums (see app I, slide 39). Until recently, DB pension plans administered by large sponsors appeared to have largely avoided the general decline evident elsewhere in the system since the 1980s. Their relative stability has been important, as these plans represent retirement income for more than three-quarters of all participants in single-employer plans. Today, these large plans no longer appear immune to the broader trends that are eroding retirement security. While few plans have been terminated, survey results suggest that modifications in benefit formulas and plan freezes are now common among these large sponsors. This trend is most pronounced among nonbargained plans but is also apparent among bargained plans. Yet, this survey was conducted before the current economic downturn, with its accompanying market turmoil. The fall in asset values and the ensuing challenge to fund these plans places even greater stress on them today. Meanwhile, the survey findings, while predating the latest economic news, add to the mounting evidence of increasing weaknesses throughout the existing private pension system that include low contribution rates for DC plans, high account fees that eat into returns, and market losses that significantly erode the account balances of those workers near retirement. Moreover, the entire pension system still only covers about 50 percent of the workforce, and coverage rates are very modest for low-wage workers. Given these serious weaknesses in the current tax-qualified system, it may be time for policymakers to consider alternative models for retirement security. We provided a draft of this report to the Department of Labor, the Department of the Treasury, and PBGC. The Department of the Treasury and PBGC provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Labor, the Secretary of the Treasury, and the Director of the PBGC, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have or your staffs any questions about this report, please contact me at (202) 512-7215 or bovbjergb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions are listed in appendix III. the nation’s largest private sector DB plans: 1) What recent changes have employers made to their pension and benefit offerings? 2) What changes might employers make with respect to their pensions in the future, and how might these changes be influenced by changes in pension law and other factors? generalizable to all DB plan sponsors. However, the sample can serve as an important indicator of the health of the private DB system and the sample’s possible importance to the Pension Benefit Guaranty Corporation (PBGC) The 44 sponsoring firms that responded represent an estimated: 25 percent (or $370 billion) of total DB system liabilities as of 19 percent (or 6 million) of the system’s DB participants (active, separated-vested, retired as of 2004) business line was manufacturing, with other key areas being finance and information. (Figure 1) These firms reported employing on average 75,000 employees in their U.S. operations in 2006. increased or did not change employer contributions to 401(k) plans for their NB employees. (Figure 8) Main reasons for change included redesigned matching formula as well as compensation adjustments to attract top employees. The vast majority of respondents reported that plans covering NB employees either increased or did not change employee contributions. Main reasons among respondents reporting increased contributions included addition of automatic enrollment feature to one or more plans. 72 percent of large sponsors reported either using or planning to use auto enrollment for plans covering NB employees (Figure 9). either increased or did not change employer contributions to 401(k) plans for their bargaining unit employees. (Figure 8) No single reason stood out for this result. Bargaining unit employees of most sponsors did not change employee contributions. (Figure 8) 50 percent of large sponsors with plans covering CB employees reported either not using or not planning to use auto enrollment (Figure 9). (Figure 10) All responding DB plan sponsors offered health insurance to active employees and contributed to the cost All responding DB plan sponsors offered health insurance to at least some current retirees—nearly all to both pre-age 65 and age 65-plus employees 80 percent provided health insurance to at least some active employees who become eligible for the benefit upon retirement 20 percent provided health insurance that was fully paid by the retired employee (Figure 11) Compared to respondents reporting on their benefits covering CB employees, respondents with NB employees reported decrease in the employer’s share of the cost of providing health benefits to current retirees (Figure 12) Main reasons were increases in cost of health insurance for retirees and for active employees (Figure 13) 46 percent of plan sponsors no longer offered retiree health benefits to active employees hired after a certain date. 54 percent decreased or eliminated the firm's share cost of providing health benefits for future retirees who were non-bargaining employees; (Figure 14) Primary reasons cited were large cost increases in health insurance for both retirees and active employees (Figure 15) 41 percent of sponsors with bargaining unit employees reported decrease in or elimination of firm's share of health care costs for future retirees (Figure 14) 26 percent reported no change Primary reason cited was match/maintain parity with competitor’s benefits package (Figure 16) them definitely consider forming a new DB plan 26 percent of sponsors reported that there were conditions under which they would have considered offering a new DB plan; the most common conditions selected were: Provide sponsors with greater scope in accounting for DB plans on corporate balance sheets DB plans became more effective as an employee retention Reduced unpredictability or volatility in DB plan funding requirements (Figure 17) To achieve our objectives, we conducted a survey of sponsors of large defined-benefit (DB) pension plans. For the purposes of our study, we defined “sponsors” as the listed sponsor on the 2004 Form 5500 for the largest sponsored plan (by total participants). To identify all plans for a given sponsor, we matched plans through unique sponsor identifiers. We constructed our population of DB plan sponsors from the 2004 Pension Benefit Guaranty Corporation’s (PBGC) Form 5500 Research Database by identifying unique sponsors listed in this database and aggregating plan- level data (for example, plan participants) for any plans associated with this sponsor. As a result of this process, we identified approximately 23,500 plan sponsors. We further limited these sponsors to the largest sponsors (by total participants in all sponsored plans) that also appeared on the Fortune 500 or Fortune Global 500 lists. We initially attempted to administer the survey to the first 100 plans that met these criteria, but ultimately, we were only able administer the survey to the 94 sponsoring firms for which we were able to obtain sufficient information for the firm’s benefits representative. While the 94 firms we identified for the survey are an extremely small subset of the approximately 23,500 total DB plan sponsors in the research database, we estimate that these 94 sponsors represented 50 percent of the total single-employer liabilities insured by PBGC and 39 percent of the total participants (active, retired, and separated-vested) in the single-employer DB system as of 2004. The Web-based questionnaire was sent in December 2007, via e-mail, to the 94 sponsors of the largest DB pension plans (by total plan participants as of 2004) who were also part of the Fortune 500 or Global Fortune 500. This was preceded by an e-mail to notify respondents of the survey and to test our e-mail addresses for these respondents. This Web questionnaire consisted of 105 questions and covered a broad range of areas, including the status of current DB plans; the status of frozen plans (if any) and the status of the largest frozen plan (if applicable); health care for active employees and retirees; pension and other benefit practices or changes over approximately the last 10 years and the reasons for those changes (parallel questions asked for plans covering collectively bargained employees and those covering nonbargaining employees); prospective benefit plan changes; the influence of laws and accounting practices on possible prospective benefit changes; and opinions about the possible formation of a new DB plan. The first 17 questions and last question of the GAO Survey of Sponsors of Large Defined Benefit Pension Plans questionnaire mirrored the questions asked in a shorter mail questionnaire (Survey of DB Pension Plan Sponsors Regarding Frozen Plans) about benefit freezes that was sent to a stratified random sample of pension plan sponsors that had 100 or more participants as of 2004. Sponsors in the larger survey were, like the shorter survey, asked to report only on their single-employer DB plans. To help increase our response rate, we sent four follow-up e-mails from January through November 2008. We ultimately received responses from 44 plan sponsors, representing an overall response rate of 44 percent. To pretest the questionnaires, we conducted cognitive interviews and held debriefing sessions with 11 pension plan sponsors. Three pretests were conducted in-person and focused on the Web survey, and eight were conducted by telephone and focused on the mail survey. We selected respondents to represent a variety of sponsor sizes and industry types, including a law firm, an electronics company, a defense contractor, a bank, and a university medical center, among others. We conducted these pretests to determine if the questions were burdensome, understandable, and measured what we intended. On the basis of the feedback from the pretests, we modified the questions as appropriate. The practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents, or the types of people who do not respond can introduce unwanted variability into the survey results. We included steps in both the data collection and data analysis stages for the purpose of minimizing such nonsampling errors. We took the following steps to increase the response rate: developing the questionnaire, pretesting the questionnaires with pension plan sponsors, and conducting multiple follow-ups to encourage responses to the survey. We performed computer analyses of the sample data to identify inconsistencies and other indications of error and took steps to correct inconsistencies or errors. A second, independent analyst checked all computer analyses. We initiated our audit work in April 2006. We issued results from our survey regarding frozen plans in July 2008. We completed our audit work for this report in March 2009 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions. Barbara D. Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov. In addition to the contact above, Joe Applebaum, Sue Bernstein, Beth Bowditch, Charles Ford, Brian Friedman, Charles Jeszeck, Isabella Johnson, Gene Kuehneman, Marietta Mayfield, Luann Moy, Mark Ramage, Ken Stockbridge, Melissa Swearingen, Walter Vance, and Craig Winslow made important contributions to this report.","The number of private defined benefit (DB) pension plans, an important source of retirement income for millions of Americans, has declined substantially over the past two decades. For example, about 92,000 single-employer DB plans existed in 1990, compared to just under 29,000 single-employer plans today. Although this decline has been concentrated among smaller plans, there is a widespread concern that large DB plans covering many participants have modified, reduced, or otherwise frozen plan benefits in recent years. GAO was asked to examine (1) what changes employers have made to their pension and benefit offerings, including to their defined contribution (DC) plans and health offerings over the last 10 years or so, and (2) what changes employers might make with respect to their pensions in the future, and how these changes might be influenced by changes in pension law and other factors. To gather information about overall changes in pension and health benefit offerings, GAO asked 94 of the nation's largest DB plan sponsors to participate in a survey; 44 of these sponsors responded. These respondents represent about one-quarter of the total liabilities in the nation's single-employer insured DB plan system as of 2004. The survey was largely completed prior to the current financial market difficulties of late 2008. GAO's survey of the largest sponsors of DB pension plans revealed that respondents have made a number of revisions to their retirement benefit offerings over the last 10 years or so. Generally speaking, they have changed benefit formulas; converted to hybrid plans (such plans are legally DB plans, but they contain certain features that resemble DC plans); or frozen some of their plans. Eighty-one percent of responding sponsors reported that they modified the formula for computing benefits for one or more of their DB plans. Among all plans reported by respondents, 28 percent of these (or 47 of 169) plans were under a plan freeze--an amendment to the plan to limit some or all future pension accruals for some or all plan participants. The vast majority of respondents (90 percent, or 38 of 42 respondents) reported on their 401(k)-type DC plans. Regarding these DC plans, a majority of respondents reported either an increase or no change to the employer or employee contribution rates, with roughly equal responses to both categories. About 67 percent of (or 28 of 42) responding firms plan to implement or have already implemented an automatic enrollment feature to one or more of their DC plans. With respect to health care offerings, all of the (42) responding firms offered health care to their current workers. Eighty percent (or 33 of 41 respondents) offered a retiree health care plan to at least some current workers, although 20 percent of (or 8 of 41) respondents reported that retiree health benefits were to be fully paid by retirees. Further, 46 percent of (or 19 of 41) responding firms reported that it is no longer offered to employees hired after a certain date. At the time of the survey, most sponsors reported no plans to revise plan formulas, freeze or terminate plans, or convert to hybrid plans before 2012. When asked about the influence of recent legislation or changes to the rules for pension accounting and reporting, responding firms generally indicated these were not significant factors in their benefit decisions. Finally, a minority of sponsors said they would consider forming a new DB plan. Those sponsors that would consider forming a new plan might do so if there were reduced unpredictability or volatility in DB plan funding requirements and greater scope in accounting for DB plans on corporate balance sheets. The survey results suggest that the long-time stability of larger DB plans is now vulnerable to the broader trends of eroding retirement security. The current market turmoil appears likely to exacerbate this trend.",govreport
"A refugee is generally defined as a person who is outside his or her country and who is unable or unwilling to return because of persecution or a well-founded fear of persecution on account of race, religion, nationality, membership in a particular social group, or political opinion. The Refugee Act of 1980, which amended the Immigration and Nationality Act, provided a systematic and permanent procedure for admitting refugees to the United States and maintains comprehensive and uniform provisions to resettle refugees as quickly as possible and to encourage them to become self-sufficient. Several federal, state, and local government agencies coordinate with private organizations to implement the admission and resettlement process. Each year the President, after appropriate consultation with the Congress and certain Cabinet members, determines the maximum number of refugees the United States may admit for resettlement in a given year. The number actually resettled is typically below this maximum number and has varied over time—sometimes due to security concerns (see fig. 1). The federal government gives private, voluntary agencies responsibility to determine where refugees will live in the United States, with approval from the Department of State. Refugees are assigned first to a national voluntary agency and then the voluntary agency decides where the refugee will live. More specifically, the nine national voluntary agencies, which maintain a network of about 350 affiliates in communities throughout much of the United States, meet weekly to allocate individual refugees based on an annual evaluation of the communities’ capacity to See figure 2 for the number of refugees that arrived in serve refugees.each state during fiscal year 2011. Appendix III provides additional detail about the countries of origin for arrivals to the 20 states with the largest refugee populations. In the last 10 years, refugees have come to the United States from an increasing number of countries, and the issues associated with these diverse populations have become more complex. For example, many refugees today arrive after having lived in refugee camps for years, and may have little formal education or work experience, or untreated medical or mental health conditions. In turn, receiving communities have needed to adjust their language capabilities and services in order to respond to the changing needs of these diverse refugee populations. Figure 3 shows the top 20 countries of origin for refugees arriving in the United States in fiscal year 2011. Three federal agencies are involved in the refugee resettlement process. The Department of Homeland Security (DHS) approves refugees for admission to the United States. State’s Bureau of Population, Refugees, and Migration (PRM) is responsible for processing refugees overseas. Once refugees are processed and arrive in the United States, PRM partially funds services to meet their immediate needs. PRM enters into cooperative agreements with national voluntary agencies under its Reception and Placement Program to provide funding that helps refugees settle into their respective communities during their initial 30 to 90 days and covers housing, food, clothing, and other necessities. Each local affiliate receives $1,850 per refugee to provide these services. Figure 4 illustrates the general path of refugee resettlement in the United States. Many refugees are then eligible to receive temporary resettlement assistance from the Office of Refugee Resettlement (ORR), located within HHS. In most states, ORR funds cash and medical assistance as well as social services to help refugees become economically self-sufficient. ORR provides these funds through grants to state refugee coordinators, who may be employed by a state agency or by a nonprofit organization depending on how a state’s program is set up.grants provide funding for employment and other support services. States also receive funding from ORR to award discretionary grants—including school impact, services to older refugees, and targeted assistance grants—to communities that are particularly affected by large numbers of refugees or to serve specific refugee populations such as the elderly. See table 1 for a list of selected refugee assistance programs. Voluntary agencies consider a variety of factors when they propose the number of refugees to be resettled in each community (see table 2). Before preparing their annual proposals for PRM’s Reception and Placement Program for approval, national voluntary agencies ask local voluntary agency affiliates to assess their own capacity and that of other service providers in the wider community and propose the number of refugees that they will be able to resettle that year. In making these assessments, local voluntary agency affiliates typically consider both their own internal capacity and the capacity of the community, with different For example, when determining levels of emphasis on one or the other.how many refugees their community can accommodate, local affiliates in one community told us that they primarily consider their internal capacity—such as staffing levels, staff skills, long-term funding needs, the number of refugees they have served in the past, and success in meeting refugee employment goals in the previous year. Local affiliates in another community explained that they primarily consider community-based factors, such as housing availability and employment opportunities. To help make this process more consistent, Refugee Council USA, a coalition of the nine national voluntary agencies, developed guidance and a list of factors that local affiliates could use when evaluating community capacity. However, national voluntary agencies do not require their local affiliates to use the guidance. Moreover, national voluntary agencies may adjust the numbers proposed by local affiliates. Because refugees are generally placed in communities where national voluntary agency affiliates have been successful in resettling refugees, the same communities are often asked to absorb refugees year after year. One state refugee coordinator noted that local affiliate funding is based on the number of refugees they serve, so affiliates have an incentive to maintain or increase the number of refugees they resettle each year rather than allowing the number to decrease. Even though they are required to coordinate and consult with state and local governments about their resettlement activities, voluntary agencies have received only limited guidance from PRM on how to obtain input from these and other community stakeholders when assessing communities’ capacity. The Immigration and Nationality Act, as amended, states that it is the intent of Congress that local voluntary agency activities should be conducted in close cooperation and advance consultation with and the cooperative agreements that the state and local governments,Department of State enters into with national voluntary agencies require the agencies to conduct their reception and placement activities in this manner. Driven by concerns that voluntary agencies were not consulting sufficiently with state and local stakeholders when developing their proposals, PRM directed local voluntary agencies to do more to document consultations with state and local stakeholders regarding the communities’ capacity to serve refugees. However, PRM’s guidance on consultation with state and local governments does not provide detailed information regarding the agency’s expectations for the content of these discussions. While the guidance provides some examples of state and local stakeholders that the voluntary agencies could potentially consult, it does not state which stakeholders must be consulted. PRM officials said that they allow local voluntary agencies to decide whom to consult because the voluntary agencies know their communities best and because local circumstances vary. Most local voluntary agencies we visited have not taken steps to ensure that other relevant service providers are afforded the opportunity to provide input on the number and types of refugees that can be served. As a result, many local service providers experienced challenges in properly serving refugees. Most of the local voluntary agencies told us they generally consult with private stakeholders such as apartment landlords or potential employers prior to resettling refugees in an area. They also stated that they consult with some public entities, such as state refugee coordinators; however, most public entities such as public schools and health departments generally said that voluntary agencies notified them of the number of refugees expected to arrive in the coming year, but did not consult them regarding the number of refugees they could serve before proposals were submitted to PRM. Moreover, service providers in one community noted that because the local voluntary agencies did not consult them on the numbers and ethnicities of refugees they were planning to resettle, there were no interpreters or residents that spoke the language of some of the refugees who were resettled there, even though the providers could have served refugees that spoke other languages. Voluntary agencies may not consult with relevant stakeholders if they perceive them to be unaware of the resettlement process or if they believe that refugees do not use certain services. For example, local voluntary agency staff in one community said they did not consult with certain stakeholders because they believed that they were not well informed about the resettlement process and might unnecessarily object to the proposed number of refugees to be resettled. In fact, one local, elected official we spoke to was unaware that refugees were living in the community. Other elected officials noted that it was difficult to tell if or when refugees accessed services, even though school and health department officials in those same communities had frequent interactions with refugees and wanted opportunities to provide input. Although they bear much of the responsibility for providing services to refugees, some of the health care providers and schools that had not been consulted on, or even notified of, the number of refugees that were to be resettled sometimes felt unprepared to do so. For example, health care providers in two communities told us that they were not notified in advance that refugees would be arriving in their communities, and thus, had no time to set up screening procedures. They were also unaware of the specific needs and health challenges of the communities they were serving. In addition, in some instances when voluntary agencies were unable to adequately prepare the community as a whole for the new arrivals and provide refugees with the services they needed, some community members expressed opposition toward the refugees. For example, in Fort Wayne, Indiana, a few case studies show that the community, which had been receiving fewer than 500 refugees per year prior to 2007, experienced a rapid increase that more than tripled the number of refugees resettled in the community. The community, in turn, was forced on short notice to obtain new sources of funding and establish a new infrastructure in order to serve their new arrivals. This unplanned increase in refugees, combined with a growing unemployment rate, engendered frustrations that resulted in backlash from the community. Moreover, a number of other factors, including the high frequency of communicable diseases among certain populations, unmet needs for mental health services, overcrowding in homes, and cultural practices caused existing residents to become concerned or even hostile. Similarly, officials in Clarkston, Georgia, another community that was not initially consulted regarding the resettlement of thousands of refugees beginning in 1996, described the flight of long-time residents from the town in response to refugee resettlement and the perceived deterioration of the quality of schools. In a few of the communities we visited, after reaching a crisis point due to the influx of refugees, stakeholders took the initiative to develop formal processes for providing input to the local voluntary agencies on the number of refugees they could serve. For example, an influx of refugees in Fargo, North Dakota, in the 1990s overwhelmed local service providers. In response, those service providers and the local voluntary agency formed a Refugee Advisory Committee to provide a formal, community-based structure for finding solutions to challenges in resettling refugees. The committee includes representatives from the local voluntary agency, state and county social services departments, various city departments, school districts, as well as local health care providers, nonprofit organizations, and the assistant state refugee coordinator. The local voluntary agency solicits input from the committee annually on the number of refugees the community has the capacity to serve in the coming year and also meets quarterly to address other issues such as the needs of service providers. Committee members told us that the number of new refugees arriving in Fargo declined after the committee was developed. Committee members and voluntary agency officials said that their close communication allows them to better educate the community and better serve the refugees, and both believe the number being resettled is manageable. Similarly, in Boise, Idaho, city officials formed a roundtable group to develop a Refugee Resource Strategic Community Plan in 2009 to work with the local voluntary agencies, the state refugee coordinator’s office, and community organizations to identify strategies for successful resettlement of Boise’s refugees, in light of the most recent economic downturn. The group includes representatives from the state coordinator’s office, local voluntary agencies, various city departments, school district representatives, nonprofit organizations, as well as employers, health care providers, and other community stakeholders. The group meets quarterly to review progress on the objectives outlined in the strategic plan. The local voluntary agencies obtain input from the group members on the community’s capacity for serving refugees, but they do not discuss the specific number of refugees that will be proposed to the national voluntary agency and PRM for resettlement. Roundtable members told us that the local voluntary agencies have worked with their national offices to reduce the proposed number of refugees to resettle in Boise in 2011 based on community capacity. The state of Tennessee has passed legislation that creates formal processes for communication between voluntary agencies and local stakeholders. Specifically, the Refugee Absorptive Capacity Act,was passed in 2011, requires the state refugee program office to enter into a letter of agreement with each voluntary agency in the state. The which letter of agreement must contain a requirement that local stakeholders mutually consult and prepare a plan for the initial placement of refugees in a community as well as a plan for ongoing consultation. In addition, the state program office must ensure that local voluntary agencies consult upon request with local governments regarding refugee placement in advance of the refugees’ arrival. Communities can benefit socially and economically from refugee resettlement. In all of the communities we visited, stakeholders said that refugees enriched their cultural diversity. For example, local service providers in Fargo commented that refugees bring new perspectives and customs to a city with predominately Norwegian ancestry. Some city officials and business leaders we spoke with in several communities said that refugees help stimulate economic development by filling critical labor shortages as well as by starting small businesses and creating jobs. For instance, new refugee-owned businesses revitalized a neighborhood in Chicago after other businesses in the area closed. In addition, an official in Washington State told us that diverse resettlement communities with international populations attract investment from overseas businesses. According to ORR officials, refugees also bring economic benefits to communities by renting apartments, patronizing local businesses, and paying taxes, and the presence of refugees may increase the amount of federal funding that a community receives. In Boise, officials commented that the refugee students helped stabilize the public school population, which had been declining before the city established a refugee resettlement program. While refugees can benefit their communities, they can also stretch the resources of local service providers, such as school districts and health care systems. In several communities we visited, school district officials said that it takes more resources to serve refugee students than nonrefugee students, because they sometimes lack formal schooling or have experienced trauma, which can require additional supports, such as special training for school staff. In addition, newly arrived refugee students often have limited English proficiency, and hiring interpreters can be costly. Similarly, some health care providers expressed concerns about serving refugees, because they said that they are required to provide interpreter services to patients with limited English proficiency. One provider told us that their clinic spent more than $100,000 on interpreter services in the previous year, costs that were not reimbursed. In addition, in some communities we visited, school district officials and health care providers said that locating interpreters for certain languages can be difficult. ORR and PRM officials noted that these impacts are not unique to refugees and that serving immigrants may pose similar challenges. ORR offers discretionary grants to assist school districts that serve a large number of refugees, but we learned that district officials may be unaware of these grants or may decide that the effort involved in applying for them outweighs the potential benefits. For example, through its school impact grant, ORR funds activities for refugee students such as English as a Second Language instruction and after-school tutorials. However, school district officials in one community that was new to the refugee resettlement program said they had no information about where they could find assistance in serving refugee students. In another community, district officials were aware of the school impact grant, but said they did not apply for it because they found the application process to be burdensome and the funding level would have been insufficient to meet their needs. In addition to stretching school district resources, refugee students can also negatively affect district performance outcomes. School district performance is measured primarily by students’ test scores, including the scores of refugee students. School district officials in several communities said that even though refugee students often have limited English proficiency, they are evaluated against the same metrics as their native English-speaking peers, which can result in lower performance outcomes for the district. In one community, officials told us that the district had not demonstrated adequate yearly progress under the state standards in recent years, and they attributed this in part to the test scores of refugee students. Furthermore, refugees who exhaust federal refugee assistance benefits and are not self-sufficient can strain local safety nets. Refugees who are no longer eligible to receive cash and medical assistance from ORR after 8 months but are unemployed—or are working in low-wage jobs that do not provide sufficient income—may seek help from local service providers such as food pantries, organizations providing housing assistance, and even homeless shelters. If service providers are unprepared to serve these refugees in addition to their other clients, it can stretch their budgets and diminish the safety net resources available to others in the community. Table 3 lists the benefits and challenges of refugee resettlement identified by stakeholders in the communities we visited. Migration from one community to another after initial resettlement— referred to as secondary migration—can unexpectedly increase the refugee population in a community, and communities that attract large numbers of secondary migrants may not have adequate, timely funding to provide resettlement services to the migrants who need them. According to ORR, refugees relocate for a variety of reasons: better employment opportunities, the pull of an established ethnic community, more welfare benefits, better training opportunities, reunification with relatives, or a more congenial climate. Not all refugees who migrate choose to access resettlement services in their new communities, according to PRM officials. However, for those migrants who need resettlement services, federal funding does not necessarily follow them to their new communities, even though refugees continue to be eligible for some resettlement services for 5 years after arrival. According to ORR officials, refugees who relocate while they are receiving cash assistance, medical assistance, or refugee social services are eligible to continue receiving those services in their new communities for a limited time.However, ORR does not coordinate this continuation of service, and state refugee coordinators must communicate with one another to determine eligibility for each refugee who relocates. In addition, ORR provides grants to communities and states affected by secondary migration, but the annual cycle of these grants may not provide ORR the flexibility to respond in a timely manner. ORR uses secondary migration data submitted by states once a year, among other data, to inform refugee social services funding allocations for future fiscal years. According to ORR officials, these formula grants are awarded annually to states based on the number of refugee arrivals during the previous 2 years. As a result, a year may pass before states experiencing secondary migration receive increased funding. For example, Minnesota reported to ORR that 1,999 refugees migrated into the state during fiscal year 2010, but under ORR’s current formula funding process, the state would not have received increased funding until fiscal year 2011. In another example, social services funding did not keep pace with a large number of arrivals of both newly resettled refugees and secondary migrants in Detroit in fiscal year 2008. According to a report commissioned by ORR, after this rapid influx of arrivals, caseloads rose to 150 clients per caseworker in the employment and training program, and caseworkers were forced to devote a majority of their time to paperwork and case management, which limited their ability to provide job development and training services. Further, ORR will not adjust a state’s level of social services funding to account for secondary migration until it verifies that the refugees migrated to the state. According to one state refugee coordinator, ORR rejects the data states submit if the refugee’s information does not match the information in ORR’s database or if two or more states claim to have served the same refugee. ORR officials said that, while their process allows states to update missing data and correct formatting errors, it does not allow states to resubmit data that does not match the information in ORR’s database or that was submitted by two or more states. ORR offers supplemental, short-term funding to help communities affected by secondary migration. For example, the Supplemental Services for Recently Arrived Refugees grant is designed to help communities provide services to secondary migrants or newly arriving refugees when the communities are not sufficiently prepared in terms of linguistic or culturally appropriate services or do not have sufficient service capacity. However, this grant is only available to communities that will serve a minimum of 100 refugees annually, and the funding is for a fixed period of time. Communities must apply and be approved for the grant, and funding may not arrive until many months after the influx began. For example, in a draft report on secondary migration commissioned by ORR, the Spring Institute for Intercultural Learning found that one community did not receive supplemental funding until 14 months after secondary migrant refugees began arriving. Without comprehensive secondary migration data, ORR cannot target supplemental assistance to communities and refugees in a timely way. Currently, the data that PRM and ORR collect on secondary migration are limited and little is known about secondary migration patterns. PRM collects data from local voluntary agencies regarding the number of refugees who move away from a community within the first 90 days after arrival, but does not collect data on the estimated number of refugees who enter the community during the same time period. PRM officials said that they use these out-migration data to assess the success of refugee placement decisions. In contrast, ORR collects secondary migration data annually from each state, but does not collect community-level data. Specifically, ORR collects information on the number of refugees who move into and out of each state every year. However, ORR officials explained that they can only collect these data when secondary migrants access services. As a result, refugees who move into or out of a state but do not use refugee services in their new communities are not counted. Even so, these refugees access other community services and their communities may need additional assistance to meet their needs. Secondary migration can strain local resources significantly. For example, the draft report on secondary migration prepared for ORR by the Spring Institute for Intercultural Learning found that refugees who migrate to new communities can overwhelm local service providers, such as health departments, that are unprepared to serve them. In addition, a report prepared for ORR by General Dynamics Information Technology, Inc. found that, in one community, the influx of a large number of secondary migrants who lacked resources led to a homelessness crisis that stressed the capacity of both the shelter system and the other agencies serving refugees. Some communities that face challenges in serving additional refugees have requested restrictions or even temporary moratoriums on refugee resettlement. According to PRM, the cities of Detroit and Fort Wayne, Indiana, requested restrictions on refugee resettlement due to poor economic conditions. In response, PRM limited resettlement in Detroit and Fort Wayne to refugees who already have family there.the mayor of Manchester, New Hampshire, asked in 2011 that PRM temporarily stop resettling refugees in the city because of a shortage of jobs and sufficient affordable housing. While PRM did not grant the requested moratorium, the agency reduced the number of refugees to be resettled there in fiscal year 2011 from 300 to about 200. PRM officials said that a moratorium on resettlement would not have made sense because nearly all of the refugees slated to be resettled in Manchester have family there and would likely relocate to Manchester eventually— even if they were initially settled in another location. Tennessee recently created a process by which communities could request a temporary moratorium on refugee resettlement for capacity reasons. The state’s Refugee Absorptive Capacity Act allows local governments to submit a request to the state refugee office for a 1-year moratorium on resettling additional refugees if they document that they lack the capacity to do so and if further resettlement would have an adverse impact on residents. The state refugee office may then forward this request to PRM. Passed in 2011, the law states that local governments should consider certain capacity factors—the capacity of service providers to meet existing needs of current residents, the availability of affordable housing, the capacity of the school district to meet the needs of refugee students, and the ability of the local economy to absorb new workers—before making such a request. According to PRM, to date, no community in Tennessee has submitted such a request. PRM conducts regular on-site monitoring of national voluntary agencies and about 350 local affiliates to ensure that the voluntary agencies deliver the services outlined in their cooperative agreements. Under the cooperative agreements, local voluntary agencies must provide certain services to refugees in the first 30 to 90 days after they arrive. PRM monitors national voluntary agencies annually and local affiliates once every 5 years, and requires national voluntary agencies to monitor their affiliates at least once every 3 years. During its local affiliate monitoring visits, PRM reviews case files and interviews staff. PRM officials also visit a small sample of refugees in their homes to ensure that the refugees received clean, safe housing and appropriate furniture. PRM also requires voluntary agencies to report certain outcome measures for each refugee they resettle. In recent years, PRM found most local affiliates generally compliant, and for those that were not, PRM made recommendations and required immediate corrective action. For fiscal years 2009 through 2011, according to PRM, it conducted 136 on-site monitoring visits. In over three-quarters of those visits, PRM determined that the local affiliate was compliant or mostly compliant. In about one-quarter of the cases, however, PRM determined that they were partially or mostly noncompliant (about 20 percent) or simply noncompliant (about 5 percent). PRM or national resettlement agencies can make return, on-site monitoring trips to assess the progress of affiliates when problems are identified. Furthermore, if the problems persist, national voluntary agencies can close an affiliate’s operation or PRM can decide not to allow placement of refugees at an affiliate. For fiscal year 2011, PRM determined that the most common recommendation made to local affiliates was that the local affiliate should document the reason core services could not be provided in the required time frames. (See table 4 for the top 10 recommendations made for fiscal year 2011.) Whereas PRM’s oversight focuses on services provided, ORR’s oversight focuses more on performance outcomes. In order to assess the performance of its programs that provide cash, medical assistance, and social services to refugees, ORR monitors employment outcomes and cash assistance terminations (see table 5). It uses a similar set of measures for its Matching Grant program. According to ORR, its focus on employment outcomes as a measure of effectiveness is based on the Immigration and Nationality Act, as amended, which requires ORR to help refugees attain economic self- sufficiency as soon as possible. ORR considers refugees self-sufficient if they earn enough income that enables the family to support itself without cash assistance—even if they receive other types of noncash public assistance, such as Supplemental Nutrition Assistance Program benefits or Medicaid. ORR conducts its on-site monitoring at the state level to ensure the program is able to collect and report accurate data and to ensure that the state is able to provide services to refugees. ORR’s on-site monitoring identifies deficiencies as well as best practices. ORR generally monitors state refugee coordinators onsite once every 3 years, as the state coordinator is responsible for administering and overseeing ORR’s major grants. During the on-site visit, ORR also monitors a sample of subgrantees. In monitoring reports from its most recent on-site monitoring in the states we visited, ORR identified a number of deficiencies including: failure to inform refugees that they were eligible for certain services for up to 5 years, failure to ensure that medical assistance was terminated at the end of the 8-month eligibility period, failure to ensure that translators were available when providing services to refugees, and missing documentation in case files. The monitoring reports contained ORR’s recommendations and noted when corrective action was required. ORR’s monitoring reports also identified program strengths and best practices that monitors observed while on site. For example, one ORR monitoring report noted that having a state refugee housing coordinator was a program strength, because this coordinator can locate affordable housing and research funding sources, which saves the caseworkers time and effort. In the same state, ORR found that having an employment specialist at a voluntary agency who can help refugees obtain job upgrades and pursue professional certificates was also a program strength. According to ORR officials, they supplement this on-site monitoring with desk monitoring, which may include reviews of case files, or reviews of information provided in periodic reports. Neither ORR nor PRM has formal mechanisms for collecting and sharing information gleaned during monitoring to improve services, such as solutions to common problems or promising practices. ORR and PRM officials identified some informal mechanisms for sharing such information with service providers, but relied mostly on service providers to network among themselves or share information during quarterly conference calls and annual consultations. ORR also relies on external technical assistance providers to disseminate best practices when training grantees and expects state refugee coordinators to share findings of monitoring reports with their local partners. However, monitoring reports are not publicly available, and, unless the state coordinators share this information, service providers may not be able to identify promising practices, track monitoring results, identify trends, and address common issues. As a result, service providers do not always get the information they need to improve services, whether by preventing a problem or implementing a best practice. ORR’s performance measures focus on short-term outcomes, even though refugees remain eligible for social services funded by ORR for up to 5 years. Because it is important for refugees to become employed before their cash assistance runs out—8 months or less, depending on the service delivery model—ORR’s performance measures provide incentives for service providers to focus on helping refugees gain and maintain employment quickly. Specifically, ORR requires grantees to measure entered employment at 6 months for the Matching Grant program or 8 months for statewide cash assistance programs. In addition, ORR requires grantees to measure job retention 90 days after employment. This focus on short-term employment, however, can result in a one-size-fits-all approach to employment services and may, in turn, limit service providers’ flexibility to provide services that may benefit refugees after the 6 to 8 month time frame. That is, with limited incentives to focus on longer-term employment and wages, service providers may not help refugees obtain longer-term services and training, such as on- the-job or vocational training, which could significantly boost their income or benefit the refugee in the long-term or after employment is measured.For example, when assisting refugees who arrive with college degrees and professional experience, service providers may not help them earn a credential valid in the United States, because the providers’ effectiveness is measured by whether the refugee is employed. Additionally, ORR does not allow skills certification training to exceed 1 year and requires the refugees to be employed when receiving training and services. Several service providers mentioned this as a challenge for highly skilled Iraqi refugees, in particular, some of whom include doctors and engineers. In addition, voluntary agency officials noted that ORR’s employment measures do not allow them to report on the longer-term or non- employment-related outcomes of the other refugee resettlement services they provide. As a result, services such as skills training, English language training, or mental health services—which provide longer-term benefits and benefits unrelated to employment—may not be emphasized. According to some local voluntary agency officials we spoke to, given the current performance measures, there is a disincentive to dedicate necessary time and resources to the nonemployment activities that create pathways to success for refugees. It may be particularly difficult to serve those who do not arrive in the United States ready to work due to trauma, illness, or lack of basic skills. While much of ORR’s grant funding focuses on short-term employment, ORR does have some discretionary grants that provide funding for particular purposes that may include services that focus on longer-term goals or more intensive case management. For example, the individual development account program provides matching funds to help refugees save money for the purchase of a vehicle or a home. For these relatively small competitively awarded discretionary grant programs, ORR gathers data on how much money was saved and what assets were purchased, but does not gather data on how these asset purchases affected earnings or self-sufficiency. Descriptions of discretionary grants that can be used to fund services beyond the initial resettlement period, as well as other selected ORR and PRM grant programs, can be found in appendix IV. In addition to the employment measures’ focus on short term outcomes, one state coordinator also noted that these employment measures leave room for interpretation. Specifically, some voluntary agencies may have a narrow definition of employment services while others may have a broader definition. In turn, the percentage of refugees who become employed after receiving employment services could vary based on what types of services are considered employment services. As a result, according to a state coordinator, measures may not provide consistent information about how well a program is performing in different communities. While federal refugee resettlement programs generally provide only short- term assistance, PRM and ORR both aim to prepare refugees for long- term integration into their communities. Although there is no single, generally accepted definition of integration in the literature, integration can be defined as a dynamic, multidirectional process in which newcomers and the receiving communities intentionally work together, based on a shared commitment to acceptance and justice, to create a secure, welcoming, vibrant, and cohesive society. The federal government’s efforts to facilitate integration begin before refugees even enter the United States, as PRM offers cultural orientation for all refugees and recently piloted English language training for refugees in certain overseas locations. According to PRM, this cultural orientation and language training is intended to lay the groundwork for refugees’ long- term integration into the United States. Integration is also a part of ORR’s mission and overall goal, and officials told us that they consider integration to be a central aspect of refugee resettlement. Although ORR only provides refugees with cash and medical assistance for a maximum of 8 months, officials noted that this initial assistance helps set the foundation for long-term integration. Other ORR programs provide longer- term services that are intended to further facilitate integration, but these services may not be as widely available as cash and medical assistance. For example, ORR’s social services grant program funds employment services and other support services to refugees for up to 5 years after arrival, but communities may choose to provide these services for a shorter period of time due to local resource constraints. ORR’s discretionary grants for micro-enterprise assistance and individual development accounts are also designed to facilitate integration by helping refugees start businesses in the communities where they live, among other goals. However, these discretionary grants are competitively awarded and are thus not available to all communities. ORR has studied approaches that facilitate refugee integration. In 2006, ORR created an integration working group to identify indicators of refugee integration and ways in which ORR could more fully support the integration process. In a 2007 interim report, the working group made both short-term and long-term recommendations to ORR, including that it (1) consider expanding ORR’s discretionary grant programs; (2) focus on integration in the areas of employment, English language acquisition, health, housing, and civic engagement; and (3) identify lessons learned from communities where refugee integration appears to be taking place. ORR officials told us that they have implemented many, but not all, of the working group’s recommendations due to funding constraints. For example, ORR commissioned a study to identify promising practices that appear to facilitate integration in four U.S. cities. Neither PRM nor ORR currently measure refugee integration as a program outcome. According to PRM, it does not measure refugee integration due to the short-term nature of the Reception and Placement Program. While refugee integration is part of ORR’s mission and overall goal, ORR officials said they have not measured it because there is no clear definition of integration, because it is unclear when integration should be measured, and because the Refugee Act focuses on self- sufficiency outcomes related to employment. Even so, ORR officials told us that they collect some data related to refugee integration. Specifically, as part of its annual report to Congress, ORR conducts a survey to gauge refugees’ economic self-sufficiency that includes integration-related measures such as employment, English language proficiency, participation in job training, attendance in a high school or university degree or certificate program, and home ownership. However, ORR officials noted that the survey is not designed to measure integration and should not be used for this purpose, especially since there is no clear definition of integration. In addition, the survey has had a low response rate, which may affect the quality of the data. Studies on refugee resettlement do not offer a broad assessment of how well refugees have integrated into the United States. Of the 13 studies we identified that addressed refugee integration, almost all were limited in scope in that they focused on particular refugee groups in specific geographic locations.of specific refugee groups, including factors that help refugees successfully integrate into their communities. However, because of the studies’ limited scope and differences in their methodologies, they provide limited insight into how refugees overall have integrated in the United States or how the experiences of different groups compare to one another. The studies describe the integration experiences Although the studies we reviewed were not directly comparable, together they identified a variety of indicators that can be used to assess progress toward integration for both individuals and communities, as well as common facilitators of integration. Indicators of integration include employment, English language acquisition, housing, physical and mental health, and social connections, as well as political involvement, citizenship status, and participation in community organizations. One study noted that when assessing integration, it is important to ask refugees whether they consider themselves to be integrated. The studies we reviewed also identified a range of barriers to integration. Some frequently cited barriers were a lack of formal education, illiteracy or limited English proficiency, and insufficient income from low-paying jobs. For example, refugees who are illiterate or have limited English proficiency may be limited to low-paying jobs such as hotel housekeepers and may not earn sufficient income to meet their needs. Furthermore, one study found that the timing of employment can be a barrier to integration. Specifically, the study found that taking a job soon after arrival can slow down the acquisition of English language skills because refugees may have less available time to attend language classes. In addition, the studies we reviewed identified facilitators of integration— circumstances and strategies that can help refugees integrate successfully into their communities. English language acquisition is an important facilitator of integration. For example, one study found that refugees who are proficient in English are better able to connect with nonrefugees in their communities, expanding their social connections and sources of support. Other facilitators of integration included employment, social support from other refugees, and affiliation with or sponsorship by a religious congregation. For example, religious congregations may provide refugees with language classes, social activities, emotional and financial support, and linkages with employment and educational opportunities, medical care, and transportation. See table 6 for additional examples of indicators of integration, barriers to integration, and facilitators of integration. While most of the communities we visited had not established formal goals or strategies to facilitate refugee integration, two of the eight communities had developed formal plans to promote integration. The City of Boise, for example, developed a plan to facilitate the successful resettlement of refugees that includes goals related to integration. Specifically, the plan aims to facilitate integration by (1) establishing refugee community centers, (2) using a media campaign to increase community awareness and support of refugees, and (3) creating a mentoring program for refugee youth, among other things. Similarly, the Village of Skokie, Illinois, a suburb of Chicago, created a strategic plan to help facilitate the integration of immigrants, including refugees, by (1) establishing a coordinating council of key service providers, (2) developing a system to improve providers’ access to interpreters, and (3) recruiting and training immigrant and refugee community leaders for government commissions and school boards, among other strategies. Additionally, in Lancaster, Pennsylvania, Franklin & Marshall College had taken a variety of steps to help facilitate the integration of refugees, including using student volunteers to teach refugees English, tutor refugee students, and help refugee families enroll their children in school and access public health services. In addition, at the time of our visit, the college was partnering with a local voluntary agency affiliate to plan a community conference on refugee integration with the goals of (1) better understanding and addressing the needs of refugees, (2) identifying strategies for fostering rapid integration, and (3) developing a broad coalition of organizations serving refugees that could continue to work together on these issues in the future. Each year, as part of its humanitarian role in the international community, the United States admits tens of thousands of refugees who add richness and diversity to our society but can also have a significant impact on the communities in which they live, particularly in cases where relevant state and local stakeholders are not consulted before refugees are resettled. Advance consultation is important because stakeholders need time to plan so that they can properly serve refugees when they arrive, and because their input on the number of refugees to be resettled can help communities avoid reaching a crisis point. Information about communities that have developed effective strategies for consultation would likely benefit other communities facing similar obstacles. Without more specific guidance and information on effective strategies for consultation, communities may continue to struggle to meet refugees’ needs, which may negatively affect both refugees and their communities and would likely deter integration. Similarly, while ORR has recognized that some service providers have particularly effective strategies for resettlement, neither ORR nor PRM disseminate this information to other service providers. As a result, not all communities are aware of ways they can do their work more effectively. Furthermore, while refugees can receive resettlement services for up to 5 years, some find it difficult to access those services when they relocate to another community. In addition, states do not receive increased funding for serving secondary migrants until the year after refugees relocate. As a result, in communities that experience high levels of secondary migration, voluntary agencies and service providers may not have the resources to provide services to the migrants who need them. Without a funding process that would respond more quickly to localities experiencing high rates of secondary migration, voluntary agencies may have to prioritize serving recently arrived refugees and communities may find their resources for refugees stretched too thin. As required by the Immigration and Nationality Act, as amended, ORR’s programs are designed to help refugees become employed as quickly as possible. ORR’s measures of effectiveness, which focus on whether refugees gain employment in the short term, in turn, influence the types of services that refugees receive. Specifically, service providers may choose to provide services that encourage short-term independence from cash assistance, but might not help refugees achieve long-term self- sufficiency. However, refugees may face unique challenges such as a lack of formal education or work experience, language barriers, and physical and mental health conditions that can make the transition to the United States difficult. Without some incentives to focus on long-term self- sufficiency in addition to short-term independence from cash assistance, refugees may be more likely to need government assistance again in the future, and it may take longer for both refugees and their communities to experience the benefits of integration. We are making the following four recommendations based on our review: To help ensure that state and local stakeholders have the opportunity to provide input on the number of refugees resettled in their communities, we recommend that the Secretary of State provide additional guidance to resettlement agencies and state coordinators on how to consult with local stakeholders prior to making placement decisions, including with whom to consult and what should be discussed during the consultations; and the Secretaries of State and of Health and Human Services collect and disseminate best practices related to refugee placement decisions, specifically on working with community stakeholders, as well as other promising practices from communities. To assist communities in providing services to secondary migrants, we recommend that the Secretary of Health and Human Services consider additional ways to increase the responsiveness of the grants designed for this purpose. This could include asking states to report secondary migration data more often than once a year, allowing resubmission of secondary migration data from states that was rejected because it did not match ORR’s database, creating a process for counting migrants who received services in more than one state, and establishing an emergency grant that could be used to more quickly identify and assist communities that are struggling to serve high levels of secondary migrants. To give service providers more flexibility to serve refugees with different needs and to create incentives to focus on longer term goals, including integration, independence from any government services, and career advancement, we recommend that the Secretary of Health and Human Services examine ORR’s performance measures in light of its goals and determine whether changes are needed. We shared a draft of this report with HHS and State for review and comment. In its written comments, reproduced in appendix VI, HHS generally concurred with our recommendations. Specifically, HHS stated that it supports our recommendation to disseminate best practices, including promising practices from communities, while noting that State and nonprofit community-based and faith-based organizations have traditionally taken the lead on resettling refugees. HHS highlighted the efforts it has made in conducting quarterly placement meetings, which include resettlement agencies and refugee coordinators. While these meetings may be helpful, we believe that HHS can also implement this recommendation by disseminating best practices and program strengths that it documents through its monitoring of states and service providers. In addition, HHS concurred with our recommendation that it consider additional ways to increase the responsiveness of grants that help communities provide services to secondary migrants, but noted that it already provides Supplemental Services grants, which provide short-term assistance to areas that are impacted by increased numbers of new arrivals or secondary migrants. In addition, it raised concerns that an increase in the frequency of data collection would significantly increase the reporting burden without a mandatory need for the data. HHS also stated that it has a process in place for notifying states of technical problems with population data submitted and allowing them to make corrections. While we recognize that HHS has strategies in place to serve secondary migrants, we continue to believe that (1) the Supplemental Services grants can be improved to be more responsive; (2) more up-to- date population data can help HHS respond more quickly to communities experiencing high levels of secondary migration; and (3) improvements can be made to the process for correcting population data. HHS also stated that it will consider modifying its performance measures and will also continue to assess the usefulness of data elements collected through required reporting to ensure that the program addresses both self-sufficiency and integration. HHS noted, for example, that it has already begun collecting more information about health through its annual survey of refugees and expanded the number of reporting elements pertaining to health in its program performance reporting form. In addition, it is developing approaches to increase the overall participation rates in its annual survey. In its written comments, reproduced in appendix VII, State generally concurred with our recommendations and outlined steps it will take to address them. HHS and State also provided technical comments that were incorporated, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to relevant congressional committees, the Secretary of Health and Human Services, the Secretary of State, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or brownke@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. To identify the factors resettlement agencies consider when deciding where refugees are initially placed, we reviewed relevant federal and state laws and regulations and other relevant documents, and conducted interviews with federal agency officials and national voluntary agency staff. We interviewed officials from the U.S. Department of State’s Bureau of Population, Refugees, and Migration (PRM) and the Department of Health and Human Services’ Office of Refugee Resettlement (ORR), as well as representatives from several national voluntary resettlement agencies. We also reviewed documents related to the refugee placement process, such as relevant federal and state laws and regulations, guidance for determining community capacity to resettle refugees, the terms of the cooperative agreements between PRM and national voluntary agencies, and funding opportunity announcements for PRM’s Reception and Placement Program. To understand the effects refugees have on their communities, we met with experts on refugee programs and conducted site visits to eight communities across the United States where we met with representatives from state and local government entities, voluntary agency affiliates, community-based organizations, local businesses, and other relevant individuals and groups, including refugees, professors from local universities, and a local church that provided assistance to refugees. For our site visits, we selected Boise, Idaho; Chicago, Illinois; Detroit, Michigan; Fargo, North Dakota; Knoxville, Tennessee; Lancaster, Pennsylvania; Owensboro, Kentucky; and Seattle, Washington. These eight communities represent a nongeneralizable sample that was selected to include geographically distributed communities with variations in their population sizes, levels of experience resettling refugees, and racial and ethnic diversity. In addition to these factors, several communities were selected because they are considered examples of best practices in refugee resettlement by federal officials. All of the selected communities were receiving refugees at the time we visited. We developed site selection criteria based on available literature that discussed factors that influence the impact of refugees on their respective communities and factors that either facilitate or hinder refugee integration. We used these criteria in combination with one another to arrive at a diverse set of communities with varying characteristics. To assess the effectiveness and integrity of refugee resettlement programs, we interviewed federal agency officials, state coordinators, and local voluntary agencies. We also reviewed federal agencies’ monitoring plans, protocols and selected monitoring reports for the communities we visited. We reviewed the terms of the cooperative agreements between PRM and national voluntary agencies, as well as reporting guidance, sample performance reports, and performance measures federal agencies use to monitor their programs. To determine what is known about refugees’ integration into the United States, we conducted a literature review of academic research on this topic. To identify relevant studies, we conducted searches of various databases including Academic OneFile, EconLit, Education Resources Information Center, National Technical Information Service, PAIS International, PASCAL, ProQuest, PsycINFO, Social Sciences Abstracts, Social Services Abstracts, Social SciSearch, Sociological Abstracts, and WorldCat. We conducted a search using the following criteria, which yielded 18 studies: Studies must address the integration of refugees into U.S. Studies must have been published from 1995 to the present; Studies must be in English; and Studies must be scholarly, such as peer-reviewed journal articles. We performed these searches and identified studies between August 2011 and October 2011. In addition, ORR officials provided us with an ORR-commissioned study of promising practices that appear to facilitate refugee integration, and this study met our selection criteria. To assess the methodological quality of the 18 studies that met our selection criteria, we evaluated each study’s research methodology, including whether the study was original research, the reliability of the data set, if applicable, and the study’s findings, assumptions, and limitations. We determined that 13 of the 18 studies were sufficiently reliable for our purposes. We then analyzed the findings of these 13 studies. In addition to conducting a literature review, we met with officials from ORR and PRM to determine what, if any, efforts the federal government has to define, measure, or facilitate refugees’ integration into the United States. We discussed refugee integration in our interviews with state and local entities during our site visits. We also reviewed the ORR integration working group’s 2007 interim report and ORR’s annual reports to Congress. We also obtained secondary migration data from ORR’s annual report. We assessed the reliability of this data by interviewing ORR officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purpose of background in this report. We conducted this performance audit from May 2011 through July 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Abu-Ghazaleh, F. “Immigrant Integration in Rural Communities: The Case of Morgan County.” National Civic Review, vol. 98, no. 1 (2009). Birman, D., and N. Tran. “Psychological Distress and Adjustment of Vietnamese Refugees in the United States: Association with Pre- and Postmigration Factors.” American Journal of Orthopsychiatry, vol. 78, no. 1 (2008). Duchon, D. A. “Home Is Where You Make It: Hmong Refugees in Georgia.” Urban Anthropology, vol. 26, no. 1 (1997). Franz, B. “Transplanted or Uprooted? Integration Efforts of Bosnian Refugees Based Upon Gender, Class and Ethnic Differences in New York City and Vienna.” The European Journal of Women’s Studies, vol. 10, no. 2 (2003). Grigoleit, G. “Coming Home? The Integration of Hmong Refugees from Wat Tham Krabok, Thailand, into American Society.” Hmong Studies Journal, vol. 7 (2006). Hume, S.E., and S.W. Hardwick. “African, Russian, and Ukrainian Refugee Resettlement in Portland, Oregon.” The Geographical Review, vol. 95, no. 2 (2005). ISED Solutions. Exploring Refugee Integration: Experiences in Four American Communities. A report prepared at the request of the Department of Health and Human Services Office of Refugee Resettlement. June 2010. Ives, N. “More than a ‘Good Back’: Looking for Integration in Refugee Resettlement.” Refuge, vol. 24, no. 2 (2007). Kenny, P., and K. Lockwood-Kenny. “A Mixed Blessing: Karen Resettlement to the United States.” Journal of Refugee Studies, vol. 24, no. 2 (2011). Patil, C.L., M. McGown, P.D. Nahayo, and C. Hadley. “Forced Migration: Complexities in Food and Health for Refugees Resettled in the United States.” NAPA Bulletin, vol. 34, issue 1 (2010). Shandy, D., and K. Fennelly. “A Comparison of the Integration Experiences of Two African Immigrant Populations in a Rural Community.” Journal of Religion & Spirituality in Social Work, vol. 25, no. 1 (2006). Smith, R.S. “The Case of a City Where 1 in 6 Residents is a Refugee: Ecological Factors and Host Community Adaptation in Successful Resettlement.” American Journal of Community Psychology, vol. 42, no. 3-4 (2008). Westermeyer, J.J. “Refugee Resettlement to the United States: Recommendations for a New Approach.” The Journal of Nervous and Mental Disease, vol. 199, no. 8 (2011). Description Provides financial support to partially cover resettlement services based on a fixed per capita sum per refugee resettled in the United States. Services include arranging for refugees’ placement and providing refugees with basic necessities and core services during their initial resettlement period. Reimburses states and alternative refugee assistance programs for the cost of cash and medical assistance provided to refugees during the first 8 months after their arrival in this country or grant of asylum. It does not provide reimbursement for refugees deemed eligible for Temporary Assistance for Needy Families, Supplemental Security Insurance, and Medicaid. Funds are provided on a matching basis to provide private, nonprofit organizations to fund an alternative to public cash assistance and to support case management, employment services, maintenance assistance, cash allowance, and social services for new arrivals for 4 to 6 months. Provides funding for employment and other social services to refugees for 5 years after their data of arrival or grant of asylum. Provides funding for employment-related and other social services for refugees in counties with large refugee populations and high refugee concentrations. Provides funds to provide medical screenings to newly arriving refugees, interpreter services, information and referral, and health education. Funds to states to implement special employment services not implemented with formula social services grants. Provides funding for employment-related and other social services for refugees in counties with large refugee populations and high refugee concentrations. Provides funds to subcontract with local school systems and nonprofits to support local school systems that are impacted by significant numbers of newly arrived refugee children. Provide funds to ensure that older refugees will be linked to mainstream aging services in their communities or to provide services directly to older refugees if they are not currently being provided for in the community. Description The Preferred Communities Program supports the resettlement of newly arriving refugees with the best opportunities for their self-sufficiency and integration into new communities, and supports refugees with special needs that require more intensive case management, culturally and linguistically appropriate linkages and coordination with other service providers to improve their access to services. Provides funding for a comprehensive program of support for survivors of torture, including rehabilitation, social and legal services, and training for providers. Funds projects to establish and manage Individual Development Accounts, which are matched savings accounts available for the purchase of specific assets. Matching funds, together with the refugee’s own savings, are available for purchasing one (or more) of four savings goals: home purchase; microenterprise capitalization; postsecondary education or training; and purchase of an automobile if necessary for employment or educational purposes. Grants to enable organizations with expertise in a particular area to provide assistance to ORR-funded agencies. Provides funding to assist refugees to become financially independent by helping them develop capital resources and business expertise to start, expand, or strengthen their own businesses. Microenterprise projects typically include components of training and technical assistance in business skills and business management, credit assistance, and credit in the form of micro loans. Provides agricultural and food related resources and technical information to refugee families that are consistent with their agrarian backgrounds, and results in rural and urban farming projects that supports increased incomes, access to quality and familiar foods, better physical and mental health, and integration into this society. Provides funds to provide services to newly arriving refugees or sudden and unexpected large secondary migration of refugees where communities are not sufficiently prepared in terms of linguistic or culturally appropriate services and/or do not have sufficient service capacity. Provides funds to support ethnic community based organizations in providing refugee populations with critical services to assist them in becoming integrated members of American society. For the purposes of this table, states refers to state agencies, state alternative programs, and state replacement designees. State alternative programs include (1) the Wilson/Fish program, which gives states flexibility in how they provide assistance to refugees, including whether to administer assistance primarily through local voluntary agencies, and (2) the Public Private Partnership program, which allows states to partner with local voluntary agencies to provide assistance. State replacement designees are authorized by ORR to administer assistance to refugees when a state withdraws from all or part of the refugee program. For the purposes of this table, refugees refers to refugees, certain Amerasians from Viet Nam, Cuban and Haitian entrants, asylees, victims of a severe form of trafficking, and Iraqi and Afghan Special Immigrants. In January 2007, ORR’s Integration Working Group made short-term and long-term recommendations regarding ways in which ORR could more fully support the integration process for refugees. Include integration language in all grant announcements. Review discretionary grant programs offered in the standing announcement, ensuring that they promote integration. Establish the Department of Health and Human Services as the lead federal agency for integration. Consider expanding ORR’s discretionary programs. Focus on integration in the areas of employment, English language acquisition, health, housing, and civic engagement. Focus technical assistance providers to support integration as an intentional process leading to civic engagement and citizenship. Seek and fund pilot programs such as the Building the New American Community project. Develop an initiative to support professional recertification and credentialing for qualified individuals. Identify and share best practices through a survey of states, mutual aid associations, and voluntary agencies. Identify lessons learned, including case studies, from communities in which integration appears to be working well and where there are challenges. Study the effect of ORR policy and funding initiatives to promote integration over a three to five year period. Refine/develop/disseminate an action model to be used for other immigrants and marginalized populations. Seek broader collaboration with nonfederal entities such as private foundations, businesses, financial institutions, and the United Way. In addition to the contact named above, Kathryn Larin, Assistant Director; Cheri Harrington and Lara Laufer, Analysts-in-Charge; James Bennett; David Chrisinger; Caitlin Croake; Bonnie Doty; Ashley McCall; Jean McSween; James Rebbe; and Carla Rojas made key contributions to this report. Sharon Hermes, Margaret Weber, and Amber Yancey Carroll verified our findings.","In fiscal year 2011, the United States admitted more than 56,000 refugees under its refugee resettlement program. Upon entry, a network of private, nonprofit voluntary agencies (voluntary agencies) selects the communities where refugees will live. The Department of State's PRM and the Department of Health and Human Services' ORR provide funding to help refugees settle in their communities and obtain employment and monitor implementation of the program. Congress has begun to reexamine the refugee resettlement program, and GAO was asked to examine (1) the factors resettlement agencies consider when determining where refugees are initially placed; (2) the effects refugees have on their communities; (3) how federal agencies ensure program effectiveness and integrity; and (4) what is known about the integration of refugees. GAO reviewed agency guidance, monitoring protocols, reports, and studies; conducted a literature review; reviewed and analyzed relevant federal and state laws and regulations; and met with federal and state officials, voluntary agency staff, and local stakeholders in eight selected communities. Voluntary agencies consider various factors when determining where refugees will be placed, but few agencies we visited consulted relevant local stakeholders, which posed challenges for service providers. When deciding how many refugees to place in each community, some voluntary agencies prioritize local agency capacity, such as staffing levels, while others emphasize community capacity, such as housing availability. Although the Immigration and Nationality Act states that it is the intent of Congress for voluntary agencies to work closely with state and local stakeholders when making these decisions, the Department of State's Bureau of Population, Refugees, and Migration (PRM) offers limited guidance on how this should occur. Some communities GAO visited had developed formal processes for obtaining stakeholder input after receiving an overwhelming number of refugees, but most had not, which made it difficult for health care providers and school systems to prepare for and properly serve refugees. State and local stakeholders reported that refugees bring cultural diversity and stimulate economic development, but serving refugees can stretch local resources, including safety net services. In addition, refugee students can negatively affect performance outcomes for school districts because they often have limited English proficiency. Furthermore, some refugees choose to relocate after their initial placement, and this secondary migration may stretch communities that do not have adequate resources to serve them. In fact, capacity challenges have led some communities to request restrictions or temporary moratoriums on resettlement. PRM and the Department of Health and Human Services' Office of Refugee Resettlement (ORR) monitor their refugee assistance programs, but weaknesses in performance measurement may hinder effectiveness. Although refugees are eligible for ORR services for up to 5 years, the outcome data that ORR collects focuses on shorter-term employment outcomes. ORR officials said that their performance measurement reflects the goals outlined by the Immigration and Nationality Act--to help refugees achieve economic self-sufficiency as quickly as possible. However, the focus on rapid employment makes it difficult to provide services that may increase refugees' incomes, such as helping them obtain credentials to practice their professions in the United States. Little is known about the extent of refugee integration into U.S. communities, but research offers a framework for measuring and facilitating integration. PRM and ORR both promote refugee integration, but neither agency currently measures integration as a program outcome. While integration is part of ORR's mission, ORR officials said one of the reasons they have not measured it is that there is no clear definition of integration. In addition, research on refugee resettlement does not offer an overall assessment of how well refugees have integrated into the United States. Most of the 13 studies GAO reviewed were limited in scope and focused on particular refugee groups in specific geographic locations. However, these studies identified a variety of indicators that can be used to assess integration as well as factors that can facilitate integration, such as English language acquisition, employment, and social support from other refugees. Despite limited national information, some U.S. communities have developed formal plans for refugee integration. GAO makes several recommendations to the Secretaries of State and Health and Human Services to improve refugee assistance programs in the United States. HHS and State generally concurred with the recommendations and each identified efforts they have under way or plan to undertake to address them.",govreport
"The National Flood Insurance Act of 1968 established NFIP as an alternative to providing direct assistance after floods. NFIP, which provides government-guaranteed flood insurance to homeowners and businesses, was intended to reduce the federal government’s escalating costs for repairing flood damage after disasters. FEMA, which is within the Department of Homeland Security (DHS), is responsible for the oversight and management of NFIP. Since NFIP’s inception, Congress has enacted several pieces of legislation to strengthen the program. The Flood Disaster Protection Act of 1973 made flood insurance mandatory for owners of properties in vulnerable areas who had mortgages from federally regulated lenders and provided additional incentives for communities to join the program. The National Flood Insurance Reform Act of 1994 strengthened the mandatory purchase requirements for owners of properties located in special flood hazard areas (SFHA) with mortgages from federally regulated lenders. Finally, the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 authorized grant programs to mitigate properties that experienced repetitive flooding losses. Owners of these repetitive loss properties who do not mitigate may face higher premiums. To participate in NFIP, communities agree to enforce regulations for land use and new construction in high-risk flood zones and to adopt and enforce state and community floodplain management regulations to reduce future flood damage. Currently, more than 20,000 communities participate in NFIP. NFIP has mapped flood risks across the country, assigning flood zone designations based on risk levels, and these designations are a factor in determining premium rates. NFIP offers two types of flood insurance premiums: subsidized and full risk. The National Flood Insurance Act of 1968 authorizes NFIP to offer subsidized premiums to owners of certain properties. These subsidized premium rates, which represent about 40 to 45 percent of the cost of covering the full risk of flood damage to the properties, apply to about 22 percent of all NFIP policies. To help reduce or eliminate the long-term risk of flood damage to buildings and other structures insured by NFIP, FEMA has used a variety of mitigation efforts, such as elevation, relocation, and demolition. Despite these efforts, the inventories of repetitive loss properties—generally, as defined by FEMA, those that have had two or more flood insurance claims payments of $1,000 or more over 10 years—and policies with subsidized premium rates have continued to grow. In response to the magnitude and severity of the losses from the 2005 hurricanes, Congress increased NFIP’s borrowing authority from the Treasury to $20.8 billion. We have previously identified four public policy goals for evaluating the federal role in providing natural catastrophe insurance: charging premium rates that fully reflect actual risks, limiting costs to taxpayers before and after a disaster, encouraging broad participation in natural catastrophe insurance encouraging private markets to provide natural catastrophe insurance. Taking action to achieve these goals would benefit both NFIP and the taxpayers who fund the program but would require trade-offs. I will discuss the key areas that need to be addressed, actions that can be taken to help achieve these goals, and the trade-offs that would be required. As I have noted, NFIP currently does not charge all program participants rates that reflect the full risk of flooding to their properties. First, the act requires FEMA to charge many policyholders less than full-risk rates to encourage program participation. While the percentage of subsidized properties was expected to decline as new construction replaced subsidized properties, today nearly one out of four NFIP policies is based on a subsidized rate. Second, FEMA may “grandfather” properties that are already in the program when new flood maps place them in higher-risk zones, allowing some property owners to pay premium rates that apply to the previous lower-risk zone. FEMA officials told us that they made the decision to allow grandfathering because of external pressure to reduce the effects of rate increases, and considerations of equity, ease of administration, and the goals of promoting floodplain management. Similarly, FEMA recently introduced a new rating option called the Preferred Risk Policy (PRP) Eligibility Extension that in effect equals a temporary grandfathering of premium rates. While these policies typically would have to be converted to more expensive policies when they were renewed after a new flood map came into effect, FEMA has extended eligibility for these lower rates. Finally, we have also raised questions about whether NFIP’s full-risk rates reflect actual flood risks. Because many premium rates charged by NFIP do not reflect the full risk of loss, the program is less likely to be able to pay claims in years with catastrophic losses, as occurred in 2005, and may need to borrow from Treasury to pay claims in those years. Increasing premium rates to fully reflect the risk of loss—including the risk of catastrophic loss—would generally require reducing or eliminating subsidized and grandfathered rates and offers several advantages. Specifically, increasing rates could: result in premium rates that more fully reflected the actual risk of loss; decrease costs for taxpayers by reducing costs associated with postdisaster borrowing to pay claims; and encourage private market participation, because the rates would more closely approximate those that would be charged by private insurers. However, eliminating subsidized and grandfathered rates and increasing rates overall would increase costs to some homeowners, who might then cancel their flood policies or elect not to buy them at all. According to FEMA, subsidized premium rates are generally 40 to 45 percent of rates that would reflect the full risk of loss. For example, the projected average annual subsidized premium was $1,121 as of October 2010, discounted from the $2,500 to $2,800 that would be required to cover the full risk of loss. In a 2009 report, we also analyzed the possibility of creating a catastrophic loss fund within NFIP (one way to help pay for catastrophic losses). Our analysis found that in order to create a fund equal to 1 percent of NFIP’s total exposure by 2020, the average subsidized premium—which typically is in one of the highest-risk zones—would need to increase from $840 to around $2,696, while the average full-risk premium would increase from around $358 to $1,149. Such steep increases could reduce participation, either because homeowners could no longer afford their policies or simply deemed them too costly, and increase taxpayer costs for postdisaster assistance to property owners who no longer had flood insurance. However, a variety of actions could be taken to mitigate these disadvantages. For example, subsidized rates could be phased out over time or not transferred with the property when it is sold. Moreover, as we noted in our past work, targeted assistance could be offered to those most in need to help them pay increased NFIP premiums. This assistance could take several forms, including direct assistance through NFIP, tax credits, or grants. In addition, to the extent that those who might forego coverage were actually required to purchase it, additional actions could be taken to better ensure that they purchased policies. According to RAND Corporation, in SFHAs, where property owners with loans from federally insured or regulated lenders are required to purchase flood insurance, as few as 50 percent of the properties had flood insurance in 2006. In order to reduce expenses to taxpayers that can result when NFIP borrows from Treasury, NFIP needs to be able to generate enough in premiums to pay its claims, even in years with catastrophic losses—a goal that is closely tied to that of eliminating subsidies and other reduced rates. Since the program’s inception, NFIP premiums have come close to covering claims in average loss years but not in years of catastrophic flooding, particularly 2005. Unlike private insurance companies, NFIP does not purchase reinsurance to cover catastrophic losses. As a result, NFIP has funded such losses after the fact by borrowing from Treasury. As we have seen, such borrowing exposes taxpayers to the risk of loss. NFIP still owes approximately $17.8 billion of the amount it borrowed from Treasury for losses incurred during the 2005 hurricane season. The high cost of servicing this debt means that it may never be repaid, could in fact increase, and will continue to affect the program’s solvency and be a burden to taxpayers. Another way to limit costs to taxpayers is to decrease the risk of losses by undertaking mitigation efforts that could reduce the extent of damage from flooding. FEMA has taken steps to help homeowners and communities mitigate properties by making improvements designed to reduce flood damage—for example, elevation, relocation, and demolition. As we have reported, from fiscal year 1997 through fiscal year 2007, nearly 30,000 properties were mitigated using FEMA funds. Increasing mitigation efforts could further reduce flood damage to properties and communities, helping to put NFIP on a firmer financial footing and reducing taxpayers’ exposure. FEMA has made particular efforts to address the issue of repetitive loss properties through mitigation. These properties account for just 1 percent of NFIP’s insured properties but are responsible for 25 to 30 percent of claims. Despite FEMA’s efforts, the number of repetitive loss properties increased from 76,202 in 1997 to 132,100 in March 2011, or by about 73 percent. FEMA also has some authority to raise premium rates for property owners who refuse mitigation offers in connection with the Severe Repetitive Loss Pilot Grant Program. In these situations, FEMA can initially increase premiums to up to 150 percent of their current amount and may raise them again (by up to the same amount) on properties that incur a claim of more than $1,500. However, FEMA cannot increase premiums on property owners who pay the full-risk rate but refuse a mitigation offer, and in no case can rate increases exceed the full- risk rate for the structure. In addition, FEMA is not allowed to discontinue coverage for those who refuse mitigation offers. As a result, FEMA is limited in its ability to compel owners of repetitive loss properties to undertake flood mitigation efforts. Mitigation offers significant advantages. As I have noted, mitigated properties are less likely to be at a high risk for flood damage, making it easier for NFIP to charge them full-risk rates that cover actual losses. Allowing NFIP to deny coverage to owners of repetitive loss properties who refused to undertake mitigation efforts could further reduce costs to the program and ultimately to taxpayers. One disadvantage of increased mitigation efforts is that they can impose up-front costs on homeowners and communities required to undertake them and could raise taxpayers’ costs if the federal government elected to provide additional mitigation assistance. Those costs could increase still further if property owners who were dropped from the program for refusing to mitigate later received federal postdisaster assistance. These trade-offs are not insignificant, although certain actions could be taken to reduce them. For example, federal assistance such as low-cost loans, grants, or tax credits could be provided to help property owners pay for the up-front costs of mitigation efforts. Any reform efforts could explore ways to improve mitigation efforts to help ensure maximum effectiveness. For example, FEMA has three separate flood mitigation programs. Having multiple programs may not be the most cost-efficient and effective way to promote mitigation and may unnecessarily complicate mitigation efforts. Increasing participation in NFIP, and thus the size of the risk pool, would help ensure that losses from flood damage did not become the responsibility of the taxpayer. Participation rates have been estimated to be as low as 50 percent in SFHAs, where property owners with loans from federally insured and regulated lenders are required to purchase flood insurance, and participation in lower-risk areas is significantly lower. For example, participation rates outside of SFHAs have been found to be as low as 1 percent, leaving significant room to increase participation. Expanding participation in NFIP would have a number of advantages. As a growing number of participants shared the risks of flooding, premium rates could be lower than they would be with fewer participants. Currently, NFIP must take all applicants for flood insurance, unlike private insurers, and thus is limited in its ability to manage its risk exposure. To the extent that properties added to the program were in geographic areas where participation had historically been low and in low- and medium-risk areas, the increased diversity could lower rates as the overall risk to the program decreased. Further, increased program participation could reduce taxpayer costs by reducing the number of property owners who might draw on federally funded postdisaster assistance. However, efforts to expand participation in NFIP would have to be carefully implemented, for several reasons. First, as we have noted, NFIP cannot reject applicants on the basis of risk. As a result, if participation increased only in SFHAs, the program could see its concentration of high- risk properties grow significantly and face the prospect of more severe losses. Second, a similar scenario could emerge if mandatory purchase requirements were expanded and newly covered properties were in communities that did not participate in NFIP and thus did not meet standards—such as building codes—that could reduce flood losses. As a result, some of the newly enrolled properties might be eligible for subsidized premium rates or, because of restrictions on how much FEMA can charge in premiums, might not pay rates that covered the actual risk of flooding. Finally, historically FEMA has attempted to encourage participation by charging lower rates. However, doing so results in rates that do not fully reflect the risks of flooding and exposes taxpayers to increased risk. Moderating the challenges associated with expanding participation could take a variety of forms. Newly added properties could be required to pay full-risk rates, and low-income property owners could be offered some type of assistance to help them pay their premiums. Outreach efforts would need to include areas with low and moderate flood risks to help ensure that the risk pool remained diversified. For example, FEMA’s goals for NFIP include increasing penetration in low-risk flood zones, among homeowners without federally related mortgages in all zones, and in geographic areas with repetitive losses and low penetration rates. Currently, the private market provides only a limited amount of flood insurance coverage. In 2009, we reported that while aggregate information was not available on the precise size of the private flood insurance market, it was considered relatively small. The 2006 RAND study estimated that 180,000 to 260,000 insurance policies for both primary and gap coverage were in effect. We also reported that private flood insurance policies are generally purchased in conjunction with NFIP policies, with the NFIP policy covering the deductible on the private policy. Finally, we reported that NFIP premiums were generally less expensive than premiums for private flood insurance for similar coverage. For example, one insurer told us that for a specified amount of coverage for flood damage to a structure, an NFIP policy might be as low as $500, while a private policy might be as high as $900. Similar coverage for flood damage to contents might be $350 for an NFIP policy but around $600 for a private policy. Given the limited nature of private sector participation, encouraging private market participation could transfer some or all of the federal government’s risk exposure to the private markets and away from taxpayers. However, identifying ways to achieve that end has generally been elusive. In 2007, we evaluated the trade-offs of having a mandatory all-perils policies that would include flood risks. For example, it would alleviate uncertainty about the types of natural events homeowners insurance covered, such as those that emerged following Hurricane Katrina. However, at the time the industry was generally opposed to an all- perils policy because of the large potential losses a mandatory policy would entail. Increased private market participation is also not without potential disadvantages. First, if the private markets provide coverage for only the lowest-risk properties currently in NFIP, the percentage of high-risk properties in the program would increase. This scenario could result in higher rates as the amount needed to cover the full risk of flooding increased. Without higher rates, however, the federal government would face further exposure to loss. Second, private insurers, who are able to charge according to risk, would likely charge higher rates than NFIP has been charging unless they received support from the federal government. As we have seen, such increases could create affordability concerns for low-income policyholders. Strategies to help mitigate these disadvantages could include requiring private market coverage for all property owners— not just those in high-risk areas—and, as described earlier, providing targeted assistance to help low-income property owners pay for their flood coverage. In addition, Congress could provide options to private insurers to help lower the cost of such coverage, including tax incentives or federal reinsurance. As Congress weighs NFIP’s various financial challenges in its efforts to reform the program, it must also consider a number of operational and management issues that may limit efforts to meet program goals and impair NFIP’s stability. For the past 35 years, we have highlighted challenges with NFIP and its administration and operations. For example, most recently we have identified a number of issues impairing the program’s effectiveness in areas that include the reasonableness of payments to Write-Your-Own (WYO) insurers, the adequacy of financial controls over the WYO program, and the adequacy of oversight of non- WYO contractors. In our ongoing work examining FEMA’s management of NFIP—covering areas including strategic planning, human capital planning, intra-agency collaboration, records management, acquisition management, and information technology—some similar issues are emerging. For example, preliminary results of our ongoing work show that FEMA: does not have a strategic plan specific to NFIP with goals, objectives, and performance measures for guiding and measuring the program; lacks a strategic human capital plan that addresses the critical competencies required for its workforce; does not have effective collaborative practices that would improve the functioning of program and support offices; lacks a centralized electronic document management system that would allow its various offices to easily access and store documents; has only recently implemented or is still developing efforts to improve some acquisition management functions, making it difficult to assess the effects of these actions; and does not have an effective system to manage flood insurance policy and claims data, despite having invested roughly 7 years and $40 million on a new system whose development has been halted. While FEMA has begun to acknowledge and address some of these management challenges, additional work remains to be done to address these issues. Our final report will include recommendations to address them. Congressional action is needed to increase the financial stability of NFIP and limit taxpayer exposure. GAO previously identified four public policy goals that can provide a framework for crafting or evaluating proposals to reform NFIP. First, any congressional reform effort should include measures for charging premium rates that accurately reflect the risk of loss, including catastrophic losses. Meeting this goal would require changing the law governing NFIP to reduce or eliminate subsidized rates, limits on annual rate increases, and grandfathered or other rates that did not fully reflect the risk of loss. In taking such a step, Congress may choose to provide assistance to certain property owners, and should consider providing appropriate authorization and funding of such incentives to ensure transparency. Second, because of the potentially high costs of individual and community mitigation efforts, which can reduce the frequency and extent of flood damage, Congress may need to provide funding or access to funds for such efforts and consider ways to improve the efficiency of existing mitigation programs. Moreover, if Congress wished to allow NFIP to deny coverage to owners of properties with repetitive losses who refused mitigation efforts, it would need to give FEMA appropriate authority. Third, Congress could encourage FEMA to continue to increase participation in the program by expanding targeted outreach efforts and limiting postdisaster assistance to those individuals who choose not to mitigate in moderate- and high-risk areas. And finally, to address the goal of encouraging private sector participation, Congress could encourage FEMA to explore private sector alternatives to providing flood insurance or for sharing insurance risks, provided such efforts do not increase taxpayers’ exposure. For its part, FEMA needs to take action to address a number of fundamental operational and managerial issues that also threaten the stability of NFIP and have contributed to its remaining on GAO’s high-risk list. These include improving its strategic planning, human capital planning, intra-agency collaboration, records management, acquisition management, and information technology. While FEMA continues to make some progress in some areas, fully addressing these issues is vital to its long-term operational efficiency and financial stability. Chairman Biggert, Ranking Member Gutierrez, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any of the questions you or other members of the Subcommittee may have at this time. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Orice Williams Brown at (202) 512-8678 or williamso@gao.gov. This statement was prepared under the direction of Patrick Ward. Key contributors were Tania Calhoun, Emily Chalmers, Nima Patel Edwards, and Christopher Forys. FEMA Flood Maps: Some Standards and Processes in Place to Promote Map Accuracy and Outreach, but Opportunities Exist to Address Implementation Challenges. GAO-11-17. Washington, D.C.: December 2, 2010. National Flood Insurance Program: Continued Actions Needed to Address Financial and Operational Issues. GAO-10-1063T. Washington, D.C.: September 22, 2010. National Flood Insurance Program: Continued Actions Needed to Address Financial and Operational Issues. GAO-10-631T. Washington, D.C.: April 21, 2010. Financial Management: Improvements Needed in National Flood Insurance Program’s Financial Controls and Oversight. GAO-10-66. Washington, D.C.: December 22, 2009. Flood Insurance: Opportunities Exist to Improve Oversight of the WYO Program. GAO-09-455. Washington, D.C.: August 21, 2009. Information on Proposed Changes to the National Flood Insurance Program. GAO-09-420R. Washington, D.C.: February 27, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Flood Insurance: Options for Addressing the Financial Impact of Subsidized Premium Rates on the National Flood Insurance Program. GAO-09-20. Washington, D.C.: November 14, 2008. Flood Insurance: FEMA’s Rate-Setting Process Warrants Attention. GAO-09-12. Washington, D.C.: October 31, 2008. National Flood Insurance Program: Financial Challenges Underscore Need for Improved Oversight of Mitigation Programs and Key Contracts. GAO-08-437. Washington, D.C.: June 16, 2008. Natural Catastrophe Insurance: Analysis of a Proposed Combined Federal Flood and Wind Insurance Program. GAO-08-504. Washington, D.C.: April 25, 2008. National Flood Insurance Program: Greater Transparency and Oversight of Wind and Flood Damage Determinations Are Needed. GAO-08-28. Washington, D.C.: December 28, 2007. National Disasters: Public Policy Options for Changing the Federal Role in Natural Catastrophe Insurance. GAO-08-7. Washington, D.C.: November 26, 2007. Federal Emergency Management Agency: Ongoing Challenges Facing the National Flood Insurance Program. GAO-08-118T. Washington, D.C.: October 2, 2007. National Flood Insurance Program: FEMA’s Management and Oversight of Payments for Insurance Company Services Should Be Improved. GAO-07-1078. Washington, D.C.: September 5, 2007. National Flood Insurance Program: Preliminary Views on FEMA’s Ability to Ensure Accurate Payments on Hurricane-Damaged Properties. GAO-07-991T. Washington, D.C.: June 12, 2007. Coastal Barrier Resources System: Status of Development That Has Occurred and Financial Assistance Provided by Federal Agencies. GAO-07-356. Washington, D.C.: March 19, 2007. Budget Issues: FEMA Needs Adequate Data, Plans, and Systems to Effectively Manage Resources for Day-to-Day Operations. GAO-07-139. Washington, D.C.: January 19, 2007. National Flood Insurance Program: New Processes Aided Hurricane Katrina Claims Handling, but FEMA’s Oversight Should Be Improved. GAO-07-169. Washington, D.C.: December 15, 2006. GAO’S High-Risk Program. GAO-06-497T. Washington, D.C.: March 15, 2006. Federal Emergency Management Agency: Challenges for the National Flood Insurance Program. GAO-06-335T. Washington, D.C.: January 25, 2006. Federal Emergency Management Agency: Improvements Needed to Enhance Oversight and Management of the National Flood Insurance Program. GAO-06-119. Washington, D.C.: October 18, 2005. Determining Performance and Accountability Challenges and High Risks. GAO-01-159SP. Washington, D.C.: November 2000. Standards for Internal Control in the Federal Government. GAO/AIMD-00-21.3.1. Washington, D.C.: November 1999. Budget Issues: Budgeting for Federal Insurance Programs. GAO/T-AIMD-98-147. Washington, D.C.: April 23, 1998. Budget Issues: Budgeting for Federal Insurance Programs. GAO/AIMD-97-16. Washington, D.C.: September 30, 1997. National Flood Insurance Program: Major Changes Needed If It Is To Operate Without A Federal Subsidy. GAO/RCED-83-53. Washington, D.C.: January 3, 1983. Formidable Administrative Problems Challenge Achieving National Flood Insurance Program Objectives. RED-76-94. Washington, D.C.: April 22, 1976. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","The National Flood Insurance Program (NFIP) has been on GAO's high-risk list since 2006, when the program had to borrow from the U.S. Treasury to cover losses from the 2005 hurricanes. The outstanding debt is $17.8 billion as of March 2011. This sizeable debt, plus operational and management challenges that GAO has identified at the Federal Emergency Management Agency (FEMA), which administers NFIP, have combined to keep the program on the high-risk list. NFIP's need to borrow to cover claims in years of catastrophic flooding has raised concerns about the program's long-term financial solvency. This testimony 1) discusses ways to place NFIP on a sounder financial footing in light of public policy goals for federal involvement in natural catastrophe insurance and 2) highlights operational and management challenges at FEMA that affect the program. In preparing this statement, GAO relied on its past work on NFIP and on its ongoing review of FEMA's management of NFIP, which focuses on its planning, policies, processes, and systems. The management review includes areas such as strategic and human capital planning, acquisition management, and intra-agency collaboration. Congressional action is needed to increase the financial stability of NFIP and limit taxpayer exposure. GAO previously identified four public policy goals that can provide a framework for crafting or evaluating proposals to reform NFIP. These goals are: (1) charging premium rates that fully reflect risks, (2) limiting costs to taxpayers before and after a disaster, (3) encouraging broad participation in the program, and (4)encouraging private markets to provide flood insurance. Successfully reforming NFIP would require trade-offs among these often competing goals. For example, currently nearly one in four policyholders does not pay full-risk rates, and many pay a lower subsidized or ""grandfathered"" rate. Reducing or eliminating less than full-risk rates would decrease costs to taxpayers but substantially increase costs for many policyholders, some of whom might leave the program, potentially increasing postdisaster federal assistance. However, these trade-offs could be mitigated by providing assistance only to those who needed it, limiting postdisaster assistance for flooding, and phasing in premium rates that fully reflected risks. Increasing mitigation efforts to reduce the probability and severity of flood damage would also reduce flood claims in the long term but would have significant up-front costs that might require federal assistance. One way to address this trade-off would be to better ensure that current mitigation programs were effective and efficient. Encouraging broad participation in the program could be achieved by expanding mandatory purchase requirements or increasing targeted outreach to help diversify the risk pool. Such efforts could help keep rates relatively low and reduce NFIP's exposure but would have to be effectively managed to help ensure that outreach efforts were broadly based. Encouraging private markets is the most difficult challenge because virtually no private market for flood insurance exists for most residential and commercial properties. FEMA's ongoing efforts to explore alternative structures may provide ideas that could be evaluated and considered. Several operational and management issues also limit FEMA's progress in addressing NFIP's challenges, and continued action by FEMA will be needed to help ensure the stability of the program. For example, in previous reports GAO has identified weaknesses in areas that include financial controls and oversight of private insurers and contractors, and has made many recommendations to address them. While FEMA has made progress in addressing some areas, preliminary findings from GAO's ongoing work indicate that these issues persist and need to be addressed as Congress works to more broadly reform NFIP. GAO has made numerous recommendations aimed at improving financial controls and oversight of private insurers and contractors, among others.",govreport
"Section 287(g) of the INA, as amended, authorizes ICE to enter into written agreements under which state or local law enforcement agencies may perform, at their own expense and under the supervision of ICE officers, certain functions of an immigration officer in relation to the investigation, apprehension, or detention of aliens in the United States. The statute also provides that such an agreement is not required for state and local officers to communicate with ICE regarding the immigration status of an individual or otherwise to cooperate with ICE in the identification and removal of aliens not lawfully present in the United States. Thus, 287(g) agreements go beyond state and local officers’ existing ability to obtain immigration status information from ICE and to alert ICE to any removable aliens they identify. Under these agreements, state and local officers are to have direct access to ICE databases and act in the stead of ICE agents by processing aliens for removal. They are authorized to initiate removal proceedings by preparing a notice to appear in immigration court and transporting aliens to ICE-approved detention facilities for further proceedings. Section 287(g) and its legislative history do not detail the exact responsibilities to be carried out, the circumstances under which officers are to exercise 287(g) authority, or which removable aliens should be prioritized for removal, thus giving ICE the discretion to establish enforcement priorities for the program. The statute does, however, contain a number of detailed requirements or controls for the program. It requires that a written agreement be developed to govern the delegation of immigration enforcement functions (e.g., MOA), ICE determine that any officer performing such a function is qualified to do so (e.g., background security check), the officer have knowledge of, and adhere to, federal law relating to immigration (e.g., training), officers performing immigration functions have received adequate training regarding enforcement of federal immigration laws (e.g., written certification of training provided upon passing examinations), any officer performing such a function be subject to the direction and supervision of ICE, with the supervising office to be specified in the written agreement, and specific powers and duties to be exercised or performed by state or local officers be set forth in the written agreement. Currently, the 287(g) program is the responsibility of ICE’s Office of State and Local Coordination (OSLC). The OSLC is responsible for providing information about ICE programs, initiatives, and authorities available to state and local law enforcement agencies. In August 2007, OSLC organized its various programs to partner with state and local law enforcement agencies as Agreements of Cooperation in Communities to Enhance Safety and Security (ACCESS). ACCESS offers state and local law enforcement agencies the opportunity to participate in 1 or more of 13 programs, including the Border Enforcement Security Task Forces, the Criminal Alien Program, and the 287(g) program. More detailed descriptions of the ACCESS programs appear in appendix IV. Under ACCESS, OSLC officials are to work with state and local applicants to help determine which assistance program would best meet their needs. For example, before approving an applicant for 287(g) program participation, OSLC officials are to assess first whether ICE has the resources to support the applicant, such as available detention space and transportation assets based on what historical patterns indicate will be the approximate number of removable aliens apprehended per year by the applying law enforcement agency. Based on an overall assessment of these and other factors, such as the type of agreement requested, availability of training, congressional interest, and proximity to other 287(g) programs, ICE may suggest that one or more of the other assistance programs under ACCESS would be more appropriate. Within the 287(g) program, ICE has developed three models for state and local law enforcement participation. One model, referred to as the “jail model,” allows for correctional officers working in state prisons or local jails to screen those arrested or convicted of crimes by accessing federal databases to ascertain a person’s immigration status. Another option, referred to as the “task force model,” allows law enforcement officers participating in criminal task forces such as drug or gang task forces to screen arrested individuals using federal databases to assess their immigration status. ICE has approved some local law enforcement agencies to concurrently implement both models, an arrangement referred to as the “joint model.” The 287(g) program has grown rapidly in recent years as more state and local communities seek to address criminal activity by those in the country illegally with specialized training and tools provided by ICE. From its initiation 287(g) authority was viewed by members of Congress as an opportunity to provide ICE with more resources—in the form of state and local law enforcement officers—to assist ICE in the enforcement of immigration laws. In 2005, the conference committee report for DHS’s appropriation encouraged ICE to be more proactive in encouraging state and local governments to participate in the program. Beginning in fiscal year 2006, DHS appropriations acts expressly provided funds for the 287(g) program, and accompanying committee reports provided guidance on program implementation. In fiscal year 2006, the DHS Appropriations Act provided $5.0 million to facilitate 287(g) agreements, and the accompanying conference report noted full support for the program, describing it as a powerful force multiplier to better enforce immigration laws and, consequently, to better secure the homeland. In fiscal year 2007, ICE received $5.4 million for the 287(g) program in its regular appropriation and allocated $10.1 million in supplemental funding towards the program. In fiscal year 2008, ICE received $39.7 million for the program, and has received $54.1 million for fiscal year 2009 to support the program. Accompanying committee reports have emphasized that ICE should perform close monitoring of compliance with 287(g) agreements, extensive training prior to delegation of limited immigration enforcement functions, direct supervision of delegated officers by ICE, and enrollment of correctional facilities in the program to identify more removable aliens. Participating state and local law enforcement agencies in the 287(g) program may apply for financial assistance to cover some costs associated with the program either directly from ICE or through grants provided by the Department of Justice (DOJ). For example, for agencies with contractual reimbursement agreements, ICE can reimburse law enforcement agencies for (1) detention of incarcerated aliens in local facilities who are awaiting processing by ICE upon completion of their sentences and (2) transportation of incarcerated aliens, upon completion of their sentences, from a jurisdiction’s facilities to a facility or location designated by ICE. In addition, state and local law enforcement agencies may apply for grants from the DOJ’s State Criminal Alien Assistance Program (SCAAP) for a portion of the costs of incarcerating certain removable aliens convicted of a felony or two or more misdemeanors. The 287(g) program lacks several management controls that limit ICE’s ability to effectively manage the program. First, ICE has not documented the program’s objectives in program-related materials. Second, program- related documents, including the MOA, lack specificity as to how and under what circumstances participating agencies are to use 287(g) authority, or how ICE will supervise the activities of participating agencies. Third, ICE has not defined what program information should be tracked or ensured that program information is being consistently collected and communicated, which would help ensure that management directives are followed. And finally, ICE has not developed performance measures to assess the effectiveness of the 287(g) program and whether it is achieving its intended results. According to ICE senior program officials, the main objective of the 287(g) program is to enhance the safety and security of communities by addressing serious criminal activity such as violent crimes, human smuggling, gang/organized crime activity, sexual-related offenses, narcotics smuggling and money laundering committed by removable aliens. However, program-related documents, including the MOAs and program case files for the initial 29 participating agencies, the 287(g) brochure, training materials provided to state and local officers, and a “frequently asked questions” document do not identify this as the objective of the 287(g) program. Internal controls also call for agencies to establish clear, consistent objectives. In addition, GPRA requires agencies to consult with stakeholders to clarify their missions and reach agreement on their goals. Successful organizations we have studied in prior work involve stakeholders in program planning efforts, which can help create a basic understanding among the stakeholders of the competing demands that confront most agencies, the limited resources available to them, and how those demands and resources require careful and continuous balancing. The statute that established the 287(g) program and associated legislative history do not set enforcement priorities for the program, which leaves the responsibility to ICE. Therefore, ICE has the discretion to define the 287(g) program objectives in any manner that is reasonable. Although ICE has prioritized its immigration enforcement efforts to focus on serious criminal activity because of limited personnel and detention space, ICE officials told us they did not document the stated 287(g) program objectives as such because a situation could arise where detention space might be available to accommodate removable aliens arrested for minor offenses. We identified cases where participating agencies have used their 287(g) authority to process for removal aliens arrested for minor offenses. For example, of the 29 participating agencies we reviewed, 4 agencies told us they used 287(g) authorities to process for removal those aliens the officers stopped for minor violations such as speeding, carrying an open container of alcohol, and urinating in public. None of these crimes fall into the category of serious criminal activity that ICE officials described to us as the type of crime the 287(g) program is expected to pursue. Due to the rapid growth of the 287(g) program, an unmanageable number of aliens could be referred to ICE if all the participating agencies sought assistance to remove aliens for such minor offenses. Another potential consequence of not having documented program objectives is misuse of authority. The sheriff from a participating agency said that his understanding of the 287(g) authority was that 287(g)-trained officers could go to people’s homes and question individuals regarding their immigration status even if the individual is not suspected of criminal activity. Although it does not appear that any officers used the authority in this manner, it is illustrative of the lack of clarity regarding program objectives and the use of 287(g) authority by participating agencies. While agencies participating in the 287(g) program are not prohibited from seeking the assistance of ICE for aliens arrested for minor offenses, detention space is routinely very limited and it is important for ICE to use these and other 287(g) resources in a manner that will most effectively achieve the objective of the program—to process for removal those aliens who pose the greatest threat to public safety. According to ICE’s Office of Detention and Removal (DRO) strategic plan, until more alternative detention methods are available, it is important that their limited detention bed space is available for those aliens posing greater threats to the public. ICE’s former Assistant Secretary made this point in her congressional testimony in February 2008, stating that given the rapid growth of the program in the last 2 years, it is important to ensure that ICE’s bed space for the 287(g) program is used for the highest priority aliens. This may not be achieved if ICE does not document and communicate to participating agencies its program objective of focusing limited enforcement and detention resources on serious and/or violent offenders. ICE has not consistently articulated in program-related documents, such as MOAs, brochures and training materials, how participating agencies are to use their 287(g) authority, nor has it described the nature and extent of ICE supervision over these agencies’ implementation of the program. Internal control standards state that government programs should establish control activities to help ensure management’s directives are carried out. According to ICE officials, they use various controls to govern the 287(g) program, including conducting background checks on officers working for state and local law enforcement agencies that apply to participate in the 287(g) program, facilitating a training program with mandatory examinations to prepare law enforcement officers to carry out 287(g) program activities, and documenting agreements reached on program operations in the MOA. ICE has not consistently communicated, through its MOAs with participating agencies, how and under what circumstances 287(g) authority is to be used. Internal control standards state that government programs should establish control activities, including ensuring that significant events are authorized and executed only by persons acting within the scope of their authority. For the 287(g) program, ICE officials identified the MOA as a key control document signed by both ICE and participating agency officials. The MOA is designed to help ensure that management’s directives for the program are carried out by program participants. However, the MOAs we reviewed were not consistent with statements by ICE officials regarding the use of 287(g) authority. For example, according to ICE officials and other ICE documentation, 287(g) authority is to be used in connection with an arrest for a state offense; however, the signed agreement that lays out the 287(g) authority for participating agencies does not address when the authority is to be used. While all 29 MOAs we reviewed contained language that authorizes a state or local officer to interrogate any person believed to be an alien as to his right to be or remain in the United States, none of them mentioned that an arrest should precede use of 287(g) program authority. Furthermore, the processing of individuals for possible removal is to be in connection with a conviction of a state or federal felony offense. However, this circumstance is not mentioned in 7 of the 29 MOAs we reviewed, resulting in implementation guidance that is not consistent across the initial 29 participating agencies. Due to the rapid expansion of the 287(g) program in the last 2 years, it is important that ICE consistently communicate to participating agencies how this authority is to be used to help ensure that state and local law enforcement agents are not using their 287(g) authority in a manner not intended by ICE. ICE has also not defined in its program-related documents the responsibilities required of ICE agents directing and supervising local officers under the 287(g) program. Internal control standards state that a good internal control environment requires that an agency’s organizational structure define key areas of authority and responsibility. The statute that established the program specifically requires ICE to direct and supervise the activities of the state and local officers who participate in the 287(g) program. The statute and associated legislative history, however, do not define the terms of direction and supervision, which leaves the responsibility for defining them to ICE. Although ICE has the discretion to define these terms in any manner that it deems reasonable, it has not defined them in program documents. In our analysis of the 29 MOAs, we found little detail regarding the nature and extent of supervisory activities to be performed by ICE working with state and local law enforcement officers. For example, the MOAs state that participating officers will be supervised and directed by ICE regarding their immigration enforcement functions. The MOAs also state that participating officers cannot perform any immigration officer functions except when being supervised by ICE, and that those actions will be reviewed by ICE supervisory officers on an ongoing basis to ensure compliance and to determine if additional training is needed. The MOAs further state that the participating state or local agency retains supervisory responsibilities over all other aspects of the officers’ employment. However, details regarding the nature and extent of supervision, such as whether supervision is to be provided remotely or directly, the frequency of interaction, and whether reviews are conducted as written assessments or through oral feedback, are not described in the MOAs or in any documentation provided to us by ICE. In response to our inquiry, ICE officials did not provide a clear definition of the nature and extent of ICE supervision to be provided to participating agencies. These officials also cited a shortage of supervisory resources. The Assistant Director for the Office of State and Local Coordination that manages the 287(g) program said the ICE officer who supervises the activities of a participating agency’s officers is responsible for conducting general tasks, such as reviewing and providing oversight over the information added to immigration files; however, he also said the ICE official responsible for supervising the activities of a participating agency’s officers may not have a supervisory designation within ICE. He added that documentation of an ICE 287(g) supervisor’s responsibilities may be included in the position description of a Supervisory Detention and Deportation Officer. We examined seven position descriptions provided by ICE, including this position. Some of the activities described in this position description address such issues as level of supervision or direction and expectations setting for subordinates. For example, the position description for a Supervisory Detention and Deportation Officer establishes guidelines and performance expectations that are clearly communicated, observes workers’ performance and conducts work performance critiques, provides informal feedback, assigns work based on priorities or the capabilities of the employee, prepares schedules for completion of work, gives advice and instruction to employees, and identifies developmental and training needs, in addition to other duties. However, because supervision activities specific to the 287(g) program (or more generally, state and local law enforcement officers carrying out immigration enforcement activities) were not contained in the description, it is unclear the extent to which the supervisory activities enumerated in those position descriptions would apply to the supervision of state and local officers in the 287(g) program. Further, ICE officials in headquarters noted that the level of ICE supervision provided to participating agencies has varied due to a shortage of supervisory resources. The officials said it has been necessary in many instances for ICE to shift local resources or to utilize new supervisory officers to provide the required oversight and to manage the additional workload that has resulted from the 287(g) program. For example, agents from ICE’s Office of Investigations (OI) and DRO have been detailed to the 287(g) program to fulfill the requirement within section 287(g) of the INA, which mandates that ICE supervise officers performing functions under each 287(g) agreement. Officials explained that these detailees have been taken away from their permanent positions, which affects ICE’s ability to address other criminal activity. ICE officials noted that the small number of detailed agents does not have a significant impact on ICE’s overall ability to supervise the 287(g) program in the field. In addition to the views by ICE officers in headquarters, we asked ICE field officials about 287(g) supervision. There was wide variation in the perceptions of what supervisory activities are to be performed. For example, one ICE official said ICE provides no direct supervision over the local law enforcement officers in the 287(g) program in their area of responsibility. Conversely, another ICE official characterized ICE supervisors as providing frontline support for the 287(g) program. ICE officials at two additional offices described their supervisory activities as overseeing training and ensuring the computer systems are working properly. Officials at another field office described their supervisory activities as reviewing files for completeness and accuracy. We also asked state and local officers about ICE supervision related to this program. Officials from 14 of the 23 agencies that had implemented the program gave positive responses when asked to evaluate ICE’s supervision of their 287(g)-trained officers. Another four law enforcement agencies characterized ICE’s supervision as fair, adequate, or provided on an as- needed basis. Three agencies said they did not receive direct ICE supervision or that supervision was not provided daily, which one agency felt was necessary to assist with the constant changes in requirements for processing of paperwork. Officials from two law enforcement agencies said ICE supervisors were either unresponsive or not available. One of these officials noted that it was difficult to establish a relationship with the relevant managers at the local ICE office because there was constant turnover in the ICE agents responsible for overseeing the 287(g) program. Given the rapid growth of the program and ICE’s limited supervisory resources, defining supervision activities would improve ICE’s ability to ensure management directives are carried out appropriately. While ICE states in its MOAs that participating agencies are responsible for tracking and reporting data, the MOA did not provide details as to what data needs to be collected or in what manner data should be collected and reported. For example, in 20 of the 29 MOAs we reviewed, ICE generally required participating agencies to track data, but the MOA did not define what data should be tracked, or how data should be collected and reported to ICE. Specifically, the reporting requirements section in 20 of the MOAs states: The LEA will be responsible for tracking and maintaining accurate data and statistical information for their 287(g) program, including any specific tracking data requested by ICE. Upon ICE’s request, such data and information shall be provided to ICE for comparison and verification with ICE’s own data and statistical information, as well as for ICE’s statistical reporting requirements and to help ICE assess the progress and success of the LEA’s 287(g) program. Furthermore, results of our structured interview with 29 program participants indicated confusion regarding reporting requirements. For example, of the 20 law enforcement agencies we reviewed whose MOA contained a reporting requirement: 7 agencies told us they had a reporting requirement and reported data to ICE; 3 agencies told us they had a requirement, but were not sure what specific data was to be reported; 3 agencies told us they were not required to report any data; 2 agencies told us that while ICE did not require them to report data, they submitted data to ICE on their activities anyway; and 5 agencies did not respond directly regarding a reporting requirement. Of the nine program participants we interviewed without a reporting requirement in the MOA: 5 agencies told us they reported data to ICE; 2 agencies told us they were not required to report data to ICE, but did so anyway; 1 agency told us they do not report data to ICE; and 1 agency did not know if they were required to report data to ICE. According to internal control standards, pertinent information should be recorded and communicated to management and others within the entity that need it in a form and within a time frame that enables them to carry out internal control and other responsibilities. Consistent with these standards, agencies are to ensure that information relative to factors vital to a program meeting its goals is identified and regularly reported to management. For example, collecting information such as the type of crime for which an alien is detained could help ICE determine whether participating agencies are processing for removal those aliens who have committed serious crimes, as its objective states. Without clearly communicating to participating agencies guidance on what data is to be collected and how it should be gathered and reported, ICE management may not have the information it needs to ensure the program is achieving its objective. While ICE has defined the objective of the 287(g) program—to enhance the safety and security of communities by addressing serious criminal activity by removable aliens— the agency has not developed performance measures for the 287(g) program to track the progress toward attaining that objective. GPRA requires that agencies clearly define their missions, measure their performance against the goals they have set, and report on how well they are doing in attaining those goals. Measuring performance allows organizations to track the progress they are making toward their goals and gives managers critical information on which to base decisions for improving their programs. Our previous work has shown that agencies successful in evaluating performance had measures that demonstrated results, covered multiple priorities, provided useful information for decision making, and successfully addressed important and varied aspects of program performance. Internal controls also call for agencies to establish performance measures and indicators. ICE officials stated that they are in the process of developing performance measures, but have not provided any documentation or a time frame for when they expect to complete the development of these measures. In accordance with standard practices for program and project management, specific desired outcomes or results should be conceptualized and defined in the planning process as part of a road map, along with the appropriate projects needed to achieve those results, and milestones. ICE officials told us that, although they have not yet developed performance measures, in an effort to monitor how the program is being implemented, they are beginning to conduct compliance inspections based on information provided in the MOA in locations where the 287(g) program has been implemented. ICE’s Office of Professional Responsibility (OPR) was recently directed to conduct field inspections of all participating 287(g) program agencies. OPR officials state that the inspections are based on a checklist drawn from participating agencies’ MOAs as well as interviews with state and local law enforcement agencies and ICE officials who are responsible for overseeing these agencies. OPR’s checklists include items such as the review of the arrest and prosecution history of undocumented criminals, relevant immigration files, and ICE’s Enforcement Case Tracking System (ENFORCE) entries, as well as review of any complaints by those detained pursuant to the 287(g) program directed towards ICE, state and local law enforcement officers. OPR officials use this checklist to confirm whether the items agreed to in the MOA have been carried out. As discussed earlier in this report, the 29 MOAs we reviewed did not contain certain internal controls to govern program implementation consistent with federal internal control standards. According to OPR officials, they have completed six compliance inspections, and have a seventh inspection underway. In addition, OPR officials told us that they are planning to complete compliance inspections for the rest of the initial 29 program participants within the next 2 years. Although ICE has initiated compliance inspections for the 287(g) program, ICE officials stated that the compliance inspections do not include performance assessments of the program. ICE officials stated that developing performance measures for the program will be difficult because each state and local partnership agreement is unique, making it challenging to develop measures that would be applicable for all participating agencies. Nonetheless, these measures are important to provide ICE with a basis for determining whether the program is achieving its intended results. Without a plan for the development of performance measures, including milestones for their completion, ICE lacks a roadmap for how this project will be achieved. ICE and participating agencies used program resources mainly for personnel, training, and equipment. From fiscal years 2006 through 2008, ICE received approximately $60 million to provide 287(g) resources for 67 participating agencies nationwide as follows: Training. Once officers working for state and local law enforcement participating agencies pass a background investigation performed by ICE, they are also required to attend a 4-week course and pass mandatory examinations to be certified. Training is focused on immigration and nationality law, and includes modules on identifying fraudulent documents, understanding removal charges, cross-cultural communications, and alien processing (e.g., accessing federal databases). Of the 27 participating agencies that had received training at the time of our interviews 20 said the training prepared them to perform their 287(g) activities; four of these agencies also reported that their participation in the program was delayed due to problems with scheduling training. ICE provided information reflecting an average training cost per student of $2,622 using the on-site training facility—the Federal Law Enforcement Training Center—and $4,840 using off-site facilities. These average costs include travel, lodging, books, meals, and miscellaneous expenses. As of October 2008, ICE had trained and certified 951 state or local officers in the 287(g) program. Equipment. ICE is to provide the equipment necessary to link participating state and local law enforcement agencies with ICE to assist these agencies in performing their immigration enforcement activities. ICE estimates that, on average, for each participating agency it spends $37,000 for equipment set-up and installation, and about $43,000 for equipment hardware. These costs include installation of a secure transmission line, which connects the participating agency to ICE databases, one or more workstations, one or more machines that capture and transmit fingerprints electronically, and personnel labor and support costs. In addition, it spends on average about $107,000 annually for recurring equipment operations and maintenance costs for each participating agency. Supervision. ICE is to provide supervision to state and local law enforcement agencies participating in the 287(g) program. However, as mentioned earlier in this report, ICE has not identified what responsibilities are required of ICE agents directing and supervising local officers under the 287(g) program, and comments about program supervision from ICE officers at headquarters and in field offices, as well as officers from participating agencies, differ widely. Therefore, we are unable to provide more detail as to this 287(g) resource provided by ICE. In addition to the resources provided by ICE, state and local law enforcement agencies also provide resources to implement the 287(g) program. For example, state and local law enforcement agencies provide officers, space for equipment, and funding for any other expenses not specifically covered by ICE, such as office supplies and vehicles. Of the 29 state and local participating agencies we interviewed, 11 were able to provide estimates for some of their costs associated with participating in the 287(g) program; however, the data they provided was not consistent. Therefore, it was not feasible to total these costs. Those law enforcement agencies able to identify costs may be able to recover some of these expenses through an intergovernmental service agreement, or through DOJ’s SCAAP grant process. When we asked state and local law enforcement participating agencies whether they received federal reimbursement from any source for costs associated with the 287(g) program (e.g., detention or transportation), 18 of the 29 reported that they did not. Six participating state and local agencies said they received SCAAP funding for some of these costs, and another five said they received federal reimbursements for some costs related to detention, transportation, and hospitalization. The rapid growth of the 287(g) program has presented resource challenges that ICE has begun to address. For example, 11 of the 29 participating agencies we contacted told us of equipment-related problems. Specifically, two of these agencies did not have equipment to carry out the 287(g) program for several months after their staff had received training on how to use it, and they had concerns that refresher training would be needed, while another agency received more equipment than it needed. ICE has worked with participating agencies to address the problems with program equipment distribution. ICE headquarters and field staff also told us that their resources to supervise activities of program participants are being stretched to their maximum capacities to manage the increased growth of the program. To address these issues, ICE has detailed agents from OI and DRO to meet supervisory and other program requirements. ICE is also considering other ways to address the challenges presented by program growth. As discussed earlier in this report, the 287(g) program is 1 of 13 ICE programs to partner with state and local law enforcement agencies under ACCESS. ICE officials are working with state and local participants and applicants to help determine whether a different ACCESS program would better meet their needs, and as a result, ICE has reduced the backlog of applications to the 287(g) program from approximately 80 applications to 29 as of October 2008. Both ICE and state and local law enforcement agencies participating in the 287(g) program have reported activities, benefits, and concerns associated with the program. As of October 2008, ICE reported that 67 state and local law enforcement agencies had enrolled in the 287(g) program, and that about 25 state and local jurisdiction program applications were pending. In addition, ICE reported that 951 state and local officers received training in immigration law and enforcement functions and were certified to use 287(g) authority. ICE’s data show that for 25 of the 29 participating agencies we reviewed in fiscal year 2008 that about 43,000 aliens had been arrested under the 287(g) program authority, with individual agency participant arrests ranging from about 13,000 in one location to no arrests in two locations. Of those 43,000 aliens arrested by program participants pursuant to the 287(g) authority, ICE detained about 34,000 and placed about 14,000 (41 percent) of those detained in removal proceedings, and arranged for about 15,000 (44 percent) to be voluntarily removed. The remaining 5,000 (15 percent) arrested aliens detained by ICE were either given a humanitarian release, sent to a federal or state prison to serve a sentence for a felony offense, or not taken into ICE custody given the minor nature of the underlying offense and limited availability of detention space. State and local law enforcement agencies we interviewed have reported specific benefits of the 287(g) program, including the reduction of crime/making the community safer, identifying/removing repeat offenders, improving the quality of life for the community, and giving law enforcement officers a sense of accomplishment related to immigration enforcement. On the other hand, more than half of the 29 state and local law enforcement agencies we interviewed reported concerns that some members of their communities expressed about the 287(g) program, including concerns that law enforcement officers in the 287(g) program would be deporting removable aliens because of minor traffic violations (e.g., speeding); fear and apprehension in the Hispanic community about possible deportation; and concerns that officers would be performing increased enforcement of immigration laws at worksites and would engage in racial profiling. To help mitigate these fears and concerns, 27 of the 29 law enforcement agencies we reviewed reported that they had conducted outreach in their communities regarding the program (e.g., newspaper articles, press releases, TV and radio spots, speaking engagements, and public meetings). Removing aliens who have committed violent crimes is of great importance to the safety of the community at large. Through the 287(g) program and its partnerships with state and local agencies, ICE has an opportunity to identify and train additional law enforcement resources that could help it meet this challenge. However, the lack of internal controls governing the program limits ICE’s ability to take full advantage of this additional resource. For example, without documenting that the objective of the program is to remove aliens who have committed serious crimes or pose a threat to public safety, participating agencies may further burden limited detention resources by continuing to seek ICE assistance for aliens detained for minor crimes. According to ICE, it is important to ensure that their limited detention bed space is available for those aliens posing the greatest threat to the public. Moreover, without consistently communicating to participating agencies how and under what circumstances 287(g) authority is to be used, participating agencies may use this authority in a manner that is not intended by ICE. Additionally, given the rapid growth of the program, the lack of defined supervision activities could hamper ICE’s ability to ensure management directives are being carried out appropriately. Furthermore, without guidance for what data participating agencies are to collect and how this information is to be gathered and reported, ICE may not have the information it needs to help ensure participating agencies are adhering to program objectives. Finally, performance measures are important to provide ICE with a basis for determining whether the program is achieving its intended results. While it is encouraging that ICE is working to develop these measures, without establishing a plan, including a time frame for development, ICE lacks a roadmap for how it will achieve this goal. To help ensure that the ICE 287(g) program achieves the results intended, we are recommending that the Assistant Secretary for ICE take the following five actions: Document the objective of the 287(g) program for participants, Clarify how and under what circumstances 287(g) authority is to be used by state and local law enforcement officers in participating agencies, Document in MOAs the nature and extent of supervisory activities ICE officers are expected to carry out as part of their responsibilities in overseeing the implementation of the 287(g) program and communicate that information to both ICE officers and state and local participating agencies, Specify the program information or data that each agency is expected to collect regarding their implementation of the 287(g) program and how this information is to be reported, and Establish a plan, including a time frame, for the development of performance measures for the 287(g) program. We provided a draft of this report to DHS for review and comment. DHS provided written comments on January 28, 2009, which are presented in appendix V. In commenting on the draft report, DHS stated that it agreed with our recommendations and identified actions planned or underway to implement the recommendations. ICE also provided us with technical comments, which we considered and incorporated in the report where appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Homeland Security, the Secretary of State, the Attorney General, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-8777 or at stanar@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are acknowledged in appendix VI. 8 U.S.C. § 1357(g) (g) Performance of immigration officer functions by State officers and employees (1) Notwithstanding section 1342 of title 31, the Attorney General may enter into a written agreement with a State, or any political subdivision of a State, pursuant to which an officer or employee of the State or subdivision, who is determined by the Attorney General to be qualified to perform a function of an immigration officer in relation to the investigation, apprehension, or detention of aliens in the United States (including the transportation of such aliens across State lines to detention centers), may carry out such function at the expense of the State or political subdivision and to the extent consistent with State and local law. (2) An agreement under this subsection shall require that an officer or employee of a State or political subdivision of a State performing a function under the agreement shall have knowledge of, and adhere to, Federal law relating to the function, and shall contain a written certification that the officers or employees performing the function under the agreement have received adequate training regarding the enforcement of relevant Federal immigration laws. (3) In performing a function under this subsection, an officer or employee of a State or political subdivision of a State shall be subject to the direction and supervision of the Attorney General. (4) In performing a function under this subsection, an officer or employee of a State or political subdivision of a State may use Federal property or facilities, as provided in a written agreement between the Attorney General and the State or subdivision. (5) With respect to each officer or employee of a State or political subdivision who is authorized to perform a function under this subsection, the specific powers and duties that may be, or are required to be, exercised or performed by the individual, the duration of the authority of the individual, and the position of the agency of the Attorney General who is required to supervise and direct the individual, shall be set forth in a written agreement between the Attorney General and the State or political subdivision. (6) The Attorney General may not accept a service under this subsection if the service will be used to displace any Federal employee. (7) Except as provided in paragraph (8), an officer or employee of a State or political subdivision of a State performing functions under this subsection shall not be treated as a Federal employee for any purpose other than for purposes of chapter 81 of title 5 (relating to compensation for injury) and sections 2671 through 2680 of title 28 (relating to tort claims). (8) An officer or employee of a State or political subdivision of a State acting under color of authority under this subsection, or any agreement entered into under this subsection, shall be considered to be acting under color of Federal authority for purposes of determining the liability, and immunity from suit, of the officer or employee in a civil action brought under Federal or State law. (9) Nothing in this subsection shall be construed to require any State or political subdivision of a State to enter into an agreement with the Attorney General under this subsection. (10) Nothing in this subsection shall be construed to require an agreement under this subsection in order for any officer or employee of a State or political subdivision of a State — (A) to communicate with the Attorney General regarding the immigration status of any individual, including reporting knowledge that a particular alien is not lawfully present in the United States; or (B) otherwise to cooperate with the Attorney General in the identification, apprehension, detention, or removal of aliens not lawfully present in the United States. This report addresses (1) the extent to which ICE has designed controls to govern 287(g) program implementation and (2) how program resources are being used and the program activities, benefits, and concerns reported by participating agencies. To address our objectives, we contacted and obtained information from key people and organizations associated with the arrest, detention, and removal of aliens, and U.S. Immigration and Customs Enforcement’s (ICE) 287(g) program, including the following: ICE headquarters officials from the following offices: Office of Investigations, Office of the Principal Legal Advisor, Office of Detention and Removal, Office of the Chief Financial Officer/Budget Office, Office of State and Local Coordination, and Office of Professional Responsibility. ICE officials from ICE Field Offices in Phoenix, Arizona, and in the California offices of Los Angeles, Santa Ana, Riverside, and San Bernardino in conjunction with our site visits to state and local law enforcement agencies in these areas. Officials from all 29 state and local law enforcement agencies that had entered into agreements with ICE as of September 1, 2007, listed below. Six of these agencies reported that they had not yet begun implementing the program. Our analysis includes information from these six agencies as appropriate. We conducted structured interviews with officials from these organizations from October 2007 through February 2008. By interviewing officials from all participating agencies, we were able to obtain information and perspectives from participating agencies that had been involved in the program for the longest period of time as well as from those agencies that had just started participating to learn how law enforcement agencies get their program implemented. State and local law enforcement agencies that had entered into agreements with ICE as of September 1, 2007: Alabama Department of Public Safety; Arizona Department of Corrections; Arizona Department of Public Safety; Maricopa County Sheriff’s Office (Arizona); Los Angeles County Sheriff’s Office (California) Orange County Sheriff’s Office (California); Riverside County Sheriff’s Office (California); San Bernardino County Sheriff’s Office (California); Colorado Department of Public Safety/State Patrol; El Paso County Sheriff’s Office (Colorado); Collier County Sheriff’s Office (Florida); Florida Department of Law Enforcement; Cobb County Sheriff’s Office (Georgia); Georgia Department of Public Safety; Barnstable County Sheriff’s Office (Massachusetts); Framingham Police Department (Massachusetts); Massachusetts Department of Corrections; Alamance County Sheriff’s Office (North Carolina); Cabarrus County Sheriff’s Office (North Carolina); Gaston County Sheriff’s Office (North Carolina); Mecklenburg County Sheriff’s Office (North Carolina); Hudson Police Department (New Hampshire) New Mexico Department of Corrections; Tulsa County Sheriff’s Office (Oklahoma); Davidson County Sheriff’s Office (Tennessee); Herndon Police Department (Virginia); Prince William-Manassas Adult Detention Center (Virginia); Rockingham County Sheriff’s Office (Virginia); and Shenandoah County Sheriff’s Office (Virginia). We also conducted site visits with nine state and local law enforcement agencies that entered into an agreement with ICE as of September 1, 2007, and had begun implementing the program. These sites were selected to represent variation in length of partnership with ICE, type of model (e.g., jail, task force, or joint), geographic location, size of jurisdiction, and proximity to ICE Special-Agent-in-Charge or regional office. The offices from which we interviewed officials about their participation in the 287(g) program, include Rockingham County Sheriff’s Office, Shenandoah County Sheriff’s Office, Los Angeles County Sheriff’s Office, Orange County Sheriff’s Office, San Bernardino County Sheriff’s Office, Riverside County Sheriff’s Office, Arizona Department of Corrections, Maricopa County Sheriff’s Office (including the Enforcement Support, Human Smuggling Unit), and Arizona Department of Public Safety (including the Gang Enforcement Bureau and the Criminal Investigations Division). Although we are not able to generalize the information gathered from these visits to all other participating law enforcement agencies, they provided us with a variety of examples related to program implementation. To determine what the 287(g) program’s objectives are and to what extent ICE has designed controls to govern implementation, we collected and analyzed information regarding the program’s objective and obtained information from both ICE and the participating law enforcement agencies we interviewed and visited to determine if ICE objectives for the program were clearly articulated to law enforcement agencies. We reviewed available program-related documents, including program case files for the initial 29 participating agencies, the 287(g) brochure, training materials provided to state and local officers to become certified in the program, and a “frequently asked questions” document on the program. In addition, we analyzed the MOAs of each state and local agency participating in the 287(g) program as of September 1, 2007. Specifically, we examined sections of the MOAs related to program authority, designation of enforcement functions, and ICE supervision responsibilities, among other areas of these written agreements. We completed a content analysis of responses to structured interviews that were conducted with key officials from each of the participating law enforcement agencies in this review and from information gathered from site visits. Our content analysis consisted of reviewing the responses to the structured interview questions and identifying and grouping responses by theme or characterization. These themes were then coded and tallied. For some questions, participating agencies gave multiple responses or characterizations, therefore responses are not always mutually exclusive. Selection of themes and coding of responses were conducted separately by two analysts; any discrepancies were resolved. We also compared controls ICE told us they designed to govern implementation of the 287(g) program, including conducting background checks, providing formal training with qualifying exams for the applicants’ officers, and agreeing with state and local agencies to MOAs, with criteria in GAO’s Standards for Internal Control in the Federal Government, the Government Performance and Results Act (GPRA) and standard practices for program management. To corroborate the information we received from the law enforcement agencies through both the structured interviews and site visits, we interviewed officials from ICE both at headquarters and in the field, and examined documentation on guidance given to both ICE and state and local participants about the implementation of the program, as well as reviewed all 29 case files created and maintained by ICE on program participants. We identified for what purposes ICE relies on data collected from law enforcement agencies, and how data reliability checks are performed for data collection associated with the 287(g) program. We interviewed ICE officials and participating law enforcement agencies to determine what guidance ICE has provided to law enforcement agencies on how data are collected, stored, and reported to ICE. We interviewed officials and examined documentation from ICE to determine the measures established to monitor performance and improvements made to the program. We reviewed reports that use data from ICE’s Enforcement Case Tracking System or the ENFORCE database, which automates the processes associated with the identification, apprehension, and deportation of removable aliens. During our review, we learned that some data regarding the 287(g) program may not have been included in ENFORCE, and therefore, we are unsure of the completeness of the information relevant to this program in this database. We used this data to a limited extent in our Objective II discussion related to activities, benefits, and concerns of the 287(g) program. The data used was for illustrative purposes only and not used to draw conclusions about the program. To determine what resources ICE and participating law enforcement agencies provide to the program including the equipment and training for program participants, and the assignment of ICE supervisory staff for this program, we examined ICE’s budget for the 287(g) program, including how ICE calculates the funding requirements for each additional agreement. We also interviewed officials from the participating law enforcement agencies, analyzed information collected from these agencies to determine what resources they reported using to implement the program and the activities, benefits, and concerns they reported associated with the program. In addition, we examined budget and appropriations documentation from the program’s inception to the fiscal year 2009 budget request for the 287(g) program. We collected and analyzed information on the activities reported by ICE stemming from the program. Through our structured interviews, we gathered and analyzed the participating state and local agencies views on the activities, benefits, and concerns related to the program. We did not conduct a fiscal examination of the cost of detention facilities, nor review the budgetary effect on law enforcement agencies implementing the 287(g) program. In addition to the contact named above, Bill Crocker, Assistant Director, and Lori Kmetz, Analyst-in-Charge, managed this assignment. Susanna Kuebler, Carolyn Garvey, and Orlando Copeland made significant contributions to the work. Michele Fejfar assisted with design, methodology, and data analysis. Katherine Davis, Linda Miller, Adam Vogt and Peter Anderson provided assistance in report preparation, and Frances Cook provided legal support.","Section 287(g) of the Immigration and Nationality Act, as amended, authorizes the federal government to enter into agreements with state and local law enforcement agencies to train officers to assist in identifying those individuals who are in the country illegally. U.S. Immigration and Customs Enforcement (ICE) is responsible for supervising state and local officers under this program. GAO was asked to review this program. This report reviews (1) the extent to which ICE has designed controls to govern 287(g) program implementation; and (2) how program resources are being used and the activities, benefits, and concerns reported by participating agencies. GAO reviewed memorandums of agreement (MOA) between ICE and the 29 program participants as of September 1, 2007. GAO compared controls ICE designed to govern the 287(g) program with criteria in GAO's Standards for Internal Control in the Federal Government. GAO interviewed officials from both ICE and participating agencies on program implementation, resources, and results. ICE has designed some management controls to govern 287(g) program implementation, such as MOAs and background checks of state and local officers, but the program lacks other controls, which makes it difficult for ICE to ensure that the program is operating as intended. First, the program lacks documented program objectives to help ensure that participants work toward a consistent purpose. ICE officials stated that the objective of the program is to address serious crime, such as narcotics smuggling committed by removable aliens; however, ICE has not documented this objective in program materials. As a result, of 29 program participants reviewed by GAO, 4 used 287(g) authority to process individuals for minor crimes, such as speeding, contrary to the objective of the program. Second, ICE has not described the nature and extent of its supervision over participating agencies' implementation of the program, which has led to wide variation in the perception of the nature and extent of supervisory responsibility among ICE field officials and officials from the participating agencies. ICE is statutorily required to supervise agencies participating in the 287(g) program, and internal control standards require an agency's organizational structure to clearly define key areas of authority and responsibility. Defining the nature and extent of the agency's supervision over this large and growing program would strengthen ICE's assurance that management's directives are being carried out. Finally, while ICE states in its MOAs that participating agencies are responsible for tracking and reporting data to ICE, in 20 of 29 MOAs GAO reviewed, ICE did not define what data should be tracked or how it should be collected and reported. Communicating to participating agencies what data is to be collected and how it should be gathered and reported would help ensure that ICE management has the information needed to determine whether the program is achieving its objective. ICE and program participants use resources for personnel, training, and equipment, and participants report activities, benefits, and concerns regarding the program. In fiscal years 2006-2008, ICE received about $60 million to train, supervise, and equip program participants. As of October 2008, ICE reported enrolling 67 agencies and training 951 state and local law enforcement officers. According to data provided by ICE for 25 of the 29 program participants reviewed by GAO, during fiscal year 2008, about 43,000 aliens had been arrested pursuant to the program, and of those, ICE detained about 34,000. About 41 percent of those detained were placed in removal proceedings, and an additional 44 percent agreed to be voluntarily removed. The remaining 15 percent of those detained by ICE were given a humanitarian release, sent to federal or state prison, or released due to the minor nature of their crime and federal detention space limitations. Program participants report a reduction in crime, the removal of repeat offenders, and other public safety benefits. However, over half of the 29 agencies GAO contacted reported concerns from community members that use of program authority would lead to racial profiling and intimidation by law enforcement officials.",govreport
"SEC oversees mutual funds primarily through its Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Division of Enforcement. OCIE examines mutual funds to evaluate their compliance with the federal securities laws, to determine if they are operating in accordance with disclosures made to investors, and to assess the effectiveness of their compliance control systems. The Division of Investment Management administers the securities laws affecting funds and advisers. It reviews disclosure documents that mutual funds are required to file with SEC and engages in other regulatory activities, such as rulemaking, responding to requests for exemptions from federal securities laws, and providing interpretation of those laws. Finally, SEC’s Division of Enforcement investigates and prosecutes violations of securities laws related to mutual funds. SEC regulates mutual funds under the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934. The Investment Company Act was passed specifically to regulate mutual funds and other types of investment companies. Under the act, mutual funds are required to register with SEC, subjecting their activities to SEC regulation. The act also imposes requirements on the operation and structure of mutual funds. Its core objectives are to ensure that investors receive adequate and accurate information about mutual funds, protect the integrity of fund assets, prohibit abusive forms of self-dealing, prevent the issuance of securities that have inequitable or ensure the fair valuation of investor purchases and redemptions. The Investment Advisers Act requires mutual fund advisers to register with SEC, imposes reporting requirements on them, and prohibits them from engaging in fraudulent, deceptive, or manipulative practices. The Securities Act requires fund shares offered to the public to be registered with SEC and regulates mutual fund advertising. Under the Securities Act and Investment Company Act, SEC has adopted rules to require mutual funds to make extensive disclosures in their prospectuses. The Securities Exchange Act, among other things, regulates how funds are sold and requires persons distributing funds or executing fund transactions to be registered with SEC as broker-dealers. SEC, NASD, and NYSE regulate broker-dealers, including their mutual fund sales practices, by examining their operations and reviewing customer complaints. Broker-dealers that are members of NYSE and do business with the public are typically also required to be members of NASD. Historically, NASD has conducted the mutual fund sales practice portions of examinations for firms that are dually registered with it and NYSE. As a result, NYSE generally plays a lesser role in examining broker-dealers for mutual fund sales practices. NASD has established specific rules of conduct for its members that provide, among other things, standards for advertising and sales literature, including filing requirements, review procedures, approval and recordkeeping obligations, and general standards. NASD also tests members to certify their qualifications as registered representatives. SEC evaluates the quality of NASD and NYSE oversight in enforcing their member compliance with federal securities laws through SRO oversight inspections and broker-dealer oversight examinations. SROs are private organizations with statutory responsibility to regulate their own members through the adoption and enforcement of rules of conduct for fair, ethical, and efficient practices. As part of this responsibility, they conduct examinations of the sales practices of their broker-dealer members. SEC’s SRO oversight inspections cover all aspects of an SRO’s compliance, examination, and enforcement programs. The inspections determine whether an SRO is (1) adequately assessing risks and targeting its examinations to address those risks, (2) following its examination procedures and documenting its work, and (3) referring cases to enforcement authorities when appropriate. Under its broker-dealer oversight examinations, SEC examines some of the broker-dealers that SROs recently examined. SEC conducts these examinations to assess the adequacy of the SRO examination programs. In addition to its oversight examinations, SEC conducts cause, special, and surveillance examinations of broker-dealers, but these examinations do not serve to assess the quality of SRO examinations. Since the detection of the mutual fund trading abuses in the summer of 2003, SEC has made significant changes to its traditional examination approach, which generally focused on conducting routine examinations of all funds on an established schedule. To better detect potential violations, SEC has reallocated or plans to reallocate its staff to conducting targeted examinations focusing on specific risks and monitoring larger funds on a continuous basis. SEC’s revised examination approach offers the potential for the agency to more quickly identify emerging risks and better understand the operations of large and complex funds, although it is too soon to reach definitive judgments. However, due to the limited number of SEC’s examination staff relative to the number of mutual funds and advisers for which the agency has oversight responsibility, the decision to focus examination resources on particular areas involved tradeoffs that raise regulatory challenges. In particular, SEC’s capacity to examine lower risk advisers and funds within a reasonable time period and develop industry risk ratings has been limited. Historically, routine examinations of mutual fund complexes—groups or families of funds sharing the same adviser or underwriter—have served as the cornerstone of SEC’s mutual fund oversight, accounting for 85 percent of the total fund examinations done from 1998 through 2003. During that period, SEC generally tried to examine each complex at least once every 5 years. Due to resource constraints, SEC examinations typically focused on discrete areas that staff viewed as representing the highest risks of presenting compliance problems that could harm investors. Major areas of review have included portfolio management, order execution, allocation of trades, and advertising returns. In late 2002, SEC implemented a revised approach to conducting routine examinations that included a systematic process for documenting and assessing risks and controls for managing those risks in a range of areas related to the asset management function. Besides routine examinations, SEC conducts sweep examinations to probe specific activities of a sample of funds identified through tips, complaints, the media, or other information. The agency also conducts cause examinations when it has reason to believe something is wrong at a particular fund. Sweep and cause examinations accounted for about 5 and 10 percent, respectively, of the total examinations done during 1998 through 2003. After the detection of the market timing and late trading abuses in the summer of 2003, SEC officials concluded that the agency’s traditional focus on routine examinations had limitations. In particular, SEC staff said that routine examinations were not the best tool for broadly identifying emerging compliance problems, since funds were selected for examination based largely on the passage of time, not based on their particular risk characteristics. In addition, SEC officials stated that they concluded the growth in the number of mutual fund companies and the breadth of their operations, combined with the need to perform more in-depth examinations of discrete areas, did not allow SEC to maintain its existing routine examination cycle. To focus its resources on issues and funds presenting the greatest risk of having compliance problems that may harm investors, SEC has made significant revisions to its examination priorities and oversight processes as described below: First, SEC is placing a higher priority on sweep and cause examinations and a lower priority on routine examinations. SEC has directed its 10 field offices that conduct fund examinations to give priority to initiating, as warranted, sweep examinations of funds or advisers, focusing particularly on operational or compliance issues. To address the market timing and late trading abuses surfacing in late 2003, SEC shifted resources away from routine examinations to support sweep and cause examinations, according to SEC officials. As a result, sweep and cause examinations accounted for 87 percent of the 690 fund examinations completed in fiscal year 2004. SEC officials said that about 17 percent of these examinations resulted in referrals to the agency’s Division of Enforcement for potential violations of securities laws and regulations. (We note that the large increase in the number of sweep and cause examinations in fiscal year 2004 as well as the number of referrals was likely due to SEC’s focusing a substantial amount of resources on detecting market timing and late trading abuses.) Second, SEC no longer will routinely examine all funds and advisers on a regular basis, but it will conduct routine examinations of funds and advisers perceived to be high risk, once every 2 to 3 years. In addition, SEC will randomly select a sample of advisers and their affiliated funds perceived to be low risk for routine examination each year. Because these firms will be selected randomly, each firm will have an equal chance of being examined each year. According to SEC officials, the random selection process will enable agency staff to project the examination findings to the population of firms deemed low risk and assess the possible existence of problems within the population. Third, SEC plans to provide more continuous and in-depth oversight of the largest mutual funds. Specifically, SEC is creating teams of examiners dedicated to regularly interacting with and closely monitoring and examining the activities of firms in the largest and most complex groups of affiliated advisers and mutual funds. SEC initially plans to form teams under a pilot program to monitor 10 large advisory groups. Any decision to form additional monitoring teams will depend on how the pilot program develops, according to an SEC official. SEC officials said that the monitoring teams are loosely modeled on the federal bank regulators’ use of on-site teams to continuously monitor operations of large banks. However, unlike the bank regulator approach, SEC staff said the monitoring teams would not be located on-site at large mutual fund companies. Fourth, an SEC task force is considering the development of a surveillance program to support the agency’s oversight of all funds and advisers. The purpose of this program is to obtain from firms information that would enable examiners to identify aberrant patterns in fund and adviser activities and the possible existence of fraud or abusive schemes that require follow-up through examinations. In its fiscal 2006 budget request, SEC reported that the agency expects the surveillance system to begin operations during the second half of 2006. Fifth, SEC has promulgated rules that require investment advisers and investment companies to appoint independent chief compliance officers (CCO) who are responsible for ensuring that their companies adopt policies and procedures designed to prevent violations of federal securities laws and regulations. Fund CCOs are also responsible for preparing annual reports that must, among other things, identify any material compliance matter at the company since the date of the last report. SEC staff said that they plan to review such annual compliance reports while conducting examinations to assist in identifying problems at mutual funds and determine whether the funds have taken corrective actions. (As described later in this report, SEC is missing opportunities to take full advantage of CCO compliance reports to detect potential violations in the mutual fund industry.) Finally, SEC has established the Office of Risk Assessment (ORA) to assist the agency in carrying out its overall oversight responsibilities, including mutual fund oversight. ORA’s director reports directly to the SEC Chairman. According to SEC staff, ORA will enable the agency to analyze risk across divisional boundaries, focusing on new or resurgent forms of fraudulent, illegal, or questionable behavior or products. ORA’s duties include (1) gathering and maintaining data on new trends and risks from external experts, domestic and foreign agencies, surveys, focus groups, and other market data; (2) analyzing data to identify and assess new areas of concern across professions, industries, and markets; and (3) preparing assessments of the agency’s risk environment. ORA is to work in coordination with internal risk teams established in each of the agency’s major program areas—including OCIE—and a Risk Management Committee responsible for reviewing implications of identified risks and recommending appropriate courses of action. As we recently reported, the market timing and late trading abuses that surfaced in 2003 revealed weaknesses in SEC’s mutual fund oversight approach. We noted in the report that lessons can be learned from SEC not having detected market timing arrangements at an earlier stage. The key initiatives that SEC is taking to strengthen its mutual fund oversight program are largely intended to focus the agency’s resources on the largest and highest risk funds and activities. Although it is too soon to assess the effectiveness of the initiatives in light of their recent or planned implementation, the initiatives are consistent with some of the lessons learned concerning the importance of (1) conducting independent assessments of the adequacy of controls over areas such as market timing, (2) developing the institutional capability to identify and analyze evidence of potential risks, and (3) ensuring the independence and effectiveness of company compliance staff and potentially using their work to benefit the agency’s oversight program. By placing greater priority on sweep examinations, SEC may be better positioned to independently assess, as needed, the adequacy of fund controls designed to prevent and detect abusive practices. As we reported, SEC staff did not examine mutual funds for market timing abuses before late 2003, because they viewed market timing as a relatively lower risk area since agency staff believed that funds had adequate financial incentives to establish effective controls for it. In that regard, we noted the importance for SEC to conduct independent assessments of controls at a sample of funds, at a minimum, to verify that areas viewed as low risk, such as market timing, are in fact low risk and effective controls are in place. SEC’s revised examination priorities, particularly their emphasis on initiating sweep examinations that focus on operational or compliance issues, may provide the agency with greater opportunity to conduct independent assessments of controls for emerging risks, in part to validate critical assumptions about such risks and confirm the adequacy of controls in place to address those risks. By forming examiner teams dedicated to monitoring the largest and most complex groups of affiliated advisers and funds, SEC may have the opportunity to more efficiently or effectively use its resources and help ensure the independence and effectiveness of the monitored firms’ compliance staff. SEC estimates that the 100 largest advisory groups of affiliate advisers and funds accounted for about $7.1 trillion, or 85 percent, of the fund assets under management as of the end of September 2004. Thus, focusing on the largest advisory groups may enable SEC to attain the greatest dollar coverage with its limited examination resources. Focusing on the largest advisory groups may also be appropriate due to the control deficiencies that have been found at such companies. For example, SEC determined that nearly 50 percent of the 80 largest mutual funds had entered into undisclosed arrangements permitting certain shareholders to engage in market timing that appeared to be inconsistent with the funds’ policies, prospectus disclosures, or fiduciary obligations. In our earlier mutual fund work, we also found that compliance staff at some funds identified market timing but lacked the independence or authority necessary to control it. This finding suggested that routine communications with fund compliance staff could enhance SEC’s capacity to detect potential violations at an earlier stage, if compliance staff are effective and forthcoming about the problems they detect. SEC’s monitoring teams will provide agency staff with the opportunity to be in routine communication with fund compliance staff, including CCOs. Furthermore, such communications, combined with examinations, could help SEC ensure that fund CCOs, as required under SEC’s compliance rules, are in a position of authority to compel others to adhere to applicable compliance policies and procedures. By creating ORA, SEC is laying an important part of the foundation for developing the institutional capability to identify and analyze evidence of potential risks. SEC staff said that ORA will seek to ensure that SEC will have the information necessary to make better, more informed decisions on regulation. Working with other SEC offices, ORA staff expect to identify new technologies, such as data mining systems, that can help agency staff detect and track risks. SEC’s compliance rules create opportunities for ORA to leverage the knowledge of fund CCOs, including their annual compliance reports. Although ORA may help SEC be more proactive and better identify emerging risks, it is too soon to assess its effectiveness. In this regard, we note that as of February 2005, ORA had established an executive team of 5 individuals but still planned to hire an additional 10 staff to assist in carrying out its responsibilities. Finally, SEC’s fund and adviser surveillance system is in the exploratory stage but, if properly designed and implemented, may help the agency to leverage its limited resources to augment its examinations and oversee funds and advisers. Federal bank and other regulators use off-site surveillance programs to complement their on-site examinations. Each federal bank regulator has an off-site surveillance program to monitor the financial condition of banks between examinations. Information from off- site monitoring is used in setting bank examination schedules and determining the allocation of examiner resources for higher risk banks. Similarly, a recently deployed NASD surveillance program is used to analyze trends in broker-dealer activities and identify unusual patterns that indicate potential problems. NASD uses surveillance analyses to initiate cause examinations and to help its examiners focus on high-risk areas during their routine broker-dealers examinations. SEC’s planned changes to its mutual fund examination program offer potential advantages, but they also involve significant tradeoffs that raise important regulatory challenges for the agency. In comparison to federal bank regulators, SEC has significantly less examiners relative to the number of entities it regulates (see fig. 1), although bank and mutual fund regulatory regimes, including their examinations, differ from each other. As reflected in SEC’s revised oversight approach, any decision by SEC to focus additional examination resources on one or more fund areas involves tradeoffs that could result in less oversight of, or create a regulatory gap in, other areas. We are particularly concerned about SEC’s capacity going forward to review the operations of firms considered to be lower risk, conduct risk assessments of the industry, and potentially oversee the hedge fund industry. By shifting examination resources to targeted sweep and cause examinations as well as monitoring teams for larger funds, SEC may be limiting its capacity to examine the operations of funds perceived to pose lower risk (generally smaller funds) within a reasonable period. As stated previously, between 1998 and 2003, SEC generally sought to conduct routine examinations of all funds once every 5 years and shortened the cycle to 2 or 4 years in fiscal year 2004 following an increase in resources. However, under SEC’s revised examination program, some mutual funds may not be examined within a 10-year period. This is because SEC plans to annually review the operations of 10 percent of the funds deemed lower risk on a random basis. While reviewing funds on a random basis means each firm will have an equal chance of being reviewed annually, it is not clear that this approach will have more of an effect in deterring abuses than if each fund was assured of being examined every 5 years or less. Moreover, if SEC lacks sufficient resources to annually examine 10 percent of the funds deemed lower risk, its approach would have less of a deterrent effect. We recognize that through sweep examinations, SEC may review particular facets of funds deemed lower risk much more frequently than every 10 years or more. At the same time, sweep examinations are much more narrowly scoped than routine examinations and may exclude other potential areas of noncompliance at individual firms. Similarly, SEC’s inability to conduct examinations of all mutual funds within a reasonable period may limit its capacity to accurately distinguish relatively higher risk funds from lower risk funds and effectively conduct routine examinations of higher risk funds. Between late 2002 and October 2004, SEC routinely examined 297, or 30 percent, of the existing fund complexes and used its revised examination guidelines to assess the effectiveness of the funds’ compliance controls in deterring and preventing abuses and to assign the funds risk ratings of low, medium, or high. Had SEC not decided in late 2003 and 2004 to shift examination resources to sweep and cause examinations, it might have been able to assign risk ratings to all 982 fund complexes within the following 3 years in accordance with its routine examination cycle. Completing risk ratings for all fund complexes would have provided SEC with an additional basis for allocating resources to the highest risk firms. Over time, SEC’s risk ratings can become outdated, or stale, raising the possibility for funds deemed lower risk to become higher risk. For example, changes in a fund’s management, such as CCO, could lead to changes that weaken the fund’s compliance culture and controls. However, because SEC may not examine all fund complexes within a 10-year period under its revised examination program, its ability to assign risk ratings to all fund complexes and routinely examine all higher risk funds may be limited. In a previous report, we found that SEC may be missing opportunities to obtain useful information about the compliance controls of mutual funds, including those perceived to represent lower risks and may not be examined within a reasonable period of time. While SEC plans to review investment company CCO annual compliance reports during examinations, the agency has not developed a plan to receive and review the reports on an ongoing basis. Obtaining access to such annual reports and reviewing them on an annual basis could provide SEC examiners with insights into the operations of all mutual funds, including those perceived to represent lower risks, and could serve as a basis for initiating examinations to correct potential deficiencies or violations. SEC noted that it is considering how best to utilize the annual reports but noted any required filing of the reports with SEC would require rulemaking by SEC. A final oversight challenge facing SEC’s mutual fund examination program involves a new rule requiring hedge fund advisers to register with the agency. Issued in December 2004, the new rule requires hedge fund advisers to register with SEC as investment advisers by February 2006. The rule is designed, in part, to enhance SEC’s ability to deter or detect fraud by unregistered hedge fund advisers, some of which were involved in the recent mutual fund abuses. Once hedge fund advisers register, SEC will have the authority to examine their activities. The rule is expected to increase SEC’s examination workload, but because of data limitations the precise extent will not be known until hedge fund advisers actually register. Currently, comprehensive information on the number of hedge funds and advisers is not available, but SEC estimates that from 690 to 1,260 additional hedge fund advisers may be required to register under the new rule, increasing the pool of registered advisers by 8 to 15 percent. SEC officials estimate that at least 1,000 hedge fund advisers have previously registered as investment advisers with SEC to meet client needs or requirements. Under its examination program, SEC has examined these hedge fund advisers in the same way it has examined all other registered advisers. According to SEC officials, it is anticipated that the additional hedge fund advisers that register with SEC will be treated the same as all other registered advisers under SEC’s examination program. SEC has recognized that providing oversight of the additional registered hedge fund advisers will pose a resource challenge and has identified options for addressing the challenge. It could require fewer hedge fund advisers to register with SEC by raising the threshold level of assets under management required for adviser registration. It also has the option of seeking additional resources from Congress for the increased workload resulting from an increased number of registered advisers. Whatever approach is ultimately taken, SEC will have to consider the potential resource implications of the new rule for its oversight of mutual funds. SEC has integrated quality controls into its routine examinations but could benefit from additional controls to ensure that policies and procedures are being implemented effectively and consistently throughout SEC field offices. Under its new initiatives, SEC’s routine examinations will continue to be the primary regulatory tool for determining whether all funds and advisers are complying with the federal securities laws. Examination quality controls provide, among other things, assurances that important documents are provided supervisory review, and examinations are conducted according to agency policies, procedures, and individual examination plans. SEC could improve its quality control measures in three areas: supervisory review of risk scorecards, preparation of written examination plans, and review of completed examinations and work papers. Bank and other financial regulators have quality control measures that provide assurances above and beyond those measures used by SEC. The risk scorecards prepared by SEC during each mutual fund examination are critical work papers, providing the basis for determining areas to review in depth and an overall risk rating for a fund. A set of individual scorecards has been developed to assist examiners in assessing and documenting a fund’s compliance controls in 13 strategic areas and to determine the amount of additional testing examiners will do. (See table 1.) If controls in an area are strong, examiners may do limited or no additional testing to detect potential abuses, but if weak, additional testing is expected to be performed. Collectively, the 13 areas reviewed with the set of individual scorecards provides the basis for determining a mutual fund’s overall risk rating, which OCIE uses to determine how frequently the fund will be examined. While the risk scorecards currently cover 13 areas, SEC officials stated that each scorecard serves, in concept, as a model for assessing controls in a particular area of a firm’s activities. As such, SEC staff could create additional scorecards to assist them in their review of areas not covered by existing scorecards or modify existing scorecards not suitable for reviewing the controls used by a firm in a critical area. OCIE and field office officials told us that all applicable risk scorecards generally should be completed during routine examinations, but if there are time constraints due to extenuating factors, all scorecards may not be completed. Even though risk scorecards are important work papers for documenting and assessing fund compliance controls, SEC standards do not expressly require that they receive supervisory review. Current OCIE standards for preparing examination work papers, including scorecards, specify that they should be prepared in an organized manner facilitating supervisory review and examination reporting. The standards do not provide further supervisory review requirements such as who should do the review, how, or when. While the review of scorecards is not expressly required, OCIE headquarters and SEC field office officials stated that supervisors do review scorecards and other examination work papers but typically do not sign or initial them to document that they have been reviewed. In addition, we were told that lead examiners and branch chiefs review work papers throughout the examination process. These officials also review risk scorecards and other work papers when reviewing final examination reports, making sure that all findings are adequately supported and summaries of the scorecard findings included in the examination reports are accurate. After completing their review of examination reports, branch chiefs sign a form to document their review. In contrast to OCIE, federal bank and other regulators have standards requiring supervisors to document that they have reviewed examination work papers. Examples of the work paper standards include: Federal Reserve guidance requires examiners-in-charge or other experienced examiners to review all work papers as soon as practicable and to sign or initial the applicable documents to evidence their review. OCC guidance requires examiners-in-charge or other experienced examiners to sign or initial work paper cover sheets to evidence their review. The guidance allows reviewers to tailor the thoroughness of their review based on the experience of the examiner preparing the work paper. According to NYSE and NFA officials, the organizations require senior staff to review and sign work papers. NFA officials said that their work papers are electronic, so staff mark a checkbox to evidence their work paper review. While SEC officials stated that the review of the scorecards is documented indirectly by the supervisor’s signature on the examination report, without the supervisor’s signature or initials on the scorecards themselves, there is no way to readily verify that the scorecards were reviewed. Our review of 546 scorecards from 66 routine examinations of funds completed in fiscal year 2004 by SEC’s Midwest Regional Office (MRO), Northeast Regional Office (NERO), and Philadelphia District Office (PDO) disclosed a number of deficiencies potentially stemming from quality control weaknesses. Most of the scorecards did not contain evidence of supervisory review as expected, based on statements by SEC officials, but 34 scorecards, or about 6 percent, were signed or initialed as evidence of review. Regardless of whether the completed scorecards were signed or initialed, we found deficiencies in four areas that raise questions about the adequacy or completeness of supervisory review. First, each scorecard should be marked as to whether examiners rated the compliance controls in the area as highly effective, effective, or ineffective. We found 32, or about 6 percent, of the total scorecards where the control rating was not marked. Second, copies of scorecards should be included with the work papers to facilitate supervisory review, but we found 11, or about 17 percent, of the 66 examinations lacked any scorecards and 15, or about 23 percent, were missing one or more scorecards. Third, documentary evidence should be cited on scorecards to support effective and highly effective ratings, but we found 25, or about 5 percent, of the total scorecards did not cite documentary evidence supporting such ratings. Fourth, scorecard ratings are included in examination reports, but we found the ratings marked on 21, or about 4 percent, of the total scorecards had ratings that differed from the ones in the examination reports. SEC supervisors document their review of examination reports, which include a summary of the risk scorecard findings. Nonetheless, without documenting that the scorecards themselves were reviewed, SEC does not know if deficiencies resulted from a lack of or inadequate supervisory review. The systematic supervisory review of work papers, particularly risk scorecards, is essential for ensuring examination quality. Such reviews help to ensure that the work is adequate and complete to support the assessment of fund compliance controls as well as report findings and conclusions. Likewise, documentation of the review is important to ensure that all critical areas are reviewed. The reviewer’s initials or signature are written verification that a specific employee checked the work. Written examination plans that document the scope and objectives of routine examinations are not required by OCIE. Instead, OCIE officials stated that written examination plans are optional. OCIE allows branch chiefs and lead examiners to decide whether to prepare written plans, with branch chiefs typically meeting with examination teams to discuss the preliminary scope of examinations. Each routine examination is somewhat different because of the risk-based approach used by OCIE. Under this approach, all areas of compliance or fund business activities are not reviewed and instead review areas are judgmentally selected based on their degree of risk to shareholders. As a result, each examination is customized to the activities of the particular fund under examination, with the success of routine examinations depending, in part, on proper planning. The documentation of this planning is important for tracking agreements reached on examination scope and objectives and can be used as a guide for the examination team. Furthermore, the plan can be used to determine whether the examination was completed in accordance with the planned scope. According to OCIE officials, written plans may be helpful in planning examinations of large fund complexes, but many of the examinations conducted are of small firms that have five or fewer employees. For these small firms, the officials said that it may not be necessary to prepare a written examination plan, especially if the examination team conducting the work consists of one or two persons. While OCIE does not require the preparation of written examination plans, we found that SEC’s NERO requires examiners to prepare a planning memorandum to document examination scope and objectives, including firms to be examined within a fund complex, areas considered high risk, and areas to be reviewed. NERO branch chiefs approve the memorandums before the on-site work begins, and the memorandums effectively serve as examination plans. In contrast, SEC’s MRO and PDO do not require planning memorandums or examination plans. Instead, branch chiefs in these two offices meet with the examination teams to discuss the scope of examinations and then let the staff decide whether to prepare a written plan, according to MRO and PDO officials. MRO officials said that some branch chiefs will recommend that for large funds, teams prepare written examination plans since it helps coordinate the work. For 66 routine examinations we reviewed at these three offices, about half, or 53 percent, had written planning memorandums or examination plans. Examinations of the larger fund complexes that were managing more than $1 billion in assets also had examination plans for about half, or 54 percent. In contrast to OCIE, federal bank and other regulators require their staff to prepare written examination plans before conducting examinations. Examples of examination plan requirements include: FDIC guidance requires the examiner-in-charge to prepare a scope memorandum to document, among other things, the preliminary examination scope; areas to be reviewed, including the reasons why; and areas not to be included in the examination scope, including the reasons why. Federal Reserve guidance requires that a comprehensive risk-focused supervisory plan be prepared annually for each banking organization. The guidance also requires the examiner-in-charge, before going on-site, to prepare a scope memorandum to document, among other things, the objectives of the examination and activities and risks to be evaluated; level of reliance on internal risk management systems and internal and external audit findings; and the procedures that are to be performed. To ensure consistency, the guidance requires the scope memorandum to be reviewed and approved by Reserve Bank management. OCC guidance requires the examiner-in-charge or portfolio manager to develop and document a supervisory strategy for the bank that integrates all examination areas and is tailored to the bank’s complexity and risk profile. The strategy includes an estimate of resources that will be needed to effectively supervise the bank and outlines the specific strategy and examination activities that are planned for that supervisory cycle. The strategies are reviewed and approved by the examiner-in- charge’s or portfolio manager’s supervisor. NYSE and NFA officials told us that staff are required to prepare written examination or audit plans. NYSE officials said that staff meet with examination directors to reach agreement on the scope of their examination plans. NFA officials said that staff complete a planning module that includes a series of questions that staff answer to determine the scope of the audit, and the completed planning module serves as the audit plan. Examination planning meetings between SEC branch chiefs and examination teams are important for providing the opportunity to discuss and reach decisions about critical areas of examination scope and objectives. These discussions by themselves, however, do not provide a record of the agreements reached and may not result in a clear and complete understanding for examiners about the scope and objectives of a particular examination. A written examination plan would provide such a record—potentially enabling branch chiefs to better supervise examinations and assisting lead examiners to better communicate the examination strategy to the examination team. Such quality control is especially important given that staff must exercise considerable judgment for examination scope under SEC’s risk-based approach. SEC uses several methods to ensure the quality of its examinations but does not review completed examinations and work papers as done by other regulators to determine whether the examinations were conducted according to procedures or done consistently across field offices. OCIE has issued various policies and procedures to promote examination quality and consistency across the 10 SEC field offices that conduct the majority of its examinations. To help ensure that these policies and procedures are followed, SEC relies on experienced supervisors in its field offices to oversee all stages of routine examinations. Specifically, branch chiefs meet with examination staff to discuss the preliminary scope of examinations, advise staff during the fieldwork, and review all examination reports. Assistant directors in SEC field offices also assist in overseeing examinations and review all examination reports. Also, associate directors and regional or district administrators in SEC field offices may review examination reports. In addition, SEC field offices send each report and deficiency letter, if any, to an OCIE liaison, who reviews them. Finally, OCIE annually evaluates each field office examination program based on factors such as the overall quality of the office’s examination selection and findings; new initiatives and special projects; use of novel or effective risk assessment approaches; and overall productivity, including achievement of numerical examination goals. In contrast to OCIE, we were told that federal bank and other regulators have quality assurance programs that include reviews of completed examinations or other activities. Examples of such reviews include: FDIC guidance states that the agency reviews each regional office’s compliance examination program every 2 years, in part, to evaluate the consistency of supervision across the regions and compliance with policies and procedures. According to the guidance, evaluations include a review of examination reports and work papers. Federal Reserve officials said that the agency conducts on-site operations reviews of the banking supervision function of individual Reserve Banks at least every 3 years. The review targets each Reserve Bank’s risk-focused supervision program and includes a review of a sample of examination reports, work papers, and other supporting documentation. It also encompasses the bank’s ongoing quality management function, or the processes, procedures, and activities the bank uses to ensure that examination reports and related documents are of high quality and comply with established policy. OCC officials told us that the agency reviews its large bank examination program, including specific examination procedures. It conducts reviews to determine whether lead examiners are supervising banks according to plans. It also assesses specific examination procedures across samples of banks. Agency officials said that teams periodically review how examiners are conducting certain procedures to ensure that they are being implemented consistently throughout all field offices. NASD conducts quality and peer reviews to improve the quality, consistency, and effectiveness of its examination program. Under quality reviews, each NASD district office annually evaluates its performance in two or three areas. Under peer reviews, staff go on-site to district offices to evaluate particular program areas. NFA officials told us that the organization randomly selects completed audits for review on a quarterly basis and, as part of the review, supervisory teams review work papers to determine whether the audits complied with established policies and procedures. While OCIE staff evaluate all completed examinations by reviewing the final examination report, they do not review a sample of completed examinations and work papers to periodically assess examination quality and consistency across SEC’s field offices. SEC officials stated that after- the-fact reviews of underlying work papers may not be a cost-effective use of resources, given that key findings and evidentiary materials should be discussed and described in the examination report itself, which is reviewed by OCIE staff. Further, it would be difficult to second-guess decisions made by examiners when on-site, since reviewers would not have access to the same information. Finally, agency officials said that OCIE resources are limited, and time spent reviewing completed examination work papers would result in less time spent on conducting examinations. While reviewing completed examination work papers involves resource tradeoffs, it may yield important benefits. OCIE may be able to better determine whether its examiners are complying with established policies and procedures and whether its built-in quality controls are working. A review of underlying work papers also may allow OCIE to better assess the consistency of examination quality within and across SEC’s field offices as well as the extent to which existing quality controls are helping to ensure that quality is maintained. According to SEC officials, the agency is implementing a computer-based document management system. Under this system, it is anticipated that most, if not all, of the work papers created during examinations will be converted into electronic files, and these files will be maintained in a consistent manner online for a number of years. SEC officials said that when the system is fully operational, estimated to be some time in 2006, all work papers created during an examination will be available electronically to OCIE staff. At that point, OCIE liaisons could review electronic examination work papers on a sample basis in conjunction with their review of examination reports. In addition, electronic work papers would eliminate the need to be on-site to review underlying examination documentation and work papers across SEC’s examination program. Importantly, deficiencies we found during our review of risk scorecards highlight the need for OCIE to periodically assess the consistency of examination staff’s use of scorecards and other steps being taken during examinations. While the requirement to complete risk scorecards became effective in October 2002, SEC has not yet evaluated, for instance, whether the risk scorecards are being completed according to the guidance provided, whether changes to the design of the scorecards are needed, and whether additional guidance or training is needed. In March 2003, OCIE provided one training course on the scorecards, which was attended by 98 examiners, or about 20 percent of the SEC examiners devoted to fund and adviser examinations. According to SEC officials, two senior OCIE staff visited each field office during the spring and summer of 2003 and provided a full day of training on the scorecards to all examination staff. Nevertheless, the scorecard deficiencies we found during our review may indicate that additional training is needed. In addition, the scorecards may have design weaknesses that result in inconsistencies across SEC field offices. For example, field office officials stated that scorecards are designed for investment companies organized as mutual funds and do not readily apply to investment companies organized as unit investment trusts. NERO examiners did not complete scorecards for unit investment trusts, but MRO examiners did by modifying the scorecards as needed. Similarly, SEC field office officials stated that while the scorecards are designed to cover a broad range of fund compliance controls, fund controls for detecting and preventing market timing do not fall squarely under any of the 13 areas covered by the scorecards. As a result, staff have used work papers other than the risk scorecards to document their assessment of market timing controls. SEC officials said that the scorecards are models created to assist examiners in assessing fund controls. As such, scorecards are not intended to exist necessarily for every conceivable control and examiners have the flexibility to modify the scorecards as necessary. Moreover, the officials said that some inconsistencies in the preparation of risk scorecards are expected because not all funds and advisers are the same. In that regard, SEC officials told us that the approach taken by MRO staff in modifying a scorecard to fit the circumstances of an examination appears to be consistent with the approach to scorecard use expected by OCIE. To assess SRO oversight of broker-dealers, including their mutual fund sales practices, SEC conducts examinations of broker-dealers shortly after they have been examined by SROs. However, these SEC broker-dealer examinations, which involve a significant commitment of agency examination resources, provide limited information on the adequacy of SRO oversight and impose duplicative regulatory costs on the securities industry. SEC and SROs’ broker-dealer examinations often cover different time periods, and generally employ different sampling methodologies and use different examination guidelines. Consequently, SEC cannot reliably determine whether its examination findings are due to weaknesses in SRO examination procedures or some other factor. Another deficiency we found regarding SEC’s SRO oversight of broker-dealer mutual fund sales practices is that the agency does not have automated information on the full scope of areas reviewed during its broker-dealer oversight examinations and, therefore, cannot readily and reliably track useful examination information. SEC performs two types of activities to review the quality of SRO oversight of broker-dealers, including their sales of mutual funds. First, SEC conducts inspections of NASD and NYSE on a 3-year cycle that cover various aspects of their compliance, examination, and enforcement programs. These SRO oversight inspections are designed to determine whether an SRO is (1) adequately assessing risks and targeting its examinations to address those risks, (2) following its examination procedures and documenting its work, and (3) referring cases to enforcement authorities when appropriate. When conducting these inspections, SEC reviews a sample of the SRO’s examination reports and work papers to identify problems in examination scope or methods. As a result of these inspections, SEC has identified deficiencies in SRO examinations, including ones related to the SROs’ examinations of mutual fund sales practices, and communicated those to the SRO to remedy the problem. Second, SEC conducts broker-dealer oversight examinations, during which it examines some broker-dealers from 6 to 12 months after an SRO examines the firms. The purpose of broker-dealer oversight examinations is to help the SROs improve their examination programs by identifying violations that the SROs did not find and also by assisting them in evaluating improvements in how SRO examiners perform their work. SEC officials told us that a secondary goal of these examinations is to supplement the SROs’ enforcement of broker-dealer compliance with federal securities laws and regulations. SEC’s broker-dealer oversight examinations involve a significant commitment of agency resources and expose firms to duplicative examinations and costs. In addition to conducting broker-dealer examinations for the purposes of assessing SRO oversight (including for mutual fund sales practices), SEC conducts cause, special, and surveillance examinations of broker-dealers to directly assess broker-dealer compliance with federal securities laws and regulations, including those related to mutual fund sales. SEC currently has an internal goal of having oversight examinations account for 40 percent of all broker-dealer examinations each year. In 2004, 250, or 34 percent, of its 736 broker-dealer examinations were oversight examinations. Broker-dealers that are subject to similar SEC and SRO examinations that may take place within a 6 to 12 month period incur the costs associated with assigning staff to respond to examiner inquiries and to make available relevant records as requested. Although SEC broker-dealer oversight examinations involve a significant commitment of agency examination resources and impose costs on securities firms, our past work questioned their cost-effectiveness. In a 1991 report, we found that the way SEC conducted oversight examinations of broker-dealers provided limited information to help SROs improve the quality of their broker-dealer examination programs. Specifically, during its oversight examinations of broker-dealers, SEC often found violations not identified by SROs and frequently could not attribute the violations it found to weaknesses in SRO examination programs. Because SEC and SROs used different examination procedures or covered different time periods of broker-dealer activity, SEC examiners often could not determine whether the violations they found resulted from the improper implementation of procedures by SRO examiners or differences between the procedures used or the activity period covered. We previously recommended that SEC directly test SRO examination methods and results. However, based on its efforts to replicate some examinations conducted by SROs, the agency concluded that this was unproductive because it only confirmed findings identified by SROs during their examinations. Our current review has shown that despite our 1991 findings, SEC continues to conduct oversight examinations in a similar manner—by using different examination guidelines and time periods. First, SEC continues to review firm activities during the time between the completion of the SRO examination and its own examination. Next, when SEC is reviewing a firm’s transactions or customer accounts to identify potential abuses, it generally does not duplicate the sampling technique used by the SRO, but instead selects its own sample of transactions or customer accounts based on its own procedures. Finally, SEC examiners ask different questions to identify potential abuses. For example, although SEC and NASD both direct their examiners to ask questions to assess potential weaknesses in a firm’s internal controls to prevent market timing and late trading, their procedures call for examiners to ask about different potential internal control weaknesses. According to SEC officials, its examiners do not use the same procedures as SROs because using different procedures allows them to find violations that would not otherwise be found if they just duplicated the SRO procedures. Also, SEC officials stated that SEC has an obligation to review the broker-dealer’s activities at the time of the SEC examination to ensure compliance with securities laws at that time. However, as a result, SEC often cannot determine the specific reason why the SRO did not find the violations, limiting its ability to suggest improvements to SRO programs. SEC routinely provides SROs copies of deficiency letters it sends to broker- dealers as a result of oversight examinations. These deficiency letters sometimes include oversight comments that include steps the SRO can take to enhance its program. SRO officials stated they can often identify the reasons why SEC found the violations, but in many cases the reason is due to SEC’s use of different procedures, such as different review periods or samples. Consequently, SEC often cannot attribute a violation it finds to a problem with the SRO’s examination program. SEC officials said in some cases when SEC identifies a violation, it is able to determine whether the violation was occurring at the time of the original examination and should have been detected by the SRO. For example, in some cases when SEC finds an error in a broker-dealer’s net capital calculation, it is able to trace the error to previous calculations and determine whether it existed during the SRO examination. Even in cases when SEC can attribute a violation it found to a weakness in the SRO examination, it does not track this information in its automated examination tracking system and, as a result, cannot use it to identify trends in SRO problems it discovered during oversight examinations. SEC officials stated that they have a staff committee conducting a comprehensive review of oversight examination procedures and plan to add a feature to SEC’s examination tracking system to allow it to more systematically track identified weaknesses in SROs’ examination programs. Although SEC’s oversight examinations continue to find violations at broker-dealers and, thus, provide investor protection benefits, the violations provide limited information for assessing the quality of the SRO program. This information is particularly important given that the number of violations that SEC has found during its oversight examinations and determined as not found by NASD has increased in recent years. As shown in figure 2, the number of these violations that SEC found but has categorized as not found by NASD more than doubled between fiscal years 2002 and 2004. Despite this significant increase, SEC officials could not explain why the number of these violations increased but stated that the increase did not necessarily represent a decrease in the quality of NASD’s examination program. They said some of the increase is due to a significant increase in the number of rules applicable to broker-dealers. SEC officials told us that SRO officials have noted, and they agree, that the number of these violations, alone, is not always an appropriate measure of the quality of SRO examination programs. Accordingly, SEC officials told us that the agency recently began tracking findings deemed to be significant to allow it to better assess the materiality of an increase in the number of missed violations. If SEC had tested NASD’s examination methods or better tracked the reasons why NASD did not find a violation, SEC would have more information to assess the quality of NASD’s examination program. Another deficiency we found regarding SEC’s SRO oversight is that the agency cannot readily and reliably track key examination information. In assessing the quality of SEC’s oversight of broker-dealer sales of mutual funds, we asked SEC to provide data on which of its broker-dealer oversight examinations in recent years included reviews of mutual fund sales practices. The data would help determine the extent that SEC has reviewed mutual fund sales practices. SEC was not able to provide this information because it does not have automated information on the full scope of areas reviewed during its broker-dealer oversight examinations. SEC maintains a broad range of automated information about its examinations in its Super Tracking and Reporting System (STARS), including basic information about the firm, SEC staff assigned to conduct the examination, and the deficiencies and violations found during the examination. STARS identifies examinations that reviewed specific areas of special interest to SEC, called “focus areas,” as identified by senior SEC staff in headquarters, and new areas are added in part based on the emergence of new abuses. For example, SEC added breakpoints as a focus area in January 2003 and market timing and late trading in 2004. Although focus area designations provide useful information about how often SEC reviews some areas, focus areas do not cover all areas potentially reviewed by SEC during its examinations. Without methodically tracking the full scope of work performed during oversight examinations, SEC lacks information for determining how effective its oversight is in two important areas. First, because SEC does not know how often it has reviewed particular areas such as mutual fund sales practices during its oversight examinations, it cannot ensure that it has adequately reviewed all areas it considers important. When SEC reviews particular areas, its examiners generally refer to a set of written procedures, known as examination modules that provide information to guide examiners’ work. STARS does not include data fields to track whether staff use the module on mutual funds during an examination. Therefore, the extent of coverage of mutual funds is unknown. As a result, SEC officials could not determine how many of the approximately 1,400 broker-dealer oversight examinations conducted between 2000 and 2004 included a review of mutual fund sales practices. SEC officials stated that they have a separate database containing examination reports that can be electronically searched to identify relevant examinations containing a search term such as “mutual fund,” which would yield an estimate of the number of examinations that reviewed broker-dealer mutual fund sales practices. However, according to an official, not all examinations covering mutual fund sales practices would be captured because some examination reports that included reviews of mutual fund sales practices would not necessarily include any mention of mutual funds, especially if SEC identified no deficiencies or violations in that area. In contrast to SEC, both NASD and NYSE have systems with capability to track the full scope of examinations including the use of mutual fund and other examination modules. For NASD, some of its offices are able to track which of its broker-dealer examinations were followed by an SEC oversight examination. At 8 of its 15 district offices, which account for 55 percent of its examinations, NASD tracked this information and SEC conducted oversight examinations of approximately 5 percent of the 2,602 NASD examinations conducted between January 1999 and August 2004 that reviewed mutual fund sales practices. The remaining seven offices were not able to track this information because, according to an NASD official, the SEC field office conducting oversight examinations did not always provide a letter informing them that an oversight examination was conducted. With mutual fund sales practices being a regulatory priority, the percentage of SEC examinations reviewing these practices would be a useful measure for ensuring that the agency is addressing this priority. Second, because SEC does not track the full scope of work performed during its oversight examinations, it is limited in its ability to assess the significance of deficiencies and violations it finds. Because SEC does not know how often it has reviewed a particular area, the data it tracks on the number of deficiencies and violations it finds in a particular area are less meaningful. For example, it would be less significant if SEC found violations in a particular area during 5 out of 100 examinations as opposed to finding violations during 5 out of 5 examinations during which it reviewed the area. Without knowing the full scope of each oversight examination and therefore the number of times a particular area was reviewed, data tracked by SEC on the number of deficiencies and violations it finds are less meaningful. In addition to conducting broker-dealer oversight examinations to evaluate the adequacy of SRO activities, SEC conducts other types of examinations, including cause and sweep examinations, which are designed to directly assess broker-dealer compliance with the law. SEC tracks the number of firms it targets during its examination sweeps along with the number of violations and deficiencies it finds. SEC officials told us that the agency tracks the number of findings from these examinations as a percentage of the number of firms examined, and that tracking such information helps SEC assess the prevalence of the findings relative to the number of firms. However, without tracking the scope of work performed during its oversight examinations, SEC is unable to make similar assessments about the prevalence of violations and deficiencies identified during those reviews. Appendix II provides information you requested about (1) how SEC, NASD, and NYSE share information, including written examination guidance, related to their review of mutual fund sales practices and other examination priorities; (2) how SEC distributes and stores examination guidance for use by its broker-dealer examiners; and (3) what training SEC has provided to broker-dealer examiners on mutual funds and other topics and how it tracks and assesses such training. In the wake of the market timing and late trading abuses, SEC staff implemented significant changes to the agency’s mutual fund examination program in the view that doing so would help ensure the earlier detection and correction of violations. These changes—including conducting additional sweep examinations and continuously monitoring large companies—reflect a practical approach designed to focus SEC’s limited resources on higher risk funds and activities and have the potential to strengthen SEC’s oversight practices in certain regards. Nonetheless, the changes also involve tradeoffs, such as limiting the agency’s capacity to review funds perceived to be lower risk and conduct risk assessments of all funds in a timely manner. Moreover, SEC’s capacity to effectively monitor the hedge fund industry is open to question, given the tradeoffs that the agency has had to make in overseeing the mutual fund industry. While we recognize that SEC at some point may need to request additional resources from Congress to carryout its mutual fund and other oversight responsibilities, such requests should only occur after the agency has explored and achieved all available efficiencies within its existing resource limitations. Whether SEC’s utilization of resources under its revised examination program will provide effective oversight remains to be seen. Future adjustments by SEC to resources devoted to various oversight activities, such as sweep examinations and randomly selected lower risk fund examinations, are likely to occur as the agency gains experience through conducting these oversight activities and changing conditions in the mutual fund industry. However, SEC has had extensive experience with its broker-dealer oversight examinations, and the effectiveness of these examinations for improving the quality of SRO oversight remains unclear. This situation raises concern, particularly in light of the significant level of resources devoted to oversight examinations and the resource challenges faced by SEC’s fund and adviser examination program. We also identified basic weaknesses in SEC’s approaches to conducting mutual fund and broker-dealer examinations. For mutual fund examinations, SEC does not require staff to document their examination plans to facilitate supervisory review. Second, SEC has issued work paper standards but lacks guidance on their supervisory review. Moreover, despite the importance of risk scorecards in determining the depth of work done during examinations, SEC has not yet assessed whether they are prepared according to standards since implementing the scorecards in 2002. For broker-dealer examinations, SEC has not developed an automated system to track the full scope of work completed during examinations and therefore lacks useful information about SRO oversight. Without addressing these deficiencies, SEC’s capacity to effectively oversee the mutual fund industry and SROs is reduced. To improve SEC’s oversight of mutual funds and SRO oversight of broker- dealers that sell mutual funds, we are making four recommendations to the SEC Chairman. First, we recommend that SEC periodically assess the level of resources allocated to the various types of examinations in light of their regulatory benefits to help ensure that the agency is using its resources efficiently and effectively to oversee the mutual fund industry, including broker-dealers that offer mutual funds. As part of this assessment, SEC should seek to ensure that it allocates sufficient resources to mitigate any regulatory gaps that may currently exist concerning the timely examination of mutual funds perceived to represent lower risk, complete mutual fund risk assessments within a more reasonable period, and fulfill its new oversight responsibilities for the hedge fund industry. Second, in so doing, we recommend that the agency assess its methodology for conducting broker-dealer oversight examinations and whether some portion of the resources currently devoted to these examinations could be better utilized to perform mutual fund examinations. Third, to strengthen SEC’s approach to mutual fund examinations, we recommend that SEC establish a policy or procedure for supervisory review of work papers prepared during routine examinations and for documenting such reviews; establish a policy or procedure for preparing a written plan for each routine examination, documenting at a minimum the preliminary objectives and scope of the examination; and consider reviewing on a sample basis completed routine examinations and work papers to assess the quality and consistency of work within and across the field offices conducting examinations. Fourth, to assess and improve the effectiveness of SEC’s oversight of SRO broker-dealer examination programs, we recommend that the Chairman, SEC, electronically track information about the full scope of work performed during broker-dealer oversight examinations, including all major areas reviewed, to determine whether areas are receiving adequate review and to more fully assess the significance of deficiencies and violations found. SEC provided written comments on a draft of this report, which are reprinted in appendix III. SEC also provided technical comments that we incorporated into the final report, as appropriate. SEC focused most of its comments on providing further elaboration on the potential benefits of its examination strategy for overseeing mutual funds and investment advisers and on the benefits obtained from its broker-dealer oversight examinations. In addition, SEC briefly commented that it will consider our recommendation directed at improving its quality controls for routine fund examinations and that it has formed a working group to explore ways to enhance the value of its broker-dealer oversight examinations, including their ability to identify the reasons that violations may have been missed by SRO examinations. First, SEC stated that it is not possible for the agency to conduct timely, comprehensive routine examinations of every mutual fund and adviser, given the size of the industry and agency resources. Further, it expects its risk-targeted examinations to provide an effective means of addressing risks in the securities industry. Specifically, it believes that looking at the same type of risk at a number of different firms is a better approach than examining a single firm in depth. According to SEC, this approach will provide benefits by promptly identifying emerging trends and compliance problems, and individual firms can be compared to their industry peers. The agency believes this approach has already yielded benefits in identifying and addressing significant compliance problems before becoming major crises. In addition, SEC stated that the program it is developing to randomly select a sample of lower risk firms for routine examination will address our concern that such firms may not be given sufficient attention under its revised oversight strategy. According to SEC, this approach will provide a deterrent effect, enable the agency to test assumptions and techniques used throughout its examination program, and allow the agency to draw inferences about compliance in the adviser community, based on statistically valid sampling techniques. We recognize that SEC’s revised examination strategy for mutual funds and advisers offers potential benefits, including focusing its limited resources on firms and activities that are perceived to pose higher risks. Nonetheless, we continue to be concerned about SEC’s ability to examine all mutual funds within a reasonable period and accurately assess the relative risk of each fund on a timely basis. Unlike broker-dealers, mutual funds are regulated and examined solely by SEC. Under SEC’s current plans to randomly sample 10 percent of the firms perceived to be lower risk for routine examination each year, it is possible that up to a third of the total number of firms would not be selected for examination within a 10-year period. We believe that this is a lengthy time period for firms to conduct business without being examined. Similarly, SEC’s inability to conduct examinations of all mutual funds within a reasonable period will limit its capacity to accurately distinguish relatively higher risk funds from lower risk funds and effectively target its limited examination resources on those funds posing the highest risks. Therefore, we continue to believe that, as recommended, SEC should periodically assess the level of resources allocated to its various types of examinations and in so doing ensure that it allocates sufficient resources to mitigate any regulatory gaps that currently exist in the timely examination of funds perceived to represent lower risks and to ensure that it completes mutual fund risk assessments within a more reasonable time period. Second, SEC stated that its broker-dealer oversight examinations provide quality control over SRO examinations and serve other important goals. For example, SEC stated that oversight examinations allow it to detect violations that otherwise might not be detected, conduct routine examinations of new products or services, and test and validate assumptions and techniques used throughout the broker-dealer examination program. In addition, SEC expressed concern about our suggestion that it should reproduce SRO examinations if its oversight examinations are to provide accurate quality control information. SEC stated that this suggested approach would result in redundancies for broker-dealers being examined and limit the agency’s ability to reach conclusions about SRO examination programs. By conducting its examinations as independent compliance reviews, SEC stated that it can assess whether SRO procedures were followed and whether SRO procedures need to be modified or enhanced. The agency stated that through its oversight program it has identified SRO procedures that need to be modified or enhanced and its examiners meet regularly with SRO examiners to review the results of oversight examinations. Finally, SEC commented that it has formed a working group to explore ways to gain additional value from its broker-dealer oversight examinations, such as by better identifying the reasons that a violation may not have been detected by an SRO examination, aiding the SRO in improving its program, and minimizing burden on the firm examined. We recognize that SEC’s oversight examinations serve more than one goal and provide investor protection benefits. While such examinations serve a variety of purposes, one of their primary purposes is to assess the quality of SRO examinations. In fulfilling this purpose, we remain concerned that SEC’s approach provides limited ability to identify the reasons why an SRO did not find violations that SEC found and, in turn, provide suggestions for improving SRO examinations. SEC is responsible for overseeing SROs that examine broker-dealers on a regular basis, and it conducts oversight examinations of only a small percentage of the total number of broker- dealers. Thus, it is critical for SEC to ensure that SROs conduct effective examinations. As discussed, SEC has formed a working group to evaluate its oversight examinations. We believe this is a step in the right direction and also provides the agency with the opportunity to evaluate its approach and level of resources devoted to broker-dealer oversight examinations. Finally, regarding our recommendation that SEC strengthen three aspects of its quality control framework for routine fund examinations, the agency stated it will fully consider the recommendation. Specifically, in 2006, the agency plans to deploy an electronic system for work papers. In preparation for this effort, it plans to review how new technology can be used to improve the quality of examinations and it will consider our recommendation in its review. While SEC did not directly comment on our recommendation that it electronically track information about the full scope of work performed during its broker-dealer oversight examinations, we believe that this would provide SEC important information to determine whether areas are receiving adequate review and the relative significance of violations found in each area. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will provide copies of this report to the Chairman of the House Committee on Financial Services; the Chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, House Committee on Financial Services; and the Chairman and Ranking Minority Member of the Senate Committee on Banking, Housing, and Urban Affairs. We also will provide copies of the report to SEC, FDIC, the Federal Reserve Board of Governors, NASD, NYSE, and OCC and will make copies available to others upon request. In addition, the report will be available at no cost on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or hillmanr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To identify and assess the changes SEC has made to or is planning for its mutual fund examination program, we reviewed SEC testimony, speeches, reports, and other documents related to the agency’s mutual fund examination program. We also reviewed federal securities laws and regulations applicable to mutual funds and analyzed SEC data on the number, types, and results of its fund and adviser examinations. We also interviewed officials from SEC’s Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Office of Risk Assessment and representatives from the Investment Company Institute to obtain information on the significance of planned changes. In addition, we interviewed federal bank regulatory officials from the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System, and Office of the Comptroller of the Currency (OCC) and self-regulatory organization (SRO) officials from NASD, the New York Stock Exchange (NYSE), and the National Futures Association (NFA) to discuss their examination programs and supervisory tools. To assess key aspects of the quality control framework of SEC’s routine mutual fund examinations, we reviewed policies, procedures, and other guidance applicable to those examinations. We also reviewed routine fund examinations completed in fiscal year 2004 by SEC’s Midwest Regional Office (MRO), Northeast Regional Office (NERO), and Philadelphia District Office (PDO). We selected these field offices because they were the three largest in the number of completed routine fund examinations in fiscal year 2004. The three offices completed 66 routine fund examinations, accounting for about 72 percent of all routine fund examinations completed in fiscal year 2004. Where appropriate, we also reviewed examinations of advisers to the funds we reviewed. We used a standardized data collection instrument to document the methods examiners used to conduct examinations and areas examiners reviewed during examinations. In addition, we interviewed officials from OCIE and three SEC field offices—MRO, NERO, and PDO—about their examination policies and procedures and representatives from a mutual fund company and consulting firm about fund examinations. To gather information and compare SEC examinations with those of other regulators, we interviewed officials from FDIC, the Board of Governors of the Federal Reserve System, OCC, NYSE, and NFA about their quality controls and reviewed some of their quality control policies and procedures. To determine the adequacy of SEC’s oversight of NASD and NYSE in protecting shareholders from mutual fund sales practice abuses, we reviewed SEC policies, procedures, and other guidance related to its broker-dealer oversight examinations and inspections and interviewed officials from SEC’s OCIE and Boston District Office, NASD, and NYSE. We also reviewed judgmentally selected SEC broker-dealer oversight examinations conducted by SEC’s Boston District Office in 2003 and 2004, and reviewed all reports of SRO inspections conducted of NASD and NYSE between 2001 and 2003. To gather information on SEC’s automated tracking system, Super Tracking and Reporting System, we interviewed SEC staff responsible for the system in headquarters and received an overview of the system and its capabilities at the Boston District Office. In addition, we reviewed reports generated from the system and training documents for the system. To help assess the extent to which SEC, NASD, and NYSE have shared written guidance, we compared and contrasted the examination modules they used to examine for certain mutual fund sales practice abuses. As part of our assessment of the training received by broker-dealer examiners, we obtained and analyzed SEC’s training attendance rosters and list of examiners employed by SEC since 1999. To ensure that data provided about the number, nature, and results of examinations conducted by SEC, NASD, and NYSE were reliable, we reviewed written materials describing these systems and reviewed the data provided to check for missing or inaccurate entries. We also interviewed agency staff responsible for maintaining the information systems that track such data. We determined that the data were sufficiently reliable for use in this report. We performed our work in Boston, Massachusetts; Chicago, Illinois; New York, New York; Philadelphia, Pennsylvania; and Washington, D.C. We conducted our work between February 2004 and July 2005 in accordance with generally accepted government auditing standards. You asked us to provide information about aspects of SEC’s oversight of the broker-dealer industry, including (1) how SEC, NASD, and the New York Stock Exchange (NYSE) share information, including written examination guidance, related to their review of mutual fund sales practices and other examination priorities; (2) how SEC distributes and stores examination guidance for use by its broker-dealer examiners; and (3) what training SEC has provided to its broker-dealer examiners on mutual funds and other topics, and how it tracks and assesses such training. SEC, NASD, and NYSE have developed guidance for examiners to use in assessing compliance by broker-dealers with mutual fund sales practice rules. Each regulator has developed its own examination module, or set of procedures, covering various topics related to mutual fund sales. Moreover, all three regulators recently revised their modules to include procedures to detect market timing and late trading abuses. In addition, the regulators periodically have provided their staff with other written guidance related to mutual fund sales. For example, SEC issued internal memorandums in 1997 and 2001 to inform staff about abuses related to breakpoints and other mutual fund sales practices and provide them with procedures for detecting such abuses. Through its oversight role, SEC reviews aspects of the self-regulatory organization (SRO) examination modules, including the mutual fund sales practice module. First, SEC officials told us that NYSE and NASD e-mail SEC copies of their examination modules when they make material changes to them. Second, during SEC’s on-site inspections of SRO examination programs, staff generally review SRO examination modules in connection with their review of completed SRO broker-dealer examinations and work papers. Third, as part of their broker-dealer oversight examinations, SEC staff generally review the SRO broker-dealer examinations and applicable examination modules before going on-site to conduct examinations of such broker-dealers. SEC and the SRO officials meet at least semiannually to discuss significant examination findings, customer complaints, trends in the industry, enforcement cases, and examination guidance. SEC officials told us that agency staff have met with NASD and NYSE officials semiannually and quarterly, respectively, to discuss, among other things, examination findings and guidance. The officials also said that they hold frequent telephone conversations to coordinate their examination efforts. For example, SEC, NASD, and NYSE staff talked with each other immediately following NASD’s discovery of breakpoint abuses in 2002, and established a joint task force to determine the extent of the abuses by conducting examinations of firms designed to identify failures to provide breakpoint discounts. Similarly, SEC, NASD, and NYSE staff talked with each other in their efforts to respond to the late trading and market timing abuses uncovered in 2003. In addition, SEC and SRO staff jointly attended conferences and training that included examination guidance as a topic of discussion. Finally, SEC, NASD, and NYSE have jointly developed a number of examination modules to enforce recent changes in laws and rules applicable to broker-dealers. Although SEC, NASD, and NYSE coordinate in these ways to oversee broker-dealers, they generally do not provide copies of their written examination materials to each other. That is, SEC typically does not provide copies of its modules or other internal written guidance to the SROs, nor do NASD and NYSE generally provide copies of such guidance to each other. Officials at these agencies shared benefits and drawbacks of providing written copies of examination materials to each other. The regulators agreed that sharing information about their examination approaches and outcomes is overall a positive way to more effectively oversee the broker-dealer industry. They cautioned, however, that certain drawbacks should be considered regarding the sharing of written examination materials. SEC officials said that sharing SEC examination modules could compromise its supervision of the SROs. According to the officials, if SEC shared its modules, the SROs may be less innovative and motivated to improve their methods. They said, for example, that the SROs may view SEC’s procedures as the most that they would need to do. NASD officials strongly disagreed with SEC’s assertions about the sharing of examination modules, saying they always seek the most effective examination procedures, regardless of those used by SEC; and an NYSE official said that while NYSE understands the SEC’s position in this regard, the sharing of SEC’s examination module would only enhance NYSE’s pre- existing examination procedures related to mutual funds. NASD and NYSE officials said it would be helpful if SEC shared copies of its modules and other guidance it shares with its own examiners. However, SEC and NASD officials said that NASD and NYSE may not want to share their examination modules with each other because of competitive reasons. For example, if one SRO shared its modules with another SRO, it would run the risk that its competitor could be able to adopt similar procedures without the cost of developing them. Finally, NASD officials told us that differences exist between NASD’s and NYSE’s membership, culture, priorities, and strategies that can lead to differences in examination procedures, and the same is true for financial institutions overseen by the banking regulators. SEC’s Office of Compliance Inspections and Examinations (OCIE) oversees and directs SEC’s broker-dealer examination program, but SEC’s 11 field offices conduct the vast majority of the broker-dealer examinations. Among other things, OCIE creates and updates broker- dealer examination modules, or policies and procedures; issues other examination guidance; and reviews broker-dealer examination reports. Currently, when OCIE develops and issues policy changes and examination guidance, it typically distributes such guidance to the field offices by e-mail. In turn, each field office separately stores the guidance on one of its shared computer drives or in some other way to provide its examiners access to the information. Field office examiners generally are responsible for keeping abreast of changes in guidance and reviewing it as needed in performing examinations. To better ensure that SEC examiners across all field offices have access to current and complete broker-dealer examination guidance, OCIE is developing an internal Web site to serve as a central repository for all broker-dealer examination guidance. According to agency officials, OCIE launched its internal Web site in April 2005 on a pilot basis to select broker- dealer examiners nationwide to obtain their comments about its organization and comprehensiveness. Subsequently, SEC made the Web site available to all examiners in July 2005. According to SEC officials, the Web site will allow broker-dealer examiners to access not only all guidance at one location but also links to databases and numerous other examiner tools. SEC’s OCIE has a training branch that provides routine and specialized training to its broker-dealer examiners, with some of the training related to mutual funds. More specifically, OCIE’s training branch provides a two- phased training program for broker-dealer examiners that is designed to teach examiners how to handle increasingly complex examination issues. According to an SEC official, the phase-one course is designed for new examiners and includes some training on mutual fund operations and mutual fund sales practices of broker-dealers. OCIE’s training branch also offers a range of specialized training delivered in a variety of formats. For example, it offers classroom training sessions and videoconferences taught by senior examiners or vendors, such as NASD, as well as training videos that examiners can view when convenient. An SEC official told us that since 1999 the training branch has offered over 25 training sessions that have included mutual fund topics, such as breakpoints. In addition, SEC periodically has coordinated its training efforts with SROs, including NASD and NYSE. For example, examiners representing SEC, NASD, NYSE, and other SROs, as well as state regulators have met annually for a 3-day joint regulatory seminar to receive training about emerging and recurring regulatory issues. In 2003 and 2004, the seminars provided training on mutual fund sales practice abuses, including late trading, market timing, and failure to provide breakpoint discounts. Finally, SEC examiners attend or participate in external training, such as industry conferences. Separate from OCIE’s training branch, SEC has a central training center called SEC University that oversees the agency’s training programs. SEC University uses an electronic database to track training received by SEC staff. According to SEC officials, the database has a number of weaknesses that limits its usefulness in helping SEC to track and assess the training received by examiners. For example, the database cannot be used to generate reports on which examiners have taken or not taken a particular course. Also, the database is not directly accessible to examiners or their supervisors and, thus, does not allow them to review their training records or enter external training they may have taken. Because of these weaknesses, OCIE’s training branch uses training rosters as needed to manually track which examiners have taken particular courses. SEC training staff said that they are requesting that the agency purchase a learning management system that would better enable it, including OCIE, to track and assess all training and other developmental opportunities. According to one of the officials, the initiative is currently tabled and may or may not receive funding this year. Despite challenges in its ability to track training in an automated way, OCIE takes some steps to evaluate the training needs of its examiners. It gathers and evaluates training participants’ reactions to and satisfaction with training programs and uses that information to decide on what training to offer in the future. Training branch staff told us that at the end of each course, they hand out course evaluation forms to participants. These forms include closed-ended questions about the extent to which participants found the course helpful and open-ended questions about what additional training needs they have. The training branch uses the information to improve individual classes and the program as a whole. In addition, training staff attend monthly meetings with management and staff from all field offices, in part, to identify training needs and opportunities, and they also attend yearly meetings with examination program managers to discuss the examiners’ training needs. In addition to the contact named above, John Wanska, Randall Fasnacht, Joel Grossman, Christine Houle, Marc Molino, Wesley Phillips, David Pittman, Paul Thompson, Richard Tsuhara, and Mijo Vodopic made key contributions to this report.","As the frontline regulator of mutual funds, the Securities and Exchange Commission (SEC) plays a key role in protecting the nearly half of all U.S. households owning mutual funds, valued around $8 trillion in 2005. Mutual fund abuses raised questions about the integrity of the industry and quality of oversight provided by SEC and self-regulatory organizations (SRO) that regulate broker-dealers selling funds. This report assesses (1) changes SEC has made to, or is planning for, its mutual fund exam program; (2) key aspects of SEC's quality control framework for routine fund exams; and (3) the adequacy of SEC's oversight of NASD and the New York Stock Exchange in protecting shareholders from mutual fund sales abuses. SEC is initiating several changes intended to strengthen its mutual fund exam program but faces challenges overseeing the fund industry. In the wake of the fund abuses, SEC has revised its past approach of primarily conducting routine exams of all funds on a regular schedule. It concluded these exams were not the best tool for identifying emerging problems, since funds were not selected for examination based on risk. To quickly identify problems, SEC is shifting resources away from routine exams to targeted exams that focus on specific risks. It will conduct routine exams on a regular schedule but only of funds deemed high risk. SEC also is forming teams to monitor some of the largest groups of advisers and funds. Although SEC is seeking to focus its resources on higher risk funds and activities, the resource tradeoffs it made in revising its oversight approach raise significant challenges. The tradeoffs may limit SEC's capacity not only to examine funds considered lower risk within a 10-year period but also to accurately identify which funds pose higher risk and effectively target them for routine examination. Potentially taxing its resources further, SEC recently adopted a rule to require advisers to hedge funds (investment vehicles generally not widely available to the public) to register with it. This rule is expected to increase SEC's exam workload, but the precise extent is not yet known. SEC has integrated some quality controls into its routine exams, but certain aspects of its framework could be improved. It relies on experienced staff to oversee all exam stages but does not expressly require supervisors to review work papers or document their review. GAO found deficiencies in key SEC exam work papers, raising questions about the quality of supervisory review. SEC also does not require examiners to prepare written exam plans, though they use considerable judgment in customizing each exam. Written plans could serve as a guide for conducting exams and reviewing whether exams were completed as planned. As done by other regulators, SEC also could review a sample of work papers to test compliance with its standards. A primary tool that SEC uses to assess the adequacy of SRO oversight of broker-dealers offering mutual funds provides limited information for achieving its objective and imposes duplicative costs on firms. To assess SRO oversight, SEC reviews SRO exam programs and conducts oversight exams of broker-dealers, including their mutual fund sales practices. SEC's oversight exams take place 6 to 12 months after SROs conduct their exams and serve to assess the quality of SRO exams. However, GAO reported in 1991 that SEC's oversight exams provided limited information in helping SROs to improve their exam quality, because SEC and the SROs used different exam guidelines and their exams often covered different periods. GAO found that these problems remain, raising questions about the considerable resources SEC devotes to oversight exams. GAO also found that SEC has not developed an automated system to track the full scope of work done during its oversight exams. Thus, SEC cannot readily determine the extent to which these exams assess mutual fund sales practices.",govreport
"This section describes TVA’s (1) legislation and governance, (2) operations and planning, (3) debt ceiling, and (4) retirement system. TVA is an independent federal corporation established by the TVA Act. The act established TVA to improve the quality of life in the Tennessee River Valley by improving navigation, promoting regional agricultural and economic development, and controlling the floodwaters of the Tennessee River. To those ends, TVA built dams and hydropower facilities on the Tennessee River and its tributaries. From its inception in 1933 through fiscal year 1959, TVA received annual appropriations to finance its cash and capital requirements. In 1959, however, Congress amended the TVA Act and provided TVA with the authority to finance its power program through revenue from electricity sales and borrowing and required it to repay a substantial portion of the annual appropriations it had received to pay for its power facilities. Under the TVA Act, TVA must design its rates to cover all costs but also keep rates as low as feasible. TVA must charge rates for power that will produce gross revenues sufficient to provide funds for its costs including operating, administrative and maintenance costs. TVA can borrow by issuing bonds and notes, an authority set by Congress that cannot exceed $30 billion outstanding at any given time. Legislation also limits competition between TVA and other utilities. When the TVA Act was amended in 1959, it prohibited TVA, with some exceptions, from entering into contracts to sell power outside the area where it or its distributors were the primary source of power supply on July 1, 1957. This is commonly referred to as the “fence,” because it limits TVA’s ability to expand substantially outside its service area. In addition, the Federal Power Act includes a provision that helps protect TVA’s ability to sell power within its service area. This provision, called the “anti- cherrypicking” provision, exempts TVA from being required to allow other utilities to use its transmission lines to deliver power to customers within its service area. The anti-cherrypicking provision reduces TVA’s exposure to loss of customers and competition from other utilities. A nine-member Board of Directors nominated by the President and confirmed by the U.S. Senate administers TVA. The board sets TVA’s goals and policies, appoints the CEO, develops long-range plans, seeks to ensure those plans are carried out, and approves TVA’s budget. The board also approves rate changes and has the sole authority to set wholesale electric power rates and approve the retail rates charged by TVA’s distributors. TVA’s board approves the agency’s strategic plan which outlines TVA’s broad goals, priorities, and performance measures. TVA’s most recent strategic plan covers fiscal years 2014 through 2018 and outlines its “strategic imperatives”—namely, to “maintain low rates, live within our means, manage our assets to meet reliability expectations and provide a balanced portfolio, and be responsible stewards of the region’s natural resources.” In August 2013, TVA’s board approved the goal to reduce TVA’s debt to about $22 billion by fiscal year 2023. TVA developed this goal during its fiscal year 2014 long-term financial planning process, but TVA updates its long range financial plan each year. The TVA board approves the budget each fiscal year, and the board is updated at least semi-annually on the long-range financial plan. TVA uses a 10-year long-range financial plan to determine the amount of funds that will be available for capital investment. Operating priorities are detailed in business unit plans, such as the power supply plan, the transmission assessment plan, and the coal and gas operations asset plan. In addition, TVA files publicly available quarterly and annual financial reports with the Securities and Exchange Commission. TVA also submits a budget proposal and management agenda (performance report) to Congress and a performance budget (performance plan) to OMB. To meet demand for electricity, utilities can construct new plants, upgrade existing plants, purchase power from others, and provide incentives to customers to reduce and shift their demand for electricity through energy efficiency or demand-response programs. Since its establishment, to meet the subsequent need for more electric power, TVA has expanded beyond hydropower to other types of power generation such as natural gas, coal, and nuclear plants. In fiscal year 2016, TVA provided nearly 159 billion kilowatt-hours to customers from its power generating facilities and purchased power, as shown in figure 1. To guide TVA decisions about the resources needed to meet future demand for electricity and determine the most cost-effective ways to prepare for the future power needs of its customers, TVA periodically develops an integrated resource plan (IRP). TVA’s 2015 IRP found no immediate needs for new baseload plants—plants that generally have been the most costly to build but have had the lowest hourly operating costs—beyond the completion of the Watts Bar Unit 2 nuclear plant in Tennessee and the expansion of capacity at the Browns Ferry nuclear plant in Alabama. In October 2016, TVA completed Watts Bar Unit 2— the first nuclear unit to enter commercial operation in 20 years. Beyond those projects, the 2015 IRP found that TVA could rely on additional natural gas generation, greater levels of cost-effective energy efficiency, and increased contributions from competitively priced renewable power. TVA develops forecasts of demand for electricity that help it make resource planning decisions, such as how much and what kind of capacity to build, how much power to buy from other sources, or how much to invest in energy efficiency. To forecast the demand for electricity in its service area for the next 20 or more years, TVA employs a set of models but forecasting beyond a few years into the future involves great uncertainty. Utilities deal with uncertainty partly by producing a range of forecasts based on demographic and economic factors, and by maintaining excess generating capacity, known as reserves. Models help utilities choose the least-cost combination of generating resources to meet demand. If demand forecasts are unreasonably high or low, a utility could end up with more or less generating capacity than it needs to serve its customers reliably, or it could end up with a mix of generating capacity that is not cost effective. These outcomes can affect electricity rates as well as the utility’s financial situation. TVA experienced less than anticipated electricity demand growth over the past 20 years and now forecasts little, if any, growth in demand for electricity in the upcoming years. Congress increased TVA’s debt ceiling four times from 1966 to 1979, from $750 million to $30 billion. In the years following these increases, TVA’s financial condition worsened, largely as the result of construction delays, cost overruns, and operational shutdowns in its nuclear program. In the late 1960s and 1970s, TVA started construction on 17 nuclear units but completed only 7 because of lower-than-anticipated demand for electricity, resulting in billions of dollars of debt. In February 2001, we reported that TVA had about $6.3 billion in unrecovered capital costs associated with uncompleted and nonproducing nuclear units. In fiscal year 2016, TVA had about $1.1 billion in unrecovered costs associated with uncompleted nuclear units. While the debt ceiling has not been changed since 1979, TVA’s business and operations have grown along with the power needs of the Tennessee Valley. TVA has continued to add generating capacity to the system, as its customer base has increased, and environmental spending requirements have increased. TVA generally uses debt financing for capital investments in new generation capacity and environmental controls and uses revenues for operation and maintenance of the power system. TVA can borrow funds at competitive interest rates as a result of its triple-A credit rating which is based, in part, on its ownership by the federal government. Appendix I includes historical data on TVA’s debt and other selected financial data. TVA’s board established TVARS in 1939. TVARS is a separate legal entity from TVA and is administered by a seven-member Board of Directors. The TVARS board manages the retirement system, including decision-making on investment portfolios, the interest rate or rates used in actuarial and other calculations, and benefits. The Rules and Regulations of the TVA Retirement System (TVARS Rules) establish how the retirement system is administered and what benefits are payable to participants. The TVARS Rules establish the minimum amount TVA must contribute to the system each year. The TVARS board can amend the TVARS Rules, but TVA has veto power and amendments proposed by the TVARS board become effective only if TVA does not exercise its veto within 30 days. As a governmental plan, TVA’s plan is not subject to the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards for pension plans in the private sector. As of September 30, 2016, the defined benefit pension plan (which we refer to as the pension plan in this report) had about 34,000 participants, of whom about 24,000 were retirees; it is a “mature” plan, in that there are more than twice as many retirees and beneficiaries as employees participating in the plan. To meet its goal to reduce its debt from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023, TVA plans to increase revenue through rate increases, limit the growth of operating expenses, and reduce capital expenditures. TVA’s plans assume the completion of capital projects will occur on time and within budget. TVA’s plans also include costs for investigating the development of new nuclear technology but do not include capital costs for construction. According to TVA officials, TVA aims to increase its overall financial flexibility over the long term to ensure sufficient room under the debt ceiling so it can access capital for future investments to meet its mission. TVA plans to gradually decrease debt through 2023 (see fig. 2). To meet its goal to reduce its debt to about $22 billion by fiscal year 2023, TVA’s plans include the following. Rate increases. TVA’s plans include annual rate increases not to exceed 1.5 percent of the retail rate as needed to maintain its debt reduction trajectory. According to TVA officials and documents, TVA’s plans included rate increases of 1.5 percent for about $200 million in annual revenue. TVA can use increased revenue to refinance existing debt or to fund certain expenditures rather than taking on new debt, but TVA’s board must approve rate increases. TVA increased rates each fiscal year from 2014 through 2017. According to TVA officials, annual rate increases through 2023 could result in the reduction of debt to about $19.8 billion by fiscal year 2023, which would exceed the agency’s debt reduction goal. Limits in the growth of operating expenses. TVA plans to continue evaluating its operations and to limit the growth of its operating expenses. Having fewer operating expenses frees up revenue from rates that TVA can use to repay outstanding debt or fund certain expenditures without taking on new debt. In fiscal year 2016, TVA’s O&M expenses totaled about $2.8 billion—a reduction of about 18 percent from $3.4 billion in fiscal year 2013. As part of its cost-reduction initiatives, TVA eliminated 2,200 positions through attrition and elimination of vacant positions. TVA plans to pursue additional workforce reductions to offset increases in retirement benefit and labor costs. According to TVA documents, reductions in expenses associated with coal plant closures will offset some of the increase in labor-related costs but other reductions will be required. TVA officials said that additional reductions could involve contract labor in its nuclear group. In July 2016, TVA offered a voluntary reduction-in-force program to all 3,500 employees in its nuclear group, providing an opportunity to retire or depart; as of January 2017, TVA officials had not provided information on the number of employees participating in this program. In fiscal year 2016, TVA’s workforce included 10,691 employees and 12,729 contractors. According to TVA documentation, as a major component of its O&M costs, TVA continuously evaluates its staffing levels, both employees and contractors. TVA plans are being finalized, over the next several years, to decrease the overall workforce through various mechanisms as TVA aligns its workforce with changes to its generating assets; these mechanisms may include reductions-in-force, attrition, and elimination of vacant positions. However, early retirements and severance associated with workforce reductions could also pose additional expenses. Reductions in capital expenditures. TVA plans to reduce its capital expenditures through fiscal year 2023. Over the past decade, TVA’s capital expenditures increased by over 180 percent—from about $1.2 billion in fiscal year 2006 to about $3.4 billion in fiscal year 2015. TVA aims to decrease capital expenditures to about $1.8 billion by fiscal year 2023 (see fig. 3). Based on its electricity demand forecast, TVA does not anticipate the need for additional baseload capacity until the 2030s beyond completion of Watts Bar Unit 2—which cost about $4.7 billion—and capacity expansion at three nuclear units. TVA’s capital expenditure plan from fiscal years 2016 through 2023 includes a total of about $17.4 billion; about $8.3 billion for base capital projects to maintain the current operational state, about $5.2 billion for capacity expansion projects, and about $3.9 billion for environmental and other projects. Under TVA’s financial guiding principles, TVA may issue debt for new assets, including capacity expansion and installation of environmental controls, but, according to TVA officials, TVA plans to primarily fund capital expenditures with revenue, as opposed to issuing new debt, to reach its debt goal. TVA increased construction expenditures from fiscal years 2006 through 2016 from about $1.4 billion ($1.6 billion in 2016 dollars) to about $2.7 billion while reducing the amount of new debt issued (see fig. 4). According to TVA officials, TVA’s plans assume that the completion of capital projects will occur on time and within budget. TVA’s plans included the assumption that it would complete construction of a new nuclear unit—Watts Bar Unit 2—in 2016. Watts Bar Unit 2 began commercial operation in October 2016. By completing construction of this unit in 2016, a key assumption underlying TVA’s debt reduction plans was met. However, TVA’s plans include other key capital projects such as the construction of two natural gas plants, modification of a coal plant to install clean air controls, and two smaller nuclear projects. Information about these two nuclear projects follow. Browns Ferry extended power uprate (EPU). TVA’s capital plans include a project that aims to increase generation capacity at the Browns Ferry nuclear plant’s three existing units. TVA began the project in 2001 and anticipated completion within 2 to 4 years but the project remains incomplete. As of September 30, 2016, TVA reported that it anticipates completion of the project by 2024 at a total estimated cost of about $475 million—an increase of 25 percent from an estimated $380 million in fiscal year 2014. According to TVA documentation, the agency spent about $191 million on the project through fiscal year 2016. The project involves engineering analyses and modification and replacement of certain existing plant components to enable the units to produce additional power. To allow operation at the higher power level, the license for each unit requires modification that would occur in parallel with the NRC license amendment review process. TVA originally submitted the licensing amendment requests to NRC in June 2004. However, TVA withdrew these requests in September 2014 and submitted a new request in September 2015. According to NRC, it is planning to complete its review by fall 2017. Watts Bar Unit 2 steam generator replacement. TVA’s capital plans include about $438 million to replace steam generators at the newly operational unit. The existing generators prematurely developed leaks and other problems occurred at nuclear plants, including Watts Bar Unit 1 which required replacement of the generators 9 years into operation. According to TVA officials, TVA has completed steam generator replacements at other nuclear units without significant cost overruns or schedule delays. Given historical trends in nuclear construction, TVA’s estimated capital costs may be optimistic and could increase. Any cost overruns or delays on its nuclear or other capital projects could require adjustments to its future financial plans. TVA’s history of cost overruns and schedule delays includes the construction of Watts Bar Unit 2 which began commercial operation in October 2016 after decades of construction (see table 1). TVA did not complete another nuclear project. TVA auctioned off the 1,400 acre site of the Bellefonte nuclear plant in Alabama, including two unfinished nuclear units, in November 2016 for $111 million—a fraction of the approximately $5 billion TVA had spent on the plant. TVA began building the plant in 1974, but several stops and starts in construction occurred primarily as a result of lower-than-anticipated growth in electricity demand. According to TVA officials, TVA decided again to complete unit 1 in 2011 but stopped work in 2013 because of reduced electricity demand, Watts Bar Unit 2 concerns, and anticipated increases in construction costs. In 2013, TVA estimated that the cost to complete the unit had grown from its prior approved cost of $4.9 billion to at least $7.5 billion or more. TVA stated that it wanted to complete Watts Bar Unit 2 and await the results of its IRP process. Based on the 2015 IRP, TVA decided not to complete construction of Bellefonte. According to TVA documentation, TVA spent about $10 million to $12 million annually maintaining the Bellefonte site. TVA’s plans do not anticipate any such events occurring with its current projects that would interfere with timely completion within budget. TVA’s plans include costs for investigating the development of new nuclear technology but do not include capital costs for construction of the technology. Specifically, TVA is assessing the potential of its Clinch River site in Tennessee for the construction of small modular reactors (SMR). According to TVA documentation, these efforts include research and development activities that support its technology innovation mission. In 2016, TVA submitted an early site permit application to NRC to assess the suitability of the site for construction and operation of SMRs at its 1,200-acre Clinch River site. An early site permit is valid for up to 20 years and would address site safety, environmental protection, and emergency preparedness associated with any of the light-water reactor SMR designs under development in the United States. According to TVA documentation, TVA has not selected a technology and has not entered into any contracts for design work. If TVA decides to construct SMRs, its costs are uncertain but could total about $3 billion after cost sharing through public-private partnerships but expenditures prior to a construction decision would be a very small portion of this cost, according to TVA documentation. The total estimated costs for TVA to develop, submit, and support the NRC application and review include about $72 million, according to an interagency agreement with DOE, and TVA is responsible for half of these costs. According to TVA documentation, the agency spent about $23 million on SMR activities through fiscal year 2015 and estimates spending about $5 million in fiscal year 2016. According to TVA, it spends about $10 million to $15 million on research and development activities each year as part of its technology innovation organization (not including spending on SMRs). TVA officials said that the agency will not decide whether or not to construct SMRs for at least 5 years. However, TVA is investigating SMRs even though its 2015 IRP found that TVA does not need additional baseload power plants beyond the projects currently under way and that SMRs are cost-prohibitive. TVA’s debt reduction plans and performance information are not reported in a manner consistent with GPRAMA requirements. GPRAMA requires agencies, including TVA, to report major management challenges that they face, and for each major management challenge that agencies develop and report performance information—including performance goals, measures, milestones, and planned actions to resolve the challenge. TVA identifies managing debt and its unfunded pension liabilities as major management challenges but TVA has not reported required performance information in its annual performance plan or report on these challenges. For managing debt, TVA’s CEO stated a goal for debt reduction by 2023 during a congressional hearing in April 2015 and the goal is reported in internal documents and Board presentation slides available on TVA’s website. In addition, according to TVA’s 2016 performance report, its strategic objectives include “effectively manage debt to ensure long-term financial health.” TVA’s 2016 performance report includes a goal related to total financing obligations for fiscal years 2016 and 2017, but the goal shows these obligations increasing, and the report does not include information on planned actions to resolve the challenge. Although TVA established a goal to reduce its debt, it has not documented in its annual performance plan or report strategies for how it will meet its goal, as required by GPRAMA, thereby reducing transparency and raising questions about how the agency will meet its goal. For TVA’s unfunded pension liabilities, TVA officials have stated a goal to eliminate the pension funding shortfall (about $6 billion at the end of fiscal year 2016) by 2036, but TVA has not identified such a goal or milestones in its performance plan or report. As of September 30, 2016, TVA’s pension plan was about 54 percent funded with a funding shortfall of about $6 billion (plan assets totaled $7.1 billion and liabilities $13.1 billion). While TVA’s debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years (see fig. 5). Unfunded pension liabilities are similar to other kinds of debt because they constitute a promise to make a future payment or provide a benefit. According to a joint American Academy of Actuaries and Society of Actuaries task force, a pension plan needs to be evaluated as part of a plan sponsor’s overall enterprise; an analysis that looks at the pension plan as a self-standing entity is incomplete and too narrow. However, TVA officials told us that because TVA uses revenue from the rates it charges customers to fund the pension, and not debt in the form of bonds, unfunded pension liabilities would not affect TVA’s debt reduction plan. In addition, TVA defers pension costs as “regulatory assets”— incurred costs deferred for recovery through rates in the future—in accordance with accounting standards and with TVA board approval. However, because TVA will need to recover these costs through rates in the future, this affects its financial health and operations. If TVA uses revenue from rate increases to close the pension shortfall, this could decrease its ability to fund other activities such as capital projects with revenue from rates. This could, in turn, require TVA to rely on debt to fund certain capital projects and interfere with efforts to meet overall debt reduction goals. Alternatively, further rate increases could interfere with TVA’s objective of keeping rates as low as feasible. Without the Board of Directors ensuring that TVA better document and communicate information about its goals to reduce debt and unfunded pension liabilities in its performance plan and report, including strategies for achieving its goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. Several factors could affect TVA’s ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. In addition, TVA aims to eliminate its $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but no mechanism is in place to ensure TVA fully funds the liabilities if, for example, plan assets do not achieve expected returns. Several factors could affect TVA’s ability to meet its debt reduction goals, including regulatory pressures that could require additional capital investment, changes in demand for electricity, technological innovations, or unforeseen events that could affect revenues or require additional investments. TVA’s fossil fuel and nuclear power plants are, or potentially will be, affected by existing and proposed environmental and other regulations, and the implementation of these regulations may require TVA to make additional capital investments. For example, TVA estimates it will spend about $2 billion on environmental expenditures and compliance with regulations from 2017 through 2023 but, according to a TVA document, this estimate could change as additional information becomes available and regulations change. TVA spent about $977 million to eliminate the wet storage of coal combustion residual, commonly called coal ash, to assist in meeting EPA and Tennessee Department of Environment and Conservation environmental requirements. As part of these efforts, TVA prepared a June 2016 environmental impact statement on the approach it planned to take for closing coal ash impoundments at its coal plants, which involved converting all its wet storage to dry storage. According to a TVA document, the agency anticipates spending about an additional $1.2 billion in related coal ash costs through 2022. While the status of the Clean Power Plan that EPA issued in 2015 is unclear, TVA continues to assess the plan and its status. According to TVA documentation, TVA is well positioned to meet carbon emission guidelines for existing fossil fuel plants under the plan. Specifically, in April 2011, TVA agreed to retire 18 of its 59 fossil fuel units by the end of 2017 for several reasons, including the cost of adding emission control equipment and other environmental improvements to the units. As of September 2016, TVA had retired 14 of the 18 units and reported that it would continue to evaluate the appropriate asset mix, given the costs of continuing to operate its coal plants, including adhering to environmental regulations. With regard to TVA’s nuclear power plants, TVA also faces potential costs related to proposed regulations. For example, in May 2014, NRC notified certain nuclear power plant licensees of the results of seismic hazard screening evaluations performed following the Fukushima nuclear accident. Based on the screening results, TVA must conduct additional seismic risk evaluations of all three of its nuclear plants—Browns Ferry, Sequoyah, and Watts Bar—by 2019. According to TVA, NRC is developing a rule anticipated in mid-2017 for nuclear plants to mitigate the effects of events, such as seismic events, that exceed plant design standards that could require TVA to modify one or more of its nuclear plants. According to TVA documents, plant modification costs will be unknown until the rule is finalized, but they could be substantial. Reductions in demand for electricity could affect TVA’s revenues; alternatively, increases in demand could generate additional revenue but require investment in additional capacity or purchased power. The expanded use of distributed generation and increased energy efficiency and conservation could reduce demand for electricity in TVA’s service area and affect its revenues. As the amount of distributed generation grows and renewable generation and energy efficiency technologies improve and become more cost-effective, TVA projects sales of electricity will see little, if any, growth in upcoming years. According to several representatives from industry and stakeholder groups, distributed generation could increase competition from end-use customers— consumers who typically buy power from the local power companies that obtain power from TVA—if they adopt on-site power generation. According to EIA’s Annual Energy Outlook 2016, annual electricity demand for the average household will decline by 11 percent from 2015 to 2040. EIA reported that factors contributing to a decline in household demand include efficient lighting technologies and increased distributed generation, particularly rooftop solar. According to TVA documents, the agency cannot predict the financial impact from future growth of distributed generation but TVA has taken steps to anticipate the changes in the electricity market that distributed generation could bring. For example, in 2016, TVA announced a new business unit focused on distributed energy resources and the energy delivery marketplace, and according to a TVA official, it also formed information exchanges to provide forums to discuss implementation issues related to distributed generation and energy efficiency. Other technological developments in the electric utility industry could change TVA’s operating costs or requirements. For example, several representatives we interviewed from industry and stakeholder groups said that energy storage technology could become more cost-effective and change the way utilities operate. While the added capacity provided by energy storage could delay or alleviate the need for TVA to build additional power plants, TVA officials said that there are still several unknowns about the technology though they do not believe integration of battery storage into the system would be problematic. Finally, unforeseen events could also affect TVA’s ability to meet debt reduction goals. For example, the 2008 Kingston coal ash spill cost about $1.2 billion to remediate—costs TVA is still recovering. TVA plans to make annual contributions of $300 million to the pension plan, or more if required by the TVARS Rules, for up to 20 years. According to TVA’s analysis, there is a 50 percent chance that annual contributions of $300 million could eliminate the $6 billion funding shortfall at the end of 20 years and a 50 percent chance that a funding shortfall would remain. TVA’s analysis assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. According to TVA officials, the pension plan asset performance is critical to TVA’s ability to close the pension funding shortfall. TVA officials have stated a goal to fully fund the pension plan within 20 years. However, if market conditions over the next 20 years are not favorable enough to fully fund the pension liabilities, which TVA’s analysis assigns a 50 percent chance, TVA would need to contribute more than $300 million per year to make up the difference if it aims to eliminate the funding shortfall. Other factors that could affect TVA’s pension liabilities include greater than expected increases in retiree lifespans and declining bond yields. In a 2010 report, the TVA OIG found that a combination of factors— including market conditions and TVA actions—resulted in a significant shortfall between pension plan assets and projected liabilities. These factors included: (1) TVA not making contributions to TVARS for 6 years, (2) the addition of significant retirement benefits to the plan when the funded status was better, (3) the establishment of TVARS Rules that had the effect of enticing employees to retire, and (4) the economic downturn in 2008 and 2009. The TVARS pension plan’s funded status decreased from about 92 percent in 2007 to about 55 percent in 2016 (see fig. 6). In December 2015, TVA proposed changes to the TVARS Rules to reduce the obligations of the pension plan and commit to making consistent contributions. The TVARS board approved amendments that reduced TVA’s pension liabilities by about $960 million, reduced future benefit accruals, and added a minimum contribution requirement of $300 million to the existing requirement for a period of 20 years. However, the amended TVARS Rules do not adjust TVA’s annual contribution requirement to ensure TVA will fully fund its pension liabilities. The TVARS Rules require that for a period of 20 years, or until the plan is deemed fully funded, TVA’s annual contribution equal the greater of (1) a formula-based contribution or (2) $300 million. To the extent that a $300 million contribution proves inadequate because of plan experience, the formula-based contribution would determine the amount TVA must contribute each year. The formula uses a 30-year “open amortization method,” meaning that the amortization period is reset to 30 years each fiscal year, so the end of the amortization period (i.e., paying off the unfunded liability) may never be achieved. A Blue Ribbon Panel commissioned by the Society of Actuaries believes that plans’ risk management practices and their ability to respond to changing economic and market conditions would be enhanced through the use of amortization periods shorter than the 30-year period commonly used today. The panel recommended amortization periods of no more than 15 to 20 years for gains and losses. According to the panel’s 2014 report, the panel believes that fully funding pension benefits of public employees over their average future service reasonably aligns the cost of today’s public services with the taxpayers who benefit from those services. In addition, according to the American Academy of Actuaries, funding rules should include targets based on accumulating the present value of benefits for employees by the time they retire, and a plan to make up for any variations in actual assets from the funding target within a defined and reasonable time period. In the private sector, ERISA generally requires a 7-year amortization of shortfalls for private sector single- employer pension plans. Unlike an open amortization period, a closed, or fixed, amortization period is generally maintained until the original unfunded liability amount is fully repaid. Thus, a closed amortization period would be a better practice if the goal is to fully fund pension liabilities. Table 2 compares the amortization of $6 billion in unfunded liabilities using open and closed amortization methods, assuming assets return 7 percent, as TVA expects. The closed amortization method would extinguish the unfunded liability in 30 years, whereas more than $4 billion in unfunded liability would remain under the open amortization method (see table 2). As we mentioned earlier, TVA assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. If the return on investment was lower than expected, the unfunded liabilities would be greater, and TVA would need to contribute more than $300 million per year to make up the difference. The open amortization period utilized by the TVARS formula-based contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and does not ensure full funding of the pension liabilities. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. TVA officials told us that the agency does not plan to contribute more than the TVARS Rules require and that it plans to continue to treat its unfunded pension liabilities as regulatory assets, deferring pension costs for recovery through rates in the future. However, the TVARS Rules do not provide for fully funding pension benefits over the service of TVA employees covered by the plan, which would align the cost of services provided by covered employees with the rates paid by customers who benefit from the services of covered employees. The deferral of contributions necessary to close the funding shortfall reduces future financial flexibility and may result in the need for rate increases during a period of declining demand for electricity. If TVA needs to use revenue originally targeted for debt reduction to pay for greater than estimated pension expenses, this could interfere with TVA’s debt reduction goal and additional rate increases may be required which could interfere with TVA’s ability to keep rates low. Alternatively, less flexibility could lead to pressure to reduce the pay or benefits of future TVA employees. Since fiscal year 2013, TVA reduced its O&M costs by about 18 percent while completing construction of the first nuclear unit to enter commercial operation in 20 years. However, since the late 1970s, TVA’s financial condition worsened largely as a result of delays, cost overruns, and operational shutdowns in its nuclear program, and the agency continues to invest in nuclear projects while deferring full recognition and funding of pension liabilities. TVA generally aims to reduce its debt to increase its financial flexibility over the long term to ensure sufficient room under its debt ceiling so it can access capital for future investments to meet its mission. However, retirement benefit and labor costs and cost overruns or delays on nuclear capital projects could put pressure on TVA’s plan, along with other factors including future demand for electricity or unforeseen events. GPRAMA requires agencies to report major management challenges that they face and report performance information—including performance goals, measures, milestones, and planned actions needed to resolve them. However, TVA is not fully meeting this requirement, thereby reducing transparency and raising questions about how it will meet its goals of managing debt and reducing its unfunded pension liabilities. TVA’s unfunded pension liabilities affect TVA’s financial health and operations especially if TVA will need to fund them through rate increases in the future. Without better documentation and communication of TVA’s goals to reduce debt and unfunded pension liabilities in its performance plan and report, including the strategies for achieving these goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. TVA aims to eliminate $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but factors such as market conditions could affect TVA’s progress and no mechanism is in place to ensure the pension plan is fully funded. The TVARS Rules do not adjust TVA’s required contributions to ensure pension liabilities will be fully funded and TVA plans to contribute no more than the rules require and to defer the remaining pension liability. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. We recommend that the Board of Directors ensure that TVA take the following two actions: better document and communicate its goals to reduce its debt and unfunded pension liabilities in its performance plans and reports, including detailed strategies for achieving these goals. propose, and work with the TVARS board to adopt, funding rules designed to ensure the plan’s full funding. We provided a draft of this product to TVA for comment. In its comments, reproduced in appendix II, TVA agreed with our first recommendation and stated that it will incorporate additional details in the next iteration of its performance plan and report to enhance transparency. TVA neither agreed nor disagreed with our second recommendation. However, TVA said that it is committed to working with the TVARS Board to ensure a fully funded system. It did not specifically state whether it would consider proposing, and working with the TVARS Board to adopt, funding rules designed to ensure the pension plan’s full funding. As TVA states in its comments, it worked with the TVARS Board to implement plan amendments that were effective October 1, 2016. TVA states that those amendments have placed the retirement system on a path toward achieving full funding in 20 years. We continue to believe that the action we recommended is needed and, as discussed in the report, that the open amortization period used in the TVARS Rules to determine TVA’s minimum contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and, therefore, does not ensure full funding of the pension liabilities. In addition, we received technical comments, which we have incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, TVA’s board of directors, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix III. The Tennessee Valley Authority (TVA) reports on debt using a measure of total financing obligations that includes bonds and notes, which TVA considers “statutory debt,” and other financing obligations which include lease-leaseback obligations, energy prepayment obligations, debt related to variable interest entities, and membership interests issued in connection with a lease financing transaction. As table 3 shows, in fiscal year 2016, TVA’s $26 billion in debt included about $24 billion in bonds and notes and $2 billion in other financing obligations. Table 4 shows selected data from TVA’s financial statements including revenues, expenses, and other data. Table 5 shows TVA’s pension liabilities, assets and funded status. Table 6 shows TVA’s regulatory assets—incurred costs deferred for recovery through rates in the future—by major category. Frank Rusco, (202) 512-3841 or ruscof@gao.gov. In addition to the contact named above, Michael Hix (Assistant Director), Janice Ceperich, Philip Farah, Kirk Menard, and Joseph Silvestri made key contributions to this report. Also contributing to this report were Antoinette Capaccio, Cindy Gilbert, Steve Lowrey, Alison O’Neill, Karissa Robie, Dan C. Royer, Barbara Timmerman, and Jacqueline Wade.","TVA, the nation's largest public power provider, is a federal electric utility with revenues of about $10.6 billion in fiscal year 2016. TVA's mission is to provide affordable electricity, manage river systems, and promote economic development. TVA provides electricity to more than 9 million customers in the southeastern United States. TVA must finance its assets with debt and operating revenues. TVA primarily finances large capital investments by issuing bonds but is subject to a statutorily imposed $30 billion debt limit. In fiscal year 2014, TVA established a debt reduction goal. GAO was asked to review TVA's plans for debt reduction. This report examines (1) TVA's debt reduction goal, plans for meeting its goal, and key assumptions; (2) the extent to which TVA reports required performance information; and (3) factors that have been reported that could affect TVA's ability to meet its goal. GAO analyzed TVA financial data and documents and interviewed TVA and federal officials and representatives of stakeholder and industry groups. To meet its goal to reduce debt by about $4 billion—from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023—the Tennessee Valley Authority (TVA) plans to increase rates, limit the growth of operating expenses, and reduce capital expenditures. For example, TVA increased rates each fiscal year from 2014 through 2017 and was able to reduce operating and maintenance costs by about 18 percent from fiscal year 2013 to 2016. TVA's plans depend on assumptions that future capital projects will be completed on time and within budget, but TVA's estimated capital costs may be optimistic and could increase. TVA's debt reduction plans and performance information are not reported in a manner consistent with the GPRA Modernization Act of 2010. Specifically, TVA identifies managing its debt and its unfunded pension liabilities as major management challenges but has not reported required performance information in its performance plans or reports on these challenges, thereby reducing transparency and raising questions about how it will meet its goal. As of September 30, 2016, TVA‘s pension plan was about 54 percent funded (plan assets totaled about $7.1 billion and liabilities $13.1 billion). While TVA's debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years, as shown below. Tennessee Valley Authority's Debt and Unfunded Pension Liabilities, Fiscal Years 2006 through 2016 Several factors could affect TVA's ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. Also, TVA aims to eliminate its unfunded pension liabilities within 20 years, according to TVA officials. However, factors such as market conditions could affect TVA's progress, and no mechanism is in place to ensure it fully funds the pension liabilities if, for example, plan assets do not achieve expected returns. The TVA retirement system rules that determine TVA's required annual pension contributions do not adjust TVA's contributions to ensure full funding and TVA does not plan to contribute more than the rules require. Without a mechanism that ensures TVA's contributions will adequately adjust for actual plan experience, unfunded liabilities could remain and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. GAO recommends that TVA (1) better communicate its plans and goals for debt reduction and reducing unfunded pension liabilities in its annual performance plan and report and (2) take steps to have its retirement system adopt funding rules designed to ensure the pension plan's full funding. TVA agreed with the first recommendation and neither agreed nor disagreed with the second. GAO believes that action is needed as discussed in the report.",govreport
"By the late 1970s, the First City Bancorporation of Texas, Inc., through its subsidiary banks, had a high concentration of loans to the energy industry in the Southwest United States and was regarded as a principal lender in that industry. In the early and mid-1980s, when the energy industry experienced financial difficulties, so did First City. By 1986, First City was reporting operating losses. First City, its regulators, and FDIC recognized that many of the subsidiary banks could not survive without major infusions of capital. These parties agreed that the capital needed for long-term viability could not come wholly from the private sector due to the financially strained condition of the Southwest’s economy and banking industry. A chronology of events leading to FDIC’s open bank assistance in 1988 and the final resolution of the First City banks in 1993 appears below. A description of changes in various legal authorities over the same period, 1987 to 1993, is contained in appendix II. After considering available alternatives, FDIC and First City entered into a recapitalization agreement—commonly referred to as open bank assistance—that called for First City to reduce its subsidiary banks from nearly 60 to about 20. The agreement also required the creation of a “collecting bank” to dispose of certain troubled assets held by the subsidiary banks. The open bank assistance included a $970 million capital infusion from FDIC along with $500 million of private capital raised by the new bank management to restore First City’s financial health. As part of the agreement, FDIC received $970 million in preferred stock of the collecting bank. FDIC also received a guarantee, from both First City Bancorporation and the subsidiary banks, for $100 million payable in 1998 toward the retirement of the collecting bank preferred stock. The recapitalized First City banks embarked on a short-lived aggressive growth policy that resulted in First City banks’ assets increasing from about $10.9 billion as of April 19, 1988, to about $13.9 billion as of September 30, 1990. First City banks’ loan portfolios included high-risk loans, such as loans to finance highly leveraged transactions, international loans, and out-of-territory lending. During this period, First City reported $183 million in profits and paid $122 million in cash dividends. In part, the earnings used to justify the cash dividends were profits that depended on income from nontraditional and onetime sources, such as the sale of its credit card operations. By September 1990, problems with the quality of its loan portfolios not only caused operating losses but also started to erode First City’s capital. A 1990 OCC examination report strongly criticized the lending practices of First City’s lead bank, First City-Houston. Some of its loan losses resulted from continued deterioration in loans made before April 1988. However, other losses were attributed to new loans associated with an aggressive risk-taking posture by new management combined with poor underwriting practices. During and immediately after OCC’s 1990 examination, First City made changes in the lead bank’s senior executive management, and OCC entered into formal supervisory agreements with First City’s Houston, Austin, and San Antonio banks. The agreements required each of the banks to achieve and maintain adequate levels of capital. They also required improvements in (1) underwriting standards, (2) bank management and board oversight, (3) strategic planning, (4) budgeting, (5) capital and dividend policies, (6) management of troubled assets, (7) internal loan review, (8) allowance for loan and lease losses (ALLL), (9) lending activities, and (10) loan administration and appraisals. According to OCC, First City bank management complied with substantially all of the provisions of the formal agreements, except the capital maintenance provisions. While First City significantly strengthened its underwriting criteria, reduced its aggressive high-risk lending practices, and initiated actions to recapitalize, these efforts did not prevent the First City banks from failing. Between September 30, 1990, and October 30, 1992, problems in the loan portfolios continued to mount. First City bank assets decreased from about $13.9 billion to about $8 billion, and First City incurred total losses of about $625 million. Most of the post-recapitalization losses were from loans at First City’s lead bank in Houston and its second-largest bank in Dallas. Among the primary reasons for the banks’ financial difficulties were the continued decline in the Texas economy, weaker-than-anticipated loan portfolios in the recapitalized banks, questionable lending activity by First City management within the first 2 years of the recapitalization, and high bank operating expenses. OCC, as primary federal bank regulator for the lead bank, projected in early 1991 that operating losses would deplete the capital of this bank by year-end 1992. Later, on the basis of First City’s operating results, OCC projected that by the end of 1992 bank losses would either (1) deplete the capital at the Houston bank and cause its insolvency or (2) erode the bank’s capital to less than 2 percent of its assets, in which case OCC had the authority to close the bank effective December 19, 1992, in accordance with the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The Federal Reserve System (FRS)—the primary federal bank regulator for the Dallas bank—also projected its likely insolvency by the end of 1992. Under the cross-guarantee provisions of the Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA), FDIC could require the 18 otherwise solvent First City banks to reimburse FDIC for any anticipated losses resulting from the failures of the Houston and Dallas banks. FDIC staff advised the FDIC Board that the capital of the 18 banks would not be sufficient to cover the projected losses from the 2 insolvent banks, and the application of the cross-guarantee provision could result in the insolvency of all 20 First City banks. OCC, FDIC, and the Texas Banking Commissioner closely monitored the First City banks following the recapitalization, and along with FRS, shared information concerning the Houston and Dallas banks’ deteriorating financial conditions. Following its September 1991 and January 1992 examinations of First City-Houston, OCC advised First City that its future viability could not be ensured without a significant capital infusion. Similarly, FRS examination of the holding company in 1991 found that First City lacked adequate capital to support its network of subsidiary banks. Beginning in June 1991, representatives of OCC began working with their counterparts at FDIC on a plan for early intervention and resolution of First City-Houston. These efforts were intense and ongoing throughout 1991 and into 1992. During 1991 and 1992, First City, OCC, and FDIC considered a number of alternative resolution plans. The resolution plans considered by First City involved three types of transactions: (1) Type A—Acquisition of First City banks by a stronger, well-capitalized banking company. (2) Type B—Major capital infusion by an outside investor or investor groups. (3) Type C—A self-rescue by the banking organization through some combination of consolidation or sale of subsidiary banks, new capital, and FDIC concessions and financial support. Initially, First City favored a Type B transaction and indentified a number of potential investors as possible sources of significant new capital. However, in anticipation that raising new capital would be extremely difficult given the banking organization’s precarious financial position and continuing OCC concerns with bank management, First City did not actively pursue a Type B transaction. Thereafter, it pursued a Type A transaction almost exclusively. In October 1991, OCC, FDIC, and First City developed a proposal (Type A transaction) that called for the banks’ acquisition by a stronger institution, with the possible need for FDIC financial assistance. In late 1991, FDIC’s Division of Resolutions (DOR) staff contacted a number of banking organizations to assess their interest in acquiring the First City banks. While a number of institutions expressed considerable interest in the First City banks and conducted in-depth reviews of bank operations, only one institution ultimately submitted a bid. DOR staff recommended that the bid be rejected for a number of reasons, including its estimated $240 million cost to FDIC, which was higher than FDIC’s estimate of $179 million to liquidate the banks at that time. DOR staff also asserted that the proposal was not in the best interest of FDIC because it contained several items that were difficult to quantify and would require costly negotiations with the acquirer. DOR staff asserted that these negotiations could significantly delay completion of any open bank assistance until after December 1992, when FDIC projected the banks would become insolvent. After the Type A transaction for open bank assistance was rejected by FDIC, First City developed two new self-rescue proposals (Type C) to recapitalize the troubled banks. In July 1992, First City submitted its first self-rescue plan, which called for the closure and immediate reopening of four of the largest First City banks under the control of an acquiring bank. Under this proposal, the acquiring bank would purchase about $7.5 billion of First City banks’ performing and fixed assets, and FDIC would enter into a loss-sharing agreement with the acquiring bank for the remaining $1.2 billion of troubled assets. DOR staff recommended this alternative be pursued because they estimated no losses to BIF. According to the staff’s projections, a combination of the financial commitments made by the acquiring bank and the ALLL previously established by First City banks could absorb additional deterioration that might occur in the quality of the loan portfolios. However, the FDIC Board was concerned about the ability of First City bank management to execute the proposal. In August 1992, the FDIC Board rejected the proposal mainly because of a condition in the plan that required FDIC to guarantee payment in full for all deposits, including uninsured deposits. In August 1992, First City management submitted another self-rescue proposal to OCC to recapitalize the banks. This proposal called for First City to merge its four largest banks—Houston, Dallas, Austin, and San Antonio. This plan also called for 13 of the remaining 16 First City banks to be sold for an estimated $200 million. An additional $100 million in new equity capital would be raised through a stock offering to new investors and current shareholders. Approximately $96 million would be raised through cost savings from proposed renegotiation of long-term leases. Finally, the proposal would have required FDIC to make concessions totaling over $100 million—stemming largely from the 1988 open bank assistance. The plan projected that the reconstituted and recapitalized First City banks would work their way back to profitability. According to First City documents, it had received commitments from potential investors and landlords needed to raise more than $300 million in capital. OCC’s analysis of First City’s August self-rescue proposal concluded that the plan lacked viability due to an estimated $200 million capital shortfall at the reconstituted banks. OCC concluded that the plan did not provide sufficient incoming capital to cover asset quality problems and to provide the capital base required to reestablish the banks for long-term viability. OCC documents also showed that the planned lease renegotiations would not result in the projected savings. Finally, OCC also believed that First City would not be able to raise sufficient capital through stock issuances. Shortly after receipt of First City’s August 1992 self-rescue plan, OCC determined that an up-to-date examination was necessary to evaluate the likelihood that the plan would result in long-term viability for First City. The examination of the Houston bank, which began in late August 1992, focused on problem loans. OCC noted significant deterioration in several large loans since its last examination. On the basis of the results of its August examination, OCC determined that the bank had underestimated its ALLL by about $67 million. This amount exceeded the Houston bank’s existing equity capital of about $28 million, thus making the Houston bank insolvent and requiring OCC to close it. The Examiner-In-Charge (EIC) and other OCC officials told us that their adjustment of ALLL was based on both objective and subjective considerations. They said they gave consideration to First City-Houston’s history relating to its management’s inadequate recognition of loan quality problems and provision for ALLL. The OCC officials said they were also concerned about deteriorating financial conditions at the bank as reflected in dangerous classification trends within its loan portfolio, whereby a higher percentage of loans were recognized as troubled loans and the bank had not experienced the same recovery pattern as experienced by most banks. Further, OCC officials said they were concerned about the bank’s financial condition relative to other comparable institutions. In comparing First City’s ALLL to that of peer institutions, OCC said that it found that First City had maintained an ALLL level far below that of its peers. OCC said that given First City’s asset problems, it believed that First City’s ALLL should have been far higher than the peer average. OCC officials said they were also concerned about the weakening economic conditions in Texas and First City’s ability to overcome its problems in this environment. Finally, OCC officials said that, by this time, they had lost confidence in First City’s management and its processes for establishing proper reserve levels. On October 16, 1992, OCC advised FDIC of its latest examination findings and its plans to close First City-Houston as soon as practicable so that FDIC could resolve it in an orderly manner. FDIC advised OCC that FDIC could accelerate its projected December 1992 resolution to October 30, 1992, in light of the OCC examination findings. Accordingly, on October 30, 1992, OCC declared the First City-Houston bank insolvent and appointed FDIC receiver. On that same day, the Texas Banking Commissioner closed First City-Dallas on the grounds of imminent insolvency, and FDIC exercised its statutory authority to issue immediately payable cross-guarantee demands on the remaining 18 First City banks. This resulted in the closure of the entire First City banking organization on October 30, 1992. After being advised of OCC’s examination findings, FDIC considered two basic alternatives to provide for the orderly resolution of the First City banks: (1) liquidate them immediately or (2) place them under FDIC control and operate them as bridge banks until a sale could be arranged. FDIC chose the latter alternative, which would provide time for FDIC to compare the cost of liquidation to the cost of selling the banks based on bids it planned to solicit after the banks failed. FDIC assumed potential acquirers would be interested in purchasing the banks only if FDIC removed certain risks associated with asset quality problems, potential litigation liabilities, and costly contractual obligations. The January 1993 sale attracted bids from 30 potential acquirers and resulted in the sale of all 20 of the bridge banks. At the time of sale, FDIC estimated the sale would result in a gain, or surplus, of about $60 million—substantially different from the $500 million loss that FDIC had estimated 3 months earlier. FDIC officials said they were astonished by the proceeds. After resolution and liquidation expenses are paid, FDIC is to return any surplus to First City creditors and shareholders. Shortly after the First City banks were closed, the holding company filed lawsuits on behalf of the shareholders. The lawsuits asserted, among other things, that federal and state banking regulators acted without regard to due process and illegally and unnecessarily closed a solvent banking organization. More specifically, the lawsuits allege that OCC wrongfully closed the lead national bank and that the Texas Banking Commissioner wrongfully closed First City-Dallas. The lawsuits also asserted that FDIC, as the insurer, was responsible for the inappropriate closure of the financially sound First City banks. According to the suit, FDIC used its cross-guarantee authorities to execute the agency’s preconceived plan to gain control of the First City banking organization. The holding company asserted that FDIC’s use of its cross-guarantee provisions was both inappropriate and unnecessary, and violated the Fifth Amendment of the Constitution. The suit also noted that on numerous occasions during the summer of 1992, First City Bancorporation offered to merge all the First City banks and restore the capital at the troubled banks. The holding company asserted that if the regulators had approved such an action, their plans to close the First City banks could not have been carried out. In 1988, FDIC could have waited until the First City banks were insolvent and either liquidated them or sold them to interested potential acquirers. However, FDIC determined that providing $970 million in assistance to the First City banks was the best alternative available. When FDIC approved First City’s open bank assistance, FDIC’s resolution alternatives were limited by both regulatory requirements and economic conditions. In April 1988, OCC could not have closed First City banks for insolvency because, at that time, OCC could close a bank for insolvency only when a bank’s primary capital was negative. At the time, a bank’s primary capital was defined by OCC as the sum of the bank’s retained earnings and the bank’s ALLL. Although First City had negative retained earnings of $625 million, it also had $730 million in ALLL; hence, it had positive primary capital of $105 million. Additionally, in the mid-1980s, the Texas banking industry was experiencing its worst economic performance since the Great Depression, which limited FDIC’s resolution alternatives. According to FDIC, the economic conditions increased the cost to liquidate troubled banks and reduced the number of potential acquirers. Consequently, FDIC considered two resolution alternatives in August 1987. One was to allow First City losses to continue to mount until the banks’ primary capital was depleted, then either liquidate or operate First City banks as bridge banks until potential acquirers could be found. Under the other alternative, FDIC could have provided open bank assistance to willing acquirers of the First City banks—as long as the estimated cost of assistance was less than the estimated cost of liquidation to the insurance fund. FDIC decided against the first alternative for three reasons. First, FDIC believed that allowing First City banks to continue to deteriorate could jeopardize the stability of the regional banking industry. FDIC also was unsure about operating First City as a bridge bank because bridge banks were new to FDIC (the agency had received bridge bank authority in August 1987). Second, the First City banks were far too large and complex to be the agency’s first bridge banks, in FDIC’s opinion. And third, FDIC rejected liquidation because estimated liquidation costs were determined to be higher than the estimated cost to the fund for open bank assistance. FDIC approved $970 million of open bank assistance as the best resolution alternative available. A total of eight parties expressed interest in acquiring the troubled banks, and three submitted bids. FDIC’s estimates of potential insurance fund commitments based on those bids ranged from the $970 million for open bank assistance to $1.8 billion for the bid most costly to the insurance fund. According to FDIC records, one of the bids led to estimated fund costs as low as $603 million, but FDIC found that the bidder had used overly optimistic assumptions in the offer. When adjusted, the insurance fund cost of that bid was nearly $1.3 billion. The Federal Reserve Board (FRB) approved the change of control of these recapitalized banks to the new First City bank management with reservations. FRB’s memo approving the change of control warned the new management that assumptions agreed upon by FDIC and First City and used to forecast the banks’ road to recovery were optimistic. It also warned that if regional economic conditions did not drastically improve, the recapitalization effort was not likely to succeed. We reviewed the First City banks’ performance following the recapitalization to identify the factors that contributed to the October 1992 failures. We found that the failures resulted from a combination of factors, including the payment of dividends to shareholders, deteriorating loan portfolios, and relatively high operating costs. These findings are described in appendix III. On October 28, 1992, the FDIC Board determined that placing the failed First City banks into interim bridge banks constituted the least costly and most orderly resolution to First City’s financial difficulties. On that date the FDIC Board considered three alternatives. Two involved bridge bank resolutions and the third called for a liquidation of First City banks’ assets. The difference between the two bridge bank alternatives was that one alternative contained a loss-sharing agreement on a selected pool of troubled assets. Under this agreement, the acquirer would manage and dispose of the asset pool, and FDIC would reimburse the acquirer for a portion of the losses incurred when selling those assets. The other bridge bank alternative did not provide for loss sharing. The purpose of the two bridge bank alternatives was to provide for an orderly resolution by continuing the business of the banks until acceptable acquirers could be found. FDIC’s belief was that the bridge banks would preserve the First City banks’ value as going concerns while FDIC marketed them. FDIC estimated that a bridge bank resolution would minimize BIF’sfinancial exposure. FDIC was aware of various parties’ interest in acquiring the banks. However, FDIC believed that the potential acquirers would be interested in the banks only after they were placed in receivership, since, after closure, new bank management could renegotiate contractual and deposit arrangements with bank servicers and customers. FDIC staff estimated resolution costs to BIF ranging from a low of about $700 million (bridge bank with loss sharing) to a high of over $1 billion (FDIC liquidation). FDIC estimated both bridge bank alternatives to be less costly than a liquidation primarily because of the likelihood that FDIC would be able to obtain a premium, or a cash payment, from potential acquirers who would be assuming the deposits of the bridge banks. In a liquidation, no such premium would be paid because FDIC pays the depositors directly instead of selling the right to assume the deposits to an acquirer. FDIC also estimated that it could minimize the losses to the insurance fund if it provided loss sharing. While the FDIC Board believed that a bridge bank with a loss-sharing arrangement was the most orderly and least costly alternative presented by DOR, the ultimate cost of resolving the First City banks was uncertain. DOR staff’s initial cost model, which was based on the estimated proceeds and costs of each resolution alternative, estimated that a bridge bank resolution with loss sharing would cost about $700 million. This estimate was based largely on an asset valuation review performed for DOR by an outside contractor. Representatives from FDIC’s Division of Liquidations (DOL), which was responsible for disposing of assets assumed by FDIC, said that liquidating the First City banks would likely cost more than $1 billion. Other FDIC officials—including senior level DOR officials—said that because of the considerable market interest in the banks on a closed-bank basis, the cost to resolve First City banks would likely be about $300 million. The Board determined that placing First City banks into interim bridge banks would cost the insurance fund about $500 million. The then DOR Director told us that the fact that the Board did not rely solely on the initial DOR cost model was not a deviation from the normal resolution process. He explained to us that the resolution process is dynamic and takes into account FDIC Board deliberations. He noted that it was his responsibility to advise the Board regarding the merits and shortfalls associated with the DOR asset valuation process. He pointed out that DOR’s asset valuations estimated the net realizable value for failed bank assets disposed of by FDIC through a liquidation. The methodology determining net realizable value of assets may not always reflect the market value of assets disposed of through such resolution alternatives as an interim bridge bank. Typically, a going concern (including a bridge bank) establishes asset values that attempt to maximize the return to the investor regardless of the period the assets may be held. Net realizable asset valuation in a liquidation, on the other hand, attempts to maximize the return to the investor given a limited holding period, often less than 2 years. According to FDIC documents used in its Board’s deliberations, the October 1992 decision to place the First City banks in bridge banks and commit about $500 million to resolve First City was the least costly of the three alternatives the FDIC Board formally considered when the banks were closed. During the year preceding the failure, FDIC and OCC considered and rejected a number of alternatives to resolve the First City banks because the alternatives were considered too costly, did not ensure the banks’ long-term viability, or included provisions that were unacceptable from a policy perspective. As previously discussed, OCC had projected that operating losses, caused by imbedded loan portfolio problems, would render First City banks insolvent by December 1992. However, OCC’s determination that the Houston bank was insolvent in October 1992 accelerated First City banks’ closure by about 2 months. FDIC officials believed the earlier than projected closure unintentionally but effectively precluded either previous or new potential acquirers from doing due diligence, i.e., determining the value of the bank assets, deposits, and other liabilities necessary to ascertain their interest in bidding on the First City banks at the time of closure. Although FDIC initially estimated the cost to BIF of the October 1992 resolution of First City banks to be $500 million, the agency has since projected that this resolution will result in no cost to BIF. When it announced the sale of the First City banks in January 1993, FDIC estimated the proceeds generated from the sale would amount to a surplus of about $60 million. In June 1994, FDIC estimated that the surplus may exceed $200 million. As mentioned earlier, any surplus remaining after payment of FDIC’s resolution expenses is to be returned to First City’s creditors and shareholders. According to FDIC’s analysis of the resolution, sales proceeds were higher than FDIC expected largely because acquirers paid a 17-percent premium for the banks—substantially more than the 1-percent premium on deposits that FDIC had estimated in arriving at the $500 million loss estimate. According to FDIC officials, a deposit premium of 1 percent was typical for failed bank resolutions contemporaneous with the 1992 First City bank resolution. Some FDIC officials, however, told us that at least part of the premium paid by the acquirers should be attributed to the value the acquirers placed on First City bank assets. Since acquirers do not specify in their bids how much they are willing to pay for assets or deposits, neither we nor FDIC can determine the exact basis for the premium. As of June 1994, FDIC projected that settlement of the lawsuits by First City Bancorporation would result in no cost to BIF. FDIC’s projection was based on the assumption that the estimated surplus from the bridge bank sale will exceed its costs to resolve and liquidate the bridge banks, with any excess ultimately to be paid to the holding company. On June 22, 1994, FDIC and the holding company signed a settlement agreement under which First City would immediately receive in excess of $200 million. The settlement would allow the First City Bancorporation to pay its creditors and permit a distribution to its shareholders sooner rather than later.Basic tenets of this proposed settlement are (1) BIF will incur no loss in connection with the 1992 resolution of the First City banks and (2) FDIC will not receive more than its out-of-pocket costs to resolve the banks. Consistent with these tenets, the proposed settlement provides for FDIC to receive the net present value of over $100 million, largely based on First City’s guarantee to pay in 1998 toward the retirement of the collecting-bank-preferred-stock FDIC received in return for the 1988 open bank assistance. Any settlement between the two parties cannot be consummated until it is approved by the bankruptcy court. FDIC officials anticipate a decision on the settlement in early 1995. Generally, the processes used in providing financial assistance, closing banks, and resolving troubled banks should always include adequate safeguards for BIF. The events surrounding the First City resolutions offer valuable lessons for FDIC as the insurer and for all of the primary bank regulators. These lessons relate to how to better assist, close, or otherwise resolve troubled institutions in the future. Consultation between regulatory agencies might have led FDIC to adopt more realistic assumptions concerning the likelihood of success of the $970 million open bank assistance provided First City in 1988. When FDIC and the new First City management forecasted the First City banks’ success in 1988, a key economic assumption was that the economies of Texas and the Southwest would reverse their recessionary trend and grow at about 3 percent per year to mirror the growth rate of the national economy during the mid-1980s. However, the Texas economy grew only an average of 2.2 percent per year between 1989 and 1991. Furthermore, by the late 1980s and early 1990s, the national economy, which had been growing at about 3 percent per year, started to weaken and experience its own recessionary conditions. While approving the change of control to the new First City bank management, FRB raised a concern about these economic assumptions being too optimistic and, if not realized, possibly jeopardizing the success of the recapitalized banks. If FDIC had consulted with its regulatory counterparts in FRS and OCC on economic and financial assumptions for the economy and market in which the assisted bank would operate, it would have had a broader base for, and greater confidence in, the economic assumptions used as a basis to approve the open bank assistance. Such consultation might have produced more realistic assumptions and a better understanding of the likelihood that the financial assistance that FDIC provided could be successful. The financial assistance agreement could have included safeguards to better ensure that First City undertook only those operations that were within its capabilities and capacities. At the time of the open bank assistance, the new management of the First City bank projected relatively modest growth, primarily in traditional consumer lending activities. However, under pressure to generate a return for its investors through earnings and dividends, the management pursued much riskier lending and investment activities than it had described in its reorganization prospectus. In addition to taking more risks, the new bank management did not have the expertise, policies, or procedures in place to adequately control these activities. Further, the new bank management entered into contractual arrangements based on projected growth that, when not realized, resulted in higher operating expenses than the bank could sustain. FDIC’s assistance agreement did not include sufficient safeguards to ensure that the new bank management actually pursued a business strategy comparable to the one agreed upon as being prudent, or that the bank’s activities were in line with management’s capabilities or the bank’s capacities. In retrospect, such safeguards could have been specified in the agreement. For example, according to the reorganization prospectus, First City projected that it would expand its overall loan portfolio an average of about 10 percent per year for the first 3 years after the recapitalization. The new bank management projected that consumer, credit card, and energy loans would grow at significantly higher rates than the overall loan portfolio. Management also projected little growth in the riskier areas of real estate and international lending. Contrary to those projections, overall lending activity grew by only about 3 percent in 1989 and actually declined by about 3 percent in 1990 and by over 31 percent in 1991. First City sold its credit card portfolio in early 1990. In addition, First City’s actual real estate and international loans accounted for far greater percentages of its total loan portfolio than projected in the 1988 prospectus. FDIC’s financial assistance agreement with First City did not contain provisions requiring First City’s management to develop specific business strategies reflecting safe and sound banking practices and internal control mechanisms safeguarding FDIC’s investment in the First City banks. Shortly after the recapitalization, OCC examiners criticized the management of First City’s Houston bank for not having established policies and procedures to manage the risk associated with the bank’s highly leveraged transaction loans. Consequently, OCC directed the bank to establish policies and procedures to minimize the risks of those transactions. OCC similarly directed the bank management to establish policies and procedures related to the Houston bank’s international lending activities. In the meantime, First City bank management paid dividends based on income derived from its lending activity as well as from extraordinary events, such as the sale of its credit card operations. While such payments were permissible under the law at the time, they did not help the bank retain needed capital. Consequently, First City banks lacked sufficient capital to absorb the losses stemming from their lending activities. Further, First City-Houston entered into long-term contractual arrangements for buildings and services, such as data processing, that were based on overly optimistic projections of future growth. When that growth was not realized, the overhead costs related to these arrangements proved to be a drain on earnings and contributed to the bank’s failure. FDIC would have been in a better position to avoid the risks associated with these banking practices if it had strengthened the open assistance agreement by including provisions to (1) require bank management to develop business strategies relative to its market, expertise, and operational capabilities; and (2) control the flow of funds out of the bank through dividends, contractual arrangements, and other activities, such as management fees paid to the holding company or affiliates. The provisions could have been structured so that the primary regulator held bank management accountable for compliance with them. Such a structure could have involved having bank management stipulate that it would comply with specific assistance agreement provisions. Such a stipulation would have allowed the primary regulator to monitor the bank’s adherence to the key provisions of the assistance agreement, including the development of specific business strategies and lending policies and procedures. The primary regulator would then have had the information and authority necessary to take the appropriate enforcement action to ensure compliance with the key provisions of the agreement. Banks are required to follow statutory limitations on dividend payments provided in 12 U.S.C. §§ 56 and 60. While the regulations implementing the statutes and governing the payment of dividends have been tightened since 1988, banks are still authorized to pay dividends, as long as they satisfy the FDICIA minimum capital requirements. FDIC could have better controlled the flow of funds from the assisted banks by either limiting dividend payments or requiring regulatory approval based on the source of dividends. Such controls are typically used by FDIC and other regulators in enforcement actions when they have reason to be concerned about the safety and soundness of a bank’s practices or condition, and they could have been used in a similar manner in the First City assistance agreement. OCC could have better documented the bases for its closure decision had its examination reports and workpapers been clear, complete, and self-explanatory. Congress authorized the Comptroller of the Currency, as the charterer of national banks, to close a national bank whenever one or more statutorily prescribed grounds are found to exist, including insolvency. It is generally agreed in the regulatory community that closure decisions should be supported by clear, well-documented evidence of the grounds for closure. Thus, OCC and other primary regulators’ bank examination reports and underlying workpapers supporting closure decisions need to be complete, current, and accurate and provide documentation of the bases for closure decisions that is self-explanatory. However, we were unable to determine the basis for the OCC examiners’ finding that First City-Houston’s ALLL was insufficient solely from our review of the examination report or workpapers. Specifically, the examination report that OCC conveyed to Houston bank management did not fully articulate the basis for OCC’s finding that the bank’s ALLL was inadequate. From our review of OCC’s workpapers, we were unable to reconstruct the analysis performed to arrive at the need to increase the Houston bank’s ALLL. We had to supplement the information in the working papers with additional information obtained through discussions with the EIC and senior level OCC officials in order to determine how OCC arrived at its decision to require First City-Houston to increase its ALLL by $67 million. OCC officials were able to provide additional clarifying information on the basis for this finding. Although some information regarding these concerns was included in the examination workpapers, it was not sufficient for us to independently follow how OCC’s examiners arrived at the basis for their conclusion that First City-Houston’s ALLL was insufficient. Thoroughly documented workpapers would also have provided OCC and FDIC with a clear trail of the examiners’ methodology, analytical bases of evidentiary support, and mathematical calculations. This would have precluded the need for resource expenditures to reconstruct or verify the basis for examiners’ conclusions. Workpapers are important as support for the information and conclusions contained in the related report of examination. As described in OCC’s examination guidance, the primary purposes of the workpapers include (1) organizing the material assembled during an examination to facilitate review and future reference, (2) documenting the results of testing and formalizing the examiner’s conclusions, and (3) substantiating the assertions of fact or opinions contained in the report of examination. When examination reports and workpapers are clear and concise, independent reviewers, including those affected by the results, should be able to understand the basis for the conclusions reached by the examiner. OCC officials agreed that the First City examination workpapers should have included a comprehensive summary of the factors considered in reaching the final examination conclusions, especially regarding such a critical issue as a determination of bank insolvency. FDIC’s DOR could have considered information from the primary regulator relative to asset quality in making its resolution decisions. In situations like First City, where the primary regulator had just extensively reviewed a high proportion of the loan portfolio as part of a comprehensive examination and found deficiencies in the bank’s loan classification and reserving processes, FDIC resolutions officials should have been able to utilize the examination findings, at least as a secondary source, to test their asset valuation assumptions. This would have been particularly useful because the failure came on short notice and some FDIC officials had reservations about some of the underlying assumptions. OCC examination officials were apparently communicating with their FDIC examination counterparts about the accelerated First City-Houston bank examination. Even so, FDIC’s DOR officials could have benefitted from earlier information on OCC’s preliminary findings that indicated that First City-Houston would be insolvent before December 1992, as had been anticipated by all affected parties. This information would have provided DOR more lead time to consider a wider range of resolution alternatives, including soliciting bids from parties it knew to be interested in acquiring the banks. FDIC officials, however, did not believe the interested parties would submit bids since neither they nor FDIC had an opportunity to perform due diligence on the First City bank assets on such short notice. DOR officials could have used the OCC examiners’ assessment of asset quality as a means of verifying the asset valuations estimated through its own techniques. This would have been similar to the way FDIC uses its research model on smaller resolutions, i.e., as an independent check against the valuations. Also, the FDIC Board could have used such information since it was not confident that the more traditional resolution estimating techniques provided reliable results for the circumstances relative to the failing bank. The going concern valuation used by OCC examiners may even have been more relevant than the net realizable valuation used by DOR because FDIC expected a bridge bank or open bank assistance resolution to be the most orderly and least costly resolution alternative. FDIC and OCC provided written comments on a draft of this report, which are described below and reprinted in appendixes IV and V. FRS also reviewed a draft, generally agreed with the information as presented, but provided no written comments. FDIC described the report as being well researched and an overall accurate recording of the events that led up to and through the 1988 and 1992 transactions. FDIC offered further information and explanation related to the two transactions, including reasons why some of the lessons to be learned could not have been used by FDIC in 1988 and 1992 or would not have altered the outcomes of these transactions. FDIC further stated, however, that it will consider the lessons enumerated in the report and, where appropriate, incorporate them into future resolution decisions. We believe FDIC’s elaborations about the 1988 and 1992 transactions provide meaningful insights about its assistance and resolutions processes. The Executive Director, in later discussions about FDIC’s written comments, assured us that FDIC is open and receptive to the lessons to be learned, and his elaborations were intended to explain the bases for FDIC’s decisions and why other positions were not considered or taken at the time of the transactions. OCC raised concerns that the report might create an inference that we were questioning OCC’s basis to close the First City banks and about our suggestion that OCC needs to improve the quality of its examination reporting and workpaper documentation. OCC believes its basic standards for examiner documentation are appropriate for supervisory oversight and examiner decisionmaking purposes. While OCC believes its basic approach to be sound, including its documentation practices, it will consider our views in reviewing current examination guidance for potential revision to provide clarity, ensure consistency, and reduce burden. Our study was basically intended to provide an accurate accounting of the events, involving both the banks and regulators, that led to the 1988 and 1992 transactions to resolve First City. In compiling this account, we identified lessons to be learned from the First City experience that could potentially improve the insurer’s and regulators’ open bank assistance, bank closure, and bank resolution processes. We did not question the bases used by the insurer or regulators in making decisions relative to First City, but instead we looked for opportunities to improve those processes to ensure the insurer’s and regulators’ interests are adequately protected in making future decisions. The insurer and regulators, including FRS, generally agreed to consider the lessons to be learned from the First City experience to improve their processes. We will provide copies of this report to the Chairman, Federal Deposit Insurance Corporation; the Comptroller of the Currency; the Chairman of the Federal Reserve Board; and the Acting Director of the Office of Thrift Supervision. We will also provide copies to other interested congressional committees and members, federal agencies, and the public. This review was done under the direction of Mark J. Gillen, Assistant Director, Financial Institutions and Markets Issues. Other major contributors to this review are listed in appendix VI. If you have any questions about the report, please call me on (202) 512-8678. Concerned with FDIC’s provision of $970 million financial assistance to First City banks in 1988 and their ultimate failure less than 5 years later, the former Chairman of the Senate Committee on Banking, Housing and Urban Affairs asked us to review the events surrounding First City Bancorporation of Texas’ 1988 and 1992 resolutions and to use our review to reflect on FDIC’s use of open bank assistance. As agreed with the Committee, we focused our review on First City’s largest bank in Houston and its second largest bank in Dallas, because the financial difficulties of these two banks resulted in the insolvency of First City’s 18 other banks. Our objectives were to review the events leading up to First City’s 1988 open bank assistance and its 1992 bank failures to determine why FDIC provided open bank assistance in 1988 rather than close the First why the 1992 resolution estimate differed so much from the estimate resulting from the 1993 sale of the banks; whether the First City banks’ failures in 1992 are expected to result in additional costs to BIF; and whether the First City experience provides lessons relevant to the assistance, closure, and/or resolution of failing banks. To achieve our objectives, we reviewed examination reports and related available examination documents and workpapers relative to First City’s Houston and Dallas banks and other subsidiary banks for 1983 through 1992. We began our review of examination reports with the 1983 examination because OCC officials told us that was when they first identified safety and soundness deficiencies in First City banks. The 1993 examination also precipitated the first supervisory agreement between First City management and the bank regulatory agencies. In reviewing the examination reports we sought to obtain information on the condition of the banks at the time of each examination and the significance of deficiencies as identified by the regulators. We reviewed examination workpapers, correspondence files, and management reports to gain a broader understanding of the problems identified, the approach and methodology used to assess the conditions of the First City banks, and the regulatory actions taken to promote or compel bank management to address deficient conditions found by regulators. We also used the examination workpapers to compile lists of loans that caused significant losses to the banks to try and compare the loan quality problems arising from loans made before the recapitalization to those made by new bank management. We interviewed the OCC examiners-in-charge of the 1989 examinations and all subsequent examinations to obtain their perspectives on the conditions found at the First City banks. We also interviewed OCC National Office officials to obtain their views on the adequacy of OCC’s oversight of the banks. We reviewed all relevant examination reports, workpapers, and supporting documentation to assess their adequacy in explaining the positions taken by OCC relative to First City-Houston and the Collecting Bank. When we were unable to gain adequate information from the examination records, we sought further explanations from OCC examination officials and assessed those explanations when received. We also reviewed FDIC and FRS records of examinations and supporting documents, particularly those related to First City-Dallas. We also discussed issues relating to First City banks with FDIC and FRS officials. Further, we reviewed First City Bancorporation financial records and supporting documents and discussed issues relating to OCC, FDIC, and FRS oversight with First City officials. Finally, we reviewed FDIC records relating to First City’s 1988 recapitalization and FDIC’s 1992 and 1993 bridge bank decisions. We discussed issues relating to these actions with FDIC, OCC, FRS, and First City officials to obtain their viewpoints on the actions taken. We also reviewed FDIC, OCC, and FRS records assessing the economy and the conditions of Texas financial institutions from the mid-1980s to the early 1990s. FDIC and OCC provided written comments on a draft of this report. FRS also reviewed a draft, generally agreed with the information as presented, but provided no written comments. The agencies’ written comments are presented and evaluated on page 21 of the letter and reprinted in appendixes IV and V. We did our work between January 1993 and June 1994 at FDIC, OCC, and FRS in Washington, D.C.; at FDIC, OCC, and FRS in Dallas; and at the First City banks in Houston and Dallas. We did our work in accordance with generally accepted government auditing standards. The 1980s and the early 1990s were tumultuous times for the banking industry, especially in the Southwest. During this time, the banking industry experienced record profits followed by record losses, and a number of legislative and regulatory changes altered both the way banks did business and the way banks were regulated. The responsibility for regulating federally insured banks is divided among three federal agencies. OCC is the primary regulator for nationally chartered banks. FRS regulates all bank holding companies and state-chartered banks that are members of FRS. FDIC regulates state-chartered banks that are not members of FRS. FDIC is also the insurer of all federally insured banks and thrifts, which gives it the dual role of being both the regulator and insurer for many banks. The primary role of federal regulators is to monitor the safety and soundness of the operations of both individual banks and the banking system as a whole. The regulators’ major means of monitoring the banks is through the examination process. Examinations are intended to evaluate the overall safety and soundness of a bank’s operations, compliance with banking laws and regulations, and the quality of a bank’s management and directors. Examinations are also to identify those areas where bank management needs to take corrective actions to strengthen performance. When a regulator identifies an area where the bank needs to improve, it can require the bank to initiate corrective action through either formal or informal measures. These measures can be as informal as a comment in the examination report or as severe as the regulator ordering the bank to cease and desist from a particular activity or actually ordering the closure of the bank. The role of the insurer is to protect insured depositors in the nation’s banks, help maintain confidence in the banking system, and promote safe and sound banking practices. As the insurer of bank deposits, FDIC may provide financial assistance for troubled banks. The assistance may be granted directly to the bank or to a company that controls or will control it. FDIC may also grant assistance to facilitate the merger of banks. When a chartering authority closes a bank, it typically appoints FDIC as receiver for the bank. FDIC then arranges for insured depositors to be paid directly by FDIC or the acquiring bank and liquidates the assets and liabilities not assumed by the acquiring bank. Many banks, including First City’s, are owned or controlled by a bank holding company and have one or more subsidiary banks. Typically, in a bank holding company arrangement, the largest subsidiary bank is referred to as the lead bank. The subsidiary banks may or may not have the same types of banking charters, i.e., either national or state charters. Consequently, different regulators may be responsible for overseeing the lead bank and the other subsidiary banks in the organization, with FRS responsible for overseeing all bank holding companies. First City Bancorporation of Texas typified this structure. It consisted of a holding company, a nationally chartered lead bank, 11 other nationally chartered subsidiary banks, 5 state-chartered banks that were members of FRS, and 3 state-chartered banks that were not members of FRS. Hence, the First City organization was supervised and examined by all three federal bank regulators. Between the time FDIC first announced open bank assistance for First City in 1987 and its closure in 1992, a number of regulatory and legislative initiatives gave the federal government greater authority to deal with troubled financial institutions. Passage of the Competitive Equality Banking Act of 1987 (CEBA), the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) provided both regulators and the insurer greater authorities in dealing with troubled financial institutions. Their passage also provided the impetus for regulatory changes that granted regulators and the insurer greater authorities to close and resolve troubled financial institutions. The regulators’ expanded authority to close a bank is possibly one of the most significant changes that has occurred in the federal government’s oversight of banks. At the time of the 1988 First City reorganization, OCC had the authority to appoint FDIC as receiver for a national bank whenever OCC, through its examination of the bank, determined that the bank was insolvent. The National Bank Act did not define insolvency, and the courts afforded OCC considerable discretion in determining the standard for measuring insolvency. OCC used two standards to measure insolvency—a net worth standard and a liquidity standard. Basically, a bank becomes net worth or equity insolvent when its capital has been depleted. Similarly, a bank becomes liquidity insolvent when it does not have sufficient liquid assets—i.e., cash—to meet its obligations as they become due, regardless of its net worth. Following the 1988 First City reorganization, OCC promulgated a regulation that allowed it to find a national bank insolvent at an earlier stage than before. Under the new rule, OCC redefined primary capital to exclude a bank’s allowance for loan and lease losses. Prior to this change, OCC considered a national bank’s regulatory capital to include not only its retained earnings and paid-in capital but also the allowance a bank had set up for loan and lease losses; i.e., for uncollectible or partially collectible loans. According to OCC, the change brought OCC’s measurement of a bank’s equity more closely in line with generally accepted accounting principles’ measurement of equity. While this action was not specifically required by FIRREA, OCC stated the change was within the spirit of the 1989 amendments to the federal banking laws. The cross-guarantee provisions of FIRREA also granted FDIC authority to recoup from commonly controlled depository institutions any losses incurred or reasonably anticipated to be incurred by FDIC due to the failure of a commonly controlled insured depository institution. As in the case of the First City banks, the cross-guarantee assessment may result in the failure of an otherwise healthy affiliated institution if the institution is unable to pay the amount of the assessed liability. This provision imposes a liability on commonly controlled institutions for the losses of their affiliates at the time of failure, thereby reducing BIF losses. The law gives FDIC discretion in determining when to require reimbursement and to exempt any institution from the cross-guarantee provisions if FDIC determines that the exemption is in the best interest of the applicable insurance fund. The manner in which FDIC can resolve troubled banks involves another significant set of changes that has occurred since FDIC announced First City’s first resolution in 1987. More specifically, FDICIA now requires FDIC to evaluate all possible methods for resolving a troubled bank and resolve it in a manner that results in the least cost to the insurance fund. Prior to FDICIA’s least-cost test, FDIC was required to choose a resolution method that was no more costly than the cost of a liquidation. Currently, the only exception to the least-cost determination is when the Secretary of the Treasury determines that such a selection would have a serious adverse effect on the economic conditions of the community or the nation and that a more costly alternative would mitigate the adverse effects. To date, the systemic risk exception has not been used. FDIC’s ability to provide open bank assistance has also undergone significant changes since FDIC assisted First City in 1988. At that time, FDIC was authorized to provide assistance to prevent the closure of a federally insured bank. FDIC was permitted to provide the assistance either directly to the troubled bank or to an acquirer of the bank. Before providing the assistance, FDIC had to determine that the amount of assistance was less than the cost of liquidation, or that the continued operation of the bank was essential to provide adequate banking services in the community. To implement these provisions, FDIC adopted guidelines that open assistance had to meet. The key guidelines are summarized below: The assistance had to be less costly to FDIC than other available alternatives. The assistance agreement had to provide for adequate managerial and capital resources (from both FDIC and non-FDIC sources) to reasonably ensure the bank’s future viability. The agreement had to provide for the assistance to benefit the bank and FDIC and had to include safeguards to ensure that FDIC’s assistance was not used for other purposes. The financial effect on the debt and equity holders of the bank, including the impact on management, shareholders, and creditors of the holding company, had to approximate what would have happened if the bank had failed. If possible, the agreement had to provide for the repayment of FDIC’s assistance. FDICIA placed additional limits on FDIC’s use of open bank assistance. FDICIA added a new precondition to FDIC’s authority to provide open assistance under section 13(c), which is summarized below. Under FDICIA, FDIC may consider providing financial assistance to an operating financial institution only if the following criteria can be met: (a) Grounds for the appointment of a conservator or receiver exist or likely will exist in the future if the institution’s capital levels are not increased and it is unlikely that the institution will meet capital standards without assistance. (b) FDIC determines that the institution’s management has been competent and has complied with laws, directives, and orders and did not engage in any insider dealing, speculative practice, or other abusive activity. In addition to the previously discussed statutory changes, FDICIA contained a resolution by Congress that encourages banking agencies to pursue early resolution strategies provided they are consistent with the new least-cost provisions and contain specific guidelines for such early resolution strategies. Since FDICIA, a further statutory limitation has been placed on open assistance transactions. Section 11 of the Resolution Trust Corporation Completion Act of 1993 prohibits the use of BIF and Saving Association Insurance Fund (SAIF) funds in any manner that would benefit the shareholders of any failed or failing depository institution. In FDIC’s view, as set forth in its report to Congress on early resolutions of troubled insured depository institutions, this provision “largely eliminates the possibility of open assistance, except where a systemic risk finding” is made pursuant to the least-cost provisions. Another change to FDIC’s resolution alternatives occurred when CEBA provided FDIC the authority to organize a bridge bank in connection with the resolution of one or more insured banks. Essentially, a bridge bank is a nationally chartered bank that assumes the deposits and other liabilities of a failed bank. The bridge bank also purchases the assets of a failed institution and temporarily performs the daily functions of the failed bank until a decision regarding a suitable acquirer or other resolution alternative can be made. To better understand some of the factors that contributed to the ultimate failure of the 1988 recapitalized First City banks, we reviewed First City’s activities from 1988 to 1990 as reflected in examination reports and workpapers. The results of that review are summarized in this appendix. First City Bancorporation banks’ reported profits in 1988, 1989, and 1990 depended on nontraditional sources of income that were not sustainable. These profits were then used to justify the payment of cash dividends during 1989 and 1990 that significantly reduced the banks’ retained earnings. First City’s reliance on income from the Collecting Bank nearly equalled First City’s net income during 1988 and 1989, First City’s only profitable years. Furthermore, we found that if it were not for the $73 million in interest and fee income the Collecting Bank paid First City in 1988, the latter would have lost about $7 million that year. While First City’s 1989 net income did not completely depend upon the Collecting Bank’s interest and fees, we found that such income accounted for nearly $100 million of the $112 million in net income earned by First City during 1989. Another nontraditional source of First City income was generated in the first quarter of 1990 when First City sold its credit card portfolio for a $139 million profit. This sale enabled First City to turn an otherwise $49 million loss from operations into a $90 million net profit during the quarter that ended March 31, 1990. These nontraditional sources of income accounted for nearly all of First City’s net income during the first 2 years of operations after recapitalization and did not necessarily indicate a significant problem with First City’s operations. It is also not necessarily a basis for criticizing First City’s management. First City’s reliance on income from nontraditional sources could be explained as the result of initial start-up problems associated with taking over a large regional multibank holding company during a period of economic instability. What is noteworthy is that First City used the profits on income from nontraditional and onetime sources to pay $122 million in cash dividends, thereby decreasing the bank’s retained earnings. The assistance agreement’s only limitation on the payment of dividends was that common stock dividends could not exceed 50 percent of the period’s earnings. The anticipated success of the recapitalized First City was at least partially based upon the assumption that First City Bancorporation, including the Collecting Bank, would not experience further loan portfolio deterioration. This assumption proved to be incorrect. Problems with both pre- and post-recapitalization loan portfolios resulted in significant loan charge-offs and the depletion of bank equity. For example, we found that about $270 million in assets that originated prior to the recapitalization at First City’s Houston and Dallas banks resulted in nearly $75 million in losses. Furthermore, problems with pre-recapitalization assets also plagued the Collecting Bank. These problems forced First City to charge-off nearly $200 million of Collecting Bank notes by the time the banks were closed in October 1992. First City also experienced significant problems with loans originated after the 1988 reorganization. We found that First City suffered about $300 million in losses on such loans. Some of these losses occurred as a result of First City’s aggressive loan growth policy that increased its portfolio of loans to finance inherently risky, highly leveraged transactions. First City’s highly leveraged transaction lending peaked in 1989 at more than $700 million. Other significant losses resulted from First City’s international and other nonregional lending practices. Still other losses resulted from poor underwriting practices or adverse economic conditions. First City’s recapitalization prospectus predicted that the banks would realize savings of more than $100 million per year by reducing operating expenses to a level commensurate with industry standards. While First City realized at least some of the anticipated savings during its first 2 years of operations, it was unable to sustain these cost-cutting efforts. According to both OCC and FDIC, high operating expenses contributed to First City’s 1992 failure. As shown in table III.1, First City’s operating expenses did not decrease as First City’s net income, gross profits, and total assets decreased. Rather, First City’s operating expenses were the lowest during 1988 and 1989, when it reported year-end profits, and highest during 1990 and 1991, when it lost more than $380 million. Our review of First City’s escalating operating expenses showed that during 1990 and 1991—a period when the banks’ revenues and assets were decreasing—its data processing and professional services expenses increased because of the way in which payments for these services were structured in related long-term contracts. Furthermore, First City’s operating expenses were already high due to above-market long-term building leases negotiated before the recapitalization. (158) (225) The following are GAO’s comments on the Federal Deposit Insurance Corporation’s letter dated October 24, 1994. 1. We agree with FDIC that it received bridge bank authority in 1987, prior to the 1988 First City resolution, but did not receive cross-guarantee authority until later, in 1989. We do not dispute the FDIC scenario regarding what may have happened had it exercised its bridge bank authority on the two troubled First City banks in 1988 without having the authority to recover the losses from the other affiliated First City banks. Under the circumstances, FDIC alternatives for resolving the First City banks in 1988 were to either provide open bank assistance for the two troubled banks, or wait until they failed and consider the other resolution methods, including bridge banks. 2. We do not dispute the FDIC position that regulatory agencies were invited to all important meetings or that its Board of Directors was aware of the regulators’ opinions prior to making the 1988 open bank assistance decision. Our suggestion, however, is for FDIC to actively consult with its regulatory counterparts about key assumptions used in resolution alternatives recommended to the Board. We believe FDIC could take better advantage through greater consultation in making economic projections. The Federal Reserve, for example, has developed considerable expertise. In later discussions with the Executive Director, he agreed with us that such consultation with regulatory counterparts would be of value, although he noted that the accountability for the resolution decision, along with its assumptions, resides with FDIC. 3. In later discussions with the Executive Director, he told us that he does not disagree with our suggestion that FDIC include safeguards in open bank assistance agreements. His only concern would be if the safeguards were so stringent as to discourage potential private investors, thereby potentially costing FDIC more to resolve a troubled bank. He agrees with us that FDIC’s responsibility is to protect the Bank Insurance Fund and FDIC should include safeguards in its assistance agreements. 4. We agree that FDIC could realistically enforce the assistance agreement conditions only if FDIC determined that the bank breached the contractual conditions. The Executive Director told us that he is receptive to including provisions in future FDIC assistance agreements that authorize primary regulators to take enforcement actions if they find noncompliance with safeguards contained in future FDIC assistance agreements. His primary concern involves the potential of discouraging private investors, although he also believes there may be some practical problems in agreeing on conditions that serve the interests of the acquirer, the insurer, and the primary regulator. The Executive Director understands that such provisions would enable the primary regulator to gather the necessary information and have the requisite authority to take the appropriate enforcement action to ensure compliance with the relevant provisions of the assistance agreement. 5. We agree that in 1992, earlier FDIC notification of OCC’s finding that First City-Houston was insolvent may not have provided FDIC with a broader range of resolution alternatives because First City management was still convinced that it could raise sufficient capital to make the bank financially viable. Consequently, while some potential investors or acquirers had performed due diligence relative to earlier First City self-rescue proposals, FDIC did not believe sufficient due diligence had been performed by potential acquirers or that First City management would permit those interested to perform due diligence. Therefore, FDIC believed bridge banks would provide for the most orderly resolution, which FDIC also determined to be the least costly resolution alternative available at that time. While earlier notification may not have affected the First City resolution, the Executive Director agreed with us that early notification of insolvency is critically important for FDIC to consider the full range of resolution alternatives. He also said that FDIC is in regular contact with primary regulators to ensure early warning of potential insolvencies to maximize its resolution options. 6. We agree that examiners typically value assets on a going concern basis, and resolvers value the assets on a net realizable value presuming that they will be liquidated. The Executive Director, however, agreed with us that in unique situations like First City—where a high percentage of the assets were just assessed by examiners and market interest in the troubled banks suggests the assets will be acquired by a healthy bank—FDIC could use the examiners’ assessments as a secondary source to check on the validity of its asset valuation review results. Such a use would be comparable to how FDIC generally uses its research model, the results of which the FDIC Board of Directors may consider in its deliberations in making its resolution decisions. The following are GAO’s comments on the Comptroller of the Currency’s letter dated January 5, 1995. 1. Our objectives in the First City study included a review of the processes used by regulators to assist, close, or otherwise resolve failing financial institutions. We reviewed the adequacy of those processes, including the bases for the related decisions made by federal regulators for First City. While we found some deficiencies in the processes as applied in the First City decisions and suggested opportunities to improve those processes from the First City experience, it was not our objective nor did we take a position on the regulators’ decisions. 2. We agree with OCC that its basic standards for examination reporting and workpaper documentation are adequate based on this study and on other GAO studies of OCC’s examination process. In our report entitled Bank and Thrift Regulation: Improvements Needed in Examination Quality and Regulatory Structure (GAO/AFMD-93-15), dated February 16, 1993, we found that OCC generally adequately documented its examination results. Although we did not find in our study of First City adequate documentation for the examination results, OCC officials assured us that our concerns are being considered in their efforts to improve OCC examination processes, including the documentation of examination results. Rosemary Healy, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed the Federal Deposit Insurance Corporation's (FDIC) resolution of the First City Bancorporation of Texas, focusing on: (1) why FDIC decided to resolve the corporation by providing financial assistance instead of using other available resolution alternatives; and (2) the additional cost to the Bank Insurance Fund (BIF) as a result of the resolution. GAO found that: (1) in 1988, FDIC provided $970 million in financial assistance to recapitalize and restructure the banking organization; (2) FDIC chose this method of resolution because it was less costly than liquidating the banks in the event of insolvency; (3) FDIC estimated BIF costs to liquidate the banks to be about $1.74 billion, as opposed to the $970 million estimated for open bank assistance; (4) FDIC did not opt to sell the banks because it did not believe that it would be able to find acceptable buyers with sufficient capital to restore the banks to long-term viability; (5) FDIC placed the banks under its control for about 3 months and operated them as bridge banks to facilitate the orderly resolution of the banks; (6) FDIC relied on its best business judgment in estimating BIF costs at the time of the banks' failures; (7) FDIC considered loss estimates that ranged from $300 million to over $1 billion in making its least-cost resolution determination; (8) the Office of the Comptroller of the Currency could have better supported its decision to close the largest bank by ensuring that its examination reports and underlying workpapers were clear, well documented, and self-explanatory; and (9) FDIC resolution officials could have used OCC examination findings as a means of verifying its valuation of the banks' assets.",govreport
"In the early 1980s, Congress had concerns about a lack of adequate oversight and accountability for federal assistance provided to state and local governments. Before passage of the Single Audit Act in 1984 (the act), the federal government relied on audits of individual grants to help gain assurance that state and local governments were properly spending federal assistance. Those audits focused on whether the transactions of specific grants complied with program requirements. The audits usually did not address financial controls and were, therefore, unlikely to find systemic problems with an entity’s fund management. Further, individual grant audits were conducted on a haphazard schedule, which resulted in large portions of federal funds being unaudited each year. In addition, the auditors conducting the individual grant audits did not coordinate their work with the auditors of other programs. As a result, some entities were subject to numerous grant audits each year, while others were not audited for long periods. In response to concerns that large amounts of federal financial assistance were not subject to audit and that agencies sometimes overlapped on oversight activities, Congress passed the Single Audit Act of 1984. The act stipulated that state and local governments that received at least $100,000 in federal financial assistance in a fiscal year have a single audit conducted for that year. The concept of a single audit was created to replace multiple grant audits with one audit of an entity as a whole. State and local governments which received between $25,000 and $100,000 in federal financial assistance had the option of complying with audit requirements of the act or the audit requirements of the federal program(s) that provided the assistance. The objectives of the Single Audit Act, as amended, are to promote sound financial management, including effective internal control, with respect to federal awards administered by nonfederal entities; establish uniform requirements for audits of federal awards administered promote the efficient and effective use of audit resources; reduce burdens on state and local governments, Indian tribes, and nonprofit organizations; and ensure that federal departments and agencies, to the maximum extent practicable, rely upon and use audit work done pursuant to the act. The Single Audit Act adopted the single audit concept to help meet the needs of federal agencies for grantee oversight as well as grantees’ needs for single, uniformly structured audits. Rather than being a detailed review of individual grants or programs, the single audit is an organizationwide financial statement audit that includes the audit of the Schedule of Expenditures of Federal Awards (SEFA) and also focuses on internal control and the recipient’s compliance with laws and regulations governing the federal financial assistance received. The act also required that grantees address material noncompliance and internal control weaknesses in a corrective action plan, which is to be submitted to appropriate federal officials. The act further required that single audits be performed in accordance with GAGAS issued by GAO. These standards provide a framework for conducting high-quality financial audits with competence, integrity, objectivity, and independence. The Single Audit Act Amendments of 1996 refined the Single Audit Act of 1984 and established uniform requirements for all federal grant recipients. The refinements cover a range of fundamental areas affecting the single audit process and single audit reporting, including provisions to extend the law to cover all recipients of federal financial assistance, including, in particular, nonprofit organizations, hospitals, and universities; ensure a more cost-beneficial threshold for requiring single audits; more broadly focus audit work on the programs that present the greatest financial risk to the federal government; provide for timely reporting of audit results; provide for summary reporting of audit results; promote better analyses of audit results through establishment of a federal clearinghouse and an automated database; and authorize pilot projects to further streamline the audit process and make it more useful. The 1996 amendments required the Director of OMB to designate a Federal Audit Clearinghouse (FAC) as the single audit repository, required the recipient entity to submit financial reports and related audit reports to the clearinghouse no later than 9 months after the recipient’s year-end, and increased the audit threshold to $300,000. The criteria for determining which entities are required to have a single audit are based on the total amount of federal awards expended by the entity. The initial dollar thresholds were designed to provide adequate audit coverage of federal funds without placing an undue administrative burden on entities receiving smaller amounts of federal assistance. When the act was passed, the dollar threshold criteria for the audit requirement were targeted toward achieving audit coverage for 95 percent of direct federal assistance to local governments. As part of OMB’s biennial threshold review required by the 1996 amendments, OMB increased the dollar threshold for requirement of a single audit to $500,000 in 2003 for fiscal years ending after December 31, 2003. Federal oversight responsibility for implementation of the Single Audit Act is currently shared among various entities—OMB, federal agencies, and their respective Offices of Inspector General (OIG). The Single Audit Act assigned OMB the responsibility of prescribing policies, procedures, and guidelines to implement the uniform audit requirements and required each federal agency to amend its regulations to conform to the requirements of the act and OMB’s policies, procedures, and guidelines. OMB issued Circular No. A-133, Audits of States, Local Governments, and Non-Profit Organizations, which sets implementing guidelines for the audit requirements and defines roles and responsibilities related to the implementation of the Single Audit Act. The federal agency that awards a grant to a recipient is responsible for ensuring recipient compliance with federal laws, regulations, and the provisions of the grant agreements. The awarding agency is also responsible for overseeing whether the single audits are completed in a timely manner in accordance with OMB Circular No. A-133 and for providing annual updates of the Compliance Supplement to OMB. Some federal agencies rely on the OIG to perform quality control reviews (QCR) to assess whether single audit work performed complies with OMB Circular No. A-133 and auditing standards. The grant recipient (auditee) is responsible for ensuring that a single audit is performed and submitted when due, and for following up and taking corrective action on any audit findings. The auditor of the grant recipient is required to perform the audit in accordance with GAGAS. A single audit consists of (1) an audit and opinions on the fair presentation of the financial statements and the SEFA; (2) gaining an understanding of internal control over federal programs and testing internal control over major programs; and (3) an audit and an opinion on compliance with legal, regulatory, and contractual requirements for major programs. The audit also includes the auditor’s schedule of findings and questioned costs, and the auditee’s corrective action plans and a summary of prior audit findings that includes planned and completed corrective actions. Under GAGAS, auditors are required to report on significant deficiencies in internal control and on compliance associated with the audit of the financial statements. Recipients expending more than $50 million in federal funding ($25 million prior to December 31, 2003) are required to have a cognizant federal agency for audit in accordance with OMB Circular No. A-133. The cognizant agency for audit is the federal awarding agency that provides the predominant amount of direct funding to a recipient unless OMB otherwise makes a specific cognizant agency assignment. The cognizant agency for audit provides technical audit advice, considers requests for extensions to the submission due date for the recipient’s reports, obtains or conducts QCRs, coordinates management decisions for audit findings, and conducts other activities required by OMB Circular No. A-133. According to OMB officials, the FAC single audit database generates a listing of those agencies that should be designated cognizant agencies for audit based on information on recipients expending more than $50 million. The officials also stated that OMB is responsible for notifying both the recipient and cognizant agency for audit of the assignment. Federal award recipients that do not have a cognizant agency for audit are assigned an oversight agency for audit, which provides technical advice and may assume some or all of the responsibilities normally performed by a cognizant agency for audit. Federal grant awards to state and local governments have increased significantly since the Single Audit Act was passed in 1984. Because single audits represent the federal government’s primary accountability tool over billions of dollars each year in federal funds provided to state and local governments and nonprofit organizations, it is important that these audits are carried out efficiently and effectively. As shown in figure 1, the federal government’s use of grants to state and local governments has risen substantially, from $7 billion in 1960 to almost $450 billion budgeted in 2007. GAO supported the passage of the Single Audit Act, and we continue to support the single audit concept and principles behind the act as a key accountability mechanism over federal grant awards. However, the quality of single audits conducted under this legislation has been a longstanding area of concern since the passage of the Single Audit Act in 1984. During the 1980s, GAO issued reports that identified concerns with single audit quality, including issues with insufficient evidence related to audit planning, internal control and compliance testing, and the auditors’ adherence to GAGAS. The federal Inspectors General as well have found similar problems with single audit quality. The deficiencies we cited during the 1980s were similar in nature to those identified in the recent PCIE report. In June 2002, GAO and OMB testified at a House of Representatives hearing about the importance of single audits and their quality. In its testimony, OMB identified reviews of single audit quality performed by several federal agencies that disclosed deficiencies. However, OMB emphasized that an accurate statistically based measure of audit quality was needed, and should include both a baseline of the current status and the means to monitor quality in the future. We also recognized in our testimony the need for a solution or approach to evaluate the overall quality of single audits. To gain a better understanding of the extent of single audit quality deficiencies, OMB and several federal OIGs decided to work together to develop a statistically based measure of audit quality, known as the National Single Audit Sampling Project. The work was conducted by a committee of representatives from the PCIE, the Executive Council on Integrity and Efficiency (ECIE), and three State Auditors, with the work effort coordinated by the U.S. Department of Education OIG. The Project had two primary objectives: to determine the quality of single audits by performing QCRs of a statistical sample of single audits, and to make recommendations to address any audit quality issues noted. The project conducted QCRs of a statistical sample of 208 audits randomly selected from a universe of over 38,000 audits submitted and accepted for the period April 1, 2003, through March 31, 2004. The sample was split into two strata: Stratum 1: entities with $50 million or more in federal award expenditures, Stratum 2: entities with less than $50 million in federal award expenditures (with at least $500,000). The above split in the sample strata corresponds with the current threshold for designating a cognizant agency, which is for entities that expend more than $50 million in a year in federal awards. Table 1 shows the universe and strata used in the analysis and the reviews completed in the National Single Audit Sampling Project. The project covered portions of the single audit relating to the planning, conducting, and reporting of audit work related to (1) the review and testing of internal control and (2) compliance testing pertaining to compliance requirements for selected major federal programs. The scope of the project included review of audit work related to the SEFA and the content of all of the auditors’ reports on the federal programs. The project did not review the audit work and reporting related to the general purpose financial statements. The PCIE project team categorized the audits based on the results of the QCRs into the following three groups: Acceptable—No deficiencies were noted or one or two insignificant deficiencies were noted. This group also includes the subgroup, Accepted with Deficiencies, which is defined as one or more deficiencies with applicable auditing criteria noted that do not require corrective action for the engagement, but should be corrected on future engagements. Audits categorized into this subgroup have limited effect on reported results and do not call into question the auditor’s report. Examples of deficiencies that fall into this subgroup are (1) not including all required information in the audit findings; (2) not documenting the auditor’s understanding of internal control, but testing was documented for most applicable compliance requirements; and (3) not documenting internal control or compliance testing for a few applicable compliance requirements. Limited Reliability—Contains significant deficiencies related to applicable auditing criteria and requires corrective action to afford reliance upon the audit. Deficiencies for audits categorized into this group have a substantial effect on some of the reported results and raise questions about whether the auditors’ reports are correct. Examples of deficiencies that fall into this category are (1) documentation did not contain adequate evidence of the auditors’ understanding of internal control or testing of internal control for many or all compliance requirements; however, there was evidence that most compliance testing was performed; (2) lack of evidence that work related to the SEFA was adequately performed; and (3) lack of evidence that audit programs were used for auditing internal control, compliance, and/or the SEFA. Unacceptable—Substandard audits with deficiencies so serious that the auditors’ opinion on at least one major program cannot be relied upon. Examples of deficiencies that fall into this group are (1) no evidence of internal control testing and compliance testing for all or most compliance requirements for one or more major programs, (2) unreported audit findings, and (3) at least one incorrectly identified major program. As shown in table 2, the PCIE study estimated that, overall, approximately 49 percent of the universe of single audits fell into the acceptable group. This percentage also includes “accepted with deficiencies.” The remaining 51 percent had deficiencies that were severe enough to cause the audits to be classified as having limited reliability or being unacceptable. Specifically, for the 208 audits drawn from the universe, the statistical sample showed the following about the single audits reviewed in the PCIE study: 115 were acceptable and thus could be relied upon. This includes the category of “accepted with deficiencies.” Based on this result, the PCIE study estimated that 48.6 percent of the entire universe of single audits were acceptable. 30 had significant deficiencies and thus were of limited reliability. Based on this result, the PCIE study estimated that 16.0 percent of the entire universe of single audits was of limited reliability. 63 were unacceptable and could not be relied upon. Based on this result, the PCIE study estimated that 35.5 percent of the entire universe of single audits was unacceptable. It is important to note the significant difference in results in the two strata. Specifically, 63.5 percent of the audits of entities in stratum 1 (those expending $50 million or more in federals awards) were deemed acceptable, while 48.2 percent of audits in stratum 2 (those expending at least $500,000 but less than $50 million) were deemed acceptable. Because of these differences, it is also important to analyze the results in terms of federal dollars. For the 208 audits drawn from the entire universe, the statistical sample showed the following about the single audits reviewed in the PCIE study: The 115 acceptable audits represented 92.9 percent of the value of federal award amounts reported in all 208 audits the PCIE study reviewed. The 30 audits of limited reliability represented 2.3 percent of the value of federal award amounts reported in all 208 audits the PCIE study reviewed. The 63 unacceptable audits represented 4.8 percent of the value of federal award amounts reported in all 208 audits the PCIE study reviewed. The dollar distributions for the 208 audits reviewed in the study are shown in table 3. The most prevalent deficiencies related to the auditors’ lack of documenting an understanding of internal control over compliance requirements, testing of internal control of at least some compliance requirements, and compliance testing of at least some compliance requirements. The PCIE report states that for those audits not in the acceptable group, the project team believes that lack of due professional care was a factor for most deficiencies to some degree. The term due professional care refers to the responsibility of independent auditors to observe professional standards of auditing. GAGAS further elaborate on this concept in the standard on Professional Judgment. Under this standard, auditors must use professional judgment in planning and performing audits and in reporting the results, which includes exercising reasonable care and professional skepticism. Reasonable care concerns acting diligently in accordance with applicable professional standards and ethical principles. Using professional judgment in all aspects of carrying out their professional responsibilities—including following the independence standards, maintaining objectivity and credibility, assigning competent audit staff to the assignment, defining the scope of work, evaluating and reporting the results of the work, and maintaining appropriate quality control over the assignment process—is essential to performing a high quality audit. We previously noted similar audit quality problems in prior reports. In December 1985, we reported that problems found by OIGs in the course of QCRs mostly related to lack of documentation showing whether and to what extent auditors performed testing of compliance with laws and regulations. In March 1986, we reported that our own review of single audits showed that auditors performing single audits frequently did not satisfactorily comply with professional auditing standards. The predominant issues that we found in our previous reviews were insufficient audit work in testing compliance with governmental laws and regulations and evaluating internal controls. We also observed, through discussions with the auditors and reviews of their work, that many did not understand the nature and importance of testing and reporting on compliance with laws and regulations, or the importance of reporting on internal control and the relationship between reporting and the extent to which auditors evaluated controls. As a result, in 1986, we reported that the public accounting profession needed to (1) improve its education efforts to ensure that auditors performing single audits better understand the auditing procedures required, and (2) strengthen its enforcement efforts in the area of governmental auditing to help ensure that auditors perform those audits in a quality manner. Similar to our prior work, the PCIE report presents compelling evidence that a serious problem with single audit quality continues to exist. The PCIE study also reveals that the rate of acceptable audits for organizations with $50 million or more in federal expenditures was significantly higher than for audits for organizations with smaller amounts of federal expenditures. The results also showed that overall, a significant number of audits fell into the groups of limited reliability with significant deficiencies and unacceptable. In our view, the current status of single audit quality is unacceptable. We are concerned that audits are not being conducted in accordance with professional standards and requirements. These audits may provide a false sense of assurance and could mislead users of audit reports regarding issues of compliance and internal control over federal programs. The PCIE report recommended a three-pronged approach to reduce the types of deficiencies noted and improve the quality of single audits: 1. revise and improve single audit standards, criteria, and guidance; 2. establish minimum continuing professional education (CPE) as a prerequisite for auditors to be eligible to conduct and continue to perform single audits; and 3. review and enhance the disciplinary processes to address unacceptable audits and for not meeting training and CPE requirements. More specifically, to improve standards, criteria, and guidance, the PCIE report recommended revisions to (1) OMB Circular No. A-133, (2) the AICPA Statement on Auditing Standards (SAS) No. 74, Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance, and (3) the AICPA Audit Guide, Current AICPA Audit Guide, collectively to emphasize correctly identifying major programs for which opinions are make it clear when audit findings should be reported; include more detailed requirements and guidance for compliance testing; emphasize the minimal amount of documentation needed to document the auditor’s understanding of, and testing of, internal control related to compliance; provide specific examples of the kind of documentation needed for risk assessment of individual federal programs; present illustrative examples of properly presented findings; specify content and examples of SEFA and any effect on financial emphasize requirements for management representations related to federal awards, similar to those for financial statement audits; provide additional guidance about documenting materiality; and require compliance testing to be performed using sampling in a manner prescribed by the AICPA SAS No. 39, Audit Sampling, as amended, to provide for some consistency in sample sizes. The PCIE report recommendation called on OMB to amend its Circular No. A-133 to require that (1) as a prerequisite to performing a single audit, staff performing and supervising the single audit must have completed a comprehensive training program of a minimum specified duration (e.g., at least 16–24 hours); (2) every 2 years after completing the comprehensive training, auditors performing single audits complete a minimum specified amount of CPE; and (3) single audits may only be procured from auditors who meet the above training requirements. The PCIE report also recommends that OMB develop, or arrange for the development of, minimum content requirements for the required training, in consultation with the National State Auditors Association (NSAA), the AICPA and its Governmental Audit Quality Center (GAQC), and the cognizant and oversight agencies for audit. The report states that the minimum content should cover the essential components of single audits and emphasize aspects of single audits for which deficiencies were noted in this project. In addition, the report recommends that OMB develop, or arrange for the development of, minimum content requirements for the ongoing CPE and develop a process for modifying future content. The report further recommends that OMB encourage professional organizations, including the AICPA, the NSAA, and qualified training providers, to offer training that covers the required content. It also recommends that OMB encourage these groups to deliver the training in ways that enable auditors throughout the United States to take the training at locations near or at their places of business, including via technologies such as Webcasts, and that the training should be available at an affordable cost. The PCIE project report emphasizes that the training should be “hands on” and should cover areas where the project team specifically found weaknesses in the work or documentation in its statistical study of single audits. The report specifically stated that the training should cover requirements for properly documenting audit work in accordance with GAGAS and other topics related to the many deficiencies disclosed by the project, including critical and unique parts of a single audit, such as the auditors’ determination of major programs for testing, review and testing of internal controls over compliance, compliance testing, auditing procedures applicable to the SEFA, how to use the OMB Compliance Supplement, and how to audit major programs not included in the Compliance Supplement. The PCIE report concludes that such training would require a minimum of 16 to 24 hours, and that a few hours or an “overview” session will not suffice. We believe that the proposed training requirements would likely satisfy the criteria for meeting a portion of the CPE hours already required by GAGAS. This recommendation focuses on developing processes to address unacceptable audits and auditors not meeting the required training requirements. OMB Circular No. A-133 currently has sanctions that apply to an auditee (i.e., the entity being audited) for not having a properly conducted audit and requires cognizant agencies to refer auditors to licensing agencies and professional bodies in the case of major inadequacies and repetitive substandard work. The report noted that other federal laws and regulations do currently provide for suspension and debarment processes that can be applied to auditors of single audits. Some cognizant and oversight agency participants in the project team indicated that these processes are rarely initiated due to the perception that it is a large and costly effort. As a result, the report specifically recommends that OMB, with federal cognizant and oversight agencies, should (1) review the process of suspension and debarment to identify whether (and if so, how) it can be more efficiently and effectively applied to address unacceptable audits, and based on that review, pursue appropriate changes to the process; and (2) enter into a dialogue with the AICPA and State Boards of Accountancy to identify ways the AICPA and State Boards can further the quality of single audits and address the due professional care issues noted in the PCIE report. The report further recommends that OMB, with federal cognizant agencies, should also identify, review, and evaluate the potential effectiveness of other ways (both existing and new) to address unacceptable audits, including (but not limited to) (1) revising Circular No. A-133 to include sanctions to be applied to auditors for unacceptable work or for not meeting training and CPE requirements, and (2) considering potential legislation that would provide to federal cognizant and oversight agencies the authority to issue a fine as an option to address unacceptable audit work. While we support the recommendations made in the PCIE report, it will be important to resolve a number of issues regarding the proposed training requirement. Some of the unresolved questions involve the following: What are the efficiency and cost-benefit considerations for providing the required training to the universe of auditors performing the approximately 38,500 single audits? How can current mechanisms already in place, such as the AICPA’s Government Audit Quality Center (GAQC), be leveraged for efficiency and effectiveness purposes in implementing new training? Which levels of staff from each firm would be required to take training? What mechanisms will be put in place to ensure compliance with the training requirement? How will the training requirement impact the availability of sufficient, qualified audit firms to perform single audits? The effective implementation of the third prong, developing processes to address unacceptable audits and for auditors who do not meet professional requirements, is essential as the quality issues have been long-standing. We support the PCIE recommended actions to make the process more effective and efficient and to help ensure a consistent approach among federal agencies and their respective OIGs overseeing the single audit process. In addition to the findings and recommendations of the PCIE report, we believe there are two other critical factors that need to be considered in determining actions that should be taken to improving audit quality: (1) the distribution of unacceptable audits and audits of limited reliability across the different dollar amounts of federal expenditures by grantee, as found in the PCIE study; and (2) the distribution of single audits by size in the universe of single audits. These factors are critical in effectively evaluating the potential dollar implications and efficiency and effectiveness of proposed actions. The PCIE study found that rates of unacceptable audits and audits of limited reliability were much higher for audits of entities in stratum 2 (those expending less than $50 million in federal awards) than those in stratum 1 (those expending $50 million or more). Table 1 presented earlier in this testimony shows the data from the sample universe of single audits used by the PCIE. Analysis of the data shows that 97.8 percent of the total number of audits (37,671 of the 38,523 total) covered approximately 16 percent ($143.1 billion of the $880.2 billion) of the total reported value of federal award expenditures, indicating significant differences in distributions of audits by dollar amount of federal expenditures. At the same time, the rates of unacceptable audits and audits of limited reliability were relatively higher in these smaller audits. We believe that there may be opportunities for considering size characteristics when implementing future actions to improve the effectiveness and quality of single audits. For instance, there may be merit to conducting a more refined analysis of the distribution of audits to determine whether less-complex approaches could be used for achieving accountability through the single audit process for a category of the smallest single audits. Such an approach may provide sufficient accountability for these smaller programs. An example of a less-complex approach consists of requirements for a financial audit in accordance with GAGAS, that includes the higher level reports on internal control and compliance along with an opinion on the SEFA and additional, limited or specified testing of compliance. Currently, the compliance testing in a single audit is driven by compliance requirements under OMB Circular No. A-133 as well as program-specific requirements detailed in the compliance supplement. A less-complicated approach could be used for a category of the smallest audits to replace the current approach to compliance testing, while still providing a level of assurance on the total amount of federal grant awards provided to the recipient. Another consideration for future actions is strengthening the oversight of the cognizant agency for audit with respect to auditees expending $50 million or more in federal awards. As shown in the data from the sample universe of single audits used by the PCIE, 852 audits (or 2.2 percent) of the total 38,523 audits covered $737.2 billion (or 84 percent) of the reported federal award expenditures. This distribution suggests that targeted and effective efforts on the part of cognizant agencies aimed at improving audit quality for those auditees that expend greater than $50 million could achieve a significant effect in terms of dollars of federal expenditures. We continue to support the single audit concept and principles behind the act as a key accountability mechanism over federal awards. It is essential that the audits are done properly in accordance with GAGAS and OMB requirements. The PCIE report presents compelling evidence that a serious shortfall in the quality of single audits continues to exist. Many of these quality issues are similar in nature to those reported by GAO and the Inspectors General since the 1980s. We believe that actions must be taken to improve audit quality and the overall accountability provided through single audits for federal awards. Without such action, we believe that substandard audits may provide a false sense of assurance and could mislead users of audit reports. While we support the recommendations made in the PCIE report, we believe that a number of issues regarding the proposed training requirements need to be resolved. The PCIE report results also showed a higher rate of acceptable audits for organizations with larger amounts of federal expenditures and showed that the vast majority of federal dollars are being covered by a small percentage of total audits. We believe that there may be opportunities for considering size characteristics when implementing future actions to improve the effectiveness and quality of single audits as an accountability mechanism. Considering the recommendations of the PCIE within this larger context will also be important to achieve the proper balance between risk and cost-effective accountability. In addition to the considerations surrounding the specific recommendations for improving audit quality, a separate effort taking into account the overall framework for single audits may be warranted. This effort could include answering questions such as the following: What types of simplified alternatives exist for meeting the accountability objectives of the Single Audit Act for the smallest audits and what would the appropriate cutoff be for a less-complex audit requirement? Is the current federal oversight structure for single audits adequate and consistent across federal agencies? What alternative federal oversight structures could improve overall accountability and oversight in the single audit process? Are federal oversight processes adequate and are sufficient resources being dedicated to oversight of single audits? What role can the auditing profession play in increasing single audit quality? Do the specific requirements in OMB Circular No. A-133 and the Single Audit Act need updating? Mr. Chairman, we would be pleased to work with the subcommittee as it considers additional steps to improve the single audit process and federal oversight and accountability over federal grant funds. Mr. Chairman and members of this subcommittee, this concludes my statement. I would be happy to answer any questions that you or members may have at this time. For information about this statement, please contact Jeanette Franzel, Director, Financial Management and Assurance, at (202) 512-9471 or franzelj@gao.gov. Individuals who made key contributions to this testimony include Marcia Buchanan (Assistant Director), Robert Dacey, Abe Dymond, Heather Keister, Jason Kirwan, David Merrill, and Sabrina Springfield (Assistant Director). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","Federal government grants to state and local governments have risen substantially, from $7 billion in 1960 to almost $450 billion budgeted in 2007. The single audit is an important mechanism of accountability for the use of federal grants by nonprofit organizations as well as state and local governments. However, the quality of single audits conducted under the Single Audit Act, as amended, has been a longstanding area of concern since the passage of the act in 1984. The President's Council on Integrity and Efficiency (PCIE) recently issued its Report on National Single Audit Sampling Project, which raises concerns about the quality of single audits and makes recommendations aimed at improving the effectiveness and efficiency of those audits. This testimony provides (1) GAO's perspective on the history and importance of the Single Audit Act and the principles behind the act, (2) a preliminary analysis of the recommendations made by the PCIE for improving audit quality, and (3) additional considerations for improving the quality of single audits. In the early 1980s, Congress had concerns about a lack of adequate oversight and accountability for federal assistance provided to state and local governments. In response to concerns that large amounts of federal financial assistance were not subject to audit and that agencies sometimes overlapped on oversight activities, Congress passed the Single Audit Act of 1984. The act adopted the single audit concept to help meet the needs of federal agencies for grantee oversight as well as grantees' needs for single, uniformly structured audits. GAO supported the passage of the Single Audit Act, and continues to support the single audit concept and principles behind the act as a key accountability mechanism for federal grant awards. However, the quality of single audits has been a longstanding area of concern since the passage of the act in 1984. In its June 2007 Report on National Single Audit Sampling Project, the PCIE found that, overall, approximately 49 percent of single audits fell into the acceptable group, with the remaining 51 percent having deficiencies severe enough to classify the audits as limited in reliability or unacceptable. PCIE found a significant difference in results by audit size. Specifically, 63.5 percent of the large audits (with $50 million or more in federal award expenditures) were deemed acceptable compared with only 48.2 percent of the smaller audits (with at least $500,000 but less than $50 million in federal award expenditures). The PCIE report presents compelling evidence that a serious problem with single audit quality continues to exist. GAO is concerned that audits are not being conducted in accordance with professional standards and requirements. These audits may provide a false sense of assurance and could mislead users of the single audit reports. The PCIE report recommended a three-pronged approach to reduce the types of deficiencies found and to improve the quality of single audits: (1) revise and improve single audit standards, criteria, and guidance; (2) establish minimum continuing professional education (CPE) as a prerequisite for auditors to be eligible to be able to conduct and continue to perform single audits; and (3) review and enhance the disciplinary processes to address unacceptable audits and for not meeting training and CPE requirements. In this testimony, GAO supports PCIE's recommendations and points out issues that need to be resolved regarding the proposed training and other factors that merit consideration when determining actions to improve audit quality. GAO believes that there may be opportunities for considering size when implementing future actions to improve the effectiveness and quality of single audits. In addition, a separate effort considering the overall framework for single audits could answer such questions as whether simplified alternatives can achieve cost-effective accountability in the smallest audits; whether current federal oversight processes for single audits are adequate; and what role the auditing profession can play in increasing single audit quality.",govreport
"Medicare is a federal health insurance program designed to assist elderly and disabled beneficiaries. Hospital insurance, or part A, covers inpatient hospital, skilled nursing facility, hospice care, and certain home health services. Supplemental medical insurance, or part B, covers physician and outpatient hospital services, laboratory and other services. Claims are paid by a network of 49 claims administration contractors called intermediaries and carriers. Intermediaries process claims from hospitals and other institutional providers under part A while carriers process part B claims. The intermediaries’ and carriers’ responsibilities include: reviewing and paying claims; maintaining program safeguards to prevent inappropriate payment; and educating and responding to provider and beneficiary concerns. Medicare contracting for intermediaries and carriers differs from that of most federal programs. Most federal agencies, under the Competition in Contracting Act and its implementing regulations known as the Federal Acquisition Regulation (FAR), generally may contract with any qualified entity for any authorized purpose so long as that entity is not debarred from government contracting and the contract is not for what is essentially a government function. Agencies are to use contractors that have a track record of successful past performance or that demonstrate a current superior ability to perform. The FAR generally requires agencies to conduct full and open competition for contracts and allows contractors to earn profits. Medicare, however, is authorized to deviate from the FAR under provisions of the Social Security Act enacted in 1965. For example, there is no full and open competition for intermediary or carrier contracts. Rather, intermediaries are selected in a process called nomination by provider associations, such as the American Hospital Association. This provision was intended at the time of Medicare’s creation to encourage hospitals to participate by giving them some choice in their claims processor. Currently, there are three intermediary contracts, including the national Blue Cross Blue Shield Association, which serves as the prime contractor for 26 local member plan subcontractors. When one of the local Blue plans declines to renew its subcontract, the Association nominates the replacement contractor. Carriers are chosen by the Secretary of Health and Human Services from a small pool of health insurers, and the number of such companies seeking Medicare claims-processing work has been dwindling in recent years. The Social Security Act also generally calls for the use of cost-based reimbursement contracts under which contractors are reimbursed for necessary and proper costs of carrying out Medicare activities but does not expressly provide for profit. Further, Medicare contractors cannot be terminated from the program unless they are first provided with an opportunity for a public hearing––a process not afforded under the FAR. Medicare could benefit from various contracting reforms. Freeing the program to directly choose contractors on a competitive basis from a broader array of entities able to perform needed tasks would enable Medicare to benefit from efficiency and performance improvements related to competition. It also could address concerns about the dwindling number of insurers with which the program now contracts. Allowing Medicare to have contractors specialize in specific functions rather than assume all claims-related activities, as is the case now, also could lead to greater efficiency and better performance. Authorizing Medicare to pay contractors based on how well they perform rather than simply reimbursing them for their costs, as well as allowing the program to terminate contracts more efficiently when program needs change or performance is inadequate, could also result in better program management. Since Medicare was implemented in 1966, the program has used health insurers to process and pay claims. Before Medicare’s enactment, providers feared that the program would give the government too much control over health care. To win acceptance, the program was designed to be administered by health insurers like Blue Cross and Blue Shield. Subsequent regulations and decades of the agency’s own practices have further limited how the program contracts for claims administration services. The result is that agency officials believe they must contract with health insurers to handle all aspects of administering Medicare claims, even though the number of such companies willing to serve as Medicare contractors has declined and the number of other entities capable of doing the work has increased. While using only health insurers for claims administration may have made sense when Medicare was created, that may be much less so today. The explosion in information technology has increased the potential for Medicare to use new types of business entities to administer its claims processing and related functions. Additionally, the need to broaden the pool of entities allowed to be contractors has increased in light of contractor attrition. Since 1980, the number of contractors has dropped by more than half, as many have decided to concentrate on other lines of business. This has left the program with fewer choices when one contractor withdraws, or is terminated, and another must be chosen to replace it. Since 1993, the agency has repeatedly submitted legislative proposals to repeal the provider nomination authority and make explicit its authority to contract for claims administration with entities other than health insurers. Just this month, the Secretary of Health and Human Services told the Senate Finance Committee that CMS should be able to competitively award contracts to the entities best qualified to perform these functions and stated that such changes would require legislative action. With such changes, when a contractor leaves the program, CMS could award its workload on a competitive basis to any qualified company or combination of companies—including those outside the existing contractor pool, such as data processing firms. Allowing Medicare to have separate contractors for specific claims administration activities—also called functional contracting—could further improve program management. Functional contracting would enable CMS to select contractors that are more skilled at certain tasks and allow these contractors to concentrate on those tasks, potentially resulting in better program service. For example, the agency could establish specific contractors to improve and bring uniformity to efforts to educate and respond to providers and beneficiaries, efforts that now vary widely among existing contractors. Currently, CMS interprets the Social Security Act and the regulations implementing it as constraining the agency from awarding separate contracts for individual claims administration activities, such as handling beneficiary inquiries or educating providers about program policies. Current regulations stipulate that, to qualify as an intermediary or carrier, the contracting organization must perform all of the Medicare claims administration functions. Thus, agency officials feel precluded from consolidating one or more functions into a single contract or a few regional contracts to achieve economies of scale and allow specialization to enhance performance. CMS has had some experience with functional contracting under authority granted in 1996 to hire entities other than health insurers to focus on program safeguards. CMS has contracted with 12 program safeguard contractors (PSC) who compete among themselves to perform task- specific contracts called task orders. These entities represent a mix of health insurers, including many with prior experience as Medicare contractors, along with consulting organizations, and other types of firms. The experience with PSCs, however, makes clear that functional contracting has challenges of its own, which are discussed later in this testimony. Allowing Medicare to offer financial incentives to contractors for high- quality performance also may have benefits. According to CMS, the Social Security Act now precludes the program from offering such incentives because it generally stipulates that payments be based on costs. Contractors are paid for necessary and proper costs of carrying out Medicare activities but do not make a profit. Repeal of cost-based restrictions would free CMS to award different types of contracts–– including those that provide contractors with financial incentives and permit them to earn profits. CMS could test different payment options to determine which work best. If effective in encouraging contractor performance, such contracts could lead to improved program operations and, potentially, to lower administrative costs. Again, implementing performance-based contracting will not be without significant challenges. Allowing Medicare to terminate contractors more efficiently may also promote better program management. The Social Security Act now limits the agency’s ability to terminate intermediaries and carriers, and the provisions are one-sided. Intermediaries and carriers may terminate their contracts without cause simply by providing CMS with 180 days notice. CMS, on the other hand, must demonstrate, that (1) the contractor has failed substantially to carry out its contract or that (2) continuation of the contract is disadvantageous or inconsistent with the effective administration of Medicare. CMS must provide the contractor with an opportunity for a public hearing prior to termination. Furthermore, CMS may not terminate a contractor without cause as can most federal agencies under the FAR. In past years, the agency has requested statutory authority to eliminate the public hearing requirement and the ability of contractors to unilaterally initiate contract termination. Such changes would bring Medicare claims administration contractors under the same legal framework as other government contractors and provide greater flexibility to more quickly terminate poor performers. Eliminating contractors’ ability to unilaterally terminate contracts also may help address challenges the agency faces in finding replacement contractors on short notice. While Medicare could benefit from greater contracting flexibility, time and care would be needed to implement changes to effectively promote better performance and accountability and avoid disrupting program services. Competitive contracting with new entities for specific claims administration services in particular will pose new challenges to CMS–– challenges that will likely take significant time to fully address. These include preparing clear statements of work and contractor selection criteria, efficiently integrating the new contractors into Medicare’s claims processing operations, and developing sound evaluation criteria for assessing performance. Because these challenges are so significant, CMS would be wise to adopt an experimental, incremental approach. The experience with authority granted in 1996 to hire special contractors for specific tasks related to program integrity can provide valuable lessons for CMS officials if new contracting authorities are granted. If given authority to contract competitively with new entities, CMS would need time to accomplish several tasks. First among these would be development of clear statements of work and associated requests for proposals detailing work to be performed and how performance will be assessed. CMS has relatively little experience in this area for Medicare claims administration because current contracts instead incorporate by reference all regulations and general instructions issued by the Secretary of Health and Human Services to define contractor responsibilities. CMS has experience with competitive contracting from hiring PSCs. It did take 3 years to determine how best to implement the new authority through its broad umbrella contract, develop the statement of work, issue the proposed regulations governing the PSCs, develop selection criteria, review proposals, and select contractors. Program officials have told us they are optimistic about their ability to act more quickly if contracting reform legislation were enacted, given the lessons they have learned. However, we expect that it would take CMS a significant amount of time to develop its implementation strategy and undertake all the necessary steps to take full advantage of any changes in its contracting authority. CMS took an incremental approach to awarding its PSC task orders, and the same would be prudent for implementing any changes in Medicare’s claims administration contracting authorities. Even after new contractors are hired, CMS should not expect immediate results. The PSC experience demonstrates that it will take time for them to begin performing their duties. PSCs had to hire staff, obtain operating space and equipment, and develop the systems needed to ultimately fulfill contract requirements––activities that often took many months to complete. Without sufficient start-up time, new contractors might not operate effectively and services to beneficiaries or providers could be disrupted. Developing a strategy for how to incorporate functional contractors into the program and coordinate their activities is key. While there may be benefits from specialization, having multiple companies performing different claims administration tasks could easily create coordination difficulties for the contractors, providers, and CMS staff. For example, between 1997 and 2000, HCFA contracted with a claims administration contractor that subcontracted with another company for the review of the medical necessity of claims before they were paid. The agency found that having two different contractors perform these functions posed logistical challenges that could make it difficult to complete prepayment reviews without creating a backlog of unprocessed claims. The need for effective coordination was also seen in the PSC experience. PSCs and the claims administration contractors need to coordinate their activities in cases where the PSCs assumed responsibility for some or all of the program safeguard functions previously performed by the contractors. In these situations, HCFA officials had to ensure that active claims did not get lost or ignored while in the processing stream. Coordination is also necessary to ensure that new efficiencies in one program area do not adversely affect another area. For example, better review of the medical necessity of claims before they are paid could lead to more accurate payment. This would clearly be beneficial, but could also lead to an increase in the number of appeals for claims denials. Careful planning would be required to ensure adequate resources were in place to adjudicate those appeals and prevent a backlog. CMS has not stated how claims administration activities might be divided if the agency could do functional contracting. It would be wise for CMS to develop a strategy for testing different options on a limited scale. In our report on HCFA’s contracting for PSC services, we recommended, and the agency generally agreed, that it should adopt such a plan because HCFA was not in a position to identify how best to use the PSCs to promote program integrity in the long term. Taking advantage of benefits from competition and performance-based contracting hinges on being able to identify goals and objectives and to measure progress in achieving them. Specific and appropriate evaluation criteria would be needed to effectively manage any new arrangements under contracting reform. Effective evaluations are dependent, in part, upon clear statements of expected outcomes tied to quantifiable measures and standards. Because it has not developed such criteria for most of its PSC task orders, we reported that CMS is not in a position to effectively evaluate its PSCs’ performance even though 8 of the 15 task orders had been ongoing for at least a year as of April 2001. If CMS begins using full and open competition to hire new entities for other specific functions, it should attempt to move quickly to develop effective outcomes, measures, and standards for evaluating such entities. Effective criteria are also critical if financial incentives are to be offered to contractors. Prior experiments with financial incentives for Medicare claims administration contractors generally have not been successful. This experience raises concerns about the possibility for success of any immediate implementation of such authority without further testing. For example, between 1977 and 1986, HCFA established eight competitive fixed-price-plus-incentive-fee contracts designed to consolidate the workload of two or more small contractors on an experimental basis. Contractors could benefit financially by achieving performance goals in certain areas at the potential detriment of performance in other activities. In 1986, we reported that two of the contracts generated administrative savings estimated at $48 million to $50 million. However, the two contractors’ activities also resulted in $130 million in benefit payment errors (both overpayments and underpayments) that may have offset the estimated savings. One of these contractors subsequently agreed to pay over $140 million in civil and criminal fines for its failure to safeguard Medicare funds. Removing the contracting limitations imposed at Medicare’s inception to promote full and open competition and increase flexibility could help to modernize the program and lead to more efficient and effective management. However, change will not yield immediate results, and lessons learned from the experience with PSC contractors underscore the need for careful and deliberate implementation of any reforms that may be enacted. This concludes my statement. I would be happy to answer any questions that either Subcommittee Chairman or Members may have. For further information regarding this testimony, please contact me at (312) 220-7600. Sheila Avruch, Bonnie Brown, Paul Cotton, and Robert Dee also made key contributions to this statement.","Discussions about how to reform and modernize the Medicare Program have, in part, focused on whether the structure that was adopted in 1965 is optimal today. Questions have been raised about whether the program could benefit from changes to the way that Medicare's claims processing contractors are chosen and the jobs they do. Medicare could benefit from full and open competition and its relative flexibility to promote better performance and accountability. If the current limits on Medicare contracting authority are removed, the Centers for Medicare and Medicaid Services could (1) select contractors on a competitive basis from a broader array of entities capable of performing needed program activities, (2) issue contracts for discrete program functions to improve contractor performance through specialization, (3) pay contractors based on how well they perform rather than simply reimbursing them for their costs, and (4) terminate poor performers more efficiently.",govreport
"Faced with a goal of increasing the Department’s investments in modernization without increasing overall defense budgets, DOD has recently focused on the cost of support operations and their associated infrastructure, with the objective of finding ways to provide required support resources and capability at reduced costs. DOD recognizes that portions of its support structure are inefficient and continue to absorb a large share of the defense budget. To the extent support costs can be reduced, available future defense dollars could be used for modernization or other defense priorities. The Office of the Secretary of Defense (OSD) requested that DSB identify DOD activities that the private sector could do more efficiently and to determine the expected savings from outsourcing. DSB, a civilian advisory board to DOD, issued two reports in 1996 addressing outsourcing and other opportunities for substantially reducing DOD support services. The first focused solely on outsourcing and privatization issues. The second, incorporating findings from the earlier report, had a broader scope that included other methods for reducing infrastructure costs. In preparation for the Quadrennial Defense Review (QDR), OSD’s Program Analysis and Evaluation (PA&E) directorate assessed the DSB’s savings estimates from the second report. Our analysis also focused on the second report’s findings and recommendations. The first DSB task force concluded that DOD could realize savings of 30 to 40 percent of logistics costs and achieve broad improvements in service delivery and responsiveness by outsourcing support services traditionally done by government personnel. The report cited evidence from the Center for Naval Analyses (CNA) public-private competition studies of commercial and depot maintenance activities. The Board also noted that an Outsourcing Institute study found that the private sector saved about 10 to 15 percent by outsourcing but that the public sector savings from outsourcing would be higher because of the inefficiency of government service organizations. The DSB task force stated that an aggressive DOD outsourcing initiative could generate savings ranging from $7 billion to $12 billion annually by fiscal year 2002. Building on the earlier study, DSB’s second task force report provided a new vision wherein DOD would only provide warfighting, direct battlefield support, policy- and decision-making, and oversight activities. All other activities would be done by the private sector. DSB said that DOD would need to make an investment of about $6 billion but would ultimately save about $30 billion annually by the year 2002, primarily through outsourcing support functions. Of these $30 billion in annual savings, $6 billion was to come from CONUS logistics infrastructure activities, which DSB defined as including inventory control points, distribution depots, maintenance depots, and installation supply and repair. About $4.2 billion of the savings would be achieved by outsourcing these activities; the remaining $1.8-billion savings would be achieved through improvements in inventory management practices and equipment reliability. Table 1 shows a breakout of the estimated logistics infrastructure savings. According to the DSB estimates, the $6-billion savings represents an approximate 40-percent reduction in the $14 billion the Board estimated DOD spends annually for CONUS logistics activities. According to a DSB task force member, estimates for the cost of installation supply and repair activities were unavailable. Therefore, the group used $14 billion as a rough estimate to approximate total CONUS logistics cost, not including activities already contracted out. Although we were unable to substantiate those numbers, the data that is available indicates that DSB’s estimate of $14 billion for CONUS logistics costs is conservative. For example, the Navy has reported that more than $8.5 billion of Navy resources was applied in fiscal year 1996 to maintenance programs in support of fleet ships and aircraft. The report also stated that to gain economies and achieve significant savings, DOD needs to consider dramatic changes in the way it does business. DSB said the Department must get out of the material management/distribution and repair business by expanding contractor logistics support to all fielded weapon systems and by expanding the use of “prime vendors” for all commodities. Contractor logistics support, which relies on a contractor to provide long-term, total life-cycle logistics support, combines depot-level maintenance with wholesale and selected retail material management functions. Under the “prime vendor” concept, DOD would rely on a single vendor to buy, warehouse, and distribute inventory to the customer as needed, thus removing the Defense Logistics Agency and the services from their present middleman role. Our reviews of best practices within the private sector and ongoing work at DOD indicate that DOD has significant opportunities for reducing logistics costs and improving performance by changing its business processes. This work also indicates that determining the most cost-effective processes to use requires an evaluation of costs and benefits of each situation. These findings are consistent with the general theme of the DSB’s reports that opportunities exist for savings in the operation of DOD’s logistics support activities. However, DSB focused on outsourcing, while our work has focused first on reengineering and streamlining, and outsourcing where appropriate and more cost-effective. Over the past several years, DOD has considered a number of actions to improve the efficiency and effectiveness of its logistics system. As with the private sector, such actions should include using highly accurate information systems, consolidating certain activities, employing various process streamlining methods, and outsourcing. For example, defense maintenance depots have about 40-percent excess capacity, and we have advocated consolidating workloads to take advantage of economies of scale and eliminate unnecessary duplication. Consolidating workloads from two closing depots would allow the Air Force, for instance, to achieve annual savings of over $200 million and reduce its excess capacity from 45 percent to about 8 percent. In addition, our work has pointed out the benefits of outsourcing when careful economic analysis indicates the private sector can provide required support at less cost than a DOD activity can. For example, the Defense Logistics Agency has successfully taken steps to use prime vendors to supply personnel items directly to military facilities. The consumable items under these vendor programs account for 2 percent of the consumable items DOD manages. DOD’s prime vendor program for medical supplies, along with other inventory reduction efforts, has resulted in savings that we estimate exceed $700 million. More importantly, this program has moved DOD out of the inventory storage and distribution function for these supplies, thus emptying warehouses, eliminating unnecessary layers of inventory, and reducing the overall size of the DOD supply system. Also, service is improved because DOD buys only the items that are currently needed and consumers can order and receive inventory within hours of the time the items are used. While DOD has achieved benefits from outsourcing, it has been shown that adequate competition has been key to achieving significant reductions. Public-private competition studies by CNA have stressed this point. In its 1993 review of the Navy’s Commercial Activities Program, CNA noted that about half the competitions were won by the in-house team and that when competitions with no savings were excluded, the savings from contracts awarded to the public sector were 50 percent and those to the private sector were 40 percent. CNA officials concluded that because of competition both sectors were spurred to increase efficiency and reduce costs and DOD achieved greater savings. CNA also concluded that savings would have been less had the public sector been excluded from competition. Likewise, our review of DOD’s public-private competition program for depot maintenance determined that such competitions resulted in reduced costs. Facing increasing pressures to maintain market competitiveness, private companies have been reevaluating their organization and processes to cut costs and improve customer service. The most successful improvements include (1) using highly accurate information systems that provide cost, tracking, and control data; (2) consolidating and/or centralizing certain activities; (3) employing various methods to streamline work processes; and (4) shifting certain activities to third-party providers. Each company’s overall business strategy and assessment of “core competencies” guide which tools to use and how to use them. Private companies use a variety of approaches to meet their logistics support needs. For example, Southwest Airlines contracts out almost all maintenance, thus avoiding costly investments in facilities, personnel, and inventory. However, in contrast, having already made a significant investment in building infrastructure and training personnel, British Airways reached a different decision about its support operations. While it has sold off and/or outsourced some activities (namely engine repair and parts supply) and improved remaining in-house repair operations, the airline now has become a third-party supplier of aircraft overhaul. Whether the organization decides to consolidate, reengineer, or outsource activities, or to do some combination thereof, the private firms and consultants with whom we met stressed that identifying and understanding the organization’s core activities and obtaining accurate cost data for all in-house operations are critical to making informed business decisions and assessing overall performance. Core activities are those that are essential for meeting an organization’s mission. Before making decisions on what cost-saving options should be used, an organization should develop a performance-based, risk-adjusted analysis of benefits and costs for each option to provide (1) the foundation for comparing the baseline benefits and costs with proposed options and (2) a basis for decisionmakers to use in selecting a feasible option that meets performance goals. The organization should also factor into the analysis the barriers and risks in implementing the options. Thus, the best practice would be to make an outsourcing decision only after a core assessment and comprehensive cost-benefit analysis have been performed rather than to take a blanket approach and outsource everything in a certain area. PA&E’s analysis of the DSB’s estimated $6 billion in annual logistics savings found that the estimate was overstated by about $1 billion and that another $3 billion in projected savings would be difficult to achieve or unlikely to be achieved. According to PA&E officials, DSB’s $6-billion savings estimate was overstated by about $1 billion because contract administration and oversight costs were understated and one-time inventory savings (spread over 6 years) was claimed as steady state savings. Further, in assessing the degree of difficulty in achieving the savings, PA&E concluded that about $1 billion would be difficult to achieve, but was possible if Congress changed the required 60/40 public-private split to 50-50, which has since occurred. PA&E also believed that another $2 billion was unlikely to be saved primarily because of timing and DOD’s culture. It did not believe that DOD could carry out the proposals within the DSB’s 6-year schedule, if at all. PA&E’s assessment concluded that the remaining $2 billion of the DSB’s $6-billion savings estimate was achievable or already identified in DOD’s future year defense program. PA&E officials defined as achievable those savings that they believed could be realized given DSB’s 25-percent savings assumption and the then-current legal restrictions on outsourcing depot maintenance activities. About $0.2 billion in savings would involve maximizing the use of outsourcing under legislative constraints as they existed at that time, such as the 60/40 rule. The remainder of the achievable savings have already been identified in DOD’s future year defense program. Table 2 shows PA&E’s revised estimate of the DSB’s logistics savings. Our analysis confirms PA&E’s conclusion that the DSB’s logistics savings estimates are not well supported and are unlikely to be as large as estimated. Specifically, we found that (1) the Board’s projected annual savings from reliability improvements are overstated by over $1 billion; (2) the DSB’s 25-percent savings rate from outsourcing appears to be overly optimistic; and (3) DSB, while recognizing it would be difficult to do so, assumed that DOD would overcome impediments that prevent the outsourcing of all logistics functions. We do not know by how much or whether these questions would change the $2 billion in savings that PA&E concluded were achievable. In addition to overstating inventory management savings noted by PA&E, the DSB task force overstated its estimate of annual savings from equipment reliability improvements. The Board’s estimate of $1.5 billion in annual savings by year 2002 (6 years from the year of DSB’s study) is overstated by at least $1.2 billion. DSB based its estimate on a Logistics Management Institute (LMI) study that assessed the reductions of operation and support costs that result from improved reliability and maintainability due to technological advancements. Such advancements may include using improved materials and fewer component parts; thus reducing the number of spare purchases and the need for scheduled and unscheduled maintenance. Accomplishing these advancements requires an investment that must be evaluated in light of the expected return on investment. For its study, LMI assumed an aggressive technology improvement program. For example, it assumed a 9 to 1 return on investment that would accrue over 20 years, with savings starting the second year. Further, it assumed that any given investment would generate a savings stream for at least 10 years. Based on these assumptions and its analysis, LMI concluded that with an annual investment starting at $100 million and leveling at $500 million within 5 years, DOD could achieve $300 million in savings in the sixth year. DOD would not achieve the $1.5-billion savings that DSB included in its savings estimate until the fourteenth year. Thus, even without questioning LMI’s aggressive assumptions, the DSB’s savings estimate is overstated by at least $1.2 billion. DSB assumed that outsourcing all logistics activities would reduce DOD’s logistics costs by 25 percent. The Board based this projection on public-private competition studies, industry studies by such companies as Caterpillar and Boeing, and anecdotal evidence. While we believe that savings can be achieved through appropriate outsourcing, these savings are a result of competition rather than from outsourcing itself. The studies DSB cited were primarily for commercial activities—such as base operations, real property maintenance, and food service. As we have reported, these activities generally have highly competitive markets. For some logistics activities, such as nonship depot maintenance, our recent work has shown that competitive markets do not currently exist. To the extent that competitive markets do not exist, the amount of savings that can be generated through outsourcing may be reduced. As we reported in 1996, 76 percent of the 240 open depot maintenance contracts we examined were awarded noncompetitively (i.e., sole source). More recently, we reported that the percentage of noncompetitive depot maintenance contracts had increased for activities other than shipyards. For the three services, about 91 percent of the 15,346 new depot maintenance contracts awarded from the beginning of fiscal year 1996 to date were sole source. Moreover, the DSB recommended contractor logistics support arrangements for new and modified weapon systems. Our past work demonstrates that most contractor logistics support depot work is sole sourced to the original equipment manufacturer, raising cost and future competition concerns. Furthermore, eliminating the public sector from competition, as advocated by DSB, could further decrease savings. In developing its savings estimates for CONUS logistics, DSB assumed that DOD would outsource all logistics activity. However, certain barriers, including legal and cultural impediments, must be overcome to fully implement DSB’s recommendations. While it may be possible to implement DSB’s recommendations, in some cases, implementation may require congressional action, and in others, implementation may take substantially longer than DSB’s 6-year estimate. We did not quantify how much these impediments will reduce DSB’s savings, but consistent with PA&E’s analysis, these factors will mitigate portions of the projected savings. Although it recommended that essentially all logistics—including material management and depot maintenance, distribution, and other activities—be outsourced, DSB recognized that outsourcing is limited or precluded by various laws and regulations. For example, fundamental to determining whether or not to outsource is the identification of core functions and activities. Section 2464 of title 10 U.S.C. states that DOD activities should maintain the government-owned and government-operated core logistics capability necessary to maintain and repair weapon systems and other military equipment needed to fulfill national strategic and contingency plans. The delineation of core activities has historically proven to be extremely difficult. For example, proponents of increased privatization have questioned the justification for retaining many support activities as core and have recommended revising the core logistics requirement. Section 311 of the 1996 DOD Authorization Act directed the Secretary of Defense to develop a comprehensive depot maintenance policy, including a definition of DOD’s required core depot maintenance capability. While DOD has identified a process for determining core depot maintenance capability requirements, it has not completed its evaluation. Moreover, DOD has not developed a process for identifying core requirements for other logistics functions and activities. Thus, core requirements in these areas are also unknown. The 1998 DOD Authorization Act again requires that the Department identify its core depot maintenance requirements, this time under the new provisions described above. Additionally, 10 U.S.C. 2466 states that no more than 50 percent of the depot maintenance funds made available in a given fiscal year may be spent for depot maintenance conducted by nonfederal personnel. This provision, along with other relevant provisions significantly affects DSB’s savings estimate because about 50 percent of depot maintenance would not be subject to outsourcing. Section 2469 of title 10 states that DOD-performed depot maintenance and repair workloads valued at not less than $3 million cannot be changed to contractor-performed work without using competitive procedures that include both public and private entities. This requirement for public-private competition affects the DSB savings estimate because DSB assumed the requirement would be eliminated. The 1998 DOD Authorization Act also added a new section 2469a to title 10 that affects public-private competitions for certain workloads from closed or realigned installations. Further, during the congressional deliberation on the 1997 DOD Authorization Act, DOD provided Congress a list of statutory encumbrances to outsourcing, including 10 U.S.C. 2461, which requires studies and reports before converting public workloads to a contractor; 10 U.S.C. 2465, which prohibits contracts for performance of fire-fighting and security guard functions; section 317 of the National Defense Authorization Act for Fiscal Year 1987 (P.L. 99-661), which prohibits the Secretary of Defense from contracting for the functions performed at Crane Army Ammunition Activity or McAllister Army Ammunition Plant; 10 U.S.C. 4532, which requires the Army to have supplies made by factories and arsenals if they can do so economically; and 10 U.S.C. 2305 (a)(1), which specifies that in preparing for the procurement of property or services, the Secretary of Defense shall specify the agency’s needs and solicit bids or proposals in a manner designed to achieve full and open competition. DOD officials have repeatedly recognized the importance of using resources for the highest priority operational and investment needs rather than maintaining unneeded property, facilities, and overhead. However, DOD has found that infrastructure reductions, whether through outsourcing or some other means, are difficult and painful because achieving significant cost savings may require up-front investments, the closure of installations, and the elimination of military and civilian jobs. In addition, according to DOD officials, the military services fear that savings achieved from outsourcing would be diverted to support other DOD requirements and may not be available to the outsourcing organization to fund service needs. DSB recognized DOD’s cultural resistance to outsourcing logistics activities and said that overcoming resistance may take some time. DOD has a tradition of remarkable military achievement but it also has an entrenched culture that resists dramatic changes from well-established patterns of behavior. In 1992, we reported that academic experts and business executives generally agreed that a culture change is a long-term effort that takes at least 5 to 10 years to complete. Although a change in DOD’s management culture is underway, continual support of its top managers is critical to successful completion of cultural change. We agree with DSB that there are many opportunities for significant reductions in logistics infrastructure costs. However, the Board’s projected savings are overly optimistic. Further, savings opportunities from consolidating and reengineering must be considered in addition to outsourcing. Even though the Board recognized that there are impediments to outsourcing, PA&E’s and our analyses show that because of such impediments, not all logistics activities can be outsourced. This is particularly true for the legislative barriers—principally, the legislated workload mix between the public and private sectors. Moreover, PA&E’s and our analyses show estimating errors of about $1 billion for contract administration and inventory reductions and another $1 billion for reliability improvements. These combined adjustments will further reduce the Board’s projected savings by another 30 percent. Notwithstanding the problems with DSB’s estimates, DOD’s effort to reduce costs and achieve savings is extremely important, and we encourage DOD to move forward as quickly as possible to develop a realistic and achievable cost-reduction program. As discussed in our high-risk infrastructure report, breaking down cultural resistance to change, overcoming service parochialism, and setting forth a clear framework for a reduced defense infrastructure are key to effectively implementing savings. To aid in achieving the most savings possible, we recommend that the Secretary of Defense require the development of a detailed implementation plan for improving the efficiency and effectiveness of DOD’s logistics infrastructure, including reengineering, consolidating, outsourcing logistics activities where appropriate, and reducing excess infrastructure. We recommend that the plan establish time frames for identifying and evaluating alternative support options and implementing the most cost-effective solutions and identify required resources, including personnel and funding, for accomplishing the cost-reduction initiatives. We also recommend that DOD present the plan to Congress in much the same way it presented its force structure reductions in the Base Force Plan and the bottom-up review. This would provide Congress a basis to oversee DOD’s plan and would allow the affected parties to see what is going to happen and when. In commenting on a draft of this report (see app. II), DOD said that DSB had considered legal barriers to outsourcing and had expressly sought to identify the savings that could result if they were lifted. As noted in the report, we believe it is unlikely that the legal barriers cited would be lifted within the time frame DSB envisioned. DOD said that actions consistent with our recommendation were underway and there was no need for the recommended plan. Specifically, DOD said that the Secretary of Defense was preparing a more detailed plan for implementing the strategy formulated by QDR. Subsequently, on November 12, 1997, the Secretary of Defense announced the publication of the Defense Reform Initiative Report. This report contained the results of the task force on defense reform established as a result of QDR. The task force, which was charged with identifying ways to improve DOD’s organization and procedures, defined a series of initiatives in four major areas: reengineering, by adopting modern business practices to achieve world-class standards of performance; consolidating, by streamlining organizations to remove redundancy and competing, by applying market mechanisms to improve quality, reduce costs, and respond to customer needs; and eliminating infrastructure, by reducing excess support structure to free resources and focus on competencies. This report is a step in the right direction and sets forth certain strategic goals and direction. However, the intent of our recommendation was that a detailed implementation plan be developed, and we have modified our final recommendations accordingly. Our scope and methodology are provided in appendix I. We are sending copies of this report to interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Director of the Office of Management and Budget; and interested congressional committees. Copies will be made available to others upon request. Please contact me at (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report were James Wiggins, Julia Denman, Hilary Sullivan, and Jeffrey Knott. John Brosnan from our Office of General Counsel provided the legal review. The scope of our review was limited to reviewing the Defense Science Board’s (DSB) projected $6 billion annual savings for the continental United States (CONUS) logistics. To determine the basis of DSB’s savings estimate and recommendations, we reviewed the two DSB reports that made savings estimates based on outsourcing: Report of the Defense Science Board Task Force on Outsourcing and Privatization, August 28, 1996, and Report of the Defense Science Board 1996 Summer Study on Achieving an Innovative Support Structure for 21st Century Military Superiority: Higher Performance at Lower Costs, November 1996. We discussed the assumptions with task force members and reviewed supporting data that was available to us. We requested DSB task force minutes pertaining to these studies; however, we did not receive them in time to include them in our review. We reviewed the Center for Naval Analyses (CNA) studies of public-private competitions cited by DSB as well as CNA’s more recent studies and discussed those studies with CNA officials. A CNA official said that CNA analysts performed limited testing of the computer-generated data they had used in analyzing the results from the commercial activity competitions. He said that the data was reasonably accurate for the purposes of their studies. We did not independently verify the data used in CNA’s studies because we did not rely solely on CNA’s studies for our conclusions. To further evaluate DSB’s savings estimates and recommendations we (1) reviewed Program Analysis and Evaluation’s (PA&E) analysis and discussed that analysis and conclusions with PA&E officials and (2) reviewed the Logistics Management Institute’s (LMI) study, Using Technology to Reduce Cost of Ownership, Volume 1: Annotated Briefing (LG404RD4, April 1996), and discussed the studies’ assumptions and conclusions with LMI officials. In addition, we reviewed our past reports and testimony on depot maintenance, public-private competitions, and infrastructure reductions. To determine other infrastructure savings opportunities for the Department of Defense (DOD), we relied on our past reports and testimony on commercial “best practices,” public-private competitions, and depot maintenance. In addition, we also drew on ongoing work on outsourcing practices within the private sector. We performed our review at the following locations: Logistics Management Institute, Arlington, Va.; DOD’s Office of Maintenance Policy, Office of Program Analysis and Evaluation; and the Defense Science Board, Washington, D.C. We also had discussions with officials from the Center for Naval Analyses, Alexandria, Va. We conducted our review in July and August 1997, and, except where noted, in accordance with generally accepted government auditing standards. Air Force Depot Maintenance: Information on the Cost Effectiveness of B-1B and B-52 Support Options (GAO/NSIAD-97-210BR, Sept. 12, 1997). Navy Depot Maintenance: Privatizing the Louisville Operations in Place Is Not Cost Effective (GAO/NSIAD-97-52, July 31, 1997). Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds (GAO/T-NSIAD/AIMD-97-152, May 7, 1997). Depot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111, Mar. 18, 1997) and (GAO/T/NSIAD-112, Apr. 10, 1997). Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997). Navy Ordnance: Analysis of Business Area Price Increases and Financial Losses (GAO/AIMD/NSIAD-97-74, Mar. 14, 1997). High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997). Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996). Army Depot Maintenance: Privatization Without Further Downsizing Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996). Navy Depot Maintenance: Cost and Savings Issues Related to Privatizing-in-Place the Louisville, Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18, 1996). Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15, 1996). Defense Depot Maintenance: DOD’s Policy Report Leaves Future Role of Depot System Uncertain (GAO/NSIAD-96-165, May 21, 1996). Defense Depot Maintenance: More Comprehensive and Consistent Workload Data Needed for Decisionmakers (GAO/NSIAD-96-166, May 21, 1996). Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996) and (GAO/T-NSIAD-96-148, Apr. 17, 1996). Military Bases: Closure and Realignment Savings Are Significant, but Not Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996). Depot Maintenance: Opportunities to Privatize Repair of Military Engines (GAO/NSIAD-96-33, Mar. 5, 1996). Closing Maintenance Depots: Savings, Personnel, and Workload Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996). Navy Maintenance: Assessment of the Public-Private Competition Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan. 22, 1996). Depot Maintenance: The Navy’s Decision to Stop F/A-18 Repairs at Ogden Air Logistics Center (GAO/NSIAD-96-31, Dec. 15, 1995). Military Bases: Case Studies on Selected Bases Closed in 1988 and 1991 (GAO/NSIAD-95-139, Aug. 15, 1995). Military Base Closure: Analysis of DOD’s Process and Recommendations for 1995 (GAO/T-NSIAD-95-132, Apr. 17, 1995). Military Bases: Analysis of DOD’s 1995 Process and Recommendations for Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995). Aerospace Guidance and Metrology Center: Cost Growth and Other Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec. 9, 1994). Navy Maintenance: Assessment of the Public and Private Shipyard Competition Program (GAO/NSIAD-94-184, May 25, 1994). Depot Maintenance: Issues in Allocating Workload Between the Public and Private Sectors (GAO/T-NSIAD-94-161, Apr. 12, 1994). Depot Maintenance (GAO/NSIAD-93-292R, Sept. 30, 1993). Depot Maintenance: Issues in Management and Restructuring to Support a Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993). Air Logistics Center Indicators (GAO/NSIAD-93-146R, Feb. 25, 1993). Defense Force Management: Challenges Facing DOD as It Continues to Downsize Its Civilian Workforce (GAO/NSIAD-93-123, Feb. 12, 1993). Navy Maintenance: Public-Private Competition for F-14 Aircraft Maintenance (GAO/NSIAD-92-143, May 20, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed the basis for the Defense Science Board's (DSB) estimate that the Department of Defense (DOD) could potentially save $6 billion annually by reducing its logistics infrastructure costs within the continental United States, focusing on: (1) the opportunities for logistics infrastructure savings; and (2) DOD's and GAO's analyses of the DSB's projected logistics infrastructure savings. GAO noted that: (1) GAO agrees with the DSB that DOD can reduce the costs of its logistics activities through outsourcing and other initiatives; (2) DOD has already achieved over $700 million in savings from the use of a prime vendor program and other inventory-related reduction efforts for defense medical supplies; (3) according to studies by the Center for Naval Analyses, competition for work, including competition between the public sector and the private sector--regardless of which one wins--can result in cost savings; (4) many private-sector firms have successfully used outsourcing to reduce their costs of operations; (5) the DOD Program Analysis and Evaluation (PA&E) directorate's analysis shows, however, that the DSB's estimated annual savings of $6 billion is overstated by about $4 billion because of errors in estimates, overly optimistic savings assumptions, and legal and cultural impediments; (6) according to PA&E's analysis, this $4 billion includes: (a) $1 billion in overstated contract administration and oversight savings and one-time inventory savings; and (b) $3 billion in savings that would be unlikely or would be difficult to achieve within the Board's 6-year time frame, given certain legislative requirements and DOD's resistance to outsourcing all logistics functions; (7) GAO's analysis confirmed PA&E's conclusion that the Board's estimated savings were overstated; (8) GAO's analysis also raised questions about the Board's projected savings, but GAO does not know by how much or whether these questions would change the $2 billion in savings that PA&E concluded were achievable; (9) GAO questioned whether DOD would achieve a 25-percent savings from outsourcing, as the Board assumed, because the savings were based primarily on studies of public-private competitions in highly competitive private-sector markets; (10) however, competitive markets may not exist in some areas; (11) notwithstanding GAO's concerns about the magnitude of savings, DOD can make significant reductions in logistics costs; (12) the Secretary of Defense recently issued a strategic plan for achieving such reductions; (13) this report is a step in the right direction; and (14) DOD now needs an implementation plan based on a realistic assessment of the savings potential of various cost-reduction alternatives and the time frames for accomplishing various activities required to identify and implement the most cost-effective solutions.",govreport
"Beginning in 1993, both Congress and the administration agreed that federal employment levels should be cut as a means of reducing federal costs and controlling deficits. Through a series of executive orders and legislation, goals were established for reducing federal staffing levels. Two driving forces in the reductions were the Federal Workforce Restructuring Act of 1994 and the National Performance Review. The act, passed in March 1994, mandated governmentwide reductions of 272,900 FTE positions through fiscal year 1999. The National Performance Review, the administration’s major management reform initiative, recommended that any reductions be accomplished through agency efforts to streamline operations, reduce management control and headquarters positions, and improve government operations through reinvention and quality management techniques. In addition to reducing their workforces and streamlining their operations, agencies are required to measure their performance. The Government Performance and Results Act of 1993 requires agencies to (1) develop strategic plans covering a period of at least 5 years and submit the first of these plans to Congress and OMB by the end of fiscal year 1997, (2) develop and submit annual performance plans to OMB and Congress beginning for fiscal year 1999 containing the agencies’ annual performance goals and the measures they will use to gauge progress toward achieving the goals, and (3) submit annual reports on program performance for the previous fiscal year to Congress and the President beginning with fiscal year 2000. In addition, the Results Act established requirements for pilot projects so that participating agencies could gain experience in using key provisions of the Results Act and provide lessons for other agencies as well. Over 70 federal organizations, including GSA, HUD, and OPM, participated in the pilot projects for performance planning and reporting. Between fiscal years 1993 and 1996, when the federal civilian workforce was cut by about 12 percent, the workforces of certain agencies were reduced by larger percentages. These included cuts of 14 percent at HUD, 13 percent at DOI, 22 percent at GSA, 13 percent at NASA, and 42 percent at OPM. To determine which components within HUD, DOI, GSA, NASA, and OPM were downsized and to what extent, we examined agency FTE data for fiscal years 1993 through 1996. These data were organized by component. To address our remaining objectives, we selected one component from each agency, primarily on the basis of the percentage it downsized; however, we also considered such factors as public interest, the effects of downsizing on safety, and privatization of agency functions as selection criteria. We selected HUD’s Office of Housing and GSA’s PBS because, on a percentage basis, they accounted for the largest portion of their parent agencies’ staffing reductions. We selected DOI’s BOR because it was one of the most heavily downsized of DOI’s components, and within BOR, we focused on the Denver Reclamation Service Center because of its central role in BOR operations. Within NASA, the Human Space Flight Program experienced the greatest percentage of downsizing, and from the program’s centers, we focused on KSC because of its high profile as the space shuttle launch and recovery site and because of public concerns that had been expressed about shuttle safety. We selected OPM’s Investigations Service because many of its functions had been privatized. To determine what actions were taken to maintain performance in the selected components as a result of downsizing, the results of these actions on performance, the effects of downsizing on customer satisfaction, and lessons learned, we interviewed officials from the parent agencies, components, unions, and employee associations. We also interviewed a small number of randomly selected BOR and KSC employees who were not represented by unions to obtain their views on agency performance during downsizing. We reviewed streamlining, performance, and customer service plans; where available, we examined performance and customer satisfaction measurement data. We did not evaluate the performance or customer satisfaction measures used by the components or verify their performance measurement or customer satisfaction scores. Because of limited customer satisfaction data at the Office of Housing, BOR, and the Investigations Service, we interviewed a small number of randomly selected customers to determine their satisfaction with performance during downsizing. The lessons learned by components reflect the judgment of component officials. We did not independently assess how well these lessons were followed during components’ actual downsizing experiences. The results of our work are limited to the components reviewed and cannot be projected to the entire agency or governmentwide. Our work was performed at the headquarters of the parent agencies and components in Washington, D.C.; at the KSC in Florida; and at BOR’s Reclamation Service Center in Denver, CO. We also interviewed BOR employees, KSC employees, HUD customers, BOR customers, and OPM customers in various locations throughout the United States. We performed our work between October 1996 and November 1997 in accordance with generally accepted government auditing standards. We asked HUD, DOI, GSA, NASA, and OPM to provide comments on a draft of this report. The comments provided are discussed at the end of this letter. Nearly all organizational components in each agency were affected, some more than others. The downsizing of components at the five parent agencies we reviewed ranged from around 2 percent to 100 percent. In addition, the effect of each component’s downsizing on the parent agency’s total reductions varied. For example, HUD’s Office of Housing’s FTE reductions between fiscal years 1993 and 1996 were 52 percent of HUD’s total reductions, while BOR’s FTE reductions were 15 percent of DOI’s total reductions for the period. The extent of agency downsizing by selected organizational component is shown in table 1. Although officials told us it was difficult to isolate actions that agencies and their components took to maintain performance independently of downsizing from those taken because of downsizing, the actions they said were taken to maintain performance amid downsizing fell into three categories: refocusing their missions, reengineering their work processes, and taking steps to build and maintain employee skills. Detailed information on each component is provided in appendixes I through V. The National Performance Review, budget reductions, and workforce reductions generally have led federal agencies to rethink how they operate and work to reinvent themselves to become more efficient organizations. According to component officials, most of the five components, under the guidance of their parent agencies, refocused their missions primarily to increase their efficiency. For example, BOR changed its emphasis from water project construction to water resources management because of the increased demand on limited water resources and cutbacks in federal spending. NASA’s Human Space Flight program shifted its focus and scarce resources from operations—which it believed could be conducted more efficiently by private vendors—to its primary mission, research and development. OPM created US Investigations Services (USIS), Inc., to do the background investigations work OPM’s Investigations Service previously provided to other agencies. In addition to refocusing missions, components reengineered their work processes to improve effectiveness and/or efficiency. Changes to work processes included consolidating functions into fewer locations, aligning operations more closely with private sector business practices, modernizing data processing systems, placing increased decisionmaking authority in field offices, and increasing reliance on contractors. HUD’s Office of Housing, for example, consolidated single family housing activities from 17 field offices into 1 homeownership center, which officials said helped reduce processing times. The Office plans further consolidations by the year 2000. KSC changed from its traditional contractor oversight role to one of “insight.” Under oversight, KSC directly oversaw contractors on a continual basis, but under insight, KSC will directly oversee contractor processes on a periodic basis. Another component, OPM’s Investigations Service, privatized its investigations operations through the establishment of a private corporation owned by former Investigations Services employees under an Employee Stock Ownership Plan. An Investigations Service official said that USIS completed about 20 percent more investigations in fiscal year 1997 than the Investigations Service did in fiscal year 1996. Along with reengineering their work processes, components generally took steps to help ensure that they had the skilled workforces needed to maintain their performance in a downsized environment. These steps included retraining employees for additional responsibilities and consolidating expertise in fewer locations. For example, according to a PBS official, PBS lacked a workforce suited to its mission; however, it was training its staff to develop a workforce with the necessary skills. BOR officials said that although their workforce had retained the appropriate skills and experience, employees were being retrained and rotated among functions to develop future supervisors and managers. Nevertheless, some officials were concerned about the sufficiency of current or future workforces for some components. In March 1997, the HUD Inspector General (IG) reported that the Office of Housing did not have the staffing levels and skill mixes it needed. The IG also reported staffing shortages in some areas, barriers to effective staff redeployment, and mismatches between skills and needs. The report stated that staff reductions would be compounded as anticipated budget restrictions led to further reductions by the end of fiscal year 2000. The report also said staffing needs continued to be most critical in the multifamily insured portfolio monitoring area and, to a lesser degree, in the multifamily note servicing area. The IG said this prevented the component from placing adequate resources on multifamily loss mitigation functions and properly managing troubled multifamily assets. In October 1997, HUD began implementing its 2020 Management Reform Plan, which included a specific initiative to refocus HUD’s mission and retrain its workforce to perform a wider variety of interdisciplinary tasks. Office of Housing officials reported to us that one expected effect of the HUD 2020 Management Reforms will be that Housing will be able to focus a highly trained staff with adequate automated systems on the multifamily portfolio. Also, because of concern about the safety of the space shuttle as KSC downsized and a new contract for shuttle operations was implemented, NASA’s Aerospace Safety Advisory Panel reviewed issues associated with program safety and management. It found that, overall, efforts to streamline the space shuttle program had not created unacceptable risks, but it was concerned with the long-term loss of critical skills and experience. The panel said these personnel issues were challenging and had the potential to adversely affect risk in the future. Component officials, employee representatives, and employees we spoke with believed that efforts to maintain performance had generally been successful. However, some expressed concern about whether performance could be maintained with additional downsizing. They also largely believed that their customers remained satisfied, a view generally supported by the limited customer survey data available; however, customers we spoke with did not always agree with that assessment. Officials, employee representatives, and employees we spoke with at all five components said that they generally believed performance had been maintained; however, some officials expressed concern about whether performance could be maintained with additional downsizing. Office of Housing officials, for example, believed downsizing had not greatly affected the Office’s performance. Further, they reported to us that they anticipate the component’s performance would not only be maintained but would improve after the additional downsizing called for by HUD’s management reform plan is completed in the year 2000. Office of Housing union representatives had mixed opinions, with one agreeing with the Housing officials that there were few performance problems to date and another believing that performance had been negatively affected. KSC officials said they believed KSC was still able to perform its mission. However, they also said they were concerned about retaining the human resources needed to react to problems, meet unplanned requirements, and sustain work as the workforce continued to decline. Most KSC employees we spoke with supported their management’s view. They said mission performance had been unaffected by downsizing but that it could be affected by future downsizing. We found limited performance measurement baseline or trend data to validate the belief of component officials and employees that performance had been maintained. However, the data that were available showed that the components generally met performance goals they set for themselves. For example, at the time of our review, PBS had been developing performance measures under a Government Performance and Results Act pilot project, and while there were little trend data, the data that existed showed that PBS met or exceeded more than half of the goals it set for itself during downsizing. At KSC, available performance measurement data indicated that KSC had maintained performance during downsizing. The data showed that KSC had maintained its shuttle launch schedule at lower cost and that the number of in-flight problems caused by ground processing had declined. BOR officials were unable to provide any BOR-wide performance measurement data to use in corroborating officials’ views that performance had been maintained. The Results Act requires that agencies collect performance measurement data for managing their programs, and component officials told us they are currently developing these data. Officials, employee representatives, and employees we spoke with at all five components largely believed that their customers remained satisfied even as the organizations took action to maintain their performance during downsizing. This view was generally supported by the limited customer survey data available. However, customers of the Office of Housing and BOR that we spoke with did not always agree. PBS and KSC officials cited customer survey results that supported their positive views of customer satisfaction during downsizing. PBS reported surveys of its buildings’ tenants showed satisfaction increasing from 74 percent to 77 percent between fiscal years 1993 and 1996. KSC reported that its payload customers’ satisfaction remained at about 4.2 on a scale of 1 to 5 with 5 being excellent service, despite downsizing, during fiscal years 1993 through 1996. Because BOR, the Office of Housing, and the Investigations Service had little customer satisfaction data to support their opinions, we interviewed a small number of their customers. We interviewed seven randomly selected BOR customers consisting of six water districts located in rural areas in the western United States and one state agency. One customer was satisfied with BOR’s performance, five were not satisfied, and one reported declining satisfaction. The most common reason cited for dissatisfaction was the view that BOR more often favored the water demands of politically powerful groups at the expense of rural farmers. However, none of the customers we talked to blamed their dissatisfaction on downsizing. Of the five Office of Housing customers we interviewed, three either were not satisfied or had mixed feelings with Housing’s performance. All three said downsizing caused major losses of staff with adequate technical expertise. The two Investigations Service customers we spoke with said there had been no change in their satisfaction level since the Service had privatized. Although officials from the components identified a number of lessons that they said helped them maintain performance during downsizing, most cited two overarching lessons. They believed that open lines of communication between management and employees were a must and that management must solicit employee input into the planning process. NASA officials told us that unions, employee associations, and employees should be involved with developing the agency downsizing implementation strategy. In addition, officials said that (1) people must be treated with compassion and must know they are valued by the agency; (2) there must be no favoritism even though management may be reluctant to let some people leave; (3) buyouts need to be planned to prevent a sudden loss of expertise; and (4) critical skills should be backed up by more than one person so that, if people leave, the agency still has employees with the required skills. We requested comments on a draft of this report from the heads of each of the five agencies or their designees from which we had obtained information. We received written comments from NASA in a letter dated January 22, 1998, from the Acting Deputy Administrator. The Acting Deputy Administrator had no comments on any of the substantive content of the draft report. However, he did suggest one technical change, which we have made in the report. See appendix VI for a reprint of NASA’s letter. We requested comments from the Administrator, GSA, but despite several follow-up inquiries, no comments were received. On January 28 and 29, 1998, we spoke with the GAO Liaisons at OPM, DOI, and HUD, respectively. The OPM GAO Liaison said that OPM had no substantive comments on the draft report. He suggested several technical comments to improve the accuracy or context in the draft report; we made these changes in this report where appropriate. The DOI GAO Liaison had no comments on the draft report. The HUD GAO Liaison told us that except for one statement attributed to Office of Housing officials that the Department cannot support, the agency had no comments on the draft report. Consequently, we deleted the sentence from this report. As arranged with your office, unless you announce the contents of this report earlier, we plan no further distribution until 30 days after its issue date. At that time, we will send copies to the Ranking Minority Member of the Subcommittee on Civil Service, House Committee on Government Reform and Oversight, and to the Chairman and Ranking Minority Member of the Senate Committee on Governmental Affairs. We will also send copies to the Secretaries of HUD and DOI, the Administrators of GSA and NASA, and the Director of OPM. We will make copies available to others on request. The major contributors to this report are listed in appendix VII. If you have any questions about the report, please call me on (202) 512-8676. The Department of Housing and Urban Development (HUD) reduced its workforce by 1,894 FTEs between fiscal years 1993 and 1996. As shown in Table I.1, the Office of Housing accounted for the largest percentage of HUD’s downsizing. Actions taken that helped HUD’s Office of Housing maintain performance during downsizing can be categorized into three general areas: (1) HUD refocused its mission, (2) Office of Housing reengineered its work processes, and (3) Office of Housing took steps to build and maintain employee skills. HUD, according to its streamlining plan, had operated for years without a clear mission, resulting in an inability to mobilize its resources to meet the needs of America’s communities. In a 1996 statement highlighting the agency’s reinvention efforts, the Secretary of HUD stated that HUD’s mission is to help people create communities of opportunities and that the programs and resources of HUD help Americans create cohesive, economically healthy communities. HUD’s Office of Housing has responsibility for (1) underwriting single family, multifamily, property improvement, and manufactured home loans and (2) administering special purpose programs designed specifically for the elderly, the handicapped, and the chronically mentally ill. In addition, the Office of Housing administers assisted-housing programs for low-income families, administers grants to fund resident ownership of multifamily housing properties development, and protects consumers against fraudulent practices of land developers and promoters. In support of its mission, HUD officials said that Office of Housing took or planned a number of actions to help maintain performance during this period of downsizing. Routine, location neutral activities were consolidated into fewer offices. In August 1994, the Office of Housing consolidated single family housing activities from 17 field offices into the Denver Homeownership Center and reported reduced processing times as a result. By 2000, Housing plans to consolidate remaining single family loan processing, quality assurance, marketing and outreach, and asset management activities from its 81 field offices into 4 homeownership centers (including Denver), which officials said should enable them to reduce single family personnel by 50 percent. The multifamily housing program consolidated voucher processing in Kansas City in August 1995, property disposition in Atlanta and Fort Worth in October 1996, and risk-sharing lender activities in Greensboro, NC, in January 1997 to reduce processing time, improve customer service, and use staff resources more efficiently. Multifamily housing officials planned to continue consolidating its 51 hub locations until activities are located in 18 hub locations and 33 additional smaller sites by fiscal year 1998. According to these officials, this will create economies of scale and maximize use of limited resources while still maintaining a local presence. They explained these consolidations were not done specifically because of downsizing, but they were part of an ongoing HUD reinvention effort, which permitted HUD to adjust to a fluctuating workload and maintain performance during downsizing. In addition to the consolidations, the Office of Housing began implementing paperless processing of mortgage record changes, default reporting, and other record changes. Office of Housing officials told us their employees generally had the appropriate skills and experience to maintain performance during this downsizing period. However, in certain instances, the Office of Housing used contractors to supplement shrinking staff and provide technical expertise, such as physical inspections and property disposition rehabilitation reviews. The various consolidations reduced the need to have expertise in all functions in all offices. To augment employee skills, the multifamily housing program implemented work sharing using a “matrix” scheme of 5 teams consisting of 18 to 20 offices each. Under this scheme, offices within a matrix shared work so that, if an office needed help with a function, it could get it from another office in the team. Union officials we spoke with also believed that Office of Housing employees had the skills and experience needed to maintain performance in most but not all locations; however, they warned that the skills would not be available as downsizing continued. Although Office of Housing and union officials believed Housing had the skills and experience necessary to maintain performance, a March 1997 IG’s audit was less optimistic. It found staffing shortages in some areas, barriers to effective staff redeployment, and mismatches between skills and needs. The IG report stated that staff reductions would be compounded as anticipated budget restrictions led to further reductions by the end of fiscal year 2000. The report said staffing needs continued to be most critical in the multifamily insured portfolio monitoring area and, to a lesser degree, in the multifamily note servicing area. Office of Housing officials reported to us that the realignment of functions and responsibilities as outlined in HUD’s 2020 Management Reform Plan, initiated in October 1997, will enable Housing to focus a highly trained staff with adequate automated systems on the multifamily portfolio. The Office of Housing reported that the creation of new methods to deal with its workload, such as the single family homeownership centers and work sharing, had allowed it to maintain, and in some cases, improve performance. Union officials differed on whether downsizing had affected performance. Two union officials thought performance had been negatively affected, while one union official said it had not been because employees took pride in their work and were willing to do what was necessary to get it done. Office of Housing performance measurement goals changed from year to year so there were few trend data, but the available data showed that Housing generally met or exceeded the goals it set for itself during this downsizing period. Trend data for one goal, to close sales on 95 percent of each year’s single family inventory, were available. They showed closed sales were 95 percent of inventory in fiscal year 1994, 109 percent in fiscal year 1995, and 194 percent in fiscal year 1996. Housing officials told us that HUD was developing performance measures in compliance with the Government Performance and Results Act. HUD’s 2020 Management Reform Plan seeks to (1) consolidate most of its recordkeeping and many program activities in selected cities around the country and (2) focus the agency on assessing the quality of the government housing stock, and curtailing waste, fraud, and abuse. As part of this plan, HUD would continue its downsizing efforts. In a November 25, 1997, audit-related memorandum providing for an interim review of HUD’s reform plan, HUD’s IG criticized the plan for setting a downsizing target without first analyzing HUD’s workload and mission. The IG reported that HUD’s staff reductions are resulting in a serious loss of technical expertise leading to concerns about the relative capacity of HUD’s remaining staff to carry out their mission and responsibilities once reforms are in place. HUD officials had not yet responded to the audit-related memorandum at the time we concluded our work. Office of Housing officials, citing feedback from lending institutions and a decreased number of complaints, believed customers were satisfied with their performance. A union official believed that customer satisfaction on the part of the private real estate industry had increased because private companies were asked to do more for themselves, which they applaud, but satisfaction on the part of the public had decreased because downsizing had reduced the opportunities for the public to interact with the Office of Housing. Another union official believed that customers had generally remained satisfied in spite of downsizing because the extra time employees were devoting to their jobs enabled the Office of Housing to continue providing levels of service after downsizing that were comparable to those provided before downsizing. The Office of Housing provided results of two customer satisfaction surveys done during downsizing. A Denver Single Family Processing Center customer survey in 1995 with an 8 percent response rate indicated that the respondents were satisfied. A 1996 survey found moderate satisfaction among lenders and low satisfaction among realtors for the Section 203(k) Rehabilitation Mortgage Insurance Program, and it found high satisfaction among lenders and moderate satisfaction among realtors for the Section 203(b) Mortgage Insurance Program. However, in the absence of any similar surveys prior to downsizing, we could not tell if satisfaction among these customers had increased or decreased during downsizing. Further, the low response rates for the surveys undermine their value as accurate measures of customer satisfaction. In the absence of agency data measuring changes in customer satisfaction during downsizing, we interviewed a small number of Office of Housing customers. The Office of Housing provided customer lists containing 80 customers composed primarily of nonprofit organizations representing industry groups and homeowners. From the 80 customers, we randomly selected 10. We asked them if their satisfaction with the Office of Housing’s performance had changed since 1992 and if their satisfaction had been affected by downsizing. Three of the organizations denied being customers, one could not be contacted, and one did not respond to our questions. Of the remaining five, two were satisfied with the Office of Housing’s performance, but three were either dissatisfied or had mixed feelings. The dissatisfaction all three expressed was due to major losses, at headquarters or field offices, of staff with adequate technical expertise, and all three blamed downsizing. The organizations said these losses made it difficult for the organizations and their constituents to obtain information they needed. One organization described the situation at the Office of Housing as a “brain drain.” Office of Housing officials identified a number of lessons learned they believed helped maintain performance during downsizing. They said agencies should involve employees who will be affected by downsizing in the planning and development of new organizational procedures. They said managers need to “be straight” with employees about what is happening because it makes acceptance easier; tell employees the situation as soon as possible so they can make decisions about their futures; not change direction after the inevitable is accepted because that causes downtime while employees become reoriented; and make every effort to convey to the employees how important they are to the agency’s success and to ensure that the employees feel they are part of a team. Officials also said it is important to develop a cooperative relationship with employee unions. The Department of the Interior (DOI) reduced its workforce by almost 10,200 FTEs between fiscal years 1993 and 1996. Table II.1 shows components with the largest downsizing percentages. Actions taken that helped Bureau of Reclamation (BOR) maintain performance amid downsizing can be categorized into three general areas: BOR (1) refocused its mission, (2) reengineered its work processes, and (3) took steps to build and maintain employee skills. According to the Secretary of the Interior, his agency’s mission is to protect and provide access to the nation’s natural and cultural heritage and to honor its trust responsibilities to tribes. DOI’s internal operating manual states that BOR’s mission is to manage, develop, and protect water and related resources in an environmentally and economically sound manner in the interest of the American public. In fulfilling its mission, BOR designs and constructs water resources projects; develops and enhances recreational uses at BOR projects; conducts research and encourages technology transfer to improve resource management development and protection; assists other federal and state agencies in protecting and restoring surface water and ground water resources from hazardous waste contamination; and provides engineering and technical support to federal and state agencies, Native American tribes, and other nations. Over the past decade, BOR shifted its mission emphasis from water project construction to water resources management, including water conservation, environmental restoration, and solutions to the water problems of Native Americans and urban water suppliers. According to BOR officials, this reemphasis occurred at the same time as downsizing, but not because of downsizing. In October 1994, BOR reengineered its Denver facilities into the Reclamation Service Center to provide administrative, research, scientific, and technical services to BOR, other DOI organizational components, water districts, and others. These services are provided through four major units, specifically, the Administrative Service Center, the Human Resources Office, the Management Services Office, and the Technical Service Center. As part of the restructuring, the Technical Service Center became self-supporting—dependent on client payments for its financing. In addition to establishing the Reclamation Service Center, BOR’s 35 project offices were consolidated into 26 area offices. BOR officials believed that BOR employees had the appropriate skills and experience to maintain performance amid downsizing, although they also believed additional younger people needed to be hired. To develop a cadre of people to be future supervisors and managers, the officials said BOR was rotating people among functions and retraining them. A union official also believed that BOR had the appropriate skills and experience to maintain acceptable performance with the workforce currently on board. Employees we spoke with generally agreed that BOR had the necessary skills, but they were concerned about the future. One employee said that skills were thinly spread, and although the work would get done, its quality might suffer. Another employee said there were skill gaps, and unless BOR was careful, it would not have the skills needed. Some employees also expressed concern that employees were leaving who would have been BOR’s future leaders and that few young people were being hired. BOR headquarters officials believed no performance problems had emerged because of downsizing; however, Reclamation Service Center officials were less positive. While Service Center officials generally agreed performance had not suffered greatly, they also noted that some problems had emerged, particularly in the Service Center’s ability to provide computer support to other BOR units. Service Center officials believed that people were working harder and were tired because of fewer people to carry the same or even an increased workload, and performance may ultimately suffer because stress leads to mistakes. Service Center officials said there had already been incidents such as threats of violence and bizarre behavior brought on by stress. A union official concurred that some performance problems had emerged, particularly the ability to provide all the computer support needed. Employees we spoke with, for the most part, agreed with headquarters officials that downsizing had not yet led to performance problems, although some said downsizing had caused a loss of expertise. We found no BOR-wide performance measurement data to use in corroborating officials’ views that performance had been maintained. The Power Programs’ Power Management Laboratory had identified a number of fiscal year 1994 measures, such as FTEs per operating unit and per megawatt, but there were no data for other fiscal years. A Power Program official said data for other fiscal years were being gathered but would not be available for several months, and consequently there were no data showing performance trends during downsizing. The 1994 data showed that BOR was performing within an acceptable range of the power industry’s standards. At the Reclamation Service Center, an official suggested one performance measure would be whether its Technical Service Center unit broke even each year. The official pointed out that, although the Technical Service Center suffered a deficit of about $180,000 in its first year of operation as a self-supporting activity in fiscal year 1995, it earned a surplus of about $270,000 in its second year even after recovering the previous year’s deficit. BOR officials said the agency was developing performance measures in compliance with the Government Performance and Results Act. BOR officials told us that, based on informal feedback, their customers remained satisfied with their work. One measure of satisfaction cited was that Technical Service Center customers continued to seek and pay for services. Furthermore, an official said, downsizing had benefited customer satisfaction because it forced BOR employees to become more customer-oriented. Employees we spoke with were not unanimous, but most employees felt that customers remained satisfied. One employee echoed management’s statement that downsizing had benefited customer satisfaction because BOR employees had become more customer-oriented and added that having fewer people on projects resulted in more direct communication with customers about routine matters. On the other hand, one employee said BOR had been unable to adequately service two federal agencies and a water district, and another employee said it was hard to provide staff for all of the unit’s projects. A BOR official said there were no agencywide customer satisfaction data; however, BOR was developing an agencywide customer satisfaction survey that it hoped to administer at 3-year intervals. BOR’s Power Program surveyed 942 customers in 1995 and found that 84 percent of the respondents thought BOR was doing a good to excellent job. There were no predownsizing data for comparison, but the Power Program intended to continue seeking customer feedback in the future. In the absence of BOR-wide customer satisfaction data, we interviewed a small number of customers. BOR provided customer lists containing 627 customers. Customers included other federal agencies, international customers, and state agencies, but most of them were water districts located in rural areas in the western United States. From the 627 customers, we randomly selected 10 to survey of which 9 were rural water districts and 1 was a state agency. We asked them if their satisfaction with BOR’s performance had changed since 1992 and if their satisfaction had been affected by downsizing. Two organizations denied being BOR customers, and one did not respond. Of the remaining seven, one was satisfied with BOR’s performance, five were not satisfied, and one reported declining satisfaction. Reasons cited for dissatisfaction included longer turnaround time for decisions, diminished technical support, increased reporting requirements, and higher water fees. However, the most common reason cited for dissatisfaction was customers’ belief that BOR is prone to favor the water demands of politically powerful groups, such as large population centers and environmental groups, at the expense of rural farmers. Four of the dissatisfied customers did not think that downsizing caused their dissatisfaction, and two were not sure. BOR officials identified a number of lessons learned they believed helped maintain performance amid downsizing. First, officials said that agencies should include employees in planning and implementing the downsizing. The officials believed it was impossible to communicate with employees too much, and said to be open and honest with them. If there must be a reduction-in-force, officials said it should be conducted without favoritism even though there are some employees managers may not want to lose. By adhering to this principle, they said only two appeals resulted from BOR’s reduction-in-force, both of which they said were quickly resolved. Officials also stressed the need to plan for buyouts. Although BOR’s first buyout round was open to everyone, by phasing the time when employees left, officials said BOR prevented a sudden loss of expertise. In addition, the officials cited the need to provide training for employees in coping with downsizing, and to also provide them time to talk out troubling issues with their peers. One official said, in addition to rewarding employees, agencies should also hold them accountable for their actions. The official said BOR cannot afford to tolerate poor performers since it has downsized and relies on customer reimbursement for funding. The General Services Administration (GSA) reduced its workforce by 4,535 FTEs between fiscal years 1993 and 1996. As shown in table III.1, the Public Buildings Service (PBS) accounted for the largest percentage of GSA’s downsizing. Actions taken that helped PBS maintain performance during downsizing can be categorized into two general areas: (1) reengineering work processes and (2) PBS taking steps to build and maintain employee skills. According to its fiscal year 1998 budget overview, GSA’s mission is to improve the effectiveness of the federal government by ensuring quality work environments for its employees. To that end, GSA began moving from being a mandatory source of services to being a provider of choice, which must compete with other providers in terms of cost, quality, and timeliness. GSA reported it is increasingly competing effectively for customer purchases of real property services. In support of GSA’s mission, PBS is responsible for the design, construction, management, operation, alteration, and remodeling of space, owned and leased, in which accommodations for government activities are provided, and where authorized, for the acquisition, use, custody, and accountability of GSA real property and related personal property. In addition, PBS has responsibility for providing leadership in the development and maintenance of needed property management information systems for the government. In January 1995, PBS reengineered its work processes to align itself more closely with private sector business practices, allow regional offices to operate more independently, and fill gaps left by downsizing. PBS decentralized property development operations to field offices to allow for increased contact with customers. In July 1996, GSA implemented the “Can’t Beat GSA Leasing” program to reduce delivery times and enhance cost-effectiveness by cutting procedures and offering greater competition and choices to federal agencies. In November 1996, it initiated the “Can’t Beat GSA Space Alterations” program for the procurement of construction services that aim to be better, cheaper, and faster for customers. According to an official, PBS also solicited several national real estate services to identify private sector service providers with which PBS could contract to deliver leasing services to federal agencies. The official said these contracts will allow PBS’ smaller staff to continue to satisfy customers by outsourcing routine transactional details. Further, the official said PBS planned, in fiscal year 1998, to begin transitioning its automated data processing system from multiple applications operating on an antiquated mainframe computer to the use of integrated commercial applications to provide on-line transaction processing, permit data sharing, and support an easy to use query facility. A PBS official said PBS lacked the necessary skills mix suited to today’s mission; however, it was developing the necessary mix, for example, by retraining staff in asset management and empty building space disposal. The official further said that PBS was losing experienced employees, forcing those remaining to assume higher-level responsibilities, but this situation also allowed PBS to train people to replace lost managers by providing opportunities for employees to act in management roles. The official added that PBS would have sufficient staff with the appropriate skills and experience to maintain performance only if its improved automated data processing system is successfully implemented. PBS employee representatives differed in their views about whether PBS had the necessary employee skill mix. Officials of one union believed that PBS did not have the appropriate skill mix and experience to maintain performance, while an official of another union believed the skill mix and experience were sufficient to maintain acceptable performance. An employee association official also believed that PBS currently had a sufficient skill and experience mix and added that GSA had greatly increased employee training. A PBS official said it was not possible to describe the effects of downsizing alone on PBS performance because it occurred concurrently with changes GSA had already planned to make before downsizing was mandated. However, the official said streamlining its operations enabled PBS to maintain its performance, and implementation of the new data processing system planned for fiscal year 1998 will further enhance its ability to maintain performance. In addition, the official said downsizing forced PBS to implement changes faster, and in that respect, downsizing had been healthy. Employee representatives we spoke with disagreed about the effect of downsizing on PBS performance. Officials of one union believed it had been affected because constant change did not allow people to settle in and learn their jobs and because, in his opinion, contractor employees cannot perform the work as well as federal employees. An official of another union believed performance had not been greatly affected because of good planning and preparation by the agency. An employee association official said performance was initially affected because employees were placed in jobs for which they were not qualified, and experienced employees were replaced by temporary workers. The PBS official said GSA did not have good baseline performance measurement data because it had historically done little performance measurement; however, it is now focusing its attention on developing performance measures to meet Results Act requirements. PBS had developed performance measures under a Results Act pilot project, but they had been evolving from year to year, and there were little data showing trends. The data did show, however, that PBS met or exceeded more than half of the pilot project goals it set for itself during fiscal years 1994, 1995, and 1996. PBS surveyed its buildings’ tenants between fiscal years 1993 and 1996, and the results showed an upward trend in satisfaction ranging from 74 percent in fiscal year 1993 to 77 percent in fiscal year 1996. However, because different buildings’ tenants were surveyed in different years, the results did not measure changes in satisfaction of the same tenants. Union officials we spoke with disagreed on the extent of customer satisfaction. One union believed that the customer survey data misrepresented customer satisfaction because of a low response rate; however, another union believed that customer satisfaction was improving. A PBS official said GSA made a mistake in its first round of buyouts by not targeting them. In some areas and occupations, too many employees left, while in others, too few left, causing a mismatch between buyout results and organization needs. GSA had to use the staff who remained as best it could to repair the damage. The official said it was also a mistake for GSA to offer deferred buyouts over an 18-month period. Although deferred buyouts gave GSA more time to adjust to a downsized workforce, according to the official, the motivation of employees who knew they would be leaving was never the same. NASA reduced its workforce by nearly 4,000 FTEs between fiscal years 1993 and 1996. Table IV.1 shows the components with the largest percentage in downsizing. As table IV.1 shows, NASA’s Human Space Flight Program experienced the largest percentage FTE reduction between fiscal years 1993 and 1996. Table IV.2 shows downsizing at Johnson, Kennedy, Marshall, and Stennis space centers, which are part of the Human Space Flight Program. Percent of FY 1993 FTEs reduced (KSC) Actions taken that helped KSC maintain performance can be categorized into three general areas: (1) refocusing its mission (NASA), (2) reengineering its work processes (KSC), and (3) taking steps to build and maintain employee skills (KSC). According to the Administrator of NASA, NASA’s mission encompasses the following: (1) explore, use, and enable the development of space for human enterprise; (2) advance scientific knowledge and understanding of the Earth, the solar system, and the universe; (3) use the environment of space for research; and (4) research, develop, verify, and transfer advanced aeronautics, space, and related technologies. NASA has shifted the focus of its mission from operations to research and development. It has cut back on operations, bought commercial services from the private sector, and focused its efforts on technology development. In carrying out its part of NASA’s refocused mission, KSC designs, constructs, operates, and maintains space vehicle facilities and ground support equipment for launch and recovery operations. It maintains responsibility for prelaunch and launch operations, payload processing for the space shuttle and expendable launch vehicle programs, landing operations for the space shuttle orbiter, and recovery and refurbishment of the reusable solid rocket booster. As NASA refocused on being a high-tech research and development agency, it turned over more of its operations to contractors and in September 1996, it awarded a space flight operations contract to United Space Alliance. This contract consolidated a number of existing contracts under one prime contractor and gave the prime contractor overall responsibility for space shuttle operations, including orbiter vehicles, solid rocket boosters, external fuel tank, flight crew equipment, ground support systems, and integration of payloads. The space shuttle program remained NASA managed; however, according to KSC officials KSC changed from its traditional oversight role to “insight.” Under oversight, KSC maintained continual surveillance over the contractor, telling it not only what to do but how to do it. Under insight, KSC will directly oversee contractor processes only periodically. KSC officials said they will maintain technical visibility through audit, surveillance, assessment of trends, software verification, the flight readiness review process, and independent assessment of problems. KSC officials believed KSC had the workforce needed to carry out its shuttle operations; however, they were concerned about the future. Because KSC programs had lost “centuries” of operating and engineering knowledge, the officials worried about having the appropriate skills mix and experience to maintain performance as downsizing continued. Employees we spoke with generally agreed that KSC’s skill mix and experience remained adequate, but some employees believed that if downsizing continued, skills and experience would become inadequate. To help ensure that KSC would continue to have needed skills, its fiscal year 1997 buyout plan was designed to limit skill loss by limiting the number of buyouts in shuttle processing, safety and mission assurance, and payload processing. Further, some senior executive service positions, for example, shuttle processing and safety and mission assurance program directors, were excluded from buyout eligibility. In addition, KSC officials said they were planning for the succession of managers and other senior people that did leave. KSC instituted individual development plans for future managers and, as part of its senior executive service candidate program, offered programs in management development, project management, and skills training. To prepare for work on the international space station, KSC was cross-utilizing people currently working on the space laboratory program, which was winding down. KSC officials said that KSC was still able to perform its mission. However, they were concerned about retaining the human resources needed to react to problems, to meet unplanned and new requirements, and to sustain the work as the workforce continued to decrease. Most of the employees we spoke with believed downsizing had not yet affected KSC’s performance or shuttle safety. One employee, however, believed downsizing had begun affecting performance and said the quality of safety inspections would decline if personnel were not restored and the workload was not reduced. The employee believed safety of the shuttle program had been affected and cited a wrench left inside a solid rocket booster and water spilled on a maneuver pod as causes for concern. Other employees said, although the work gets done, they were concerned about the effect of further downsizing or overload of remaining employees on performance. Performance measurement data showed KSC maintained its shuttle launch schedule at lower cost during downsizing. In addition, as flight costs decreased, quality increased as measured by the decrease in the number of in-flight problems caused by ground processing. According to KSC surveys, customers remained satisfied with KSC’s performance during downsizing. Payload customers rated KSC’s service on a five-point scale ranging from 1 for poor service to 5 for excellent service. Ratings during downsizing were 4.2 in 1993, 4.3 in 1994, 4.2 in 1995, and 4.2 in 1996. KSC found the apparent leveling off of satisfaction disturbing but attributed it to several factors: (1) during the survey’s early years, KSC concentrated on improving those issues that drew the most frequent customer comments, but subsequently it concentrated on smaller, but important, improvements; (2) inconsistent methods for counting survey results may have skewed the results; and (3) as KSC’s performance improved, customers came to expect even more from it and became more critical in their survey responses. KSC viewed this critical customer feedback as positive because its customers recognized its commitment to improving customer service and became increasingly forthcoming with suggestions for improvements. Employees we spoke with also believed that customers so far remained satisfied with KSC’s performance. As KSC downsized and transitioned to the space flight operations contract negotiated with United Space Alliance, concern grew about the safety of the space shuttle. This led to a review by NASA’s Aerospace Safety Advisory Panel of issues associated with the safe operation and management of the space shuttle program. The panel’s conclusion concurred with NASA officials’ beliefs that shuttle safety had not been adversely affected. The panel found that NASA’s efforts to streamline the space shuttle program had not created unacceptable risks. However, the panel also said there was a clear need for NASA to take steps to ensure the availability of a skilled and experienced civil service workforce in sufficient numbers to meet ongoing safety needs. The panel said these personnel issues were challenging and had the potential to adversely affect risk in the future. The panel said the space flight operations contract appeared to be a comprehensive and workable document espousing safety as paramount throughout. It also said there were minimal adverse safety implications, especially in the short term, largely because the people currently in place were dedicated to making the new scheme work. However, the panel was concerned with the loss of critical skills and experience among NASA personnel over the long term. It said that NASA should not be misled by the apparent initial success of all the transition efforts and that a major test of the new approach would likely be faced after there was significant turnover among incumbents at all levels. KSC officials identified a number of lessons learned that helped maintain performance during downsizing. The officials said agencies should recognize that they are going to have to downsize, be proactive, and not wait for downsizing to happen before acting. They said unions, employee associations, and employees should be involved in developing the agency downsizing implementation strategy. The officials said communication with employees should be open and honest. Communication, the officials said, builds credibility, while silence makes workers think something is going on behind the scenes, and openness helps retain key people by reducing their concerns about their jobs. The officials suggested that agencies should do positive things for employees—for example, hold job fairs, which promote the message that the agency is trying to help them, and offer training courses to help people cope with change. The officials said employee anxiety should be recognized and addressed. They believed that employees should be treated with compassion and should know that they are valued by the agency. Employees should be told the agency does not want them to leave, but if they do leave, respect them for taking actions they feel are in their own best interests. The officials said agencies should back up critical skills so that, if people leave, the agency still has employees with those skills. The Office of Personnel Management (OPM) reduced its workforce by 2,489 FTEs between fiscal years 1993 and 1996. Components experiencing the largest downsizing percentages are shown in table V.1. Although the Investigations Service downsized by 61 percent according to its full fiscal year 1996 usage, the OPM GAO Liaison noted that if the Investigations Service downsizing was measured using the FTE complement at the close of fiscal year 1996, a reduction of 96 percent occurred from the fiscal year 1993 level. The privatization of Investigations occurred in the last quarter of fiscal year 1996, which dramatically lowered the end-of-year staffing level. Actions taken that helped OPM’s Investigations Service maintain performance during downsizing can be categorized into two general areas. The Investigations Service (1) refocused its mission, and (2) reengineered its work processes. Among other things, OPM’s mission includes supporting agencies in merit-based examining and hiring. OPM oversees the merit principles and hiring and retention procedures used by agencies to select applicants for competitive positions in the federal service at general schedule grades and for federal wage system positions. Personnel background investigations are used in support of the selection and appointment process. The Office of Investigations formerly performed these background investigations of federal employees, contractors, and applicants to provide a basis for determining an individual’s suitability for federal employment and whether an individual should be granted clearance for access to national security information. Investigation Service officials said they began downsizing the Investigations Service in 1993 by offering buyouts to employees. In May 1994 the Investigations Service laid off approximately 440 (of about 1,440) employees. As a result of continuing downsizing and reinvention of government initiatives, the investigations function was privatized in 1996 through the establishment of a private corporation known as the US Investigations Service, Inc. (USIS). USIS’ workforce, with the exception of people with specialized skills, primarily marketing, finance, and human resources, was drawn from OPM’s Investigations Service staff. At the time the Investigations Service was privatized, approximately 90 percent of those who worked in the office and received reduction-in-force notices accepted USIS job offers at the same salary, and with comparable benefits. The other 10 percent either stayed as part of OPM’s Investigations Service, transferred to another agency, or retired. With a total staff of about 40 individuals, OPM’s Investigations Service currently limits its functions to policy, agency oversight, contract management, processing of Freedom of Information and Privacy Act requests, adjudicating cases, and the making of suitability determinations. The Investigations Service reengineered its work processes, which enabled it to maintain performance during downsizing. No longer designed to do background investigations, the Investigations Service oversees the government’s contract with USIS. Officials told us that the creation of USIS, an employee-owned firm (owned by former federal civil servants) and the subsequent award of a 3-year contract to USIS to conduct federal background investigations, resulted in a seamless transition for OPM’s former federal customers. An Investigations Service official said performance was maintained or improved even as investigations were privatized. The official said that USIS completed about 20 percent more investigations in fiscal year 1997 than the Investigations Service did in fiscal year 1996, and also maintained the Service’s timeliness record. In addition, the official said there had been no decrease in the quality of cases processed by USIS. A May 1997 USIS employee survey showed that 85 percent of the respondents recognized the importance of quality, and 80 percent believed that USIS puts the customer’s needs first. Investigations Service officials believed that USIS’ customers were satisfied with its investigations; however, we found no customer satisfaction survey data to support this position. Two customers we spoke with said there had been no change in their respective satisfaction levels since prior to privatization. An OPM employee association official said there was no indication that customers were dissatisfied. An OPM union representative said that the union wanted to be more proactive and discuss the downsizing and possible impacts with OPM management early on, but that initial communications between management, employees, and union representatives were not very good. An Investigations Service official identified open communication as a lesson learned during the Investigation Service’s downsizing and ensuing privatization. The official said there was no such thing as too much communication, and there should be open lines of communication whereby information can be passed in all directions. The official added that agencies and components should realize they will not be able to do everything and should concentrate on their most critical areas and functions. They should listen to their customers and ensure that their satisfaction is taken into account before making major decisions. Robert P. Pickering, Evaluator-in-Charge Robert W. Stewart, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed the Department of Housing and Urban Development (HUD), the Department of the Interior, the General Services Administration (GSA), the National Aeronautics and Space Administration (NASA), and the Office of Personnel Management (OPM) to obtain information on the effects downsizing has had on their performance and what actions were taken to maintain performance, focusing on: (1) which components within the five agencies were downsized and to what extent; (2) what actions were taken to maintain performance for one selected downsized component at each parent agency, the results of those actions on the component's performance, and the effect of the downsizing on customer service; and (3) the lessons that the five components learned about maintaining performance during a period of downsizing. GAO noted that: (1) most components within the five parent agencies were downsized to some extent, although how much varied considerably; (2) the percentage of agency components' full-time equivalent reductions from fiscal year (FY) 1993 through 1996 ranged from 3 percent to 100 percent at HUD, 2 percent to 87.5 percent at Interior, 10 percent to 37 percent at GSA, 3 percent to 42 percent at NASA, and 2 percent to 100 percent at OPM; (3) according to officials of the parent agencies and the five selected components, several actions helped the components maintain performance levels during the period of downsizing; (4) they explained that it was difficult to isolate actions taken independently of downsizing from those taken because of downsizing; (5) however, the actions the officials told GAO about generally fell into three categories: (a) refocusing of missions; (b) reengineering of work processes; and (c) building and maintaining employee skills; (6) the officials stated that the five components were generally able to maintain performance and fulfill the requirements of their missions despite the relatively large downsizing that occurred from FY 1993 to FY 1996; (7) although the officials stated that they could not connect specific actions taken with specific outcomes, they stated that without the three actions mentioned, the performance levels of the components would not have been maintained; (8) officials at some components stated that additional downsizing could hamper future performance; (9) it should be noted that GAO's results primarily reflect the viewpoints of officials from the agencies and components and are a snapshot at the time of its review; (10) performance measurement data, particularly baseline data with which current data could be compared, that would support agency officials' views or enable policymakers to track program performance and make informed decisions were limited; (11) the data that were available tended to substantiate the views of component officials that they were meeting goals they had set for themselves; (12) according to component officials and employees or their representatives at the five components, customers remained satisfied with the components' performance during the period of downsizing; and (13) among the lessons learned, officials stated that the most important was the need for early planning and open communication with employees.",govreport
"IRS designed NRP to obtain new information about taxpayers’ compliance with the tax laws. While IRS is using NRP to measure voluntary filing, reporting, and payment compliance, the majority of NRP efforts are devoted to obtaining accurate voluntary reporting compliance data. In measuring reporting compliance, IRS’s two primary goals are to obtain accurate information but minimize the burden on the approximately 47,000 taxpayers with returns in the NRP sample. IRS plans to use NRP data to update return selection formulas, allow IRS to design prefiling programs that will help taxpayers comply with the tax law, and permit IRS to focus its limited resources on the most significant areas of noncompliance. NRP’s reporting compliance study consists of three major processes: (1) casebuilding—creating information files on returns selected for the NRP sample, (2) classification—using that information to classify the returns according to what, if any, items on the returns cannot be verified without additional information from the taxpayers, and (3) taxpayer audits limited to those items that cannot be independently verified. We reported in June 2002 that NRP’s design, if implemented as planned, is likely to yield the sort of detailed information that IRS needs to measure overall compliance, develop formulas to select likely noncompliant returns for audit, and identify compliance problems for the agency to address. Figure 1 shows NRP’s main elements. IRS designed the casebuilding process to bring together available data to allow the agency to establish the accuracy of information reported by taxpayers on their returns. For each taxpayer with a return in the NRP sample, IRS is compiling internal information, such as past years’ returns and information reported to IRS by third parties, such as employers and banks, and information from outside databases, such as property listings, address listings, and stock sale price data. Classification is where IRS uses the casebuilding information to determine whether an NRP audit is necessary and which items need to be verified through an audit. Classifiers place NRP returns into one of four categories: (1) accepted as filed, (2) accepted with adjustments, (3) correspondence audit, and (4) face-to-face audit. If the casebuilding material allows IRS to verify all of the information that a taxpayer reported on his or her tax return, then the taxpayer will not be contacted and the return will be classified as accepted as filed. On returns where minor adjustments are necessary, the adjustments will be recorded for research purposes, but the taxpayers will not be contacted. These returns will be classified as accepted with adjustments. NRP returns that have one or two items from a specified list requiring examination will be classified for correspondence audits. All other NRP returns for which the casebuilding material does not enable IRS to independently verify the information reported on the returns will be classified for face-to-face audits. NRP audits will take place either through correspondence with the taxpayers or through face-to-face audits. When classifiers determine that an NRP return will be sent for a correspondence audit, IRS will request that the taxpayer send documentation verifying the line items in question. To ensure accurate and consistent data collection, NRP audits will address all issues identified by classifiers and will not be focused only on substantial issues or cases for which there is a reasonable likelihood of collecting unpaid taxes, according to IRS officials. NRP auditors also may expand the scope of the audits to cover items that were not classified initially. IRS plans to conduct detailed, line-by-line audits on 1,683 of the approximately 47,000 returns in the NRP sample in order to assess the accuracy of NRP classification and, if necessary, to adjust NRP results—a process called calibration. One-third of the returns in the calibration sample will be returns that were classified accepted as filed (either with or without adjustments), one-third from those classified for correspondence audits, and one-third from those classified for face-to-face audits. None of the taxpayers with returns in the calibration sample will have been audited or otherwise contacted by IRS prior to the start of these line-by-line audits. To describe IRS’s implementation of NRP, we have conducted frequent meetings with officials in IRS’s NRP Office and other IRS officials as they have implemented the program. We reviewed NRP training materials and observed NRP classifier, correspondence examination, and field examination training sessions. We also observed NRP process tests and conducted site visits to IRS area offices in Baltimore, Maryland; Brooklyn, New York; Oakland, California; Philadelphia, Pennsylvania; and St. Paul, Minnesota, in order to observe and review NRP classification in field offices. We considered whether NRP is being implemented in accordance with its design. In our report issued on June 27, 2002, we found that NRP’s design, if implemented as planned, is likely to provide IRS with the type of information it needs to ensure overall compliance, update workload selection formulas, and discover other compliance problems that the agency needs to address. For this review, we also considered whether IRS was maintaining a focus on meeting NRP’s objectives of obtaining quality research results while, at the same time, minimizing taxpayer burden. This assessment was also based on IRS’s NRP implementation plans. As of the completion of our work, IRS had a significant amount of NRP implementation to carry out. Our evaluation of IRS’s efforts to implement NRP, therefore, only provides an assessment of efforts that have taken place through the time of our work. Additionally, we did not attempt to assess IRS’s efforts to measure filing compliance and payment compliance through NRP. Our evaluation focuses only on IRS’s efforts to obtain voluntary reporting compliance information. A more detailed description of NRP can also be found in our 2002 report. We conducted our work from September 2002 through April 2003 in accordance with generally accepted government auditing standards. In addition to the two tests described in our prior report on NRP, IRS conducted two more tests of NRP processes prior to implementing the program. IRS tested the casebuilding and classification processes in an NRP simulation in July 2002, and conducted another classification process test during the initial classification training session in September 2002. IRS used the preliminary results of both of these tests to estimate NRP classification outcomes and to evaluate the effectiveness of NRP training. As we recommended in our June 2002 report, IRS substantially completed this testing prior to full NRP implementation, though final reports from the tests were not completed until later. In July 2002, IRS used draft NRP training materials to train 16 auditors from IRS field offices in the use of NRP casebuilding materials to carry out the NRP classification process. The newly trained classifiers then classified 506 tax year 2000 returns. NRP staff members reviewed the classifiers’ results and found that, overall, the results of this NRP simulation were positive. They found that the classifiers understood the NRP approach to classification but that there were instances where the classifiers overlooked some of the issues indicated by the casebuilding materials or made other errors. In September 2002, IRS conducted another test of the NRP classification process immediately following the initial training session using final classification training materials. As we recommended in our June 2002 report, IRS had NRP classifiers classify previously audited tax returns in order to compare classifiers’ results with the results of actual audits. Twenty-two newly trained classifiers classified 44 previously audited returns, with each return classified by 5 different classifiers. All of the earlier audits resulted in some changes. NRP staff members then compared the classifiers’ results with those of the other classifiers and with the results of the earlier audits. NRP officials reported that the test showed that about three-fourths of the time the trained NRP classifiers were able to identify issues where noncompliance was found through an audit. IRS used preliminary results of these tests to identify and implement improvements to NRP. For example, NRP staff members noticed early in the course of the second test that NRP classifiers were failing to classify some line items in accordance with NRP guidelines. Trainers reiterated the importance of following the classification guidelines for these items. NRP staff members also saw that the format of the form that classifiers were to use to record their classification decisions made it easy to make mistakes. They revised the form to make decision recording less error-prone. IRS also used these tests to identify the need for more stringent classification review guidelines than initially planned in order to ensure that classifiers understand and follow the classification guidelines. IRS did not finish analysis and documentation of the NRP simulation and assessment and the classification process test until after the beginning of classification in IRS area offices. NRP classification began at IRS area offices during November 2002, but IRS did not finalize its report on the July 2002 NRP simulation until December 2002, and the report on the September 2002 NRP process test was finalized in December 2002. According to NRP officials, this did not create problems because they made changes to NRP processes and training materials before the reports of these tests were final. Though the final reports were not completed until later, these tests and the NRP modifications they generated were complete before full implementation of NRP. IRS identified and trained staff to complete NRP classification and audits. IRS selected NRP classifiers and auditors from field offices across the country to handle NRP cases along with the non-NRP enforcement cases and carried out plans for special training of the staff members tasked with NRP responsibilities. IRS delayed the delivery of computer software training to managers and clerks involved in NRP audits due to technical problems with NRP software. This initially delayed the start of NRP audits, but the training is now complete. The timing of NRP staff selection and training fit the conclusion and recommendation in our June 2002 report that IRS should make sure that these key steps are carried out in the appropriate sequence and not rushed to meet an earlier, self-imposed deadline. IRS selected over 3,000 auditors to handle NRP cases. Most of these auditors are assigned to the Small Business/Self Employed operating division. IRS selected 138 Small Business/Self Employed auditors to be NRP classifiers and about 3,500 to handle NRP face-to-face audits. According to NRP staff members, IRS offices across the country now have one or more auditors trained to handle the NRP cases that come to those offices. IRS area office managers determined how many auditors should receive NRP training based on the projected distribution of NRP returns to their areas. Unlike face-to-face audits, NRP correspondence audits are being handled out of a single office. IRS selected two groups of correspondence auditors—26 correspondence auditors—from the Wage and Investment operating division’s Kansas City office to handle NRP correspondence audits. IRS originally planned to select a cadre of auditors to work only on NRP face-to-face audits. According to NRP officials, the geographic distribution of NRP returns would have made it difficult to have a cadre of auditors dedicated entirely to NRP examinations because they would have had to travel extensively to carry out NRP audits. IRS officials said that even though they did not implement the plan for a dedicated cadre of NRP auditors, the number of full-time equivalent employees needed for NRP— about 1,000 in fiscal year 2003—has not changed. In September 2002, IRS trained 138 auditors to perform NRP classification. The classifiers learned how to apply the guidelines for NRP classification and were shown how to use NRP casebuilding materials. Instructors stressed the concept of “when in doubt, classify the item” meaning that, unless the casebuilding materials explicitly verify the line item in question, the classifier should classify the item as needing to be verified through an audit. Instructors explained that with a random sample such as in NRP, every return represents many others so even small oversights on the part of classifiers or auditors can have a substantial impact on data quality. After the classification training, the classifiers remained at the training location and began classifying NRP returns. Specially trained classification reviewers reviewed most of the classified cases and provided rapid feedback to the newly trained NRP classifiers. The intent of this was to ensure that NRP classifiers understood and consistently applied the NRP classification guidelines and received any needed retraining before returning to their respective field offices and participating in future NRP classification sessions. IRS delivered NRP correspondence and face-to-face auditor training during late 2002 and early 2003. Instructors provided an overview of NRP goals and objectives, reviewed the casebuilding materials that auditors would have at their disposal, and explained the guidelines for NRP audits. IRS trained about 3,500 auditors to conduct NRP face-to-face audits. This training took place in IRS field offices across the country from October 2002 through February 2003. Each face-to-face NRP audit training session lasted 3 days. The training consisted of an overview of NRP goals and objectives, an explanation of how NRP audits differ from traditional enforcement audits, and a description of how to apply NRP guidelines during NRP audits. Trainers stressed that, for the purposes of consistent and accurate data collection, NRP auditors should not focus solely on significant issues or take into consideration the likelihood of collecting unpaid taxes when conducting NRP audits, but should make sure that every item identified by the classifier is carefully verified in the course of the audit. Correspondence auditor training was similarly focused, and the 1-day training took place in September 2002. Staff members were trained before they began to carry out NRP tasks. IRS needed to provide training to NRP auditors and to IRS managers and clerks with NRP responsibilities in order for staff members to understand how to use the computer program IRS developed to capture NRP information. Because of some problems IRS encountered in installing the NRP software in offices across the agency, IRS had to delay training some clerks and managers. This led to delays in starting some NRP audits because managers were unable to assign NRP cases to auditors and clerks were unable to assist in loading NRP cases on NRP auditors’ laptop computers. IRS resolved these problems and finished delivering the majority of this training by the end of January 2003. IRS is nearly finished creating NRP casebuilding files, has classified nearly three-fourths of the NRP returns, and has begun conducting NRP audits. As of the end of March 2003, IRS completed NRP casebuilding for about 94 percent of the approximately 47,000 returns in the NRP sample and about 73 percent of NRP returns have been classified. Also, for 3,651 NRP cases, IRS completed all necessary audit work. Some of these are cases where correspondence or face-to-face audits are finished, but most of the NRP cases closed so far—2,709—are those that did not require audits. Cases involving audits take longer to complete, so few have been closed thus far. IRS made substantial progress in casebuilding and classification starting in 2002, and the number of cases assigned to NRP auditors has been increasing quickly since January 2003. Figure 2 shows the progress IRS has made in casebuilding, classifying, and closing cases. The number of completed NRP casebuilding files began to grow during the second half of 2002, as shown in figure 3. As figure 3 also illustrates, NRP classification began in September 2002. These were the cases classified during sessions held immediately after classifier training. Over 9,000 NRP returns were classified by the end of October 2002. After these sessions, classification became an area office function, with some offices scheduling weeklong classification sessions on a somewhat regular basis and others classifying returns as they come into the office. IRS began conducting some NRP audits during November 2002, though these audits began in earnest during the first quarter of 2003. By the end of January 2003, IRS had assigned over 4,600 NRP cases to auditors to begin conducting face-to-face and correspondence audits. By the end of March 2003, about 18,000 taxpayers had been contacted regarding NRP audits. IRS recognizes the need for accurate NRP data and, as planned, has built into the program several measures to ensure the quality of NRP results. IRS designed the NRP classification process to include quality assurance reviews and has added additional quality assurance measures in response to suggestions we made in the course of this engagement. The NRP audit process also includes quality assurance measures that include both in- process and completed case reviews, with all NRP audits reviewed before they are formally closed with the taxpayer. IRS also built accuracy checks into the data capture steps that take place throughout the NRP process. IRS designed NRP classification to include regular reviews of classifiers’ decisions. We found that these reviews are generally taking place according to NRP guidelines. We also found that additional measures could further improve NRP classification accuracy, and IRS implemented our suggestions. NRP guidelines specify that NRP classification reviewers review all cases for which returns are classified as needing either no audit at all or only correspondence audits to confirm their accuracy. Additionally, reviewers must initially review 25 percent of the cases classified by each auditor that are selected for face-to-face audits until they are satisfied with the quality and consistency with NRP guidelines of the classifier’s work. After that standard has been met, the guidelines specify that reviewers need only review approximately 10 percent of the cases that each classifier selects for face-to-face audit. We conducted site visits to five IRS area offices where NRP classification was taking place and found that IRS’s plans to implement the classification steps of the program were generally well understood by the classifiers carrying them out. Classifiers were knowledgeable about the differences between the NRP classification process and the classification process used in the enforcement audit environment and supported NRP goals in general. However, we also found instances where NRP classifiers were not consistently following NRP classification guidelines. Another issue we identified involved the use of the classification review sheets that reviewers fill out when they find problems with classifiers’ decisions. We learned that there was no provision for further review of these forms. In some cases, we found that reviewers were not always documenting classification errors on the forms. We discussed with NRP officials the potential benefits of using NRP classification review sheets for more than identifying issues at the area office level. Specifically, we suggested that classification review sheets be forwarded from the area offices to a central location in order to identify problems that may be occurring in different locations around the country or other trends that the NRP Office may need to address during the course of NRP classification. The NRP Office agreed with our suggestion and added centralized review of classification review sheets to its other classification quality assurance measures. The NRP Office adopted our suggestion that it conduct site visits to area offices to identify NRP classification implementation issues. Similar to the visits we conducted, NRP staff members visited area offices and met with classifiers, reviewers, and managers to identify issues encountered in carrying out NRP classification and possible areas where NRP guidelines may have been misinterpreted. Among the issues they are asking about is the usefulness of the various materials included in the casebuilding files, information which may prove useful in the design of the casebuilding portion of future iterations of NRP. NRP staff members are also conducting separate reviews of completed classification cases. IRS has designed NRP to include several steps to identify NRP audit quality problems at both the individual auditor level and across the program. Reviews include quality checks while cases are in progress and after work is complete, and reviews by managers at different levels. Importantly, IRS’s plans call for every NRP audit to be reviewed at least once at a point where it is still possible to return to the taxpayer and complete additional audit steps, if necessary. These quality assurance measures will serve to mitigate the risk of IRS including erroneous or incomplete data in the NRP database. NRP guidelines task group managers with reviewing one open NRP audit for each auditor in the first 90 days of that auditor’s NRP activity and another in the first 180 days. NRP officials intend for these in-process reviews to be extensive and timed early enough in the program to identify individual auditors’ misunderstandings of the program, correct them on the audits under review, and prevent them on future NRP audits. IRS has also created Quality Review Teams both to oversee individual audit cases and identify problems at the area office level and systemically across NRP. These teams are made up of IRS managers and are tasked with checking for compliance with NRP-specific and overall IRS standards on 40 open cases and 20 closed cases for each of IRS’s 15 area offices. These reviews will be repeated in each area about once every 3 months throughout the planned 18-month NRP audit period. The IRS standards applied by the teams to the audits they review are the same standards employed by IRS’s Examination Quality Measurement System (EQMS). Similar to the visits NRP officials made to area offices to review classification activities, NRP officials are also visiting area offices to review NRP audit activities. NRP officials said that any systemic issues identified through Quality Review Team reviews will then be addressed across NRP. Another NRP audit quality assurance element calls for all face-to-face audits to be checked by group managers after work is completed but before the cases are formally closed with the taxpayers. This review will include assessing technical correctness, mathematical accuracy, completeness, and adherence to procedural requirements. IRS officials said that these requirements include adherence to the NRP-specific requirement that audits include verification of all items identified through the NRP classification process. These reviews also include assessing adherence to IRS standards in areas such as audit depth and reviewing large, unusual, or questionable items on the audited return. We were initially concerned that IRS planned for these reviews to take place after NRP audits were completely closed, precluding IRS from reopening the cases or otherwise obtaining additional information from the taxpayers even if the reviewers found that the original NRP audits were incomplete. However, senior IRS officials informed us in March 2003 that these reviews will take place after NRP auditors consider their audit work to be complete but before the taxpayers are notified that the audits are over. The officials explained that these reviews of all NRP cases will be timed to provide an important means of ensuring that complete and accurate audit results are entered into the NRP database. They also explained that the importance of NRP audit reviews has been stressed throughout NRP implementation and will be the subject of ongoing communication with managers in the field. It is very important that IRS conduct reviews of NRP audits before they are closed because IRS data show that auditors do not always meet enforcement audit quality standards. In fiscal year 2002, IRS’s EQMS found that auditors in the field did not meet the audit depth standard about 15 percent of the time on field audits; the standard for auditing taxpayer income was not met about 25 percent of the time on field audits; and the standard concerning audits of large, unusual, or questionable items was not met 40 percent of the time on field audits. IRS officials said that accurate audit results in these areas are critical to NRP’s overall accuracy. IRS officials pointed out that the error rate for NRP audits should be lower than in the enforcement audit environment because NRP auditors received special training and because the NRP classification process will enhance NRP audit quality. For example, NRP guidelines call for classifiers to identify large, unusual, or questionable items on returns (the largest EQMS error category) and NRP auditors must address all classified items. However, IRS did not implement its earlier plan of having a selected cadre of auditors work only on NRP cases. While NRP-specific training will serve to prevent many audit errors, NRP audits are now being conducted by a cross section of auditors from IRS field offices across the country and more typical of the auditors who generated the 2002 EQMS error rates. Because every return in the NRP sample represents many returns in the whole population of 1040 filers, even a small number of cases closed with incomplete information could affect the accuracy of NRP data. IRS officials also noted that their plan to conduct early reviews of NRP cases will identify problems with auditors’ understanding of NRP and help to keep them from recurring on subsequent NRP audits. At least two of each NRP auditor’s early cases will have extensive manager involvement while the cases are still in progress, and other managers will be looking at a sample of both completed and open cases to identify problems. IRS officials believe that these measures are sufficient to ensure NRP audit quality. IRS is including a series of data consistency checks in the NRP database to verify that the information NRP auditors record in IRS’s NRP reporting system agrees with the information that IRS recorded from the tax returns earlier in processing. NRP auditors must first record the results of NRP audits in the report-generating software that was modified for NRP purposes. Once auditors have recorded audit results, NRP coordinators must use a data conversion program to transfer the data into a format that the NRP database will accept. Following data conversion, IRS coordinators transfer the audit data to the NRP database. Once the data are transferred to the NRP database, a series of data consistency checks take place to confirm that the data IRS originally transcribed from the tax return are consistent, within specified tolerances, with the data that NRP auditors recorded in the NRP reporting software. If any of the consistency checks fail for a return in the NRP sample, the NRP area coordinator will be notified and the mistake will need to be corrected. According to IRS officials, they will impress upon NRP auditors the importance of entering data into the NRP software correctly the first time because it will be time-consuming to correct errors. NRP officials have developed a case tracking system in order to monitor which cases still need to pass all of the consistency tests and which tests they need to pass. IRS officials reported that, as of early April 2003, the NRP database and related programs were running and that completed NRP cases were being entered into the database. They said that they were still making some enhancements, but that the programs were fully functional. As IRS planned, NRP casebuilding and classification processes are helping minimize the burden on taxpayers with returns in the NRP sample. In addition, the size of the NRP sample is now smaller than IRS expected it to be. However, the number of taxpayers who will be subject to NRP audits has increased. IRS plans to survey taxpayers who receive NRP audits to assess their perceptions of the burden posed by those audits. IRS also used input from tax practitioners to identify ways to improve interactions with taxpayers subject to NRP audits. IRS is following its plans to reduce burden on taxpayers selected as part of the NRP sample by (1) compiling NRP casebuilding materials that allow IRS to verify certain items on tax returns without requesting the information from the taxpayer, (2) classifying returns according to items that need to be verified through an audit, and (3) limiting most NRP audits to items that cannot be verified without an audit. IRS officials also intend to compare classification decisions with the results of NRP audits to identify ways of improving the classification process for future rounds of NRP. Moreover, IRS’s intent in carrying out NRP is to reduce the burden on taxpayers in general by developing better audit selection formulas and reducing the number of audits of fully compliant taxpayers. The NRP casebuilding and classification processes described on page 4 are having their intended effect of reducing the burden NRP creates for taxpayers with returns in the NRP sample. IRS has assembled IRS and third-party data on most of the returns in the NRP sample and classifiers have used these data to verify information on the returns, where possible, without contacting taxpayers. The remaining casebuilding and classification work was under way as of the end of March 2003. The material in the casebuilding files has allowed IRS to fully verify about 10 percent of NRP returns without any audit. Classifiers were able to use the casebuilding material to verify all but one or two items on another 5 percent of NRP returns, and these were sent for correspondence audits. Classifiers identified line items needing verification through a face-to-face audit on about 85 percent of NRP returns classified as of the end of March 2003. Because of the casebuilding and classification processes IRS developed for NRP, these audits will generally be limited to line items that cannot be verified using the information in the casebuilding files. This is a substantial change from earlier compliance research efforts, in which all returns were subject to audits of every line on the return. Only the 1,683 taxpayers with returns selected for NRP calibration audits will be subject to complete audits of their returns. IRS plans to use NRP results to improve future iterations of NRP. For example, NRP officials plan to compare classification outcomes with NRP audit results to help them to identify possible changes needed in casebuilding materials and the NRP classification process. They have told us that it may be possible to further reduce the number of accurately reported line items that are subject to compliance research audits. On the other hand, IRS may also find through NRP calibration audits that classification missed many items that should have been audited, so more line items should receive some form of audit in future rounds of NRP in order for the research results to be useful. IRS also intends to apply lessons learned in NRP classification to classification in the enforcement audit environment. As we noted in our prior report, NRP should also lead to reductions in taxpayer burden in general. IRS plans to use NRP results to help identify and reduce causes of noncompliance and to better target enforcement audits to noncompliant taxpayers, reducing the number of audits of fully compliant taxpayers. IRS projects that, without improved audit selection formulas based on NRP results, the percentage of enforcement audits that result in no tax change will be about 35 percent higher in 2005 than it was in 1993, the first year that selection formulas from the 1988 compliance study were available. Taxpayer burden will decrease if successful execution of NRP enables IRS to reduce the number of these audits of compliant taxpayers. The NRP sample consists of 46,860 tax returns. We reported in June 2002 that the NRP sample would consist of 49,251 returns. The current number is smaller than the initial estimate because IRS originally estimated the NRP sample size based on the characteristics of the filing population that existed during the 1988 reporting compliance study. According to IRS officials, when they applied the NRP sampling plan to the 2001 filing population, the number of returns necessary to satisfy the requirements for some of the NRP strata declined because filing rates for those strata were smaller than IRS officials had projected. The final NRP sample consists of about 2,400 fewer returns than initially planned. IRS officials are currently finding that the NRP classification results are different than initially planned. IRS now estimates that more face-to-face audits will take place than initially projected because (1) as the NRP plan recognized, IRS’s initial estimates were uncertain and based on aging data and (2) the final form of NRP classification guidelines meant more face-to- face and fewer correspondence audits. IRS initially estimated that out of an NRP sample of over 49,000 tax returns, classification would result in about 30,000 face-to-face audits of selected line items, about 9,000 correspondence audits covering no more than two line items, and about 8,000 taxpayers who would not undergo any audit because classifiers were able to either verify all of the items on their returns or could correct some line items without contacting the taxpayers. The final NRP sample is 46,860 returns, and IRS now estimates that NRP classification will result in face-to-face audits of about 39,000 taxpayers, with approximately an additional 2,300 receiving correspondence audits and 3,800 subject to no audit at all. IRS also plans to conduct 1,683 line-by- line calibration audits, drawing 561 returns from each of the three classification categories—these numbers have not changed. Figure 4 shows IRS’s current estimate of how the three NRP classification categories will be distributed. NRP officials explained that the number of face-to-face NRP audits is higher than expected because they were relying on aging data and preliminary classification guidelines. Our 2002 report on NRP also noted the preliminary nature of these estimates. Initial classification breakdown estimates were made using 14-year-old data from the 1988 Taxpayer Compliance Measurement Program study. NRP staff members said that changes in the tax code and in the economic makeup of the filing population since the 1988 study make the returns from that study an unreliable tool for predicting NRP classification results, though that was all they had to work with. They also said that some of the change can be attributed to changes they made in the final form of NRP classification guidelines. NRP staff members said that they modified the NRP classification guidelines as a result of discussions that took place between NRP staff members and representatives from IRS’s business operating divisions. They instituted the changes to the classification guidelines in order to better match the training and skills of the examiners selected to conduct NRP correspondence and face-to-face audits with the types of issues to be covered by those audits. One change is that discrepancies between the casebuilding files and the tax returns for issues such as Individual Retirement Account contributions and Social Security income were removed from the list of issues that could be verified through a correspondence audit. Another change is that the final guidelines call for virtually all business returns to receive face-to-face audits—initial assumptions about the classification process allowed for some business returns to be accepted as filed or receive only correspondence audits. IRS will survey taxpayers who are subject to NRP audits to assess overall customer satisfaction and their perceptions of the burden audits created for them. IRS will ask taxpayers to fill out the same survey it uses to assess customer satisfaction in the enforcement audit environment and compare the results for the two populations. The surveys include issues related to taxpayer burden in the form of questions about the amount of time taxpayers spent preparing for the audits and the amount of time that they spent on the audits themselves. The surveys also ask whether taxpayers receiving NRP audits believe the information that they were asked to provide seemed reasonable and whether they feel they received fair treatment from IRS. After collecting the survey results, IRS will then develop a “score” for each question on the survey that relates to burden. IRS will compare the results from the NRP customer satisfaction survey to the results from surveys completed after enforcement audits. IRS consulted with outside stakeholders to enhance its efforts to minimize the burden NRP created for taxpayers with returns in the sample. IRS consulted with members of organizations that provide feedback to IRS on matters concerning taxpayers, including the National Public Liaison, the Information Reporting Program Advisory Committee, and the Internal Revenue Service Advisory Council. According to IRS, practitioner input led to wording changes on taxpayer notification letters and improvements to training materials, which strengthened the emphasis on maintaining good relations with NRP-selected taxpayers. Representatives of the National Public Liaison also participated in the training for the staff members who were selected to conduct NRP auditor training. IRS continues to be on track for meeting its NRP goal of obtaining meaningful compliance data while minimizing the burden on taxpayers with returns in the NRP sample. IRS has followed the key elements of the plans it laid out last year and has responded to identified needs to modify the program that have come from its own testing as well as from outside stakeholders. Because of this, we are not making any recommendations in this report. We recognize that IRS efforts to gather information about NRP implementation while the program is under way are very important to IRS’s continued success in carrying out NRP. Classification review results, audit review results, and customer satisfaction surveys all provide the means for IRS to make immediate adjustments to NRP now and to enhance the design of future iterations of the program. Provisions for 100 percent review of NRP audits before they are closed are particularly important because even a small number of erroneous or incomplete cases will negatively affect the quality of NRP data. On May 22, 2003, we received written comments on a draft of this report from the Commissioner of Internal Revenue (see app. I). The commissioner noted the importance of NRP and IRS’s continued emphasis on minimizing taxpayer burden and delivering quality results. We also received technical comments from NRP staff members, which we have incorporated into this report where appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies of this report to the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions, please contact Ralph Block at (415) 904-2150, David Lewis at (202) 512-7176, or me at (202) 512-9110. Thomas Gilbert was also a key contributor to this assignment.","The Internal Revenue Service (IRS) needs up-to-date information on voluntary compliance in order to assess and improve its programs. IRS's last detailed study of voluntary compliance was done in the late 1980s, so the compliance information IRS is using today is not current. IRS is now carrying out the National Research Program (NRP), through which IRS auditors are reviewing about 47,000 randomly selected tax year 2001 individual tax returns. In June 2002, GAO reported that NRP was necessary, that its design was sound, and that it appeared to meet IRS's goals of acquiring useful compliance data while minimizing burden on taxpayers with returns in the sample. GAO was asked to review IRS's implementation of NRP. GAO reviewed IRS's method of gathering internal and third-party data (casebuilding) and IRS's process of reviewing casebuilding materials to determine if audits are necessary (classification) and assessed IRS's plans to ensure consistent data collection while minimizing burden on taxpayers. IRS's NRP is being implemented as planned and consequently is on track to meet the agency's objectives of obtaining quality research results while minimizing the burden on the approximately 47,000 taxpayers with returns in the NRP sample. IRS officials have completed the development and testing of NRP processes and have selected and trained staff members to carry out the program. Additionally, as the graphic illustrates, IRS is currently nearing the completion of casebuilding and has made progress in classifying NRP returns. Audits, when required, began in November 2002. As of the end of March 2003, IRS had closed 3,651 NRP cases. In accordance with IRS's plans to minimize burden on taxpayers with returns in the NRP sample, some cases have been closed without any taxpayer contact or with only limited audits. The NRP plan recognized that the initial estimates for the overall NRP sample size and the number of returns to be audited were uncertain because they were based on aging data. The overall NRP sample size will be smaller and IRS officials expect to conduct more face-to face audits than initially estimated. As IRS completes NRP casebuilding, classification, and audits, it is implementing quality assurance steps, including efforts to ensure that key audit steps are completed on all NRP audits before they are formally closed with taxpayers. This is important since the data collected from each NRP audit represent information from thousands of similar taxpayers.",govreport
"Thorough and comprehensive planning and preparation are crucial to the ultimate cost-effectiveness of any large, long-term project, particularly one with the scope, magnitude, and immutable deadlines of the decennial census. Indeed, the Bureau’s past experience has shown that the lack of proper planning can increase the costs and risks of downstream operations. Moreover, sound planning is critical to obtaining congressional support and funding because it helps demonstrate that the Bureau has chosen the optimal design given various trade-offs and constraints and that it will effectively manage operations and control costs. However, Congress, GAO, the Department of Commerce Inspector General, and even the Bureau itself have noted how the 2000 Census was marked by poor planning, which unnecessarily added to the cost, risk, and controversy of the last national head count. For example, our earlier work, and that of the Department of Commerce Inspector General, reported that in planning the 2000 Census, the Bureau, among other shortcomings, did not involve key operations staff in the initial design phases; did not translate key performance goals into operational, measurable terms that could be used as a basis for planning; did not develop and document a design until mid-decade; and initially failed to provide sufficient data to stakeholders on the likely effects of its initiatives for addressing the key goals for the census— reduced costs and improved accuracy and equity. Planning weaknesses were not limited to the 2000 Census. In fact, a variety of problems plagued the planning of the 1990 Census. To help prevent the Bureau from repeating those mistakes as it plans the 2010 Census, in our October 2002 report, we recommended that the Secretary of Commerce direct the Bureau to provide comprehensive information backed by supporting documentation in its future funding requests for planning and development activities, including, but not limited to, specific performance goals for the 2010 Census and information on how the Bureau’s programs would contribute to those goals; detailed information on program feasibility, priorities, and potential key implementation issues and decision milestones; and performance measures. The consequences of a poorly planned census are high given the billions of dollars spent on the enterprise and the importance of collecting quality data. The Constitution requires a census as a basis for apportioning seats in the House of Representatives. Census data are also used to redraw congressional districts, allocate billions of dollars in federal assistance to state and local governments, and provide information for many other public and private sector purposes. As agreed with your offices, our objectives for this report were to review the Bureau’s current plans for the 2010 Census and the extent to which they might address shortcomings with the 2000 Census, analyze the Bureau’s cost estimates, and assess the rigor of the Bureau’s 2010 planning process. To achieve these three objectives, we interviewed officials from the Bureau’s Decennial Management Division and other units involved with planning the 2010 Census. We also reviewed relevant design and budget documents as well as our prior work and that of the Department of Commerce Inspector General, on planning the 2000 and earlier censuses. We also reviewed reports by the National Academy of Sciences on planning the 2010 Census. We did not independently verify the cost information the Bureau provided. To help determine the key elements for successful project planning, we reviewed a number of guides to project management and business process reengineering. Our work was performed from January through September 2003 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary of Commerce and the Director of the Office of Management and Budget. On November 6, 2003, we received the Secretary’s written comments on the draft (see app. I). On October 14, 2003, the Director of OMB forwarded OMB’s comments on the draft (see app. II). They are addressed in the Agency Comments and Our Evaluation section of this report. In designing the 2010 Census, Bureau officials had four principal goals in mind: (1) increase the relevance and timeliness of census long-form data, (2) reduce operational risk, (3) increase the coverage and accuracy of the census, and (4) contain costs. The goals were a direct response to problems the Bureau experienced in conducting the 2000 Census, such as untimely long-form data; inaccurate maps; coverage difficulties; and expensive, labor-intensive, and paper-laden field data collection. The Bureau recognized that its traditional approach to counting the population was insufficient for meeting these four objectives. In its place, the Bureau developed what it believes is a paradigm shift to taking the census, basing its reform efforts on three interrelated components the Bureau refers to as a “three-legged stool.” The mainstay of a successful census is an accurate address list and its associated maps. The Bureau uses MAF and TIGER to provide (1) maps for field operations and data reference, (2) the geographic location of every structure, (3) address lists for the decennial census, and (4) names and codes of entities for data tabulation and data for use by the commercial geographic information systems industry. The Bureau’s experience in conducting the 2000 Census highlighted the need to update and modernize MAF/TIGER prior to 2010. For example, the centerlines of streets in TIGER did not accurately reflect their true geographic locations, which could cause houses to be placed in the wrong census blocks. Also, according to the Bureau, the 1980s software used to develop TIGER is now outdated and cumbersome to update. To fix these and other problems, the Bureau launched the MAF/TIGER Enhancements Program (MTEP) as part of the 2010 Census modernization efforts. Its objectives include correcting the locations of each MAF address, street, and other map developing and deploying a new MAF/TIGER processing environment; expanding and encouraging geographic intergovernmental partnership programs; implementing the Community Address Updating System (CAUS), an initiative to partner with local governments to update MAF data; and initiating quality assurance evaluation activities. The Bureau estimates the total cost for these five objectives to be $536 million. According to Bureau officials, while some elements of MAF will be improved as part of the overall MAF/TIGER enhancements program, the primary focus of the effort is on TIGER modernization and data correction. This modernization program will not reengineer the MAF process. ACS is intended to be a monthly survey of 250,000 households that would replace the long form used in past decennial censuses. According to the Bureau, the benefits of ACS include (1) more timely long-form data at detailed geographic levels that would be as accurate as subnational annual data from existing surveys, such as the Current Population and American Housing Surveys, and (2) the ability to improve the accuracy of the decennial census population counts by eliminating the long-form questionnaire. The ACS data will be published annually for geographic areas with populations over 65,000; as a 3-year average for geographic areas with populations of 20,000 to 65,000; and as a 5-year average for geographic areas with populations under 20,000. According to the Bureau, because of the larger sample size associated with long-form data, the annual and 3- year average data will be significantly less accurate than the long-form data. The 5-year data would be about as accurate as the long form. The Bureau believes that eliminating the long form will result in a number of benefits to decennial data collection and general field operations. For example, according to the Bureau, the reduction in paper will enable it to process data with three data capture centers instead of the four centers used during Census 2000. The Bureau also would not need as many local census offices, thereby allowing it to reduce the rolls of clerical and administrative staff. According to the Bureau, a short-form-only census also allows the Bureau to use such technology as handheld mobile computing devices so that enumerators can locate and update data on housing units, help conduct interviews, transmit data directly to the data capture centers, and receive regularly updated field assignments. The devices will be linked to the satellite-based Global Positioning System (GPS) to enable field workers to locate addresses more precisely and efficiently. The Bureau also plans to incorporate changes that are not dependent on ACS and MAF/TIGER. For example, the Bureau plans to expand the respondents’ ability to complete their questionnaires via the Internet. As shown in table 1, the Bureau’s three-legged stool strategy is generally aligned with three of its four key goals for the 2010 Census and, if successful, could put the Bureau on track toward achieving them. Less clear is how the Bureau will achieve its goal of reducing operational risk using its current plan. Although the Bureau’s position that early testing will enable it to identify and correct flaws is both a common sense business practice and supported by its past experience (assuming its testing program is adequately designed), as described below, the operational and other hurdles associated with successfully implementing the three-legged stool actually introduce new risks and challenges. This does not necessarily mean that the Bureau’s design is flawed. To the contrary, the obstacles to a cost-effective head count call for the Bureau to consider bold and innovative initiatives, and these are not risk free. At the same time, given the enormity of the census and all of its complexities, the three-legged stool by itself will not automatically guarantee the successful accomplishment of the Bureau’s goals. Our work on transforming agencies into high-performing organizations has underscored the importance of an agency’s leadership and core business practices. Critical success factors include, among others, effective communication strategies to ensure coordination, synergy, and integration; strategic planning; aligning the agency’s organization to be consistent with the goals and objectives established in the strategic plan; and effective performance, financial, acquisition, and information technology management. In all, the Bureau faces at least three key challenges. Among the more significant challenges the Bureau faces is securing congressional approval for its proposed approach. As we noted in our January 2003 performance and accountability report, congressional support for the 2010 design is necessary to ensure adequate planning, testing, and funding levels. Conversely, the lack of an agreed-upon design raises the risk that basic design elements might change in the years ahead, while the opportunities to test those changes and integrate them with other operations will diminish. In other words, in order for the Bureau to conduct proper planning and development activities, the basic design of the 2010 Census needs to be stable. According to the Bureau, a go/no-go decision on key aspects of the design—a short-form-only census and replacing the long form with ACS— will need to be made around 2006. Bureau officials told us that if ACS were dropped after 2007, the Bureau would not be able to reinstate the long form with the short form in 2010 because of logistical obstacles. They noted that the Bureau is already testing the short-form-only census and, in late-2005 or early-2006, expects to sign a contract for data capture operations. If the Bureau had to revert to a long-form census at that point, it would add significant risks and costs to the 2010 Census. During the 2000 Census, the lack of an agreement between the administration and Congress on the fundamental design—and particularly, the Bureau’s planned use of sampling—increased the likelihood of an unsuccessful head count and was one of the principal reasons why, in 1997, we designated the 2000 Census a high-risk area. Members of Congress questioned the use of sampling and estimation for legal and methodological reasons. Contributing to Congress’s skepticism was the Bureau’s failure to provide sufficiently detailed data on the effects of its proposed approach. Although the U.S. Supreme Court settled the dispute in January 1999, the Bureau ultimately wound up having to plan for both a “traditional” census and one involving sampling, which added to the costs and risks of the 2000 decennial census. To help secure congressional support for its 2010 reform efforts, it will be important for the Bureau to convincingly demonstrate that it has chosen the optimum design given various resource and other constraints and that it will effectively manage operations and costs. A critical first step in this regard is to have comprehensive and transparent information that lays out the specifics of the Bureau’s plans, explains their benefits, and supports assumptions. However, as discussed more fully in the next section, while the Bureau’s planning for the 2010 Census has improved compared with its efforts for the 2000 Census, certain information gaps remain. For example, the Bureau’s most recent budget submissions have not included complete life cycle cost estimates that could enable Congress to make more informed decisions about the cost implications of the three-legged stool design, including ACS. Most of the reforms, savings, and improvements in accuracy the Bureau anticipates will not be possible unless it conducts a short-form-only census. However, the Bureau’s planned replacement for the long form, ACS, faces methodological and other questions that need to be resolved soon. Consequently, the Bureau is taking a significant risk by pinning the success of its reform efforts largely on a survey that may not be an adequate replacement for the long form. The Bureau believes that without ACS, it will need to repeat the Census 2000 design. One methodological question is whether to administer ACS as a mandatory or voluntary survey. Under the Bureau’s current approach, survey recipients will be legally required to respond to ACS. However, in response to congressional concerns that a mandatory survey is intrusive, the Bureau tested conducting ACS as a voluntary survey. Based on the results of the test, the Bureau estimates that a voluntary survey could produce a response rate around 4.2 percentage points lower than a mandatory survey. The Bureau estimates that costs would increase by $59.2 million per year to maintain the same level of reliability achieved from a mandatory survey. Moreover, the Bureau’s efforts to ensure that ACS data will serve as a satisfactory replacement for the long-form data are not yet complete. Among the remaining issues, most of which are critical to the reliability of the small geographic area ACS data, are the following: 1. Benchmarking ACS data or small geographic areas to the population counts and characteristics from the 2010 short form. 2. Inconsistency of ACS residency rules—which determine the geographic area in which a person is supposed to be counted—with those used for the census. 3. Consistency of ACS data with long-form data from the 2000 Census. 4. For multiyear averages of ACS data for small areas, consistency with annual ACS data for larger areas and utilization as a measure of change. Each leg of the Bureau’s three-legged stool is dependent on the other; that is, the implementation of one leg allows the other two legs to operate successfully. For example, ACS is facilitated by first updating the MAF/TIGER database for the ACS sample. Similarly, as noted above, the Bureau’s plan to conduct a short-form-only enumeration depends on ACS. Consequently, the Bureau’s design assumes that by 2008, (1) ACS will be in place nationwide and producing data, (2) a GPS-aligned and modernized MAF/TIGER will be available, and (3) all reengineering efforts will be complete to allow for a true dress rehearsal. Completing any one of these tasks would be a considerable undertaking; for 2010, the Bureau plans to develop, refine, and integrate all three in the space of just a few years. Moreover, the Bureau has no contingency plans other than to revert to a “traditional” census. According to the Bureau, while the failure of any one leg would not doom the census, it could jeopardize the Bureau’s goals. For example, if the MAF/TIGER modernization is not completed on schedule, the Bureau would be unable to employ the GPS-enabled handheld mobile computing devices that enumerators are to use when conducting nonresponse follow-up. This in turn could affect the efficiency of the effort and the quality of the data collected. In addition, the Bureau would not have time to conduct the research and testing necessary to improve the long form based on lessons learned in the 2000 Census. Because of limitations in census taking methods, some degree of error in the form of persons missed or counted more than once is inevitable. Since 1980, the Bureau has used statistical methods to generate detailed measures of the undercounts of particular ethnic, racial, and other population groups. To assess the quality of population data for the 2000 Census and to possibly adjust for any errors, the Bureau conducted the Accuracy and Coverage Evaluation (A.C.E.) program. Although the U.S. Supreme Court ruled in 1999 that the Census Act prohibited the use of statistical sampling for purposes of apportioning seats in the House of Representatives, the Court did not specifically address the use of statistical sampling for other purposes. In March 2001, the Acting Director of the U.S. Census Bureau recommended to the Secretary of Commerce that only unadjusted data be released for purposes of congressional redistricting. The Acting Director made this recommendation when, after considerable research, the Bureau was unable to conclude that the adjusted data were more accurate for use in redistricting. Specifically, the Acting Director cited the apparent inconsistency in population growth over the decade as estimated by the A.C.E., and demographic analysis, which estimated the population using birth, death, and similar records. He noted that the inconsistency raised the possibility of an unidentified error in either the A.C.E. estimates or the census numbers, and the inconsistency could not be resolved prior to April 1, 2001, the legally mandated deadline for releasing redistricting data. Later that year, following additional research, the Acting Director decided against using adjusted census data for nonredistricting purposes, such as allocating federal aid, because A.C.E. estimates failed to identify a significant number of people erroneously included in the census. The Acting Director noted that “this finding of substantial error, in conjunction with remaining uncertainties, necessitates that revisions, based on additional review and analysis, be made to the A.C.E. estimates before any potential uses of these data can be considered.” As the Bureau turned toward the 2010 Census, it needed to decide whether it would have a coverage measurement program and how the results would be used. Because of the 1999 U.S. Supreme Court ruling noted earlier, the Bureau could not use coverage measurement results to adjust census data for purposes of congressional apportionment. However, adjusting census data for other purposes remained an open question. In our January 2003 report on the objectives and results of the 2000 A.C.E. program, we noted that an evaluation of the accuracy and completeness of the census is critical given the many uses of census data, the importance of identifying the magnitude and characteristics of any undercounts and overcounts, and the cost of the census overall. We cautioned that the longer the 2010 planning process continues without a firm decision on the role of coverage measurement, the greater the risk of wasted resources and disappointing results. Consequently, we recommended that the Bureau, in conjunction with Congress and other stakeholders, come to an early decision on whether and how coverage measurement will be used in the 2010 Census. In reaching this decision, we recommended that the Bureau (1) demonstrate both the operational and technical feasibility of its coverage measurement methods, (2) determine the level of geography at which coverage can be reliably measured, (3) keep Congress and other stakeholders informed of its plans, and (4) adequately test its coverage measurement methodology prior to full implementation. The Bureau agreed with our recommendations, noting that we had identified important steps that should be followed in developing a coverage measurement methodology for the 2010 Census. While certain aspects of the Bureau’s coverage measurement plans are still being developed, the Bureau is not currently planning to develop a procedure that would allow it to adjust census numbers for purposes of redistricting. According to the Director of the U.S. Census Bureau, although the Bureau plans to evaluate the accuracy of the coverage it achieves in the 2010 Census, its experience during the 2000 Census demonstrated “that the science is insufficiently advanced to allow making statistical adjustment to population counts of a successful decennial census in which the percentage of error is presumed to be so small that adjustment would introduce as much or more error than it was designed to correct.” Furthermore, irrespective of whether it is both legal and appropriate to do so, the Bureau does not believe that it can both collect coverage measurement data and complete the analysis of those data’s accuracy in time to deliver the information to the states to meet their redistricting deadlines. Although the Bureau’s experience during the 2000 Census shows that its approach to measuring coverage needs to be improved if it is to be used to adjust census numbers, the Bureau has not yet determined the feasibility of refinements to the 2000 approach or alternative methodologies. Consequently, the Bureau’s decision on how coverage evaluation data will be used in 2010 appears to be premature. Indeed, while the Bureau has reported that the 2000 Census had better coverage compared to the 1990 Census, as noted below, the U.S. population is becoming increasingly difficult to count, a factor that could affect the quality of the 2010 Census. More generally, the decennial census is an inherently fragile endeavor, where an accurate population count requires the near-perfect alignment of a myriad of factors ranging from the successful execution of dozens of census-taking operations to the public’s willingness to cooperate with enumerators. External factors such as the state of the economy and world events might also affect the outcome of the census. The bottom line is that while the census is under way, the tolerance for any breakdowns is quite small. Therefore, the Bureau’s ability to maintain the level of quality reported for the 2000 Census is far from guaranteed. Thus, to ensure that the nation uses the best available census data, it will be important for the Bureau to research procedures that depending on what the results of the coverage evaluation say about the quality of the census data, would allow adjustment, if necessary, for those purposes for which it is both legal and appropriate to do so. The Bureau should conduct this effort on a timetable that allows it to adequately test and refine those procedures, as well as obtain input from both majority and minority parties in the Senate and House of Representatives. In June 2001, the Bureau estimated that the reengineered 2010 Census would cost $11.3 billion in current dollars. This would make the 2010 head count the most expensive in the nation’s history, even after adjusting for inflation. According to the Bureau estimates in June 2001, a repeat of the 2000 approach would cost even more, over $11.7 billion. This estimate of repeating the 2000 approach was revised to approximately $12.2 billion in April 2003. Moreover, the actual cost of the census could end up considerably higher as the Bureau’s initial cost projections for previous censuses proved to be too low because of such factors as unforeseen operational problems or changes to the fundamental design. For example, while the Bureau estimated that the 2000 Census would cost around $4 billion using sampling, and that a traditional census without sampling would cost around $5 billion, the final price tag for the 2000 Census (without sampling) was over $6.5 billion. The Bureau’s cost projections for the 2010 decennial census continue an escalating trend. As shown in figure 1, in constant 2000 dollars, the estimated $9.3 billion cost of the 2010 Census represents a tenfold jump over the $920 million spent on the 1970 Census (as noted above, the Bureau estimates the 2010 Census will cost $11.3 billion in current dollars). Although some cost growth can be expected in part because the number of housing units—and hence the Bureau’s workload—has gotten larger, the cost growth has far exceeded the housing unit increase. The Bureau estimates that the number of housing units for the 2010 Census will increase by 10 percent over 2000 Census levels. Meanwhile, the average cost per housing unit for 2010 is expected to increase by approximately 29 percent from 2000 levels (from $56 to $72), nearly five and a half times greater than the $13 it cost to count each household in 1970 (see fig. 2). As for previous censuses, the major cost for the 2010 Census is what the Bureau calls “field data collection and support systems.” Over half of decennial census life cycle costs are attributed to this area. Specific components include the costly and labor-intensive nonresponse follow-up operation as well as support activities such as the opening and staffing of hundreds of temporary local census offices. One reason why field data collection is so expensive is because the Bureau is finding it increasingly difficult to locate people and get them to participate in the census. According to Bureau officials, societal trends, such as the increasing number of respondents who do not speak English, the growing difficulty of finding respondents at home, and the general increase of privacy concerns, impede a cost-effective head count. Further, the legal requirement to count everyone leads the Bureau to employ operations that only marginally improve coverage but that are relatively expensive to conduct. Societal changes have also reduced the cost-effectiveness of the census, and it has become increasingly difficult to simply stay on par with the results of previous enumerations. For example, during the 1990 Census, the Bureau spent $0.88 per housing unit (in 2000 dollars) to market the census and encourage participation and achieved a response rate of 65 percent. During the 2000 Census, the Bureau spent $3.19 per housing unit (in 2000 dollars) to promote participation, but the response rate was 64 percent. The constitutional mandate to count the nation’s population explicitly commits or “exposes” the government to spending money on the census each decade. In this way, the census is similar to other fiscal exposures such as retirement benefits, environmental cleanup costs, and the payment of Social Security benefits in that the government is obligated to a certain level of future outlays. Early in each census cycle, expenditures are relatively low as the Bureau plans the census and conducts various tests. As the decade continues, spending increases, spiking during the decennial year when costly data collection activities take place. As shown in figure 3, during the 2000 Census, $4.1 billion—almost two-thirds of the money spent on the entire census—was spent in fiscal year 2000 alone. Current budget reporting, however, does not always fully capture or require explicit consideration of some future fiscal exposures. In fact, this is particularly true with the census, as annual budget requests and reports provided to Congress early in the decennial census life cycle do not reflect the full cash consequences of the spending and policy decisions. Thus, as it begins funding the 2010 Census early in the decade at relatively low levels, Congress will have implicitly accepted a future spike in costs—essentially a balloon payment in 2010—without requiring the Bureau to clearly define what those costs might be, why they are justified, and what alternatives might exist. As we noted in our January 2003 report on improving the budgetary focus on long-term costs and uncertainties, information on the existence and estimated cost of fiscal exposures needs to be considered along with other factors when making policy decisions. With respect to the census, not capturing the long-term costs of annual spending decisions limits Congress’s ability to control the government’s exposure at the time decisions are made, consider trade-offs with other national priorities, and curtail the growth in census costs. Consequently, fiscal transparency is critical to better reflect the magnitude of the government’s long-term spending on the census and signal unanticipated cost growth. Greater fiscal transparency can also facilitate an independent review and provide an opportunity to improve stakeholder confidence and commitment to the Bureau’s reengineered decennial census design. Our January 2003 report noted that increased supplemental reporting could help improve fiscal transparency and described several options for how to accomplish this. Although that report recommended that OMB consider implementing these options governmentwide, at least two options could be adapted specifically for the Bureau and its parent agency, the Department of Commerce. The two options are (1) annually reporting the planned life cycle cash flow and explaining any material changes from previous plans (currently, the Bureau does not make this information available) and (2) setting triggers to signal when the amount of money expected to be spent in any one year exceeded a predetermined amount. Combined, these actions could prompt more explicit deliberations on the cost and affordability of the census and help inform specific cost control measures by Congress, if warranted. The assumptions the Bureau used to develop the life cycle cost estimate could also benefit from greater transparency. More robust information on the likelihood that the values the Bureau assigned to key cost drivers might differ from those initially assumed, and the impact that any differences would have on the total life cycle cost, could provide Congress with better information on the range and probability of the fiscal exposure the nation faces from the upcoming census. As shown in figure 4, the Bureau derived the baseline for its 2010 cost estimate using the actual cost of the 2000 Census and assumptions about certain cost drivers, estimating the cost of the 2010 Census as if the Bureau were to repeat its 2000 design. The key assumptions include a 35 percent decrease in enumerator productivity, a pay rate increase for census workers from 2000 levels, a mail-back response rate lower than Census 2000 levels, and inflation. The projected costs and savings of repeating the 2000 design versus the Bureau’s approach based on the three-legged stool, are shown in table 2. Transparent information is especially important since decennial cost estimates are sensitive to many key assumptions. In fact, for the 2000 Census, the Bureau’s supplemental funding request for $1.7 billion in fiscal year 2000 primarily involved changes in assumptions related to increased workload, reduced employee productivity, and increased advertising. Given the cost estimates’ sensitivity to key assumptions, greater transparency could be obtained by showing the range and likelihood of how true cost drivers could differ from those assumed and how those differences would affect estimates of total cost. Thus, if early research and testing show that response rates may be higher than originally anticipated, or that enumerator productivity could be better than expected, the Bureau can report on the nature of its changing assumptions and its effect on life cycle costs. Also important, by providing information on the likely accuracy of assumptions concerning cost drivers, the Bureau would better enable Congress to consider funding levels in an uncertain environment. Other key areas in which changes in assumptions can greatly affect costs are salary rates for enumerators, the future price of handheld mobile computing devices, and inflation. Our prior work has described how agencies provide supporting information when developing budget assumptions. For example, the Nuclear Regulatory Commission identifies a basis and a certainty level for its budget assumptions used for internal reporting. A basis summarizes the facts that were evaluated to justify the assumption, while a certainty level depicts the likelihood of its occurrence as high, medium, or low. Finally, it is important to have timely cost information for congressional decision making. The Bureau’s life cycle estimates were updated in April 2003 after being first presented in June 2001—nearly a 2-year interval. In addition, when we requested additional information on life cycle costs the Bureau took several months to provide information on its life cycle cost estimates and assumptions, ultimately revising its total cost estimates before providing us with the data. The Bureau has taken several positive steps to correct problems encountered planning past censuses, and the Bureau appears to be further along in planning the 2010 Census than at this same point during the 2000 Census cycle. Although an improvement over past efforts, the Bureau’s 2010 planning process still contains certain weak points that if not addressed could undermine a cost-effective head count and make it more difficult to obtain the support of Congress and other stakeholders. The characteristics of the census—long-term, large-scale, high-risk, costly, and politically sensitive—together make a cost-effective enumeration a monumental project management challenge, one that demands meticulous planning. To help determine the principal ingredients of successful project planning, we reviewed a number of guides to project management and business process reengineering. Although there is no one best approach to project planning, the guides we reviewed contained many elements in common, including the following: Developing a project plan. The plan should consider all phases of the project and should have clear and measurable goals; all assumptions, schedules, and deadlines clearly stated; and needed skills and resources identified. Evaluating human resource implications. This includes assessing needed competencies and how they will be acquired and retained. Involving stakeholders and incorporating lessons learned. Stakeholders—both internal and external to an organization—have skills and knowledge that could contribute to a project and should be involved in the decision-making process. An organization should focus on the highest priority stakeholder needs and mission goals. Evaluating past performance and capitalizing on lessons learned is also important for improving performance. Analyzing and mitigating risks. This involves identifying, analyzing, prioritizing, and documenting risks. Ideally, more than one alternative should be assessed. Monitoring progress. Measurable performance goals should be identified and performance data should be gathered to determine how well the goals are being achieved. The Bureau has made considerable progress in planning the 2010 Census, and some of the positive steps taken to date include the following efforts. Early in the decade, senior Bureau staff considered various goals for the 2010 Census and articulated a design strategy to achieve those goals. Senior Bureau officials collaborated on this initial design plan to set the stage for further refinements during later field testing and research activities. The Bureau has involved experienced staff in the design process through cross-divisional planning groups. Staff involved in these planning groups will ultimately be responsible for implementing the 2010 Census. According to Bureau officials, this is a departure from the 2000 Census planning effort when Bureau staff with little experience in conducting the census played a key role in designing the decennial census, which resulted in impractical reforms that could not be implemented. The Bureau has recognized the importance of strategically managing its human capital to meet future requirements. The planning and development of the 2010 Census will take place at a time when the Bureau could find itself experiencing substantial employee turnover (three senior Bureau managers left the agency in 2002, and according to a report by the Department of Commerce Inspector General, the Bureau could lose through retirement around half of the senior staff who carried out the 2000 Census). The Bureau, as part of a broader risk assessment, plans to provide less experienced staff the opportunity to obtain operational experience prior to the actual 2010 Census. In addition, the Bureau has provided training in project management and has encouraged staff to take training courses in management and planning. However, other aspects of the Bureau’s 2010 planning process could be improved. A more rigorous plan would better position the Bureau to fulfill its key objectives for the 2010 Census and help demonstrate to Congress and other stakeholders that it can effectively design and manage operations as well as control costs. Although the Bureau has developed project plans for some of the key components of its 2010 strategy, the Bureau has not yet crafted an overall project plan that (1) includes milestones for completing key activities; (2) itemizes the estimated cost of each component; (3) articulates a clear system of coordination among project components; and (4) translates key goals into measurable, operational terms to provide meaningful guidance for planning and measuring progress. OMB Circular A-11 specifies that an agency’s general goals should be sufficiently precise to direct and guide agency staff in actions that carry out the agency’s mission and aid the agency in developing annual performance goals. The importance of this information for improving accountability and performance can be seen, for example, in the Bureau’s principal goal to increase coverage and accuracy. Though laudable, the Bureau has yet to assign any numbers to this goal. This makes it difficult to evaluate the costs and benefits of alternative designs, determine the level of resources needed to achieve this goal, measure the Bureau’s progress, or hold managers accountable for results. Bureau managers provided us with several documents that pieced together present 2010 Census goals and strategies, life cycle costs, and schedules, but no single, comprehensive document exists that integrates this information. For example, the Bureau’s life cycle cost estimates and information on its performance goals were contained in two separate documents, making it hard to see the connection between cost and the Bureau’s objectives. Likewise, a draft document, entitled 2010 Reengineered Census Milestone Schedule, included various milestones by fiscal quarter, but did not contain information on dependencies and interrelationships among the various aspects of the project. In its 2001 letter to the Bureau’s acting director, the National Academy of Sciences’ (NAS) Panel on Research on Future Census Methods raised similar concerns about the need for a coherent project plan. The panel noted that it wanted “to see a clearer case for components of the 2010 census strategy, itemizing the goals, costs, and benefits of each initiative and indicating how they integrate and contribute to a high quality census.” To that end, NAS recommended that the Bureau develop what it called a business plan for 2010. The Bureau is making an effort to develop and incorporate the lessons learned from the 2000 Census and, in fact, created an elaborate evaluation program to help inform this effort. Moreover, the Bureau chartered 11 planning groups consisting of knowledgeable census staff (see app. III for the 2010 planning organization). However, the Bureau’s ability to build on the results of 2000 could be hampered by the fact that while the evaluation program assessed numerous aspects of the census, the Bureau still lacks data and information on the performance of key census activities, as well as on how specific census operations contributed to two of the Bureau’s key goals for 2000: improved accuracy and cost-effectiveness. For example, as noted earlier, the cost of the 2010 Census is increasing relative to 2000 partly because the Bureau expects nonresponse follow-up enumerators will be less productive in 2010. Because of various societal factors, it will simply take enumerators more time to complete their work. And yet, despite the importance of accurate productivity data to inform the Bureau’s planning and budgeting processes for 2010, the Bureau had trouble obtaining quality productivity data following the 2000 Census. Although the Bureau later committed additional resources to refine the numbers, the adjustment was coarse and addressed just one of the two known problems. Moreover, because of differences in the way the Bureau measured staffing levels and hours worked from census to census, none of the productivity data from the last few censuses are comparable. Another area in which the Bureau lacks useful performance information is in the extent to which the dozen or so separate activities used to build MAF in 2000 contributed to its overall accuracy relative to one another. Without this information, the Bureau has limited data with which to guide investment and trade-off questions for 2010, such as which activity provided the biggest “bang for the buck” and should thus be repeated, or whether it would be more effective for the Bureau to improve accuracy and coverage by putting more resources into MAF-building activities or some other operation altogether, such as marketing. To date, the Bureau’s planning groups have incorporated a variety of lessons learned from the evaluations of the 2000 Census. As an example, the Coverage Improvement Planning Group observed an increase in inconsistent responses from 2000 Census compared to the previous census (e.g., some questionnaires were marked “uninhabited,” but individuals were enumerated at the sites). According to a Bureau official, one hypothesis for the higher rate of inconsistent responses was that enumerators were encouraged to fill in information even when not all of the relevant information was known. The Bureau plans to address this issue by building in “edits” to its planned handheld mobile computing devices so that inconsistent data cannot be entered. In addition, the Coverage Improvement Planning Group also looked at the 2000 Census experience to provide recommendations for the Bureau’s 2004 test. Risk management is important for preparing for contingencies or changes in the external operating environment. At the time of our review, the Bureau had completed a risk assessment of some aspects of its operations as part of its OMB Circular A-11, Exhibit 300 submission, and for certain aspects of the reengineering efforts. However, the Bureau had not developed a risk assessment that addressed the entire 2010 Census, including ACS and the MAF/TIGER modernization. The risk assessment for the reengineering effort uses a consistent scoring system to assess the severity of the risks identified and addresses various contingencies and mitigation strategies, such as preparing for the retirement of key personnel and using succession planning to offset the attrition. The scoring system and how it was applied is clearly described in the plan, making it easy to evaluate the way it was used. However, the assessment does not provide extensive detail on the mitigation actions proposed. Also, it does not indicate how risks were identified and whether any risks were excluded. A notable exclusion was that it did not address the risks if ACS or MAF/TIGER fail or are not funded and the impact this might have on the census as a whole. As mentioned earlier, the Bureau’s three-legged stool strategy assumes that all three legs must work together to achieve its goals. One of the reasons for doing a risk analysis is to prepare to make trade-offs when faced with inevitable budgetary pressures, operational delays, or other risks. Lacking information on trade-offs, the Bureau maintains that its only alternative to the reengineering is to repeat the 2000 Census design, an approach that Bureau officials believe will be extremely expensive. The obstacles to conducting a cost-effective census have grown with each decade, and as the Bureau looks toward 2010, it confronts its biggest challenge yet. Consequently, the Bureau will need to balance the growing cost, complexity, and political sensitivity of the census with meticulous planning. As the Bureau’s past experience has shown, early investments in planning can help reduce the costs and risks of its downstream operations. Moreover, a rigorous plan is essential for securing early agreement between the Bureau and Congress on the Bureau’s fundamental strategy for 2010. Congressional support—regardless of whether the Bureau’s current approach or an alternative is ultimately selected—is crucial for creating a stable environment in which to prepare for the census and avoiding a repeat of the 2000 Census when disagreement over the Bureau’s methodology led to late design changes and additional costs and risks. The Bureau has laid out an ambitious schedule of planning, testing, and evaluation for the coming years, culminating with a “dress rehearsal” in 2008. While midcourse corrections are to be expected as a result of these efforts, it will be important for the Bureau to proceed with as few alterations to its fundamental strategy as possible so that all of the operations used in 2010 have been thoroughly road tested. The Bureau appears to be further along in planning the 2010 Census compared to a similar point during the 2000 Census cycle, and its efforts to enhance past planning practices are commendable. Focusing its activities on early design, research, and testing and organizing its reengineering activities around cross-divisional planning groups, are just some of the noteworthy improvements the Bureau has made. However, the Bureau’s plans for 2010, while not unreasonable on the surface, lack a substantial amount of supporting analysis, budgetary transparency, and other information, making it difficult for us, Congress, and other stakeholders to properly assess the feasibility of the Bureau’s design and the extent to which it could lead to greater cost-effectiveness compared to alternative approaches. Questions surrounding the Bureau’s underlying budget assumptions; uncertainties over ACS; the failure to translate key goals into measurable, operational terms; and the lack of important performance data from the 2000 Census to inform 2010 decision making are just some of the problematic aspects of the 2010 planning process. More than simply paperwork or documentation issues, this information is essential for improving the performance and accountability of the Bureau and of the decennial census in particular. To be sure, some challenges are to be expected in an endeavor as demanding as counting a population that is mobile and demographically complex and whose members reside under a multitude of living arrangements. Further, shortcomings with prior censuses call for the Bureau to consider bold initiatives for 2010 that entail some risk. However, if Congress is to accept and fund the Bureau’s approach—now estimated at more than $11 billion—then the Bureau needs to more effectively demonstrate that it has (1) selected a design that will lead to the most cost- effective results and (2) establish a rigorous capacity to manage risks, control costs, and deliver a successful head count. Moreover, to ensure the nation uses the best available data, it will be important for the Bureau to research procedures that would allow it to adjust census results for purposes for which it is both legal and appropriate to do so, if it is determined that the adjusted figures would provide greater accuracy than the enumeration data. Such procedures could function as a safety net should there be problems with the initial census count. It will also be important for policymakers to consider, early in the decade, the long-term costs associated with the census and finding the right balance between controlling mushrooming costs and improving accuracy. Although initial spending on the census is relatively low, it will accelerate in the years ahead, culminating with a balloon payment in 2010 when data collection and other costly operations take place. Greater fiscal transparency prior to getting locked into a particular level of spending could help inform deliberations on the extent to which (1) the cost of the census is reasonable, (2) trade-offs will need to be made with competing national priorities, and (3) additional dollars spent on the census yield better quality data. Just over 6 years remain until Census Day 2010. While this might seem like an ample amount of time to shore up the Bureau’s planning process and take steps to control costs, past experience has shown that the chain of interrelated preparations that need to occur at specific times and in the right sequence leave little room for delay or missteps. To help control the cost of the 2010 Census and inform deliberations on the acceptability of those costs, we recommend that the Director of the Office of Management and Budget take steps to ensure that the Bureau improves the transparency of the fiscal exposure associated with the census. Specifically, OMB should ensure that the Bureau, in a notational item in the Program and Financing schedule of the President’s budget, include an updated estimate of the life cycle costs of the census and the amount of money the Bureau expects to spend in each year of the cycle, as well as an explanation of any material changes from previous plans. The information should also contain an analysis of the sensitivity of the cost figures to specific assumptions, including a range of values for key cost assumptions, their impact on total cost estimates of the census, the likelihood associated with those ranges, and their impact on the total estimated cost of the census. As part of this process, OMB should establish triggers that would signal when the yearly 2010 Census costs, total 2010 Census costs, or both exceeded some predetermined amount. In such instances, the Bureau should then be required to prepare a special report to Congress and OMB justifying why the additional costs were necessary and what alternatives were considered. Further, to enhance the Bureau’s performance and accountability, as well as to help convince Congress and other stakeholders that the Bureau has chosen an optimum design and will manage operations and control costs effectively, we recommend that the Secretary of Commerce direct the Bureau to improve the rigor of its planning process by developing an operational plan that consolidates budget, methodological, and other relevant information about the 2010 Census into a single, comprehensive project plan that would be updated as needed. Individual elements could include specific performance goals, how the Bureau’s efforts, procedures, and projects would contribute to those goals, and what performance measures would be used; risk and mitigation plans that fully address all significant potential risks; detailed milestone estimates that identify all significant annually updated life cycle cost estimates, including a sensitivity analysis, and an explanation of significant changes in the assumptions on which these costs are based. Moreover, to help ensure that the nation has at its disposal the best possible data should there be problems with the quality of 2010 Census, the Bureau, with input from both majority and minority parties in the Senate and House of Representatives, should research the feasibility of procedures that could allow it to adjust census results for those purposes for which it is both legal and appropriate to do so and, if found to be feasible, test those procedures during the 2006 census test and 2008 census dress rehearsal. The Secretary of Commerce forwarded written comments from the U.S. Census Bureau on a draft of this report that we received November 6, 2003. The comments are reprinted in appendix I. The Bureau generally disagreed with many of our key findings, conclusions, and recommendations. The Bureau believes that the report, in its discussion of escalating census costs, ignores the fact that a key cost driver is stakeholders’ demand for better accuracy. We agree with the Bureau that its mandate to count each and every resident in the face of countervailing societal trends is an important reason for the cost increases. As we noted in the report, societal changes have reduced the cost-effectiveness of the census, and it has become more and more difficult to stay on par with the results of previous enumerations. Similarly, we stated that “the legal requirement to count everyone leads the Bureau to employ operations that only marginally improve coverage but that are relatively expensive to conduct.” Further, we do not, as the Bureau asserts, treat the cost issue in a vacuum, and agree with the Bureau that little would be gained by focusing on the cost of the 2010 Census alone. Rather, any deliberations on the 2010 Census need to focus on how changes in spending on the census might affect the quality of the count. Our draft report emphasized this exact point noting that “The growing cost of the head count, at a time when the nation is facing historic budget deficits, highlights the importance of congressional deliberations on the extent to which each additional dollar spent on the census results in better data, as well as how best to balance the need for a complete count, with the need to ensure the cost of a complete count does not become unreasonable.” Similarly, we concluded that “it will also be important for policymakers to consider, early in the decade, the long-term costs associated with the census and finding the right balance between controlling mushrooming costs and improving accuracy.” The Bureau also believes the report implies that the cost increases are caused by the reengineering effort. Our draft report did not state, nor did we intend to imply, that the reengineering effort would cause most of the projected cost increases for the 2010 Census. In fact, our report even notes that the Bureau's reengineering strategy has the potential to reduce costs relative to a design that would repeat the Census 2000 approach. To help clarify this point, we added text that describes how a repeat of the 2000 approach would be more costly than the reengineered design, according to Bureau estimates. The Bureau disagreed with our recommendation to OMB regarding the need for greater budgetary transparency, noting that the real reason for the vagueness of out-year cost estimates stems from a fundamental difference of opinion between the administration and Congress over the appropriate time to share that information. We believe that it is important for the administration to provide details of out-year cost projections for the decennial census for the reason stated in our draft report: annual budget requests and reports provided to Congress early in the decennial census life cycle do not reflect the full cash consequences of the spending in later years of the decade. We understand that the Bureau has followed the administration’s guidance on providing out-year cost estimates; this is also why we directed our recommendation for greater fiscal transparency to OMB, which we discuss in greater detail below. The Bureau disagreed with our recommendation to improve the rigor of its planning process by developing an operational plan that consolidates budget, methodological, and other relevant information into a single, comprehensive project plan. The Bureau noted that these documents already exist and are widely available, and the Bureau already shares them with Congress, us, the National Academy of Sciences (NAS) Panel on Research on Future Census Methods—the panel responsible for reviewing the census, and other stakeholders. While we agree with the Bureau that some of this information is available (and we noted this fact in our draft report), it is piecemeal—one can only obtain it by cobbling together the Bureau’s budget submission, its strategic plan, and several other documents, and even then, key information such as performance goals would still be lacking. Further, although the Bureau notes that it has provided this information to the NAS panel, as we stated in our report, NAS, like us, also found the information wanting. As we described in the report, the panel shared our concerns over the need for a coherent project plan, and called on the Bureau to develop a business plan that among other things, itemized the goals, costs, and benefits of each census component and a describes how they contributed to a high-quality census. Whether it is called a business plan or a project plan, such information is not, as the Bureau maintains, simply “more process.” Quite the contrary, this information is essential for improving performance; facilitating a thorough, independent review of the Bureau’s plans; and demonstrating to Congress and other stakeholders that the Bureau can effectively design and manage operations and control costs. The Bureau incorrectly asserts that our report criticizes it for not completing the evaluations of the 2000 Census in a timely manner. Our report did not address this matter, although NAS’s Second Interim Report on Planning the 2010 Census urged the Bureau to “give high priority to evaluation studies” and complete them as expeditiously as possible. We agree that the Bureau’s planning staff do have access to the draft evaluations, and in fact, we noted in the report that they are using them in planning for the 2010 Census. The key point, however, is the Bureau’s ability to build on the results of the 2000 Census. This could be hampered by the fact that while the evaluation program assessed numerous aspects of the census, the Bureau still lacks data on the performance of key census activities as well as how specific census operations contributed to two of the Bureau’s key goals for 2000: improved accuracy and cost-effectiveness. The Bureau agreed with us that it is important to bring closure to the discussion on whether and how coverage measurement will be used in the 2010 Census. However, the Bureau believes that the approach used for the 2000 Census proved that it was not feasible to produce a final analysis of coverage measurement in time to meet redistricting requirements. We agree with the Bureau’s assessment that the coverage measurement approach used in the 2000 Census needs to be reworked. However, this should not preclude it from researching alternative approaches for the 2010 Census in light of the fact that the Bureau’s ability to maintain the level of quality reported for the 2000 Census is less than certain. Finally, the Bureau questioned our assessment that the only contingency plan for conducting the 2010 Census, if the reengineered effort fails, was to fall back on the Census 2000 methods. The Bureau maintains that the 2000 Census was by most accounts a very successful census and, accordingly, the Bureau already has available the methods and procedures for taking an excellent census. Our report does not advocate the development of another set of census methods. Rather, we were trying to illustrate the challenge the Bureau faces in implementing its reengineering plans, where the failure of any one leg could compromise the other two, thereby requiring the Bureau to rely on the approach it used for the 2000 Census. According to Bureau officials, this in turn could make it difficult for the Bureau to accomplish its goals for the 2010 Census, which include cost containment and better quality data. On October 14, 2003, the Associate Director for General Government Programs, OMB, provided written comments on a draft of this report, which are reprinted in appendix II. OMB shared our view that the costs and risks associated with the 2010 Census must be carefully monitored and evaluated throughout the decade. OMB also agreed that it is essential to understand the key cost drivers and said that it is working with the U.S. Census Bureau to ensure that the Bureau develops high-quality, transparent life cycle cost estimates. However, OMB disagreed with our recommendation that it ensure that the Bureau, include a notational item in the Program and Financing (P&F) schedule of the President’s Budget with an updated estimate of the life cycle costs of the census and the amount of money the Bureau expects to spend in each year of the cycle, as well as an explanation of any significant changes from previous plans. OMB believes that the Bureau’s report on the life cycle costs, which is updated regularly, is the best mechanism to present estimates of the total life cycle costs and explanations for any material changes from previous plans. Further, OMB noted that presenting this information in the P&F schedule is cumbersome and unnecessary because the Analytical Perspectives volume of the President’s Budget currently shows out-year estimates that incorporate anticipated programmatic changes of the Decennial Census within the Periodic Censuses and Program account. As noted in our report, we do not believe the information OMB currently reports to Congress is sufficiently timely or detailed to provide the level of transparency needed for effective congressional oversight and cost control. Indeed, while OMB cites the Bureau’s life cycle report, the document that we reviewed for this report took the Bureau nearly 2 years to revise. Moreover, the revised estimates, like the original estimates, overstated the life cycle cost estimate by $300 million because the Bureau did not take into account a surplus of that amount that it identified near the end of fiscal year 2000. Although the Bureau is to reissue the 2010 life cycle cost estimates early in calendar year 2004, the incorrect estimates will have been in circulation for more than 2 years. Additionally, the information contained in the Analytical Perspectives volume of the President’s Budget is limited. For example, it only provides information on out-year estimates for 5 years. As a result, the volume will not include estimates for the high-cost year of 2010 until the release of the President’s fiscal year 2006 budget. Further, the Analytical Perspectives volume lacks information on the sensitivity of cost figures to specific assumptions and the likelihood of these estimates. It also does not contain any explanations of changes in cost estimates from year to year. Complete and transparent information on out-year costs is important to inform deliberations on the acceptability of these costs and to ensure that Congress understands the possible range of census life cycle costs. OMB also disagreed with our recommendation to establish triggers to signal when the yearly 2010 Census costs, total 2010 Census costs, or both exceeded some predetermined amount. OMB noted that it has established internal procedures within its budget reviews to monitor 2010 Census costs and believes they are sufficient for ensuring that estimates are not exceeded without clear justification. OMB added that this justification could be included in the Bureau’s updates to its life cycle cost estimates. Although OMB’s internal procedures might be sufficient for OMB’s requirements, they do little to address the fundamental need for greater fiscal transparency. Continued reliance on these procedures would inhibit independent review by congressional and other external stakeholders, as well as limit informed discussion of the trade-offs of dollars versus accuracy and what cost control measures, if any, might be needed to make the 2010 Census more affordable. In closing, OMB commented that the Bureau’s reengineering plan is being reviewed by NAS as well as seven advisory committees. OMB stated that the analyses stemming from these reviews, such as NAS’s recently issued report on census planning, enhance the Bureau’s accountability and help ensure “that the ultimate 2010 Census design is optimal.” We agree with OMB that NAS and the advisory committees are important for reviewing the Bureau’s plans and holding the Bureau accountable for a cost-effective census in 2010. And this is precisely why we made the recommendations that we did. Without a transparent budgeting and planning process, a thorough, independent review by these and other external groups would be difficult to impossible. That greater transparency is needed in both these areas is highlighted not just in our report, but in the very NAS study that OMB cites. Indeed, NAS found that “a major conclusion of the panel is that discussion of the 2010 Census design needs to be more fully informed by the evaluation of various trade- offs—the costs and benefits of various reasonable approaches in order to make wise decisions.” As agreed with your offices, unless you release its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time we will send copies to other interested congressional committees, the Secretary of Commerce, the Director of the U.S. Census Bureau, and the Director of the Office of Management and Budget. Copies will be made available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-6806 or daltonp@gao.gov or Robert Goldenkoff, Assistant Director, at (202) 512-2757 or goldenkoffr@gao.gov. Key contributors to this report were Richard Donaldson, Ty Mitchell, Robert Yetvin, and Christine Bonham. The U.S. Census Bureau (Bureau) has given its Decennial Management Division responsibility for planning the 2010 Census, including the American Community Survey (ACS) and the Master Address File/Topologically Integrated Geographic Encoding and Referencing (MAF/TIGER) enhancements. The division established an executive steering committee, shown in figure 5, for this purpose. Each group under the 2010 Census planning organization has specific activities that it was charged with studying. Listed below are the research and development planning groups chartered at the time of our review and a list of these activities. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading.","The key to a successful census is meticulous planning as it helps ensure greater cost-effectiveness. However, the 2000 and previous censuses have been marked by poor planning, which unnecessarily raised the costs and risks of those efforts. GAO was asked to (1) review the U.S. Census Bureau's (Bureau) current plans for 2010 and whether they might address shortcomings of the 2000 Census, (2) analyze the Bureau's cost estimates, and (3) review the rigor of the Bureau's 2010 planning process. While preparations for the 2010 Census appear to be further along compared to a similar point prior to the 2000 Census, cost and design information had to be pieced together from various documents. The Bureau's plans also lack a substantial amount of supporting analysis, budgetary transparency, and other information that made it difficult to verify the Bureau's assertions concerning the costs and benefits of its proposed approach. Further, unlike in previous censuses, the Bureau does not intend to develop coverage measurement procedures that would allow it to adjust census data for certain purposes. Although its experience in 2000 shows that its coverage measurement methodology needs improvement, GAO believes the Bureau should have researched alternative approaches more thoroughly and disclosed the results of its research before making a decision. In designing the 2010 Census, the Bureau hoped to address several shortcomings of the 2000 enumeration, namely to (1) increase the relevance and timeliness of data, (2) reduce operational risk, (3) increase coverage and accuracy, and (4) contain costs. To achieve these goals, three components--all new operations--are key to the Bureau's plans for 2010. They include enhancing procedures for building the census address list and associated maps, replacing the census long-form questionnaire with a more frequent sample survey, and conducting a short-form-only census. The Bureau's approach has the potential to achieve the first three goals, but reducing operational risk could prove to be more difficult as each of the three components actually introduces new risks. The Bureau will also be challenged to control the cost of the 2010 Census, now estimated at over $11 billion. The current budget reporting process masks the long-term costs of the census, most of which will be incurred in 2010; making it difficult for Congress to monitor the Bureau's planned expenditures. Certain actions by the Office of Management and Budget could produce greater fiscal transparency, and thus help inform congressional deliberations on how to best balance the need for an accurate census, with the need to ensure a reasonable cost for this endeavor.",govreport
"According to HHS, widespread use of health information technology could improve the quality of care received by patients and reduce health care costs. One such technology, electronic prescribing, can be used, for example, to electronically transmit a prescription or prescription-related information between a health care provider and a pharmacy or to provide other technological capabilities, such as alerting a provider to a potential interaction between a drug and the patient’s existing medications. In traditional, or paper-based, prescribing, health care providers that are licensed to issue prescriptions for drugs (e.g., physicians or others licensed by the state) write a prescription, and calling it into or have the patient take that prescription to a dispenser (e.g., pharmacy) to be filled. In contrast, use of an electronic prescribing system consists of a licensed health care provider using a computer or hand-held device to write and transmit a prescription directly to the dispenser. Before doing so, the health care provider can request the beneficiary’s eligibility, formulary, benefits, and medication history. Figure 1 illustrates an example of the flow of information during the electronic prescribing process. In order to transmit a prescription electronically, multiple entities need to have access to an individual’s identifiable health information in an electronic format. Federal laws and regulations dictate the acceptable use and disclosure activities that can be performed with individually identifiable health information, defined as protected health information (PHI). These activities include treatment, payment, health care operations, and—provided certain conditions are met—public health or research purposes. For example, electronic health information can be held by covered entities that perform treatment functions for directly providing clinical care to a patient through electronic prescribing. These covered entities and business associates, such as medical professionals, pharmacies, health information networks, and pharmacy benefit managers, work together to gather and confirm patients’ electronic health information for prescribing, such as a beneficiary’s eligibility, formulary, benefits, and medication history. To electronically transmit prescription drug data between a health care provider and a pharmacy, an electronic health record can be used to obtain information about the health of an individual or the care provided by a health practitioner. In both paper-based and electronic prescribing, information is also provided to the individual’s health plan for payment, which would include the identification of the beneficiary, the pharmacy, and the drug cost information. In the case of Medicare beneficiaries’ prescription drug data, the information is provided to CMS for Part D payment calculations. Every time a beneficiary fills a prescription under Medicare Part D, a prescription drug plan sponsor must submit a summary record called prescription drug event data to CMS. The prescription drug event data record contains PHI, such as date of birth, the pharmacy that filled the prescription, and the drug dispensed, that enables CMS to make payments to plans. Appendix II provides a summary of the permitted uses and disclosures of PHI. Under certain circumstances, PHI, including prescription drug use information, can be used for purposes not related to directly providing clinical care to an individual. For example, CMS makes Medicare beneficiaries’ prescription drug event data available for use in research studies. Release of these elements outside of CMS must be in accordance with its policies and data-sharing procedures. For example, in order to obtain access to this information interested parties must send in an application and submit a user agreement. Table 1 provides other examples of using prescription drug use data for purposes other than directly providing clinical care. Depending on the nature of the use, the prescription drug use information is used and transmitted in identifiable form or in de-identified format, which involves the removal of PHI (e.g., name, date of birth, and Social Security number) that can be used to identify an individual. Key privacy and security protections associated with individually identifiable health information, including prescription drug information used for purposes other than directly providing clinical care, are established in two federal laws, HIPAA and the HITECH Act. Recognizing that benefits and efficiencies could be gained by the use of information technology in health care, as well as the importance of protecting the privacy of health information, Congress passed HIPAA in 1996. Under HIPAA, the Secretary of HHS is authorized to promulgate regulations that establish standards to protect the privacy of certain health information and is also required to establish security standards that require covered entities that maintain or transmit health information to maintain reasonable and appropriate safeguards. HIPAA’s Administrative Simplification Provisions provided for the establishment of national privacy and security standards, as well as the establishment of civil money and criminal penalties for HIPAA violations. HHS promulgated regulations implementing the act’s provisions through its issuance of the HIPAA rules–the Privacy Rule, the Security Rule, and the Enforcement Rule. The rules cover PHI and require that covered entities only use or disclose the information in a manner permitted by the Privacy Rule, and take certain measures to ensure the confidentiality and integrity of the information and to protect it against reasonably anticipated unauthorized use or disclosure and threats or hazards to its security. HIPAA provides authority to the Secretary to enforce these standards. The Enforcement Rule provides rules governing HHS’s investigation of compliance by covered entities, both through the investigation of complaints and the conduct of compliance reviews, and also establishes rules governing the process and grounds for establishing the amount of a civil money penalty for a HIPAA violation. The Secretary has delegated administration and enforcement of privacy and security standards to the department’s Office for Civil Rights (OCR). The HITECH Act, enacted as part of the American Recovery and Reinvestment Act of 2009 (Recovery Act), is intended to promote the adoption and meaningful use of health information technology to help improve health care delivery and patient care. The act adopts amendments designed to strengthen the privacy and security protections of health information established by HIPAA and also adopts provisions designed to strengthen and expand HIPAA’s enforcement provisions. Table 2 below provides a brief overview of the HITECH Act’s key provisions for strengthening HIPAA privacy and security protection requirements. Under the HITECH Act, the Secretary of HHS has significant responsibilities for enhancing existing enforcement efforts, providing public education related to HIPAA protections, and providing for periodic audits to ensure HIPAA compliance. In implementing the act’s requirements, OCR’s oversight and enforcement efforts are to be documented and reported annually to Congress. These annual reports provide information regarding complaints of alleged HIPAA violations and the measures taken to resolve the complaints. These reports and other related information are required by the HITECH Act to be made publicly available on HHS’s website. In response to requirements set forth in HIPAA and the HITECH Act, HHS, through OCR, has established a framework for protecting the privacy and security of individually identifiable health information, including Medicare beneficiaries’ prescription drug use information used for purposes other than directly providing clinical care. This framework includes (1) establishing regulatory requirements, (2) issuing guidance and performing outreach efforts, and (3) conducting enforcement activities to ensure compliance with the rules. However, OCR has not issued required guidance to assist entities in de-identifying individually identifiable health information due to—according to officials—competing priorities for resources and internal and external reviews. Furthermore, although it has recently initiated a pilot audit program, the office has not implemented periodic compliance audits as required by the HITECH Act. Until these requirements are fulfilled, OCR will have limited assurance that covered entities and business associates are complying with HIPAA regulations. The Secretary of HHS issued regulations, such as the HIPAA rules, that implement HIPAA requirements and amendments required by the HITECH Act to govern the privacy and security of individually identifiable health information, known as PHI. These rules establish the required protections and acceptable uses and disclosures of individually identifiable health information, including Medicare beneficiaries’ prescription drug use information. HIPAA provided for the Secretary of HHS to, among other things, (1) issue privacy regulations governing the use and disclosure of PHI and (2) adopt security regulations requiring covered entities to maintain reasonable and appropriate technical, administrative, and physical safeguards to protect the information. In December 2000, to address the privacy regulation requirement, HHS issued the Privacy Rule. The Privacy Rule regulates covered entities’ use and disclosure of PHI. Under the Privacy Rule, a covered entity may not use or disclose an individual’s PHI without the individual’s written authorization, except in certain circumstances expressly permitted by the Privacy Rule. The Privacy Rule reflects basic privacy principles for ensuring the protection of personal health information, as summarized in table 3. The Privacy Rule generally requires that a covered entity make reasonable efforts to use, disclose, or request only the minimum necessary PHI to accomplish the intended purpose. Further, the Privacy Rule establishes methods for de-identifying PHI. Under the rule, once identifiers are removed from a data set, it is no longer considered individually identifiable health information and the HIPAA protections no longer apply. De-identification provides a mechanism for reducing the amount of PHI used and disclosed. The Privacy Rule establishes two ways in which PHI can be de-identified. The Safe Harbor Method requires the removal of 18 unique types of identifiers from a data set coupled with no actual knowledge that the remaining data could be used to reidentify an individual, either alone or in combination with other information. The expert determination method requires a qualified statistician or other appropriate expert, using generally accepted statistical and scientific principles, to determine that the risk is very small that an individual could be identified from the information when used alone or in combination with other reasonably available information. In February 2003, to implement HIPAA security requirements for protecting PHI, HHS issued the HIPAA Security Rule. To ensure that reasonable safeguards are in place to protect electronic PHI, including Medicare beneficiaries’ health information, from unauthorized access or disclosure, the Security Rule specifies a series of administrative, technical, and physical safeguards for covered entities to implement to ensure the confidentiality, integrity, and availability of electronic PHI. Table 4 summarizes these security safeguards. The Security Rule, which applies only to PHI in electronic form, states that covered entities have the flexibility to use any security measures that allow them to reasonably and appropriately implement specified standards. Specifically, the rule states that in deciding what security measures are appropriate, the covered entity must take into account elements such as its size, complexity, technical infrastructure, cost of security measures, and the probability and criticality of potential risks to its PHI. The HITECH Act set additional requirements for the Secretary of HHS and expanded and strengthened certain privacy and security requirements mandated under HIPAA and the HIPAA rules. Specifically, to implement provisions of the HITECH Act, the Secretary was required to (1) issue breach notification regulations to require covered entities and business associates under HIPAA to provide notification to affected individuals and the Secretary concerning the unauthorized use and disclosure of unsecured PHI; (2) establish enforcement provisions for imposing an increased tiered structure for civil money penalties for violations of the Privacy and Security Rules; and (3) extend certain Privacy and Security Rule requirements to business associates of covered entities. Such required activities are intended to strengthen protections for PHI, including Medicare beneficiaries’ prescription drug use information. To implement these provisions of the act, OCR issued two interim final rules—the Breach Notification for Unsecured Protected Health Information Rule, known as the “Breach Notification Rule,” and the HITECH Act Enforcement Rule—and has developed a draft rule intended to, among other things, extend the applicability of certain requirements of the Privacy and Security Rules to business associates. OCR issued the Breach Notification for Unsecured Protected Health Information Rule in August 2009. This rule contains detailed requirements for HIPAA-covered entities and business associates to notify affected individuals and the Secretary following the discovery of a breach of unsecured PHI. In addition, in October 2009, OCR issued the HITECH Enforcement Rule, which amends the HIPAA rules to incorporate HITECH Act provisions establishing categories of violations based on increasing levels of culpability and correspondingly increased tier ranges of civil money penalty amounts. In addition, in July 2010, OCR issued a notice of proposed rulemaking to modify the HIPAA Privacy, Security, and Enforcement Rules to implement other provisions of the HITECH Act. According to the OCR website, the proposed rule is intended to, among other things, make modifications to extend the applicability of certain Privacy and Security Rule requirements to the business associates of covered entities, strengthen limitations on the use or disclosure of PHI for marketing and fundraising and prohibit the sale of PHI, and expand individuals’ rights to access their information and obtain restrictions on certain disclosures of protected health information to health plans. According to OCR officials, the proposed rule is currently under review by the Office of Management and Budget (OMB), and OCR officials have not determined an estimated time frame for its issuance. The HITECH Act also requires HHS to educate members of the public about how their PHI, which may include Medicare beneficiaries’ prescription drug use information, may be used. In addition, the HITECH Act requires HHS to provide guidance for covered entities on implementing HIPAA requirements for de-identifying data—that is, taking steps to ensure the data cannot be linked to a specific individual. Specifically, the act requires HHS to provide information to educate individuals about the potential uses of PHI, the effects of such uses, and the rights of individuals with respect to such uses. In addition—to clarify the de-identification methods established in the HIPAA Privacy Rule—the HITECH Act required OCR to produce guidance by February 2010 on how best to implement the HIPAA Privacy Rule requirements for the de- identification of protected health information. OCR has undertaken an array of efforts since the rules were issued, as well as to implement the HITECH Act’s requirements to promote awareness of the general uses of PHI and the privacy and security protections afforded to the identifiable information. For example, the office has made various types of information resources publicly available. Through its website, the office provides a central hub of resources related to HIPAA regulations, ranging from guidance to consumers on their rights and protections under the HIPAA rules to compliance guidance to covered entities. More specifically, the office has developed resources to guide covered entities and business associates in implementing the provisions of the Privacy and Security Rules, which include, among other things, examples of business associate contract provisions for sharing PHI, answers to commonly asked questions, summaries of the HIPAA rules, and information on regional privacy officers designated to offer guidance and education assistance to entities and individuals on rights and responsibilities related to the Privacy and Security Rules. Table 5 below provides a brief overview of OCR’s guidance and education outreach activities in regard to their target audience, purpose, and guidance materials. In another effort to promote awareness, OCR–—in conjunction with the Office of the National Coordinator for Health Information Technology— established a Privacy and Security Toolkit to provide guidance on privacy and security practices for covered entities that electronically exchange health information in a network environment. The toolkit was developed to implement the Nationwide Privacy and Security Framework for Electronic Exchange of Individually Identifiable Health Information, also known as the Privacy and Security Framework, and includes tools to facilitate the implementation of these practices to protect PHI. Guidance included with the toolkit includes, among other things, security guidelines to assist small health care practices as they become more reliant on health information technology and facts and template examples for developing notices for informing consumers about a company’s privacy and security policies in a web-based environment. Although OCR has initiated these efforts to fulfill its responsibilities to promote awareness of allowable uses and provide guidance for complying with required protections under the HITECH Act, it has yet to publish HITECH Act guidance on implementing HIPAA de-identification methods, which was to be issued by February 2010. OCR officials stated that they have developed a draft of the de-identification guidance, but have not set an estimated issuance date. According to the officials, the draft guidance was developed based on the office’s solicitation of best practices and guidelines from multiple venues and forums, including a workshop panel discussion with industry experts in March 2010 that included discussions on best practices and risks associated with de- identifying PHI. The officials stated that guidance will explain and answer questions about de-identification methods as well as clarify guidelines for conducting the expert determination method of de-identification to reduce entities’ reliance on the Safe Harbor method. The issuance of such implementation guidance could provide covered entities—including those that rely on de-identified prescription drug use information for purposes other than directly providing clinical care—with guidelines and leading practices for properly de-identifying PHI in accordance with Privacy Rule requirements. According to OCR officials, competing priorities for resources and internal reviews have delayed the issuance of the guidance. Officials stated that the draft is currently under government wide review. Although officials stated that the guidance will be issued upon completion of the review, no estimated time frame has been set. Until this guidance is issued, increased risk exists that covered entities are not properly implementing the standards set by the HIPAA Privacy Rule and that identifiers are not properly removed from PHI. Federal laws authorize HHS to take steps to ensure that covered entities comply with HIPAA privacy and security requirements targeted toward protecting patient data, including Medicare beneficiaries’ prescription drug use information. Specifically, HHS has authority to enforce compliance with the Privacy and Security Rules in response to, among other things, (1) complaints reporting potential privacy and security violations and (2) data breach notifications submitted by covered entities. Furthermore, the HITECH Act increased HHS’s oversight responsibilities by requiring the department to perform periodic audits to ensure covered entities and business associates are complying with the Privacy and Security Rules and breach notification standards. OCR has developed and implemented an enforcement process that is focused on conducting investigations in response to actions that potentially violate the Privacy and Security Rules. According to OCR officials, the office opens investigations in response to submitted complaints and data breach notifications, as well as conducts compliance reviews based on other reports of potential violations of which the department becomes aware. If necessary, it then requires covered entities to make changes to their privacy and security practices. OCR receives thousands of complaints and breach notifications each year. Officials stated that these complaints and notifications are reviewed to determine if they are eligible for enforcement and require an OCR investigation. According to information provided by OCR, from 2006 to 2010 the office has received on average about 8,000 Privacy and Security Rule complaints each year. OCR officials reported that as of February 2012, the office conducted investigations of approximately 24,000 complaints alleging compliance violations of the Privacy or Security Rule, resulting in corrective actions by covered entities in 66 percent of the cases. Corrective actions have included training or sanctioning employees, revising policies and procedures, and mitigating any alleged harm. According to OCR’s annual report to Congress on HIPAA Privacy and Security Rule compliance, in instances where an investigation resulted in a determination that a violation of the Privacy or Security Rule occurred, the office first attempted to resolve the case informally by obtaining voluntary compliance through corrective action. Compliance issues investigated most often include impermissible uses and disclosures of PHI and lack of safeguards for or patient access to PHI. As of May 2012, OCR investigations have resulted in the issuance of a resolution agreement in eight cases. According to OCR officials, a resolution agreement is a formal agreement between OCR and the investigated entity and is used to settle investigations with more serious outcomes. A resolution agreement is a contract signed by HHS and a covered entity in which the covered entity agrees to perform corrective actions (e.g., staff training), submit progress reports to HHS (generally for a period of 3 years), and—in some cases—pay a monetary fine. The eight resolution agreements entered into with the investigated entities all included a payment of a resolution amount, and the development or revision of policies and procedures. In six of these cases further submission of compliance reports or compliance monitoring was required for 2 to 3 years. For example, in response to complaints that several patients’ electronic PHI was viewed without permission by university health system employees, OCR initiated an investigation which revealed that unauthorized employees repeatedly looked at the electronic PHI for numerous patients. The university health system agreed to settle potential violations of the Privacy and Security Rules by committing to a corrective action plan and paying approximately $865,000. When a covered entity does not cooperate with an OCR investigation or take action to resolve a violation, the office also has the authority to impose a civil money penalty. OCR can levy civil money penalties for failure to comply with the requirements of the Privacy Rule, Security Rule, and Breach Notification Rule. For each violation, the maximum penalty amount in four separate categories is $50,000. For multiple violations of an identical provision in a calendar year, the maximum penalty in each category is $1.5 million. As of May 2012, OCR had issued one civil money penalty for noncompliance in the amount of $4.3 million. Since February 2010, pursuant to the HITECH Act, OCR has received and used the money from settlement amounts and civil money penalties for enforcement of the HIPAA rules. In June 2011, OCR initiated efforts to conduct pilot audits of 150 covered entities by the end of December 2012. The office contracted for a private firm to identify the population of covered entities from which to select audit candidates. Additionally, the office contracted with a private audit firm to develop the initial audit procedures for covered entities. These procedures—which OCR documentation asserts are to be in accordance with generally accepted government auditing standards—are composed of the requirements from the Privacy, Security and Breach Notification Rules, which include protections afforded to prescription drug use information and uses of it for purposes other than directly providing clinical care. In January 2012, OCR officials stated that the target for audits to complete was revised to 115. According to OCR documentation, during the pilot each audit is conducted based on the following steps: 1. An audit is initiated with the selected covered entity being informed by OCR of its selection and asked to provide documentation of its privacy, security, and breach notification compliance efforts to the contracted auditors. 2. Contracted auditors use the audit procedures developed to assess the compliance activities of the covered entity. According to officials and documentation provided, these procedures correspond to the requirements of the Privacy, Security, and Breach Notification Rules. In this pilot phase, every audit will include a documentation review and site visit. 3. Contracted auditors will provide the audited covered entity the draft findings within 30 days after conclusion of the field work. 4. Audited entities will have 10 days to provide the audit contractor with comments and outline corrective actions planned or taken. 5. Contracted auditors will develop a final audit report to submit to OCR within 30 days of receipt of the comments. The final report will describe how the audit was conducted, what the findings were, and what actions the covered entity is taking in response to those findings as well as describe any best practices of the entity. According to OCR officials, an initial set of 20 pilot audits was completed by March 2012. Officials stated that these initial audits resulted in the identification of both privacy and security issues at covered entities, such as potential impermissible uses and disclosures and not appropriately conducting reviews of audit logs and other reports monitoring activity on information systems. OCR officials stated that the remaining 95 pilot audits, 25 of which were initiated in April 2012, will be completed by the end of December 2012. However, OCR has yet to establish plans for (1) continuing the audit program once the audit pilot finishes in December 2012 and (2) auditing business associates for privacy and security compliance. According to OCR officials, the dedicated Recovery Act funding for the office’s audit effort will expire at the end of December 2012 and officials stated that they have not yet finalized a decision on the future of the program, including the manner in which an audit process will need to be designed to address compliance by business associates. OCR officials stated that the office plans to award a contract in 2012 for a review of the pilot program, including a sample of audits completed during the pilot. OCR officials anticipate that this review will help determine how the office can fully implement an audit function. Implementing a sustained audit program could allow OCR to help covered entities and business associates identify and mitigate risks and vulnerabilities that may not be identified through OCR’s current reactive processes. Furthermore, inclusion of business associates in such a program is important because, according to OCR data, more than 20 percent of data breaches affecting over 500 individuals that were reported to OCR involved business associates. Without a plan for deploying a sustained audit capability on an ongoing basis, OCR will lack the ability to ensure that covered entities and business associates are complying with HIPAA regulations, including properly de-identifying PHI when data on prescription drug use are used for purposes other than directly providing clinical care. Through its issuance of regulations, outreach, and enforcement activities, HHS has established a framework for protecting the privacy and security of Medicare beneficiaries’ prescription drug use information when used for purposes other than directly providing clinical care. It has also promoted public awareness on the uses and disclosures of PHI through its education and outreach activities. Further, OCR has established and implemented a process to enforce provisions of the HIPAA Privacy and Security Rules through investigations. However, it has not issued required implementation guidance to assist entities in de-identifying PHI. By not issuing the guidance, increased risk exists that covered entities are not properly implementing the standards set by the HIPAA Privacy Rule and that PHI is not properly stripped of all identifiers that would identify an individual. In addition, OCR has not fully established a capability to proactively monitor covered entities’ compliance through the use of periodic audits as required by the HITECH Act. Specifically, OCR has yet to establish plans for a sustained audit capability upon completion of its pilot program at the end calendar year 2012 and has yet to determine how to include auditing business associates. Without a plan for deploying a sustained audit capability on an ongoing basis, OCR will have limited assurance that covered entities and business associates are complying with HIPAA regulations, including whether Medicare beneficiaries’ prescription drug use information, when used for purposes other than directly providing clinical care, is being appropriately safeguarded from compromise. To improve the department’s guidance and oversight efforts for ensuring the privacy and security of protected health information, including Medicare beneficiaries’ prescription drug use information, we recommend that the Secretary of HHS direct the Director of the Office for Civil Rights to take the following two actions: Issue guidance on properly implementing the HIPAA Privacy Rule requirements for the de-identification of protected health information.  Establish plans for conducting periodic audits to ensure covered entities and business associates are complying with the HIPAA Privacy and Security Rules and breach notification standards. In written comments on a draft of the report, the HHS Assistant Secretary for Legislation agreed with our two recommendations, but provided qualifying comments for both. HHS’s comments are reprinted in appendix III. Regarding our recommendation that OCR issue guidance on properly implementing the HIPAA Privacy Rule requirements for the de- identification of protected health information, the Assistant Secretary stated that while the department agrees that issuing the guidance will be helpful to covered entities, the department does not agree that without the guidance, covered entities will have limited assurance that they are complying with the HIPAA Privacy Rule de-identification standards. The Assistant Secretary noted that covered entities have been operating under these existing de-identification standards for almost 10 years and that OCR has not found that the standards have been the subject of significant or frequent compliance issues by covered entities. The Assistant Secretary noted that OCR’s purpose in issuing the de- identification guidance was to provide covered entities with the current options and approaches available for de-identifying health information. We agree that the existing agency information on the de-identification standards provide a level of assurance that covered entities have the parameters and requirements needed to properly remove identifiers from PHI and have clarified this in our report. However, the HITECH Act requires HHS to issue de-identification implementation guidance that addresses how covered entities should implement the de-identification standards. OCR officials stated that the planned guidance will explain and answer questions about de-identification methods as well as clarify guidelines for conducting the expert determination method of de- identification to reduce entities’ reliance on the Safe Harbor method. Such information could assist covered entities in determining how to properly implement the de-identification methods. Until such implementation guidance is issued, increased risk exists that covered entities are not properly adhering to the standards set by the HIPAA Privacy Rule and that PHI is not properly stripped of all identifiers that would identify an individual. Regarding our recommendation that OCR establish plans for conducting periodic audits to ensure covered entities and business associates are complying with the HIPAA Privacy and Security Rules and breach notification standards, the Assistant Secretary stated the department did not agree with our report’s conclusion that without such a plan, OCR will lack the ability to ensure that covered entities and business associates are complying with the HIPAA rules. Specifically, he stated that our conclusion did not adequately take into account the considerable impact of the thousands of complaint investigations, compliance reviews, and other enforcement activities OCR conducts annually to ensure covered entities are complying with the rules. He noted that although the audit function is a critical compliance tool for identifying vulnerabilities, the importance of the audit function should not be understood to diminish the effectiveness of OCR’s other enforcement activities for bringing about and enforcing compliance with the HIPAA rules. As our report highlighted, OCR has developed and implemented an enforcement process that is focused on responding to actions that potentially violate the Privacy and Security Rules. OCR conducts this reactive process through processing complaints and conducting thousands of investigations each year. An audit program is an important addition to OCR’s compliance program as it is a tool to identify vulnerabilities before they cause breaches and other incidents. Without the addition of a proactive process, such as an audit capability, OCR will have limited assurance that covered entities are complying with HIPAA regulations. HHS also provided technical comments on the report draft, which we addressed in the final report as appropriate. We will send copies of this report to other interested congressional committees and the Secretary of Health and Human Services. The report will also be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-6244 or at wilshuseng@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Our objective was to determine the extent to which the Department of Health and Human Services (HHS) has established a framework to ensure the privacy and security of Medicare beneficiaries’ protected health information (PHI) when data on prescription drug use are used for purposes other than their direct clinical care. To address our objective, we identified HHS’s and its Office for Civil Rights’ (OCR) responsibilities for protecting the privacy and security of PHI by reviewing and analyzing the Health Insurance Portability and Accountability Act (HIPAA), including the HIPAA Privacy and Security Rules; the Health Information Technology for Economic and Clinical Health (HITECH) Act; and applicable privacy best practices, such as the Fair Information Practices. To obtain information on OCR efforts in implementing HIPAA’s and the HITECH Act’s requirements, we reviewed and analyzed documentation related to the office’s public outreach and guidance efforts, enforcement practices, and regulations for covered entity and business associate compliance provided by the office and through the department’s website and compared those documents to the office’s statutory requirements. To obtain information on the office’s enforcement through complaint and breach notice investigations, we interviewed officials, reviewed agency- provided and public information, and analyzed agency documentation. We conducted interviews with OCR officials to discuss the department’s approaches and future plans for addressing the protection and enforcement requirements of the HIPAA Privacy and Security Rules that applied to covered entities and business associates. We also analyzed plans and documentation provided by OCR officials that described enforcement and compliance activities for developing an audit mechanism and compared them with requirements for the audit program established in the HITECH Act. To describe the uses of prescription drug use data for purposes other than directly providing clinical care, we interviewed representatives from several covered entities, business associates, and medical associations, and reviewed the HIPAA Privacy Rule and academic publications. We conducted this performance audit at the Department of Health and Human Services in Washington, D.C., from August 2011 through June 2012, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Description The provision, coordination, or management of health care and related services among health care providers or by a health care provider with a third party, consultation between health care providers regarding a patient, or the referral of a patient from one health care provider to another. The various activities of health care providers to obtain payment or be reimbursed for their services and of a health plan to obtain premiums, to fulfill their coverage responsibilities and provide benefits under the plan, and to obtain or provide reimbursement for the provision of health care. Certain administrative, financial, legal, and quality improvement activities of a covered entity, as defined in the Privacy Rule, that are necessary to run its business and to support the core functions of treatment and payment. Example A hospital may use protected health information about an individual to provide health care to the individual and may consult with other health care providers about the individual’s treatment. A hospital may send a patient’s health care instructions to a nursing home to which the patient is transferred. A hospital emergency department may give a patient’s payment information to an ambulance service provider that transported the patient to the hospital in order for the ambulance provider to bill for its service. With certain exceptions, to make a communication about a product or service that encourages recipients of the communication to purchase or use the product or service. Marketing includes an arrangement between a covered entity and any other entity, whereby the covered entity discloses PHI to the other entity in exchange for direct or indirect remuneration, for the other entity or its affiliate to make a communication about a product or service that encourages recipients of the communication to purchase or use the product or service. With limited exceptions, such as for face to face communications, the Privacy Rule requires an individual’s written authorization before a use or disclosure of his or her PHI can be made for marketing. Covered entities may disclose protected health information, without authorization, to public health authorities who are legally authorized to receive such reports for the purpose of preventing or controlling disease, injury, or disability. Conducting quality assessment and improvement activities, and case management and care coordination. Business management and general administrative activities, including those related to implementing and complying with the Privacy Rule. Needing an individual’s authorization: A health plan sells a list of its members to a company that sells blood glucose monitors, which intends to send the plan’s members brochures on the benefits of purchasing and using the monitors. Not needing an individual’s authorization: An insurance agent sells a health insurance policy in person to a customer and proceeds to also market a casualty and life insurance policy as well. A systematic investigation, including research development, testing, and evaluation, designed to develop or contribute to generalizable knowledge. To use or disclose protected health information without authorization by the research participant, a covered entity must obtain either: (1) institutional review board or privacy board waiver of authorization; (2) representations for a preparatory to research activity; (3) representations that the research is on the protected health information of decedents; or (4) a data use agreement with recipient where only a limited data sets is shared. The social services department of a local government might have legal authority to receive reports of child abuse or neglect, in which case the Privacy Rule would permit a covered entity to report such cases to that authority without obtaining individual authorization. Approval of a waiver of authorization by an Institutional Review Board or Privacy Board for research, such as for certain records research, when the Board has determined that the use or disclosure of protected health information involves no more than a minimal risk to the privacy of individuals, and the research could not practicably be conducted without the waiver and without access to the protected health information. In addition to the contact above, John de Ferrari, Assistant Director; Nick Marinos, Assistant Director; Sher`rie Bacon; Marisol Cruz; Wilfred Holloway; Lee McCracken; Monica Perez-Nelson; Matthew Snyder; Daniel Swartz; and Jeffrey Woodward made key contributions to this report.","Prescribing medications and filling those prescriptions increasingly relies on the electronic collection of individuals’ health information and its exchange among health care providers, pharmacies, and other parties. While this can enhance efficiency and accuracy, it also raises privacy and security concerns. Federal law establishes the authority for the Secretary of HHS to develop standards for protecting individuals’ health information (which includes Medicare beneficiaries) and to ensure that covered entities (such as health care providers and pharmacies) and their business associates comply with these requirements. The Medicare Improvements for Patients and Providers Act of 2008 required GAO to report on prescription drug use data protections. GAO’s specific objective for this review was to determine the extent to which HHS has established a framework to ensure the privacy and security of Medicare beneficiaries’ protected health information when data on prescription drug use are used for purposes other than direct clinical care. To do this, GAO reviewed HHS policies and other related documentation and interviewed agency officials. While the Department of Health and Human Services (HHS) has established a framework for protecting the privacy and security of Medicare beneficiaries’ prescription drug use information when used for purposes other than direct clinical care through its issuance of regulations, outreach, and enforcement activities, it has not issued all required guidance or fully implemented required oversight capabilities. HHS has issued regulations including the Health Insurance Portability and Accountability Act (HIPAA) Privacy and Security Rules to safeguard protected health information from unauthorized use and disclosure. Through its Office for Civil Rights (OCR), HHS has undertaken a variety of outreach and educational efforts to inform members of the public and covered entities about the uses of protected health information. Specifically, OCR has made available on its website guidance and other materials informing the public about the uses to which their personal information may be put and the protections afforded to that information by federal laws. It has also made available guidance to covered entities and their business associates that is intended to promote compliance with the HIPAA Privacy and Security Rules. However, HHS has not issued required implementation guidance to assist entities in de-identifying personal health information including when it is used for purposes other than directly providing clinical care to an individual. This means ensuring that data cannot be linked to a particular individual, either by removing certain unique identifiers or by applying a statistical method to ensure that the risk is very small that an individual could be identified. According to OCR officials, the completion of the guidance, required by statute to be issued by February 2010, was delayed due to competing priorities for resources and internal reviews. Until the guidance is issued, increased risk exists that covered entities are not properly implementing the standards set forth by federal regulations for de-identifying protected health information. Additionally, in enforcing compliance with the HIPAA Privacy and Security Rules, OCR has established an investigations process for responding to reported violations of the rules. Specifically, the office annually receives thousands of complaints from individuals and notices of data breaches from covered entities, and initiates investigations as appropriate. If it finds that a violation has occurred, the office can require covered entities to take corrective action and pay fines and penalties. HHS was also required by law to implement periodic compliance audits of covered entities’ compliance with HHS privacy and security requirements; however, while it has initiated a pilot program for conducting such audits, it does not have plans for establishing a sustained audit capability. According to OCR officials, the office has completed 20 audits and plans to complete 95 more by the end of December 2012, but it has not established plans for continuing the audit program after the completion of the pilots or for auditing covered entities’ business associates. Without a plan for establishing an ongoing audit capability, OCR will have limited assurance that covered entities and business associates are complying with requirements for protecting the privacy and security of individuals’ personal health information. GAO recommends that HHS issue de-identification guidance and establish a plan for a sustained audit capability. HHS generally agreed with both recommendations but disagreed with GAO’s assessment of the impacts of the missing guidance and lack of an audit capability. In finalizing its report, GAO qualified these statements as appropriate.",govreport
"The main mission of the MHSS, which spends more than $15 billion a year, is medical readiness. This mission requires the MHSS to (1) provide medical support to active-duty military personnel in preparation for and during combat and (2) maintain the health of the active-duty force during peacetime. The Army, Navy, and Air Force all maintain uniformed health care providers to fill their MHSS medical readiness needs. To the extent that military space, staff, and other resources are available, the MHSS may also support DOD’s mission to care for nonactive-duty beneficiaries (dependents of active-duty members, retired members and their dependents, and survivors of deceased members). Whenever nonactive-duty beneficiaries’ need for health care exceeds the MHSS’ resources available to them, DOD purchases services for them from the civilian health care sector. The role of psychiatrists and clinical psychologists in meeting the MHSS medical readiness mission is to provide mental health care that helps military active-duty personnel perform their duties before, during, and after combat or some other military operation. Both psychiatrists and clinical psychologists, whether in the military or civilian sector, provide a variety of mental health services, some of which are similar. Both can diagnose mental conditions and treat these conditions with psychotherapy. A degree in medicine is required to practice psychiatry, however, so psychiatrists may treat mental disorders medically, that is, with medication. Because medical training is not required to practice clinical psychology, psychologists are not qualified to prescribe medication. To practice medicine, psychiatrists complete 4 years of medical school and a 1-year clinical internship during which they are trained to evaluate and treat all types of organic conditions and to perform general surgery. After this, they complete a 3-year psychiatric residency during which they learn to evaluate and treat mental conditions and the organic conditions associated with them. Because psychiatrists practice medicine, they can diagnose organic as well as mental conditions and treat each with medication. They consider a full range of possible organic causes for abnormal behavior when diagnosing a condition. Therefore, they can distinguish between mental conditions with an organic cause, such as schizophrenia and bipolar disorder, and organic conditions, such as diabetes and thyroid disease, which have symptoms that mimic a mental disorder. Organic mental disorders are best treated through a combination of medication and psychotherapy, according to DOD officials. Clinical psychologists, on the other hand, practice psychology, not medicine. Typically, they complete 6 years of graduate school leading to a doctoral degree and 1 to 2 years of postdoctoral clinical experience. Clinical psychologists are trained in theories of human development and behavior, so their general approach to diagnosing and treating mental illness is psychosocial rather than medical. They are trained to diagnose and treat all mental conditions and rely on the behavior a patient displays to diagnose these conditions. The MHSS created the PDP to increase the scope of practice of clinical psychologists in the military so they could treat their patients with psychotropic medication when needed. DOD established this project in response to a conference report dated September 28, 1988, which accompanied the fiscal year 1989 DOD Appropriations Act (P.L. 100-463). The report specified that, “given the importance of addressing ‘battle fatigue,’ the conferees agreed that the Department should establish a demonstration pilot training program in which military psychologists may be trained and authorized to issue appropriate psychotropic medications under certain circumstances.” The Army’s Office of the Surgeon General was tasked with designing and implementing the PDP. A blue ribbon panel was formed by the Army Surgeon General in February 1990 to determine the best method for implementing the PDP. After considering various models, the panel endorsed a training model that included course work at the Uniformed Services University for the Health Sciences (USUHS). In February 1991, the Chairmen of the Senate and House Subcommittees on Defense of the respective Committees on Appropriations then recommended that DOD develop a 2-year training model for the PDP in accordance with the panel’s recommendations. DOD later formed a committee to develop a suitable training program to provide clinical psychologists with the knowledge required for safely and effectively using a limited list or formulary of psychotropic medication. This committee recommended a special 3-year postdoctoral fellowship program for the PDP with (1) 2 years of course work at USUHS, followed by (2) 1 year of clinical experience at Walter Reed Army Medical Center. This training began in August 1991 with four participants. For subsequent classes, however, the PDP consisted of 2 years of training—1 year of classroom and 1 year of clinical training. Classroom training included courses at USUHS in subjects such as anatomy, pharmacology, and physiology. PDP participants’ clinical experience took place on inpatient wards and outpatient clinics at Walter Reed Army Medical Center in Washington, D.C., or the Malcolm Grow Medical Center at Andrews Air Force Base in Maryland. There, participants were trained to take medical histories and incorporate them into treatment plans and to prescribe medication for patients with certain types of mental disorders. After their clinical year, participants received a certificate of “Fellowship in Psychopharmacology for Psychologists” and became known as “prescribing psychologists.” Once PDP participants graduated from training, they completed 1 year of supervised or proctored practice; their respective services assigned participants to military medical facilities for this 1 year of practice. These facilities authorized participants to prescribe a specified formulary of psychotropic drugs. Although the medical education received under the PDP qualified clinical psychologists to treat mental conditions with medication, it was less extensive than psychiatrists’ medical training. Therefore, the MHSS limits prescribing psychologists’ scope of practice. They may only treat patients between the ages of 18 and 65 who have mental conditions without medical complications as determined by their supervisors. ACNP helped develop and evaluate the PDP. ACNP is a professional association of about 600 scientists from disciplines such as behavioral pharmacology, neurology, pharmacology, psychiatry, and psychology. ACNP’s principal functions are research and education. It conducted several assessments of the PDP under contract to the Army and made a number of recommendations on the project’s goals and implementation. One of them was for DOD to establish a PDP Advisory Council to help develop criteria and procedures on implementing the PDP. DOD established this council in 1994. The American Psychiatric Association, American Psychological Association, and literature on this topic have noted the possible advantages or disadvantages of allowing psychologists in the civilian sector to prescribe medication. One article has suggested that training psychologists to prescribe psychotropic medication could be particularly beneficial if they were permitted to practice this skill in clinical settings such as nursing homes, mental institutions, or medically underserved areas. Some have suggested that using prescribing psychologists could reduce the cost of care and maintain the continuity of patient care by eliminating the need to switch patients from psychologists to psychiatrists when drug therapy is indicated. On the other hand, because prescribing psychologists would receive only partial training in medicine, some are concerned about the quality of care these psychologists would be able to provide. No state licensing authority allows psychologists to prescribe medication. A few states are considering legislation, however, that would allow those already licensed by the state’s psychologist licensing board to be certified to prescribe medication after completing certain courses in medicine and gaining clinical experience. Under legislation introduced in Hawaii in 1997, psychologists seeking authority to prescribe would have to pass a standard examination. Legislation proposed in Missouri would require the development of a specified formulary of drugs for certified prescribing psychologists. None of the services needs additional mental health providers capable of prescribing medication to meet either current or upcoming medical readiness requirements, according to our review of DOD’s health care needs. Each service has more than enough psychiatrists, as well as clinical psychologists, to care for its anticipated wartime psychiatric caseload. Given this surplus, spending resources to provide psychologists with additional skill does not seem justified. Each of the three services has a model and procedures to determine the number of specific types of health care providers needed to support its MHSS medical readiness mission. These are based on the types and number of casualties anticipated under a wartime scenario. About one out of eight casualties would involve combat stress, according to an Army official.Caring for combat stress requires skill in (1) diagnosing combat stress, including the ability to distinguish it from neurological or other psychological disorders with like signs and symptoms, and (2) treating a range of severity levels of combat stress. Psychologists have many but not all of the skills necessary to treat combat stress and are therefore included, along with psychiatrists, in the services’ staffing of those who treat anticipated wartime casualties. Psychologists cannot be substituted for psychiatrists, however. Even if trained to prescribe drugs, psychologists are not as equipped as psychiatrists to distinguish between actual combat stress and certain neurological disorders that appear to be combat stress. Psychiatrists are also better able to treat more severe or complicated combat stress cases. The services have separate requirements for psychiatrists and clinical psychologists. None of the services has a separate readiness requirement for prescribing psychologists. Table 1 shows the number of MHSS psychiatrists each service has determined it needs and the number assigned or on board for fiscal years 1995 through 1998. Table 2 shows the number of clinical psychologists each service has determined it needs and the number assigned for fiscal years 1995 through 1998. As these tables show, the MHSS has at least as many uniformed psychiatrists and clinical psychologists as it needs to meet its current and upcoming readiness requirements. Our discussions with psychiatry consultants to the Surgeons General of the three services confirm the picture these numbers portray, and testimony of DOD officials at congressional hearings is consistent with the views expressed by these consultants. At a March 1995 Senate Armed Services Committee hearing, the Assistant Secretary of Defense for Health Affairs stated that on the basis of DOD staffing guidelines, the MHSS has no shortage of active-duty physicians in general. The Navy Surgeon General also testified at this hearing that the Navy has no shortage of psychiatrists. In addition, an official from the DOD Office of Health Affairs said that DOD has a surplus of psychiatrists. Although training psychologists to prescribe medication enables them to perform functions they do not normally perform, it does not give them all the skills needed to enable them to substitute for psychiatrists. Furthermore, the MHSS’ current staffing level of psychiatrists and psychologists is more than enough to meet its readiness requirements for caring for psychiatric cases without adding to some psychologists’ capabilities. Therefore, the MHSS seems to have no current or upcoming need for psychologists who may prescribe drugs. Although DOD met the mandate to establish a demonstration project to train military psychologists to prescribe psychotropic medication for mental illness, the PDP implementation faced several problems. Some of these problems have been resolved. The problems include the lack of a clearly defined purpose for prescribing psychologists in the MHSS, difficulty recruiting the desired number of participants per class, unspecified participant selection criteria, repeated changes in the classroom curriculum, delays in granting prescribing privileges, and unresolved issues involving supervision. The lack of precedent and experience with authorizing psychologists to prescribe medication, according to some officials at locations where PDP participants are stationed, is partly to blame for some of these problems. These include delays in granting prescribing privileges and disagreements over the extent of supervision. The PDP did not clearly define the role of prescribing psychologists in the MHSS. The ACNP’s PDP evaluation panel noted in 1992 that the project’s goal “to train psychologists to issue appropriate medication under certain circumstances” was “rich with ambiguities.” The project was structured and revised periodically without specifying the (1) prescribing psychologists’ duties and responsibilities, (2) types of clinical settings or facilities their skills would be best suited for, (3) types of psychotropic medication psychologists would be qualified to prescribe, and (4) level of supervision they would require. In September 1995, after the project had operated for 4 years, the ACNP panel suggested that DOD define clearly how PDP graduates could be used; this did not take place. DOD had difficulty recruiting PDP participants throughout the project. The recruiting goal, which was not met, was six psychologists for each PDP class. Since the project started in 1991, 13 psychologists have participated. Seven have completed it. Three have dropped out, and three are expected to finish their clinical experience in June 1997 (see table 3). Those who dropped out did so for various reasons: One left the military. Another enrolled in the medical school at USUHS. The third left because of dissatisfaction with the program. Because the PDP did not attract enough military psychologists, the program was opened to civilian clinical psychologists willing to enter the military. Two of the five PDP participants who began the program in 1994 were civilians who joined the military to participate in the PDP. Finally, only two psychologists entered the PDP in 1995. The MHSS established no formal candidate selection criteria for the PDP. Four classes of candidates had entered the PDP before prerequisites for participation were first addressed in February 1995. At that time, the PDP Advisory Council recommended that a candidate for the PDP (1) be on active duty, in good standing as a psychologist, and have an active state license to practice clinical psychology; (2) have a minimum of 2 years of active-duty experience as a clinical psychologist in one of the uniformed services; (3) agree to meet the service’s payback obligations for postdoctoral training; and (4) volunteer for the program. The duration, content, and sequencing of PDP training continued to change after the project began. Originally, PDP training was intended to last for 2 years and consist of both course work and clinical experience during each year. An additional year of clinical experience was added for the first class after it began the program, however, because the participants were not receiving enough clinical experience. Subsequent classes received 2 years of training as originally planned: the first dedicated exclusively to course work at USUHS, the second, to clinical practice. In addition, the curriculum content and sequencing of the courses changed after the project began. Courses such as neuroscience and psychopharmacology were added, while others were dropped. In 1995, the ACNP panel noted that the curriculum for those who started the PDP in 1994 was “markedly different” from the curriculum for participants who started the PDP in 1991. The panel said at that time that the curriculum needed to be thought through more thoroughly, using the final scope of practice and formulary as a starting point. The panel also noted that assessing the adequacy of the curriculum was difficult because it changed frequently. The panel saw a need for a well-organized, structured approach to the design of courses as well as the selection of participants. It recommended at that time that unless the MHSS addressed these concerns satisfactorily, the project should end. The first psychologists who completed the PDP faced delays of up to 14 months in getting prescribing privileges at the facilities where they were assigned possibly due to the facilities’ lack of experience with this type of provider. Two recent graduates, however, received privileges within 2 months of arriving at their facilities. In each of these cases, PDP officials visited the facilities where these psychologists had been assigned to explain the project and training and provide information about the graduates to facility officials. Facility officials cited these visits as helpful in resolving their concerns about psychologists’ prescribing privileges. The MHSS has not decided who should supervise prescribing psychologists. In 1994, the MHSS decided that after prescribing psychologists had completed their clinical year, they would spend the next year practicing under a psychiatrist’s supervision. The MHSS originally anticipated that these psychologists would ultimately function independently. All of the PDP graduates, however, continue to practice under the supervision of a psychiatrist, and whether they will ever prescribe independently is unclear. The PDP Advisory Council’s February 1995 scope of practice statement, which has been used as guidance for allowing prescribing privileges for some PDP graduates, states that prescribing psychologists should prescribe psychotropic medication only under the direct supervision of a physician. According to the Advisory Council that developed this statement, PDP graduates’ prescribing practice should be closely supervised. These psychologists should then gradually be permitted to practice under less supervision as they demonstrate their competence. Even if the MHSS had a need for additional mental health care providers to prescribe medication, the cost of meeting this need by training clinical psychologists to prescribe drugs is substantial. Furthermore, although the PDP produced additional providers who can prescribe and some facilities have reported positive experiences with them, determining the PDP’s cost-effectiveness is impossible at this time. The total cost of the PDP will be about $6.1 million through the completion of the proctored year for those currently in the program—or about $610,000 per psychologist who completes the program (see table 4). On the basis of our previous estimates of the cost of a USUHS medical education, we estimate that the cost of the classroom training for PDP participants provided by USUHS was about $110,028 per participant per year. Most of this amount consisted of faculty cost and costs for operating and maintaining USUHS. The remainder included the cost of research, development, testing and evaluation, military construction, and other miscellaneous costs. Our estimate of total cost for PDP training includes the cost of 12 classroom years of training for 10 PDP graduates as well as 3 years of training for three psychologists who dropped out of the program. Our estimates of psychologists’ salaries while participating in the PDP are based the assumption that those entering the project would receive a salary of $56,071 during their first year in the PDP, $57,571 during their second year, and $58,985 during their third year. Student salaries totaled $844,065 during the classroom training portion of the PDP, according to our estimate. This included the salaries of 11 participants for 1 year of classroom training each, 3 of whom ultimately dropped out of the PDP, and 2 participants for 2 years each. Because PDP participants treated patients during their clinical and proctored years, we reduced our salary estimates for these years by a productivity factor representing the time they spent treating patients. We used a productivity factor of 50 percent for the clinical year and 100 percent for the proctored year. On the basis of these productivity factors, total participant salary costs for the clinical portion of the PDP were $333,154, according to our estimates. This accounts for one participant who dropped out approximately halfway through the clinical year and another who received an additional year of clinical training. To estimate faculty and supervisor salaries for the PDP for the clinical and proctored years, we assumed that one faculty member per psychologist would devote 40 percent of his or her time per clinical year of training. Likewise, we assumed that during the proctored year, one supervisor would spend 20 percent of his or her time supervising each prescribing psychologist. On the basis of these assumptions, the total cost of lost faculty productivity due to training the 10 graduates for 11.5 years of clinical training was $475,810, according to our estimate; the total cost of lost supervisor productivity was $206,874 for 10 participants for 10 proctored years of practice. The lost productivity cost is based in each case on an annual salary of $103,437. Total PDP overhead cost was $2.58 million, according to our estimate.This included the cost of the evaluation contracts ($1.75 million) and personnel support costs ($830,000) for a PDP Director and a Training Director for fiscal years 1992 (when the PDP began) through 1998, when those currently in training are expected to complete their proctored year. Also included in overhead costs are smaller amounts for invited lecturers, travel and per diem expenses, supplies, and other miscellaneous expenses during this time. If the PDP had attracted a total of 24 participants and all of them had graduated, the cost would have been about $365,000 per prescribing psychologist. In addition, the cost per graduate would have been about $94,000 less than this if the project had progressed beyond the developmental stage and external evaluations could have been discontinued. After operating for 7 years, however, the project was only able to attract about half the number of participants considered optimal and had not progressed beyond the stage for which external evaluations were needed. The PDP increased the number of MHSS mental health care providers who may prescribe drugs to treat certain mental conditions. This may reduce psychiatrists’ workloads. Psychiatrists, psychologists, and primary care physicians, however, have different opinions on the effect of allowing psychologists to prescribe drugs on the quality of mental health care and collaboration among these providers. As a result of the PDP, seven psychologists are prescribing medication at DOD military facilities, and three more are expected to complete clinical training in the summer of 1997 and receive prescribing privileges some time after that. The first three participants are seeing mainly patients who require medication, and one of these temporarily filled a vacancy created by the departure of a psychiatrist. Having prescribing psychologists on staff has certain benefits to facilities where they are assigned. One of these facilities had been experiencing unusually heavy psychiatrist workloads because it did not have enough psychiatrists to fill all its psychiatry positions. In the interim, this facility specifically requested a prescribing psychologist to fulfill some of the responsibilities of a psychiatrist, reducing the psychiatry workload. Another prescribing psychologist temporarily saw the patients of a psychiatrist who transferred to another facility until the facility brought in another psychiatrist. VRI obtained perceptions of the PDP by surveying MHSS psychiatrists, primary care physicians, and psychologists about the possible effects of allowing psychologists to prescribe medication. The most frequent responses to the survey’s open-ended questions about the potential benefit of this practice were that it would (1) increase the number of mental health care providers in the MHSS and (2) reduce psychiatrists’ workloads. The most frequently noted limitation to allowing psychologists to prescribe medication was their perceived lack of knowledge about medicine, physiology, and adverse drug interactions and effects. Survey results also indicated that psychiatrists, psychologists, and primary care physicians differed about whether adding prescribing psychologists to the MHSS was beneficial. Most psychologists responded that training psychologists to prescribe would improve the quality of mental health care in the military. Conversely, most psychiatrists believed quality of care would decline. Furthermore, psychiatrists thought this would undermine their working relationships with MHSS psychologists; most primary care physicians responded that this would improve their collaboration with psychologists. Most psychologists agreed that the authority to prescribe would enhance their collaboration with MHSS primary care physicians. But as far as their collaboration with MHSS psychiatrists was concerned, about half the psychologists believed this would improve such collaboration; the other half thought it would interfere with it. The cost-effectiveness of having MHSS psychologists prescribe psychotropic medication is unclear at this time. Determining the cost-effectiveness of this effort would require information on the (1) proportion of the time remaining in the military that prescribing psychologists would have to perform functions that psychiatrists would normally perform and (2) extent to which having psychologists prescribe medication would result in fewer psychiatrists in the MHSS. The results of analyses designed to predict the relative cost-effectiveness of training and employing psychologists to prescribe compared with other providers with this authority differ depending on the cost estimates used. VRI’s analysis concluded that the PDP would prove cost-effective under certain circumstances. Additional analyses using different cost estimates, however, suggest that the PDP would not be cost-effective under these same circumstances. VRI found that the annual life cycle cost of a prescribing psychologist was potentially lower than that of a psychiatrist-psychologist combination, which is typically required to treat an MHSS patient with a mental condition requiring medication. As table 5 indicates, VRI’s analysis accounted for acquisition costs (the cost of recruiting people into the military), training costs, basic and special pay and benefits (such as housing allowances), health care costs, risk management expenses (for potential malpractice claims), and retirement costs. It assumed various pay levels for different types of providers at different stages in their military careers as well as for different career lengths. It also assumed that PDP enrollees would enter the project after 6 years as DOD clinical psychologists. VRI estimated the annual life cycle cost of prescribing psychologists given two scenarios, a start-up case scenario and an optimal case scenario. To predict the conditions under which the PDP would be cost-effective, VRI compared the annual life cycle cost of a prescribing psychologist under the start-up scenario with the life cycle cost of what it refers to as the “base” scenario. It used the start-up scenario rather than the optimal scenario because the former accounts for the nonrecurring, fixed (or start-up) costs actually associated with developing and implementing the PDP. The base scenario is the annual life cycle cost of the current psychiatrist-psychologist combination required to treat MHSS mental health care patients who need medication. Given the difference in annual life cycle costs between the base and the start-up scenarios, VRI predicted that the PDP would be more cost-effective than the base scenario if PDP participants in the start-up period functioned as prescribing psychologists, rather than traditional clinical psychologists, for more than 92.6 percent of their time remaining in the military. For this estimate, VRI assumed that (1) each PDP class would have three psychologists, (2) prescribing psychologists would be supervised for the remainder of their military service, (3) supervisory costs after the proctored year would amount to 5 percent of a physician’s annual salary per prescribing psychologist per year, and (4) prescribing psychologists would remain in the military an average of 10.2 years after completing the PDP. The validity of VRI’s predictions about the circumstances under which the PDP would be cost-effective depends on how realistic VRI’s cost estimates are as well as the other assumptions it used to estimate the annual life cycle cost of MHSS psychiatrists, psychologists, and prescribing psychologists. Some of VRI’s estimates were based on scant MHSS experience in training and employing psychologists to prescribe. Information about the PDP’s overhead cost that we collected after VRI completed its work, for example, indicated that overhead cost was lower than originally thought. Also, VRI’s estimate of the cost of training at USUHS was lower than our estimate of the cost of this training. For a more realistic prediction of the circumstances under which the PDP would be cost-effective, we asked VRI to redo its analysis, replacing its estimate of $2.89 million for total overhead cost during the start-up period with an updated estimate of $2.58 million. We also asked VRI to substitute the $39,969 it used per participant per year for PDP classroom training and related overhead with $110,028, our estimate of the per student per year cost of USUHS training, which includes training overhead. See table 6 for the results of this analysis. On the basis of our overhead and training cost estimates, PDP graduates under the start-up scenario could not be cost-effective because they would have to function as prescribing psychologists more than 101.85 percent of their time remaining in the military. This prediction is based on the same assumptions that VRI made about PDP class size, prescribing psychologists’ supervision, supervisory costs, and prescribing psychologists’ remaining time in the military. In DOD’s mental health care system, the main function of prescribing psychologists is to care for patients with certain types of mental conditions that require certain psychotropic medications. According to DOD’s needs assessments, the MHSS has more psychiatrists to care for these patients than needed to meet medical readiness requirements. Therefore, the MHSS has no current or upcoming need for clinical psychologists who may prescribe medication. In addition, the cost of producing 10 prescribing psychologists was substantial. Regardless of the cost, spending resources to produce more providers than the MHSS needs to meet its medical readiness requirement is hard to justify. The PDP has demonstrated that training psychologists to prescribe drugs, which increased the number of MHSS providers with this skill, reduced psychiatrists’ workloads in some cases. A potential benefit of the PDP, therefore, is the savings associated with prescribing psychologists delivering some of the services that psychologists in conjunction with psychiatrists have traditionally provided. These savings result because a prescribing psychologist can deliver this care with lower personnel-related costs than the combination of a psychologist and a psychiatrist. To realize these savings, however, DOD must (1) use a prescribing psychologist to treat patients who normally would have been treated by a psychiatrist and a psychologist and (2) replace higher priced providers in the MHSS with prescribing psychologists. Otherwise, the PDP cannot save DOD money. Even if the 10 prescribing psychologists from the PDP do, in certain situations, function as psychiatrists, the PDP is still not guaranteed to save money. Although prescribing psychologists cannot totally replace psychiatrists, DOD does not account for the introduction of prescribing psychologists in the MHSS when determining its readiness needs for psychiatrists. Therefore, it is uncertain whether DOD will reduce its readiness requirement for psychiatrists in response to shifting some of a psychiatrist’s functions to a prescribing psychologist. Concerning the PDP’s implementation, DOD has demonstrated that it can train clinical psychologists to prescribe psychotropic medication, and these psychologists have shown that they can provide this service in the MHSS. The implementation faced several problems, however, that persisted for the PDP’s duration. Given DOD’s readiness requirements, the PDP’s substantial cost and questionable benefits, and the project’s persistent implementation difficulties, we see no reason to reinstate this demonstration project. In the future, should prescribing psychologists be needed to meet DOD’s medical readiness requirements, the Congress should require DOD to (1) clearly demonstrate that the use of those MHSS psychologists who have been trained to prescribe has resulted in savings, (2) clearly define a prescribing psychologist’s role and scope of practice in the MHSS compared with other psychologists and psychiatrists, (3) design a curriculum appropriate to this role and scope of practice, and (4) determine the need for and the level of supervision that prescribing psychologists require. In comments received March 26, 1997, in response to a draft of this report, the Assistant Deputy Assistant Secretary of Defense (Clinical Affairs) stated that, on the basis of the methodology employed in this study, DOD has no objections to its results and recommendations. Department officials did provide a few technical corrections to the report. We modified the report as appropriate. Copies of this report will also be sent to other interested congressional committees and the Secretary of Defense. Copies will also be made available to others upon request. This report was prepared under the direction of Stephen P. Backhus, Director, Veterans’ Affairs and Military Health Care Issues, who may be reached at (202) 512-7101 if you or your staff have any questions or need additional assistance. Other major contributors to this report include Clarita Mrena, Assistant Director; William Stanco, Senior Evaluator; and Deena El-Attar and Gregory Whitney, Evaluators. DOD. To accomplish the first objective, VRI compared the annual life cycle cost of various types of MHSS mental health care providers with the annual life cycle cost of a prescribing psychologist. To address the remaining two objectives, VRI conducted what it referred to as a feasibility analysis of the PDP. VRI issued a report on this work on May 17, 1996. To determine the relative cost-effectiveness of training and employing prescribing psychologists relative to other DOD health care providers, VRI compared its estimate of DOD’s average annual life cycle cost of a prescribing psychologist with its estimate of this cost for clinical psychologists, psychiatrists, physicians specializing in internal medicine, and physicians specializing in family practice. It calculated these costs on the basis of three scenarios: the “base” case scenario, which is the status quo, a combination of psychologists and psychiatrists, with no prescribing psychologists in the MHSS; the “start-up” case scenario for prescribing psychologists, which had all the same elements of the base scenario but accounted for the introduction of prescribing psychologists into the MHSS; and the “optimal” case scenario for prescribing psychologists, which represented a modification of the start-up scenario. Costs in the start-up scenario included the nonrecurring, fixed costs associated with the PDP development and initial implementation as well as other costs for the PDP that VRI also believed would diminish or disappear in the long run. The optimal scenario represents the PDP in a long-term, steady state, during which no recurring costs associated with start-up and optimal class size would accrue. In this scenario, VRI set the cost of supplies and training to levels that indicate long-term efficiency. The following are the main steps in VRI’s cost-effectiveness analysis: 1. Calculate life cycle costs for active-duty military psychiatrists, family practitioners, internists, and clinical psychologists; then calculate the cost per full-time equivalent (FTE) for each of these by dividing their respective life cycle cost by their respective expected length of service (length of service minus unproductive time while in training). 2. Calculate life cycle costs for prescribing psychologists using actual and anticipated costs for a PDP sized at six and at three psychologists per class; and then, under both the start-up and base scenarios, calculate the cost per FTE for prescribing psychologists assuming that they (1) serve as clinical psychologists before entering the PDP and (2) after which they prescribe psychotropic medication. 3. Calculate the cost per FTE for the combination of clinical psychologists and psychiatrists that could be replaced by a prescribing psychologist. 4. Compare the annual life cycle cost per FTE of prescribing psychologists under start-up and optimal scenarios with the cost per FTE of the psychologist-psychiatrist combination. VRI’s estimates of the annual life cycle cost per FTE of various types of providers accounted for the cost of acquiring each type of provider, training costs, “force” costs, and retirement costs associated with each. Acquisition cost is DOD’s cost of recruiting someone into the military. Training costs include the cost of providing DOD-sponsored training to military health care providers. Force costs cover basic pay and allowances, special pay, miscellaneous expenses, and health care benefits of health care providers during their active-duty careers. Finally, retirement costs include the cost of retirement pay and retiree health care benefits. VRI’s overall estimates of the annual life cycle cost per FTE for different health care providers were based on a number of cost estimates and assumptions about these four cost categories that varied somewhat by provider and scenario. Following are the major assumptions VRI made when calculating life cycle cost for prescribing psychologists: For cost savings to be realized, the introduction of prescribing psychologists into the MHSS reduced FTEs for psychiatrists or other physicians. PDP participants had at least 6 years of experience as clinical psychologists when they entered the PDP. The PDP lasted 3 years—1 year for classroom training, 1 year for clinical experience, and 1 year for proctored practice. Each PDP class had three or six psychologists. PDP participants required 40 percent of a faculty member’s time during their clinical year of training and 20 percent of a faculty member’s time during their proctored year, which took time from faculty members’ patient care. After completing the PDP, graduates were able to “safely and effectively” prescribe medication and were assigned to “utilize their new prescription skills along with their clinical psychology skills to treat patients that otherwise would have had to be treated by physicians for their mental health care.” PDP participants continued to practice as prescribing psychologists for the rest of their military career. Prescribing psychologists required supervision amounting to 5 percent of a psychiatrist’s time for the rest of their military career. PDP graduates posed no more of a malpractice risk to DOD than any other mental health providers delivering the same treatment to the same types of patients. PDP graduates did not receive special pay otherwise paid to psychiatrists and other physicians in the military. Pension rates were based on an average service time for military pensioners of 22.5 years as determined by a DOD actuarial study. The objectives of VRI’s feasibility analysis were to assess the barriers to employing prescribing psychologists in the DOD health care system and how prescribing psychologists would be used in the DOD health care system. To address the first objective, VRI conducted two surveys. It conducted telephone interviews of about 400 DOD health care providers, including psychiatrists, primary care physicians, psychologists, and social workers to obtain their views on the PDP. This survey measured their awareness of the PDP, attitudes toward allowing psychologists to prescribe drugs, participant training, and ultimate ability of psychologists to prescribe medication. VRI also surveyed DOD medical beneficiaries to determine their awareness of the relative scope of practice of psychiatrists and psychologists and the PDP and to measure their attitudes toward allowing psychologists to prescribe drugs. To address its second objective, VRI reviewed DOD medical regulations, records of the PDP Advisory Council, and military health care utilization data and interviewed PDP graduates and officials familiar with the PDP. VRI acknowledged that its conclusions about the use of prescribing psychologists were “conjectures” because of DOD’s lack of experience with prescribing psychologists. The objectives of our evaluation were to assess the need for prescribing psychologists in the Military Health Services System (MHSS), provide information on the implementation of the PDP, and provide information on the PDP’s cost and benefits. To address the first objective, we used the need for MHSS psychiatrists as a proxy for the need for prescribing psychologists because psychiatrists are the only mental health care providers with full prescribing authority for which the military determines a readiness need. To assess the need for additional MHSS psychiatrists, we reviewed the Army, Navy, and Air Force methods for determining the number they need to fulfill their medical readiness mission and the results of their determinations. We compared the number of psychiatrists each branch of the service determined it needed, both now and in the future, with the number each currently has. To collect information on the PDP’s implementation, we reviewed many documents, annual reports, and assessments of the project. These included periodic evaluations conducted by the American College of Neuropsychopharmacology under contract to DOD and others done by the Army Surgeon General’s blue ribbon panels as well as the Army’s annual reports on the PDP. We based our estimate of the PDP’s cost on (1) information on cost in the Army’s annual reports on the PDP, (2) our estimates of the cost of training provided by the Uniformed Services University of the Health Sciences (USUHS), and (3) estimates of military salaries and benefits and the productivity of PDP participants and their supervisors found in Vector Research, Inc.’s (VRI) cost-effectiveness analysis of the PDP. This cost was calculated in constant 1996 dollars. To identify the qualitative benefits of the PDP, we interviewed all PDP participants who completed the PDP and others at the facilities where they were practicing and representatives of the American Psychiatric Association and the American Psychological Association. We reviewed articles that addressed the advantages and disadvantages of allowing clinical psychologists to prescribe medication. We also examined the results of a VRI survey of DOD health care providers that collected information on providers’ perceptions of PDP’s benefits. To determine what cost savings or quantitative benefit, if any, might be realized by enabling clinical psychologists to prescribe medication, we reviewed VRI’s cost-effectiveness analysis of the program done under contract to DOD. We compared the results of this analysis with those of a subsequent analysis VRI did at our request using different assumptions. In this subsequent analysis, VRI replaced its original assumptions on the number of participants and level of supervision with information we had collected about actual program experience. It also replaced its USUHS training cost estimates with our estimates noted above. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a legislative requirement, GAO reviewed the Military Health Services System's (MHSS) Psychopharmacology Demonstration Project (PDP), focusing on the: (1) need for prescribing psychologists in the MHSS; (2) implementation of the PDP; and (3) PDP's costs and benefits. GAO noted that: (1) the MHSS has more psychiatrists than it needs to meet its current and upcoming readiness requirements, according to GAO's analysis of the Department of Defense's (DOD) health care needs; (2) therefore, the MHSS needs no prescribing psychologists or any other additional mental health care providers authorized to prescribe psychotropic medication; (3) moreover, DOD does not even account for prescribing psychologists when determining its medical readiness needs; (4) although DOD met its goal to train psychologists to prescribe drugs, it faced many difficulties in implementing the PDP; (5) not all of these were resolved; (6) for example, the MHSS never had a clear vision of the prescribing psychologist's role, did not meet recruitment goals, and repeatedly changed the curriculum; (7) consequently, the American College of Neuropsychopharmacology recommended in 1995 that unless these issues were addressed, the PDP should end; (8) the total cost of the PDP, from start-up through the date the last participants will complete the program, is about $6.1 million or about $610,000 per prescribing psychologist, according to GAO's estimate; (9) ultimately, the PDP will have added 10 mental health care providers who can prescribe drugs to an MHSS that already has a surplus of psychiatrists; (10) opinions differ on the effect of adding these prescribing psychologists to the MHSS concerning such issues as quality of care and collaboration between psychologists and physicians; (11) without a clear purpose or role for prescribing psychologists and given the uncertainty about the extent to which they would replace higher cost providers, GAO cannot conclude that the benefits gained from training prescribing psychologists warrant the costs of the PDP; and (12) training psychologists to prescribe medication is not adequately justified because the MHSS has no demonstrated need for them, the cost is substantial, and the benefits are uncertain.",govreport
"JWST is envisioned to be a large deployable, infrared-optimized space telescope and the scientific successor to the aging Hubble Space Telescope. JWST is being designed for a 5-year mission to find the first stars and trace the evolution of galaxies from their beginning to their current formation, and is intended to operate in an orbit approximately 1.5 million kilometers—or 1 million miles—from the Earth. With a 6.5-meter primary mirror, JWST is expected to operate at about 100 times the sensitivity of the Hubble Space Telescope. JWST’s science instruments are to observe very faint infrared sources and as such are required to operate at extremely cold temperatures. To help keep these instruments cold, a multi-layered tennis-court-sized sunshield is being developed to protect the mirrors and instruments from the sun’s heat. The sunshield and primary mirror are designed to fold and stow for launch and fit within the launch vehicle. When complete, the observatory segment of JWST is to include several elements (Optical Telescope Element (OTE), Integrated Science Instrument Module (ISIM), and spacecraft) and major subsystems (sunshield and cryocooler). The JWST project is divided into three major segments: the observatory segment, the ground segment, and the launch segment. The hardware configuration created when the Optical Telescope Element and the Integrated Science Instrument Module are integrated, referred to as OTIS, is not considered an element by NASA, but we categorize it as such for ease of discussion. Additionally, JWST is dependent on software to deploy and control various components of the telescope as well as collect and transmit data back to Earth. The elements, major subsystems, and software are being developed through a mixture of NASA, contractor, and international partner efforts. See figure 1 below for an interactive graphic that depicts the elements and major subsystems of JWST. For more information on JWST’s organizational structure, see appendix III. Given JWST’s complexity, integration and test activities are comprised of five separate periods—two of which have already started—over the course of almost 7 years to build the observatory. During the test periods, the project works to mitigate risks to an acceptable level prior to launch. According to project officials, while some risks may be eliminated entirely through various mitigation strategies, others will be accepted as residual risks that remain upon launch. See figure 2 below for the overall planned integration and test flow for JWST that includes the remaining schedule reserve—or extra time built into the schedule to address any issues found. For the majority of the work remaining, the JWST project will rely on three contractors: Northrop Grumman, Harris (formerly Exelis), and the Space Telescope Science Institute (STScI). Northrop Grumman plays the largest role, developing the sunshield, the OTE, the spacecraft, and a cooling subsystem for the Mid-Infrared Instrument (MIRI). Northrop Grumman performs most of this work under a prime contract with NASA, but its work on the MIRI cooler is performed under a separate subcontract with the Jet Propulsion Laboratory (JPL). Harris is manufacturing the test equipment, equipping the test chamber, and assisting in the testing of the optics of JWST. Finally, STScI will collect and evaluate research proposals from the scientific community and will receive and store the scientific data collected, both of which are services that they currently provide for the Hubble Space Telescope. Additionally, STScI is responsible for developing the ground system that manages and controls the telescope’s observations on behalf of NASA. The MIRI instrument, one of the four instruments within ISIM, requires a dedicated, interdependent two-stage cooler subsystem designed to cool the infrared light detector to about 6.7 Kelvin (K), just above absolute zero. This cooler is referred to as a cryocooler and works by moving helium gas through about 10 meters (approximately 33 feet) of refrigerant lines located on the sun-facing surface of the JWST observatory to the colder, shaded side where the ISIM is located. According to NASA officials, a cryocooler of this configuration has never been developed or flown in space before. See figure 3 below for an illustration of the MIRI cryocooler on JWST and the varying temperatures needed in different areas of the telescope. Complex development efforts like JWST face myriad risks and unforeseen technical challenges which oftentimes can become apparent during integration and testing. To accommodate these risks and unknowns, projects reserve extra time in their schedules—which is referred to as schedule reserve—and extra money in their budgets— which is referred to as cost reserve. Schedule reserve is allocated to specific activities, elements, and major subsystems in the event there are delays or to address unforeseen risks. Each JWST element and major subsystem has been allocated schedule reserve. When an element or major subsystem exhausts schedule reserve, it may begin to affect schedule reserve on other elements or major subsystems whose progress is dependent on prior work being finished for its activities to proceed. The element or major subsystem with the least amount of schedule reserve determines the critical path for the project. Any delay to an activity that is on the critical path will reduce schedule reserve for the whole project, and could ultimately impact the overall project schedule. Cost reserves are additional funds within the project manager’s budget that can be used to address unanticipated issues for any element or major subsystem and are used to mitigate issues during the development of a project. For example, cost reserves can be used to buy additional materials to replace a component or, if a project needs to preserve schedule reserve, reserves can be used to accelerate work by adding shifts to expedite manufacturing and save time. NASA’s Goddard Space Flight Center (Goddard)—the NASA center with responsibility for managing JWST—has issued procedural requirements that establish the levels of both cost and schedule reserves that projects must hold at project confirmation. After this point, a specified amount of schedule reserve continues to be required throughout the remainder of development. In addition to cost reserves held by the project manager, management reserves are funds held by the contractors that allow them to address cost increases throughout development. We have found that management reserves should contain 10 percent or more on the cost to complete a project and are used to address different issues. JWST has experienced significant increases to project costs and schedule delays. Prior to being approved for development, cost estimates of the project ranged from $1 billion to $3.5 billion with expected launch dates ranging from 2007 to 2011. Before 2011, early technical and management challenges, contractor performance issues, low level cost reserves, and poorly phased funding levels caused JWST to delay work after confirmation, which contributed to significant cost and schedule overruns, including launch delays. The Chair of the Senate Subcommittee on Commerce, Justice, Science, and Related Agencies requested from NASA an independent review of JWST in June 2010. In response, NASA commissioned the Independent Comprehensive Review Panel, which issued its report in October 2010, and concluded that JWST was executing well from a technical standpoint, but that the baseline funding did not reflect the most probable cost with adequate reserves in each year of project execution, resulting in an unexecutable project. Following this review, the JWST program underwent a replan in September 2011, and Congress in November 2011 placed an $8 billion cap on the formulation and development costs for the project. On the basis of the replan, NASA rebaselined JWST with a life-cycle cost estimate of $8.835 billion that included additional money for operations and a planned launch in October 2018. The revised life-cycle cost estimate included a total of 13 months of funded schedule reserve. In the President’s fiscal year 2013 budget request, NASA reported a 66 percent joint cost and schedule confidence level—lower than the 70 percent level noted in NASA procedural requirements—for these cost and schedule baselines. A joint cost and schedule confidence level is the process NASA uses to assign a percentage to the probable success of meeting cost and schedule estimates and is part of the project’s estimating process. In December 2014, we found that the project was progressing within the 2011 replan for both cost and schedule. We reported on technical challenges with JWST elements and major subsystems that had consumed a portion of the cost and schedule reserves. We also found that the cryocooler remained an ongoing challenge and continued to use a disproportionate amount of cost reserves. Finally, we found that NASA had not conducted a cost risk analysis since the 2011 replan. A cost risk analysis determines the reliability of a program’s cost estimate by determining a program’s cost drivers and the risk of cost overruns through an analysis that links historical schedule information along with technical issues and uncertainties in schedule and cost. Since new risks had emerged, we recommended that NASA follow best practices when it updated the 2011 analysis for the Northrop Grumman contract and ensure the analysis is updated as significant risks emerge in the future. NASA partially concurred with our recommendation and stated that the JWST program and project use a range of tools to assess all major contractors’ performance and that the project initiated a cost risk analysis of Northrop Grumman’s contract incorporating best practices and would update it when required by NASA policy. The status of NASA’s analysis and our evaluation of it are discussed later in the report. The JWST project is currently on schedule with 8.75 months of schedule reserve remaining. However, all of JWST’s elements and major subsystems are within weeks of moving onto the project’s critical path, potentially reducing schedule reserve further. This is a tenuous position for the project given that it must complete five integration and test periods, three of which have not yet started. Testing can uncover problems that can be difficult or time-consuming to resolve, thereby adding schedule risk to the project and the unusual complexity of JWST further heightens these risks. To achieve mission success, the project will have to address over 100 technical risks and ensure that the project’s potential areas for mission failure are fully tested and understood before project launch in October 2018. Overall project schedule reserve, currently at 8.75 months, remains above Goddard requirements and the project’s plan—which was set above the Goddard standard at the replan in 2011 and included more reserve than required. However, as shown in figure 4 below, the use of schedule reserve on any element or major subsystem—two of which have entered integration and testing phases—may reduce the overall project schedule reserve. While some use of schedule reserve is expected, the proximity of each element and major subsystem schedule to the critical path means that the project must prioritize the mitigations when problems occur. Overall, the project has used more than 30 percent of its schedule reserve established at the time of the replan in 2011 to address technical challenges. Our prior work has shown that it is in integration and testing where problems are most likely to be found and as a result, schedules tend to slip. As we found in 2012, the project has a set amount of time allocated to the final three integration and test efforts over the next 3 years, with between 2 and 4 months for each. This time could easily be used if a significant problem occurred. For example, the OTIS integration and test period—the first major integration involving OTE and ISIM—planned to start in 2016 currently has 3 months of schedule reserve allocated at the end of testing. The final event in the OTIS integration and test effort is a cryovacuum test that takes approximately 3 months to complete. If an issue occurred that required stopping and repeating the cryovacuum test, this reserve could easily be exhausted. Additionally, as the project moves further into integration and testing, events become more serial so flexibility will be diminished. Issues uncovered in integration and testing also tend to be more expensive to mitigate, due to increased schedule pressure. To prevent the use of additional schedule reserve, the project and its contractor for OTIS testing are taking proactive steps to reduce risk before testing needs to commence by ensuring the availability and readiness of test equipment and the cryogenic chamber to be used to test the optics of JWST. For example, the project’s contractor that is to test the optics has conducted two of three optical ground support equipment tests on a replica of the OTE with 2 of 18 primary mirror segments installed. According to the project, the first test met its intended objectives and provided valuable insight into the performance of the ground support equipment and preparation of the cryogenic chamber. The second test was completed in October 2015, and project officials are currently analyzing the results. The third test is to build upon these findings to provide further confidence for the eventual OTIS testing. Additionally, the contractor performed several risk mitigation activities, including additional testing of the large cryogenic chamber that will be used for OTIS testing, which revealed several issues, including a leak in the cryogenic chamber that would have had major impacts if not discovered and repaired before OTIS testing began. The project has used schedule reserve in 2015 to address various technical problems that have arisen. More specifically, the project experienced several problems with ISIM and OTE, elements in the two of five integration and test phases that have begun. For example, the ISIM heat straps—flexible straps that are to conduct energy and heat away from the instruments—did not perform as expected in testing. An investigation revealed design issues with the parts as delivered from the supplier. As a result, the heat straps were redesigned and reinstalled, which required the use of schedule reserve. Additionally, as a result of these and other issues, the beginning of the third cryovacuum test was delayed by 3 months. ISIM currently holds 1.75 months in schedule reserve—down from 4.5 months as we found last year—from its overall schedule reserve of 8.75 months to address any issues that may arise during the third cryovacuum test and before OTIS testing begins. Additionally, the OTE element used about 2 months of schedule reserve this past year due to workmanship issues related to the 76 cryogenic harnesses that connect to JWST’s mirrors. According to program and contractor officials, the majority of these harnesses were damaged due to use of inappropriate tooling by the supplier. The damage was not discovered until some of the harnesses were installed on the OTE. The harnesses were removed for inspection with most requiring repairs or replacement. According to contractor officials, initially, the harnesses would have been installed at Northrop Grumman’s facility in Redondo Beach, California, but due to the workmanship issues, and in an effort to preserve as much schedule as possible, all but two of the harnesses are being installed at Goddard after the OTE was transferred there to begin the integration of the mirrors with the backplane. Various spacecraft challenges during the past year have used about 3 months of schedule reserve. For example, Northrop Grumman planned for certain integration activities to be conducted concurrently. However, according to project officials, due to safety and access to the spacecraft bus, the work had to be completed sequentially instead which took longer than expected. Additionally, a propellant tank required redesign and rework to meet its requirements. Spacecraft bus structure integration has been completed and the bus assembly recently completed various fit checks and acoustics and dynamics testing in preparation for the spacecraft integration and testing phase to begin in 2016. Schedule reserve for the sunshield was reduced to 9.25 months—two weeks from the critical path—due to various manufacturing challenges, and additional reserves will likely be needed in the near future. For example, an anomaly with the membrane retention devices—which need to operate correctly to ensure that the sunshield can unfold properly— during qualification testing required a redesign of the parts. According to contractor officials, when the devices were released, the contact between the metal surfaces moving adjacent to one another resulted in a small amount of debris being generated. Project officials expressed concern that the debris posed a risk of damaging other parts of the telescope. A new design has since been tested and proven to no longer pose the same risk. Additionally, coordinating the testing of the five individual layers of the sunshield created some delays. The five layers of the sunshield are currently in various stages of assembly, with two layers having been delivered to Northrop Grumman from the supplier in April 2015 and November 2015, respectively. In addition, in October 2015, the project reported that a piece of flight hardware for the sunshield’s mid boom assembly was irreparably damaged during vacuum sealing in preparation for shipping. The effect of the accident on the schedule has not yet been determined as project and prime contractor officials are currently determining the path forward. The cryocooler continued to experience technical challenges in 2015 that used schedule reserve and delayed its delivery. Although it has now been delivered—approximately 18 months later than planned—the cryocooler remains a schedule risk as it begins testing. Northrop Grumman delivered the compressor assembly—the third and final cryocooler component to be delivered after the cold head assembly and electronics assembly—to JPL in July 2015. Over the last several years, the project has accommodated a series of cryocooler schedule slips by reordering and compressing JPL’s test schedule and resequencing the spacecraft bus integration schedule. For example, several tests that were initially planned to be conducted on flight hardware will now be conducted on the spare hardware later into JWST’s integration and testing phase and closer to launch. Additionally, in May 2015, the project used 3 weeks of reserve and removed 3 weeks of lower priority and redundant items from the planned 40 weeks of acceptance and end-to-end testing. The project took these actions to accommodate a further delay in the delivery of the compressor assembly. According to contractor officials, the delay was primarily caused by the contractor not scheduling enough time to complete the bake out—a process whereby moisture is removed by heating the compressor and pumping helium through it. Table 1 below shows the tests removed from the acceptance and end-to-end testing. According to JPL officials, the thermal tests removed were from those that would have tested the cryocooler compressor assembly with the electronics assembly. A program official stated that the risk of eliminating these tests has been reduced now that the compressor and electronics assembly have been tested together for the first time. NASA and JPL assessed the removal of the electromagnetic interference and electromagnetic compatibility testing as low risk, and a program official stated that additional parallel activities and testing of the spare electronics to further mitigate the risk have been added. However, various integration and test experts we spoke with noted that eliminating testing is a sign that the project may be taking on additional risk because discovery of issues may be pushed to higher levels of testing or to later in the testing phase, where problems are more costly and time consuming to address. To accommodate any delays to testing or problems that may be found, JPL currently maintains 12 weeks of reserve for acceptance and end-to- end testing of the cryocooler. According to JPL officials, a key driver in deciding to eliminate testing instead of using additional schedule reserve was to retain as much as possible in the event that a test has to be stopped and restarted—which would require approximately 5 weeks—in addition to the time it takes to mitigate a problem. At the completion of the acceptance and end-to-end testing programs, the cryocooler is needed for spacecraft integration and testing—when the spacecraft and sunshield are integrated—no later than August 2, 2016. Spacecraft integration and test is followed by the final observatory level integration and test— completing the telescope—which is expected to begin in September 2017. The cryocooler’s testing flow and schedule reserve leading to its integration with the spacecraft is depicted in figure 5 below. Because the development and delivery of the cryocooler by Northrop Grumman took significantly longer than expected and to maintain the 12 weeks of reserve, JPL must complete acceptance and end-to-end testing in a more schedule-compressed environment. However, challenges have persisted in bringing the cryocooler flight model to testing and completing development of the spare model which could be needed if the flight model is not available in time to be integrated into the observatory for launch. For example, despite having an extra 18 months to prepare for the cryocooler testing due to the delay in the delivery of the compressor assembly, the project noted concerns with JPL’s readiness to accept the flight hardware. Specifically, a procedure error led to an interruption of the ongoing testing of the electronics assembly and fit checks of the flight cooler tower assembly and flight refrigerant line deployable assembly were delayed because the procedures were late in being completed. JWST is one of the most technologically complex projects NASA has undertaken. The project incorporates nine critical technologies— technologies that are required for the project to successfully meet requirements—whereas we found the average technology development project at NASA incorporates an average of 2.3 critical technologies. JWST also incorporates 15 pre-existing technologies that are being leveraged from previous development efforts. Future testing on JWST has to reduce a significant amount of risk before the October 2018 launch. The project identifies and maintains a list of risks—currently with 102 items—that need to be tested and mitigated to an acceptable level in the next 3 years. According to the project, approximately 25 of these risks are not likely to be closed until the conclusion of the observatory integration and test phase—just prior to project launch. This is the point where the project has determined that no further mitigations are feasible and that these risks have been tested per a plan to reduce the risk, when possible, to an acceptable level. In some cases, it may take years to resolve a particular risk. For example, the project continues to track a risk related to the release mechanisms that hold the spacecraft and the OTE together for launch. Once in space, they are to activate and release to allow the OTE to separate from the spacecraft. If the mechanisms do not operate correctly, mission failure will occur. This risk was identified in January 2014 at the spacecraft critical design review. During testing, these devices were causing excessive shock when performing their releasing function. After redesign, the project is continuing to work on resolving the underlying problem and qualifying the new design. Additionally, while testing the redesigned mechanism, a new concern arose that it could release early which would cause mission failure. According to a program official, the redesigned mechanism is not needed for spacecraft integration and test until summer of 2016 and therefore these issues do not pose a significant schedule concern at this time. As integration and testing moves forward, the project will need to be able to resolve problems in a timely manner to stay on schedule. A backlog of unresolved problems and risks may indicate there may not be enough schedule left before launch to complete all necessary work. The project keeps track of these problems via problem reports and problem failure reports. Thus, ensuring that problem reports and problem failure reports are resolved in a timely manner is key to successfully launching the project on time. Project officials reported that they do not track problem report and problem failure report closure rates over time; instead, they monitor the reports to ensure that they are closed before subsequent test events and receive monthly briefings from the contractors on the status of their progress. According to project officials responsible for the ISIM and OTIS development and testing, while there are numerous problem reports open at any given time, they are comfortable with the number of open reports at this stage of the project. Northrop Grumman officials reported that development of the OTE, sunshield, and spacecraft are on track with respect to problem and failure reports, which they refer to as nonconformance reports. Additionally, experts we spoke with told us that addressing requests for action (RFAs) from project reviews is important because RFAs are written to identify potential risks to the project. Since the spacecraft critical design review in January 2014, the project has closed 14 RFAs from that review while one related to the release mechanism noted above remains open. The project tracks and reports open RFAs to senior management at NASA, and we will continue to examine the open RFA and additional RFAs that result from future reviews to monitor their timely closure. The extent of JWST’s deployments—which are necessary because JWST must be stowed for launch to fit in the launch vehicle—means the telescope could fail to operate as planned in an extensive number of ways. According to project officials, there are over 100 different ways that a failure could occur, referred to as single point failure modes, across hundreds of individual items in the observatory. Each of these could result in a loss of minimum mission objectives, and thus needs to be fully tested and understood. Nearly half of the single point failure modes involve the deployment of the sunshield. The approval of single point failures requires written justification from the project including sound engineering judgement, supporting risk analysis, and implementation of measures to mitigate the risk to acceptable levels. The project’s mission systems engineers have developed justifications and mitigation strategies for its single point failures, and project officials expect these to be summarized and submitted to the agency prior to launch. According to project officials, this approach is consistent with other high-priority NASA missions, which require the most stringent design and development approach that NASA takes to ensure the highest level of reliability and longevity on orbit. The JWST project continued to meet its cost commitments throughout fiscal year 2015 despite cryocooler delays that used a disproportionate amount of cost reserves. However, the project required larger than planned workforce levels to complete new and existing work, which poses a cost threat in future years if levels do not decrease. To help manage the project and account for new risks since the 2011 replan, JWST project officials conducted a cost risk analysis of the Northrop Grumman contract. We found that while the cost risk analysis substantially met best practices, these officials do not plan to periodically update it. Instead, the project is using risk-adjusted analyses to update and inform its cost position. However, we found that this method is a simplified version of a cost-risk analysis that does not contain the same rigor or allow the project to prioritize risks. Furthermore, we found anomalies in the contractor- provided data rendering the results of the analyses unreliable. Finally, we also found the project lacks an independent surveillance mechanism for the data to ensure anomalies are corrected by the contractor before being incorporated into larger analyses. As a result, the project is relying partially on unreliable information to inform its cost and schedule decision-making. Project officials managed JWST within its allocated budget for the fourth consecutive year since the 2011 replan. Additionally, the project’s fiscal year 2016 budget request to Congress is consistent with its cost commitment. According to preliminary estimates, at the end of fiscal year 2015, the project spent $68 million dollars more than planned at the beginning of the fiscal year, carrying over less money into fiscal year 2016 than originally planned. As in past years, the project used a portion of its cost reserves to address technical challenges that included funding activities to address significant delays with the cryocooler. The project also used program-level cost reserves to pay for new work that included conducting additional thermal verification tests and risk reduction activities, such as an analysis to better understand how JWST will likely interact with its launch vehicle—the Ariane 5. The cryocooler used a significant share of the project’s fiscal year 2015 cost reserves—more than 50 percent—to fund the workforce for this effort and address technical issues. This is the fourth year in a row that the cryocooler used a substantive portion of the project’s cost reserves to further fund the subcontractor’s schedule delays in delivering its components. The project estimates that the overall cryocooler development cost will be nearly 250 percent higher than baselined at the 2011 replan. The Northrop Grumman cryocooler team forecasts that a larger workforce is needed until at least February 2016 when the spare compressor assembly is currently scheduled to be delivered. JPL will maintain the majority of its workforce through the conclusion of spare cryocooler testing. After testing concludes, its workforce is projected to decrease by about 50 percent. Project cost reserves will likely continue to be needed to fund cryocooler development and testing costs until fiscal year 2017 when JPL testing of the spare compressor assembly is scheduled to conclude. While the project remains on cost, contractor work is costing more to complete because a larger workforce than planned was needed for components beyond the cryocooler, including Northrop Grumman for the sunshield, spacecraft, and OTE, and Harris for OTIS testing and preparation. This need derives from work taking longer than planned to complete and additional work requested by NASA. For example, Northrop Grumman’s workforce projections for fiscal year 2015 predicted a peak in the workforce in November 2014. However, the actual workforce peaked in February 2015 and continued to remain above the projected peak until August 2015. While workforce numbers have declined somewhat since February, these increases largely remained in place through the end of the fiscal year. In its role as prime contractor, Northrop Grumman’s workforce stayed within its budget in fiscal year 2015. From January through July of 2015, its workforce was exactly at its funding threshold in order to conduct new work and address technical issues for its body of work. In addition, larger workforces contributed to additional contractor cost for two other development efforts—OTIS testing and the cryocooler—requiring the use of additional project cost reserves. Looking forward, the primary threat to JWST meeting its long-term cost commitment is the prime contractor, which must continue to control its costs and decrease its workforce. For the past 20 months, Northrop Grumman’s actual workforce exceeded its projections. Figure 6 below illustrates the difference between the workforce levels that Northrop Grumman projected at the beginning of fiscal years 2014 and 2015 and its actual workforce levels for those periods. Based on its projections at the beginning of the fiscal year, Northrop Grumman exceeded its total fiscal year 2014 workforce monthly projections by about 12 percent, and exceeded its projections for fiscal year 2015 by about 20 percent. On average, in fiscal year 2015, Northrop Grumman was 121 FTEs above its projections each month, and at the end of fiscal year 2015, it exceeded its monthly projection for September 2015 by 235 FTEs. While actuals have remained above projections since the workforce levels peaked in February 2015, Northrop Grumman currently projects that its workforce will decline throughout fiscal year 2016, with the exception of August 2016, when additional work is projected to be needed for integration and testing, among other areas. However, this was the projection for both fiscal years 2014 and 2015 and has yet to happen. For example, while Northrop Grumman expected to be ramping down by the end of fiscal year 2014, its projections at the start of fiscal year 2015 were approximately 55 percent higher than where workforce levels were projected for the end of fiscal year 2014. The primary drivers that have increased the cost and size of the workforce under the prime contract have been the development of the sunshield and spacecraft and additional work NASA has requested. Over 60 percent of the cost increases are attributed to addressing technical concerns such as sunshield alignment and verification work, mechanical design integration, and spacecraft mass reduction. Northrop Grumman has covered additional costs pertaining to technical issues through its management reserves, and has not needed project cost reserves in fiscal years 2014 and 2015. The remaining cost increases are attributable to new contract scope which has been funded by the JWST program. Some of this new scope included additional spacecraft simulators, as well as new thermal risk reduction testing to verify the final design changes made to the core of the telescope–the region between all the observatory elements. Approximately 15 percent of work remains on Northrop Grumman’s contract and its management reserves exceed the recommended minimum amount that should be held at the contractor level—10 percent or more of the cost of work remaining on the project. Significant decreases in the workforce are planned to occur in fiscal year 2017 when final hardware delivery to observatory integration and test is scheduled to take place. To incentivize the contractor to lower its workforce, project officials evaluate workforce management as part of NASA’s appraisal of Northrop Grumman’s performance in its award fee determinations. The project also communicates frequently with the contractor including phone calls, face to face meetings twice a month, and quarterly in-person management meetings to discuss workforce planning, among other subjects. The project has communicated the need to reduce the workforce size, but since Northrop Grumman has operated within its budget in fiscal years 2014 and 2015, the award fee it has received has not been reduced as a result of workforce size issues. The subcontractor for OTIS testing, Harris, needed additional funding to cover cost overruns and additional work. Project cost reserves were utilized to pay for this work to maintain schedule through a contract change in January 2015. Over 55 percent of the increase was made to address cost overruns that resulted from increasing workforce levels to maintain schedule. The rest of the contract increase covered new scope. As a result, Harris is anticipating more work than originally planned for fiscal years 2016 and 2017. Despite the contract increases, Harris’s management reserves are 2.5 percent as of August 2015—significantly below the 10 percent cost of work remaining that is considered to be healthy. With over 25 percent of work remaining on its contract, this low level of reserves means that any additional overruns will likely need to be covered by project-held reserves. We found that NASA’s 2014 cost risk analysis on Northrop Grumman’s remaining work substantially met best practices. In December 2014, we recommended that project officials update the 2011 JWST cost risk analysis utilizing best practices, and to update it periodically as significant risks emerge. NASA partially concurred with our recommendation stating that the program and project use a range of tools to assess the performance of the project and conducted a one-time update to the cost risk analysis in 2014. We found that NASA’s updated cost risk analysis substantially met best practices. For example, it incorporated subject matter expert input to model cost and schedule uncertainties from the prime contractor’s threats and opportunities list—both of which are components of the best practice of modeling a probability distribution for each cost element’s uncertainty based on data availability, reliability and variability. See appendix I for a list of best practices that we used to evaluate cost risk and uncertainty. In addition, NASA included correlation between elements to account for different cost elements being affected by the same external factors—another best practice. However, the cost risk analysis also had some weaknesses as a result of not fully following best practices. For the first best practice noted above on modeling probability distribution, NASA relied on the contractor’s risk data without conducting corroborating interviews with contractor personnel to obtain insight into threats and opportunities not listed in contractor data. For the same best practice, the detailed schedule that reflected all of the work that needed to be done by Northrop Grumman that was used for the cost risk analysis had some activity sequencing logic issues. For example, we found instances where activities listed were not sequentially linked to one another. As a result, this called into question the calculation of the critical path during simulations as well as the ability of the schedule to dynamically respond to changes, which it must do thousands of times during the risk simulations. Moreover, the JWST project does not plan to periodically update its cost risk analysis even as additional risks have emerged. JWST officials stated that the cost risk analysis was a time intensive process to complete and that the program and project use various tools consistent with best practices to assess all major contractors’ performance. Nonetheless, best practices call for conducting periodic updates to a cost risk analysis as a project progresses even if it is not experiencing problems. Updating the cost risk analysis is also part of the best practice of implementing a risk management plan with the contractor which calls for identifying and analyzing risk, planning for risk mitigation, and continually tracking risks. An accurate cost risk analysis is particularly vital to JWST because about 70 percent of the project cost reserves have been used to address concerns that were not anticipated as threats by the project’s budget system. Failure to update the cost risk analysis as we recommended in 2014 limits stakeholder confidence that the cost risk analysis prepared in 2014 accurately reflects the project’s current financial status. Given this uncertainty, it is important for the project to have reliable information for the risks that are known to inform decision making. One of the tools that the project has started to use in place of updating the cost risk analysis is a monthly risk-adjusted analysis to provide insight into potential future cost growth. The monthly risk-adjusted analyses are based on contractor EVM data that incorporate known threats to provide an estimate at completion (EAC) that is updated monthly by NASA for each contractor. The results of these analyses may then be compared to the contractors’ estimates and project cost reserves to provide insight into the project’s ability to cover future increases. Monthly risk-adjusted analyses demonstrate a commitment by NASA to manage and project future costs. However, we found that the risk-adjusted analyses do not serve as an adequate substitute for an updated cost risk analysis because they are a simplified version of a cost risk analysis that does not allow the project to prioritize risks or assign confidence levels to meet key milestones in the schedule consistent with best practices for cost risk analyses. Additionally, based on our analysis of contractor EVM data over 17 months, we found that some of the data used to conduct the analyses were unreliable. First, we found that both Northrop Grumman and Harris were reporting optimistic EACs at the time of our analysis that did not align with their historical EVM performance and fell outside the low end of our independent EAC range. Second, we found various anomalies in contractor EVM data for both the Northrop Grumman and Harris work that they had not identified throughout the 17-month period we examined. The anomalies included unexplained entries for negative values of work performed (meaning that work was unaccomplished or taken away rather than accomplished during the reporting period), work tasks performed but not scheduled, or actual costs incurred with no work performed. For Northrop Grumman, many were relatively small in value ranging from a few thousand to tens of thousands of dollars. These anomalies are problematic because they distort the EVM data, which affect the projection of realistic EACs. We found that these anomalies occurred consistently within the data over a 17-month period, which brings into question the reliability of the risk-adjusted EAC analysis built upon this information. NASA did not provide explanations into the anomalies for either contractor. While the contractors were able to provide explanations for the anomalies upon request, their explanations or corrections were not always documented within EVM records. Some of the reasons the contractors cited that were not in the EVM records included tasks completed later than planned, schedule recovered on behind schedule tasks, and replanning of customer-driven tasks. Finally, like the cost-risk analysis in 2014, the risk-adjusted EAC analysis does not include interviews with contractor officials to gain insight into risks which may not be present in the contractors’ threats and opportunities list. Without updating the cost risk analysis, reconciling and documenting data anomalies, and utilizing reliable data for the risk-adjusted EAC, the JWST project does not have a reliable method to assess its cost reserve status going forward. This means that some of the cost information the project officials use to inform their decision making may indicate they are in good shape when the reality might be otherwise, and as result, project management may not have a solid basis for decision making. In discussions with the contractors, we found that the project also lacks an independent surveillance mechanism, such as the Defense Contract Management Agency, to monitor contractors’ EVM data—provided to the project each month from two of the contractors. Surveillance entails reviewing a contractor’s EVM system with the purpose of focusing on how well a contractor is using its EVM system to manage cost, schedule, and technical performance. However, the lack of surveillance and the data anomalies in EVM data are problems we previously identified across NASA’s portfolio of major spaceflight projects. We found in November 2012 that 4 of NASA’s 10 major spaceflight projects we reviewed had established formal independent surveillance reviews. For the 6 projects that did not have formal independent surveillance in place, we found that each provided evidence that they instituted monthly EVM data reviews, which according to project officials, helped them to continually monitor cost and schedule performance. However, we found that the rigor of both the formal and informal surveillance reviews was questionable given the numerous EVM data anomalies we found in the monthly EVM data. As a result, we recommended that NASA improve the reliability of project EVM data by requiring projects to implement a formal surveillance program that ensured anomalies in contractor-delivered and in-house monthly earned value management reports were identified and explained, and report periodically to the center and mission directorate’s leadership on relevant trends in the number of unexplained anomalies. Citing resource constraints, NASA partially concurred with the recommendation and commented that it did not plan to implement a formal surveillance program, but agreed that the reliability and utility of the EVM data needed to be improved and noted several steps it planned to take to do so. We continue to believe that implementing this recommendation would be beneficial and prevent anomalies in EVM data from occurring that we have identified on the JWST project. Implementing surveillance of EVM contractor data is a best practice listed in the NASA Earned Value Management Implementation Handbook and GAO’s Cost Estimating and Assessment Guide. With adequate surveillance in place, the anomalies we found in the EVM data could have been identified earlier and corrective action could have been directed to the contractors to explain the anomalies in the data. Without implementing proper surveillance, the project may be utilizing unreliable EVM data in its analyses to inform its cost and schedule decision making. NASA has taken steps to provide independent oversight of the JWST project. Independent oversight of the JWST project has played and will likely continue to play an important role leading up to JWST’s launch in October 2018. Before the 2011 replan, two groups examined JWST to address underlying concerns with schedule and cost and made recommendations that NASA implemented. On an ongoing basis until launch, the Standing Review Board and the Independent Verification & Validation (IV&V) facility are to continue to oversee progress on hardware and software development, identify concerns, and assist the project to identify solutions to reduce risk and improve JWST’s likelihood of success. Various groups internal and external to NASA have conducted reviews, provided insights, and identified schedule efficiencies to inform and enhance the project’s approach to managing the development of JWST. Prior to the 2011 replan and because of concerns raised at the JWST mission critical design review held in the spring of 2010, the Test Assessment Team was formed to address those concerns. Convened by the Astrophysics division of the NASA Science Mission Directorate, the team included nine members and three NASA consultants with considerable experience in systems engineering, instrument development, system verification, modeling and testing, and other areas focused on reviewing plans for the ISIM and OTIS cryogenic testing. The team was primarily tasked to determine whether (1) the test plans in place at that time were sufficient to test the relevant observatory functions, (2) the key optical and thermal objectives were clearly identified, (3) the test plans themselves were properly scoped and prioritized, (4) any duplicative or unnecessary tests existed in the plans, and (5) the plans were overly ambitious or optimistic regarding hardware performance and analysis capabilities. Their insights and recommendations have helped to decrease programmatic cost and future growth as well as to find schedule efficiencies. For example, they recommended OTIS testing duration be reduced from 167 to 90 days while still verifying critical functions of the telescope. Also prior to the 2011 replan, the Chair of the Senate Subcommittee on Commerce, Justice, Science, and Related Agencies asked that NASA set up a panel to review the JWST project because of concerns about cost growth and schedule delays. In response, NASA convened the Independent Comprehensive Review Panel to provide an independent, integrated perspective and response with the goal of providing recommendations that would lead to a successful launch while minimizing cost. At the conclusion of its work in October 2010, the panel made 22 recommendations to NASA to increase oversight, improve communications, and assist with risk management and mitigation, among other recommendations. NASA implemented all of these recommendations. Both of these reports have informed our ongoing reviews of the JWST project as we have incorporated many of the concerns on cost estimates and cost reserves into our methodology and reporting on the health and status of JWST as it moves forward. Another aspect of independent oversight that is a key element of NASA’s strategic framework for managing space flight projects are Standing Review Boards which consist of technical experts who do not actively work on a specific project or program. The mission of the boards is to provide NASA senior management with objective information to ensure there is appropriate program and project management oversight to increase the likelihood of mission success. The boards help to determine the adequacy of programs’ (1) management approach, (2) technical approach, (3) integrated cost and schedule estimates and funding strategy, and (4) risk management, among others. NASA’s Independent Program Assessment Office and various NASA centers organize these boards and coordinate their involvement at different reviews. The boards are involved at various agency-level reviews with some members participating in lower-level reviews at NASA’s different centers, in monthly reviews held by the projects and program, or in special reviews on a specific topic or set of issues. Standing Review Boards may also make non-binding recommendations after life-cycle reviews, but do not have programmatic or technical authority over the programs or projects. The Standing Review Board Handbook describes three types of boards that may be formed to provide independent oversight of programs or projects. See table 2 below for the three types of Standing Review Boards. NASA’s Standing Review Board Handbook states that a civil servant consensus with no expert support is the preferred structure within NASA because experience demonstrates that a consensus board leads to a more meaningful discussion of the review findings and recommendations, especially where dissenting opinions are discussed. A non-consensus mixed board provides only the perspective of the chairman. In 2015, 1 of 33 active Standing Review Boards was a civil service consensus board with no expert support, 15 were civil service consensus with consultant support, and 17 were non-consensus mixed boards. Although NASA guidance prefers civil servant consensus boards, NASA officials told us that they have found it challenging to staff boards exclusively with civil servants for a number of reasons including availability of staff, finding a person with the appropriate skill set, and independence reasons, among others. JWST has had a number of changes occur on the boards overseeing the project for different reasons. JWST has had a Standing Review Board since 2006 when a special review was conducted. During that review and from 2008 to 2014, the board was a non-consensus board led by an outside expert chosen by NASA senior officials. The experts were civil servants as well as non-civil-servant experts. In May 2014, the chairman retired, a new chair was appointed the same year, and NASA senior officials changed the board to a consensus board with consultants. Independent Program Assessment Office officials told us that board types can change for numerous reasons, including when a project or program enters a different phase of development that may require different technical skills or if all of the convening authorities request it. As a result of the retirement of the chairman, most of the 2008-2014 Standing Review Board members who were not civil servants but who had overseen JWST for more than 6 years were replaced and 2 civil servants were carried over to the new board. Consultant support was added for schedule analysis and in one technical area to support launch vehicle integration because NASA has never launched a mission on an Ariane 5 rocket as it plans to do for JWST. Before retiring in 2015, the previous Standing Review Board chairman expressed the importance of having representation from JPL as a member of the board to provide experience working on unmanned spacecraft projects—but a JPL member could not be added since JPL employees are not civil servants and can only be consultants to the board. With the appointment of a new chairman in October 2015, there have been additional membership changes to the board including the addition of a JPL consultant. NASA’s IV&V facility—which independently examines software development—reviews mission critical software for most NASA programs and projects to achieve the highest levels of safety and cost-effectiveness by ensuring that developed software will perform as required. Experts at the facility work to uncover high-risk errors early in the development life cycle of software for many NASA programs and projects. IV&V is a process whereby organizations can reduce the risks inherent in system development and acquisition efforts by having a knowledgeable party who is independent of the developer to determine whether the system or product meets the users’ needs and fulfills its intended purpose. IV&V applies software engineering best practices to risk elements on safety critical and mission-critical software throughout the development life cycle. We have found IV&V to be a leading practice for federal agencies in managing their complex, large-scale, or high-risk acquisition of programs. Software development is a challenge we have found on many different acquisitions—some space-related—in government programs that has led to schedule delays and cost growth. Examples include the F-35 Joint Strike Fighter, the Aegis Modernized Weapon System, NASA’s Stratospheric Observatory for Infrared Astronomy, and Geostationary Weather Satellite development, among others. The goal of IV&V is to examine the three following questions regarding software: Will the system do what it is supposed to do? Will the system not do what it is not supposed to do? Will the system perform as expected under adverse conditions? IV&V is required to examine software on all projects with a life cycle cost over $1 billion, other projects over $250 million with a higher risk classification, or those specifically selected by the NASA Chief, Safety and Mission Assurance. Once selected, a portfolio-based risk assessment is developed to identify top-level mission capabilities and a risk based assessment process identifies the most important system capabilities and the software components that play the most important role in the mission. IV&V officials noted that due to limited resources, they examine mission and safety critical software and they do not have the funding to examine all programs or projects across NASA’s portfolio. Generally, IV&V officials stated that they believe JWST’s software development is going well, but the testing that lies ahead—when the different components are integrated—will be a challenge. For example, IV&V officials noted that JWST’s software build is the largest they have reviewed for a science mission, but not the largest they have reviewed across NASA as some Human Exploration Operations are larger. They said that most of JWST’s software required to position and deploy the telescope will be examined by IV&V. However, they noted that JWST’s integration is more challenging, primarily due to the number of software developers involved. While most science programs or projects have two to four software developers, JWST has eight. JWST’s software development has been examined by IV&V since fiscal year 2004 and, according to officials, will likely continue to be examined until after launch when operations begin. IV&V officials said they do not examine the software for the launch vehicle. While IV&V’s function requires independence from programs and projects, there have been recent changes in funding that have reduced its financial independence to some extent. Organizationally, the IV&V Facility remains independent by reporting to the Office of the Director of Goddard and the Office of Safety and Mission Assurance at NASA Headquarters— not to the programs or projects it examines. However, financially, starting in 2015, an IV&V financial management official said that 75 percent of the IV&V’s funding came from NASA Headquarters via the Agency Management Operations fund and the remaining 25 percent was divided amongst the various mission directorates. This changed from the past 10 years, when 100 percent of the IV&V Facility’s budget came from the Agency Management Operations to ensure the independence of the IV&V office. We have previously found that financial independence requires that the funding for IV&V be controlled by an organization separate from the development organization. This ensures that the effort will not be curtailed by having its funding diverted to other program needs, and that financial pressures cannot be used to influence the effort. As a user of IV&V’s expertise, JWST, via the use of program cost reserves, contributed a small portion of funding to the software IV&V facility to help fund their budget in fiscal year 2015. While this financial situation was new in fiscal year 2015, we will continue to monitor how NASA deals with funding the IV&V facility in the future to protect its independence. The JWST project has made progress building, integrating, and testing significant portions of JWST in the past year within the commitments made at the time of the 2011 replan for both schedule and cost. With the third major integration and test period starting in 2016, resolving technical challenges in a timely manner, and ensuring the OTIS test goes smoothly are key to continued progress within the project’s schedule commitment. Additionally, reducing the size of Northrop Grumman’s workforce and controlling costs within the fiscal year 2016 budget will be key metrics to monitor to demonstrate the project can meet requirements within its cost commitment. In the past, the project has benefited from independent expertise, information, and recommendations to improve the management of the project. Moving forward, the project may benefit from having more reliable data provided from its contractors to ensure that its EACs, which take into account risks and threats, are better able to inform its cost status. While the contractors were able to explain the anomalies, most had not been previously identified or documented. NASA used the data for its analyses, which subsequently raised questions about the reliability of those analyses. Making management decisions using unreliable data can result in bad decision making and can misinform the project on its long-term financial position which may have significant consequences if not corrected. We recommended in our December 2014 report that NASA conduct a cost risk analysis and follow best practices, which include updating it as risks change during the life of the program. Because the project is not going to conduct another cost risk analysis, putting independent surveillance in place to improve the accuracy of its risk- adjusted analysis—despite its weaknesses relative to the information a cost risk analysis provides—will provide better information to inform its decision making. In November 2012, we recommended that NASA improve the reliability of project EVM data by requiring its major spaceflight projects to implement a formal surveillance program that ensured anomalies in contractor-delivered data and in-house monthly EVM reports were identified and explained. NASA partially concurred with this recommendation but has not taken steps to require surveillance on projects like JWST. However, we continue to believe that improving the surveillance on projects will help reduce data anomalies from occurring like the ones we identified on JWST, resulting in better information and analyses to inform project decision making. To resolve contractor data reliability issues and ensure that the project obtains reliable data to inform its analyses and overall cost position, we recommend that the NASA Administrator direct JWST project officials to require the contractors to identify, explain, and document all anomalies in contractor-delivered monthly earned value management reports. We provided a draft of this report to NASA for comment. In written comments, NASA agreed with our recommendation. These comments are reprinted in appendix IV. NASA also provided technical comments, which have been addressed in the report, as appropriate. We are sending copies of the report to NASA’s Administrator and interested congressional committees. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-4841 or chaplainc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Our objectives were to assess (1) the extent to which technical challenges have impacted the James Webb Space Telescope (JWST) project’s ability to meet its schedule commitments, (2) the current cost status of the JWST project and the primary challenges that may influence the project’s ability to meet its future cost commitments, and (3) the extent to which independent oversight provides insight about project risks to management. To assess the extent to which technical challenges have impacted the JWST project’s ability to meet its schedule commitments, we reviewed project and contractor schedule documentation, and held interviews with program, project, and contractor officials on the progress made and challenges faced building the different components of the telescope. We examined and analyzed monthly JWST project status reports to management to monitor schedule reserve levels and usage and potential risks and technical challenges that may impact the project’s schedule, and to gain insights on the project’s progress since our last report in December 2014. Further, we attended flight program reviews at the National Aeronautics and Space Administration (NASA) headquarters on a quarterly basis where the current status of the program was briefed to NASA headquarters officials outside of the project. We examined selected individual risks for elements and major subsystems from monthly risk registers prepared by the project to understand the likelihood of occurrence and impacts to the schedule based on steps the project is taking to mitigate the risks. We examined previous and current test schedules and plans to understand the sequence, what risks will be mitigated, which risks will continue, and any reductions to planned testing. Furthermore, we interviewed experts within and outside of NASA to identify criteria, best practices, and metrics that may be used to assess the project’s progress in reducing risk or provide insight into the health of the project. Finally, we interviewed project officials at Goddard, contractor officials from the Harris Corporation, the Jet Propulsion Laboratory, the Space Telescope Science Institute, and different divisions of Northrop Grumman Aerospace Systems concerning technological challenges that have had an impact on schedule, and the project’s and contractor’s plans to address these challenges. To assess the current cost status of the JWST project and the primary challenges that may influence the project’s ability to meet its future cost commitments, we reviewed and analyzed program, project, contractor, and subcontractor data and documentation and held interviews with officials from these organizations. We reviewed JWST project status reports on cost issues to determine the risks that could impact cost. We analyzed contractor and subcontractor’s workforce plans against workforce actuals to determine whether contractors’ are meeting their workforce plans. We monitored and analyzed the status of program, and project cost reserves in current and future fiscal years to determine the project’s financial posture. We evaluated the cost risk analysis conducted by NASA of the remaining Northrop Grumman work to determine the extent to which all applicable best practices from GAO’s Cost Estimating and Assessment Guide were used to build the analysis. Those best practices included the following: A probability distribution modeled each cost element’s uncertainty based on data availability, reliability, and variability. The correlation between cost elements was accounted for to capture risk. A Monte Carlo simulation model was used to develop a distribution of total possible costs and an S curve showing alternative cost estimate probabilities. The probability associated with the point estimate was identified. Contingency reserves were recommended for achieving the desired confidence level. The risk-adjusted cost estimate was allocated, phased, and converted to then year dollars for budgeting, and high-risk elements were identified to mitigate risks. A risk management plan was implemented jointly with the contractor to identify and analyze risk, plan for risk mitigation, and continually track risks. We examined and analyzed earned value management (EVM) data from two of the project’s contractors to identify trends in performance, whether tasks were completed as planned, and likely estimates at completion. We also conducted analysis to ensure the reliability of the data over a 17- month period. In addition, we examined and analyzed risk-adjusted analyses from NASA to determine what information they provide to the project, the risks incorporated, their reliability, and how the project is utilizing this information. We also discussed our assessment of the project’s data and analysis with program and project officials to obtain their input. To assess the extent to which independent oversight provides insight about project risks to management, we reviewed documentation and data from NASA relevant groups, the program, the project, and the Standing Review Board and held interviews with experts as well as officials from independent oversight entities. We analyzed NASA policy and guidance documents to understand the elements for setting up and managing a Standing Review Board. We also reviewed the Test Assessment Team and Independent Comprehensive Review Panel team reports to determine how independent oversight has provided insight to JWST in the past. We interviewed officials at NASA’s Independent Program Assessment Office, as well as past and current Standing Review Board members, to understand how Standing Review Boards are created, members are selected, and how structural and personnel changes are made over the life of NASA programs and projects, including JWST. We also interviewed and reviewed documentation and analysis provided by NASA’s Independent Verification and Validation group working on JWST’s software development to determine the extent to which this group is providing oversight of JWST software development, to determine the health of software development on JWST, and determine what kinds of problems remain. We did not independently review JWST’s software development. Our work was performed primarily at NASA headquarters in Washington, D.C.; Goddard Space Flight Center in Greenbelt, Maryland; the Independent Verification and Validation facility in Fairmont, West Virginia; and by video teleconference with officials from the Independent Program Assessment Office at Langley Research Center, Hampton, Virginia. We also visited the Jet Propulsion Laboratory in Pasadena, California; Northrop Grumman Aerospace Systems in Redondo Beach, California; and the Space Telescope Science Institute in Baltimore, Maryland. We conducted this performance audit from February 2015 to December 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix III: Organizational Chart for the James Webb Space Telescope (JWST) Program The Jet Propulsion Laboratory is the contractor for the development of the cryocooler, but has subcontracted most of the work to a different division of Northrop Grumman than the one that is responsible for OTE, spacecraft, and sunshield development. Cristina Chaplain, (202) 512-4841 or chaplainc@gao.gov. In addition to the contact named above, Shelby S. Oakley, Acting Director; Arthur Gallegos, Assistant Director; Jay Tallon; Assistant Director; Karen Richey, Assistant Director; Jason Lee, Assistant Director; Brian Bothwell; Patrick Breiding; Aaron Gluck; Laura Greifner; Michael Kaeser; Katherine Lenane; Silvia Porres; Carrie Rogers; Sylvia Schatz; and Ozzy Trevino made key contributions to this report.","JWST is one of NASA's most complex and expensive projects, at an anticipated cost of $8.8 billion. With significant integration and testing scheduled in the 3 remaining years until the planned launch date, the JWST project will need to continue to address many challenges and identify problems, many likely to be revealed during its rigorous testing to come. The continued success of JWST hinges on NASA's ability to anticipate, identify, and respond to these challenges in a timely and cost-effective manner to meet its commitments. Conference Report 112-284 included a provision for GAO to assess the project annually and report on its progress. This is the fourth such report. This report assesses (1) the extent to which JWST is meeting its schedule commitments and (2) the current cost status of the project, among other issues. To conduct this work, GAO reviewed monthly JWST reports, reviewed relevant policies, conducted independent analysis of NASA and contractor data, and interviewed NASA and contractor officials. The National Aeronautics and Space Administration's (NASA) James Webb Space Telescope (JWST) project is meeting its schedule commitments, but it will soon face some of its most challenging integration and testing. JWST currently has almost 9 months of schedule reserve—down more than 2 months since GAO's last report in December 2014—but still above its schedule plan and the Goddard Space Flight Center requirement. However, as GAO also found in December 2014, all JWST elements and major subsystems continue to remain within weeks of becoming the critical path—the schedule with the least amount of schedule reserve—for the overall project. Given their proximity to the critical path, the use of additional reserve on any element or major subsystem may reduce the overall project schedule reserve. Before the planned launch in October 2018, the project must complete five major integration and test events, three of which have not yet begun. Integration and testing is when problems are often identified and schedules tend to slip. At the same time, the project must also address over 100 technical risks and ensure that potential areas for mission failure are fully tested and understood. JWST continues to meet its cost commitments, but unreliable contractor performance data may pose a risk to project management. To help manage the project and account for new risks, project officials conducted a cost risk analysis of the prime contract. A cost risk analysis uses information about cost drivers, technical issues, and schedule to determine the reliability of a program's cost estimates. GAO found that while NASA's cost risk analysis substantially met best practices for cost estimating, officials do not plan to periodically update it. Instead, the project is using a risk-adjusted analysis to update and inform its cost position, but this analysis is a simplified version of a cost risk analysis—and not a replacement—and is based on contractor-provided performance data that contains anomalies that render the data unreliable. Further, the project does not have an independent surveillance mechanism, such as the Defense Contract Management Agency, to help ensure data anomalies are corrected by the contractor before being incorporated into larger cost analyses, as GAO recommended in 2012. As a result, the project is relying partially on unreliable information to inform its decision making and overall cost status. GAO recommends that the JWST project require contractors to identify, explain, and document anomalies in contractor-delivered monthly earned value management reports. GAO continues to believe that its 2012 recommendation to implement formal surveillance to help improve the reliability of contractor-provided data has merit and should be implemented. NASA concurred with the recommendation made in this report.",govreport
"Experts agree that chemical facilities are among the most attractive targets for terrorists intent on causing massive damage. Despite the risk these facilities pose, no one has yet comprehensively assessed security at the nation’s chemical facilities. EPA regulates about 15,000 facilities under the 1990 amendments to the Clean Air Act because they produce, use, or store more than certain threshold amounts of specific chemicals that would pose the greatest risk to human health and the environment if they were accidentally released into the air. These facilities must take a number of steps, including preparing a risk management plan (RMP), to prevent and prepare for an accidental release and, therefore, are referred to as RMP facilities. These facilities fall within a variety of industries and produce, use, or store a variety of products, including basic chemicals; specialty chemicals, such as solvents; life science chemicals, such as pharmaceuticals and pesticides; and consumer products, such as cosmetics. Some of these facilities are part of critical infrastructure sectors other than the chemical sector. For example, about 2,000 of these facilities are community water systems that are part of the water infrastructure sector. In addition, other facilities that house hazardous chemicals that are listed under the RMP regulations are not subject to RMP requirements because the quantities stored or used are below threshold amounts. Through the RMP program, EPA has gained extensive expertise with chemical facilities and processes that could be useful in helping DHS assess security issues. Federal requirements currently address security at some U.S. chemical facilities. For example, a small number of chemical facilities must comply with the Maritime Transportation Security Act of 2002 and its implementing regulations, which require maritime facility owners and operators to conduct assessments, develop security plans, and implement security measures. In addition, certain community water systems—while not specifically considered chemical facilities but which use and store large volumes of chemicals—are required by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 to conduct and submit a vulnerability assessment to EPA and prepare an emergency response plan that incorporates the results of the assessment. According to EPA, 1,928 drinking water facilities that are also subject to EPA’s RMP program must comply with this act. Some states and localities have also created security requirements at chemical facilities. In addition, the federal government imposes safety and emergency response requirements on chemical facilities that may incidentally reduce the likelihood and consequences of terrorist attacks. For example, Section 112(r) of the Clean Air Act includes a general duty clause directing owners and operators of facilities to identify hazards, design and maintain a safe facility to prevent releases, and minimize the consequences of any accidental releases that occur. Under Section 112(r), RMP facilities must also implement a program to prevent accidental releases that includes safety precautions and maintenance, and monitoring and training measures, and they must have an emergency response plan. The Department of Labor’s Occupational Safety and Health Administration’s process safety management standard also requires facilities to conduct analyses of their chemical processes which must address hazards of the process, engineering and administrative controls applicable to the hazards, facilities siting, and evaluation of the possible health and safety effects of failures of controls on employees. DHS is developing a plan for protecting the chemical sector that will establish a framework for reducing the overall vulnerability of the sector in partnership with the industry and state and local authorities. At the time of our review, DHS did not provide a specific date for completion of the Chemical Sector-Specific Plan. DHS completed a draft of the plan in July 2004 and has been working to revise it to accommodate changes to DHS’s risk management strategy and comments from stakeholders. DHS officials told us that the final plan—which they now expect to complete and release in the fall of 2006—will reflect the basic principles and content described in the draft plan. On the basis of our review of the draft plan and discussions with DHS officials, the final plan will, among other things, (1) present background information on the sector; (2) describe the process DHS will use to develop an inventory of chemical sector assets; (3) describe DHS’s efforts to identify and assess chemical facilities’ vulnerabilities and plans to prioritize these efforts on the basis of the vulnerability assessments; (4) outline the protective programs that will be created to prevent, deter, mitigate, and recover from attacks on chemical facilities, and describe how DHS will work with private sector and government entities to implement these programs; (5) explain the performance metrics DHS will use to measure the effectiveness of DHS and industry security efforts; and (6) outline the department’s challenges in coordinating the efforts of the chemical sector. DHS has also initiated actions to identify the chemical sector’s critical assets, prioritize facilities, develop and implement protective programs, exchange information with the private sector, and coordinate efforts with EPA and other federal agencies. DHS is focusing its efforts for the chemical sector by identifying high-priority facilities. As a starting point, DHS has adapted EPA’s RMP database of facilities with more than threshold amounts of certain chemicals to develop an interim inventory of 3,400 chemical facilities that pose the greatest hazard to human life and health in the event of a terrorist attack. These are facilities where a worst- case scenario release potentially could affect over 1,000 people. According to DHS, 272 of these facilities could potentially affect more than 50,000 people. DHS is also developing a new risk assessment methodology to compare and prioritize all critical infrastructure assets according to their level of threat, their vulnerability to attack, and the consequences of an attack on the facility. According to DHS, Risk Analysis Management for Critical Asset Protection (RAMCAP) will provide a common methodology, terminology, and framework for homeland security risk analysis and decision making that is intended to allow consistent risk management across all sectors. The RAMCAP process entails chemical facility owners/operators voluntarily completing a screening tool to identify the consequences of an attack. On the basis of the results of the screening tool, DHS will identify facilities of highest concern and ask them to voluntarily complete a security vulnerability assessment. Finally, DHS has implemented a number of programs to assist the private sector and local communities in reducing vulnerabilities. For example, DHS works with local law enforcement officials and facility owners through the Buffer Zone Protection Program to improve the security of the area surrounding a facility. To assess and identify vulnerabilities at chemical facilities, DHS deploys teams of experts from both government and industry to conduct a site assistance visit. DHS had conducted 38 site assistance visits at chemical facilities as of June 15, 2005, and planned to conduct additional visits in fiscal year 2006 on the basis of need. DHS has also installed cameras at some high-consequence facilities, providing local law enforcement authorities with the ability to conduct remote surveillance and allowing state homeland security offices and DHS to monitor the facilities. In addition, DHS distributes threat information to the industry through various means and coordinates sector activities with the Chemical Sector Coordinating Council, an industry-led working group formed voluntarily by trade associations that acts as a liaison for the chemical sector. DHS also coordinates with EPA and other federal agencies through a government coordinating council. EPA officials believe that the agency could further assist DHS by providing analytical support in identifying high-risk facilities that should be targeted in DHS’ chemical sector efforts, among other activities. With few federal security requirements, industry associations have been active in promoting security among member companies. Some industry associations, including the American Chemistry Council (ACC), the Synthetic Organic Chemical Manufacturers Association, and the National Association of Chemical Distributors, require member companies to assess their facilities’ vulnerabilities and make security enhancements, requiring as a condition of membership that they conduct security activities and verify that these actions have been taken. ACC, representing 135 chemical manufacturing companies with approximately 2,000 facilities, has led the industry’s efforts to improve security at their facilities. ACC requires its members to adhere to a set of security management principles that include performing physical security vulnerability assessments using an approved methodology, developing plans to mitigate vulnerabilities, taking actions to implement the plans, and having an independent party such as insurance representatives or local law enforcement officials verify that the facilities implemented the identified physical security enhancements. These reviewers do not verify that a vulnerability assessment was conducted appropriately or that actions taken by a facility adequately address security risks. However, ACC requires member companies to periodically conduct independent third-party audits that include an assessment of their security programs and processes and their implementation of corrective actions. In addition, ACC members must take steps to secure cyber assets, such as computer systems that control chemical facility operations, and the distribution chain from suppliers to customers, including transportation. Other industry associations have encouraged their members to address security by a variety of means. Most of the 16 associations we spoke to have developed security guidelines and best practices. For example, the International Institute of Ammonia Refrigeration, representing facilities such as food storage warehouses, developed site security guidelines tailored to ammonia refrigeration facilities and provides information about security resources to members. Several industry associations have also developed vulnerability assessment methodologies to assist their member companies in evaluating security needs. For example, the National Petrochemical and Refiners Association, in partnership with the American Petroleum Institute, developed a vulnerability assessment methodology tailored to refiners and petrochemical facilities. Despite industry associations’ efforts to encourage or require members to voluntarily address security, the extent of participation in the industry’s voluntary initiatives is unclear. Chemical industry officials told us they face a number of challenges in preparing facilities against a terrorist attack. Most of the chemical associations we contacted stated that the cost of security improvements is a challenge for some chemical companies. For example, ACC reports that its members have spent an estimated $2 billion on security improvements since September 11, 2001. Representatives of the American Forest & Paper Association and the National Paint and Coatings Association told us that small companies, in particular, may struggle with the cost of security improvements or the cost of complying with any potential government security programs because they may lack the resources larger companies have to devote to security. Industry stakeholders also cited the need for guidance on what level of security is adequate. While DHS has issued guidance to state Homeland Security Offices and the Chemical Sector Coordinating Council on vulnerabilities and protective measures that are common to most chemical facilities, several stakeholders expressed a desire for guidance on specific security improvements. For example, representatives of the National Petrochemical and Refiners Association stated that one reason the association holds workshops and best practices sessions is to meet the challenge of determining the types of security measures that constitute a reasonable amount of security. In addition, industry officials told us that the lack of threat information makes it difficult for companies to know how to protect facilities. A few industry officials also mentioned limited guidance on conducting vulnerability assessments and difficulty in conducting employee background checks as challenges. One industry association stated that it would like its members to receive guidance from DHS on how to conduct vulnerability assessments. Another association expressed frustration because none of the current vulnerability assessment tools address issues specific to their member facilities, which package and distribute chemicals, and it would like DHS to help develop or approve a methodology for this type of facility. Finally, a number of stakeholders we contacted told us that emergency response preparedness is a challenge for chemical companies. An official with an industry-affiliated research center asserted that emergency responders and communities in the United States are prepared to respond to a toxic release. However, other stakeholders we spoke with stated that many facilities have conducted security vulnerability assessments but may not have done enough emergency response planning and outreach to the responders and communities that would be involved in a release. A 2004 survey by a chemical workers union of workers at 189 RMP facilities found that only 38 percent of respondents indicated that their companies’ actions in preparing to respond to a terrorist attack were effective, and 28 percent reported that no employees at their facilities had received training about responding to a terrorist attack since September 11, 2001. While environmental laws require emergency response planning for accidental chemical releases, several stakeholders told us facilities need to consider very different scenarios with consequences on different orders of magnitude when planning the emergency response for a terrorist incident. Existing laws give DHS limited authority to address chemical sector security, but DHS currently lacks specific authority to require all high-risk facilities to assess their vulnerabilities and take corrective actions, where needed. A number of existing laws outline DHS’s responsibilities for coordinating with the private sector and obtaining information on and protecting critical infrastructure, but these laws provide DHS with only limited authority to address security concerns at U.S. chemical facilities. For example, under the Homeland Security Act, the Secretary of DHS is responsible for coordinating homeland security issues with the private sector to ensure adequate planning, equipment, training, and exercise activities. Furthermore, the Act gives DHS’s Under Secretary for Information Analysis and Infrastructure Protection (IAIP) responsibilities related to protecting critical infrastructure, including accessing, receiving, analyzing, and integrating information from federal, state, and local governments and private sector entities to identify, detect, and assess the nature and scope of terrorist threats to the United States; carrying out comprehensive assessments of the vulnerabilities of the nation’s key resources and critical infrastructure; developing a comprehensive national plan for securing the nation’s key resources and critical infrastructure; and recommending the necessary measures to protect these key resources and critical infrastructure. DHS does not currently have the authority to require all chemical facilities to conduct vulnerability assessments or to enter chemical facilities without their permission to assess security or to require and enforce security improvements. There is also no legislation requiring chemical facilities to provide information about their security and vulnerabilities. Furthermore, except with respect to certain chemical facilities covered under federal security requirements for other critical infrastructures, existing laws do not give DHS the right to enter a chemical facility to assess its vulnerability to a terrorist attack or the authority to require and enforce the implementation of any needed security improvements at these facilities. The Homeland Security Act, with some limited exceptions, does not provide any new regulatory authority to DHS and only transferred the existing regulatory authority of any agency, program, or function transferred to DHS, thereby limiting actions DHS might otherwise be able to take under the Homeland Security Act. Therefore, DHS has relied solely on the voluntary participation of the private sector to address facility security. As a result, DHS cannot ensure that all high-risk facilities are assessing their vulnerability to terrorist attacks and taking corrective action, where necessary. DHS has concluded that its existing patchwork of authorities does not permit it to regulate the chemical industry effectively, and that the Congress should enact federal requirements for chemical facilities. Echoing public statements by the Secretary of Homeland Security and the Administrator of EPA in 2002 that voluntary efforts alone are not sufficient to assure the public of the industry’s preparedness, in June 2005, both DHS and EPA called for legislation to give the federal government greater authority over chemical facility security. Similarly, we concluded in 2003, and continue to believe, that additional federal legislation is needed because of the significant risks posed by thousands of chemical facilities across the country to millions of Americans and because the extent of security preparedness at these facilities is unknown. In testimony before the Congress in June 2005, the Acting Undersecretary for IAIP stated that any proposed regulatory structure (1) must recognize that not all facilities within the chemical sector present the same level of risk, and that the most scrutiny should be focused on those facilities that, if attacked, could endanger the greatest number of lives, have the greatest impact on the economy, or present other significant risks; (2) should be based on reasonable, clear, equitable, and measurable performance standards; and (3) should recognize the progress that responsible companies have made to date. He also stated that the performance standards should be enforceable and based on the types and severity of potential risks posed by terrorists, and that facilities should have the flexibility to select among appropriate site-specific security measures that will effectively address those risks. In addition, he said that DHS would need the ability to audit vulnerability assessment activities and a mechanism to ensure compliance with requirements. While many stakeholders—including representatives from industry, research centers, and government—agreed on the need for additional legislation that would place federal security requirements on chemical facilities, they expressed divergent views on whether such legislation should require the use of inherently safer technologies. Implementing inherently safer technologies could potentially lessen the consequences of an attack by reducing the chemical risks present at facilities. The Department of Justice, in introducing a methodology to assess chemical facilities’ vulnerabilities, recognized that reducing the quantity of hazardous material may make facilities less attractive to terrorist attack and reduce the severity of an attack. Furthermore, DHS’s July 2004 draft Chemical Sector-Specific Plan states that inherently safer chemistry and engineering practices can prevent or delay a terrorist incident, noting that it is important to make sure that facility owners/operators consider alternate ways to reduce risk, such as using inherently safer design, implementing just-in-time manufacturing, or replacing high-risk chemicals with safer alternatives. However, DHS told us that the use of inherently safer technologies tends to shift risks rather than eliminate risks, often with unintended consequences. Some previous chemical security legislative proposals have included a requirement that facility security plans include safer design and maintenance actions, or that facility security plans include “consideration” of alternative approaches regarding safer design. Representatives from three environmental groups told us that facilities have defined security too narrowly, without focusing on reducing facility risks through safer technologies. Noting that no existing laws require facilities to analyze inherently safer options, these representatives believe legislation should require such an analysis and give DHS or EPA the authority to require the implementation of technologies if high-risk facilities are not doing so. Process safety experts at one research organization recognized that reducing facility hazards and the potential consequences of chemical releases makes facilities less vulnerable to attack. However, these experts also explained that inherently safer technologies can be prohibitively expensive and can shift risks onto other facilities or the transportation sector. For example, reducing the amount of chemicals stored at a facility may increase reliance on rail or truck shipments of chemicals. However, the substitution of chemicals such as liquid bleach for chlorine gas at drinking water facilities reduces overall risks. These experts support legislative provisions requiring analysis or consideration of technology options but do not support giving the federal government the authority to require specific technology changes because of the complexity of these decisions. Representatives of two research centers affiliated with the industry told us that while facilities should look at inherently safer technologies when assessing their vulnerability to terrorist attack, safer technologies are not a substitute for security. Industry associations and company officials were strongly opposed to any requirements to use inherently safer technologies. The majority of the industry officials we contacted opposed an inherently safer technologies requirement, with many stating that inherently safer technologies involve a safety issue that is unrelated to facility security. Industry officials voiced concerns about the federal government’s second-guessing complex safety decisions made by facility process safety engineers. Representatives from four associations and two companies told us that, in many cases, it is not feasible to substitute safer chemicals or change to safer processes. Certain hazardous chemicals may be essential to necessary chemical processes, while changing chemical processes may require new chemicals that carry different risks. In July 2005 testimony before the Congress, a Synthetic Organic Chemical Manufacturers Association representative explained that while inherently safer technologies are intended to reduce the overall risks at a facility, they could do so only if a chemical hazard was not displaced to another time or location or did not magnify another hazard. Furthermore, process safety experts and representatives from associations and companies report that some safer alternatives are extremely expensive. For example, reducing facility chemical inventories by moving to on-site manufacturing when chemicals are needed can cost millions of dollars, according to a stakeholder. One company also voiced opposition even to a legislative requirement that facilities “consider” safer options. The official explained that the company opposed such a provision—even if legislation does not explicitly give the government the authority to require implementation of safer technologies—because it might leave companies liable for an accident that might have been prevented by a technology option that was considered but not implemented. Despite voluntary efforts by industry associations and a number of DHS programs to assist companies in protecting their chemical facilities, the extent of security preparedness at U.S. chemical facilities remains largely unknown. DHS does not currently have the authority to require the chemical industry to take actions to improve their security. On this basis, DHS has concluded—as we did in 2003 and again in January 2006—that its existing authorities do not allow it to effectively regulate chemical sector security. Since 2002, both DHS and EPA have called for legislation creating security requirements at chemical facilities, and legislation has been introduced without success in every Congress since September 11, 2001. By granting DHS the authority to require high-risk chemical facilities to take security actions, policy makers can better ensure the preparedness of the chemical sector. Furthermore, implementing inherently safer technologies potentially could lessen the consequences of a terrorist attack by reducing the chemical risks present at facilities, thereby making facilities less attractive targets. However, substituting safer technologies can be prohibitively expensive and can shift risks onto other facilities or the transportation sector. Also, in many cases, it may not be feasible to substitute safer chemicals or change to safer processes. Therefore, given the possible security and safety benefits as well as the potential costs to some companies of substituting safer technologies, a collaborative study employing DHS’s security expertise and EPA’s chemical expertise could help policy makers determine the appropriate role of safer technologies in facility security efforts. For further information about this statement, please contact John B. Stephenson at (202) 512-3841. Karen Keegan, Omari Norman, Joanna Owusu, Vincent P. Price, and Leigh White made key contributions to this statement. Since 2001, the Congress has considered a number of legislative proposals that would give the federal government a greater role in ensuring the protection of the nation’s chemical facilities. These legislative proposals would have granted DHS or EPA, or one of these agencies in consultation with the other, the authority to require chemical facilities to conduct vulnerability assessments and implement security measures to address their vulnerabilities. In the 109th Congress, five bills have been introduced but have not yet been acted upon: H.R. 1562, H.R. 2237, S. 2145, H.R. 4999, and S. 2486. High-priority facilities would be required to submit vulnerability assessments and security plans to DHS; other chemical sources would be required to self-certify completion of assessments and plans and provide DHS copies upon request. High-priority facilities would be required to submit vulnerability assessments and to certify that they have prepared prevention, preparedness, and response plans to EPA. Designated chemical sources would be required to submit vulnerability assessments, security plans, and emergency response plans to DHS. The assessment and security plan would be required to address security performance standards established by DHS for each risk-based tier. Chemical sources would be required to self-certify completion of assessments and plans. DHS, in consultation with EPA, would identify high-priority categories of facilities; DHS would receive and review assessments and plans. EPA, in consultation with DHS and state and local agencies, would identify high-priority categories of facilities; EPA would receive assessments and certifications. DHS would designate facilities as chemical sources and assign each chemical source to a risk-based tier. DHS would receive and review assessments, plans and certifications. EPA would have no role. DHS would, when and where it deems appropriate, conduct or require the conduct of vulnerability assessments and other activities to ensure and evaluate compliance; DHS could disapprove a vulnerability assessment or site security plan; following written notification and consultation with the owner or operator, DHS could issue a compliance order. Not later than 3 years after the deadline for submission of vulnerability assessments and response plans, EPA, in consultation with DHS, would review and certify compliance of each assessment and plan; following consultation with DHS, and 30 days after providing notification to the facility and providing advice and technical assistance to bring the assessment or plan into compliance and address threats, EPA could issue a compliance order. DHS would review and approve or disapprove all vulnerability assessments, security plans, and emergency response plans for facilities in higher risk tiers within one year, and within five years for all other facilities. DHS would be required to disapprove of any vulnerability assessment, site security plan, or emergency response plan not in compliance with the vulnerability assessment, site security plan, and emergency response plan requirements. For higher risk facilities, if DHS disapproves the assessment or plans, the Secretary could issue an order to a chemical source to cease operation. For other facilities, the Secretary could issue an order to a chemical source to cease operation, but only after a process of written notification, consultation and time for compliance. Would provide for court awarded civil penalties up to $50,000 per day for failure to comply with an order, site security plan, or other recognized procedures, protocols, or standards, and administrative penalties up to $250,000 for failure to comply with an order. Would provide for court awarded civil penalties up to $25,000 per day, criminal penalties, and administrative penalties (if the total civil penalties do not exceed $125,000) for failure to comply with an order. Would provide for court awarded civil penalties up to $50,000 per day, and administrative penalties of not more than $25,000 per day (not to exceed $1 million per year) for failure to comply with a DHS order or directive issued under the act. Also calls for criminal penalties of up to $50,000 in fines per day, imprisonment for not more than two years, or both for knowingly violating an order or failing to comply with a site security plan. Response plans would be required to include a description of safer design and maintenance options considered and reasons those options were not implemented; EPA would be required to establish a clearinghouse for information on inherently safer technologies and would be authorized to provide grants to assist chemical facilities demonstrating financial hardship in implementing inherently safer technologies. None. Would exempt information obtained from disclosure under the Freedom of Information Act (FOIA) or otherwise, or from disclosure under state or local laws; information would also not be subject to discovery or admitted into evidence in any federal or state civil judicial or administrative procedure other than in civil compliance action brought by DHS. Calls for DHS, in consultation with others, to establish confidentiality protocols. Would exempt information obtained from disclosure under FOIA; calls for EPA, in consultation with DHS, to establish information protection protocols. Would exempt information obtained from disclosure under FOIA, or from disclosure under state or local laws. Certifications submitted by the chemical sources, orders for failure to comply, and certificates of compliance and other orders would generally be made available to the public. Calls for DHS, in consultation with the Director of the Office of Management and Budget and appropriate federal law enforcement officials, to create confidentiality protocols for the maintenance and use of records; would establish penalties for the unlawful disclosure of protected information. Upon petition, DHS would be required to endorse other industry, state, or federal protocols or standards that the Secretary of DHS determines to be substantially equivalent. None. Would allow the Secretary to determine that vulnerability assessments, security plans, and emergency response plans prepared under alternative security programs meet the act’s requirements and to permit submissions or modifications to the assessments or plans. Would grant DHS right of entry; would exempt facilities that are subject to MTSA (port facilities) or the Bioterrorism Act (community water systems). Except with respect to protection of information, would not affect requirements imposed under state law. Would grant EPA right of entry; would authorize EPA to provide grants for training of first responders and employees at chemical facilities; would not affect requirements imposed under state law. Would grant DHS right of entry; would exempt facilities that are subject to MTSA from certain area security requirements but these facilities would otherwise comply with the act’s requirements. Would preserve the right of States to adopt chemical security requirements that are more stringent than the Federal standard, as long as the State standard does not conflict with the Federal standard. S. 2486, introduced on March 30, 2006, would impose a general duty on chemical facility owners and operators, in the same manner as the duty under the Clean Air Act’s Section 112(r), to identify hazards that may result from a criminal release, ensure the design, operation, and maintenance of safe facilities by taking such actions as are necessary to prevent criminal releases, and eliminate or significantly reduce the consequences of any criminal release that does occur. S. 2486 also directs DHS to work with EPA, as well as state and local agencies, to identify not fewer than 3,000 high priority chemical facilities. These facilities would be required to take adequate actions (including the design, operation, and maintenance of safe facilities), to detect, prevent, or eliminate or significantly reduce the consequences of criminal releases and to submit a report to DHS that includes a vulnerability assessment; a hazards assessment; a prevention, preparedness, and response plan; statements as to how the response plan meets regulatory requirements and general duty requirements; and a discussion of the consideration of the elements of design, operation, and maintenance of safe facilities. “Design, operation, and maintenance of safe facilities” is defined as practices of preventing or reducing the possibility of a release through use of inherently safer technologies, among other things. DHS would certify compliance and DHS and EPA would establish a program to conduct inspections of facilities. The bill also provides for civil penalties, administrative penalties, and criminal penalties (including imprisonment for up to 2 years for first violations and up to 4 years for subsequent violations), for owners or operators of high priority facilities who fail to comply with an order. Also in the 109th Congress, the conference committee for H.R. 2360, making appropriations for DHS for fiscal year 2006, directed DHS to submit a report to the Senate and House Committees on Appropriations by February 10, 2006, describing (1) the resources needed to implement mandatory security requirements for the chemical sector and to create a system for auditing and ensuring compliance with the security standards and (2) the security requirements and any reasons why the requirements should differ from those already in place for chemical facilities that operate in a port zone; complete vulnerability assessments of the highest risk U.S. chemical facilities by December 2006, giving preference to facilities that, if attacked, pose the greatest threat to human life and the economy; and complete a national security strategy for the chemical sector by February 10, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","Terrorist attacks on U.S. chemical facilities could damage public health and the economy. The Department of Homeland Security (DHS) coordinates federal efforts to protect these facilities from attacks. GAO was asked to provide a statement for the record based on its report Homeland Security: DHS Is Taking Steps to Enhance Security at Chemical Facilities, but Additional Authority Is Needed ( GAO-06-150 , January 27, 2006), GAO reviewed (1) DHS's actions to develop a strategy to protect chemical plants, assist with the industry's security efforts, and coordinate with other federal agencies, (2) industry security initiatives, (3) DHS's authorities and the need for additional security legislation, and (4) stakeholders' views on any requirements to use safer technologies. DHS is developing a Chemical Sector-Specific Plan, which is intended to, among other things, describe DHS's ongoing efforts and future plans to coordinate with federal, state, and local agencies and the private sector; identify chemical facilities to include in the sector, assess their vulnerabilities, and prioritize them; and develop programs to prevent, deter, mitigate, and recover from attacks on chemical facilities. DHS officials told GAO that they now expect to complete and release the plan in the fall of 2006. In addition, DHS has taken a number of actions to protect the chemical sector from terrorist attacks. DHS identified 3,400 facilities that, if attacked, could pose the greatest hazard to human life and health and has initiated programs to assist the industry and local communities in protecting chemical plants. DHS also coordinates with the Chemical Sector Coordinating Council, an industry-led group that acts as a liaison for the chemical sector, and with EPA and other federal agencies. The chemical industry is voluntarily addressing plant security, but faces challenges. Some industry associations require member companies to assess plants' vulnerabilities, develop and implement mitigation plans, and have a third party verify that security measures were implemented. Other associations have developed guidelines and other tools to encourage their members to address security. Industry officials said that high costs and limited guidance on how much security is adequate create challenges in preparing facilities against terrorism. Because existing laws provide DHS with only limited authority to address security at chemical facilities, it has relied primarily on the industry's voluntary security efforts. However, the extent to which companies are addressing security is unclear. DHS does not have the authority to require chemical facilities to assess their vulnerabilities and implement security measures. Therefore, DHS cannot ensure that facilities are taking these actions. DHS has stated that its existing authorities do not permit it to effectively regulate the chemical industry, and that the Congress should enact federal requirements for chemical facilities. Many stakeholders agreed--as GAO concluded in 2003 and again in January 2006--that additional legislation placing federal security requirements on chemical facilities is needed. Stakeholders had mixed views on whether any chemical security legislation should require plants to substitute safer chemicals and processes, which could lessen the potential consequences of an attack, but could be costly or infeasible for some plants. DHS has stated that safer practices may make facilities less attractive to terrorist attack, but may shift risks rather than eliminate them. Environmental groups told GAO that they favored including or considering inherently safer technologies in any federal requirements, but most industry officials GAO contacted opposed a requirement to use safer technologies because they may shift risks or be prohibitively expensive.",govreport
"The major requirements for the protection of personal privacy by federal agencies are specified in two laws, the Privacy Act of 1974 and the E-Government Act of 2002. The Federal Information Security Management Act of 2002 (FISMA) also addresses the protection of personal information in the context of securing federal agency information and information systems. The Privacy Act places limitations on agencies’ collection, disclosure, and use of personal information maintained in systems of records. The act describes a “record” as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines “system of records” as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires that when agencies establish or make changes to a system of records, they must notify the public by a “system-of-records notice”: that is, a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended “routine” uses of data, and procedures that individuals can use to review and correct personal information. Among other provisions, the act also requires agencies to define and limit themselves to specific predefined purposes. For example, the act requires that to the greatest extent practicable, personal information should be collected directly from the subject individual when it may affect an individual’s rights or benefits under a federal program. The provisions of the Privacy Act are largely based on a set of principles for protecting the privacy and security of personal information, known as the Fair Information Practices, which were first proposed in 1973 by a U.S. government advisory committee; these principles were intended to address what the committee termed a poor level of protection afforded to privacy under contemporary law. Since that time, the Fair Information Practices have been widely adopted as a standard benchmark for evaluating the adequacy of privacy protections. Attachment 2 contains a summary of the widely used version of the Fair Information Practices adopted by the Organization for Economic Cooperation and Development in 1980. The E-Government Act of 2002 strives to enhance protection for personal information in government information systems and information collections by requiring that agencies conduct privacy impact assessments (PIA). A PIA is an analysis of how personal information is collected, stored, shared, and managed in a federal system. More specifically, according to Office of Management and Budget (OMB) guidance, a PIA is to (1) ensure that handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (2) determine the risks and effects of collecting, maintaining, and disseminating information in identifiable form in an electronic information system; and (3) examine and evaluate protections and alternative processes for handling information to mitigate potential privacy risks. Agencies must conduct PIAs (1) before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form, or (2) before initiating any new data collections involving personal information that will be collected, maintained, or disseminated using information technology if the same questions are asked of 10 or more people. To the extent that PIAs are made publicly available, they provide explanations to the public about such things as the information that will be collected, why it is being collected, how it is to be used, and how the system and data will be maintained and protected. FISMA also addresses the protection of personal information. It defines federal requirements for securing information and information systems that support federal agency operations and assets; it requires agencies to develop agencywide information security programs that extend to contractors and other providers of federal data and systems. Under FISMA, information security means protecting information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction, including controls necessary to preserve authorized restrictions on access and disclosure to protect personal privacy. To oversee its implementation of privacy protections, DHS has established a Chief Privacy Officer, as directed by the Homeland Security Act of 2002. According to the act, the Chief Privacy Officer is responsible for, among other things, “assuring that the use of technologies sustain, and do not erode privacy protections relating to the use, collection, and disclosure of personal information,” and “assuring that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as set out in the Privacy Act of 1974.” As it develops and participates in important homeland security activities, DHS faces challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. Our reviews of DHS programs have identified cases where these challenges were not fully met, including data mining, airline passenger prescreening, use of data from commercial sources, use of personal identification technologies (especially RFID), and development of an information sharing environment. I will now discuss each of these subjects in greater detail. Many concerns have been raised about the potential for data mining programs to compromise personal privacy. In our May 2004 report on federal data mining efforts, we defined data mining as the application of database technology and techniques—such as statistical analysis and modeling—to uncover hidden patterns and subtle relationships in data and to infer rules that allow for the prediction of future results. As we noted in our report, mining government and private databases containing personal information raises a range of privacy concerns. In the government, data mining was initially used to detect financial fraud and abuse. However, its use has greatly expanded. Among other purposes, data mining has been used increasingly as a tool to help detect terrorist threats through the collection and analysis of public and private sector data. Through data mining, agencies can quickly and efficiently obtain information on individuals or groups from large databases containing personal information aggregated from public and private records. Information can be developed about a specific individual or a group of individuals whose behavior or characteristics fit a specific pattern. For example, terrorists can be tracked through travel and immigration records, and potential terrorist-related activities, including money transfers and communications, can be pinpointed. The ease with which organizations can use automated systems to gather and analyze large amounts of previously isolated information raises concerns about the impact on personal privacy. As a July 2006 report by the DHS Privacy Office points out, “privacy and civil liberties issues potentially arise in every phase of the data mining process.” Potential privacy risks include improper access or disclosure of personal information, erroneous associations of individuals with undesirable activities, misidentification of individuals with similar names, and misuse of data that were collected for other purposes. Our recent report notes that early attention to privacy in developing a data mining tool known as ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement) could reduce risks that personal information could be misused. ADVISE is a data mining tool under development intended to help DHS analyze large amounts of information. It is designed to allow an analyst to search for patterns in data—such as relationships among people, organizations, and events—and to produce visual representations of these patterns, referred to as semantic graphs. The intended benefit of the ADVISE tool is to help detect threatening activities by facilitating the analysis of large amounts of data. Although the tool is being considered for several different applications within DHS, none of them are yet operational. DHS is currently in the process of testing the tool’s effectiveness. DHS did not conduct a PIA as it developed the ADVISE tool, as required by the E-Government Act of 2002. A PIA, if it had been completed, would identify specific privacy risks and help officials determine what controls were needed to mitigate those risks. DHS officials believed that ADVISE did not need to undergo such an assessment because the tool itself did not contain personal data. However, the intended uses of the tool included personal data, and the E-Government Act and related guidance emphasize the need to assess privacy risks early in system development. Further, if an assessment were conducted and privacy risks identified, a number of controls could be built into the tool to mitigate those risks. Because privacy had not been assessed and mitigating controls had not been implemented, the department faced the risk that systems based on ADVISE that also contained personal information could require costly and potentially duplicative retrofitting to add the needed controls. We made recommendations to DHS to conduct a PIA of the ADVISE tool and implement privacy controls, as needed, to mitigate any identified risks. In its comments, DHS stated that it is currently developing a “Privacy Technology Implementation Guide” to be used to conduct a PIA. Broadly considered, data mining is a tool that has the potential to provide valuable assistance to analysts and investigators as they pursue the war on terror. However, it has been challenging for DHS to thoroughly consider and address privacy concerns early enough in its attempts to develop data mining tools and applications. As the department moves forward with ADVISE and other data mining activities, close attention to privacy will remain a critical concern. An example of the importance of ongoing attention to privacy can be taken from TSA’s development of passenger prescreening programs. TSA is responsible for securing all modes of transportation while facilitating commerce and the freedom of movement for the traveling public. Passenger prescreening is one program among many that TSA uses to secure the domestic aviation sector. The process of prescreening passengers—that is, determining whether airline passengers might pose a security risk before they reach the passenger-screening checkpoint—is used to focus security efforts on those passengers that represent the greatest potential threat. In accordance with a requirement set forth in the Aviation and Transportation Security Act, TSA has been working since 2003 to develop a computer-assisted passenger prescreening system to be used to evaluate passengers before they board an aircraft on domestic flights. An early version of that system, known as the Computer-Assisted Passenger Prescreening System II, was canceled in 2004 based in part on concerns about privacy and other issues expressed by us and others. In its place, TSA announced a new passenger prescreening program, called Secure Flight, that would be narrower in scope and designed to avoid problems that had been raised about the previous program. Aspects of the new Secure Flight system underwent development and testing in 2005. In July 2005, we reported on privacy problems associated with testing of Secure Flight. In 2004, TSA had issued privacy notices in the Federal Register that included descriptions of how personal information drawn from commercial sources would be used during planned upcoming tests. However, these notices did not fully inform the public about the procedures that TSA and its contractors would follow for collecting, using, and storing commercial data. In addition, the scope of the data used during commercial data testing was not fully disclosed. Specifically, a contractor, acting on behalf of the agency, collected more than 100 million commercial data records containing personal information such as name, date of birth, and telephone number without informing the public. As a result, the public did not receive the full protections of the Privacy Act. In its comments on our findings, DHS stated that it recognized the merits of the issues we raised, and that TSA had acted immediately to address them. The privacy problems faced in developing Secure Flight arose not because it was prohibitively difficult to protect privacy while prescreening airline passengers, but because TSA had not reassessed privacy risks when key programmatic changes were made and taken appropriate steps to mitigate them. Recently, TSA officials stated that as they work to restructure the Secure Flight program, they plan a more privacy-enhanced program by addressing concerns identified by us and others. For example, officials stated that the program no longer plans to use commercial data. Officials also stated that they have added privacy experts to the system development teams to address privacy issues as they arise. It is encouraging that TSA is now including privacy experts within its development teams, with the express goal of continuously monitoring privacy concerns. We will continue to assess TSA’s efforts to manage system privacy protections as part of our ongoing review of the program. A major task confronting federal agencies, especially those engaged in antiterrorism tasks, is to ensure that information obtained from resellers is being appropriately used and protected. In fiscal year 2005, DHS reported planning to spend about $9 million on acquiring personal information from information resellers. The information was acquired chiefly for law enforcement purposes, such as developing leads on subjects in criminal investigations, and for detecting fraud in immigration benefit applications (part of enforcing the immigration laws). For example, the agency’s largest investigative component, U.S. Immigration and Customs Enforcement—the largest user of personal information from resellers—collects data such as address and vehicle information for criminal investigations and background security checks. DHS also reported using information resellers in its counterterrorism efforts. For example, as already discussed, TSA used data obtained from information resellers as part of a test associated with the development of Secure Flight. In our report on the acquisition of personal information from resellers by agencies such as DHS, we noted that the agencies’ practices for handling this information did not always reflect the Fair Information Practices. For example, system-of-records notices issued by these agencies did not always state that agency systems could incorporate information from data resellers, a practice inconsistent with the principle that the purpose for a collection of personal data should be disclosed beforehand and its use limited to that purpose. Furthermore, accountability was not ensured, as the agencies did not generally monitor usage of personal information from resellers; instead, they relied on end users to be responsible for their own behavior. Contributing to the uneven application of the Fair Information Practices was a lack of agency policies, including at DHS, that specifically address these uses. Reliance on information from resellers is an emerging use of personal data for which the government has been challenged to develop appropriate guidance. We recommended that DHS and other agencies develop specific policies, reflecting the Fair Information Practices, for the collection, maintenance, and use of personal information obtained from resellers. According to the DHS Privacy Office, while a policy governing the department’s use of commercial data is being drafted, the document has not yet been issued. Until the department issues clear guidance on this use, it faces the risk that appropriate privacy protections may not be in place consistently across its programs and applications. RFID is an automated data-capture technology that can be used to electronically identify, track, and store information contained on a tag. The tag can be attached to or embedded in the object to be identified, such as a product, case, or pallet. RFID technology provides identification and tracking capabilities by using wireless communication to transmit data. In May 2005, we reported that major initiatives at federal agencies that use or propose to use the technology included physical access controls and tracking assets, documents, or materials. For example, DHS was using RFID to track and identify assets, weapons, and baggage on flights. The Department of Defense was also using it to track shipments. In our May 2005 report we identified several privacy issues related to both commercial and federal use of RFID technology. Among these privacy issues is the potential for the technology to be used inappropriately for tracking an individual’s movements, habits, tastes, or predilections. Tracking is real-time or near-real-time surveillance in which a person’s movements are followed through RFID scanning.) Public surveys have identified a distinct unease with the potential ability of the federal government to monitor individuals’ movements and transactions. Like tracking, profiling— the reconstruction of a person’s movements or transactions over a specific period of time, usually to ascertain something about the individual’s habits, tastes, or predilections—could also be undertaken through the use of RFID technology. Once a particular individual is identified through an RFID tag, personally identifiable information can be retrieved from any number of sources and then aggregated to develop a profile of the individual. Both tracking and profiling can compromise an individual’s privacy. Concerns also have been raised that organizations could develop secondary uses for the information gleaned through RFID technology; this has been referred to as mission or function “creep.” The history of the Social Security number, for example, gives ample evidence of how an identifier developed for one specific use has become a mainstay of identification for many other purposes, governmental and nongovernmental. Secondary uses of the Social Security number have been a matter not of technical controls but rather of changing policy and administrative priorities. DHS uses and has made plans to use RFID technology to track individuals in several border security programs. This has been met with concern from the DHS Data Privacy and Integrity Advisory Committee, which reiterated our concerns that employing the technology for human identification poses privacy risks, including notice problems and potential for secondary use. One program that planned to make use of RFID was the US-VISIT program, a multibillion dollar program that collects, maintains, and shares information on selected foreign nationals who enter and exit the United States at over 300 ports of entry around the country. The incorporation of RFID into the program arose from the agency’s requirement for a less costly alternative to biometric verification of visitors exiting the country. We recently testified that US-VISIT RFID tests revealed numerous performance and reliability problems. For example, the readers placed to detect identifying tags failed to do so for a majority of the RFID tags. Faced with these test results, the Secretary of Homeland Security recently stated that the agency would cancel the use of RFID for US-VISIT. However, despite having rejected RFID for US-VISIT, the department has endorsed the technology for another border control initiative, the proposed PASSport (People Access Security Service) system identification card, which is part of the Western Hemisphere Travel Initiative. The RFID-enabled PASSport card would serve as an alternative to a traditional passport for use by U.S. citizens who cross the land borders and travel by sea between the United States, Canada, Mexico, the Caribbean, or Bermuda. The department’s varying approaches to the use of RFID for human identification suggests the need for a departmentwide policy that fully addresses privacy concerns. Unless DHS issues comprehensive guidance to direct the development and implementation of new technologies such as RFID, it faces the risk that appropriate privacy protections may not be implemented consistently across its programs and applications. According to the DHS Privacy Office, it is considering developing guidance to address the use of specific technologies, including RFID. The challenges that DHS faces in protecting privacy extend beyond the need to consider and address privacy issues while developing its own programs and systems. The department also interacts with many other intelligence and law enforcement entities, both within and outside the federal government, and potentially shares information with them all. As with its own programs and systems, it will be important for DHS to ensure that privacy has been thoroughly considered and guidelines clearly established as it participates in the emerging information sharing environment. As directed by the Intelligence Reform and Terrorism Prevention Act of 2004, the administration has taken steps, beginning in 2005, to establish an information sharing environment to facilitate the sharing of terrorism information. The direction to establish an information sharing environment was driven by the recognition that before the attacks of September 11, 2001, federal agencies had been unable to effectively share information about suspected terrorists and their activities. In addressing this problem, the National Commission on Terrorist Attacks Upon the United States (9/11 Commission) recommended that the sharing and uses of information be guided by a set of practical policy guidelines that would simultaneously empower and constrain officials, closely circumscribing what types of information they would be permitted to share as well as the types they would need to protect. Exchanging terrorism-related information continues to be a significant challenge for federal, state, and local governments—one that we recognize is not easily addressed. Accordingly, since January 2005, we have designated information sharing for homeland security a high-risk area. In developing guidelines for the information sharing environment, there has been general agreement that privacy considerations must be addressed. The Intelligence Reform Act called for the issuance of guidelines to protect privacy and civil liberties in the development and use of the information sharing environment, and the President reiterated that requirement in an October 2005 directive to federal departments and agencies. Based on the President’s directive, a committee within the Office of the Director of National Intelligence was established to develop such guidelines, and they were approved by the President in November 2006. According to its annual report for 2004–2006, the DHS Privacy Office has played a role in developing these guidelines. However, the guidelines as issued provide only a high-level framework for addressing privacy protection and do not include all of the Fair Information Practices. The 9-page document includes statements of principles, such as “purpose specification,” “data quality,” “data security,” and “accountability, enforcement, and audit” that align with certain elements of the Fair Information Practices, but it provides little or no guidance on how these principles are to be implemented and does not address another key practice—limiting the collection of personal information. For example, as the policy director of the Center for Democracy and Technology has pointed out, a number of principles mentioned in the guidelines do not include any specificity on how they should be carried out. The guidelines call for agencies to “take appropriate steps” when merging information about an individual from two or more sources to ensure that the information is about the same individual, but they give no indication of what steps would be adequate to achieve this goal. For example, no guidance is provided on gauging the reliability of sources or determining the minimum amount of information needed to determine that different sources are referring to the same individual. Likewise, the guidelines direct agencies to implement adequate review and audit mechanisms to ensure compliance with the guidelines but, again, do not specify the nature of these mechanisms, which could include, for example, the use of electronic audit logs that cannot be changed by individuals. Finally, the guidelines also direct agencies to put in place internal procedures to address complaints from persons regarding protected information about them that is under the agency’s control. No further guidance is provided about the essential elements of a complaint process or what sort of remedies to provide. According to the DHS Privacy Office, individual agencies, including DHS, are to develop specific guidelines that implement the high- level framework embodied in the governmentwide guidelines. However, no overall DHS guidance on the protection of privacy within the context of the information sharing environment has yet been developed. According to the Privacy Office, an effort is currently being initiated to develop such guidance. While DHS is only one participant in the governmentwide information sharing environment, it has the responsibility to ensure that the information under its control is shared with other organizations in ways that adequately protect privacy. Until it adopts specific implementation guidelines, the department will face the risk that its information sharing activities may not protect privacy adequately. In summary, DHS faces continuing challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. We have made recommendations previously regarding ADVISE, Secure Flight, and use of information resellers, and officials have taken action or told us they are taking action to address our recommendations. Implementation of these recommendations is critical to ensuring that privacy protections are in place throughout key DHS programs and activities. Likewise, issuing guidance for participation in the information sharing environment will also be critical to ensure implementation of consistent, appropriate protections across the department. Mr. Chairman, this concludes my testimony today. I would be happy to answer any questions you or other members of the subcommittee may have. If you have any questions concerning this testimony, please contact Linda Koontz, Director, Information Management, at (202) 512-6240, or koontzl@gao.gov. Other individuals who made key contributions include Barbara Collier, Susan Czachor, John de Ferrari, Timothy Eagle, David Plocher, and Jamie Pressman. Data Mining: Early Attention to Privacy in Developing a Key DHS Program Could Reduce Risks. GAO-07-293. Washington, D.C.: February 28, 2007. Aviation Security: Progress Made in Systematic Planning to Guide Key Investment Decisions, but More Work Remains. GAO- 07-448T. Washington, D.C.: February 13, 2007. Border Security: US-VISIT Program Faces Strategic, Operational, and Technological Challenges at Land Ports of Entry. GAO-07-248. Washington, D.C.: December 6, 2006. Personal Information: Key Federal Privacy Laws Do Not Require Information Resellers to Safeguard All Sensitive Data. GAO-06-674. Washington, D.C.: June 26, 2006. Veterans Affairs: Leadership Needed to Address Information Security Weaknesses and Privacy Issues. GAO-06-866T. Washington, D.C.: June 14, 2006. Privacy: Preventing and Responding to Improper Disclosures of Personal Information. GAO-06-833T. Washington, D.C.: June 8, 2006. Privacy: Key Challenges Facing Federal Agencies. GAO-06-777T. Washington, D.C.: May 17, 2006. Personal Information: Agencies and Resellers Vary in Providing Privacy Protections. GAO-06-609T. Washington, D.C.: April 4, 2006. Personal Information: Agency and Reseller Adherence to Key Privacy Principles. GAO-06-421. Washington, D.C.: April 4, 2006. Information Sharing: The Federal Government Needs to Establish Policies and Processes for Sharing Terrorism-Related and Sensitive but Unclassified Information. GAO-06-385. Washington, D.C.: March 17, 2006. Data Mining: Agencies Have Taken Key Steps to Protect Privacy in Selected Efforts, but Significant Compliance Issues Remain. GAO- 05-866. Washington, D.C.: August 15, 2005. Aviation Security: Transportation Security Administration Did Not Fully Disclose Uses of Personal Information during Secure Flight Program Testing in Initial Privacy Notices, but Has Recently Taken Steps to More Fully Inform the Public. GAO-05- 864R. Washington, D.C.: July 22, 2005. Identity Theft: Some Outreach Efforts to Promote Awareness of New Consumer Rights are Under Way. GAO-05-710. Washington, D.C.: June 30, 2005. Information Security: Radio Frequency Identification Technology in the Federal Government. GAO-05-551. Washington, D.C.: May 27, 2005. Aviation Security: Secure Flight Development and Testing Under Way, but Risks Should Be Managed as System is Further Developed. GAO-05-356. Washington, D.C.: March 28, 2005. Social Security Numbers: Governments Could Do More to Reduce Display in Public Records and on Identity Cards. GAO-05-59. Washington, D.C.: November 9, 2004. Data Mining: Federal Efforts Cover a Wide Range of Uses, GAO-04- 548. Washington, D.C.: May 4, 2004. Aviation Security: Computer-Assisted Passenger Prescreening System Faces Significant Implementation Challenges. GAO-04-385. Washington, D.C.: February 12, 2004. Privacy Act: OMB Leadership Needed to Improve Agency Compliance. GAO-03-304. Washington, D.C.: June 30, 2003. Data Mining: Results and Challenges for Government Programs, Audits, and Investigations. GAO-03-591T. Washington, D.C.: March 25, 2003. Technology Assessment: Using Biometrics for Border Security. GAO-03-174. Washington, D.C.: November 15, 2002. Information Management: Selected Agencies’ Handling of Personal Information. GAO-02-1058. Washington, D.C.: September 30, 2002. Identity Theft: Greater Awareness and Use of Existing Data Are Needed. GAO-02-766. Washington, D.C.: June 28, 2002. Social Security Numbers: Government Benefits from SSN Use but Could Provide Better Safeguards. GAO-02-352. Washington, D.C.: May 31, 2002. The Fair Information Practices are not precise legal requirements. Rather, they provide a framework of principles for balancing the need for privacy with other public policy interests, such as national security, law enforcement, and administrative efficiency. Ways to strike that balance vary among countries and according to the type of information under consideration. The version of the Fair Information Practices shown in table 1 was issued by the Organization for Economic Cooperation and Development (OECD) in 1980 and has been widely adopted.","Advances in information technology make it easier than ever for the Department of Homeland Security (DHS) and other agencies to obtain and process information about citizens and residents in many ways and for many purposes. The demands of the war on terror also drive agencies to extract as much value as possible from the information available to them, adding to the potential for compromising privacy. Recognizing that securing the homeland and protecting the privacy rights of individuals are both important goals, the Congress has asked GAO to perform several reviews of DHS programs and their privacy implications over the past several years. For this hearing, GAO was asked to testify on key privacy challenges facing DHS. To address this issue, GAO identified and summarized issues raised in its previous reports on privacy and assessed recent governmentwide privacy guidance. As it develops and participates in important homeland security activities, DHS faces challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. GAO's reviews of DHS programs have identified cases where these challenges were not fully met. For example, increased use by federal agencies of data mining--the analysis of large amounts of data to uncover hidden patterns and relationships--has been accompanied by uncertainty regarding privacy requirements and oversight of such systems. As described in a recent GAO report, DHS did not assess privacy risks in developing a data mining tool known as ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement), as required by the E-Government Act of 2002. ADVISE is a data mining tool under development intended to help the department analyze large amounts of information. Because privacy had not been assessed and mitigating controls had not been implemented, DHS faced the risk that uses of ADVISE in systems containing personal information could require costly and potentially duplicative retrofitting at a later date to add the needed controls. GAO has also reported on privacy challenges experienced by DHS in reassessing privacy risks when key programmatic changes were made during development of a prescreening program for airline passengers. The Transportation Security Administration (TSA) has been working to develop a computer-assisted passenger prescreening system, known as Secure Flight, to be used to evaluate passengers before they board an aircraft on domestic flights. GAO reported that TSA had not fully disclosed uses of personal information during testing of Secure Flight, as required by the Privacy Act of 1974. To prevent such problems from recurring, TSA officials recently said that they have added privacy experts to Secure Flight's development teams to address privacy considerations on a continuous basis as they arise. Another challenge DHS faces is ensuring that privacy considerations are addressed in the emerging information sharing environment. The Intelligence Reform and Terrorism Prevention Act of 2004 requires the establishment of an environment to facilitate the sharing of terrorism information, as well as the issuance of privacy guidelines for operation in this environment. Recently issued privacy guidelines developed by the Office of the Director of National Intelligence provide only a high-level framework for privacy protection. While DHS is only one participant, it has the responsibility to ensure that the information under its control is shared with other organizations in ways that adequately protect privacy. Accordingly, it will be important for the department to clearly establish departmental guidelines so that privacy protections are implemented properly and consistently.",govreport
"Social Security is one the largest federal programs in the United States, providing about $546 billion in benefits in 2006 to over 49 million beneficiaries. Although the majority of Social Security benefits are paid to retirees, Social Security does much more than provide retirement income. Social Security Disability Insurance (DI) pays monthly cash benefits to nearly 7 million workers who, due to a severe long-term disability, can no longer remain in the workforce. Additionally, Social Security provides benefits to over 11 million dependents, including payments to widows and widowers as well as surviving parents and children under Survivors’ Insurance (SI), plus benefits to dependent spouses and children of retired and disabled workers paid from the Old Age Insurance (or Old Age) and DI trust funds. Social Security benefits often represent a significant source of income for their recipients, providing an average of $1,051 a month (as of July 2007) to retired workers, $995 a month to widows and widowers, and $979 a month to disabled workers. Although disabled workers and dependents receive slightly lower average monthly benefits than retired workers, benefits could be particularly important to these individuals. These beneficiaries may face considerable hardships; for example, a disabling condition may make work and other activities of daily living more difficult. As a result, these beneficiaries may have financial difficulties planning and preparing for death or disability in the way one might plan for retirement. Social Security was never intended to provide an adequate income by itself, but instead serves as an income base on which to build. In fact, the Social Security program balances the goals of income adequacy with individual equity, i.e., that lower income beneficiaries should receive higher benefits relative to wages than higher income beneficiaries (adequacy), and beneficiaries with higher lifetime income receive higher benefits in accordance with their income/lifetime contributions (equity). Although Social Security had originally been envisioned to include disability and survivors’ insurance, the 1935 Social Security Act created only a retirement program. Over the next 40 years, the program expanded both the size and type of its benefits, introducing benefits for dependents and disabled workers (fig. 2). The first new type of benefits went to dependents, as the 1939 amendments offered payments to elderly dependent wives and widows, as well as dependent children. (Some husbands and widowers were allowed to receive these same benefits after 1950). Creating these benefits was not only seen as socially desirable, but also offered additional protections for workers and their families from risk and spent down surpluses created by the system. Disability Insurance, which had been recommended by the 1938 and 1948 advisory councils, was established in 1956 to provide cash benefits to permanently disabled workers over the age of 50. The DI program was later expanded to include disabled workers under the age of 50 as well. In 1961, widows benefits increased from 75 to 85 percent of their deceased spouse’s benefits, and then to 100 percent in 1972. In addition, eligibility was extended to divorced spouses as well as to the spouses and children of disabled workers. Furthermore, benefit levels for retirees, dependents, and disabled worker beneficiaries grew during this time period. However, facing solvency crises, legislative efforts to control the size of the Social Security program were made in the mid 1970s and early 1980s. In order to maintain trust fund solvency, major changes were enacted to reduce the growth of Social Security benefit levels from the mid1970s to the early 1980s. Additionally, a number of legislative changes to the DI and dependents’ programs eliminated or reduced certain benefits and tightened the eligibility standards for receiving other benefits. However, despite ongoing fiscal concerns, eligibility for a few dependents’ and disability benefits has been expanded since 1975, suggesting an interest in protecting some vulnerable populations who may rely on Social Security for a significant portion of their monthly income. Although recent reform proposals have focused on elements intended to improve solvency, there continues to be some interest in protecting some or all DI and dependents’ benefits from potential benefit reductions. Figure 3 shows how Old Age, Survivors, and Disability Insurance (OASDI) has grown financially and in terms of beneficiaries over time. Although the 1935 act did not provide for disability and dependents’ benefits, those benefits were later built upon the existing Social Security structure, and today all benefits continue to be calculated from a common formula. Dependents’ benefit levels were set as fractions of the benefits owed to the person upon whom beneficiaries depended. For example, under the 1939 legislation, a widow would receive 75 percent of her deceased husband’s benefits, and dependent children or spouses would receive 50 percent of the retired worker’s benefits. When Congress created the DI program in 1956, it provided a lower retirement age (50) for those who were permanently and totally disabled. The same benefit formula used in computing OASI benefits was adopted for disability benefits because the original DI program treated disabled workers as being forced into premature retirement. In 1960, when Congress expanded the DI program by eliminating the requirement that disabled workers had to be 50 years old, the same benefit formula applied. Because benefit types shared a common formula, automatic indexing provisions implemented in 1972 and 1977 applied across the board. The OASDI programs are tightly linked in other ways as well. These programs are financed through a common mechanism—payroll taxes; receipts from the payroll tax are deposited into the OASI and DI trust funds which, like the two programs, are separate but often combined in discussion and analysis of Social Security’s solvency and sustainability. Furthermore, beneficiaries can receive multiple types of benefits over their lifetimes, moving into, out of, and among Social Security programs at different life stages. When disabled workers reach the full retirement age (FRA), for example, they begin to receive retirement benefits from the Old Age program, in place of DI benefits; the common benefit formula keeps such individuals’ benefit levels stable. In another case, a recent widow(er) might have her (or his) retirement or spousal benefits replaced with survivors’ benefits based on the relative earnings of the deceased spouse. Because parents, children, or spouses may be eligible for dependents’ benefits through the Old Age, Survivors, and Disability Insurance programs, a person can collect several types of Social Security benefits over a lifetime, although generally not simultaneously. The many linked pieces of Social Security could make developing a single, comprehensive reform package challenging because such a package would need to take into account all of these pieces. Under current law, Old Age benefits are generally calculated through a four-step process in which a progressive yet earnings-based formula is applied to an earnings history, and then updated annually through a cost- of-living adjustment (COLA). For those who receive retirement benefits, this earnings history is generally based on the 40 years in which credited earnings were highest, with the 5 lowest-earning years dropped out (leaving the highest 35 years of indexed earnings to be included in the initial benefit calculation). Dependents’ benefit levels are determined as a given percentage of Old Age benefit levels. Eligible children and spouses can receive up to 50 percent of a worker’s benefit; widow(er)s can be given up to 100 percent; and surviving parents or children can collect up to 75 percent, subject to a family maximum. DI benefits are calculated similarly to Old Age benefits, but are generally based upon a shortened work history. (For more detail on how benefits are calculated, refer to app. II.) To be eligible for benefits, individuals must have a specified number of recent work credits under Social Security when they first become disabled. Individuals must also demonstrate the inability to engage in substantial gainful activity by reason of a physical or mental impairment that has lasted or is expected to last for twelve continuous months or to result in death. If not eligible on medical grounds, SSA must also consider age, education and past work history. In particular, medical eligibility criteria for DI are less stringent for applicants over the age of 55. Based on prior work, GAO has designated modernizing federal disability programs (including the DI program) as a high risk area because of challenges that continue today. For example, GAO found that federal disability programs remain grounded in outmoded concepts that equate medical conditions with work incapacity. While SSA has taken some actions in response to prior GAO recommendations, GAO continues to believe that SSA should continue to take a lead role in examining the fundamental causes of program problems and seek the regulatory and legislative solutions needed to modernize its programs so that they are aligned with the current state of science, medicine, technology, and labor market conditions. Moreover, SSA should continue to develop and implement strategies to better manage the programs’ accuracy, timeliness, and consistency of decision making. Social Security’s Financing Social Security is currently financed primarily on a pay-as-you-go basis, in which payroll tax contributions of current workers are used primarily to pay for current benefits. Since the mid1980s, the Social Security program has collected more in taxes than it has paid out in benefits. However, because of the retirement of the baby boomers coupled with increases in life expectancy, and decreases in the fertility rate, this situation will soon reverse itself. According to the Social Security Administration’s 2007 intermediate assumptions, annual cash surpluses are predicted to turn into ever-growing cash deficits beginning in 2017. Absent changes to the program, these deficits are projected to deplete the Social Security DI trust fund in 2026 and the OASI trust fund in 2042, leaving the combined system unable to pay full benefits by 2041. Reductions in benefits, increases in revenues, or a combination of both will likely be needed to restore long- term solvency. A number of proposals have been made to restore fiscal solvency to the program, and many include revenue enhancements, benefit reductions, or structural changes such as the introduction of individual accounts as a part of Social Security. Because many reforms to the benefit side of the equation would reduce benefits through changes in the benefit formula, they could affect DI and dependents’ benefits as well as Old Age benefits. Unless accompanied by offsets or protections, these reforms might reduce the income of disabled workers and dependents. This situation could be challenging for these beneficiaries as they may have relatively low incomes or higher health care costs and rely heavily on Social Security income. Many disabled workers and dependents may also have trouble taking on additional work and accumulating more savings and, thus, have difficulty preparing for Social Security benefit reductions. Many reform elements could have a substantial impact on the benefits of Social Security recipients, including those of disabled workers and dependents. We considered six such elements that have been included in reform proposals to improve trust fund solvency. These reform elements take a variety of forms and would change either the initial benefit calculation or the growth of individual benefits over time. Our projections indicated that most of these elements would reduce benefits from currently scheduled levels for the majority of both disabled workers and dependents. That is, most would reduce median lifetime benefits for these beneficiary types—some more substantially than others. Many of these beneficiaries would also experience a reduction in total lifetime benefits; the extent of which would depend on the reform element and individual. We considered six different reform elements that could help control costs and improve Social Security solvency by reducing benefits. Five would change how initial benefits are calculated, and one would limit the growth of an individual’s benefits over time. We considered several ways to improve solvency: Longevity indexing would lower the amount of the initial benefit in order to reflect projected increases in life expectancy. Such indexing would maintain relatively comparable levels of lifetime benefits across birth years by proportionally reducing the replacement factors in the initial benefit formula. Price indexing would maintain purchasing power while slowing the growth of initial benefits. This would be accomplished by indexing initial benefits to the growth in prices rather than wages, as wages tend to increase faster than prices. Progressive price indexing, a form of price indexing, would control costs while protecting the benefits of those beneficiaries at the lowest earnings levels (in terms of career average earnings). It would continue to index initial benefit levels to wages for those below a certain earnings threshold and employ a graduated combination of price indexing and wage indexing for those above this threshold. Increasing the number of years used in the benefit calculation would also control program costs. For example, initial benefits could be based on the highest 40, rather than 35, years of indexed earnings. This could be done either by eliminating the 5 years normally excluded from the calculation or by increasing the total number of years factored in from 40 to 45 years. In either of these cases, the initial Old Age benefit would be calculated using the highest 40 years of indexed earnings. (For more information on these reform elements and how we incorporated them into our microsimulation model, see app. I.) Raising the age at which people are eligible for full retirement benefits could change the amount and/or the timing of initial benefits. Increasing the full retirement age would improve solvency by generally increasing the number of years worked, reducing the number of years benefits are received and increasing revenue to the system through payroll taxes in the additional years worked. Further, those who retire early would have their benefits actuarially reduced. Though it would not generally affect initial benefit amounts, a change to Social Security’s cost-of-living adjustment (COLA) could also control costs and improve solvency by limiting the growth of an individual’s benefits over time. The COLA adjusts benefits to account for inflation by indexing benefits to price growth annually, using the Consumer Price Index (CPI). Setting the COLA below the CPI would limit the nominal growth of an individual’s benefits over time, and as such those who receive benefits for a prolonged period of time would see the largest reductions. According to our projections for the 1985 cohort, four of the five reform elements that we analyzed would reduce total lifetime benefits for more than three-quarters of disabled workers and dependents, relative to currently scheduled benefits. Table 1 shows the proportions of disabled workers and dependents affected by each of the reform elements. For three of the elements—reducing the COLA by one percentage point, price indexing and progressive price indexing—the percentage of disabled workers affected is very similar to the percentage of dependents affected. Moreover, for these three reform elements, more than 99 percent, or virtually all, disabled workers and dependents would see their benefits reduced. In contrast, progressive price indexing differs from other reform elements in its impact: fewer beneficiaries are affected, and the percentage of disabled workers affected varies from that of dependents. While an estimated 87 percent of dependents would experience a reduction in lifetime benefits under progressive price indexing, an estimated 77 percent of disabled workers would do so. While the COLA reduction, longevity indexing and price indexing are all designed in such a way that they affect virtually all beneficiaries, the COLA, which has a greater impact on solvency than longevity indexing, affects relatively fewer disabled workers and dependents. This is because the COLA reduction would first affect benefits one year after the initial benefit payment was made, whereas both longevity indexing and price indexing affect the initial benefit amount. Our simulations indicated that 1.11 percent of disabled workers died within the first year of receiving benefits, while only 0.35 percent of dependents did so. Most such beneficiaries would not have received a COLA. According to our simulations each of the reform elements we selected would reduce median lifetime benefits for both disabled workers and dependents relative to currently scheduled benefits (figs. 4 and 5). However, our projections also indicated that these reductions would vary by reform element. Price indexing would have the largest impact on disabled workers and dependents, reducing median lifetime benefits by more than 25 percent. Median lifetime benefits would fall from $473,960 to $343,350 for disabled workers and from $351,910 to $244,745 for dependents. Progressive price indexing, on the other hand, would create the smallest reduction in median lifetime benefits, with median lifetime benefits falling by 7 percent for disabled workers and 8 percent for dependents. Additionally, increasing the full retirement age and increasing the number of computation years would likely reduce median lifetime benefits for dependents. Since dependent benefits are linked to those of the primary worker, an increase in the full retirement age could shorten the period of time over which they both receive benefits. Alternatively, some workers may decide not to adjust their retirement plans in response to the increase in the FRA. Those who maintain their original retirement plans, retiring prior to the new FRA, will also receive reduced benefits relative to current law. (See app. II for a discussion of how benefits are adjusted for early retirement.) Thus, under both scenarios, total lifetime benefits would be reduced, and so, too, would median lifetime benefits. A similar outcome results from increasing the number of computation years by which initial benefits are calculated. By increasing the number of computation years, a worker’s earnings history is expanded to include years of possibly lower indexed earnings. As a result, total benefits for some retired workers, and therefore, their dependents, would likely be reduced, as would median lifetime benefits. Our projections suggest that, while lifetime benefits would be reduced for virtually all disabled workers and dependents, such reductions would not be uniform across individuals. Figures 6 and 7 compare beneficiaries’ total lifetime benefit reductions by each reform element, for disabled workers and dependents, respectively. If the COLA were reduced by one percentage point, our projections show that approximately 58 percent of disabled workers experienced lifetime benefit reductions of 10 percent or less, while about 42 percent of disabled workers experienced lifetime benefits reduced by 10 to 25 percent. Almost no disabled workers would see benefits fall by more than 25 percent. Certain reform elements would create reductions in total lifetime benefits for the vast majority of disabled workers and dependents. These reductions may create new hardships for certain beneficiaries, such as disabled workers, who may not be able to easily replace lost income. According to our projections, price indexing would result in the greatest benefit reductions for the largest percentage of beneficiaries, with decreases in lifetime benefits of between 25 percent and 50 percent for almost 70 percent of disabled workers and about 90 percent of dependents. Both price indexing and longevity indexing have a greater effect on initial benefit amounts the longer the reform is in place. As such, people who leave the workforce early may experience a smaller reduction in lifetime benefits than those who leave at full retirement age. For example, as shown in figures 6 and 7, longevity indexing could reduce lifetime benefits for about 86 percent of disabled workers and about 96 percent of dependents by 10 to 25 percent. Progressive price indexing may have a more moderate effect on the benefits of disabled workers and certain dependents because it is designed to protect benefit levels for low earners and gradually apply benefit reductions to beneficiaries with higher earnings. Because of shorter earnings histories, some disabled workers would be in the low end of the earnings distribution. Thus, under progressive price indexing, a greater proportion of disabled workers would be likely to have benefits adjusted by wage indexing. According to our projections, progressive price indexing would reduce total lifetime benefits by 5 percent or less for 46 percent of disabled workers and 35 percent of dependents. Various options are available to protect benefits in different ways, including accelerating the growth of an individual’s benefits, modifying current constraints on benefit levels, and exempting certain populations from reforms. Options can also target certain types of beneficiaries. We analyzed some of these protections and found they could be structured to mitigate the effects of benefit reductions for varying lengths of time. In addition, we found that specific options to protect dependent benefits could be targeted to certain vulnerable beneficiaries, such as widows and dependent children. We found a wide range of options exist for protecting disabled workers and dependents from benefit-reducing reforms. Table 2 provides a summary of the options. The protection options may be very specific in terms of whom they protect and how, or broader in scope. For example, while two protection options focus specifically on disabled adult children (DAC), others, such as partial exemptions could apply to any vulnerable population. In addition to each option having its own strengths and weaknesses, the options could interact with each other and with the various reform elements. When implementing a protection option, all of these factors could influence its impact. There are several protection options that could be applied to all disabled workers and dependents. Under a full exemption, beneficiaries would not be subject to a reform and their benefits would remain unchanged. Under a partial exemption, beneficiaries would not be subject to a reform until a certain point in time. For example, disabled workers could be exempt from benefit changes until they are converted to the Old Age program at the full retirement age. At this point, their benefit amount would be recalculated to reflect the reform in proportion to the years they spent working. In addition, a super COLA could help protect the benefits of disabled workers and dependents. A super COLA would mitigate some of the effects of a benefit-reducing reform by annually increasing benefits at a rate above the consumer price index—which is currently used to index benefits. Some protection options could cover all dependents by increasing the percentage of the worker’s benefit that the dependent receives. (See app. II for more detail on how dependent benefits are calculated.) For example, a number of proposals have called for increasing the percentage of the worker’s benefit that widow(er)s receive. Another option that could protect the benefits of a wide range of dependents would be to raise the maximum benefit that families can receive based on one worker’s earnings record. Other protection options, such as caregiver credits, could focus on protecting particular groups of dependents. Several reform proposals have, in fact, called for providing caregiver credits to individuals who spend time out of the workforce to care for their dependents or to those with reduced or low earnings while attending to care-giving responsibilities. Some proposals assign caregivers a specified level of earnings for each year the caregiver received zero or low earnings compared to prior years. Other proposals exclude zero-earning care years from the initial benefit calculation. Another option specific to a certain type of dependent would be to increase benefits for aged survivors, since they are more likely to rely on Social Security to stay out of poverty and could have fewer opportunities, such as returning to work, to respond to benefit-reducing reforms. Increasing the early retirement age could offer some protection for survivors. If the early retirement age were raised—for example, from 62 to 64—then workers who take early retirement would receive actuarially adjusted benefits for a shorter period of time under the new early retirement age, and thus their monthly benefits would be relatively higher than the monthly benefits they would have received if they had retired at the current early retirement age. Since a dependent’s benefit is linked to the worker’s initial benefit amount, an increase in the worker’s benefit would also increase the dependent’s benefit, mitigating some of the negative effects of other reforms. Similarly, raising the FRA coupled with a partial exemption from a benefit reduction could offer some additional protection for disabled worker benefits. With an increase in the FRA, disabled workers would receive (exempted) DI benefits for a longer period of time because the age at which their disability benefits are converted to retiree benefits would rise with the new FRA. In general, the reform elements we examined reduce median lifetime benefits for disabled workers and dependents. Because disabled workers may not have the financial resources—especially earnings related income—to adjust to benefit reductions, we explored the interaction of reform elements and certain options to offset them. According to our projections, protections from a reduction in the COLA could restore benefits of disabled workers to levels close to those scheduled under current law. Reducing the COLA by one percentage point would result in about a 10 percent decrease in median lifetime benefits for workers who become disabled before age 60. To offset such a decrease, they could be partially or fully exempted. With a COLA reduction, a partial exemption would mean that the Social Security Administration would increase a disabled worker’s benefits annually as scheduled under current law (i.e., using the full COLA) until the worker reached the full retirement age. At that point, the disabled worker’s benefits would grow annually by the reduced COLA (1 percentage point lower than what it would be under current law). Our projections showed that a partial exemption as described above would raise median lifetime benefits from their reduced levels by 7 percent (up to 96 percent of scheduled levels under current law). In contrast, a full exemption would allow annual COLA adjustments in line with current law until death (fig. 8). In addition to a decrease in the COLA, we analyzed options for protecting the benefits of disabled workers under three reform elements that have an impact on the initial benefit amount a disabled worker receives—price indexing, longevity indexing, and progressive price indexing. There are several protection options for mitigating the effects of these reform elements, including full and partial exemptions. In the case of price indexing initial benefits, we projected that the median lifetime benefits of disabled workers would be about 75 percent of the median benefits under current law (fig. 9). A full exemption for disabled workers would raise the benefits of those disabled workers who exclusively receive DI benefits to the currently scheduled levels. However, a partial exemption from price indexing would restore the median lifetime benefit to 89 to 90 percent of scheduled levels, depending on how the partial exemption is implemented. One type of partial exemption (Type I) uses price indexing to calculate the portion of the benefits based on the years a person is out of the workforce and receiving DI benefits. In contrast, the other type of partial exemption (Type II) uses wage indexing to cover the same time period. (For more details, please see app. I.) The difference between the two partial exemptions becomes more substantial the earlier one becomes disabled, as the difference between wages and prices increases over time. While offering some protection from benefit reductions, both types of partial exemptions involve a recalculation of benefits at the full retirement age. This recalculation would result in lower benefits for the DI recipient and could create a potential problem if that individual relied on the prior benefit amount and had limited options for replacing the lost income. (See figs. 10 and 11 for longevity indexing and progressive price indexing, respectively.) Another protection option would be to allow disability benefits to grow at a greater rate than other benefits. For example, disabled workers could be explicitly included in the scope of the reform, and receive reduced initial benefits. However, instead of receiving annual increases based on the current-law COLA, disabled workers could have their benefits increased by a “super COLA”—one that is set above the Consumer Price Index. In this case, benefits for the disabled would grow at a faster rate than they would under current law and could approach or even exceed current law levels. Variations on the super-COLA could include an “age-indexed super COLA” which would be greater for those disabled at younger ages. For those workers who become disabled near the full retirement age the COLA would be closer to that used for retirees. These protections could be particularly beneficial for disabled workers who receive benefits for a prolonged period of time. While protections for disabled workers would generally cover all such beneficiaries, the options for protecting dependent benefits could be more targeted to specific dependents and not necessarily applied to the full range of dependents, which includes spouses, divorcees, widow(er)s, and child survivors. The circumstances around which a person becomes a dependent vary greatly, as does the role of Social Security benefits in their lives. For some, Social Security may be the primary source of support; for others, it may be only a small proportion of their income. Protections could target children, who make up about 8 percent of Social Security beneficiaries, receiving benefits as the survivors or dependents of disabled or retired workers. Table 3 shows the number of children who receive benefits in each category and the average monthly benefit for these children. One way to protect the benefits of children would be to exempt them from any reform, keeping their benefit calculation tied to current law. Another way to protect their benefits to some degree would be to raise the maximum benefit a family could receive on a single worker’s earnings record. The majority of experts with whom we spoke told us that increasing the maximum amount that a family could receive from one worker’s earnings record could help protect child and other dependent benefits. Such an increase could help those dependents who are constrained by the family maximum. A family may have several people receiving benefits based on one worker’s record. The sum of the family members’ benefits may exceed the specified maximum, which is calculated as a percentage of the worker’s benefit amount. Thus, any reform that would result in a decrease in the primary benefit amount would also result in a decrease in the amount that each eligible family member would receive and a corresponding decrease in the total amount a family would receive. Certain options, including increased allowable benefits for widows or partial exemptions, could be designed to protect the benefits of widow(er)s or others who may have fewer resources available to them. Under current law, widows and widowers can collect 100 percent of their deceased spouse’s benefits (or their own benefit—whichever is greater); a “widow’s boost” would allow them to receive up to 75 percent of the couple’s combined benefits. Widow(er)s may rely on Social Security for a large percentage of their retirement income, in part because they may live many years beyond the exhaustion of other financial resources, may find it difficult to work, or may incur large health expenses that deplete their other resources. A reduction in the COLA may be particularly detrimental to the lifetime benefits of those who live long lives, because the effect of reducing the COLA is compounded over time. As such, it may be desirable to protect older widow(er)s—along with other individuals who receive benefits for a prolonged period of time—from the effect of a COLA reduction. For example, in our projections for the COLA reduction, we found that for the group of widows who received some benefits and who died before age 75, median lifetime benefits would be approximately 93 percent of those under current law. In contrast for those who lived past age 95, median lifetime benefits would be only 83 percent of currently scheduled levels. The options for protecting the benefits of disabled workers and those of dependents come at a cost to the Social Security program in terms of its solvency. In addition, some protections options may create incentives for people to apply to the Disability Insurance program if DI benefits increase while retirement benefits stay stable. Further, protection options could provide disincentives for some to return to work. The Social Security reform elements we examined were designed primarily to improve program solvency. These reform elements would generally reduce benefits from their currently scheduled but underfunded levels. While protecting the benefits of disabled workers and dependents may be socially desirable, such protection would come at some cost to the Social Security program. In particular, the protections lessen the degree to which the potential reforms could restore solvency. One could counter these costs with further benefit reductions to beneficiaries considered less vulnerable than those recipients whose benefits are specifically protected. That is, reform packages with certain benefit protections for vulnerable populations may necessitate further reductions in the benefits of retired workers or increases in revenues to achieve the intended solvency effect. In addition to the effects on solvency, some of the protections discussed may also have administrative costs associated with them. Protecting the benefits of disabled workers may increase the number of people who apply for disability benefits. This may also be relevant to certain reform elements. An increase in the full retirement age coupled with the reduction in benefits for early retirement could motivate some individuals approaching the early retirement age to apply for disability benefits, if they believed that they could qualify for the now greater DI benefits. For example, before a change in the retirement age a worker who is a year away from the full retirement age, and who would qualify for DI but is unsure of that outcome, may choose to wait and only receive Old Age benefits. Once the full retirement age is raised, this worker may choose to apply for DI, rather than waiting to receive retirement benefits. The greater the benefit disparity between the two programs, the more likely it may be that DI applications and enrollment will increase. Thus, the potential for an increase in DI program costs exists with any reform elements that decrease the generosity of the Old Age component of OASDI without a corresponding decrease in that of the DI component. Under current law, there may already be an incentive for older workers to apply for DI rather than retire early. Using individual level data from the simulation model, we analyzed the benefits of two similar individuals under current law and under price indexing with and without full and partial exemptions. Both of the simulated individuals had similar lifetime earnings, close to the median for the simulated 1985 cohort, and both would have received initial benefits at age 62. However, they differed in two significant ways: one retired at age 62, while the other was disabled at age 62, and the retiree had lower lifetime benefits under current law. The retiree, who died at age 84, had lifetime benefits of about $433,000, while the disabled worker, who died at age 82, had lifetime benefits of about $505,000—about 16 percent higher than those of the retired worker. A full exemption for disabled workers from certain reform elements could similarly create discrepancies between the two programs, resulting in incentives to apply for the DI program. Under price indexing, the lifetime benefits of both individuals would be reduced, but the relative difference would remain at about 16 percent. However, if disabled workers were fully exempted from price indexing, the simulated disabled worker’s lifetime benefits would be back to the initial amount of $505,000, or 72 percent greater than those of the retired worker. This difference in potential benefits would likely increase the incentive to apply for the DI program. Figure 12 and table 4 show the total lifetime benefits and the average monthly benefits of these two simulated individuals under current law, price indexing, and with exemptions. However, partial rather than full exemptions or other protections, such as an age-indexed super COLA, could provide benefit protections without substantially increasing the disparity between the programs for people approaching the early or full retirement ages. Under a partial exemption, in which the disabled worker would be exempted from the reform until full retirement age, the added incentive that could be created by a full exemption would be reduced. Such a partial exemption for the disabled worker in our example would result in lifetime benefits that are about 33 percent higher than those of the retired worker under price indexing. The family maximum limits the amount that can be received off of a worker’s record. This limit is compatible with the incentive for individuals to work. Changing such a limit could affect beneficiaries’ work decisions. For example, protecting benefits of dependents by increasing the family maximum could affect an individual’s work decisions. Under the current family maximum with a benefit reduction in place, if a person chooses to work 30 hours a week, an increase in the total amount a family (or individual dependents) could receive might affect this decision and decrease the person’s time in the workforce. In such a case, the individual may find that the increase in the benefits received would allow for fewer weekly hours of work without a change in total income. In addition, protections that increase the benefits of disabled workers, such as the super COLA, can also create disincentives for such beneficiaries to return to work. As such, some individuals may continue to rely on the DI program, rather than finding a way to re-enter the workforce. Social Security’s financial challenges may result in program modifications that may include benefit reductions. These benefit reductions will likely affect all beneficiaries, including vulnerable individuals who may not be able to adjust to these reductions or who rely on Social Security as their primary source of income. While protecting the benefits of vulnerable populations may be desirable, such action does come at a cost. Further benefit reductions or revenue increases would be needed to achieve program solvency. These offsets, in turn, may create new financial vulnerabilities among other beneficiaries who would bear the burden of these protections. Few reform proposals consider the impact that benefit reductions would have on all beneficiary types, instead treating all beneficiaries similarly. However, some special consideration should be given to the effects of the reform on the benefits of the most vulnerable, especially when these individuals are disproportionately affected. If the solution to Social Security’s financing problems includes benefit reductions, then the equal treatment of all beneficiaries may need to be reconsidered, and the complex interactions of benefit reductions, protections, and direct and indirect costs to the system and to other retirees will need to be weighed carefully. Benefit protections can be a part of a comprehensive reform package and the reform debate should consider the design, inclusion, and implications of such measures to assure income adequacy. Likewise, to the extent that Social Security aligns the disability program with the current state of science, medicine, technology, and labor market conditions, such modernization should also be considered. Accordingly, in light of potential reform, Congress should consider the potential implications of reform on disability and dependent beneficiaries. Such a review might usefully be coordinated with any modernization of the Social Security disability program. We provided a draft of this report to SSA and the Department of the Treasury, which generally agreed with our findings. Both provided technical comments, and SSA also provided general comments, which appear in appendix III. We incorporated the comments throughout our report as appropriate. In general, SSA concurred with the methodology, overall findings, and conclusions of the report. However, SSA felt that the report could benefit from a more direct comparison of disabled beneficiaries and retired beneficiaries (and a similar construct for dependents). While such a comparison could be beneficial and give context to the reform discussion, this report was premised on the notion that certain beneficiaries would be less able to offset benefit reductions, rather than a comparison of relative welfare. Finally, GAO agrees that one could better assess the degree to which a reform element or protection option support the program’s goal of adequacy if benefits were compared to a standard of adequacy; however such a comparison was beyond the scope of the current study. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution until 30 days after the date of this letter. At that time, we will send copies of this report to the Social Security Administration and the Department of the Treasury, as well as other interested parties. Copies will also be made available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-7215, if you have any questions about this report. Other major contributors include Michael Collins, Nagla’a El-Hodiri, Jennifer Gregory, Joe Applebaum, Melinda Cordero, Mark Goldwein, Meaghan Mann, and Dan Schwimer. To analyze the effects of individual reform elements and certain protections from these reforms on Social Security benefit levels for disabled workers and dependents, we simulated their benefits using the Policy Simulation Group’s (PSG) microsimulation models. We based our analysis on projected lifetime benefits for a simulated 1985 birth cohort. In order to have a point of comparison, we also used the microsimulation models to simulate Social Security benefits of retirees who receive benefits on their own record. To simulate longevity indexing, which links the growth of initial benefits to changes in life expectancy, we successively modified the PIA formula replacement factors (90, 32, 15) beginning in 2009, reducing them annually by multiplying them by 0.995. This specification mimics provision 1 of Model 3 of the President’s Commission to Strengthen Social Security (CSSS). The CSSS solvency memorandum notes that the 0.995 successive reductions “reduces monthly benefit levels by an amount equivalent to increasing the normal retirement age (NRA) for retired workers by enough to maintain a constant life expectancy at NRA, for any fixed age of benefit entitlement.” This provision as specified and scored—using the intermediate assumptions of the 2001 Trustees’ report—in the CSSS memo by SSA’s Office of the Chief Actuary would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 1.17 percent of taxable payroll. We also simulated the effects of price indexing, where initial benefits would be indexed to the consumer price index (CPI) in order to limit the growth of benefits. We successively modified the primary insurance amount (PIA) formula replacement factors (90, 32, and 15) beginning in 2012, reducing them successively by real wage growth in the second prior year. This specification mimics provision B6 of the August 10, 2005, memorandum to SSA’s Chief Actuary regarding the provision requested by the Social Security Advisory Board (SSAB), which is an update of provision 1 of Model 2 of the CSSS. As noted in the CSSS’s solvency memorandum from SSA’s Chief Actuary, “his provision would result in increasing benefit levels for individuals with equivalent lifetime earnings across generations (relative to the average wage level) at the rate of price growth (increase in the CPI), rather than at the rate of growth in the average wage level as in current law.” This provision as specified and scored by OCACT in the SSAB memo would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 2.38 percent of taxable payroll. To simulate the effects of implementing a progressive price index, we mimicked provision B7 of the August 10, 2005, memorandum to SSA’s Chief Actuary. We created a new bend point at the 30th percentile of earnings, beginning in 2012. We maintained current-law benefits for earners at the 30th percentile and below. We also maintained the lower two PIA formula replacement factors (90 and 32). We reduced the upper two PIA formula replacement factors (32 and 15) so that maximum worker benefits from one generation to the next grew by inflation rather than the growth in average wages. This provision as specified and scored by OCACT would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 1.43 percent of taxable payroll. In our modeling of this reform element, we gradually reduced the number of drop out years from 5 to 0, thereby extending the number of computation years from 35 to 40. The number of computation years would increase to 36 in 2007, 37 in 2008, 38 in 2010, 39 in 2012, and 40 in 2014. This specification mimics provision B2 of the August 10, 2005 memorandum to SSA’s Chief Actuary. This provision as specified and scored by OCACT would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 0.46 percent of taxable payroll. We also simulated a reduction in the cost-of-living adjustment (COLA) of one percentage point, beginning in 2012. This specification mimics provision A2 of the August 10, 2005, memorandum to SSA’s Chief Actuary. This provision as specified and scored by OCACT would improve the long-range OASDI actuarial balance (reduce the actuarial deficit) by an estimated 1.49 percent of taxable payroll. Some reform proposals have called for reducing the COLA by about 0.2 percent to 0.4 percent, in response to methodological concerns that the CPI for urban wage earners and clerical workers, the current CPI measure used to adjust benefits, overstates inflation. The intent of these proposals is to implement a COLA that may more accurately reflect inflation. To simulate the effects of fully exempting disabled workers from the various reform elements, we modified the simulation to exclude the benefits of disabled workers from the reform elements. As such, there would be no recalculation of benefits when the exempted beneficiary reached full retirement age. We defined partial exemptions for disabled workers to mean that their benefit would be exempted from any simulated reform until the FRA and then would be recalculated. For the COLA reduction, we simply started the one percentage point reduction at the FRA for disabled workers. However, for the reforms that involved a change in the initial benefit amount (longevity indexing, price indexing, and progressive price indexing), we simulated the recalculation of benefits at the FRA in two different ways. The first partial exemption, which we refer to as Partial Exemption Type I, followed the Kolbe-Stenholm model of converting benefits at the FRA. The Kolbe-Stenholm model reduces benefits in proportion to the difference in the disabled-worker PIA and the retired-worker PIA at the DI-onset age. This OASI benefit amount would be indexed by the COLA to for the years between the disability onset age and age 62. ) DIC is the promised DI benefit level under current law YD is the number of years (ages 21 to 62) that the disabled worker received DI benefits OASI is the OASI benefit level, calculated by computing the PIA under the reform using the formula applicable for newly eligible retired workers in the year the converting worker reached age 62. In this case, earnings from the years prior to disability would be wage indexed. The disability freeze years would apply in computing the AIME. To assess the reliability of simulated data from GEMINI, we reviewed PSG’s published validation checks and examined the data for reasonableness and consistency. PSG has published a number of validation checks of its simulated life histories. For example, simulated life expectancy is compared with projections from the Social Security Trustees; simulated benefits at age 62 are compared with administrative data from SSA; and simulated educational attainment, labor force participation rates, and job tenure are compared with values from the Current Population Survey. We found that simulated statistics for the life histories were reasonably close to the validation targets. Social Security offers a variety of types of benefits, and although they are all based upon the same formula, they are calculated in different ways. The methods for calculating the different types of benefits are outlined below. Old Age benefits are calculated through a four-step process in order to provide retirees with progressive yet wage-based cash payments (see fig. 13). First a worker’s Average Indexed Monthly Earnings (AIME) is calculated by indexing the worker’s past earnings to changes in average wage levels over the worker’s lifetime and then averaging them. The AIME formula considers all years in which a worker earned covered earnings. It then uses the number of elapsed years from 1950 or attainment of age 21 through the age of 62 (or death) and allows for 5 “drop-out years” so that the worker’s highest 35 years of covered indexed earnings are used in the calculation. Once the AIME is determined, a progressive formula is applied to the AIME to yield a worker’s Primary Insurance Amount (PIA). In 2007, the PIA formula had the following bend points: 90 percent of the first $680 of AIME, plus 32 percent of the next $3,420, and 15 percent of any earnings above that level (fig. 13). For example, the PIA of a worker whose AIME was $1000, the equivalent of at $12,000 annual salary, would be the sum of $612 (90 percent of $680) and $102.40 (32 percent of $320), yielding a total initial monthly benefit of around $715. Similarly, the PIA of a worker with an $8,000 AIME (the equivalent of a $96,000 annual salary) would be the sum of $612 (90 percent of $680), $1094.40 (32 percent of $3420), and $585 (15 percent of $3,900), for a total of just under $2,292. Because the formula is both wage-based and progressive, the second worker receives a much higher actual benefit than the first worker ($2,292 versus $715), but his benefits are a much lower proportion of his past earnings than the first worker’s benefits (28.6 percent versus 71.4 percent). If a worker retires at the full retirement age, which is currently between ages 65 and 66, and legislated to reach 67 in 2027, this PIA represents the first year’s benefit (although it is adjusted for inflation through a cost-of- living adjustment (COLA)). However, workers can begin receiving reduced benefits at 62; benefits are progressively larger for each month workers postpone drawing them, up to age 70. In general, benefits are actuarially neutral to the Social Security program; that is, the reduction for starting benefits before full retirement age and the credit for starting after full retirement age are such that the total value of benefits received over one’s lifetime is approximately equivalent for the average individual. Those receiving benefits before the full retirement age will also be subject to an earnings test. If earned income is above a certain threshold, Social Security withholds one dollar of benefits for every two dollars of earning above the threshold. Each year, benefits receive a COLA to keep pace with inflation. Similarly to Old Age benefits, disability benefits are determined by calculating a worker’s AIME, applying the progressive PIA formula to it, and then adjusting benefit levels through yearly COLAs (fig. 14). However, because disabled workers are likely to have shorter work histories, their benefits calculation relies on fewer years of earnings. In general, the number of years of earnings used to calculate the AIME is based on the total number of years between when a worker turns 21 and when he applies for DI. If this number of years is 25 or more, a worker’s 5 lowest (or zero) earnings years will be dropped from the calculation. The number of drop-out years gradually declines as a worker applies for disability earlier in life. If the disabled worker is 60 at the time of application, for example, 38 years would have elapsed since age 21. He will receive 5 drop out years, and his AIME will be calculated based upon his 33 highest-earning years. In contrast, if a worker applies for DI at 32, he would have only had 10 elapsed years since age 21, and only be eligible for 2 drop-out years; his AIME would be calculated based upon his top 8 years. At the full retirement age, disabled workers begin receiving retirement benefits, instead of disability benefits; however, benefit levels remain the same and continue to grow through annual COLAs. Spouses: In addition to being eligible to receive retirement benefits on their own earnings records as early as age 62, individuals can also receive dependents’ benefits at age 62, based on their spouse’s benefit amount or, in some cases, that of an ex-spouse (table 5). These individuals can collect these benefits regardless of whether their spouse is concurrently receiving retired or disabled worker benefits. If collection begins at full retirement age, these individuals are eligible for either one-half of their spouse’s benefit amount, or the benefits based on their own earnings record; whichever is greater. As with Old Age benefits, adjustments are made if these individuals chooses to take early retirement. Dependent Children: Dependent children may also qualify for one- half of their retired or disabled parent’s benefit amount. This benefit is available for disabled adult children who are not working on a regular basis, children under age 18, or children still in high school and under age 19. Like other benefits, dependents’ benefits receive annual COLAs. Dependent benefits are subject to a family maximum, whereby a family is limited in the total amount of benefits that can be received from a single individual’s earnings record. The size of the family maximum is currently between 150 percent and 188 percent of the primary beneficiary’s benefit. Widow(er)s may be eligible to receive a one-time death benefit of $255. In addition, widow(er)s, surviving parents, children under the age of 18 (19 if the child is still in school) and disabled adult children can collect benefits off of the deceased person’s earnings record. A widow(er) at full retirement age will receive 100 percent of his or her spouse’s benefits, unless his or her own benefit is higher. Younger widow(er)s (those between age 60 and the full retirement age) can receive between 71 and 99 percent of their deceased spouses’ benefits depending on how close they are to the full retirement age. Furthermore, regardless of age, a widow(er) with young children, can receive 75 percent of the deceased spouse’s benefit. Surviving parents and children can also collect up to 75 percent of their deceased family members’ benefits. All of these benefits receive annual COLA adjustments and are subject to the family maximum. Retirement Security: Women Face Challenges in Ensuring Financial Security in Retirement. GAO-08-105. Washington, D.C.: October 11, 2007. Retirement Decisions: Federal Policies Offer Mixed Signals about When to Retire. GAO-07-753. Washington, D.C.: July 11, 2007. Social Security Reform: Implications of Different Indexing Choice. GAO-06-804. Washington, D.C.: Sept ember 14, 2006. Social Security: Societal Changes Add Challenges to Program Protections. GAO-05-706T. Washington, D.C.: May 17, 2005. Options for Social Security Reform. GAO-05-649R. Washington, D.C.: May 6, 2005. Social Security Reform: Answers to Key Questions. GAO-05-193SP. Washington, D.C.: May 2, 2005. Social Security Reform: Early Action Would Be Prudent. GAO-05-397T. Washington, D.C.: March 9, 2005. Long Term Fiscal Issues: The Need for Social Security Reform. GAO-05-318T. Washington, D.C. February 9, 2005. Social Security: Distribution of Benefits and Taxes Relative to Earnings Level. GAO-04-747. Washington, D.C.: June 15, 2004. Social Security: Program’s Role in Helping Ensure Income Adequacy. GAO-02-62. Washington, D.C.: November 30, 2001. Social Security Reform: Potential Effects on SSA’s Disability Programs and Beneficiaries. GAO-01-35. Washington, D.C.: January 24, 2001. Social Security: Evaluating Reform Proposals. GAO/AIMD/HEHS-00-29. Washington, D.C.: November 4, 1999. Social Security Reform: Implications of Raising the Retirement Age. GAO/HEHS-99-112. Washington, D.C.: August 27, 1999. Social Security: Issues in Comparing Rates of Return with Market Investments. GAO/HEHS-99-110. Washington, D.C.: August 5, 1999. Social Security: Criteria for Evaluating Social Security Reform Proposals. GA0/T-HEHS-99-94. Washington, D.C.: March 25, 1999.","Many recent Social Security reform proposals to improve program solvency include elements that would reduce benefits currently scheduled for future recipients. To date, debate has focused primarily on the potential impact on retirees, with less attention to the effects on other Social Security recipients, such as disabled workers and dependents. As these beneficiaries may have fewer alternative sources of income than traditional retirees, there has been interest in considering various options to protect the benefits of disabled workers and certain dependents. This report examines (1) how certain elements of Social Security reform proposals could affect disability and dependent benefits, (2) options for protecting these benefits and how they might affect disabled workers and dependents, and (3) how protecting benefits could affect the Social Security program. To conduct this study, GAO used a microsimulation model to simulate benefits under various reform scenarios. GAO also interviewed experts and reviewed various reform plans, current literature, and GAO's past work. We considered several reform elements that could improve Social Security Trust Fund solvency by reducing the initial benefits received or the growth of individual benefits over time. According to our simulations, these reform elements would reduce median lifetime benefits for disabled workers by up to 27 percent and dependents by up to 30 percent of currently scheduled levels. While the size of the benefit reduction could vary across individuals, it could be substantial for the vast majority of these beneficiaries, depending upon the reform element. Options for protecting the benefits of disabled workers and dependents from the impact of reform elements include, among others, a partial exemption, whereby currently scheduled benefits are maintained until retirement age. For example, while simulations showed that one reform element could decrease median lifetime benefits of disabled workers to about 89 percent of currently scheduled levels, a partial exemption could restore them to about 96 percent. Further, these protections could be more targeted. For example, a larger cost of living adjustment would result in more rapid benefit growth for those disabled workers who receive benefits for a prolonged period of time. Some protections for dependent benefits could be targeted to a single group of dependents, such as widows, while others could affect multiple groups. For example, increasing the maximum benefit a family can receive could protect a wider group of beneficiaries, including children and spouses of disabled workers, and disabled adult children. While it may be desirable to protect the benefits of disabled workers and certain dependents, such protections would come at a cost to Social Security. Protecting benefits could lessen the impact that a reform element would have on solvency. In addition, such protections could create incentives to apply for Disability Insurance, if disability benefits remained stable while retirement benefits were reduced.",govreport
"When EESA was enacted on October 3, 2008, the U.S. financial system was facing a severe crisis that rippled throughout the global economy, moving from the U.S. housing market to the financial markets and affecting an array of financial assets and interbank lending. The crisis restricted access to credit and made the financing on which businesses and individuals depended increasingly difficult to obtain. Further tightening of credit exacerbated a global economic slowdown. During the crisis, Congress, the President, federal regulators, and others took a number of steps to facilitate financial intermediation by banks and the securities markets. While the financial system has generally stabilized and investor confidence has improved, some concerns persist that global demand will remain weak for a significant period of time, and that central bank efforts to combat inflation could disrupt financial markets. Under EESA, Treasury established a variety of TARP programs. American International Group, Inc. (AIG) Investment Program. Provided support to AIG to avoid disruptions to financial markets as the insurer’s financial condition deteriorated. Asset Guarantee Program. Provided federal government assurances for assets held by financial institutions that were viewed as critical to the functioning of the nation’s financial system. Bank of America and Citigroup were the only two participants in this program. AIFP. Aimed to prevent a significant disruption of the American automotive industry through government investments in domestic automakers Chrysler and GM and auto financing companies Chrysler Financial and Ally Financial (formerly known as General Motors Acceptance Corporation, or GMAC). Capital Assessment Program. Created to provide capital to institutions not able to raise it privately to meet Supervisory Capital Assessment Program—or “stress test”—requirements. This program was never used. CPP. The largest TARP program, designed to provide capital investments to financially viable financial institutions. Treasury received preferred shares and subordinated debentures, along with warrants. Consumer and Business Lending Initiative programs. The AIG Investment Program was formerly known as the Systemically Significant Failing Institutions Program. Community Development Capital Initiative (CDCI.) Provided capital to Community Development Financial Institutions (CDFI) by purchasing preferred stock and subordinated debentures. Small Business Administration (SBA) 7(a) Securities Purchase Program. Provided liquidity to secondary markets for government- guaranteed small business loans in SBA’s 7(a) loan program. Term Asset-backed Securities Loan Facility (TALF). Provided liquidity in securitization markets for various asset classes to improve access to credit for consumers and businesses. Public-Private Investment Program (PPIP). Created to address the challenge of “legacy assets” as part of Treasury’s efforts to repair balance sheets throughout the financial system. Treasury partnered with private funds that purchased residential and commercial mortgage-backed securities. Targeted Investment Program (TIP). Sought to foster market stability and strengthen the economy by making case-by-case investments in institutions that Treasury deemed critical to the functioning of the financial system. Bank of America and Citigroup were the only two institutions that participated in this program. Many of these programs are winding down or have ended. For example, as of September 30, 2014, Treasury had recovered all debt and equity investments made in PPIP. Furthermore, the AIG Assistance Program, the Asset Guarantee Program, the Capital Assessment Program, the SBA 7(a) Securities Purchase Program, and TIP are no longer active, and Treasury no longer holds assets related to these programs. Treasury still holds investments in CPP, CDCI, and AIFP, and the housing assistance programs remain active. The housing programs include: Making Home Affordable (MHA). MHA includes several housing programs, but the cornerstone is the Home Affordable Modification Program (HAMP), under which Treasury shares the cost of reducing monthly payments on first-lien mortgages with mortgage holders/investors and provides other financial incentives to servicers, borrowers, and mortgage holders/investors for loans modified under the program. There are several other programs that operate under MHA: Home Affordable Foreclosure Alternatives (HAFA) Program. The HAFA Program offers assistance to homeowners looking to relinquish their homes through a short sale or a deed-in-lieu of foreclosure. Treasury offers incentives to eligible homeowners, servicers, and investors under the program. Principal Reduction Alternative (PRA). PRA, a companion program to HAMP, requires servicers to evaluate the benefit of principal reduction for mortgages being assessed for a HAMP first-lien loan modification that have a loan-to-value ratio of 115 percent or more and that are not owned or guaranteed by Fannie Mae or Freddie Mac. Servicers are required to evaluate homeowners for PRA when evaluating them for a HAMP first-lien modification but are not required to actually reduce principal as part of the modification. Second Lien Modification Program (2MP). 2MP provides additional assistance to homeowners receiving a HAMP first-lien permanent modification who have an eligible second lien with participating servicers. When a borrower’s first lien is modified under HAMP, participating program servicers must offer to modify the borrower’s eligible second lien according to a defined protocol. This assistance can result in a modification or even full or partial extinguishment of the second lien. Treasury provides incentive payments to second lien mortgage holders in the form of a percentage of each dollar in principal reduction on the second lien. Treasury doubled the incentive payments offered to second lien mortgage holders for 2MP permanent modifications that included principal reduction and had an effective date on or after June 1, 2012. Government-insured or guaranteed loans (Federal Housing Administration (FHA-HAMP) and Rural Development (RD- HAMP)). FHA and the Department of Agriculture’s Rural Housing Service (RHS) have implemented modification programs similar to HAMP Tier 1 for FHA-insured and RHS-guaranteed first-lien mortgage loans. RD-HAMP provides borrowers with a monthly mortgage payment equal to 31 percent of the homeowners’ monthly gross income and FHA-HAMP provides for payment reduction based on a formula that considers gross income options (31 percent and 25 percent) and current payment (80 percent). Both programs require borrowers to complete a trial payment plan before permanent modification. If a modified FHA-insured or RHS- guaranteed mortgage loan meets Treasury’s eligibility criteria, the borrower and servicer can receive TARP-funded incentive payments from Treasury. Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit Fund). The Hardest Hit Fund seeks to help homeowners in the states hit hardest by unemployment and house price declines by funding innovative measures developed by state housing finance agencies and approved by Treasury. By September 2010, Treasury had completed the distribution of $7.6 billion in funds across 18 states and the District of Columbia.for funding either because their unemployment rates were at or above the national average or they had experienced housing price declines of 20 percent or more that left some borrowers owing more on their mortgages than the value of their homes. Although the type of assistance provided varies by state, all states use some portion of their funds to help unemployed homeowners make mortgage payments. Some states have programs that reduce principal to help make mortgage payments more affordable, reduce or eliminate borrowers’ second liens, and provide transition assistance to borrowers leaving their homes. Department of Housing and Urban Development’s (HUD) FHA Short Refinance program (FHA Short Refinance). FHA Short Refinance enables homeowners whose mortgages exceed the value of their homes to refinance into more affordable mortgages. Treasury continues to make progress in winding down the TARP nonhousing programs. According to Treasury, its decision to exit a program depends on various circumstances, including market conditions and other factors outside the government’s control. Treasury estimates that some nonhousing programs have produced, or will produce, a lifetime income while others have, or are expected to have, a lifetime cost. For example, repayments and income from the federal government’s investments in participating CPP institutions have exceeded the original amounts. Further, Treasury’s estimates of the lifetime costs of CDCI have been falling significantly as participants exit the program. However, under AIFP Treasury sold its stock in GM at a loss, although it will make a profit on the sale of its investments in Ally Financial. Treasury expects lifetime income from two other programs— TALF and PPIP. As of September 30, 2014, Treasury had completed the wind down of four of nine TARP nonhousing programs that were once active. Treasury has stated that when deciding to sell assets and exit TARP programs, it strives to: protect taxpayer investments and maximize overall investment returns within competing constraints, and promote the stability of financial markets and the economy by preventing disruptions to the financial system; bolster markets’ confidence in order to encourage private capital dispose of investments as soon as practicable. We and others have noted that these goals can at times conflict.example, we previously reported that deciding to unwind some of its assistance to GM by participating in an initial public offering (IPO) presented Treasury with a conflict between maximizing taxpayer returns and exiting as soon as practicable. Holding its shares longer could have meant realizing greater gains for the taxpayer but only if the stock appreciated in value. By participating in GM’s November 2010 IPO, Treasury tried to fulfill both goals, selling almost half of its shares at an early opportunity. Treasury officials stated that although they strove to balance these competing goals, they had no strict formula for doing so. Rather, they ultimately relied on the best available information in deciding when to start exiting this program. Moreover, in some cases Treasury’s ability to exercise control over the timing of its exit from TARP programs is limited. For example, Treasury has limited control over its exit from CDCI because the program’s exit depends on when each financial institution decides to repay Treasury’s investments. For As shown in table 1, Treasury estimates that several of the TARP nonhousing programs will provide or have provided income over their lifetimes, while others will incur a lifetime cost. Though direct costs for TARP—including potential lifetime income—can be estimated and quantified, certain indirect costs connected to the government’s assistance are less easily measured. For example, as we have previously concluded, when the government provides assistance to the private sector, it may increase moral hazard that would then need to be mitigated. That is, in the face of government assistance, private firms are motivated to take risks they might not take in the absence of such assistance, or creditors may not price into their extensions of credit the full risk assumed by the firm, believing that the government would provide assistance should the firm become distressed. Government interventions can also have consequences for the banking industry as a whole, including institutions that do not receive bailout funds. For instance, investors may perceive the debt associated with institutions that received government assistance as being less risky because of the potential for future government bailouts. This perception could lead them to choose to invest in such assisted institutions instead of those that did not receive assistance. Treasury continues to wind down CPP, the largest TARP investment program, which was designed to provide capital investments to viable financial institutions, and thus far, repayments and income have exceeded the total amount of original outlays. As we have reported, Treasury disbursed $204.9 billion to 707 financial institutions nationwide from October 2008 through December 2009. As of September 30, 2014, Treasury had received $226.4 billion in repayments and income from its CPP investments, exceeding the amount originally disbursed by $21.5 billion (see fig. 1). The repayments and income amounts include $199.4 billion in repayments and sales of original CPP investments, as well as $12.1 billion in dividends and interest, and $14.9 billion in proceeds in excess of costs, which includes $8.0 billion from the sale of warrants. After accounting for write-offs and realized losses from sales totaling $4.9 billion, CPP had $625 million in outstanding investments as of September 30, 2014. Treasury estimated a lifetime income of $16.1 billion for CPP as of September 30, 2014. As of September 30, 2014, a total of 664 of the 707 institutions (94 percent) that originally participated in CPP had exited the program. Of these, 253 had repurchased their preferred shares or subordinated debentures in full (see fig. 2). Another 165 institutions refinanced their shares through other federal programs: 28 through CDCI and 137 through another Treasury fund—separate from TARP—the Small Business Lending Fund (SBLF).investments sold through auction or other sales, and 30 institutions went into bankruptcy or receivership. The remaining 4 merged with another institution. Treasury created the CDCI program to help mitigate the adverse impacts of the financial crisis on communities underserved by traditional banks by providing capital to CDFIs—banks and credit unions—that provide financial services to low- and moderate-income, minority, and other underserved communities. CDCI, which is structured much like CPP, provides capital to financial institutions by purchasing preferred equity and subordinated debt from them.original 84 CDCI institutions remained in the program. Of the 16 institutions that had exited the program, 15 had done so through repayment and 1 had done so as a result of its subsidiary bank’s failure. Three of the 68 remaining institutions had begun to repay the principal on investments they had received, while the other remaining institutions had paid only dividends and interest. As of September 30, 2014, 68 of the As of September 30, 2014, the outstanding investment balance for CDCI was $465 million of an original investment of $570 million. As of the same date, Treasury had received approximately $98 million in principal repayments from CDCI participants, and had written off approximately $7 million. CDCI participants have also paid approximately $43 million in dividends and interest. Treasury has lowered its estimates of the program’s lifetime cost over the last 3 years as market conditions have improved and institutions have begun to repay their investments. As of November 2010, Treasury estimated the program’s lifetime cost at about $290 million. As of September 30, 2014, Treasury estimated the program’s lifetime cost at $110 million. As we have reported, Treasury continues to monitor the performance of CDCI participants because their financial strength will affect their ability to repay Treasury. Generally, the number of CDCI institutions with missed quarterly dividend or interest payments has been low, representing, on average, about 4 percent of all remaining institutions over the life of the program. The percentage of remaining institutions with missed payments has ranged from 0 to about 7 percent (0 to 6 institutions). Since November 2010 (the first quarter that dividend and interest payments were due), nine institutions (seven banks and two credit unions) have missed at least one quarterly payment. Of those institutions, three banks have missed at least eight payments, the threshold at which Treasury has the right to elect directors to their boards. However, as of September 30, 2014, Treasury had not appointed directors to the board of any CDCI banks, but it had sent an observer to one bank and asked to send an observer to a second. In an effort to preserve their capital and promote safety and soundness, federal and state regulators generally do not allow institutions on these lists to make dividend payments. As of September 30, 2014, Treasury was continuing to assess exit alternatives for the CDCI program. Treasury had not yet determined a final exit strategy and associated timing and has limited control over participants’ decision to exit. As we previously reported, CDCI participants said that the 2 percent dividend rate they would pay on investments until 2018 was lower than the cost of private capital and that access to capital would play a major factor in their decision to repay their CDCI investments. The dividend rate will increase from 2 percent to 9 percent in 2018 and may be a key factor for many CDCI participants in the decision to stay in or exit the program. Treasury disbursed $79.7 billion through AIFP from December 2008 through June 2009 to support two automakers, Chrysler and GM, and their automotive finance companies, Chrysler Financial and Ally Financial (then known as GMAC). As of September 30, 2014, the government had recovered $68.9 billion (86.3 percent) of the funds disbursed through the program, and expects AIFP to have a lifetime cost of $12.2 billion. Chrysler. In May 2011, Chrysler repaid its outstanding TARP loans, 6 years ahead of schedule. Chrysler returned more than $11.1 billion of $12.4 billion committed to Chrysler through principal repayments, interest, and cancelled commitments. Treasury has fully exited its investment in Chrysler Group under TARP. GM. On December 9, 2013, Treasury fully exited its investment in GM. Treasury completed its fourth and final pre-arranged trading plan for the sale of its remaining 31.1 million shares. Treasury recovered a total of $39.7 billion from its original investment of $51.0 billion in GM. Chrysler Financial. In July 2009, Chrysler Financial repaid its $1.5 billion in TARP loans plus around $7 million in interest. Chrysler Financial has since ceased operations. Also through AIFP, Treasury provided $17.2 billion of assistance to Ally Financial, a large financial holding company, whose primary business is auto financing. To provide this assistance, Treasury purchased senior equity, mandatory convertible preferred shares, and trust preferred securities, some of which Treasury ultimately converted into common shares. By December 2010, Treasury held common shares totaling 74 percent of Ally financial as well as $5.9 billion in mandatory convertible preferred shares. Treasury retained this level of ownership through the third quarter of 2013. Then, in late 2013, three key regulatory and legal developments helped Treasury accelerate the wind down of its investments in Ally Financial (see text box). As a result, in November 2013, Ally Financial made cash payments totaling $5.9 billion to repurchase all remaining mandatory convertible preferred shares outstanding and terminate an existing share adjustment provision. Additionally, Ally Financial issued $1.3 billion of common equity to third- party investors, reducing Treasury’s ownership share from 74 to 63 percent. The Board of Governors of the Federal Reserve System (Federal Reserve) did not object to Ally Financial’s resubmitted capital plan, allowing Ally Financial to complete the private placement of common shares valued at $1.3 billion, which it had announced in August 2013. The private placement, intended in part to help finance the repurchase of the $5.9 billion remaining Treasury-owned mandatory convertible preferred shares, was completed in November 2013, and the Treasury shares were repurchased. In December 2013, the bankruptcy of Ally Financial’s subsidiary ResCap was substantially resolved. The final bankruptcy agreement included a settlement that the bankruptcy court judge had approved in June 2013. It released Ally Financial from any and all legal claims by ResCap and, with some exceptions, all other third parties, in exchange for $2.1 billion in cash from Ally Financial and its insurers. Also in December 2013, Ally Financial obtained Federal Reserve approval to convert from a bank holding company to a financial holding company, enabling it to continue insurance underwriting and other Because of the positive results of the March 2014 stress test and Comprehensive Capital Analysis and Review (CCAR) conducted by the Board of Governors of the Federal Reserve System (Federal Reserve) on Ally Financial, Treasury decided to further reduce its ownership share.The day after the release of the CCAR results in March 2014, Treasury announced that it would sell Ally Financial common stock in an initial public offering (IPO). In April 2014, Treasury completed the IPO of 95 million shares at $25 per share. The $2.4 billion sale reduced Treasury’s ownership share to approximately 17 percent. Following the IPO, Ally Financial became a publicly held company. In May 2014, Treasury received $181 million from the sale of additional shares after underwriters exercised the option to purchase an additional 7 million shares from Treasury at the IPO price. This additional sale reduced Treasury’s ownership share to approximately 16 percent. In September 2014, Treasury announced the completion of its first trading strategy for Ally common stock. With this plan, Treasury sold 8.89 million shares and recovered approximately $218.7 million, further reducing its ownership share to 13.8 percent (around 64 million shares of common stock). On September 12, 2014, Treasury announced that it would continue to wind down its investment in Ally by selling additional shares of common stock through its second pre-defined written trading plan, with sales beginning that day. As of September 30, 2014, Treasury had recovered approximately $18.1 billion in sales proceeds and interest and dividend payments on its total $17.2 billion investment in Ally Financial. On December 19, 2014, Treasury announced an agreement to sell all of its remaining common shares in Ally Financial. Treasury reported that it recovered $19.6 billion from Ally, which is approximately $2.4 billion more than its initial investment of $17.2 billion. This results in the exit of Treasury’s last outstanding investments in AIFP. The Federal Reserve established TALF in an effort to reopen the securitization markets and improve access to credit for consumers and Treasury committed funds to the TALF special-purpose businesses.vehicle, TALF LLC, established by the Federal Reserve Bank of New York (FRBNY) to provide credit protection to FRBNY for TALF loans should borrowers fail to repay and surrender the asset-backed securities (ABS) or commercial mortgage-backed securities (CMBS) pledged as collateral. Treasury disbursed $100 million for start-up costs to TALF LLC (see fig. 5). TALF LLC repaid Treasury’s initial $100 million disbursement in 2013, and as of September 30, 2014, had accumulated $759 million in income from the TALF loans, of which $632 million was paid to Treasury as contingent interest. On November 6, 2014, the net portfolio holdings of TALF LLC were reduced to zero, and TALF LLC together with the other TALF agreements were terminated, effectively closing the TALF program. To create PPIP, Treasury partnered with private funds that purchased troubled mortgage-related assets (“legacy assets”) from financial institutions in order to help repair balance sheets throughout the financial system. The program’s Public-Private Investment Funds (PPIF) each had a 3-year investment period that began at each fund’s inception date, and at the completion of the investment period each fund had 5 years to completely divest. Treasury provided these PPIFs with equity and loan commitments of $7.4 billion and $14.7 billion, respectively, but disbursed a total of $18.6 billion (see fig. 6). On September 30, 2014, Treasury received its final $1.8 million distribution from the PPIP. With this distribution all nine PPIFs have completely divested their assets and Treasury recovered a total of $22.5 billion. According to Treasury officials, as of December 29, 2014, all nine PPIFs had formally provided Treasury official termination notices and the PPIP program had been effectively wound down. As of September 30, 2014, Treasury had disbursed $13.7 billion (36 percent) of the $38.5 billion in TARP funds that had been allocated to support housing programs. The number of new HAMP permanent modifications added on a quarterly basis rose slightly in early 2013 but has declined in 2014, falling to 29,000 in the third quarter, the lowest level since the program’s inception. Treasury has taken steps to help more borrowers, including by extending the deadline for HAMP applications for a third time. Treasury’s Office of Homeownership Preservation within OFS is tasked with finding ways to help prevent avoidable foreclosures and preserve homeownership. Treasury established three initiatives under TARP to address these issues: MHA, the Hardest Hit Fund, and FHA Short Refinance. As of September 30, 2014, Treasury had disbursed approximately $13.7 billion (36 percent) of the $38.5 billion in TARP housing funds, though the amount of disbursements varied across the three programs (see fig. 7). For example, of the $29.8 billion dedicated to MHA, the largest TARP-funded housing program, Treasury had disbursed $9.3 billion (31 percent) as of September 2014. In the case of the Hardest Hit Fund, $7.6 billion (59 percent) had been disbursed as of that date. In contrast, only $0.01 billion (0.13 percent) had been disbursed for the FHA Short Refinance program. As we have reported, Treasury officials said that they anticipated using all of the remaining MHA funds, and in April 2014, the Congressional Budget Office (CBO) increased its estimate of likely disbursements under TARP-funded housing programs because of extensions of the MHA program. But CBO has continued to project an $11 billion dollar surplus for the TARP-funded housing programs because it anticipates that fewer households will participate in the housing programs. Treasury will continue to disburse TARP funds under the housing programs for several more years. Specifically, homeowners have until at least December 31, 2016, to apply for assistance under MHA programs, and Treasury will continue to pay incentives for up to 6 years after the last permanent modification begins. Treasury’s obligation under FHA Short Refinance will continue until September 2020. Unlike TARP expenditures under some other programs, such as those that provided capital infusions to banks, expenditures under these programs are generally direct outlays of funds with no provision for repayment. As of September 30, 2014, the estimated lifetime cost for the housing programs was $37.4 billion. The centerpiece of Treasury’s MHA program is HAMP, which seeks to help eligible borrowers facing financial distress avoid foreclosure by reducing their monthly first-lien mortgage payments to more affordable levels. Treasury announced HAMP (which originally included what is now called HAMP Tier 1) on February 18, 2009. At that time, Treasury projected that the program would help up to 3 million to 4 million borrowers who were at risk of default and foreclosure. However, we noted then that reaching the projected number of borrowers might be difficult for several reasons. In an effort to reach more borrowers, Treasury expanded HAMP to include HAMP Tier 2, which servicers began implementing in June 2012. Treasury also provides incentive payments to services, investors, and borrowers for modifications under HAMP Tier 1 and HAMP Tier 2. Since the HAMP first lien modification program began in 2009 through September 2014, there have been 2,246,680 trial modifications and 1,416,705 permanent modifications. These modifications resulted in a median monthly mortgage payment reduction of $490 per month. As shown in figure 8, HAMP participation, as measured by trial and permanent modifications started each quarter, peaked in early 2010, generally declined in 2011, and then held relatively steady through the middle of 2013. However, beginning with the third quarter of 2013, the number of new HAMP trial modifications began to decline, falling to 27,000 in the second quarter of 2014, then increasing slightly, to 33,000 in the third quarter of 2014—the most recent for which data are available. During the same period, the number of new HAMP permanent modifications declined steadily, from 46,000 in the third quarter of 2013 to 29,000 in the third quarter of 2014. As we have reported, according to Treasury, the decline in HAMP modifications is a reflection of the shrinking pool of HAMP-eligible mortgages, as evidenced in the declining number of 60-day-plus delinquencies reported by the industry. Treasury has taken steps to increase HAMP participation, including extending the program application deadline and making other program changes. First, in June 2014, Treasury announced the third extension of the program to at least December 31, 2016. With this extension, Treasury has increased the period for eligible borrowers—including the unemployed and those facing an increase in interest rates—to apply for assistance by 4 years from the initial program deadline of December 31, 2012. However, as we have reported earlier, the pool of mortgages eligible for HAMP programs is declining. Second, in September 2014 Treasury, in conjunction with HUD and the Ad Council, launched a new series of public service advertisements (PSA) to raise awareness of the free government resources available through MHA to assist struggling homeowners in avoiding foreclosure. The campaign includes television, print, radio, outdoor (billboards and other signage), and digital PSAs. According to Treasury, since the campaign was initially launched in 2010, media outlets have donated about $137 million in airtime and physical and digital space, and more than 16,000 outdoor or transit ads have been placed nationwide. Treasury officials said that calls to the Homeowner’s HOPETM Hotline increased by 20 percent during the first week of the campaign. Treasury attributes the increase to the September 2014 campaign effort. Lastly, in late 2014, Treasury released two Supplemental Directives. The first, Supplemental Directive 14-04, was issued in October 2014 and stated that the interest rate on a HAMP Tier 2 modification would be lowered effective January 1, 2015, to the weekly Freddie Mac Primary Mortgage Market Survey Rate minus 50 basis points (down from zero basis points). Treasury is lowering the rate in an effort to increase the population that is potentially eligible for HAMP and provide greater payment reduction. In particular, Treasury believes the lowered rate will allow more HAMP Tier 1 borrowers, who might struggle with an interest rate step-up under Tier 1, to qualify for a HAMP Tier 2 modification. On November 30, 2014, Treasury issued Supplemental Directive 14-05, which made several changes to HAMP that, among other things, will extend the pay-for-performance borrower incentives by an additional year, to a sixth year for the modification, and increases the amount of the incentive payment for that additional year to $5,000, up from $1,000 for years 1 to 5. While previously Tier 2 modifications were not eligible for pay-for-performance incentive payments, the changes in Supplemental Directive 14-05 apply to both Tier 1 and Tier 2 modifications, as well as to FHA-HAMP and RD-HAMP modifications. Among the other programs designed to help borrowers, HAFA has assisted the largest number of borrowers—approximately 169,000— through September 2014. Under HAFA, 162,498 short sales and 6,975 deeds-in-lieu had taken place, as of September 2014 PRA had provided an estimated $14.8 billion in principal reduction to borrowers, through 163,951 permanent loan modifications, with $68,861 in median principal reduction. Through 2MP, servicers reported starting about 141,697 second-lien modifications, of which 38,480 fully extinguished the second lien as of September 2014. Nearly 67,708 trial modifications were started that received Treasury FHA-HAMP incentives as of June 2014, and the median monthly payment reduction for active permanent modifications was $232. However, as of June 2014, only 187 modifications had been made that qualified for Rural Development (RD)-HAMP incentives. For the RD-HAMP loans, the median monthly payment reduction for active permanent modifications was $260. As discussed earlier, Treasury extended HAMP and all MHA programs until at least December 31, 2016. However, Treasury officials told us that they might decide at a future date to wind down some programs under MHA at an earlier date or to extend MHA beyond 2016. They added that their decision would be based on market conditions, program volume, and other factors. As of September 30, 2014, six states and the District of Columbia had closed their Hardest Hit Fund application process in anticipation of full commitment of program funds. As of that date, participating states and the District of Columbia had committed a total of $3.4 billion of the $7.6 billion dedicated to the program, and assisted a total of 207,511 homeowners. However, as we have reported, progress in disbursing funds and meeting state-level targets for household participation varied across states. As we also reported, state officials told us that, with Treasury’s help, they had confronted challenges related to staffing and infrastructure, servicer participation, borrower outreach, and program implementation In terms of an exit strategy and end date for the Hardest Hit Fund, state housing finance agencies must commit funds by December 31, 2017, but can continue to spend committed funds after that date. According to Treasury officials, currently there are no plans to extend the deadline for committing Hardest Hit Fund monies beyond 2017. However, Treasury will continue to evaluate that deadline over time, taking into account changing market conditions in Hardest Hit Fund areas, program performance, and other factors. Finally, FHA refinanced 4,963 loans between September 2010 and September 2014 through the FHA Short Refinance program. As of September 30, 2014, Treasury would pay a portion of claims in the event Through September 2014, of a default for 3,015 of those loans.Treasury had paid one claim of approximately $48,000 and spent approximately $10 million in administrative costs. The scheduled end date for the FHA Short Refinance program was December 31, 2014. However, on November 14, 2014, FHA extended the program for an additional 2 years, with all loans required to close on or before December 31, 2016. Treasury officials are evaluating whether the extension through 2016 will require an extension of Treasury’s line of credit. We provided a draft of this report to Treasury for review and comment. In its written comments, reproduced in appendix II, Treasury generally concurred with our findings. Treasury stated that it will continue its efforts to wind down the remaining investment programs while protecting taxpayers’ interests and maximizing returns and continue to implement TARP-funded housing programs, primarily through mortgage modifications and other assistance programs. Treasury also provided technical comments that we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees. This report will be available at no charge on our website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The objectives in this report were to examine the condition and status of (1) nonhousing-related Troubled Asset Relief Programs (TARP) and (2) TARP-funded housing programs. To assess the condition and status of all the nonhousing-related programs initiated under TARP, we collected and analyzed data about program utilization and assets held, as applicable, focusing primarily on financial information that we had audited in the Office of Financial Stability’s (OFS) financial statements, as of September 30, 2014. In some instances we analyzed more recent, unaudited financial information. The financial information includes the types of assets held in the program, obligations that represent the highest amount obligated for a program (to provide historical information on total obligations), disbursements, and income. We also used OFS cost estimates for TARP that we audited as part of the financial statement audit. As part of the financial statement audit, we tested OFS’s internal controls over financial reporting. The financial information used in this report is sufficiently reliable to assess the condition and status of TARP programs based on the results of our audits of fiscal years 2009 through 2014 financial statements for TARP. Further, we reviewed the Department of the Treasury’s (Treasury) documentation such as press releases and reports on TARP programs and costs. Also, we interviewed OFS program officials and obtained information from them to determine the current status of each TARP program and to update what is known about exit considerations for TARP programs. In reporting on these programs and their exit considerations, we leveraged our previous TARP reports, as appropriate. In addition, we did the following: For the Capital Purchase Program, we used OFS’s reports to describe the status of the program, including which participants had begun repaying Treasury investments, the number of institutions that had exited the program, and the amount of dividends paid. In addition, we reviewed Treasury’s press releases on the program and interviewed Treasury officials. For the Community Development Capital Initiative, we interviewed program officials to determine what exit concerns Treasury has for the program. To update the status of the Automotive Industry Financing Program and Treasury’s plans for managing its investment in the companies, we reviewed information on Treasury’s plans for overseeing its financial interests in Ally Financial, including Treasury reports. We also interviewed officials from Treasury. For the Term Asset-Backed Securities Loan Facility, we interviewed OFS officials about their role in the program as it continues to unwind. To update the status of the Public-Private Investment Program, we analyzed program quarterly reports, term sheets, and other documentation related to the public-private investment funds. We also interviewed OFS staff responsible for the program to determine the status of the program while it remains in active investment status. To assess the status of TARP-funded housing programs, we reviewed Treasury reports, guidance, and documentation and interviewed Treasury officials, in addition to leveraging our recent work.determine the status of Treasury’s TARP-funded housing programs, we obtained and reviewed Treasury’s published reports on the programs, as well as guidelines and related updates issued by Treasury for each of the programs. In addition, we obtained information from and interviewed Treasury officials about the status of the TARP-funded housing programs. We conducted this performance audit from September 2014 to January 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov. In addition to the contacts named above, Marcia Carlsen, Lynda E. Downing, Harry Medina, and Karen Tremba (lead assistant directors); Kristeen McLain (Analyst-in-Charge), Bethany M. Benitez, Emily R. Chalmers, William R. Chatlos, Rachel DeMarcus, Alex Fedell, John A. Karikari, Dragan Matic, Marc Molino, and Jena Y. Sinkfield have made significant contributions to this report. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2014 and 2013 Financial Statements. GAO-15-132R. Washington, D.C.: November 7, 2014. Troubled Asset Relief Program: Treasury Could Better Analyze Data to Improve Oversight of Servicers’ Practices. GAO-15-5. Washington, D.C.: October 6, 2014. Troubled Asset Relief Program: Government’s Exposure to Ally Financial Lessens as Treasury’s Ownership Share Declines. GAO-14-698. Washington, D.C.: August 5, 2014. Community Development Capital Initiative: Status of the Program and Financial Health of Remaining Participants. GAO-14-579. Washington, D.C.: June 6, 2014. Troubled Asset Relief Program: Status of the Wind Down of the Capital Purchase Program. GAO-14-388. Washington, D.C.: April 7, 2014. Troubled Asset Relief Program: More Efforts Needed on Fair Lending Controls and Access for Non-English Speakers in Housing Programs. GAO-14-117. Washington, D.C.: February 6, 2014. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2013 and 2012 Financial Statements. GAO-14-172R. Washington, D.C.: December 12, 2013. Troubled Asset Relief Program: Status of Treasury’s Investments in General Motors and Ally Financial. GAO-14-6. Washington, D.C.: October 29, 2013. Troubled Asset Relief Program: GAO’s Oversight of the Troubled Asset Relief Program Activities. GAO-13-840R. Washington, D.C.: September 6, 2013. Troubled Asset Relief Program: Treasury’s Use of Auctions to Exit the Capital Purchase Program. GAO-13-630. Washington, D.C.: July 8, 2013. Capital Purchase Program: Status of the Program and Financial Health of Remaining Participants. GAO-13-458. Washington, D.C.: May 7, 2013. Troubled Asset Relief Program: Status of GAO Recommendations to Treasury. GAO-13-324R. Washington, D.C.: March 8, 2013. Troubled Asset Relief Program: Treasury Sees Some Returns as It Exits Programs and Continues to Fund Mortgage Programs. GAO-13-192. Washington, D.C.: January 7, 2012. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2012 and 2011 Financial Statements. GAO-13-126R. Washington, D.C.: November 9, 2012. Treasury Continues to Implement Its Oversight System for Addressing TARP Conflicts of Interest. GAO-12-984R. Washington, D.C.: September 18, 2012. Troubled Asset Relief Program: Further Actions Needed to Enhance Assessments and Transparency of Housing Programs. GAO-12-783. Washington, D.C.: July 19, 2012. Troubled Asset Relief Program: Government’s Exposure to AIG Lessens as Equity Investments Are Sold. GAO-12-574. Washington, D.C.: May 7, 2012. Capital Purchase Program: Revenues Have Exceeded Investments, but Concerns about Outstanding Investments Remain. GAO-12-301. Washington, D.C.: March 8, 2012. Management Report: Improvements Are Needed in Internal Control over Financial Reporting for the Troubled Asset Relief Program. GAO-12-415R. Washington, D.C.: February 13, 2012. Troubled Asset Relief Program: As Treasury Continues to Exit Programs, Opportunities to Enhance Communication on Costs Exist. GAO-12-229. Washington, D.C.: January 9, 2012. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2011 and 2010 Financial Statements. GAO-12-169. Washington, D.C.: November 10, 2011. Troubled Asset Relief Program: Status of GAO Recommendations to Treasury. GAO-11-906R. Washington, D.C.: September 16, 2011. Troubled Asset Relief Program: The Government’s Exposure to AIG Following the Company’s Recapitalization. GAO-11-716. Washington, D.C.: July 28, 2011. Troubled Asset Relief Program: Results of Housing Counselors Survey on Borrowers’ Experiences with the Home Affordable Modification Program. GAO-11-367R. Washington, D.C.: May 26, 2011. Troubled Asset Relief Program: Survey of Housing Counselors about the Home Affordable Modification Program, an E-supplement to GAO-11-367R. GAO-11-368SP. Washington, D.C.: May 26, 2011. TARP: Treasury’s Exit from GM and Chrysler Highlights Competing Goals, and Results of Support to Auto Communities Are Unclear. GAO-11-471. Washington, D.C.: May 10, 2011. Management Report: Improvements Are Needed in Internal Control Over Financial Reporting for the Troubled Asset Relief Program. GAO-11-434R. Washington, D.C.: April 18, 2011. Troubled Asset Relief Program: Status of Programs and Implementation of GAO Recommendations. GAO-11-476T. Washington, D.C.: March 17, 2011. Troubled Asset Relief Program: Treasury Continues to Face Implementation Challenges and Data Weaknesses in Its Making Home Affordable Program. GAO-11-288. Washington, D.C.: March 17, 2011. Troubled Asset Relief Program: Actions Needed by Treasury to Address Challenges in Implementing Making Home Affordable Programs. GAO-11-338T. Washington, D.C.: March 2, 2011. Troubled Asset Relief Program: Third Quarter 2010 Update of Government Assistance Provided to AIG and Description of Recent Execution of Recapitalization Plan. GAO-11-46. Washington, D.C.: January 20, 2011. Troubled Asset Relief Program: Status of Programs and Implementation of GAO Recommendations. GAO-11-74. Washington, D.C.: January 12, 2011. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2010 and 2009 Financial Statements. GAO-11-174. Washington, D.C.: November 15, 2010. Troubled Asset Relief Program: Opportunities Exist to Apply Lessons Learned from the Capital Purchase Program to Similarly Designed Programs and to Improve the Repayment Process. GAO-11-47. Washington, D.C.: October 4, 2010. Troubled Asset Relief Program: Bank Stress Test Offers Lessons as Regulators Take Further Actions to Strengthen Supervisory Oversight. GAO-10-861. Washington, D.C.: September 29, 2010. Financial Assistance: Ongoing Challenges and Guiding Principles Related to Government Assistance for Private Sector Companies. GAO-10-719. Washington, D.C.: August 3, 2010. Troubled Asset Relief Program: Continued Attention Needed to Ensure the Transparency and Accountability of Ongoing Programs. GAO-10-933T. Washington, D.C.: July 21, 2010. Management Report: Improvements are Needed in Internal Control Over Financial Reporting for the Troubled Asset Relief Program. GAO-10-743R. Washington, D.C.: June 30, 2010. Troubled Asset Relief Program: Treasury’s Framework for Deciding to Extend TARP Was Sufficient, but Could be Strengthened for Future Decisions. GAO-10-531. Washington, D.C.: June 30, 2010. Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs. GAO-10-634. Washington, D.C.: June 24, 2010. Debt Management: Treasury Was Able to Fund Economic Stabilization and Recovery Expenditures in a Short Period of Time, but Debt Management Challenges Remain. GAO-10-498. Washington, D.C.: May 18, 2010. Troubled Asset Relief Program: Update of Government Assistance Provided to AIG. GAO-10-475. Washington, D.C.: April 27, 2010. Troubled Asset Relief Program: Automaker Pension Funding and Multiple Federal Roles Pose Challenges for the Future. GAO-10-492. Washington, D.C.: April 6, 2010. Troubled Asset Relief Program: Home Affordable Modification Program Continues to Face Implementation Challenges. GAO-10-556T. Washington, D.C.: March 25, 2010. Troubled Asset Relief Program: Treasury Needs to Strengthen Its Decision-Making Process on the Term Asset-Backed Securities Loan Facility. GAO-10-25. Washington, D.C.: February 5, 2010. Troubled Asset Relief Program: The U.S. Government Role as Shareholder in AIG, Citigroup, Chrysler, and General Motors and Preliminary Views on its Investment Management Activities. GAO-10-325T. Washington, D.C.: December 16, 2009. Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial Statements. GAO-10-301. Washington, D.C.: December 9, 2009. Troubled Asset Relief Program: Continued Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM. GAO-10-151. Washington, D.C.: November 2, 2009. Troubled Asset Relief Program: One Year Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges. GAO-10-16. Washington, D.C.: October 8, 2009. Troubled Asset Relief Program: Capital Purchase Program Transactions for October 28, 2008, through September 25, 2009, and Information on Financial Agency Agreements, Contracts, Blanket Purchase Agreements, and Interagency Agreements Awarded as of September 18, 2009. GAO-10-24SP. Washington, D.C.: October 8, 2009. Debt Management: Treasury Inflation Protected Securities Should Play a Heightened Role in Addressing Debt Management Challenges. GAO-09-932. Washington, D.C.: September 29, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-1048T. Washington, D.C.: September 24, 2009. Troubled Asset Relief Program: Status of Government Assistance Provided to AIG. GAO-09-975. Washington, D.C.: September 21, 2009. Troubled Asset Relief Program: Treasury Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable. GAO-09-837. Washington, D.C.: July 23, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-920T. Washington, D.C.: July 22, 2009. Troubled Asset Relief Program: Status of Participants’ Dividend Payments and Repurchases of Preferred Stock and Warrants. GAO-09-889T. Washington, D.C.: July 9, 2009. Troubled Asset Relief Program: June 2009 Status of Efforts to Address Transparency and Accountability Issues. GAO-09-658. Washington, D.C.: June 17, 2009. Troubled Asset Relief Program: Capital Purchase Program Transactions for October 28, 2008, through May 29, 2009, and Information on Financial Agency Agreements, Contracts, Blanket Purchase Agreements, and Interagency Agreements Awarded as of June 1, 2009. GAO-09- 707SP. Washington, D.C.: June 17, 2009. Auto Industry: Summary of Government Efforts and Automakers’ Restructuring to Date. GAO-09-553. Washington, D.C.: April 23, 2009. Troubled Asset Relief Program: March 2009 Status of Efforts to Address Transparency and Accountability Issues. GAO-09-504. Washington, D.C.: March 31, 2009. Troubled Asset Relief Program: Capital Purchase Program Transactions for the Period October 28, 2008 through March 20, 2009 and Information on Financial Agency Agreements, Contracts, and Blanket Purchase Agreements Awarded as of March 13, 2009. GAO-09-522SP. Washington, D.C.: March 31, 2009. Troubled Asset Relief Program: March 2009 Status of Efforts to Address Transparency and Accountability Issues. GAO-09-539T. Washington, D.C.: March 31, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-484T. Washington, D.C.: March 19, 2009. Federal Financial Assistance: Preliminary Observations on Assistance Provided to AIG. GAO-09-490T. Washington, D.C.: March 18, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-474T. Washington, D.C.: March 11, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-417T. Washington, D.C.: February 24, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-359T. Washington, D.C.: February 5, 2009. Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues. GAO-09-296. Washington, D.C.: January 30, 2009. Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency. GAO-09-266T. Washington, D.C.: December 10, 2008. Auto Industry: A Framework for Considering Federal Financial Assistance. GAO-09-247T. Washington, D.C.: December 5, 2008. Auto Industry: A Framework for Considering Federal Financial Assistance. GAO-09-242T. Washington, D.C.: December 4, 2008. Troubled Asset Relief Program: Status of Efforts to Address Defaults and Foreclosures on Home Mortgages. GAO-09-231T. Washington, D.C.: December 4, 2008. Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency. GAO-09-161. Washington, D.C.: December 2, 2008.","The Emergency Economic Stabilization Act of 2008 (EESA) authorized Treasury to create TARP, designed to restore liquidity and stability to the financial system and to preserve homeownership by assisting borrowers struggling to make their mortgage payments. Congress reduced the initial authorized amount of $700 billion to $475 billion as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. EESA also required that GAO report every 60 days on TARP activities in the financial and mortgage sectors. This report provides an update on the condition of all TARP programs—nonhousing and housing—as of September 30, 2014. To conduct this work, GAO analyzed audited financial data for various TARP programs; reviewed documentation such as press releases, and agency reports on TARP programs; and interviewed Treasury officials. GAO provided a draft of this report to Treasury. Treasury generally concurred with GAO's findings and provided technical comments, which GAO has incorporated, as appropriate. GAO makes no recommendations in this report. The Department of the Treasury (Treasury) continues to wind down Troubled Asset Relief Program (TARP) nonhousing programs that were designed to support financial and automotive markets (see figure). As of September 30, 2014, Treasury had exited four of the nine nonhousing programs that were once active, and was managing assets totaling $2.9 billion under those remaining. Some programs have yielded returns that exceed the original investment. For example, as of September 30, 2014, repayments and income from participants in the Capital Purchase Program, which provided capital to over 700 financial institutions, had exceeded original investments. In contrast, as of the same date Treasury had recouped 86 percent of its expenditures and incurred an estimated lifetime cost of $12.2 billion for the Automotive Industry Finance Program, which invested in major domestic automakers to prevent a significant industry disruption. Treasury's decision to fully exit a program depends on various factors, including the participating institutions' health and market conditions. TARP-funded housing programs, which focus on preventing avoidable foreclosures, are ongoing. As of September 30, 2014, Treasury had disbursed $13.7 billion (36 percent) of the $38.5 billion in TARP housing funds (see figure). The number of new Home Affordable Modification Program (HAMP) permanent modifications added on a monthly basis rose in early 2013 but fell in 2014 to the lowest level since the program's inception. According to Treasury, this decline is attributable in part to the shrinking pool of eligible mortgages, as evidenced in the declining number of 60-day-plus delinquencies reported by the industry. Treasury has taken steps to help more borrowers, including by extending the deadline for program applications for a third time until at least 2016. Also, Treasury launched a new series of public service advertisements that were distributed through a donated media campaign.",govreport
"Because of the abundance of coal and its historically low cost, coal-fueled electricity generating units provide a large share of the electricity produced in the United States. In 2012, according to Energy Information Administration (EIA) data, there were 1,309 coal-fueled generating units in the United States, with a total of 309,680 megawatts (MW) of net summer generating capacity—about 29 percent of the total net summer generating capacity in the United States.produced by using other fossil fuels, particularly natural gas and oil; nuclear power; and renewable sources, including hydropower, wind, geothermal, and solar. Historically, coal-fueled generating units have provided about half of the electricity produced in the United States—an amount that has declined in recent years, falling to 37 percent in 2012. In addition to coal, electricity is To address concerns over air pollution, water resources, and solid waste, several environmental laws, including the Clean Air Act, Clean Water Act, and Resource Conservation and Recovery Act, were enacted. As required or authorized by these laws, EPA recently proposed or finalized four key regulations that will affect coal-fueled units. As outlined in table 1, these regulations are at different stages of development and have different compliance deadlines. These four regulations have potentially significant implications for public health and the environment. In particular, EPA projected that, among other benefits, CSAPR would reduce SO emissions by over half in covered states, reducing asthma and related human health impacts. In addition, EPA projected that MATS would reduce mercury emissions by 75 percent from coal-fueled electricity generating units, reducing the impacts of mercury on adults and children. In addition to these four regulations, on June 2, 2014, EPA proposed new regulations to reduce carbon dioxide emissions from existing fossil-fueled generating units that, if finalized, will impact the electricity industry, including coal-fueled generating units, aiming for overall reductions equivalent to 30 percent from 2005 emissions levels by 2030. The proposed regulations include state-specific goals for carbon dioxide emissions and guidelines for states to follow in developing, submitting, and implementing plans to achieve these goals, which would be due in June 2016, although, under some circumstances, a state may submit an initial plan by June 2016 and a completed plan up to 2 years later. In addition to DOE, FERC, and EPA, other key stakeholders have certain responsibilities for overseeing actions power companies take in response to the regulations and have a role in mitigating some potential adverse implications. These other stakeholders include state environmental and electricity regulators and system planners that coordinate planning decisions regarding transmission and generation infrastructure to maintain the reliable supply of electricity to consumers. System planners and operators attempt to avoid reliability problems through advance planning of transmission and, in some cases, generation resources, and coordinating or determining operational decisions such as which generating resources are operated to meet demand throughout the day. The role of a system planner can be carried out by individual power companies or RTOs. System planners’ responsibilities include analyzing expected future changes in generation and transmission assets, such as the retirement of a generating unit; customer demand; and emerging reliability issues. For example, once a power company notifies the system planner that it is considering retiring a generating unit, the system planner generally studies the electricity system to assess whether the retirement would cause reliability challenges and identify long- or short-term solutions to mitigate any impacts. The solutions could include building new generating units, reducing demand in specific areas, building new transmission lines or adding other equipment. DOE, EPA, and FERC have taken initial steps to implement the recommendation we made in our July 2012 report that these agencies develop and document a formal, joint process to monitor industry progress in responding to the four EPA regulations. Since that time, DOE, EPA, and FERC have taken initial steps collectively and individually to monitor industry progress responding to EPA regulations including jointly conducting regular meetings with key industry stakeholders. However, recent and pending actions on the four existing regulations, as well as EPA’s recently proposed regulations to reduce carbon dioxide emissions from existing generating units may require additional monitoring efforts, according to DOE, EPA, and FERC officials. DOE, EPA, and FERC have taken initial steps to implement the recommendation we made in our July 2012 report. In that report we found the agencies had undertaken individual monitoring efforts of varied scale and scope and engaged in informal coordination, but lacked a formal documented process for routinely monitoring industry progress toward compliance with the regulations. As such, we recommended that these agencies develop and document a formal, joint process to monitor industry progress in responding to EPA regulations. We concluded that such a process was needed until at least 2017 to monitor the complexity of implementation and extent of potential effects on price and reliability. Since that time, DOE, EPA, and FERC have taken initial steps collectively to monitor industry progress responding to EPA regulations including jointly conducting regular meetings with key industry stakeholders. Currently, these monitoring efforts are primarily focused on industry implementation in regions with a large amount of capacity that must comply with the MATS regulation—the only one of the four regulations that has taken effect. According to EPA officials, DOE, EPA, and FERC officials have met three times since our July 2012 report to coordinate the efforts under way at each agency to monitor industry’s progress implementing the MATS regulation and other related issues, including EPA’s development of recently proposed regulations to reduce carbon dioxide emissions from existing generating units. In addition, in May 2013, staff from DOE, EPA, and FERC jointly developed a coordination memorandum that was intended to identify how the agencies would work together to address the potential effects of EPA’s regulations on reliability. According to one EPA official, the memorandum was intended to be an evolving document that the agencies would revisit as appropriate, for example, as additional EPA regulations are finalized. These four RTOs include PJM Interconnection, which serves all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia; Midcontinent ISO, which serves parts of Arkansas, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, North Dakota, South Dakota, Texas, and Wisconsin, as well as the Canadian province of Manitoba; the Southwest Power Pool, which serves parts of Arkansas, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, and Texas; and the Electric Reliability Council of Texas, which serves parts of Texas. control equipment in use and retrofit plans, and other information such as reliability assessments under way in the region. As part of these meetings, officials told us that the RTOs provided information of varying levels of detail to the agencies, including information on retirement notifications and associated impacts as determined by the reliability studies completed by the RTOs; the status and findings of reliability assessments they conduct; data on the generating capacity of units with planned, announced, or completed retirements and retrofits; and data on planned outages. RTO officials told us they each gathered information about the plans for generating units in the areas they oversee. Officials from several RTOs told us that they gathered this information by surveying owners of generating units to identify, among other things, information on decisions related to retiring or retrofitting specific generating units. According to EPA officials, the agencies’ monitoring and technical assistance efforts are primarily focused on implementation of the MATS requirements because it has taken effect and includes requirements that must be achieved within well-defined time frames. The MATS regulation was finalized in February 2012 and calls for a 3-year compliance period for existing generating units with the deadline of April 16, 2015, but permitting authorities may provide an extra year for certain generating units that request additional time to comply. Agency officials and stakeholders told us that state agencies are generally providing the 1- year extension for generating units—providing these units a total of 4 years to comply. In addition, according to the National Association of Clean Air Agencies (NACAA), as of May 2014, all but 9 of over 100 requests for extensions were granted by the state permitting agencies. In addition to the MATS extension, EPA also provided a mechanism to allow certain units—generating units that are needed to address specific and documented reliability concerns—to request an additional year to come into compliance through the use of Clean Air Act administrative orders—which, if granted, would provide a total of 5 years to comply. According to EPA officials, compliance with the MATS requirements has been less challenging for industry than anticipated, and operators have generally been able to undertake retrofits as part of scheduled maintenance outages; however, certain retrofits, such as the installation of a fabric filter will require additional or longer outages to be completed. According to EPA officials, whether a plant will need to schedule outages for retrofits will depend on a number of factors including the type of controls required for compliance. EPA officials told us they anticipate few administrative orders to be requested. However, if EPA receives a request for an administrative order, EPA has stated in its policy that it will rely on the advice and counsel of reliability experts, including FERC, to identify and analyze reliability risks, but EPA officials will make the final decision on these requests. In May 2012, FERC issued a policy statement detailing how it intends to provide advice to EPA on such requests. In addition to participating in the EPA-facilitated meetings with industry and reviewing information provided from the RTOs through those meetings, DOE, FERC, and EPA have taken other steps to individually monitor or support industry progress implementing EPA regulations. DOE. DOE is offering technical assistance to state public utility commissioners, generating unit owners and operators, and utilities on implementing the new and pending EPA regulations affecting the electric utility industry. Specifically, according to DOE officials and documents, DOE may provide technical information on cost and performance of the various retrofit control technologies; technical information on generation or transmission alternatives for any replacement power needed for retiring generating units; and assistance to public utility commissions regarding any regulatory evaluations or approvals they may have to make on utility compliance strategies. According to agency officials, while DOE offers technical assistance on implementing new and pending EPA rules, DOE has received limited requests for such assistance. EPA. According to EPA officials, EPA has conducted outreach to ensure state agencies understand their ability to provide MATS extensions and EPA officials also review information from NACAA on the status of MATS extension requests. In addition, EPA has updated its power sector modeling tool—a model EPA uses to analyze the impact of policies, regulations, and legislative proposals on the power sector—to reflect MATS requirements along with changes in other market conditions. FERC. FERC officials told us that they monitor information from several sources including the NERC reliability assessments,capacity additions, and information from NACAA on the status of MATS extension requests. In addition, FERC obtained industry information on EIA data on reliability challenges through a technical conference that it convened to obtain information on the effect of recent cold weather events on the RTOs. Recent and pending actions on the four existing regulations, as well as EPA’s recently proposed regulations to reduce carbon dioxide emissions from existing generating units, may require additional agency effort to monitor industry’s progress in responding to the regulations and any potential impacts on reliability. DOE, EPA, and FERC officials told us that, in light of these changes, their coordination efforts may need to be revisited. Specifically, one EPA official noted that the agencies may need to reexamine their coordination efforts, as appropriate, in light of changing conditions, including newly proposed EPA regulations. In addition, according to FERC officials, since not all the regulations have been finalized, conditions will continue to change, making continued monitoring of potential reliability or resource adequacy challenges important. Furthermore, in April 2014, a FERC Commissioner testified before Congress about concerns and uncertainty related to potential reliability and price impacts associated with environmental regulations.Specifically, the Commissioner expressed concerns about the reliability of data on which generating units are retiring and the resources to replace those retiring generating units and called for a more formal review process including FERC, EPA, and others to analyze the specific details of retiring units, as well as the new units and new transmission that will be needed to manage the transition and ensure reliability of the nation’s electricity sector. RTO officials and other industry stakeholders also told us that recent and pending actions on regulations could have impacts on the industry’s ability to reliably deliver electricity. Officials from several RTOs told us that, while widespread reliability concerns are not anticipated, some regions may face reliability challenges including challenges associated with increasing reliance on natural gas. Officials from several RTOs said that their efforts to monitor reliability impacts will include evaluating the recently proposed regulations to reduce carbon dioxide emissions, which may present challenges in the future. In addition, officials from one RTO told us that compliance with new and proposed EPA regulations and an evolving generation portfolio will have significant effects on the industry’s ability to reliably deliver electricity. Officials from this RTO reported that their region is forecasting shortfalls in its reserve margin—additional capacity that exceeds the maximum expected demand to provide for potential backup—in some areas. In addition, these RTO officials and industry stakeholders noted that retirement of coal-fueled generating units may lead to increasing reliance on natural gas, as these generating units are replaced with natural gas fueled generating units, which will require construction of new pipeline and storage infrastructure. As a result, according to officials from one RTO, their region has increased coordination with the natural gas industry through a stakeholder forum and a series of gas infrastructure studies. These officials said that, while relying on natural gas to generate electricity has not historically negatively affected reliability, greater reliance on natural gas may require more consideration of potential fuel-related future reliability challenges. RTO officials and other industry stakeholders also told us recent and pending actions on regulations could have impacts on electricity prices. For example, industry stakeholders told us that the retirements that are occurring or planned are significant and could lead to increased electricity rates in some regions. In addition, as we reported in July 2012, the studies we reviewed estimated that increases in electricity prices could vary across the country, with one study projecting a range of increases from 0.1 percent in the Northwest to an increase of 13.5 percent in parts of the South more dependent on electricity generated from coal. Officials from several RTOs told us that, while they analyze the potential reliability impacts of specific generating units that power companies are considering retiring, they do not analyze the potential market impacts of these retirements on electricity prices or other market factors. In addition, several RTO officials told us they cannot estimate the impacts of these potential retirements on the markets due to the number of factors involved in determining market prices and affecting markets. Based on our discussions with agency officials, FERC, DOE, and EPA are not evaluating the potential impacts of planned retirements or retrofits on electricity prices as part of their monitoring efforts. However, EPA officials told us it uses its power sector modeling tool to analyze the potential impact of new regulations on economic factors including electricity prices and has used the tool to examine the potential impact of the new carbon rule that reflected publicly announced retirements and retrofits at the time of its analysis. According to EPA’s analysis for the recently proposed regulations to reduce carbon dioxide emissions from existing generating units, it projected an increase in the national average retail electricity price between 5.9% and 6.5% in 2020 compared with its base case estimate. According to our analysis, power companies plan to retire a greater percentage of coal-fueled net summer generating capacity and retrofit less capacity with environmental controls than the estimates we reported in July 2012. Specifically, our analysis indicates that power companies retired or plan to retire about 13 percent of coal-fueled net summer generating capacity (42,192 MW) from 2012 through 2025, which exceeds the estimates of 2 to 12 percent of capacity we reported in 2012. In addition, power companies have planned or completed some type of retrofit on about 70,000 MW of net summer generating capacity to reduce SO, NO, or particulate matter from 2012 through 2025, which is less than estimates we reported in 2012. In addition to our analysis of publicly announced retirements and retrofits, RTO officials told us that power companies may take additional steps and provided information on generating units that owners may take steps to retire or retrofit; specifically, about 7,000 MW of additional capacity from 46 generating units may be retired from 2012 through 2025, beyond what we identified in our analysis of SNL data. According to our analysis of SNL data, planned retirements of coal-fueled generating units appear to have increased and are above the high end of the estimates we reported in July 2012. Specifically, power companies retired or plan to retire about 13 percent of coal-fueled net summer generating capacity (42,192 MW from 238 units) from 2012 through 2025. When we reported in July 2012, projections suggested that 2 to 12 percent of coal-fueled capacity may be retired. Based on our analysis of SNL data, power companies retired 100 coal-fueled units from January 2012 to May 2014 with a total of 14,887 MW net summer generating capacity. In addition, based on our analysis of SNL data, power companies have reported plans to retire an additional 138 coal- fueled units with a total of 27,306 MW of net summer generating capacity from June 2014 through 2025. Another recent review also identified higher projected retirements of coal-fueled capacity than estimates we reported in July 2012. Specifically, in April 2014, EIA projected that retirements from 2012 through 2020 could reach approximately 50,000 MW or about 16 percent of net summer generating capacity available at the end of 2012. Consistent with the reasons we had reported for retirements in 2012, some stakeholders we interviewed said that some of these projected retirements may have occurred without the environmental regulations. Specifically, these stakeholders noted that several industry trends may be contributing to the retirement of coal-fueled generating units, including relatively low natural gas prices, increasing prices for coal, and low expected growth in demand for electricity. In addition, in June 2012, we reported that operators of some coal-fueled generating units had entered into agreements with EPA to retire or retrofit units to settle EPA enforcement actions. However, we also reported in July 2012 that, according to some stakeholders, the new environmental regulations may accelerate retirements because power companies may not want to invest in retrofitting units with environmental controls for those units they expect to retire soon for other reasons. About three-quarters of the retirements we identified in our analysis of SNL data are expected to occur by the end of 2015, corresponding to the initial April 2015 MATS compliance deadline (see fig. 1). This level of retirements is significantly more retirements than have occurred in the past; for example, according to our analysis, between 2000 and 2011, 150 coal-fueled units with a total net summer generating capacity of 13,786 MW have been retired. According to our analysis of SNL data, the units that power companies have retired or plan to retire are generally older, smaller, and more polluting, and this is generally consistent with what we reported in October 2012. In addition, we found that many of the units that companies have retired or plan to retire are those that are not used extensively and are geographically concentrated, with some exceptions. Specifically, we found the following: Older. Generating units that power companies have retired or plan to retire are generally older. The fleet of operating coal-fueled units was built over many decades, with most of the capacity currently in service built in the 1970s and 1980s. In particular, from 2012 through 2025, power companies retired or plan to retire about 80 percent of net summer generating capacity from units that were placed in service prior to 1970 (33,419 MW from 213 of the 238 units). However, SNL data indicate that power companies retired or plan to retire some newer generating units, including one generating unit placed into service in 2008. Smaller. Generating units that power companies have retired or plan to retire are generally smaller. Smaller generating units are generally less fuel efficient than larger units and can be more expensive to retrofit, maintain, and operate on a per-MW basis. In particular, smaller units—those less that 300 MW—comprise about 63 percent of the net summer generating capacity that power companies retired or plan to retire from 2012 through 2025 (26,659 MW from 208 of the 238 units). However, some larger generating units are also planned for retirement. In particular, according to our analysis, power companies retired 4 generating units with a net summer generating capacity of over 300 MW from 1990 to 2012, and they retired or plan to retire about 30 such generating units from 2012 through 2025. More polluting. Generating units that power companies retired or plan to retire over the next 3 years emit air pollutants such as SO at generally higher rates than the remaining fleet. According to our analysis, units that were retired or are planned for retirement from 2014 through 2017 emitted on average almost three times as much SO per unit of fuel used at the generating unit in 2013 as units that are not planned for retirement. Similarly, units that were retired or are planned for retirement from 2014 through 2017 emitted on average about 41 percent more NO per unit of fuel used at the generating unit in 2013 than units not planned for retirement. Not used extensively. Most generating units that power companies have retired or plan to retire have not been extensively used in recent years, but other units were used more often. Specifically, according to our analysis, from 2012 through 2025, power companies retired or plan to retire units that comprise about 70 percent of the net summer generating capacity (30,000 MW from 186 of the 238 units) that operated the equivalent of less than half of the hours they were available over the past few years. However, data also indicate that about 13 of the 238 units that companies retired or plan to retire— which represent about 4,200 MW of net summer generating capacity—operated the equivalent of 70 percent or more of the hours they were available over the past few years. Geographically concentrated. Generating units that power companies have retired or plan to retire are concentrated in certain states (see fig. 2). Specifically, about 38 percent of the net summer generating capacity that power companies retired or plan to retire from 2012 through 2025 is located in four states—Ohio (14 percent), Pennsylvania (11 percent), Kentucky (7 percent), and West Virginia (6 percent). In particular, figure 2 shows how completed or planned retirements from 2012 through 2025 are distributed nationwide and how these are concentrated in certain areas. According to our analysis of SNL data, completed or planned retrofits of coal-fueled generating units include less capacity than estimates we reported in July 2012. These retrofits include the use of a wide range of the technologies we reported at that time. As noted in our July 2012 report, operators of generating units were expected to rely on the combined installation of several technologies to comply with the regulations. These technologies include: (1) fabric filters or electrostatic precipitators to control particulate matter; (2) flue gas desulfurization units—also known as scrubbers—or dry sorbent injection units to control SO and acid gas emissions; (3) selective catalytic reduction or selective noncatalytic reduction units to control NO; and (4) activated carbon injection units to reduce mercury emissions. Appendix I includes a description of these controls, how they operate, and their potential capacity to remove pollutants. that power companies have either installed or expect to install a scrubber—generally intended to reduce SO—on about 34,000 MW of net summer generating capacity from 2012 through 2025, an effort that we reported in July 2012 has typically been costly and can take some time to complete. In addition, about 20,000 MW have completed or planned to complete a retrofit to reduce particulates, including about 17,000 MW with completed or planned installations of fabric filters known as “baghouses.” By comparison, in July 2012, we reported that several studies forecasted the steps generating unit owners would take to retrofit units. In particular, EPA estimated that, in response to MATS, companies would retrofit 102,000 MW of generating capacity with fabric filters and 83,000 MW with new scrubbers or scrubber upgrades. In addition, a study by NERC, which collectively examined early versions of all four regulations in 2011, estimated that 576 units that account for about 234,371 MW of capacity would be retrofitted by the end of 2015. We identified two key characteristics of the units that power companies have retrofitted or plan to retrofit as follows: Larger. Most of the net summer generating capacity that have completed or plan to complete a retrofit—about 68 percent—is at larger units with capacity greater than 500 MW. Geographically concentrated. A large share of the net summer generating capacity that has completed or plan to complete a retrofit—about 36 percent—is composed of generating units located in four states: Illinois, Indiana, Kansas, and Texas. In addition, some states have completed or plan to complete more retrofits than others. In particular, seven states (Kansas, Louisiana, New Hampshire, New Mexico, Oregon, South Dakota, and Washington) have completed or plan to retrofit more than half of the net summer generating capacity located in that state. Based on information provided by RTOs, power companies may be considering retiring or retrofitting some additional generating units. In particular, RTO officials provided information on additional generating capacity that power companies have either announced plans to retire or retrofit, or are in the process of considering for a retirement or retrofit. In particular, RTOs identified about 46 coal-fueled generating units that account for about 7,000 MW of additional generating capacity that may be retired from 2012 through 2025, beyond what we identified in our analysis of SNL data. In addition, RTOs identified a total of 260 units that account for about 108,000 MW of generating capacity that have completed or may undertake a retrofit from 2012 through 2025, which may include the capacity identified in our analysis. The electricity sector is in the midst of a significant transition as power companies face decisions on the future of coal-fueled electricity generating units in light of new regulations and changes in the market, such as recent low prices for natural gas, and even though compliance deadlines for three of the regulations remain uncertain, power companies have already identified retirements beyond the range of estimates we reported in 2012. Reliable electricity remains critically important to U.S. homes and businesses and is itself reliant upon the availability of sufficient generating capacity. DOE, EPA, and FERC have taken initial steps to implement our recommendation to establish a joint process to monitor industry’s progress in responding to the four EPA regulations and other factors. However, stakeholders, including a FERC Commissioner, continue to express concerns about reliability and electricity prices. Furthermore, proposed regulations focused on reducing emissions of carbon dioxide from the electricity sector, when finalized, may pose additional challenges for coal-fueled generating units. The initial coordination efforts now under way across the three agencies are an important tool for understanding and monitoring the potential effects of EPA regulations and other factors on the electricity sector. However, consistent with our recommendation in 2012, careful monitoring and coordination by the federal agencies incorporating the views of other stakeholders such as RTOs will be even more important over the next several years as key regulations are finalized and implemented. We are not making new recommendations in this report. We provided a draft of this report to DOE, EPA, and FERC, for review and comment. In written comments from DOE, EPA, and FERC, reproduced in appendixes II, III, and IV respectively, the three agencies generally concurred with our analysis. The agencies stated that they will continue to monitor the progress of industry implementation of the regulations and coordinate with one another to address potential reliability challenges. Specifically, DOE stated that these coordination efforts have primarily focused on MATS and may be revisited as they work with industry to monitor compliance with other EPA regulations. EPA stated that it will monitor compliance with all of the rules, as appropriate, to ensure that reliability is not put at risk. FERC stated that it is working with industry to explore reliability issues stemming from new and pending environmental rules for the power sector, and that it will continue to monitor industry’s progress implementing these rules and will coordinate with DOE, EPA, and industry. We continue to believe it is important that these agencies jointly monitor industry’s progress in responding to the EPA regulations and fully document these steps as we recommended in 2012. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Energy, the Administrator of the EPA, the Chairman of FERC, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix V. How it works An induced electrical charge removes particles from flue gas. Fabric filter (commonly referred to as a “baghouse”) Flue gas passes through tightly woven fabric filter “bags” that filter out the particulates. Flue gas desulfurization unit (commonly referred to as a “scrubber”) Wet flue gas desulfurization units inject a liquid sorbent slurry, such as a limestone slurry, into the flue gas to form a wet solid that can be disposed of or sold. Dry flue gas desulfurization units inject a dry sorbent, such as lime, into the flue gas to form a solid byproduct that is collected. Coal combustion conditions are adjusted so less NO is formed. For SCR, ammonia is injected into flue gas to react with NO to form nitrogen (N) and water and uses a catalyst to enhance the reaction. For SNCR, ammonia or urea is injected into flue gas to react with NO as well, but does not use a catalyst. Activated carbon injection units Powdered activated carbon sorbent is injected into flue gas, binds with mercury, and is collected in particulate matter control device. In addition to the individual named above, Jon Ludwigson (Assistant Director), Janice Ceperich, Margaret Childs, Philip Farah, Quindi Franco, Cindy Gilbert, Richard Johnson, Armetha Liles, and Alison O’Neill made key contributions to this report.","EPA recently proposed or finalized four regulations affecting coal-fueled electricity generating units, which provide about 37 percent of the nation's electricity supply. These regulations are the: (1) Cross-State Air Pollution Rule; (2) Mercury and Air Toxics Standards; (3) Cooling Water Intake Structures regulation; and (4) Disposal of Coal Combustion Residuals regulation. In 2012, GAO reported that, in response to these regulations and other factors such as low natural gas prices, companies might retire or retrofit some units. GAO reported that these actions may increase electricity prices and, according to some stakeholders, may affect reliability–the ability to meet consumers' demand—in some regions. In 2012, GAO recommended that DOE, EPA, and FERC develop and document a formal, joint process to monitor industry's progress responding to these regulations. In June 2014, EPA proposed new regulations to reduce carbon dioxide emissions that will also affect these units. GAO was asked to update its 2012 report. This report examines (1) agencies' efforts to respond to GAO's recommendation and (2) what is known about planned retirements and retrofits. GAO reviewed documents, analyzed data, and interviewed agency officials and stakeholders. The Department of Energy (DOE), the Environmental Protection Agency (EPA), and the Federal Energy Regulatory Commission (FERC) have taken initial steps to implement a recommendation GAO made in 2012 that these agencies develop and document a joint process to monitor industry's progress in responding to four proposed or finalized EPA regulations affecting coal-fueled generating units. GAO concluded that such a process was needed until at least 2017 to monitor the complexity of implementation and extent of potential effects on price and reliability. Since that time, DOE, EPA, and FERC have taken initial steps to monitor industry progress responding to EPA regulations including jointly conducting regular meetings with key industry stakeholders. Currently, these monitoring efforts are primarily focused on industry's implementation of one of four EPA regulations—the Mercury and Air Toxics Standards—and the regions with a large amount of capacity that must comply with that regulation. Agency officials told GAO that in light of EPA's recent and pending actions on regulations including those to reduce carbon dioxide emissions from existing generating units, these coordination efforts may need to be revisited. According to GAO's analysis of public data, power companies now plan to retire a greater percentage of coal-fueled generating capacity and retrofit less capacity with environmental controls than the estimates GAO reported in July 2012. About 13 percent of coal-fueled generating capacity—42,192 megawatts (MW)—has either been retired since 2012 or is planned for retirement by 2025, which exceeds the estimates of 2 to 12 percent of capacity that GAO reported in 2012 (see fig.). The units that power companies have retired or plan to retire are generally older, smaller, more polluting and not used extensively, with some exceptions. For example, some larger generating units are also planned for retirement. In addition, the capacity is geographically concentrated in four states: Ohio (14 percent), Pennsylvania (11 percent), Kentucky (7 percent), and West Virginia (6 percent). GAO's analysis identified about 70,000 MW of generating capacity that has either completed some type of retrofit to reduce sulfur dioxide, nitrogen oxides, or particulate matter since 2012 or plan to complete one by 2025, which is less than the estimate of 102,000 MW GAO reported in 2012. GAO is not making new recommendations but believes it is important that these agencies jointly monitor industry progress and fully document these steps as GAO recommended in 2012. The agencies concurred with GAO's findings.",govreport
"While many estates are kept open for legitimate reasons, we found that FSA field offices do not systematically determine the eligibility of all estates kept open for more than 2 years, as regulations require, and when they do conduct eligibility determinations, the quality of the determinations varies. Without performing annual determinations, an essential management control, FSA cannot identify estates being kept open primarily to receive these payments and be assured that the payments are proper. Generally, under the 1987 Act, once a person dies, farm program payments may continue to that person’s estate under certain conditions. For most farm program payments, USDA regulations allow an estate to receive payments for the first 2 years after the death of the individual if the estate meets certain eligibility requirements for active engagement in farming. Following these 2 years, the estate can continue to receive program payments if it meets the active engagement in farming requirement and the local field office determines that the estate is not being kept open primarily to continue receiving program payments. Estates are commonly kept open for longer than 2 years because of, among other things, asset distribution and probate complications, and tax and debt obligations. However, FSA must annually determine that the estate is still active and that obtaining farm program payments is not the primary reason it remains open. Our review of FSA case file documents found the following. First, we found FSA did not consistently make the required annual determinations. Only 39 of the 181 estates we reviewed received annual eligibility determinations for each year they were kept open beyond the initial 2 years FSA automatically allows, although we found shortcomings with these determinations, as discussed below. In addition, 69 of the 181 estates had at least one annual determination between 1999 and 2005, but not with the frequency required. Indeed, the longer an estate was kept open, the less likely it was to receive all required determinations. For example, only 2 of the 36 estates requiring a determination every year over the 7-year period, 1999 through 2005, received all seven required determinations. FSA did not conduct any program eligibility determinations for 73, or 40 percent, of the 181 estates that required a determination from 1999 through 2005. Because FSA did not conduct the required determinations, the extent to which these estates remained open for reasons other than for obtaining program payments is not known. Sixteen of these 73 estates received more than $200,000 in farm program payments and 4 received more than $500,000 during this period. In addition, 22 of the 73 estates had received no eligibility determinations during the 7-year period we reviewed, and these estates had been open and receiving payments for more than 10 years. In one case, we found that the estate has been open since 1973. The following estates received farm program payments but did not receive FSA eligibility determinations for the period we reviewed: A North Dakota estate received farm program payments totaling $741,000 from 1999 through 2003. An Alabama estate—opened since 1981—received payments totaling $567,000 from 1999 through 2005. Two estates in Georgia—opened since 1989 and 1996, respectively— received payments totaling more than $330,000 each, from 1999 through 2005. A New Mexico estate, open since 1991, received $320,000 from 1999 through 2005. Second, even when FSA conducted at least one eligibility determination, we found shortcomings. FSA sometimes approved eligibility for payments when the estate had provided insufficient information—that is, either no information or vague information. For example, in 20 of the 108 that received at least one eligibility determination, the minutes of FSA county committee meetings indicated approval of eligibility for payments to these estates, but the associated files did not contain any documents that explained why the estate remained active. FSA also approved eligibility on the basis of insufficient explanations for keeping the estate open. In five cases, executors explained that they did not want to close the estate but did not explain why. In a sixth case, documentation stated that the estate was remaining active upon the advice of its lawyers and accountants, but did not explain why. Some FSA field offices approved program payments to groups of estates kept open after 2 years without any apparent determination. In one case in Georgia, minutes of an FSA county committee meeting listed 107 estates as eligible for payments by stating that the county committee approved all estates open over 2 years. Two of the estates on this list of 107 were part of the sample that we reviewed in detail. In addition, another 10 estates in our sample, from nine different FSA field offices, were also approved for payments without any indication that even a cursory determination had been conducted. Third, the extent to which FSA field offices make eligibility determinations varies from state to state, which suggests that FSA is not consistently implementing its eligibility rules. Overall, FSA field offices in 16 of the 26 states we reviewed made less than one-half of the required determinations of their estates from 1999 to 2005. The percentage of estates reviewed by FSA ranged from 0 to 100 percent in the states we reviewed. Eligibility determinations could also uncover other problems. Under the three-entity rule, individuals receiving program payments may not hold a substantial beneficial interest in more than two entities also receiving payments. However, because a beneficiary of an Arkansas estate we reviewed received farm program payments through the estate in 2005, as well as through three other entities, the beneficiary was able to receive payments beyond what the three-entity rule would have allowed. FSA was unaware of this situation until we brought it to officials’ attention, and FSA has begun taking steps to recover any improper payments. Had FSA conducted any eligibility determinations for this estate during the period, it might have determined that the estate was not eligible for these payments, preventing the beneficiary from receiving what amounted to a payment through a fourth entity. We informed FSA of the problems we uncovered during the course of our review. According to FSA field officials, a lack of sufficient personnel and time, and competing priorities for carrying out farm programs explain, in part, why many determinations were either not conducted or not conducted thoroughly. Nevertheless, officials told us that they would investigate these cases for potential receipt of improper payments and would start collection proceedings if they found improper payments. FSA cannot be assured that millions of dollars in farm program payments it made to thousands of deceased individuals from fiscal years 1999 through 2005 were proper because it does not have appropriate management controls, such as computer matching, to verify that it is not making payments to deceased individuals. In particular, FSA is not matching recipients listed in its payment databases with individuals listed as deceased in the Social Security Administration’s Death Master File. In addition, complex farming operations, such as corporations or general partnerships with embedded entities, make it difficult for FSA to prevent improper payments to deceased individuals. FSA paid $1.1 billion in farm program payments in the names of 172,801 deceased individuals—either as individuals or as members of entities, from fiscal years 1999 through 2005, according to our matching of FSA’s payment databases with the Social Security Administration’s Death Master File. Of the $1.1 billion in farm payments, 40 percent went to individuals who had been dead for 3 or more years, and 19 percent went to individuals who had been dead for 7 or more years. Figure 1 shows the number of years in which FSA made farm program payments after an individual had died and the value of those payments. We identified several instances in which FSA’s lack of management controls resulted in improper payments to deceased individuals. For example, FSA provided more than $400,000 in farm program payments from 1999 through 2005 to an Illinois farming operation on the basis of the ownership interest of an individual who had died in 1995. According to FSA’s records, the farming operation consisted of about 1,900 cropland acres producing mostly corn and soybeans. It was organized as a corporation with four shareholders, with the deceased individual owning a 40.3-percent interest in the entity. Nonetheless, we found that the deceased individual had resided in Florida. Another member of this farming operation, who resided in Illinois and had signature authority for the operation, updated the operating plan most recently in 2004 but failed to notify FSA of the individual’s death. The farming operation therefore continued to qualify for farm program payments on behalf of the deceased individual. As noted earlier, FSA requires farming operations to certify that they will notify FSA of any change in their operation and to provide true and correct information. According to USDA regulations, failure to do so may result in forfeiture of payments and an assessment of a penalty. FSA recognized this problem in December 2006 when the children of the deceased individual contacted the FSA field office to obtain signature authority for the operation. FSA has begun proceedings to collect the improper payments. USDA recognizes that its farm programs have management control weaknesses, making them vulnerable to significant improper payments. In its FY 2006 Performance and Accountability Report to the Office of Management and Budget, USDA reported that poor management controls led to improper payments to some farmers, in part because of incorrect or missing paperwork. In addition, as part of its reporting of improper payments information, USDA identified six FSA programs susceptible to significant risk of improper payments with estimated improper payments totaling over $2.8 billion in fiscal year 2006, as shown in table 1. Farm program payments made to deceased individuals indirectly—that is, as members of farming entities—represent a disproportionately high share of post-death payments. Specifically, payments to deceased individuals through entities accounted for $648 million—or 58 percent of the $1.1 billion in payments made to all deceased individuals from 1999 through 2005. In contrast, payments to all individuals through entities accounted for $35.6 billion—or 27 percent of the $130 billion in farm program payments FSA provided from 1999 through 2005. The complex nature of some types of farming entities, in particular, corporations and general partnerships, increases the potential for improper payments. For example, a significant portion of farm program payments went to deceased individuals who were members of corporations and general partnerships. Deceased individuals identified as members of corporations and general partnerships received nearly three- quarters of the $648 million that went to deceased individuals in all entities. The remaining one-quarter of payments went to deceased individuals of other types of entities, including estates, joint ventures, limited partnerships, and trusts. With regard to the number of deceased individuals who received farm program payments through entities, they were most often members of corporations and general partnerships. Specifically, of the 39,834 deceased individuals who received farm program payments through entities, about 57 percent were listed in FSA’s databases as members of corporations or general partnerships. Furthermore, of the 172,801 deceased individuals identified as receiving farm program payments, 5,081 received more than one payment because (1) they were a member of more than one entity, or (2) they received payments as an individual and were a member of one or more entities. According to FSA field officials, complex farming operations, such as corporations and general partnerships with embedded entities, make it difficult for FSA to prevent making improper payments to deceased individuals. In particular, in many large farming operations, one individual often holds signature authority for the entire farming operation, which may include multiple members or entities. This individual may be the only contact FSA has with the operation; therefore, FSA cannot always know that each member of the operation is represented accurately to FSA by the signing individual for two key reasons. First, it relies on the farming operation to self-certify that the information provided is accurate and that the operation will inform FSA of any operating plan changes, which would include the death of an operation’s member. Such notification would provide USDA with current information to determine the eligibility of the operation to receive the payments. Second, FSA has no management controls, such as computer matching of its payment databases with the Social Security Administration’s Death Master File, to verify that an ongoing farming operation has failed to report the death of a member. FSA has a formidable task—ensuring that billions of dollars in program payments are made only to estates and individuals that are eligible to receive them. The shortcomings we have identified underscore the need for improved oversight of federal farm programs. Such oversight can help to ensure that program funds are spent as economically, efficiently, and effectively as possible, and that they benefit those engaged in farming as intended. In our report, we recommended that USDA conduct all required annual estate eligibility determinations, implement management controls to verify that an individual receiving program payments has not died, and determine if improper payments have been made to deceased individuals or to entities that failed to disclose the death of a member, and if so, recover the appropriate amounts. USDA agreed with these recommendations and has already begun actions to implement them. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Lisa Shames, Director, Natural Resources and Environment, (202) 512-3841 or shamesl@gao.gov. Key contributors to this testimony were James R. Jones, Jr., Assistant Director; Thomas M. Cook; and Carol Herrnstadt Shulman. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","Farmers receive about $20 billion annually in federal farm program payments, which go to individuals and ""entities,"" including corporations, partnerships, and estates. Under certain conditions, estates may receive payments for the first 2 years after an individual's death. For later years, the U.S. Department of Agriculture (USDA) must determine that the estate is not being kept open primarily to receive farm program payments. This testimony is based on GAO's report, Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent Improper Payments to Estates and Deceased Individuals ( GAO-07-818 , July 9, 2007). GAO discusses the extent to which USDA (1) follows its regulations that are intended to provide reasonable assurance that farm program payments go only to eligible estates and (2) makes improper payments to deceased individuals. USDA has made farm program payments to estates more than 2 years after recipients died, without determining, as its regulations require, whether the estates were kept open to receive these payments. As a result, USDA cannot be assured that farm payments are not going to estates kept open primarily to obtain these payments. From 1999 through 2005, USDA did not conduct any of the required eligibility determinations for 73, or 40 percent, of the 181 estates GAO reviewed. Sixteen of these 73 estates had each received more than $200,000 in farm payments, and 4 had each received more than $500,000. Only 39 of the 181 estates received all annual determinations as required. Even when FSA conducted determinations, we found shortcomings. For example, some USDA field offices approved groups of estates for payments without reviewing each estate individually or without a documented explanation for keeping the estate open. USDA also cannot be assured that it is not making improper payments to deceased individuals. For 1999 through 2005, USDA paid $1.1 billion in farm payments in the names of 172,801 deceased individuals (either as an individual recipient or as a member of an entity). Of this total, 40 percent went to those who had been dead for 3 or more years, and 19 percent to those dead for 7 or more years. Most of these payments were made to deceased individuals indirectly (i.e., as members of farming entities). For example, over one-half of the $1.1 billion in payments went through entities from 1999 through 2005. In one case, USDA paid a member of an entity--deceased since 1995--over $400,000 in payments for 1999 through 2005. USDA relies on a farming operation's self-certification that the information it provides USDA is accurate; operations are also required to notify USDA of any changes, such as the death of a member. Such notification would provide USDA with current information to determine the eligibility of the operation to receive payments. The complex nature of some farming operations--such as entities embedded within other entities--can make it difficult for USDA to avoid making payments to deceased individuals.",govreport
"As the principal component of the NAS, FAA’s ATC system must operate continuously—24 hours a day, 365 days a year. Under federal law, FAA has primary responsibility for operating a common ATC system—a vast network of radars; automated data processing, navigation, and communications equipment; and traffic control facilities. FAA meets this responsibility by providing such services as controlling takeoffs and landings and managing the flow of air traffic between airports. Users of FAA’s services include the military, other government users, private pilots, and commercial aircraft operators. Projects in FAA’s modernization program are primarily organized around seven functional areas—automation, communications, facilities, navigation and landing, surveillance, weather, and mission support. Over the past 16 years, FAA’s modernization projects have experienced substantial cost overruns, lengthy schedule delays, and significant performance shortfalls. To illustrate, the centerpiece of that modernization program—the Advanced Automation System (AAS)—was restructured in 1994 after estimated costs to develop the system tripled from $2.5 billion to $7.6 billion and delays in putting significantly less-than-promised system capabilities into operation were expected to run 8 years or more over original estimates. The Congress has appropriated over $25 billion for ATC modernization between fiscal years 1982 and 1998. FAA estimates that it plans to spend an additional $11 billion through fiscal year 2003 on projects in the modernization program. Of the over $25 billion appropriated to date, FAA has reported spending about $5.3 billion on 81 completed projects and $15.7 billion on about 130 ongoing projects. Of the remaining funds, FAA has reported spending about $2.8 billion on projects that have been cancelled or restructured and $1.6 billion for personnel-related expenses associated with systems acquisition. (See app. I for a list of completed projects.) FAA has fielded some equipment, most recently a new voice communications system. However, delays in other projects have caused the agency to implement costly interim projects. Furthermore, the agency is still having difficulties in acquiring new systems within agreed-to schedule and cost parameters. FAA has been fielding new ATC systems. For example, in February 1997, FAA commissioned the last of 21 Voice Switching and Control System (VSCS) units. As one of the original projects in the 1983 modernization plan, the VSCS project encountered many difficulties during its early years. Since the project was restructured in 1992, FAA has been successful in completing the first phase of the project—installing the equipment into existing en route controller workstations. The second phase is now underway—making VSCS interface with the new display replacement equipment that is being installed in the en route centers. During the past year, FAA has commissioned 183 additional systems or units of systems. For example, FAA commissioned an additional 97 units for its Automated Surface Observing System, which brings the total of commissioned units to 230 out of 597 that are planned. (See app. II for details on the implementation status of 17 major ongoing modernization projects and app. III for data on changes in their cost and schedules.) Problems with modernization projects have caused delays in replacing FAA’s aging equipment, especially the automation equipment in the en route and terminal facilities. We found that FAA has added four interim projects—three for the TRACONs and one for the en route centers—reported to cost about $655 million—to sustain and enhance current automated air traffic control equipment. FAA began its first program for the TRACONs in 1987 and expects to complete its third program in 2000. In general, these programs provide new displays and software and upgrade hardware and data-processing equipment to allow TRACONs to handle increased traffic. One program for the en route centers—the Display Complex Channel Rehost—was completed in 1997. Under this program, FAA transferred existing software from obsolete display channel computers to new more reliable and maintainable computers at five en route centers. The cost for interim projects could go even higher if FAA decides to implement an interim solution to overcome hardware problems and resolve year 2000 date requirements with the Host computer system. FAA is assessing the Host computer’s microcode—low-level machine instructions used to service the main computer—with a plan to resolve any identified year 2000 date issues, while at the same time preparing to purchase and implement new hardware—Interim Host—for each of its 20 en route centers before January 1, 2000. FAA expects to incur costs of about $160 million during fiscal years 1998 and 1999 for the Interim Host. Two key components of the modernization effort—the Wide Area Augmentation System (WAAS) and the Standard Terminal Automation Replacement System (STARS)—have encountered delays and cost increases. In September 1997, FAA estimated total life cycle costs for WAAS at $2.4 billion ($900 million for facilities and equipment and $1.5 billion for operations). In January 1998, the estimate had increased by $600 million to $3 billion ($1 billion for facilities and equipment and $2 billion for operations). The increased costs for facilities and equipment are attributable to FAA’s including previously overlooked costs for periodically updating WAAS’ equipment. The revised cost estimate for operations and maintenance is largely attributable to higher than expected costs to lease geostationary satellites. In developing WAAS, FAA has also encountered delays. When signing the original development contract with Wilcox Electric in August 1995, FAA planned for the initial system to be operational by December 1997. Because of concerns about the contractor’s performance, however, FAA terminated the original contract and signed a development contract with Raytheon (formerly Hughes Aircraft) in October 1996 that called for the initial system to be operational by April 1999. The 16-month schedule slippage was caused by problems with the original contractor’s performance, design changes, and increased software development. Last year, we reported that the implementation of STARS—particularly at the three facilities targeted for operating the system before fiscal year 2000—will likely be delayed if FAA and its contractor experience any difficulties in developing the software. These difficulties have materialized. In January 1998, FAA reported that more delays are likely because software requirements could increase to resolve air traffic controllers’ dissatisfaction with the system’s computer-human interface. FAA also reported an unexpected cost increase of $35 million for STARS during fiscal year 1998. It attributed the increase to such factors as adding resources to maintain the program’s schedule and the effects of any design changes to address new computer-human interface concerns. Also, the estimated size of software development—measured in source lines of code—is now 50 percent larger than the original November 1996 estimate. FAA has requested a reprogramming of fiscal year 1998 funds to address this cost increase. Our reviews have identified some of the root causes of long-standing problems with FAA’s modernization and have recommended solutions to them. Among the causes of these problems were the lack of a complete and enforced systems architecture, unreliable cost information, lack of mature software acquisition processes, and an organizational culture that did not always act in the agency’s long-term best interest. While FAA has begun to implement many of our recommendations, it will need to stay focused on continued improvement. FAA has proceeded to modernize its many ATC systems without the benefits of a complete systems architecture, or overall blueprint, to guide their development and evolution. In February 1997, we reported that FAA has been doing a good job of defining one piece of its architecture—the logical architecture. That architecture describes FAA’s concept of operations, business functions, high-level descriptions of information systems and their interrelationships, and information flows among systems. This high-level architecture will guide the modernization of FAA’s ATC systems over the next 20 years. We identified shortcomings in two main areas. FAA’s system modernization lacked a technical architecture and an effective enforcement mechanism. FAA generally agreed with the recommendation in our February 1997 report to develop a technical architecture and has begun the task. We will continue to monitor FAA’s efforts. Also, to be effective, the architecture must be enforced consistently. FAA has no organizational entity responsible for enforcing architectural consistency. Until FAA defines and enforces a complete ATC systems architecture, the agency cannot ensure compatibility among its existing and future programs. We also recommended in the February 1997 report that FAA develop a management structure for enforcing the architecture that is similar to the provisions of the Clinger-Cohen Act of 1996 for department-level Chief Information Officers (CIO). FAA disagrees with this recommendation because it believes that the current location of its CIO, within the research and acquisition line of business, is effective. We continue to believe that such a structure is necessary. FAA’s CIO does not report directly to the Administrator and does not have organizational or budgetary authority over those who develop ATC systems or the units that operate and maintain them. Furthermore, the agency’s long history of problems in managing information technology projects reflects weaknesses in its current structure. In January 1997, we reported that FAA lacks reliable cost-estimating processes and cost-accounting practices needed to effectively manage investments in information technology, which leaves it at risk of making ill-informed decisions on critical multimillion, even billion, dollar air traffic control systems. Without reliable cost information, the likelihood of poor investment decisions is increased, not only when a project is initiated, but also throughout its life cycle. We recommended that FAA improve its cost-estimating processes and fully implement a cost-accounting system. Our recent review of the reliability of FAA’s reported financial information and the possible program and budgetary effects of reported financial statement deficiencies again highlights the need for reliable cost information. The audit of FAA’s 1996 financial statement disclosed many problems in reporting of operating materials and supplies and property and equipment. Many of these problems resulted from the lack of a reliable system for accumulating project cost accounting information. Although FAA has begun to institutionalize defined cost-estimating processes and to acquire a cost-accounting system, it will be awhile before FAA and other decisionmakers have accurate information to determine and control costs. In March 1997, we reported that FAA’s processes for acquiring software—the most costly and complex component of ATC systems—are ad hoc, sometimes chaotic, and not repeatable across projects. As a result, FAA is at great risk of acquiring software that does not perform as intended and is not delivered on time and within budget. Furthermore, FAA lacks an effective approach for improving its processes for acquiring software. In the March 1997 report, we recommended that FAA improve its software acquisition capabilities by institutionalizing mature acquisition processes and reiterated our prior recommendation that FAA establish a management structure similar to the department-level CIOs to instill process discipline. FAA concurred with part of our recommendation and has initiated efforts to improve its software acquisition processes. These efforts, however, are not comprehensive, are not complete, and have not yet been implemented agencywide. Furthermore, FAA disagrees with our recommendation related to its management structure. Without establishing strong software acquisition processes and an effective management structure, FAA risks making the same mistakes it did on failed systems acquisition projects. In August 1996, we reported that an underlying cause of FAA’s ATC acquisition problems is its organizational culture—the beliefs, the values, and the attitudes and expectations shared by an organization’s members that affect their behavior and the behavior of the organization as a whole.We found that FAA’s acquisitions were impaired when employees acted in ways that did not reflect a strong commitment to mission focus, accountability, coordination, and adaptability. We recommended that FAA develop a comprehensive strategy for cultural change that (1) addresses specific responsibilities and performance measures for all stakeholders throughout FAA and (2) provides the incentives needed to promote the desired behaviors and achieve agencywide cultural change. In response to our recommendations, FAA issued a report outlining its overall strategy for changing its acquisition culture and describing its ongoing actions to influence organizational culture and improve its life cycle acquisition management processes. For example, the Acquisition and Research (ARA) organization has proposed restructuring its personnel system to tie pay to performance based on 15 measurable goals, each with its own performance plan. ARA’s proposed personnel system is under consideration by the Administrator. In our August 1996 report, we also noted that the Integrated Product Development System, based on integrated teams, was a major FAA initiative to address the shortcomings with its organizational culture. According to an ARA program official, FAA has 15 integrated product teams, the majority of which have approved plans. The official indicated that all team members have received training to prepare them for their roles and that ARA is developing a set of standards to measure the performance of the integrated teams. However, the official also acknowledged that FAA has had difficulty in gaining commitment to the integrated team concept throughout the agency because offices outside of ARA have been resistant to integrated teams. To help overcome institutional cultural barriers, FAA and external stakeholders have been discussing the establishment of a special program office responsible for the acquisition of free flight systems. Although, the details of how such an office would operate have not been put forward, one option would be for this office to have its own budget and the authority to make certifications and regulations and to determine system requirements. Such an office could be viewed as the evolutionary successor to the integrated product team system. Another approach being considered by FAA is the establishment of a single NAS manager at the level of associate administrator to eliminate traditional “stovepipes” between the acquisition and air traffic organizations. As FAA considers recommendations to create a new structure, we believe that it would be advantageous for FAA to implement our recommendation to create a management structure similar to the department-level CIO as called for in the Clinger-Cohen Act. Having an effective CIO, with the organizational and budgetary authority to implement and enforce a complete, agencywide systems architecture would go a long way towards eliminating traditional “stovepipes” between integrated product teams, as well as between the acquisition and air traffic organizations. Furthermore, the agency could gain valuable insight from the experiences of other organizations that have implemented similar structures. Regardless of future direction, FAA recognizes that considerable work is needed to modify behaviors and create comprehensive cultural change. A continued focus on cultural change initiatives will be critical in the years ahead. While FAA is involving external and internal stakeholders in revising its approach to the modernization program, it will need to stay focused on implementing solutions to the root causes of past problems, ensure that all aspects of its acquisition management system are effectively implemented, and quickly address the looming crisis with the year 2000 date requirements. The FAA Administrator has begun an outreach effort with the aviation community to build consensus on and seek commitment to the future direction of the agency’s modernization program. Similar to our findings on the logical architecture, a review of this program by the NAS Modernization Task Force concluded that the architecture under development builds on the concept of operations for the NAS and identifies the programs needed to meet the needs of the user community. However, the task force found that the architecture is not realistic because of (1) an insufficient budget; (2) the preponderance of risks associated primarily with certifying and deploying new equipment and with users’ cost to acquire equipment; and (3) unresolved institutional issues and a lack of user commitment. The task force recommended a revised approach that would be less costly and would be focused more on providing near-term user benefits. Under this revised approach, FAA would (1) implement a set of core technologies to provide immediate user benefits; (2) modify the Flight 2000 initiative to address critical risk areas associated with key communications, navigation, and surveillance programs; and (3) proceed with implementing critical time-driven activities related to the Host computer and the year 2000 problems and with implementing such systems as STARS, surveillance radars, and en route displays to replace aging infrastructure. The details on how FAA intends to implement the task force’s recommendations are not yet known. However, from our discussions with task force officials, their practical effect would be that the development and the deployment of some current programs would be accelerated while others would be slowed down. Meanwhile, FAA would continue developing programs like STARS and the Display System Replacement and work to ensure that its computers recognize the year 2000. For example, under the revised approach, the WAAS program would be slowed down after Phase I, which is scheduled to provide initial satellite navigation capabilities by 1999, to enable FAA to resolve technical issues and explore how costs could be reduced. Further development would be subject to review and risk mitigation under the expanded Flight 2000 initiative. FAA faces both opportunities and challenges as it revises the modernization program. On the one hand, FAA has an opportunity to regain user confidence by delivering systems that benefit them. On the other hand, FAA is challenged to follow through with its investment management process improvements. We urge FAA to proceed cautiously as it attempts to expedite the deployment of key technologies to avoid repeating past practices, such as undue concern for schedules at the expense of disciplined systems development and careful, thorough testing. FAA will need to resist this temptation, as the results are typically systems that cost more than expected, are of low quality, and are late as well. Concerned that burdensome procurement rules were a primary contributor to FAA’s acquisition problems, the Congress exempted FAA from many procurement rules. In response, the agency implemented its Acquisition Management System (AMS) on April 1, 1996, to improve its acquisition of new technology. AMS is intended to provide high-level acquisition policy and guidance and to establish rigorous investment management practices. We are currently reviewing FAA’s investment management approach, including its practices and processes for selecting, controlling, and evaluating projects, and expect to report later this year. As FAA continues to implement AMS and embarks on a revised modernization approach, it will need to establish baselines for individual projects and performance measurements to track key goals. Under AMS, an acquisition project should have a baseline, which establishes the performance, life-cycle cost, schedule, and benefit boundaries within which the program is authorized to operate. Having an effective investment analysis capability is important in developing these baselines. In its May 1997 report on AMS, FAA noted that it has focused more attention on investment management analyses. The agency reported that it has established several investment analysis teams of individuals with expertise in such areas as cost estimating, market analysis, and risk assessment to help prepare program baselines to use in determining the best way to satisfy mission needs. Although FAA has begun efforts to establish new baselines for projects that were underway prior to AMS, program evaluation officials question the availability and the quality of operations and maintenance data that are being used to estimate life-cycle project costs. FAA’s history of unplanned cost increases, most recently seen with its STARS and WAAS programs, coupled with past deficiencies in cost estimating processes and practices point to the need to use reliable and complete data to establish realistic baselines. As for performance measurements, FAA does not have a unified effort underway to effectively measure progress toward achieving acquisition goals. FAA has established a goal to reduce the time to field systems by 50 percent and to reduce the cost of acquisitions by 20 percent during the first 3 years under AMS. FAA also plans to measure performance in such other critical areas as customer satisfaction and the quality of products and services. According to FAA’s evaluation, while individual organizations are attempting to measure progress in meeting the two goals, a coordinated agencywide measurement effort is lacking. FAA’s failure to field systems on time and within cost indicates the need for a comprehensive system of performance measurements that can help provide systematic feedback about accomplishments and progress in meeting mission objectives. The need for such measurements will become even more critical as FAA expedites the deployment of some projects. Clearly identified performance measurements will help FAA, the Congress, and system users assess how well the agency achieves its goals. On January 1, 2000, computer systems worldwide could malfunction or produce inaccurate information simply because the century has changed. Unless corrected, such failures could have a costly, widespread impact. The problem is rooted in how dates are recorded and computed. For the past several decades, systems have typically used two digits to represent the year, such as “97” for 1997, to save electronic storage space and reduce operating costs. This practice, however, makes 2000 indistinguishable from 1900, and the ambiguity could cause systems to malfunction in unforeseen ways or to fail completely. FAA’s challenge is great. Correcting this problem will be difficult and expensive, and must be done while such systems continue to operate. In less than 2 years, hundreds of computer systems that are critical to FAA’s operations, such as monitoring and controlling air traffic, could fail to perform as needed unless proper date-related calculations can be made. FAA’s progress in making its systems ready for the year 2000 has been too slow. We have reported that, at its current pace, it will not make it in time. The agency has been severely behind schedule in completing basic awareness and assessment activities—critical first and second phases in an effective year 2000 program. For example, just this month FAA appointed a program manager who reports to the Administrator. Delays in completing the first two phases have left FAA little time for critical renovation, validation, and implementation activities—the final three phases in an effective year 2000 program. With less than 2 years left, FAA is quickly running out of time, making contingency planning for continuity of operations even more critical. If critical FAA systems are not year 2000 compliant and ready for reliable operation on January 1 of that year, the agency’s capability in several areas—including the monitoring and controlling of air traffic—could be severely compromised. The potential serious consequences could include degraded safety, grounded or delayed flights, increased airline costs, and customer inconvenience. We have made a number of recommendations aimed at expediting the completion of overdue awareness and assessment activities. Mr. Chairman, this concludes my statement. We will be happy to answer any questions from you or any Member of the Subcommittee. Automated Radar Terminal System (ARTS) IIIA Assembler (22-02) Additional ARTS IIIA at FAA Technical Center (22-05) Consolidated Notice to Airmen System (23-03) Visual Flight Rules Air Traffic Control Tower Closures (22-14) Altitude Reporting Mode of Secondary Radar (Mode-C) (21-10) Enhanced Target Generator Displays (ARTS III) (22-03) National Airspace Data Interchange Network IA (25-06) Hazardous In Flight Weather Advisory Service (23-08) (continued) En Route Automated Radar Tracking System Enhancements (21-04) Sustain New York Terminal Radar Approach Control (TRACON) (22-18) National Radio Communication System (26-14) Direct Access Radar Channel System (21-03) National Airspace Data Interchange Network II (25-07) Modernization of Unmanned FAA Buildings and Equipment (26-08) Large Airport Cable Loop Systems (26-05) Interfacility Data Transfer System for Edwards Air Force Base Radar Approach Control (35-20) Acquisition of Flight Service Facilities (26-10) (continued) Radar Pedestal Vibration Analysis (44-43) Low-Level Wind Shear Alert System (23-12) Brite Radar Indicator Tower Equipment (22-16) National Implementation of the “Imaging” Aid for Dependent Converging Runway Approaches (62-24) Integrated Communications Switching System (23-13) System Engineering and Integration Contract (26-13) National Airspace Data Interchange Network II Continuation (35-07) Instrument Landing System and Visual Navaids Engineering and Sparing (44-24) Oceanic Display and Planning System (21-05) Integrated Communications Switching System Logistics Support (43-14) Replacement of Controllers Chairs (42-24) ARTS IIIA-Expand 1 Capacity and Provide Mode C Intruder Capability (32-20) (continued) Civil Aviation Registry Modernization (56-24) Precision Automated Tracking System (56-16) National Airspace Integrated Logistic Support (56-58) Long Range Radar Radome Replacement (44-42) Installed at en route centers to allow processing of existing air traffic control software on new equipment. Project comprised a variety of tower and terminal replacement and modernization projects. Project was continued in the Capital Investment Plan under projects 42-13 and 42-14. Also known as the Radio Communications Link project, it was designed to convert aging “special purpose” Radar Microwave Link System into a “general purpose” system for data, voice, and radar communications among en route centers and other major FAA facilities. Project was activated to sustain and upgrade air traffic control operations and acquire eight terminal radars awaiting the full implementation of the Advanced Automation System. Project comprised a variety of diverse support projects and has been continued in the Capital Investment Plan under Continued General Support (46-16). Over the past decade, we have reported on FAA’s progress in meeting schedule commitments for last-site implementation, which signals completion of the project. Prior to this year, we have used the dates from the 1983 NAS modernization plan. This year, after discussions with FAA officials, we are measuring FAA’s progress against an interim date—which in most cases represents the date of contract award or investment decision. We will continue to show the original date, but will only measure progress against the interim date. 57 TDLS I57 TDLS IIStage 0: 21 Stage 1 and 2: 21 0 TDLS is the Tower Data Link Services. TDLS I (Predeparture Clearance/Flight Data Input/Output CRT/Rank Emulation) has been commissioned at all 57 sites; TDLS II (Digital-Automatic Terminal Information Service) has been installed at all 57 sites and commissioned at 48 sites. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO discussed the Federal Aviation Administration's (FAA) program to modernize its National Airspace System (NAS), focusing on: (1) the status of key modernization projects; (2) FAA's actions to implement recommendations to correct modernization problems; and (3) the opportunities and challenges facing FAA as it embarks upon its new modernization approach. GAO noted that: (1) since 1982, Congress has appropriated over $25 billion to the modernization program; (2) while FAA has fielded some equipment, historically, the agency has experienced considerable difficulty in delivering systems with promised cost and schedule parameters; (3) as a result, FAA has been forced to implement costly interim projects; (4) meanwhile, two key systems--the Wide Area Augmentation System and the Standard Terminal Automation Replacement System--have encountered cost increases and schedule delays; (5) GAO's work has pinpointed the root causes of FAA's modernization problems and has recommended actions to overcome them; (6) most recently, GAO found shortcomings in the areas of systems architecture or the overall modernization blueprint, cost estimating and accounting, software acquisition, and organizational culture; (7) although FAA has begun to implement many of GAO's recommendations, sustained management attention is required to improve the management of the modernization program; (8) FAA is collaborating with and seeking commitment from users in developing a new approach to make the modernization less costly and to provide earlier user benefits; (9) the challenge for FAA is to have disciplined processes in place in order to deliver projects as promised; and (10) FAA will also need to quickly address the looming year 2000 computer crisis to ensure that critical air traffic control systems do not malfunction or produce inaccurate information simply because the date has changed.",govreport
"During fiscal years 1993-98, the United States funded rule of law programs and related activities in countries throughout the world. Over this period, rule of law assistance totaled at least $970 million. Figure 1 illustrates the worldwide U.S. rule of law funding for fiscal years 1993-98. Over the period, the total annual rule of law funding increased from $128 million to $218 million. Although funding appears to have declined substantially in 1996, this may be largely explained by the fact that USAID could not readily provide rule of law funding information for fiscal year 1996 due to problems with its automated information system. On a regional basis, the Latin America and the Caribbean region received the largest share, with about 36 percent. Africa, Central Europe, and the newly independent states of the former Soviet Union received about 15 percent each. (See table 1.) From fiscal year 1993 to 1998, rule of law funding shifted primarily from the Latin America and the Caribbean region to other regions, mainly Central Europe. Funding for Central Europe grew from about $9 million in fiscal year 1993 to over $67 million in fiscal year 1998, accounting for 31 percent of the worldwide rule of law assistance that year. Over the same period, rule of law assistance in Latin America and the Caribbean declined from about $57 million (44 percent of the worldwide total) to $42 million (19 percent). Rule of law assistance to Africa also declined from $38 million (30 percent of the worldwide total) in 1993 to $29 million (13 percent) in 1998. Figure 2 illustrates these trends; appendix I provides more detailed data.          During fiscal years 1993-98, we identified 184 countries that received at least some U.S. rule of law funding. However, over half of this assistance went to just 15 countries. Haiti received the most, primarily in connection with U.S. and international efforts to restore peace and stability to the country after a 1991 coup. Most countries (102 of the 184) received less than $1 million. Table 2 illustrates the top 15 recipients. (App. II provides detailed rule of law funding by region and country for fiscal years 1993-98.) State’s Under Secretary for Global Affairs has overall responsibility for coordinating rule of law programs and activities. At least 35 entities from the departments and agencies have a role in providing U.S. rule of law assistance programs. (See app. III.) Most U.S. rule of law funding is provided through the international affairs appropriations and is transferred or reimbursed to the other departments and agencies, primarily by USAID, but to a lesser extent by State. USAID and the Department of Justice oversaw the implementation of 70 percent, or about $683 million, of all U.S. rule of law assistance programs and activities worldwide during fiscal years 1993-98. USAID focused on improving the capabilities of judges, prosecutors, and public defenders and their respective institutions as well as increasing citizen access to justice. Most of Justice’s rule of law activities were carried out by its International Criminal Investigative Training Assistance Program (ICITAP), which emphasized enhancing the overall police and investigative capabilities of law enforcement organizations. State, the Department of Defense, and USIA accounted for about $258 million, or about 27 percent, of the U.S. worldwide efforts. State’s activities focused on international narcotics and law enforcement and antiterrorist assistance. Defense provided rule of law training to foreign military servicemembers, but most of its rule of law assistance was provided to support its operations in Haiti. USIA focused on increasing the awareness and knowledge of rule of law issues through various educational programs, such as exchanges between host country judicial and law enforcement personnel and their U.S. counterparts. (See fig. 3.) Funding for rule of law programs and related activities was provided primarily through the international affairs appropriations for USAID, State, and USIA. These three entities accounted for more than 91 percent of all rule of law funding, or $884 million, in fiscal years 1993-98. In addition, Defense provided about $58 million (6 percent). Although they provided small amounts of funding, almost all rule of law assistance provided by Justice, the Treasury, and other departments and agencies was funded through interagency transfers and reimbursements from USAID and, to a lesser extent, State. As previously noted, the Latin America and the Caribbean region was the largest recipient of U.S. rule of law assistance in fiscal years 1993-98. As with the overall worldwide rule of law assistance, we identified the funding and recipients and the departments and agencies involved. In addition, we categorized the rule of law assistance provided to the region to help describe what the overall purposes of the assistance were. In fiscal years 1993-98, the United States provided $349 million in rule of law assistance to Latin America and the Caribbean (about 36 percent of the worldwide total). Forty countries in the region received a portion of this assistance, although the funding was concentrated among a few countries. Seven countries accounted for about 76 percent of the total regional funding. Two of the seven—Haiti and El Salvador—accounted for just over 50 percent of the regional total, with $137.9 million and $40.7 million, respectively. (See fig. 4.) Haiti was a special case. The United States provided large amounts of assistance during this period in an attempt to restore order and democracy after a coup in 1991. Nearly one-third of the assistance for Haiti was a $42.6 million, one-time commitment from Defense in 1994 for equipment, supplies, and other support to assist international police monitors and a multinational force. In subsequent years, Haiti continued to be the top recipient of rule of law funds in the region, receiving $35.5 million in fiscal year 1995, $16 million in 1996, and about $15 million in fiscal years 1997 and 1998. Most of this assistance was provided to develop and support a civilian national police force. To help illustrate what rule of law assistance was used for in the Latin America and the Caribbean region, we grouped rule of law assistance into one of six categories based on descriptions provided by the cognizant agencies. Although we placed each program or activity into one primary category, many programs, USAID’s in particular, had multiple purposes that could be identified with more than one category. Figure 5 illustrates the distribution of rule of law assistance by these categories. (App. IV defines the categories we used and provides funding levels by country and category.) The largest rule of law category was assistance for criminal justice and law enforcement. About $199 million—57 percent of the regional total for fiscal years 1993-98—was dedicated to these activities. We included assistance to police, prosecutors, public defenders, and other host country agencies (such as customs) that take on law enforcement functions, as well as antinarcotics and antiterrorism assistance, in this category. Almost every country in the region that received rule of law assistance had some criminal justice and law enforcement funding. Haiti received the largest amount of such assistance—$72.5 million. Other major recipients were El Salvador ($25.9 million), Colombia ($19.9 million), Panama ($11.2 million), and Bolivia ($9.8 million). Virtually all of the assistance provided through Justice and most of the funding provided by USAID and State was in this category. Assistance for judicial and court operations was the second largest category, comprising $74.2 million (21 percent of the regional total). USAID provided 88 percent of the funding. Assistance for civil government and military reform was the third largest category—$47.6 million (13.6 percent). We included assistance for governmental entities other than the courts and criminal justice and law enforcement systems in this category. The largest single element was $42.6 million provided by Defense to Haiti in 1994. In addition, we included most of the military service training on topics such as civil-military relations and professional skills for maritime and military personnel. Much less funding was devoted to the other categories—$22 million for democracy and human rights, $5.3 million for general and other activities, and $1.1 million for law reform. In the category of democracy and human rights, we included civic education activities, as well as some efforts that focused specifically on human rights, citizen participation, and related topics. In the general/other category, we included most of the legal education grants provided by USIA, as well as assistance on various topics such as intellectual property rights and drug education and rehabilitation. To determine how much U.S. rule of law assistance was provided worldwide in fiscal years 1993-98, and to identify the U.S. departments and agencies involved, we reviewed program documentation and interviewed officials at the Department of State, USAID, the Department of Defense, and USIA—the principal sources of funding for U.S. rule of law programs. These officials identified other departments and agencies with rule of law activities. We asked officials from each of these entities to provide funding and descriptive information for its activities over the period. However, most of these departments and agencies did not have rule of law funding information readily available and had to initiate ad hoc efforts to compile data addressing our questions. Further complicating this effort was the fact that the departments and agencies did not have a commonly accepted definition of what constituted rule of law activities. Therefore, we relied on each department and agency (and the bureaus and offices within those entities) to provide us information on the programs and activities it considered rule of law. In some instances, programs with an apparent rule of law element were not included. For example, USAID did not include all of its assistance for human rights, and State did not include all of its antinarcotics assistance. Additionally, the funding data is a mix of obligated amounts and actual expenditures. For agencies (primarily USAID) that provided rule of law assistance over several years, obligation data better reflected the magnitude of the funding involved because actual expenditures (or requests for reimbursement) may not be reported until subsequent years. However, other rule of law assistance provided, for example by law enforcement agencies, was relatively low-cost, short-term training or exchange programs. In this instance, obligations and actual expenditures were virtually synonymous. Therefore, we used actual expenditures. Because of the volume of data—almost 4,600 program and activity records—and the lack of documentation in some agencies, we did not independently verify the accuracy of the data provided. Some agencies could not provide data for the entire period—fiscal years 1993-98—or lacked funding amounts for some identified rule of law activities. USAID’s automated information system could not provide worldwide data for fiscal year 1996. The system was upgraded that year, and 1996 information was not captured in the new system nor was it available in USAID’s prior system. At our request, USAID polled each of its missions in Latin America and the Caribbean to obtain rule of law funding data, including fiscal year 1996; however, because of the magnitude of the effort, we did not request that USAID do the same for the other regions of the world. To help mitigate this limitation, we used information from other agencies indicating USAID rule of law funding for 1996. However, this information likely understates USAID’s assistance levels to regions other than Latin America and the Caribbean for the year. State’s Bureau of International Narcotics and Law Enforcement Affairs provided us funding information for fiscal years 1997 and part of 1998. Essentially, this office transferred rule of law funds to U.S. law enforcement and related agencies to assist their foreign counterparts. Therefore, for the other years, we relied on the U.S. recipients of this funding to report the amount of rule of law funding provided by the Bureau. In addition, for many agencies, the fiscal year 1998 data provided to us was compiled before the fiscal year data had been finalized and may be incomplete. However, with the exception of not having complete USAID funding information for fiscal year 1996, we believe the funding levels for the other departments and agencies generally reflect their rule of law activities. We performed our work from June 1998 to May 1999 in accordance with generally accepted government auditing standards. The Departments of Commerce, Defense, Justice, State, and the Treasury; USAID; and USIA commented on a draft of this report. Defense and USAID provided written comments (see apps. V and VI); the others provided oral comments. USAID also provided its definition of rule of law. All of the agencies concurred with the report; some provided technical comments that have been incorporated, as appropriate. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after its issue date. At that time, we will send copies of this report to the Honorable Madeleine K. Albright, the Secretary of State; the Honorable William S. Cohen, the Secretary of Defense; the Honorable Robert E. Rubin, the Secretary of the Treasury; the Honorable William M. Daley, the Secretary of Commerce; the Honorable J. Brian Atwood, the Administrator of USAID; the Honorable Penn Kemble, the Acting Director of USIA; and interested congressional committees. We will make copies available to others upon request. Please contact me at (202) 512-4128 if you or your staff have any questions about this report. Key contributors to this report are listed in appendix VII. Worldwide U.S. rule of law assistance grew from about $128 million in fiscal year 1993 to about $218 million in fiscal year 1998. The growth was not uniform across the geographic regions, with Central Europe increasing from about $8 million to over $67 million during the period—supplanting the Latin America and the Caribbean region as the leading recipient of rule of law assistance. Table I.1 shows rule of law assistance by region for fiscal years 1993-98. We used “multiregional” for rule of law assistance provided to several countries in two or more regions or when such assistance was not broken out by recipient countries. In fiscal years 1993-98, the United States provided at least some rule of law assistance to 184 countries. The assistance ranged from multiyear institutional development programs to one-time, short-term training for police or other law enforcement personnel. Table II.1 shows the dollar value of the rule of law assistance provided to all the countries we identified as receiving some assistance. In some cases, the assistance was not identified with a specific country or was provided to countries in multiple regions—such assistance is identified as “regional” or “multiregional,” respectively. Table II.1: U.S. Rule of Law Funding by Region and Country, Fiscal Years 1993-98 Congo (Brazzaville) Congo (Kinshasa) In compiling the rule of law assistance data for this report, we identified 7 cabinet-level departments and 28 related agencies, bureaus, and offices involved in providing rule of law assistance. Many are law enforcement agencies providing training and technical assistance to their counterparts overseas. These are listed below. International Trade Administration National Telecommunications and Information Administration Office of General Counsel, Commercial Law Development Program U.S. Patent and Trademark Office U.S. Air Force U.S. Army U.S. Marine Corps U.S. Navy Drug Enforcement Administration Federal Bureau of Investigation Immigration and Naturalization Service Criminal Division International Criminal Investigative Training Assistance Program Office of Overseas Prosecutorial Development, Assistance and Bureau of Diplomatic Security, Office of Antiterrorism Assistance Bureau of International Narcotics and Law Enforcement Affairs Bureau of Western Hemisphere Affairs (formerly Bureau of Inter-American Affairs) Bureau of Alcohol, Tobacco and Firearms Office of International Affairs Office of Investigations Federal Law Enforcement Training Center Financial Crimes Enforcement Network Internal Revenue Service U.S. Secret Service U.S. Agency for International Development (USAID) U.S. Information Agency (USIA) To develop an overview of the types of activities being funded for the Latin America and the Caribbean region, we grouped the U.S. rule of law assistance program data for the region into six categories based on activity descriptions provided by the cognizant departments and agencies. Although we placed each program or activity into one primary category, many programs, USAID’s in particular, had multiple purposes that could be identified with more than one category. The following definition for each category we used and the types of activities we included. Criminal Justice and Law Enforcement: Assistance to help criminal justice or law enforcement organizations make reforms or improve their capabilities to carry out their responsibilities in a professional and competent manner. We included technical assistance and training for police, prosecutors, public defenders, and other personnel in law enforcement-related agencies (such as Customs) in this category. Assistance for police often focused on investigative capabilities and management improvements. Technical assistance and training topics included detection and identification of firearms, development of criminal investigation units, maritime law enforcement, and detection of counterfeit currency. We also included antinarcotics and antiterrorism assistance. Judicial and Court Operations: Assistance to help reform or improve operations of judicial and court systems. We included activities that focused on modernizing court administration, training in oral advocacy skills, training judicial personnel, and establishing procedures for judge selection and a career ladder for judges. In addition, we included programs intended to improve access to the justice system and establish legal aid services and justice centers; to institute alternative dispute resolution, mediation, or arbitration procedures in various sectors; and to provide exchange opportunities, training, or research related to the judicial or legal system in general. Civil Government and Military Reform: Assistance to help promote reform in other than judicial and law enforcement government agencies, improve cooperation and understanding between civil and military agencies, or develop responsive or responsible government institutions and officials. The majority of the activities were training courses provided by the military services on topics such as civil-military relations, professional skills for maritime and military personnel, and military law, although the largest single item was the funding to support multinational forces and police monitors in Haiti. We also included training and related programs on government ethics and corruption in this category. Democracy and Human Rights: Assistance to promote democracy, electoral reforms, or respect for human rights. We included USAID human rights activities and many USIA-funded activities that focused on civic education, citizen participation, free press, and related topics in this category. General/Other Activities: Assistance that did not fit into other categories or was not clearly described. We included legal education grants provided by USIA and training or exchange programs on an assortment of topics such as intellectual property rights, drug education and rehabilitation, and domestic and gender violence. In addition, we included assistance that had no description. Law Reform: Assistance to help develop, document, or revise constitutions, laws, codes, regulations, or other guidance that institute and strengthen the rule of law. We included activities primarily focused on law reform, including judicial or criminal procedures code reforms. However, some law reform activities may be included in other categories as a component of a larger program—especially USAID programs that had multiple goals. Table IV.1 illustrates the distribution of the rule of law assistance by the categories we developed among the countries in Latin America and the Caribbean. Well over half of all U.S. rule of law assistance to the region was technical assistance and training for criminal justice and law enforcement personnel—police, prosecutors, public defenders, and others. In addition to those named above, Ann L. Baker, Mark B. Dowling, Marcelo Fava, Wyley Neal, and Richard Seldin made key contributions to this report. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary, VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO provided information on U.S. rule of law assistance programs and activities, focusing on the: (1) amount of U.S. rule of law funding provided worldwide in fiscal years 1993-1998; and (2) U.S. Departments and agencies involved in providing rule of law assistance. GAO noted that: (1) based on the funding data cognizant Departments and agencies made available, during fiscal years 1993-1998, the United States provided at least $970 million in rule of law assistance to countries throughout the world; (2) the Latin America and the Caribbean region was the largest recipient of U.S. rule of law assistance over the period, accounting for $349 million, or more than one-third of the total assistance; (3) in recent years, Central European countries received an increasingly larger share and, in 1998, Central Europe was the largest regional recipient, accounting for about one-third of all rule of law assistance; (4) the United States provided at least some assistance to 184 countries--ranging from $138 million for Haiti to $2,000 for Burkina Faso; (5) while most countries received less than $1 million, 15 countries, including 7 in Latin America and the Caribbean, accounted for just over half of the total funding; (6) at least 35 entities from various U.S. Departments and agencies have a role in the U.S. rule of law assistance programs; (7) the Departments of State and Justice and the Agency for International Development are the principal organizations providing rule of law training, technical advice, and related assistance; (8) the Department of Defense, the U.S. Information Agency, numerous law enforcement agencies and bureaus, and other U.S. Departments and agencies also have a direct role; (9) 40 countries in the Latin America and the Caribbean region received some rule of law assistance; (10) more than three-fourths of the $349 million in assistance was provided to seven countries; (11) Haiti received nearly $138 million, or about 40 percent of the regional total, largely in connection with U.S. and international efforts to restore order and democracy after a September 1991 military coup; (12) six other countries in the region--ranging from about $41 million for El Salvador to $12 million for Panama--accounted for about $127 million, or nearly 37 percent of the regional total; (13) most of the rule of law assistance for Latin America and the Caribbean was provided to help the countries reform their criminal justice or law enforcement organizations, including training and technical assistance for prosecutors, public defenders, police officers, and investigators; and (14) a substantial amount was also dedicated to improving court operations, including modernizing court administration and enhancing public access to the judicial system.",govreport
"Franchise funds are government-run, self-supporting businesslike enterprises managed by federal employees. Franchise funds provide a variety of common administrative services, such as payroll processing, information technology support, employee assistance programs, public relations, and contracting. This review focuses on DOD’s use of the franchise funds’ contracting services. Franchise funds are required to recover their full costs of doing business and are allowed to retain up to 4 percent of their total annual income. To cover their costs, the franchise funds charge fees for services. The Government Management Reform Act of 1994 authorized the Office of Management and Budget to designate six federal agencies to establish the franchise fund pilot program. Congress anticipated that the franchise funds would be able to provide common administrative services more efficiently than federal agencies’ own personnel. The original operating principles for franchise funds included offering services on a fully competitive basis, using a comprehensive set of performance measures to assess the quality of franchise fund services, and establishing cost and performance benchmarks against their competitors—other government organizations providing the same types of services. Although there are five franchise funds currently in operation, DOD primarily uses two for contracting services—GovWorks, operated by the Department of the Interior, and FedSource, operated by the Department of the Treasury. Figure 1 shows the revenues for GovWorks and FedSource and the percentage of revenue derived from doing business with DOD in fiscal year 2004. Effective contract management requires specialized knowledge and careful attention to a range of regulatory requirements and contracting practices designed to protect the government’s interests. In obtaining contracting services through a franchise fund, three main parties share responsibilities for ensuring that proper procedures are followed: government customer—the program office or agency in need of a good or service; franchise fund—the federal entity that provides contracting services; and contractor—the vendor that provides the good or service desired by the government customer. DOD program officials are most familiar with the technical requirements for the goods and services they need. DOD contracting officers can place orders directly through many interagency contracts. Alternatively, DOD pays the franchise fund to assume many of the contracting responsibilities that normally would have been handled by DOD’s contracting officers if the customers had relied on them to purchase the goods or services. Whether DOD makes purchases directly or through another agency, regulatory procedures and requirements are the same, such as ensuring competition, determining fair and reasonable pricing, and monitoring contractor performance. Table 1 shows the basic steps to acquire a good or service through GovWorks or FedSource. GovWorks and FedSource can either make use of their own or other agencies’ contracts, or they can develop new, customized contracts to satisfy a DOD customer’s needs. GovWorks generally uses other agencies’ contracts, and FedSource generally uses its own contracts. Table 2 lists the various types of contracting methods the franchise funds use. While use of other agencies’ contracting services may offer convenience and efficiency, our prior work and that of some agency inspectors general have identified problems with the use of other agencies’ contracting services, including lack of compliance with federal requirements for competition and lack of contractor oversight. In prior work, we found that increasing demands on the acquisition workforce and insufficient training and guidance are among the causes for these deficiencies. Two additional factors are worth noting. First, the fee-for-service arrangement creates an incentive to increase sales volume because revenue growth supports growth of the organization. This incentive can lead to an inordinate focus on meeting customer demands at the expense of complying with contracting policy and required procedures. Second, it is not always clear where the responsibility lies for such critical functions as describing requirements, negotiating terms, and conducting oversight. Several parties—the government customer, the agencies providing the contracting services, and, in some cases, the contractors—are involved with these functions. But, as the number of parties grows, so too does the need to ensure accountability. We have previously reported that ensuring the proper execution of the contracting process is a shared responsibility of all parties involved in the acquisition process and that specific responsibilities need to be more clearly defined. GovWorks and FedSource did not always obtain the full benefits of competitive procedures, did not otherwise ensure fair and reasonable prices, and may have missed opportunities to achieve savings on behalf of DOD customers for millions of dollars worth of goods and services. With limited evidence that prices were fair and reasonable, GovWorks sometimes added millions of dollars of work to existing orders—as high as 20 times the original order value. In addition, we found limited and inconsistent evidence in the GovWorks and FedSource contract files we reviewed that the franchise funds sought to negotiate prices or conducted price analysis when required. DOD customers told us they were under the impression that franchise funds ensure competition and analyze prices. However, we found numerous cases in which these practices did not occur. The FAR states that contracting officers must purchase goods and services from responsible sources at fair and reasonable prices. Price competition is the preferred method to ensure that prices are fair and reasonable. The FAR also includes special competition procedures for orders placed under the types of contracts the franchise funds use, including GSA schedules and multiple-award contracts. DOD’s procurement regulations have additional procedures for ensuring competition when purchasing services from these types of contracts with certain exceptions—such as urgency or logical follow-on. For example, when ordering from GSA schedules, DOD procurement regulations require contracting officers to request proposals from as many contractors as practicable and receive at least three offers. If three offers are not received, a contracting officer must determine in writing that no additional contractors can fulfill the requirement. Alternatively, the contracting officer may provide notice to all schedule holders that could fulfill the requirement. When prices for the specific services being ordered are not established in the contract, the FAR and GSA ordering procedures require contracting officers to analyze proposed prices and to document that they are determined to be fair and reasonable. For example, when labor rates are established in the contract, relying on labor rates alone is not a good basis for deciding which contractor is the most competitive. The labor rates do not reflect the full cost of the order or critical aspects of the service being provided, such as the number of hours and mix of labor skill categories needed to perform the work. These procedures are designed to ensure that the government’s interests are protected when purchasing goods and services. We reviewed 10 orders—totaling about $164 million in fiscal year 2003 funding—in which GovWorks provided contracting services to DOD’s customers. With the exception of two orders, which were placed against GovWorks’ own contracts, the orders we reviewed were placed against GSA schedules. In 5 of the 10 cases, GovWorks sought, but did not receive, competing proposals as required for the types of contracts used. In 3 of the 10 cases, GovWorks sought and received multiple proposals for the work. In the remaining 2 cases, GovWorks placed orders on a sole-source or single-source basis and provided relevant explanations, such as an urgent need for the work and an award to a small disadvantaged business. Table 3 provides details on these 10 orders, and additional information is available in appendix I. In the five cases for which GovWorks sought competing proposals but received only one proposal for each order, GovWorks allowed 2 weeks or less for proposals to be submitted. In four of these cases, orders were ultimately placed with incumbent contractors to fill requirements for ongoing programs. For example, when the Air Force’s Office of the Deputy Chief of Staff Air and Space Operations sought a contractor to provide analytical services, GovWorks gave potential contractors 4 days—around Christmas—to respond. The one contractor that responded was the incumbent and received the order, which totaled $63.4 million. When the Air Force’s Aging Landing Gear Life Extension Program needed a contractor to provide services involving landing gear technology, GovWorks invited 17 contractors to submit proposals and posted the solicitation on the Internet allowing 14 days for proposals to be submitted. The incumbent contractor, which had provided services to the program since its inception in 1998, submitted the only proposal and received the order, which totaled $19.8 million. Each of these 5 orders was subject to the standards for obtaining competing offers for DOD orders, but in only the case of the Aging Landing Gear Life Extension Program did contract documentation indicate that GovWorks had attempted to meet Defense procurement regulations for ordering from GSA schedules. Our findings at GovWorks are consistent with our previous work on DOD’s use of other agencies’ contracts. In our prior work we found that the reasons only one contractor responded to opportunities to compete for work included a perception among potential contractors that incumbent contractors have an advantage in competing for ongoing work and that very short time frames to prepare proposals discouraged others from competing. In this review, we found GovWorks received multiple proposals for work when there was no incumbent contractor and longer time frames allowed for competition to occur. In the five cases in which competing proposals were sought but not obtained, we found limited evidence of price analyses in GovWorks’ contract files. In four of these cases, orders were subject to GSA ordering procedures for services requiring a statement of work. In the fifth case, an Interior multiple-award contract, the FAR required price analysis. (See table 3.) Consequently, GovWorks should have determined that the total price was fair and reasonable. GovWorks told us that it had conducted analyses, but we found that the files generally included only brief statements that prices had been determined reasonable, and GovWorks generally could not provide us with documentation showing what data had been gathered or analyses conducted to support the conclusion for the cases we reviewed. In 6 of the 10 cases we reviewed, GovWorks added substantial work beyond what was originally planned without determining that prices were fair and reasonable. For example, GovWorks increased an original order 20-fold by adding $45.5 million for management consulting services for the National Guard Bureau Chief Information Office. GovWorks modified another National Guard order on numerous occasions, this time increasing the value of the original order for an automated information system from $17.6 million to $44.6 million. An order for reconnaissance and surveillance flight support to Army combatant commands increased in value from $7.4 million to $34.9 million. The order was intended to provide support in Bosnia, for a period of 15 months with no option to renew, but was expanded to include operations in Colombia, and the period of performance was extended by more than 2 years. In each of these examples, GovWorks assigned the additional work without conducting price analyses to determine whether the prices charged were fair and reasonable. We reviewed seven FedSource projects—amounting to $85 million in fiscal year 2003—and found that the franchise fund did not compete orders it placed under multiple-award contracts or perform analyses to ensure fair and reasonable pricing. FedSource commonly used multiple-award contracts to make purchases for DOD. When placing orders against multiple-award contracts, DOD is generally required to ensure that contract holders have a fair opportunity to submit an offer and have that offer fairly considered for each order with certain exceptions—such as urgency or logical follow-on. In addition, FedSource used Blanket Purchase Agreements and requirements contracts for some of the projects we reviewed. Table 4 provides detail on the seven projects, and additional information is available in appendix I. The FedSource business model involves a two-step process of placing an order under previously awarded contracts and subsequently developing work assignments to define requirements for that order. In the first step, contracting officers issue orders indicating the type and approximate dollar value of work that FedSource anticipates will be required under each contract. This estimated value is based on historical usage. The second step is executed later when DOD identifies its needs. At this point, FedSource administrative personnel define tasks and outcomes and assign work to a contractor. In our past work, we recommended that the FAR clarify that agencies should not award large, undefined orders against multiple-award contracts and subsequently define specific tasks. The FAR was revised to encourage agencies to define work clearly so that the total price for work could be established at the time orders are issued. Although this requirement was in effect for the period of our review, we found that FedSource routinely allowed modifications to orders through work assignments that substantially increased the total price of the orders. FedSource did not provide contractors the opportunity to submit offers for orders under multiple-award contracts and have their offers fairly considered, as required by the FAR. FedSource officials told us that their business model does not provide contractors the opportunity to submit offers on orders. Instead, FedSource officials told us that administrative personnel were responsible for providing contractors a fair opportunity to be considered for work under multiple-award contract orders when assigning specific work to contractors. However, we found this generally did not occur. Of the 120 work assignments we reviewed, 75 were for work under multiple-award contracts. We found that in most of the 75 work assignments, FedSource administrative personnel did not provide contractors this opportunity. For example, FedSource used one of these contracts to fill several individual support staff positions at Brooke Army Medical Center at Fort Sam Houston and generally assigned work to one of the three multiple-award contractors without providing the other two contractors an opportunity to be considered. Justifications accompanying these assignments stated that assigning work to more than one contractor might create conflict among assigned staff over variations in pay and benefits. The Army’s Fort McCoy used FedSource to obtain contractor support for a variety of construction projects, and FedSource assigned the work noncompetitively for all 12 work assignments we reviewed to 1 of 3 multiple-award contract holders—totaling $7.2 million. The contract holder, a firm specializing in staffing, subsequently passed the work through to local construction companies that Fort McCoy officials had identified. Justifications accompanying some of the projects stated that the FedSource contracting officer’s representative had determined that it was “in the best interest of the government to award task orders to the vendor that solicited and brought in the business.” A FedSource quality review later concluded that these justifications were inadequate. Many months after the assignments were made, a second justification was placed in the contract files citing numerous reasons for selecting the preferred contractor. One of the reasons was that the project required expedited effort to support urgent requirements, which might have been an acceptable reason, except that the justification did not indicate that use of the other two contractors would have resulted in unacceptable delays. In another example, the Navy needed to fill several administrative positions at its 31 regional recruiting centers around the country. Under another purchasing arrangement, FedSource assigned the work to two contractors, one for recruiting centers east of the Mississippi River and the other for centers to the west of the river. These arrangements did not establish prices for any of the services provided, and FedSource personnel told us that they accepted the prices provided by the contractors. This type of purchasing arrangement does not justify purchasing from only one source—contracting officers are still required to solicit price quotations from other sources. However, there was no evidence FedSource personnel had negotiated or analyzed these prices. In addition, FedSource did not always demonstrate that prices were reasonable. For example, in two of the customer projects we reviewed, FedSource made work assignments for construction services at the Army’s Fort McCoy and Fort Snelling against a contract for operational support. Because the original contract had a very broad and undefined statement of work that did not explicitly include construction, no prices for that type of work had been established in the contract. For the project at Fort McCoy, the contractor that received the assignment solicited prices from potential subcontractors and presented their price, including a markup, to FedSource. We did not find any analysis to determine that the contractor’s price was reasonable in FedSource’s files. FedSource officials told us that they have since awarded a separate contract for construction services. In four of the five projects involving staffing support, FedSource paid contractors higher prices for services than were established in the contract. Most of the files we reviewed contained no justifications for the higher prices. For example, in our review of 25 work assignments for staffing support services at an Army medical center, 14 of the work assignments were priced higher than the price established in the contracts. In 9 of these cases, FedSource had agreed to additional sick leave or vacation time as part of the hourly rate, but FedSource’s contract file contained no documentation indicating that the contractor employee qualified for the additional benefits. DOD did not follow sound management practices designed to ensure value while expeditiously acquiring goods and services. DOD customers chose to use franchise funds based on convenience, rather than as part of an acquisition plan. DOD conducted little analysis, if any, to determine whether using franchise funds’ contracting services was the best method for acquiring a particular good or service. For their part, although franchise funds’ business operating principles require that they maintain and evaluate cost and performance benchmarks against their competitors, they did not perform analyses that DOD could use to assess whether the franchise funds deliver good value. Their performance measures generally focus on customer satisfaction and generating revenues, rather than proper use of contracts and sound management practices. This focus on customer satisfaction and generating revenues provides an incentive to emphasize customer service rather than ensuring proper use of contracts and good value. DOD customers told us that they did not formally analyze contracting alternatives but generally chose to pay GovWorks and FedSource to provide contracting services because the franchise funds provided quick and convenient service. Some customers were dissatisfied with the speed and quality of services provided by DOD’s in-house contracting offices. For example, two DOD customers told us that their contracting offices required 9 months to respond to their purchasing needs, while the franchise fund required only a few weeks. The franchise fund’s ability to place orders quickly was valuable to DOD customers in these situations. DOD customers said that franchise funds’ contracting services were less restrictive than other DOD contracting alternatives. Some DOD customers told us that GovWorks and FedSource made it easier to spend funds at the end of a fiscal year unlike DOD’s in-house contracting offices. Two DOD customers said that GovWorks made it easier to spend small amounts of funding because GovWorks would place orders incrementally as funding became available. Some DOD customers mentioned that using FedSource meant they did not have to “live with the terms and conditions” of a long term contract or that it was easier to replace problem contractor employees. In one case, we were told that, if the organization had to fill positions with government employees, it would have less flexibility to hire the personnel it needed in a timely manner. Analysis of contracting alternatives helps to ensure that purchases are made by the most appropriate means and are in DOD’s best interest; however, DOD has no clear mechanism for making this determination when using other agencies’ contracting services. DOD’s guidance on the use of these vehicles has been evolving for several years and has not yet been fully implemented. DOD also lacks a means to gather data on the use of interagency contracts on a recurring basis, although it has been subject over the years to various requirements to monitor interagency purchases. In 2003, in response to a congressional mandate, DOD was unable to compile complete data on spending through interagency contracts. DOD officials told us that their financial systems are not designed to collect this data. Without this type of data, it is difficult to make informed decisions about the use of other agencies’ contracting services. DOD issued guidance in October 2004 that requires the military departments and defense agencies to determine whether using interagency contracts—such as those the franchise funds manage—is in DOD’s best interest. While this guidance outlines procedures to be developed, and general factors to consider, it does not provide specific criteria for how to make this determination and does not require military departments and agencies to report on the use of interagency contracts. DOD has directed the military departments and defense agencies to develop their own guidance to implement this policy. Congress has also recently taken action to ensure DOD’s proper use of interagency contracts. The conference report accompanying this legislation established expectations that DOD’s procedures will ensure that any fees paid by DOD to the contracting agency are reasonable in relation to work actually performed. In 2001, Congress adopted legislation requiring DOD to establish a management structure and establishing savings goals for the procurement of services. The legislation also requires DOD to ensure that contracts for services are entered into or issued and managed in compliance with applicable laws and regulations regardless of whether the services are procured by DOD directly or through a non-DOD contract or task order. One of the goals of this legislation was to allow DOD to improve the management of the procurement of services. However, DOD generally chose to use franchise funds for reasons of speed, convenience, and flexibility rather than taking a strategic and coordinated approach to acquiring services. We found that prior to choosing to use a franchise fund, DOD did not analyze costs and benefits or prepare business cases to determine whether the franchise fund provided better value—considering the fees it charges—compared with other alternatives, such as using a DOD contracting office or purchasing goods or services through another federal agency’s existing contract. As a result, DOD customers did not consider opportunities to leverage their buying power when using franchise funds. None of the DOD customers we spoke to analyzed trade- offs between total price, including fees, and the benefits of convenience. For example, on a group of work assignments for construction services valued at $7.2 million, the Army’s Fort McCoy paid FedSource a total of about $1 million, or 17 percent above the subcontractor’s proposed price, for the contractor markup and the franchise fund fee. Most of these assignments were placed towards the end of the fiscal year. This may have led to a higher price for the services than DOD would have paid in contracting directly with the subcontractors. Figure 2 shows the general process by which the Army’s Fort McCoy used FedSource to obtain contractor support for construction services. The DOD customer said that FedSource made it easier than his own contracting office to assign work with values greater that $25,000 late in the fiscal year because FedSource’s deadlines were not as strict. He also speculated that the subcontractor probably would have charged more if contracting directly with the government because dealing with the government is cumbersome and costly. He did not have information to indicate what the subcontractor’s price might have been, nor did he perform any formal analysis to compare FedSource with other contracting opportunities. Conducting a thorough analysis also might have given DOD a better understanding of the fees paid to make purchases through the franchise funds. For example, DOD customers sometimes paid a GovWorks fee, or service charge, on top of a fee to use another agency’s contract because GovWorks generally uses other agencies’ contracts to make purchases for DOD customers. While some customers were aware of the fees they paid, in two cases, DOD customers selected GovWorks because its fees were lower than fees charged by other agencies; however, the customers did not realize that GovWorks’ fees were in addition to the other agencies’ fees. GovWorks’ fees generally ranged from 2 percent to 4 percent of the price for goods and services purchased, and our analysis showed that FedSource fees ranged from 2 percent to 8 percent for the contracts and orders we reviewed. Congress has mandated that DOD agencies report fees paid for the use of other agencies’ contracts in the past and required DOD to do so again for fiscal year 2005. The franchise funds’ business operating principles require that they maintain and evaluate cost and performance benchmarks against their competitors. However, they did not perform analyses that DOD could use to assess whether the franchise funds deliver good value. FedSource claims that it achieves lower prices on goods and services because it aggregates requirements and negotiates price discounts. Further, FedSource claims that competition with other contracting offices provides an incentive to provide better quality at lower cost. However, this incentive may not drive costs down unless customers are sensitive to the cost of doing business with one agency over another and make decisions based on costs. Franchise fund officials told us that demonstrating these advantages was difficult because they lacked insight into the prices customers would have paid when using other contracting alternatives to fill their requirements. FedSource officials also explained that quantifying the value of the other benefits they provide—such as convenience and flexibility—is difficult. Instead, GovWorks and FedSource have used such measures as growth in total contracting activity and revenues as well as customer satisfaction but have little data to demonstrate that they provide better quality and lower price goods and services than other federal contracting alternatives can provide. In fact, GovWorks marketing materials emphasize convenience and value-added service rather than costs. In our prior work, we found that fee-for-service contracting arrangements emphasize the overall sustainability of the contracting operation, as the fees collected are used to cover the costs of doing business, which may lead to a focus on customer service at the expense of compliance with contracting policy and procedures. DOD, GovWorks, and FedSource did not follow federal contracting procedures designed to ensure value while expeditiously acquiring goods and services. DOD and the franchise funds did not define desired outcomes and the specific criteria against which contractor performance could be measured and paid limited attention to monitoring contractors’ work. As we have reported previously, it is not always clear where the responsibility lies for such critical functions as describing requirements, negotiating terms, and conducting oversight. Although the FAR states that contracting officers are responsible for including appropriate quality requirements in solicitations and contracts and for contract surveillance, the franchise funds do not have sufficient knowledge about the DOD customers’ needs to fulfill these responsibilities without the assistance of the DOD customer. Recently, the franchise funds contracting operations performed some internal reviews that have findings similar to ours, and the funds are working to address the problems. These shortcomings mirror many of the findings of our previous work and are among the reasons we have designated interagency contracting as a governmentwide high-risk area. In the GovWorks and FedSource cases we reviewed, required outcomes were not well-defined, work was generally described in broad terms, and orders sometimes specifically indicated that work would be defined more fully after the order was placed. GovWorks and FedSource files we reviewed lacked clear descriptions of outcomes to be achieved or requirements that the contractor was supposed to meet. The FAR states that contracting officers are responsible for including the appropriate quality requirements in solicitations and contracts. Without these criteria, accountability becomes harder to determine and the risk of poor performance is increased. Clear definition of requirements promotes better mutual understanding of the government’s needs. In a typical situation, the customer—a DOD program office, for example—is best qualified to know what it needs. However, once a DOD program office chooses to pay a franchise fund to make purchases on its behalf, the office must then rely on the franchise fund to provide the contracting expertise. The two parties have to work together to ensure that requirements for purchases are well-defined with sufficient detail to determine whether the desired outcomes were met and the goods and services provided meet the government’s needs. Critical information must be documented in order to make these determinations. GovWorks and FedSource use different processes, and the tables in appendix III explain some of the pertinent contract documents used to define desired outcomes and criteria. In 7 of the 10 GovWorks orders we reviewed, statements of work were very broad. For example, six of these orders contained language stating that specific tasks could be added, deleted, or redefined throughout the period of performance. In some cases, DOD program officials told us that the statements of work were broad because they were not aware of all requirements when the order was placed or because they were operating in a constantly changing technological environment. DOD program officials also told us that the broad statements of work gave them flexibility to add requirements to existing orders as additional needs arose. Orders placed by FedSource against its contracts contained only a very general statement—generally just a few words—describing the work in broad terms and an anticipated dollar value. These orders did not clearly describe all services to be performed or supplies to be delivered so that the full price for the work could be established when the order was placed, as required by the FAR. As noted earlier, FedSource officials explained that in their business model, orders were not intended to describe specific work to be completed. Instead, FedSource administrative personnel issued work assignments that were intended to provide the clear descriptions of desired outcomes that the orders did not. However, we found that these work assignments were often unclear as well. Five of FedSource’s largest customer projects for DOD involved use of contracts to provide staff. Work assignments for staffing services often described the position to be filled, including a general outline of duties. However, the assignments did not contain criteria for evaluating the work performed by contract employees. In addition, when providing staffing support, FedSource uses these contracts to fill positions individually, rather than describing functional needs or desired results. For example, at an Army medical center FedSource filled over 200 positions individually instead of aggregating these positions into fewer functional requirements. This acquisition approach does not provide contractors with the flexibility to determine how best to staff a function and does not lend itself to a performance- based approach. Under performance-based contracting, the contracting agency specifies the outcome or result it desires and leaves it to the contractor to decide how best to achieve the desired outcome. FedSource officials said they were moving toward a more performance- based contracting approach. To determine whether an environment had been created that would allow improper personal services relationships to develop, we interviewed officials at five DOD program offices that used FedSource contracts to staff individual positions. We asked questions about the work performed by the contractor employees and the relationships between the DOD customers and the contractor employees. The DOD officials said that generally: the services provided by the contract employee were integral to agency functions or missions; the contractor employees were providing services comparable to those performed using civil service personnel; and the services were provided on site and with the use of equipment provided by the government. With regard to the work relationships, DOD customers told us that government employees assigned and prioritized daily tasks for the contractor employees. FedSource guidelines also state that the government customer is responsible for verifying contract employee hours worked by signing the contractor’s weekly timesheet. Further, a FedSource internal review found that statements of work contained “personal services-type language like ‘under the direction of’ or ‘oversee’ or ‘duties’ or ‘job description.’” Our review also found documents that had been edited to revise similar language. FedSource officials were aware of the potential that these contracts might be used for personal services and took various steps to clarify that personal services were not to be provided. For example, FedSource officials provided training for DOD customers on how to avoid creating a situation that had the appearance of personal services. Although this training is a positive step, poorly defined statements of work provided the opportunity for situations to arise in which personal services relationships could develop. FedSource relied on administrative staff, not contracting officers, to work with the customer to define and assign the specific tasks to be performed or the positions to be filled. A FedSource review found that trained contracting staff was needed for developing task order requirements and warranted contracting officers were required for issuing task orders. The FedSource administrative employees do not have the same level of expertise as contracting officers, who have specialized knowledge to ensure compliance with federal regulations and guidelines. Inadequacies we found in FedSource’s contracting practices pointed to the challenges of relying on administrative personnel rather than contracting experts to review statements of work, choose appropriate contracting vehicles, ensure adequate competition, and sign off on assignments of specific work. DOD customers, GovWorks, and FedSource often relied on methods of contract oversight that lacked performance measures to ensure that contractors provided quality goods and services in a timely manner. Typically, the franchise funds failed to include an oversight plan that contained specific quality criteria in their contracts or orders. Without this critical information, neither DOD nor the franchise funds could effectively measure contractor performance. The FAR and DOD’s procurement regulations require contract surveillance and documentation that it occurred. Contract surveillance, also referred to as oversight, is a contracting officer’s responsibility, and DOD pays the franchise fund to assume the responsibilities of contracting officers. The Office of Management and Budget’s Office of Federal Procurement Policy has issued policy stating that contract oversight begins with the assignment of trained personnel who conduct surveillance throughout the performance period of the contract to ensure the government receives the services required by the contract. DOD guidance states that documentation constitutes an official record and the surveillance personnel assessing performance are to use a checklist to record their observations of the contractor’s performance. The guidance also states that all performance should be documented whether it is acceptable or not. The GovWorks contract files we reviewed generally did not include contractor monitoring plans, quality assurance surveillance plans, test and acceptance plans, or other evidence of monitoring activities. However, the files did contain evidence that a contracting officer’s representative from the DOD program office had been appointed to assist in performing contractor oversight. Although ensuring that contract oversight occurs is a contracting officer responsibility, GovWorks officials told us that surveillance plans were not usually kept in the GovWorks contracting officers’ contract files. Instead, these plans were maintained by the contracting officer’s representative at the DOD customer agency. When we asked about contract oversight, we found that in the absence of an agreed upon oversight plan, DOD customers generally ensured that there was some process in place for monitoring performance. Some customers described status meetings and regular progress reports, but generally told us that they had no specific criteria for monitoring contractor performance or established measures for determining the quality of services. Although GovWorks officials told us that their contracting officers did assist customers in measuring quality services from the acquisition planning stages through contract completion, we found little evidence that this actually took place. We found that FedSource generally did not ensure that contractor oversight occurred. As was the case with GovWorks, FedSource officials told us that they encouraged DOD to develop criteria for quality. However, FedSource allowed general information—such as job descriptions—to serve as requirements, even though the job descriptions contained no criteria for measuring quality. These descriptions did not provide sufficient information to establish an oversight plan. FedSource did not appoint trained contracting officers’ representatives from DOD to conduct on-site monitoring. Instead, FedSource relied on its own administrative personnel, who had been trained as contracting officers’ technical representatives but were not located on-site with the customer, to assess contractor performance. Because they were not on-site, they could not observe the quality of the contractors’ work, and FedSource generally took the absence of complaints from DOD customers as an indication that the contractor was performing satisfactorily. A FedSource official explained that FedSource guidelines state that the customer agency’s acceptance of the contract employee’s time sheet indicates agreement that services have met quality standards and requirements. This policy lacks clear criteria and measures to determine whether the contractor has provided quality services. In place of criteria, we found DOD customers said they generally evaluated performance of contractor staff based on informal observation and customer satisfaction. The lack of adequate oversight is consistent with what we have reported in our recent work on contractor oversight for DOD service contracts, where we found that almost all of those that had insufficient oversight were interagency contracts. DOD explained that contractor oversight is not as important to contracting officials as awarding contracts and does not receive the priority needed to ensure that oversight occurs. DOD concurred with our recommendations to develop guidance on contractor oversight of services procured from other agencies’ contracts, to ensure that proper personnel be assigned to perform contractor oversight in a timely manner no later than the date of contract award, and that DOD’s service contract review process and associated data collection requirements provide information that will provide management visibility over contract oversight. Aside from monitoring the contractors’ performance, we also found that the departments of the Interior and the Treasury, which operate GovWorks and FedSource, respectively, and the Office of Management and Budget have conducted infrequent reviews of franchise funds’ procurement activities. GovWorks and FedSource have recently conducted internal reviews of their operations that have identified concerns similar to those we found. A GovWorks’ 2004 Management Review identified such issues as lack of acquisition planning for work added to existing awards, unanticipated increases in the amounts of orders, and inadequate documentation of many requirements such as competitive procedures, determinations that changes were within the scope of the contract, the basis of award decisions, and that prices were fair and reasonable. FedSource officials recently started conducting “office assistance reviews.” A June 2004 FedSource review identified lack of documentation, use of purchasing agreements beyond their intended parameters and dollar limits, lack of price analysis, lack of quality assurance plans, and the need for warranted contracting officers rather than administrative personnel to perform much of the work. While the operating principles for franchise funds require the funds to have comprehensive performance measures, these measures do not emphasize compliance with contracting regulations and generally focus on customer satisfaction, financial performance, and generating revenues to cover operating costs. Several customers we interviewed were unaware of compliance problems and told us that they believed the franchise funds placed orders on a competitive basis, analyzed prices, or otherwise sought to ensure the best deal for the government when the funds, in fact, did not. GovWorks has taken steps that address concerns raised in its own reviews, such as increased training for contracting officers, developing a written acquisition procedures manual, and creating a uniform system of contract file maintenance and sample documents to ensure adequate documentation. GovWorks officials also told us they are trying to improve competitive procedures by requiring all solicitations for DOD work to be posted on e-Buy, an online system to request quotes for products and services. FedSource also has taken steps toward addressing concerns raised in this report, such as quality assurance planning, hiring contracting officers, and restructuring its operations. These initiatives are underway, and it is too early to tell whether they will improve contracting operations at the franchise funds. The Office of Management and Budget’s oversight of franchise funds has been limited. The Office of Management and Budget and the Chief Financial Officers Council established business-operating principles as a foundation for effective franchise fund management and, as required by the Government Management Reform Act, submitted an interim report on the franchise fund pilot program to Congress in 1998. Among other efforts, the report recommended that the franchise funds should continue to seek opportunities to provide services at the least cost to the taxpayer, contributing to reducing duplicative administrative functions and consequently to the costs of those functions. The report noted that the franchise funds’ performance measures were in varying stages of development. The report recommended that the Office of Management and Budget should report to Congress on franchise fund activity prior to the expiration of the pilot authority and that the office should continue to develop and implement operating guidance for the franchise fund program. Although the Office of Management and Budget’s budget examiners conduct some monitoring of franchise funds as part of their general oversight responsibilities, Office of Management and Budget representatives said they have not conducted any comprehensive reviews of franchise funds since they submitted the required report to Congress. Neither have they reviewed the funds’ contracting practices. GovWorks and FedSource, created as a result of governmentwide initiatives to improve efficiency, have streamlined contracting processes to provide customers with greater flexibility and convenience. However, GovWorks and FedSource have not always adhered to competitive procedures and other sound contracting practices. They have paid insufficient attention to basic tenets of the federal procurement system— taxpayers’ dollars should be spent wisely, steps should be taken to ensure fair and reasonable prices, and purchases should be made in the best interest of the government. One factor contributing to these deficiencies is that the departments of the Interior and the Treasury have not ensured that the franchise funds’ contracting services follow the FAR and other procurement policies. The franchise funds need to develop clear, consistent, and enforceable policies and processes that comply with contracting regulations while maintaining good customer service. Another contributing factor is that the roles and responsibilities of the parties involved in the interagency contracting process are not always clearly defined. GovWorks and FedSource are ultimately accountable for compliance with procurement regulations when they assume the role of the contracting officer. However, they often depend on the customer for detailed information about the customer’s needs. To facilitate effective purchasing and to help obtain the best value of goods and services, all parties involved in the use of interagency contracts have a stake in clarifying roles and responsibilities. Additionally, franchise funds sometimes face incentives to provide good customer service at the expense of proper use of contracts and good value. These pressures are inherent in the fee-for-service contracting arrangement. Because the franchise funds have not always adhered to sound contracting practices, DOD customers must be cautious when deciding whether franchise fund contracting services are the best available alternative. In addition to convenience and flexibility, decisions to use franchise funds should be grounded in analysis of factors such as price and fees. Further, to enhance DOD’s ability to develop sound policies related to the use of franchise funds, DOD needs measurable data that would allow it to assess whether franchise funds’ contracting services help lower contract prices, reduce administrative costs, and improve the delivery of goods and services. This information would also be useful in leveraging DOD’s overall buying power through strategic acquisition planning. No one knows the total cost of using other agencies’ contracting services. Without understanding total cost, value is elusive. In addition, DOD customers should ensure that taxpayers’ dollars are spent wisely by sharing in the responsibilities for developing clear contract requirements and oversight mechanisms. DOD customers are the best source of information about their specific needs and are also best positioned to oversee the delivery of goods and services. Given the incentive to focus on sustaining the franchise funds’ operations and the many service providers from which customers like DOD may choose, objective oversight would help to ensure that franchise funds adhere to procurement regulations and operate as intended. The Office of Management and Budget, which designated and has previously evaluated the franchise funds, is well positioned to periodically evaluate, monitor, and develop guidance to improve the franchise funds’ contracting activities. While a number of actions to improve DOD’s use of other agencies’ contracting services are already underway, to enhance these initiatives, we make the following eight recommendations to DOD, the Interior, the Treasury, and the Office of Management and Budget. To ensure that DOD customers analyze alternatives when choosing franchise funds and to provide DOD with the measurable data it needs to assess the value of the franchise funds’ contracting services, we recommend that the Secretary of Defense take the following three actions: Develop a methodology to help DOD customers determine whether use of franchise funds’ contracting services is in the best interest of the government. The methodology should include analysis of tradeoffs. Reinforce DOD customers’ ability to define their needs and desired contract outcomes clearly. This skill includes working with franchise fund contracting officers to translate their needs into contract requirements and to develop oversight plans that ensure adequate contract monitoring. monitor and evaluate DOD customers’ use of franchise funds’ contracting services, prices paid, and types of goods and services purchased. Prices include franchise fund fees and fees for use of other interagency contracts. To ensure that GovWorks and FedSource adhere to sound contracting practices, we recommend that the Secretaries of the Interior and the Treasury take the following two actions: develop procedures and performance measures for franchise fund contracting operations to demonstrate compliance with federal procurement regulations and policies while maintaining focus on customer service and develop procedures for franchise fund contracting officers to work closely with DOD customers to define contract outcomes and effective oversight methods. To ensure that the FedSource workforce has the skills to carry out contracting responsibilities, we recommend that the Secretary of the Treasury take the following action: assign warranted contracting officers to positions responsible for performing contracting officer functions. In order to provide incentives for the franchise funds to adhere to procurement regulations and to ensure that franchise funds operate as intended, we recommend that the Director of the Office of Management and Budget take the following two actions: Expand monitoring to include franchise funds contracting operations’ compliance with procurement regulations and policies. These findings should be available to customers to ensure transparency and accountability to customers and the Congress. Develop guidance to clarify the roles and responsibilities of the parties involved in interagency contracting through franchise funds. We provided a draft of this report to DOD, the departments of the Interior and the Treasury, and the Office of Management and Budget for review and comment. We received written comments from DOD and the Department of the Treasury, which are reprinted in appendices IV and V respectively. The Department of the Interior and the Office of Management and Budget provided comments via e-mail. DOD concurred with our recommendations and identified actions it has taken or plans to take to address them. In response to our recommendation that the Secretary of Defense develop a methodology to help DOD customers determine whether the use of franchise funds’ contracting services is in the best interest of the government, DOD indicated that action had been taken through the issuance of a policy memo titled Proper Use of Non-DOD Contracts and subsequent policies issued by the military departments. We acknowledge the DOD policy memo in our report and note that this guidance describes general factors to consider but does not provide specific criteria for how to make this determination. The policies issued by the military departments establish procedures for review and approval of the use of non-DOD contract vehicles, but do not address methods of determining whether this is in the best interest of the government. Our recommendation takes these actions into account and encourages DOD to go further by developing a methodology to help customers assess contracting alternatives. In response to our recommendation that DOD reinforce DOD customers’ ability to define their needs and desired contract outcomes clearly, DOD maintained that it is the responsibility of the franchise fund contracting officer to decide whether or not the requirement is described accurately. Nonetheless, DOD committed to issue a memo by August 31, 2005, reinforcing the need for DOD customers to define clearly their requirements and articulate clearly their desired outcomes in the acquisition process. We believe that this memo, coupled with DOD’s ongoing efforts to educate DOD customers about the use of interagency acquisitions, are steps in the right direction. Finally, in response to our recommendation that DOD monitor and evaluate DOD customers’ use of franchise funds’ contracting services, DOD concurred but explained that the data capture systems that would provide this information are not yet in place. DOD stated that the Federal Procurement Data System-Next Generation would provide this capability in fiscal year 2006. However, data collection is just one step in the evaluation process. In addition to collecting data, DOD will also need to compare alternatives and prices in order to make more informed choices. Further, the accuracy and reliability of interagency contracting data in the Federal Procurement Data System-Next Generation will depend heavily on accurate reporting by franchise funds. The Department of the Interior concurred with our recommendations and identified actions it has taken or plans to take to address them. The Interior highlighted 2004 accomplishments and acknowledged a need for better documentation to demonstrate compliance and value provided. The Interior also committed to ensuring an adequate contracting staff and to publishing information to help DOD determine the value of using the franchise fund. In response to our recommendation that the Department of the Interior develop procedures and performance measures for franchise fund contracting operations to demonstrate compliance with federal procurement regulations, the Interior highlighted a number of recent efforts to improve performance, including its 2004 management control review and performance improvement plan that will monitor compliance with federal procurement regulations. This plan establishes a goal of 75 percent reduction in reportable findings. Interior also stated that it had revised its acquisition review process, awarded a contract for a third party acquisition review, and provided additional training to its staff. Interior committed to continue monitoring performance and creating guidance as needed. In response to our recommendation that the Interior develop procedures for franchise fund contracting officers to work more closely with DOD customers, the Interior highlighted efforts to train its contracting officers and develop policies for working with DOD customers. The Department of the Treasury concurred with our recommendations and identified actions it has taken or plans to take to address them, including centralization of FedSource’s acquisition workforce under one line of authority to allow for standardization and consistency. In response to our recommendation that FedSource develop procedures and performance measures for franchise fund contracting operations to demonstrate compliance with federal procurement regulations, the Treasury committed to continue to conduct reviews to measure and evaluate compliance with federal procurement regulations and policies. This is a positive step toward ensuring compliance. The Treasury also said that FedSource had instituted performance-based statements of work for its acquisitions. While this initiative focuses on some aspects of compliance and is important in managing contractor performance, our recommendation addresses the performance of the franchise fund. Developing performance measures related to compliance with procurement regulations would reinforce the agency’s commitment to compliance and provide a means to monitor and demonstrate progress. In response to our recommendation that FedSource develop procedures for franchise fund contracting officers to work more closely with DOD customers, the Treasury indicated that FedSource will also develop procedures to provide its customers with clear guidance for defining contract outcomes. In response to our recommendation that FedSource assign warranted contracting officers to positions responsible for performing contracting officer functions, Treasury stated that FedSource has hired contracting officers to perform all contracting officer functions. OMB concurred with our recommendations that OMB expand its monitoring to include franchise funds contracting operations’ compliance with procurement regulations and policies and develop guidance to clarify the roles and responsibilities of the parties involved in interagency contracting through franchise funds. OMB stated that its Office of Federal Procurement Policy (OFPP) proposed to include the implementation of our recommendations in an undertaking pertaining to governmentwide acquisition contracts and incorporate franchise funds into that project. As part of that project, OMB/OFPP is asking the designated agencies to develop plans to ensure cost-effective and responsible contracting. The plans will address (1) training to contracting staff; (2) customer staff training; (3) management controls to ensure contracts are awarded in accordance with applicable laws, regulations, and policies; (4) contract administration; and (5) periodic management reviews. OMB acknowledged that this was only a part of the solution. We encourage OMB to give additional consideration to providing guidance that would clarify roles and responsibilities of the parties involved in interagency contracting through franchise funds. We are sending copies of this report to the Secretaries of Defense, the Interior, and the Treasury; the Director of the Office of Management and Budget; and interested congressional committees. We will provide copies to others on request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report or need additional information, please call me at (202) 512-4841 (cooperd@gao.gov). Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other staff making key contributions to this report were Amelia Shachoy, Assistant Director; Lily Chin; Lara Laufer; Janet McKelvey; Kenneth Patton; Monty Peters; and Ralph Roffo. In memory of Monty Peters (1948-2005), under whose skilled leadership this review was conducted. We reviewed legislation establishing the franchise fund pilot program, governmentwide guidance relating to the program, and reports summarizing program outcomes. We held discussions with Office of Management and Budget representatives responsible for overseeing and providing guidance for the program and with Department of Defense (DOD) officials responsible for oversight of procurement issues. We performed work at the franchise funds managed by the departments of the Interior and the Treasury and interviewed officials and reviewed records relating to Interior’s GovWorks and Treasury’s FedSource programs. The Interior and Treasury franchise funds accounted for about 76 percent of total revenues for the six franchise funds during fiscal year 2003 (the most recently completed fiscal year at the time we were planning our field work) and about 95 percent of all services the six funds provided DOD. Contracting services the GovWorks and FedSource programs provided accounted for over 95 percent of total revenues at the Interior and Treasury franchise funds. To gain insight into how DOD customers were using franchise funds and into franchise fund contracting processes, we reviewed documentation relating to 17 selected customer projects totaling $249 million in funding provided and interviewed GovWorks and FedSource contracting personnel responsible for these projects and representatives of the DOD customers. To determine how DOD customers determined whether franchise funds provided a good value, we interviewed representatives of DOD customers for the selected projects and reviewed available documentation relating to decisions to use franchise fund contracts. We also reviewed information available from the franchise funds that would indicate whether the franchise funds provided a good value, and interviewed franchise fund officials. To determine how franchise fund contracting officers worked with DOD customers to define measurable quality standards for goods and services and develop effective oversight mechanisms, we reviewed contract documentation for selected customer projects that would establish quality standards, and documentation relating to contract oversight. We also discussed these issues with franchise fund contracting personnel. In addition, we discussed these issues with representatives of DOD customers and reviewed available documentation. To determine whether franchise funds followed the contracting practices needed to ensure fair and reasonable prices, we reviewed contract documentation for selected customer projects to assess the extent to which contracting personnel sought competition for work and analyzed proposed prices to determine whether they were fair and reasonable, and discussed these issues with contracting personnel. In addition, we discussed these issues with representatives of DOD customers and reviewed available documentation. To select customer projects for review, we obtained data files from the Department of the Interior’s GovWorks and the Department of the Treasury’s FedSource contracting programs that reflected customer projects active during fiscal year 2003, and the dollar value of customer funding provided for these projects during the year. We ranked these projects in terms of funding provided and selected projects representing the greatest dollar value of customer funding provided—10 GovWorks projects accounting for $164 million and 7 FedSource projects accounting for $85 million. Table 5 summarizes GovWorks projects, and table 6 summarizes FedSource projects. GovWorks contracting personnel fulfilled the requirements of each project selected by award of a single order, and we reviewed contract documentation related to the relevant order. FedSource contracting personnel, in contrast, fulfilled the requirements of customer projects by award of one or more contracts or orders. Further, FedSource personnel initiated multiple work assignments—in some cases several hundred—to define specific work what would be performed under each of the contracts awarded or orders placed. Accordingly, we reviewed all contracts awarded or orders placed to fulfill the requirements of the selected customer projects and a sample of work assignments initiated under these contracts or orders. To select sample work assignments for review, we first ranked the work assignments in terms of dollar value of the work to be performed. For those projects where a relatively small number of work assignments accounted for a significant share of total project value, we selected the highest dollar value assignments representing at least 50 percent of total project value. For those projects where most individual work assignments represented only a small fraction of total project value, we selected all assignments valued at $150,000 or more and a sample— selected at random—of the remaining work assignments. We conducted our review between June 2004 and June 2005 in accordance with generally accepted government auditing standards. Appendix II: Franchise Fund Operating Principles The enterprise should only provide common administrative support services. The organization would have a clearly defined organizational structure including readily identifiable delineation of responsibilities and functions and separately identifiable units for the purpose of accumulating and reporting revenues and costs. The funds of the organization must be separate and identifiable and not commingled with another organization. The provision of services should be on a fully competitive basis. The organization’s operation should not be “sheltered” or be a monopoly. The operation should be self-sustaining. Fees will be established to recover the “full costs,” as defined by standards issued in accordance with the Federal Accounting Standards Advisory Board. The organization must have a comprehensive set of performance measures to assess each service that is being offered. Cost and performance benchmarks against other “competitors” are maintained and evaluated. The ability to adjust capacity and resources up or down as business rises or falls, or as other conditions dictate, if necessary. Resources to provide for “surge” capacity and peak business periods, capital investments, and new starts should be available. The organization should specify that prior to curtailing or eliminating a service, the provider will give notice within a reasonable and mutually agreed time frame so the customer may obtain services elsewhere. Notice will also be given within a reasonable and mutually agreeable time frame to the provider when the customer elects to obtain services elsewhere. Customers should be able to “exit” and go elsewhere for services after appropriate notification to the service provider and be permitted to choose other providers to obtain needed service. Full-time equivalents would be accounted for in a manner consistent with the Federal Workforce Restructuring Act and Office of Management and Budget requirements, such as Circular A-11. Capitalization of franchises, administrative service, or other cross-servicing operations should include the appropriate full-time equivalents commensurate with the level of effort the operation has committed to perform.","The Department of Defense (DOD) is the largest user of other federal agencies' contracting services. The availability of these contracting services has enabled DOD and other departments to save time by paying other agencies to award and administer contracts for goods and services on their behalf. DOD can access these contracting services a number of ways, such as ordering directly from interagency contracts for commonly needed items. DOD also can pay someone else to do the work. For example, DOD uses franchise funds, which are government-run, fee-for-service organizations that provide a portfolio of services, including contracting services. As part of a congressional mandate, GAO assessed whether franchise funds ensured fair and reasonable prices for goods and services, whether DOD analyzed purchasing alternatives, and whether DOD and franchise funds ensured value by defining contract outcomes and overseeing contractor performance. GovWorks and FedSource, two of the franchise funds that DOD has relied on for contracting services, have not always ensured fair and reasonable prices while purchasing goods and services. The franchise funds also may have missed opportunities to achieve savings from millions of dollars in purchases, including engineering, telecommunications, or construction services. In the course of its review, GAO examined $249 million worth of orders and work assignments from the contracts the franchise funds used to make purchases on DOD's behalf. In many cases, GovWorks sought but did not receive competing proposals. GovWorks added substantial work--as much as 20 times above the original value of a particular order--without determining that prices were fair and reasonable. FedSource generally did not ensure competition for work, did not conduct price analyses, and sometimes paid contractors higher prices for services than established in contracts with no justification provided in the contract files. For its part, DOD--in the absence of clear guidance on the proper use of other agencies' contracting services--chose to use franchise funds on the basis of convenience without analyzing whether using franchise funds' contracting services was the best method for meeting purchasing needs. DOD also lacks information about purchases made through other agencies contracts, including franchise funds, which makes it difficult to make informed decisions about the use of these types of contracts. The franchise funds' business-operating principles require that they maintain and evaluate cost and performance benchmarks against their competitors. However, the franchise funds did not perform analyses that DOD could have used to assess whether the funds deliver good value. The funds' performance measures generally focus on customer satisfaction and generating revenues. These measures create an incentive to increase sales volume and meet customer demands at the expense of ensuring proper use of contracts and good value. DOD and the franchise funds--which share responsibility for ensuring value through sound contracting practices such as defining contract outcomes and overseeing contractor performance--did not adequately define requirements. Without well-defined requirements, DOD and the franchise funds lacked criteria to measure contractor performance effectively. On a separate oversight-related issue, GAO found that the departments of the Interior and the Treasury--each of which has responsibility in the successful operation of the respective franchise funds--and the Office of Management of Budget have performed little oversight of GovWorks and FedSource.",govreport
"Wildland fires play an important ecological role on the nation’s landscapes. Fires have long shaped the composition of forests and grasslands across every region of the United States, including ponderosa pine forests in the Northwest and the Rocky Mountain West, chaparral in the Southwest, sagebrush steppe in the Great Basin, tallgrass prairies in the Midwest, longleaf pine forests in the South, and the pine barrens of the Atlantic Coast. Fires periodically reduce vegetation densities and stimulate seedling regeneration and growth in some species. Wildland fires can be ignited by lightning or by humans, either accidentally or intentionally. As we have described in previous reports from our body of work on wildland fire management, however, various land use and management practices over the past century—including fire suppression, grazing, and timber harvesting—have reduced the normal frequency of fires in many forest and rangeland ecosystems and have reduced these ecosystems’ resiliency to fire. We have reported that these practices contributed to abnormally dense, continuous accumulations of vegetation, which not only can fuel uncharacteristically large or severe wildland fires but also—with more homes and communities built in or near areas at risk from wildland fire—threaten lives, health, property, and infrastructure. In addition, changing climate conditions, including drier conditions in certain parts of the country, have increased the length and severity of wildfire seasons, according to many scientists and researchers. For example, in the western United States, the average number of days in the fire season increased from approximately 200 in 1980 to approximately 300 in 2013, according to the 2014 Quadrennial Fire Review. In Texas and Oklahoma, the average fire season increased from fewer than 100 days to more than 300 during this time frame. According to the U.S. Global Change Research Program’s 2014 National Climate Assessment, projected climate changes suggest that western forests in the United States will be increasingly affected by large and intense fires that occur more frequently. Figure 1 shows the Forest Service’s assessment of wildfire hazard potential across the country as of 2014. Working collaboratively across federal-nonfederal boundaries to address the wildland fire issue can involve any mix of the nation’s 2.3 billion acres of federal, state, local, private, or tribal lands. Historical settlement and development of the nation resulted in the intermingling of lands among these different entities. As we reported in 2008, about 60 percent of the nation’s land is privately owned and managed, and about 30 percent is managed by five federal land management agencies, with the Forest Service and BLM managing the majority of those lands. Of the remainder, about 8 percent of the nation’s land is owned and managed by state and local governments, and about 2 percent is owned and managed by the federal government for purposes such as military installations and water infrastructure. Under the National Forest Management Act and the Federal Land Policy and Management Act of 1976, respectively, the Forest Service and BLM manage lands for various uses such as protection of fish and wildlife habitat, forage for livestock, recreation, timber harvesting, and mineral production. FWS and NPS manage federal lands under legislation that primarily calls for conservation; activities such as harvesting timber for commercial use are generally precluded. As noted, BIA is responsible for the administration and management of lands held in trust by the United States for Indian tribes, individuals, and Alaska Natives. Each of the five agencies has regional or state offices that oversee individual field units. State forestry agencies and other nonfederal entities—including tribal, county, city, and rural fire departments—have primary responsibility for managing wildland fires on nonfederal lands, and share responsibility for protecting homes and other private structures. State and local governments can also adopt laws requiring homeowners and homebuilders to take measures to help protect structures from wildland fires. Regulating land use on nonfederal and nontribal lands is primarily a state and local responsibility. The challenge of balancing the benefits of periodic fires with fire’s negative effects on communities is particularly difficult in the WUI. Development in the WUI increased over the last several decades, in turn increasing the risk to life and property from wildland fire. According to the 2014 Quadrennial Fire Review, 60 percent of new homes built in the United States since 1990 were built in the WUI, which contains 46 million single-family homes, representing about 40 percent of single-family homes in the United States. Most development in the WUI occurs on nonfederal lands, and, according to the National Association of State Foresters, approximately 76,000 communities nationwide are considered to be at risk from wildland fire. According to the National Interagency Fire Center, the average number of structures burned by wildfire each year from 1999 through 2015 was 2,750; in 2015 alone, the total number of structures destroyed by wildfire was 4,636, of which 2,638 were residences. In addition to residential development, other assets that support communities can be located in the WUI, including power lines, highways, and resources that provide economic benefits to communities, such as timber, oil and gas wells, and recreational opportunities. WUI communities can be very different from each other—for example, seasonal resort towns located in valleys, with homes in close proximity and surrounded by fire-prone vegetation, or major suburban or metropolitan areas adjacent to wildlands. The risk each community faces also varies depending on such things as the flammability of the vegetation in and around the community, structure location and building materials, and local land use decisions. While the degree of risk can vary from one place to another, under specific conditions, wildfire can affect people and their homes in almost any location where vegetation is found. Even structures not immediately adjacent to wildland vegetation can be vulnerable because wind can transport embers and ignite homes more than a mile from a fire. Figure 2 provides examples of variation across communities by showing characteristics of the communities included in our review. See appendix II for the full text of this graphic. Federal agencies and nonfederal entities collaborate in a variety of ways to reduce the risk of wildland fire before a potential wildland fire incident occurs, through fuel reduction, fire preparedness, prevention, and education activities. In addition, individuals and communities may take action to mitigate fire risk by, for example, using fire-resistant building materials or building in low-risk areas. Collectively, these activities are generally intended to contribute to helping communities become more fire adapted. Fuel reduction—the removal of flammable vegetation that can fuel fires— can reduce the severity of wildland fires that occur, slow fire spread, or otherwise make fires more manageable. Fuel reduction can occur through mechanical treatment (i.e., thinning of trees and underbrush) or planned ignitions (known as prescribed fires), which often replicate the positive effects of naturally occurring wildfire. Federal agencies have collaborated with nonfederal entities to prioritize, plan, and conduct fuel reduction activities. For example, federal agencies have assisted local communities or counties in developing Community Wildfire Protection Plans— documents that outline ways individual communities plan to reduce their risk from wildland fire, such as by identifying priority areas for fuel reduction. Federal agencies have also funded landscape-scale fuel reduction projects that span multiple jurisdictions and include multiple partners. Federal initiatives involving such projects include the Collaborative Forest Landscape Restoration Program and the Reserved Treaty Rights Lands Program. Preparedness activities can help communities protect themselves during a wildland fire by ensuring they have access to fire suppression equipment, personnel, and emergency dispatch services. To prepare for wildfire seasons, federal agencies, states, and others sign agreements— such as State Cooperative Wildland Fire Management and Stafford Act Response Agreements—to document their commitment to coordinate and exchange personnel, equipment, supplies, services, and funds among the agencies for responding to wildland fires. At the local level, federal land management officials may meet with nonfederal entities, such as local fire department officials, ahead of the wildland fire season to discuss roles and responsibilities for wildland fire response and to train together by simulating incident responses. Prevention activities can reduce the likelihood of fires caused by humans. From 2001 through 2011, approximately 85 percent of wildfires in the United States were human-caused, according to the National Interagency Fire Center. Such fires can occur unintentionally—for example, when people burn leaves or trash or leave campfires unattended—or they may be deliberately set. According to research, communities with effective wildfire prevention programs are likely to have fewer human-caused fire starts. To help provide information about fire prevention, federal agencies work with nonfederal entities. For example, under the Cooperative Forest Fire Prevention program, established under the Smokey Bear Act of 1952, the Forest Service works with the National Association of State Foresters and the Ad Council to develop and distribute materials for the Smokey Bear campaign. Education activities can help reduce risk by helping homeowners and communities understand actions they can take to reduce risk. For example, communities may help minimize their risk by reducing vegetation and flammable objects around structures—an activity often called creating defensible space. They also may help minimize their risk by using fire-resistant building materials in construction and building in low-risk areas. To help provide information about these activities, federal agencies worked with stakeholder groups to develop a guide “designed to help leaders, planners, emergency professionals, and citizens learn the best approaches and programs to help their community become more fire adapted.” Some communities have encouraged the use of voluntary programs aimed at improving fire risk awareness and promoting steps to reduce their risk, such as the Firewise Communities program. In addition, some states have adopted legislation to encourage or require wildfire mitigation in high-risk areas. For example, some state and local governments have adopted laws and ordinances requiring property owners to establish and maintain defensible space. Figure 3 shows various actions federal agencies and nonfederal entities may take to reduce wildfire risk in and around communities. Some federal-nonfederal collaboration at the national level encompasses all types of risk-reduction efforts. For example, federal agencies and nonfederal entities participate in the Wildland Fire Leadership Council (WFLC), an intergovernmental committee of federal, tribal, state, county, and municipal government officials. The WFLC is to provide strategic oversight to help ensure policy coordination, accountability, and effective implementation of long-term strategies to address wildfire preparedness and suppression, hazardous fuel reduction, restoration and rehabilitation of the nation’s wildlands, and assistance to communities. After emphasizing the need to suppress all fires for much of the 20th century, federal agencies in recent decades reassessed their approach to wildland fire management. As part of this reassessment, and as a result of several wildfires and associated firefighter fatalities, the agencies developed the Federal Wildland Fire Management Policy of 1995. Under this policy, the agencies sought to make communities and resources less susceptible to damage from wildland fires and to respond to fires to protect communities and important resources at risk while considering the cost and long-term effects of that response. The policy was reaffirmed and updated in 2001, and guidance for its implementation was issued in 2003 and 2009. To address the increase in wildland fires threatening communities, over the past 2 decades, federal land management agencies have also placed greater emphasis on coordinating efforts with nonfederal entities to reduce the risk of fire. For example, in 2000, the President asked the Secretaries of Agriculture and the Interior to submit a report on managing the impact of wildland fires on communities and the environment. The report, along with congressional approval of increased appropriations for wildland fire management for fiscal year 2001, as well as other related activities, formed the basis of what is known as the National Fire Plan. As part of this effort, Congress directed the Secretaries of Agriculture and the Interior to work with state governors to develop a strategy. The resulting strategy—the 10-Year Comprehensive Strategy—was developed by federal, state, tribal, and local government and nongovernmental representatives and outlined a collaborative framework to facilitate implementation of proactive and protective measures to reduce the risk of wildland fire to communities and the environment. For example, the strategy recognized that while suppressing fires—especially near homes and communities—is important, a continued shift in fire management emphasis from reactive to proactive is also important in order to address the root of the problem rather than react only when faced with costly emergencies. Specifically, the strategy emphasized, among other things, the importance of reducing human-caused fires through fire-prevention education, increasing incentives for private landowners to address defensible space and fuel reduction on private property through local land use policies, promoting local government initiatives to implement fire- sensitive land use planning, and prioritizing fuel reduction where the negative impacts of wildland fire are greatest. As noted, in 2014, the federal agencies, in collaboration with partners from multiple jurisdictions, issued the Cohesive Strategy. The vision of the Cohesive Strategy is “to safely and effectively extinguish fire, when needed; use fire where allowable; manage our natural resources; and as a nation, live with wildland fire.” The Cohesive Strategy identified three goals: (1) landscapes across all jurisdictions are resilient to fire-related disturbances in accordance with management objectives, (2) human populations and infrastructure can withstand wildfire without loss of life or property, and (3) all jurisdictions participate in developing and implementing safe, effective, and efficient risk-based wildfire management decisions. The Cohesive Strategy calls for a set of national outcome measures to assess progress in meeting these goals. Since 2003, Congress has passed several laws aimed at actions federal agencies can take to reduce wildland fire risk across federal and nonfederal jurisdictions. For example, the Good Neighbor Authority contained in the Consolidated Appropriations Act, 2014, authorizes the Forest Service and BLM to enter into agreements allowing states to perform watershed restoration activities, including hazardous fuel reduction projects, on federal lands when the state is performing similar activities on adjacent state or private lands. In addition, the Tribal Forest Protection Act of 2004 authorizes the Secretaries of Agriculture and the Interior to enter into agreements or contracts with Indian tribes to carry out projects to protect Indian forest lands. See appendix III for additional details about these and other relevant laws. Federal officials and stakeholders we interviewed identified federal authorities, agency initiatives, joint community-level planning, leadership, community engagement, and agency resources for collaboration as directly affecting federal-nonfederal collaboration aimed at reducing wildland fire risk to communities. In some cases these factors enhanced collaboration, according to officials, while in other cases they hindered collaboration. Federal officials and stakeholders also identified factors that indirectly affect federal and nonfederal collaboration to reduce wildland fire risk in the WUI. These included community education, fire prevention messaging, and state and local requirements for private property owners to reduce risk. Many federal officials and stakeholders said that certain federal legal authorities that allow federal agencies to work across jurisdictions with nonfederal entities facilitate federal-nonfederal collaboration to reduce wildland fire risk. Among the specific authorities they mentioned were the Good Neighbor Authority and the Tribal Forest Protection Act of 2004. For example, under the Good Neighbor Authority, the Forest Service and BLM may enter into cooperative agreements or contracts with states to allow the parties to conduct restoration and forest management activities across jurisdictional boundaries. Using this authority, the Forest Service’s Eldorado National Forest and the California Department of Forestry and Fire Protection signed an agreement in 2016 allowing the agencies to work together on large-scale fuel reduction projects that both entities identified as critical to meeting fire protection objectives. The agreement is to allow the agencies to complete treatment on 500 acres located in the WUI along a major highway corridor between Sacramento and Lake Tahoe where five major wildfires have burned in the last 40 years. According to Forest Service officials, as of October 2016, the agency had executed 54 agreements using the Good Neighbor Authority in 20 states. The Tribal Forest Protection Act of 2004 authorizes the Secretaries of Agriculture and the Interior to enter into agreements or contracts with Indian tribes that meet certain criteria in order to carry out projects to protect Indian forest lands. Using this authority, the White Mountain Apache Tribe and the Forest Service’s Apache-Sitgreaves National Forest in Arizona completed the Los Burros Project on the national forest, which borders the Fort Apache Indian Reservation. According to BIA’s Fort Apache Agency officials, the project was important for reducing the risk of fire spreading onto the reservation from adjacent national forest land. According to Forest Service officials, as of November 2016, six projects had been completed using this authority, and at least six more were ongoing. Some federal officials and stakeholders said that federal and nonfederal entities are reluctant to use the Good Neighbor Authority and the Tribal Forest Protection Act of 2004 because the authorities are unclear or because not all agency staff are aware of how to use them. Forest Service headquarters officials said that since 2015, they have taken steps to provide greater clarity about using the authorities. For example, they said that Forest Service staff hosted webinars in 2015 about resources available to facilitate the use of the Good Neighbor Authority and that the agency’s website provides links to agreement templates, agency contacts, and training materials for federal and nonfederal employees working to develop agreements under this authority. Regarding the use of the Tribal Forest Protection Act of 2004, Forest Service officials said they partnered with the Intertribal Timber Council to improve working relationships with tribes and accomplish more cross-boundary landscape level restoration. According to Forest Service officials, they conducted workshops on the use of this authority in three forest service regions in 2015 and 2016, which they said contributed to six new projects pursued using the authority. Federal officials and stakeholders identified other federal and state environmental laws, including the National Environmental Policy Act (NEPA) and the Clean Air Act, as affecting their efforts to collaborate to reduce risk. For example, some federal officials and stakeholders said that the time it takes federal agencies to complete the NEPA process can hamper joint efforts. As we have previously reported, NEPA environmental reviews have been identified by critics as a cause of delay for projects due to time-consuming environmental analysis requirements, while they have been praised by proponents for, among other things, bringing public participation into government decision making. We also found that little data exist on the costs and benefits of NEPA analysis. With respect to the Clean Air Act, see appendix IV for additional information about the act and its effect on risk-reducing activities. Several federal officials and stakeholders identified landscape-scale restoration efforts and other programs that cross jurisdictional boundaries as helpful in bolstering collaboration to reduce wildland fire risk to communities. Among the efforts mentioned were the Department of Agriculture’s Joint Chiefs’ Landscape Restoration Partnership and BIA’s Reserved Treaty Rights Lands Program. In addition, many federal officials and stakeholders identified the Cohesive Strategy as enhancing federal-nonfederal collaboration to reduce wildland fire risk to communities. The Forest Service and the Natural Resources Conservation Service (NRCS) within the Department of Agriculture initiated the Joint Chiefs’ Landscape Restoration Partnership program in 2014 to improve the health and resilience of forest ecosystems where public and private lands meet. The program’s objectives include reducing wildfire threats to communities and landowners. In 2017, the Department of Agriculture is to invest in 10 new projects under the program while providing funding to 26 existing projects. The projects are located in 29 states across the country. For example, in 2016, the Forest Service and NRCS selected the Greater La Pine Basin project in Central Oregon as a recipient of funding under the program. The project is to take place over 3 years and is to target restoration on nearly 345,000 acres of federal, state, and private land. NRCS is to offer assistance to private landowners conducting fuel reduction treatments, while the Forest Service is to perform similar treatments on the project area located within the Deschutes National Forest. Figure 4 shows an example of tree thinning in the Greater La Pine Basin in Oregon. In 2015, BIA initiated the Reserved Treaty Rights Lands Program to treat and restore tribal landscapes within and adjacent to reserved treaty rights lands. Through this program, tribes may participate in and leverage funding for collaborative projects with nontribal landowners to enhance the health of priority tribal natural resources at high risk from wildland fire and move tribal landscapes toward long-term resilience to wildland fire. In fiscal year 2016, Interior directed $10 million toward the program, which funded 21 projects. In addition, many officials and stakeholders said that the Cohesive Strategy, issued in 2014, enhances collaboration because it emphasizes the importance of coordination across multiple agencies through an “all lands approach” and frames comprehensive goals that, taken together, may mitigate wildland fire risk. As noted, the Cohesive Strategy identified three goals: (1) landscapes across all jurisdictions are resilient to fire- related disturbances in accordance with management objectives, (2) human populations and infrastructure can withstand wildfire without loss of life or property, and (3) all jurisdictions participate in developing and implementing safe, effective, and efficient risk-based wildfire management decisions. Unlike the other initiatives described above, implementation of the Cohesive Strategy is not separately funded because the agencies do not consider it a program. One stakeholder involved in its implementation described the Cohesive Strategy as a framework designed to be applied differently in various locations and scales to best suit a particular circumstance or address a need or opportunity, rather than a one-size-fits-all approach. Even with these officials and stakeholders citing the Cohesive Strategy as enhancing collaboration, however, many officials and stakeholders also stated that improvements could be made to its implementation, as we discuss later in this report. Many federal officials and stakeholders said that joint planning, including prioritizing and developing community plans and regularly sharing information regarding wildland fire issues in person, has enhanced collaboration to reduce wildland fire risk to communities. For example, several federal officials and stakeholders said that developing annual operating plans—which outline roles, responsibilities, and resources involved in wildland fire management—between federal and nonfederal entities has been helpful for collaborating on fire preparedness activities. In addition, many federal officials and stakeholders said developing Community Wildfire Protection Plans (CWPP)—which outline ways communities aim to reduce their risk from wildland fire by, for example, prioritizing areas for fuel reduction in or near the community—enhances collaboration. Communities are not required to develop CWPPs, but when they do, the Healthy Forests Restoration Act of 2003 directs that CWPPs be developed collaboratively by local and state government representatives, in consultation with federal agencies and other interested parties. Under the act, agencies can prioritize funding for fuel reduction projects that implement CWPPs. Communities may benefit from CWPPs in several ways. For example, according to a 2015 Forest Stewards Guild report, CWPPs provide a structure for collaboration and building community capacity. The report also suggested that fuel reduction treatments completed in New Mexico communities with CWPPs have changed fire behavior, and that projects identified in CWPPs are less likely to be canceled or postponed compared to projects conducted in areas without CWPPs. Eldorado National Forest officials said that a CWPP completed in 2016 that covers an area managed by state, federal, and private landowners has helped enhance collaboration with community members to reduce risk because participants came together to jointly determine priority projects, including the placement of fuel reduction treatments. In addition, Florida state forestry officials said they used information from CWPPs to develop their statewide wildland fire risk assessment. According to these officials, the assessment helps identify communities at high risk and inform state land management decisions. Some federal officials and stakeholders also said that regularly sharing information about wildland fire issues in person can enhance collaboration to reduce wildland fire risk. For example, community members near the Eldorado National Forest said that pre-season wildland fire response training simulations, which included approximately 15 federal and nonfederal entities, helped participants develop relationships and gain a better understanding of each stakeholder’s responsibilities and concerns ahead of a potential wildland fire. These community members said that after participating in one such simulation, the state highway patrol agency began to understand the community’s concerns about impediments to safe evacuation. In addition, meeting regularly to discuss wildland fire risk reduction also helps create and facilitate collaboration, according to some officials from federal and nonfederal entities. For example, a Deschutes County official in Oregon said he participates in monthly meetings with BLM officials and community members to exchange information about upcoming activities, including efforts to reduce risk from wildland fire. He also said such meetings help develop and maintain trust between federal and nonfederal entities. Similarly, a study titled Fighting Fires with Education reported that in-person communication can increase community mitigation efforts. Many federal officials and stakeholders said that dedicated federal agency and community leadership enhances collaboration to reduce wildland fire risk to communities. Federal officials and stakeholders characterized leadership as seeking input from others, providing encouragement and support, committing, and collaborating. For example, according to Eldorado National Forest officials, leaders who actively seek input from multiple perspectives, including those with whom they may not agree, help strengthen relationships. Merritt Island National Wildlife Refuge officials said agency management’s encouragement to engage in partnerships helps employees initiate collaboration with nonfederal entities. Some Forest Service officials said that committed leaders who stay in their positions over a long period can help sustain relationships, which in turn help partners accomplish their goals of reducing wildland fire risk. For example, an Apache-Sitgreaves National Forest official said the length of time he has been at the forest—about 30 years—has helped him develop strong relationships with community members. In addition, federal officials and community members said that engaged leaders enhance federal- nonfederal collaboration. For example, Eldorado National Forest officials said that the forest supervisor, who respects community members with differing views, has helped the forest successfully complete NEPA requirements for fuel reduction projects. A National Association of Counties representative said that having federal officials who are willing to engage with communities by providing frequent updates about agency risk reduction efforts shows people that federal officials consider themselves part of the community; in doing so, they can help reduce communities’ risk of wildland fire. Similarly, a Forest Service official said that in cases in which federal, state, and local representatives work together, mitigation actions are more likely to occur and be sustained. Community members in Southern California cited an example of leadership they said enhanced collaboration. These community members said officials from NPS’ Santa Monica Mountains National Recreation Area initiated a meeting with local agencies in early 2016 to address public concern regarding standing dead oak trees in the area. Some of these characteristics align with a set of leading practices we previously identified as enhancing collaboration. For example, we previously found that, while collaborative mechanisms differ in complexity and scope, they all benefit from certain key features, including leadership. Many federal officials and stakeholders said an engaged community— that is, a community that understands the issues associated with wildland fire and is willing to take action to reduce risk—enhances federal- nonfederal collaboration to reduce wildland fire risk. According to federal officials and stakeholders, communities tend to be more engaged in wildland fire risk reduction activities if they have experienced recent fires, have resources to carry out risk reduction projects, and have a group of stakeholders from multiple jurisdictions dedicated to working collaboratively on wildland fire risk reduction. According to a 2013 Forest Service report, efforts to create and maintain fire-adapted communities must involve the entire community—including residents, government agencies, emergency responders, businesses, land managers, and others—if these efforts are to succeed. Officials and stakeholders provided examples of actions on the part of engaged communities, including working to identify priority locations and actions for reducing risk, creating defensible space on properties, and establishing WUI codes and ordinances aimed at reducing risk. Several federal officials and community members said that communities that have recently experienced nearby wildfires are often more eager to take action and work with federal agencies to reduce risk. For example, community members in Calabasas, California, and Topanga, California, said they created a multiagency fire council after the Old Topanga Fire in 1993, which burned about 18,000 acres, destroyed 359 homes, and resulted in three deaths. The community members said that working together through the council has helped them provide wildland fire education to community members and implement fuel reduction projects. FWS officials said that agencies and others should harness this interest in reducing risk because once a fire ends and time has passed, some community members may no longer feel the same urgency to reduce risk. In 2015, the Forest Service started a pilot program that officials said tries to take advantage of the “teachable moment” in communities recently affected by wildfires by deploying a “Community Mitigation Assistance Team” to these communities. Forest Service officials said the team focuses on, among other things, risk mitigation education and building local capacity to undertake mitigation actions. Some federal officials and stakeholders also said communities that have access to financial or other resources tend to be more engaged in carrying out risk-reduction projects. For example, Oregon Department of Forestry officials said state funding has helped establish collaborative groups, consisting of diverse stakeholders, that focus on forest-related issues around the state. California officials said federal grant funds aimed at community risk reduction help communities purchase equipment for fuel reduction projects, thereby keeping these communities engaged in mitigation efforts. Some officials and stakeholders also said it can be helpful when communities have a designated person assigned to work on wildland fire mitigation by facilitating coordination, communication, activities, and projects aimed at reducing risk. For example, Deschutes County in Oregon hired a forester who is dedicated to collaborating with the community to reduce risk, providing education about risk reduction, and initiating and implementing fuel reduction projects, among other duties. Similarly, the Forest Stewards Guild reported in 2015 that having dedicated WUI specialists helped accelerate fuel reduction work and expand public outreach in a county in New Mexico. In addition, community engagement increases when groups of stakeholders from multiple jurisdictions are involved, according to BIA headquarters officials we interviewed. For example, 27 states have prescribed fire councils, in which federal agencies, nonfederal entities, and others gather to discuss priority areas for fuel reduction treatments and adopting building codes to mitigate wildfire risk, among other issues. In contrast, some federal officials and stakeholders identified several potential impediments to community engagement. For example, some federal officials in certain areas said that residents are resistant to government intervention, including requirements that they take steps to reduce their risk on their own properties. On the other hand, an NPS official and stakeholders from western Colorado said some people expect firefighters to intervene and save their homes, and as a result these residents are not interested in taking steps to reduce risk. Furthermore, other stakeholders said that some residents resist fuel reduction treatments because they perceive the treatments as damaging the environment or because they want the privacy provided by the vegetation near their homes. Additionally, some federal officials and stakeholders said the public’s tolerance of smoke from prescribed burns can be limited, which results in fewer prescribed fire treatments. Many federal officials and stakeholders said that the availability of agency resources, including funds provided to states and localities as well as funding for agency activities, affects federal-nonfederal collaboration to reduce wildland fire risk to communities and federal efforts to reduce wildland fire risk more broadly. Regarding funding for states and localities, federal officials and stakeholders cited cooperative agreements and grants provided under the Forest Service’s State Fire Assistance (SFA) and Volunteer Fire Assistance (VFA) programs, and Interior’s assistance aimed at rural fire districts and communities, as helping communities in their efforts to reduce risk. For example, the Forest Service’s SFA program provides financial assistance through partnership agreements with state foresters for fire management activities, including helping communities become fire adapted. According to the Forest Service’s fiscal year 2017 budget justification, SFA is a critical part of the agency’s efforts to reduce wildland fire risk to communities, residents, property, and firefighters, because the program helps ensure that state, local, and private landowners have the capacity and tools they need to prepare for, respond to, and mitigate fire risk in the WUI and other critical areas. (See app. V for descriptions of selected federal programs that provide risk- reduction funding to states and localities.) Several federal officials and stakeholders said the uncertainty of federal funding through grants and assistance makes some nonfederal entities reluctant to undertake joint efforts to reduce risk. For example, California state officials said that landowners and other nonfederal entities may be reluctant to commit to joint efforts because federal funding may decrease, resulting in incomplete projects. In addition, several federal officials and stakeholders said that, in contrast to the cost-sharing mechanisms available for fire suppression activities, leveraging dollars for fuel reduction projects can be difficult because no standard procedures or agreements exist for sharing costs for such projects. According to a senior official from the National Association of State Foresters, state and federal agencies drafted a new “Supplemental Project Agreement” appendix for the Master Cooperative Wildland Fire Management and Stafford Act Response Agreement template that includes standard procedures and agreements for sharing costs associated with non- suppression projects, such as fuel reduction projects. As of February 2017, the updated Master Agreement template was undergoing review and awaiting final approval from the Departments of Agriculture and the Interior. Many federal officials and stakeholders expressed concern about the amount of funding available for risk-reducing activities carried out by the agencies. Some federal officials and stakeholders said the growing percentage of Forest Service funding spent to suppress fire has hampered the agencies’ ability to invest in activities on federally managed lands that may reduce risk. Similarly, several Interior officials said that Interior’s funding reductions, and shifts in wildland fire management priorities over the past 2 years to include a greater emphasis on sagebrush steppe ecosystems, have affected their ability to carry out wildland fire risk reduction activities. The officials also said that proposed changes to the department’s process for determining funding distribution to its four agencies may have similar effects. Funding constraints can have various effects, according to officials and stakeholders. For example, Forest Service officials said that limiting agency travel can reduce the agency’s ability to establish or maintain collaborative relationships with nonfederal entities. Forest Service officials also said that fire prevention efforts have been diminished in cases in which the agency has eliminated fire prevention positions or not filled them when they became vacant. A BIA official said that decreased fuel reduction funding reduced the number of acres the agency could treat on the Warm Springs Indian Reservation. Many federal officials and stakeholders identified other factors that indirectly affect federal-nonfederal collaboration to reduce wildland fire risk in the WUI. These include community education, fire prevention messaging, and state and local requirements for private property owners to take steps to reduce risk. Many federal officials and stakeholders identified community education efforts, such as the Firewise program and individual home risk assessments, as helping reduce community wildland fire risk. Some federal officials and stakeholders said Firewise, which encourages homeowners to take responsibility for their own properties by using fire resistant building materials and establishing defensible space, has helped reduce risk through community education. For example, a Florida Forest Service official said the Firewise program helped communicate to communities across the state the importance of reducing wildland fire risk. This official said the Firewise program works well in the state because it primarily relies on voluntary action rather than regulations. Figure 5 shows an example of a Firewise presentation at a community event and an advertisement for a Firewise event. Federal officials also said they have used the Ready, Set, Go! program to educate the public. For example, officials from the Apache-Sitgreaves National Forest in Arizona said they use this program to help members of the public understand actions they can take to prepare for a wildland fire incident, such as making sure car gas tanks are at least half full so that homeowners can evacuate quickly in case of a wildfire. Some federal officials said that conducting property risk assessments has been helpful to educate property owners about the steps they can take to reduce their risk of wildland fire. For example, BIA officials said fire managers at the Fort Apache Indian Reservation reach out to homeowners individually to teach them about risk-reducing actions they could take based on their home’s characteristics; these actions could include clearing vegetation or relocating firewood to a spot away from their home. BIA officials said that because they make the effort to reach people at home, rather than provide general information to the broader public, homeowners are more likely to undertake risk-reducing activities pertinent to their homes. However, some officials said homeowners are not always receptive to having their properties evaluated, and some stakeholders said not all counties can afford to conduct risk assessments and not all homeowners want to pay to create defensible space. More broadly, a Forest Service headquarters official said that, while community education has been successful in increasing awareness about reducing risk, it does not necessarily result in individuals or communities taking action. In addition, this official said programs such as Firewise have increased risk awareness, but the extent of the risk reduction is unclear. To help address this, the official said the agency expects to complete a study in late 2017 that examines mitigation actions resulting from the Firewise program; the Forest Service is conducting this study in partnership with the National Wildfire Coordinating Group, the Wildland Urban Interface Mitigation Committee, and the National Association of State Foresters. Also, this Forest Service official said the agency and the National Fire Protection Association are discussing making changes to the Firewise program to emphasize mitigation actions. Another factor that several federal officials and stakeholders identified as helping reduce wildland fire risk to communities is providing both consistent and targeted messaging to prevent human-caused wildfires. Regarding consistent prevention messaging, Forest Service officials said that numerous federal and state agencies in the western United States have used the One Less Spark–One Less Wildfire campaign, which started in California in 2012 and has since been used in other states. In addition, some federal officials we spoke with said they use the Smokey Bear campaign and materials as part of fire prevention efforts in their communities. A community in Arizona, which attracts recreation visitors but is prone to fires, created a working group to improve the consistency of local fire prevention messages. Specifically, officials from the Apache-Sitgreaves National Forest, the BIA Fort Apache Agency, surrounding counties, the Pinetop-Lakeside community, and other entities formed the White Mountain Fire Restrictions Working Group. Working group members said they issue unified, cross-jurisdictional fire restrictions (i.e., limitations on activities such as building campfires or using fireworks) to help ensure the consistency of information provided to the public. According to working group members, before they formed this group, the area was at greater risk of human-caused fire because each jurisdiction issued its own level of fire restriction, which led to public confusion because the fire restrictions often differed across jurisdictions. Working group members said that as a result of their efforts, the risk of fire has decreased because the public is less confused about where and when fire-related activities can be conducted. Regarding targeted fire prevention messaging, Forest Service officials cited National Fire Prevention Education Teams as an example of federal-nonfederal efforts to provide targeted fire prevention information. These officials said the National Wildfire Coordinating Group sends teams—which may include members from the Departments of Agriculture and the Interior, states, and others—to areas at high risk of wildland fire to raise awareness of actions communities can take to reduce their risk. According to the National Interagency Fire Center, these teams can help reduce the loss of human life, property, and resources. They can also improve interagency relations. BIA officials said that, in part because of targeted efforts aimed at reducing arson, the number of human-caused fires on the Fort Apache Indian Reservation in Arizona decreased from several hundred in 2004 to 40 in 2016. BIA officials estimated that these types of efforts also helped reduce the number of fires caused by youths on the Warm Springs Indian Reservation in Oregon from 17 in 2009 to 2 in 2016. A study conducted by the Forest Service and Interior agencies found that large-scale wildfire prevention programs on tribal lands are highly effective and such programs have reduced the number of wildfire ignitions caused by campfire escapes, arson, and youth-ignited wildfires, among others. Several federal officials and stakeholders noted that state and local laws governing home location, construction, and landscaping can reduce wildland fire risk to communities. Some states and local governments require homeowners in certain locations to use fire-resistant building materials or to create a certain amount of “defensible space” around structures on their properties by removing or reducing potentially flammable vegetation. For example, under Oregon’s Forestland-Urban Interface Fire Protection Act, property owners in identified forestland- urban interface areas must reduce excess vegetation around structures and along driveways that can fuel a fire. According to Oregon state officials, the law, at the time of our review, was applicable to 17 of Oregon’s 36 counties identified as having a higher wildland fire risk. Oregon state officials said it is helpful that the state legislature recognizes the need for individual homeowner action in risk mitigation, and they said they are reviewing the law to determine ways it could be improved. California state law also requires property owners in certain areas to maintain a specified amount of defensible space around structures. Local governments in several states have codes or ordinances aimed at wildland fire risk reduction by requiring fire resistant building materials, requiring the creation of defensible space, or limiting where homes can be built. For example, the San Diego, California, municipal code’s Landscape Regulations aim to reduce the risk of fire through site design and management of flammable vegetation. An official from the National Association of Counties said that local policies promoting resiliency and fire readiness through building codes and zoning ordinances can be helpful but also resource intensive. As a result, this official said, county decision-makers should weigh the costs of requiring such actions against the benefits gained through reduced risk. Forest Service headquarters officials said codes and ordinances can help reduce wildland fire risk in some circumstances, but they said no data are available to show what type of community planning is instrumental in reducing risk. These officials also noted that taking action does not guarantee that a home will be spared, given the conditions and severity of a fire. According to a nonfederal researcher we interviewed, it is also helpful when communities integrate actions or requirements to reduce risk into comprehensive county land-use plans. For example, the Community Planning Assistance for Wildfire program, established in 2015 by Headwaters Economics and Wildfire Planning International, is a grant program that works with communities to help reduce wildfire risk through improved land-use planning. In Wenatchee, Washington, the program developed recommendations to help the community improve its land-use plans specific to its wildland fire risk. While the community has high- frequency fires, they are not high intensity and most are grass fires, though many buildings have been lost in recent fires. Through the program, community planners determined that it was unnecessary to require the entire community to use fire-resistant building materials and create defensible space; instead, they decided to place such requirements on homes located in the community’s highest risk areas. Federal officials and stakeholders we interviewed said that improving implementation of the Cohesive Strategy, increasing collaborative planning, expanding education, increasing prevention efforts, and improving local timber-processing capabilities could improve federal agencies’ and nonfederal entities’ ability to reduce wildland fire risk to communities. Officials and stakeholders also identified actions that, while not necessarily within federal agencies’ control, could help reduce wildland fire risk to communities. These include increasing state and local adoption of laws and ordinances that encourage fire-resistant building and landscaping and that limit development in certain areas, and providing insurance incentives to encourage property owners and communities to adopt risk-reducing measures. Many federal officials and stakeholders said that improving the implementation of the Cohesive Strategy could help reduce wildland fire risk to communities. For example, some stakeholders said that federal agencies could improve communication about the Cohesive Strategy, which could further its implementation. One such stakeholder said that he believes some federal land management officials still have not heard of the Cohesive Strategy (issued in 2014), and that roles and responsibilities for implementing the strategy are not well defined at the national level. Some officials and stakeholders said it is important to increase accountability for implementing the Cohesive Strategy, such as through the use of performance measures as part of implementing the strategy. The Cohesive Strategy states that its successful implementation depends in part on monitoring and accountability, noting that “A set of national outcome performance measures will allow Congress, the national wildland fire management community, and other stakeholders to monitor and assess progress toward achieving the results for each of the three national goals.” This emphasis on monitoring and accountability is consistent with key characteristics we have described for developing and implementing effective national strategies. Likewise, one of the key collaboration practices we have identified is that federal agencies engaged in collaborative efforts should develop mechanisms to monitor, evaluate, and report on results. We found that reporting on these activities can help key decision makers within the agencies, as well as clients and stakeholders, obtain feedback for improving both policy and operational effectiveness. The agencies use “success stories” to share what they consider successful or effective efforts at implementing the Cohesive Strategy. However, the success stories we reviewed focus on individual projects or efforts and do not generally indicate the role, if any, that the Cohesive Strategy played or describe the extent to which the projects or efforts have individually or cumulatively contributed to achieving the strategy’s goals. More broadly, the Wildland Fire Leadership Council (WFLC)—the interagency organization responsible for oversight and leadership in implementing the Cohesive Strategy (and which includes the Forest Service and Interior as members)—has not developed measures to assess progress on the part of federal and nonfederal participants in meeting the national goals of the Cohesive Strategy. According to a December 2016 WFLC report, a performance measure task group was convened in January 2013 and proposed several performance measures that could be used to track progress in achieving the broad goals of the Cohesive Strategy. One such measure was the percentage of communities at risk with a high probability of withstanding wildfire without loss of life and infrastructure; this measure was intended to assess the extent to which the threat to communities at risk from wildfire had decreased. However, the Wildland Fire Executive Council, a former advisory council to WFLC, concluded that, while performance information for many of the 2013 task group’s proposed measures could be collected using reporting measures the agencies already had in place, fully implementing the proposed performance measures would likely place undue burden on the agencies and nonfederal partners. The Forest Service and Interior each have performance measures to monitor and assess their wildland fire management efforts. For example, one of Interior’s performance measures is the amount of fuel reduction conducted in the WUI, which is consistent with the Cohesive Strategy’s emphasis on resilient landscapes. However, these agency measures are intended to separately assess each agency’s performance—or, in some cases the performance of specific programs—and do not represent the set of measures to assess national progress toward meeting the Cohesive Strategy’s goals, as called for in the strategy. The 2016 WFLC report states that the use of research findings, remote sensing, and modelling can help quantify the effects of activities over time and can contribute to showing accountability and success in meeting the goals of the Cohesive Strategy. Because the report was issued in December 2016, Forest Service and Interior officials said they have not had sufficient time to determine which, if any, research findings can be useful in this effort. By working with their WFLC partners to develop measures, the Forest Service and Interior could better assess national progress toward achieving the goals of the Cohesive Strategy. Many federal officials and stakeholders said increasing collaborative planning could help reduce fire risk to communities. Several federal officials and stakeholders said such planning could occur by developing or improving CWPPs, and some said increasing the frequency of collaborative in-person meetings ahead of fire seasons could help reduce risk. These suggested actions align with a 2013 Forest Service study that found that, while individual homeowner actions are essential to reduce the potential for wildfire damage to property, it is also critical for entire communities to work together on a broader planning and development scale. Regarding CWPPs, some officials and stakeholders said that more communities developing CWPPs and taking steps to improve their usefulness could enhance collaborative efforts to reduce wildland fire risk to communities. The National Association of State Foresters estimates that, as of fiscal year 2015, about 20 percent of the approximately 76,000 communities identified as being at risk from fire were covered by a CWPP. Because it is helpful to collaboratively plan, a stakeholder with the Northeast Regional Cohesive Strategy Committee said the committee is encouraging more communities to develop CWPPs or equivalent plans and to make collaborative planning a priority. In addition, some stakeholders said that updating and assessing CWPPs is important to maintaining their usefulness because some are outdated and many are not comprehensive, suggesting that the plans do not reflect changing circumstances such as increased housing development or altered landscape conditions. Community members in Southern California said their CWPP states that the plan should be updated every 5 years, or sooner if social, political, or economic factors warrant. This language aligns with the Forest Service’s Best Management Practices for Creating a Community Wildfire Protection Plan, which includes as a best practice to “quickly identify changes affecting the CWPP and adapt the plan to new conditions as they arise.” In some locations we visited, we found that CWPPs outlined communities’ plans to monitor and evaluate their risk-reduction efforts every 5 years or on an annual basis, such as in Central Oregon’s Greater La Pine CWPP. Forest Service and Interior officials said they participate in community efforts to develop and implement CWPPs, but they said it is not their role to direct communities about how and when to develop and maintain CWPPs or to oversee their implementation. As another way to improve collaborative planning, a senior NPS official and community members in California said the frequency of collaborative in-person meetings ahead of fire seasons should increase. For example, these community members said it would be beneficial to resume pre-fire season meetings that the community formerly held with local fire chiefs, state and county officials, and Eldorado National Forest officials, during which participants discussed issues such as resources and evacuation plans in the event of a wildfire. These community members said these meetings were a good way to foster trust and develop relationships, thereby increasing the chances of a successful response in the event of a wildland fire. Many federal officials and stakeholders said that expanding the amount of education provided to communities about the benefits of wildland fire and the steps individuals can take to reduce their risk could help reduce wildland fire risk to communities. Some stakeholders said it is important to provide more education on the ecological role of fire and the benefits it can provide. For example, a representative of the Southern Group of State Foresters said it would be helpful for private landowners across the United States to understand the benefits of prescribed burning because this could help landowners reduce risk on their properties and become more accepting of prescribed burning as a treatment on adjacent public lands. Some federal officials and stakeholders also said that expanding education about mitigation steps communities and individuals can take can help reduce risk. For example, some federal officials and stakeholders said sharing success stories about ways communities have reduced their wildland fire risk could help increase awareness about actions other communities could take. Some community members also said that tailored and more creative public education materials (i.e., those that reflect the unique topography, vegetation, culture, and building type of a particular community) describing steps individuals can take to reduce their wildland fire risk could prompt homeowners to act. For example, community members in Estes Park, Colorado, said that their county’s Firewise materials were tailored to reflect the community’s characteristics. These community members said the Colorado State Forest Service has provided such materials to counties in Colorado for approximately 20 years. According to 2006 and 2013 Forest Service reports, among the key ingredients for successful educational programs are publications that are geared toward specific geographic areas, as well as varied educational approaches and information pathways that meet differing learning styles. Some federal officials and stakeholders said that a clearinghouse that provides information about resources could help communities better understand actions they could take to reduce their risk. Interior Office of Wildland Fire officials said that a cooperative effort between the Forest Service and the Interior agencies resulted in a website, www.forestsandrangelands.gov, that provides fire, fuels, and land management information to government officials, land and fire management professionals, businesses, communities, and other interested organizations and individuals. Many federal officials and stakeholders said that increasing fire prevention efforts could help reduce wildland fire risk to communities, because many wildland fires are caused by humans. According to the National Interagency Fire Center, from 2001 to 2011, approximately 85 percent of wildland fires in the United States were caused by humans. Some federal officials we interviewed said consistent prevention messaging across locations, such as through the nationwide Smokey Bear campaign, is important; this is because it helps the public identify with the message no matter where they travel. Federal officials said that, in addition, targeting prevention messages to specific groups is important because the origin of human-caused fires varies depending on the location and characteristics of the community. For example, some areas may have more instances of juvenile arson, while other areas may have more instances of campers not fully extinguishing their campfires. A senior Forest Service official said that communities can benefit from developing prevention plans that identify a targeted prevention audience. Otherwise, this official said, communities and federal officials “throw darts at a board” rather than targeting prevention efforts at specific fire-causing activities unique to a particular area. Similarly, Oregon Department of Forestry officials said that better studies and analyses on how human- caused fires start could help target prevention efforts. Both Forest Service and Interior officials, however, said limited resources affect their ability to take additional steps to increase targeted prevention messaging. Many community and tribal members said that improving their timber- processing capability could help reduce wildland fire risk. Some said that their community’s timber-processing capability no longer exists, thereby affecting the market for timber or other materials removed as part of fuel reduction projects. Community members in northern California said limited timber-processing capability affects their ability to process the vegetation removed as part of fuel reduction efforts. Because timber is valuable to some communities, the ability to process it can help support jobs and the local economy. Apache-Sitgreaves National Forest officials in Arizona cited the usefulness of establishing biomass processing facilities near communities, noting that such facilities located near the neighboring community of Snowflake have helped facilitate a local timber- processing market. One stakeholder said a more developed biomass industry could help reduce wildland fire risk by providing an outlet for removed vegetation but noted that it is a more localized solution that may not work in every community. The Forest Service has multiple efforts aimed at maintaining and spurring the timber industry. For example, through its Wood Innovations grant program, formerly known as the “Woody Biomass Utilization Grant” program, the Forest Service has awarded grants to stimulate widespread use of forest byproducts for renewable energy, wood products, and innovative wood building materials. From fiscal years 2005 through 2016, the program awarded more than $54 million to more than 200 grant recipients, including small businesses, non-profit organizations, tribes, and state agencies. Many federal officials and stakeholders said that increased state and local adoption of laws and ordinances that encourage fire-resistant building and the removal of potentially flammable vegetation around structures could help reduce wildland fire risk. Some stakeholders also said that local nonfederal land-use plans should discourage development in areas at high risk from wildland fire. A 2013 Forest Service study found that 91 percent of WUI residents interviewed in California, where defensible space ordinances are in place, have lowered fire risk by removing flammable vegetation from their properties. Community members in western Colorado said it would be helpful if communities that develop such ordinances track their effectiveness in reducing wildland fire risk and publicize the results to help other communities make informed decisions about implementing their own ordinances. Community members in central Florida said that without such ordinances, homeowners and developers are less likely to take steps to reduce their risk. Some stakeholders said that increasing communities’ responsibility for the costs of suppressing fires could create an incentive for communities to take actions to reduce their wildland fire risk. One state recently took action to create such an incentive. In 2016, the Utah state legislature passed a law under which the state will assume certain wildland fire suppression costs for local governments that implement prevention, preparedness, and mitigation actions to reduce the risk and cost of wildfire. Local governments that do not implement such actions will be responsible for wildland fire costs within their jurisdictions. This new law was developed with the involvement of the Utah Association of Counties, the Utah League of Cities and Towns, the Utah State Fire Chiefs Association, local fire departments, various policy workgroups, and others. Many federal officials and stakeholders said that it can be helpful for insurance companies to provide incentives such as discounts or lower rates on insurance premiums for actions homeowners take to reduce their vulnerability to wildfire. Such discounts are provided in some areas; for example, according to the National Fire Protection Association, one insurance company provides homeowners in Arizona, California, Colorado, New Mexico, Oregon, Texas, and Utah with a discount on their insurance premiums if they are located in a Firewise-designated community. Stakeholders in Southern California also said some insurance companies have refused to provide homeowner’s insurance to property owners unless they undertake risk-reducing actions. For example, these stakeholders said that property owners in a community identified as being at particularly high wildland fire risk successfully obtained insurance only after using fire-safe building materials on their homes and other structures and clearing their properties of vegetation within 200 feet of their structures. Some federal officials and stakeholders, however, suggested that the effects of such insurance incentives may be limited. For example, a senior Forest Service official said insurance discounts may not be large enough to incentivize property owners to make risk-reducing changes. This official also noted that providing discounts to homeowners in Firewise communities does not guarantee that every homeowner within the community has taken action to reduce risk. Similarly, a 2016 review by Headwaters Economics reported, based in part on conversations with insurance industry experts, that it is unlikely that insurance rates and policies alone will determine whether a landowner decides to build a new home on wildfire-prone land. The 2015 Forest Stewards Guild report stated that some residents see insurance as a substitute for risk-reducing efforts, and that insurance therefore becomes a disincentive to such efforts. Abnormally dense accumulations of vegetation, combined with drought and other climate stressors, have contributed to larger and more severe wildland fires; at the same time, more people are choosing to live in fire- prone locations. Because fire can cross jurisdictions, efforts to reduce the risk of fire to communities involve a multitude of entities working together, including federal land management agencies, state and local governments, Indian tribes, and others. One area of focus for both federal and nonfederal entities has been the development of the Cohesive Strategy, which emphasizes the importance of coordination across entities and frames comprehensive national goals for mitigating the risk of wildland fire. However, WFLC has not developed performance measures to assess the combined efforts of federal and nonfederal participants in meeting the goals of the Cohesive Strategy. The Forest Service and Interior each have performance measures to monitor and assess their wildland fire management efforts, but those measures apply to the agencies individually and do not represent the set of national measures called for in the Cohesive Strategy. By working with the interagency body WFLC to establish such measures, the Forest Service and Interior, together with federal and nonfederal partners, could better assess national progress toward achieving the goals of the Cohesive Strategy. To help determine the extent to which the goals of the Cohesive Strategy are being met, we recommend that the Secretaries of Agriculture and the Interior direct the Chief of the Forest Service and the Director of the Office of Wildland Fire, respectively, to work with WFLC to develop measures to assess national progress toward achieving the strategy’s goals. We provided a draft of this report for review and comment to the Departments of Agriculture and the Interior. We received written comments from the Forest Service (responding on behalf of the Department of Agriculture), which are reproduced in appendix VII. In its letter, and in a subsequent discussion with the Forest Service audit liaison, the Forest Service stated that it generally agreed with our findings and recommendation, and that it is committed to implementing the Cohesive Strategy and will continue to work with WFLC and other entities towards reducing the risk of wildland fire on all lands in the United States. We also received written comments from Interior, which are reproduced in appendix VIII. Interior did not concur with our recommendation, citing three primary areas of disagreement. First, while acknowledging that measures to assess national progress toward achieving the goals of the Cohesive Strategy could be beneficial, Interior noted in its letter that the Wildland Fire Executive Council had previously determined that instituting the measures that had been presented to it would place undue burden on the agencies and nonfederal partners. Interior also stated that assessing national progress toward achieving the Cohesive Strategy’s goals would cost taxpayers more than it would save, and cited a 2013 study that noted the challenging nature of efforts to assess the effectiveness of fuel reduction and restoration treatments. More recently, however, as we note in our report, a December 2016 WFLC report stated that the use of research findings, remote sensing, and modelling can help quantify the effects of activities over time and can contribute to showing accountability and success in meeting the goals of the Cohesive Strategy. During our review, Interior officials said they had not had sufficient time to determine which, if any, research findings could be useful in this effort, and Interior’s letter does not refer to this aspect of the 2016 WFLC report. As a result, it is not clear whether Interior has fully considered the potential for using research findings or other tools described in the 2016 report to measure national progress in a cost-effective way. Second, Interior stated that in 2014 it changed its strategic performance metrics to demonstrate departmental progress toward meeting the strategy’s goals. Our report describes an example of one such departmental measure that is consistent with the Cohesive Strategy’s emphasis on resilient landscapes. However, as we note in our report, agency performance measures are intended to separately assess each agency’s performance—or, in some cases the performance of specific programs—and do not represent a set of measures to assess national progress toward meeting the Cohesive Strategy’s goals, as called for in the strategy. Such measures could, as noted in the Cohesive Strategy, allow Congress and other stakeholders to monitor and assess progress toward achieving the strategy’s goals. Interior did not indicate any steps it would take to meet the Cohesive Strategy’s call for measuring national, rather than departmental, progress in meeting the strategy’s goals. Third, Interior noted that federal entities cannot control or mandate response or participation from non-federal partners. However, given the Cohesive Strategy’s emphasis on collaboration between federal and nonfederal entities to achieve its goals, the WFLC—as the interagency body charged with implementing the strategy—is an appropriate forum for working to develop measures. While we understand that federal entities cannot control or mandate response or participation from non-federal partners, we believe that, as members of WFLC, Interior and other federal agencies can provide leadership in helping ensure accountability for the mutually agreed upon goals of the Cohesive Strategy. Interior also provided technical comments regarding the Cohesive Strategy. In response, we incorporated additional information to note that implementation of the Cohesive Strategy is not separately funded. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretaries of Agriculture and the Interior, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions regarding this report, please contact me at (202) 512-3841 or fennella@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to the report are listed in appendix IX. This report examines (1) factors federal officials and nonfederal stakeholders cited as affecting federal-nonfederal collaboration aimed at reducing wildland fire risk to communities and (2) actions federal officials and nonfederal stakeholders said could help improve their ability to reduce wildland fire risk to communities. To perform this work, we reviewed various laws, policies, guidance, state and local zoning codes and ordinances, agency budget justifications, academic literature, and reviews related to federal wildland fire management. Among the laws we reviewed were the Federal Land Assistance, Management, and Enhancement Act; Healthy Forests Restoration Act of 2003; Good Neighbor Authority; Wyden Amendment; and Tribal Forest Protection Act of 2004. In addition, we reviewed policy documents and agency budget justifications, such as the 2009 Guidance for Implementation of Federal Wildland Fire Management Policy, the National Cohesive Wildland Fire Management Strategy, and the Forest Service fiscal year 2017 budget justification. We also reviewed other documents such as the 2014 Quadrennial Fire Review Final Report, the U.S. Global Change Research Program’s 2014 National Climate Assessment, Headwaters Economics’ paper Do Insurance Policies and Rates Influence Home Development on Fire-Prone Lands?, and the Forest Stewards Guild report Evaluating the Effectiveness of Wildfire Mitigation Activities in the Wildland-Urban Interface. We conducted a basic assessment of these studies’ methodologies, assumptions, and limitations and determined them to be sufficiently credible for our purposes. We also interviewed headquarters officials from each of the five federal land management agencies responsible for wildland fire management—the Forest Service in the Department of Agriculture and the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service in the Department of the Interior—as well as Interior’s Office of Wildland Fire. Because our report addresses reducing risk to communities, we focused our review on federal wildland fire management activities intended to reduce risk before a potential wildland fire occurs, through fire preparedness, fuel reduction, prevention, and education. To address our first objective, we interviewed fire management officials from 10 federal land management units, such as national forests and national parks, as well as representatives of communities near these lands. We selected land management units from each of the five federal agencies using the following criteria: the size of the estimated population in nearby wildland-urban interface areas, as defined by the Forest Service, with high wildland fire hazard potential; the size in acres of the land management unit; input from regional land management agency officials; and the geographic location of the land management unit, with units selected to provide geographic diversity. We then selected communities adjacent to the federal land management units by considering input from local land management agency officials. For each community selected, we interviewed representatives from nonfederal entities with which land management unit officials interacted; these representatives included county officials, local fire department officials, and homeowners. Using these criteria, we selected land management units and adjacent communities in five states: Arizona, California, Colorado, Florida, and Oregon. During our interviews with federal officials and community representatives, we asked about ways in which federal and nonfederal entities collaborated and factors that enhanced or hindered their ability to collaborate. In addition, for the five states we selected, we interviewed officials with state wildland fire and forestry agencies. To gain a wider range of perspectives from states that were not included in our site selection, we interviewed officials with the National Association of State Foresters, the Southern Group of State Foresters, and the Northeastern Area Association of State Foresters, which represent states across the country. In addition, to gain a better perspective on the Cohesive Strategy, we interviewed members of the Wildland Fire Leadership Council (WFLC) and the three regional committees—Northeast, Southeast, and West—responsible for overseeing the Cohesive Strategy’s implementation. We also interviewed representatives of nongovernmental organizations that were identified by federal officials we interviewed or in reports we reviewed as being involved in federal- nonfederal efforts to reduce wildland fire risk. During these interviews we asked about ways in which they collaborated with federal land management agencies and factors that enhanced or hindered their ability to collaborate. Table 2 provides a list of nonfederal associations, organizations, and committees included in our review. We reviewed and analyzed interviewees’ responses and identified broad categories of factors they said enhance or hinder federal-nonfederal collaboration to reduce fire risk to communities and actions they said could improve their ability to reduce such risk. In response to our interview questions about factors that affect collaboration efforts aimed at reducing risk to communities, officials and stakeholders described factors that we defined as having affected direct collaboration and indirect collaboration. For example, direct collaboration (i.e., situations involving a tangible relationship between two or more parties) includes federal policies and authorities that require or enable collaboration. Factors that affect indirect collaboration (i.e., situations in which actions by one entity may affect other entities attempting to achieve a similar outcome) include community education, which can affect communities’ ability to take risk reduction actions that may or may not include collaboration with others. We include both types of factors in our report, distinguishing between direct and indirect collaboration as appropriate. Based on the frequency of factors identified, as well as information we obtained through our review of documents mentioned above related to this topic, we reported on factors associated with nine categories. The list of factors and associated definitions we used for analytical purposes were: Federal authorities: laws that authorize federal and nonfederal entities to conduct risk-reducing efforts across jurisdictions. State and local authorities: state and local laws or ordinances that may require homeowners, businesses, or communities to conduct certain risk-reducing actions or meet specified building requirements. Initiatives: federal efforts aimed at conducting cross-jurisdictional projects to reduce risk. Joint planning: federal-nonfederal efforts to discuss and document future risk reduction activities. Agency resources for collaboration: the ability of federal and nonfederal entities to share staff or funding and the presence of staff or funding to engage in collaborative activities. Leadership: efforts to collaborate, communicate, and seek input from others, among other characteristics. Education: efforts to educate individuals about steps they can take to reduce risk. Wildfire prevention messaging: efforts to provide prevention information or materials. Community engagement: the extent to which communities are aware of and engaged in taking actions to reduce risk, such as establishing defensible space. Two analysts coded each response into these categories. Because many of the responses were broad in nature and could be categorized into multiple categories, analysts verified each other’s categorizations. After completing the categorization of responses, we assessed the frequency with which responses occurred in each category to help identify factors to discuss in our report. Our report generally does not discuss infrequently identified factors. To address our second objective, we interviewed federal officials and nonfederal entities described above to obtain information about actions they said could reduce risk to communities from wildland fire. We categorized and coded their responses using the method described above. Based on the frequency of solutions identified, as well as information we obtained through our review of documents mentioned above related to this topic, we reported on solutions associated with seven categories: improving implementation of the Cohesive Strategy, increasing collaborative planning, expanding education, increasing prevention efforts, improving timber-processing capability, adopting state and local ordinances, and providing insurance incentives. To increase our understanding of the actions identified, we reviewed information about related programs and initiatives, including information about the Forest Service’s Wood Innovations grant program, documents such as Best Management Practices for Creating a Community Wildfire Protection Plan, and information about the Smokey Bear campaign. We reviewed the Cohesive Strategy and action plans for implementing it, various “success story” project descriptions, guiding documents for WFLC and its regional committees, and other relevant documents. We also reviewed Cohesive Strategy implementation guidance and a 2016 report on the Cohesive Strategy by WFLC’s National Strategic Committee. We then compared agency efforts to assess progress toward achieving the Cohesive Strategy’s goals against guidance contained in the strategy and associated action plans. To obtain additional insight into the use of performance information on the part of federal agencies, we reviewed our previous reports related to interagency strategies and agencies’ efforts to collaborate. We also reviewed various state and local ordinances that encourage fire-resistant building and the removal of potentially flammable vegetation around structures and that discourage development in areas at high risk from wildland fire. In addition, upon completing our analysis of interviewee responses, we followed up with Forest Service and Interior headquarters officials to learn the extent to which the agencies were implementing or considering the actions the interviewees suggested. For both objectives, when providing general statements to describe factors that affect collaboration and actions to reduce risk, we use the term stakeholders to refer to representatives of the nonfederal entities listed above. When describing individual examples, we often refer to the specific type of stakeholder, such as community members. In addition, because this is a nonprobability sample, the information we report is not generalizable to all land management units and communities. It does not represent a comprehensive list of collaborative programs or efforts nationwide or in these states but, rather, provides illustrative examples from a geographically diverse range of land management units and communities that are at high risk of experiencing wildland fire. We conducted this performance audit from October 2015 to May 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 3 shows various characteristics of the communities included in our review. Table 4 describes several federal laws aimed at reducing wildland fire risk through collaboration. Several federal officials and stakeholders we interviewed said that some national and state air quality standards under the Clean Air Act have the effect of limiting fuel reduction treatments that rely on prescribed burning. Under the act, the Environmental Protection Agency (EPA) establishes standards for controlling air pollution. Pollutants in smoke, including those emitted from prescribed fires, can cause health issues and also cause air quality to exceed EPA’s health standards for fine particulate matter and ozone. Wildfire smoke can reach hazardous levels in downwind communities for long periods of time, while prescribed fire can cause nuisance and shorter but still significant smoke impacts. To help ensure that EPA’s standards are met, state officials responsible for enforcing the act might not in all cases provide land managers with the permits necessary to conduct prescribed burns. Federal agencies have taken steps to address the issue of balancing the need to protect public health with conducting prescribed burns as a method of fuel reduction. Specifically, since 2015, the Wildland Fire Leadership Council’s priorities have included smoke and air quality, and in January 2016, EPA and the Departments of Agriculture and the Interior issued a joint Wildland Fire and Air Quality summary. Among other things, the summary describes EPA’s commitment to working with land managers to effectively use prescribed fire to reduce the effects of wildfire-related emissions. EPA’s Exceptional Events Rule provides regulatory relief for states that exceed national air quality standards because of emissions from certain sources of pollution, including wildfires and certain prescribed fires. EPA finalized updates to the rule in October 2016 intended to simplify and shorten the process for state air quality agencies to address the impacts of wildfire smoke in their air quality plans. EPA also released a guidance document in 2016 intended to help state air quality agencies develop supporting information for wildfires that affect monitored ozone concentrations. This appendix provides information about selected federal programs that provide risk-reduction funding to states and localities. The Forest Service’s State Fire Assistance (SFA) program provides financial assistance through partnership agreements with state foresters for fire management activities, including helping communities become fire adapted. According to the Forest Service’s fiscal year 2017 budget justification, SFA is a critical part of the agency’s efforts to reduce wildland fire risk to communities, residents, property, and firefighters because it helps ensure that state, local, and private landowners have the capacity and tools they need to prepare for, respond to, and mitigate fire risk in the wildland-urban interface (WUI) and other critical areas. In each fiscal year from 2014 through 2016, approximately $78 million was enacted for the program. Of the total $78 million enacted for SFA in fiscal year 2015, $15.9 million was spent on hazardous fuel reduction treatments in the WUI, directly paying for the treatment of 148,020 acres of hazardous fuel and contributing to the treatment of another 126,368 acres with in-kind partner support, according to the Forest Service’s fiscal year 2017 budget justification. In addition, SFA funding supports national partnerships and agreements, including, among others, the National Fire Protection Association’s Firewise program, the wildfire prevention campaign with the Ad Council, and The Nature Conservancy Fire Learning Network. The Forest Service’s Volunteer Fire Assistance (VFA) program provides technical and financial assistance to local volunteer fire departments serving rural communities with a population of 10,000 or fewer. According to the Forest Service’s fiscal year 2017 budget justification, rural fire departments represent the first line of defense in addressing fires and other emergencies, and without the cooperation of rural fire departments, the agency would be unable to provide the level of fire response needed to keep fires near communities small. In each fiscal year from 2014 through 2016, $13 million was enacted for the program. In 2015, this funding helped 9,318 communities to train 22,272 firefighters and purchase, rehabilitate, and maintain $8.1 million in equipment, according to the 2017 budget justification. The Department of the Interior’s Rural Fire Assistance program (RFA) provided assistance in education and training, as well as supplies and equipment, to rural fire districts. However, funding for this program ended in fiscal year 2012 because of the increased availability of other fire assistance grant programs outside of Interior, according to officials with Interior’s Office of Wildland Fire. Interior’s Community Assistance is intended to support activities that improve and sustain community and individual responsibilities to adapt to, prepare for, and respond to wildfire. Unlike the Forest Service’s VFA or Interior’s now-expired RFA, Interior does not manage Community Assistance as a grant program, but as an activity under the existing wildland fire management programs of fuel reduction and preparedness, with funding levels determined by each Interior agency. Interior officials estimated that overall Community Assistance funding decreased from fiscal year 2009 through fiscal year 2013. For example, during this period, funding for Community Assistance decreased from an estimated $4.5 million to $2.1 million for BLM and from an estimated $1.2 million to $355,000 for Bureau of Indian Affairs, according to these officials. Since 2014, the Department of the Interior’s Office of Wildland Fire has been developing a Risk-Based Wildland Fire Management model, which it plans to use to help support decisions about how to distribute funding for preparedness and fuel reduction to four Interior agencies: Bureau of Indian Affairs (BIA), Bureau of Land Management (BLM), Fish and Wildlife Service, and National Park Service. The proposed system is to assess the probability and likely intensity of wildland fire, values at risk, and the expected value of acres likely to burn. Several Interior officials we interviewed raised concerns about the equity of the model because it makes determinations based on priority values at risk across the four Interior agencies, which can be challenging given the variation in agency missions and types of land they manage. For example, a threatened species located primarily on BLM lands may be among that agency’s highest priorities, but a forested area relied upon by an Indian tribe for its livelihood may be among BIA’s highest priorities. We found in 2015 that Interior officials said they expected to identify the prioritized values and issue guidance on the proposed system by the end of calendar year 2015 and use its results to inform their fiscal year 2016 funding distributions to the four agencies. As of February 2017, officials with Interior’s Office of Wildland Fire said they had not completed final revisions to the model but planned to do so in 2017. In addition to the individual named above, Steve Gaty (Assistant Director), Ulana M. Bihun, Mark Braza, Richard P. Johnson, and Keesha Luebke made key contributions to this report. Important contributions were also made by Martin (Greg) Campbell, William Carrigg, Lee Carroll, Charles Culverwell, Christopher P. Currie, Dan Royer, and Sarah Veale.","Dense vegetation, drought, and other factors have resulted in more severe wildland fires in recent years. At the same time, development in and around wildlands continues to increase, with some communities experiencing devastating effects from wildland fire. To reduce risk to communities, federal agencies and nonfederal stakeholders can collaborate in various ways. GAO was asked to review collaboration to reduce wildland fire risk to communities. This report examines federal officials' and stakeholders' views on (1) factors that affect federal-nonfederal collaboration aimed at reducing wildland fire risk to communities and (2) actions that could improve their ability to reduce risk to communities. GAO reviewed laws and documents about collaboration on wildland fire management; compared agency efforts with guidance; and interviewed officials from a nongeneralizable sample of 10 federal land management units selected based on wildland fire potential, geographic diversity, and other factors. GAO also interviewed stakeholders including community members near the selected units and representatives of nonfederal entities involved in fire risk-reduction efforts. Officials GAO interviewed from the five federal agencies responsible for wildland fire management—the Forest Service within the Department of Agriculture and the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service within the Department of the Interior—and nonfederal stakeholders, including state and local officials, homeowners, and representatives of nongovernmental organizations, identified several factors as affecting federal-nonfederal collaboration aimed at reducing wildland fire risk to communities. In some cases these factors were cited as enhancing collaboration, while in other cases they were cited as hindering it. Among the factors identified were federal authorities, agency initiatives, joint community-level planning, and others. For example, several officials and stakeholders cited laws such as the Good Neighbor Authority and Tribal Forest Protection Act of 2004 as enhancing collaboration because they provide federal and nonfederal entities the authority to work across jurisdictions on projects to reduce risk. In addition, several officials and stakeholders cited the 2014 National Cohesive Wildland Fire Management Strategy (Cohesive Strategy) as helpful for collaboration because it emphasizes the importance of coordination across multiple agencies and includes comprehensive fire management goals. In contrast, some officials and stakeholders said collaboration on certain types of projects was hindered by the difficulty in sharing project costs between federal and nonfederal entities. Federal officials and nonfederal stakeholders also identified several actions they said could improve federal agencies' and nonfederal entities' ability to reduce wildland fire risk to communities. Among the actions cited was improving the implementation of the Cohesive Strategy. Some agency officials and stakeholders noted the importance of increasing accountability for implementing the Cohesive Strategy, such as through the use of performance measures. The strategy states that its success depends in part on monitoring and accountability, and calls for national outcome measures. This is consistent with previous GAO findings regarding national strategies. However, GAO found that the Wildland Fire Leadership Council (WFLC)—the interagency body charged with overseeing and implementing the Cohesive Strategy and which includes the Forest Service and Interior as members—has not developed measures to assess progress on the part of federal and nonfederal participants in meeting the national goals of the Cohesive Strategy. In 2013, WFLC proposed several measures but concluded that implementing them could place undue burden on the agencies and nonfederal partners. In 2016, however, WFLC reported that recent research findings could help quantify the strategy's effects over time. By working with WFLC to develop such measures, the Forest Service and Interior, together with federal and nonfederal partners, could better assess national progress toward achieving the goals of the Cohesive Strategy. Federal officials and nonfederal stakeholders also identified actions that, while not necessarily within the federal agencies' control, could be taken to reduce wildland fire risk to communities. For example, these actions include adopting state laws that require property owners to take risk-reducing actions such as using fire-resistant building materials or reducing vegetation around their homes. Some states have adopted laws to promote such actions. GAO recommends that the Forest Service and Interior work with WFLC to develop measures to assess progress toward achieving the Cohesive Strategy's goals. The Forest Service agreed with GAO's recommendation, while Interior did not. GAO believes the recommendation is valid, as discussed in the report.",govreport
"The Foundation, originally incorporated in Washington, D.C., in 1985 as the U.S. Committee for the Battle of Normandy Museum, is a private nonprofit organization, tax-exempt under section 501(c)(3) of the Internal Revenue Code and is not part of the U.S. government. In published literature, the Foundation has described the purposes of its programs to be (1) honoring America’s World War II veterans and (2) teaching future generations the causes and consequences of World War II. The Foundation’s activities, which center around promoting public awareness of the historical significance of America’s participation in the liberation of Europe, have included building and promoting the Memorial Garden to commemorate D-Day and the Battle of Normandy; providing financial support for a French-owned and operated World War II memorial museum in the city of Caen, France; circulating newsletters to contributing members of the Foundation; sponsoring a Normandy scholar program, which educates university students in the history of World War II and the Battle of Normandy; and planning and promoting a Wall of Liberty in Normandy to honor World War II veterans involved in the European theater of operations. On October 14, 1992, the World War II 50th Anniversary Commemorative Coins Act was passed, directing the Secretary of the U.S. Treasury to mint and issue commemorative World War II coins with specified denominations and metallic content. It also directed the Treasury to sell the coins at a price equal to the sum of (1) the face value of the coins, (2) the cost of designing and issuing the coins, and (3) surcharges. The Coins Act specified that the first $3 million in surcharges received by the Treasury from the sale of coins be transferred to the Battle of Normandy Foundation and used by the Foundation to create, endow, and dedicate, on the 50th Anniversary of D-Day, a United States D-Day and Battle of Normandy Memorial in Normandy. The Coins Act also specified that the next $7 million in surcharges received from the sale of coins be made available to the American Battle Monuments Commission for the purpose of establishing a World War II memorial in or around Washington, D.C. Any amounts received by the Treasury in excess of $10 million were to be distributed to the two entities in the same 30 percent to 70 percent ratio. The coins were minted and sold by the Treasury and $3 million was transferred to the Foundation in 1993. In March 1994, the U.S. Mint reported to the Congress that, through February 1994, $7.6 million in surcharges had been generated and that it would continue coin sales through June 1994 but was not expecting any significant increase to the overall total. Therefore, additional funds are not expected to be available to the Foundation under the Coins Act. The Coins Act stipulated that the funds were also to be used by the Foundation to encourage and support visits to the memorial by United States citizens, especially students. We are required by the act to audit the Foundation’s use of any Treasury funds it receives under the act. In September 1993, the Foundation obtained approximately 2.5 acres of land adjacent to the World War II memorial museum in Caen, under a 99-year lease with the local government, and the Foundation constructed the Memorial Garden on this land. While the lease calls for a nominal annual rental payment of one French franc, it requires the Foundation to fund the costs of operating and maintaining the Memorial Garden and land for the entire lease term. In 1993, the Foundation began promoting a Wall of Liberty, which it planned to build in Normandy. For a fee of $40, the name of an American who served in the European theater of operations (which included Europe, North Africa, and the Mediterranean) is registered for inscription on the still-to-be constructed wall. The Foundation stated that it requested additional financial support for the wall from individuals, corporations, and other foundations in order to register veterans who may be unable to contribute the $40. The Foundation has employed independent certified public accountants (CPA) to perform annual audits of its financial statements. The Foundation’s independent CPA firm issued its most recent audit report on the Foundation’s calendar year 1993 financial statements in late August 1994. In the summer of 1993, allegations of financial impropriety were made against the Foundation and its then president, Anthony C. Stout, in a series of articles which appeared in a Washington, D.C., newspaper. These, and certain other allegations which focused on the viability of the Wall of Liberty project, subsequently appeared in the national media. On July 30, 1993, the Foundation’s Board of Directors appointed a special committee to investigate certain allegations, and the committee employed another public accounting firm to assist it by reviewing certain aspects of the Foundation’s financial management. In January 1994, the special committee concluded its investigation and reported that the Foundation had met its stated corporate goals and that accusations against Mr. Stout were unsupported. Under the Coins Act, we are required to audit the transfer of surcharge coin proceeds—and any interest earned thereon—from the Treasury to the Foundation and determine if these funds were used for the design and construction of the Memorial Garden in Normandy. During our audit of the Memorial Garden, we noted significant financial problems at the Foundation and received congressional inquiries regarding the Wall of Liberty and the Foundation’s finances. We, therefore, made additional inquiries regarding the current overall financial condition of the Foundation and the financial condition’s impact on operations, including the current and future maintenance of the Memorial Garden and the progress of the wall project. Also, we were asked by congressional committees to follow up on three specific media allegations involving the Foundation. In carrying out our work, we reviewed historical and current Foundation financial information, including audited financial statements, federal income tax returns, minutes of Board of Directors’ meetings, pertinent agreements, and other financial reports; interviewed current and former Foundation officials regarding financial matters, including management’s plans for current and future financial operations; obtained from the U.S. Mint, Department of the Treasury, documentation on the payment of surcharge coin proceeds to the Foundation; verified selected interest income payments to Foundation bank accounts and performed analytical reviews of selected interest payments through June 30, 1994; traced a sample representing over 95 percent of Memorial Garden design and construction costs through June 30, 1994, to payment vouchers, invoices, and construction manager approvals; traced selected accounting, legal, and consulting costs for the Memorial Garden through June 30, 1994, to payment vouchers and invoices; reviewed the computations and reasonableness of the Foundation’s general and administrative overhead allocation rates and selected salary allocations charged to the Memorial Garden project through June 30, 1994; examined progress and final construction photographs of the Memorial Garden and interviewed officials at the office of the construction manager in New York City who were responsible for the Memorial Garden construction; read the Independent Review Committee’s January 7, 1994, report on its investigation and reviewed the work performed by the public accounting firm which assisted the committee; interviewed a U.S. Department of Defense official who was referred to in a newspaper article as implying that the Foundation had acted improperly in promoting tours to Normandy; and read the travel brochure published by the tour company that contracted with the Foundation. Since the Foundation received a $3 million federal award in 1993 for the Memorial Garden, the Foundation’s independent CPA firm, in accordance with Office of Management and Budget Circular A-133, reported on the Foundation’s internal control structure and its compliance with applicable laws and regulations. We relied on these reports and the work of the CPA firm, and did not perform an independent comprehensive review of the Foundation’s overall accounting system or internal controls. We performed our work primarily in Washington, D.C., from September 1993 through August 1994. Our audit was performed in accordance with generally accepted government auditing standards. The Foundation has experienced significant managerial, financial, and internal control problems, and its liabilities substantially exceed its assets. The Foundation’s precarious financial condition casts doubt on whether it can continue its operations. Financial management problems at the Foundation were acknowledged in the January 1994 report of the special committee which investigated media allegations against the Foundation and Mr. Stout. In a November 1993 report, the public accounting firm which assisted the Foundation’s special committee, identified internal control weaknesses and recommended improving the Foundation’s internal controls governing financial management. Financial management problems included weak internal controls over transactions between the Foundation and its now former president, Anthony C. Stout, and a lack of formal written policies and procedures for travel and expense reimbursements. The committee report recommended specific management changes including that a full-time chief executive be employed as president in place of Mr. Stout, who had generally held the position on a part-time, unsalaried basis, and that Mr. Stout be elected Chairman of the Foundation’s Board of Directors or its Executive Committee. The Foundation announced 26 steps to resolve identified problems, including plans to require formal Board approval of all related party transactions, the adoption of formal written travel and expense reimbursement policies, and the hiring of a full-time president. Following the committee’s report, the Foundation experienced turnover in its management and leadership. Mr. Stout resigned as president in February 1994 and was elected by the Board as Chairman of the Foundation’s Executive Committee. The Foundation hired a new full-time president; however, he resigned the position after 3 months and another new president was hired. The Foundation’s executive director resigned in April 1994. In June 1994, about the time of the D-Day commemoration and the dedication of the Memorial Garden, several Foundation staff members were suspended after publicly attributing Foundation financial difficulties to Mr. Stout’s interference and financial mismanagement. At the same time, the Foundation’s recently-hired president also resigned. Mr. Stout resigned as Chairman of the Executive Committee in late June, but remained on the Board of Directors. In July 1994, the Foundation announced a major management restructuring which included electing two new co-chairmen of the Board of Directors, appointing a new president (the Foundation’s fourth since February) and a new chief financial officer, and rehiring of the executive director who had resigned in April. In addition, the Foundation announced that Mr. Stout had resigned from the Board of Directors. Foundation management told us that it had formulated a business plan designed to place the Foundation on a financially viable course and that it had developed a list of operational reforms to correct deficiencies in the Foundation’s corporate governance and financial management. The Foundation’s recently issued 1993 audited financial statements show that as of December 31, 1993, it had accumulated a financial deficit of about $727,000. The notes to the financial statements stated that the Foundation has been the subject of controversy in certain newspaper articles and that this has affected fund-raising. In July 1994, Foundation officials gave us a document which disclosed that the Foundation’s liabilities continued to substantially exceed its assets. The document also showed that of the approximately $2.5 million in contributions it had received for its Wall of Liberty project, about $1.1 million had been used by the Foundation to pay for other projects’ costs and operating expenses. Based on the information contained in Foundation financial records and reports, and interviews with Foundation officials, it appears that unless the Foundation obtains significant amounts of new donations or other sources of funding, now and in the future, the Foundation will not be able to meet its financial and operational responsibilities related to the Memorial Garden. Also, the precarious financial condition casts doubt on whether other projects, such as the Wall of Liberty, will proceed. Our audit showed that the Treasury transferred $3 million in surcharge coin proceeds to the Foundation on June 21, 1993. These funds were deposited in Foundation bank accounts, and as of June 30, 1994, interest of $73,152 had been earned. Our audit also showed that total design, construction, and other costs of the Memorial Garden recorded by the Foundation through June 30, 1994, were $3.6 million, and the $3.0 million received from the U.S. Treasury in Coins Act surcharge proceeds, plus interest earned thereon, were used toward funding these costs. As of June 30, 1994, the Foundation’s recorded cost included about $400,000 still owed to Memorial Garden contractors. In September 1993, the Foundation began construction of the Memorial Garden and dedicated it in a D-Day commemoration ceremony on June 5, 1994. The Memorial Garden is located in the city of Caen, adjacent to a World War II museum known as Le Memorial. The museum is operated by a French nonprofit organization whose majority shareholder is the city of Caen, and one of the Foundation’s projects has been to provide financial support to the museum. The Memorial Garden occupies approximately 2.5 acres and consists of a granite fountain shaped like a pair of hands, symbolizing the giving of American lives to save the European allies. The fountain contains a “Wall of States,” which is a display of stones native to the 50 states and several U.S. territories. On the stones are engraved seals, flags, or military emblems. A waterfall flows from the fountain into a pond. The stone walkway approach to the Memorial Garden winds through a grove of trees and is bordered by flowering shrubs and ornamental grasses. The Foundation’s direct and indirect costs for the Memorial Garden recorded as of June 30, 1994, are shown in table 1. Construction costs include the (1) cost and sculpturing of granite, (2) material and labor for concrete and forms for the fountain and other structures, and (3) landscaping. Design costs consist of the services provided by American and French architects. Accounting and legal costs include legal services from a French law firm, and consultants’ costs include those for photographs and security of the construction site. General and administrative costs consist primarily of travel costs and Foundation overhead charged to the project. The costs of the Memorial Garden have exceeded the amounts provided by the Coins Act, and additional Memorial Garden funding came, or needs to come, from other sources. Because of the Foundation’s current financial condition, it is uncertain whether the Foundation will be able to fund future costs of operating and maintaining the Memorial Garden. Congressional requesters asked us to follow up on three of the several allegations which initially appeared in a Washington, D.C., newspaper. Allegation one: The Foundation spent most of its revenues from 1986 to 1992 for purposes not related to its stated program activities. The Foundation, as a private, nonprofit corporation chartered in the District of Columbia, is required to conduct its activities in accordance with the District of Columbia Nonprofit Corporation Act and the Internal Revenue Code for tax exempt organizations. However, the Internal Revenue Service and the District of Columbia do not specify spending criteria for nonprofit organizations. The Council of Better Business Bureaus, which promotes ethical practices and promulgates operating standards for charitable organizations, suggests that organizations such as the Foundation annually spend at least 50 percent of their revenues on program activities directly related to their stated purpose. The National Charities Information Bureau, which promotes informed giving and a vigorous and responsive philanthropic sector, suggests in its standards that a charitable organization spend at least 60 percent of its annual expenses for program activities. The Foundation’s audited financial statements for 1986 through 1992, the period covered by the allegation, and other financial records, such as tax returns, showed that the Foundation had spent approximately 63 percent of its revenues—61 percent of its expenses—for its stated program activities, such as member services, museum support, and the Normandy scholar program. For 1993, the Foundation’s financial statements showed that the cost of program activities were about 83 percent of its revenues or 76 percent of its expenses. Allegation two: The Foundation inappropriately promoted tours to Normandy in 1993. It was alleged that the Foundation had inappropriately engaged a private tour company to assist it in promoting tours to Normandy in connection with the commemoration of the 50th anniversary of D-Day. Specifically, the allegation stated that the Foundation had been engaging in unethical and possibly illegal activities to promote the tours. The Coins Act, under which the Foundation received $3 million in surcharge coin funds, specifically called on the Foundation to create and dedicate a Normandy memorial and to encourage and support visits to the memorial by U.S. citizens, especially students. The Foundation, through competitive means, contracted with a travel agency for the purpose of facilitating travel services for Foundation members and others who planned to attend the commemorative events for the 50th anniversary of D-Day. At the request of the Department of Defense’s 50th Anniversary of World War II Commemoration Committee, the Army’s Office of General Counsel provided an opinion regarding the Foundation’s tour promotion activities. That opinion stated that the Foundation may designate whomever it wishes as its tour company, so long as the Foundation does not imply that the U.S. Government has made the designation. The travel brochure published by the tour company engaged by the Foundation makes no such implications and refers to the Battle of Normandy Foundation, indicating that the Foundation is a nonprofit organization coordinating a private-sector initiative for the 50th anniversary of D-Day. Allegation three: Anthony C. Stout’s private company, GIM Corp., owed rent to the Foundation for space it occupied under a sublease and in 1991, while Foundation president, Mr. Stout had the Foundation’s records altered to substitute the rent receivable with a GIM Corp. pledge for contributions that would not be honored. Foundation records show that while he was the Foundation’s president, Anthony C. Stout controlled a company, Government Investment Management Corporation (GIM Corp.), which periodically shared the cost of office space and certain personnel, including a chief financial officer, with the Foundation. Also, at various times, the Foundation and GIM Corp. each paid for expenses incurred by the other and the Foundation recorded receivables or payables to reflect these arrangements, commonly referred to as related party transactions. It was alleged that in 1991 Anthony C. Stout had the Foundation’s records altered to replace a $108,000 receivable from GIM Corp. with a promise from GIM Corp. to donate $30,000 a year for 4 years. It was further alleged that the amount of the pledge was subsequently reduced to an insignificant amount, implying that Mr. Stout did not intend to honor it. Foundation records show that in August 1989, GIM Corp. entered into a sublease agreement with the Foundation, to pay a portion of the Foundation’s rent. During the term of the sublease with GIM Corp., the Foundation recorded rental charges to GIM Corp. in its accounting records; however, these charges exceeded the amounts that were to be charged under the sublease. Certain of these charges were not paid and, therefore, contributed to the receivable from GIM Corp. reflected in Foundation accounting records. Foundation Board minutes indicate that GIM Corp. moved out of the Foundation’s offices in July 1991 and that the Foundation’s Treasurer adjusted the Foundation’s books to reduce the rent due from GIM Corp. Board minutes also reflect the unanimous Board approval of both the Treasurer’s adjustments and the cancellation of the sublease with GIM Corp. Our review confirmed that adjustments made to Foundation records to reduce amounts due from GIM Corp. brought rent charges more in line with the Foundation’s sublease agreement with GIM Corp. Foundation records also showed that the reduced receivable amount was subsequently paid by GIM Corp. In October 1991, Mr. Stout, acting on behalf of GIM Corp., pledged to the Foundation contributions totaling $120,000 over a 4-year period. In an October 1991 memorandum to the then chief financial officer, Mr. Stout stated that the pledge was made to provide the Foundation with an insurance policy against insufficient income and to accurately portray GIM Corp.’s future financial support to the Foundation. Through December 1993, Foundation records indicate that $90,000 of the $120,000 pledge had been paid. Foundation officials, commenting on a draft of this report, stated that it reflects accurately the decisions and actions which brought the Foundation to its present condition. (See appendix I.) We are sending copies of this report to the Ranking Minority Members of the House and Senate Committees on Veterans’ Affairs and other interested parties. Copies will be made available to others upon request. Please contact me at (202) 512-9489 if you or your staffs have any questions concerning this report. Major contributors to this report are listed in appendix II. Alan Mandell, Assistant Director Robert Coufal, Project Manager The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a legislative requirement, GAO reviewed the Battle of Normandy Foundation's use of coin surcharge proceeds for the creation of the United States Armed Forces Memorial Garden in Normandy, France. GAO found that: (1) the Foundation has experienced significant managerial, financial, and internal control problems; (2) it is uncertain whether the Foundation will be able to pay current and future operating costs for the Memorial Garden or fund other projects such as the Wall of Liberty, since its liabilities substantially exceed its assets and its management structure is unstable; (3) the Foundation spent $3 million in surcharge coin proceeds it received in 1993 for the design and construction of the United States Armed Forces Memorial Garden in accordance with the Commemorative Coins Act; (4) as of June 1994, the total recorded cost of the Memorial Garden was $3.6 million and the Foundation owed $400,000 to Memorial Garden contractors; (5) between 1986 and 1992, the Foundation spent 63 percent of its revenues on program activities; (6) in 1993, the Foundation spent 83 percent of its revenues on program activities; (7) the Foundation properly contracted with a private tour company to promote the Memorial's tour activities; (8) the Foundation recovered $90,000 of the $120,000 a private contractor owed the Foundation; and (9) Battle of Normandy Foundation officials concurred with the findings presented in the report.",govreport
"Millions of current and future retirees rely on private or public DB pension plans, which promise to pay retirement benefits that are generally based on an employee’s salary and years of service. The financial condition of these plans—and hence their ability to pay promised retirement benefits when such benefits are due—depends on adequate contributions from employers and, in some cases, employees, as well as prudent investments that preserve principal and yield an adequate rate of return over time. The plan sponsor must make required contributions to the plan that are intended to ensure it is adequately funded to pay promised benefits. To maintain and increase plan assets, fiduciaries of public and private sector pension plans invest in assets that are expected to grow in value or yield income. In making investments, DB plan managers consider a plan’s benefit payment requirements and balance the desire to maximize return on investment and the desire to limit the overall risk to the investment portfolio to an acceptable level. In doing so, plan fiduciaries invest in various categories of assets classes, which traditionally have consisted mainly of stocks and bonds. Stocks offer relatively high expected long- term returns at the risk of considerable volatility, that is, the likelihood of significant short-term losses or gains. On the other hand, bonds and other fixed income investments offer a steady income stream and relatively low volatility, but lower expected long-term returns. Different proportions of these two asset classes will, therefore, provide different degrees of risk and expected return on investment. Pension fiduciaries may also invest in other asset classes or trading strategies, such as hedge funds and private equity, which are generally considered to be riskier investments, so long as such investments are prudent. Private sector pension plan investment decisions must comply with the provisions of ERISA, which stipulates fiduciary standards based on the principle of a prudent man standard. Under ERISA, plan sponsors and other fiduciaries must (1) act solely in the interest of the plan participants and beneficiaries and in accordance with plan documents; (2) invest with the care, skill, and diligence of a prudent person with knowledge of such matters; and (3) diversify plan investments to minimize the risk of large losses. Under ERISA, the prudence of any individual investment is considered in the context of the total plan portfolio, rather than in isolation. Hence, a relatively risky investment may be considered prudent, if it is part of a broader strategy to balance the risk and expected return to the portfolio. In addition to plan sponsors, under the ERISA definition of a fiduciary, any other person that has discretionary authority or control over a plan asset is subject to ERISA’s fiduciary standards. The Employee Benefit Security Administration (EBSA) at Labor is responsible for enforcing these provisions of ERISA, as well as educating and assisting retired workers and plan sponsors. Another federal agency, the Pension Benefit Guaranty Corporation (PBGC), collects premiums from federally insured plans in order to insure the benefits of retirees if a plan terminates without sufficient assets to pay promised benefits. In the public sector, governments have established pension plans at state, county, and municipal levels, as well as for particular categories of employees, such as police officers, fire fighters, and teachers. The structure of public pension plan systems can differ considerably from state to state. In some states, most or all public employees are covered by a single consolidated DB retirement plan, while in other states many retirement plans exist for various units of government and employee groups. Public sector DB plans are not subject to funding, vesting and most other requirements applicable to private sector DB plans under ERISA, but must follow requirements established for them under applicable state law. While states generally have adopted standards essentially identical to the ERISA prudent man standard, specific provisions of law and regulation vary from state to state. Public plans are also not insured by the PBGC, but could call upon state or local taxpayers in the event of a funding shortfall. Although there is no statutory or universally accepted definition of hedge funds, the term is commonly used to describe pooled investment vehicles that are privately organized and administered by professional managers and that often engage in active trading of various types of securities, commodity futures, options contracts, and other investment vehicles. In recent years, hedge funds have grown rapidly. As we reported in January 2008, according to industry estimates, from 1998 to early 2007, the number of funds grew from more than 3,000 to more than 9,000 and assets under management from more than $200 billion to more than $2 trillion globally. Hedge funds also have received considerable media attention as a result of the high-profile collapse of several hedge funds, and consequent losses suffered by investors in these funds. Although hedge funds have the reputation of being risky investment vehicles that seek exceptional returns on investment, this was not their original purpose, and is not true of all hedge funds today. Founded in the 1940s, one of the first hedge funds invested in equities and used leverage and short selling to protect or “hedge” the portfolio from its exposure to movements in the stock market. Over time, hedge funds diversified their investment portfolios and engaged in a wider variety of investment strategies. Because hedge funds are typically exempt from registration under the Investment Company Act of 1940, they are generally not subject to the same federal securities regulations as mutual funds. They may invest in a wide variety of financial instruments, including stocks and bonds, currencies, futures contracts, and other assets. Hedge funds tend to be opportunistic in seeking positive returns while avoiding loss of principal, and retaining considerable strategic flexibility. Unlike a mutual fund, which must strictly abide by the detailed investment policy and other limitations specified in its prospectus, most hedge funds specify broad objectives and authorize multiple strategies. As a result, most hedge fund trading strategies are dynamic, often changing rapidly to adjust to market conditions. Hedge funds are typically structured and operated as limited partnerships or limited liability companies exempt from certain registration, disclosure and other requirements under the Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, and Investment Advisers Act of 1940 that apply in connection to other investment pools, such as mutual funds. For example, to allow them to qualify for various exemptions under such laws, hedge funds usually limit the number of investors, refrain from advertising to the general public, and solicit fund participation only from large institutions and wealthy individuals. The presumption is that investors in hedge funds have the sophistication to understand the risks involved in investing in them and the resources to absorb any losses they may suffer. Although many workers may be impacted by any losses resulting from pension fund investment in hedge funds, a pension plan counts as a single investor that does not prevent a hedge fund from qualifying for the various statutory exemptions. Individuals and institutions may also invest in hedge funds through funds of hedge funds, which are investment funds that buy shares of multiple underlying hedge funds. Fund of funds managers invest in other hedge funds rather than trade directly in the financial markets, and thus offer investors broader exposure to different hedge fund managers and strategies. Like hedge funds, funds of funds may be exempt from various aspects of federal securities and investment law and regulation. Like hedge funds, there is no legal or commonly accepted definition of private equity funds, but the term generally includes privately managed pools of capital that invest in companies, many of which are not listed on a stock exchange. Although there are some similarities in the structure of hedge funds and private equity funds, the investment strategies employed are different. Unlike many hedge funds, private equity funds typically make longer-term investments in private companies and seek to obtain financial returns not through particular trading strategies and techniques, but through long-term appreciation based on corporate stewardship, improved operating processes and financial restructuring of those companies, which may involve a merger or acquisition of companies. Private equity is generally considered to involve a substantially higher degree of risk than traditional investments, such as stocks and bonds, for a higher return. While strategies of private equity funds vary, most funds target either venture capital or buy-out opportunities. Venture capital funds invest in young companies often developing a new product or technology. Private equity fund managers may provide expertise to a fledgling company to help it advance toward a position suitable for an initial public offering. Buyout funds generally invest in larger established companies in order to add value, in part, by increasing efficiencies and, in some cases, consolidating resources by merging complementary businesses or technologies. For both venture capital and buy-out strategies, investors hope to profit when the company is eventually sold, either when offered to the public or when sold to another investor or company. Each private equity fund generally focuses on only one type of investment opportunity, usually specializing in either venture capital or buyout and often specializing further in terms of industry or geographical area. Investment in private equity has grown considerably over recent decades. According to a venture capital industry organization, the amount of capital raised by private equity funds grew from just over $2 billion in 1980 to about $207 billion in 2007; while the number of private equity funds grew from 56 to 432 funds over the same time period. As with hedge funds, private equity funds operate as privately managed investment pools and have generally not been subject to Securities and Exchange Commission (SEC) examinations. Pension plans typically invest in private equity through limited partnerships in which the general partner develops an investment strategy and limited partners provide the large majority of the capital. After creating a new fund and raising capital from the limited partners, the general partner begins to invest in companies that will make up the fund portfolio (see fig. 1). Limited partners have both limited control over the underlying investments and also limited liability for potential debts incurred by the general partners through the fund. Similar to hedge funds, private equity funds may be structured to qualify for exemptions from certain registration and disclosure requirements of federal securities laws; for example, by refraining from advertising to the general public. The majority of investments in private equity funds come from wealthy individuals and institutional investors, such as endowments, banks, corporations, and pension plans. According to several recent surveys, investments in hedge funds and private equity are typically a small portion of total plan assets—about 4 to 5 percent on average—but a considerable and growing number of plans invest in them. While investment in hedge funds is less common than private equity, the number of plans with investments in hedge funds has experienced greater growth in recent years. Furthermore, survey data show that larger plans, measured by total plan assets, are more likely to invest in hedge funds and private equity compared to mid-size plans. Survey data on plans with less than $200 million in assets are unavailable and, thus, the extent to which small plans invest in hedge funds and private equity is unknown. Individual plans’ hedge fund or private equity investments typically comprise a small share of total plan assets. According to a Pensions & Investments survey of large plans (as measured by total plan assets), the average allocation to hedge funds among plans with such investments was about 4 percent in 2007. Similarly, among plans with investments in private equity, the average allocation was about 5 percent. An earlier survey by Pyramis Global Advisors, which included mid- to large-size plans, found an average allocation of 7 percent for hedge funds and 5 percent for private equity in 2006. Although the majority of plans with investments in hedge funds or private equity have small allocations to these assets, a few plans have relatively large allocations, according to the Pensions & Investments survey (see fig. 2). Of the 62 plans that reported investments in hedge funds in 2007, 12 plans had allocations of 10 percent or more and, of those, 3 plans had allocations of 20 percent or more. The highest reported hedge fund allocation was 30 percent of total assets. Large allocations to private equity were even less common. A total of 106 surveyed plans reported investments in private equity in 2007, of which 11 plans had allocations of 10 percent or more and, of those, 1 plan had an allocation of about 20 percent. Two recent surveys of pension plans indicate that a considerable number of plans invest in hedge funds or private equity. As seen in table 1, from about 21 to 27 percent of all plans surveyed, which included mid- to large- size plans, held investments in hedge funds as of 2006, according to data from Greenwich Associates and Pyramis. Both surveys reveal that a greater share of private sector plans invested in hedge funds compared to public sector plans. The Greenwich survey also found that hedge fund investment was most common among collectively bargained plans, although the number of these plans surveyed was substantially smaller as there are relatively few of these plans in operation. Nearly half—8 out of 17—of collectively bargained plans surveyed invested in hedge funds. Investment in private equity is much more prevalent than investment in hedge funds, among plans surveyed. The Greenwich survey found that about 43 percent of plans held investments in private equity in 2006, while the Pyramis survey found that 41 percent of plans had such investments. Both surveys also show that a larger percentage of public sector plans are invested in private equity compared to private sector plans. As with hedge funds, the Greenwich survey found that investment in private equity was most common among collectively bargained plans. More than two-thirds— 12 out of 17—of collectively bargained plans surveyed invested in private equity. While pension plan investment in hedge funds is less prevalent than investment in private equity, hedge fund investment has increased much more in recent years. According to Greenwich Associates, from 2004 to 2006, the percent of plans with investments in hedge funds grew from just under 20 percent to almost 27 percent. Meanwhile, the percent of plans with investments in private equity increased at a lesser rate, from about 39 percent in 2004 to 43 percent in 2006. A survey by Pensions & Investments found that this comparison was more pronounced over a 6-year period (see fig. 3). Among larger plans surveyed by Pensions & Investments, the percent of plans with investments in hedge funds grew from about 11 percent in 2001 to nearly 47 percent in 2007. Over the same time period, investments in private equity remained more prevalent, but grew much more slowly. While pension plan investment in hedge funds has experienced greater growth in recent years, pension plan investment in private equity increased markedly following a 1979 Labor clarification that plans may make some investments in riskier assets, such as venture capital and buyout funds. Prior to 1979, such investments were generally viewed as a potential violation of ERISA. Labor clarified that ERISA’s prudent man standard applies to investment decisions in the context of the entire portfolio rather than in isolation. Following the Labor guidance, pension plan investments in venture capital and buy-out funds experienced rapid growth. One study reported that pension plans’ share of venture capital investments grew from 15 percent in 1978 to 50 percent in 1986, during which time overall investment in venture capital increased more than 10- fold from $427 million to $4.4 billion. More recently, the National Venture Capital Association estimates that pension plans held 42 percent of the approximately $20 billion invested in domestic venture capital funds in 2004. Survey data show that larger plans, measured by total plan assets, are more likely to invest in hedge funds and private equity compared to mid- size plans. Greenwich found that only 16 percent of mid-size plans—those with $250 to $500 million in total assets—were invested in hedge funds, compared to about 31 percent of the largest plans—those with $5 billion or more in assets (see fig. 4). Similarly, only about 16 percent of mid-size plans held investments in private equity, whereas slightly over 71 percent of the largest plans held such investments. Pensions & Investments survey of large plans corroborates this pattern—about 47 percent of plans held investments in hedge funds and nearly 80 percent held investments in private equity in 2007 (see fig. 3). Survey data on plans with less than $200 million in assets are unavailable and, in the absence of this information, it is unclear to what extent these plans invest in hedge funds and private equity. Representatives of investment consulting firms and industry experts told us that they suspect few small plans have such investments, but they could not provide data to confirm this. A representative of a large investment consulting firm explained that smaller plans face inherent restrictions on investing in hedge funds and private equity funds because the required minimum investments for these funds are often too high to allow small plans to make such investments while remaining sufficiently diversified. While pension plans seek important benefits through investments in hedge funds, hedge funds also pose challenges that demand greater expertise and effort than investments in more traditional assets. Pension plans told us that they invest in hedge funds to achieve one or more of several goals, including lessening the volatility of returns, obtaining returns greater than those expected in the stock market, and/or diversifying the portfolio by investing in a vehicle that will not be correlated with other asset classes in the portfolio. While all the pension plans we contacted that had invested in hedge funds expressed general satisfaction with these investments, hedge fund investments nonetheless pose significant challenges to pension plan fiduciaries, beyond the inherent challenges of investing in more familiar asset classes such as stocks and bonds. Plan officials and others outlined steps to limit these and other challenges, such as conducting in-depth due diligence reviews or investing through funds of funds, which can mitigate some of the main difficulties of hedge funds. Such steps entail greater expense, effort, or expertise than is required for more traditional investments, and some pension plans may not be equipped to meet these demands. Pension plans’ investments in hedge funds resulted in part from stock market declines and disenchantment with traditional investment management in recent years. Most pension plan officials we contacted cited the steep declines in the public equity market early in this decade as a reason for initiating or expanding hedge fund investments. From August 2000 to February 2003, the stock market, as measured by the Standard and Poor’s 500 index, declined in value by about 45 percent, and according to plan sponsors and others, this massive market decline severely affected pension plans that were deeply invested in the U.S. stock market. For example, representatives of one public pension plan told us that this market decline led to largest annual loss in its history and resulted in the plan’s first hedge fund investments 2003. A representative of another large public pension plan told us that the main motive for initially investing in hedge funds was the weak equity markets early in this decade, and the perceived need for greater exposure to alternative assets that relied less on the stock market for returns. At the same time, some plan officials also cited disenchantment with traditional “long-only” investment managers, and questioned whether such managers delivered returns that justified the fees the managers’ charge. Officials with most of the plans we contacted indicated that they invested in hedge funds, at least in part, to reduce the volatility of returns. According to a representative of an investment consulting firm, this is a common objective of pension plans that invest in hedge funds. One plan official explained the importance of reducing volatility by noting that even in periods of relatively good stock returns, volatility can eat away at the compounding effect of returns over time, and substantially reduce long- term growth. Another plan official said that in trying to reduce volatility through hedge funds, the plan expected that certain hedge fund returns may lag behind stock market indices during bull (rising) markets, but also expected that it would not suffer nearly the same declines during bear (falling) markets. Officials of several pension plans told us that they sought to obtain returns greater than the returns of the overall stock market through at least some of their hedge fund investments. For example, officials of one pension plan explained that one of the overall goals of its hedge fund portfolio strategy was to obtain an annual return of 2.5 percentage points greater than returns in the stock market, as measured by the S&P 500 stock index. Officials of pension plans that we contacted also stated that hedge funds are used to help diversify their overall portfolio and provide a vehicle that will, to some degree, be uncorrelated with the other investments in their portfolio. This reduced correlation has a number of benefits, including reduction in overall portfolio volatility and risk. For example, officials of one pension plan told us that hedge funds are attractive because they are not solely dependent on equity and fixed income markets for their returns, thus reduce the overall risk of the investment portfolio. At the time of our contacts with pension plans in 2007, the 15 pension plans with hedge fund investments indicated mixed but generally positive results. Among officials of these plans, all said that their hedge fund investments had generally met or exceeded expectations, although some noted mixed experiences. For example, one plan explained that it had dropped some hedge fund investments because they had not performed at or above the S&P 500 benchmark. Also, this plan redeemed its investment from other funds because they began to deviate from their initial trading strategy. Further, officials of several plans noted that their venture into hedge funds was only a few years old, and, at the time of our contact, their investment had not yet been tested by trying economic conditions or financial events, such as a significant stock market decline. Nonetheless, representatives of all of the plans with hedge fund investments indicated that they planned to maintain or increase their portfolio allocation to hedge funds in the foreseeable future. Pension plans face a number of challenges in hedge fund investing beyond those of more traditional investing, including specific investment risks, limited transparency and liquidity, and risks related to the operations of the hedge fund. While any plan investment may fail to deliver expected returns over time, hedge fund investments pose investment challenges beyond those posed by traditional investments. These include (1) reliance on the skill of hedge fund managers, who often have broad latitude to engage in complex investment techniques that can involve various financial instruments in various financial markets; (2) use of leverage, which amplifies both potential gains and losses; and (3) higher fees, which require a plan to earn a higher gross return to achieve a higher net return. Hedge funds are among the most actively managed investments, and thus returns are often dependent not on broad market movements, but on smaller moves in the markets they invest in and the skills and abilities of the hedge fund manager. For example, hedge fund managers may seek to profit through complex and simultaneous positions in stocks, bonds, options contracts, futures contracts, currencies, and other vehicles, and can abruptly change their positions and trading tactics in order to achieve desired return as changing market conditions warrant. Representatives of some pension plans that had not invested in hedge funds, cited concerns about the ability of hedge fund managers to accomplish this over the long- term. One plan official said the plan had avoided hedge funds in part because of doubt that the managers’ skills could generate an acceptable return over time. Instead, this plan seeks to capture the increase in the overall stock market. Regulatory officials and plan sponsors also said that, given the growth of the hedge fund industry in recent years, the market inefficiencies from which hedge funds profit may diminish. For example, SEC noted in a 2004 regulatory proposal that the capacity of hedge fund advisers to generate large returns is limited because the use of similar financial strategies by other hedge funds narrows spreads and decreases profitability. Hedge fund managers may use leverage—that is, use borrowed money or other techniques—to potentially increase an investments value or return without increasing the amount invested. While registered investment companies are subject to leverage limits, hedge funds can make relatively unrestricted use of leverage to magnify the expected returns of an investment. At the same time that leverage can magnify profits, it can also magnify losses to the hedge fund if the market goes against the fund’s expectations. Concerns about leverage were cited by several pension plans either as an important consideration in selecting a hedge fund, or as a reason for avoiding them altogether. For example, one public pension plan told us that it has avoided hedge funds because when hedge funds hit “potholes,” the potholes are deep because of high amounts of leverage used. The challenge of relying on manager skill for a desired rate of return is compounded by the costly fee structure that is typical of the hedge fund industry. Whereas mutual fund managers reportedly charge a fee of about 1 percent of assets under management, hedge fund managers often charge a flat fee of 2 percent of total assets under management, plus a performance fee, of about 20 percent of the fund’s annual profits. The impact of such fees can be considerable. As figure 5 illustrates, an annual return of 12 percent falls to about 7.6 percent after fees are deducted. Several pension plans cited the costly fee structure fees as a major drawback to hedge fund investing. For example, representatives of one plan that had not invested in hedge funds said that they are focused on minimizing transaction costs of their investment program, and the hedge fund fee structure would likely not be worth the expense. On the other hand, an official of another plan noted that, as long as hedge funds add value net of fees, they found the higher fees acceptable. Because many hedge funds may own thinly traded securities and derivatives whose valuation can be complex, and in some cases subjective, a plan may not be able to obtain timely information on the value of assets owned by a hedge fund. Further, hedge fund managers may decline to disclose information on asset holdings and the net value of individual assets largely because release of such information could compromise their trading advantage. In addition, even if hedge fund managers were to provide detailed positions, plan sponsors might be unable to fully analyze and assess the prospective return and risk of a hedge fund. As a consequence, a plan may not be able to independently ascertain the value of its hedge fund investment or fully assess the degree of investment risk posed by its hedge fund investment. Although we noted in January 2008 that hedge funds have improved disclosure and transparency about their operations due to the demands of institutional investors, several pension plans cited limited transparency as a prime reason they had chosen not to invest in hedge funds. For example, representatives of one plan told us that they had considered investing in hedge funds several years ago, but that most of the hedge funds it contacted would not provide position-level information, and that they were reluctant to make such an investment without this information. Hedge funds offer investors relatively limited liquidity, that is, investors may not be able to redeem a hedge fund investment on demand because of a hedge fund’s redemption policy. Hedge funds often require an initial “lockup” of a year or more, during which an investor cannot cash out of the hedge fund. After the initial lockup period, hedge funds offer only occasional liquidity, sometimes with a pre-notification requirement. While some pension plans told us that liquidity limitations are not a significant concern because the plan has other liquid assets to pay benefits, they nonetheless can pose certain disadvantages. For example, liquidity limitations can inhibit a plan’s ability to minimize a hedge fund investment loss. As one state official noted after a state fund had suffered losses in the wake of the 2006 collapse of Amaranth, even when a plan learns that a hedge fund is losing value, various lockup provisions often make it difficult to promptly withdraw from the investment. Further, an investor’s rights with regard to cashing out may not be entirely clear from the written contract. According to an investigative study by a Grand Jury of one pension plan’s experience with a failed hedge fund, the contracts can be dense with legal language, which may make understanding of basic terms and conditions difficult, especially with regard to withdrawal provisions. Further, the study noted that contracts can delegate immense discretionary authority to the hedge fund manager to change conditions and rules. Pension plans investing in hedge funds are also exposed to operational risk—that is, the risk of investment loss due not to a faulty investment strategy, but from inadequate or failed internal processes, people, and systems, or problems with external service providers. Operational problems can arise from a number of sources, including inexperienced operations personnel, inadequate internal controls, lack of compliance standards and enforcement, errors in analyzing, trading, or recording positions, or outright fraud. According to a report by an investment consulting firm, because many hedge funds engage in active, complex, and sometimes heavily leveraged trading, a failure of operational functions such as processing or clearing one or more trades may have grave consequences for the overall position of the hedge fund. Concerns about some operational issues were noted by SEC in a 2003 report on the implications of the growth of hedge funds. For example, the 2003 report noted that SEC had instituted a significant and growing number of enforcement actions involving hedge fund fraud in the preceding 5 years. Further, SEC noted that while some hedge funds had adopted sound internal controls and compliance practices, in many other cases, controls may be very informal, and may not be adequate for the amount of assets under management. Similarly, a recent Bank of New York paper noted that the type and quality of operational environments can vary widely among hedge funds, and investors cannot simply assume that a hedge fund has an operational infrastructure sufficient to protect shareholder assets. Several pension plans we contacted also expressed concerns about operational risk. For example, one plan official noted that the consequences of operational failure are larger in hedge fund investing than in conventional investing. For example, the official said a failed long trade in conventional investing has relatively limited consequences, but a failed trade that is leveraged five times is much more consequential. Representatives of another plan noted that back office and operational issues became deal breakers in some cases. For example, they said one fund of funds looked like a very good investment, but concerns were raised during the due diligence process. These officials noted, for example, the importance of a clear separation of the investment functions and the operations and compliance functions of the fund. One official added that some hedge funds and funds of funds are focused on investment ideas at the expense of important operations components of the fund. Pension plans that invest in hedge funds take various steps to mitigate the risks and challenges posed by hedge fund investing, including developing a specific investment purpose and strategy, negotiating important investment terms, conducting due diligence, and investing through funds of funds. Such steps require greater effort, expertise and expense than required for more traditional investments. As a result, some plans, especially smaller plans, may not have the resources to take the steps necessary to address these challenges. Discussions with pension plan officials revealed the importance of defining a clear purpose and strategy for their hedge fund investments. As one pension fiduciary noted, plan managers should define exactly why they want to invest in hedge funds. He added that there are many different possible hedge fund strategies, and wanting to invest in hedge funds to obtain the large returns that other investors have reportedly obtained is not a sufficient reason. Most of the 15 pension plans with hedge fund investments that we contacted described one or more strategies for their hedge funds investments. For example, an official of one state plan told us that the plan invested only in long-short hedge fund strategies while other plans use multiple strategies. Our contacts with plan officials and others also highlighted the importance of diversification. All of the plans having hedge fund investments that we contacted invested in either multiple individual hedge funds, or through funds of funds, which are designed to provide diversification across many underlying funds. Some plans described specific diversification requirements, and spread their hedge fund investment across many funds to limit exposure to one or a small number of hedge funds. For example, one plan determined that no more than 15 percent of its hedge fund portfolio would be with a single hedge fund manager and that no more than 40 percent in a particular hedge fund investment strategy. Our contacts with plan officials and others also highlighted the importance of identifying specific investment terms to guide hedge fund investing and ensuring that the hedge fund investment contract complies with these criteria. These can include fee structure and conditions, degree of transparency, valuation procedures, redemption provisions, and degree of leverage employed. For example, pension plans may want to ensure that they will not pay a performance fee unless the value of the investment passes a previous peak value of the fund shares—known as a high water mark. Some plans we contacted also specified leverage limits for their hedge funds. For example, one public plan that we contacted has established specific leverage limits for each of 10 hedge fund strategies employed by its funds of funds—ranging from an upper limit of 2 times invested capital for one strategy, to 20 times invested capital for another. Once decided upon, these and other terms of the investment can be used as criteria in the hedge fund search, and if necessary, negotiated with the hedge fund or fund of funds manager. Pension plans take steps to mitigate the challenges of hedge fund investing through an in-depth due diligence and ongoing monitoring process. While plans conduct due diligence reviews of other investments as well, such reviews are especially important when making hedge fund investments, because of hedge funds’ complex investment strategies, the often small size of hedge funds, and their more lightly regulated nature, among other reasons. Due diligence can be a wide-ranging process that includes a review and study of the hedge fund’s investment process, valuation, and risk management. The due diligence process can also include a review of back office operations, including a review of key staff roles and responsibilities, the background of operations staff, the adequacy of computer and telecommunications systems, and a review of compliance policies and procedures. Representatives of several plans told us they mitigate several of the major hedge fund challenges by investing through funds of funds, which are investment funds that buy shares of multiple underlying hedge funds. Funds of hedge funds provide plan investors diversification across multiple hedge funds, thereby having the potential to mitigate investment risk. For example, one plan fiduciary told us the plan reduces investment risk by investing in a fund of funds that diversifies their hedge fund investments into at least 40 underlying hedge funds. Further, by investing in a fund of funds, a pension plan relies on the fund of funds’ manager to conduct negotiations, due diligence, and monitoring of the underlying hedge funds. According to pension plan officials, funds of funds can be appropriate if a plan does not have the necessary skills to manage its own portfolio of hedge funds. According to a hedge fund industry organization, investing through a fund of funds may provide a plan better access to hedge funds than a plan would be able to obtain directly. Nonetheless, investing through funds of funds has some drawbacks. Funds of funds’ managers also charge fees—for example, they may charge a 1 percent flat fee and a performance fee of between 5 and 10 percent of profits—on top of the substantial fees that the fund of funds manager pays to the underlying hedge funds. Funds of funds also pose some of the same challenges as hedge funds, such as limited transparency and liquidity, and the need for a due diligence review of the fund of funds firm. According to plan officials, state and federal regulators, and others, some pension plans, especially smaller plans, may not be equipped to address the various demands of hedge fund investing. For example, an official of a national organization representing state securities regulators told us that medium- and small-size plans are probably not equipped with the expertise to oversee the trading and investment practices of hedge funds. This official said that smaller plans may have only one or two person staff, or may lack the resources to hire outside consulting expertise. A labor union official made similar comments, noting that smaller pension plans lack the internal capacity to assess hedge fund investments, and noted that such plans may be locked out of top-performing hedge funds. Some plans may also lack the ability to conduct the necessary due diligence and monitoring of hedge fund investments. One hedge fund consultant told us that certain types of plans, such as plans that are not actively overseen by an investment committee and plans that do not have a sufficient in-house dedicated staff, should not invest in hedge funds. Similarly, a representative of a firm specializing in fiduciary education and support noted the special relationship of trust and legal responsibility that plan fiduciaries carry and concluded that the challenges of hedge fund investing are too high for most pension plans. While such plans might often be smaller plans, larger plans may also lack sufficient expertise. A representative of one pension plan with more than $32 billion in total assets noted that before investing in hedge funds, the plan would have to build up its staff in order to conduct the necessary due diligence during the fund selection process. According to plan representatives, investment consultants, and other experts we interviewed, pension plans invest in private equity primarily to attain returns superior to those attained in the stock market in exchange for greater risk, but such investments pose several distinct challenges. Generally, these plan representatives based their comments on significant experience investing in private equity—in some cases over 20 years—and said they had experienced returns in excess of the stock market. Nonetheless, private equity funds can require longer-term commitments of 10 years or more, and during that time, a plan may not be able to redeem its investments. In addition, plan representatives described extensive and ongoing management of private equity investments beyond that required for traditional investments and that, like hedge fund investments, may be difficult for plans with relatively limited resources. Unlike hedge funds, pension plan investment in private equity is not a recent phenomenon. The majority of plans included in our review began investing in private equity more than 5 years before the economic downturn of 2000 to 2001, and some of these plans have been investing in private equity for 20 years or more. According to a pension investment consultant we interviewed, due to the longer history of pensions’ investment in private equity, it is generally regarded as a more well- established and proven asset class compared to other alternative investments, such as hedge funds. Pension plans invest in private equity primarily to attain returns in excess of returns from the stock market over time in exchange for the greater risk associated with these investments. Officials of each plan we interviewed said these investments had provided the expected returns. Plan representatives and investment consultants said that attaining returns superior to stocks was a primary reason for investing in private equity. Among the plan representatives we interviewed the most commonly reported benchmark for private equity funds ranged from 3 to 5 percentage points above the S&P 500 stock index, net of fees. At the time of our interviews with plans about private equity investments, between October 2007 and January 2008, plan representatives indicated their private equity investments had met their expectations for relatively high returns and many said they planned to maintain or increase their allocation in the future. Further, representatives of some plans told us that private equity has been their best performing asset class over time despite some individual investments that resulted in considerable losses. For example, according to documentation provided by one private sector plan, the plan had earned a net return of slightly more than 16 percent on its private equity investments over the 10-year period ending September 30, 2007, which was their highest return for any asset class over that time period. To a lesser degree, pension plans also invest in private equity to further diversify their portfolios. To the extent that private equity is not closely correlated with the stock market, these investments can reduce the volatility of the overall portfolio. However, some plan representatives cautioned that the diversification benefits are limited because the performance of private equity funds is still strongly, although not perfectly, linked to the stock market. Pension plans investing in private equity face several challenges and risks, which include the concentration of underlying holdings, use of leverage, and wide variation in performance among funds. In addition, the value of the underlying holdings is difficult to estimate prior to their sale and private equity investments entail long-term commitments, often of 10 years or more. Pension plans that invest in private equity funds face a number of investment risks, beyond the risks of traditional investments. Unlike a traditional fund manager who diversifies by investing in many stocks or bonds, a private equity fund manager’s strategy typically involves holding a limited number of underlying companies in their portfolio. A single private equity fund generally invests in only about 10 to 15 companies, often in the same sector. The risks associated with such concentrated, undiversified funds may be compounded by particular aspects of the buyout and venture capital sectors. Fund managers in the buyout sector generally invest using leverage to seek greater returns but such investments also increase investment risks. In the venture capital sector, fund managers typically make smaller investments in companies that may have a limited track record and rely on technological development and growing the company’s commercial capacity for success. In light of this, some plan officials noted that some of these companies will fail, but the success of one or more of the portfolio firms is often large enough to more than compensate for the losses of other investments. Like other investments, the returns to private equity funds are susceptible to market conditions when investments are bought or sold. When competition among private equity fund managers is intense, research has shown that a fund manager may pay more for an investment opportunity that leads to lower net returns. In addition, the returns of a private equity fund are also affected by the condition of the market when the underlying investments are sold. For example, a private equity fund may have lower returns if its underlying holdings are sold through an initial public offering made during a period of low stock values. An official from one plan told us that private equity funds that sold investments around 2000 had lower returns because of the overall decline in the stock market. However, a representative of another plan noted that, while market conditions have some effect on the performance of a private equity fund, the effect may be mitigated by the ability of the fund managers to enact sound business plans and thereby add value to the underlying companies. Further, the challenge of meeting the high performance goals for private equity investments is compounded by the relatively high fees that private equity funds charge. Similar to hedge funds, private equity funds typically charge an annual fee of 2 percent of invested capital and 20 percent of returns, whereas mutual fund managers typically charge a fee of about 1 percent or less of assets under management. If the gross returns from a private equity fund are not sufficiently high, net returns to investors will not meet the commonly cited goal of exceeding the return of the stock market. Another risk from investing in private equity is the variation of performance among private equity funds. Officials of an investment consulting firm, a state regulatory agency, and several pension plans noted that, compared to other asset classes, private equity has greater variation in performance among funds and cited research to support this view. For example, one study found that the difference in returns between the median and top quartile funds is much greater for private equity, particularly among venture capital investments, than it is for domestic stocks. Another study found that returns of private equity funds at the 75th percentile were more than seven times greater than the returns of funds at the 25th percentile. A further challenge of investing with private equity funds—regardless of how they perform—is that they often require commitments of 10 years or more during which a plan may not be able to redeem its investment. The longer-term commitment of private equity funds contrasts with stock and bond investments, which can be bought and sold daily, and hedge fund investments, which can be redeemed episodically. Plans must provide committed capital when called upon by the fund manager, and may not redeem invested capital or typically see any return on the investment, for at least several years. However, several plan representatives and other experts we interviewed stated that the nature of private equity funds necessitates long commitments as returns are generated through longer- term growth strategies, rather than short-term gains. A private equity fund cycle typically follows a pattern known as the “J-curve,” which reflects an initial period of negative returns during which investors provide the fund with capital and then obtain returns over time as investments mature (see fig. 6). Representatives of several plans noted that they expect higher returns from private equity in exchange for the long-term commitment. An additional challenge of private equity investments is the uncertain valuation during the fund cycle. Unlike stocks and bonds, which are traded and priced in public markets, plans have limited information on the value of private equity investments until the underlying holdings are sold. Some plan representatives we interviewed explained that fund managers often value underlying holdings at their initial cost until they are sold through an initial public offering or other type of sale. In some cases private equity funds estimate the value of the fund by comparing companies in their portfolio to the value of comparable publicly-traded assets. However, an investment consultant explained that such periodic valuations have limited utility. Prior to the sale of underlying investments, it is difficult to assess the value a private equity fund manager has generated. While plan officials we interviewed acknowledged the difficulty of valuing private equity investments, they generally accepted it as a trade-off for the potential benefits of the investment. Plan representatives said that they take several key steps to address the challenges of investing in private equity funds. Plan representatives and industry experts emphasized the importance of investing with top- performing funds to mitigate the wide variation in fund performance; however, they noted that access to these top-performing funds is very limited, particularly for new investors. Furthermore, due diligence and ongoing monitoring of private equity investments requires substantial effort and expertise, which may be too complex or costly for plans with more limited resources. The majority of plan representatives we interviewed told us that, because of the wide variation in performance among private equity funds, they must invest with top-performing funds in order to achieve long-term returns in excess of the stock market. In addition to identifying the top- performing fund managers, plan officials explained that the selection process involves a thorough assessment of the fund manager’s investment strategy. For example, an official from one state plan told us that their assessment includes a review of a fund manager’s strategy for improving the operations and efficiency of its proposed investments and they invest with managers that have a persuasive business model. Plan officials stressed the importance of these steps, and some noted that investing in private equity is only worthwhile if they can invest with funds in the top quartile of performance. For example, one plan official said that if a plan does not invest with a top quartile fund, it may not obtain returns in excess of stock market returns and, thus, will not have earned a premium for assuming the risks and fees inherent in private equity fund investments. While many plans we interviewed noted the importance of investing with top-performing funds, the competition to gain access to these funds may make it difficult or impossible for some plans, especially smaller plans, to do so. Several of the plan representatives we interviewed noted that investment opportunities with top-performing funds are limited, and the demand for such opportunities is high. According to representatives of a venture capital trade association, there is greater demand to invest in venture capital funds than can be absorbed, because the venture capital sector is relatively small in size. Plan officials also noted that access to private equity funds can be limited, because fund managers prefer to deal with larger, more sophisticated investors or investors who have invested in the fund manager’s previous private equity funds. For example, one state official told us that the largest public plan in the state has the clout to gain access to top-performing funds, but smaller public funds in the state do not. He added that top-performing funds are very selective, and generally will not respond to solicitation by smaller public funds. Plan representatives told us they further mitigate the challenges of investing in private equity funds by diversifying their investments. Plan representatives we interviewed said they invest with multiple fund managers to mitigate the risk that some managers may have mediocre or poor performance. For example, a representative of one plan said they would be comfortable investing about 5 percent of their private equity allocation with one carefully vetted fund manager, but investing 20 percent with one manager would be overly risky. The director of another plan told us the plan aims to ensure diversification by investing with over 130 different private equity funds, encompassing more than 80 fund managers. Plans also stagger investments over several years to ensure their private equity fund investments are ready to sell their underlying investments at different times. Staggering investments over time helps mitigate the risk of fund managers selling funds’ underlying holdings during a time of poor market conditions, which may reduce the funds’ returns to investors. For example, one plan official noted they have investments in funds that were established in many different years, dating back to 1994. In addition, some plan officials told us they further diversify their private equity investments among funds concentrated in different industries and regions. Plan representatives said that they mitigate the long-term commitments of private equity investments by limiting the size their allocation. Officials we interviewed at several plans noted that their allocation to private equity is only about 5 percent of the portfolio and benefit obligations can be paid from more liquid assets. They said it is important to estimate a plan’s benefit obligations and determine the need for liquid investments to ensure the plan can pay benefits when they are due. They also noted that once liquidity needs are determined, a plan can more safely invest in an illiquid asset that cannot be used to pay benefits in the near term. Plans attempt to negotiate key terms of the investment contract to further manage the risks of investing in private equity, but, as one large public plan noted, their ability to negotiate favorable contract provisions is limited when investing with top-performing funds because investing in these funds is highly competitive. Like hedge fund investments, these contract terms may include the fee structure and valuation procedures of the fund. In addition, many plan representatives we interviewed said they can redeem their investments before the end of the originally agreed investment period if staff that are considered key to the success of the fund leave prematurely. Similar to hedge fund investments, plans take additional steps to mitigate challenges of investing in private equity through extensive and ongoing management, beyond those required for traditional investments. Plan representatives we interviewed said these steps include regularly reviewing reports on the performance of the underlying investments of the private equity fund and having periodic meetings with fund managers. In some cases, plans participate on the advisory board of a private equity fund, which provides a greater opportunity for oversight of the fund’s operations and new investments; however this involves a significant time commitment and may not be feasible for every private equity fund investment. Plan representatives and investment consultants noted that, as with hedge funds, private equity investments entail considerably greater due diligence and ongoing monitoring than traditional investments and some plan representatives said they needed to hire an external investment consultant because the plan lacked sufficient internal resources. Funds of private equity funds, like funds of hedge funds, enable plans to address several challenges of investing in private equity, for an additional cost. Benefits of investing in funds of funds can include diversification across fund managers, industry, geographic region, and year of initial investment. Through funds of funds, plans can also gain access to top- performing fund managers that may otherwise be unavailable to them. One plan representative stated that, due to the competition among investors, funds of funds are their best option for accessing top-performing funds. In addition, several plan representatives said that they invest in funds of funds to benefit from the expertise of the fund manager. For example, officials of two large plans said they generally limit their use of funds of funds to private equity investments in emerging markets and small funds because the plan prefers not to devote resources to maintaining expertise in these areas. Nonetheless, fund of funds’ managers charge their own fees in addition to the fees the fund of funds pays the underlying private equity fund managers. According to a plan official and an investment consulting firm, a fund of funds manager typically charges a fee of 1 percent of invested capital over the fees it pays to the underlying funds. The federal government does not specifically limit or monitor private sector pension investments in hedge funds or private equity, and state approaches for public plans vary. ERISA requires that plan fiduciaries meet general standards of prudent investing but does not impose specific limits on investments in hedge funds or private equity. Further, while Labor has conducted enforcement actions that have involved hedge fund or private equity funds, it does not specifically monitor these investments. While states generally impose a prudent man standard, similar to ERISA’s, on plan fiduciaries, some states still have policies that restrict or prohibit pension plan investment in hedge funds or private equity. Although ERISA governs the investment practices of private sector pension plans, neither federal law nor regulation specifically limit pension investment in hedge funds or private equity. Instead, ERISA requires that plan fiduciaries apply a prudent man standard, including diversifying assets and minimizing the risk of large losses. The prudent man standard does not explicitly prohibit investment in any specific category of investment. Further, an unsuccessful individual investment is not considered a per se violation of the prudent man standard, as it is the plan fiduciary’s overall management of the plan’s portfolio that is evaluated under the standard. In addition, the standard focuses on the process for making investment decisions, requiring documentation of the investment decisions, due diligence, and ongoing monitoring of any managers hired to invest plan assets. Although there are no specific federal limitations on pension plan investments in hedge funds, two federal advisory committees have, in recent years, highlighted the importance of developing best practices in hedge fund investing. In November 2006, the ERISA Advisory Council recommended that Labor publish guidance describing the unique features of hedge funds, and matters for consideration in their adoption for use by qualified pension plans. To date, Labor has not acted on this recommendation. According to Labor officials, an effort to address these recommendations was postponed while Labor focused on implementing various aspects of the Pension Protection Act of 2006. However, in April 2008, the Investors’ Committee established by the President’s Working Group on Financial Markets, composed of representatives of public and private pension plans, endowments and foundations, organized labor, non- U.S. institutions, funds of hedge funds, and the consulting community, released draft best practices for investors in hedge funds. These best practices discuss the major challenges of hedge fund investing, and provide an in-depth discussion of specific considerations and practices that investors in hedge funds should take. While this guidance should serve as an additional tool for pension plan fiduciaries and investors to use when assessing whether and to what degree hedge funds would be a wise investment, it may not fully address the investing challenges unique to pension plans leaving some vulnerable to inappropriate investments in hedge funds. Although many private sector plans are insured by the PBGC, which guarantees most benefits when an underfunded plan terminates, public sector plans are not insured and may call upon state or local taxpayers to overcome funding shortfalls. Labor does not specifically monitor pension investment in hedge funds or private equity. Labor annually collects information on private sector pension plan investments via the Form 5500, on which plan sponsors report information such as the plan’s operation, funding, assets, and investments. However, the Form 5500 includes no category for hedge funds or private equity funds, and plan sponsors may record these investments in various categories on the form’s Schedule H. In addition, because there is no universal definition of hedge funds or private equity and their strategies vary, their holdings can fall within many asset classes. While EBSA officials analyze Form 5500 data for reporting compliance issues—including looking for assets that are “hard to value”—they have not focused on hedge fund or private equity investments specifically. According to EBSA officials, there have been several investigations and enforcement actions in recent years that involved investments in hedge funds and private equity, but these investments have not raised significant concerns. Our state pension plan contacts indicated that, in recent years, state regulation of public pension plan investments has become generally more flexible. According to a NASRA official, state regulation of public pension plan investments has gradually become less restrictive and more reliant on fiduciary prudence standards. This official noted that, for example, blanket prohibitions on investments such as international stocks or real estate have given way to permission for a wider range of investments. Some of our state contacts described this shift over time from a prescriptive list of authorized investments (“legal lists”) and asset allocation limits to a more flexible approach, such as adoption of the prudent man standard. Of the state pension plan officials we contacted in 11 states, officials in 7 states indicated that applicable state law imposes restrictions on the ability of public pension plans to invest in hedge funds and/or private equity, as seen in table 2. Among these seven states, the restriction may be in the form of (i) a provision applicable to investments in hedge funds or private equity funds specifically, (ii) an exclusive list of permissible of investments that is not likely to capture hedge funds or private equity investments, or (iii) a provision that restricts investments in certain categories of assets that, because of the typical structure or investment strategy of hedge funds or private equity funds, are likely to apply to investments in such funds. Some of the selected states have, through statute or regulation, established explicit limitations on the amount that pension plans can invest in hedge funds or private equity. For example, under Texas law, the Teacher Retirement System of Texas (TRS)—the largest public pension plan in Texas—is statutorily limited to investing no more than 5 percent of the plan’s total assets in hedge funds. According to a Texas Pension Review Board official, the statute codified TRS’s ability to invest in hedge funds while at the same time limiting the amount TRS can invest in hedge funds. According to a TRS official, this law was a compromise between TRS’s desire to invest more broadly in hedge funds and some state legislators who were concerned about the possible risks of hedge funds. Other states we reviewed have comparable limitations for public plans. The Commonwealth of Massachusetts’ Public Employee Retirement Administration Commission (PERAC) has established a detailed set of limitations and guidance, with particular limitations on smaller public plans. In Massachusetts, public plans with less than $250 million in assets may not invest in hedge funds directly, but they may invest through a state- managed hedge fund investment pool (see table 3). According to a PERAC official, this limitation exists because hedge funds are relatively new investments for pension plans and because they require high levels of due diligence and expertise that may be excessive for smaller plans. PERAC also limits and offers guidance to larger public plans, emphasizing diversification, to help limit a plan’s exposure to potential losses from hedge fund failures. According to a PERAC official, the group is less strict about private equity investments because private equity is a more familiar asset class among the state’s public plans. Public plans with less than $25 million in assets may invest up to three percent of assets in private equity and plans with more than $25 million may invest up to 5 percent of assets in private equity. PERAC requires plans of either size to obtain PERAC permission before investing in private equity above those levels. Some of the selected states have instituted “legal lists” of authorized investments for pension plans that do not specifically include investments in hedge funds or private equity funds as authorized assets. According to a NASRA official, this was the dominant regulatory approach of state pension investment 40 years ago, and while some states have moved away from this approach, others have continued to maintain legal lists. Illinois has established a legal list of assets that does not include interests in hedge funds or private equity funds, in which certain smaller plans that cover police officers and fire fighters are authorized to invest. Large statewide plans, such those managed by the Illinois State Board of Investment, are governed by a prudent man standard, which does not explicitly restrict investment of pension assets in any particular investment. In some instances, states allow a certain percentage of plan assets to be invested in assets that do not qualify under one of the authorized categories on the legal list. For example, the New York State Common Retirement Fund is governed by a legal list, but the state allows the plan to invest up to 25 percent of its assets in investments not otherwise permitted by the legal list. Finally, public pension plan investments in hedge funds are prohibited or limited in some states by laws restricting pension plan investment in certain investment vehicles or trading strategies. For example, the North Carolina Retirement system can not invest more than 10 percent of plan assets in limited partnerships or limited liability corporations. Similarly, before new legislation broadening investment authority went into effect in April 2008, the Wisconsin Retirement System could not invest assets in vehicles that trade options or engage in short selling, two techniques commonly used by hedge funds. However, with the new statutory authority, the Wisconsin Retirement System may use any investment strategy that meets its prudent investor standard. States we contacted take a variety of approaches to overseeing and monitoring public pension plan investment. In Massachusetts, before conducting a hedge fund manager search, public plans must first obtain PERAC approval and provide the agency with a summary of the plan’s objectives, strategies, and goals in hedge fund investing. PERAC requires pension plans to document the major due diligence steps taken in the hedge fund manager selection process. In addition, prospective hedge fund managers must submit detailed information to PERAC regarding their key personnel, assets under management, investment strategy and process, risk controls, past performance, and organizational structure. Finally, hedge fund managers must also submit quarterly performance and strategy review reports directly to PERAC. Officials in other states we contacted may review hedge fund and private equity investments as part of a broader oversight approach. For example, the Ohio Retirement Study Council reviews the five large statewide public retirement funds semiannually to evaluate a plan’s investment policies and objectives, asset allocations decisions, and risk and return assumptions. In California, individual pension boards have sole and exclusive authority over investment decisions; however, they ensure public information on investment decisions and fund performance, including detailed reports of alternative investments, are publicly available. Available data indicate that pension plans have increasingly invested in hedge funds and have continued to invest in private equity to complement their traditional investments in stocks and bonds. Further, these data indicate that individual plans’ hedge fund or private equity investments typically comprise a small share of total plan assets. However, data are generally not available on the extent to which smaller pension plans have made such investments. Because such investments require a degree of fiduciary effort well beyond that required by more traditional investments, this can be a difficult challenge for plans, especially smaller plans. Smaller plans may not have the expertise or financial resources to be fully aware of these challenges, or have the ability to address them through negotiations, due diligence, and monitoring. In light of this, such investments may not be appropriate for some pension plans. Although plans are responsible for making prudent choices when investing in any asset, EBSA also has a role in helping to ensure that pension plan sponsors fulfill their fiduciary duties in managing pension plans that are subject to ERISA. This can include educating employers and service providers about their fiduciary responsibilities under ERISA. Many private sector plans are insured by the PBGC, which guarantees most benefits when an underfunded plan terminates; however, public sector plans are not insured and may call upon state or local taxpayers to overcome funding shortfalls. The importance of educating investors about the special challenges presented by hedge funds has been recognized by a number of organizations. For example, in 2006, the ERISA Advisory Council recommended that Labor publish guidance about the unique features of hedge funds and matters for consideration in their use by qualified plans. To date, EBSA has not acted on this recommendation. More recently, in April 2008, the Investors’ Committee formed by the President’s Working Group on Financial Markets published draft best practices for investors in hedge funds. This guidance will be applicable to a broad range of investors, such as public and private pension plans, endowments, foundations, and wealthy individuals. EBSA can further enhance the usefulness of this document by ensuring that the guidance is interpreted in light of the fiduciary responsibilities that ERISA places on private sector plans. For example, EBSA could outline the implications of a hedge fund’s or fund of funds’ limited transparency on the fiduciary duty of prudent oversight. EBSA can also reflect on the implications of these best practices for some plans—especially smaller plans—that might not have the resources to take actions consistent with the best practices, and thus would be at risk of making imprudent investments in hedge funds. While EBSA is not tasked with offering guidance to public sector plans, such plans may nonetheless benefit from such guidance. To ensure that all plan fiduciaries can better assess their ability to invest in hedge funds and private equity, and to ensure that those that choose to make such investments are better prepared to meet these challenges, we recommend that the Secretary of Labor provide guidance specifically designed for qualified plans under ERISA. This guidance should include such things as (1) an outline of the unique challenges of investing in hedge funds and private equity; (2) a description of steps that plans should take to address these challenges and help meet ERISA requirements; and (3) an explanation of the implications of these challenges and steps for smaller plans. In doing so, the Secretary may be able to draw extensively from existing sources, such as the finalized best practices document that will be published in 2008 by the Investors’ Committee formed by the President’s Working Group on Financial Markets. We provided a draft copy of this report to the Department of Labor, PBGC, the Department of the Treasury, the SEC, and the Federal Reserve Bank for their review and comment. Labor generally agreed with our findings and recommendation. With regard to our recommendation, Labor stated that providing more specific guidance on investments in hedge funds and private equity may present challenges. Specifically, Labor noted that given the lack of uniformity among hedge funds, private equity funds, and their underlying investments, it may prove difficult to develop comprehensive and useful guidance for plan fiduciaries. Nonetheless, Labor agreed to consider the feasibility of developing such guidance. Labor’s formal comments are reproduced in appendix III. We agree that the lack of uniformity among hedge funds or private equity funds may pose challenges to Labor. However, we do not believe it will be an insurmountable obstacle to developing guidance for plan sponsors. Indeed, the lack of uniformity among hedge funds and private equity funds is itself an important issue to convey to fiduciaries, and highlights the need for an extensive due diligence process preceding any investment. Additionally, as we state in the recommendation, Labor’s efforts can be facilitated through use of existing best practices documents, such as the best practices for investors in hedge funds document that will be published in the summer of 2008 by the Investors’ Committee formed by the President’s Working Group on Financial Markets. The PBGC also provided formal comments, which are reproduced in appendix IV. PBGC generally concurred with our findings. Labor, PBGC, the Department of the Treasury, and the Federal Reserve Bank also provided technical comments and corrections, which we have incorporated where appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees and members, federal agencies, and other interested parties. We will also make copies available to others upon request. If you or your staff has any questions concerning this report, please contact Barbara Bovbjerg on (202) 512-7215 or Orice Williams on (202) 512-8678. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Key contributors are listed in appendix V. Our objectives were to address the following questions: 1. To what extent do public and private sector pension plans invest in hedge funds and private equity funds? 2. What are the potential benefits, risks, and challenges pension plans face in making hedge fund investments, and how do plans address the risks and challenges? 3. What are the potential benefits, risks, and challenges pension plans face in making private equity fund investments, and how do plans address the risks and challenges? 4. What mechanisms regulate and monitor pension plan investments in hedge funds and private equity funds? To answer the first question, we obtained and analyzed survey data of private and public sector defined benefit (DB) plans on the extent of plan investments in hedge funds and private equity from three private organizations: Greenwich Associates, Pensions & Investments, and Pyramis Global Advisors. We identified the three surveys through our literature review and interviews with plan representatives and industry experts. As seen in table 4, the surveys varied in the number and size of plans surveyed. Using the available survey data, we determined the percentage of plans surveyed that reported investments in hedge funds or private equity. Using data from Greenwich Associates, we also determined the percentage of plans surveyed that invested in hedge funds or private equity by category of plan size, measured by total plan assets. We further examined data from each survey on the size of allocations to hedge funds or private equity as a share of total plan assets. Using the Pensions & Investments data, we analyzed allocations to these investments for individual plans and calculated the average allocation for hedge funds and private equity, separately, among all plans surveyed that reported these investments. The Greenwich Associates and Pyramis data reported the size of allocations to hedge funds or private equity as an average for all plans surveyed. Through our research and interviews, we were not able to identify any relevant surveys that included plans with less than $200 million in total assets. While the information collected by each of the surveys is limited in some ways, we conducted a data reliability assessment of each survey and determined that the data were sufficiently reliable for purposes of this study. These surveys did not specifically define the terms hedge fund and private equity; rather, respondents reported allocations based on their own classifications. Pensions & Investments reported private equity in three mutually-exclusive categories—buyout, venture capital, and an “other” private equity category, which includes investments such as mezzanine financing and private equity investments traded on the secondary market. Data from all three surveys are reflective only of the plans surveyed and cannot be generalized to all plans. To answer the second and third questions, we conducted in-depth interviews with representatives of 26 private and public sector DB plans, listed in table 5, from June 2007 to January 2008 and, where possible, obtained and reviewed supporting documentation. Interviews related to hedge fund investments were conducted from June 2007 to December 2007. Interviews related to private equity investments were conducted from October 2007 to January 2008. The interviews with plan representatives were conducted using a semi-structured interview format, which included open-ended questions on the following topics, asked separately about hedge funds or private equity: the plan’s history of investment in hedge funds or private equity; the plan’s experiences with these investments to date; the plan’s expected benefits from these investments; challenges the plan has faced with these investments; and steps the plan has taken to mitigate these challenges, including due diligence and ongoing monitoring. We interviewed five plans that did not invest in hedge funds to discuss the reasons the plan decided not have such investments. We also interviewed officials of government agencies, relevant industry organizations, investment consulting firms, and other national experts listed in appendix II. In addition, we interviewed officials from the Arizona State Retirement System and Missouri Local Government Employees’ Retirement System to discuss the recent decision of these plans to invest in private equity. The plans we interviewed were selected based on several criteria. We attempted to select plans that varied in the size of allocations to hedge funds and private equity as a share of total plan assets. We also attempted to select plans with a range of total plan assets, as outlined in table 6. We identified these plans using data from the Pensions & Investments 2006 survey and through our interviews with industry experts. To identify and analyze the regulation of public DB pension investments by states we consulted officials at the Department of Labor and representatives of relevant agencies in selected states, and reviewed relevant policy documents. The states we selected included the 10 states with the largest public pension assets according to our review of the National Association of State Retirement Administrators (NASRA) Public Funds Survey data listed in table 7. We also included Massachusetts because our previous contact with that state produced valuable information for this objective. Those states chosen based on the size of plan assets were: California, New York, Texas, Ohio, Florida, Illinois, Pennsylvania, New Jersey, Wisconsin, and North Carolina. In 9 of 10 states we spoke with the offices of the State Auditor, the State Treasurer, and the State Comptroller or equivalent offices. North Carolina’s Chief Investment Officer of the State Treasurer’s Office affirmed our analysis through e- mail. Finally we informed each of these states of our analysis and gave them the opportunity to comment on our description of regulations in their state. We conducted this performance audit from June 2007 to July 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Department of Treasury Department of Labor, Employee Benefit Security Administration Board of Governors of the Federal Reserve System Pension Benefit Guaranty Corporation Securities and Exchange Commission Hedge fund and private equity industry organizations Managed Funds Association National Venture Capital Association (NVCA) Private Equity Council (PEC) Cambridge Associates Cliffwater, LLC Fiduciary Counselors McCarter & English, LLP Mercer Associates Offices of Wilkie, Farr, and Gallagher, LLP Pension Governance, LLC American Benefits Council (ABC) American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) American Federation of State, County, and Municipal Employees (AFSCME) Committee on the Investment of Employee Benefit Assets (CIEBA) Financial Policy Forum National Association of State Retirement Administrators (NASRA) North American Securities Administrators Association (NASAA) National Conference of State Legislatures (NCSL) roundtable: National Association of Police Organizations (NAPO) National Conference on Public Employee Retirement Systems (NCPERS) National Association of State Treasurers National Association of Counties (NACo) Grand Lodge Fraternal Order of Police National Association of State Auditors, Comptrollers, and Treasurers (NASACT) National Education Association (NEA) National Council on Teacher Retirement (NCTR) and California Public National Conference of State Legislatures (NCSL) National Association of State Retirement Administrators (NASRA) David Lehrer, Assistant Director, and Michael Hartnett managed this report. Sharon Hermes, Angela Jacobs, and Ryan Siegel made important contributions throughout this assignment. Joseph A. Applebaum, Joe Hunter, Ashley McCall, Jay Smale Jr., Jena Sinkfield, Frank S. Synowiec, Karen Tremba, Rich Tsuhara, Charlie Willson, and Craig Winslow also provided key support.","Millions of retired Americans rely on defined benefit pension plans for their financial well-being. Recent reports have noted that some plans are investing in 'alternative' investments such as hedge funds and private equity funds. This has raised concerns, given that these two types of investments have qualified for exemptions from federal regulations, and could present more risk to retirement assets than traditional investments. To better understand this trend and its implications, GAO was asked to examine (1) the extent to which plans invest in hedge funds and private equity; (2) the potential benefits and challenges of hedge fund investments; (3) the potential benefits and challenges of private equity investments; and (4) what mechanisms regulate and monitor pension plan investments in hedge funds and private equity. To answer these questions GAO interviewed relevant federal agencies, public and private pension plans, industry groups and investment professionals, and analyzed available survey data. According to several recent surveys of private and public sector plans, investments in hedge funds and private equity generally comprise a small share of total plan assets, but a considerable and growing number of plans have such investments. Available survey data of mid to large-size plans indicate that between 21 and 27 percent invest in hedge funds while over 40 percent invest in private equity; such investments are more prevalent among larger plans, as shown below. The extent of investment in hedge funds and private equity by plans with less than $200 million in total assets is unknown. Pension plans invest in hedge funds to obtain a number of potential benefits, such as returns greater than the stock market and stable returns on investment. However, hedge funds also pose challenges and risks beyond those posed by traditional investments. For example, some investors may have little information on funds' underlying assets and their values, which limits the opportunity for oversight. Plan representatives said they take steps to mitigate these and other challenges, but doing so requires resourcesbeyond the means of some plans. Pension plans primarily invest in private equity funds to attain returns superior to the stock market. Pension plan officials GAO spoke with generally had a long history of investing in private equity and said such investments have met expectations for returns. However, these investments present several challenges, such as wide variation in performance among funds, and the resources required to mitigate these challenges may be too substantial for some plans. The federal government does not specifically limit or monitor private sector plan investment in hedge funds or private equity, and state approaches to public plans vary. Under federal law, fiduciaries must comply with a standard of prudence, but no explicit restrictions on hedge funds or private equity exist. Although a federal advisory council recommended that the Department of Labor (Labor) develop guidance for plans to use in investing in hedge funds, Labor has not yet done so. While most states also rely on a standard of investor prudence, some also have legislation that restricts or prohibits plan investment in hedge funds or private equity. For example, one state prohibits plans below a certain size from investing directly in hedge funds.",govreport
"American Samoa, CNMI, Guam, Puerto Rico, and the U.S. Virgin Islands are five territories of the United States. With the exception of Puerto Rico, the populations in the territories are small relative to the states, and are generally poorer. Within broad federal guidelines and under federally approved plans, territories have some discretion in setting Medicaid and CHIP eligibility standards and provider payment rates; determining the amount, scope, and duration of covered benefits; and developing their own administrative structures. For example, similar to the states, unless they have obtained a waiver, the territories’ Medicaid programs are required to cover certain benefits—known as mandatory Medicaid benefits—and can choose to cover additional benefits, known as optional benefits. While the states also have similar discretion, the territories have been afforded greater flexibility, including the ability to set their own income eligibility levels for certain populations and determine income eligibility using a locally established poverty level instead of the federal poverty level (FPL). Also like the states, territories can operate their CHIP programs as a separate program, include CHIP-eligible children in their Medicaid program, or use a combination of the two approaches. Significant differences exist in how Medicaid and, to a lesser extent, CHIP are funded in the territories as compared with the states. For example, the federal matching rate for states’ Medicaid programs, the Federal Medical Assistance Percentage (FMAP), is based on a state’s per capita income in relation to the national per capita income, with poorer states receiving higher federal matching rates than wealthier states. In contrast, the Medicaid FMAP for the territories does not recognize their capacity to pay for program expenses. Although PPACA increased the territories’ FMAP from 50 to 55 percent, this percentage is fixed at the lower end of the range available to states. For the CHIP program, the federal government matches states’ and territories’ program spending at a rate higher than Medicaid, known as the enhanced FMAP. However, territories’ matching rate for CHIP spending is similarly fixed at the lower end of the range available to the states. Additionally, federal Medicaid funding in states is not subject to a limit, provided the states contribute their share of program expenditures for services provided. In contrast, federal Medicaid funding in each territory is subject to a statutory cap. In general, once their Medicaid and CHIP funding is exhausted, territories must assume the full costs of their programs. These funding differences, along with differences in the costs of health care in the territories compared with the states, have contributed to lower federal and territory Medicaid program expenditures in the territories. For example, in the aggregate, total Medicaid expenditures in all five territories comprised less than one half of one percent of the total national Medicaid expenditures in fiscal year 2014. However, when examined separately, Puerto Rico had Medicaid enrollment and expenditures similar to some states. Specifically, in fiscal year 2014, Puerto Rico ranked 11th in Medicaid enrollment nationally and ranked 42nd in total Medicaid expenditures. Like the states, territories must report their quarterly program expenditures for Medicaid and CHIP on the CMS-64 no later than 30 days after the end of each quarter, which is used to reimburse them for their federal share of these expenditures. In recent years, legislation to provide temporary increases in Medicaid and CHIP funding has been enacted. For example, the American Recovery and Reinvestment Act of 2009 (Recovery Act) provided the territories with a 30 percent increase in their Medicaid caps from fiscal year 2009 through the first quarter of fiscal year 2011, as well as federal matching funds to encourage Medicaid providers to undertake health information technology (HIT) initiatives. Most recently, PPACA appropriated $7.3 billion in additional Medicaid funding to the territories, the majority of which is available through fiscal year 2019. According to CMS officials, this funding can be used once territories expend their Medicaid and CHIP funding each year. PPACA also permanently increased territories’ Medicaid FMAPs and CHIP enhanced FMAPs to 55 percent and 68.5 percent, respectively. Federal law generally requires state, territory, and federal entities to ensure program integrity by protecting the Medicaid and CHIP programs from fraud, waste, and abuse. Like the states, territories have primary responsibility for such program integrity because they enroll providers, establish payment policies, process claims, and pay for services furnished to beneficiaries. To execute this responsibility, territories may undertake a variety of efforts. For example, although not required, they can establish program integrity units, which are tasked with identifying and recovering improper payments. Territories, like the states, are also required to implement certain program integrity mechanisms or receive an exemption from CMS for doing so. For example, territories must establish Medicaid Fraud Control Units (MFCU), which are tasked with investigating Medicaid fraud and other health care law violations, or receive an exemption from CMS from establishing one. The territories are also required to implement a Medicaid Management Information System (MMIS), which is a claims processing and information retrieval system that includes capabilities for reporting claims data, enrollee encounter data, and conducting pre- and post-payment review. Such information can assist in identifying improper payments. Federal mechanisms are also available to assist in program oversight. For example, CMS can conduct comprehensive or focused program integrity reviews, which assess the effectiveness of state and territory program integrity efforts, including compliance with federal statutory and regulatory requirements. Further, through the Payment Error Rate Measurement (PERM) program, CMS requires states to estimate improper payments in the Medicaid and CHIP program to identify program vulnerabilities and actions to reduce improper payments; however, the agency has excluded the territories from this program. Additionally, OMB’s annual A-133 single audits examine internal controls and compliance deficiencies in certain federal programs, including Medicaid and CHIP, and can be a resource to inform program oversight. Due to the flexibility territories have in administering their Medicaid and CHIP programs, the territories’ program eligibility and benefits not only reflect their unique circumstances, but also differ from one another and from the states. For example, a notable distinction among territories’ program eligibility is that Puerto Rico is the only territory that uses its CHIP funds to cover additional children in its Medicaid programs whose income levels exceed Medicaid eligibility levels. The other four territories use their CHIP funds to pay for services provided to children up to the age of 19 in their Medicaid programs. Additionally, Guam, Puerto Rico and the U.S. Virgin Islands base program eligibility on local poverty levels (LPL) that are more restrictive than federal standards, which has resulted in lower program enrollment than would otherwise be the case. Additionally, unlike the states and other territories, American Samoa does not determine eligibility for its Medicaid program on an individual basis. Instead, it presumes that all individuals with incomes at or below 200 percent of the FPL are eligible. The different methods territories use to determine eligibility affect Medicaid enrollment in each territory, with the estimated percentage of territories’ populations enrolled in Medicaid in fiscal year 2015 ranging from about 17 percent in the U.S. Virgin Islands to 88 percent in American Samoa. (See table 1.) Territories also vary in terms of the range of benefits covered by their respective Medicaid programs. Specifically, Guam covers all of the 17 mandatory Medicaid benefits; CNMI and the U.S. Virgin Islands cover nearly all of the benefits; and American Samoa and Puerto Rico cover 10 of the 17 benefits. American Samoa and CNMI operate their Medicaid programs under broad waiver authority under section 1902(j) of the Social Security Act and, therefore, are not required to cover all mandatory benefits. While the other territories do not operate under this broad waiver authority, CMS acknowledged that the agency has not required them to cover all mandatory Medicaid benefits, citing limited federal Medicaid funding and the unavailability of certain services. Examples of the mandatory benefits most commonly covered by all five territories include Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) services for individuals under 21; inpatient hospital services; outpatient hospital services; and physician services. In contrast, the territories’ coverage of other benefits, such as nursing facility and rural health clinic services, was less widespread, and only Guam covered freestanding birth center services. (See fig. 1.) Officials from the four territories that do not cover all mandatory Medicaid benefits cited multiple reasons for not doing so, including limited funding and a lack of infrastructure. In particular, officials from Puerto Rico and American Samoa said that their programs do not cover nursing facility services due to insufficient funding and because they do not have nursing homes; CNMI officials noted that its program does not cover freestanding birth center services because there are no such facilities in the territory; and due to the lack of available providers, certain specialty services covered by American Samoa, CNMI, and Guam are only available off- island. For example, in CNMI, most cardiac, orthopedic, chemotherapy, and radiation services are only available off-island; in Guam, pediatric oncology, hematology, dermatology, and procedures such as cardiac bypass surgery, are only available off-island. In addition to mandatory Medicaid benefits, each territory has chosen to cover optional benefits, with all five territories providing coverage for outpatient prescription drugs, clinic services, dental and eyeglasses, prosthetics, physical therapy, and rehabilitative services. Optional services commonly covered by states—such as targeted case management, personal care services, and intermediate care facilities for individuals with intellectual disabilities—are not covered by any of the five territories. (See fig. 2.) The recent temporary increases in federal funding have enabled the territories to increase Medicaid and CHIP spending, and avoid federal funding shortfalls. Most notably, PPACA’s appropriation of an additional $7.3 billion in Medicaid funding for the territories—available for expenditure through at least fiscal year 2019—provided them flexibility in terms of when they choose to draw down the additional funds. For example, between fiscal year 2010 when PPACA funds were not available and fiscal year 2014 when they were, the average annual percentage change in total Medicaid and CHIP spending in CNMI and Guam was 23 percent and 19 percent, respectively, with total spending in these territories more than double in fiscal year 2014 compared to fiscal year 2010. (See table 2.) Prior to the availability of these temporary funds, the territories often exhausted their Medicaid funds anywhere from the first through the third quarter of each fiscal year, and generally utilized all of their CHIP funding each year. The territories used various strategies to address these federal funding shortfalls. For example, Puerto Rico officials said that prior to the PPACA funding, the federal Medicaid funds covered only 16 percent of their planned annual expenditures and were expended during the first quarter of the federal fiscal year, after which time the territory had to rely entirely on local funding to cover program spending. Further, a CNMI official said it was normal for their providers to provide services in one year and be paid the following year. In addition to all five territories avoiding federal funding shortfalls, officials in three of the territories noted that these temporary funds have allowed them to improve their programs by covering more benefits, enrolling more providers, or both. For example, American Samoa officials said they plan to use some of their PPACA funds to pay for services provided by new providers, thereby expanding access to services beyond the island’s only hospital. Puerto Rico officials said they used some of their PPACA funds to add coverage for certain organ transplants, which, according to CMS officials, the territory must cover due to other changes in law enacted under PPACA. Despite the influx of temporary PPACA funding, territories may nonetheless experience funding shortfalls in the near future, according to CMS and territory officials. Specifically, certain territories may exhaust their PPACA funding before the end of fiscal year 2019, as there are no restrictions on the rate at which territories may access their allotted funds. For example, CNMI and Puerto Rico, which used 49 percent and 56 percent of their allotments between fiscal years 2011 and 2015, respectively, are spending these temporary funds at a rate that could deplete their allotments early, as the amount they have spent has increased each year. (See table 3.) While the rate of expenditures to date may not reflect future spending rates, some territory officials expressed concerns about the temporary availability of the PPACA funds and the fact that their capped allotments will be reduced to pre-PPACA levels beginning in fiscal year 2019, or earlier if they expend the PPACA funds before 2019. As a result, the territory officials noted that the territories may run out of the temporary funding early, have to make program cuts once the funding is exhausted, or both. For example, Puerto Rico Medicaid officials said they determined they could exhaust their entire PPACA allotment as early as fiscal year 2017. Additionally, officials from Puerto Rico and Guam expressed concern that they may need to restrict eligibility or reduce benefits once the PPACA funding is exhausted. Territory and federal oversight efforts provide little assurance that the territories’ Medicaid and CHIP funds are protected from fraud, waste, and abuse. Citing limited resources, territory officials acknowledge a general lack of program integrity efforts. Further, federal officials cite the territories’ smaller Medicaid expenditures in limiting their program integrity efforts to technical assistance. Although the territories have primary responsibility for Medicaid program oversight, limited assurance exists that they are identifying and recovering improper payments or investigating fraud in their Medicaid programs. With the exception of Puerto Rico, the territories have not established program integrity units, which are dedicated to identifying and reducing improper payments. Although Medicaid agencies are not required to establish program integrity units, the lack of a separate entity is counter to internal controls standards regarding segregation of key duties and responsibilities for reducing the risk of error and fraud. Specifically, in four of the territories, the Medicaid Director is responsible for program oversight, including program integrity efforts, according to CMS officials. This lack of segregation of key duties and responsibilities could be remedied through the establishment of a program integrity unit or other division of labor. According to CMS officials, the territories have not established separate program integrity units because they lack adequate funding and personnel to do so, and funds spent on such an oversight effort would reduce the amount of funds available for the provision of health care services. Further, an American Samoa official said the territory is very interested in undertaking program integrity efforts, but is unable to hire additional staff to do so because of budgetary constraints. Although Puerto Rico has a program integrity unit, according to Puerto Rico officials, this unit’s responsibilities are limited to eligibility fraud and acting as a liaison regarding concerns of provider fraud with the Administración de Seguros de Salud de Puerto Rico (ASES), the Puerto Rico government entity that manages managed care organization (MCO) contracts. ASES delegates primary responsibility for program integrity efforts to the MCOs and requires them to have policies and procedures for the identification, investigation, and referral of suspected fraud. Both we and the HHS-OIG have previously reported concerns that MCOs might not have an incentive to identify and recover improper payments. For example, as we previously reported, officials from state program integrity units noted that they believed MCOs were not consistently reporting improper payments in order to avoid appearing vulnerable to fraud and abuse. In this same report, state program integrity unit officials also noted a potential conflict of interest for MCOs because reporting improper payments could reduce their future federal funding. In addition to the general absence of program integrity units, none of the territories has established a MFCU—units that investigate and prosecute Medicaid fraud and other health care law violations—or obtained an exemption from the requirement to establish one from CMS. According to CMS officials, territories have not established MFCUs because the costs associated with establishing them count against the territories’ capped Medicaid allotment and would reduce the funds available for providing services. Further, Puerto Rico officials told us they had considered developing a MFCU, but decided against it after learning that the funds used to develop it would reduce funds for services. These officials said they made this decision despite knowing that a MFCU could eventually be cost effective because they believed they could not afford the initial investment. While the establishment of a MFCU may not make sense, given the size and spending of the territories, the territories are required to demonstrate that minimal fraud exists in their programs if they do not have a MFCU. The territories’ incomplete service-level expenditure reporting also contributes to limited assurance of Medicaid program integrity in the territories. Specifically, the limited detail on the types and volume of services provided in the territories can hinder program integrity efforts, including making it difficult to identify potential fraud, waste, and abuse. As with states, different reporting requirements exist for fee-for-service and managed care spending in the territories. According to CMS officials, the health care delivery systems in American Samoa, CNMI, Guam, and the U.S. Virgin Islands are entirely fee-for-service, and therefore these territories are required to report service-level spending on the CMS-64. CMS officials cited the CMS-64 as the only data source for Medicaid and CHIP spending in these territories, underscoring the importance of accurate service-level expenditure reporting for territories’ program integrity efforts. However, we reviewed the territories’ Medicaid spending for fiscal year 2014 and found that none of the territories had reported service-level spending for all the Medicaid benefits they covered. Specifically, for the benefits we reviewed, American Samoa, CNMI, and Guam reported service-level spending for 24 percent, 55 percent, and 63 percent, respectively, of the Medicaid benefits they covered. (See table 4.) This limited reporting is the result of various circumstances. For example, Medicaid enrollees in American Samoa are serviced by a single hospital that reports costs by only three mandatory benefits—inpatient hospital services, outpatient hospital services, and emergency services for certain legalized aliens and undocumented aliens. With regard to managed care, Puerto Rico’s Medicaid managed care program, which provides coverage to all Medicaid and CHIP enrollees, is not subject to service-level reporting requirements. However, under their contracts with Puerto Rico Medicaid, the MCOs in Puerto Rico are required to submit encounter data to ASES. Although these data could provide insight on service-level utilization, CMS officials told us they do not collect or review these data on a regular basis. With regard to program oversight, CMS’s general practice has been to conduct comprehensive program integrity reviews in all of the states; however, of the five territories, it has conducted such reviews only in Puerto Rico, the most recent of which was released in January 2012 and produced multiple findings. CMS officials told us they are switching from comprehensive and more focused program integrity reviews in the states and plan to conduct such a review for Puerto Rico in 2016. Citing the other territories’ smaller Medicaid expenditures, however, CMS has neither conducted similar reviews of their Medicaid programs, nor does it plan to conduct more focused program reviews. While Medicaid spending in the territories is small as a proportion of total Medicaid spending, such limited federal oversight efforts provide little assurance that Medicaid is protected from fraud, waste, and abuse, and are inconsistent with federal internal control standards regarding the identification, analysis, and response to relevant risks as part of achieving program objectives. Given that governmental, economic, industry, regulatory, and operating conditions continually change—such as when PPACA significantly increased territory Medicaid funding—mechanisms should be provided to identify and manage any special risks prompted by such changes in program conditions. Additionally, other factors—such as the lack of enforcement of program integrity mechanisms and information systems—have contributed to the limited federal program integrity efforts in the territories. For example, CMS has neither required the territories to establish MFCUs, nor has the agency granted them an exemption, because agency officials were unclear whether they had the authority to grant such exemptions. Additionally, until recently, CMS regulations exempted territories from the requirement to develop an MMIS, which could provide more detail on the territories’ Medicaid and CHIP spending, including increasing the level of detail on the territories’ CMS-64 reporting. In December 2015, CMS amended its regulations to eliminate the MMIS exemptions for the territories, effective January 1, 2016. Despite the fact that an exemption had been in place, the U.S. Virgin Islands established a partnership with West Virginia, which allowed territory officials to make use of the state’s MMIS beginning in 2013. This has improved the level of detail on the U.S. Virgin Islands’ CMS-64 reporting. Specifically, in fiscal year 2012, prior to the implementation of its MMIS, the U.S. Virgin Islands reported service-level expenditures for 30 percent of the Medicaid benefits they covered; after the implementation, this percentage increased to 91 percent in fiscal year 2014. According to Puerto Rico Medicaid officials, the territory’s Medicaid agency is in the process of establishing a similar partnership with Florida and anticipates implementation by the end of 2016. Having additional details on program spending could strengthen CMS’s and territories’ program oversight. According to agency officials, CMS has assigned officials to the five territories to assist in program integrity efforts, and their role is generally focused on providing technical assistance. The activities of these officials vary across the territories, ranging from resolving complaints to more proactive efforts to identify trends indicating fraud, waste, and abuse. In addition, CMS officials reported that Puerto Rico and the U.S. Virgin Islands requested and received on-site training on the proper reporting of federal expenditures. Other federal oversight efforts provide insight on Medicaid program integrity needs in the territories, and CMS has reported making use of these efforts. Specifically, OMB’s annual A-133 single audits—conducted by contracted independent auditors—examine internal controls and compliance in the territories’ programs, and have identified deficiencies in each of the territories. Examples of the findings from the 2013 single audits are listed below. CNMI – the single audit found a significant deficiency in internal control over compliance. Specifically, the payments for certain Medicaid services and medications exceeded permissible amounts. This finding was resolved and closed in September 2015. Guam – the single audit found a material weakness in internal control over compliance. Specifically, the single audit found that no documentation was provided to show that eligibility specialists used the available income and eligibility verification system to determine eligibility. This finding was resolved and closed in February 2015. U.S. Virgin Islands – the single audit found a material weakness in internal control over compliance. Specifically, the audit revealed that sufficient controls did not exist for the required investigation of Medicaid utilization related to fraud. As a result, there may be prolonged, ongoing cases of fraud, which may be unreported. As of March 2015, according to CMS officials, the status of this finding was cleared, meaning that the next step is for the U.S. Virgin Islands to develop a corrective action plan for approval by CMS. CMS has a single audit coordinator that receives the single audit reports and notifies CMS’s regional offices, which are then responsible for working with the territories to correct any deficiencies that were identified. For example, CMS regional office officials help the territories develop corrective action plans, if required. However, CMS officials noted that it is not uncommon for territories to take multiple years to resolve certain deficiencies. CMS officials told us that the limited funding and staff created particular challenges for the territories when responding to single audit findings. For example, CNMI officials reported to CMS that the territory lacked sufficient staff to perform post-payment reviews in response to a finding from a single audit that found the territory incorrectly paid certain Medicaid claims. The Medicaid and CHIP programs provide critical financial support to the U.S. territories’ health care systems. However, citing the territories’ limited resources and the relatively small size of their programs, CMS has not required the territories to follow certain program requirements. In particular, this includes requirements for complete service-level expenditure reporting and the establishment of a MFCU or the receipt of an exemption—obtained by demonstrating that the operation of such a unit would not be cost effective, because minimal fraud exits in a territory’s Medicaid program. Although American Samoa and CNMI’s Medicaid programs operate under broad waivers that exempt them from many of these requirements, this is not the case for Guam, Puerto Rico, and the U.S. Virgin Islands, which have not received exemptions or waivers from these requirements. Despite acknowledging the territories’ limited resources, CMS provides limited assurance and oversight to support program integrity efforts in the territories, and undertakes limited efforts of its own in this regard. Such limited federal efforts in the territories are inconsistent with federal internal control standards regarding identifying and responding to relevant risks when conditions change, such as when PPACA significantly increased territories’ federal Medicaid funding. Without additional efforts by CMS, there is limited assurance that territories have the capacity to identify fraud, recover improper payments, or provide complete information on program spending. While Medicaid funding to the territories represents a small share of national program expenditures and may not warrant the same level of program integrity oversight as the states, additional actions are needed by CMS to ensure an appropriate level of program integrity in these areas. To ensure the appropriate level of Medicaid program integrity oversight in the territories, we recommend that the Acting Administrator of CMS reexamine CMS’s program integrity strategy and develop a cost-effective approach to enhancing Medicaid program integrity in the territories. Such an approach could select from a broad array of activities, including—but not limited to—establishing program oversight mechanisms, such as requiring territories to establish a MFCU or working with them to obtain necessary exemptions or waivers from applicable program oversight requirements; assisting territories in improving their information on Medicaid and CHIP program spending; and conducting additional program assessments of program integrity as warranted. We provided a draft of this report to the HHS and the Department of the Interior (DOI) for comment. In its written comments, HHS concurred with our recommendation and acknowledged that many territories face challenges in addressing program integrity and finding a balance between applying funds towards providing services and program integrity efforts. Further, HHS noted that it will work with territory Medicaid officials to determine the feasibility of enhancing program integrity activities, including, but not limited to, establishing MFCUs or obtaining the necessary exemptions when MFCUs are not warranted. HHS also provided technical comments, which we incorporated as appropriate. In its written comments, DOI noted the financial and infrastructure challenges related to health care faced by all territories, despite the additional funding under PPACA, which is temporary, and raised concerns about future reductions in Medicaid once PPACA funds are depleted. HHS’s and DOI’s comments are reproduced in appendices I and II. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after its issuance date. At that time, we will send copies of this report to the Secretary of Health and Human Services and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions, please contact me at (202) 512-7114 or yocomc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix II. In addition to the contact named above, Susan Anthony, Assistant Director; Manuel Buentello; Sandra George; Giselle Hicks; Drew Long; Amber Sinclair; and Teresa Tam made key contributions to this report.","Notable differences exist in the funding and operation of Medicaid and CHIP—joint federal-state health financing programs for low-income and medically needy individuals—in the territories versus the states. For example, the territories are subject to certain funding restrictions, such as capped annual federal funding, that are not applicable to the states. Further, certain federal requirements regarding eligibility, benefits, and program integrity do not apply to the territories' programs, and certain otherwise applicable requirements have not been enforced. In recent years, various laws—such as PPACA—have increased funding for Medicaid and CHIP in the territories. This report examines (1) eligibility and benefit characteristics of the territories' Medicaid and CHIP programs, (2) Medicaid and CHIP spending in the territories, and (3) Medicaid and CHIP program integrity efforts in the territories. GAO reviewed laws and regulations, data on five territories' Medicaid and CHIP spending, and federal internal control standards. GAO also interviewed CMS and territory Medicaid officials. Eligibility and benefits for Medicaid and the state Children's Health Insurance Program (CHIP) in five U.S. territories—American Samoa, Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto Rico and the U. S. Virgin Islands—differ from one another and from the states, generally reflecting the territories' unique circumstances. For example, Guam is the only territory that covers all 17 mandatory Medicaid benefits, while American Samoa and Puerto Rico cover 10 of the 17 benefits. Officials from the territories that do not cover all mandatory benefits cited multiple reasons for not doing so, including limited funding and a lack of infrastructure, and, in some cases, exercised available flexibility to exclude certain benefits. Temporary increases in federal funding have enabled the territories to increase Medicaid and CHIP spending. Unlike the states, whose Medicaid funding is not subject to a capped allotment—provided they contribute their share—territories are subject to a capped allotment, and historically have exhausted available federal Medicaid and CHIP funds each year. Most notably, the Patient Protection and Affordable Care Act (PPACA) provided the territories an additional $7.3 billion through at least fiscal year 2019. Officials in four territories cited positive effects of the additional funding, such as the ability to enroll more providers and cover more services; however, some officials also expressed concerns about the temporary nature of the funding, noting that they may have to make program cuts once the funding is exhausted—and that future shortfalls remain a concern. Despite temporary increases in Medicaid funding, GAO found little assurance that territory Medicaid funds are protected from fraud, waste, and abuse. Program oversight mechanisms : Only Puerto Rico has developed a program integrity unit, which, although not required, is tasked with identifying and recovering improper payments and is a management best practice. Additionally, no territory has established a Medicaid Fraud Control Unit—which identify and prosecute Medicaid fraud—or received an exemption from doing so, as required by federal law. Program information : Territories lack detail on the types and volume of services they provide, contrary to federal reporting requirements, resulting in limited information on how territories spend their federal Medicaid funding. Until recently, the Centers for Medicare & Medicaid Services (CMS), within the Department of Health and Human Services (HHS), exempted the territories from the requirement to implement a claims processing and information retrieval system with program integrity capabilities, although the U.S. Virgin Islands has established a partnership to use such a system. Program assessments : CMS has performed assessments on Medicaid program integrity effectiveness and compliance only for Puerto Rico. Although not required, such assessments have been conducted on all states. CMS does provide technical assistance, with the activities of CMS officials varying across the territories. Officials from CMS noted that funding for program integrity would count against the territories' capped allotments. Nonetheless, such limited efforts by the territories and federal government are inconsistent with federal internal control standards regarding identifying and responding to risks, particularly in light of increased federal Medicaid spending in the territories as a result of PPACA. GAO recommends that the Acting Administrator of CMS examine and select from a broad array of activities—such as establishing program oversight mechanisms, assisting in improving program information, and conducting program assessments—to develop a cost-effective approach to protecting territories' Medicaid programs from fraud, waste, and abuse. HHS concurred with GAO's recommendation.",govreport
"In 1980, the Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which established the Superfund program to clean up highly contaminated hazardous waste sites. EPA administers the program, oversees cleanups performed by the parties responsible for contaminating the sites, and performs cleanups itself. State governments also have a role in the Superfund process. States may enter into contracts or cooperative agreements with EPA to carry out certain Superfund actions, including evaluating sites, cleaning them up, and overseeing the cleanups. In addition, most states have established their own hazardous waste programs that can clean up sites independently of the federal Superfund program. State cleanup programs include efforts to enforce state cleanup laws on responsible parties and to encourage them to “voluntarily” clean up contaminated sites. CERCLA requires EPA to develop and maintain a list of hazardous sites, known as the National Priorities List, that the agency considers to present the most serious threats to human health and the environment. These sites represent EPA’s highest priorities for cleanup nationwide. Although EPA may undertake cleanup actions at contaminated sites not on the National Priorities List, the agency’s regulations stipulate that only sites placed on the list are eligible for long-term cleanup (“remedial action”) financed by the agency under the trust fund established by CERCLA. Additional details on EPA’s process for placing sites on the National Priorities List are included in appendix I. The 3,036 sites that were awaiting a National Priorities List decision as of October 1997 represent only a portion of the sites that EPA has evaluated and classified over the history of the Superfund program. According to EPA, as of November 1998, the Superfund program had investigated over 40,000 potential hazardous waste sites and made final decisions about whether or not to include almost 35,000 sites on the National Priorities List. EPA also reported that it has removed waste or taken other interim cleanup actions at over 5,500 sites—most of which are not on the National Priorities List—to address the most urgent risks and stabilize conditions to prevent further releases of contamination. For the more than 1,400 sites EPA has placed on the list, it has completed cleanup studies at most and has completed cleanup construction at 585. States have reported cleaning up thousands of sites under their own programs and authorities. To obtain information on the 3,036 sites that EPA identified as awaiting a National Priorities List decision, we developed and mailed two surveys for each nonfederal site and three surveys for each federal facility. We sent surveys to site assessment officials in EPA’s 10 regional offices, and since state officials might have more knowledge of some of the sites, we also sent surveys to the 50 states, the District of Columbia, Guam, Midway Island, the Northern Mariana Islands, Puerto Rico, and the Navajo Nation (collectively referred to as states in this report). In addition, if a federal agency is responsible for cleaning up sites, we also sent surveys to that agency: We surveyed 14 federal agencies for 157 of the 3,036 sites that are federally owned and/or operated. Because we did not receive responses from some states and incomplete responses from others, we sent follow-up surveys to state officials. In total, we received one or more survey responses for 3,023 (99.5 percent) of the 3,036 sites identified by EPA as awaiting a National Priorities List decision. We discuss our methodology in greater detail in appendix II, and appendix III includes reproductions of our surveys. The responses to our surveys of officials of EPA, other federal agencies, and states indicate that 1,789 of the 3,036 sites classified by EPA’s database as awaiting a National Priorities List decision are potentially eligible for the list. Another 1,234 sites are unlikely to become eligible for the Superfund program for various reasons. First, EPA’s database of potentially contaminated sites, known as the Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS), inaccurately lists some sites as awaiting a National Priorities List decision although they are not eligible for listing. EPA regions reported that about 19 percent of the 3,036 sites should not be considered eligible sites because (1) they received preliminary hazard ranking scores below the qualifying level or (2) EPA has already proposed them for the list or decided not to propose them for the list. According to an EPA Superfund program official, the incorrect data entries may have resulted from regional program managers’ misinterpretation of EPA’s guidance on CERCLIS coding. We consider another 22 percent of the sites unlikely to become eligible for the National Priorities List because, according to responding officials, they either do not require any cleanup action (183 sites), have already been cleaned up (182 sites), or are currently undergoing final cleanup (304 sites) under state programs. No information is available on the status of the remaining 13 sites because of missing survey responses (see fig. 1). Final cleanup under way (304 sites) Sites potentially eligible for the NPL (1,789 sites) We performed most of our analysis of site conditions, cleanup activities, and plans for future cleanups for the 1,789 sites remaining after we excluded the categories of sites that are shaded in the figure. We refer to the remaining sites as potentially eligible sites. They include 1,739 nonfederal sites and 50 federal facilities. Responses to our surveys indicate that many of the 1,789 sites that are potentially eligible for the National Priorities List pose risks to human health or the environment. Most of them threaten drinking water sources or groundwater; they are generally located in populated areas; and although many of the sites are fenced to prevent entry, workers, visitors, and trespassers may have direct contact with contaminants at more than half of the sites. The sites are contaminated most often with metals, but other contaminants are also present. Officials of EPA, other federal agencies, and states who responded to our survey characterized the risks presented by about two-thirds of the potentially eligible sites. They said that about 17 percent of the sites currently pose high human health and environmental risks; another 10 percent of the sites potentially pose high future risks. In addition, officials were unsure about the severity of site conditions for a large proportion of potentially eligible sites. A large portion of the potentially eligible sites have contaminated nearby groundwater, drinking water sources, or both. As figures 2 and 3 indicate, about 73 percent of the potentially eligible sites have already contaminated groundwater, and another 22 percent of the sites, approximately, could contaminate groundwater in the future. In addition, about 32 percent of the potentially eligible sites have already contaminated drinking water sources, and about 56 percent more could contaminate drinking water sources in the future. Actual groundwater contamination (1,301 sites) The contamination at many of the potentially eligible sites is also resulting in a number of other adverse conditions. Table 1 shows the percentage of potentially eligible sites that have experienced or contributed to specific conditions. As the table also shows, respondents to our surveys were uncertain whether the conditions were present at a relatively large percentage of the potentially eligible sites. As figure 4 shows, the sites that are potentially eligible for the National Priorities List are contaminated by a variety of pollutants. Metals—primarily heavy metals such as lead, mercury, or cadmium—are the principal contaminants at these sites. These metals can cause brain and kidney damage and birth defects. The second most prominent contaminants at these sites are volatile organic compounds (VOC). VOCs are carbon-based compounds, such as benzene, that easily become vapors or gases and can cause cancer, as well as damage to the blood, immune, and reproductive systems. A large portion of the potentially eligible sites are also contaminated by semivolatile organic compounds (SVOC), which are similar to VOCs and can result in human respiratory illnesses. Additional major contaminants at the sites are pesticides, the most toxic of which can cause acute nervous system effects and skin irritations and may cause reproductive system effects and cancer; polychlorinated biphenyls (PCB), which can cause skin irritations and other related conditions and may contribute to causing cancers, liver damage, and reproductive and developmental effects; dioxins, which are also a suspected human carcinogen; and other unspecified contaminants. The potentially eligible sites are generally located in populated areas: Ninety-six percent are within a half mile of residences or places of regular employment. We asked officials of EPA, other federal agencies, and states to rank the relative risks of potentially eligible sites. The officials responding to our surveys said that they could assess the current risks of 67 percent of the sites and the potential risks of 68 percent of the sites. According to these officials, about 17 percent of the potentially eligible sites currently pose high risks (see fig. 5), and another 10 percent of the sites (for a total of 27 percent) could pose high risks in the future (see fig. 6) if they are not cleaned up. Average current risks (455 sites) Low current risks (443 sites) The 1,789 sites that are potentially eligible for the National Priorities List include (1) 686 sites where some cleanup activities have reportedly taken place or are currently being conducted but the final cleanup remedies are not yet under way and (2) 1,103 sites where officials reported that no substantive cleanup activities beyond initial site assessments or investigations have occurred or no information on cleanup progress is available. Data on the year in which each potentially eligible site was entered into EPA’s records—the “discovery date”—indicate that a significant portion of these sites have been in EPA’s and states’ inventories of known hazardous waste sites for more than a decade. Furthermore, 45 percent of the sites reported to have high current risks and 47 percent of the sites with high potential risks have not had any cleanup activities, or no information on their cleanup progress is available. EPA, other federal agencies, and the states reported conducting some cleanup actions at 38 percent of the potentially eligible sites. Figure 7 shows the number and percentage of potentially eligible sites at which federal and state agencies have undertaken some cleanup activities or conducted other actions such as providing alternative water supplies. (App. IV presents data on the distribution of the sites with and without reported cleanup actions among states and responsible federal agencies.) EPA, other federal agencies, and the states have completed removal actions or interim, partial response actions (not characterized by survey respondents as final cleanup solutions), including changing the water supplies of affected residents, at 576 of the 686 sites with cleanup actions. At the other 110 sites, responding officials told us that some cleanup is under way, but they are not sure if it will be a final response. EPA, other federal agencies, and the states reported conducting no cleanup activities beyond site assessments at the remaining 1,103 potentially eligible sites, or no information on cleanup progress at these sites is available. One hundred and seventy (55 percent) of the 307 sites that are estimated to currently pose high risks have undergone some cleanup activities, while 137 (45 percent) of these sites reportedly have seen no cleanup activities, or no information on cleanup progress is available (see fig. 8). Similarly, 254 (53 percent) of the 476 sites said to potentially pose high risks have undergone some cleanup actions, and 222 (47 percent) have reportedly undergone none, or information is lacking (see fig. 9). See appendix V for additional discussion of the sites at which cleanup actions have been taken. Most of the hazardous waste sites that are potentially eligible for the National Priorities List were “discovered,” that is, entered into EPA’s inventory of sites needing examination, more than a decade ago. As table 2 indicates, 10 percent of the potentially eligible sites were discovered in 1979 or earlier, and 42 percent were discovered before 1985. As shown in figure 10, one-third of the sites that have been known for 10 to 14 years and another third of the sites that have been in the inventory for 15 years or more have undergone some cleanup activities. Conversely, the majority of the sites that have been known for 10 years or more have reportedly made no cleanup progress, or no information on cleanup progress is available. According to the CERCLIS database, many of the potentially eligible sites have not only been in the inventory for a long time but have also been awaiting a National Priorities List decision for several years. The CERCLIS database records the date of the “last action” taken at the inventory sites, including, among other actions, the completion of site inspections or expanded site inspections. These dates generally can be used as an indication of when the sites became potentially eligible for placement on the National Priorities List. The last action recorded for 87 percent of the potentially eligible sites is the completion of a site inspection. Another 12 percent of the sites have completed or are undergoing expanded site inspections. The data show that the last action at half of the potentially eligible sites occurred in 1994 or earlier. The last action date for 24 percent of the sites is 1995, and for 27 percent, 1996 or later. For 4 percent of the sites, the last recorded action took place before 1990. It is uncertain whether most potentially eligible sites will be cleaned up; who will do the cleanup; under what programs these activities will occur; what the extent of responsible parties’ participation will be; and when cleanup actions, if any, are likely to begin. Responding officials did not indicate the final outcome for 53 percent of the 1,789 potentially eligible sites (see fig. 11). They estimated that 536 (30 percent) of the sites will be cleaned up under state programs but usually could not give a date for the start of cleanup or say whether responsible parties would participate. Collectively, they believed that 232 (13 percent) of the potentially eligible sites may be listed on the National Priorities List and cleaned up under the Superfund program, but there are few sites that both federal and state officials agreed would be listed (see fig. 12). Sites likely to be cleaned up under state programs (536) Respondents thought that the largest portion of the potentially eligible sites for which they could predict a cleanup outcome—536 sites, or 30 percent of the 1,789 sites—are likely to be cleaned up under state enforcement or voluntary cleanup programs. However, state officials were able to estimate when they were likely to begin cleaning up only 121 (23 percent) of the 536 sites. They expected to begin cleanup activities at 84 of these sites before the end of 1998 and at 35 sites by the year 2000. State officials also said that parties responsible for the waste at the sites that are expected to be cleaned up under state programs are likely to clean up only 172 (32 percent) of the 536 sites. Such parties are unlikely to participate in cleanups at another 29 (5 percent) of these sites. For the remaining two-thirds of the sites that states reported are likely to be cleaned up under state programs, the extent of responsible parties’ participation is uncertain. Our survey data also show that states are more likely to have cleanup plans for the near future (within 5 years) if responsible parties are available to pay for cleanups. If responsible parties are expected to clean up a site, states are more than twice as likely to have plans to begin work on the cleanup within the next 5 years (10 percent) as for a site at which cleanup by responsible parties is unlikely (4 percent). Furthermore, states are most likely to have plans to complete the cleanup within 5 years if responsible parties are likely to clean up all or almost all of the site. Twenty-one percent of the sites with such parties are expected to be completed by 2003. State officials also provided information about their state’s capabilities for compelling responsible parties to clean up potentially eligible sites or to fund cleanup activities, if necessary. Officials of 33 (75 percent) of the 44 states participating in our telephone survey said that their state’s enforcement capacity (including resources and legal authority) to compel responsible parties to clean up potentially eligible sites is excellent or good. Officials of 5 (11 percent) of the participating states believed that their state’s enforcement capacity is fair, and another 5 (11 percent) said that their state’s enforcement capacity is poor or very poor. The remaining state official was uncertain about the state’s enforcement capability. Furthermore, officials of 11 states (25 percent) told us that their state’s financial capability to clean up potentially eligible sites, if necessary, is excellent or good. Officials of 7 (16 percent) of the states said that their state’s ability to fund cleanups is fair, and 23 (52 percent) said that their state’s ability to fund these cleanups is poor or very poor. The remaining three officials were uncertain about their state’s funding capability. (App. VI presents, by state, officials’ assessments of their state’s ability to fund cleanup activities at potentially eligible sites). EPA officials told us that 43 potentially eligible sites are likely to be cleaned up under other programs such as the Resource Conservation and Recovery Act program. EPA or state officials said that, in their opinion, as many as 232 (13 percent) of the potentially eligible sites may be listed on the National Priorities List in the future. As shown in figure 12, EPA and the states agreed on the possible listing of only a few sites. In general, EPA and state officials believed that those sites with responsible parties who are likely to clean them up are less likely candidates for placement on the National Priorities List. Of the 232 sites cited as possible National Priorities List candidates, 154 (66 percent) have no identified responsible party or no responsible party who officials felt certain is able and willing to conduct cleanup activities. Survey respondents considered such parties likely to clean up all or almost all of only 22 (9 percent) of the 232 sites. No information was provided on the likely extent of responsible parties’ participation in cleaning up the remaining 24 percent of these sites. High-risk sites are more likely to be cited as National Priorities List candidates than others. One hundred twenty-nine (56 percent) of the sites that may be listed on the National Priorities List currently pose high risks, according to survey respondents. Another 45 (19 percent) of the sites pose average risks, and 12 sites (5 percent) pose low risks. Responding officials were unable to estimate the risks of the remaining 46 (20 percent) of these sites. In our telephone surveys, we asked state officials about the types of sites that the states prefer to be placed on the National Priorities List. Officials of 26 (60 percent) of the 44 states that participated in the surveys told us that they are more likely to support listing sites with cleanup costs that are very high compared to those for other types of sites. Although respondents from EPA, other federal agencies, and states jointly believed that as many as 232 of the potentially eligible sites may eventually be placed on the list, none of these sites has yet been proposed for listing. EPA respondents cited several major reasons that the agency has not yet decided whether to propose these sites for the National Priorities List or remove them from further consideration for listing. The most common reasons were that EPA considers the state program to have the lead for cleanup or more data on the current risks of the sites are needed. Other major factors are shown in figure 13. EPA has already made decisions about whether or not to place on the National Priorities List most of the sites that have come into its hazardous waste site inventory. However, decisions to list a large number of sites potentially eligible to enter the Superfund program or to exclude them from further consideration for listing have been deferred, in many cases for over a decade. Our surveys of officials of EPA, other federal agencies, and states indicate that there is a need to decide on how to address these potentially eligible sites. First, about a quarter of the sites may pose high risks to human health and the environment, in the opinion of officials responding to our surveys. Responding officials said that they cannot rank the risks of another third of the sites. Second, some cleanup activities were reported to have occurred at only about half of the sites whose risks were rated high by survey respondents. Third, although all 1,789 potentially eligible sites included in our surveys may require cleanup, officials of EPA, other federal agencies, and states are uncertain about what cleanup actions will be taken at more than half of them and whether EPA or the states should take these actions. Furthermore, some states have concerns about their enforcement and resource capabilities for cleaning up sites. In view of the risks associated with many of the potentially eligible sites and the length of time that EPA or the states have known of them, timely action by EPA and the states is needed to obtain the information required to assess the sites’ risks, set priorities for cleanups, assign responsibility to EPA or the states for arranging the cleanups, and inform the public as to which party is responsible for each site’s cleanup. Also, as part of the process, inaccurate or out-of-date information on sites that are classified in the CERCLIS database as awaiting a National Priorities List decision needs to be corrected. Because of the need for current and accurate information on the risks posed by the 1,789 sites that are potentially eligible for the National Priorities List in order to set cleanup priorities and delineate cleanup responsibilities, we recommend that the Administrator, EPA, in consultation with each applicable state, (1) develop a timetable for EPA or the state to characterize and rank the risks associated with the potentially eligible sites and (2) establish interim cleanup measures that may be appropriate for EPA and the state to take at potentially eligible sites that pose the highest risks while these sites await either placement on the National Priorities List or state action to fully clean them up; in consultation with each applicable state, (1) develop a timetable for determining whether EPA or the state will be responsible for cleaning up individual sites, taking into consideration, among other factors, some states’ limited resources and enforcement authority, and (2) once a determination is made, notify the public as to which party is responsible for cleaning up each site; and correct the errors in the CERCLIS database that incorrectly classify sites as awaiting a National Priorities List decision and prevent the recurrence of such errors so that the database accurately reflects whether sites are awaiting a listing decision. We provided copies of a draft of this report to EPA for its review and comment. EPA provided written comments, which are reproduced in appendix VII. Overall, EPA agreed with the basic findings and recommendations of the report and stated that it believes that the report will be useful to the Congress, the agency, states, and others interested in the future of the Superfund program. EPA also said that it has made National Priorities List decisions for many of the sites in its hazardous waste site inventory and made significant progress toward cleaning up listed sites. We have added this information to the report. EPA also provided technical and clarifying comments that we have incorporated in the report as appropriate. We attempted to obtain information on all 3,036 sites that EPA has identified as awaiting a National Priorities List decision, including 157 federal sites and 2,879 nonfederal sites. To obtain this information, we developed surveys that we sent to officials in EPA’s 10 regional offices, the 50 states, the District of Columbia, Guam, Midway Island, the Northern Mariana Islands, Puerto Rico, the Navajo Nation, and 14 other federal agencies with responsibility for sites that are potentially eligible for the National Priorities List and awaiting EPA’s decision on their disposition. These agencies include the departments of Agriculture, the Air Force, the Army, Defense, Energy, the Interior, the Navy, and Transportation; the Bureau of Land Management; the General Services Administration; the National Aeronautics and Space Administration; the U.S. Army Corps of Engineers; the U.S. Coast Guard; and the U.S. Forest Service. We also conducted a telephone survey with officials in 44 states to determine general information on their hazardous waste management programs and sites within their jurisdiction. (App. II discusses our scope and methodology in greater detail.) We conducted our review between May 1997 and November 1998 in accordance with generally accepted government auditing standards. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to the appropriate congressional committees; the Administrator, EPA; and the Director, Office of Management and Budget. We will also make copies available to others upon request. Please call me at (202) 512-6111 if you or your staff have any questions. Major contributors to this report are listed in appendix VIII. The Environmental Protection Agency’s (EPA) regulations outline a formal process for assessing hazardous waste sites and placing them on the National Priorities List (NPL). The process begins when EPA receives a report of a potentially hazardous waste site from a state government, a private citizen, or a responsible federal agency. EPA enters a potentially contaminated site into a database known as the Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS). EPA or the state in which the potentially contaminated site is located then conducts a preliminary assessment to decide whether the site poses a potential threat to human health and the environment. (According to EPA, about half of the assessments are conducted by states under funding from EPA.) If the preliminary assessment shows that contamination may exist, EPA or a state under an agreement with the agency may conduct a site inspection, a more detailed examination of possible contamination, and in some cases a follow-on examination called an expanded site inspection. Using information from the preliminary assessment and site inspection, EPA applies its Hazard Ranking System to evaluate the site’s potential threat to the public health and the environment. The system assigns each site a score ranging from 0 to 100 for use as a screening tool to determine whether the site should be considered for further action under Superfund. A site with a score of 28.5 or higher is considered for placement on the NPL. Once EPA determines that an eligible site warrants listing, the agency first proposes that the site be placed on the NPL and then, after receiving public comments, either lists it or removes it from further consideration. EPA may choose not to list a site if a state prefers to deal with it under its own cleanup program. Generally, EPA’s policy is to not list sites on the NPL unless the governor of the state in which the site is located concurs with its listing. Our objectives in this review were to (1) determine the number of sites awaiting an NPL decision that remain potentially eligible for the list; (2) describe the characteristics of these sites, including their health and environmental risks; (3) determine the status of any actions to clean up these sites; and (4) collect the opinions of EPA and other federal and state officials on the likely final disposition of these sites, including the number of sites that are likely to be added to the Superfund program. EPA’s CERCLIS database indicates that as of October 8, 1997, 3,036 sites were potentially eligible for the NPL on the basis of a combination of criteria. These criteria include a preliminary hazardous ranking system score of 28.5 or above, the completion of a site inspection or the initiation of an expanded site inspection, and a status that neither eliminates the site from consideration for the NPL nor includes a proposal to list it. Because our objectives require data for each site, we did not sample the sites but included all 3,036 in our survey. To obtain information on all 3,036 sites that EPA identified as awaiting an NPL decision, we developed three mail surveys. These surveys appear in appendix III. We sent the first of the surveys to officials in EPA’s 10 regional offices responsible for evaluating the sites and making decisions about listing. Because state officials may have closer contact with some of the sites, we sent the second survey to officials in the 50 states, the District of Columbia, Puerto Rico, Guam, the Northern Mariana Islands, Midway Island, and the Navajo Nation (collectively referred to as states in this report). In addition, we sent a third survey to federal agencies that are responsible for cleaning up the 157 federally owned and/or operated sites that were classified as awaiting an NPL decision. We sent surveys on the 157 sites to 14 federal agencies, including the departments of Agriculture, the Air Force, the Army, Defense, Energy, the Interior, the Navy, and Transportation; the Bureau of Land Management; the General Services Administration; the National Aeronautics and Space Administration; the U.S. Army Corps of Engineers; the U.S. Coast Guard; and the U.S. Forest Service. The three surveys asked respondents for detailed information on the conditions at each site, including the site’s current and potential risks, and their opinions on the involvement of potentially responsible parties and the likely outcome for the site’s cleanup, including any potential for NPL listing. We mailed our three surveys in November and December 1997 and received the final survey responses in September 1998. We received one or more survey responses for 3,023 (99.6 percent) of the 3,036 sites identified by EPA as awaiting an NPL decision. On the basis of these responses, we identified 1,234 sites that are no longer eligible for the NPL or no longer awaiting an NPL decision. Because we received no survey responses for 13 sites, we could not determine whether they are still eligible for the NPL; therefore, we excluded these sites from our analyses. The remaining 1,789 sites are analyzed in this report as potentially eligible sites. Of these sites, 1,739 were nonfederal sites, and 50 were federally owned and/or operated sites. Through our surveys, we obtained information from both EPA and the states on 1,319 (76 percent) of the 1,739 potentially eligible nonfederal sites. This information includes 1,326 state responses (76 percent) and 1,732 responses from EPA (99.6 percent). Similarly, we obtained information from at least two of the three possible respondents—EPA, other federal agencies, and states—for 45 (90 percent) of the 50 potentially eligible federal sites. Responsible federal agencies provided information for 39 (78 percent) of the 50 potentially eligible federal sites, states provided responses for 26 (52 percent) of the federal sites, and EPA regions provided responses for 49 (98 percent) of the federal sites. Because 19 states—including California, Massachusetts, and New York, which account for 19 percent of the 3,036 sites—did not fully respond to our initial survey mailing, in July 1998 we sent a second survey to these states. In order to minimize the effort required for states to complete this follow-up survey, we eliminated sites that EPA and other federal agencies had identified as no longer eligible for the NPL. In addition, the follow-up survey included as a starting point the information on each site that EPA regions had provided in their responses. We asked state officials to confirm or correct the information provided to us by EPA regions. In the follow-up survey, we also repeated the original questions asked of the states but not of EPA regions. The original state survey was included as a reference source. This follow-up effort resulted in our receiving an additional 85 completed surveys from some states. However, despite numerous contacts, we received no survey responses from California, Massachusetts, Nebraska, and the District of Columbia. Rather than responding to our survey, California officials suggested that we obtain their responses to a brief 1-page survey on NPL-eligible sites conducted by the Association of State and Territorial Solid Waste Management Officials. Similarly, Massachusetts officials provided us copies of their responses to the Association’s survey. However, because of differences in the format, specificity of answers, comparability of answers, and topics covered, we could not incorporate the results of that survey into our analyses. In addition, New York State officials agreed to respond to only three survey questions for the sites in the state that EPA classified as awaiting an NPL decision. The three questions asked for information about whether sites would be listed on the NPL and what state cleanup activities had occurred at the sites. The responses to these questions were incorporated into our analyses. While our overall survey response rate was high, our data for some states are incomplete. We did not receive fully completed state surveys for 491 of the 1,789 potentially eligible sites. Nearly three-quarters of these sites are located in California (125 sites) and Massachusetts (190 sites). In addition, we received only partial information from New York for 54 of its 56 potentially eligible sites. Table II.1 shows the 16 states that either did not respond to our survey or responded only in part, and the number and percentage of potentially eligible sites in each state for which we did not receive fully completed surveys. EPA regions I and V notified us that because of time and resource constraints, they had taken a generic approach to answering certain survey questions: That is, they answered certain questions in a standardized manner for all sites in the region rather than on a site-specific basis. Questions addressed in this manner included, among others, those relating to the likely placement of sites on the NPL and the risks posed by the sites. For example, for most sites, Region I answered our questions about the degree of human health or environmental risks posed by each site by responding that it is “too early to tell/more information is needed to answer” because, according to Region I officials, “risk assessments are not conducted for most CERCLIS sites, and thus the current risks posed by these sites are difficult to determine.” EPA Region II responded to key survey questions in a similar manner. Consequently, because neither EPA regions I, II, and V nor three states in those regions —Massachusetts (190 sites), New Jersey (66 sites), and New York (54 sites)—provided complete survey information, we could not characterize the conditions at these sites with the same degree of accuracy as for other sites. For example, these three states account for 54 percent of the sites for which we could not obtain an official’s estimate of the risks to human health and the environment. We conducted pretests of our surveys with officials in six states, at two federal agencies, and in five EPA regional offices. Each pretest consisted of a visit with an official by GAO staff. We attempted to vary the types of sites for which we conducted pretests and the familiarity of the respondents with the sites. In some cases, the respondent used only site records to answer our survey. In other cases, the respondent knew most of the answers without consulting records. The pretest attempted to simulate the actual survey experience by asking the official to fill out the survey while GAO staff observed and took notes. Then the official was interviewed about the survey items to ensure that (1) the questions were readable and clear, (2) terms were precise, (3) the survey was not a burden that would result in a lack of cooperation, and (4) the survey appeared independent and unbiased. We made appropriate changes to the final survey on the basis of our pretesting. In addition to our pretesting, we obtained views on our surveys from managers in EPA’s Office of Emergency and Remedial Response in Washington, D.C., which oversees the Superfund program. We incorporated comments from these reviews as appropriate. In analyzing survey responses, we reviewed comments written by respondents on the surveys, including marginal comments, comments at the end of the survey, and comments when the respondents provided explanations after checking “other.” If a respondent’s comment explaining the selection of “other” could reasonably be interpreted as another of the answer choices provided for the question, we revised the response as appropriate. In some cases, respondents’ comments indicated a misunderstanding of our questions or answer choices. In these cases, where possible, we revised the response to reflect the appropriate answer. In other cases, respondents checked more than one answer; we then selected, where possible, what we considered to be the appropriate answer, on the basis of other responses in the survey or our own judgment. The procedures used in this editing process were documented in an internal 17-page document provided to all of the GAO reviewers of the survey responses. At least two reviewers analyzed each survey response, and the reviewers coordinated their efforts to ensure that all reviewers followed the established procedures. Both the original answers and the answers revised by reviewers were recorded. In our surveys of officials of EPA regions, states, and federal agencies, some of the questions we asked about particular sites were identical. We combined the responses to these questions where possible in this report. If opinions differed, we used a set of criteria to combine answers. Namely, we chose the answer that seemed to reflect the most knowledge of the site. For site conditions, we assumed that any affirmative answer was the more knowledgeable. For example, if one respondent said that a site has groundwater contamination and the other respondent was unable to comment on that site’s contamination, we recorded the site as having groundwater contamination. We also sought to avoid understatement of the risks posed by a site. Therefore, if respondents disagreed on the level of a site’s risks, we selected the response indicating the more severe threat. For example, sites scored by any respondent as high-risk were recorded as high-risk sites. Furthermore, if a respondent indicated in any survey response that a site might be included on the NPL, we recorded the site as a possible candidate for the NPL. Finally, when opinions about the most likely outcome for a site were in conflict—for example, if the state thought that EPA would clean up a site but EPA thought the state would conduct the cleanup—we recorded the most likely outcome as unknown. In addition to our mail surveys, we also conducted a telephone survey with officials in 44 states to determine general information on their hazardous waste management programs and sites within their states. State officials in Idaho, New York, Missouri, Utah, Virginia, and Wyoming declined to participate in our telephone survey. We conducted our review between May 1997 and November 1998 in accordance with generally accepted government auditing standards. The 1,789 sites that are potentially eligible for the NPL include 1,739 nonfederal sites and 50 federal facilities. Among the 1,789 sites, there are (1) 686 sites at which some cleanup activities have taken place or are currently being conducted, but the final cleanup remedy is not yet under way, and (2) 1,103 sites for which no substantive cleanup activities have been reported or no information on cleanup progress is available. The 1,789 sites that are potentially eligible for placement on the NPL are located in 48 states, the District of Columbia, Puerto Rico, and the Northern Mariana Islands and under the jurisdiction of the Navajo Nation (hereinafter referred to as states). Table IV.1 shows, for each state, the number of (1) sites classified in EPA’s inventory as awaiting an NPL decision as of October 8, 1997, (2) sites that our surveys indicate are unlikely to become eligible for the NPL, (3) potentially eligible sites at which some cleanup activities have been conducted, (4) potentially eligible sites at which there has been no reported cleanup progress or for which no information on cleanup progress is available, and (5) sites for which we received no surveys. Number of sites for which no surveys were received (continued) Number of sites for which no surveys were received (continued) California, the District of Columbia, Massachusetts, and Nebraska did not respond to our surveys. For these states, the data in table IV.1 are based on EPA’s survey responses alone and, for that reason, may be less reliable than for states having responses from both EPA and states. New York provided responses to only a few questions in our survey. Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), federal agencies are responsible, under EPA’s supervision, for evaluating and cleaning up properties under their jurisdiction. As required by CERCLA, EPA has established a Federal Agency Hazardous Waste Compliance Docket that lists federal facilities awaiting evaluation for possible cleanup. Once a federal facility is listed on the docket, the responsible agency then conducts a preliminary assessment to gather data on the facility and performs a site inspection, which may involve taking and analyzing samples, to learn more about potential contamination there. Ten federal agencies other than EPA have primary responsibility for managing the 50 federal facilities that are potentially eligible for the NPL. Table IV.2 presents for each agency the number of (1) sites classified in EPA’s inventory as awaiting an NPL decision as of October 8, 1997, (2) sites that our surveys indicate are unlikely to become eligible for the NPL, (3) potentially eligible sites at which some cleanup activities have been conducted, and (4) potentially eligible sites at which there has been no reported cleanup progress or for which no information on cleanup progress is available. We asked officials of EPA, other federal agencies, and states about the cleanup actions that have been conducted at the potentially eligible sites. These activities include interim measures to mitigate the contamination, such as removing waste or taking action to protect people against contaminated drinking water sources. These actions were not considered by the officials to be final cleanup remedies. As figure V.1 shows, of the total 1,789 potentially eligible sites, 13 percent exhibit one or more of the conditions associated with contaminated drinking water sources. The majority of these sites have undergone some cleanup activities. Survey data indicate that some cleanup activities have occurred at 77 percent of the sites for which nearby residents are advised not to use wells and at 72 percent of the sites for which residents are advised to use bottled water. Figure V.1 includes, among other factors, the five most prevalent adverse conditions identified by officials responding to our surveys. As this figure indicates, the majority of the sites with these conditions reportedly have made no cleanup progress, or no information on cleanup progress is available. No known cleanup actions have been taken at (1) 56 percent of the sites at which workers or visitors may come into direct contact with contaminants; (2) 57 percent of the sites at which trespassers may come into direct contact with contaminants; (3) 52 percent of the sites with fences, barriers, and/or signs to prevent entry into contaminated areas; (4) 61 percent of the sites associated with fish that may be unsafe to eat; and (5) 48 percent of the sites about which nearby residents have expressed some health concerns. During our telephone survey of officials in 44 states to obtain general information on their hazardous waste management programs, officials gave their opinions about their state’s capability to fund cleanup activities if responsible parties were not willing or able to pay for these actions. Officials of about a quarter of the responding states told us that their state’s financial capability to clean up potentially eligible sites, if necessary, is excellent or good, and more than half said that their state’s ability to fund these cleanups is poor or very poor. Table VI.1 presents, by state, the responding officials’ assessments of each state’s ability to fund cleanup activities at potentially eligible sites. State officials’ assessment of state’s financial capability to clean up potentially eligible sites (continued) James F. Donaghy, Assistant Director Vincent P. Price, Senior Evaluator Rosemary Torres Lerma, Staff Evaluator Fran Featherston, Senior Social Science Analyst Alice Feldesman, Assistant Director The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO surveyed Environmental Protection Agency (EPA) regions, other federal agencies, and states to: (1) determine the number of sites classified as awaiting a National Priorities List (NPL) decision that remain potentially eligible for the list; (2) describe the characteristics of these sites, including their health and environmental risks; (3) determine the status of any actions to clean up these sites; and (4) collect the opinions of EPA and other federal and state officials on the likely final disposition of these sites, including the number of sites that are expected to be added to the NPL. GAO noted that: (1) on the basis of surveys of EPA regions, other federal agencies, and states, GAO has determined that 1,789 of the 3,036 sites that EPA's database classified as awaiting a NPL decision in October 1997 are still potentially eligible for placement on the list; (2) GAO considered the 1,234 other sites as unlikely to become eligible for various reasons; (3) the other sites do not require cleanup in the view of the responding officials, have already been cleaned up, or have final cleanup activities under way; (4) officials of EPA, other federal agencies, and states said that many of the potentially eligible sites present risks to human health and the environment; (5) the potentially eligible sites are generally located in populated areas; (6) officials of EPA, other federal agencies, and states said that about 17 percent of the potentially eligible sites currently pose high human health and environmental risks and that another 10 percent could also pose high risks in the future if they are not cleaned up; (7) however, these officials were unsure about the severity of risks for a large proportion of the sites; (8) responding officials said that some cleanup actions have taken place at 686 of the potentially eligible sites; (9) no cleanup activities beyond initial site assessments or investigations have been conducted, or no information is available on any such actions, at the other 1,103 potentially eligible sites; (10) many of the potentially eligible sites have been in states' and EPA's inventories of hazardous sites for extended periods; (11) 73 percent have been in EPA's inventory for more than a decade; (12) no cleanup progress was reported at the majority of the sites that have been known for 10 years or more; (13) responding officials did not indicate whether or how more than half of the potentially eligible sites would be cleaned up; (14) collectively, EPA and state officials believed that 232 of the potentially eligible sites might be placed on the NPL in the future; (15) however, EPA and the states agreed on the listing prospects of only a small number of specific sites; (16) officials estimated that almost one third of the potentially eligible sites are likely to be cleaned up under state programs but usually could not give a date for the start of cleanup activities; (17) officials of about 20 percent of the states said that their state's enforcement capacity to compel responsible parties to clean up potentially eligible sites is fair to very poor; and (18) officials of about half of the states told GAO that their state's financial capability to clean up potentially eligible sites is poor or very poor.",govreport
"Foreign nationals who wish to come to the United States on a temporary basis must generally obtain an NIV to be admitted. State manages the visa process, as well as the consular officer corps and its functions, at 219 visa- issuing posts overseas. The process for determining who will be issued or refused a visa contains several steps, including documentation reviews, in- person interviews, collection of biometrics (fingerprints), and cross- referencing an applicant’s name against the Consular Lookout and Support System—State’s name-check database that posts use to access critical information for visa adjudication. In some cases, a consular officer may determine the need for a Security Advisory Opinion, which is a recommendation from Washington on whether to issue a visa to the applicant. Depending on a post’s applicant pool and the number of visa applications that a post receives, each stage of the visa process varies in length. For an overview of the visa process see figure 1. Congress, State, and DHS have initiated new policies and procedures since the 9/11 terrorist attacks to strengthen the security of the visa process. These changes have added to the complexity of consular workload and have increased the amount of time needed to adjudicate a visa. Such changes include the following: Beginning in fiscal year 2002, State began a 3-year transition to remove visa adjudication functions from consular associates. All NIVs must now be adjudicated by consular officers. Personal interviews are required by law for most foreign nationals seeking NIVs. As of October 2004, consular officers are required to scan visa applicants’ right and left index fingers through the DHS Automated Biometric Identification System before an applicant can receive a visa. In 2005, the Secretary of Homeland Security announced that the U.S. government had adopted a 10-fingerscan standard for biometric collection of fingerprints. In February 2006, State reported that it would begin pilot testing and procuring 10-print equipment to ensure that all visa-issuing posts have collection capability by the end of fiscal year 2007. According to State, consular officers face increased requirements to consult with headquarters and other U.S. agencies prior to visa issuance in the form of Security Advisory Opinions. According to State, as a result of the Patriot Act, consular officers have access to, and are required to consult, far greater amounts of interagency data regarding potential terrorists and individuals who would harm U.S. interests. A number of potential factors can contribute to delays for visa interview appointments at consular posts. For example, increased consular officer workload at posts, which can be caused by factors such as increased security screening procedures or increased visa demand, can exacerbate delays because there are more work requirements for each available officer to complete. Other factors such as staffing gaps and ongoing consular facility limitations could also affect waits because they may limit the number of applicants that can be seen for an interview in a given day. Following the 9/11 terrorist attacks, applications for visas declined from a high of over 10.4 million in fiscal year 2001 to a low of approximately 7 million in 2003. For fiscal years 2004 through 2006, the number of visa applications increased, according to State’s data (see fig. 2). State anticipates that 8.1 million visas applications will be received in fiscal year 2007 and 8.6 million in 2008. State’s visa workload increased by almost 16 percent between 2004 and 2006. In addition, several countries and posts have seen large growth in visa demand, and State has projected these trends to continue well into the future. Following are examples of these trends: India had an 18 percent increase in visa adjudications between 2002 and 2006. Posts in China reported that their visa adjudication volume increased between 18 and 21 percent last year alone, and growth is expected to continue. We have previously reported on visa delays at overseas posts. In particular, we have reported on the following delays in Brazil, China, India, and Mexico: In March 1998, we reported that the post in Sao Paolo, Brazil, was facing extensive delays due to staffing and facilities constraints. In February 2004, we reported delays at consular posts in India and China. For example, in September 2003, applicants at one post we visited in China were facing waits of about 5 to 6 weeks. Also, we reported that, in summer 2003, applicants in Chennai, India, faced waits as long as 12 weeks. In April 2006, we testified that, of nine posts with waits in excess of 90 days in February 2006, six were in Mexico, India, and Brazil. According to State, wait times for visa interviews have improved at many overseas consular posts in the past year. However, despite recent improvements—such as those at posts in India, Mexico, and Brazil—a number of posts reported long waits at times during the past year. Believing the waits at some posts are excessive, in February of this year, State announced its goal of providing all applicants an interview within 30 days. We identified a number of shortcomings in the way in which State’s visa waits data is developed, which could mask the severity of the delays for visa interviews at some posts and limit the extent to which State can monitor whether the visa wait problem has been addressed. To better understand and manage post workload, State has begun to develop a measure of applicant backlog. In recent months, reported wait times for visa appointments have generally improved. For example, in reviewing visa waits data provided to us by the Bureau of Consular Affairs for the period of September 2006 to February 2007, we found that 53 of State’s 219 visa-issuing posts had reported maximum wait times of 30 or more days in at least 1 month—44 fewer posts than had reported this figure when we reviewed the same period during the previous year (see fig. 3). Furthermore, wait times reported by several consular posts have improved during the past year, including for a number of high volume posts in India, Brazil, and Mexico that had previously reported extensive delays. In April 2007, wait times at all posts in India were under 2 weeks, down from previous waits that exceeded 140 days at four key posts, as recently as August 2006, in most cases. For example, Mumbai reported a reduction in wait times from a high of 186 days in September 2006 to 10 days as of April 9, 2007. Reported wait times at some key posts in Mexico also significantly declined, as have wait times for several posts in Brazil in the past year. Furthermore, an additional number of posts with delays experienced large reductions in wait times over a recent 12 month period. Despite recent improvements in wait times at a number of consular posts, at times during the past year, especially during peak processing periods, a number of visa adjudicating posts have faced challenges in reporting wait times of less than 30 days. For example, during typical peak demand season, 29 posts reported maximum monthly waits exceeding 30 days over the entire 6-month period of March through August 2006 (see fig. 4). We observed that long waits had occurred over the summer months in Tegucigalpa, Honduras; San Jose, Costa Rica; and several posts in India. Furthermore, some posts we reviewed developed increased wait times. For example, in Caracas, the reported visa waits significantly increased— from 34 days in February 2006 to 116 days in April 2007. In addition, several other posts, including Sao Paolo, Brazil; Monterrey, Mexico; Tel Aviv, Israel; and Kingston, Jamaica; have experienced increases in wait times since February 2006. Moreover, 20 posts reported experiencing maximum monthly wait times in excess of 90 days at least once over the past year. In February 2007, State’s Bureau of Consular Affairs distributed guidance setting a global standard that all visa applicants should receive an appointment for a visa interview within 30 days. Previously, State had not set a formal performance standard for visa waits but had set a requirement that posts report their wait times on a weekly basis and make this information publicly available through post Web sites. In setting the 30– day standard for visa waits, officials acknowledged that wait times are not only a measure of customer service but also help posts to better manage their workload and visa demand. Furthermore, State identified that such a standard allows it to better track post performance, helps with resource allocation, and provides transparency in consular operations. Consular officials explained to us that posts that consistently have wait times for visa interview appointments of 30 days or longer may have a resource or management problem. In setting its 30-day performance benchmark, State also distributed information to posts on how wait times data is to be used by Bureau of Consular Affairs management. For example, State indicated it will review all posts that have reported waits over 20 days to determine if remedial measures are needed. State has provided guidance indicating that posts are required to report wait times on a weekly basis, even if the times have not changed from the previous week. However, we found posts are not reporting waits data consistently, which impacts the reliability of State’s visa waits figures. In September 2005, our analysis of State’s data on reported wait times revealed significant numbers of posts that did not report this information on a weekly basis during the 6-month period we reviewed. In reviewing data over the past year, we again found that a large number of posts were not consistently reporting waits data on a weekly basis, as required by State. For example, post reporting of wait times from January 2006 to February 2007 showed that, while a large number of posts (about 79 percent) had reported waits at least monthly, only 21 posts (about 10 percent) reported waits at least weekly. Inconsistencies among posts in the reporting of visa waits data impacts the reliability of visa waits figures and limits State’s ability to assess whether the problem has been addressed by posts. However, State does not appear to be enforcing its weekly reporting requirement. State acknowledges that it has had difficulties in getting all 219 consular posts to report this data consistently. According to cables provided to us by State, posts are directed to provide the “typical” appointment wait time applicable to the majority of applicants applying for a given category of visas on a given day. Several of the posts we visited calculated wait times based on the first appointment available to the next applicant in a given visa category; however, other posts we reviewed calculated waits differently. For example, one post we visited computed wait times by taking the average of several available appointment slots. In addition, several consular officials we spoke with overseas said that they are still unclear on the exact method posts are to use to calculate wait times, and some managers were unsure if they were calculating wait times correctly. Additionally, we observed that some posts artificially limit wait times by tightly controlling the availability of future appointment slots—such as by not making appointments available beyond a certain date, which can make appointment scheduling burdensome for the applicant who must continually check for new openings. State officials admitted that posts should not be controlling the availability of appointment slots to artificially limit wait times but, to date, there has not been specific guidance distributed to posts on this issue. We determined that State’s data are sufficiently reliable for providing a broad indication of posts that have had problems with wait times over a period of time and for general trends in the number of posts that have had problems with wait times over the period we reviewed; however, the data were not sufficiently reliable to determine the exact magnitude of the delays because the exact number of posts with a wait of 30 days or more at any given time could not be determined. Until State updates and enforces its collection standards for visa waits data, precise determinations about the extent to which posts face visa delays cannot be made. State officials acknowledge that current wait times data is of limited reliability. State officials have also said that visa waits data was not originally designed for the purpose of performance measurement but to provide applicants with information on interview availability. According to State, a current goal of the Bureau of Consular Affairs is to refine collection standards for wait times information to provide more uniform and transparent information to applicants and management; however, the bureau has not yet done so. State’s reported wait time data generally reflect the wait, at a moment in time, for new applicants, and do not reflect the actual wait time for an average applicant at a given post. Furthermore, wait times generally do not provide a sense of applicant backlog, which is the number of people who are waiting to be scheduled for an appointment or the number of people who have an appointment but have yet to be seen. To better understand and manage post workload, State officials we spoke with said that they were in the process of developing a measure of applicant backlog. Although State has not yet developed the measure of backlog, officials we spoke with said that they expect to begin testing methods for measuring applicant backlog by the end of 2007. State has implemented a number of measures to increase productivity and better manage visa workload, as well as measures to address shortcomings in staffing and facilities for a number of consular posts experiencing visa delays. State has provided temporary duty staff to assist in adjudicating visas at several locations with long wait times, particularly at posts in India, and recently developed a plan to relocate consular positions to locations where large disparities in staff and visa demand were apparent. In addition, State has continued to upgrade embassies and consulates overseas to aid in processing visa applicants. Furthermore, State has implemented some procedures and policies to maximize efficiency and better manage visa workload. However, despite the measures State has taken to address staffing, facilities, and other constraints at some posts, State’s current efforts are generally temporary, nonsustainable, and are insufficient to meet the expected increases in demand at some posts. State has recently taken action at several posts to address current staffing gaps to minimize the impact on visa wait times. State has deployed temporary duty staff from other consular posts and from headquarters to help process and adjudicate visa applicants. For example, State deployed 166 officials to staff consular sections in fiscal year 2006 and through April of fiscal year 2007. In addition, at the order of the Ambassador to India, beginning in 2006, posts in India utilized consular-commissioned officials from other offices in the embassy and consulates to assist the consular section in handling its workload, including fingerprinting applicants and interviewing some applicants, which helped reduce the wait times at posts. According to consular officials, the additional assistance in India was necessary as posts there did not have enough permanent consular staff to handle the demand and reduce wait times. In addition, in February 2007, State completed a review of consular officer positions that examined the disparity between visa workload and the number of consular officers at posts. As a result of this study, State will transfer consular positions from certain posts that are capable of handling the workload without reporting long visa waits to posts where there has not been adequate staff to handle the visa workload. The majority of the positions are being transferred from posts in the European and Eurasian Affairs Bureau to posts in the Western Hemisphere, East Asia and Pacific, and South and Central Asian bureaus. Of these transferred and newly created consular officer positions, the majority will be located in Brazil, China, India, and Mexico—posts with a history of long wait times and high demand for visas. State acknowledges that the repositioning of consular staff, while necessary, may not adequately address the increasing demand for visas worldwide. Despite the measures State has taken to address the staffing issues at some posts, State’s current consular staffing efforts are generally temporary, nonsustainable, and insufficient to meet the expected increases in demand at some posts. First, when-actually-employed staff are only allowed to work 1,040 hours per year due to federal regulations. Second, posts are typically required to cover the housing costs of assigned temporary staff, which is not always feasible if posts are facing budget constraints. Third, embassy or consulate officials that were temporarily assigned to support consular operations indicated that their new duties negatively affected their ability to perform their regular assignments, as they were spending time performing consular duties instead of their typical functions at post. Fourth, although temporary staff have helped to improve wait times at select posts, current efforts—and some recent temporary assignments, such as over the past 7 months in India—have been undertaken during a period of lower applicant volume. It is unknown whether State will be able to maintain the improved wait times during the summer of 2007, as the period between May and August is typically when posts have the largest influx of visa applicants and, in turn, longer waits. For example, one post in India recently reported wait times now exceed 30 days. Moreover, the temporary staff assisting with visa adjudications during our visit to posts in India was expected to leave by the end of May 2007. According to State’s Assistant Deputy Secretary for Visa Services, surges in temporary duty staff, such as the ones State employed for India, can be useful in tackling short-term situations but are not a viable long- term solution in places with high visa demand. Furthermore, consular staffing gaps are a long-standing problem for State and have been caused by such factors as State’s annual staffing process, low hiring levels for entry-level junior officer positions, and insufficient numbers of midlevel consular officers. We have previously reported that factors such as staffing shortages have contributed to long wait times for visas at some posts. A number of State’s visa-adjudicating posts reported shortages in consular staff for 2006, and we observed gaps that contributed to visa wait times at several posts overseas. Furthermore, we reviewed reports for 32 select consular posts abroad to assess visa workload, consular staffing and facilities, as well as other issues affecting visa wait times. We found that of the 32 posts, 19 posts (or about 60 percent) indicated the need for additional consular staff to address increasing workload. State has improved a number of consular sections at embassies and consulates worldwide. According to the Bureau of Overseas Buildings Operations, since September 2001, State has improved almost 100 embassies and consulates, improving the consular section facilities at a number of these locations. For example, between fiscal years 2003 and 2005, State obligated $26.9 million to fund consular workspace improvement projects at 101 posts. Although these improvement projects have been completed, according to the Bureau of Consular Affairs, most were designed as temporary solutions that may require additional construction in the future. Moreover, although some consular improvement projects were recently completed or were under way when we visited Mumbai and Chennai, India, these posts did not have adequate office, waiting room, security screening, or window space to accommodate the volume of visa applicants. State’s construction project in Chennai to add windows and additional processing areas was expected to be completed by May 2007, and State has begun construction on a new consulate in Mumbai that will be completed in 2008 and will add more space for additional consular staff and 26 more windows for interviewing. In addition, State is planning new consulate and embassy construction projects for New Delhi and Hyderabad, India, as well as at a number of other posts. We also found that a number of posts we reviewed currently face facility constraints, which limit the number of visa interviews that can take place in a given day and, in some cases, prevent posts from keeping pace with the current or expected future demand for visas. For example, 21 of 32 posts reported, in their consular packages, that limitations to their facilities affected their ability to increase the number of applicants they could interview, which can contribute to longer wait times. Although State has taken steps to improve consular facilities and has plans to rebuild a number of posts, it is unclear whether the facilities will be adequate to handle the future demand. Two posts that we reviewed are already predicting that future increased demand will outstrip visa processing capacities given existing facilities constraints. For example, in Seoul, South Korea, post officials report that, despite recent improvements to the facility, the post will soon have no additional space to accommodate future applicant growth. Moreover, there is no current viable option to build a new facility due to continuing land negotiations between the U.S. and South Korean governments. In addition, a number of State’s recent facilities projects have not incorporated planned projections of increased workload growth and are expected to soon face challenges meeting demand. For example, even though a new embassy construction project is currently under way in Beijing, China, State officials indicated that the number of planned interviewing windows and space in the new facility will be insufficient to allow for future increases in visa demand. In addition, in Shanghai, China, even though the consular section was moved to an off- site location to process visa applications, the post has indicated that it already has reached visa-adjudicating capacity because it cannot add any more interviewing windows in the current space, and construction on a new consulate will not begin until 2009. According to the Director and Chief Operating Officer of the Bureau of Overseas Buildings Operations, the bureau designs and constructs consular facilities with input from Consular Affairs; therefore, Consular Affairs needs to provide more defined assessments of future needs at a facility. The director stated that proper planning and stronger estimates of future needs will help in building facilities that can better address wait times at post over the long term. Since the 9/11 terrorist attacks, Congress, State, and DHS have initiated a series of changes to visa policies and procedures, which have added to the complexity of consular officers’ workload and, in turn, exacerbated State’s consular staffing and facilities constraints. For example, most visa applicants are required to be interviewed by a consular officer at post, and applicants’ fingerprints must be scanned. Furthermore, additional procedural changes are expected, including the expansion of the electronic fingerprinting program to the 10-fingerscan standard, which could further increase the workload of officers and the amount of time needed to adjudicate an application. For example, consular officers in London, which is one of the posts piloting the 10-fingerprint scanners, indicated that the 10-fingerscan standard would significantly affect other posts’ operations given that they had experienced about a 13 percent reduction in the number of applicants processed in a day. However, as each post faces slightly different circumstances, it is unclear whether this reduction would take place at all posts. To lessen the increase in wait times caused by of some of these legislative and policy changes, State has promoted some initiatives to aid posts in processing legitimate travelers. For example, State has urged all posts to establish business and student facilitation programs intended to expedite the interviews of legitimate travelers. State also continues to use Consular Management Assistance Teams to conduct management reviews of consular sections worldwide, which have provided guidance to posts on standard operating procedures, as well as other areas where consular services could become more efficient. In addition, according to State officials, State has developed a Two-Year Plan, an overall visa processing strategy to coordinate changes to the visa process that will ensure consular officers focus on tasks that can only be accomplished overseas, and is also contemplating other changes to reduce the burden placed on applicants and consular officers. These changes include the following: the deployment of a worldwide appointment system, use of a domestic office to verify information on visa petitions, a revalidation of fingerprints for applicants who have already completed the 10-fingerprint scan, and the implementation of an entirely paperless visa application process and remote or off-site interviewing of visa applicants. Furthermore, some posts have taken action to reduce their increased workload. For example, the following actions have been taken: The consular sections in South Korea and Brazil have established expedited appointment systems for certain applicant groups, including students. Consular officers in Manila, Philippines, redesigned the flow of applicants through the facility to ease congestion and utilized space designated to the immigrant visa unit to add three new visa processing stations. Posts in Brazil have waived interviews for applicants who were renewing valid U.S. visas that were expiring within 12 months and had met additional criteria under the law. The embassy in Seoul, South Korea, implemented a ticketing system that tracks applicants through the various stages of processing and provides notification to consular section management if backups are occurring. The system will also automatically assign applicants to the first available interviewing window in order to balance the workload of applicant interviews between all available interviewing windows. The embassies in El Salvador and South Korea have conducted workflow studies in order to identify obstructions to efficient applicant processing. Although State has recently implemented a number of policy and procedural changes to address increased consular workload and is considering additional adjustments, more could be done to assist posts in their workload management. Moreover, the effective practices and procedures implemented by individual posts that help manage workload and assist in improving applicant wait times are not consistently shared with the other consular posts. While recognizing that not all the policies and procedures used by posts to help manage visa workload are transferable to other posts, State officials indicated that, although there is currently not a forum available for consular officers to share such ideas, State is in the process of developing some online capabilities for posts to share visa practices and procedures. With worldwide nonimmigrant visa demand rising closer to pre-9/11 levels, and current projections showing a dramatic increase in demand over time, State will continue to face challenges in managing its visa workload and maintaining its goal of keeping interview wait times under 30 days at all posts. State has not developed a strategy for addressing increasing visa demand that balances such factors as available resources and the need for national security in the visa process against its goal that visas are processed in a reasonable amount of time. In 2005, State contracted with an independent consulting firm to analyze several factors to help predict future visa demand in 20 select countries, which, according to State officials, constituted approximately 75 percent of the visa workload at the time. The consulting firm identified some demographic, economic, political, commercial, and other factors that it believed would affect visa demand over a 15-year period, beginning in 2005, and estimated a likely rate of growth in demand in those select countries. The study predicted the growth in demand in these countries would range between 8 percent and 232 percent, with Argentina, Brazil, China, India, Mexico, and Saudi Arabia all projected to experience significant growth of more than 90 percent (see fig. 5). State officials indicated that they used the futures study to assist in determining consular resource allocations and in the repositioning of consular staff in State’s review of consular positions in February 2007. However, State has not analyzed the 5-, 10-, or 20-year future staffing and other resource needs based on the demand projections found in the study. Although officials indicated that State continues to use the visa demand projections in the Consular Affairs Futures Study to assist in making staffing and resource decisions, some of the study’s projections have already been proven to underestimate growth in demand. In addition, State has not taken action to update the study to reflect changes in visa workload since 2005. More than half of the countries reviewed are already facing surges in visa demand greater than the levels predicted in the Consular Affairs Futures Study for fiscal year 2006 and beyond. For example, Brazil adjudicated more visas in 2006 than the volume of applications the study projected for Brazil for 2010. In addition, Mexico adjudicated approximately 126,000 more visas in 2006 than the study projected. Also, the Ambassador to India recently stated that all posts in India would process over 800,000 applications in 2007, which exceeds the study’s forecasts for India’s demand in 2016. The Deputy Assistant Secretary for Visa Services testified to Congress in March 2007 of the need to consider and implement viable long-term solutions for posts with high visa demand and indicated that State needed to ensure it aligns consular assets to meet the demand. In November 2006, State developed a plan for improving the visa process that details several steps it intends to implement, or pilot, by 2009. Although the visa improvement plan can assist State in improving the visa process, and State has taken some steps to address wait times at a number of overseas posts, State has not determined how it will keep pace with continued growth in visa demand over the long term. For example, the strategies in the plan do not identify the resources State would need to increase staff or construct adequate facilities to handle the projected demand increases. Moreover, State has not proposed plans to significantly reduce the workload of available officers or the amount of time needed to adjudicate a visa if such resources are not available. Without a long-term plan to address increasing demand, State does not have a tool to make decisions that will maximize efficiency, minimize wait times, and strengthen its ability to support and sustain its funding needs. In order to develop a strategy addressing future visa demand, State may want to make use of operations research methods and optimization modeling techniques. These approaches can allow State to develop a long- term plan that takes into account various factors—such as State’s security standards for visas, its policies and procedures to maximize efficiency and minimize waits, and available resources. Researchers have developed statistical techniques to analyze and minimize wait times in a wide variety of situations, such as when cars queue to cross toll bridges or customers call service centers. These techniques consider the key variables that influence wait times, such as the likely demand, the number of people already waiting, the number of staff that can provide the service required, the time it takes to process each person, and the cost of each transaction; consider a range of scenarios; and provide options to minimize wait times, bearing in mind the relevant factors. The analyses can, for instance, provide quantitative data on the extent to which wait times could be reduced if more staff were assigned or the time for each transaction were decreased. For example, State could determine the approximate number of additional resources it would need in order to meet its stated goal of providing an appointment to all applicants within 30 days despite increased visa demand. Such a response would either require State to provide additional staff through new hires or by using other staffing methods, such as utilizing civil servants to adjudicate visas overseas. Alternatively, State could require consular officers to process applicants more efficiently and quickly. State may require multiple new facilities to support an increase in the number of Foreign Service officers and allow posts to process more applicants daily. However, if State were to determine that a significant increase in resources for staffing and facilities is not feasible, then State would have to evaluate the efficacy of its 30-day standard for visa appointments or consider requesting Congress to allow for changes in the adjudication process, such as allowing additional flexibility in the personal appearance requirement for visa applicants. It is dependent upon State to determine the specific techniques and appropriate variables or factors required to optimize its capability to address the demand for visas. Expediting the adjudication of NIV applications is important to U.S. national interests because legitimate travelers forced to wait long periods of time for a visa interview may be discouraged from visiting the country, potentially costing the United States billions of dollars in travel and tourism revenues over time. Moreover, State officials have previously testified that long waits for visa appointments can negatively impact our image as a nation that openly welcomes foreign visitors. Given projected increases in visa demand, State should develop a strategy that identifies the possible actions that will allow it to maintain the security of the visa process and its interest in facilitating legitimate travel in a timely manner. The development of such a plan will strengthen State’s ability to manage visa demand, support and sustain its funding needs, encourage dialogue with relevant congressional committees on the challenges to addressing waits, and promote consensus by decision makers on funding levels and expectations for eliminating visa delays. Furthermore, there are several measures State could take in the short run to improve the wait times for interviews of NIV applicants and the reliability of visa waits information for management purposes. To improve the Bureau of Consular Affair’s oversight and management of visa-adjudicating posts, we recommend that the Secretary of State take the following actions: Develop a strategy to address worldwide increases in visa demand that balances the security responsibility of protecting the United States from potential terrorists and individuals who would harm U.S. interests with the need to facilitate legitimate travel to the United States. In doing so, State should take into consideration relevant factors, such as the flow of visa applicants, the backlog of applicants, the availability of consular officers, and the time required to process each visa application. State’s analysis should be informed by reliable data on the factors that influence wait times. State should update any plan annually to reflect new information on visa demand. Improve the reliability and utility of visa waits data by defining collection standards and ensuring that posts report the data according to the standards. Identify practices and procedures used by posts to manage workload and reduce wait times and encourage the dissemination and use of successful practices. We provided a draft of this report to the Departments of State and Homeland Security. The Department of Homeland Security did not comment on the draft but provided a technical comment. State provided written comments on the draft that are reprinted with our comments in appendix II of this report. State concurred with our recommendations to enhance methods of disseminating effective management techniques, to improve the reliability and utility of visa waits data, and to develop a strategy to address increases in visa demand. State noted that any appropriate strategy to address worldwide increases in visa demand must address the need for resources to meet national security goals for both travel facilitation and border security. Furthermore, State said that any suggestion of trade-offs between these two goals would be inappropriate. Clearly we agree that in developing a strategy, State must maintain its security responsibilities while also facilitating legitimate travel to the United States. Our report does not suggest that one of these goals should be sacrificed at the expense of the other. State also provided a number of technical comments, which we have incorporated throughout the report, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees. We will also send copies to the Secretary of State and the Secretary of Homeland Security. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-4128 or fordj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions are listed in appendix III. We reviewed (1) Department of State (State) data on the amount of time visa applicants were waiting to obtain a visa interview, (2) actions State has taken to address visa wait times, and (3) State’s strategy for dealing with projected increases in visa demand. To accomplish our objectives, we interviewed officials from State’s bureaus of Consular Affairs, Human Resources, and Overseas Buildings Operations. We also interviewed officials from the Department of Commerce’s Office of Travel and Tourism Industries. In addition, we observed consular operations and interviewed U.S. government officials at 11 posts in eight countries—Brazil, China, Costa Rica, El Salvador, Honduras, India, South Korea, and the United Kingdom. For our site visits, we selected posts that had either (1) recently reported wait times of 60 days or more, (2) had previously experienced long-standing wait time problems, (3) were projected to experience a large future volume of visa adjudications, or (4) were able to process a large volume of visas with little or no wait for applicant interviews. During these visits, we observed visa operations; interviewed consular staff and embassy management about visa adjudication policies, procedures, and resources; and reviewed documents and data. In addition, to obtain a broader view of visa workload, consular staffing and facilities, as well as other issues affecting visa wait times in consular sections, we selected an additional 21 posts for a document review based on the same selection criteria we used for selecting our site visits. Our selection of posts was not intended to provide a generalizable sample but allowed us to observe consular operations under a wide range of conditions. To determine the amount of time visa applicants were waiting to obtain a visa interview, we analyzed interview wait times data for applicants applying for visas for temporary business or tourism purposes, but not for other types of visas, including student visas. Specifically, the data provided to us showed the minimum and maximum wait times for visa-issuing posts for the period January 2006-February 2007. Data were also provided for the same period that indicated the number of posts that reported maximum wait times of 30 or more days in at least 1 month and the number that reported wait times in excess of 30 days for this entire 6- month period. In addition, at various points-in-time, we received information on the most recently reported wait times for visa-issuing posts and the date of last entry. To determine the reliability of State’s data on wait times for applicant interviews, we reviewed the department’s procedures for capturing these data, interviewed the officials in Washington who monitor and use these data, and examined data that was provided to us electronically. In addition, we interviewed the corresponding officials from our visits to select posts overseas and in Washington, who input and use the visa waits data. We found that data was missing throughout the 13-month period because posts were not reporting each week. Based on our analysis, we determined that the data were not sufficiently reliable to determine the exact magnitude of the delays because the exact number of posts with a wait of 30 days or more at any given time could not be determined. Consular officials who manage consular sections overseas acknowledged that many posts are not reporting on a weekly basis. However, we determined that the data are sufficiently reliable for providing a broad indication of posts that have had problems with wait times over a period of time and for general trends in the number of posts that have had problems with wait times over the 13 months we reviewed. To determine the actions State has taken to address visa wait times and its strategy for addressing waits, we analyzed consular policies and procedures cables and staffing and facilities plans developed by the department. In addition, we analyzed consular workload and staffing data. We also reviewed the methodology for the Change Navigations Study and found it to be one of a number of fairly standard approaches that are available for a forecasting exercise of this nature. However, we did not attempt to replicate the methodology or test alternative models that relied on different techniques, data, or assumptions. We conducted our work from August 2006 through May 2007 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of State’s letter dated June 25, 2007. 1. State’s Deputy Assistant Secretary for Visa Services has acknowledged that visa applicants may be deterred from visiting the United States by long appointment wait times and that this could have negative economic consequences and could adversely affect foreign opinions of our country. The Department of Commerce points out that foreign visitors bring economic benefits to our country in excess of $100 billion each year. We agree that it is difficult to correlate visa wait times with specific dollar value losses in travel and tourism revenues. However, given that wait times for interviews are very high at a number of posts, we believe that the loss in economic benefits to our country over time could potentially be significant. Our report acknowledges that visa issuances have increased over the last several years. 2. We believe our report, as well as past GAO reports, shows that long waits for visa interviews have been a long-standing problem for the department. Furthermore, State’s data show that there have been long waits at some posts during peak and nonpeak periods (see fig. 2) and that long waits are not solely cyclical in nature. State acknowledges a number of cyclical factors that affect visa demand and resource availability, such as staffing gaps and the personnel transfer cycle. We believe these and other factors can contribute to chronic as well as cyclical backlogs. In addition, we have modified the draft to acknowledge the fact that wait times may reoccur cyclically as well as unexpectedly. However, the report points toward the need for a strategy for addressing such delays, which State has not developed to address either cyclical or chronic visa waits. 3. We agree that increasing consular staff levels may ultimately be necessary to address increasing visa demand. This is why we recommended that State develop a strategy to address wait times and that, in doing so, identify its resource needs. Such actions could promote consensus by decision makers on funding levels and expectations for eliminating visa delays. 4. We agree that State has taken a number of actions to share information with posts on reducing wait times. However, as noted in the report, during our fieldwork, we found that there were instances where posts were not aware of certain practices and procedures implemented by other posts to help manage workload and assist in improving applicant wait times. We understand that all practices may not be transferable to all posts, but we believe that all posts would benefit from knowing the options that are available for more efficient operations. 5. Our report discusses State’s efforts to estimate visa demand and gives ample credit to the 2006 repositioning exercise to shift some consular staffing to posts with the greatest need. Furthermore, neither the annual consular package exercise nor the Consular Affairs Future Study estimated the resources needed to meet long-term future demand. Our point is that State has not estimated what resources will be required to keep up with the increase in future demand that State forecasts. Because these resources could be substantial, we think it is incumbent on State to develop a long-term strategy now. 6. We based our statements on the testimony of State’s Deputy Assistant Secretary for Visa Services before Congress in March 2007, where he stated, “we strive to constantly strike the right balance between protecting America’s borders and preserving America’s welcome to international visitors.” We acknowledge that in striking this balance security is the primary concern. Clearly the time it takes to process an application affects how many applications an officer can process in a given day. We are not suggesting that State sacrifice security in order to avoid visa waits, but rather that State develop a plan for how it will cope with rising demand, taking these various circumstances and responsibilities into consideration. 7. We agree that these are important factors and have modified the text accordingly. 8. We understand that there are spikes in visa demand for various reasons, some of which are difficult to predict. However, State is aware that such spikes in visa demand can occur. We believe that State needs a strategy to address growing visa demand that includes consideration of how it will meet unanticipated spikes in demand. The development of such a plan would allow State to use its visa surge teams of temporary duty staff to deal with unanticipated spikes, rather than using them to handle the anticipated increasing demand. 9. We have modified language in the report. State’s comment reinforces our belief that it is time for State to develop a strategy for addressing long-term visa demand. If State determines it needs more staff to handle projected demand, then it should detail these needs in its strategy. 10. We based our comment on a cable prepared by the U.S. Embassy in London. State acknowledges that the 10-fingerprint requirement could reduce the number of applicants processed. Applicants are not interviewed until after their fingerprints are taken, so a reduction in the number of applicants processed would subsequently result in a reduction of applicants interviewed. We have modified language in the draft to clarify our point. 11. We have incorporated information on the Visa Office’s Two-Year Plan into the report. 12. State does not have a plan that outlines how it will cope with growing visa demand, which is why we recommend that State develop a strategy that identifies the actions it will take to address increasing demand. We believe that there may be opportunities to achieve efficiencies at some posts and that more resources may be needed. The short-term, temporary measures that State is currently taking to address visa demand are not adequate to handle the projected visa demand. We suggest that State take advantage of available analytical tools in order to identify options for the development of an overall strategy that will address the projected increase in visa demand worldwide. A wide range of sophisticated techniques are available to help manage customer waiting times in many areas of government operations, such as testing drivers at departments of motor vehicles and treating patients at public health clinics. Our report does not recommend that State reduce the processing time at the expense of security. We agree that State must maintain its security responsibilities while facilitating legitimate travel to the United States. In addition to the individual named above, John Brummet, Assistant Director; Joe Brown; Joe Carney; Martin de Alteriis; Jeff Miller; Mary Moutsos; and Melissa Pickworth made key contributions to this report.","After the 9/11 terrorist attacks, Congress and the Department of State (State) initiated changes to the visa process to increase security, but these changes also increased the amount of time needed to adjudicate a visa. Although maintaining security is of paramount importance, State has acknowledged that long waits for visas may discourage legitimate travel to the United States, potentially costing the country billions of dollars in economic benefits over time, and adversely influencing foreign citizens' opinions of our nation. GAO testified in 2006 that a number of consular posts had long visa interview wait times. This report examines (1) State's data on visa interview wait times, (2) actions State has taken to address wait times, and (3) State's strategy for dealing with projected growth in visa demand. According to State, the amount of time that applicants must wait for a visa interview has generally decreased over the last year; however, some applicants continue to face extensive delays. State's data showed that between September 2005 and February 2006, 97 consular posts reported maximum wait times of 30 or more days in at least 1 month, whereas 53 posts reported such waits for the same period 1 year later. However, despite recent improvements, at times during the past year, a number of posts reported long wait times, which could be expected to reoccur during future visa demand surges. In 2007, State announced a goal of providing applicants an interview within 30 days. Although State's data is sufficiently reliable to indicate that wait times continue to be a problem at some posts, GAO identified shortcomings in the way the data is developed that could mask the severity of the problem. State has implemented steps to reduce wait times at several posts including using temporary duty employees to fill staffing gaps at some posts and repositioning some consular positions to better utilize its current workforce. However, these measures are not permanent or sustainable solutions and may not adequately address the increasing demand for visas worldwide. In addition, State has made improvements to several consular facilities and has identified plans for improvements at several other posts with high workload. Some posts have utilized procedures that enable them to process applications more efficiently. However, not all of these procedures are shared among posts in a systematic way and, therefore, not all posts are aware of them. State has not determined how it will keep pace with growth in visa demand over the long-term. State contracted for a study of visa demand, in select countries, over a 15-year period beginning in 2005, which projected that visa demand will increase dramatically at several posts. However, at some posts, demand has already surpassed the study's projected future demand levels. State has not developed a strategy that considers such factors as available resources and the need for maintaining national security in the visa process, along with its goal that visas are processed in a reasonable amount of time. Given dramatic increases in workload expected at many posts, without such a strategy State will be challenged in achieving its current goal for wait times.",govreport
"OPM’s mission is to ensure that the federal government has an effective civilian workforce. In this regard, one of the agency’s major human resources tasks is to manage and administer the retirement program for federal employees. According to the agency, the program serves federal employees by providing (1) retirement compensation and (2) tools and options for retirement planning. OPM’s Center for Retirement and Insurance Services administers the two defined benefit retirement plans that provide retirement, disability, and survivor benefits to federal employees. The first plan, the Civil Service Retirement System (CSRS), provides retirement benefits for most federal employees hired before 1984. The second plan, the Federal Employees Retirement System (FERS), covers most employees hired in or after 1984 and provides benefits that include Social Security and a defined contribution system. According to OPM, there are approximately 2.9 million active federal employees and nearly 2.5 million retired federal employees. The agency’s March 2008 analysis of federal employment retirement data estimates that nearly 1 million active federal employees will be eligible to retire and almost 600,000 will most likely retire by 2016. Figure 1 summarizes the estimated number of employees eligible and likely to retire. OPM and employing agencies’ human resources and payroll offices are responsible for processing federal employees’ retirement applications. The process begins when an employee submits a paper retirement application to his or her employer’s human resources office and is completed when the individual begins receiving regular monthly benefit payments (as illustrated in fig. 2). Once an employee submits an application, the employing agency’s human resources office provides retirement counseling services to the employee and augments the retirement application with additional paperwork, such as a separation form that finalizes the date the employee will retire. Then the agency provides the retirement package to the employee’s payroll office. After the employee separates for retirement, the payroll office is responsible for reviewing the documents for correct signatures and information, making sure that all required forms have been submitted, and adding any additional paperwork that will be necessary for processing the retirement package. Once the payroll office has finalized the paperwork, the retirement package is mailed to OPM to continue the retirement process. Payroll offices are expected to submit the package to OPM within 30 days of the retiree’s separation date. Upon receipt of the retirement package, OPM calculates an interim payment based on information provided by the employing agency. The interim payments are partial payments that typically provide retirees with 80 percent of the total monthly benefit they will eventually receive. OPM then starts the process of analyzing the retirement application and associated paperwork to determine the total monthly benefit amount to which the retiree is entitled. This process includes collecting additional information from the employing agency’s human resources and payroll offices or from the retiree to ensure that all necessary data are available before calculating benefits. After OPM completes its review and authorizes payment, the retiree begins receiving 100 percent of the monthly retirement benefit payments. OPM then stores the paper retirement folder at the Retirement Operations Center in Boyers, Pennsylvania. According to the agency’s 2008 performance report, the average processing time from the date OPM receives the initial application to the time the retiree receives a full payment is 42 days. According to the Deputy Associate Director for the Center of Retirement and Insurance Services, about 200 employees are directly involved in processing the approximately 100,000 retirement applications OPM receives annually. This processing includes functions such as determining retirement eligibility, inputting data into benefit calculators, and providing customer service. The agency uses over 500 different procedures, laws, and regulations, which are documented on the agency’s internal Web site, to process retirement applications. For example, the site contains memorandums that outline new procedures for handling special retirement applications, such as those for disability or court orders. Further, OPM’s retirement processing involves the use of over 80 information systems that have approximately 400 interfaces with other internal and external systems. For instance, 26 internal systems interface with the Department of the Treasury to provide, among other things, information regarding the total amount of benefit payments to which an employee is entitled. OPM has stated that the federal employee retirement process currently does not provide prompt and complete benefit payments upon retirement, and that customer service expectations for more timely payments are increasing. The agency also reports that a greater workload is expected due to an anticipated increase in the number of retirement applications over the next decade, yet current retirement processing operations are at full capacity. Further, the agency has identified several factors that limit its ability to process retirement benefits in an efficient and timely manner. Specifically, it noted that current processes are paper-based and manually intensive, resulting in a higher number of errors and delays in providing benefit payments; the high costs, limited capabilities, and other problems with the existing information systems and processes pose increasing risks to the accuracy of benefit payments; current manual capabilities restrict customer service; federal employees have limited access to their retirement records, making planning for retirement difficult; and attracting qualified personnel to operate and maintain the antiquated retirement systems, which have about 3 million lines of custom programming, is challenging. In the late 1980s, OPM recognized the need to automate and modernize its retirement processing and began retirement modernization initiatives that have continuously called for automating its antiquated paper-based processes. The agency’s previously established program management plans included the objectives of having timely and accurate retirement benefit payments and more efficient and flexible processes. For example, the agency’s plans call for processing retirement applications and providing retirees 100 percent of their monthly benefit payments the day it is due versus providing interim monthly payments. Its initial modernization vision called for providing prompt and complete benefit payments by developing an integrated system and automated processes. However, the agency has faced significant and long-standing challenges in doing so. In early 1987, OPM began a program called the FERS Automated Processing System (FAPS). However, after 8 years of planning, the agency decided it needed to reevaluate the program, and the Office of Management and Budget (OMB) requested that an independent board conduct a review to identify critical issues impeding progress and recommend ways to address the issues. The review identified various management weaknesses, including the lack of an established strategic plan, cost estimation methodologies, and baseline; improperly defined and ineffectively managed requirements; and no clear accountability for decision making and oversight. Accordingly, the board suggested areas for improvement and recommended terminating the program if immediate action was not taken. In mid-1996, OPM terminated the program. In 1997, OPM began planning a second modernization initiative, called the Retirement Systems Modernization (RSM) program. The agency originally intended to structure the program as an acquisition of commercially available hardware and software that would be modified in-house to meet its needs. From 1997 to 2001, OPM developed plans and analyses and began developing business and security requirements for the program. However, in June 2001, it decided to change the direction of the retirement modernization initiative. In late 2001, retaining the name RSM, the agency embarked upon its third initiative to modernize the retirement process and examined the possibility of privately sourced technologies and tools. To this end, OPM issued a request for information to obtain private sourcing options and determined that contracting was a viable alternative that would be cost efficient, less risky, and more likely to be completed on time and on budget. In 2006, the agency awarded three contracts for: (1) a commercially available, defined benefits technology solution (DBTS) to automate retirement processing; (2) services to convert paper records to electronic files; and (3) consulting services to support the redesign of its retirement operations. The contract for DBTS was awarded to Hewitt Associates, and the additional contracts to support the technology were awarded to Accenture Ltd. and Northrop Grumman Corporation, as reflected in table 1. OPM produced a December 2007 program management plan that, among other things, described capabilities the agency expected to implement as outcomes of retirement modernization. Among these capabilities, the agency expected to implement retirement benefit modeling and planning tools for active federal employees, a standardized retirement benefit calculation system, and a consolidated system to support all aspects of retirement processing. In February 2008, OPM renamed the program RetireEZ and deployed a limited initial version of DBTS. As the foundation of the modernization initiative, DBTS was to be a comprehensive technology solution that would provide capabilities to substantially automate retirement processing. This technology was to be provided by the contractor for a period of 10 years and was intended to provide, among other things, an integrated database with calculation functionality for retirement processing. In addition to calculating retirement benefit amounts, DBTS was intended to provide active and retired federal employees with self- service, Internet-based tools for accessing accounts, updating retirement records, submitting transactions, monitoring the status of claims, and forecasting retirement income. The technology was also expected to enhance customer service by providing OPM and agency personnel with the capability to access retirement information online. Further, the technology was expected to be integrated with OPM and federal agency electronic retirement records and processes. When fully implemented, the modernized program was expected to serve OPM retirement processing personnel, federal agency human resources and payroll offices, active federal employees, retirees, and the beneficiaries of retirees. According to the agency, in late February 2008, the DBTS was deployed with limited functionality to 26,000 federal employees serviced by the General Services Administration’s (GSA) payroll offices. In April 2008, OPM reported that 13 of the 37 retirement applications received from GSA’s payroll office had been processed through DBTS with manual intervention and provided the retirees 100 percent of their monthly benefits within 30 days from their retirement date. However, a month later, the agency determined that DBTS had not worked as expected and suspended system operation. In October 2008, after 5 months of attempting to address system quality issues, the agency terminated the contract. In November 2008, OPM began restructuring the program and reported that its efforts to modernize retirement processing would continue. Figure 3 illustrates the timeline of retirement modernization initiatives from 1987 to the present. Various entities within OPM are responsible for managing RetireEZ. Specifically, the management is composed of committees, a program office, and operational support, as reflected in table 2. Since 2005, we have conducted several studies of OPM’s retirement modernization noting weaknesses in its management of the initiative. In February of that year, we reported that the agency lacked processes for retirement modernization acquisition activities, such as determining requirements, developing acquisition strategies, and implementing a risk program. Further, the agency had not established effective security management, change management, and program executive oversight. We recommended that the Director of OPM ensure that the retirement modernization program office expeditiously establish processes for effective oversight of the retirement modernization in the areas of system acquisition management, information security, organizational change management, and information technology (IT) investment management. In response, between 2005 and 2007, the agency initiated steps toward establishing management processes for retirement modernization and demonstrated the completion of activities with respect to each of our nine recommendations. However, in January 2008, we reported that the agency still needed to improve its management of the program to ensure a successful outcome for its modernization efforts. Specifically, we reported that initial test results had not provided assurance that DBTS would perform as intended, the testing schedule increased the risk that the agency would not have sufficient resources or time to ensure that all system components were tested before deployment, and trends in identifying and resolving system defects had indicated a growing backlog of problems to be resolved prior to deployment. Further, we reported that although the agency had established a risk management process, it had not reliably estimated the program costs, and its progress reporting was questionable because it did not reflect the actual state of the program. We recommended that the Director of OPM address these deficiencies by conducting effective system tests and resolving urgent and high priority system defects prior to system deployment, in addition to improving program cost estimation and progress reporting. In response to our report, OPM stated that it concurred with our recommendations and was taking steps to address them. However, in March 2008, we determined that the agency was moving forward with system deployment and had not yet implemented its planned actions. OPM subsequently affirmed its agreement with our recommendations in April 2008 and reported that it had implemented or was in the process of implementing each recommendation. As of March 2009, however, these recommendations still had not been fully addressed. OPM remains far from fully implementing the retirement modernization capabilities described when it documented its plans for RetireEZ in 2007. The agency only partially implemented two of eight capabilities that it identified to modernize retirement processing. The remaining six capabilities, which were to be delivered through the DBTS contract, have not been implemented, and OPM’s plans to continue implementing them are uncertain. While the agency has taken steps to restructure the RetireEZ program without the DBTS contract, it has not developed a plan to guide its future modernization efforts. OPM’s retirement modernization plans from 2007 described eight capabilities that were to be implemented to achieve modernized processes and systems. As of late March 2009, the agency had partially implemented two of these capabilities while the remaining six had not been implemented (see table 3). Specifically, it had achieved partial implementation of an integrated database of retirement information that was intended to be accessible to OPM and agency retirement processing personnel. In this regard, the agency implemented a new database, populated with images of retirement information, which is accessible to OPM retirement processing personnel online. This database contains over 8 million files which, according to agency officials, represent approximately 80 to 90 percent of the available retirement information for all active federal employees. However, the capability for the information in the database to be integrated with OPM’s legacy retirement processing systems and to be accessible to other agency retirement processing personnel has not yet been implemented. OPM has also partially implemented enhanced customer service capabilities. Specifically, the agency acquired a new telephone infrastructure (i.e., additional lines) and hired additional customer service representatives to reduce wait times and abandonment rates. However, the agency has not yet developed the capabilities for OPM retirement processing personnel to provide enhanced customer support to active and retired federal employees through online account access and management. Moreover, six other capabilities have not been implemented—and plans to implement them are uncertain—because they were to be delivered through the now-terminated DBTS contract, which had been expected to provide a single system that would automate the processing of retirement applications, calculations, and benefit payments. Among the capabilities not implemented was one for other agencies’ automated submissions of retirement information to OPM that could be used to process retirement applications. While OPM began developing this capability by establishing interfaces with other agencies as part of its effort to implement DBTS, it discontinued the use of the interfaces for processing retirement applications when the DBTS contract was terminated. Thus, federal agencies that submit retirement information to OPM continue to provide paper packages and information when employees are ready to retire. Further, OPM has not implemented a planned capability for active and retired federal employees to access online retirement information through self-service tools. While the agency provided demonstrations of DBTS in April 2008 that showed the ability for employees to access information online, including applying for retirement and modeling future retirement benefits, this capability was to be provided by DBTS, and thus, no longer exists. The contractor had also been expected to deliver a consolidated system to support all aspects of retirement processing and an electronic case management system to support retirement processing. In the absence of these capabilities, the agency continues to manage cases through paper tracking and stand-alone systems. Additionally, OPM and federal agencies continue to rely on nonstandardized systems to determine and calculate retirement benefits, and federal retirees currently have only limited online, self-service tools. Program management principles and best practices emphasize the importance of using a program management plan that, among other things, establishes a complete description that ties together all program activities. An effective plan includes a description of the program’s scope, implementation strategy, lines of responsibility and authority, management processes, and a schedule. Such a plan incorporates all the critical areas of system development and is to be used as a means of determining what needs to be done, by whom, and when. Furthermore, establishing results-oriented (i.e., objective, quantifiable, and measurable) goals and measures, that can be included in a plan, provides stakeholders with the information they need to effectively oversee and manage programs. A plan for the future of the RetireEZ program has not been completed. In November 2008, OPM began restructuring the program and reported it was continuing toward retirement modernization without the DBTS contract. The restructuring efforts have resulted in a wide variety of documentation, including multiple descriptions of the program in formal agency reports, budget documentation, agency briefing slides, and related documents. For example, OPM’s November Fiscal Year 2008 Agency Financial Report described what the RetireEZ program is expected to achieve (e.g., provide retirement modeling tools for federal employees) once implemented. The agency’s Annual Performance Report, dated January 2009, outlined that the new vision for the restructured program is “to support benefit planning and management throughout a participant’s lifecycle through an enhanced federal retirement program.” The agency also presented information to OMB that identified eight fiscal year 2009 program initiatives, as listed in table 4. The agency has developed a variety of informal program documents and briefing slides that describe retirement modernization activities. For instance, one document prepared by the program office describes a five- phased approach that is intended to replace its previous DBTS-reliant strategy. The approach includes the following activities: (1) collecting electronic retirement information, (2) automating the retirement application process, (3) integrating retirement information, (4) developing retirement calculation technologies and tools, and (5) improving post- retirement processes through a technology solution. In addition, briefing slides also prepared by the program office outline a schedule for efforts to identify new technologies to support retirement modernization by drafting a request for information, which OPM expects to issue in late April 2009. Regardless, OPM’s various reports and documents describing its planned retirement modernization activities do not provide a complete plan for its restructured program. Specifically, although agency documents describe program implementation activities, they do not include a definition of the program, its scope, lines of responsibility and authority, management processes, and schedule. Also, the modernization program documentation does not describe results-oriented (i.e., objective, quantifiable, and measurable) performance goals and measures. According to the RetireEZ program manager, the agency is developing plans, but they will not be ready for release until the new OPM director has approved them, which is expected to occur in April 2009. Until the agency completes and uses a plan that includes all of the above elements to guide its efforts, it will not be properly positioned to obtain agreement with relevant stakeholders (e.g., Congress, OMB, federal agencies, and OPM senior executives) for its restructured retirement modernization initiative. Further, the agency will also not have a key mechanism that it needs to help ensure successful implementation of future modernization efforts. OPM has significant management weaknesses in five areas that are important to the success of its retirement modernization program: cost estimating, EVM, requirements management, testing, and program oversight. For example, the agency has not performed key steps, including the development of a cost estimating plan or completion of a work breakdown structure, both of which are necessary to develop a reliable program cost estimate. Also, OPM has not established and validated a performance measurement baseline, which is essential for reliable EVM. Further, although OPM is revising its previously developed system requirements, it has not established processes and plans to guide this work. Nor has the agency addressed test activities, even though developing processes and planning test activities early in the life cycle are recognized best practices for effective testing. Furthermore, although OPM’s Executive Steering Committee and Investment Review Board have recently become more active regarding RetireEZ, these bodies did not exercise effective oversight in the past, which has allowed the aforementioned management weaknesses to persist. Notably, OPM has not established guidance regarding how these entities are to engage with the program when corrective actions are needed. Until OPM addresses these weaknesses, many of which we and others made recommendations to correct, the agency’s retirement modernization initiative remains at risk of failure. The establishment of a reliable cost estimate is a necessary element for informed investment decision making, realistic budget formulation, and meaningful progress measurement. A cost estimate is the summation of individual program cost elements that have been developed by using established methods and validated data to estimate future costs. According to federal policy, programs must maintain current and well- documented estimates of program costs, and these estimates must span the full expected life of the program. Our Cost Estimating and Assessment Guide includes best practices that agencies can use for developing and managing program cost estimates that are comprehensive, well-documented, accurate, and credible, and provide management with a sound basis for establishing a baseline to measure program performance and formulate budgets. This guide identifies a cost estimating process that includes initial steps such as defining the estimate’s purpose (i.e., its intended use, scope, and level of detail); developing the estimating plan (i.e., the estimating approach, team, and timeline); defining the program (e.g., technical baseline description); and determining the estimating structure (e.g., work breakdown structure). According to best practices, these initial steps in the cost estimating process are of the utmost importance, and should be fully completed in order for the estimate to be considered valid and reliable. OPM officials stated that they intend to complete a modernization program cost estimate by July 2009. However, the agency has not yet fully completed initial steps for developing the new estimate. Specifically, the agency has not yet fully defined the estimate’s purpose, developed the estimating plan, defined program characteristics in a technical baseline description, or determined the estimating structure. With respect to the estimate’s purpose, agency officials stated that the estimate will inform the budget justification of RetireEZ for fiscal year 2011 and beyond. However, the agency has not clearly defined the scope or level of detail of the estimate. Regarding the estimating plan, agency officials stated that they have created a timeline to complete the estimate by July 2009. However, the agency has not documented an estimating plan that includes the approach and resources required to complete the estimate in the time period identified. With respect to the technical baseline description, agency officials stated that they are in the advanced stages of developing a request for information and a concept of operations that will serve as the basis for a technical baseline description. These documents are expected to be reviewed for approval in April 2009. Regarding the estimating structure, the agency has developed a work breakdown structure that identifies elements of the program to be estimated. However, the agency has not yet developed a work breakdown structure dictionary that clearly defines each element. Weaknesses in the reliability of OPM’s retirement modernization cost estimate have been long-standing. We first reported on the agency’s lack of a reliable cost estimate in January 2008 when we noted that critical activities, including documentation of a technical baseline description, had not been performed, and we recommended that the agency revise the estimate. Although OPM agreed to produce a reliable program cost estimate, the agency has not yet done so. Until OPM fully completes each of the steps, the agency increases the risk that it will produce an unreliable estimate and will not have a sound basis for measuring program performance and formulating retirement modernization program budgets. OMB and OPM policies require major IT programs to use EVM to measure and report program progress. EVM is a tool for measuring program progress by comparing the value of work accomplished with the amount of work expected to be accomplished. Such a comparison permits actual performance to be evaluated, based on variances from the planned cost and schedule, and future performance to be forecasted. Identification of significant variances and analysis of their causes helps program managers determine the need for corrective actions. Before EVM analysis can be reliably performed, developing a credible cost estimate is necessary. In addition to developing a cost estimate, an integrated baseline review must be conducted to validate a performance measurement baseline and attain agreement of program stakeholders (e.g., agency and contractor officials) before reliable EVM reporting can begin. The establishment of a baseline depends on the completion of a work breakdown structure, an integrated master schedule, and budgets for planned work. Although the agency plans to begin reporting on the restructured program’s progress using EVM in April 2009, the agency is not yet prepared to do so because initial steps have not been completed and are dependent on decisions about the program that have not been made. Specifically, the agency has not yet developed a reliable cost estimate for the program; such an estimate, which is critical for establishing reliable EVM, is not expected to be complete until July 2009; the agency does not plan to conduct an integrated baseline review to establish a reliable performance measurement baseline before beginning EVM reporting; and the work breakdown structure and integrated master schedule that agency officials report they have developed may not accurately reflect the full scope and schedule because key program documentation, such as the concept of operations, has not been completed. This situation resembles the state of affairs that existed in January 2008, when we reported that OPM’s EVM was unreliable because an integrated baseline review had not been conducted to validate the program baseline. At that time we recommended, among other things, that the agency establish a basis for effective use of EVM by validating a program performance measurement baseline through a program-level integrated baseline review. Although the agency stated that it agreed, it did not address this recommendation. Until the agency has developed a reliable cost estimate, performed an integrated baseline review, and validated a performance measurement baseline that reflect its program restructuring, the agency is not prepared to perform reliable EVM. Engaging in EVM reporting without first performing these fundamental steps could again render the agency’s assessment unreliable. Well-defined and managed requirements are a cornerstone of effective system development and acquisition. According to recognized guidance, disciplined processes for developing and managing requirements can help reduce the risks of developing a system that does not meet user and operational needs. Such processes include (1) developing detailed requirements that have been derived from the organization’s concept of operations and are complete and sufficiently detailed to guide system development and (2) establishing policies and plans, including defining roles and responsibilities, for managing changes to requirements and maintaining bidirectional requirements traceability. OPM’s retirement modernization requirements processes include some, but not all, of the elements needed to effectively develop and manage requirements. The agency began an effort to better develop its retirement modernization requirements in November 2008. This effort was in response to the agency’s recognition that its over 1,400 requirements lacked sufficient detail, were incomplete, and required further development. The agency intends to complete this requirements development effort in April 2009. However, the requirements will not be derived from OPM’s concept of operations because the agency is revising the concept of operations expected to be completed by April 2009, to reflect the program restructuring. Further, OPM documentation indicates that the agency has not yet determined the level of detail to which requirements should be developed. Additionally, agency officials stated that OPM is developing a requirements development process for retirement modernization. With respect to requirements management, OPM developed an organizational charter that outlined roles and responsibilities for supporting efforts to manage requirements. However, the agency does not yet have a requirements management plan. OPM’s prior experience with DBTS illustrates the importance of effective requirements development and management. According to RetireEZ program officials, insufficiently detailed requirements, poorly controlled requirements changes, and inadequate requirements traceability were factors that contributed to DBTS not performing as expected. Moreover, these requirements development and management weaknesses were identified, and recommendations for improvement were made by OPM’s independent verification and validation contractor before DBTS deployment. However, the agency has not yet corrected these weaknesses. Until OPM fully establishes requirements development and management processes, the agency increases the risk that it will (1) identify requirements that are neither complete nor sufficiently detailed and (2) not effectively manage requirements changes or maintain bidirectional traceability, thus further increasing agency risk that it will produce a system that does not meet user and operational needs. Effective testing is an essential component of any program that includes developing systems. Generally, the purpose of testing is to identify defects or problems in meeting defined system requirements and satisfying user needs. To be effectively managed, testing should be planned and conducted in a structured and disciplined fashion that adheres to recognized guidance and is coordinated with the requirements development process. Beginning the test planning process in the early stages of a program life cycle can reduce rework later in the program. Early test planning in coordination with requirements development can provide major benefits. For example, planning for test activities during the development of requirements may reduce the number of defects identified later and the costs related to requirements rework or change requests. Further, planning test activities early in a program’s life cycle can inform requests for proposals and help communicate testing expectations to potential vendors. OPM has not begun to plan test activities in coordination with developing its requirements for the RetireEZ program. According to OPM officials, the agency intends to begin its test planning by revising the previously developed DBTS test plans after requirements have been developed. However, the agency has not yet added test planning to its project schedule. Early test planning is especially important to avoid repeating the agency’s experience during DBTS testing when it identified more defects than it could resolve before system deployment. In January 2008, we reported that an unexpectedly high number of defects were identified during testing; yet, the deployment schedule had increased the risk of not resolving all defects that needed to be corrected before deploying DBTS. According to the RetireEZ program officials, the failure to fully address these defects contributed to the limited number of federal employees who were successfully processed by the system when it was deployed in February 2008. If it does not plan test activities early in the life cycle of RetireEZ, OPM increases the risk that it will again deploy a system that does not satisfy user expectations and meet requirements (i.e., accurately calculate retirement benefits) because of its potential inability to address a higher number of defects than expected. Moreover, criteria used to develop requests for proposals and communicate testing expectations to potential vendors could be better informed if the agency plans RetireEZ test activities early in the life cycle. GAO and OMB guidance calls for agencies to ensure effective oversight of IT projects throughout all life-cycle phases. Critical to effective oversight are investment management boards made up of key executives who regularly track the progress of IT projects such as system acquisitions or modernizations. These boards should maintain adequate oversight and track project performance and progress toward predefined cost and schedule goals, as well as monitor project benefits and exposure to risk. Another element of effective IT oversight is employing early warning systems that enable management boards to take corrective actions at the first sign of cost, schedule, and performance slippages. OPM’s Investment Review Board was established to ensure that major investments are on track by reviewing their progress and determining appropriate actions when investments encounter challenges. Despite meeting regularly and being provided with information that indicated problems with the retirement modernization, the board did not ensure that the investment was on track, nor did it determine appropriate actions for course correction when needed. For example, from January 2007 to August 2008 the board met and was presented with reports that described problems the retirement modernization program was facing, such as the lack of an integrated master schedule and earned value data that did not reflect the “reality or current status” of the program. However, meeting minutes indicate that no discussion or action was taken to address these problems. According to a member of the board, OPM guidance regarding how the board is to communicate recommendations and corrective actions when needed for the investments it is responsible for overseeing has not been established. In addition, OPM established an Executive Steering Committee to oversee retirement modernization. According to its charter, the committee is to provide strategic direction, oversight, and issue resolution to ensure that the program maintains alignment with the mission, goals, and objectives of the agency and is supported with required resources and expertise. However, the committee was inactive for most of 2008 and, consequently, did not exercise oversight of the program during a crucial period in its development. For example, from January 2008 until October 2008, the committee discontinued its formal meetings, and as a result, it was not involved in key program decisions, including the deployment of DBTS. Further, a member of the committee noted that OPM guidance for making recommendations and taking corrective actions also has not been provided. The ineffectiveness of the board and the inactivity of the committee allowed program management weaknesses in the areas of cost estimation, EVM, requirements management, and testing to persist and raise concerns about OPM’s ability to provide meaningful oversight as the agency proceeds with its retirement modernization. Without fully functioning oversight bodies, OPM cannot monitor modernization activities and make the course corrections that effective boards and committees are intended to provide. OPM’s retirement modernization initiative is in transition from a program that was highly dependent on the success of a major contract that no longer exists, to a restructured program that has yet to be fully defined. Although the agency has been able to partially implement a database of retirement information and improvements to customer service, it remains far from implementing six other key capabilities. Recognizing that much work remains, OPM has undertaken steps to restructure the retirement modernization program, but it has not yet produced a complete description of its planned program, including fundamental information about the program’s scope, implementation strategy, lines of responsibility and authority, management processes, and schedule. Further, OPM’s retirement modernization program restructuring does not yet include definitions of results-oriented goals and measures against which program performance can be objectively and quantitatively assessed. In addition, OPM has not overcome managerial shortcomings in key areas of program management, including areas that we have previously reported. Specifically, the agency is not yet positioned to develop a reliable program cost estimate or perform reliable EVM, both of which are critical to effective program planning and oversight. Nor has OPM overcome weaknesses in its management of system testing and defects, two activities that proved problematic as the agency was preparing to deploy the RetireEZ system that subsequently was terminated. Adding to these long-standing concerns are weaknesses in OPM’s process to effectively develop and manage requirements for whatever system or service it intends to acquire or develop. Finally, these weaknesses have been allowed to persist by entities within the agency that were ineffective in overseeing the retirement modernization program. As a consequence, the agency is faced with significant challenges on two fronts: defining and transitioning to its restructured program, and addressing new and previously identified managerial weaknesses. Until OPM addresses these weaknesses, many of which were previously identified by GAO and others, the agency’s retirement modernization initiative remains at risk of failure. Institutionalizing effective planning and management is critical not only for the success of this initiative, but also for that of other modernization efforts within the agency. To improve OPM’s effort toward planning and implementing its retirement modernization program by addressing management weaknesses, we recommend that the Director of the Office of Personnel Management provide immediate attention to ensure the following six actions are taken: Develop a complete plan for the restructured program that defines the scope, implementation strategy, lines of responsibility and authority, management processes, and schedule. Further, the plan should establish results-oriented (i.e., objective, quantifiable, and measurable) goals and associated performance measures for the program. Develop a reliable cost estimate by following the best practice steps outlined in our Cost Estimating and Assessment Guide, including definition of the estimate’s purpose, development of an estimating plan, definition of the program’s characteristics, and determination of the estimating structure. Establish a basis for reliable EVM, when appropriate, by developing a reliable program cost estimate, performing an integrated baseline review, and validating a performance measurement baseline that reflects the program restructuring. Develop a requirements management plan and execute processes described in the plan to develop retirement modernization requirements in accordance with recognized guidance. Begin RetireEZ test planning activities early in the life cycle. Develop policies and procedures that would establish meaningful program oversight and require appropriate action to address management deficiencies. The Director of the Office of Personnel Management provided written comments on a draft of this report. (The comments are reproduced in app. II.) In the comments, OPM agreed with our recommendations and stated that it had begun to address them. To this end, the Director stated that the agency had, among other actions, begun revising its retirement modernization plans, developing a new program cost estimate, planning for accurate EVM reporting, incorporating recognized guidance in requirements management planning, and planning test activities during requirements development. If the recommendations are properly implemented, they should better position OPM to effectively manage its retirement modernization initiative. The agency also provided comments on the draft report regarding our description of the federal retirement application process, as well as our characterizations of OPM’s EVM and requirements management capabilities vis-à-vis the retirement modernization program. In each of these instances, we made revisions as appropriate. We are sending copies of this report to the Director of the Office of Personnel Management, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-6304 or melvinv@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. As requested, the objectives of our study were to (1) assess the status of the Office of Personnel Management’s (OPM) efforts toward planning and implementing the RetireEZ program and (2) evaluate the effectiveness of the agency’s management of the modernization initiative. To assess the status of OPM’s efforts toward planning and implementing the RetireEZ program, we reviewed and analyzed program documentation, including program management plans, briefing slides, and project status documentation, to identify planned retirement modernization capabilities and determine to what extent these capabilities have been implemented; evaluated the agency’s documentation about restructuring the program and analyzed the extent to which the documentation describes current and planned RetireEZ program activities; identified and evaluated the agency’s program goals and measures and compared them to relevant guidance to determine the extent to which the goals and measures are described in results-oriented terms; supplemented agency program documentation and our analyses by interviewing agency and contractor officials, including the OPM Director, Chief Information Officer, Chief Financial Officer, Director of Modernization, Associate Director for Human Resources Products and Services Division, and executives from Hewitt Associates and Northrop Grumman Corporation; and observed retirement operations and ongoing modernization activities at OPM and contractor facilities in Washington, D.C.; Boyers, Pennsylvania; and Herndon, Virginia. To determine the effectiveness of OPM’s management of the retirement modernization initiative, we evaluated the agency’s management of program cost estimating, earned value management (EVM), requirements, test planning, and oversight and compared the agency’s work in each area with recognized best practices and guidance. Specifically, to evaluate whether OPM effectively developed a reliable program cost estimate, we analyzed the agency’s program documentation and determined to what extent the agency had completed key activities described in our Cost Estimating and Assessment Guide; to assess OPM’s implementation of EVM, we reviewed program progress reporting documentation and compared the agency’s plans for restarting its EVM-based progress reporting against relevant guidance, including our Cost Estimating and Assessment Guide; regarding requirements management, we evaluated OPM’s processes for developing and managing retirement systems modernization requirements and compared the effectiveness of those processes against recognized guidance; to determine the effectiveness of the agency’s test planning for the retirement modernization, we reviewed program activities and test plans against best practices and evaluated the extent to which the agency has begun planning for these activities; and we reviewed and analyzed documentation from program oversight entities and evaluated the extent to which these entities took actions toward ensuring the RetireEZ program was being effectively overseen. We also evaluated OPM’s progress toward implementing our open recommendations and interviewed OPM and contractor officials as noted. We conducted this performance audit at OPM headquarters in Washington, D.C., the Retirement Operations Center for OPM in Boyers, Pennsylvania, and contractor facilities in Herndon, Virginia, from May 2008 through April 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, key contributions to this report were made by Mark T. Bird, Assistant Director; Barbara S. Collier; Neil J. Doherty; David A. Hong; Thomas J. Johnson; Rebecca E. LaPaze; Lee A. McCracken; Teresa M. Neven; Melissa K. Schermerhorn; Donald A. Sebers; and John P. Smith.","For the past two decades, the Office of Personnel Management (OPM) has been working to modernize the paper-intensive processes and antiquated systems used to support the retirement of federal employees. By moving to an automated system, OPM intends to improve the program's efficiency and effectiveness. In January 2008, GAO recommended that the agency address risks to successful system deployment. Nevertheless, OPM deployed a limited initial version of the modernized system in February 2008. After unsuccessful efforts to address system quality issues, OPM suspended system operation, terminated a major contract, and began restructuring the modernization effort, also referred to as RetireEZ. For this study, GAO was asked to (1) assess the status of OPM's efforts to plan and implement the RetireEZ program and (2) evaluate the effectiveness of the agency's management of the modernization initiative. To do this, GAO reviewed OPM program documentation and interviewed agency and contractor officials. OPM remains far from achieving the modernized capabilities it had planned. Specifically, the agency has partially implemented two of eight planned capabilities: (1) an integrated database of retirement information accessible to OPM and agency retirement processing personnel and (2) enhanced customer service capabilities that support customer needs and provide self-service tools. However, the remaining six capabilities have yet to be implemented because they depended on deliverables that were to be provided by a contract that is now terminated. Examples of these missing capabilities include: (1) automated submission of retirement information through interfaces with federal agencies and (2) Web-accessible self-service retirement information for active and retired federal employees. Further, OPM has not yet developed a complete plan that describes how the program is to proceed without the system that was to be provided under the terminated contract. Although agency documents describe program implementation activities, they do not include a definition of the program, its scope, lines of responsibility and authority, management processes, and a schedule. Also, modernization program documentation does not describe results-oriented performance goals and measures. Until the agency completes and uses a plan that includes all of the above elements to guide its efforts, it will not be properly positioned to move forward with its restructured retirement modernization initiative. Further, OPM has significant weaknesses in five key management areas that are vital for effective development and implementation of its modernization program: cost estimating, earned value management (a recognized means for measuring program progress), requirements management, testing, and oversight. For example, the agency has not developed a cost estimating plan or established a performance measurement baseline--prerequisites for effective cost estimating and earned value management. Further, although OPM is revising its previously developed system requirements, it has not established processes and plans to guide this work or addressed test activities even though developing processes and plans, as well as planning test activities early in the life cycle, are recognized best practices for effective requirements development and testing. Finally, although OPM's Executive Steering Committee and Investment Review Board have recently become more active regarding RetireEZ, these bodies did not exercise effective oversight in the past, which has allowed the aforementioned management weaknesses to persist and OPM has not established guidance regarding how these entities are to intervene when corrective actions are needed. Until OPM addresses these weaknesses, many of which GAO and others made recommendations to correct, the agency's retirement modernization initiative remains at risk of failure. Institutionalizing effective management is critical not only for the success of this initiative, but also for that of other modernization efforts within the agency.",govreport
"Over the last 2 decades, the number of school-aged children with limited English proficiency in the nation has grown dramatically, increasing from less than 1 million in 1980 to more than 3.5 million in 1998. Despite small rates of growth in the total enrollment of all K-12 children, the enrollment of school-aged children with limited English proficiency across the United States grew exponentially between school years 1989-90 and 1997-98 (see fig. 1). While California, Florida, New York, and Texas continue to have the largest number of children with limited English proficiency (see fig. 2), other states that previously had small populations of such children have experienced large increases in recent years. For example, in Alabama, Idaho, Nebraska, Nevada, North Carolina, and Tennessee, the number of children with limited English proficiency more than doubled between school years 1992-93 and 1997-98 (see fig. 3). In 1968, the Congress passed the Bilingual Education Act (BEA). The purpose of the BEA is to educate students with limited English proficiency so that they can reach the academic standards expected of all students. The 1994 reauthorization of BEA created the four bilingual education grant programs—Program Development and Implementation Grants (PDI), Program Enhancement Projects (Enhancement), Comprehensive School Grants (Comprehensive), and Systemwide Improvement Grants (Systemwide)—to distribute funds directly to school districts serving children with limited English proficiency. These are the only federal programs that specifically target instructional services to children with limited English proficiency. In addition to the four federally funded bilingual education programs authorized by the BEA, other federal programs also address the special needs of these children though they do not exclusively target this population. For example, Title I of the Elementary and Secondary Education Act, which gave $8.7 billion in fiscal year 2000 to assist school districts educating disadvantaged students, is the largest federal program that includes support for children with limited English proficiency.However, most services for children with limited English proficiency are funded with local and state—not federal—dollars. Education’s Office of Bilingual Education and Minority Languages Affairs (OBEMLA) administers the four competitive bilingual education grant programs. The cost of administering these programs is funded through Education’s program administration account, while funding for the program grants is included in OBEMLA’s program budget. The bilingual education programs do not receive separate appropriations from the Congress; rather, OBEMLA receives a single budget appropriation to fund programs authorized by the BEA. (See app. I for a listing of all programs funded by the single budget appropriation.) During the grant competition cycle (approximately 4 to 6 months long), application forms are reviewed and scored based on applicants’ responses to the selection criteria (see app. II). The applications for the four programs are very similar and are organized into two main sections. The first section requests such information as a proposed summary budget, a detailed itemization of proposed annual expenses, and student data including the language groups and number of both limited English and English-proficient students to be served. The second section, the bulk of the application, is a narrative in which applicants describe the proposed project by demonstrating how it meets the selection criteria established by Education. Although the application forms and the selection criteria for all four programs are very similar, school districts and schools use the application to describe projects tailored to their specific local needs. School districts may submit applications to receive funding from more than one of the programs. At the end of the grant competition cycle, Education ranks the applications and awards funding to grantees. OBEMLA’s management plan contains safeguards to prevent individual schools from receiving funding from more than one bilingual education program. In fiscal year 2000, Education funded approximately 28 percent of the 665 applications it received. According to OBEMLA staff, the following number of grants were awarded in fiscal year 2000 to school districts to serve children with limited English proficiency: 18 Systemwide grants averaging $551,000 each; 75 Comprehensive grants averaging $245,300 each; and 92 PDI grants averaging $156,200 each. No Enhancement grants were awarded in fiscal year 2000. In coming years, Education plans to award a greater proportion of the grants to schools in the early stages of developing and implementing new programs. Congressional interest in the BEA has centered on the appropriate federal role in meeting the special needs of children with limited English proficiency. The 107th Congress is considering several bills as it deliberates BEA reauthorization in fiscal year 2001. One bill recommends the elimination of the four grant programs and another seeks to significantly increase funding for bilingual education programs and consolidate the four programs into a single grant program. The President’s budget proposes to implement changes in bilingual and immigrant education that would consolidate all currently funded bilingual and immigrant programs, as well as the Foreign Language Assistance program, into a single flexible performance-based state grant program. All four federal bilingual education programs share the same performance goals and measures, possess similar eligibility criteria, and allow similar uses of program funds (see table 1). The four programs target students with limited English proficiency in kindergarten through 12th grade. The overall objectives of these four programs are to provide bilingual or special alternative education programs to children with limited English proficiency and to help such children reach high academic standards. Under each program, students’ achievement is measured biannually to determine if they have demonstrated continuous progress in oral and written English, as well as in language arts, reading, and math. LEAs are eligible to apply for funding under the four bilingual education programs; however, only LEAs with high concentrations of such students are eligible to apply for grants from the Comprehensive and Systemwide programs. LEAs may collaborate on their grant applications with institutions of higher education, community-based organizations, and state education agencies. All four programs also permit the use of funds to provide instructional services and materials, professional staff development for teachers and teacher’s aides, and family education programs. The PDI and Enhancement programs require specific uses of funds; the Comprehensive and Systemwide programs permit funds to be used on services from any of the above broad categories. Only the Systemwide program specifically authorizes services at the school district level, such as those associated with grade promotion and graduation requirements. All school districts and schools receiving funds must coordinate with other relevant programs and services to meet the full range of needs of participating students. The legislative purpose and grant length of the four bilingual education programs also vary. For example, PDI grants are to be used to develop and implement new bilingual education programs. According to Education officials, school districts typically submit applications to the PDI program if the population they intend to serve is new to a community and the students are relatively close in age. The purpose of the Enhancement program, according to the legislation, is to expand existing bilingual education programs. In practice, however, differences between the PDI and Enhancement programs have not been apparent to grantees. Education officials said that the types of programs described in the applications submitted by some school districts are the same for both the PDI and Enhancement programs. School districts typically submit applications to the Comprehensive program if the students they intend to serve are concentrated in one school but are disbursed throughout several grades. School districts typically submit applications to the Systemwide program if students with limited English proficiency of all ages attend schools throughout the district. Both the PDI and Enhancement programs make what are considered short-term grants because they provide funding for 2 to 3 years. Both the Comprehensive and the Systemwide program grants provide funding for 5 years. OBEMLA officials awarded grants to school districts with similar characteristics that provided similar services; however, individual schools typically did not receive funding from more than one bilingual education program. Our review of grantee files confirmed Education officials’ estimate that 80 percent of grants funded projects in elementary schools, and approximately 70 percent of the children served by the programs spoke Spanish as their primary language. A majority of grants funded in fiscal year 2000 went to school districts in states with historically high concentrations of students with limited English proficiency (see fig. 4). However, according to agency officials, Education has begun to award an increasing number of grants to school districts in states that until recently had small numbers of such students. According to Education officials, grantees receiving funding under each of the four programs provided similar services to their students with limited English proficiency. The services provided with program funds fell within three broad categories: instructional activities and materials, professional staff development for teachers and teacher’s aides, and family education programs. However, the precise nature of the services varied by district and school. For instance, some school districts chose an English-based instructional approach to teaching students with limited English proficiency, while others made more extensive use of the students’ native language (bilingual approach). Although schools receiving funds were similar in many respects, according to our file review, there is little evidence to indicate that individual schools received funding from more than one bilingual education program (see table 2). Even in instances where school districts received multiple grants, they were distributed so that individual schools typically did not receive funding from more than one program. On the basis of our file review and discussions with grantees and Education officials, we learned that while large school districts located in New York City and Los Angeles County were among the proportion (18 percent) of school districts receiving funding from more than one bilingual education program, individual grants were targeted to different schools within these large districts. The effectiveness of the four bilingual education programs on a national level is unknown because locally collected data are not comparable. The BEA requires local assessments of student outcomes, and leaves the choice of assessment tests to the local program. Although the legislation does not address how these evaluations are to be funded, grantees are required to submit evaluations every 2 years and can—according to Education officials—use grant funds for that purpose. Grantees use these evaluations to improve the local program, further define local program goals and objectives, and measure student outcomes such as academic achievement. To measure student academic achievement, the legislation specifies that local projects provide data on whether students with limited English proficiency are achieving state performance standards. For example, grantees must provide data comparing the academic achievement and school retention rates of students with limited English proficiency with those of English-proficient students. The legislation also requires data on program implementation and the relationship between activities funded by these programs and those funded by other sources. Because school districts use different assessment tests and define terms differently, student outcome data are not comparable among grantees, or nationally. While the BEA does not require grantees to use specific assessment tests, individual states or school districts may have such requirements. Grantees measure student academic achievement against different performance standards depending on, for instance, whether the standards were set at the state level or by a school district. Furthermore, many grantees have their own definitions and measures of key terms such as school retention. Education’s guidance states that because of the variation in how school retention is defined and measured, it is important that each local program follow its own school, district, or state definition and measure. One study prepared for Education found that it was difficult to aggregate data to provide a national picture of program effectiveness for these reasons, and also because of the variability in the quality and amount of data reported by school districts. However, Education may be able to garner some information about how well local bilingual education programs are meeting program goals by comparing local data with Education’s performance standards. Even if Education were able to obtain uniform data across local programs, it would still be difficult to isolate the effects of BEA funding. As mentioned earlier, funding from other federal programs—the largest of which is Title I—also supports these children. Moreover, state and local funds support most of the services provided to students with limited English proficiency. Because services provided to students with limited English proficiency are funded through multiple federal, state, and local sources, it would be difficult to isolate the effects of the four bilingual education program funds from other funding effects. Because all four bilingual education programs share the same goals, target the same types of children, and provide similar services, these programs lend themselves to consolidation. Though federal cost savings would likely be small, program consolidation would allow Education to redirect some of the resources it uses to manage four separate grant competitions to accomplish other activities, such as conducting site visits, reviewing and evaluating specific aspects of a grantee’s activities, and providing technical assistance. Program consolidation may also reduce applicant burden associated with multiple federal programs designed to achieve the same overall objectives. Education officials believe that consolidating these programs has merit and have already taken some steps to reduce overlap among the four programs. For example, because of similarities between the PDI and Enhancement programs cited by grantees and OBEMLA staff, Education holds grant competitions for these programs on alternating years (except in fiscal year 1999) (see table 3). Although reducing the number of programs for students with limited English proficiency requires congressional action, Education already decides which of the four programs to fund in a particular fiscal year and at what level to fund them. Given the inefficiencies associated with program overlap, the Congress may want to consider consolidating the four bilingual education programs into one program. While opportunities exist for consolidating the four bilingual education programs, federal cost savings, if any, from this action would likely be small for two reasons. First, the way programs are funded may limit any savings. As part of its annual budget request, Education proposes a funding level (as a single line item) for the four bilingual education programs. Because congressional appropriations are made as a single line item for the four programs, Education has the discretion to decide how to distribute the appropriated funds to the individual programs. Therefore, eliminating one or more of the programs would not necessarily change the funding level, which is proposed by Education’s budget request and determined by the Congress. Second, staff reductions are unlikely, thus limiting cost savings. Because the same 28 staff members administer all of OBEMLA’s programs (the four bilingual education programs we examined as well as 10 others), staff reductions could affect the management of all OBEMLA programs. Consolidating the four bilingual education programs may provide benefits other than cost savings to Education. According to OBEMLA officials, a reduction in the number of applications received—and possibly the number of grant competitions held—would allow staff to reallocate some of their time to other important program-related activities. Currently, OBEMLA holds a grant competition lasting approximately 4 to 6 months for each of the bilingual education programs awarded in a given year. According to OBEMLA staff, approximately 10 grant competitions are held for the bilingual education and other OBEMLA programs each year. This process consumes significant staff resources. OBEMLA officials also mentioned that some school districts submit grant applications to more than one bilingual education program in an effort to increase their chances of receiving funding from at least one, but OBEMLA does not maintain data on how widespread this practice is. According to Education officials, reducing the number of programs would likely decrease the number of grant applications received because school districts would be less likely to submit multiple grant applications. As a result, OBEMLA staff would spend less time reviewing applications and, possibly, less time conducting grant competitions. OBEMLA staff stated that, by spending less time reviewing applications and conducting grant competitions, they would have more time to effectively conduct other important activities such as visiting every grantee at least once during the course of its funding cycle, reviewing and evaluating specific aspects of a grantee’s activities, and providing technical assistance. Furthermore, as part of its efforts to provide technical assistance, Education officials might have more time to identify and disseminate information on effective practices gathered from grantees that have been successful in meeting program goals. Education officials also believe that time saved as a result of consolidation may allow for a greater emphasis on building collaborations between grantees and the other programs providing support to children with limited English proficiency. Consolidation may also directly benefit grantees applying to more than one of the bilingual education programs by reducing the burden associated with applying to multiple federal programs designed to achieve the same overall objectives. Several grantees we interviewed said that the application process was time consuming. According to the Office of Management and Budget, each application takes from 80 hours (PDI and Enhancement applications) to 120 hours (Comprehensive and Systemwide applications) to complete. Grantees we spoke with estimated that they spent anywhere from 6 days to 6 weeks completing applications. Furthermore, according to Education officials, grantee applications submitted to the PDI and Enhancement programs often proposed using the grants to fund the same types of activities. Given that applications for funding from the four bilingual education programs we reviewed require extensive time and effort to prepare, reducing the number of programs may decrease the administrative burden experienced by school districts applying for multiple program grants. OBEMLA staff believes that the four bilingual education programs meet two funding priorities for students with limited English proficiency. The first priority is to help school districts and schools that have experience serving students with limited English proficiency, and the second is to help those with little experience serving such students. At present, the Comprehensive and Systemwide programs focus on the first priority by meeting the needs of grantees that are upgrading existing programs, and the PDI and Enhancement programs meet the second priority by awarding grants to educate new populations of limited English-proficient students. Education officials recognize that four bilingual education programs are not necessary to meet the needs of school districts serving students with limited English proficiency. Education has taken steps to reduce redundancy by not awarding new grants under all four programs every year. During the 6-year period between 1995 (when the programs were first funded) and 2000, Education held grant competitions for all four bilingual education programs in only 1 year. Staff members acknowledged that given enough flexibility to meet a variety of funding priorities, they may be able to serve all grantees with one program. The four federal bilingual education programs included in this review overlap in many significant ways, and our current and past work has shown that overlap can create an environment in which programs do not serve participants as efficiently as possible. Education officials and some grantees recognize that fewer than four programs could meet the needs of schools educating students with limited English proficiency. We believe it would be possible for a single federal program to address the agency’s funding priorities if the program has adequate flexibility. To decrease the overlap caused by four bilingual education programs that were designed to achieve the same overall objectives, the Congress may want to consider program consolidation. The Congress could authorize a single federal program that consolidates all four bilingual education programs into one but provides Education with the flexibility to meet the varied needs of school districts serving students with limited English proficiency. Such a program would focus on grantees with experience educating students with limited English proficiency as well as those grantees with little experience in this area. We provided a draft of this report to the Department of Education for comment and we received written comments, which are included in appendix III. Since the discussions we had with program staff during our review, Education has decided that it supports consolidating the four programs into one, which is consistent with the President’s budget proposal. Thus, we have revised the report to reflect Education’s position, which also supports the consolidation of the four programs suggested in our Matter for Congressional Consideration. However, our review did not address whether the federal government or states should administer the program, and Education officials did not discuss this topic with us during our review. In addition, we received technical comments from Education and incorporated these comments where appropriate. We are sending copies of this report to the Honorable Roderick R. Paige, Secretary of Education; relevant congressional committees; and other interested parties. We will also make copies available to others on request. Please contact me on (202) 512-7215 if you or your staff have any questions about this report. Other GAO contacts and staff acknowledgments are listed in appendix IV. During grant competitions, a group of peer reviewers rates applications for each of the four bilingual education programs using the following selection criteria. These criteria help reviewers assess the strength of individual applications. Reviewers assign numerical scores and rank the applications to determine those that merit grant awards. The selection criteria are similar across all four programs. Selection criterion Meeting purpose of statute Extent of need for project Quality of project design Quality of project services Proficiency in English and another language Language skills of personnel Project activities Quality of project personnel Adequacy of resources Quality of management plan Integration of project funds Quality of project evaluation plan Commitment and capacity building *Program uses indicated selection criteria. In addition to those named above, the following individuals made important contributions to this report: Sherri Doughty, Ellen Habenicht, Corinna Nicolaou, James Rebbe, Jay Smale, and Jim Wright.","In fiscal year 2000, the federal government funded four bilingual education programs--Program Development and Implementation Grants, Program Enhancement Projects, Comprehensive School Grants, and Systemwide Improvement Grants--that award grants to school districts to serve children with limited English proficiency. This report reviews (1) how similar the performance goals and measures, eligibility criteria, and allowable services are among the four bilingual education programs; (2) to what extent the different kinds of grants were made to the same types of schools or school districts and were used to provide the same services; (3) what is known about these programs' effectiveness; and (4) whether these programs can be better coordinated or if opportunities exist for program coordination and cost savings. GAO found that all four federal bilingual education programs share the same performance goals and measures, use similar eligibility criteria, and allow for similar uses of program funds. In fiscal year 2000, the four bilingual programs made grants to school districts that shared some characteristics and provided similar services; however, individual schools typically did not receive funding from more than one program. The services provided with program funds are similar, but are tailored by school districts and schools to meet local needs. Currently, the effectiveness of the four bilingual programs on a national level is not known. The authorizing legislation requires the use of local evaluations to assess students' progress in meeting state standards. The variation in local assessment tests complicates the task of providing a national picture of program effectiveness. Even if the Department of Education were able to obtain uniform information on local projects, it faces challenges in trying to isolate the funding effects of the four bilingual programs from funding effects of other programs that support students with limited English proficiency. Finally, these four bilingual programs lend themselves to consolidation. Although cost savings from consolidation would likely be small, there may be advantages to consolidation, such as freeing up staff for other important activities and reducing the administrative burden associated with redundant federal programs.",govreport
"NCIC is an extensive computerized criminal justice information system maintained by the FBI that serves as a repository of data on crimes and criminals of nationwide interest and as a locator file for missing and unidentified persons. Over 92,000 law enforcement agencies and other criminal justice partners have access to NCIC, which includes approximately 35,000 federal, state, and local law enforcement agencies in the United States. As of January 1, 2011, NCIC contained 85,820 active records in its missing persons file. See figure 1 for additional information on the age of missing persons reported by law enforcement to NCIC. NCIC is managed cooperatively by FBI’s CJIS—the division within the FBI that operates as the focal point and central repository for criminal justice information services—and the state and local agencies that access the system. An Advisory Process, consisting of an Advisory Policy Board (the Board) with representatives from criminal justice and national security agencies throughout the United States, and working groups are responsible for establishing policy for NCIC use by federal, state, and local agencies and providing advice and guidance on all CJIS Division programs. In addition, the Board creates ad hoc subcommittees as necessary to review policies and develop alternatives or recommendations for the Board’s consideration. NCIC policies and procedures are documented in the NCIC 2000 Operating Manual and the CJIS Security Policy. Local level governance of NCIC use is performed by the CSA. The CSA is a criminal justice agency that has overall responsibility for the administration and usage of NCIC, including providing quality assurance and training and assuring LEA compliance with operating procedures within its jurisdiction. Most CSAs are state agencies that oversee NCIC use by all LEAs that enter data into NCIC in the state. A CSA may be a law enforcement agency, such as a state police agency, that also enters data into NCIC, in addition to overseeing the administration of the state’s NCIC system. Furthermore, the Board requires that each local LEA appoint a Terminal Agency Coordinator who serves as the representative and point of contact for disseminating information on NCIC policies and procedures to that agency. CJIS shares with the CSAs the responsibility for monitoring compliance with NCIC policy, as shown in figure 2. CJIS policy, as approved by the Board, calls for triennial audits of each CSA to assess the CSA’s compliance with NCIC policies, including the 2-hour entry requirement. Further, CJIS relies on the CSAs to audit all LEAs that enter data into NCIC in each state, to help ensure compliance among all NCIC users. CJIS’s NCIC performance-based audit program tasks the CJIS Audit Unit with conducting a compliance audit of each CSA to verify compliance with federal laws, such as the 2-hour entry requirement for reports of missing children, and other CJIS policies and regulations. The purpose of the audit is to: assess CSA compliance with NCIC system policy requirements; assess the quality, integrity, and security of the data maintained in and accessed from a variety of criminal justice information systems and networks; and ensure timely and relevant criminal justice information is made available to authorized users. As part of its audit of CSAs, CJIS reviews random samples of records of missing persons in selected LEAs, and assesses all missing children records contained in the sample to determine compliance with the 2-hour entry requirement. During the current triennial audit cycle, the CJIS Audit Unit plans to audit CSAs in all 50 states plus the District of Columbia from October 1, 2009, through September 30, 2012. CJIS funding for conducting NCIC audits was $207,570 in fiscal year 2009 and $309,854 in fiscal year 2010, and is projected to be $244,202 in fiscal year 2011. CJIS’s audit of CSAs consists of a pre-audit questionnaire, on-site visit, and follow-up report. The pre-audit questionnaire is sent to CSAs and selected LEAs within the state to obtain written responses as well as assist CJIS in gathering the relevant information to better inform the audit process. In selecting LEAs, CJIS takes into account a number of factors, which may include the number of records entered by each LEA, the total number of records to be reviewed in the state, the LEA’s geographic location to reduce the time and travel burden imposed on CJIS audit staff, whether the LEA was previously found to have extensive and/or serious NCIC noncompliance issues, and whether CSA officials request that CJIS include the LEA in its audits based on CSA concerns from prior CSA audits. The on-site visit consists of interviews of CSA and LEA personnel to determine compliance with NCIC policies and procedures, and a data quality review of selected LEA NCIC records. In designing its review of these records, CJIS seeks to balance the need for a cost-effective, logistically feasible approach, with the need to ensure the review obtains statistically valid information on the accuracy, completeness, and timeliness of all missing person records. During the post-audit phase, CJIS prepares a draft audit report that includes findings from the interviews with the agency personnel as well as the data-quality reviews and recommendations for agency compliance. The report is provided to the CSA for review, and the final report, including the CSA’s responses to any recommendations, is forwarded to the Sanctions Ad Hoc Subcommittee of the Board. This subcommittee is responsible for evaluating the results of audits conducted of participants in the CJIS Division programs. The subcommittee makes specific recommendations to the Board concerning sanctions that should be imposed on agencies that are not in compliance with the policies established by the Board for the operation of the CJIS Division programs. Sanctions may be in the form of a letter of concern from the subcommittee enumerating audit problems that had not been resolved from previous audit cycles, or a letter of sanction, which is similar to the letter of concern, but with stronger language and specific compliance terms and procedures. If the CSA does not adequately address noncompliance issues, the Board has the option of terminating the state’s access to NCIC. Each CSA is also required by CJIS and the Board to establish a system to, at a minimum, triennially audit all LEAs that enter data into NCIC within their jurisdiction, to ensure compliance with NCIC policy and regulations. Each CSA is responsible for developing an audit program to meet this requirement and the resulting audit approach can vary across CSAs. We discuss the audit approaches used to assess the timeliness of missing children records by the 6 selected CSAs later in this report. During its audits, CJIS assesses the extent to which the CSAs are fulfilling the requirement to audit all LEAs that enter data into NCIC under their jurisdiction. CJIS and the Board have taken a number of steps to help ensure that LEAs implement the 2-hour entry requirement. Beginning in January 2007, CJIS: informed CSAs and LEAs that the Adam Walsh Act of July 2006 required all reports of missing persons under the age of 21 to be entered into NCIC within 2 hours of receipt; provided guidance to CSAs and LEAs regarding how LEAs might best document compliance with the requirement; and informed CSAs and LEAs that the Board had authorized it to begin assessing noncompliance with the requirement in October 2009 and possibly subject noncompliant CSAs to sanctions beginning in October 2012. Starting with its CSA audits conducted in January 2007, CJIS provided verbal and written information to all CSAs and the selected LEAs it audited that LEAs will have 2 hours to enter reports of missing children into NCIC from the time LEAs complete collecting 10 data elements required by statute. As the Adam Walsh Act did not specify how compliance was to be measured, CJIS started measuring the 2 hours once the required data were obtained because this is how CJIS has measured timely entry requirements for all other types of NCIC records, such as missing persons age 21 and older and wanted persons. In addition, CJIS recognized that law enforcement may face challenges obtaining complete information at the time of the initial report, for example, from parents who are traumatized by a child’s disappearance. If the elapsed time between obtaining and entering the information on a missing child was equal to or less than 2 hours, CJIS would deem the entry to be in compliance with the 2-hour entry requirement. Conversely, if the elapsed time was more than 2 hours, CJIS would deem the entry to be out of compliance with the 2-hour entry requirement. Generally, according to CJIS officials, if CJIS finds that 10 percent or more of missing children records reviewed are out of compliance, CJIS would make an audit recommendation requiring the CSA to take actions to address non-compliance. The officials also said that CJIS provides and discusses all findings from its LEA reviews with the cognizant LEAs. CJIS more broadly disseminated information to CSAs and LEAs regarding how timeliness would be assessed via (1) a January 2008 letter to the heads of all CSAs and (2) a June 2009 update to NCIC’s Operating Manual. In CJIS’s letter to the heads of the CSAs and in the update to the NCIC Operating Manual, CJIS recommended that LEAs use a time and date stamp to document when they completed collecting the required information from the party or parties reporting the missing child. CJIS also informed CSAs and LEAs that it would assess timeliness using the 2-hour criterion and make audit recommendations that would require CSA responses in the audit cycle beginning in October 2009. This start date was selected because of the Board’s decision to grant a grace period to allow agencies time to establish and institute procedures to accurately document the receipt of the minimum data necessary for entry. CJIS did not specifically require LEAs to use the recommended time and date stamps, but if an audited LEA did not document the date and time it received the minimum data, CJIS stated it would consider any unjustified delay in entering information on a missing child into NCIC as untimely. This could result in CJIS making an audit recommendation that the CSA take action to address the noncompliance and the Sanctions Ad Hoc Subcommittee applying sanctions in the future. As of January 2011, CJIS had audited 22 CSAs using the 2-hour criterion for entering reports of missing children into NCIC. Of the 22 audits, 10 audit reports were finalized and 12 were in draft form. Of the 10 CSAs where audit reports were final, CJIS found 9 CSAs to be out of compliance with the 2-hour entry requirement and issued audit recommendations to them to take actions to ensure timely entry. As shown in figure 3, the percentage of missing children records assessed by CJIS as having been entered into NCIC within 2 hours ranged from 53 percent to 91 percent across the 10 states; and the percentage of records entered into NCIC after 2 hours ranged from 9 percent to 47 percent. During the audits, CJIS attempts to capture information on the reasons missing children records are untimely to assist the CSAs in identifying issues that they may need to address statewide in order to become compliant with the 2-hour entry requirement. For each untimely missing child record, CJIS audit staff asks the LEA personnel to provide a description of the reason that led to the delay in entry. However, for 82 percent of the 432 untimely missing children records identified across the 10 states, CJIS officials told us they did not know the reason for the delay because the LEAs could not provide them with information on the reasons why the records were not entered within 2 hours. For the 79 untimely missing children records where LEAs were able to provide CJIS information on the causes for the delay in NCIC entry, two predominant reasons were given: LEA personnel did not know about the 2-hour entry requirement. Responding officers did not provide the information on the missing child in a timely manner. This could occur, for example, if officers began investigating the case before submitting the report of the missing child, waited until the end of the shift to submit a report, were dispatched to another service call prior to submitting the report, or did not deem it necessary to submit the report immediately for NCIC entry because they considered the child to be a frequent run-away. CJIS officials also said that in cases where CJIS auditors could not find documentation of the date and time that the minimum data required for NCIC entry were obtained, they deemed the entry to be untimely. In written responses to CJIS’s findings of untimely entry, CSAs generally focused on their plans to provide training to personnel responsible for entering reports of missing children into NCIC and educate personnel through the CSAs’ audits of LEAs. CJIS informed CSAs that, in order to allow for an appropriate transition period, the Board had decided that audit recommendations based on the 2- hour entry requirement would not be forwarded to the Board’s Sanctions Ad Hoc Subcommittee until the audit cycle beginning in October 2012. Thus, while CSAs must respond to CJIS audit recommendations regarding non-compliance with the 2-hour entry requirement, non-compliance in this area will not be a factor in the Board’s decisions about whether to impose sanctions on a CSA until October 2012. During its audits of CSAs, CJIS verifies that each CSA is conducting the triennial audits that are required by CJIS and the Board. However, the Board has not taken steps to establish audit standards that require CSAs to assess compliance with the 2-hour entry requirement. Standards for Internal Control in the Federal Government call for management to design control activities to help ensure that its control objectives are met. Such standards could better position CJIS and the Board to ensure that the CSA audits accomplish CJIS’s specific oversight and compliance objectives for timely entry of missing children records. In the absence of standards, we found that audit approaches used by the 6 selected CSAs to assess compliance with the 2-hour entry requirement varied. For example, lacking standards, two CSAs were not using the 2- hour criterion to assess timeliness and the six CSAs varied in the number of missing children records reviewed. The number of missing children records reviewed ranged from all active records in one state to no records in another. The fact that CSAs were not consistently applying the 2-hour criterion to review a sample of missing children records raises questions about the reliability of CSA information on LEA compliance. The two CSAs that were not using the 2-hour criterion had different approaches to assessing timeliness: Officials for one CSA stated they used an “immediate” criterion to assess the timeliness of missing children records, which they said was stricter than the 2-hour entry requirement. However, the CSA did not have documentation on the time frame that was to be used for measuring “immediate” entry or how it assessed compliance with this criterion. Thus, CSA auditors could not demonstrate LEAs’ compliance with the 2-hour entry requirement. One CSA relied on LEAs to complete a questionnaire that asks, among other things, if the agencies impose a waiting period before taking reports of missing children and if there is a “large delay” between the time a missing person report is taken and the time it is entered into NCIC. However, the questionnaire does not define what the CSA considers to be a “large delay,” and the CSA does not test for compliance. Therefore, auditors for this CSA also could not demonstrate LEAs’ compliance with the 2-hour entry requirement. CSAs were also not consistent in the number of missing children records they assessed for compliance with the 2-hour entry requirement, specifically: One CSA (the CSA mentioned above that relied on LEA responses to a questionnaire) did not review any missing children records because the state had over 500 LEAs and, according to CSA officials, a limited number of auditing staff. One CSA determined the number of missing children records to review at each LEA based upon the LEA’s entry error rate—the portion of records that were untimely, incomplete, or did not comply with other entry requirements—from its past CSA audit. This approach resulted in the CSA reviewing 2 missing person records out of about 400 at one LEA. One CSA generally reviewed 4 to 10 missing children records from each LEA it audited. This sampling approach resulted in the CSA reviewing about the same number of records from an LEA with over 1,250 active missing children records as from an LEA with about 100 active missing children records. One CSA generally reviewed 10 percent of all missing person records from each LEA it audited, some portion of which would be missing children records. The CSA also imposed a minimum of 20 missing person records to be reviewed. If a LEA had fewer than 20 missing person records in NCIC, then the CSA would review all records. One CSA reviewed 10 percent of active missing children records from large LEAs, such as one with over 800 missing children records in NCIC, and all records from the remaining LEAs it audited. One CSA reviewed all active missing children records from each LEA it audited. We do not know the extent to which the variability we identified in CSA audit approaches exists across all CSAs. However, our findings that one CSA did not assess any missing children records and other CSAs reviewed a relatively small number of records raises questions about the CSAs’ and, in turn, CJIS’s ability to draw conclusions regarding LEAs’ compliance with the 2-hour entry requirement for missing children. CJIS officials acknowledged that CSA audits would be more useful if they measured LEAs’ compliance with the 2-hour criterion and reviewed a sample of missing children records to assess compliance with the entry requirement, but CJIS and the Board do not require CSAs to incorporate either of these into their audits. CJIS officials said that when CSAs request audit guidance, CJIS makes information available to them on its audit methodology and protocols, which include applying the 2-hour criterion to assess a sample of missing children records. Standards for Internal Control in the Federal Government call for agencies to ensure control activities are in place that enforce management’s directives and effectively accomplish agencies’ control objectives. Without such minimum audit standards for assessing compliance with the entry requirement—including applying the 2-hour criterion and how to sample missing children records—CSAs’ audits may not be collecting as consistent and reliable information on LEA compliance with the requirement as they could. Minimum standards could also help CJIS better accomplish its specific oversight and compliance objectives for timely entry of reports of missing children. We recognize that when CSAs conduct audits, they have multiple responsibilities to ensure compliance with all NCIC policies and face resource constraints that may limit their ability to review missing children records for timeliness. Therefore, it could be helpful for CJIS, CSAs, and the Board to collaborate in developing minimum standards that are both feasible to implement and provide reliable information on LEA compliance. Once standards are established, CJIS could help ensure that CSA audits are meeting standards by reviewing the audit approaches that CSAs use to assess timeliness. This type of review is another key internal control activity that could help CJIS achieve its oversight and compliance objectives for the 2-hour entry requirement for reports of missing children. Officials from eight of the nine LEAs we contacted identified custody disputes and coordination with child welfare agencies as potential impediments to reporting missing children to NCIC in a timely manner or investigating these cases. OJJDP has funded research and policy development to produce guidance in these areas, but CJIS and OJJDP could take additional steps to better position DOJ to carry out its oversight role over NCIC, with respect to helping ensure compliance with the 2-hour requirement. Custodial issues may come into play when a child is missing as a result of having been removed from his or her usual place of residence by a family member. Officials from all of the nine LEAs we met with reported that the responding officer may need to ascertain the custodial arrangements for the child and whether the report is the result of a misunderstanding between family members or constitutes an abduction by a family member. More specifically, officials from seven of the nine LEAs reported that challenges in making this determination may delay reporting or investigation of the case. Of the seven LEAs that raised custody- determination issues as a challenge, officials in five LEAs said that where a missing child case may involve interference by a noncustodial family member, the report cannot be taken by law enforcement unless a court docket number or judge’s order establishing custody is first produced. In one case in one of these LEAs, waiting for court paperwork resulted in a 2- day delay between receiving a report from the parent, and entering the report into NCIC. Officials in two of the seven LEAs said that further steps must be taken to determine custody when the missing child’s parents were never married and do not have a custody agreement, or when there are competing custody orders from different states that must be resolved. These steps can delay reporting into NCIC or investigating the case. OJJDP, NCMEC, and the International Association of Chiefs of Police have taken steps to try to address these issues. For example, in 2006, NCMEC and the International Association of Chiefs of Police, with funding from OJJDP, developed a model missing children’s policy for law enforcement agencies, which agencies could use to establish guidelines and responsibilities for agency personnel in responding to reports of missing children. The model policy contains a provision stating that the LEA will accept reports of missing children when it can be demonstrated that the child has been removed, without explanation, from the child’s usual place of residence, even if custody has not been formally established. OJJDP officials stated that NCMEC currently makes use of the model policy in its Missing and Exploited Children Chief Executive Officer Seminars for police chiefs, sheriffs, and communication center managers. NCMEC requests that participants provide a copy of their agency’s policy on missing children in advance of the seminar, and NCMEC will review the policies and offer suggestions for improvement or refer the participants to the model policy developed by NCMEC and the International Association of Chiefs of Police. In 2009, NCMEC also updated guidance for parents and attorneys addressing family abductions, emphasizing in several places the necessity for law enforcement to report to NCIC within 2 hours, even if custody has not yet been determined. Officials from six of the nine LEAs we interviewed reported that difficulty in obtaining information about missing children who are in the child welfare system (which includes individuals in the care of foster-care group homes) may delay reporting to NCIC or the investigation of the episode. These officials stated that the foster-care group homes do not always collect information—such as the child’s height and weight or parental information—that law enforcement needs to complete a missing person report or the mandatory fields in NCIC. Officials from three LEAs stated that while the lack of such information from the foster-care group home does not prevent the initial reporting to NCIC, the lack of additional information—such as a recent photo of the child—may delay the investigation of a missing child because law enforcement must spend time obtaining the necessary information. Furthermore, officials from three of the six LEAs that raised coordination with child welfare agencies as a challenge said that certain practices of foster-care group homes may result in reporting delays. For example, these officials stated that personnel from foster-care group homes sometimes reported the same incident multiple times to law enforcement, which would require law enforcement personnel to determine whether the existing record in NCIC was closed and could be removed from the system in order to enter the most recent reported incident, or whether the new report was the same as the prior report that had already been entered into NCIC. In one LEA, officials stated that in one week, they had received approximately 10 such duplicate reports of missing children, the majority coming from a single foster-care group home. Officials from one LEA stated that some of the foster-care group homes in the jurisdiction do not always inform law enforcement when a child has been located, thus requiring law enforcement, when receiving a new report for the same child, to conduct research into whether a prior case should have been closed before entering a new record. Officials from the three child welfare agencies we contacted in three of the four states where LEA officials reported challenges in coordinating with child welfare agencies noted that in some cases, foster-care group homes may not have the information law enforcement needs to enter reports of missing children into NCIC, but stated that this situation does not occur very frequently. The officials said that ensuring that a recent photograph of a child is available has been a challenge and that they are working to have a recent photograph available for each child under their care. The officials also acknowledged that their law enforcement partners have raised concerns about foster-care group homes filing multiple reports for the same missing child episode and about some child welfare personnel not informing law enforcement when a child has been located. Officials from two of the child welfare agencies stated that high staff turnover among child welfare personnel may be a reason why some personnel do not know how to best coordinate with law enforcement. According to these officials, child welfare agencies may need to provide additional training and oversight to ensure that child welfare personnel understand clearly when a child should be reported missing to law enforcement and communicate in a timely manner with law enforcement officials to inform them when children are located or return. DOJ, NCMEC, and the Child Welfare League of America have taken steps to try to assist LEAs and child welfare agencies in addressing these issues. For example, concerns about timely reporting and investigation of children missing from care were highlighted by NCMEC in guidance it issued in 2006 with funding from OJJDP. The guidance states that collaboration between LEAs and child welfare agencies is necessary to ensure that children missing from care are reported to law enforcement, and provides a sample self-assessment for LEAs to use to help them develop policies and procedures to enhance LEAs’ responses to children missing from care. The self-assessment recommends that LEAs discuss with child welfare agencies the type of information LEAs need from child welfare agencies in order to complete a missing person report, and ensure that law enforcement officers have a way to access child welfare data or caseworkers 24 hours a day, 7 days a week. The Child Welfare League of America, in partnership with NCMEC in 2005, developed guidelines for standardized child welfare intake forms to ensure information necessary for NCIC entry is routinely maintained by foster-care providers. DOJ’s Office of Community Oriented Policing Services in 2006 also funded development of a guide focusing on juvenile runaways that recommended that LEAs work with foster-care group home providers to develop joint protocols for reporting and sharing information. The fact that officials from eight of the nine LEAs we contacted reported facing challenges entering missing children information into NCIC within 2 hours due to custody disputes and coordination with child welfare agencies—even in the context of efforts by DOJ to develop and disseminate guidance regarding these issues—raises questions about the extent to which LEAs are well-positioned to comply with the 2-hour entry requirement. According to OJJDP officials, although guidance relating to custody disputes and coordination with child welfare agencies was, for the most part, developed prior to the passage of the 2-hour entry requirement in 2006, OJJDP believes the guidance remains useful in helping LEAs address these challenges, and has not undertaken additional efforts to update it. According to the officials, the guidance is disseminated widely to law enforcement personnel in the field, through national conferences and other mechanisms, and is used in training courses funded by OJJDP and provided by NCMEC. DOJ does not know the extent to which the challenges we identified in our LEA interviews exist across all LEAs. However, CJIS officials told us that due to the limited scope of its audits and the limited investigative expertise of its auditors, CJIS’s Audit Unit would not be in a position to assess local challenges to reporting missing children to NCIC as part of CJIS’s triennial audit cycle. We recognize that CJIS’s Audit Unit may be limited in its ability to conduct a nationwide assessment of the challenges that LEAs face in meeting the 2-hour reporting requirement. We also recognize that when CSAs conduct local audits of each LEA in their respective states every 3 years, they have multiple responsibilities to ensure compliance with all NCIC policies and face resource constraints that may limit their ability to assess local challenges to reporting. However, there are other existing CJIS and OJJDP mechanisms that could be useful for collecting and sharing information about LEA challenges to timely reporting and the ways in which some LEAs have successfully addressed these challenges. For example, the CJIS Advisory Policy Board’s working groups and subcommittees and CJIS’s voluntary annual training for representatives of all CSAs and selected LEAs in each state could be useful for obtaining information on the extent and severity of challenges faced by LEAs. They could also be useful for disseminating information on how LEAs have successfully implemented forms or protocols or collaborated with foster- care group homes to ensure missing children are reported in a timely fashion. In addition, OJJDP could obtain information on challenges to timely reporting and disseminate information on successful efforts to mitigate these challenges in OJJDP-funded training courses for local law enforcement officials. Standards for Internal Control in the Federal Government call for management to identify and analyze the relative risks from internal and external sources associated with achieving the agency’s objectives. Using existing CJIS and OJJDP mechanisms to (1) obtain information on the extent to which LEAs face the types of challenges we identified, as well as other challenges that may be prevalent or significant and (2) share examples of LEA-reported successes to mitigating the challenges, could better position DOJ to carry out its oversight role over NCIC with respect to helping ensure compliance with the 2-hour requirement. CJIS has a responsibility to ensure that missing children records are complete, accurate, and timely to comply with federal requirements and promote law enforcement’s ability to investigate, locate, and provide support to missing children. CJIS’s reliance on CSAs to ensure compliance with the 2-hour entry requirement underscores the importance of CSAs’ triennial audits of all LEAs that enter data into NCIC within their jurisdiction. Evidence from our review of six CSAs raises questions about the consistency and reliability of information from CSA audits on LEA compliance with the 2-hour entry requirement. Therefore, we believe it could be helpful for CJIS and the Board to consider establishing minimum audit standards for assessing compliance with the entry requirement. Such minimum standards could better position CSAs to design audits of LEAs to obtain more consistent and reliable information on LEA compliance with the requirement. This could also help CJIS better accomplish its specific oversight and compliance objectives for timely entry of reports of missing children. Once these standards are established, by reviewing the CSA audit approaches as part of CJIS’s own triennial audits of CSAs, CJIS could help ensure the standards are being met. Because some LEAs we visited continued to identify challenges due to custody disputes and coordination with child welfare agencies that affected their ability to meet the 2-hour entry requirement despite DOJ’s previous efforts to address such challenges, it could be useful for CJIS and OJJDP to consider using existing mechanisms to determine the extent to which LEAs face these and other kinds of challenges and to share approaches that LEAs have taken to mitigate these challenges. Such actions could better position DOJ to carry out its oversight role over NCIC with respect to helping ensure compliance with the 2-hour requirement. We are making the following three recommendations: To increase the likelihood that CJIS is positioned to oversee compliance with the requirement that LEAs enter records of missing children into NCIC within 2 hours, we recommend that the Director of the FBI direct CJIS to consider: In collaboration with CSAs and the Board, establishing minimum standards that provide CSAs guidance on assessing compliance with timely entry requirements, including applying the 2-hour criterion and how to sample missing children records; and Ensuring that in future triennial audits, CJIS assesses the extent to which CSA audit programs adhere to the minimum standards. To increase the likelihood that LEAs are better positioned to comply with the requirement to enter missing children records into NCIC within 2 hours, we recommend that the Director of the FBI and the Administrator of OJJDP consider opportunities to use existing mechanisms to obtain information on the extent to which LEAs face challenges—such as custodial determinations and coordination with child welfare agencies—in reporting missing children to NCIC, and share examples of successful efforts to mitigate these challenges. We provided a draft of this report to DOJ for its review and comment. We received written comments from the FBI, which are reproduced in full in appendix I. The comments focused on actions the FBI plans to take, to recommend that the CJIS Advisory Policy Board revise its policy so that agencies found to be non-compliant with the 2-hour requirement are referred immediately for sanctions. We did not recommend this as part of our review, however, and so cannot address the extent to which it will impact law enforcement’s ability to comply with the 2-hour requirement. Because DOJ’s comment letter did not state DOJ’s position on our recommendations, we engaged in discussions and e-mail exchanges with DOJ officials and on June 7 the Department’s audit liaison confirmed that the Department concurred with all three recommendations. On May 12, the Unit Chief of CJIS’s Audit Unit provided oral comments regarding our first two recommendations. Specifically, he stated that CJIS plans to suggest that the Board consider and approve our first two recommendations—establishing minimum audit standards for assessing compliance with the 2-hour requirement and assessing adherence to the standards in future CJIS audits. In a June 7 email, DOJ’s audit liaison stated that during meetings in fall 2011, CJIS, through the Advisory Policy Board, plans to solicit the law enforcement community’s input on our third recommendation regarding challenges to timely entry. Specifically, according to DOJ’s audit liaison, CJIS plans to obtain information regarding the challenges of entering missing children reports into NCIC in a timely manner, request examples of successful efforts to mitigate the challenges presented and, among other things, document the lessons learned so that they can be shared among the law enforcement community. Furthermore, the liaison stated that OJJDP will include the subject of timely reporting in at least six training sessions for local law enforcement that OJJDP will sponsor over the next fiscal year. We believe these steps would address the intent of our recommendations. Because CJIS and OJJDP plan to take these steps, we redirected our first two recommendations to the Director of the FBI, and our third recommendation to both the Director of the FBI and the Administrator of OJJDP, rather than the Attorney General. In commenting on the draft, the Unit Chief of CJIS’s Audit Unit reported that CJIS shares responsibility for implementing and monitoring compliance with the 2-hour requirement with the Board. Thus, we have modified language in the objective and in the body of the report to reflect this shared responsibility. Finally, the FBI provided technical comments which we incorporated into the report, as appropriate. As agreed with your offices, we plan no further distribution of this report until 30 days from its date, unless you publicly announce its contents earlier. At that time, we will send copies of this report to the Attorney General, selected congressional committees, and other interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any further questions about this report, please contact me at (202) 512-8777 or larencee@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in app. II. Eileen R. Larence, (202) 512-8777 or larencee@gao.gov. In addition to the contact named above, Evi Rezmovic, Assistant Director; Tom Jessor; Heather May; Susan Czachor; Keesha Egebrecht; Sharanjit Singh; Bill Crocker; Janet Temko; Amanda Miller; Linda Miller; Labony Chakraborty; and Cheron Green made significant contributions to this report.","Missing children who are not found quickly are at an increased risk of victimization. The National Child Search Assistance Act, as amended, requires that within 2 hours of receiving a missing child report, law enforcement agencies (LEAs) enter the report into the Department of Justice's (DOJ) National Crime Information Center (NCIC), a clearinghouse of information instantly available to LEAs nationwide. DOJ's Criminal Justice Information Services (CJIS), the CJIS Advisory Policy Board (the Board), and state criminal justice agencies share responsibility for overseeing this requirement. As requested, GAO examined (1) CJIS's and the Board's efforts to implement and monitor compliance with the requirement; and (2) selected LEA-reported challenges with timely entry and DOJ's actions to assist LEAs in addressing them. GAO reviewed documents, such as agency guidelines, and interviewed officials from DOJ, six state criminal justice agencies, and nine LEAs selected in part based on missing children rates. The results are not generalizable to all states and LEAs, but provided insights on this issue. CJIS and the Board have taken steps to help ensure implementation of the 2-hour entry rule, but could strengthen their oversight to better assure compliance with the rule. Starting in 2007, CJIS: (1) informed all state criminal justice agencies that LEAs will have 2 hours to enter reports of missing children into NCIC once they have collected the required data (e.g., child's biographical information); (2) provided guidance on how LEAs could document compliance with the rule; and (3) informed state criminal justice agencies that the Board had authorized CJIS to begin assessing compliance with the rule in audits starting in 2009. To help ensure compliance among all NCIC users, CJIS and the Board require state criminal justice agencies to audit all LEAs in the state that enter data into NCIC. However, CJIS and the Board have not taken steps to establish minimum audit standards for state criminal justice agencies to use in assessing LEAs' compliance with the 2-hour rule. In the absence of such standards, the selected six state criminal justice agencies GAO contacted used varied approaches to assess LEAs' compliance. For example, two were not using the 2-hour criterion, and the number of missing children records the six agencies reviewed to assess timeliness ranged from all records in one state to no records in another. The fact that the state agencies did not consistently apply the 2-hour criterion to review a sample of missing children records raises questions about the reliability of the information the agencies collect on LEA compliance. Establishing minimum standards for state agency audits could help provide CJIS with reasonable assurance that the audits contain reliable information on LEA compliance. Officials from eight of nine LEAs GAO contacted reported challenges to entering information on missing children into NCIC within 2 hours; CJIS and the Office of Juvenile Justice and Delinquency Prevention (OJJDP) could use existing mechanisms to obtain and share information on challenges. Seven LEAs reported challenges determining whether a child is missing when there are custodial disputes. Six LEAs reported challenges obtaining information from child welfare agencies on missing children in the child welfare system. Officials from child welfare agencies in areas where LEAs reported this challenge said that they may not always have the information LEAs need, and are taking steps to ensure timely communication between their staff and LEAs. In association with the National Center for Missing and Exploited Children and other stakeholders, in 2006 OJJDP developed (1) a model policy stating that LEAs will accept reports of missing children even when custody has not been established and (2) sample self-assessments so LEAs could enhance their responses to missing children in the child welfare system. However, eight of the nine LEAs stated that these challenges persist. DOJ does not know the extent of these challenges across all LEAs and has limited capability to conduct such an assessment. By using existing CJIS and OJJDP mechanisms--such as CJIS's training for state agencies and OJJDP-funded training for LEAs--to obtain information on the extent to which LEAs face these and other challenges and provide examples of how some LEAs have mitigated the challenges, DOJ could be better positioned to carry out its oversight of NCIC with respect to assuring compliance with the 2-hour rule. GAO recommends that CJIS and the Board consider establishing minimum standards for states to use to monitor compliance with the 2-hour rule and CJIS and OJJDP use existing mechanisms to obtain and share information on LEA challenges and successful efforts to mitigate them. DOJ concurred.",govreport
"In recent years, automobiles have been associated with nearly 29,000 traffic fatalities annually in the United States, including the deaths of both automobile occupants and others involved in collisions with automobiles.The National Highway Traffic Safety Administration (NHTSA), a unit of the Department of Transportation (DOT), has the lead role in federal government efforts to reduce the number of traffic crashes and to minimize their consequences. Some types of automobiles have higher fatality rates than others. (For example, small cars generally have higher rates than large cars.) In addition, some categories of drivers are more likely to be involved in serious crashes than others. (Young drivers, for example, have higher involvement rates than other drivers.) However, as we previously reported, one cannot conclude from differences in fatality rates that some types of cars, or some types of drivers, are in fact more dangerous than others, because driver and automobile characteristics are highly related (GAO, 1991). For example, since small cars have a disproportionate percentage of young drivers, do the high fatality rates for those cars stem from vehicle characteristics or the recklessness with which they are operated? The goal of this report is to isolate the independent effects of important crash-related factors on the likelihood of injury in a collision. The report focuses on the most important predictors of occupant injury in a collision: crash type and crash severity, automobile size, safety belt use, and occupant age and gender. The report is concerned with both crashworthiness (protecting automobile occupants) and aggressivity (protecting other roadway users struck by automobiles). The report also considers prospects for improving the safety of automobile occupants. This report is one of three GAO reports examining automobile safety. One of these, Highway Safety: Factors Affecting Involvement in Vehicle Crashes (GAO, 1994), examines the independent effects of driver characteristics and automobile size on crash involvement. Another, Highway Safety: Reliability and Validity of DOT Crash Tests (GAO/PEMD-95-5), looks at the extent to which results from the crash test programs conducted by NHTSA accurately predict injury in actual automobile crashes. Since the mid-1960’s, both the number of traffic fatalities and the fatality rate per registered vehicle have sharply decreased in the United States. The fatality rate for automobile occupants has declined by 36 percent since 1975. The continued emphases on reducing drunk driving and increasing safety belt use, along with the introduction of antilock brakes, air bags, and other safety enhancing features, have increased the chances that this favorable trend will continue. Nonetheless, in 1991 automobiles were associated with nearly 29,000 traffic deaths in the United States.About 22,000 of the automobile-related fatalities were automobile occupants (about 10,000 killed in single-car collisions and 12,000 in multiple-vehicle collisions), about 2,500 were occupants of other types of vehicles (for example, light trucks, vans, or motorcycles) involved in collisions with automobiles, and approximately 4,000 were pedestrians or cyclists hit by automobiles. (See table 1.1.) Different models of automobiles appear to make very different contributions to this fatality toll. For instance, the Insurance Institute for Highway Safety (IIHS) has reported that the most “dangerous” automobile models have occupant fatality rates more than nine times higher than the “safest” models. Further, some of the automobile characteristics associated with this variation in fatality rates are well known. For instance, sports cars have higher fatality rates than station wagons, and small cars have higher fatality rates than large cars. However, this does not mean that types of automobiles with high fatality rates are necessarily more dangerous than those with low fatality rates. This is because different types of drivers prefer particular types of automobiles, affecting both the number of collisions involving particular autos and, perhaps, the probability of serious injury in the event of a collision. For example, young drivers are much more likely to be involved in fatal accidents than others—drivers age 16 to 20 are involved in fatal accidents at a rate three times higher than that for drivers age 45 to 54—thereby inflating the fatality rate for types of cars preferred by young drivers. Similarly, some types of automobile occupants are more likely to be seriously injured in a collision than others. For example, in collisions in which at least one vehicle was towed from the accident scene, NHTSA (1992a) recently estimated that women automobile occupants are about 36 percent more likely to be hurt than men occupants in similar collisions. This suggests that types of cars with a disproportionate number of women occupants may have higher fatality rates than other cars. As automobiles abruptly stop or change direction in a collision, occupants continue moving in the original direction of travel. This independent movement of an occupant within a rigid vehicle that is decelerating more quickly than its occupant provides several opportunities for injury. First, some occupants are injured by being ejected (either partially or totally) from the vehicle. Ejection substantially increases the risk of serious injury—ejected occupants are three to four times more likely to be killed in a collision than occupants who do not leave the vehicle. Second, occupants can collide with the interior of the vehicle or other objects intruding into the passenger compartment. This “second collision” (following the “first collision” of the automobile striking an object) is understandably worse if it occurs at high speed, involves impact with a sharp or unyielding portion of the car’s interior, or involves contact with part of another vehicle or a roadside object that has penetrated the passenger compartment. Finally, because different portions of an occupant’s body decelerate at different rates, internal injuries can be caused by the “third collision” of soft tissues against hard, bony structures. For example, in high-speed collisions, the skull decelerates more quickly than the brain, potentially causing injury to the brain as it strikes the hard skull. Automobiles, and federal automobile safety regulations, are designed to protect their occupants from these dangers in several ways. One way is to attempt to reduce the deceleration forces acting on occupants. Deceleration forces can be reduced by designing the structure of a vehicle to absorb as much energy as possible before the crash forces are transmitted to the passenger compartment or by giving the occupant more time to slow down, thereby reducing the maximum force level the occupant is subjected to. The latter can be accomplished by starting the deceleration period more quickly (for example, by designing safety belts that begin holding back the occupant sooner) or by increasing the total deceleration period (for example, by lengthening the front end of the vehicle). Another way cars may protect their occupants is by encasing them in a protective compartment that preserves a living space and prevents the intrusion into the passenger compartment of striking vehicles or other objects (such as light posts or trees) that a car hits. Third, automobiles are designed to keep their occupants both in the vehicle and away from interior surfaces. This is most obviously accomplished through the use of safety belts, but a number of other components are also intended to keep the occupant in the vehicle, including door latches and windshields that are reinforced to eliminate potential ejection routes. In addition, automobile interiors are designed to absorb energy from the occupant and to limit the occupant’s movement rather than serve as a rigid barrier. Energy absorbing steering columns are one example. There is little doubt that cars from recent model years, as a group, are safer than automobiles from past model years and that some of this improvement can be attributed to federal government safety regulations. For instance, in comparing the crash test results of cars from model years 1980 and 1991, NHTSA researchers found that one set of scores measuring injury potential had declined about 30 percent during the intervening years (Hackney, 1991). Similarly, Evans (1991b) estimated that the total effect of nine federal motor vehicle safety standards enacted by 1989 had been to reduce the occupant fatality rate by about 11 percent. The objective of this report is to examine the independent effects of a number of factors—crash type, crash severity, automobile weight and size, safety belt use, and occupant age and gender—on the risk of injury in an automobile crash. We are concerned with both crashworthiness and aggressivity. Crashworthiness refers to the extent to which automobiles protect their occupants in a collision, and aggressivity refers to automobile characteristics that affect the safety of the occupants of the other vehicles in a collision. We restricted the scope of the study in several ways in order to obtain a clear picture of the most important phenomena. First, we looked only at the safety of automobile occupants and the dangers automobiles pose to occupants of other vehicles. We were not directly concerned with factors affecting the safety of occupants of other types of passenger vehicles, such as pickup trucks, vans, minivans, and multipurpose vehicles; we considered these vehicles only as they affect the safety of automobile drivers in two-vehicle collisions. In our judgment, concerns about the safety of light trucks and other passenger vehicles differ significantly from that of automobiles. Light trucks and other passenger vehicles are less stable and thus roll over more frequently than automobiles, and they have been subject to less stringent safety regulations than automobiles. Second, our statistical analysis focused on model year 1987 and later cars, because the safety experiences of those cars are more likely to apply to today’s new cars than are the safety experiences of older ones. Finally, we considered in our analysis only the injury experiences of drivers, not those of automobile passengers or factors specifically affecting the safety of child occupants. (Roughly half of the automobiles on the road have no occupants other than the driver.) To meet our objective, we reviewed technical reports from NHTSA and other sources and consulted auto safety experts and representatives of automobile manufacturers. We also conducted our own statistical analyses of traffic safety databases obtained from NHTSA. Our primary data set was compiled from the National Accident Sampling System—Crashworthiness Data System (NASS) for 1988 through 1991. NASS is a nationally representative probability sample of all police-reported crashes involving a passenger car, light truck, or van in which at least one vehicle was towed from the scene. In addition, all the automobiles included in NASS were towed from the crash site. Thus, the automobiles in NASS, as a whole, are much more likely to have injured occupants than are cars involved in typical crashes. Not only are police-reported crashes more severe than those not reported to the police, but tow-away crashes on the whole are also more severe than those not involving tow-aways. Indeed, almost all serious occupant injuries occur in police-reported tow-away collisions. For our analysis, we selected a subset of cases from the NASS data for 1988 through 1991. We included all one-car collisions involving a 1987 or newer model year automobile and all collisions between a model year 1987 or later automobile and any other car, van, pickup truck, or other light truck. These crash types, taken together, accounted for about 81 percent of all automobile occupant fatalities in 1991. The remaining 19 percent occurred in types of crashes that we did not include in our data set because of a lack of cases, principally collisions with medium and heavy trucks (about 10 percent of the 1991 total). In our statistical analyses, we used logistic regression to look at the independent contributions of a variety of factors on the probability of driver injury. Driver injury was indexed with a dichotomous outcome variable coded “1” if the driver was hospitalized or killed in the crash and “0” otherwise. The regression analysis allowed us to isolate the effects of one factor (for example, automobile weight) while statistically holding constant the other factors (for example, collision severity as well as driver age and gender). Regression analysis answers the question: If there were no differences among these drivers except for the factor of automobile weight, for example, how would that factor predict the probability of driver injury? (The data sets and analyses are described in appendix I.) The studies that we reviewed from the traffic safety literature differed in several ways that increase the difficulty of comparing their results and of relating their conclusions to our own findings. For instance, some studies focused on injuries to automobile drivers, as we did, while others examined injuries to all automobile occupants, not just drivers. Similarly, different studies looked at slightly different sets of automobile crashes—at tow-away crashes (as we did) or at all police-reported crashes or only at crashes in which a fatality occurred. In addition, the studies employed different outcome measures. Our analysis concerned driver hospitalizations or deaths, while other studies looked only at fatalities or at injuries considered serious or worse or at injuries categorized as moderately severe or worse, for example. While these and other differences mean that the studies we cite rarely produced precisely equivalent findings, in most the findings were roughly the same. In particular, the direction of the findings was almost always the same (that is, whether a factor increases or decreases the risk of injury), and there was usually approximate agreement about the size of the effect (that is, whether a factor has a large effect on injury risk or only a minor influence). Our work was performed in accordance with generally accepted government auditing standards. Chapter 2 looks at the effects of crash type and crash severity. It also discusses the effects of automobile size and safety belt use in three different configurations: one-car rollover crashes, one-car nonrollover crashes, and collisions between cars and other light vehicles. Chapter 3 examines the influence of driver age and gender on injury probability. Chapter 4 discusses the relative contributions of driver and automobile factors to driver injury. Chapter 5 discusses the potential for improving automobile safety. Appendix I describes our data set and statistical analyses. This chapter discusses the safety consequences of crash characteristics, automobile weight and size, and safety belts and air bags. The chapter begins with a discussion of crash characteristics that are related to occupant injury, including the injury risk associated with one-car rollover crashes, one-car nonrollover crashes, and collisions with an automobile, a van, or a light truck. It then examines the safety consequences of automobile weight and size as well as of safety belt use in the different crashes. Each section summarizes relevant findings from the literature and then presents the results of our analyses of the NASS data. The chapter ends with a look at the effects of air bags. The great majority of traffic crashes do not involve serious injury. A large proportion of all traffic crashes are not reported to the police (Evans, 1991b). And NHTSA has estimated that about one third of crashes reported to the police involve personal injury (two thirds having property damage only) and that just 6 percent involve a severe or fatal injury (NHTSA, 1991b). Nonetheless, some crashes are much more likely to lead to serious injury than others. First, some types of crashes are more severe than others. Overall, single-car crashes are more likely to seriously injure occupants than are multiple-vehicle collisions. Single-vehicle crashes account for about 30 percent of police-reported crashes annually, yet in 1991 about 45 percent of all automobile occupant fatalities were in these collisions. Single-car rollover crashes are particularly dangerous, accounting for only about 2 percent of all police-reported accidents but about 20 percent of occupant fatalities (NHTSA, 1991b). A major reason for the relative severity of single-car crashes is that most crashes involving drunk drivers are single-car incidents, and crashes involving drunk drivers tend to be more severe than other collisions. For example, NHTSA reported that 53 percent of drivers killed in single-vehicle crashes in 1991 were intoxicated, compared with only 21 percent of the drivers killed in multiple-vehicle collisions (NHTSA, 1993b). Second, for nonrollover crashes, some points of impact on the automobile are more dangerous than others. The preponderance of fatal crashes other than rollovers involve frontal impacts, followed at a distance by left- and right-side impacts. For example, table 2.1 indicates that 43 percent of all automobile occupant fatalities in 1991 occurred in frontal impacts, or more than half of all fatalities that did not occur in single-car rollovers. Third, crashes at high speeds are more dangerous than others. For example, Joksch (1993) estimated that the risk to drivers of fatal injury in two-car collisions was about 1 percent for a 20 mph collision, 10 percent for a 35 mph collision, and 44 percent for a collision involving a change in velocity of 50 mph. NHTSA (1993e) recently reported similar findings for restrained vehicle occupants, noting, for instance, that the probability of fatal injury is about nine times as great in frontal collisions with a change of velocity of 40 mph as in those with a change of 30 mph. That the probability of death increases sharply with impact speed is one reason for the predominance of frontal impacts in fatal crashes, since frontal impacts are likely to involve cars that are moving forward. Here we report how injury risk and driver and automobile characteristics vary by crash type. Our data, from NASS, were for model year 1987 and later cars in three types of police-reported tow-away crashes in 1988-91: one-car rollovers, one-car nonrollovers, and collisions with other cars, vans, and light trucks. The pattern of injury risk by crash type that we found in the NASS data set reflects the pattern described in the literature. As table 2.2 indicates, one-car crashes are more dangerous than multivehicle collisions. One-car rollover crashes, in particular, are much more dangerous than other crash types, with a rate of driver hospitalization or death that is double that of one-car nonrollover crashes and four times that of collisions with cars and light trucks. In addition to having a higher rate of driver injury, one-car crashes are disproportionately likely to involve men drivers and young drivers. (See table 2.2.) We found that about 60 percent of the drivers in one-car crashes were men, compared with approximately 46 percent in two-vehicle collisions. In addition, while close to half of the drivers in one-car crashes were 16 to 24 years of age, only about one third of the drivers in collisions with other cars or light trucks were that young. These findings are consistent with those of our companion report, Highway Safety: Factors Affecting Involvement in Vehicle Crashes (GAO, 1994), in which we found that driver age and gender are more strongly related to involvement in single-vehicle crashes than they are to involvement in two-vehicle collisions. In addition, as table 2.2 indicates, the average curb weight of automobiles in one-car rollover crashes was somewhat lower than that of cars involved in other crashes. As we noted in Highway Safety: Factors Affecting Involvement in Vehicle Crashes, involvement in rollover crashes increases as automobile weight decreases. Just as the literature suggests, we found that the risk of injury to drivers is significantly affected by impact point. In particular, we found that two-vehicle collisions involving head-on impacts between vehicles moving in opposite directions are much more dangerous than other two-vehicle crashes. The risk of driver injury or death is about five times as great in head-on collisions as in other two-vehicle collisions. For crashes other than head-on collisions, frontal impacts and left-side impacts had higher rates of driver hospitalization or death than others. Finally, we found that high impact speeds are, not surprisingly, more dangerous than low impact speeds. Considering the three crash types together, we estimated that each increase of 10 mph in the change of velocity at impact increases the probability of driver hospitalization or death nearly sevenfold. As we have previously reported, safety experts agree that, in general, heavier and larger cars are both more crashworthy and more aggressive than lighter and smaller automobiles (GAO, 1991). Thus, in the event of a collision, occupants are less likely to be hurt when they are in heavier and larger cars and when they are struck by lighter and smaller cars. However, there is some disagreement in the literature about which is the more important dimension for occupant safety, weight or exterior size (that is, overall length and width). Proponents of weight as the important dimension argue that automobile mass protects occupants from injury because it is aggressive—that is, heavier cars knock down objects and push other vehicles back, thereby transferring momentum and energy to the struck object, including other vehicles, that could otherwise affect occupants of the striking vehicle (see, for example, Evans and Frick, 1992). In contrast, proponents of exterior size as the more important dimension maintain that large vehicles protect their occupants by absorbing crash energy without increasing the injury risk of other roadway users (for example, see Robertson, 1991). In most cases, this debate is of little practical significance now, since weight and exterior size are very highly correlated—that is, heavy cars are almost invariably also long and wide—but it has important implications for the design of future automobiles. If exterior size is the more important dimension, using lighter weight materials could make future automobiles lighter without decreasing exterior size, thus increasing fuel efficiency without exacting a safety cost. Conversely, using lighter weight materials would involve a safety cost if weight is the more important dimension. In addition, estimates of the amount of additional protection offered by a given increase in automobile weight vary considerably. For example, consider the effects of a 500-pound increase in the weight of one automobile in a collision with another, assuming no change in the weight of the latter. Klein, Hertz, and Borener (1991) used data from two states to generate two different estimates of the decreased risk of serious driver injury from that automobile weight increase—13 percent and 20 percent. Other estimates are higher. For example, Evans (1982) concluded that this increase in automobile weight would reduce a driver’s risk of fatal injury by about 29 percent. Further, the protective effect of automobile size appears to differ by crash type. First, it is likely that this effect is somewhat less pronounced in one-car nonrollover crashes than in multivehicle collisions (Evans, 1991b). For example, in the 1991 paper by Klein and colleagues, NHTSA researchers estimated that a 500-pound increase in automobile weight reduces the risk of driver fatality by not quite 5 percent in one-car nonrollover crashes, somewhat less than the estimates of 13 percent and 20 percent for two-car collisions. Second, although it is well documented that small cars are much more likely to be involved in one-car rollover crashes than are large cars (see, for example, GAO, 1994), the literature is less clear about the safety consequences of automobile size once a rollover has occurred. On the one hand, in examining the effects of reduced automobile weight and size on safety in rollover crashes, some researchers have focused on the increased number of rollover crashes among light and small cars (Evans, 1991b; Kahane, 1990; NHTSA, 1991a). The implication of these studies is that automobile weight and size do not affect crashworthiness in rollovers; otherwise, these researchers would have included weight and size as factors in their calculations. On the other hand, some direct studies of crashworthiness in rollovers have found that drivers of larger cars are more likely to be injured than drivers of smaller cars in rollovers (see, for example, Partyka and Boehly, 1989). One explanation for this finding is that it takes more energy to roll over a heavy automobile than a light one, meaning that the typical rollover crash involving heavy autos is more severe (that is, occurs at a higher speed) than the typical rollover involving light cars (see, for example, Terhune, 1991). After combining all the crashes in our database (one-car rollovers, one-car nonrollovers, and collisions with cars and light trucks), we found that the risk of injury to drivers was significantly reduced as car weight and wheelbase increased in our sample. (See figure 2.1.) We estimated that the risk of driver hospitalization or death decreases about 14 percent for every additional 500 pounds of automobile weight and about 13 percent for each additional 5 inches of wheelbase. (See tables I.1 and I.2.) Further, considering all crash types taken together, we could not statistically differentiate the injury reduction effects of curb weight and wheelbase. That is, the benefits of increasing weight and wheelbase were roughly equivalent in reducing injuries, and we were unable to establish that one had a stronger influence than the other. The nearly equivalent slopes of the lines for weight and wheelbase in figure 2.1 demonstrate this. The endpoints of the lines in figure 2.1 represent approximately the 5th and 95th percentiles of automobile weight and wheelbase in this data set. Thus, 2,000-pound cars are among the lightest and 3,600-pound cars are among the heaviest in this database of cars involved in serious crashes; similarly, cars with a wheelbase of 93 inches are among the shortest, 113 inches among the longest. Figure 2.1 shows that, for all three crash types taken together, whether measured by weight or wheelbase, drivers in the heaviest and largest cars had a risk of hospitalization or death about 40 percent less than the drivers of the lightest and smallest cars. However, these overall effects mask the fact that automobile weight and wheelbase have very different safety consequences in different types of crashes. Figure 2.2 shows the estimated effects of curb weight separately for the three crash types (see also tables I.3-I.5); figure 2.3, the estimated effects of wheelbase (see also tables I.6-I.8). Most importantly, although increasing weight and wheelbase reduces the risk of driver injury in one-car nonrollover crashes and in collisions with other cars or light trucks, drivers in heavier cars were much more likely to be hospitalized or killed in one-car rollover crashes than were drivers of lighter automobiles. For one-car rollover crashes, we estimated that each 500 pounds of additional automobile weight increases the risk of driver hospitalization or death by about 59 percent. This effect is solely a function of automobile weight, not of wheelbase; we found that the relationship between wheelbase and driver injury was not statistically significant in one-car rollovers. This finding agrees with the report of Partyka and Boehly (1989) that drivers of heavier and larger cars are more likely to be injured in rollovers than drivers of lighter and smaller cars. This finding is also consistent with the explanation that it takes more energy to roll over a heavy automobile than a light one, meaning that rollover crashes involving heavy autos occur at higher speeds than rollovers involving light cars. However, it is important to keep in mind that the rate of involvement in one-car rollover crashes is much greater for light cars than for heavy ones, so this finding does not necessarily mean that, considering both involvement and crashworthiness, drivers of heavy cars are more likely to suffer injuries in one-car rollovers. Figures 2.2 and 2.3 also show that we found a tendency for the risk of driver hospitalization or death to decrease with increasing car weight and size in one-car nonrollover crashes, but neither curb weight nor wheelbase was a statistically significant predictor of driver injury in those crashes. In contrast, we found that in collisions with other cars and light trucks, both automobile weight and wheelbase were statistically significant predictors of driver injury. In those crashes, we estimate that each additional 500 pounds of automobile weight decreased the risk of driver hospitalization or death by about 23 percent and each 5 inches of additional wheelbase lowered the risk of driver injury approximately 19 percent. These findings reflect the pattern, described in the literature, that the protective effects of automobile weight and wheelbase are somewhat greater in multivehicle collisions than in single-car nonrollover crashes. In two-vehicle collisions, the injury risk of an automobile occupant is affected not only by the characteristics of his or her own automobile but also by the characteristics of the other vehicle. We looked at the effects of the weight and vehicle type of the other vehicle on the probability of injury for the first driver: both factors affect the aggressivity of the other vehicle. First, not surprisingly, heavier vehicles pose more of a risk than lighter vehicles. (See figure 2.4.) In our analysis, each increase of 500 pounds in the weight of the other vehicle increased the probability of hospitalization or death by about 13 percent, holding other factors constant. (See table I.5.) It is important to note that the magnitude of this aggressive effect of vehicle weight is less than that of the protective effect of weight described earlier. (We estimated that each additional 500 pounds of automobile weight reduces the probability of injury by about 23 percent.) After statistically controlling for the influence of other factors, we found that this ratio of the protective effect to the aggressive effect of automobile weight of 1.77 to 1 is roughly consistent with the findings of other researchers. For example, Klein, Hertz, and Borener (1991), analyzing data from two different states, generated two estimates of the size of this ratio in two-car collisions: 1.54 to 1 and 1.30 to 1. Second, figure 2.5 shows that driver injury risk is strongly influenced by the body type of the other vehicle. We found that while pickup trucks do not pose more danger than automobiles, vans and other light trucks are more aggressive than automobiles. Indeed, statistically controlling for the weight of the driver’s car and of the other vehicle, we estimate that the risk of hospitalization or death for the driver is more than twice as great in collisions with vans and light trucks than with other cars or light vehicles. (See also table I.5.) This finding reflects two characteristics of vans and light trucks. One is that because vans and light trucks can carry heavy cargo loads, these vehicles may be, in reality, heavier than the curb weight measurements available to us indicate. The second characteristic is that the structure and design of vans and other light trucks make those vehicles especially dangerous for automobile occupants in two-vehicle collisions (National Research Council, 1992; Terhune and Ranney, 1984). Safety belts greatly reduce the risk of injury and death in roadway crashes. In a recent review of studies of safety belt effectiveness, we concluded that most studies show that belted vehicle occupants have a risk of serious injury or death that is approximately 50 to 75 percent less than that of unrestrained occupants (GAO, 1992). Other researchers have found safety belts to have slightly smaller effects. For example, NHTSA (1993d) estimated that when manual lap and shoulder safety belts are used in serious crashes, they reduce fatality risk by 45 percent. Similarly, Evans (1986) estimated that three-point lap and shoulder safety belts reduce a driver’s risk of fatality by about 43 percent, with about half of that benefit the result of eliminating or attenuating impacts with the interior of the vehicle and about half the result of preventing occupant ejection. There are three other important points about safety belt effectiveness. First, the effectiveness of safety belts varies by crash type. Belts are most effective in rollover crashes because they largely prevent occupant ejection (Evans, 1990; Partyka, 1988). They are also more effective in one-car crashes than in multivehicle collisions. For example, Evans and Frick (1986) estimated that safety belts reduce the risk of driver fatality in one-car crashes by 62 percent but by only 30 percent in two-car crashes. Second, belt effectiveness also varies by point of impact. Belts are most effective in frontal impacts and least effective in left-side impacts (Evans, 1990). Since one-car crashes are more likely to involve frontal impacts than are two-car collisions, this offers one possible explanation for the greater efficacy of safety belts in one-car crashes. Third, it is likely that manual lap and shoulder belts are somewhat more effective than other safety belt configurations. For example, Evans (1991a) estimated that lap and shoulder belts reduce fatality risk in serious collisions by about 41 percent, compared with estimated risk reductions of 18 percent for lap belts only and 29 percent for shoulder belts only. Evans speculated that these two components have somewhat different functions, with lap belts primarily preventing ejection and shoulder belts mitigating contact with the interior of the vehicle. Comparing manual lap and shoulder belts to automatic belts, NHTSA (1993d) estimated that automatic safety belts, when used in serious crashes, reduce the risk of fatality by 42.5 percent, compared with an estimated fatality reduction of 45 percent for manual lap and shoulder belts. Considering all three crash types together, NASS researchers categorized 73 percent of the drivers in the NASS data set as using a safety belt at the time of collision, with those involved in one-car rollovers slightly less likely to be belted than others. This figure is higher than might be expected from the results of other estimates of safety belt use among the general driving population, particularly given that drivers involved in crashes are less likely to wear safety belts than others and that all the drivers included in our analysis had been involved in a crash. In one point of comparison, NHTSA estimated a 51-percent safety belt usage rate for all passenger cars in 1991 (NHTSA, 1992a). Further, it is well established that unbelted drivers are more reckless than belted drivers (Evans and Wasielewski, 1983; Evans, 1987; Preusser, Williams, and Lund, 1991; Stewart, 1993). As a result, unbelted drivers have much higher crash involvement rates than belted drivers: NHTSA (1992a) estimated that unbelted drivers have an involvement rate in potentially fatal crashes that is more than double that of belted drivers. We cannot determine with certainty if, or to what degree, the safety belt use figures reported in NASS are incorrect, nor can we determine with certainty the extent to which any potential bias in those figures affected our analyses. For that reason, our results should be interpreted with caution. Nonetheless, because the results of our analyses concerning the relative effectiveness of different safety belt configurations in different types of crashes are consistent with the findings from the traffic safety literature, we believe that any potential bias has not seriously affected our findings. For each of the three categories of crashes, we examined the performance of three safety belt configurations: (1) manual lap and shoulder belts, (2) automatic and manual belts combined (most commonly automatic shoulder belts and manual lap belts), and (3) automatic belts without manual components. Other safety belt configurations, including manual lap belts alone, had too few cases in the data set for us to estimate their effectiveness. Statistically controlling for crash severity, driver characteristics, and other background factors, we found that, compared with unbelted drivers, drivers using any of the three safety belt configurations had greatly reduced risks of injury. We also found that, looking at the three types of crashes together, manual lap and shoulder belts were somewhat more effective in preventing driver injury than the other configurations. (See figure 2.6.) Compared with unbelted drivers, the estimated risk of hospitalization or death was reduced about 70 percent for those using manual lap and shoulder belts, about 63 percent for those using automatic and manual belts combined, and about 54 percent for those using automatic belts without manual components. (See also table I.1.) We also found small variations in safety belt performance among the different types of crashes. Safety belts were somewhat less effective in collisions with other cars or light trucks than they were in single-car crashes. For example, in our analysis, manual lap and shoulder belts reduced the risk of driver hospitalization or death by 83 percent in one-car rollover crashes and by 80 percent in one-car nonrollover crashes but by only 64 percent in collisions with other cars or light trucks. (See tables I.3-I.5.) Evaluations of the effectiveness of air bags are hampered by the relatively small number of cars now equipped with them (although all passenger cars, vans, and light trucks will be required to have both driver- and passenger-side air bags by the 1998 model year). There were too few automobiles with air bags in the NASS data set for us to conduct our own analysis of air bag effectiveness. Nonetheless, some of the characteristics of air bag performance have already been established. First, air bags are effective only in frontal impacts; they do not protect drivers in side impacts or other nonfrontal collisions (see, for example, Zador and Ciccone, 1993). While frontal impacts account for by far the greatest proportion of automobile occupant fatalities, more than half of occupant fatalities do not involve frontal impacts. (See table 2.1.) Second, air bags offer additional protection to drivers already wearing safety belts. Researchers have found that belted drivers with air bags are about 10 percent less likely to be fatally injured than are belted drivers without air bags (Evans, 1991b; Zador and Ciccone, 1993). For example, NHTSA (1993d) estimated that lap and shoulder safety belts alone reduce automobile driver fatality risk by about 45 percent. In that paper, NHTSA also estimated that drivers with lap and shoulder belts and air bags are about 50 percent less likely to be killed than unbelted drivers, for a safety increment of close to 10 percent (50/45 = 1.11, or about 10 percent). Finally, safety belts alone are much more effective than air bags alone. Estimates of the effectiveness of air bags for drivers who do not wear safety belts indicate that those drivers are approximately 20 to 30 percent less likely to be killed in a collision than are unbelted drivers without air bags (NHTSA, 1993d; Zador and Ciccone, 1993). In contrast, as noted previously, drivers wearing lap and shoulder safety belts are, by the most conservative estimate, 41 percent less likely to be killed than unbelted drivers. DOT had one general comment concerning the topics presented in this chapter: it maintained that the subset of the NASS data we used in the report is inappropriate for studying the effect of car size on safety and, more particularly, that the sample size is inadequate for assessing the consequences of changing the weight of both vehicles in a two-vehicle collision. We disagree. As the findings presented in this chapter demonstrate, the NASS data set we constructed clearly was adequate for uncovering a number of statistically significant relationships (the analyses are described in appendix I). In addition, our findings are similar to NHTSA’s findings from statistical analyses of state accident databases (particularly concerning the effects of the weights of both vehicles in two-car collisions; see Klein, Hertz, and Borener, 1991) and to NHTSA’s findings from statistical analyses of a slightly different NASS database (see table I.1 and NHTSA, 1992a, p. 72). Safety researchers have consistently found that women automobile occupants have a greater risk of injury in a collision than men and that the risk of injury increases with occupant age. For example, NHTSA (1992a) found that women vehicle occupants involved in tow-away crashes are 36 percent more likely than men to suffer an injury categorized as moderately severe or worse. NHTSA also found that the risk of moderate injury increases about 2 percent for each year of age, meaning that, compared with 20-year-olds, 30-year-olds have a 21-percent greater risk of injury and 60-year-olds are more than twice as likely to be injured. Similarly, Evans (1988b) reported that 30-year-old women have a fatality risk in traffic crashes about 31-percent higher than 30-year-old men and that the risk of fatality increases about 2 percent for each year of age. Our analysis of the NASS data set of police-reported tow-away crashes produced similar findings. For statistically equivalent crashes, we found that women drivers are about 29 percent more likely to be hospitalized or killed than men drivers. We also found that drivers 65 and older are about 4.5 times more likely to be seriously hurt than drivers 16 to 24 years old in equivalent crashes. (See table I.1.) One explanation for the greater vulnerability of women drivers and older drivers emphasizes their inherent physical frailty. This view postulates that the same degree of physical trauma is more likely to produce injury in women than in men and in older automobile occupants than in younger ones, because women and older people are physically less resilient than men and younger people. Indeed, there is some support for the view that women are physically more vulnerable than men (Evans, 1988b), and that older people are more fragile than younger ones is well documented (for example, Mackay, 1988; Pike, 1989). The implication of this view is that the greater vulnerability of women and older persons is not amenable to correction through automobile design changes, because weaker individuals will be hurt more often than stronger ones no matter what. Other possible explanations have not been carefully developed in the literature, but they tend to involve speculation that some characteristic of the vulnerable group interacts with automobile design to cause a safety problem. For example, because women are shorter than men, on the average, they may sit closer to the steering wheel, causing them to hit the steering column more quickly in a crash. Similarly, the interaction of lower height and safety belts designed for average-sized drivers may oblige women, for reasons of comfort, to wear safety belts incorrectly more than men do, thereby increasing the injury risk of ostensibly belted women drivers relative to that of belted men drivers (see, for example, National Transportation Safety Board, 1988). Here, we discuss whether the factors we examined in chapter 2 differentially affect the probability of injury of women and men and of older and younger drivers. If the “inherent frailty” view is correct, women should be injured more than men, and older drivers more than younger drivers, regardless of crash type, automobile weight, or safety belt use. If any of these factors affect the relationship between gender or age and injury risk, the credibility of this view would be called into question, as this would mean that something other than frailty also makes an important difference. It would also indicate that the safety of women and older drivers could be at least somewhat improved by automobile design changes. Crash Type. The pattern of injury by crash type varies for women drivers and men drivers. Multivehicle collisions are a greater source of injury for women than they are for men. Figure 3.1 shows our finding that 67 percent of the women drivers hospitalized or killed were injured in collisions with cars and light trucks, with only one third injured in one-car crashes (11 percent in rollovers, 22 percent in nonrollovers). In contrast, only 45 percent of the men drivers hospitalized or killed were injured in collisions with cars and light trucks; most of the men drivers were hurt in one-car crashes (20 percent of the total in rollovers, 35 percent in nonrollovers). One reason for these differences in the pattern of injury is that men and women drivers tend to be involved in different types of crashes, as described in chapter 2. Men drivers are involved in one-car crashes more often than women drivers. In our analysis, 69 percent of the crash involvements of men drivers were in collisions with cars and light trucks, with about 31 percent in one-car crashes. In contrast, about 79 percent of the crash involvements of women drivers were in collisions with cars and light trucks, with only about 21 percent in one-car crashes. However, another reason is that women drivers are much more likely than men drivers to be hospitalized or killed in collisions with cars and light trucks. That is, women drivers are especially likely to be hurt in the type of crash that they are also particularly likely to experience. In statistically equivalent crashes, women drivers are 52 percent more likely than men drivers to be hospitalized or killed in collisions with other cars or light trucks, but injury risks for women drivers are roughly the same as those for men drivers in one-car crashes—4 percent higher in one-car rollovers and 6 percent lower in other one-car crashes. (See tables I.3-1.5.) Automobile Weight. In our data set, women drove lighter and smaller cars than men. The automobiles women drove had an average curb weight of 2,615 pounds and a mean wheelbase of 100.7 inches; for men drivers, the figures were 2,715 pounds and 101.5 inches. We also found that the protective effect of increasing automobile weight was less evident for women drivers than for men drivers. Since increasing weight generally offers protection in a crash, the average automobile weight for drivers who were hospitalized or killed should be lower than the average weight for those who were not injured. This was true for men but not for women. The average curb weight of the cars driven by men who were hospitalized or killed was 2,626 pounds, compared with a greater average curb weight of 2,719 pounds for men who were not injured. In contrast, the average automobile curb weight for women drivers who were hospitalized or killed was 2,611 pounds, compared with an equivalent average curb weight of 2,615 pounds for women drivers who were not injured. Safety Belts. Each of the safety belt configurations that we examined (manual lap and shoulder belts, automatic and manual belts, and automatic belts only) significantly reduced the injury risk of both men and women drivers. However, we also uncovered evidence that, in this data set, safety belts were somewhat less effective for women drivers than for men drivers. Table 3.1 compares men and women automobile drivers hospitalized as the result of a crash by safety belt use. For all three types of crashes, the table separates the percentage of drivers who were hospitalized or killed from those not hospitalized as well as separating men and women in each group. Safety belt use did not differ by gender for drivers who were not hospitalized: about three quarters of both the men and women drivers in that group were belted. If safety belts offered equivalent protection to men and women drivers, the belt use percentages among hospitalized or killed drivers should reflect the same pattern—in this case, rough equivalence for men and women. However, the table shows that among drivers who were hospitalized or killed, women were more likely to have been wearing safety belts than men. In particular, injured women drivers were about 50 percent more likely to have been wearing manual lap and shoulder belts than were injured men (36 percent to 24 percent). Crash Type. The patterns of injury by crash type are very different for drivers 65 and older and for younger drivers. Figure 3.2 shows that, in our analysis, nearly four fifths of the drivers 65 or older who were hospitalized or killed were injured in collisions with cars or light trucks, while only about one fifth were injured in one-car crashes (and almost none were hurt in one-car rollovers—just 3 percent). Conversely, just over half of the drivers 16 to 64 who were hospitalized or killed were injured in collisions with cars or light trucks, while about 29 percent were hurt in one-car nonrollovers and 17 percent were in one-car rollovers. The primary reason for this difference between the age categories is that drivers in the two groups are involved in different types of crashes. Drivers younger than 65 are involved in collisions with cars and light trucks less often, and in one-car crashes more often, than are drivers 65 and older. In our analysis, 73 percent of the crash involvements of drivers 16 to 64 were in collisions with cars and light trucks, about 22 percent in one-car nonrollover crashes, and about 5 percent in one-car rollover crashes. In contrast, about 86 percent of the crash involvements of drivers 65 and older were collisions with cars and light trucks, with only about 11 percent one-car nonrollover crashes and just 3 percent one-car rollovers. Older drivers are much more likely to be hurt in crashes than younger drivers in almost all circumstances. For one-car nonrollover crashes, we found that, in statistically equivalent crashes, drivers 65 and older were hospitalized or killed about 6.6 times more often than the youngest drivers, those 16 to 24. Similarly, for collisions with cars and light trucks, drivers 65 and older had a probability of injury more than four times as great as drivers 16 to 24. Automobile Weight. Drivers 65 and older operated heavier and larger cars than younger drivers. The automobiles of drivers 65 and older had an average curb weight of 2,874 pounds and a mean wheelbase of 104.9 inches. The automobiles of drivers 16 to 64 had an average curb weight of 2,649 pounds and a mean wheelbase of 100.8 inches. We also found that the protective effect of increasing automobile weight was only slightly less strong for drivers 65 and older than for younger drivers. Thus, the average curb weight of the cars driven by those 16 to 64 who were hospitalized or killed was 2,590 pounds, compared with a larger average curb weight of 2,652 pounds for those who were not hospitalized. The average automobile curb weight for drivers 65 and older who were hospitalized or killed was 2,836 pounds, compared with an average curb weight of 2,878 pounds for drivers who were not hospitalized. Safety Belts. Although the safety belt use figures in the NASS data set may be inflated, as we discussed earlier, we found that safety belts reduced the risk of injury for drivers in both age categories. We also found that the effectiveness of safety belts was roughly equivalent for drivers 16 to 64 and for drivers 65 and older in this data set. For example, table 3.2 shows the percentage of belted drivers separately for those hospitalized or killed and for those not hospitalized, as well as separating these categories by age. The table shows that drivers 65 and older used safety belts more often than drivers 16 to 64 and that this pattern holds both among those who were hospitalized or killed and among those who were not hospitalized. Thus, while older drivers use safety belts more frequently, this difference from younger drivers is found across the board, rather than only among the hospitalized and killed, as it was for the comparison between women drivers and men drivers. Taken as a whole, the evidence indicates that the “inherent frailty” hypothesis does not accurately describe the injury experience of women drivers in automobile crashes but is consistent with that of older drivers. This is because the relative injury risk of women drivers compared with men drivers differs as a function of crash type, automobile size, and safety belt use, while the relative injury risk of drivers 65 and older compared with younger drivers is largely unaffected by those three factors. Women drivers are more likely than men drivers to be hospitalized or killed in collisions with cars and light trucks but not in one-car crashes, and women drivers may be protected less well by heavier cars and by safety belts than are men drivers. In contrast, drivers 65 and older have a greater risk of hospitalization or death than younger drivers in one-car as well as multivehicle crashes, and they are afforded roughly the same degree of protection as drivers 16 to 64 by greater automobile weight and safety belt use. The NASS data set did not allow us to pursue more specific explanations for differences stemming from gender and age. For example, men and women differ in many ways—on the average, women are shorter than men, weigh less than men, and have bones that are less strong than men’s, among other potentially relevant differences. It is difficult to identify the key difference that accounts for women’s greater injury risk. Our findings about the applicability of the inherent frailty hypothesis suggest that the concerns of women drivers are more likely to be ameliorated by automobile design changes than are those of older drivers. This means not that it is impossible to reduce the injury risk of drivers 65 and older but only that it may be difficult to close the gap between older and younger drivers. The implications of our findings for future automobile safety are discussed in chapter 5. Three other points are worthy of mention. First, it is not surprising that the injury risk in one-car rollover crashes is similar both for women and men drivers and for drivers older and younger than 65. One-car rollover crashes are very severe events, meaning that differences between individual drivers are likely to be overwhelmed by the magnitude of the crash. Further, few of the drivers in one-car rollover crashes were either women or 65 or older. Second, while our finding that safety belts may not protect women drivers as well as men drivers is far from definitive, other researchers examining data from other sources have also reported that the benefits of safety belts are not as great for women as they are for men. (See, for example, Hill, Mackay, and Morris, 1994; Mercier et al., 1993.) Third, the types of crashes experienced by drivers 65 and older reduce the protective influence of automobile weight for them. Not only are older drivers much more likely to have multivehicle than one-car crashes; also, those multivehicle collisions occur disproportionately in intersections and, therefore, disproportionately involve side impacts. (See Viano et al., 1990.) Automobile weight offers less protection in side-impact collisions than in frontal impacts. As we demonstrated in chapters 2 and 3, crash severity, crash type, automobile weight and wheelbase, safety belt use, and driver age and gender, taken separately, each significantly influences the probability of driver hospitalization or death. For this chapter, we also assessed the relative importance of these factors simultaneously to see which ones are the most important predictors of injury in a crash and which ones have relatively little influence. We found that crash severity is the most important predictor of driver hospitalization or death, followed by crash type, safety belt use, driver age and gender, and automobile weight. Crash severity refers to the speed of impact, while crash type refers to the number of vehicles in a crash, whether the car rolled over, and its points of impact. If information about only one of these several factors were available for predicting whether the driver would be seriously injured, having access to crash severity information would lead to the greatest number of accurate predictions. If crash severity information could not be obtained, information about the crash type would give the best chance of accurately predicting whether or not the driver would be injured. And so on down the list of factors. Table 4.1 documents this finding. It shows a statistical measure of the “explanatory power” of each factor. The table shows that the largest value for this measure is for crash severity, followed by crash type, and then the other factors in the order previously noted. The “explanatory power” of automobile weight is substantially less than that of all the other factors. Another way to illustrate the great importance of the crash severity and crash type factors is presented in figure 4.1. Each column in the figure shows the estimated increment in risk of injury associated with a change in the associated crash-related factor, combining the three types of crashes in our analysis. Thus, the “crash severity” bar in the figure shows that crashes involving a change in velocity of 23 mph have an estimated risk of driver injury 25 times as great as crashes with a change in velocity of only 6 mph. The bar for crash type shows our estimate that drivers involved in one-car rollover crashes are about nine times more likely to be hurt than drivers involved in collisions with cars and light trucks that are not head-on crashes. Similarly, figure 4.1 shows that drivers 65 and older are about 4.5 times more likely to be hospitalized or killed than drivers 16 to 24 and that unbelted drivers have an injury risk more than three times as great as drivers wearing manual lap and shoulder safety belts. Drivers of 2,000-pound automobiles have an estimated injury risk in a crash that is about 1.63 times (or 63 percent greater than) that of drivers of 3,600-pound cars. Finally, the estimated injury risk for women drivers is about 1.29 times (or 29 percent greater than) that of men drivers. Here we discuss the implications of our findings for future automobile safety. The first section below reviews the safety initiatives from NHTSA that have the greatest importance for automobile crashworthiness. The next section discusses ways to reduce the injury risk for particular categories of automobile drivers. The last section discusses the most effective uses of available safety technologies. It is important to keep two points in mind when considering alternative approaches to automobile crashworthiness. First, crashworthy automobiles must offer as much protection as possible for a broad matrix of crash types, crash speeds, and occupant characteristics that pose very different occupant protection problems. For example, we found that one-car crashes, particularly rollovers, are much more dangerous than collisions with cars and light trucks. We also found that men drivers and young drivers are disproportionately involved in one-car crashes, while women drivers and older drivers are more likely to be involved in collisions with cars and light trucks. Protecting young men in severe one-car crashes is very different from protecting women and older drivers in multivehicle collisions. Second, individual safety features often affect only one portion of the matrix of crash types and occupant characteristics. For example, air bags clearly help protect occupants in frontal collisions, but they do not contribute to occupant safety in side-impact collisions or rollover crashes. Starting with the 1990 model year, all automobiles sold in the United States have had to demonstrate driver and right-front-seat passenger safety with passive restraints in a full-frontal crash at 30 mph into a rigid barrier. “Passive restraint” means without the use of any safety device requiring actions by the driver or passenger, such as manual safety belts.In model year 1987, the first year of the phase-in period for this regulation, all the automobiles NHTSA tested met this requirement with automatic safety belts. By 1993, almost all the tested cars fulfilled the passive restraint requirement with air bags rather than automatic belts alone, although many of the cars with air bags also had automatic safety belts. NHTSA has announced major changes in this regulation. All cars manufactured in September 1997 or later will be required to have both air bags and manual lap and shoulder safety belts for both drivers and right-front-seat passengers. Very importantly, the revised regulation prohibits automatic safety belts—not just for use in the compliance tests but as safety equipment. All cars will have to be equipped with manual safety belts. Beginning with the 1994 model year, NHTSA began phasing in a requirement for automobile occupant protection in side impacts. By model year 1997, all automobiles will have to meet safety standards in crash tests simulating the impact of a 3,000-pound vehicle hitting the target car in a side-impact collision at 33.5 mph. Unlike the frontal impact crash tests, active restraint systems, such as manual safety belts, must be used in these tests. NHTSA is also undertaking a variety of efforts to deal with particular mechanisms of occupant injury rather than points of contact on the automobile. For example, to reduce head injuries, NHTSA is developing a regulation that would require energy-absorbing padding in the areas of automobile interiors that occupants’ heads frequently strike in side-impact collisions. Also, NHTSA is studying ways to further reduce injuries in rollover crashes, primarily by reducing the risk of ejection, by improving door latches and increasing the strength of automobile windows other than windshields, as well as by considering tougher roof crush standards. Other NHTSA activities are concerned with particular types of automobile occupants, especially children and elderly persons. It is important to note that NHTSA is seeking ways to improve protection for elderly drivers, although a major focus of NHTSA’s work involves programs to improve their driving skills or otherwise reduce their likelihood of crash involvement. (See Transportation Research Board, 1992, and NHTSA, 1993a; see also NHTSA 1992b for its activities priority plan through 1994.) Automobile manufacturers understand that different segments of the consumer market for automobiles prefer different types of cars. For example, young men are likely to prefer sports cars over station wagons, and older drivers disproportionately prefer large cars over smaller ones. In other words, in the marketplace for automobiles, one size does not fit all. Similarly, one size does not fit all when it comes to automobile safety: the crashworthiness problems of different types of drivers, and of drivers involved in different types of crashes, require a variety of different solutions. Here, we look at the differential safety concerns of segments of the safety “marketplace” that are defined by safety belt use and driver age and gender. Drivers involved in traffic crashes, on the whole, operate their vehicles in a riskier manner than drivers who are not involved in crashes. For example, the rate of safety belt use for drivers involved in crashes is less than the use rate for the general driving population. Estimates of the degree to which drivers who do not wear safety belts are overinvolved in roadway crashes vary considerably. For example, NHTSA (1992a) estimated that unbelted drivers experience potentially fatal crashes 2.2 times more than belted drivers, while Hunter et al. (1993) found that unbelted drivers had a crash involvement rate 35 percent higher than belt users. Unbelted and belted drivers have very different injury experiences in a crash. Unbelted drivers are more likely to suffer severe injuries, and their injuries are more likely to result from contact with the steering wheel or windshield (Danner, Langieder, and Hummel, 1987; Lestina et al., 1991). These differences are explained by the mechanisms of safety belt effectiveness. Safety belts tie the occupant to the car, helping the occupant decelerate over a relatively long period. In addition, by restricting movement, safety belts reduce the chances of the wearer’s striking the interior of the vehicle and help make his or her course of motion within the car more predictable. In contrast, unbelted occupants keep moving within the automobile in the moments after collision, the direction of their movement within the vehicle is relatively unpredictable, and it is likely either that their rapid motion will be abruptly stopped by contact with a rigid surface within the vehicle or that they will be ejected from it. Therefore, optimally safe vehicle interiors are conceptually dissimilar for belted and unbelted occupants (Mackay, 1993). For belted occupants, the more interior space the better, as increasing the space reduces the odds of contact with interior surfaces. Conversely, for unbelted occupants, the goal is to restrict movement and provide a soft place to land, so heavily padded interiors that minimize interior space are preferred. How can crash protection be improved for unbelted and belted drivers? For unbelted drivers, the obvious answer is to put them in safety belts. In practical terms, the best way to do this is to increase the number of automobiles with automatic safety belts. As NHTSA (1992a) and Williams et al. (1992) have reported, automobiles equipped with automatic safety belts have much higher belt usage rates than those with manual belts. While experimental vehicles have been designed with substantial protection for unbelted occupants, we do not believe that any combination of interior padding, air bags, and other passive restraint systems will be able to rival the effectiveness of safety belts in production automobiles for the foreseeable future. One reason for this is that, as noted above, designing an optimally safe car for unrestrained drivers may require abandoning safety belts as the centerpiece of occupant protection strategies. And safety belts are extraordinarily effective; alone, they are much more effective at reducing serious injuries than are air bags alone. For belted drivers, the prospects for dramatic improvements in crash protection are less obvious. On the one hand, promising efforts are under way to reduce much of the residual risk of injury confronting belted drivers. These include improvements in safety belt technology, the greater availability of air bags, and NHTSA’s efforts to improve occupant protection in side impacts. On the other hand, the great success of recent occupant protection efforts means that further crashworthiness improvements are harder to achieve, primarily because the dwindling proportion of crashes that still cause serious injury and death to belted occupants are exceptionally severe events. For example, Mackay et al. (1992), reviewing a sample of crashes involving the death of restrained front-seat occupants in Britain, found that the deaths occurred in extremely severe crashes. Fifty percent of the deaths in frontal crashes were in collisions with large trucks, and 86 percent involved passenger compartments crushed so severely as to eliminate the space occupied by the fatally injured person before the crash. Similarly, Green et al. (1994) reported that most of the fatalities of restrained occupants that they examined involved severe intrusion into the passenger compartment and multiple injuries so severe that 90 percent of the victims died within an hour of the crash. The “market segments” for automobile safety defined by driver age and gender require very different strategies for reducing fatalities. For men drivers and younger drivers, the problem is crash involvement, not crashworthiness. As we demonstrated in chapter 2, compared to women and older drivers, not only are men drivers and younger drivers involved in more automobile crashes but also the crashes they are particularly likely to be involved in have comparatively severe consequences—that is, single-car crashes have much higher driver injury rates than multivehicle crashes. However, as we saw in chapter 3, men drivers and younger drivers are significantly less likely to be hurt in a crash than women and older drivers. That is, men and younger drivers benefit from a degree of occupant protection that is not available to women and older drivers (we will discuss some of the reasons later). In summary, the surest way to improve the safety of men drivers and younger drivers is to attempt to reduce their crash involvement rates, particularly their rates of involvement in single-car crashes. The situation is exactly the reverse for women and older drivers. The problem for them is crashworthiness, not crash involvement. Compared to men and younger drivers, women and older drivers are involved in fewer automobile crashes, and the crashes they are involved in are, on the average, less severe, since they are less likely to be involved in single-car crashes than in multivehicle collisions. However, once a crash has occurred, women and, especially, older drivers are more likely to be hospitalized or killed. In our judgment, improving the crash protection offered by automobiles to women and older drivers so that it approaches the level enjoyed by men and younger drivers offers the greatest chance for reducing roadway injuries for them. In the absence of compelling evidence for the inherent physical frailty of women compared to men, we are optimistic that crashworthiness for women can be substantially improved. In contrast, the evidence we have reviewed indicates that older drivers are, in fact, more fragile than young drivers. Nonetheless, we believe that older drivers can be afforded better protection by automobiles than they now receive (see subsequent discussion and Mackay, 1988). It is important that occupant protection for women drivers and older drivers be improved without compromising the crash protection of men drivers and younger drivers; design changes that merely shift injury risk from one group of drivers to another will not improve traffic safety in the aggregate. One possible reason for the relatively high degree of crash protection enjoyed by men drivers and younger drivers is that efforts at improving automobile crashworthiness have concentrated on the crash types and occupant characteristics most often experienced by them. Current safety regulations and automobile safety designs emphasize protection in high-speed frontal collisions, and men drivers and younger drivers are more likely to be in single-car crashes, which disproportionately involve frontal impacts. The automobile crash tests NHTSA currently requires for all cars include full-frontal crashes into a rigid barrier at 30 mph (although the introduction of a requirement for side-impact tests is under way). Air bags reduce the risk of injury in frontal impacts only, not in side impacts. Similarly, safety belts are more effective in frontal than in side impacts (for example, Evans, 1990), and because of this, safety belts have a somewhat greater benefit in single-car crashes than in collisions with cars and light trucks. A second possible reason for the crashworthiness deficit of women drivers compared with men drivers is that current NHTSA regulations require the use of only one size of crash test dummy—a dummy representing the 50th percentile of the male population, or 5 feet 9 inches tall, weighing 165 pounds. Maximizing the safety of persons with these characteristics may, in a relative sense, compromise the safety of others. Another possible explanation for the greater injury risk for women drivers is that, on the average, women are shorter and lighter than men. Automobiles designed to accommodate taller and heavier men drivers may not accommodate women as well. For example, the Insurance Institute for Highway Safety (1993) recommends that drivers sit back as far as possible from the steering wheel and dashboard in order to minimize the risk of hitting those structures in a crash. Shorter drivers obviously cannot sit as far back as taller drivers if they hope to reach the accelerator and brake pedals, and this may expose them to more risk. All safety belts are not equally effective. In particular, many cars on the market today have safety belts with automatic pretensioners or web locking devices that substantially improve their effectiveness (IIHS, 1993). Pretensioners work by reducing the amount of slack in the belts or by tightening them in a crash a fraction of a second sooner. They cause the belted occupant to begin decelerating sooner in a crash, thereby increasing the total deceleration period. In addition, they increase the chances that the occupant’s forward motion will be stopped before he or she contacts the interior of the automobile. To give an idea of the magnitude of the safety increment available from belts with these features, Viano (1988) compared the performance of several restraint mechanisms in frontal crash tests. Depending on the outcome measure used, lap and shoulder belts with pretensioners had injury scores about 15 to 40 percent below those of lap and shoulder belts without pretensioners. NHTSA has recently announced regulations that would implement the requirement in the Intermodal Surface Transportation Efficiency Act of 1991 that all passenger cars and light trucks be equipped with air bags and lap and shoulder safety belts. Beginning with all cars manufactured in September 1997, both drivers and right-front-seat passengers will have both air bags and manual lap and shoulder safety belts; automatic safety belts are prohibited. We are concerned that NHTSA’s implementation of the requirement for air bags may not achieve the greatest degree of improvement in the aggregate safety of the population of automobile occupants. Automobile occupants who travel in cars with air bags and who wear manual lap and shoulder safety belts will be well protected. However, because safety belts alone offer much more protection than air bags alone, occupants of air bag-equipped cars who do not wear lap and shoulder safety belts will be less well protected than if they were traveling in cars with automatic safety belts. This is important because cars with automatic safety belts have higher safety belt usage rates than cars with manual belts, and individuals involved in serious automobile crashes have lower safety belt use rates than others. If many automobile occupants in serious crashes do not wear manual safety belts, the aggregate safety of automobile occupants under NHTSA’s proposal would be less than if, in addition to air bags, automatic safety belts were encouraged or required. To examine this question, we compared the average amount of occupant protection available to all automobile occupants under three different safety-belt-use scenarios based on a recent NHTSA report (NHTSA, 1992a). In that report, NHTSA noted that cars equipped with manual lap and shoulder belts had a belt usage rate of 56 percent in 1991, while cars equipped with automatic safety belts had usage rates ranging from 64 to 97 percent, depending on the type of automatic belt. If all cars had air bags and manual lap and shoulder belts and a belt usage rate of 56 percent, we estimate that fatality risk would fall 37.2 percent for the average automobile occupant compared with unprotected occupants. If all cars had air bags and automatic safety belts and a belt usage rate of 64 percent, we estimate that the average automobile occupant would have a 37.7-percent reduction in fatality risk. If all cars had air bags and automatic safety belts and a belt usage rate of 97 percent, we estimate that the total fatality risk reduction would be 46 percent. Thus, from the standpoint of maximizing the aggregate safety of all automobile occupants, the best proposal may be one that requires both air bags and automatic lap and shoulder safety belts. The magnitude of the fatality risk reduction arising from that configuration compared to NHTSA’s regulation requiring manual lap and shoulder safety belts depends on the difference between the usage rates of automatic and manual safety belts for automobile occupants involved in serious crashes. As our estimates show, if that difference is small, the automatic safety belt alternative offers only a very slight aggregate safety improvement. Conversely, if the usage rate difference is high, placing air bags and automatic lap and shoulder safety belts in all cars would substantially improve the safety of automobile occupants in the aggregate. DOT had two comments regarding the implications of our finding that, holding constant crash characteristics and automobile weight, women are more likely than men to suffer serious injury in a crash. The first is that NHTSA plans to conduct crash tests with test dummies of different sizes rather than only the standard dummy that represents a 50th percentile man driver. The second is that NHTSA has recently made final a rule requiring improvements in the adjustability of safety belts that may increase the percentage of vehicle occupants using belts correctly. We applaud both these developments. Nonetheless, in our opinion, there is no definitive evidence that either size differences or patterns of safety belt use fully account for the differences in injury rates between men and women. DOT also had two comments on our discussion of NHTSA’s implementation of the requirement for air bags. First, it contended that the usage figures for automatic safety belts that we used in our example are unrealistically high. More specifically, DOT stated that the usage rates for complete automatic belt systems are much less than the 97-percent scenario we described, since some drivers use only one component but not the other (for example, using the shoulder belt but not the lap belt) and other drivers disconnect the automatic belt system entirely. Second, DOT disagreed with our conclusion that manual and automatic safety belts provide “a roughly equivalent degree of protection.” For the first point, we understand that it is extremely difficult to accurately measure safety belt use, especially the use of particular safety belt components (see chapter 2). However, NHTSA (1992a) has concluded that automatic safety belts are used more often than manual belts, and our 97-percent usage rate scenario was based on a NHTSA report, not on our own analysis. Further, our findings would not differ even if automatic safety belts had usage rates much less than 97 percent; thus, we found that the scenario with a 64-percent usage rate for automatic belts (NHTSA’s lowest estimate) still provided slightly more total protection than the other scenario we considered, manual belts with a 56-percent usage rate. For the second point, our conclusion that manual and automatic safety belts provide approximately equivalent protection is based on NHTSA’s work, not on our own analyses of automobile crash data. For example, NHTSA (1993d, p.II-13) estimated that, when used in a crash, manual lap and shoulder safety belts reduce fatality risk by 45 percent and automatic three-point belts reduce fatality risk by 42.5 percent. Similarly, NHTSA earlier reported that it was unable to find any statistically significant differences between several different configurations of manual and automatic safety belts (NHTSA, 1992a, p.66). Most importantly, neither of DOT’s comments about our discussion of NHTSA’s implementation of the requirement for air bags addressed our main point—that drivers involved in serious crashes use safety belts much less than the general driving population. Our discussion is aimed at improving crash protection for drivers who have the greatest risk of involvement in serious crashes. A comprehensive evaluation of the best ways to increase safety belt use for those drivers is beyond the scope of this report. However, as our analysis demonstrates, NHTSA’s decision to prohibit automatic safety belts may not achieve the best result from that perspective. At a minimum, NHTSA needs to continue to emphasize in its public education efforts the importance of wearing safety belts even in cars equipped with air bags.","Pursuant to a congressional request, GAO reviewed highway safety, focusing on: (1) the most important predictors of injury in an automobile crash; (2) how the risk of injury in a crash is affected by the severity and type of crash, automobile size, safety belts and airbags, and the occupants' age and gender; and (3) areas for further reducing automobile occupants' crash injury risks. GAO found that: (1) the most important determinants of driver injury in car crashes are speed at impact, the type of crash, safety belt use, driver age and gender, and automobile weight and size; (2) injury is more likely in high-speed crashes, one car crashes, frontal crashes, and rollovers; (3) occupants of heavier and larger cars are less likely to be injured, but those cars pose a greater danger to persons in multivehicle crashes; (4) heavier cars offer more protection in one-car nonrollover and multivehicle crashes, but occupants of these cars are subject to more injury in rollovers than are occupants of lighter cars; (5) although safety belts reduce injury risks overall, they are most effective in rollovers, single car crashes, and frontal crashes; (6) air bags are only effective in frontal crashes and are less effective than safety belts alone; (7) although they are involved in fewer crashes overall, female and older drivers are more often injured than male and younger drivers are in similar crashes; (8) safety belts are not as effective for women as they are for men; (9) female and older drivers are involved in more multivehicle crashes and male and younger drivers are involved in more single car crashes; (10) older drivers tend to be involved in more side impact crashes; and (11) the government and manufacturers are working to improve automobile safety for each category of driver.",govreport
"The U.S. Coast Guard is a multimission, maritime military service within the Department of Homeland Security (DHS). To accomplish its responsibilities, the Coast Guard is organized into two major commands that are responsible for overall mission execution—one in the Pacific area and the other in the Atlantic area. These commands are divided into 9 districts, which in turn are organized into 35 sectors that unify command and control of field units and resources, such as multimission stations and patrol boats. In fiscal year 2005, the Coast Guard had over 46,000 full-time positions—about 39,000 military and 7,000 civilians. In addition, the agency had about 8,100 reservists who support the national military strategy or provide additional operational support and surge capacity during times of emergency, such as natural disasters. Furthermore, the Coast Guard also had about 31,000 volunteer auxiliary personnel help with a wide array of activities, ranging from search and rescue to boating safety education. The Coast Guard has responsibilities that fall under two broad missions—homeland security and non-homeland security. The Coast Guard responsibilities are further divided into 11 programs, as shown in table 1. For these 11 programs, the Coast Guard has developed performance measure to communicate agency performance and provide information for the budgeting process to Congress, other policymakers, and taxpayers. The Coast Guard’s performance measures are published in various documents, including the Coast Guard’s fiscal year Budget-in-Brief. The Coast Guard’s Budget-in-Brief reports performance information to assess the effectiveness of the agency’s performance as well as a summary of the agency’s most recent budget request. This, and other documents, reports the performance measures for each of the Coast Guard’s programs, as well as descriptions of the measures and explanations of performance results. To continue executing its missions, the Coast Guard has programs to acquire a number of assets such as vessels, aircraft, and command, control, communications, computer, intelligence surveillance, and reconnaissance (C4ISR) systems. The Coast Guard’s Deepwater program is a 25-year, $24 billion effort to upgrade or replace existing vessels and aircraft in order to carry out its missions along our coastlines and farther out at sea. The program is eventually to include 10 major classes of new or upgraded vessels and aircraft. The Coast Guard also has an acquisition program called the National Automatic Identification System to identify and track vessels bound for or within U.S. waters. Another acquisition program is called Rescue 21, a program to replace the Coast Guard’s 30- year-old search and rescue communications systems. Rescue 21 was to be used not only for search and rescue, but to support other Coast Guard missions, including those involving homeland security. The Coast Guard’s fiscal year 2008 budget request reflects a smaller increase than in years past. Requests for new capital spending are down, as the agency slows the pace of new acquisitions for Deepwater and other capital projects. Instead, several of the budget initiatives being emphasized reflect a reorganization of internal operations and support command infrastructure. Although the Coast Guard met fewer performance targets than last year, overall performance trends for most mission programs remain positive. That is, many of the measures that Coast Guard uses to evaluate performance have improved since last year, even though the agency did not meet as many of its performance targets in 2006 as in the year before. The Coast Guard’s budget request in fiscal year 2008 is $8.73 billion, approximately $275 million, or 3.3 percent, more than in fiscal year 2007 (see fig. 1). About $5.9 billion, or approximately 68 percent, is for operating expenditures (OE). This funding supports its 11 statutorily identified mission programs; increases in cost of living, fuel, and maintenance costs; and previous administration and congressional initiatives. The greatest change from the previous year is in the AC&I request, which at $949 million reflects about a 19 percent decrease from fiscal year 2007. According to Coast Guard officials, no new appropriations are requested in fiscal year 2008 for several Deepwater assets until business case reviews can be completed to assess the viability of technology and contracting oversight. The remaining part of the request consists primarily of funds requested for retiree pay and health care fund contributions. If the Coast Guard’s total budget request is granted, overall funding will have increased by over 55 percent since 2002, an increase of $3.1 billion. The Coast Guard’s budget request for homeland security missions represents approximately 35 percent of the overall budget. Figure 2 illustrates the percentage of funding requested for homeland security versus non-homeland security funding, and figure 3 shows the funding levels by each mission program. Two key budget initiatives—both reallocations rather than increases— reflect reorganization efforts. First, a major budget reallocation within the operating expenditures category establishes a single unified command for the agency’s deployable specialized forces. These are the Coast Guard’s response teams that can deploy wherever needed for natural disasters, terrorism incidents, and other concerns. According to senior Coast Guard officials, this initiative entails a onetime, budget-neutral reallocation of $132.7 million from the Atlantic and Pacific Area Commands to a new deployable operations command, which will be located in Ballston, Virginia. No new funds have been requested for this initiative. This initiative is discussed in more detail later in this testimony. The second reallocation involves an $80.5 million transfer from AC&I into the operating expense appropriation. The operational aspect of this reallocation is associated with creating a new consolidated acquisition function, also discussed in further detail below. Coast Guard officials said this reallocation consolidates all personnel funding into the operating expense appropriation and enables the Coast Guard to manage one personnel system for the entire agency. They said although this reallocation is budget neutral in 2008, future budget requests may include financial incentives that will enable the Coast Guard to develop a more robust cadre of acquisition professionals. The 19 percent decrease in fiscal year 2008 for AC&I reflects a slowing in the pace of acquisition efforts, which, according to Coast Guard officials, is an attempt to address technology issues and contracting oversight associated with Deepwater programs such as the Vertical Unmanned Aerial Vehicle and Fast Response Cutter. The Coast Guard also recognizes that it is carrying significant unobligated balances for a number of its acquisition projects. These balances reflect money appropriated but not yet spent for projects included in previous years’ budgets. During our work for this testimony, we reviewed budget data and Coast Guard documentation showing the current status of the agency’s unobligated balances. We found, for example, that the current unobligated balances total $1.96 billion for all acquisition projects. The Deepwater acquisition alone has $1.6 billion in total unobligated balances, which is nearly double the Coast Guard’s fiscal year 2008 request for the Deepwater project. Other acquisition programs, such as the Nationwide Automatic Identification System and Rescue 21, also have unobligated balances, but these are considerably lower (see table 2). The unobligated balance for Rescue 21, for example, is $30.5 million. These unobligated balances have accumulated for a variety of reasons as the Coast Guard has found itself unable to spend previous-year acquisition appropriations. For example, we and others have documented technical design issues involving the Coast Guard’s 123-foot patrol boat and the Fast Response Cutter. These problems have led to major delays in some programs and outright cancellations in others. We asked Coast Guard officials about their plans to spend these unobligated balances either in fiscal year 2008 or beyond, but at this point they were unable to provide us with detailed plans for doing so. To the agency’s credit, steps have been taken to address the issue, including reporting quarterly acquisition spending levels. Since these unobligated balances represent a significant portion of the Coast Guard’s entire budget, the degree to which the Coast Guard spends these balances in fiscal year 2008 could have a substantial impact on the overall level of capital spending for the year. According to senior Coast Guard officials, each acquisition project is now receiving more scrutiny and oversight of how previous funds are spent. The Coast Guard is not requesting additional funds for the Offshore Patrol Cutter, Fast Response Cutter, and Vertical Unmanned Aerial Vehicle in the fiscal year 2008 budget request until business case reviews are completed to assess the viability of the technology and contracting oversight. Despite the fact that Coast Guard met fewer performance targets than last year, overall performance trends for most mission programs remain positive. Performance in 7 of 11 Coast Guard mission areas increased in the last year, but the Coast Guard also set performance targets at a higher level than it did last year. Coast Guard’s performance did not improve sufficiently for the Coast Guard to meet as many of its higher performance targets in 2006 as it did in 2005. In fiscal year 2006, the Coast Guard reported that 5 of its 11 programs met or exceeded program performance targets. In addition, agency officials reported that the Coast Guard expected to meet the target for 1 additional program when results become available in August 2007, potentially bringing the total met targets to 6 out of 11 (see fig. 4). In comparison, last year we reported that in fiscal year 2005, Coast Guard met 8 out of 11 targets. In fiscal year 2006, the agency narrowly missed performance targets for 3 programs—Search and Rescue, Living Marine Resources, and Aids to Navigation. In fiscal year 2005, it missed only 1 of these 3, Living Marine Resources. The Coast Guard more widely missed performance targets for 2 programs, Defense Readiness and Marine Safety. In fiscal year 2005, Coast Guard met its Marine Safety target, but missed on Defense Readiness. See appendix I for more information on Coast Guard performance results. Congressional committees have previously expressed concern that Coast Guard’s shift in priorities and focus toward homeland security missions following the events of September 11, 2001, may have affected the agency’s ability to successfully perform its non-homeland security missions. However, the Coast Guard’s performance on its non-homeland security indicators has not changed substantially over the past 5 years. This past year, we also completed an examination of some of the performance indicators themselves. We found that while the Coast Guard’s non-homeland security measures are generally sound and the data used to collect them are generally reliable, there are challenges associated with using performance measures to link resources to results. Such challenges include comprehensiveness (that is, using a single measure per mission area may not convey complete information about overall performance) and external factors outside agency control, (such as weather conditions, which can affect the amount of ice that needs to be cleared or the number of mariners who must be rescued). The Coast Guard continues to work on these measures through such efforts as the following: Standardized reporting. The Coast Guard is currently developing a way to standardize the names and definitions for all Coast Guard activities across the agency, creating more consistent data collection throughout the agency. Measurement readiness. The Coast Guard is developing a tool to track the agency’s readiness capabilities with up-to-date information on resource levels at each Coast Guard unit as well as the certification and skills of all Coast Guard uniformed personnel. Framework for analyzing risk, readiness, and performance. The Coast Guard is developing a model for examining the links among risk, readiness management, and agency performance. This model is intended to help the Coast Guard better understand why events and outcomes occur, and how these events and outcomes are related to resources. While the Coast Guard appears to be moving in the right direction and is about done with some of these efforts, it remains too soon to determine how effective the Coast Guard’s larger efforts will be at clearly linking resources to performance results. These initiatives are not expected to be fully implemented until 2010. The 2008 budget request reflects a multiyear effort to reorganize the Coast Guard’s command and control and mission support structures. Three efforts are of note here—reorganizing shore-based forces into sector commands, placing all deployable specialized forces under a single nationwide command, and consolidating acquisitions management programs. Each of these efforts faces challenges that merit close attention. As we reported for the last 2 years, the Coast Guard has implemented a new field command structure that is designed to unify previously disparate Coast Guard units, such as air stations and marine safety offices, into 35 different integrated commands, called sectors. At each of these sectors, the Coast Guard has placed management and operational control of these units and their associated resources under the same commanding officer. Coast Guard officials told us that this change helped their planning and resource allocation efforts. For instance, Coast Guard field officials told us the sector command structure has been valuable in helping to meet new homeland security responsibilities, and in facilitating their ability to manage incidents in close coordination with other federal, state, and local agencies. Our follow-up work found, however, that work remains to ensure the Coast Guard is able to maximize the potential benefits of sector realignment. In particular, Coast Guard officials reported that some sectors had yet to colocate their vessel tracking system (VTS) centers with the rest of their operational command centers. According to field officials, the lack of colocation has hindered communications between staff that formerly were from different parts of the agency. According to Coast Guard officials, competing acquisition priorities are limiting the progress in obtaining funding needed to colocate these facilities. The fiscal year 2008 budget does not provide funds to colocate the VTS centers and command centers. Coast Guard headquarters officials told us they would work to address this challenge as part of the capital investment plan to build interagency operational centers for port security, as required under the SAFE Port Act, but they had not yet developed specific plans, timelines, and cost estimates. The Coast Guard is planning to reorganize its deployable specialized forces under a single unified command, called the Deployable Operations Group (DOG). This change is reportedly budget neutral in the fiscal year 2008 request, but it bears attention for operational effectiveness reasons. According to Coast Guard officials, the agency is making this change based on lessons learned from the federal response to Hurricane Katrina. They said the response highlighted the need to improve effectiveness of day-to-day operations and to enhance flexibility and interoperability of forces responding to security threats and natural disasters. Currently, there are five different types of Coast Guard specialized forces, totaling about 2,500 personnel. Their roles and missions vary widely, ranging from conducting antiterrorism operations to conducting environmental response and cleanup operations (see table 3). The Coast Guard’s existing structure divides operational control of specialized forces into three different command authorities— headquarters, Pacific Area, and Atlantic Area. Under the planned realignment, these forces would be available under a single operational command, with the expectation of more effective resource management, oversight, and coordination. The Coast Guard plans to establish operating capability for this unified approach by July 20, 2007, with an initial command center located in Ballston, Virginia. Officials told us they were well under way in planning for this reorganization. Officials expect about 100 staff will be assigned to the center when it reaches its initial operating capability, growing to about 150 personnel once the command structure is completed. According to officials, all administrative staff selected for the center will be drawn from headquarters, district, and area levels. We have not studied this reorganization, but our prior work on other aspects of Coast Guard operations suggests that the Coast Guard may face a number of implementation challenges. Some may be similar to those that Coast Guard faced when it created its sector commands, such as obtaining buy-in from personnel that will be affected by the reorganization or addressing realignment issues at the district level. Another challenge is to ensure that the change does not adversely affect mission performance at the sector and field unit levels. Currently, for example, sector commanders make use of available local MSST units—made available by district and area commanders—to help meet shortfalls in resource availability for everyday missions, such as conducting high-risk vessel escorts and harbor security patrols. If these units were not available to support mission needs, additional strain could be put on the performance of these local units. These changes to the command structure are part of plans that extend beyond fiscal year 2008. In his recent State of the Coast Guard speech, the Commandant of the Coast Guard unveiled a proposal to combine the Coast Guard’s Atlantic and Pacific Area command functions into a single Coast Guard operations command for mission execution. In addition, the Coast Guard plans to establish a new mission support command, which will have responsibility for nationwide maintenance, logistics, and supply activities. According to Coast Guard officials, the current structure is not well suited to responding to post-September 11 transnational threats. For example, Coast Guard officials said the current structure at times works against the Coast Guard in operations with Joint Interagency Task Forces, whose operating areas are not the same as the Coast Guard’s established area boundaries. Coast Guard officials told us a working group had developed a blueprint of the new operational force structure, but the Coast Guard is not ready to release it. Guard officials told us they expected the reorganization would be implemented during the current Commandant’s 4-year term. The Coast Guard also plans to consolidate its acquisitions management offices, placing all major acquisitions programs and oversight functions under the control of a single acquisitions officer. The goals of this consolidation are to improve Coast Guard oversight of acquisitions, better balance contracting officers and acquisition professionals among its major acquisition projects, and address staff retention and shortage problems associated with the acquisitions management program. However, the Coast Guard has not adequately staffed the acquisitions management program to meet its current workload, and maintaining an appropriate staff size will be challenging, despite the reorganization. For example, a February 2007 independent analysis found that the Coast Guard does not possess a sufficient number of acquisition personnel or the right level of experience needed to manage the Deepwater program. Headquarters officials told us the reorganization would address retention problems by creating a new acquisitions specialty career ladder that could attract new pools of talent. Still, given its past history of staff shortages and difficulties retaining acquisition staff, the Coast Guard will face challenges maintaining an appropriately sized acquisition staff, at least in the near term. Coast Guard headquarters officials told us the Deepwater program had pushed other important acquisitions priorities aside, and this new organization would help the Coast Guard advance these other priorities, such as boats, piers, and other shoreside physical infrastructure. In our view, it is unclear how the reorganization of the acquisition function will improve the prospects for these other programs, given Coast Guard’s priorities and ongoing constraints on funding. The reorganized acquisition office is expected to merge the now stand- alone Deepwater acquisition project with the existing acquisition directorate and research and development centers. The new office is expected to be led by a new Coast Guard Chief Acquisition Officer who will have responsibility over all procurement projects and by a deputy who will deal largely with Deepwater issues. At the program management level, Coast Guard is establishing four program managers to lead each acquisitions area, including (1) surface assets; (2) air assets; (3) command, control, communications, computers, intelligence, surveillance, and reconnaissance; and (4) small boats and shore-based infrastructure, such as command centers and boathouses. The Coast Guard plans to begin implementing this reorganization in July 2007. It is too early to tell if the Coast Guard’s reorganization will enable it to achieve its goals—notably, better balance of acquisitions support between Deepwater and the Coast Guard’s other acquisitions programs. While some Coast Guard major acquisition projects continue to face challenges, especially the Deepwater program, several of these projects are making progress. The record for Deepwater has been mixed, with 7 of 10 asset classes on or ahead of schedule. Three classes, however, are behind schedule for various reasons and several factors add to the uncertainty about the delivery of other Deepwater assets. Contract management issues that we have reported on previously continue to be challenges to the Coast Guard. Installation of equipment for the initial phase of NAIS, an acquisition that is designed to allow the Coast Guard to monitor and track vessels as far as 2,000 nautical miles off the U.S. coast, is currently under way, but without changes to existing regulations, some vessels will be able to avoid taking part in the system. The Coast Guard’s timeline for achieving full operating capability for its search and rescue communications system, Rescue 21, was delayed from 2006 to 2011, and the estimated total acquisition cost increased from 1999 to 2005, but according to Coast Guard officials, many of the issues that led to these problems are being addressed. Coast Guard acquisition officials said they are providing more oversight to the contractor after we reported on contract management shortcomings. The Coast Guard continues to face challenges in managing the Deepwater program. The delivery record for assets is mixed and technology and funding uncertainties, recent changes to Coast Guard plans for procuring Deepwater assets, as well as the 25-year time frame for asset delivery add to uncertainties about the delivery schedule for future Deepwater assets. We have reported concerns about management of the Deepwater program for several years now and have made recommendations aimed at improving the program. The Coast Guard continues to address these recommendations as it seeks to better manage the Deepwater program. In addition to these program management issues, performance and design problems for certain Deepwater assets have created additional operational challenges for the Coast Guard. The Coast Guard is taking steps to mitigate these problems, but challenges remain. Below is a summary of our recent Deepwater work. The Coast Guard’s Deepwater program is a 25-year, $24 billion plan to replace or upgrade its fleet of vessels and aircraft. Upon completion, the Deepwater program is to consist of 5 new classes of vessels—the National Security Cutter (NSC), Offshore Patrol Cutter (OPC), Fast Response Cutter (FRC), Short-Range Prosecutor (SRP), and Long-Range Interceptor (LRI); 1 new class of fixed-wing aircraft—the Maritime Patrol Aircraft (MPA); 1 new class of unmanned aerial vehicles—the Vertical Unmanned Aerial Vehicle (VUAV); 2 classes of upgraded helicopters—the Medium- Range Recovery Helicopter (MRR) and the Multi-Mission Cutter Helicopter (MCH); and 1 class of upgraded fixed-wing aircraft—the Long- Range Surveillance Aircraft (LRS). Figure 5 illustrates the 10 classes of Deepwater assets. Our preliminary observations indicated that, as of January 2007, of the 10 classes of Deepwater assets to be acquired or upgraded, the delivery record for first-in-class assets (that is, the first of multiple aircraft or vessels to be delivered in each class) was mixed. Specifically, 7 of the 10 asset classes were on or ahead of schedule. Among these, 5 first-in-class assets had been delivered on or ahead of schedule; and 2 others remained on schedule but their planned delivery dates were in 2009 or beyond. In contrast, 3 Deepwater asset classes were behind schedule due to various problems related to designs, technology, or funding. Using the 2005 Deepwater Acquisition Program Baseline as the baseline, figure 6 indicates, for each asset class, whether delivery of the first in class asset was ahead of schedule, on schedule, or behind schedule as of January 2007. As part of our ongoing work, we are analyzing Coast Guard planning documents to evaluate the current estimates of Deepwater asset delivery dates. Several factors add to the uncertainty about the delivery schedule of Deepwater assets. First, the Coast Guard is still in the early phases of the 25-year Deepwater acquisition program and the potential for changes in the program over such a lengthy period of time make it difficult to forecast the ability of the Coast Guard to acquire future Deepwater assets according to its published schedule. For example, technology changes since the award of the original Deepwater contract in 2002 have already, in part, delayed delivery of the VUAV, and the Coast Guard is currently studying the potential use of an alternative unmanned aerial vehicle. Second, changes to funding levels can impact the future delivery of Deepwater assets. For example, despite earlier plans, the fiscal year 2008 Department of Homeland Security congressional budget justification indicates that the Coast Guard does not plan to request funding for some Deepwater assets in FY 2008, such as the OPC and the VUAV. Acquisition of these two Deepwater assets has now been delayed until FY 2013, at the earliest. Finally, the Coast Guard has recently made a number of program management and asset-specific changes that could impact the delivery schedules for its Deepwater assets. For example, the Coast Guard has begun to bring all acquisition efforts under one organization. Further, the Coast Guard announced that it has terminated acquisition of the FRC-B, an off-the-shelf patrol boat that is intended to serve as an interim replacement for the Coast Guard’s deteriorating fleet of 110-foot patrol boats, through the system integrator and plans to assign responsibility for the project to the Coast Guard’s acquisition directorate. These types of programmatic changes will take time to implement, and thus add to uncertainty about the specific delivery dates of certain Deepwater assets. In 2001, we described the Deepwater program as “risky” due to the unique, untried acquisition strategy for a project of this magnitude within the Coast Guard. The Coast Guard used a system-of-systems approach to replace or upgrade assets with a single, integrated package of aircraft, vessels, and unmanned aerial vehicles, to be linked through systems that provide C4ISR and supporting logistics. In a system of systems, the deliveries of Deepwater assets are interdependent, thus schedule slippages and uncertainties associated with potential changes in the design and capabilities of any one asset increases the overall risk that the Coast Guard might not meet its expanded homeland security missions within given budget parameters and milestone dates. The Coast Guard also used a systems integrator—which can give the contractor extensive involvement in requirements development, design, and source selection of major system and subsystem subcontractors. The Deepwater program is also a performance-based acquisition, meaning that it is structured around the results to be achieved rather than the manner in which the work is performed. If performance-based acquisitions are not appropriately planned and structured, there is an increased risk that the government may receive products or services that are over cost estimates, delivered late, and of unacceptable quality. In 2004 and in subsequent assessments in 2005 and 2006, we reported concerns about the Deepwater program related to three main areas— program management, contractor accountability, and cost control. The Coast Guard’s ability to effectively manage the program has been challenged by staffing shortfalls and poor communication and collaboration among Deepwater program staff, contractors, and field personnel who operate and maintain the assets. Despite documented problems in schedule, performance, cost control, and contract administration, measures for holding the contractor accountable resulted in an award fee of $4 million (of the maximum $4.6 million) for the first year. Through the first 4 years of the Deepwater contract, the systems integrator received award fees that ranged from 87 percent to 92 percent of the total possible award fee (scores that ranged from “very good” to “excellent” based on Coast Guard criteria), for a total of over $16 million. Further, the program’s ability to control Deepwater costs is uncertain given the Coast Guard’s lack of detailed information on the contractor’s competition decisions. While the Coast Guard has taken some actions to improve program outcomes, our assessment of the program and its efforts to address our recommendations continues, and we plan to report on our findings later this year. In addition to the program management issues discussed above, there have been problems with the performance and design of Deepwater patrol boats that have created operational challenges for the Coast Guard. The Deepwater program’s bridging strategy to convert the legacy 110-foot patrol boats into 123-foot patrol boats has been unsuccessful. The Coast Guard had originally intended to convert all 49 of its 110-foot patrol boats into 123-foot patrol boats in order to increase the patrol boats’ annual operational hours and to provide additional capabilities, such as small boat stern launch and recovery and enhanced and improved C4ISR. However, the converted 123-foot patrol boats began to display deck cracking and hull buckling and developed shaft alignment problems, and the Coast Guard elected to stop the conversion process at eight hulls upon determining that the converted patrol boats would not meet their expanded post-September 11 operational requirements. These performance problems have had operational consequences for the Coast Guard. The hull performance problems with the 123-foot patrol boats led the Coast Guard to remove all of the eight converted normal 123- foot patrol boats from service effective November 30, 2006. The Commandant of the Coast Guard has stated that having reliable, safe cutters is “paramount” to executing the Coast Guard’s missions. Thus, removing these patrol boats from service affects the Coast Guard’s operations in its missions, such as search and rescue and alien and migrant interdiction. The Coast Guard is taking actions to mitigate the operational impacts resulting from the removal of the 123-foot patrol boats from service. Specifically, in recent testimony, the Commandant of the Coast Guard stated that the Coast Guard has taken the following actions: multicrewing eight of the 110-foot patrol boats with crews from the 123-foot patrol boats that have been removed from service so that patrol hours for these vessels can be increased; deploying other Coast Guard vessels to assist in missions formerly performed by the 123-foot patrol boats; securing permission from the U.S. Navy to continue using three 179- foot cutters on loan from the Navy (these were originally to be returned to the Navy in 2008) to supplement the Coast Guard’s patrol craft; and compressing the maintenance and upgrades on the remaining 110-foot patrol boats. The FRC, which was intended as a long-term replacement for the legacy patrol boats, has experienced design problems that have operational implications as well. As we reported in 2006, the Coast Guard suspended design work on the FRC due to design risks such as excessive weight and horsepower requirements. Coast Guard engineers raised concerns about the viability of the FRC design (which involved building the FRC’s hull, decks, and bulkheads out of composite materials rather than steel) beginning in January 2005. In February 2006, the Coast Guard suspended FRC design work after an independent design review by third party consultants demonstrated, among other things, that the FRC would be far heavier and less efficient than a typical patrol boat of similar length, in part, because it would need four engines to meet Coast Guard speed requirements. One operational challenge related to the FRC is that the Coast Guard will end up with two classes of FRCs. The first class of FRCs to be built would be based on an adapted design from a patrol boat already on the market to expedite delivery. The Coast Guard would then pursue development of a follow-on class that would be completely redesigned to address the problems in the original FRC design plans. Coast Guard officials recently estimated that the first FRC delivery will slip to fiscal year 2009, at the earliest, rather than 2007 as outlined in the 2005 Revised Deepwater Implementation Plan. Thus, the Coast Guard is also facing longer-term operational gaps related to its patrol boats. Outside Deepwater, one acquisition project included in the fiscal year 2008 budget is the Nationwide Automatic Identification System, a system designed to of identify, track, and communicate with vessels bound for or within U.S. waters and forwarding that information for additional analysis. NAIS uses a maritime digital communication system that transmits and receives vessel position and voyage data. The Coast Guard describes NAIS as its centerpiece in its effort to build Maritime Domain Awareness, its ability to know what is happening on the water. NAIS is not expected to reach full capability until 2014, when the system will be able to track ships as far as 2,000 nautical miles away and communicate with them when they are within 24 nautical miles of the U.S. coast. It is being implemented in three phases, the first of which is scheduled to be fully operational in September 2007. At that time, the Coast Guard expects to have the ability to track—but not communicate with—vessels in 55 ports and 9 coastal areas. The largest areas of the continental U.S. coastline that will remain without coverage after this first phase are the Pacific Northwest and Gulf coasts. The second phase calls for being able to track ships out to 50 nautical miles from the entire U.S. coast and communicate with them as far as 24 nautical miles out. This is the phase addressed in the fiscal year 2008 budget. The $12 million fiscal year 2008 AC&I request for NAIS is expected to pay for implementing the initial operating capability for phase two. The Coast Guard has received approval from the Department of Homeland Security to issue solicitations and award contracts for this initial capability, and the agency has held information sessions to gauge industry interest in participating and to help refine its statement of work for the initial solicitation. The initial solicitation will provide requirements for full receiving and transmitting capability for two sectors within one Coast Guard area and one sector in another area. With this infrastructure in place the Coast Guard expects to be able to test identification, tracking, and communication performance, including such features as the ability to determine if the vessel transmissions are accurately reflecting the actual location of a vessel. The Coast Guard is considering whether to require additional types of vessels to install and use the equipment needed for the Coast Guard to track vessels and communicate with them. Current regulations require certain vessels (such as commercial vessels over 65 feet in length) traveling on international voyages or within VTS areas to install and operate the transmission equipment. Vessels that are not subject to current regulations generally include noncommercial and fishing vessels and commercial vessels less than 65 feet long. This means that many domestic vessels are not required to transmit the vessel and voyage information and therefore will be invisible to the NAIS. The Coast Guard has indicated in the Federal Register that it is considering expanding the requirements to additional vessels. Another non-Deepwater project covered in the budget request is Rescue 21, the Coast Guard’s command, control, and communication infrastructure used primarily for search and rescue. The fiscal year 2008 AC&I budget includes $81 million for continued development of Rescue 21. In May 2006 we reported that shortcomings in Coast Guard’s contract management and oversight efforts contributed to program cost increases from $250 million in 1999 to $710.5 million in 2005 and delays in reaching full operating capability from 2006 to 2011. Our recommendations included better oversight of the project, completion of an integrated baseline review of existing contracts, and development of revised cost and schedule estimates. According to the Coast Guard, it has taken a series of actions in response, including program management reviews and oversight meetings, conducting integrated baseline reviews on existing contracts, and meeting regularly to assess project risks. According to the Coast Guard officials we met with, the contractor is currently on time and on budget for installing the full system in 11 Rescue 21 regions, including such regions as New Orleans, Long Island/New York, and Miami. The last of the 11 regions covered by current contracts is scheduled to be completed by October 2008. Contracts for the 25 regions that remain have not been signed. To keep to current project cost and schedule baselines, however, the Coast Guard has reduced the required performance of the system. Originally, Rescue 21 was supposed to limit coverage gaps to 2 percent, meaning that the system had to be able to capture distress calls in 98 percent of the area within 20 nautical miles of the coast and within navigable rivers and other waterways. The current contract calls for coverage gaps of less than 10 percent. Rescue 21 was also intended to have the capability to track Coast Guard vessels and aircraft and provide data communication with those assets. Neither the capability to track the Coast Guard’s own assets nor data communications is included in the current technology being installed. While the fiscal year 2008 budget request contains funding for specifically addressing the projects discussed above, certain other projects were judged by Coast Guard officials to be lower in priority and were not included. We have examined two of these areas in recent work—vessels for aids to navigation and domestic icebreaking activity, and vessels for icebreaking in polar areas. Last September, we completed work for this committee on the condition of Coast Guard aids-to-navigation (ATON) and icebreaking assets. More than half of these assets have reached or will be approaching the end of their designed service lives. In 2002, the Coast Guard proposed options for systematically rehabilitating or replacing 164 cutters and boats in these fleets after determining that the age, condition, and cost of operating these assets would diminish the capability of the Coast Guard to carry out ATON and domestic icebreaking missions. We noted that no funds had been allocated to pursue these options, apparently due to competing needs for replacing or rehabilitating other Coast Guard assets. These competing needs, reflected largely in the Coast Guard’s expensive and lengthy Deepwater asset replacement program, will continue for some time, as will other pressures on the federal budget. The Coast Guard is requesting no additional spending for ATON assets or infrastructure in fiscal year 2008. Without specific funding to move forward, the Coast Guard has attempted to break the project into smaller components and pursue potential funding from within the Coast Guard’s budget, focusing on the assets most in need of maintenance or replacement. In February 2006, the Coast Guard began a project to replace its fleet of 80 trailerable aids-to-navigation boats with new boats that have enhanced capabilities to do ATON work as well as other missions. According to a Coast Guard official, this acquisition would cost approximately $14.4 million if all 80 boats are purchased and would bring on new boats over a 5-year period as funds allow. The Coast Guard official responsible for the project said the Coast Guard intends to make the purchases using a funding stream appropriated for the maintenance of nonstandard boats that can be allocated to the boats with the most pressing maintenance or recapitalization needs. Availability of these funds, however, depends on the condition and maintenance needs of other nonstandard boats; if this funding has to be applied to meet other needs, such as unanticipated problems, it may not be available for purchasing these boats. In addition to carrying out their primary missions of ATON and domestic icebreaking, these assets have also been used in recent years for other missions such as homeland security. The Coast Guard’s ATON and domestic icebreakers saw a sharp increase in use for homeland security missions after the attacks of September 11, and while this trend has moderated somewhat, the use of some assets in these missions continues well above pre-September 11 levels. This increase is most prominent for domestic icebreakers, which are being operated more extensively for other purposes at times of year when no icebreaking needs to be done. Newer ATON vessels, which have greater multimission capabilities than older vessels, tend to be the ATON assets used the most for other missions. In addition to considering options for replacing or rehabilitating its ATON assets, the Coast Guard also has examined possibilities for outsourcing missions. In 2004 and 2006, the Coast Guard completed analyses of what ATON functions could be feasibly outsourced. Although possibilities for outsourcing were identified for further study, Coast Guard officials noted that outsourcing also carries potential disadvantages. For example, they said it could lead to a loss of “surge” capacity–that is the capacity to respond to emergencies or unusual situations. Coast Guard officials noted that outsourcing or finding a contractor to do work after an event such as Katrina is difficult due to the increased demand for their services as well as the fact that the labor pool may have been displaced. When a contractor is found, it usually takes a long time to get the work completed due to the backlog of work and tends to be very expensive. In addition, this surge capability may be needed for other missions, such as those that occur when ATON assets can be used to support search and rescue efforts. In the aftermath of Hurricane Katrina, for example, some ATON assets provided logistical support for first responders or transported stranded individuals. Coast Guard officials stated that after Hurricane Katrina, its own crews were able to begin work immediately to repair damaged aids and get the waterways open to maritime traffic again. Coast Guard officials also indicated that outsourcing may adversely affect the Coast Guard’s personnel structure by reducing opportunities to provide important experience for personnel to advance in their careers. The Coast Guard confronts ongoing maintenance challenges that have left its polar icebreaking capability diminished. The Coast Guard has two Polar-class icebreakers for breaking channels in the Antarctic. Both are reaching the end of their design service lives, and given the funding challenges associated with maintaining them, the Coast Guard decided to deactivate one of the two, the Polar Star, in 2006. This reduced icebreaking capability since only one Polar-class icebreaker, the Polar Sea, was available, and for the Polar Sea it increased maintenance needs while reducing time available to conduct maintenance. Coast Guard officials and others have reported that failure to address these challenges could leave the nation without heavy icebreaking capability and could jeopardize the investment made in the nation’s Antarctic Program. According to Coast Guard officials, the remaining Polar-class icebreaker’s age and increased operational tempo have left it unable to continue the mission in the long term without a substantial investment in maintenance and equipment renewal. One option, refurbishing the two existing Polar-class icebreakers for an additional 25 years of service, is estimated to cost between $552 million and $859 million. Another option, building new assets, would cost an estimated $600 million per vessel, according to Coast Guard officials. Coast Guard officials have begun planning a transition strategy to help keep the sole operating Polar-class icebreaker mission-capable until new or refurbished assets enter service, which would take an estimated 8 to 10 years. According to officials, this 10-year recapitalization plan will identify current and projected maintenance service needs and equipment renewal projects and associated costs, alternatives to address these needs, and timelines for completing these projects. Madam Chair and members of the subcommittee, this completes my statement for the record. For information about this statement, please Contact Stephen L. Caldwell, Acting Director, Homeland Security and Justice Issues, at (202) 512-9610, or caldwells@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Penny Augustine, Jonathan Bachman, Jason Berman, Steven Calvo, Jonathan Carver, Christopher Conrad, Adam Couvillion, Geoffrey Hamilton, John Hutton, Christopher Hatscher, Tonia Johnson, and Stan Stenersen. Appendix I provides a detailed list of Coast Guard performance results for the Coast Guard’s 11 programs from fiscal year 2002 through 2006. Coast Guard: Status of Efforts to Improve Deepwater Program Management and Address Operational Challenges. GAO-07-575T. Washington, D.C.: March 8, 2007. Coast Guard: Preliminary Observations on Deepwater Program Assets and Management Challenges. GAO-07-446T. Washington, D.C.: Feb. 15, 2007. Coast Guard: Coast Guard Efforts to Improve Management and Address Operational Challenges in the Deepwater Program. GAO-07-460T. Washington, D.C.: Feb. 14, 2007. Homeland Security: Observations on the Department of Homeland Security’s Acquisition Organization and on the Coast Guard’s Deepwater Program. GAO-07-453T. Washington, D.C.: Feb. 8, 2007. Coast Guard: Condition of Some Aids-to-Navigation and Domestic Icebreaking Vessels Has Declined; Effect on Mission Performance Appears Mixed. GAO-06-979. Washington, D.C.: Sept. 22, 2006. Coast Guard: Non-Homeland Security Performance Measures Are Generally Sound, but Opportunities for Improvement Exist. GAO-06-816. Washington, D.C.: Aug. 16, 2006. Coast Guard: Observations on the Preparation, Response, and Recovery Missions Related to Hurricane Katrina. GAO-06-903. Washington, D.C.: July 31, 2006. Maritime Security: Information-Sharing Efforts Are Improving. GAO-06-933T. Washington, D.C.: July 10, 2006. Coast Guard: Status of Deepwater Fast Response Cutter Design Efforts. GAO-06-764. Washington, D.C.: June 23, 2006. United States Coast Guard: Improvements Needed in Management and Oversight of Rescue System Acquisition. GAO-06-623. Washington, D.C.: May 31, 2006. Coast Guard: Changes in Deepwater Acquisition Plan Appear Sound, and Program Management Has Improved, but Continued Monitoring Is Warranted. GAO-06-546. Washington, D.C.: April 28, 2006. Coast Guard: Progress Being Made on Addressing Deepwater Legacy Asset Condition Issues and Program Management, but Acquisition Challenges Remain. GAO-05-757. Washington, D.C.: July 22, 2005. Coast Guard: Preliminary Observations on the Condition of Deepwater Legacy Assets and Acquisition Management Challenges. GAO-05-651T. Washington, D.C.: June 21, 2005. Maritime Security: Enhancements Made, but Implementation and Sustainability Remain Key Challenges. GAO-05-448T. Washington, D.C.: May 17, 2005. Coast Guard: Preliminary Observations on the Condition of Deepwater Legacy Assets and Acquisition Management Challenges. GAO-05-307T. Washington, D.C.: April 20, 2005. Coast Guard: Observations on Agency Priorities in Fiscal Year 2006 Budget Request. GAO-05-364T. Washington, D.C.: March 17, 2005. Coast Guard: Station Readiness Improving, but Resource Challenges and Management Concerns Remain. GAO-05-161. Washington, D.C.: January 31, 2005. Maritime Security: Better Planning Needed to Help Ensure an Effective Port Security Assessment Program. GAO-04-1062. Washington, D.C.: September 30, 2004. Maritime Security: Partnering Could Reduce Federal Costs and Facilitate Implementation of Automatic Vessel Identification System. GAO-04-868. Washington, D.C.: July 23, 2004. Maritime Security: Substantial Work Remains to Translate New Planning Requirements into Effective Port Security. GAO-04-838. Washington, D.C.: June 30, 2004. Coast Guard: Deepwater Program Acquisition Schedule Update Needed. GAO-04-695. Washington, D.C.: June 14, 2004. Coast Guard: Station Spending Requirements Met, but Better Processes Needed to Track Designated Funds. GAO-04-704. Washington, D.C.: May 28, 2004. Coast Guard: Key Management and Budget Challenges for Fiscal Year 2005 and Beyond. GAO-04-636T. Washington, D.C.: April 7, 2004. Coast Guard: Relationship between Resources Used and Results Achieved Needs to Be Clearer. GAO-04-432. Washington, D.C.: March 22, 2004. Contract Management: Coast Guard’s Deepwater Program Needs Increased Attention to Management and Contractor Oversight. GAO-04-380. Washington, D.C.: March 9, 2004. Coast Guard: New Communication System to Support Search and Rescue Faces Challenges. GAO-03-1111. Washington, D.C.: September 30, 2003. Maritime Security: Progress Made in Implementing Maritime Transportation Security Act, but Concerns Remain. GAO-03-1155T. Washington, D.C.: September 9, 2003. Coast Guard: Actions Needed to Mitigate Deepwater Project Risks. GAO-01-659T. Washington, D.C.: May 3, 2001. Coast Guard: Progress Being Made on Deepwater Project, but Risks Remain. GAO-01-564. Washington, D.C.: May 2, 2001. Coast Guard: Strategies for Procuring New Ships, Aircraft, and Other Assets. GAO/T-HEHS-99-116. Washington, D.C.: Mar. 16, 1999. Coast Guard’s Acquisition Management: Deepwater Project’s Justification and Affordability Need to Be Addressed More Thoroughly. GAO/RCED-99-6. Washington, D.C.: October 26, 1998. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","The U. S. Coast Guard is a multimission agency responsible for maritime safety, security, and stewardship. It performs these missions, relating to homeland security and non-homeland security in U.S. ports and inland waterways, along the coasts, and on international waters. The President's budget request, including the request for the Coast Guard, was transmitted to Congress on February 5, 2007. This testimony, which is based on current and past GAO work, synthesizes the results of this work as it pertains to the following: budget requests and performance goals, organizational changes and related management initiatives, current acquisition efforts and challenges, and challenges related to performing traditional legacy missions. The Coast Guard's fiscal year 2008 budget request totals $8.7 billion, an increase of 3 percent over the enacted budget for fiscal year 2007 and a slowing of the agency's budget increases over the past 3 fiscal years. The Coast Guard expects to meet its performance goals in 6 of 11 mission areas in fiscal year 2006, down from 8 in 2005. Trends indicate increased homeland security activities have not prevented meeting non-homeland security goals. Two new reorganization efforts are under way. One creates a single command for all specialized deployable units, such as those for responding to pollution or terrorist incidents. However, experience with an effort to reorganize field units suggests there may be challenges in such matters as merging different operating approaches and addressing resource issues. The other effort merges the Coast Guard's various acquisition management efforts under a single Chief Acquisition Officer. The reorganization of acquisition management is in part a response to past troubled acquisition efforts. This change in the acquisition structure is too new to assess. Current major acquisitions include Deepwater for cutters and aircraft, the Rescue 21 communication system, and the National Automatic Identification System for vessel tracking. Deepwater and Rescue 21 have had schedule delays and performance reductions in the past, but the Coast Guard has been taking actions to improve oversight. Installation of equipment for the first phase of the National Automatic Identification System is under way, but the Coast Guard is still determining which types of vessels will have to participate. All three programs have also accumulated sizeable carryover balances of unspent moneys from previous years. Competing funding priorities have placed aging polar icebreakers and aids-to-navigation assets at risk. Many aids-to-navigation vessels are near the end of their service lives. The Coast Guard is exploring alternatives for replacement or extending their service. Similarly, high maintenance costs prompted the Coast Guard to take one of two Antarctic icebreakers out of service, increasing reliance on the remaining one.",govreport
"DOD’s personal property program is used by personal property shipping office staff to manage household goods moves for all military servicemembers and DOD civilians when they relocate. The military services pay shipment and storage-related costs from their military personnel accounts’ permanent change of station budgets and pay for loss and damage claims and personal property shipment office expenses from their operation and maintenance accounts. Servicemembers generally work with DOD transportation officials at personal property processing offices to coordinate their moves. These offices can either be service- specific offices or joint or consolidated property offices that assist servicemembers from more than one service. These offices provide servicemembers with local points of contact for counseling about their moves and processing paperwork related to shipments of their personal property. Prior to the reengineering efforts over the last 11 years, DOD’s personal property program had remained virtually unchanged for nearly 40 years. DOD’s personal property program involves a complex process of qualifying carriers, soliciting rates, distributing moves, evaluating moving companies’ performance, paying invoices, and settling claims. Among the program’s many challenges is ensuring that the moving industry provides adequate year-round capacity, especially during the summer peak moving season when most servicemembers, as well as the general public, schedule their moves. In an effort to test alternative approaches and address some of its challenges, DOD previously evaluated three pilot programs. From those three pilot programs, DOD submitted a report to Congress in 2002 with recommendations to improve the quality of household goods moves for servicemembers that were originally contained in a U.S. Transportation Command report. Those recommendations were as follows: Reengineer the liability and claims process by adopting commercial practices of minimum valuation, simplifying the filing of claims, and providing the servicemember with direct settlement for claims with the carrier. Change the acquisition process to implement performance-based service contracts (as opposed to the current practice of providing contracts to the lowest bidder). Implement information technology improvements, which could integrate functions across such areas as personnel, transportation, financial, and claims. To respond to these recommendations, DOD developed a new program called Families First to improve the quality of household goods moves for servicemembers, DOD civilian employees, and their families. Families First is a U.S. Transportation Command program that is executed by the Military Surface Deployment and Distribution Command, an Army service component command. Since 1989, DOD’s personal property system has used the Transportation Operational Personal Property Standard System, a legacy data management system known as TOPS, which includes 25 additional legacy systems that support it. The Surface Deployment and Distribution Command determined that it was not feasible to upgrade TOPS to support the goals of Families First for several reasons. TOPS is being phased out because the software is no longer fully supportable and does not meet DOD’s technology standards, including its security requirements. TOPS also did not support the Business Management Modernization Program, the program that preceded the Business Transformation Agency in overseeing DOD’s business transformation efforts. In addition to these technical considerations, TOPS also has poor reporting and data capabilities. However, DOD expects that TOPS will need to be functional for a large part of the Families First rollout, until DPS is fully operational. Under the current system, servicemembers are provided with basic claims coverage using depreciated value for losses or damages incurred during a move that allows liability at a rate of $1.25 times the weight of the goods being shipped. For example, if a shipment’s weight is 10,000 pounds, the maximum liability for the moving company is $12,500. Additional coverage options are available for the servicemember to purchase. Under the current program, a servicemember has two options. Under option one, the servicemember can purchase depreciated value coverage above what the government currently pays, and under option two, the servicemember can purchase full replacement value coverage. Under both options, the servicemember shares the cost with the government. For moves within the United States and overseas or stored shipments, servicemembers can obtain additional coverage from a commercial insurance company. Some private insurance companies and moving companies sell insurance to cover certain items of personal property during moves. Additionally, some homeowner policies may cover some items in shipment. See table 1 for coverage and cost comparisons for the current DOD personal property program versus what is planned under Families First. We have completed several assessments that evaluated DOD’s pilot programs and plans for implementing Families First. For example, in 2000, we reported that the U.S. Transportation Command needed to complete an evaluation plan for its pilot programs and take necessary actions to resolve outstanding cost issues. In 2003, we evaluated the methodology used to estimate the costs associated with Families First that the services would incur. The Families First program was initially expected to increase the services’ costs for DOD’s personal property program by 13 percent, but we questioned part of the methodology used to generate this estimate. Specifically, we recommended that DOD quantify the risks of implementing the Families First program within the 13 percent estimate. As part of this evaluation, we also assessed a separate estimate for the cost of upgrading the information technology system used for managing the shipment of household goods. We questioned DOD’s ability to implement the upgrades to the information technology system within its cost estimate. We found that the estimate to implement the information technology recommendation was slightly higher than the $4 million to $6 million estimate DOD reported to Congress. In 2005, DOD reevaluated its estimated 13 percent cost increase and quantified the risks of implementing Families First within the expected cost increase. We found at that time that DOD used a reasonable methodology to validate the estimated increase and quantify the risk. Congress has been concerned about problems in this program, especially that servicemembers may receive less than what it would cost them to replace or repair their household goods that are lost or damaged during shipment. On November 24, 2003, the fiscal year 2004 National Defense Authorization Act amended the U.S. Code to allow the Secretary of Defense to include a clause for full replacement value in DOD’s contracts with moving companies. The John Warner National Defense Authorization Act for Fiscal Year 2007 mandated that DOD provide full replacement value coverage by March 1, 2008, for servicemembers and DOD civilian employees. With full replacement value, a servicemember would receive enough funds to replace or repair a lost or damaged item at its present value. Additionally, the John Warner National Defense Authorization Act for Fiscal Year 2007 mandated that the Secretary of Defense shall submit to the congressional defense committees a report containing the certifications of the Secretary on the following matters with respect to the program of the Department of Defense known as Families First: (1) whether there is an alternative to the system under the program that would provide equal or greater capability at a lower cost; (2) whether the estimates on costs, and the anticipated schedule and performance parameters, for the program and system are reasonable; and (3) whether the management structure for the program is adequate to manage and control program costs. The mandate did not specify a date for DOD to provide this information. DOD has taken some initial steps to achieve the goals and benefits of the Families First program, but delays in developing a new information management system have put achieving the program’s goals and benefits at risk. DOD continues to experience delays and missed milestones in developing and implementing DPS, and the original estimated release date for DPS has now been pushed back for more than 2 years. To meet the statutory mandate, DOD has taken steps to provide servicemembers with the full replacement value coverage benefit because of the delays in implementing DPS. However, some servicemembers may not be covered by March 1, 2008, and there are other risks associated with this backup plan. Despite these challenges, Surface Deployment and Distribution Command officials told us that they expect all types of moves will have full replacement value by March 1, 2008. DOD continues to rely on the implementation of DPS to achieve other program goals such as improving the quality of service and claims processing. DOD has taken some initial steps to help achieve the goals and benefits of the Families First program. To improve the personal property program, DOD has established three goals for Families First: (1) improving the quality of service from moving companies by using a best-value approach that incorporates performance-based service contracts; (2) streamlining the claims process used for claiming losses or damages incurred during a move; and (3) developing an integrated information management system, known as DPS. DOD designed Families First so that achieving the first two goals of the program relies heavily on completion of the third goal of the program, DPS. DOD identified numerous benefits of the Families First program, including reduced storage costs and greater operational flexibility for moving companies. Two of the program benefits identified by DOD—full replacement value coverage and expanded counseling support through a Web-based information system—are intended to directly benefit servicemembers and promote quality service when moving their personal belongings. DOD developed a phased approach to implement Families First and has taken some steps to accomplish the first and second phases. The first phase, which began in March 2004, has two main parts: (1) electronic billing and payment systems and (2) a customer satisfaction survey. The electronic billing system, known as the Central Web Application, is a government Web-based system for reviewing and approving services online, as well as for pricing shipments. The electronic payment system, U.S. Bank’s PowerTrack, is an online payment and transaction tracking system. This system is expected to reduce the payment cycle for DOD’s personal property moves. While DOD and all services other than the Air Force have made some progress in implementing the electronic billing and payment systems, the Air Force is not processing its own bills and payments using these systems because it is reengineering its payment process and cannot currently support these systems. DOD is working to fully interface and integrate electronic billing and payment systems, respectively, with DPS but continues to experience operational problems, such as invoices being delayed or lost when being processed. In addition, as part of the first phase, DOD began data collection for a customer satisfaction survey, which is intended to support the Families First goal of improving moving company performance through evaluation of past performance. Under Families First, servicemembers are expected to fill out a customer satisfaction survey about their moves, the results of which will be combined with other data to generate an overall moving company quality score. The moving companies with the best scores will be awarded more shipments. This process contributes to the best-value distribution of shipments. Under DOD’s current household goods program, DOD awards shipments to the company that bids the lowest price for a move. To generate data for ranking moving companies when Families First is implemented, DOD has instituted an interim customer satisfaction survey under the current program. However, interim customer satisfaction survey response rates have been about 16 percent within the past year, which has resulted in less than one-third of moving companies’ scores being usable. To compensate for the low response rate, DOD has developed a methodology upon program implementation to make moving companies’ scores statistically valid so the scores can be used when allocating shipments. However, the moving companies are concerned about how the low survey response rate will affect how DOD awards business to them. In addition to developing the methodology to ensure that moving companies’ scores are statistically valid, DOD has taken several steps it says will increase the customer satisfaction survey response rate. For example, it has released a commercial to increase awareness about the survey and added information in its It’s Your Move pamphlet. It also included the customer satisfaction survey requirement in the Defense Transportation Regulation. DOD also expects that the survey response rate will improve once DOD implements DPS and servicemembers can file their surveys electronically within DPS. Both of these components—the electronic billing and payment systems and the customer satisfaction survey—are necessary to support Families First. The second phase of Families First includes the development and implementation of DPS, which DOD has been working on for more than 2 years. DOD plans to use DPS to implement many key improvements for the Families First program. For example, Families First implementation documents state that with DPS, DOD will be able to use best-value distribution when awarding performance-based service provide Web-based counseling to help servicemembers with their moves, use a commercial-based tariff for domestic moves rather than the antiquated government tariff currently being used, provide direct claims settlement with the transportation service provider, use a “rate reasonableness” strategy that will help DOD manage the costs of the moving program. DOD also plans to use DPS to provide the electronic customer satisfaction survey to servicemembers and to help DOD monitor the rates moving companies charge it for moving services. The third, and final, phase of the Families First program includes adding functionality to DPS so that it can handle more types of moves, including nontemporary storage (about 16 percent of all moves) and direct procurement moves (about 8 percent of all moves). DOD continues to face delays and missed milestones in developing and implementing DPS. DPS development and implementation has been pushed back for more than 2 years from the original estimated release date. DOD began DPS development in May 2004 and DPS was originally scheduled to be available by October 2005. In October 2005, the Surface Deployment and Distribution Command initiated a review of the program. DOD then entered into an 11-month strategic pause for further program review and software testing after it encountered significant software validation and systems problems, which resulted in the system not working. DOD subsequently developed two more implementation timelines, the first in October 2006 and the second in March 2007. See table 2 for a comparison of DPS implementation timelines. During the October 2005 internal review of DPS, DOD’s review group recommended improvements in areas such as management, the type of contract used for DPS, and the DPS development process. The strategic pause following this review ended in September 2006, but the next schedule for DPS implementation was not developed until after a new DPS program office was created in October 2006. This schedule incorporated a phased rollout approach for DPS. Under this schedule, DPS software acceptance testing was to occur in winter 2007, followed by increasing use of DPS through summer and fall 2007. DOD expected DPS to be fully operational in spring 2008. DPS program managers developed what they described as an aggressive implementation schedule for two reasons. First, they planned to use DPS to meet the mandate to provide full replacement value by March 1, 2008. Second, DPS implementation was needed because the legacy system used with the current personal property system is not fully supportable and does not meet DOD information technology security standards. Program and service officials said that the legacy system has problems interfacing with DOD’s networks. In addition, the legacy system’s hardware has been breaking down. Surface Deployment and Distribution Command officials said that the number of sites not functioning at any one time varies. To keep the legacy system working, the Surface Deployment and Distribution Command provided the services with legacy system “survival kits.” These kits included motherboards and other hardware components that are difficult to find and are no longer supported commercially. DOD estimates that these survival kits will keep the legacy systems viable for 4 to 5 years, but some service personal property officials have expressed concerns that the legacy systems might not last that long. DOD delayed the DPS implementation schedule again in February 2007, after stakeholders from the services and the moving industry participated in DPS software acceptance testing and found a significant number of problems with the software. This testing generated more than 1,400 problem reports, almost 200 of which were collectively expected to result in significant changes to the software. For example, for a shipment awarded to one moving company, DPS sent the work order for the shipment to a different moving company. Thus, the moving company that was awarded the shipment did not know the shipment was awarded to it. In addition, according to a U.S. Transportation Command official, some test reports indicated that business rules still needed to be clarified, such as whether moving companies will have one or two opportunities per year to file the rates they will charge DOD to move servicemembers’ household goods. In March 2007, because of the number of test problem reports and overall concern about DPS functionality, DPS program management officials significantly altered the timeline for rolling out DPS to address concerns expressed by military service and moving industry stakeholders regarding DPS functionality and its implementation schedule. Stakeholders were also concerned that the implementation schedule called for switching to DPS during the peak summer season, when both the services and industry would have to learn a new system while also moving shipments using the current system. The revised DPS implementation schedule calls for fixing the issues identified in the test problem reports, continued testing of DPS through the summer, and adding high-priority changes requested by the services. Program managers said that DPS should be available for some shipping offices to use by fall 2007 on a test basis, with all offices using DPS beginning in spring 2008 for all moves except those using nontemporary storage and the direct procurement method. Once DPS is functional for domestic and international household goods moves, program managers will begin developing the functionality for the third phase of Families First, which includes moves using nontemporary storage and the direct procurement method. Because of the delays implementing DPS, DOD has developed a backup plan to provide servicemembers with the full replacement value coverage benefit, but its plan to implement the other goals and benefit of Families First still relies on DPS. When the backup plan was published in December 2006, it called for the next version of the current program’s domestic tariff and international rate solicitation to include language that made it mandatory for moving companies to include full replacement value coverage in the rates submitted to DOD. Using this backup plan in the current program, the majority of shipments will receive full replacement value protection by March 1, 2008. The schedule for implementing the backup plan follows the current program’s winter 2007 rate filing schedules for the domestic intra- and interstate programs and the international programs. The Surface Deployment and Distribution Command plans to begin accepting rates under the backup plan beginning in May 2007, and the rates will be effective from October 1, 2007, through April 1, 2008. Risk factors associated with DOD’s backup plan challenge DOD’s ability to implement the plan. First, the backup plan relies on a legacy system that is no longer fully supportable. For example, the system still does not meet security standards. DOD estimates that the survival kits it has sent to the services can keep the legacy system running for 4 to 5 years. However, some service officials had concerns that the system would not last this long. Without the legacy system, staff at the personal property offices have to work manually to accomplish administrative tasks. Furthermore, some service officials expressed concern that providing full replacement value without DPS would give the moving industry an opportunity to increase prices with no control to limit the cost and may create some increase in workloads for the claims offices because of the lack of automation for claims filing. Moreover, most services expressed concern about the lack of guidance for implementing full replacement value under the current system instead of within DPS. Some service and Surface Deployment and Distribution Command officials expressed concerns about possible increases in their workload because of the magnitude of the procedural changes as they work to implement full replacement value without DPS. Another risk is that thousands of moves may not be covered before the March 1, 2008, deadline. DOD’s contracts for moves within a theater of operation, those using nontemporary storage, and those using the direct procurement method do not include full replacement value and may expire after the March 2008 mandate. DOD stated that it is initiating various levels of action to ensure full replacement value is implemented by March 2008. According to DOD, as these contracts expire, the new contract will include full replacement value. The Surface Deployment and Distribution Command directed that all eligible contracts be modified not later than March 2008. However, it is still uncertain whether all contracts in place on March 1, 2008, will cover full replacement value. According to DOD estimates, in fiscal year 2006, moves that included servicemembers transferring within a theater of operation accounted for about 7,800 personal property moves, or about 1 percent of the more than 680,000 shipments that occurred. DOD officials also stated that in fiscal year 2006 direct procurement method moves represented almost 8 percent of all moves. About 16 percent of moves included nontemporary storage. In a broader sense, DOD’s backup plan does not address the other goals or counseling benefit of Families First; it is designed only to allow DOD to meet its mandate to provide full replacement value coverage. DOD officials said that they did not have a requirement to produce a backup plan for the other goals or counseling benefit and they did not invest resources to do so. Instead, DOD continues to rely on DPS to achieve the goals and counseling benefit of Families First. The reason Surface Deployment and Distribution Command officials said they created a backup plan for full replacement value is because they were required by statute to implement it by March 1, 2008, whether DPS was ready or not. For example, the backup plan does not address how to provide streamlined claims or improved quality of service from moving companies without DPS, nor does it include a way to provide the other servicemember benefit of expanded Web counseling services to help servicemembers with their moves without DPS. Until DPS is operational, some service officials have said that DOD has at least one other option for providing expanded counseling services because the Navy has a program, known as SmartWebMove, which can be used by members from other services. However, this program is connected to the legacy system, and deterioration of the legacy system may limit the feasibility of this option. Despite these challenges, Surface Deployment and Distribution Command officials told us that they expect all types of moves will have full replacement value by March 1, 2008. According to these officials, this will include nontemporary storage and direct procurement method moves. DOD continues to rely on the implementation of DPS to achieve other program goals such as improving the quality of service and claims processing. The Families First program could increase costs to DOD by about $1.4 billion over current program costs through fiscal year 2011 for two main reasons: (1) DOD estimates the program will increase costs to the services by 13 percent and (2) DOD has significantly increased the cost estimate for a new information management system since our last assessment. DOD’s Families First program has not yet been implemented, so we could not assess the actual growth in costs of the program, although DOD continues to estimate that the Families First program will increase the cost to the services for their household goods budgets by an estimated 13 percent, or as much as $1.2 billion through fiscal year 2011. In addition, the DPS program office has significantly increased the estimated cost of DPS and maintaining the DPS program office, which it now expects to cost $180 million through fiscal year 2011. We could not assess the actual growth in costs of Families First because the program has not been implemented; however, DOD continues to estimate that the costs to the services of the Families First program will be 13 percent higher than costs under the current program. In fiscal year 2006, the services’ total household goods budget was about $1.8 billion, which would mean the services would have an increase of $240 million annually above the existing budget in order to move servicemembers’ household goods under Families First in 2007, if the program were fully implemented. DOD will incorporate a cost-control mechanism into DPS, similar to the one employed in the current program, in an attempt to keep the costs within the expected increase. However, until DPS is implemented the impact of the use of this mechanism on the Families First program will not be known. Based on DOD’s total household goods budget, Families First could cost DOD about $1.2 billion more than the current program over the next 5 years. DOD continues to inform the services that the Families First program, when fully implemented, will cost them an additional 13 percent over their existing household goods budgets, which is a subset of the services’ permanent change of station budgets. According to U.S. Transportation Command and some personal property officials, this cost increase is in part because of an expectation by DOD that moving companies will increase the rates they charge as a result of their additional responsibilities under the Families First business rules, such as providing full replacement value. The actual cost of Families First will not be known until moving companies file the rates they will charge DOD to move servicemembers, which is expected to take place in March 2008. DOD is relying on features built into DPS to ensure that the costs remain at or below the expected cost increase of 13 percent. DPS will incorporate a cost-control mechanism known as rate reasonableness, which will establish an acceptable range of rates for each combination of pickup and destination locations. The program delays in implementing Families First decrease the certainty of the cost estimate because the methodology is based on certain assumptions and data that may change with time. For example, the cost methodology used to estimate the 13 percent increase was adjusted to account for fewer small businesses participating DOD-wide than participated in the pilot programs. However, according to DOD officials, the percentage of small business participation in Families First will be similar to the current DOD participation rate of 70 percent, which is significantly larger than the 30 percent assumed in the 2002 cost estimate. DOD’s evaluation of the pilot programs demonstrated that small businesses were 14 to 74 percent more expensive per shipment compared to the current program. As a result, DOD may have underestimated the cost of having small businesses participate in Families First. DOD’s estimated costs for an integrated information management system, known as DPS, have significantly increased since our last assessment in 2003. The estimates for developing an information management system to support Families First have increased from $4 million to $6 million to $86.0 million, and the total cost is expected to be about $180 million through fiscal year 2011 once annual operating costs are added. In a 2002 report, DOD estimated that implementing the information technology improvements to enhance its data management capabilities for Families First would cost $4 million to $6 million. This estimate was based on expanding the use of an upgraded, Web-based version of the existing legacy system that was implemented on a small scale during one of DOD’s pilot programs. In our April 2003 review of that estimate, we questioned whether DOD would be able to implement its new personal property program, including the technology improvements, within the estimated range. In addition, we noted that although DOD had developed a plan of action for designing the new system, the plan did not include monitoring the costs and benefits during its implementation or the extent to which system changes were being achieved within an acceptable cost range, such as the $4 million to $6 million estimate. According to DOD officials and documents, in January 2004, DOD decided to implement the technology improvements to support Families First by developing an entirely new information management system, which came to be known as DPS. In a January 2004 report, the Surface Deployment and Distribution Command said that the legacy system evaluated under the previous cost estimate was expensive to operate and maintain and could not be modified to become compliant with DOD technology standards or to support the objectives of the Families First program. At that time, DOD estimated that DPS could be developed for about $16.5 million, with an average annual cost of about $4.6 million after the initial investment. This estimate assumed that DPS could be developed using commercial-off-the-shelf or government-off-the-shelf software to account for about 75 percent of the new system. The use of existing commercial and government software was expected to keep the cost of the system low, because using ready-made software reduces the need to develop original software. For example, the Navy developed a counseling program, known as SmartWebMove, which was originally planned to be incorporated into DPS as its counseling module so that DOD would not need to develop original software as part of DPS to provide this Families First benefit. However, the Navy’s counseling module was not incorporated into DPS. The Navy, however, is still using SmartWebMove while DPS is being developed. Since the 2004 estimate, the cost of DPS has continued to increase. As of February 2007, DOD reports that it spent $51.5 million developing DPS, which is significantly higher than any previous DOD estimate. This cost includes about $8.2 million for capital hardware, $24.9 million for capital software, and $18.5 million in operating costs. According to DOD Families First officials, after the DPS contract was awarded, software developers determined that DPS would require a much larger percentage of new software development than expected because of the unique needs of the DOD personal property stakeholders, which has caused the cost to rise significantly. In addition, the costs for developing, testing, and making DPS available for use now include the cost of the Joint Program Management Office for Household Goods Systems, which was established on October 1, 2006. The original estimates did not account for a separate program office to manage the development and operation of DPS, sustain the legacy system, or evaluate future options for DOD’s household goods program. Based on our analysis of program office budget planning documents from February 2007, the DPS program office estimated that the costs for maintaining a program office, sustaining the legacy system through retirement, developing and sustaining DPS, and implementing a future household goods program through fiscal year 2011will be $180 million if all of the requirements are funded. Additional delays in the schedule are likely to further increase the costs associated with the program. However, when the legacy system is no longer needed, DOD expects that it will not have to budget for this additional cost, which is about $21 million annually. Summary information on DPS cost estimates appears in table 3. DOD faces management challenges for the Families First program, and it has not employed comprehensive planning that incorporates many sound management principles and practices. Families First offices, including the DPS program office, continue to experience organizational challenges and staffing shortfalls. Moreover, Families First does not have stakeholders’ agreement on some elements of the program, such as business rules and essential DPS functions. Additionally, the Families First program faces uncertain funding. Sound management practices require employing comprehensive planning to manage program implementation. Comprehensive planning should include many things, such as integrated approaches to manage training and workforce redeployment issues; a qualified, trained, and well-led team to reengineer the program; stakeholder agreement about key elements of a program, including the program’s business rules and its priorities; and full cost information and funding resources. However, DOD’s planning for Families First has not incorporated some of these sound management practices. Instead, DOD has developed several nonintegrated plans to cover individual portions of the Families First program. For example, DOD has a draft transition plan for organizational changes and the DPS program office has a plan for DPS development. However, DOD does not have a comprehensive plan with timelines for implementing Families First that manages all of its efforts simultaneously. Without an integrated, comprehensive plan, the program’s implementation is at risk. The offices supporting Families First, including the program office now overseeing the development and implementation of DPS, are undergoing organizational changes and experiencing staffing shortfalls that affect DOD’s ability to support Families First at a critical time in its implementation. When the first phase of Families First implementation and DPS development began in 2004, the Surface Deployment and Distribution Command, which is under the U.S. Transportation Command, managed all elements of the program. In December 2005, almost 2 years after DPS development started, the Surface Deployment and Distribution Command established a DPS program management office based on a recommendation made by a DOD review group. The review group suggested that the Surface Deployment and Distribution Command establish a clear management structure for DPS because there was no single point of authority and there was no acquisition-certified program manager. On October 1, 2006, the U.S. Transportation Command transferred this office from the Surface Deployment and Distribution Command to the U.S. Transportation Command. The new office, named the Joint Program Management Office for Household Goods Systems, is under the leadership of the U.S. Transportation Command’s Program Executive Office for Distribution Services. The DPS program office and the program executive office are now led by officials with acquisition experience. The DPS program office has several tasks: mature the program office structure and processes; sustain the legacy system currently being used through the development of its replacement, DPS; quickly implement DPS in phases; and evaluate alternatives for the future of DOD household goods services, including options for outsourcing. Although DOD’s establishment of the DPS program office addresses some of the concerns about DPS program management raised in DOD’s review, the Joint Program Management Office for Household Goods Systems was not established until a few months prior to a critical phase of DPS development and continues to organize while also facing staffing challenges. The DPS program office had a draft organization chart as of March 2007, but filling staff positions has been complicated by a base realignment and closure move to Scott Air Force Base in Illinois from the office’s current location in Alexandria, Virginia. This move is scheduled to take place in the fourth quarter of fiscal year 2007. The program office’s draft transition plan transfers several positions from the Surface Deployment and Distribution Command to the DPS program office. However, this has created human capital challenges, as many of the staff are choosing to retire or leave rather than move. These workforce planning issues are significantly affecting the DPS program office. According to DPS program management officials, as of April 2007, only 1 of 27 civilians in the program office planned to transfer to Scott Air Force Base. Thus, while Families First and DPS are at a critical stage of development, both the Surface Deployment and Distribution Command and the DPS program office are losing many of their senior leaders who possess technical and program knowledge. The DPS program office is working to mitigate these human capital planning challenges by seeking authority to hire over current staffing limits, seeking temporary functional support from other Surface Deployment and Distribution Command and U.S. Transportation Command offices, and continuing to seek support from the services and industry as software testers. As of April 2007, hiring actions had been accelerated and some job announcements had been made. The program office is also using contractor support but is facing challenges with this as well. For example, in March 2007 several contractors were not able to complete tasks for the program office because of paperwork processing issues. In addition, in March 2007, the DPS program office asked each of the services to provide two or three full-time servicemembers to continue conducting DPS software testing at the Surface Deployment and Distribution Command headquarters in Alexandria, Virginia. While the services plan to provide some human capital support, current service plans indicate that they cannot provide the servicemember support DPS management officials originally sought because each service will need its staff during the busy, peak moving season that coincides with DPS testing. For example, the Navy is planning to provide five part-time testers at Navy bases. The Army is planning to provide five part-time testers at Army bases. The Marine Corps plans to provide one full-time person to test at program headquarters as well as one support staff member at its testing site at Camp Lejeune in North Carolina. The Air Force is also providing full-time support from its joint personal property shipping office in Colorado Springs, Colorado. Overall, it is not clear how successful these temporary mitigation efforts will be in providing staff with the skills these offices need to implement both DPS and Families First. However, DOD stated that its joint stakeholder advisory team of testers will be sufficient to fulfill the mission required by the DPS program office. Surface Deployment and Distribution Command officials, who will manage and provide oversight of the current DOD personal property program and implementation of the Families First program, said that they are also facing additional workload and workforce challenges as they administer the electronic billing and payment systems as well as the customer satisfaction survey. These officials are administering these processes without the automation they expect DPS will provide while also experiencing staff reductions and changes as a result of a base realignment and closure move. As of April 2007, the U.S. Transportation Command has made some progress to staff the DPS program office, but it is not clear how successful its measures will be. Until the U.S. Transportation Command is able to ensure that the DPS program office has adequate and capable human capital resources, it may be unable to successfully implement DPS. The John Warner National Defense Authorization Act for Fiscal Year 2007 mandated that the Secretary of Defense submit to the congressional defense committees a report containing the certifications of the Secretary on the following matters with respect to the program of the Department of Defense known as Families First: (1) whether there is an alternative to the system under the program that would provide equal or greater capability at a lower cost; (2) whether the estimates on costs, and the anticipated schedule and performance parameters, for the program and system are reasonable; and (3) whether the management structure for the program is adequate to manage and control program costs. When the U.S. Transportation Command established the DPS program office, it included an evaluation of materiel alternatives for the future of household goods services as part of the office’s mission. The mandate did not specify a date for DOD to provide this information to the congressional defense committees. The U.S. Transportation Command is responsible for leading, with the assistance of the DPS program office, the evaluation of alternatives. The DPS program office is responsible for evaluating how to implement the chosen alternative. It is unclear when the DPS program office will be able to evaluate materiel alternatives for the program because (1) U.S. Transportation Command officials told us they were focusing on developing and implementing DPS and (2) the DPS program office has not yet been resourced to evaluate the materiel alternatives. DOD does not have stakeholders’ agreement on some elements of Families First, which puts the implementation of the program at risk. DOD does not have stakeholders’ agreement in two interrelated areas: (1) business rules issues, including whether existing and proposed rules will actually enable accomplishment of a key program goal, and (2) the essential functions needed for DPS. Stakeholders, including the military services, have not all agreed to some elements of Families First business rules and have not taken action to implement all of the business rules because it is unclear to them if the rules are final. At the end of our audit work, the U.S. Transportation Command was still evaluating whether the business rules would have to be published again for comment by stakeholders. However, in commenting on a draft of this report in May 2007, DOD stated that the business rules are now considered final. Business rules help define how policies are to be implemented. DPS requirements and functions are derived from these business rules. For example, in late March 2007, several months into DPS testing, DOD was still evaluating a business rule as to whether moving companies should have the opportunity to file the rates they charge DOD to move servicemembers’ household goods once or twice per year. In the current program, rates are filed twice per year. Under Families First business rules, moving companies would file rates only once per year. In April 2007, DOD decided to continue with its Families First business rule where moving companies only file rates once per year. Within DOD, debate continues about whether Families First business rules will allow DOD to accomplish its goal of improving the quality of service from moving companies by using a best-value approach that incorporates performance-based service contracts. Some DOD officials (and industry representatives) question DOD’s proposed practice of allocating business to moving companies using a system where companies that receive less than the best performance score are still allocated business. For example, under Families First rules, moving companies will be ranked into four groups based on their performance scores. Those companies with the best scores will be placed into the first group and receive the most DOD business. However, DOD officials said that even those companies that are in the fourth group, with the lowest performance scores, are expected to receive some business from DOD. According to DOD officials and industry representatives, one reason DOD will do this is to keep providing business to those companies that may not otherwise be able to stay open during the nonpeak moving season. These stakeholders said that this helps ensure that there will be enough capacity during peak moving season. However, some servicemembers’ household goods may be moved by companies that did not receive high performance scores, and therefore they may not receive quality moves. If this is not resolved, DOD may be challenged to meet the program’s goal of improving the quality of service from moving companies. Additionally, during the course of our work, stakeholders indicated that they did not consider the business rules final. However, DOD, in commenting on a draft of this report, stated that the business rules are now considered final. Stakeholders indicated that they do not yet know what will be expected of them under Families First or what DPS must include to fully support the program. Stakeholders said that the business rules are not considered final until they have been published in the Defense Transportation Regulation. The U.S. Transportation Command published business rules for phase one of the program in the Defense Transportation Regulation on February 20, 2007. However, it has not published business rules for the second and third phases of Families First in the Defense Transportation Regulation. The business rules have only been published on the Surface Deployment and Distribution Command’s Web site and once in the Federal Register so that stakeholders could comment on them. During our review, U.S. Transportation Command officials indicated that DOD planned to publish the business rules again in the Federal Register in June 2007 so that stakeholders could comment on them again and said that DOD would finalize the business rules in July 2007. It is unclear whether DOD still plans to publish the rules again in the Federal Register. Along with the uncertainty surrounding the business rules, stakeholders do not have procedural guidance and do not yet know what is expected of them under Families First. For example, an Air Force personal property official told us the Air Force needs the finalized Families First business rules so that it can train its staff on these new rules, which the personal property official described as being vastly different from the current program’s business rules. However, the Air Force personal property official said the Air Force is hesitant to develop a training curriculum on business rules that are not finalized. Additionally, without final business rules, the services cannot set up internal regulations to support the business rules. Moreover, representatives from the services and the moving industry are concerned that without a formal set of business rules on which to develop DPS, they cannot evaluate whether the computer system fully supports the Families First business rules. Service officials and industry representatives continue to have questions about Families First business rules and DPS implementation. Finally, the moving companies have concerns about the Families First business rules that define how DOD generates the performance scores used to rank them in the first, second, third, or fourth groups. The majority of a moving company’s performance score comes from a customer satisfaction survey. However, servicemember response rates for the survey have been low (about 16 percent within the past year) and, because of this, most moving companies’ scores are not statistically valid for generating a performance score. Although DOD has, as part of its business rules, devised a methodology to make moving company performance scores valid until survey response rates improve, industry representatives are still concerned that moving companies will be negatively affected by low response rates. In commenting on a draft of this report, DOD stated that while it values the opinion of the moving industry, its personal property program does not require consensus by industry. DOD stated that the main focus of the department is to provide a quality personal property program for servicemembers while being good stewards of taxpayer dollars. Another fundamental challenge facing DOD in implementing DPS is that stakeholders, such as the military services and the moving industry, have not agreed to all of the essential functions of DPS and how they should operate when DPS is made available to servicemembers to use. Service officials told us that prior to the development of the DPS program office, the Surface Deployment and Distribution Command held many meetings to understand what the services wanted DPS to provide servicemembers and personal property officials. However, service officials said that officials overseeing DPS development at that time did not include all of those requirements when first developing DPS. A Surface Deployment and Distribution Command official said that the contract for DPS was written from a requirements list generated by military service and moving industry stakeholder participation. For example, there was a General Officer Steering Committee, Council of Colonels and Captains, and moving industry stakeholder groups, which met to discuss DPS requirements. In early 2007, after the U.S. Transportation Command took over DPS, stakeholders had their first opportunity to test DPS. During these tests, stakeholders identified functions that they expected within DPS but that did not work the way they expected. This resulted in DPS not providing the functionality service officials expected, and this, in turn, could affect the services’ workloads. A U.S. Transportation Command official said that it is possible that there was miscommunication during earlier meetings to define requirements and that it was not until stakeholders were able to test DPS functionality that these issues were identified. For example, DPS users wanted to obtain the status of a moved shipment. When DPS was programmed, it only displayed whether the shipment was in the system. However, users wanted more detail in terms of where the shipment was at a certain point in time. DPS program management is still in the process of identifying and prioritizing the requirements for DPS, but currently lacks stakeholders’ agreement about all of those requirements and their priority. For example, some stakeholders disagree with the categories assigned to some of the test problem reports, because none of the reports were placed in categories 1 or 2, which are used for the most severe types of problems. Further, the moving industry expected that DPS would interface with their computer systems, but this is not yet part of DPS. DPS program officials said that earlier phases of DPS development lacked a mechanism for systematically reviewing DPS problems and requirements and identifying how to fix them. The U.S. Transportation Command and the Surface Deployment and Distribution Command formed a Functional Requirements Board to review and prioritize the problems identified during testing that must be fixed and to address other proposed changes to DPS. The Functional Requirements Board is composed of representatives from the services, the Surface Deployment and Distribution Command, and the U.S. Transportation Command and meets monthly to discuss which testing problems should be the highest priority for correcting. The prioritized list of test problems is then reviewed by a Configuration Control Board, which is composed of DPS program managers, service representatives, DPS development contractors, and software engineers who decide which of the DPS problems can be corrected after considering the resources available. As of March 2007, according to DOD, the Functional Requirements Board had developed initial DPS functional requirements, reviewed many proposed system enhancements, and prioritized the services’ top five needs in each DPS module. In addition to stakeholders’ requirements, additional priorities for DPS may also come from the business rules. This, too, could affect the DPS implementation timeline, as well as implementation of Families First. Another challenge is that without stakeholders’ agreement, DPS requirements continue to change. DPS development is being administered using a firm-fixed-price contract. With a firm-fixed-price contract all major modifications to DPS require negotiation with the contractor, which may lead to additional administrative costs. Even though Families First is projected to cost the services about $1.2 billion over the next 5 years, and DPS is expected to cost about $180 million through fiscal year 2011, the department has not set aside funding to fully cover these costs. The services have taken different approaches in budgeting for the increased costs expected to implement the Families First program, ranging from the Army requesting the entire estimated 13 percent increase to the Navy not requesting any increase at all, in part because they have not received clear guidance from DOD about how to calculate the estimated increase to their budgets. Moreover, the growing cost of DPS has led to funding shortfalls in the DPS program office that are affecting both staffing needs and software development. The services vary in the extent to which they have budgeted for the increased costs expected to implement the Families First program. As previously discussed, DOD estimates that the Families First program will increase the services’ moving budgets by 13 percent above the current budgets needed to move household goods, and DOD has informed the services to budget based on this estimate. However, some personal property officials expressed concerns about DOD’s ability to implement the Families First program within the expected increase of 13 percent; these officials expect that the cost increase will be significantly more. As a result, the services vary in the degree to which they have budgeted for Families First. According to service officials, the services have taken the following actions to budget for Families First: The Army has submitted a budget request for the entire 13 percent increase to the household goods portion of its budget in fiscal years 2008 and 2009. The Coast Guard requested the 13 percent increase based on its entire permanent change of station budget, of which household goods is just a portion. The Air Force submitted a budget that included the 13 percent cost increase for Families First in fiscal year 2008, but the Office of the Secretary of Defense did not agree with the Air Force’s budget submission and reduced its funding for permanent change of station moves. The Marine Corps has requested funding in fiscal years 2007, 2008, and 2009 only for its estimated full replacement value cost. The Navy has not requested any of the expected 13 percent cost increase. In addition, some personal property officials stated that they are having difficulty budgeting because they have not received clear guidance about how to calculate the increase. As a result, the services also vary in how they interpret the effect of the 13 percent cost estimate on their household goods budgets. For example, the Air Force estimated its typical annual expected increase in the current household goods program and then added 13 percent. Army officials told us they were unclear whether the household goods program would be increasing by 13 percent every year or just the first year of Families First. A Coast Guard budget official interpreted the 13 percent increase as an increase to just those portions of the budget that apply to the rates charged by moving companies. Neither the Surface Deployment and Distribution Command nor the Office of the Secretary of Defense Comptroller have provided clear guidance on how the services are supposed to apply the 13 percent estimate to their household goods budgets. As a result, the services may continue to apply the 13 percent in different ways, which could result in the program not being fully funded. According to some service officials, if the expected increase in Families First cost is not included in their budgets and program costs begin to rise as Families First is implemented, then the services may have to consider measures to reduce their household goods budgets. This could affect the number of moves the services can make and could ultimately impact the services’ flexibility in meeting force management needs. Surface Deployment and Distribution Command officials said they plan to monitor the cost of Families First in two ways. First, these officials will use the rate reasonableness methodology to keep the cost at the estimated 13 percent increase. Further, they plan to use reporting functions in DPS to monitor program costs. However, it is unclear how officials will monitor the costs of the program without a fully functioning DPS. Additionally, although the services plan to monitor the actual cost of the program as part of their normal budget processes, there is no plan to provide updated estimates to the services about the cost of the program prior to the services actually incurring the cost. Further, without clear guidance to the services about how to apply the 13 percent cost increase to their permanent change of station budgets, it is unclear whether the services will budget appropriately for the projected Families First cost increase. Without updated information about whether the estimated increase remains accurate as Families First is implemented, the services may not budget for Families First or may budget inaccurately for the program. As a result of the growing costs of DPS, the DPS program office is experiencing funding shortfalls that are affecting both staffing needs and software development. As of April 2007, the U.S. Transportation Command had not identified how it would fully fund its projected costs of DPS, which it estimated in February 2007 to be about $180 million through fiscal year 2011. Without these funds, the U.S. Transportation Command will be challenged to staff the DPS program office and complete DPS software development. The U.S. Transportation Command has been trying to fund DPS and the DPS program office from its transportation working capital fund. In fiscal year 2007, the U.S. Transportation Command reallocated about $7.5 million from its transportation working capital fund to support DPS. According to a U.S. Transportation Command budget planning document, this resulted in other U.S. Transportation Command information technology program delays or affected their ability to provide some services. Even with the reallocation, the U.S. Transportation Command had to defer about $9.7 million needed for high-priority software changes and development essential for DPS to fiscal year 2008. The DPS program office has an anticipated shortfall for fiscal year 2008 of $21 million, which includes staff training, contractor support, and funds for staff travel. Travel funds are important since the DPS contractor will be in Virginia and the program staff will be located at Scott Air Force Base in Illinois. However, the U.S. Transportation Command has not yet developed a detailed budget plan to resource DPS or the DPS program office. The information technology portion of the U.S. Transportation Command’s transportation working capital fund has an annual budget of about $400 million. The DPS program office estimates that it will cost from $28 million to $43 million annually to support DPS and the program office for fiscal years 2008 through 2012. This is from 7 to about 11 percent of the U.S. Transportation Command’s information technology portion of the transportation working capital budget. The U.S. Transportation Command has asked the Office of the Secretary of Defense for $5 million during fiscal year 2008, but the request has not yet been approved. Additionally, U.S. Transportation Command officials said that they have informed the services that they expect them to provide funds for some additional DPS requirements. DPS program office officials based their current cost estimates for DPS and the program office on the aggressive timeline for implementing DPS before it changed in February 2007. Additional delays in the schedule because of problems developing the software will likely increase the costs associated with the program. At the time of our review, it was too early in the DPS implementation process to determine if the oversight provided by the program office will be effective in keeping DPS costs under control given the ongoing changes to the DPS implementation schedule and the significant number of software changes identified during software testing. Despite DOD’s recent focus on its personal property program, long- standing problems persist. The department has invested millions of dollars trying to improve the program since the mid-1990s with little real progress. DOD’s Families First program is intended to address many of these long- standing problems but has faced a myriad of management problems and is now at a critical juncture in its implementation. The underlying problem is that DOD has not developed a comprehensive plan to organize, staff, and fund Families First. Until DOD develops a detailed plan to adequately recruit and retain qualified personnel, gain stakeholder agreement about essential requirements for DPS, and set aside resources such as funding and staff, it will be unable to effectively address the challenges to the program. Relying on DPS to achieve program goals—without analyzing alternatives as required by Congress—puts Families First at risk. Moreover, at a time when our nation faces increasing financial constraints and it is increasingly important for DOD to maximize the return on its investment in new systems, DPS costs are continuing to increase while DOD has little to show for its 11 years of reengineering efforts and millions of dollars of investment. Without a reexamination of the program as required by the mandate and urgent attention commensurate with the program’s importance to millions of servicemembers and their families, these problems are likely to continue to negatively affect servicemembers’ quality of life when they are required to move. We are making the following two recommendations to the Secretary of Defense. To address long-standing problems in DOD’s personal property program we recommend that the Secretary of Defense direct the Commander, U.S. Transportation Command, to expedite the evaluation of the Families First program the John Warner National Defense Authorization Act for Fiscal Year 2007 mandated the department conduct. This act mandates that the report contain the certifications of the Secretary of Defense on the following matters with respect to the Families First program: (1) whether there is an alternative to the system under the program that would provide equal or greater capability at a lower cost; (2) whether the estimates on costs, and the anticipated schedule and performance parameters, for the program and system are reasonable; and (3) whether the management structure for the program is adequate to manage and control program costs. We also recommend that DOD employ comprehensive planning to implement the Families First program and its associated system. At a minimum, this planning should address specific steps to hire and train personnel so that the Surface Deployment and Distribution Command personal property division and the DPS program office have the human capital needed to develop and implement DPS and reach agreement with stakeholders on the essential requirements for DPS and their priority to facilitate the development of DPS. In addition, this comprehensive plan should include an investment strategy that reflects the full cost of accomplishing the goals of Families First and milestones for implementation. In written comments on a draft of this report, DOD concurred with both of our recommendations and cited specific actions it has taken and will take for each recommendation. We believe DOD’s planned actions, if implemented, have the potential to improve the outcome of the Families First program. However, we also believe it is critical that DOD sustain focus on the program, especially given the delays the program has experienced and the challenges it still faces. DOD concurred with our recommendation to expedite the evaluation of the Families First program that the John Warner National Defense Authorization Act for Fiscal Year 2007 mandated the department conduct. In its comments, DOD said that it plans to provide this evaluation of its household goods program to Congress in August 2007. We modified our recommendation to include the details of what the act requires. DOD also concurred with our recommendation that it should employ comprehensive planning to implement the Families First program. In addition, DOD provided technical comments suggesting that we include the Surface Deployment and Distribution Command personal property division as part of this recommendation. We agree, and have modified this recommendation accordingly. Our recommendation now indicates that at a minimum, this planning should include specific steps to hire and train personnel for the Surface Deployment and Distribution Command personal property division and the DPS program office, address specific steps to reach agreement with stakeholders on the essential requirements for DPS and their priority, and include an investment strategy that reflects the full cost of accomplishing the goals of Families First and milestones for implementation. DOD cited specific actions it has taken or will take to implement this recommendation. For example, DOD said that hiring actions are in progress to staff the DPS program office after its relocation to Scott Air Force Base and that other actions are being implemented to staff the Surface Deployment and Distribution Command. In addition, DOD stated that it has implemented a process to reach agreement with stakeholders on the essential requirements for DPS and their priority by establishing the Functional Requirements Board and the Configuration Control Board. DOD stated that this structure has helped to stabilize the functional requirements for DPS. Finally, DOD stated that the U.S. Transportation Command will provide almost $91 million for DPS development, testing, fielding, and maintenance and that there is a DPS line item in the U.S. Transportation Command’s transportation working capital fund budget. The U.S. Transportation Command is also working with the Office of the Secretary of Defense to provide almost $2.8 million of operating/maintenance dollars from transformation funding. DOD’s comments also state that the U.S. Transportation Command will provide funds internally, if required, to fund DPS and the DPS program office. However, DOD’s comments did not address how the department intends to develop an investment strategy to cover the over $1 billion in increased costs associated with implementing Families First. Developing such a plan for Families First will be critical for the program’s future success. DOD also provided technical and editorial comments, which we have incorporated as appropriate. DOD’s comments are reprinted in appendix II. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Commander, U.S. Transportation Command; the Office of the Assistant Deputy Under Secretary of Defense (Transportation Policy); and the Director, Office of Management and Budget. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (404) 679-1816 or pendletonj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To evaluate the Department of Defense’s (DOD) Families First program, we obtained documentation from and met with DOD officials and stakeholders in the Washington, D.C., area from the Military Surface Deployment and Distribution Command; the Joint Program Management Office for Household Goods Systems; Transportation and personal property offices of the Army, Navy, Air Force, Marine Corps, and Coast Guard; three moving industry associations, including the American Moving and Storage Association, the Household Goods Forwarders Association of America, and the Military Mobility Coalition; and the Offices of the Secretary of Defense, including Transportation Policy and the Comptroller. We also met with DOD officials at Scott Air Force Base, Illinois, from the U.S. Transportation Command’s Program Executive Office for Distribution U.S. Transportation Command’s Strategy, Policy, Programs and Logistics U.S. Transportation Command’s Program Analysis and Financial Management Directorate. To assess the steps DOD has taken to achieve the goals and benefits of the Families First program with or without a new information management system, we identified the goals and benefits of the Families First program by analyzing Families First planning documents and related studies, such as briefings to the U.S. Transportation Command, and verified these goals with personal property officials from the Surface Deployment and Distribution Command. We compared the status of the Families First program to its stated goals by examining Families First implementation timelines provided by program officials and by interviewing officials and stakeholders from the offices listed. We limited our evaluation of the benefits of the Families First program to those benefits that pertain to the servicemembers, specifically full replacement value coverage and expanded counseling services. We determined DOD’s ability to achieve the goals and benefits of Families First with or without a new information management system by monitoring the status of the Defense Personal Property System (DPS) throughout the course of our review. This included observing demonstrations of DPS as it was presented to representatives from the services and moving industry, reviewing test problem reports generated during DPS software acceptance testing, and examining briefings in which DPS program management and stakeholders reevaluated the DPS implementation schedule. We also reviewed a Federal Register notice provided by Surface Deployment and Distribution Command officials, which described its plans for implementing the full replacement value benefit of Families First without DPS. We analyzed the current program business rules and requirements and compared them to the goals and benefits of Families First to determine if alternatives existed in the current program to implement them without DPS. We also interviewed the officials and stakeholders listed. We asked these officials and stakeholders to provide alternatives for achieving the Families First goals and benefits without DPS. When an alternative was identified, we questioned officials and stakeholders about the feasibility and possible challenges of implementing Families First goals and benefits without DPS. To evaluate the growth in the cost of the program since our previous assessment, we determined that we could not evaluate the actual growth in costs because data were unavailable as the program has not yet been implemented. However, we determined that DOD was still advising the services to budget for the previously estimated 13 percent cost increase for Families First. To understand this estimated increase, we reviewed the estimated cost of the Families First program from our two previous reports related to the cost of the Families First program. We analyzed the size of the services’ current permanent change of station budgets and assessed how the cost of the Families First program would increase those budgets using information provided by the Office of the Secretary of Defense Comptroller. Families First program management officials stated that DOD would use a cost-control mechanism known as rate reasonableness to ensure that program costs do not exceed the estimated increase. We analyzed Families First business rules and planning documents, such as its concept of operations, to determine the feasibility and limitations of the rate reasonableness approach. We interviewed officials from the Military Surface Deployment and Distribution Command and the U.S. Transportation Command Office for Transportation Policy to determine whether their estimate of the cost of Families First has changed since our previous assessment and what their plans were to keep the cost of the Families First program within the estimate. We also asked officials from the Military Surface Deployment and Distribution Command if they had plans to monitor the costs during implementation of the program. Although we did not independently test the reliability of data DOD extracted from its data system to develop costs or independently verify the analysis used to generate cost estimates, we determined the data were sufficiently reliable for the purposes of our report because they are the same data DOD decision makers use to manage the program. To assess the growth in the estimated cost of DPS, we reviewed our previous report, which contained DOD’s estimate of the cost of improving its information technology system. We compared this estimate to estimates contained in the U.S. Transportation Command budget planning documents and the DPS economic analysis completed in 2003, which also documented how DOD’s concept for information technology system improvements changed since our last review. To obtain updated information about the current costs of developing and fielding DPS, we analyzed budget documents provided by the Joint Program Management Office for Household Goods Systems as of February 2007. To understand the U.S. Transportation Command’s transportation working capital fund Chief Information Officer Program Review Process, we reviewed related documents, such as the Chief Information Office Program Review Process business flow and interviewed budget officials at the U.S. Transportation Command’s Program Analysis and Financial Management directorate. Although we did not independently test the reliability of data DOD extracted from its data system to develop costs or the analysis used to generate cost estimates, we determined that the data were sufficiently reliable for the purposes of our report because they are the same data DOD decision makers use to manage the program. To assess the extent to which DOD faces management challenges in implementing the Families First program, we analyzed documents, such as Families First program meeting minutes and management briefings to the General Officer Steering Committee, the Council of Colonels and Captains, and the U.S. Transportation Command, which identified difficulties in implementing the Families First program. We also identified best practices for business reengineering and transformation, which we used to compare the process by which DOD is implementing the Families First program. These best practices were found in prior GAO reports. We also reviewed documents pertaining to the Joint Program Management Office for Household Goods Systems, including the draft organization chart, the draft transition plan for the office’s move to Scott Air Force Base as part of a base realignment and closure move, and draft budget documents for developing and implementing DPS. We also interviewed officials and stakeholders. We did not evaluate DOD’s decision to implement the Families First program or develop DPS, nor did we evaluate the solicitation process for awarding the DPS contract. We conducted this performance audit from September 2006 through May 2007 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Lawson Gist, Jr., Assistant Director; Krislin Bolling; Renee S. Brown; Michelle Cooper; Arthur L. James, Jr.; Tina M. Kirschbaum; Lonnie McAllister; Maewanda Michael- Jackson; Charles W. Perdue; and Bethann Ritter made key contributions to this report. Defense Transportation: DOD Has Adequately Addressed Congressional Concerns Regarding the Cost of Implementing the New Personal Property Program Initiatives. GAO-05-715R. Washington, D.C.: June 9, 2005. Defense Transportation: Monitoring Costs and Benefits Needed While Implementing a New Program for Moving Household Goods. GAO-03-367. Washington, D.C.: April 18, 2003. Defense Transportation: Final Evaluation Plan Is Needed to Assess Alternatives to the Current Personal Property Program. GAO/NSIAD-00- 217R. Washington, D.C.: September 27, 2000. Defense Transportation: The Army’s Hunter Pilot Project Is Inconclusive but Provides Lessons Learned. GAO/NSIAD-99-129. Washington, D.C.: June 23, 1999. Defense Transportation: Plan Needed for Evaluating the Navy Personal Property Pilot. GAO/NSIAD-99-138. Washington, D.C.: June 23, 1999. Defense Transportation: Efforts to Improve DOD’s Personal Property Program. GAO/T-NSIAD-99-106. Washington, D.C.: March 18, 1999. Defense Transportation: The Army’s Hunter Pilot Project to Outsource Relocation Services. GAO/NSIAD-98-149. Washington, D.C.: June 10, 1998. Defense Transportation: Reengineering the DOD Personal Property Program. GAO/NSIAD-97-49. Washington, D.C.: November 27, 1996.","The Department of Defense (DOD) has been working to improve its personal property program since the mid-1990s to fix long-standing problems, such as excessive loss or damage to servicemembers' property and poor quality of service from moving companies. DOD plans to replace its current program with Families First, a program that promises to offer servicemembers an improved claims process and quality of service. GAO was mandated to (1) assess the steps DOD has taken to achieve the goals and benefits of the Families First program; (2) evaluate the growth in costs of the program, including the costs for a new information management system, since GAO's last assessment in 2003; and (3) assess the extent to which DOD faces management challenges--such as staffing--in implementing Families First. To address these objectives, GAO analyzed DOD's program, funding and staffing data, and interviewed personal property officials and stakeholders. DOD has taken some initial steps to achieve the goals and benefits of Families First, but delays in developing a new information management system have put the overall goals of improving the quality of service from moving companies and streamlining the claims process at risk. The information management system, the Defense Personal Property System (DPS), is now more than 2 years behind schedule. DOD has missed DPS milestones because of software development issues and is now working to address issues identified in recent software testing. Since DPS has been delayed, DOD is in the process of implementing a backup plan to meet a statutory mandate to provide servicemembers with the full replacement value of goods lost or damaged during a move by March 1, 2008. However, there are risks and costs associated with DOD's backup plan because it relies on an increasingly unreliable legacy computer system; also, DOD's plan may not cover all moves by March 1, 2008. The Families First program could increase costs to DOD by $1.4 billion over current program costs through fiscal year 2011 for two main reasons: (1) DOD estimates the program will increase costs to the services' household goods budgets by 13 percent and (2) DOD has significantly increased the cost estimate for a new information management system since GAO's last assessment. While DOD's estimate that the Families First program will increase costs by 13 percent has not changed since 2005, all of the services have not yet fully budgeted for this cost increase, which GAO analysis shows could be about $1.2 billion. Additionally, DOD has increased its estimate for an information management system for Families First because it decided to develop DPS rather than upgrade the legacy system. DOD estimated that the upgrade would cost $4 million to $6 million, and the program office estimated that DPS will cost about $180 million through fiscal year 2011. DOD's personal property program faces many management challenges--especially staffing, in addition to program requirements and funding problems--because it has not employed comprehensive planning. Sound management practices require a comprehensive approach that includes plans to assemble a qualified, trained, and well-led team; gain stakeholders' agreement about key program elements, such as business rules to define how the moving industry will serve military members; and estimate and plan for adequate resources. DOD has developed several draft plans to address individual portions of Families First and DPS, such as the draft transition plan for moving the DPS program office as part of a base realignment and closure move from Virginia to Illinois, but there is no overall plan that addresses how DOD will (1) fill significant staffing shortfalls in the newly formed DPS program office, (2) gain agreement from stakeholders, and (3) fund the significant and growing costs associated with the program. For example, DOD has not identified sources to fully fund DPS development and operations. Without a comprehensive plan, achieving the goals of the Families First program will likely remain difficult.",govreport
"Tobacco is a high-value, pesticide-intensive crop. That is, tobacco is the nation’s ninth highest valued crop, and in terms of the amount of pesticide applied per acre, tobacco ranks sixth—behind potatoes, tomatoes, citrus, grapes, and apples. In the United States, tobacco is grown in 16 states, 2 of which—Kentucky and North Carolina—produce about two-thirds of all domestic tobacco. Further, it is grown in over 100 countries. Until recently, the United States was the world’s leading exporter of unmanufactured tobacco; however, in 2001, it ranked third, behind Brazil and Zimbabwe. The tobacco industry in the United States both exports tobacco to Japan and Western Europe—principally Germany, the Netherlands, Denmark, the United Kingdom, Belgium, Italy, and Spain— and imports tobacco in increasing amounts from countries such as Brazil, Argentina, Malawi, and Thailand. Furthermore, the United States is the second largest producer of cigarettes in the world, following China. More than 90 percent of the tobacco grown in the United States is used to manufacture cigarettes, as is most tobacco produced in the world. The remainder is used for chewing tobacco, snuff, cigars, and pipe tobacco. Tobacco types are often defined by such characteristics as how the tobacco is cured (flue-, air-, or sun-cured), as well as the color, size, and thickness of the leaves. Different types of tobacco are used in the various tobacco products. The tobacco component of cigarettes made in the United States usually consists of flue-cured and burley tobacco blended with imported oriental tobacco and small amounts of specialty tobaccos grown in Maryland and Pennsylvania. Although pesticides play a significant role in increasing production of tobacco, food, and other crops by reducing the number of crop-destroying pests, exposure to pesticides can harm humans. The potential for harm is related to both the amount of a substance a person is exposed to—the dose—and the toxicity of the chemical. For example, small doses of aspirin can be beneficial to people, but at very high doses, this common medicine can be deadly. Furthermore, in some individuals, even at very low doses, aspirin may be lethal. The age and health status of an individual can also affect the potential for harm. Children may be more susceptible to harm because, for example, they eat more food, drink more water, and breathe more air than adults per pound of body weight, resulting in greater exposure. Generally, assessments of dose and response involve considering the dose levels at which adverse effects are observed in test animals and using these dose levels to calculate an equivalent dose in humans. In many cases, exposure to pesticides is through residues that remain on crops following use of the pesticides. The amount of pesticide residue that remains reflects, among other things, the amount of pesticide applied, the time lapsed since application, and the speed with which the pesticide dissipates in the environment. Residue levels remaining on crops are also affected by where the pesticides are applied, such as in the soil or on the plant, and when they are used in the life cycle of the plant, such as when the plant is a seedling or shortly before the plant is harvested. Typically, residues on tobacco decline as the plant moves from field to finished consumer product. The primary federal requirements pertaining to the registration, sale, and use of pesticides are in the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) and the Federal Food, Drug, and Cosmetic Act (FFDCA), both as amended by the Food Quality Protection Act (FQPA). Pesticides must generally be registered with EPA in order to be sold or distributed. EPA will register a pesticide if it determines, among other things, that the pesticide will not generally cause unreasonable adverse effects on human health or the environment when used in accordance with conditions specified on the label. Throughout this report we will focus on EPA’s analysis of potentially harmful effects to human health, rather than the environment. In 1988 FIFRA was amended to require that EPA review pesticides initially registered prior to November 1984—when less toxicity data were available—to consider their health effects and to determine whether and how they might continue to be registered. These reviews are designed to ensure that older pesticides meet contemporary health and safety standards and that their risks are mitigated. Essentially, manufacturers of the older pesticides must provide EPA with substantially the same toxicity, chemistry, and other data as are now required to register a new pesticide. EPA reviews of the older pesticides are called reregistrations. Most of the pesticides used on tobacco during the 1990s were initially approved before 1984 and therefore are subject to reregistration. In addition, the FQPA amendments to FIFRA passed in 1996 require EPA to reevaluate the amounts of pesticide residues allowed on or in food— known as tolerances. EPA must ensure that there is a reasonable certainty that no harm will result from all pesticide exposures from food and nonfood uses for which there is reliable information. In doing so, unless another safety factor is determined to be appropriate, EPA is required to apply an additional 10-fold safety factor in setting tolerances to ensure the safety of foods for children. EPA is also required to ensure that there is reasonable certainty that no harm will result to children specifically from “aggregate” exposure to a single pesticide—that is, from all sources, such as lawn treatments, household uses, drinking water, and food. EPA must also consider available information concerning the cumulative effects on children of pesticides that act in a similar harmful way (known as a common mechanism of toxicity). To accomplish this requirement, EPA has recently developed a method to evaluate the cumulative exposure of one class of highly toxic pesticides—the organophosphates—from residues in food and drinking water and from residential uses. EPA uses risk assessment—the systematic, scientific description of potential adverse effects from exposure to hazardous substances—to evaluate the potential health impacts of a pesticide on humans and determine what measures are needed to mitigate identified risks. The product of a risk assessment is an identification of the various health risks, along with quantitative and/or qualitative statements regarding the probability that an exposed population will be harmed and to what degree. For example, EPA qualitatively classifies pesticides and other toxic substances according to their potential to cause cancer using descriptors such as “likely” or “suggestive evidence but not sufficient to assess human carcinogenic potential.” In addition, for many carcinogens, EPA develops a quantitative dose/response health risk assessment that estimates the health risks at varying exposures. For health effects other than cancer, EPA may calculate what it terms a “reference dose” or, in the case of exposure by inhalation, a “reference concentration,” which represents a daily level of exposure that is unlikely to result in harm over a lifetime. Alternatively, EPA may calculate a “margin of exposure,” which is a ratio that shows how far the actual (or estimated) human exposure to a substance is from levels that are harmful. In essence, evaluating and managing the risk of exposure to a pesticide involves determining the maximum safe level of exposure to the pesticide and assessing whether expected actual exposure is below this maximum level. If expected actual exposure levels exceed the maximum safe amount, EPA must determine the best ways to reduce exposure. According to federally sponsored surveys, during the 1990s tobacco producers in the United States commonly used 37 of the pesticides approved by EPA for such use. As shown in table 1, most of the pesticides used on tobacco were insecticides and herbicides, which control insect and plant pests; others were fungicides, which combat fungal diseases, or plant growth regulators; and a few had more than one use. Most of these pesticides were also widely used on food crops. The actual number and amount of pesticides used on tobacco or other crops in any given year vary depending on factors such as the weather and the specific pests that become problematic. For example, the incidence of many plant diseases is closely correlated to the amount of rainfall, resulting in greater use of fungicides in years with high rainfall. In addition, pesticide use tends to change over time as pests develop resistance to the pesticides and as use on tobacco is approved for new pesticides and cancelled for older pesticides. As table 2 shows, 10 pesticides identified in the 1997 survey as commonly used on tobacco were not identified in the earlier survey. Two of these pesticides, dimethomorph and mancozeb, began to be used in response to the appearance of a disease resistant to metalaxyl, which declined in usage during the 1990s. In addition, during the years included in the 1997 survey, tobacco use for 5 of the 7 pesticides no longer reported as being used—diazinon, diphenamid, isopropalin, methidathion, and trichlorfon—was being cancelled. In some cases, pesticide cancellations resulted in the increased use of other pesticides. For example, by 1997 clomazone had replaced diphenamid and isopropalin as the pesticide of choice for controlling unwanted weeds, and imidacloprid was most commonly used to control insect pests, leading to reduced use of acephate, aldicarb, chlorpyrifos, ethoprop, and carbofuran. Manufacturers may initiate cancellation of some or all uses of a pesticide, often for economic reasons, or EPA may cancel uses when the agency determines that one or more uses pose unreasonable risks to human health or the environment. For example, as required under the Clean Air Act, EPA has been phasing out the use of methyl bromide on tobacco and a wide range of other crops because it depletes the earth’s protective layer of ozone. Methyl bromide use on tobacco decreased from about 5.4 million pounds in 1992 to about 0.7 million pounds in 1997 because of EPA’s efforts and changes in how tobacco producers raise seedlings. Specifically, producers have begun to grow tobacco seedlings in greenhouses, where methyl bromide is not generally used. EPA determines the amounts and conditions under which a pesticide may be used so that it will not pose unreasonable risks to workers or the general population. Failure to comply with the conditions set by EPA could result in a range of harmful effects. For example, 17 of the 37 pesticides commonly used on tobacco in the 1990s belong to three chemical classes that, at high doses, are known to cause adverse human health effects up to and including death (see table 3). Although they do not all produce their toxic effects in the same way, pesticides in these three classes—organochlorines, organophosphates, and carbamates—act on the nervous system to prevent the normal flow of nerve impulses to muscles that control both voluntary movement, such as walking, and involuntary movement, such as breathing and heart beat. Pesticides in all three classes are absorbed to varying degrees through inhalation, ingestion, and skin contact. Exposure to amounts of these pesticides that exceed levels set by EPA could result in immediate and life- threatening effects, such as respiratory failure, or conditions that do not appear immediately, such as cancer. While EPA has concluded that most of these 17 pesticides do not cause birth defects, the agency has also concluded that 5 of them and a by-product of another may cause cancer. Since the 1970s, EPA has severely restricted its approvals of organochlorine pesticides, which include DDT, aldrin, and chlordane, because of their potential to harm humans and the environment. Organochlorine pesticides persist in the environment—some have remained in soil for over 50 years—and accumulate in body tissue, particularly fat. Organochlorine pesticides are associated with a range of adverse health effects, including cancer and damage to the neurological and reproductive systems. The one organochlorine pesticide still approved for use on tobacco, endosulfan, is highly toxic when ingested or inhaled and slightly toxic through contact with the skin. While EPA has determined that it is unlikely to cause cancer as other members of this class do, endosulfan, like all organochlorine pesticides, primarily affects the nervous system. EPA has requested additional data from the manufacturer to address its concerns that exposure to endosulfan could harm the nervous system of developing fetuses. Organophosphate and carbamate pesticides have largely replaced the organochlorine pesticides in the United States. While they break down quickly in the environment and do not accumulate in body tissues, organophosphate pesticides are much more acutely toxic to humans and animals than the persistent organochlorine pesticides they have largely replaced. The primary cause of death from organophosphate poisoning is respiratory failure, although cardiovascular symptoms, such as decreased heart rate that progresses to cardiac arrest, usually occur as well. In humans, additional symptoms from exposure to organophosphate pesticides, which can develop during use or within minutes to hours after exposure, include headache, nausea, dizziness, sweating, muscle twitching, anxiety, and depression. Exposure by inhalation causes the most rapid appearance of toxic symptoms. As a result, to minimize the potential for harmful exposure of workers, EPA requires those who mix, use, or apply the pesticides to have special training, use respirators, and wear chemical-resistant clothing. Regarding the potential to cause cancer, EPA has determined that 4 of the 10 organophosphate pesticides used on tobacco—acephate, ethoprop, methidathion, and trichlorfon—may cause cancer. In addition, EPA has concluded that 7 of the 8 organophosphate pesticides it evaluated for their potential to cause birth defects would not cause them but that the eighth—chlorpyrifos—may do so at very high levels that may also harm the pregnant female. Carbamates, which also affect the central nervous system, produce symptoms similar to those of organophosphate pesticides, although the effects of carbamate poisoning tend to be of shorter duration and somewhat easier to treat. The primary cause of death from carbamate poisoning is respiratory failure. Of the six carbamate pesticides used on tobacco, EPA has determined that one and a by-product always associated with another may cause cancer; two are unlikely to cause cancer; data are insufficient to determine the cancer-causing potential of one; and one will be evaluated in fiscal year 2003. EPA has evaluated four of the carbamates for their potential to cause birth defects: three do not and only minimal evidence exists for the potential of the fourth to cause birth defects. EPA has requested, but not yet received, data from the manufacturer on the potential of one of the two remaining carbamate pesticides to produce birth defects, and the agency will evaluate the health effects of the other in fiscal year 2003. The potential acute adverse health effects from the remaining 20 pesticides used on tobacco—representing 12 different chemical classes— range from mild to severe. For example, EPA found no known health effects on mammals from exposure to Bacillus thuringiensis as it is currently manufactured. Similarly, EPA has found that both maleic hydrazide, a plant growth regulator and herbicide, and metalaxyl, a fungicide, have low acute toxicity, and neither is thought to cause cancer or birth defects. However, EPA has found that serious adverse health effects could occur with high exposures to insecticides, such as chloropicrin, 1,3-dichloropropene (1,3-D), and methyl bromide, which are applied as fumigants and can be severely irritating to the eyes, skin, and lungs. EPA has also found that poisoning from exposure to methyl bromide may result in persistent neurological impairment. In general, because most of the pesticides used on tobacco are widely used on food and other crops, as well as in residential and other settings, the exposure resulting from residues on tobacco represents a small portion of total exposure to these pesticides. Specifically, 1997 survey data estimate that about 27 million pounds of the 37 pesticides were used on tobacco, while the estimated use of these pesticides nationally on all crops was 175 million pounds. Therefore, most of the exposure to these pesticides stems from their use on other crops and in other products, such as household insecticides. However, for some pesticides—dimethomorph, fenamiphos, flumetralin, maleic hydrazide, mefenoxam, and sulfentrazone—more than 50 percent of their use in 1994 through 1998 was on tobacco. Further, more than 80 percent of maleic hydrazide used and 100 percent of flumetralin and sulfentrazone used were applied to tobacco. Appendix II provides information on the amounts of the 37 pesticides used on (1) tobacco and (2) domestic crops, as estimated in the 1992 and 1997 surveys. To determine whether the use of individual pesticides can reasonably be expected not to harm human health, EPA conducts health risk assessments under its pesticide registration program. These risk assessments are based on EPA’s evaluations of the results of numerous scientific studies and tests that the agency requires pesticide manufacturers to carry out. EPA also assesses the health risks to smokers from exposure to pesticides used on tobacco by analyzing data on their toxicity and the residue levels that remain on tobacco and in tobacco smoke. Because pesticides are used extensively on crops, including tobacco, and in home pesticide products, the risk assessments focus on exposures of (1) workers who handle the pesticides and (2) the general public, which is exposed to pesticides via residues on food or in drinking water or from pesticide products used in and around the home and in public places. EPA’s health risk assessments often identify risks to workers that must be mitigated before EPA will approve the pesticide. The assessments also identify risks to the general population that may also require special limitations on how or where the pesticides may be used. EPA has generally concluded that the low levels of residues measured in tobacco smoke do not pose health concerns that require mitigation. While EPA officials were generally able to provide us with copies of the studies and evaluations we requested during our review, documentation of the agency’s evaluation of the validity and reliability of the residue studies was inconsistently available. Under its pesticide registration program, EPA routinely assesses the health risks of exposure to pesticides from residues in drinking water and food and from pesticide use in the home, in public places, and at work. The Health Effects Division of the Office of Pesticide Programs in EPA develops its health risk assessments on the basis of a substantial body of data, including toxicity, residue chemistry, and other data provided by pesticide manufacturers, as well as other relevant information, such as human and animal studies from the general scientific literature and poisoning incident databases. The risk assessments focus on the potential cancer and noncancer health risks associated with short-term (acute), intermediate-, and long-term (chronic) exposures to pesticides from the primary exposure routes—oral, inhalation, and contact with skin (dermal). Noncancer health risks that EPA assesses include risk of birth defects, reproductive impairments, damage to genetic material, and interference with the body’s endocrine system. EPA’s health risk assessments are subject to numerous reviews by a variety of committees, including the agency’s Hazard Identification Science Assessment Review Committee, Cancer Science Assessment Review Committee, and Reproductive and Developmental Toxicity Science Assessment Review Committee. The health risk assessments provide critical information to the pesticide registration divisions on the human health component of risk management decisions—such as whether to approve pesticides for use; what amounts may be used; and what special restrictions, if any, may be needed. To evaluate the levels of pesticides to which cigarette smokers might be exposed from residues on tobacco, EPA reviews plant metabolism and residue studies provided by manufacturers that identify the residues of pesticides, and any harmful by-products they may produce, that remain on the crop after it has been treated. The plant metabolism studies reveal how plants process a pesticide once it is applied and the relative amounts of the pesticide and its by-products that remain after treatment—the total toxic residue (TTR). The residue studies, called field trials, quantify the levels of pesticide and by-product residues that remain on plants grown under actual agricultural conditions that approximate the expected “real life” environment. Such field trial data, which are required for all pesticides that will be used on food, may not always be required for pesticides used on tobacco because EPA uses a “tiered” approach to evaluate residues on tobacco. That is, for tobacco, the agency requires additional residue data after the metabolism study only if it has shown that the combined residue levels of the pesticide itself and any harmful by-products exceed 0.1 parts per million (ppm)—the agency’s “threshold of concern” for residues on tobacco. Thus, as figure 1 shows, EPA generally requires plant metabolism studies for green tobacco and may require data from field trials for both green and cured (aged) tobacco, depending upon the amount of residues that are identified. In addition, EPA may require pyrolysis studies that measure the residues in smoke when tobacco treated with a pesticide is burned. Finally, EPA may require additional residue studies to estimate potential exposure, even if the residues are below 0.1 ppm, if it has concerns about the toxicity of a pesticide. The tiered approach to analyzing residues on tobacco reflects the fact that, typically, pesticide residues on tobacco decline over time, as the tobacco is stored, cured, manufactured into cigarettes, and burned during smoking. EPA uses the tiered approach for tobacco, in part, because the agency has concluded that the potential for harm to human health from pesticide residues on tobacco at or below the 0.1-ppm level is extremely low and unlikely to result in a risk of concern to smokers. According to EPA officials in the Health Effects Division, since August 1999, EPA’s policy for assessing the health risks from using pesticides on tobacco has been to evaluate the risks of short-term exposure to residues on tobacco and to quantify the estimated health risks using a consistent method and set of assumptions. This policy is applied to all newly registered pesticides, as well as to currently registered pesticides as they are periodically reviewed to ensure they meet current human health and environmental safety standards in accordance with the requirements of the 1988 amendments to FIFRA. EPA officials attribute the more structured approach to advances in the science of risk assessment and the 1996 enactment of FQPA, which has spurred the agency to more systematically quantify the exposure to pesticide residues in food and drinking water and from residential uses. EPA selected the margin of exposure method to quantify the health risks associated with exposure to pesticide residues in smoke. As discussed earlier, a margin of exposure shows how far the actual (or estimated) human exposure to a substance is from levels that have been shown to cause no harm in animal studies. To estimate exposure, EPA typically uses (1) the residue levels identified in tobacco field trials or pyrolysis studies and (2) standard assumptions for key variables that affect exposure. Specifically, EPA assumes that people smoke 15 cigarettes a day and that they weigh about 150 pounds, if male, and 130 pounds, if female. Moreover, EPA assumes 100 percent of the pesticide residue on the tobacco is inhaled and absorbed. In practice, some residues will be trapped in cigarette butts, and the amount of smoke inhaled varies widely among people. EPA officials said the assumptions are conservative—that is, they are protective of public health—because they tend to overstate, rather than understate, the extent to which smokers are exposed to the potentially toxic effects of the pesticides. Also according to EPA officials, the agency does not include exposure to the residues in tobacco smoke in its aggregate health risk assessments of individual pesticides, which are required by FQPA, because the added exposure from residues in smoke is minimal. In addition, EPA has chosen not to assess the risk of either intermediate- or long-term exposure to pesticide residues in smoke because of the severity and quantity of health effects associated with the use of tobacco products themselves. Specifically, exposure to tobacco products—particularly cigarettes—is the single major preventable cause of cancer and heart and lung disease in the United States. Finally, although experts and public health officials are concerned about the potential for harm, particularly to children, from exposure to pesticides, little is known directly about the chronic effects of pesticide use in general in the United States—for example, in agriculture and in schools. Moreover, studies linking adverse human health effects to exposure to pesticide residues on tobacco are rare, according to public health officials and experts we spoke to. And while a number of federally sponsored studies of the effects of exposure to pesticides are underway, it will be years, if not decades, before conclusive results are known. Officials and experts we spoke with about possible harm from pesticide residues on tobacco generally agreed that such residues could incrementally add to the risk, and some also believed the known harm from using tobacco products dwarfs any potential effect from exposure to pesticide residues in the smoke. EPA’s health risk assessments have identified a number of potential adverse health effects associated with the pesticides used on tobacco and other crops that, in some cases, have led the agency to impose special limitations on the uses of these pesticides. The risks that required mitigation stemmed from (1) potential exposure of workers who apply pesticides or harvest crops and (2) potential exposure of the general population to pesticide residues in food or drinking water or from pesticides used in the home or in public. None of the risks requiring mitigation were associated with exposure to residues on tobacco or in tobacco smoke. Our review of studies and other documentation related to EPA’s completed reregistration reviews of 13 of the 37 pesticides commonly used on tobacco identified the health risks associated with them and the related mitigation measures the agency required. The following cases illustrate some of the health risks that have required mitigation. EPA has classified 1,3-D, a widely used fumigant that controls soil-borne pests and diseases, as a probable carcinogen—that is, evidence from human and animal studies suggests that 1,3-D, once ingested or inhaled, is likely to cause cancer. In its risk assessment, EPA determined that 1,3-D could make its way to groundwater and pose a risk of cancer for residents who obtained their drinking water from wells near treated fields. To mitigate the potential cancer risks and as a condition for reregistration, EPA required that wells used for drinking water be located 100 or more feet from treated fields and prohibited the use of 1,3-D altogether in 11 states with porous soil. In addition, vapors from 1,3-D—which is injected as a liquid into soil, where it quickly evaporates—can move into the air. Consequently, EPA also required (1) a 300-foot buffer between occupied buildings and fields treated with the pesticide and (2) workers who apply the pesticide to wear respirators and protective clothing, among other things. Further, because of 1,3-D’s volatility and potential to harm humans, EPA classified it as a “restricted use” pesticide, which means it can only be applied by, or under the supervision of, individuals trained to handle particularly toxic or harmful pesticides. Currently, 1,3-D is registered for use on soils in which all food and feed crops may be planted. Moreover, according to the 1997 survey, an estimated 13 million pounds of 1,3-D were applied to tobacco annually during the survey period—almost twice the amount of chloropicrin, the second most commonly used pesticide on tobacco. Despite the health risks posed by injecting 1,3-D into soil, EPA identified no risks associated with residues on tobacco leaves or in tobacco smoke because 1,3-D metabolizes to nontoxic by-products and is subsequently absorbed by the plant. Similarly, EPA determined that residues on tobacco of chlorpyrifos— another pesticide frequently used on tobacco and food crops and one of the most widely used organophosphate insecticides in the United States— were below the agency’s threshold of concern. But the agency determined that chlorpyrifos presented potential health risks unrelated to its use on tobacco that required strict mitigation measures. Specifically, the agency identified health risks to children from exposure to chlorpyrifos. Before 2000, chlorpyrifos was one of the insecticides used most often in residential and commercial settings—for example, on carpets and in schools, daycare centers, hotels, and restaurants—and on food crops. EPA identified significant risks to children from these many uses and required stringent measures to address them. Between 1997 and 2000, EPA cancelled nearly all indoor and outdoor residential uses and prohibited the use of chlorpyrifos in schools and public parks. In addition, manufacturers agreed to eliminate the use of chlorpyrifos on tomatoes and restrict its use on apples. EPA also identified concerns for some workers who mix, load, and apply chlorpyrifos in agricultural and other nonresidential settings. As a result, EPA required that workers wear a respirator and a double layer of clothing, including chemical-resistant gloves, shoes, and headgear. Workers must also use water-soluble packages to mix powdered forms of chlorpyrifos and remain in an enclosed cockpit when aerially spraying a field. EPA also set a time interval between applications of the pesticide and when workers can reenter treated areas, ranging from 24 hours for most crops to 5 days for others. EPA did not, however, identify risks associated with chlorpyrifos used on tobacco because residue levels on green tobacco were below 0.1 ppm. EPA also identified a range of potential harmful effects from other exposures to the other pesticides we reviewed. For 11 pesticides, including 1,3-D and chlorpyrifos, EPA identified a range of concerns, largely for exposures of workers—particularly those engaged in spraying the pesticides—that required at least some mitigation. Most often the mitigation measures included the use of enclosed mixing systems and tractor cabs, additional protective respirators and clothing, reductions in the rate and frequency of application, and increases in the time between application and reentry to the treated areas. In some cases, such as for acephate, disulfoton, and ethoprop—all of which are organophosphate pesticides—certain uses were cancelled, including use on golf courses and lawns and indoor and outdoor residential uses. Three of these 11 pesticides—disulfoton, endosulfan, and ethoprop—also raised concerns about dietary or drinking water exposure for which EPA required such mitigation as canceling use on some foods, reducing the rate and frequency of application on others, and requiring buffer zones between treated fields and water bodies. EPA placed a number of additional restrictions on the use of endosulfan, a highly toxic and persistent organochlorine pesticide, including restricting use on cotton and tobacco to certain states; eliminating or reducing aerial spray applications on crops such as strawberries, nuts, and tobacco; and requiring buffer zones between treated areas and bodies of water. In addition, EPA required that all products containing endosulfan be labeled as restricted use pesticides, which can only be used by, or under the supervision of, specially trained applicators. EPA also noted that it may require further restrictions on acephate once the agency completes its assessment of the cumulative exposure to organophosphate pesticides because this organophosphate pesticide degrades in plants to another organophosphate pesticide. EPA found that 2 of the 13 pesticides we reviewed presented no concerns that needed changes in existing conditions on how to use and apply the pesticides. The pesticides we reviewed, including ones no longer approved for use in the United States, are used in many other tobacco-producing countries, according to experts. Researchers and advocacy groups have raised concerns about adverse health effects on tobacco workers in other countries from exposure to pesticides, citing such factors as the absence of cautionary labels on some pesticides and the limited use of protective clothing by agricultural workers. For example, researchers found elevated rates of depression and suicide rates that were twice the national average among tobacco producers in Brazil, a leading tobacco exporter. And although many factors, such as poverty and stress, may play a role in suicide, one group of researchers noted tobacco producers in Brazil routinely used organophosphate pesticides, which have been shown to cause depression. Moreover, these researchers reported that suicides are more likely to occur during planting and harvesting seasons, when organophosphate pesticides are used intensively. To some extent, such harmful exposure may occur because pesticide regulations in other countries may be less stringent than those in the United States or because other countries’ enforcement of regulations may be more limited, according to advocacy groups. Regarding pesticide residues on domestic tobacco, overall, EPA officials did not find associated health risks that required mitigation. Further, the data we reviewed on 13 pesticides were consistent with statements from EPA officials that the residues on tobacco were below the agency’s identified level of concern in 11 cases. EPA did not evaluate the remaining 2 pesticides—diazinon and pendimethalin—for use on tobacco. In the case of diazinon, evaluating residue data was not relevant because the pesticide was no longer approved for use on tobacco at the time EPA conducted its evaluation. In the case of pendimethalin, at the time we conducted this work, EPA had not yet reviewed the relevant data received from the manufacturer. EPA approved the reregistration for this pesticide, but its use on tobacco is subject to the agency’s evaluation of this data. Of the 11 pesticides that EPA evaluated for use on tobacco, 3 left residues on green or cured tobacco that were less than 0.1 ppm—and one left no residues at all. Specifically, the maximum residues of ethoprop on green tobacco were 0.01 ppm, the residues of chlorpyrifos were 0.09 ppm, the residues of pebulate on both green and cured tobacco were less than 0.02 ppm, and the plant metabolism study for 1,3-D showed no residues remaining on the plant. Manufacturers provided pyrolysis studies in two of the four cases in which the residue levels on green tobacco were 0.1 ppm or less. The pyrolysis study for ethoprop identified residues in the smoke that were below the agency’s level of concern. The pyrolysis study for a by-product of chlorpyrifos that was initially of concern to the agency identified the by-product in the smoke. However, EPA subsequently concluded that the by-product, which accounted for more than 10 percent of the residue in the smoke, was not of toxicological concern because, unlike its parent compound, it does not act toxically on the nervous system. Of the seven pesticides that progressed through EPA’s tiered risk assessment approach because residues on cured tobacco were greater than 0.1 ppm, pyrolysis studies were conducted on five. No residues were found in the smoke of four of these five pesticides; the residues of the fifth were not of sufficient magnitude to require further study or evaluation. One of the remaining two pesticides with residue levels greater than 0.1 ppm was evaluated using a study of the health effects on rats exposed to residues in smoke, and one was approved subject to EPA’s review of requested additional residue data, including a pyrolysis study, to confirm EPA’s assessment that residues on tobacco do not pose a risk to human health. The reregistration decisions for 7 of the 13 pesticides we reviewed were issued after EPA implemented guidance in 1999 requiring quantification of the risks of short-term exposure to pesticide residues in tobacco smoke. However, none of the human health risk assessments or other documentation we reviewed contained this information—that is, the margin of exposure estimate—because the health risk assessments supporting these decisions were completed before the policy was implemented. For pesticides with many uses and much data, several years may elapse between the initial scientific assessment of the tobacco use and the issuance of the reregistration decision. Not including the 13 pesticides mentioned above, we reviewed five additional health risk assessments EPA prepared after it developed the policy requiring the quantification of the risks of short-term exposure to pesticide residues in tobacco smoke that did include estimates of margin of exposure. EPA generally does not have concerns about adverse health effects when a margin of exposure is greater than 100—that is, when the pesticide causes no adverse effects at levels 100 or more times greater than the expected actual exposure to the pesticide. Consequently, a margin of exposure greater than 100 is considered to reflect risk that is below EPA’s level of concern. As table 4 shows, EPA’s recent health risk assessments of five pesticides approved for use on tobacco—four of which were newly registered and one reregistered—generally indicated that the margins of exposure were substantially greater than 100. Although one margin of exposure was below 100, EPA officials told us that because they used very conservative assumptions to estimate exposure, resulting in an extreme overstatement of actual exposure, EPA was not concerned about the potential for adverse health effects. For these five pesticides, EPA concluded that no mitigation related to the use on tobacco was required. Overall, EPA officials said that potential risks from exposure to residues on tobacco had never been high enough to require mitigation. EPA requires that pesticide manufacturers provide most of the studies it considers in assessing the health risks of pesticides, and the agency’s evaluations of these studies are critical to the assessment process. EPA officials were generally able to provide us with copies of the studies and evaluations we requested, but documentation of the agency’s evaluation of the quality of the residue studies and other data upon which it relied to evaluate the potential for adverse health effects was inconsistent. Specifically, for eight of the pesticides, EPA officials were unable to provide their evaluations of the validity and reliability of residue data used in their assessments of potential health risks. In addition, for chlorpyrifos, EPA officials were unable to provide the residue studies and agency evaluations of them from the early 1980s. As a result, we examined subsequent EPA evaluations that referred to the results of these early studies and the agency’s conclusion that the residues were below the level of concern. According to EPA officials, they were unable to locate the documents, in part, because not all records from this time have yet been converted to electronic format, and the paper copies could not be located among the substantial backlog of paper documents. EPA officials noted that each pesticide registration could consist of 100 or more studies from pesticide manufacturers, each of which requires one or more agency evaluations. The officials reported that, as resources permit, contract and agency staff are converting documents to electronic format to make them more readily available for review. While EPA is required to regulate residues of pesticides approved for use on human food and animal feed crops, no such requirement applies to pesticides approved for use on tobacco. However, primarily as a matter of trade equity, USDA does (1) regulate residues of selected pesticides that are prohibited in the United States but that may be used on imported tobacco and (2) test certain types of imported and domestic tobacco to ensure they do not exceed residue limits. USDA has not reevaluated the pesticides it regulates since 1989, although changes in the pesticides used on tobacco have occurred since then. Through its testing programs, USDA has found that a small fraction of imported and domestic tobacco exceeds the residue limits. As discussed previously, EPA regulates pesticides in the United States by granting registrations, which permit the distribution, sale, and use of the pesticides according to directions identified on the label. EPA also regulates the residues of pesticides that are approved for use on human food and animal feed crops by setting tolerances—maximum concentrations of residues that may remain on crops. FDA and USDA test food and feed crops to ensure that residue levels do not exceed the tolerances EPA has set. Because tobacco is not used as food or feed, however, EPA does not set tolerances for residues of pesticides approved for use on tobacco, and FDA and USDA do not test tobacco for maximum concentrations of residues of approved pesticides. Consequently, residues of pesticides approved for use on tobacco in the United States are not federally regulated. Instead, federal regulation of pesticide residues on tobacco focuses exclusively on pesticides not approved for use on tobacco. The Dairy and Tobacco Adjustment Act of 1983, as amended, requires USDA to (1) establish maximum allowable concentrations for residues of selected pesticides that are not approved for use on tobacco in the United States but that are likely used on tobacco in some other countries and (2) test imported and domestic flue-cured and burley tobacco to ensure the residue levels do not exceed the maximum levels allowed. In selecting which pesticide residues to regulate, USDA is to consider pesticides whose use on tobacco has been cancelled, suspended, revoked, or otherwise prohibited under FIFRA. The regulation helps ensure that domestic tobacco producers are not placed at an unfair disadvantage in the market because they are not allowed to use certain pesticides that may be used in other countries; it also helps protect the public from exposure to the residues of highly toxic pesticides not approved for use on tobacco in the United States. While the focus of U.S. regulation of pesticide residues on tobacco is on those pesticides not approved for use on tobacco, some other countries have set limits on residues of pesticides that are used on tobacco. Further, as in the United States, some countries limit the concentration of residues as measured on tobacco leaf. However, at least one country—Germany— limits the pesticide residues as measured in cigarettes and other tobacco products. Appendix III provides information on the limits established by Germany, Italy, and Spain. USDA has implemented the Dairy and Tobacco Adjustment Act, in part, by setting 15 residue limits (maximum allowable concentrations) covering 20 pesticides currently not approved for use on tobacco in the United States that the agency believed were used in other countries. Most of the pesticides USDA regulates, such as DDT and toxaphene, are organochlorine pesticides. As discussed earlier, organochlorine pesticides persist in the environment and accumulate in the bodies of humans and animals, and many are highly toxic—a number of them have been banned for these reasons. Eleven of the 15 residue limits apply to individual pesticides and 4 apply to 2 or more pesticides in combination. For example, aldrin and dieldrin are summed because dieldrin is the primary degradation product of aldrin. Table 5 lists the residue limits included in USDA’s testing program, with the 12 organochlorine pesticides highlighted. As indicated in the table, methoxychlor is the only organochlorine pesticide included in USDA’s testing program that is currently approved for other uses in the United States, such as on food crops. USDA’s Agricultural Marketing Service (AMS) initially established maximum allowable concentrations of pesticides in August 1986 after determining the countries from which the United States imports tobacco, the pesticides that might reasonably be expected to be used on tobacco in those countries, and the pesticides not approved for use in the United States. In 1989, AMS revised the number of pesticides to its current total of 20 residues. Although in 1986 USDA stated its intent to periodically reevaluate the pesticides it regulates, the department has not done so since 1989. According to officials at USDA, reevaluating the regulated pesticide residues has not been a priority of the department. However, since USDA selected the pesticides it would test in 1989, tobacco uses have been cancelled for more than 30 pesticides that had been approved for use on tobacco. For example, by 2000, EPA had cancelled all tobacco uses of lindane—a highly persistent, organochlorine pesticide that may cause cancer and harm the environment. USDA does not currently regulate pesticide residues of lindane because it was still approved for tobacco when USDA last reevaluated the regulated pesticides. Other pesticides, such as trichlorfon and diazinon, are also candidates for regulation—that is, pesticides no longer approved for use on tobacco in the United States but likely to be used in some other countries. As appendix III shows, some countries that set limits for pesticides used on tobacco have established them for trichlorfon and diazinon—one of the leading causes of acute insecticide poisoning for humans. However, because USDA has not revised the regulated pesticide residues it tests for, the department’s testing program may not include some pesticides with characteristics similar to those of pesticides currently included in the testing program and that may still be used in other countries. Tobacco and pesticide experts with whom we spoke agreed that periodic reevaluations of the regulated pesticides would be appropriate. Furthermore, two of these experts—a toxicologist who has measured residues on tobacco for many years and a former government official who now represents tobacco producers—told us that many of the pesticides USDA currently regulates, particularly the organochlorine pesticides, warrant continued inclusion in the testing program because they are persistent in the environment, accumulate in the body, and continue to be used on crops overseas. Also as required by the Dairy and Tobacco Adjustment Act, USDA tests certain imported and domestic tobacco to ensure that residues do not exceed the maximum allowable concentrations the agency established. USDA is required to test samples of two types of tobacco—flue-cured and burley—that are commonly imported from other countries and also produced in the United States to determine whether they conform to the pesticide residue limits. These two types of tobacco are the major components of cigarettes, and imports of them have continued to increase over time. For example, USDA reported that imports of flue-cured tobacco represented about 12 percent of the flue-cured tobacco used in the United States in 1980 and about 36 percent in 2001. USDA is not required to test other types of imported tobacco, such as oriental tobacco, which is added to cigarettes for purposes of flavor and aroma but which is not grown in the United States. Tobacco is imported into the United States in large, sealed shipping containers that hold approximately 40,000 pounds of tobacco in 90 to 96 boxes weighing about 440 pounds each. In 1986, AMS began testing imported flue-cured and burley tobacco, which represented about 60 percent of the tobacco imported into the United States in 2001. Random samples of imported flue-cured and burley tobacco are tested for residues of the 20 regulated pesticides. AMS inspectors use a computer program to randomly select one box of tobacco from each shipping container. The domestic testing program began in 1989 and is administered by the USDA Farm Service Agency (FSA) under a cooperative agreement with AMS. Similar to the AMS program for tobacco imports, FSA tests randomly selected samples of domestic flue-cured and burley tobacco for the 20 regulated pesticides not approved for use in the United States. FSA tests the portion of domestically grown flue-cured and burley tobacco that becomes loan stock (surplus tobacco) under USDA’s tobacco price support program. The proportion of domestic tobacco that becomes loan stock varies each year, depending on tobacco quality and demand from manufacturers, and has declined in recent years. Additional information about the domestic loan stock program is provided in appendix IV. For 1999 through 2001, USDA’s testing programs found less than 1 percent of domestically produced or imported flue-cured and burley tobacco with residue levels above the allowable levels. According to agency officials, those results are consistent with results obtained since testing began in 1986. More specifically, for 1999 through 2001, the FSA domestic testing program found a small fraction of a percentage of domestically produced tobacco in excess of the limits. FSA found 4 samples of flue-cured tobacco and 24 samples of burley tobacco—representing more than 12,000 pounds of tobacco—that exceeded the maximum allowable concentrations of 2 of the regulated pesticides—methoxychlor and permethrin. AMS found residues of DDT/TDE/DDE, cypermethrin, and ethylene dibromide in excess of the limits on less than 1 percent of the imported tobacco entering the United States during this time. If imported tobacco exceeds any of the limits, the importer is notified of the violation and may choose to appeal the result or reexport the tobacco to another country. When an importer appeals, AMS inspectors randomly select three additional samples for testing, and the residue levels for the four samples are averaged. If the average result is below the limits, the tobacco is cleared for entry into the United States. However, if the average exceeds the limits, the container of tobacco is denied entry and is typically reexported. Under the Dairy and Tobacco Adjustment Act, domestically produced flue-cured or burley tobacco not meeting the residue requirements must be destroyed. According to USDA officials, because of restrictions on the disposition of products contaminated by pesticides, boxes of domestic tobacco are typically disposed of in an approved landfill with a permit from EPA. To ensure that pesticides can be used without posing an unreasonable risk to human health, EPA conducts risk assessments of exposures to the pesticides it evaluates for use in the United States, including exposure to pesticide residues on tobacco. EPA’s decision to limit its quantitative assessment of the risks associated with pesticides on tobacco to the effects of short-term exposure, and not include the long-term exposure of smokers, recognizes that the pesticides are used on a crop that itself poses very significant health risks to humans through use in various consumer products—primarily cigarettes. Overall, EPA’s health risk assessments show that the pesticides used on tobacco and other crops are probably a greater hazard for those who handle them than for those who inhale tobacco smoke. Nonetheless, while the risks of some exposures, such as acute poisoning, are clear, less is known with certainty about the effects of long-term exposure to small amounts of pesticides, such as residues in food and water, on tobacco, or in the environment. While historically EPA has required pesticide manufacturers to provide data on the residues remaining on tobacco, its assessments of the health effects associated with exposure to the residues were not identified in risk assessment documents and generally were not quantified. Mirroring the improvements in risk assessment methods in recent years, EPA has adopted a more formal and consistent approach to evaluating the health risks associated with pesticides used on tobacco and has started to document, in its risk assessment documents, its conclusions on the potential for short-term risks from pesticide residues that may remain in tobacco smoke. As a result, interested parties are better informed about the potential risks, and EPA is appropriately more accountable for its assessments. When used as intended—most commonly in cigarettes—tobacco is generally inhaled into the body. However, because it is not a food, tobacco is regulated as a nonfood crop with regard to pesticide residues. That is, no residue limits are established or monitored for pesticides approved for use on tobacco, as is done for foods. While the regulation of pesticide residues on tobacco is limited because it does not include pesticides approved for use on this crop, USDA tests tobacco for residues of 20 pesticides not approved for domestic use on tobacco, primarily for purposes of trade equity. Because many of the tested pesticides are known to harm humans and the environment, the USDA testing program helps minimize the public’s exposure to some highly toxic pesticides. The universe of pesticides not approved for use on tobacco has grown since USDA selected the pesticides it tests, but USDA has not reevaluated the program’s coverage in 14 years. The USDA testing program would be improved by assessing the current universe of pesticides not approved for use on tobacco and determining whether an update to its program is warranted. To better protect the public from exposures to residues of pesticides not approved for use on tobacco in the United States and ensure that domestic tobacco producers are not placed at an unfair disadvantage relative to producers in other countries, we recommend that the Secretary of the Department of Agriculture direct the Administrators of the Agricultural Marketing Service and the Farm Service Agency to periodically review and update the pesticides for which they set residue limits and test imported and domestic tobacco. We provided copies of our draft report to EPA and USDA for review and comment. In commenting on the draft, EPA officials said we accurately characterized the agency’s risk assessment process for pesticides used on tobacco, and USDA officials agreed with our recommendation to periodically review and update the pesticides for which the department sets residue limits and tests tobacco. USDA officials said they plan to annually review and update the testing program for tobacco. We conducted our review from May 2002 through March 2003 in accordance with generally accepted government auditing standards. Our scope and methodology are discussed in appendix I. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time we will send copies of this report to the Administrator, EPA; the Secretary of Agriculture; and other interested parties. We will make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report are listed in appendix V. This report provides information on (1) the pesticides commonly used on tobacco and the potential health risks associated with them; (2) how the Environmental Protection Agency (EPA) assesses and mitigates health risks associated with pesticides used on tobacco; and (3) how, and the extent to which, EPA, U.S. Department of Agriculture (USDA), and other federal agencies regulate and monitor pesticide residues on tobacco. In addition, this report provides information on the regulatory residue limits adopted by three countries that are significant importers of tobacco grown in the United States. To identify the chemicals commonly used on tobacco, we reviewed pesticide-use databases developed by the National Center for Food and Agricultural Policy (NCFAP), a nonprofit research organization, under a cooperative agreement with USDA. These databases summarized national use of 235 pesticides on 87 food and nonfood crops for the period 1990 though 1998. These databases, compiled from more than 130 federal and state surveys and reports, include pesticide use on cropland in the coterminous 48 states and do not include new pesticides approved by EPA since 1997. We also reviewed data from national surveys conducted in the 1990s by the U.S. Geological Survey and USDA and from several tobacco- producing states—Kentucky, North Carolina, Tennessee, and Virginia. In total, 53 pesticides were identified as being used on tobacco in one or more of the surveys. Of these, 37 were identified in one or more of the surveys that included national data, and we refer to this latter group as the pesticides that were commonly used on tobacco in the United States during the 1990s. To identify the adverse health effects associated with these 37 pesticides, we collected and reviewed relevant human health risk assessments prepared by EPA’s Office of Pesticide Programs. Where such assessments were not available, we reviewed documents from academic experts who maintain a database on pesticides and other toxic chemicals for USDA, and other programs within EPA. In addition we interviewed, and reviewed reports prepared or recommended by, experts on the human health effects of exposure to pesticides and other toxins at the National Cancer Institute, the National Institute of Environmental Health Sciences, the National Center for Environmental Health, Johns Hopkins Bloomberg School of Public Health, and the Institute for Cancer Prevention (formerly the American Health Foundation). To determine how EPA assesses and mitigates potential health risks from pesticide residues on tobacco, we reviewed agency policies and procedures on identifying the levels of pesticide residues on tobacco and the related health risks, and we interviewed EPA officials in the Office of Pesticide Programs who perform these tasks. In addition, we examined in detail how EPA implemented its policies and procedures for 13 of the 37 pesticides commonly used on tobacco. That is, we reviewed pesticide residue studies submitted to EPA and EPA’s evaluations of pesticide residues and their potential health effects conducted as part of the pesticide registration process under the Federal Insecticide, Fungicide, and Rodenticide Act for 1,3-D, acephate, chlorpyrifos, diazinon, disulfoton, endosulfan, ethoprop, ethephon, maleic hydrazide, metalaxyl, methidathion, pebulate, and pendimethalin. We focused primarily on those pesticides for which EPA had completed registrations between 1994 and 2002. We did not independently evaluate the validity or scientific merit of the studies that EPA relied upon to reach its conclusions. To determine the extent to which EPA, USDA, and other federal agencies regulate and monitor pesticide residues on tobacco, we met with cognizant officials and reviewed authorizing legislation, regulations, and documentation on how programs related to pesticide residues on tobacco are implemented. In addition, we analyzed USDA data on tobacco production, imports, and residue-testing results. We also interviewed academic and tobacco industry experts and reviewed residue data collected by North Carolina State University. To provide information on other countries that have adopted regulatory limits on pesticide residues, we reviewed articles by academic experts on the international regulation of pesticides on tobacco. We provide information on three major importers of U.S. tobacco—Germany, Italy, and Spain—as examples of regulatory approaches in other countries, focusing on the residue limits they set. We did not examine how, or the extent to which, these countries monitor or enforce their pesticide residue limits. We updated and clarified the information on the three countries’ residue limits provided in the articles with information from the Cooperation Centre for Scientific Research Relative to Tobacco (CORESTA), an international tobacco research organization, and officials responsible for oversight of pesticides and tobacco in Germany and Spain. To identify countries that import U.S. tobacco, we extracted data from the United States International Trade Commission’s interactive tariff and trade database on the countries that received U.S. flue-cured and burley tobacco from 1996 through 2001. We conducted our review from May 2002 through March 2003 in accordance with generally accepted government auditing standards. Most of the pesticides used on tobacco are widely used on food and other crops. As shown in table 6, tobacco use of most pesticides represents a small portion of the total use. However, for some pesticides— dimethomorph, fenamiphos, flumetralin, maleic hydrazide, mefenoxam, and sulfentrazone—most of the use in 1994 through 1998 was on tobacco. Several countries that are major importers of U.S. tobacco have adopted regulations for specific pesticide residues on various forms of tobacco. For example, Germany’s residue limits (maximum residue levels) apply to finished products, such as cigarettes, whereas limits in Italy and Spain generally apply to tobacco leaf. Although they have somewhat different regulatory approaches to pesticides on tobacco, Germany, Italy, and Spain differ from the United States in that they regulate residues of pesticides approved for use on tobacco in addition to regulating some residues of pesticides not approved for use on tobacco. According to 2003 data from CORESTA—the Cooperation Centre for Scientific Research Relative to Tobacco—Germany, Italy, and Spain have residue limits on tobacco for 79, 100, and 58 pesticides, respectively. Of the 37 pesticides commonly used on tobacco in the United States during the 1990s, Germany has limits for 20, Italy for 24, and Spain for 21 (see table 7). None of these countries have adopted limits for 7 of the pesticides commonly used on U.S. tobacco during the 1990s. In addition to residue limits for approved pesticides, Germany and Italy collectively have residue limits on tobacco that apply to 15 of the 20 pesticides not approved for use in the United States that USDA monitors in its tobacco testing programs. The 15 pesticides are aldrin, dieldrin, chlordane, cypermethrin, DDT, DDE, endrin, ethylene dibromide, formothion, heptachlor, heptachlor epoxide, hexachlorobenzene, methoxychlor, permethrin, and TDE. Further, where no specific pesticide limits are set for tobacco products in Germany, residues of pesticides not approved for use on tobacco in Germany may be present in amounts that are not likely to pose a risk to human health. In Italy and Spain, residues of pesticides not approved for use on tobacco in those countries must not exceed the limit of detection, generally between 0.01 ppm and 0.05 ppm. We did not examine how, or the extent to which, these countries monitor or enforce their pesticide residue limits. From 1971 to 2000, researchers at the North Carolina State University (NCSU) collected limited data on the residues of various pesticides on some domestically grown tobacco. NCSU data for the 1990s included six pesticides for which Germany, Italy, or Spain have residue limits. The domestic tobacco tested by NCSU identified residue levels that were (1) consistently below the lowest limit for endosulfan, flumetralin, and metalaxyl; (2) generally above the limit for maleic hydrazide; and (3) more varied for fenamiphos and the dithiocarbamates—a class of fungicides that includes mancozeb. For example, in 1995 residue levels on flue-cured tobacco were below the lowest limit for fenamiphos—0.02 ppm adopted by Spain—but exceeded this limit in 1992 and 1994. Also, in 1991 and 1997 residue levels of dithiocarbamates were generally lower on burley tobacco than limits in Germany and Italy—50 ppm and 10 ppm, respectively—but exceeded Spain’s limit of 0.05 ppm. The USDA Farm Service Agency (FSA) tests the portion of domestically grown flue-cured and burley tobacco that becomes loan stock (surplus tobacco) under USDA’s tobacco price support program for the 20 regulated pesticides. To receive price supports, tobacco must be sold in USDA-approved auction warehouses and inspected by USDA graders. At the auction warehouse, each individual lot of tobacco is sold to the highest bidder. If the highest bid is below the government’s loan (support) price, or no bid is received, the stabilization cooperative makes loans to growers whose tobacco does not bring the minimum price at auction with funds borrowed from USDA’s Commodity Credit Corporation. The growers’ tobacco, which is consigned to the cooperative as loan stock, is pledged as collateral to the credit corporation for the money borrowed. The cooperative receives, processes, stores, and later sells the loan stock tobacco when demand increases, with the proceeds used to repay the credit corporation loan, plus interest. An alternative to traditional auction marketing—growers contracting to sell their tobacco directly to manufacturers—also reduces the amount of tobacco going to auction and thus potentially to loan stock. For the most recently completed marketing season—growing year 2001—20 percent of domestic tobacco was sold at auction, and 2.4 percent became loan stock. After auction, the tobacco is processed in distinct “runs” of approximately 100,000 pounds, when the tobacco is stemmed, redried, finely chopped, and placed into boxes holding approximately 440 pounds. The tobacco cooperative randomly selects one box from each run and draws a one-pound sample of tobacco for pesticide testing at USDA’s laboratory. If the sample exceeds any of the residue limits, the box of tobacco from which it came is destroyed. The adjacent boxes, processed before and after the original box, are also sampled. The testing continues with adjacent boxes of tobacco until the samples are found to be below the residue limits. Because the samples are drawn by the tobacco cooperatives, FSA resamples 5 percent of the tested inventory (or 25 samples, whichever is less) for oversight purposes each year. Historically a substantial portion of domestic tobacco was sold at auctions in conjunction with the tobacco price support program, but in recent years most domestic tobacco has been sold under contract directly to cigarette manufacturers—approximately 80 percent in 2001. Officials from USDA and tobacco associations told us the market has changed because manufacturers asserted that auction markets were not providing quality tobacco with the characteristics they required. The recent, dramatic shift in the way tobacco is marketed—with a 60 to 80 percent reduction in the amount of tobacco at auction—has decreased the amount of domestic tobacco that potentially becomes loan stock and thus is tested. Although the amount of domestically produced tobacco that becomes loan stock has varied greatly, an average of 13 percent became loan stock over the past decade. In 2001, only about 2 percent of domestically produced tobacco has become loan stock, reducing the amount of domestic tobacco subjected to pesticide testing. The officials with whom we spoke said that this change is not likely to be reversed. In addition to those named above, Nancy Crothers, Laura Gatz, Terrance Horner, Richard Johnson, Ilga Semeiks, Tina Smith, and Cheryl Williams made key contributions to this report.","Pesticides play a significant role in increasing production of tobacco, food, and other crops by reducing the number of crop-destroying pests. However, if used improperly, pesticides can have significant adverse health effects. GAO was asked to (1) identify the pesticides commonly used on tobacco crops and the potential health risks associated with them, (2) determine how the Environmental Protection Agency (EPA) assesses and mitigates health risks associated with pesticides used on tobacco, and (3) assess the extent to which federal agencies regulate and test for pesticide residues on tobacco. In the 1990s, domestic growers commonly used 37 pesticides approved for use on tobacco by EPA. Most of these pesticides were also used on food crops. When used in ways that deviate from conditions set by EPA, many of these pesticides can cause moderate to severe respiratory and neurological damage--and may result in death. Moreover, animal studies suggest that some of these pesticides may cause birth defects or cancer. Under its pesticide registration program, EPA evaluates toxicity and other data to assess health risks to workers and the public from exposure to pesticides--and risks to smokers from exposure to residues in smoke. These assessments have identified a range of risks that required such mitigation as limiting where and how the pesticide may be used, prohibiting use in certain states, and requiring workers to wear respirators and chemical-resistant clothing. On the other hand, EPA has concluded that low levels of residues in tobacco smoke do not pose short-term health concerns requiring mitigation. EPA does not assess intermediate or long-term risks to smokers because of the severity of health effects linked to use of tobacco products themselves. While EPA regulates the specific pesticides that may be used on tobacco and other crops and specifies how the pesticides may be used, it does not otherwise regulate residues of pesticides approved for use on tobacco. The U.S. Department of Agriculture (USDA), however, is required by the Dairy and Tobacco Adjustment Act to test imported and domestic tobacco for residues of pesticides not approved by EPA for use on tobacco that federal officials believe are used in other countries. By helping ensure that other countries do not use highly toxic pesticides that U.S. tobacco growers may not use, federal regulation of pesticide residues on tobacco addresses trade equity as well as health and environmental issues. However, USDA has not reevaluated the list of pesticides for which it tests since 1989, even though EPA has cancelled tobacco use for over 30 pesticides since then.",govreport
"User financing—in the form of user fees, user charges, or excise taxes on certain products—is one approach to financing federal programs or activities. User fees assign part or all of the costs of these programs and activities—the cost of providing a benefit that is above and beyond what is normally available to the general public—to readily identifiable users of those programs and activities. Because user fees represent a charge for a service or benefit received from a government program, payers may expect a tight link between their payments and the cost of providing services and have expectations about the quality of the related service. For the purposes of this guide we use the term user fees to include user fees as well as excise taxes with a “user pays” element. Examples include those imposed on motor fuels, tires, and heavy vehicles that accrue to the Highway Trust Fund, from which Congress appropriates funds for federal highway and transit programs. Similarly, Federal Aviation Administration (FAA) activities are funded in part by excise taxes assessed on airline tickets, aviation fuel, and certain cargo. A highway toll may also be considered a user fee because it is related to the specific use of a particular section of highway. The boundaries between fees and taxes are not always clear and the tradeoffs among design elements presented in this guide can be relevant to both. In general, a user fee is related to some voluntary transaction or request for government goods or services above and beyond what is normally available to the public, such as a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station. Taxes, on the other hand, arise from the government’s sovereign power to raise revenue and need not be related to any specific benefit, and payment is not optional; when Congress imposes taxes, it need not consider benefits bestowed by the government on an individual but may base taxation solely on an individual’s ability to pay. The Supreme Court has ruled that a tax is “an enforced contribution to provide for the support of government.” The legal distinction between a “fee” and a “tax” can be complicated and depends largely on the context of the particular assessment. Whether a particular assessment is statutorily referred to as a tax or a fee is never legally determinative. Instead, federal courts will examine the structure and the context of the assessment’s application. Fees vary in the degree to which they can be considered truly voluntary because the availability of reasonable substitutes varies. For example, to enter certain national parks, one must pay an entrance fee. The fee is voluntary to the extent that there are alternatives to national parks for outdoor recreation, for example, state, county, or private parks and recreation facilities. In contrast, people who want to operate radio stations have no similarly close alternative and must obtain a license from the Federal Communications Commission and pay a fee for that license. Agencies derive their authority to charge fees either from the Independent Offices Appropriation Act of 1952 (IOAA) or from specific statutory authority. IOAA provides broad authority to assess user fees or charges on identifiable beneficiaries by administrative regulation. User fees assessed under IOAA authority must be (1) fair and (2) based on costs to the government, the value of the service or thing to the recipient, public policy or interest serviced, and other relevant facts. Fees collected under this authority are deposited in the general fund of the U.S. Treasury and are generally not available to the agency or the activity generating the fees. Unless otherwise authorized by law, IOAA requires that agency regulations establishing a user fee are subject to policies prescribed by the President. OMB provides such guidance to executive branch agencies under this authority through Circular No. A-25. The Circular establishes federal guidelines regarding user fees assessed under the authority of IOAA and other statutes, including the scope and types of activities subject to user fees and the basis upon which the fees are set. It also provides guidance for executive branch agency implementation of fees and the disposition of collections. In many instances, Congress has provided specific authority to federal agencies to assess user fees—in agency authorizing or appropriations legislation, for example. Legislation authorizing a user fee may enact a specified rate or amount to be assessed or may stipulate how the fee is to be calculated, such as a formula; the method and timing of collection; and the authorized uses of the fee collections, which may be broadly or narrowly defined. The amount of a fee may be set to partially or fully recover costs or may be set according to some other basis (e.g., market value). Specific authorizing statutes may even grant the agency broad discretion to set and revise fee rates without Congressional approval—that is, solely through the regulatory process—based on various factors. Specific user fee statutes should be construed consistent with IOAA and OMB Circular No. A-25 to the extent possible as part of an overall statutory scheme. Of the four components of implementing a user fee, setting the rate of the fee is perhaps the most challenging because determining the cost of the service is often quite complex and requires consideration of a range of issues (see fig. 1). In theory, the extent to which a program is funded by user fees should generally be guided by who primarily benefits from the program, though, as we discuss later, the extent to which a program benefits users or the general public is not usually clear cut. This is known as the beneficiary- pays principle. Under this principle, if a program primarily benefits the general public (e.g., national defense), it should be supported by general revenue, not user fees; if a program primarily benefits identifiable users, such as customers of the U.S. Postal Service, it should be funded by fees; and if a program benefits both the general public and users, it should be funded in part by fees and in part by general revenues. As shown in figure 2, the beneficiary-pays principle can promote equity by assigning costs to those who both use and benefit from the services. First, as shown on the left side of figure 2, the extent to which a program provides benefits to the general public versus users should guide the proportion of total program costs that are paid for by general revenues versus user fees. Second, as shown on the right side of the illustration, the cost of providing the benefits to each user should be determined and assigned through user fees. Figure 3 depicts selected federal programs funded according to this principle. Secondary beneficiaries of a program generally are not considered in this examination. For example, consumers of new prescription drugs are secondary beneficiaries of prescription drug reviews, which provide a primary benefit to the drug sponsors. Similarly, fees should be charged to the direct user, even if that payer then passes the cost of the fee on to others. The entities that bear the burden of a fee—what economists call the incidence of the fee—are not necessarily those who legally must pay the fee. Fees may be passed along to others through price changes, as the fee may change the price of one good relative to another and therefore affect the allocation of resources. How prices change—and therefore the incidence of the fee—depends on (1) how responsive market supply and demand are to price changes (price elasticity) and (2) market conditions that affect an entity’s ability to control prices. The ability of payers to pass along the fee does not necessarily change the economic efficiency effects of the fee but can affect its perceived equity and the transparency of the fee. User fees set under the beneficiary-pays principle can also enhance economic efficiency by ensuring that resources are allocated to the most highly valued use, as users make adjustments to their consumption of the service based on their costs and benefits. For example, setting a Food and Drug Administration (FDA) fee for new prescription drug applications too high could discourage the development of new drugs. On the other hand, setting the fee too low induces overuse of agency resources and services. To the extent a fee is voluntary, user fees based on a program or service’s total costs may also act as a market test and can help ensure that the benefits of the program are at least as great as its costs. Under the beneficiary-pays principle, the government may wish to charge some users a lower fee or no fee to encourage certain behaviors that provide a public benefit, such as advancing a public policy goal (e.g., promoting free trade). For example: Potential profits from the development of “orphan” drugs—those that treat rare diseases—are limited by the small size of their market, and therefore drug companies may be reluctant to invest in them; such drugs are exempt from the FDA prescription drug application fee to encourage their development. Imports from certain least developed countries are exempt from CBP’s Merchandise Processing Fee (MPF), which both addresses their ability to pay and may help promote their economic development. DHS officials noted that in other cases MPF exemptions have been used as a tool to negotiate free trade agreements; an exemption may be extended as a concession for the reduction of import tariffs on certain U.S. goods. Low-income taxpayers are exempt from the $150 application fee for the Internal Revenue Service’s Offer in Compromise (OIC) program—a program for taxpayers unable to fully pay their tax liabilities—to make the program more accessible and encourage participation. Although user fees can promote one facet of equity—the beneficiary-pays principle—they may run contrary to another facet—the ability-to-pay principle. To the extent that user fees are a substitute for funding through general tax revenues, they may be less progressive than taxes and therefore shift additional burden on those less able to pay. Fees (or taxes) that are proportionally more burdensome for low-income than high- income individuals are said to be regressive. To address this concern, the design of a fee may consider the ability of a user to pay, for example, by exempting low-income users or scaling fees by some measure of ability to pay. In certain cases user fees may not be the most equitable, efficient option for funding a program. Examples include fees for government programs intended to provide a benefit based on need or merit, such as the Department of Housing and Urban Development’s Section 8 housing voucher program (which assists low-income families, including the elderly and the disabled); competing sectors within an industry (e.g., modes of transportation) if the other sectors are not subject to similar fees; and new industries that face high initial costs and may need government support until they can become self-sustaining. Abrupt imposition of new or substantially increased user fees could have unintended consequences. For example, in May 2007, U.S. Citizenship and Immigration Services (USCIS) published a new fee schedule that raised fees effective July 2007 for immigrant and naturalization benefit applications by an average of 88 percent. Large numbers of applicants filed for benefits before the increase took effect, which contributed to a surge that exacerbated USCIS’s backlog of applications. In cases like this, transitional measures such as grandfather clauses or phasing in increases might help address concerns about the adverse effects of the abrupt imposition of a fee, while implementing the beneficiary-pays principle gradually. However, as is the case with exemptions, the benefits of transitional measures must be balanced with the likelihood of reduced efficiency and equity gains and increased administrative costs. Furthermore, delaying a fee increase may also have adverse effects on an agency’s operations. In some cases, new or increased user fees may also cause decreases in the value of privately owned assets. We have previously reported on how user fees can result in such capital losses, as well as ways of determining when, how much, and to whom compensation for these losses should be paid. Although the beneficiary-pays principle is a useful guideline for assigning costs, determining a program’s beneficiaries and the extent to which a program benefits users, the general public, or both is not usually clear cut. For example, in prior work we found that National Park Service (NPS) staff reported that they did not want to raise federal grazing fees assessed on ranchers, even though these fees were lower than fees charged by other government agencies and private landowners, in part because grazing not only benefits ranchers but also benefits parks—for example, by controlling vegetation. In another example, USDA food safety inspections benefit the meat and poultry industries as well as the general public: inspections improve consumer confidence in the safety of those food products and the companies can advertise their products as USDA inspected, which may enhance the perceived quality. The inspections also benefit the general public by preventing the spread of communicable diseases carried by meat and poultry products, but it is difficult to quantify that public health benefit and consequently the extent to which the program should be covered by user fees versus general revenues. Fees can be practical, equitable, and efficient only when the users can be identified and charged for the service or program. Sometimes, however, it may be difficult to identify specific users or to collect fees from them, making it difficult to follow the beneficiary-pays principle. NPS, which can identify and verify some users, also collects fees from air tour operators that fly over certain national park units. However, in prior work we found that because NPS could not verify air tour activity over the parks, it relied on operators to voluntarily report their air tours and pay the required fees. Some tour operators paid and some did not, resulting in inequities and less-than-owed fee collections. Fee collections should be sufficient to cover the intended portion of program costs over time. Although the costs of any particular program may rise or fall, there is a general concern that fees may not keep pace with increases in costs because of factors such as inflation. For example, in recent testimony we noted that revenues to support federal highway and transit funding are eroding in part because the federal motor fuel tax, which is set at the fixed amount of 18.4 cents per gallon, has not been increased since 1993. Therefore, the purchasing power of fuel tax revenues has eroded. To address these concerns, OMB Circular No. A-25 directs agencies to set fees as percentages of some appropriate base rather than fixed dollar amounts whenever possible. However, fees set at a percentage rate of some value (the basis) will not remain aligned with program costs if the value of the basis does not rise and fall in line with changes in the program costs. For example, in recent years the Harbor Maintenance Fee (HMF), which is assessed at a rate of 0.125 percent of the value of commercial cargo, has resulted in substantially higher collections than spending because the growth in the volume and value of commercial cargo has exceeded increases in harbor maintenance spending. As a result, HMF collections exceeded expenditures by over $506 million in fiscal year 2007. Thus, regardless of whether a fee is set at a flat dollar amount or a percentage rate, regular reviews and updates of the fee are necessary to ensure that the fee remains aligned with program costs (see final section of this guide, “Reviewing User Fees: Providing Information on Costs and Program Activities and Facilitating Stakeholder Support”). On the other hand, fee payers and other stakeholders may be concerned that, over time, the portion of program costs covered by general revenues will decline. This concern may be well founded; in prior work on fee- reliant agencies, we found that increased user fee collections sometimes appeared to have replaced appropriated funds. This substitution can be a particular concern when new or increased fees are assessed to augment total funding for a service or program. For example, part of the rationale for FDA’s Prescription Drug User Fee Act (PDUFA) fees was to increase FDA resources for—thereby decreasing the processing time of—new drug applications. To assuage fee payers’ concerns that fees might not be used to increase the level of an existing service—but instead simply be used as a substitute for funding from general revenues—a fee statute may provide a kind of maintenance of effort (MOE) requirement in terms of general revenues funding. For example, in any year, FDA may only collect and spend PDUFA fees when Congress has appropriated from general revenues a certain amount specifically for FDA new drug application reviews. Such provisions, however, can have unintended consequences. In prior work we reported that according to FDA officials the spending baseline for the drug review program reduced available resources for other activities, such as reviewing over-the-counter and generic products and inspecting medical product manufacturing facilities. Increased reliance on fees as a source of funding may lead to a misalignment between the beneficiaries of a program and the sources of funding for the program and can have significant implications for agencies. Assigning costs requires (1) determining how much a program costs and (2) determining how to assign program costs among different users. As the beneficiary-pays principle is useful in guiding decisions about how program costs are divided between the general public and users, it can also guide how program costs are assigned among users. Basing fees on the cost of providing the program or service from which a user benefits enhances equity, as measured by the beneficiary-pays principle, as each user pays for the cost of services actually used. As discussed above, fees set following the beneficiary-pays principle also generally promote economic efficiency, as users take into account the “price” of a service when deciding how much of the service to consume. To set fees so that total collections cover the intended share of program costs, a reliable accounting of total program cost is important. To obtain such an accounting, it is necessary to determine which activities and costs should be included and which should not. Unless the authorizing legislation specifies costs that should be included or excluded, agencies should follow OMB guidance. OMB Circulars No. A-25 and No. A-11 instruct agencies to include all direct and indirect costs when determining full cost, including but not limited to personnel costs, including salaries and benefits such as medical insurance and retirement; physical overhead; consulting; material and supply costs; utilities; insurance; travel; rents or imputed rents on land, buildings, and equipment; management and supervisory costs; costs of collecting and enforcing fees; research; establishment of standards and regulation; and imputed costs. In prior work we found inconsistent implementation of this guidance. Some fees designed to cover the full cost of a program include all direct and indirect costs, but others do not. The power marketing administrations, for example, include all direct and indirect costs—including the cost of employee retirement benefits paid by the Office of Personnel Management—when setting their electricity rates. On the other hand, in recent work, we found that USDA’s Animal and Plant Health Inspection Service (APHIS) did not include certain indirect and imputed costs when calculating the Agricultural Quarantine Inspection (AQI) fee rate. Fees should also be set and adjusted to cover the intended share of costs over time, which means agencies must project and consider future program costs. For example, in 2006 USDA’s Food Safety and Inspection Service set fee rates through fiscal year 2008 for its meat, poultry, and egg products overtime inspection services. The fee rates for each year included adjustments for inflation and employee pay raises, so that future fee collections were projected to grow with program costs. When more than one agency implements—and therefore incurs costs related to—a fee program, those agencies should work together to agree on a method for estimating future costs and collections. APHIS and CBP, for example, used different forecasting assumptions related to the AQI fees. In response to our recent work, the agencies now use common assumptions. Whether fee rates will be set using average cost or marginal cost is also an important consideration when setting fees. Setting fees at a rate equal to the marginal cost of providing the service or product to the user maximizes economic efficiency. In part because it is often difficult to measure marginal cost, fee rates are sometimes set based on average cost. The AQI fees are intended to cover total program costs; to set these fees, APHIS projects program costs for different inspection types (e.g., air passenger, commercial aircraft, and commercial vessels) and divides each by the total projected number of each type of payer. That is, each airline pays the same fee per arrival to cover the costs related to inspecting aircraft. When marginal costs are measurable but are low relative to the fixed costs of the program, setting the fee at marginal cost will lead to collections less than total costs. In these cases, users may be charged more than marginal costs or the program may be funded in part through general revenues. One option is to create a two-part fee consisting of (1) a flat fee to cover fixed costs and (2) a usage-based fee to cover marginal costs. For example, the marginal cost of providing electricity (i.e., operating power plants and maintaining transmission lines) is small compared with the costs of building power plants and transmission lines; thus, electricity consumers could be charged a flat monthly charge plus a charge that would vary based on their consumption. If a fee is to recover the costs associated with an agency program or service or some portion thereof, it is critical that agencies record, accumulate, and analyze timely and reliable data relating to those costs, consistent with applicable accounting standards. Many agencies, however, lack reliable cost data. For example, we previously reported that DHS’s U.S. Immigrations and Customs Enforcement lacked adequate cost data to determine the portion of costs related to international air passenger immigration inspections, a fee-funded activity. Because generating and maintaining reliable cost data can be expensive, agencies must consider the costs of implementing, maintaining, and using financial management systems when determining the level of cost detail they need. Recognizing this, OMB Circular No. A-25 notes that program cost should be determined or estimated from the best available records of the agency and that new cost accounting systems need not be established solely for this purpose. Still, unreliable cost information can skew fee-setting decisions, so management needs reliable cost information to ensure that user fees recover the intended share of costs. As such, each agency should determine the appropriate level of detail for its cost accounting processes and procedures. If the cost of providing a service varies for different types of users, the fee may vary (a user-specific fee) or be set at an average rate (a systemwide fee). All other things being equal, user-specific fees promote equity and economic efficiency because the amount of the fee is closely aligned with the cost of the service. Systemwide fees may be higher or lower than the actual cost of providing a service to certain types of users. As a result there may be cross-subsidies across users. For example, we recently reported that FAA’s current funding structure raises concerns about equity and efficiency because users pay more or less than the costs of the air traffic control services they receive and therefore may lack incentives to use the national airspace system as efficiently as possible. Because user- specific fees require agencies to track the costs of providing service to different users, these fees are often more costly to administer than systemwide fees. Fees charged to vessel operators for overtime immigration inspections are user specific. The fee is only assessed when the vessel operator or its agent requests an overtime inspection. The amount of the fee varies depending on the number and pay grade of the inspectors and the amount of time spent on the inspection. We recently reported that this structure increases the fee’s administrative costs. According to CBP estimates, the cost of processing and billing the fee was 26 percent of related collections in fiscal year 2007. In contrast, the commercial vessel AQI fee is a systemwide fee. Vessel owners/operators pay the $492 fee regardless of whether or not the ship is actually inspected by an agricultural specialist and regardless of the agricultural risk posed by the vessel. In managing these types of trade-offs between the benefits and drawbacks of user-specific versus systemwide fees, several factors may be important to consider. 1. The purpose of a program: Systemwide fees may promote a policy goal such as helping to support national systems. For example, despite variation in the amount of maintenance dredging needed at different ports, the HMF is imposed uniformly at all ports at which shipments are subject to the fee in order to support a national port system. This means that users of naturally deep draft ports that require little dredging (e.g., Seattle) in effect subsidize users of shallower and river ports (e.g., New Orleans). A user-specific fee may be more desirable if the fee is seen as a way to support individual entities or locations or when maximizing economic efficiency outweighs the desire to support a national system through the imposition of a uniform fee. 2. The amount of the fee: If the fee is small relative to other costs that a user faces, it may be less important to have a user-specific fee with different rates. For example, several ships’ agents we spoke with noted that carriers rarely question federal vessel inspection fees, in part because the fees are such a small part of a commercial vessel’s overall expenses that they do not affect business decisions. 3. The amount of cost variation among users: If there are numerous different groups of users and a small cost variation among them, the efficiency gains of a user-specific fee may be overwhelmed by the added administrative costs. Conversely, if a program has a relatively small number of user groups and the cost of providing the service to those groups differs significantly, then user-specific fees might be both beneficial and feasible. Some fees include provisions for exemptions, waivers, and caps to promote certain policy goals and these provisions affect how program costs are allocated among users. As discussed previously, exemptions can promote one kind of equity by factoring the users’ ability to pay into the fee rate formula. However, as with systemwide fees, such provisions may also increase cross-subsidies between users. Exemptions and caps may also raise equity and efficiency concerns. For example, shipments into certain ports are not subject to the HMF, which may make these ports less costly to use than ports that are subject to the HMF. Shippers may have an incentive to use a port that might otherwise not be the most cost-efficient port to use, so the HMF as designed may create competitive advantages and disadvantages among ports. Stakeholders at HMF ports argued that the exemption is inequitable and can diminish a port’s ability to compete. For example, officials at the port of Boston told us that they believe that one importer moved its operations from Boston to the port of Quonset/Davisville in Rhode Island where shipments are not subject to the HMF to avoid paying the fee. Similarly, officials from ports located near international borders reported that the HMF disadvantages them relative to nearby foreign ports. Seattle port authority officials consider the HMF to be a “punitive assessment” because they said it decreases Seattle’s competitiveness against nearby Canadian ports (which do not charge the fee). The officials noted that the port of Vancouver actively promotes itself as not charging the HMF and said this partly explains why the port of Vancouver is growing faster than the Seattle port. Reliably accounting for the costs and benefits associated with such provisions is important in order to ensure that these provisions are achieving the intended results. In fully-fee-funded programs, if some users are exempt from paying fees, total fee collections cannot cover total program costs unless other users pay a higher fee to cover the costs of the exempted users. For example, commercial and private vessels are both subject to agricultural quarantine inspections, but private vessels are exempt from the AQI fees. In prior work we found that the costs of these private vessel inspections are included in the AQI fee charged to commercial vessels. Thus commercial vessels are paying for the cost of inspecting private vessels. An alternative to cross-subsidization would be to pay for the costs of providing services to exempt entities through general revenues. In this way the policy goal is attained and the general public, rather than other users, make up the cost of exempt users or discounted fees. Finally, like user-specific fees, fee exemptions and caps can increase administrative costs to the agency because the agency must carefully track when fees are due and from whom rather than simply charging everyone. Commercial vessel operators are generally assessed a $437 customs inspection fee when they arrive at port, but the fee is capped at $5,955 per calendar year. This is approximately 13.6 payments. This means that CBP has to calculate the point at which the vessel has reached the cap and is no longer subject to the fee. We recently reported that the cap increases CBP’s administrative costs and the potential for errors. This issue was particularly problematic in 2007 because a fee increase took effect on April 1, 2007, so vessels arriving before and after that date paid two different rates. Since the fee cap applies to payments received within a calendar year, it was even more difficult for CBP to calculate the total amount paid and determine if a vessel had reached the cap. The primary challenge in determining when and how to collect a fee is striking a balance between ensuring compliance and minimizing administrative costs (see fig. 4). Fees can be collected (1) at the point of sale before the service is provided, as airline passenger fees are paid when a ticket is purchased; (2) at the point of service, as when visitors enter a national park; or (3) after the service has been provided, for example when the agency bills the user for a service, as with overtime vessel inspections. Collecting the fee at the point of sale or point of service may decrease administrative costs since billing becomes unnecessary. However, point-of-sale/point-of- service collections do not always ensure low administrative costs since other practices can considerably complicate a point-of-sale/service collections system. For example, commercial vessel customs inspection fees are collected by inspectors at the time of inspection, usually in the form of a check. We recently reported that because these collections are not automated, they are administratively costly. When an agency collects fees on the spot rather than billing for services (e.g., the national parks system), the agency may have less work to do in tracking who has paid and who has not, thus reducing administrative tasks associated with ensuring compliance. However, internal controls for fee collections are still necessary. In some cases, collecting the fee at the point of service would present challenges that make doing so impractical. For example, if CBP collected fees from international air passengers at the airport, as is the practice in some other countries, inspection wait times for passengers would likely increase. For some fees, users are billed for services. This may create additional administrative costs since agency billings for services provided can add an extra step to the process. In some instances agencies are able to reduce their cost of collecting fees by using electronic payments or lockboxes or enabling users to prepay their fees, thus reducing payments from many to perhaps one time per year. Commercial trucks entering the United States, for example, are subject to a $5.25 AQI fee, payable upon arrival. However, the owner or operator of the truck can prepay the AQI fee annually and receive a truck transponder that covers all entries for the calendar year, which enables CBP to inspect the truck and then wave the driver through, rather than taking the time to collect the fee at each crossing. This prepayment reduces the administrative costs for both the agency, which may collect an annual payment instead of payments for every inspection, and the payer, who can make one payment per year rather than paying at each crossing. In some cases, it makes sense for the agency to coordinate the collection or audit function with a third party. Specifically, when an entity or industry (e.g., shippers) is assessed multiple user fees there may be opportunities for one agency to collect on behalf of others. For example, HMF collections are used by the Corps for harbor operations and maintenance costs, but the fee is collected by CBP because CBP has the administrative structures in place to collect other fees and duties assessed on the value of imported goods. It is less costly for the government and payers of the fee for CBP to collect the fee as part of the formal entry process than it would be for the Corps or another entity to establish a new collections process. This cost saving occurs because CBP already values cargo for the assessment of duties so there is no duplication of effort. We recently reported that customs brokers with whom we spoke said that this system for collecting the HMF assessed on imported goods works well, is efficient, and imposes minimal administrative costs. It may also make sense for agencies to coordinate fee collections when multiple federal agencies administer similar programs. For example, the Bureau of Land Management (BLM) manages grazing programs operated on both BLM and Department of Energy lands. Similarly, consolidating the audit function of related fees within one agency or department can lessen the administrative costs of auditing them. For example, the audit function for the customs, immigration, and AQI user fee remittances by air carriers was consolidated under a memorandum of understanding between APHIS, the former U.S. Customs Service, and the former Immigration and Naturalization Service before the three related inspection functions were consolidated under CBP. In some instances, as when CBP collects the HMF on behalf of the Corps, the agency is compensated for its cost of collecting the fee. In some cases, a nonfederal entity such as a state government or private sector enterprise has an existing infrastructure that can collect the fees. Passenger inspection fees, for example, are collected by airlines and cruise lines along with ticket fares; the collections are then remitted to CBP. However, when a private party takes over the collection function, ensuring compliance may become more complicated, contributing to administrative costs. Agencies may use audits to monitor and enforce compliance with the requirement to remit fees. CBP audits airlines and cruise lines to ensure that they are collecting and remitting the inspection fees as required. There are a range of other tools that can encourage compliance in these situations, for example, bond requirements and rewards and penalties. However, we have previously reported that to be effective, rewards and penalties must meet specific criteria, that is, they must provide optimal incentives and must correspond with performance. Congress determines to what extent an agency may access (obligate and spend) fee collections. On the one hand, when the use of fee collections is not dedicated to the related program or agency, Congress has greater flexibility to make decisions about allocating resources and play an active oversight role. While some maintain that the merits of a program, rather than its ability to generate fees, should influence federal funding decisions, dedicating fee collections to the program that generated the fee and giving the agency authority to obligate and expend the fees readily and decide how the collections will be used enhance the agency’s flexibility and ability to respond quickly to changing conditions. Some have suggested that agencies will have less motivation to collect and users to pay if the fees are not credited to the activity that generated the fee. The extent to which this is the case is unclear. Further, this may be dealt with by engaging stakeholders—both in and out of government—to help improve their understanding of the purpose and design of the fee. In designing a fee, Congress has various mechanisms it can use to strike a balance between flexibility and oversight (see fig. 5). Agency use of fee collections is determined by Congress. If fee collections must be annually appropriated to an agency before the agency may obligate and expend such collections, an agency has less independence in using them than fees that are permanently appropriated. Requiring an appropriation increases opportunities for Congressional oversight on a regular basis. Expenditures from the Harbor Maintenance Trust Fund (HMTF), for example, are subject to annual appropriation, enabling Congress to annually determine the level of federal spending on harbor maintenance rather than automatically equating spending with total fee collections. Although the HMTF had a balance of almost $4 billion at the end of fiscal year 2007, the Corps obligated $798 million and $910 million from the fund in fiscal years 2006 and 2007, respectively. The level of spending from the HMTF reflects Congressional priorities, possibly including reduction of the overall federal budget deficit. Some stakeholders said, however, that there is a backlog of harbor maintenance needs and that the misalignment between the amount of fee collections and expenditures undermines the credibility of the fee. Conversely, a fee may be designed to give the agency authority to use collections without additional Congressional action; this design may enable the agency to respond more quickly to customers or to changing conditions. For example, the authorizing statute makes USDA Agricultural Marketing Services (AMS) fees directly available to the agency without further Congressional action. A 1999 USDA report on user fees noted that because AMS’s services are voluntary and because the agency is financed largely through user fees, AMS has a strong incentive to develop services for which the industry is willing to pay. The report also asserts that if AMS did not retain these fees, innovations in service delivery would generate no financial return for the agency. Further, the report stated that expanded agency discretion for the use of fee collections will have the greatest effect in agencies with substantial discretion for adjusting the types and amounts of services they provide. Creating a structure for oversight becomes even more important when agency discretion to use fee collections is expanded. Permanent authority for fee collections also increases agency flexibility. With permanent authority, funds are available until expended, which enables agencies to carry forward unexpended collections to subsequent years and match fee collections to average program costs over more than 1 year. Such carryovers are one way agencies can establish reserve accounts, that is, revenue to sustain operations in the event of a sharp downturn in collections. For programs in which fees are expected to cover program costs and program costs do not necessarily decline with a drop in fee collections, a reserve is important. For example, the AQI fee statute gives APHIS permanent authority to use the collected fees and APHIS maintains a reserve in case of emergency. According to APHIS, the reserve is necessary because the AQI program is funded solely through user fee collections. However, with permanent spending authority, agencies may have less incentive to limit total collections to total costs. Whether a fee program is designated as mandatory or discretionary within the budget context may affect the federal budget process more broadly. Mandatory programs are subject to “pay-as-you-go” (PAYGO) rules if they are in effect. Under such budget rules, increases in mandatory spending or decreases in revenue must be deficit neutral, that is, they must be offset by a decrease in mandatory spending or an increase in revenue. For example, if the rate of the HMF, which is classified as a mandatory governmental receipt, were reduced and total collections decreased, Congress would have to offset the lost revenues to comply with PAYGO rules. This requirement has in the past led to situations in which extensions of expiring fees are used to offset increases in unrelated programs. Programs that are classified as discretionary are affected by applicable discretionary spending limits under the Concurrent Budget Resolution. Because some fees are classified as discretionary spending, they must be considered in discretionary spending calculations. Whether fees are designed so that collections are received directly or on a reimbursement basis also affects agency flexibility. The former offers the advantage of making funds immediately available to an agency, increasing its flexibility to plan and respond to changing conditions. The AQI fee collections are shared between CBP and APHIS, but only APHIS has authority to use its portion of the collections directly. According to APHIS, having the funds automatically available is useful because it facilitates the ability to keep pace with workload demands and respond quickly to unplanned needs. CBP’s portion of the AQI fee collections—as well as its portion of the Immigration User Fee—is set up as a “reimbursable account,” wherein the agency must spend other appropriations and apply for reimbursement. This design means it takes longer for CBP to get fee collections than for APHIS. According to CBP, this “reimbursable” arrangement results in less flexibility and a greater administrative burden. Similarly, issues may occur when a program has large up-front costs (e.g., to develop an information technology system or purchase a capital asset). Fees collected over subsequent years to cover those costs would need to be either transferred to the U.S. Treasury’s general fund or “saved” for future capital expenditures, depending on the statutory authority, because they cannot be used to reimburse appropriations made in a prior fiscal year. How broadly or narrowly Congress defines the authorized uses for the fee affects agency flexibility. For example, the AQI fee statute makes the fee collections available to cover the costs of providing agricultural quarantine inspection services and administrative costs related to the fee. The customs inspection fees, however, are only available to reimburse appropriations for a limited, prioritized set of activities. Congress may also limit agency flexibility in the use of the fees by directing the agency to use the fees at the location where the fees were collected. NPS had a now- expired pilot program under which 80 percent of fee collections were retained and used by the park where they were collected. Statutes that narrowly limit how fees may be used could reduce Congress’s and an agency’s flexibility in making resource decisions and reduce the agency’s ability to adjust to changing priorities or program needs. The previously referenced NPS program is an example. We reported that restricting use of the 80 percent of fee collections from the NPS program to the sites at which they were collected created funding imbalances. This restriction resulted in some high-revenue sites having more revenue than needed to meet priority needs and contributed to a backlog of priority needs at lower-revenue sites. Restrictions on use of fees may fail to keep pace with program needs over time as activities that support the service change. This can result in authorized activities that are misaligned with actual service or program activities. We recently reported, for example, that CBP officials said that since the terrorist attacks of September 11, 2001, the merchandise processing program has a greater focus on security than was the case in previous years. Although the increase is understandable, it has led to a situation in which activities associated with merchandise processing, including screening and inspecting conveyances and inspecting vessels and containers, are not reimbursable by the Merchandise Processing Fee (MPF), even though CBP views these activities as part of the merchandise processing service, the cost of which is offset by MPF collections. Recalling the earlier discussion in this guide about public versus private benefits, if it is determined that a portion of merchandise processing activities primarily relates to national security—benefits that primarily accrue to the general public—a case could also be made that the corresponding costs be funded by general revenues. Finally, although narrowing the authorized uses of a fee in statute may facilitate Congressional oversight, it can also increase agency administrative costs. Ensuring proper use of fee collections may require collecting more detailed cost data at a greater cost to the agency. For example, we recently reported that CBP must track the time CBP officers spend on authorized activities for several of its inspection fees. To help address a concern that timekeeping was taking time away from officers’ inspection duties, CBP implemented a standard process for tracking time in early 2007. The process includes estimating the amount of time officers conducting different functions (e.g., vessel or passenger inspections) spend on different activities, including customs, immigration, and agricultural quarantine inspections. These challenges mean that statutory fee authorities that make fee collections available for obligation and expenditure for limited purposes may require more frequent review and updating for the authorized purposes to remain aligned with program needs. By providing program information to agencies, stakeholders, and Congress, reviews can improve transparency, help ensure that fees remain aligned with program costs and activities, increase awareness of the costs of the federal program, and therefore increase incentives to reduce costs where possible (see fig. 6). Reviews can also provide an opportunity to solicit stakeholder input on the fee and the programs it supports. Fees that are not reviewed and adjusted regularly run the risk of undercharging or overcharging users, raising equity, efficiency, and revenue adequacy concerns. Fee rates may be adjusted by the agency (i.e., by regulation) or by Congress (i.e., by legislation) depending on the statute authorizing a fee. When fees are adjusted by an agency through the regulatory process, fees may be updated more frequently than fees adjusted by legislation and this may improve the ability to keep fee collections aligned with changes in program costs. APHIS, for example, periodically updates the AQI fees through the regulatory process to ensure that collections are aligned with the costs of the program. However, in past reviews stakeholders have expressed distrust and concern about fee rates set by regulation because agencies that retain fee collections may have incentives to artificially inflate the costs of the user fee program. This risk may be reduced, and tools for Congressional and stakeholder oversight enhanced, if the agency clearly reports its methods for setting the fee, including an accounting of program costs and the assumptions it uses to project future program costs and fee collections. On the other hand, when fees are specified and adjusted by legislation, Congress has more tools with which to play an active oversight role, but the fees may not be updated as frequently because of competing legislative priorities and other factors. For example, a fee for registering aircraft with FAA has been an insignificant amount since the 1960s. Fees set by statute can, of course, be regularly adjusted. Such Congressional reviews and updates may be triggered in several ways, including a sunset provision. FDA prescription drug fees, for example, are authorized for 5 years at a time. A sunset provision, however, may not guarantee that a fee will be adjusted to reflect changes in program costs. Although the MPF includes a sunset provision, the maximum and minimum fees, which are set in legislation, have not been adjusted since 1995. Congress may provide strict guidelines within which an agency may set fees through a regulatory process that may depend on further Congressional action. For example, the 2007 prescription drug user fee authorizing legislation set base fee revenue amounts for fiscal years 2008 through 2012. For each year after 2008, the law permits FDA to adjust the base fee revenue amounts to account for inflation and workload, and to set fees annually through the regulatory process so that total projected fee collections will approximate the revenue levels set in statute. To ensure that Congress, stakeholders, and agencies have complete information about changing program costs and whether authorized activities align with program activities, agencies must substantively review and report on their fees on a regular basis. When a fee’s authorizing statute does not specify review and reporting requirements, and for fees that derive their statutory authority from IOAA, the Chief Financial Officers (CFO) Act of 1990 and OMB Circular No. A-25 provide for biennial fee reviews that include recommendations about adjustments to the fees, as appropriate. The regulatory process is also used to provide information on fees to Congress and stakeholders and to solicit stakeholder input. When an agency has authority to adjust a fee through the regulatory process, it should make substantive information about recent and projected program costs and fee collections available to the public through notices in the Federal Register. For example, in 2004 APHIS set the AQI fee rates for fiscal years 2005 through 2010. It published the new fee rates, along with descriptions of the costs of the program, projected program costs and fee collections, and the assumptions it used to make those projections, in the Federal Register. Similarly, USCIS notified the public of proposed fee adjustments in the Federal Register. The notice provided information on the program’s workload and the agency’s methodology for determining program costs, including a list of program activities, how it accounts for the cost of providing services to users exempt from the fees, and its assumptions about inflation. For fees set in regulation, agencies must solicit stakeholder input by requesting comments in the Federal Register. This provides an opportunity for stakeholders to comment on proposed regulatory changes—via written communication, not face-to-face conversations. As the passenger facility charge user fee was implemented, for example, stakeholders provided comments regarding the fee, many of which ultimately were addressed in the final design of the fee. Nevertheless, we previously reported that nonfederal stakeholders have said that relying solely on notice and comment through the Federal Register is insufficient for obtaining stakeholder input. In the past, APHIS solicited stakeholder comments as it adjusted the AQI fee, but it updated the fee using an interim final rule that took effect prior to the end of the comment period. Although an interim final rule does not preclude an agency from making changes to the final rule, stakeholders said that APHIS did not take their comments on the AQI fees into account because comments were not solicited before the change was implemented and because no changes to the fee were made during final rule making. Based on guidance from OMB, APHIS is no longer updating its fees using interim final rules. Whatever the means for disseminating information about the fee, if the review is not comprehensive, it may not provide sufficient information to assess whether a fee needs to be changed. For example, we recently reported that the information on the MPF in CBP’s biennial fee review was insufficient to either project fee collections or to provide assurance that the amount of the fee was aligned with program costs. This was the case because the review lacked projections of future MPF collections, the effects of exemptions, and changes in import demographics. We noted that without this information, CBP is not able to either determine if the amount, structure, or authorized uses of the fee should be changed or comment on the need for any changes to the fee statute. CBP’s review noted that a detailed analysis of the current and estimated future effects of MPF exemptions, changes in import demographics, and a reliable cost estimate for processing merchandise are needed. Transparent processes for reviewing and updating fees help assure payers and other stakeholders that fees are set fairly and accurately and are spent on the programs and activities Congress intended. Also, because user fees represent a charge for a service or benefit received from a specific government program, payers may expect a tight link between payments and the cost of providing services and have expectations about the quality of the related service. Effectively communicating with stakeholders involves sharing relevant analysis and information as well as providing opportunities for stakeholder input. In past user fee reviews, we have reported that agencies that do not communicate with stakeholders miss opportunities for meaningful feedback that could affect the outcome of changes in fees and program implementation. Providing for stakeholder input may affect their support for and acceptance of the fee, and may contribute to improved understanding about how the fees work and what activities they may fund. Payers may also expect to participate in decisions about the provision of the service, including its form or quality. For example, in prior work on a proposed user fee for FAA services, we found that some stakeholders stated that if user fees are adopted, users should have more input into FAA’s operations, citing the “user pays, user says” concept. Soliciting stakeholder input is particularly important because government is often a monopoly supplier—that is, alternatives are limited so some fees are not fully voluntary—users cannot “vote with their dollars” as freely as they can in a competitive private market. Agencies can accommodate payers’ and stakeholders’ input in various ways. The authorizing legislation of some but not all fees stipulates that the agency solicit stakeholder input in certain forms, including an advisory committee. The immigration inspection fees statute, for example, directed the Attorney General to establish an advisory committee, whose membership consists of entities subject to the fees, to advise the agency on the performance of the inspectional services and the level of fees. As we recently reported, the legislation that authorized the HMF did not establish an HMF advisory committee, although it did establish an advisory committee for a similar user-funded program for new work construction and rehabilitation on inland waterways. PDUFA requires FDA to work with stakeholders, including representatives from consumer, patient, and health provider groups and the pharmaceutical and biotechnology industries, to develop performance goals for the FDA prescription drug review program. It is important, however, that actions are taken to ensure that fee programs do not become solely beholden to stakeholder interests. Where Congress and fee payers agree on priorities, there may be no conflict between oversight and accountability to Congress on the one hand and accountability to fee payers on the other. Where Congressional and fee payer priorities differ, however, the agency may be under greater pressure to satisfy the demands of fee payers, particularly when a fee is voluntary. For example, although the FDA performance goals may be consistent with PDUFA’s goal to improve FDA application processing times for new prescription drugs, a Congressional Research Service report on the fees cited some critics as saying that giving the pharmaceutical industry a role in setting program performance goals creates conflicts of interest and gives the industry too much influence over FDA actions. We previously identified several promising practices for forming and managing federal advisory committees that could better ensure that committees are, and are perceived as being, independent and balanced. These practices include (1) obtaining nominations for committees from the public, (2) using clearly defined processes to obtain and review pertinent information on potential members regarding potential conflicts of interest and points of view, and (3) prescreening prospective members using a structured interview. The normative principles outlined in this guide are meant to present a framework for considering user fee design. Any user fee design embodies trade-offs among equity, efficiency, revenue adequacy, and administrative burden. Focusing only on the pros and cons of any single design element could make it difficult to achieve consensus on a fee’s design. Instead, policymakers will ultimately need to balance the relative importance they place on each of these criteria and focus on the overall fee design. There are always exceptions to any rule, however; as such, there will undoubtedly be cases in which policy considerations outweigh normative design principles. Nevertheless, the criteria, questions, and illustrative examples presented in this guide present real issues that policymakers must face when designing or redesigning user fees. See appendix I for a summary of key questions to consider. We provided a draft of this guide to the Director of the Office of Management and Budget and the Secretaries of Homeland Security, Defense, and Agriculture for review. We received technical comments from each agency, which we incorporated as appropriate. We are sending copies of this guide to interested Congressional committees as well as the Director of the Office of Management and Budget and the Secretaries of Homeland Security, Defense, and Agriculture. In addition, this guide will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this guide, please contact me at (202) 512-9142 or irvings@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this guide. GAO staff who made major contributions to this guide are listed in appendix II. (We note that some of these questions may overlap.) 1. To what extent does the program benefit the general public and identifiable users? a. Does use of the program by certain users, or for certain types of uses, provide a public benefit, for example, by advancing a public policy goal? b. What is the users’ ability to pay? c. To the extent that the fees are used to replace funding by general revenues, what is the impact on the distribution of the burden of financing the program? d. What would be the impact of a fee on users’ competitiveness with others that would not be subject to the fee? e. Is a similar service provided by the private sector? If so: Will private producers be subject to unfair competition if the fee is not set to recover the full costs of the service? Should their charges be a reference point in setting fees? f. For programs that have not been paid for by fees in the past, has the value of the program been capitalized into private assets? If so: Could transitional measures be used to address these concerns? 2. How will the fee be linked to the cost? a. Does the agency have timely and reliable cost data to link the fee to program costs? b. Will the fee recover full or partial costs? c. Will the fee structure include exemptions or reduced fees? d. Will the fee be set as a percentage rate or as a fixed dollar amount? e. If the fee varies, will fee minimum amount, maximum amount, or both be set? f. Will the fee structure be user-specific or systemwide? Is the amount of the fee small or large relative to other costs that the user faces? Are there numerous different groups of users? Is the cost variation among the different groups of users large or small? g. Does the program have high fixed costs? Is a two-part fee structure, with a flat rate plus a fee based on usage, appropriate? 3. How will the fee be structured to cover the intended share of program costs over time? a. Are fee collections projected to change over time in relation to the cost of the program due, for example, to inflation? b. To what degree will short-term fluctuations in economic activity and other factors affect the level of fee collections? c. Will the fee design include a maintenance of effort requirement? 1. What mechanisms are available to ensure payment and compliance with requirements while minimizing administrative costs? a. To what extent do payment and compliance mechanisms impose administrative costs on the agency, the payers, or both? b. Do rewards and penalties for compliance correspond to performance? 2. Is there an agency or other entity that already collects or audits fees from the users? a. How will compatible policies and procedures and regular communication be established? b. How does coordination affect the administrative costs of fee collection for the agency and payers? c. Will collection by another entity affect compliance with fees? 1. What degree of access will the agency have to collected fees? a. Will the fees directly support the related program or agency or be deposited to the general fund of the U.S. Treasury? b. Will agency access to fees be subject to Congressional appropriation? c. Will the budget execution of fee collections be through reimbursement, or will the agency receive fee collections directly? d. Will the amount of spending be tied to the amount of collections? e. Will the fee be categorized as mandatory or discretionary? 2. How broadly or narrowly will the activities for which fee collections can be used be defined? 1. Will the fee be updated through legislation or by agency regulation? 2. How frequently will fees be reviewed and updated? a. Will legislation include a sunset provision to trigger fee updates? b. Will legislation direct the agency to submit regular fee reviews to Congress, different from the biennial fee review required by the Chief Financial Officers Act of 1990? 3. What mechanisms will be used to gather stakeholder input? a. Will the agency establish an advisory committee? b. Will proposed changes to the fees be published for comment in the Federal Register? c. What safeguards will be used to prevent the agency from becoming beholden to fee payers/stakeholders? Jacqueline M. Nowicki (Assistant Director) and Susan E.M. Etzel managed this assignment. Jessica Nierenberg, Kathleen Padulchick, and Amy Rosewarne made key contributions to this guide. Jay Cherlow, Denise Fantone, Chelsa Gurkin, Terrance N. Horner, Susan Offutt, Alessandra Rivera, and Jack Warner also provided assistance. In addition, Pedro Briones, Carlos Diz, and Sheila Rajabiun provided legal support, and Donna Miller developed the guide’s graphics.","The federal government will need to make the most of its resources to meet the emerging challenges of the 21st century. As new priorities emerge, policymakers have demonstrated interest in user fees as a means of financing new and existing services. User fees can be designed to reduce the burden on taxpayers to finance the portions of activities that provide benefits to identifiable users above and beyond what is normally provided to the public. By charging the costs of those programs or activities to beneficiaries, user fees can also promote economic efficiency and equity. However, to achieve these goals, user fees must be well designed. GAO was asked to study how user fee design characteristics may influence the effectiveness of user fees. Specifically, GAO examined how the four key design and implementation characteristics of user fees--how fees are set, collected, used, and reviewed--may affect the economic efficiency, equity, revenue adequacy, and administrative burden of cost-based fees. GAO reviewed economic and policy literature on federal and nonfederal user fees, including prior GAO work, and used relevant case examples to illustrate different types of design elements and the impacts they may have. Setting user fees according to the beneficiary-pays principle can promote equity and economic efficiency. For cost-based fees, the extent to which a program provides benefits to the general public versus users and the cost of providing those benefits should, theoretically, guide how much of total program costs are paid for by user fees and the amount each user pays (see figure). Although this principle provides a useful guideline for setting fees, strictly following the principle is not always desirable or practical. The primary challenge of determining when and how to collect a fee is striking a balance between ensuring compliance and minimizing administrative costs. In some cases, the collection systems of another agency or a nonfederal entity, such as a private sector enterprise, may be leveraged, as when the airlines collect passenger inspection fees. Determining how fees will be used is a balancing act between Congressional oversight and agency flexibility. Congress gives agencies various degrees of access to collected fees. For example, fees may be dedicated to the related program or may instead be deposited to the general fund of the U.S. Treasury and not used specifically for the related program or agency. In addition, fee collections may be subject to appropriation or obligation limits, which increase opportunity for oversight but may limit agencies' ability to quickly respond to changing conditions. Agencies must substantively review their fees on a regular basis to ensure that they, Congress, and stakeholders have complete information. Reviews provide information on whether the fee rates and authorized activities are aligned with actual program costs and activities, may provide opportunities for stakeholder input, and can help promote understanding and acceptance of the fee.",govreport
"In school year 2009-2010, the District’s school system enrolled more than 72,300 students and was comprised of 58 local educational agencies (LEA). These included DCPS, the largest LEA with 129 schools, and 57 public charter schools. D.C.’s public charter schools act in most respects as independent and autonomous LEAs, some of which consist of more than one school location. The number of children attending public charter schools in the District has increased in recent years, with about 38 percent of the District’s children attending these schools in the 2009-2010 school year. D.C. charter schools are independent of traditional public schools and are authorized by the Public Charter School Board (PCSB), whose members are appointed by the District Mayor. The PCSB evaluates the schools’ academic performance and fiscal management, as well as their adherence to local and federal education laws, and has the authority to grant and revoke a school’s charter. D.C. public charter schools must independently lease or purchase school buildings for their use and, as previously reported by GAO, have consistently encountered problems obtaining cost effective and appropriate facilities. The D.C. Council passed the Public Education Reform Amendment Act of 2007 (Reform Act) in response to persistent challenges facing the school system. This act significantly altered the governance of the D.C. public schools by transferring the day-to-day management of the public schools from the Board of Education to the Mayor. It also created OSSE to serve in the same capacity as a state education agency (SEA). Effective October 1, 2007, DCPS transitioned its responsibilities for all SEA functions to OSSE. OSSE now fulfills the functions of an SEA under federal law, including grant-making, oversight, and maintaining standards, assessments, and federal accountability requirements for elementary and secondary education. OSSE performs these functions for both traditional public and public charter schools throughout D.C. (see figure 1). Both the President and Congress may propose financial assistance to the District in the form of special federal payments in support of specific activities or priorities. Upon being appropriated by Congress, federal payments are provided directly to D.C. agencies from the federal government and are subject to the requirements of the statutory appropriations language. Congress appropriated federal payments for school improvement in the District every fiscal year from 2004 to 2009 to the state education office (now OSSE) to expand D.C. public charter schools and to DCPS to improve public education in the District. During these years, about $190 million in federal payments were provided for these purposes (see table 1). With the exception of 2005, Congress has generally not included statutory language that offers additional specificity on the use of funds. Occasionally, committee reports accompanying the D.C. appropriations acts have stated the committee’s instructions as to the purpose and manner in which the funds should be used. These reports generally list projects and designate amounts for the expansion and improvement of public charter schools; committee reports have not consistently done this for payments to DCPS. The statutory language generally has not specified how or whether these offices should report on the use of the funds. The District’s Office of the Chief Financial Officer (OCFO) uses SOAR t budget and disburse federal payment funds in accordance with annual spending plans created by OSSE and DCPS. These spending plans outline how the agencies will use the funds, including the amounts to be available for specific initiatives or program offices. The agencies’ financial officers report to the District’s OCFO and monitor the financial activities of thei respective agencies. Within OSSE, the Office of Public Charter Schoo Financing and Support (OPCSFS), created in 2003, manages several federally funded programs that provide funding to charter schools for facility financing and grant programs to improve public charter school quality, including federal payments for these purposes. It also provides est technical assistance for grants and supports the dissemination of b practices and innovation at D.C. public charter schools. At DCPS, priorities regarding the use of federal payments are established and managed through the Chancellor’s office, which allocates funds to applicable program offices that implement various academic initiativ For those payments that fund contracts, program offices coordinate procurement activities with the contracting office which has the authori to enter into, administer, and terminate contracts. The program office monitor an awarded. es. d document contractor performance once the contract is According to annual independent audits, OSSE and DCPS have consistently had problems managing grants and contracts. These audits have identified, among other things, internal control deficiencies related to federal grants management at OSSE and procurement practices at DCPS. For example, the District’s fiscal year 2008 Single Audit found that OS SE had a total of 24 material weaknesses regarding internal control over compliance with federal grant program requirements and cash management. Also, an independent review by BDO Seidman, LLP, of DCPS’s internal controls during that time reported weaknesses related to insufficient procurement documentation and grants management. According to D.C.’s independent auditor, because its reviews likely included federal payment expenditures, their findings could also be relevant to these payments. Because of these and other findings, the U.S. Department of Education designated OSSE as a “high risk” grantee in 2007, when OSSE took over responsibility for the District’s education programs. While OSSE reports having taken corrective actions to address many of the longstanding financial, grants management, and program compliance issues that have plagued the D.C. public school system, the U.S. Department of Education has maintained a high risk designation for OSSE. Of the nearly $85 million in federal payment funds designated by Congress for the District’s public charter schools, OSSE has used approximately 77 percent—about $65 million—of these payments to help finance charter school facilities (see figure 2). OSSE has allocated approximately $17 million for other initiatives to improve the quality of public charter school education, such as supplemental education (e.g. a college preparatory program that included summer enrichment programs and standardized test preparation), and for other activities to address public charter school needs. OSSE also used nearly $1.5 million for administrative purposes and the remaining funds on other activities that included a truancy center and data collection efforts. OSSE has used roughly $65 million of federal payments to award more than 80 grants and loans to help public charter schools build, improve, lease, or purchase facilities (see table 2). According to OSSE, public charter schools often face challenges in funding facilities-related projects. Despite receiving an annual per pupil facility allowance to help pay for rent or mortgage and other facilities’ costs, public charter schools often need to supplement this with other sources of funding. Schools frequently need additional financing to purchase, renovate, or build facilities; to explore facility and financing options; and to make facility improvements. OSSE has funded various grants to not only improve school facilities but to also simultaneously meet other District needs such as creating community partnerships, revitalizing neighborhoods, and promoting the use of public facilities. The facilities projects that grantees, such as charter schools and nonprofit organizations, undertook range from building new campuses to conducting overdue maintenance on heating and cooling systems to updating security equipment and technology systems. For example, a public charter school that is a public facilities grantee used funds to help finance renovations and upgrades of a former D.C. public school to expand the number of students the school could serve. Among other things, the grantee updated mechanical, electrical, and plumbing systems; repaired roofing; replaced windows; and constructed a new gymnasium. Another public charter school that is a City Build grantee, received funds from OSSE to help build new classrooms so that it could expand the grade-levels that it serves, build vocational classrooms such as a barber shop, and create staff offices. OSSE allocated almost $17 million to award a range of grants on quality school initiatives or unmet needs (see table 3). These projects cut across several areas focused on supplemental education activities—which are activities that are provided in addition to those that occur during the course of the typical school day—and activities conducted during the school day to enrich students’ instruction. For example, between 2005 and 2008, OSSE awarded 41 incentive award grants to help schools enhance, improve, or implement an innovative program that would improve student learning and achievement or to start or expand their physical education programs. Some of the projects that schools undertook with this grant included the expansion of a reading buddies literacy volunteer program, a string instrument music program, and several physical education initiatives to address obesity. OSSE has also funded grants to help students prepare for and improve their access to college. For example, as directed in the conference report accompanying the District’s 2005 appropriations act, OSSE provided funding to the Educational Advancement Alliance to implement a college preparatory program. This program aimed to assist 9th through 12th graders with course enrollment, precollege advising, financial aid counseling, test preparation, college application completion, and career exploration and leadership development. Between 2004 and 2009, OSSE spent about $2.5 million to administer federal payment programs and undertake other projects. Specifically, OSSE allocated about $1.5 million for administration of federal payment programs, according to data provided by OSSE. OSSE funded several other projects such as a review of Medicaid billing policies and potential practices to help ensure that public charter schools received appropriate Medicaid reimbursement. OSSE also funded a data collection and analysis project to review public charter school data collection systems, coordinate data collection to ensure the systems are compatible with the entities that need to use them (e.g., the LEA, SEA, and charter school authorizers), and develop assessments to track student performance. According to OSSE officials, OSSE employs a range of activities to monitor public charter schools and other entities that receive grants funded by federal payments (federal payment grantees), but has limited written policies and procedures for conducting monitoring activities. OSSE typically outlines the monitoring activities it will employ in the request for grant applications and includes specific time frames for these activities and deliverables in grant agreements. In establishing their approach, OSSE officials stated that they try to balance OSSE’s monitoring functions with those of other organizations, such as PCSB, so they do not overburden schools with reporting requirements. Most often, these activities include reviewing financial and narrative performance reports that grantees must submit, reviewing 100 percent of all expenditures prior to providing money to grantees, conducting site visits, and in some instances auditing the grantee’s financial statements. To inform its monitoring process, OSSE officials told us that it also conducts a risk analysis based on the award amount and other information that the office reviews, such as a grantee’s independent audit results, PCSB reviews, and lender information. OSSE indicated that since 2007, it has implemented several operational improvements to monitor the use of federal payment funds. For example, OSSE also developed a document that outlines questions that staff should ask grantees and acceptable evidence the staff should review as part of their monitoring. However, we found OSSE lacks documented procedures on how staff should carry out and maintain records of these activities, including how to determine the level of risk based on the information from others’ reviews, and relies on more experienced staff to provide guidance and training. According to the Director of OPCSFS, staff generally should maintain documentation of their monitoring activities, such as grantee reports, in a grantee’s file. However, OPCSFS does not have written procedures or guidance on what should be maintained in the grantee files. The Director also stated that he would like to create a standardized file management process. According to the Director of OPCSFS, one of the main components of OSSE’s monitoring process is the review of invoices prior to reimbursing grantees for expenditures. OSSE developed a standardized form that grantees are to submit with invoices for staff to review prior to reimbursement. The files we reviewed included evidence that grantees submitted and staff reviewed the required reimbursement forms and invoices. According to the Director, the reimbursement process provides the opportunity for an extra level of monitoring in that OSSE compares expenditures with the intended purpose of the grant and approves or denies reimbursement based on this assessment. OSSE staff did not consistently document their collection and review of grantee narrative and financial reports. According to an OSSE official, these reports are used to help OSSE monitor grantees’ use of funds and their impact. Less than one-third of the files we reviewed contained all of the reports that were required during the grant award period, and one- third of the files had no reports (see figure 3). In instances in which files did not include all of the reports, the Director indicated that this may be because the grantee did not submit the reports or the staff responsible for monitoring the grantee did not put the report in the file. Of the files that did contain reports, several were submitted late—ranging from a couple of days to more than 3 months. Further, the files did not consistently have evidence that staff followed-up to obtain the reports. When there was evidence of staff follow-up, it was sometimes not until months after a report was due. For example, two files that had no reports included notices to grant recipients requesting that they submit final performance reports since they had been reimbursed for the amount of the grant award. An OSSE official stated that OSSE may withhold further payments on grants when grantees have failed to provide regular reports or other required documentation, but we saw no indication in the files that this happened. The files we reviewed also rarely had evidence that staff conducted site visits. An OPCSFS official told us that while the office conducts site visits “as necessary,” staff generally try to visit a school at least once during the grant award period. During these site visits, OSSE staff may interview school officials, review the school’s accounting practices, and request documentation on a program’s performance, among other things. We only found evidence of four site visits for the 30 files we reviewed. OSSE found that two of the schools visited needed to take corrective actions. Specifically, one school did not have adequate tools to measure the impact of the program as outlined in its grant agreement and the other did not maintain proper contractor records. According to the files, OSSE followed up with both schools to ensure that they were addressing the issues identified during the site visits. According to the expenditure data D.C. provided, DCPS has used its $105 million in federal payments for school improvement since 2004 for a variety of purposes—ranging from summer school programs to staff incentive pay. However, a lack of available information describing programs or initiatives funded with federal payments prior to 2009 precludes a full identification of the use of these funds. DCPS officials provided spending plans and other programmatic information that described program goals, objectives, activities, and outcomes related to DCPS’s use of federal payments since 2009; however, they could not provide similar information for prior years. DCPS officials stated that they searched for documentation that may have been created by the prior administration, including spending plans and guidance for 2007 and 2008, but were unable to recover any documentation that prior administrations may have developed or used. In 2009, under the current administration, DCPS used $40 million in federal payments primarily for supplemental education programs, staff incentive pay, and staff salaries, based on expenditure data (see figure 4). According to DCPS officials, it currently funds activities aligned with DCPS’s 5-year strategic plan and district-wide priorities designed to increase student achievement. Some of these funds were provided directly to schools, while others supported school administration functions within DCPS. These funding priorities are outlined in spending plans that guide the budgeting process and are submitted to Congress. Staff incentive pay. DCPS set aside almost $10 million of federal payments in 2009 to provide merit-based awards to eligible teachers and staff through a new assessment system called “IMPACT” when a contract agreement was reached with the Washington Teachers’ Union. Implemented in the 2009-2010 school year, the IMPACT system rates teachers and noninstructional staff, such as guidance counselors and custodians, on a combination of factors to assess and provide feedback on performance. For example, teachers are assessed on, among other things, the impact they and the school have on students’ learning over the course of the year, classroom observations, and commitment to the school community. Counselors, meanwhile, are assessed on DCPS counseling standards and commitment to the school community. Staff salaries. About $5.9 million was used to pay staff salaries and benefits distributed to schools through DCPS’s Comprehensive Staffing Model. According to DCPS, this model was first instituted in the 2008-2009 school year and is designed to ensure that all schools, regardless of size or location, offer a full complement of programs, including art, music, and physical education classes. It also helps schools provide services, such as social workers and psychologists, to support students’ nonacademic needs. The model distributes resources on a formula basis across the school district, and in 2009, according to DCPS, federal payment funds helped to hire and retain staff at 89 schools. Professional development. DCPS spent $5.7 million on teacher and principal development activities. Funds supported the Master Educator Program, whereby experienced educators traveled from school to school evaluating teachers and providing support as part of the IMPACT performance system. According to DCPS, educators provided targeted professional development to help teachers improve their instruction. Funds were also used for a “Principals’ Academy”—a monthly professional development session. According to DCPS, these meetings were used to train principals on effective parent and community engagement and share best practices on leadership. Finally, funds supported Partnership Schools where staff in low-performing schools received additional resources, expertise, and professional development opportunities from organizations hired to manage the schools. Supplemental education. DCPS used about $5.7 million for summer school activities and $2 million for the Saturday Scholars program. Saturday Scholars is a 12-week program that provides additional help in math and reading to students in grades 3-12. Data reporting. DCPS used about $6 million to fund data reporting activities that could provide parents with information on the performance of their children, classrooms, and schools. These initiatives included the DCPS School Scorecard, an annually released report on each school detailing school safety, culture, student growth, and family involvement in the school; stakeholder surveys; and a student information system to keep parents informed. Supplies. In 2009, DCPS used $3 million of the federal payments to purchase textbooks. Other activities. DCPS spent the remaining payments on other activities in 2009. For example, it provided $1.5 million to the Capital Gains Program, which, in partnership with Harvard University, provided financial literacy education and incentive payments for academic performance, behavior, and attendance to more than 3,000 students in grades six to eight. For the period between 2004 and 2008, D.C. provided expenditure data showing that DCPS used federal payments to fund a variety of programs for early childhood education, supplemental education, professional development activities, and supply purchases. While DCPS worked to provide information on programs funded prior to 2009, it could not locate detailed programmatic information on most expenditures to explain the goals, objectives, activities, and outcomes of these programs and we cannot, therefore, fully describe the use of federal payments for these years (see figure 5). According to DCPS, prior administrations may not have consistently created or maintained documentation on some of the programs they implemented. For example, expenditure data indicate that between 2004 and 2007, DCPS used $37.4 million to fund a literacy improvement program; however, DCPS was unable to provide information to describe the program’s goals, objectives, or outcomes. Additionally, we were unable to characterize approximately 36 percent of the other activities because DCPS could not provide information describing the expenditures beyond what was maintained for accounting purposes. In 2007, for example, 27 schools received “high performance awards.” Current DCPS officials were not able to ascertain why those schools received the funds. The lack of detailed information to fully describe the programs for which funds were expended also precludes us from assessing whether DCPS used funds as directed to do so by appropriations legislation. The 2005 District appropriation act states that DCPS shall use not less than $2 million of that year’s payments on a new incentive fund to reward improved schools and not less than $2 million on a transformation initiative directed to schools in need of improvement. While 20 expenditure data shows DCPS spent $9.8 million on a literacy improvement program, we cannot determine whether these or the remaining funds appropriated in that year were used for the two initia outlined in legislation. Expenditure data did not capture information linked to specific legislated initiatives, and according to agency officials, DCPS does not have records of the plans that would describe the incentive fund or the transformation initiative. DCPS program offices have employed a variety of methods to monitor contractor performance; however, in practice we found evidence of weaknesses in carrying out some monitoring responsibilities possibly attributable to staff turnover and a lack of a formal process to reassign responsibilities when turnover occurs. Specifically, in our revie and 2009 contract files, we found 7 of 14 files with incomplete documentation and evidence of review as well as missing files (see appendix II). DCPS’s Office of Contracts and Acquisitions has policies that specify a program officer’s responsibilities to monitor contractor pe program offices have flexibility on how to carry out these responsibilities. Pursuant to their monitoring responsibilities, program officers are to ensure that technical work is performed in accordance with the terms and conditions of the contract, maintain a contract file, review invoices, perform periodic site visits, and provide periodic written report and a final performance evaluation. Additionally, files maintained at the contracting office should consistently contain the name of the ass igned program officer who is responsible for contract oversight. In our discussions with a number of program offices, we were shown differen strategies they employ to fulfill their monitoring responsibilities. One program officer, who oversees a contract that provides an after school program, showed us a tool designed to track site visits. The document records observations of tutoring sessions to assess the tutor’s subje ct- matter knowledge, presentation style, and classroom management abilities. Another program officer did not conduct site visits because the contractors were often located at the program office and could be t observed on a more regular basis. That office independently a program to track deliverables across contracts it managed. In our review of contracting office files, we saw inconsistent documentation of monitoring activities related to the assignment of program officers and the lack of required evaluations on contractors’ performance. In our review of 14 contract files, we found that som contained notes from the contracting staff that the program officer left before the end of the contract term, and the file had no evidence that anew program officer was assigned. DCPS officials stated that the monitoring function has been impacted by staff turnover, and one offici said it is not uncommon for a contract to be overseen by two or three different program officers over the life of the contract. However, staff turnover alone does explain the lack of adequate monitoring. Program officials we spoke with stated that their respective offices did not have written protocols and procedures for transitioning responsibilities when a program officer leaves, nor did they have written processes for how to notify the contracting office. According to officials, staff generally the contracting office via e-mail when a program officer left, however, we did not see evidence of correspondence in those files. Recognizing that the specific nature and extent of contract administration may contract, one program official told us that it would be helpful for DCPS to develop a list of basic information that should be collected across program offices to ensure continuity in the event of staff turnover. Moreover, 4 of the 14 contract files we reviewed—totaling $2.7 million— were missing performance evaluations, and evaluations of 3 additional contractors were not completed within the required time frames. Performance evaluations are an important tool to help the contracting and program offices determine whether to extend a contract, and these evaluations must be submitted before a contract extension can be awarded. The evaluations are required to be submitted within 30 days of the end of the contract; however, one of the evaluations was submitted more than 1.5 years late. Further, one contract file that lacked a performance evaluation and two files that were submitted late were awarded contract extensions. According to a contracting official, staff from his office should take steps to gather this information from program staff, but we did not find evidence in the files that officials followed up to obtain these documents, or that many of the files had supervisory review. An official with the contracting office stated that it might also be helpful to have more regular formal assessments of contractor performance, and the on a office recently asked program officers to begin evaluating contractors monthly basis. The DCPS contracting office, which is responsible for maintaining all contract documentation, could not locate 3 of the 17 contract files we requested. According to a contracting official, DCPS recently moved and sent its contracts to storage and was having problems locating the files during the period of our review. DCPS could not locate the original file for one of the contracts, was unsure whether one contract was in fact awarded, and told us the other file could not be located because the name of the company had changed. According to D.C. Municipal Regulations, each D.C. office performing contracting functions is responsible for maintaining files containing records of all contractual actions pertinent to that office’s responsibilities, including documents sufficient to constitute a complete history of the transactions. These files are essential in providing a complete background as a basis for informed decisions at each step of the procurement process as well as providing information for reviews and investigations. Over the years, D.C. public schools have wrestled with numerous challenges: deteriorating facilities, low student performance, and lax administrative and management oversight. D.C. has recently taken steps address the long-standing problems with its public school system, and federal payments have contributed to some of these efforts. The statu language appropriating these funds does not generally direct OSSE and DCPS on how to use these monies for school improvements. It appears that OSSE and DCPS have expended federal payments on a range of activities related to “school improvement”—from facility renovation to summer school programs; however, the lack of detailed information on tory some of these payments dating back to 2004 precludes a complete understanding of their use. A lack of information describing how these funds were used highlights the need for stronger internal controls related to information management across administrations. Moreover, the financial management challenges that others, such as the U.S. Department of Education and D.C. Inspector General, have previous identified also persist with OSSE’s and DCPS’s monitoring of grants made with federal payment funds and contracts, respectively. Specifically, the policies OSSE and DCPS have are not consistently followed and sometimes fall short of commonly accepted standards. Because OSSE and DCPS distribute a large portion of federal payment for school improvement funds through grants and contracts, respectively, effective internal controls over grants and contracts are critical to their missions. Without proper documentation on the use of funds and the applicati strong monitoring framework, these funds may more easily be misused. Further, grantees and contractors may not be held accountable for meeting the agreed upon performance outcomes. In addition, OSSE and DCPS may risk implementing initiatives that fall short of reaching the potential to improve the District’s schools. Documenting required and actual monitoring processes may not completely eliminate potential m isuse of funds, but it could help to mitigate this risk. To improve internal controls for managing the use of federal payments and to provide continuity of information across administrations, we recommend that the Mayor of the District of Columbia take the following two actions: 1. Direct the State Superintendent of Education to establish and implement written policies and procedures for monitoring federal payment grantees. These policies and procedures, which can draw from OSSE’s general monitoring practices, should outline OSSE’s ds of practices for how staff should document and maintain recor m monitoring is appropriately and consistently implemented. onitoring activities and identify other measures to ensure that grant 2. Direct the DCPS Chancellor to establish and implement p contract monitoring to ensure that contract monitoring is appropriately and consistently done. Implementing this recommendation would include documenting monitoring activities ce throughout the term of the contract, directing DCPS to better enfor existing policies to ensure performance evaluations are complete, and rocedures for developing protocols and procedures for transitioning contracting officer responsibilities and for notifying the contracting office. Wh implementing this recommendation, DCPS should develop specific guidance on maintaining contract files and other documentation relevant to the use of these funds to ensure that contract records are available for inspection and as a means of retaining institutional knowledge of contracts. We provided a draft of this report to the D.C. Mayor’s Office, OSSE, and DCPS for review and comment. These entities provided written comme on a draft of this report, which are reproduced in appendix III. DCPS and OSSE generally concurred with our recommendations; however, they expressed concern with the way in which we evaluated their use of fed payments for school improvement and the tone of the draft report. Both OSSE and DCPS indicated that federal payment funds are unique and different from other federal funds and do not require the same reporting and monitoring. While these payments are different than funds provided ucation, a fact we state in the report, through the U.S. Department of Ed we maintain that both OSSE and DCPS should have better practices in place to monitor the use of them. OSSE stated that our recommendation is in line with its continued improvement and oversight of recipients of federal grant funded program and highlighted several of the steps it has taken since 2007 to improve its overall operations as well as the management of federal payment funds. OSSE also indicated that it will borrow from existing District and agency - wide protocols for monitoring federal payment funds, when appropriate. In our report, we recognize the processes OSSE has in place to monitor grantees; however, we continue to believe that these processes should b better documented. As indicated in our recommendation, we agree thatdrawing from existing practices that are documented is a good step for OSSE to take in ensuring that federal payment funds are appropriately monitored. OSSE also stated that our on-site review only included hard copy f During the course of our review, OSSE did indicate that it maintains some information electronically. We subsequently requested additional information that OSSE maintains on federal payment grantees, including electronic information that tracks the receipt of grantee reports. As of the time we drafted our report, OSSE had not responded to our repeated requests for this information. Regardless of whether information is maintained in hard copy or electronic form, we continue to believe that iles. OSSE should have in writing its procedures for documenting and monitoring grantees. OSSE agrees that is necessary and indicated that it would take steps to address our recommendation by June 2011. DCPS agreed with our recommendation to improve monitoring acti and maintain contract files and other applicable documents. In its response, DCPS provided information on several procedures it has recently put in place to implement more effective monitoring. These include, among other things, instituting and maintaining documentation on monthly performance evaluations and requiring contracting an officers to sign documentation acknowledging their roles and responsibilities at the beginning of the contract term. DCPS stated that these steps will mitigate the risk of not retaining an appropriate program officer for the duration of the contract. As indicated in our draft repo the time of our review, DCPS did have policies in place that clearly outlined the roles and responsibilities of the program staff. While establishing monthly performance evaluations and reinforcing staffs’ roles and responsibilities are important steps towards more effective monitoring sting practices, we maintain that DCPS needs to better enforce new and exi practices throughout the continuous monitoring. life of the contract to ensure consistent and DCPS’s response also identified areas of the report that they found to be d misleading or incomplete. Specifically, DCPS was concerned that we di not provide a sufficient explanation of the historical context of federal payments, including the use of the term “school improvement payments, which might be confused with other federal school improvement funds provided by the U.S. Department of Education. In our opening paragraph and the report background we state that federal payments are unique and separate from other federal funding, and that our use of the term “federal payments” throughout the report refers to these differentiated fund , we have subsequently not monies from federal agencies; however changed our title to help clarify this point. ” In addition, DCPS was concerned that the report does not adequately address the fact that during the current administration, programmatic initiatives and expenditures against those initiatives were clearly and w s documented. We disagree. On page 15 and again on pages 18-19 of thi report, we state that D.C. provided expenditure data for all years we requested and that the current administration has created spending plan and other programmatic information describing the planned and actual use of funds since 2009. DCPS also commented that we did not adequ explain the steps DCPS took to locate documentation from the prior ately administration that we requested. In response to this, we have provided additional clarification in the report, where appropriate, to explain that current DCPS officials took steps to locate information we requested on federal payment use prior to 2009, but spending plans or programmatic information that they could not locate may not have been created by prior administrations. DCPS also stated that it could have been more responsive in providin missing information for applicable contract files and documents for inspection if it were advised of the specific documentation deficiency referenced in the report. At the time of our file review, we worked with contracting office officials, and did, on several occasions, identify and request from them missing contract files and information. These officials or indicated that the documentation should have been in the contract file that they could not locate the information. Given our findings and the challenges DCPS had in locating information for our report, we continu ld to believe that DCPS can improve its monitoring processes and shou have practices in place to ensure these processes are implemented. We also provided a copy of the draft report to the independent D.C. Office ed technical comments on the of the Chief Financial Officer which provid draft that we incorporated as appropriate. We are sending copies of this report to the D.C. Mayor’s Office, the Office of the State Superintendent of Education, the DCPS Chancellor’s Office, al the D.C. Office of the Chief Financial Officer, appropriate congression committees, and others who are interested. We will also make copies available to others on request. In addition, the report no charge on GAO’s Web site at http://www.gao.gov. will be available at If you or your staff have any questions about this report, please contact me at (202) 512-7215 or ashbyc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To identify the activities that both the Office of the State Superintendent of Education (OSSE) and the District of Columbia Public Schools (DCPS) funded with federal payments, we analyzed allocation and spending data, reviewed documentation provided by the offices, and conducted interviews with officials in these and other knowledgeable offices. We then categorized this information into activities that we identified based on previous GAO work, U.S. Department of Education program descriptions, and categorizations used by DCPS and OSSE when tracking their use of federal payments. Primarily, we analyzed data from the District of Columbia’s (D.C. or the District) financial management system—the System of Accounting and Reporting (SOAR)—and its procurement tracking system—Procurement Automated Support System (PASS). SOAR isolates federal payments from other revenue streams and provides OSSE, DCPS, and the D.C Office of the Chief Financial Officer (OCFO) with real-time information related to revenue and expenditures, among other things. SOAR is interfaced with PASS. We supplemented these data with interviews, spending plans that identify how the offices allocated federal payments, and other documents provided by OSSE and DCPS to describe the purpose and more specific use of funds as well as how they prioritized the use of funds. For example, we used SOAR and PASS data to understand the amount of funds DCPS used for a specific contract or program, but used additional information from DCPS to understand the purpose. For public charter schools, we supplemented the SOAR data with other information received from OSSE, including grant descriptions in the request for applications and summary data on allocations of federal payments. We also reviewed documentation provided by the D.C. Public Charter School Board. Using SOAR data, we identified fields that provided descriptive information on the program or general purpose of funds and the appropriated and expended amount for a given year’s appropriation. These funds were often used across several fiscal years. For example, we used these data to identify public charter schools that received grants and the amount of these grants. We used additional information provided by OSSE to determine the amount of funding in a given appropriation year that was used. We were unable to obtain transaction level data for appropriation year 2004 because, according to an OCFO official, federal payments for charter schools were managed by the Department of Insurance, Securities, and Banking. The department did not respond to our request for this information. We took several steps to assess the reliability of the data provided. We reviewed existing documentation about SOAR and PASS and prior GAO, D.C. Office of the Inspector General (OIG), and Independent Auditor reports that discussed these systems. We also interviewed knowledgeable staff in OCFO, OSSE, and DCPS about how these data were collected, stored, used, and the access controls in place. We interviewed officials within the D.C. OIG and Independent Auditor’s office. We conducted electronic testing on transaction-level data, including checks for missing data elements or out-of-range variables. Given the objectives and scope of our review, we did not conduct transaction testing (e.g., compare data input into the SOAR or PASS systems to invoices or other expenditure documents) to verify the accuracy and classification of data in the SOAR system, nor did we test specific transactions for noncompliance with Antideficiency Act requirements. We did, however, review previous assessments conducted by D.C.’s Independent Auditor that, among other things, included transaction testing. Overall, we found the data to be sufficiently reliable for the purposes of providing an understanding of how federal payments were allocated and expended. To assess OSSE’s monitoring of grantees that received federal payments, we reviewed available information on OSSE’s monitoring practices for federal payment grantees. We also reviewed information on OSSE’s general monitoring practices and reports from the D.C. OIG, U.S. Department of Education, and GAO to understand previously identified weaknesses with grantee monitoring. We also interviewed OSSE officials on their practices. We reviewed 30 of the 34 grantee files for grants that were awarded with fiscal year 2008 and 2009 federal payments to assess OSSE’s monitoring of federal payment grantees that we identified as within our scope. OSSE identified 42 grants that were awarded during this time. However, we eliminated eight from our scope, and OSSE did not respond to our request for four additional files, although OSSE indicated that these files were maintained. Specifically, we eliminated seven grants that, according to data provided by OSSE, were awarded as a “reimbursement” for costs that a school already incurred in developing an application for the use of surplus DCPS facilities. We eliminated these grants because they would not necessitate on-going monitoring given that the deliverable was already completed as a part of the application process. We also eliminated a special education grant, which was for Medicaid Billing and Technical Assistance, because it was an amendment to a November 2007 grant between OSSE and the D.C. Public Charter School Cooperative. We selected 2008 and 2009 grantees because these were the first years that OSSE was responsible for federal payment use and we could capture the most currently available monitoring information. We developed a data collection instrument to record information from the grantee files. We reviewed files for evidence of grantee monitoring, timeliness of grantee reporting, follow-up actions by OSSE staff, submission of required documents by grantees, and other documented actions by OSSE. To ensure that our data collection efforts conformed to GAO’s data quality standards, all files were independently reviewed by two GAO analysts. When the analysts’ views on how the data were recorded differed, they met to reconcile any differences. To assess DCPS’s monitoring of contractors that received federal payments, we reviewed available information on DCPS’s monitoring practices. We obtained this information from the Office of Contracts and Acquisitions, which is responsible for contracts management and oversees purchasing goods and services for DCPS, as well as additional information from four program offices that were responsible for monitoring performance of those contracts funded through federal payments we selected. We also reviewed information on DCPS’s general monitoring practices and reports from the D.C. OIG, BDO Seidman LLP, and GAO to understand previously identified weaknesses with procurement practices and contract monitoring. We originally planned to review all 42 contracts awarded by DCPS for 2008 and 2009; however, based on discussions with DCPS on the challenges of compiling the requested files, we limited our selection to 17 contracts. We were only able to review 14 files because DCPS was unable to provide files for 3 contracts for our review. The 17 contracts we selected represented just under $9.5 million, or 61 percent, of federal payment funds that were distributed through contracts of more than $100,000 in 2008 and 2009. We selected those years to be consistent with our review of grant files from OSSE. We selected our contracts based on the type and size of contracts. Specifically, we selected the highest dollar amount in service contracts that would allow us to assess the monitoring processes throughout the term of the contract as well as the highest dollar amount contracts for goods such as textbooks. Results from this nongeneralizable sample cannot be used to make inferences about all contracts awarded for this time period. To ensure that our data collection efforts conformed to GAO’s data quality standards, all files were independently reviewed by two GAO analysts. When the analysts’ views on how the data were recorded differed, they met and reconciled any differences. While the sample allowed us to learn about many important aspects of DCPS’s monitoring, it was designed to provide an overview of DCPS’s monitoring functions, not findings that would be representative of practices at all program offices within DCPS. We reviewed the purpose of the contract and DCPS offices’ policies and practices for monitoring these contracts. We reviewed files maintained at the Office of Contracts and Acquisitions that included documentation on contractor performance submitted by the program offices, as well as obtained additional information from these program offices. Because none of the DCPS program offices that managed contracts we reviewed maintained contract files, we were unable to fully assess the steps these offices took to monitor the contracts. We did, however, review some of the monitoring tools that individual staff and offices created to track their monitoring. For example, we reviewed project plans, samples of invoices, and other types of information staff maintained to document performance. We did not hold an exit conference with the relevant D.C. agencies because the designated point of contact for the District was unresponsive to our repeated requests to schedule an exit conference. However, at the request of the Mayor’s Office, we met with representatives of the Mayor, OSSE, and DCPS, prior to receiving official comments on the draft report. We conducted this performance audit from October 2009 to November 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Janet Mascia (Assistant Director), Rachel Beers, Sue Bernstein, Scott McNulty, Jean McSween, James Rebbe, and Nyree M. Ryder Tee all made key contributions to this report.","Between fiscal years 2004 and 2009, Congress appropriated nearly $190 million in federal payments for school improvement to the District of Columbia (D.C.). This includes $85 million to the state education office--currently the Office of the State Superintendent of Education (OSSE)--to expand public charter schools and $105 million to D.C. Public Schools (DCPS) to improve education in public schools. Over the years, GAO and others have identified challenges that DCPS and OSSE face in managing federal monies. This report identifies, on the basis of available information, activities for which OSSE and DCPS used federal payments between 2004 and 2009 and describes how OSSE and DCPS monitored grant and contract recipients, respectively. GAO reviewed expenditure data and interviewed and collected documentation from OSSE and DCPS, among others. GAO reviewed all available grants awarded by OSSE in 2008 and 2009 and 14 of the largest contracts awarded by DCPS during that time. Approximately 77 percent of federal payments for public charter school improvement in D.C. have been awarded for facility costs, including acquiring, renovating, constructing, or leasing facilities. The funding for facilities has mainly been disbursed through direct loans to schools and grants to expand schools in certain neighborhoods as part of a city improvement initiative. OSSE used the remaining funds for initiatives intended to improve the quality of education through efforts such as academic enrichment and supplemental education activities (provided beyond the normal school day), as well as a variety of other charter school expenditures. OSSE officials reported having established some policies and procedures for monitoring its grant recipients, but, with one exception, these were not documented. Furthermore, the procedures as explained to us by OSSE were not consistently followed. OSSE did create a list of information that program staff are to acquire from grantees. However, the grant files we reviewed often lacked evidence that staff collected this information or performed other monitoring activities. Specifically, most of the files did not include all the narrative and financial reports as required by OSSE in many of their grant agreements. Also, few included any record indicating that staff had followed-up to obtain such documents. According to the expenditure data D.C. provided, DCPS has used federal payments for a variety of purposes--ranging from summer school programs to teacher incentive pay--but available information prior to 2009 does not provide enough details for GAO to fully identify specific activities funded with federal payments. In 2009, DCPS used $40 million primarily for teacher incentive pay, salaries for staff such as physical education and art teachers at underserved schools, and supplemental education activities such as summer school. Expenditure data show that between 2004 and 2008, DCPS funded a variety of programs such as supplemental education and professional development; however, DCPS could not locate information that may have been created on specific activities funded with federal payments during this time. For example, about half of these expenditures were for a ""literacy improvement program,"" but DCPS was unable to provide information to describe the program's goals, objectives, activities, or outcomes. DCPS has policies on responsibilities for monitoring contractor performance; however, these policies do not cover how to do the monitoring and they were not consistently followed. According to program office staff, they have some flexibility in how they implement their monitoring responsibilities and have employed a variety of methods to monitor contractor performance. Of the contract files we reviewed, we found that several lacked any evidence of a performance evaluation by a program officer, or any subsequent review. Notes added to several of the files indicated a program officer had left before the end of the contract term; however, we found no indication that these contracts had been reassigned. Furthermore, the contracting office could not locate 3 of the 17 files we requested for our review. To improve internal controls, GAO recommends that the Mayor direct OSSE and DCPS to establish and implement written policies and procedures for monitoring use of federal payments for school improvement, and DCPS to maintain contract files and other expenditure documentation. The District agreed with GAO's recommendations and provided additional information on steps taken to improve internal controls.",govreport
"Given the current fiscal environment, agencies need to learn to separate wants from needs to ensure that programs and investments provide the best return within fiscal constraints. My first four observations on systemic acquisition challenges relate to this need. They are that: Agency budgets may not be fully linked to strategic goals and may not adequately consider likely agencywide resource limitations. Agencies too often pursue their individual needs rather than collective needs. Individual program and funding decisions may undercut sound policies. Congressional direction sometimes requires agencies to buy items and provide services that have not been planned for and may not be needed. Our work has shown that agencies sometimes budget and allocate resources incrementally, largely based on historical precedents, rather than conduct bottom-up reviews and allocate resources based on the broader goals and objectives of agency strategic plans. For example, in March we reported that DOD does not allocate resources on a strategic basis and that it could improve its acquisition outcomes by adopting an integrated portfolio management approach for allocating weapon system investments. We found that military service allocations as a percentage of the department’s overall investment budget have remained essentially the same for the last 25 years, despite the dramatic changes that have occurred in the strategic environment and warfighting needs during that time. Similarly, in July 2005 we reported that the Environmental Protection Agency budgeted and allocated resources incrementally, largely based on historical precedents, and that its process did not reflect a bottom-up review of the nature or distribution of its current workload— either based on specific environmental laws or the broader goals and objectives in the agency’s strategic plan. Similarly, in our Information Technology Investment Management Model (ITIM) we point out that information technology (IT) portfolio selection criteria support an agency’s mission, organizational strategies, and business priorities and provide a link to the organization’s strategic plans and budget processes. However, in 2004 we reported that a governmentwide survey of investment management processes found that only 6 of 26 agencies had fully implemented portfolio selection criteria— 16 had partially implemented them and 4 had not implemented them at all. This remains an issue. For example, we reported just this year that the Department of Homeland Security (DHS) is missing key elements of effective investment management, such as procedures for implementing project-specific investment management policies, as well as policies and procedures for portfolio-based investment management. Further, it has yet to fully implement either project- or portfolio-level investment control practices. We noted that all told, this means DHS lacks the complete institutional capability needed to ensure that it is investing in IT projects that best support its strategic mission needs. In contrast, successful commercial companies use portfolio management to adjust their resource allocations across business areas based on changes in the marketplace and the competitive environment. The government’s failure to successfully implement such an approach significantly risks wasting investments on wants versus true needs in a time when resources are limited. We have also seen examples of agencies having fragmented decision- making processes for acquisition investments, failing to consider agencywide needs and resource limitations. Successful commercial companies make investment decisions that benefit the organization as a whole within resource constraints. However, DOD continues to allow individual organizational units to assess needs under separate processes, failing to implement a departmental approach to investment decision- making. Consequently, DOD has less assurance that its investment decisions address the right mix of warfighting needs and it starts more programs than current and likely future resources can support. Operationally, there can be real consequences in agencies’ pursuit of individual over collective interests. For example, in December 2005 we reported that on the basis of its experience with unmanned aircraft systems (UAS) in Persian Gulf Operations, U.S. Central Command believed that communications interoperability and payload commonality problems occurred because the military services’ UAS development programs had been service-specific and insufficiently attentive to joint needs. Some agencies have successfully considered wider needs. For example, in March 2005 we reported that DHS had opened communication among its acquisition organizations through its strategic sourcing and small business programs. With strategic sourcing, DHS’s organizations quickly collaborated to leverage spending for various goods and services—such as office supplies, boats, energy, and weapons—without losing focus on small businesses, thus leveraging its buying power and increasing savings. Individual program and funding decisions may also undercut sound policies. We have noted that at some agencies, individual program units may make investments in capabilities that can undercut agencywide goals. This can occur when a disconnect exists between requirements and resources and can lead to unnecessary duplication of effort and costs. For example, we reported in 2006 that NASA’s Deep Space Network and Ground Network programs made investment decisions that were leading to the development of separate array technologies to support overlapping requirements for the same lunar missions. Additionally, while congressional spending directions to agencies sometimes facilitate accomplishment of agency goals, at other times they may require agencies to buy items and provide services for which they had not planned and which may not be needed. Agency spending actions which otherwise would not be taken based on an objective value and risk assessment with consideration of available resources work against good strategic planning. Such spending can circumvent careful planning and divert resources from more critical needs. This can also serve to exacerbate our serious long-range fiscal imbalance. After differentiating their unlimited wants from their true needs, agencies need to translate their needs into appropriate, executable programs. They need to set and communicate realistic system requirements and better maintain stability in those requirements. They also need to ensure that programs proceed through the acquisition process based on having requisite knowledge and that programs are funded adequately. However, too often we see failure in one or more of these key dimensions. Specifically, I have observed that: Agencies too often overpromise and underdeliver in the acquisition of major systems. Programs too often experience requirements instability that causes delays and cost growth in fielding capabilities. Programs too often proceed through the development and demonstration of systems without having achieved needed knowledge. Agencies sometimes budget for less than is needed and put Congress in a position of having to decide whether to provide additional funding. Agencies too often overpromise and underdeliver in the acquisition of major systems as a consequence of programs competing with each other for funding in a fiscally constrained environment. In examining defense programs, we have reported that competition for funding had incentivized programs to produce optimistic cost and schedule estimates, overpromise on capability, suppress bad news, and forsake the opportunity to identify better alternatives. In addition, because DOD starts more weapons programs than it can afford, it invariably finds itself in the position of having to shift funds to sustain programs—often to the point of undermining well-performing programs to pay for poorly performing ones. I believe that even if more funding were provided, it would not be a solution because wants will usually exceed the funding available. Rather, we have to live within our means, which requires us to make difficult choices between wants and needs. Once programs are under way, they often experience requirements instability during major systems development, thereby lengthening the duration of the program. As a result, the problem the program was seeking to address changes or the user and acquisition communities may simply change their minds about a program. The resulting program instability can cause cost escalation, schedule delays, and fewer end items, and can make it harder for the government to hold contractors accountable. For example, in 2005 the Department of Justice inspector general found that the Federal Bureau of Investigation’s Trilogy project experienced significant cost increases and schedule delays due to various factors including evolving design requirements. Acquisition programs that involve development and demonstration often face another challenge—developing the requisite knowledge indicated by best practices before proceeding through key knowledge points in the system acquisition process. In examining DOD’s operations, we have assessed weapon acquisitions as a high-risk area since 1990. Although U.S. weapon systems are the best in the world, the programs to acquire them often take significantly longer and cost significantly more than promised and often deliver smaller quantities and different capabilities than planned. In fact, it is not unusual for estimates of time and money to be off by 20 to 50 percent. It does not, however, have to be so. Our best practices work has shown that it is possible to get better outcomes if decisions are based on high levels of knowledge. Similarly, we have reported that other agencies do not ensure that major acquisition programs have adequate knowledge before proceeding with development. For example, the National Polar-orbiting Operational Environmental Satellite System (NPOESS) project—a tri-agency (National Oceanic and Atmospheric Administration, DOD, and NASA) effort— proceeded into development before the design was proven and before the technologies had properly matured, knowledge that is needed based on our best practices work. In 2004 we reported that the contractor for the project was not meeting expected cost and schedule targets on the new baseline because of technical issues in the development of key sensors. Again, in November 2005, we reported that NPOESS continued to experience problems in the development of a key sensor, resulting in schedule delays and anticipated cost increases. Also, earlier this year we found that DOE lacks a systematic process for ensuring that critical technologies have been adequately demonstrated to work as intended before committing to major construction projects to help maintain the nuclear weapons stockpile, conduct research and development, and process nuclear waste for disposal. In another example, we reported in March 2005 that DHS has adopted a number of acquisition best practices in establishing an investment review process. However, we also noted that this process did not include two critical management reviews that would help ensure that (1) resources match customer needs prior to beginning a major acquisition and (2) program designs perform as expected before moving to production. Our work has also shown that it is not uncommon to find an acquisition program underfunded. In our review of defense programs, we often see cases where the cost of a system in development grows and where, as a result, the return on the defense dollar is reduced. While such cost growth may be accommodated within an agency’s budget through reductions in the number of units to be acquired or by cutting other programs, it may also put Congress in a position of having to decide to provide additional funding if it finds accepting fewer units undesirable. As a consequence, other needed programs may not be fully funded or overall government spending may be increased, thereby adding to the federal deficit. The next set of systemic acquisition challenges relate to those faced at the contract management level. First and foremost, I believe that we must engage in a fundamental re-examination of when and under what circumstances we should use contractors versus civil servants or military personnel. This is a major and growing concern that needs immediate attention. Once the decision to contract has been made, we have observed challenges in setting contract requirements, using the appropriate contract with the right incentives given the circumstances, and ensuring proper oversight of these arrangements—especially considering the evolving and enlarging role of contractors in federal acquisitions. The failure to adequately address these challenges explains, in part, why agencies continue to experience poor acquisition outcomes in buying major systems, goods, and services. My observations are that: Contracts, especially service contracts, often do not have definitive or realistic requirements at the outset to control costs and facilitate accountability. Contracts typically do not accurately reflect the complexity of projects, or appropriately allocate risk between the contractor and the taxpayer. Incentive and award fees are often paid based on contractor attitudes and efforts versus positive results. Contracts, especially service contracts, often don’t have definitive requirements at the outset which are needed to control and facilitate accountability. For example, in January we reported that many reconstruction projects in Iraq have fallen short, in part because DOD had not clearly defined its needs before it entered into contract arrangements. The absence of well-defined requirements and clearly understood objectives complicated efforts to hold DOD and contractors accountable for poor acquisition outcomes in Iraq reconstruction. Given the range of federal projects and circumstances, agencies’ contracting approaches vary widely, and with them, the level of risk. We have found that agencies may not always use the most appropriate contracting approach for the circumstance or effectively oversee their use. Time-and-materials contracts. Time-and-materials contracts— agreements where contractors are paid based on the number of labor hours and materials—pose such risk to the government that federal regulations require contracting officers to make a determination and findings in writing that no other contract type is suitable before using such an arrangement. In a recent review of DOD’s use of such contracts, we found that DOD contracting and program officials frequently did not justify why time-and-materials contracts were the only contract type suitable for the procurement. Further, with a few exceptions, we found that little effort had been made to convert follow- on work to a less risky contract type when historical pricing data existed, despite guidance to do so. We also found that oversight of time-and-materials contracts was lacking as contracting officers generally relied on contractor-provided monthly status reports to conduct oversight. Interagency contracting. We added management of interagency contracting—the use of one agency’s contract by another agency or the provision of contracting assistance and support by another agency— to our high-risk list in 2005. Interagency contracts can leverage the government’s buying power and provide a simplified and expedited method of procurement. However, the rapid growth in use of such contracts, combined with the limited expertise of some agencies in their use and recent problems related to their management, causes some concern. For example, in July 2005, we reported that the use of franchise funds—government-run, fee-for-service organizations providing a portfolio of services, including contracting services—at the Departments of the Interior and the Treasury have not always resulted in fair and reasonable prices for the government. We have also found that agencies often do not have visibility into and effective oversight of their interagency contracts. Last year, for instance, we reported that while DHS spending through interagency contracting totaled billions of dollars annually, and increased by 73 percent in the past year, the department did not systematically monitor its use of these contracts to ensure desired outcomes. Undefinitized contract actions. DOD’s use of undefinitized contract actions can also carry risk to the government and potentially waste taxpayer dollars. These agreements allow contractors to begin work before reaching final agreement on contract terms and are sometimes used by agencies to rapidly fill urgent needs. In June 2007, we reported that DOD did not meet the definitization time frame requirement of 180 days after award on 60 percent of the 77 undefinitized contract actions we reviewed. In June 2004, we found that during Iraqi reconstruction efforts, when requirements were not clear, DOD often entered into contract arrangements that introduced risks. We reported that DOD authorized contractors to begin work before key terms and conditions, such as the projected costs of the work to be performed, were fully defined. In September 2006, we reported that, under this approach, DOD contracting officials were less likely to remove costs questioned by the Defense Contract Audit Agency auditors if the contractor had incurred these costs before reaching agreement on the work’s scope and price. In one case, the Defense Contract Audit Agency questioned $84 million in an audit of a task order for an oil mission. In that case, the contractor did not submit a proposal until a year after the work was authorized, and DOD and the contractor did not negotiate the final terms of the contract until more than a year after the contractor had completed the work. As a result, the DOD contracting officer paid the contractor for all questioned costs but reduced the base used to calculate contractor profit by $45 million. As a result, the contractor was paid about $3 million less in fees. Lead systems integrators. The use of lead systems integrators—prime contractors with increased responsibilities, such as collaborating with the government on system specifications—puts the government at additional risk because it complicates the relationship between the contractor and the government. We have found that agencies may use a lead systems integrator when they believe they do not have the capacity to manage a program, which is a risk in and of itself. This arrangement creates an inherent risk, as the contractor is given more discretion to make certain program decisions. Along with this greater discretion comes the need for more government oversight and an even greater need to develop well-defined outcomes at the outset. For example, since the program’s inception, we have raised concerns about the Coast Guard’s acquisition approach for its Deepwater program— including oversight of its lead systems integrator. For instance, we observed that the Coast Guard had not held its lead systems integrator accountable for taking steps to achieve competition among the suppliers of Deepwater assets. In June of this year, we reported that the Coast Guard has recently taken steps to hold the lead systems integrator accountable for problems that have arisen with the design and construction of certain Deepwater assets that will affect the lead systems integrator’s roles and responsibilities in executing the program moving forward. On the other hand, a close partner-like relationship such as the one the Army has with its Future Combat Systems integrator can also pose risks. Specifically, the government can become increasingly invested in the results of shared decisions and runs the risk of being less able to provide oversight compared with an arms- length relationship. A lack of oversight contributes to the risks of these contracting approaches and can contribute to poor outcomes for critical government projects. Compounding this risk is the growing reliance on contractors to perform functions previously carried out by government personnel. Emergency situations can further exacerbate this risk, providing additional oversight challenges. For example, although U.S. military forces in Iraq have used contractors to a far greater extent than in prior operations, DOD lacks sufficient numbers of contractor oversight personnel at deployed locations to oversee them. Similarly, in work examining contracts undertaken in support of response and recovery efforts for Hurricanes Katrina and Rita, we found that while monitoring was occurring on the contracts we reviewed, the number of monitoring staff available was not always sufficient or effectively deployed to provide oversight. Contractors have an important role to play in the discharge of the government’s responsibilities, and in some cases the use of contractors can result in improved economy, efficiency, and effectiveness. At the same time, there may be occasions when contractors are used to provide certain services because the government lacks another viable and timely option, or due to the preferences of some government officials. In such cases, the government may actually be paying more and incurring higher risk than if such services were provided by federal employees. In this environment of increased reliance on contractors, sound planning and contract execution are critical for success. We have previously identified the need to examine the appropriate role for contractors to be among the challenges in meeting the nation’s defense and other needs in the 21st century. The proper role of contractors in providing services to the government is currently the topic of some debate. In general, I believe there is a need to focus greater attention on what type of functions and activities should be contracted out and which ones should not, to review and reconsider the current independence and conflict-of-interest rules relating to contractors, and to identify the factors that prompt the government to use contractors in circumstances where the proper choice might be the use of civil servants or military personnel. Possible factors could include inadequate force structure, outdated or inadequate hiring policies, classification and compensation approaches, and inadequate numbers of full-time equivalent slots. We also have found that agencies sometimes pay contractors incentive and award fees—financial bonuses or profit intended to motivate excellent contractor performance—without a clear link to desired program outcomes. We have reported that DOD, DOE, and NASA have not fared well at using award and incentive-fee contracts to improve cost control behavior and performance. For example, in 2005, we reported that DOD paid award and incentive fees even when programs failed. About half of the 27 incentive fee contracts that we reviewed failed or were projected to fail to meet a key measure of program success, which was to complete the acquisition at or below the target price. In March 2005, we reviewed 33 DOE contracts using a performance incentive. Of those 33, we found that DOE had awarded 15 such contracts without an associate cost incentive or constraint, as required by regulations. Thus, the contractor could receive full fees by meeting all schedule baselines while substantially overrunning costs. Earlier this year, we reported that NASA paid significant amounts of available fee on all of the 10 contracts we reviewed, including those end item contracts that did not deliver a capability within initial cost, schedule, and performance parameters. In one case, NASA paid the contractor 97 percent of the available award fee despite a delay in the completion of the contract by over 2 years and an increase in the cost of the contract of more than 50 percent. However, when properly tied to program outcomes, incentive and award fees may have their desired effect. Last year, we reported that DOE’s use of an incentive fee contributed to the early completion of the cleanup of a former nuclear weapons production facility. The last set of challenges I will discuss relate to having a capable acquisition workforce and holding it accountable. These challenges underlie the federal government’s ability to strategically plan and effectively manage individual programs and contracts as they involve the people needed to carry out these functions. My observations are that: The government faces serious acquisition workforce challenges (e.g., size, skills and knowledge, and succession planning). Key program staff rotate too frequently, thus promoting myopia and reducing accountability (i.e., tours based on time versus key milestones). Additionally, the revolving door between industry and agencies presents potential conflicts of interest. Inadequate oversight has resulted in little or no accountability for recurring and systemic problems. Lack of high-level attention reduces the chances of success in the acquisition, contracting, and other key business areas. The acquisition workforce’s workload and complexity of responsibilities have been increasing without adequate agency attention to the workforce’s size, skills and knowledge, and succession planning. This situation is made all the more challenging by the increasing use of contractors to support program operations because of the additional oversight needed. Though many agencies lack good data on their workforces, it is clear that the size of the workforce has declined, while the size of government expenditures for goods and services has risen significantly. These trends represent a major challenge to the current workforce—dealing with a significantly increased workload. At the same time that the federal acquisition workforce has decreased in numbers and the size of its investments in goods and services has increased significantly, the nature of the role of the acquisition workforce has been changing and, as a result, so have the skills and knowledge needed in that workforce to manage more complex contracting approaches. One way agencies have dealt with this situation is to rely more heavily on contractor support. For example, DOD is relying on contractors in new ways to manage and deliver weapon systems. On the basis of our work looking at various major weapon systems, we have observed that DOD has given contractors increased program management responsibilities to develop requirements, design products, and select major system and subsystem contractors. In part, this increased reliance has occurred because DOD is experiencing a critical shortage of certain acquisition professionals with technical skills related to systems engineering, program management, and cost estimation. Without adequate oversight by and training of federal employees overseeing contracting activities, reliance on contractors to perform functions that once would have been performed by members of the federal workforce carries risk. As I noted earlier, the use of lead system integrators is being undertaken by agencies when they believe they lack the expertise needed to manage complex acquisitions. Our concern over the skills and knowledge of the workforce extends beyond DOD. At times skills may be in short supply in both government and the private sector. For example, in December 2006 we reported that employees with certain information technology skills are in short supply in both the federal and private sectors—particularly in enterprise architecture, project management, and information security. Demographic changes promise to further exacerbate agencies’ acquisition workforce problems. In 2006, Office of Personnel Management reported that approximately 60 percent of the government’s 1.6 million white collar employees and 90 percent of about 6,000 federal executives will be eligible for retirement over the next 10 years. The situation facing DOD exemplifies this problem as more than half of DOD’s workforce will be eligible for early or regular retirement in the next 5 years. In fact, Navy officials recently told us that they are already seeing a “hemorrhaging” of senior contracting officers as large numbers have started to retire. Agencies facing workforce challenges have used strategic human capital planning to develop long-term strategies for acquiring, developing, motivating, and retaining staff to achieve programmatic goals. Additionally, agencies should engage in broad, integrated succession planning and management efforts that focus on strengthening their current and future organizational capacity to obtain or develop the knowledge, skill, and abilities they need to meet their missions. Without proper strategic human capital planning, the government will not be a good position to adjust to this challenge. We also have concerns that acquisition employees rotate too frequently— both between programs and between government and industry. In a recent assessment of selected DOD weapon systems, we found that many of the programs had multiple program managers within the same development phase, reducing accountability for poor program outcomes. We also reported that the Coast Guard experienced high turnover of key Deepwater program staff, resulting in the loss of knowledge on the teams responsible for managing the program and overseeing the system integrator. Also, the revolving door between industry and government may present potential conflicts of interest. Federal ethics rules and standards have been put in place to help safeguard the integrity of the procurement process by mitigating the risk that employees will use their positions to influence the outcomes of contract awards for future gain and that companies will exploit this possibility. We currently have reviews under way examining issues relating to the revolving door between federal employment and contractors working for the government including DOD actions to assess contractor hiring controls to address revolving door issues. Our work at DOD and other agencies has shown that there have been persistent acquisition problems, particularly for complex developmental systems, but also for the increasingly complex contracting arrangements being used by the government to purchase goods and services. For example, we reported on DOE’s weaknesses in managing its acquisitions and found that DOE is only meeting its cost and schedule goals for its ongoing construction projects about one-third of the time. We also found that DOE’s National Nuclear Security Administration has not developed a project management policy, implemented a plan for improving its project management practices, or fully shared project management lessons learned among its sites. Similarly, we also have reported on weaknesses in the Federal Aviation Administration’s (FAA) management of its acquisition process as the primary causes of its cost, schedule, and performance problems in developing systems for air traffic control. Because of these weaknesses, we continue to designate FAA’s modernization program as a high-risk area. A key part of addressing challenges to the acquisition workforce is having mechanisms to hold the workforce accountable and ensure sufficient high- level attention to systemic acquisition problems. We have noted the importance of sustained leadership to ensure accountability for results and addressing key deficiencies when faced with complex and long-term challenges. In July 2006, we reported that DOD continues to face vulnerabilities in contracting fraud, waste, and abuse, in part because it lacks sustained senior leadership in providing direction and vision, as well as in maintaining the culture of the organization. By not setting the right tone at the top, DOD allows a certain level of vulnerability into the acquisition process and problems to persist. Holding the workforce accountable has certain prerequisites. For example, we have reported that senior leaders have to provide program managers an executable business case, empower them, support them, and align managers’ tenures with delivery dates. We also have identified the need for similar high-level management attention at other agencies. For example, we have raised concerns in the past that DHS’s Chief Procurement Officer (CPO) did not have clear enforcement authority to ensure that acquisition initiatives are carried out. DHS recently stated that the Under Secretary for Management has authority as the Chief Acquisition Officer to monitor acquisition performance, establish clear lines of authority for making acquisition decisions, and manage the direction of acquisition policy for the department, and that those authorities also devolve to the CPO. A formal designation of a Chief Acquisition Officer and corresponding modifications to existing management directives should help address our earlier concerns. Similarly, after creating a Chief Operating Officer to head its air traffic modernization program, FAA was able to adopt more leading practices of private sector businesses to address cost, schedule, and performance shortfalls that have plagued air traffic control acquisitions. Also, our work looking at leading company practices used to acquire services found that companies elevated their procurement organizations from mission support to a more strategically important business unit that exercises more control over the acquisition of services. Further, on the basis of on our defense work, we have noted that an essential ingredient for better ensuring that overall DOD business transformation is implemented and sustained is to create a full-time and separate Chief Management Officer (CMO) position to address key business transformation challenges and stewardship responsibilities. Such a position could institutionalize accountability for DOD’s efforts to improve its business operations, including prioritizing investments across the department. In closing, I would like to reemphasize why it is imperative that we correct these systemic governmentwide acquisition challenges. The U.S. government’s current financial condition and long-term fiscal outlook require it to seek the best return it can on its investment in goods and services and make some difficult, but necessary, strategic choices between unlimited wants and real, affordable, and sustainable needs. The federal government needs to engage in a fundamental and comprehensive re-examination of the federal government’s overall approach to contracting. This includes when and on what basis the government should contract. In the day-to-day management and oversight of major projects and purchases of goods and services, agencies will need to be realistic in their requirements and technologies before they invest significant funds in programs and strike a better balance among expediency, best value, and oversight when entering into contracts for goods and services. Agencies must also assess the skills, knowledge, and appropriate size of their acquisition workforce, and must also have key leadership positions to set the right tone at the top and have high-level accountability to fix recurring acquisition issues. We should have zero tolerance for waste and mismanagement in times of surplus or deficit, but it will never be zero. Much, however, can and should be done to minimize it. We have made numerous specific recommendations to DOD and other agencies on how to address these systemic acquisition challenges, many of which have not been implemented. Where agencies are responding to our recommendations, we are seeing some improvements in their acquisition management. I appreciate this committee’s attention to this important and timely issue and look forward to working with you to see that agencies continue to take actions to address these challenges. Mr. Chairman and members of the committee, this concludes my testimony. I would be happy to answer any questions you might have. For further information regarding this testimony, please contact John P. Hutton at (202) 512-4841 or huttonj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this testimony. Key contributors to this testimony were Theresa Chen, Laura Holliday, John Neumann, Kenneth Patton, Sylvia Schatz, Karen Sloan, and Bruce Thomas. 1. Service budgets are allocated largely according to top line historical percentages rather than Defense-wide strategic assessments and current and likely resource limitations. 2. Capabilities and requirements are based primarily on individual service wants versus collective Defense needs (i.e., based on current and expected future threats) that are both affordable and sustainable over time. 3. Defense consistently overpromises and underdelivers in connection with major weapons, information, and other systems (i.e., capabilities, costs, quantities, and schedule). 4. Defense often employs a “plug and pray approach” when costs escalate (i.e., divide total funding dollars by cost per copy, plug in the number that can be purchased, then pray that Congress will provide more funding to buy more quantities). 5. Congress sometimes forces the department to buy items (e.g., weapon systems) and provide services (e.g., additional health care for non-active beneficiaries, such as active duty members’ dependents and military retirees and their dependents) that the department does not want and we cannot afford. 6. DOD tries to develop high-risk technologies after programs start instead of setting up funding, organizations, and processes to conduct high-risk technology development activities in low-cost environments, (i.e., technology development is not separated from product development). Program decisions to move into design and production are made without adequate standards or knowledge. 7. Program requirements are often set at unrealistic levels, then changed frequently as recognition sets in that they cannot be achieved. As a result, too much time passes, threats may change, or members of the user and acquisition communities may simply change their mind. The resulting program instability causes cost escalation, schedule delays, smaller quantities and reduced contractor accountability. 8. Contracts, especially service contracts, often do not have definitive or realistic requirements at the outset in order to control costs and facilitate accountability. 9. Contracts typically do not accurately reflect the complexity of projects or appropriately allocate risk between the contractors and the taxpayers (e.g., cost plus, cancellation charges). 10. Key program staff rotate too frequently, thus promoting myopia and reducing accountability (i.e., tours based on time versus key milestones). Additionally, the revolving door between industry and the department presents potential conflicts of interest. 11. The acquisition workforce faces serious challenges (e.g., size, skills, knowledge, and succession planning). 12. Incentive and award fees are often paid based on contractor attitudes and efforts versus positive results (i.e., cost, quality, and schedule). 13. Inadequate oversight is being conducted by both the department and Congress, which results in little to no accountability for recurring and systemic problems. 14. Some individual program and funding decisions made within the department and by Congress serve to undercut sound policies. 15. Lack of a professional, term-based Chief Management Officer at the department serves to slow progress on defense transformation and reduce the chance of success in the acquisitions/contracting and other key business areas. Several of my colleagues in the accountability community and I have developed a definition of waste. As we see it, waste involves the taxpayers in the aggregate not receiving reasonable value for money in connection with any government-funded activities due to an inappropriate act or omission by players with control over or access to government resources (e.g., executive, judicial or legislative branch employees; contractors; grantees; or other recipients). Importantly, waste involves a transgression that is less than fraud and abuse. Further, most waste does not involve a violation of law, but rather relates primarily to mismanagement, inappropriate actions, or inadequate oversight. Illustrative examples of waste could include the following: unreasonable, unrealistic, inadequate, or frequently changing proceeding with development or production of systems without achieving an adequate maturity of related technologies in situations where there is no compelling national security interest to do so; the failure to use competitive bidding in appropriate circumstances; an over-reliance on cost-plus contracting arrangements where reasonable alternatives are available; the payment of incentive and award fees in circumstances where the contractor’s performance, in terms of costs, schedule, and quality outcomes, does not justify such fees; the failure to engage in selected pre-contracting activities for contingent events; and congressional directions (e.g., earmarks) and agency spending actions where the action would not otherwise be taken based on an objective value and risk assessment and considering available resources. 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Department of Energy: Major Construction Projects Need a Consistent Approach for Assessing Technology Readiness to Help Avoid Cost Increases and Delays. GAO-07-336. Washington, D.C.: March 27, 2007. DOE Contracting: Better Performance Measures and Management Needed to Address Delays in Awarding Contracts. GAO-06-722. Washington, D.C.: July 30, 2006. Department of Energy: Further Actions Are Needed to Strengthen Contract Management for Major Projects. GAO-05-123. Washington, D.C.: March 18, 2005. Coast Guard: Challenges Affecting Deepwater Asset Deployment and Management and Efforts to Address Them. GAO-07-874. Washington, D.C.: June 18, 2007. Department of Homeland Security: Progress and Challenges in Implementing the Department’s Acquisition Oversight Plan. GAO-07-900. Washington, D.C.: June 13, 2007. Department of Homeland Security: Ongoing Challenges in Creating an Effective Acquisition Organization. GAO-07-948T. Washington, D.C.: June 7, 2007. Information Technology: DHS Needs to Fully Define and Implement Policies and Procedures for Effectively Managing Investments. GAO-07-424. Washington, D.C.: April 27, 2007. Interagency Contracting: Improved Guidance, Planning, and Oversight Would Enable the Department of Homeland Security to Address Risks. GAO-06-996. Washington, D.C.: September 27, 2006. Homeland Security: Challenges in Creating and Effective Acquisition Organization. GAO-06-1012T. Washington, D.C.: July 27, 2006. Hurricane Katrina: Improving Federal Contracting Practices in Disaster Recovery Operations. GAO-06-714T. Washington, D.C.: May 4, 2006. NASA Procurement: Use of Award Fees for Achieving Program Outcomes Should Be Improved. GAO-07-58. Washington, D.C.: January 17, 2007. NASA’s Deep Space Network: Current Management Structure Is Not Conducive to Effectively Matching Resources with Future Requirements. GAO-06-445. Washington, D.C.: April 27, 2006. Next Generation Air Transportation System: Status of the Transition to the Future Air Traffic Control System. GAO-07-784T. Washington, D.C.: May 9, 2007. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","In fiscal year 2006, the federal government spent over $400 billion for a wide variety of goods and services, with the Department of Defense (DOD) being the largest purchaser. Given the large and growing structural deficit, the government must get the best return it can on its investment in goods and services. For decades, GAO has reported on a number of systemic challenges in agencies' acquisition of goods and services. These challenges are so significant and wide-ranging that GAO has designated four areas of contract management across the government to be high-risk. This testimony highlights four key acquisition challenges agencies face: (1) separating wants from needs, (2) establishing and supporting realistic program requirements, (3) using contractors in appropriate circumstances and contracts as a management tool, and (4) creating a capable workforce and holding it accountable. Given the current fiscal environment, agencies must separate wants from needs to ensure that programs provide the best return on investments. Our work has shown that some agencies budget and allocate resources incrementally, largely based on historical precedents, rather than conducting bottom-up reviews and allocating resources based on agencywide goals. We have also seen examples of agencies using fragmented decision-making processes for acquisition investments. Agency spending actions that would not otherwise be taken based on an objective value and risk assessment and considering available resources, work against good strategic planning. Such spending can circumvent careful planning and divert resources from more critical needs, and can serve to exacerbate our serious long-range fiscal imbalance. Agencies also need to translate their true needs into executable programs by setting realistic and stable requirements, acquiring requisite knowledge as acquisitions proceed through development, and funding programs adequately. However, agencies too often promise capabilities they cannot deliver and proceed to development without adequate knowledge. As a result, programs take significantly longer, cost more than planned, and deliver fewer quantities and different capabilities than promised. Even if more funding were provided, it would not be a solution because wants will usually exceed the funding available. No less important is the need to examine the appropriate circumstances for using contractors and address contract management challenges. Agencies continue to experience poor acquisition outcomes in buying goods and services in part because of challenges in setting contract requirements, using the appropriate contract with the right incentives, and ensuring sufficient oversight. Exacerbating these challenges is the evolving and enlarging role of contractors in performing functions previously carried out by government personnel. Further, while contract management challenges can jeopardize successful acquisition outcomes in normal times, they also take on heightened importance and significantly increase risks in the context of contingency operations such as Afghanistan, Iraq, or Hurricane Katrina. Finally, it is imperative that the federal government develop an accountable and capable workforce, because the workforce is ultimately responsible for strategic planning and management of individual programs and contracts. Yet much of the acquisition workforce's workload and complexity of responsibilities have been increasing without adequate attention to the workforce's size, skills and knowledge, and succession planning. Sustained high-level leadership is needed to set the right tone at the top in order to address acquisition challenges and ultimately, prevent fraud, waste, and abuse.",govreport
"In each fiscal year, DOD establishes a standard price per barrel to be charged to its fuel customers. The Office of the Under Secretary of Defense (Comptroller), in coordination with the Defense Logistics Agency (DLA), estimates and sets a standard price for its fuel and other fuel- related commodities that endeavors to closely approximate the actual per barrel price during budget execution, which occurs almost a year later. The Office of the Under Secretary of Defense (Comptroller) sets the standard price annually based on three components. Crude Oil—The baseline for setting the standard price is the forecasted price for crude oil, which is provided to DOD by OMB. To estimate the cost of crude oil, the Council of Economic Advisors, the Department of the Treasury, and OMB—referred to as the Troika— jointly prepare a set of economic assumptions for agencies to use in preparing their overall budgets. In developing the crude oil price projections, the Troika uses oil price projections coming from the prices in the futures market for both West Texas Intermediate (WTI) and Brent crude oil prices. DOD uses the WTI projection as its baseline. According to OMB Circular A-11, all baseline estimates used in the budget must be consistent with the economic assumptions provided by OMB. Refinement Markup—DOD adds a markup for the cost of refining the crude oil. Because DOD and its customers use refined oil products— such as jet fuel and diesel fuel—DOD has to include the additional cost of refining the fuel in its standard price. This refinement markup is estimated based on the historical price relationship between WTI crude oil and refined product prices. Nonproduct Costs—DOD adds an estimate for nonproduct costs associated with DLA’s overhead, including facilities sustainment, restoration, and modernization; transportation; and storage costs. Other nonproduct costs include an estimate of product losses and may include cost recovery adjustments for prior year fund losses to the Defense-wide Working Capital Fund, legal judgments, and rounding. Figure 1 identifies each of the price components as a percentage of the total standard price for fiscal year 2013. In developing their annual operation and maintenance budget requests, the military services use the standard price and their estimated fuel requirements based on activity levels (such as flying hours, steaming days, tank miles, and base operations). For example, the Air Force as the largest DOD customer for fuel, purchased approximately 49 million barrels in fiscal year 2013, representing 53 percent of all sales to the military services. In determining its Operation and Maintenance funding needs, the Air Force provided an estimate for fuel in its budget request based on an analysis of each aircraft’s fuel usage and future programmed flying hours. Figure 2 below generally illustrates the process and the main organizations involved in budgeting for fuel. DOD utilizes its Defense-wide Working Capital Fund to purchase bulk fuel for customers. According to DOD’s Financial Management Regulation, working capital funds were established to satisfy recurring DOD requirements using a businesslike buyer-and-seller approach. The Defense-wide Working Capital Fund is the Working Capital Fund managed by the defense agencies. The fund consists of six activity groups. Three of these activity groups are operated by DLA, two by the Defense Information Systems Agency, and one by the Defense Finance and Accounting Service. The activity group related to DOD’s bulk fuel program is the DLA Energy Management Activity group, which provides worldwide energy support including bulk fuel purchasing, transportation, and storage for the military services and other customers. The fund covers DLA’s costs for purchasing bulk fuel and is reimbursed through its sale of fuel to the military services and other customers at a standard price. The standard price is intended to remain unchanged until the next budget year. This helps to shield the military services from market price volatility by allowing the cash balance in the fund to absorb minor fuel price fluctuations. According to DOD’s Financial Management Regulation, the goal of the fund is to remain revenue-neutral, allowing the fund to break even over time—that is, to neither make a gain nor incur a loss. During the year the budget is executed, the actual price for a barrel of fuel on the world market may be higher or lower than DOD’s standard price. If the actual price is higher, the cash balance in the Defense-wide Working Capital Fund will go down. If the actual price is lower, the cash balance in the fund will go up. These fluctuations in the cash balance are known as a net outlay. To correct for these fluctuations, DOD may adjust the standard price for the following year. For example, DOD may increase the standard price to make up for losses in the previous year and bolster the cash balance in the fund. Alternatively, DOD may decrease the standard price to reimburse the services, which had paid a higher price the previous year. DOD can also cover fund losses during the execution year by obtaining an appropriation from Congress, transferring funds from another DOD account into the fund, or adjusting the standard price out of cycle. During fiscal years 2009 through 2013, DOD’s actual costs for bulk fuel differed considerably from its budget estimates, due largely to fluctuations in fuel price. During those years, DOD either under- or overestimated what it would have to pay for bulk fuel. The differences between estimated and actual fuel costs were accounted for primarily by fluctuations in the market price for fuel. In each of fiscal years 2010, 2011, and 2012, DOD underestimated its bulk fuel costs by about $3 billion. In 2009, DOD overestimated these costs by about $3 billion and in 2013 by about $2 billion. Table 1 shows the total difference between DOD’s estimated and actual fuel costs for fiscal years 2009 through 2013. We identified two primary factors that accounted for the difference between estimated and actual costs—(1) fluctuations in the market price of fuel and (2) differences between the services’ estimated and actual fuel consumption. Our analysis showed that from fiscal years 2009 through 2013, the differences between the price DOD paid for fuel and the price it charged its fuel customers—the standard price—accounted for, on average, 74 percent of the difference between estimated and actual costs. In fiscal year 2012, for example, DOD estimated a standard price of $131.04 per barrel. DOD’s actual costs during that year averaged $167.33 per barrel—an underestimate of $36.29 per barrel—which represented 85 percent of the underestimate for fiscal year 2012. Figure 3 compares the actual price DLA paid for fuel with the standard price DOD used to calculate its budget estimates. Of the three components that constitute the standard price, crude oil prices and refinement markup costs accounted for most of the difference between the estimated standard price and actual fuel costs during fiscal years 2009 through 2013. In fiscal years 2009 and 2010, differences in the price of crude oil accounted for most of the difference between the estimated and actual prices—in 2009 for 95 percent of the difference and in 2010 for 72 percent. However, during fiscal years 2011 through 2013, the refinement markup became the main driver of the difference, accounting for between 65 and 79 percent of the difference, as shown in table 2. For fiscal years 2009 through 2012, DOD added a markup of 30 percent over the price of WTI to account for refinement costs in setting the standard price. According to DOD officials, the 30 percent markup over the WTI crude oil price had been a generally accurate predictive indicator for the price of DOD’s actual refined fuel costs. However, in fiscal year 2011, actual fuel costs exceeded the price of WTI by an average of 49 percent and in 2012 by an average of 60 percent. Therefore, DOD set the refinement markup too low in those years. According to DOD officials, to account for these differences, DOD increased the markup for refinement costs from 30 percent to 50 percent of the WTI price when developing the standard price for fiscal year 2013. Although fluctuations in fuel prices were, on average, the primary driver of the differences between estimated and actual fuel costs in fiscal years 2009 through 2013, differences between the services’ estimated and actual fuel consumption levels also contributed to the overall difference. These differences accounted for, on average, 26 percent of the difference between DOD’s estimated and actual fuel costs. In fiscal years 2009 through 2012, the military services’ estimated fuel requirements were within 5 percent of their actual consumption, as shown in figure 4. However, in fiscal year 2013, we found that differences between estimated and actual fuel consumption levels became the main driver of the total difference between estimated and actual fuel costs. In that year, DOD underestimated the cost of fuel but overestimated its consumption by approximately 19 million barrels, or 17 percent. According to DOD officials, actual consumption was much lower as a result of actions DOD took to address sequestration. In November 2013, we reported that for fiscal year 2013, DOD’s Operation and Maintenance accounts were reduced by approximately $20 billion, or 7.2 percent, due to sequestration reductions. We identified several actions DOD took to address these budgetary reductions. For example, in fiscal year 2013, the Air Force initially ceased flight operations from April through June for about one- third of active-duty combat Air Force units. Also, the Army curtailed training for all units except those deployed, preparing to deploy, or stationed overseas, and the Navy limited flight training for nondeploying units. DOD has taken actions to manage fluctuations in the cash balance of the Defense-wide Working Capital Fund caused by differences between its estimated and actual fuel costs. These actions included transferring funds into the Defense-wide Working Capital Fund from other accounts and adjusting the standard price DOD charged to its fuel customers. The Defense-wide Working Capital Fund provides the cash balance that is used to fund the day-to-day operations for six defense-wide activity groups, including DLA Energy, which provides, among other things, worldwide energy support to the military services and other authorized customers for bulk fuel purchasing, transportation, and storage. According to a DOD report, the volatility of fuel prices has historically posed a challenge to managing the cash balance of the fund. When DLA pays more or less for fuel than the standard price it charges its customers, the cash balance in the Defense-wide Working Capital Fund will go down or up. For instance, if fuel market prices rise significantly relative to the standard price, the cash balance in the fund will go down. On the other hand, if fuel market prices decrease relative to the standard price, the fund will generate excess cash and the balance will go up. In fiscal years 2009 through 2013, the fluctuations in the cash balance of the Defense-wide Working Capital Fund were partially driven by these net outlays for fuel, as shown in figure 5. The Defense-wide Working Capital Fund is intended to provide DOD with the flexibility to absorb some fluctuation in fuel prices. However, in some instances, DOD has sought to manage the fluctuations in the fund’s cash balance by transferring money into or out of the fund or by adjusting its standard price. For example, in fiscal years 2012 and 2013, DOD transferred funds into the Defense-wide Working Capital Fund. In 2012, DOD transferred $1 billion into the fund from the Afghanistan Security Forces Fund and in 2013 another $1.4 billion from various accounts, including the Foreign Currency Fluctuations account, to mitigate the cash shortfall caused by an increase in fuel costs over the standard price. DOD also transferred cash out of the fund during the period of our review. Specifically, in fiscal year 2011, Congress reduced funding for several DOD operation and maintenance accounts by about $2 billion to reflect excess cash balances in the Defense-wide Working Capital Fund. In response, DOD transferred almost $1.3 billion out of the Defense-wide Working Capital Fund to fund the reduced operation and maintenance accounts. We found that these transfers into or out of the fund can affect adjustments to the standard price. For example, according to DOD officials, the fiscal year 2013 transfer allowed DOD to maintain the same standard price throughout that year even though actual fuel costs exceeded the standard price. A DOD study noted that the fiscal year 2011 transfer out of the fund required DOD to increase its standard price by almost $40 per barrel because the cash balance in the Defense-wide Working Capital Fund was no longer sufficient to mitigate the increased costs of fuel in that year. DOD also used changes to the standard price to manage the cash balance in the Defense-wide Working Capital Fund. From the beginning of fiscal year 2009 through end of fiscal year 2013, DOD adjusted its standard price 13 times—increasing it 6 times and decreasing it 7 times. According to DOD, these price changes were due to changing product costs, approved transfers, and the availability of cash balances in the fund. For example, the fiscal year 2012 President’s Budget estimated a standard price of $131.04. However, in October 2011, DOD raised the standard price to $165.90. It then lowered the price to $160.44 in January 2012, to $151.20 in June 2012 and finally to $97.02 in July 2012, where the price remained for the rest of the fiscal year. Figure 6 shows the transfers and standard prices during fiscal years 2009 through 2013 and the cash balances in the Defense-wide Working Capital Fund. Standard price adjustments affect the military services. According to DOD officials, an adjustment to the standard price is not their preferred option for managing the fund’s cash balances because of the potential strain it places on the services’ budgets. For example, a Navy official told us that when the standard price is increased, the Navy must either reduce consumption by curtailing training or request additional funding. Fiscal year 2013 was the first year since 2004 during which DOD maintained its standard price for the entire year. DOD has studied various aspects of its bulk fuel program since 2004, but it has not updated its current approach for setting the standard price to reflect current market conditions or documented its rationale for the assumptions it uses in estimating the standard price—even though the differences between its estimated and actual costs have been considerable since that time. Since 2004, DOD has completed a number of studies reviewing various aspects of its bulk fuel program, including studies of its management of working capital funds. We identified six studies related to DOD bulk fuel pricing and management of the Defense-wide Working Capital Fund. See appendix II for a description of the purpose of the studies and any identified findings, including the status on any proposed recommendations. The John Warner National Defense Authorization Act for Fiscal Year 2007 required the Secretary of Defense to submit a report on fuel rate and the cost projections used in the DOD budget presentation. In response, DOD completed a study in February 2007 that compared the crude oil forecast provided by OMB with crude oil forecasts developed by the Department of Energy and 38 private forecasting companies. Based on its analysis, DOD elected to maintain its current approach—using OMB’s WTI forecast as its preferred baseline—because the study concluded that OMB’s forecasts were comparable to or better at estimating the actual crude oil price than the alternative forecasts it evaluated. More recently, in January 2012, in response to the Ike Skelton National Defense Authorization Act for Fiscal Year 2011, the Office of the Under Secretary of Defense (Comptroller) reviewed alternatives for managing the balances of the Defense-wide Working Capital Fund. The study found that fuel cost volatility poses a major threat to the fund’s solvency. As a result, the study concluded that DOD may need to request funding transfers that could disrupt investment programs or threaten readiness. The study recommended two alternatives for managing working capital funds. The first would allow DOD to transfer expiring unobligated balances from other appropriation accounts into the fund to build a cash reserve. The study noted that this alternative is similar to authorities provided to other federal agencies’ working capital funds, but that it would require statutory authorization. The second alternative would allow the fund to accumulate and reserve funds in times of positive cash flow—up to $12.5 billion, or two times the largest cash shortfall on record. The Office of the Under Secretary of Defense (Comptroller) identified several concerns with this alternative. For example, according to the study, DOD would need congressional authorization to accumulate positive operating results. Additionally, the study noted that maintaining a large cash balance in the fund to mitigate potential price risk is not a productive use of resources. According to DOD officials, DOD’s Financial Management Regulation is currently being updated with an estimated issuance of summer 2014 to allow for greater flexibility in developing cash balance targets for the Defense-wide Working Capital Fund. The 2012 study also listed other alternatives for managing working capital fund balances, which it did not recommend due to certain limitations, risks, and costs. These included some alternatives that had previously been studied and recommended by the Defense Business Board. For example, the Defense Business Board had previously studied the feasibility of hedging fuel on the open market, which includes purchasing financial instruments to minimize risk in future prices. However, according to the study, DOD has elected not to pursue hedging for a number of reasons including that it is outside of DOD’s current authority, would incur management fees that would increase total costs, and poses additional political and economic risk. The 2012 study also rejected the Defense Business Board’s recommendations to implement firm-fixed- price fuel contracts and to partner with the Department of the Interior to access additional funds when fuel costs increase. The study noted that firm-fixed-price contracts would shift pricing risk to the supplier, which would be likely to result in DOD paying a premium for the contracts. According to GAO’s Cost Estimating and Assessment Guide, a cost estimate should be updated regularly to reflect significant changes—such as changes to assumptions—and actual costs, so that it always reflects current conditions. Also, according to the guide, major assumptions should be assessed to determine how sensitive they are to changes, and risk and uncertainty analysis should be performed to determine the level of risk associated with the estimate. Further, OMB guidance states that agencies should consider the effect that demographic, economic, or other changes can have on assumptions for program levels beyond the budget year. However, the assumptions that DOD uses for setting the crude oil component of the standard price do not reflect current market conditions. Specifically, DOD’s assumptions do not consider (1) differences between crude oil benchmarks, (2) differences between domestic and international crude oil prices, and (3) the decreasing relationship between crude oil and refined prices. DOD’s approach for establishing the standard price has not accounted for changes in market conditions for crude oil. As discussed earlier in this report, DOD’s process of adding a refinement markup to the price of WTI in setting the standard price has resulted in estimated fuel costs that have been considerably lower than actual fuel costs. We found that, from fiscal years 2010 through 2013, the price for WTI diverged from other crude oil pricing benchmarks. According to a report from the Energy Information Administration, WTI was selling during this period for less than other crude oil pricing benchmarks, such as Brent—a commonly used crude oil benchmark. The price spread between WTI and Brent reached a high of $27 per barrel in September 2011, as shown in figure 7. Energy Information Administration officials also told us that, although the price spread between Brent and WTI has narrowed recently, they believe that the relationship between the pricing of Brent and WTI may remain volatile and that a price spread between the two benchmarks will likely continue. In its April 2014 Short-Term Energy Outlook, the Energy Information Administration estimates that in calendar year 2015 the price of WTI will be about $11 per barrel less than the price of Brent. Recognizing this market change, other federal agencies have adjusted their crude oil benchmarks for estimating energy prices because of this price spread. For example, in its 2013 Annual Energy Outlook, the Energy Information Administration shifted from WTI to Brent for estimating energy prices. According to officials from the Energy Information Administration, Brent crude oil prices have become the primary international crude oil benchmark. Furthermore, these officials noted that worldwide petroleum product prices—including in the United States—are typically based on Brent prices. This is consistent with DLA’s analysis, which found that domestic refined fuel products are more closely related with Brent than with WTI prices. OMB has also accounted for other crude oil benchmarks in its annual economic assumptions that are provided to federal agencies for budgeting purposes. According to officials from DOD and OMB, beginning with the fiscal year 2014 budget cycle, OMB began providing DOD and other federal agencies with forecasted Brent prices in addition to WTI prices. OMB officials told us that although OMB Circular A-11 requires that federal agencies’ budget estimates be consistent with OMB’s economic assumptions, DOD has discretion over which economic assumptions, such as an appropriate crude oil benchmark, to apply in developing its bulk fuel estimates. We identified other market conditions that DOD has not accounted for with its current approach to determining the crude oil component of the standard price. For example, DLA purchases about half of its fuel from overseas refiners. From fiscal years 2009 through 2013, DLA purchased, on average, 48 percent of its fuel from overseas sources. However, WTI is a pricing benchmark only for domestic crude oil. Because DOD uses WTI, its baseline for setting the standard price does not account for any potential price differences between domestic and overseas purchases. Furthermore, officials at DOD also expressed concerns that crude oil may no longer be a good indicator for refined product prices. According to an official from the Office of the Under Secretary of Defense (Comptroller), in recent years the relationship between crude oil prices and the price of DOD refined products has not been as closely related as it has in the past. This is consistent with our own analysis. Specifically, for fiscal years 2009 through 2013 we compared the actual price DLA paid for fuel with the actual price of other fuel products—including WTI crude oil, Brent crude oil, and commercial jet fuel—to determine the relationship among these prices. Based on our analysis of data from the Energy Information Administration, we found that in each year the prices DLA paid for fuel had a closer relationship with commercial jet fuel prices than with either WTI or Brent crude oil prices. To compensate for the limitations in its crude oil baseline, DOD has adjusted other components of its standard price. For example, as discussed earlier in this report, beginning in fiscal year 2013, DOD increased the refinement markup component of the standard price from 30 percent to 50 percent to account for the divergence between WTI and other crude oil pricing benchmarks. DOD has continued to use the 50 percent refinement markup in setting its standard price for fiscal years 2014 and 2015. This practice means that DOD is using the markup not only to account for refinement costs, but to cover the price spread between WTI and other crude oil pricing benchmarks. By using the increased refinement markup to compensate for the price spread, DOD is not addressing the underlying limitations with its crude oil baseline. Rather, DOD is adding further risk and uncertainty concerning its estimate, because the estimate must now account for additional price variables. Even though in recent years its methodology has been producing estimates that differ significantly from actual costs, DOD has not reevaluated its approach or documented the rationale behind the assumptions it uses for setting the standard price. DOD’s 2007 study found that its forecasting methodology produced results as good as or better than the forecasting models the study compared it with. However, that study focused exclusively on the crude oil component of the standard price. It did not evaluate the accuracy of the standard price methodology as a whole against other potential approaches. Moreover, since that time, DOD has not reevaluated whether using WTI as its baseline assumption—with the corresponding refinement markup—is still appropriate given recent market changes. Further, DOD has not considered whether a crude oil baseline is still reasonable at all. Officials from the Office of the Under Secretary of Defense (Comptroller) told us that they have held internal discussions regarding changing the crude oil pricing baseline used in the standard price, but no final decision has been made. Furthermore, DOD has not fully documented its rationale and assumptions for establishing each component of the standard price. GAO’s Cost Estimating and Assessment Guide states that a cost estimate should be supported by detailed documentation that describes how it was derived. According to the guide, the documentation should include, among other things, the estimating methodology used to derive the costs for each element of the cost estimate, and it should also discuss any limitations of the data or assumptions. Further, a well-documented methodology allows decision makers to understand and evaluate the budget request and make proper determinations. According to an official from the Office of the Under Secretary of Defense (Comptroller) responsible for overseeing DOD’s bulk fuel program, DOD’s Financial Management Regulation provides overarching guidance on establishing prices for working capital fund products, including fuel. Specifically, the Financial Management Regulation provides that all business areas of the fund are required to set their prices based upon full cost recovery, including general and administrative support provided by others. This official noted that DOD’s process for setting the standard price is based on this full cost recovery, as described in specific guidance in the Financial Management Regulation. Additionally, federal guidance also governs aspects of the rate-setting process. For example, OMB’s A-11 Circular requires DOD’s budget estimates for fuel to be consistent with OMB’s economic assumptions. For this reason the official stated that the establishment of a more specific methodology could be potentially redundant to the existing process, and could add additional administrative hurdles that may not add value. However, while DOD’s Financial Management Regulation provides overall principles for working capital funds, it does not require DOD to document its methodology for setting the standard price in a step-by-step process. Therefore, DOD does not have detailed documentation that describes the rationale for the assumptions it uses. For example, DOD has not documented its rationale for continuing to select WTI as a crude oil benchmark in establishing the standard price although OMB now provides more than WTI crude oil forecasts in its economic assumptions. Also, according to the Office of the Under Secretary of Defense (Comptroller) official, DOD determines its refinement markup to account for the fact that DLA purchases refined product and does not buy crude oil and that this factor is developed based on current commodity market experience balanced against DOD priorities. However, DOD has not documented its rationale or assumptions for determining these trade-offs. Reevaluating its approach for estimating the components of the standard price would allow DOD to develop more informed estimates and better position DOD to minimize risks and uncertainty resulting from changing market conditions. Further, documenting the rationale for its assumptions would provide greater transparency and clarify for fuel customers and decision makers the process DOD uses to set the standard price. DOD has faced challenges in setting a standard price that closely approximates its actual fuel costs, and in recent years its estimated fuel prices have differed considerably from its actual costs. Actual prices have differed from DOD’s estimates largely because changes in fuel market conditions have not been reflected in the standard price. Additionally, DOD has not documented its rationale for continuing to use the same assumptions. The Defense-wide Working Capital Fund, designed to absorb the effects of price fluctuations, has been insufficient to absorb the significant net outlays for fuel. This has led to large transfers into the fund from other DOD accounts and adjustments to the standard price DOD charges to customers—disrupting other DOD programs and straining the military services’ budgets. Despite the recurring need for these transfers and price adjustments, DOD has not reevaluated its approach to setting the standard price since 2007. Until DOD has reevaluated its approach and documented its assumptions for setting the standard price, it may not be certain that its price reflects current conditions. To improve DOD’s process for setting its standard fuel price, we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense (Comptroller), in coordination with the Defense Logistics Agency (DLA), to take the following two actions: reevaluate the approach for estimating the components of the standard price and document its assumptions, including providing detailed rationale for how it estimates each of these components. We provided a draft of this report to DOD, OMB, and the Energy Information Administration for review and comment. DOD provided written comments, which are summarized below and reprinted in appendix III. In its comments, DOD concurred with the first recommendation and partially concurred with the second recommendation. OMB and the Energy Information Administration did not provide comments on the draft report. DOD concurred with the first recommendation that the Secretary of Defense direct the Under Secretary of Defense (Comptroller), in coordination with DLA, to reevaluate DOD’s approach for estimating the components of the standard price. In its comments, DOD stated that this is an ongoing effort within the department and that the Office of the Under Secretary of Defense (Comptroller) and DLA are continually evaluating methods to better estimate the price of fuel. DOD stated that this is a challenge because the rate-setting process takes place a budget cycle in advance of execution. DOD noted that fuel-market volatility affects the Working Capital Fund’s ability to budget for, and customers’ ability to buy, fuel at a stabilized price. Additionally, in its comments, DOD stated that the department does not have the storage capacity to hold a year’s worth of fuel in advance, so fuel is purchased in real time throughout the execution year and sold at a price set 18 months prior. We agree that the rate-setting process is challenging, given the timing of DOD’s budget process and when the department actually purchases fuel. However, as stated in the report, DOD’s current approach for establishing the standard price has not accounted for changes in market conditions for crude oil, such as the decreasing relationship between crude oil and refined prices, even though its methodology has been producing estimates that differ greatly from actual costs. Although DOD noted in its comments that it is continually evaluating methods to better estimate the price of fuel, it did not specify any specific initiatives to that end. Moreover, the report did not identify any studies that DOD has undertaken since 2004 that constitute a reevaluation of the department’s approach for estimating the components of the standard price. Reevaluating its approach for estimating the components of the standard price would allow DOD to develop more- informed estimates and better position the department to minimize risks and uncertainty resulting from changing market conditions. DOD partially concurred with the second recommendation that the Secretary of Defense direct the Under Secretary of Defense (Comptroller), in coordination with DLA, to document its assumptions, including providing a detailed rationale for how it estimates each of the standard price components. In its comments, DOD stated that the department does not have a “documented” specific, step-by-step process to develop the fuel price. DOD further stated that it prices fuel by using a formal process that has been presented to the department’s leadership, briefed to congressional staffers, discussed with the administration, and reproduced in various instructional and informational briefings and papers. In its comments, DOD stated that the process for setting the fuel price is similar to other Working Capital Fund products and follows the intent of DOD’s Financial Management Regulation and congressional implementing language for full cost recovery. We stated in the report that DOD’s Financial Management Regulation provides overall principles for working capital funds, but it does not require DOD to document its methodology for setting the standard price in a step-by-step process. Therefore, DOD does not have detailed documentation that describes the rationale for the assumptions it uses, such as its rationale for selecting one crude oil benchmark over another benchmark or the factors and other tradeoffs that it considers when establishing the refinement markup. GAO’s Cost Estimating and Assessment Guide states that a cost estimate should be supported by detailed documentation that describes how it was derived. According to the guide, the documentation should include, among other things, the estimating methodology used to derive the costs for each element of the cost estimate, and it should also discuss any limitations of the data or assumptions. Documenting DOD’s assumptions, including the rationale for each component of the standard price, would provide greater transparency and clarify for fuel customers and decision makers the process DOD uses to set the standard price. We are sending copies of this report to appropriate congressional committees and the Secretary of Defense; the Under Secretary of Defense (Comptroller); the Director of DLA; the Director of OMB; and the Administrator of the Energy Information Administration. In addition, this report is available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have questions about this report, please contact Cary Russell at (202) 512-5431 or russellc@gao.gov, or Asif A. Khan at (202) 512-9869 or khana@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributors to this report are listed in appendix IV. To address our objectives, we focused our analysis on fiscal years 2009 through 2013. We focused on these years because this period covered the most recent complete year of the Department of Defense’s (DOD) fuel sales and provided 5 years of cost data to analyze any trends. To determine how estimated bulk fuel costs have compared with actual costs since fiscal year 2009 and identify the factors that contributed to any differences, we compared the estimated budget costs for fuel against actual costs in the budget year of execution and identified any differences. We calculated DOD’s estimated fuel costs by multiplying the standard price per barrel by the number of barrels the military services estimated they would consume. To calculate DOD’s actual fuel costs, we multiplied the actual purchase price per barrel by the number of barrels sold to the military services. We then determined which factors contributed to the overall differences. Specifically, we calculated the percentage of the overall difference explained by either fuel price fluctuations or differences between estimated fuel consumption and actual consumption. Next, we compared each of the three components of the standard price (crude oil price, refinement markup, and nonproduct costs—such as transportation and facilities maintenance) against the actual costs for each component to determine which one contributed most to the difference between the standard price and actual fuel costs. We also interviewed officials from the Office of the Under Secretary of Defense (Comptroller), the Defense Logistics Agency (DLA), the military services, and the Department of Energy’s Energy Information Administration to discuss the factors that contributed to these differences. To determine the extent to which DOD has taken actions to manage the effect of any differences between estimated and actual fuel costs, we reviewed monthly cash balances in the Defense-wide Working Capital Fund for the period October 2008 through September 2013 and determined the effect of bulk fuel purchases and sales on those balances. In doing so, we determined net outlays from the Defense-wide Working Capital Fund and compared them with the cash balance in the fund. We analyzed DOD financial management documents for this same period to determine the number and amount of approved transfer actions related to fuel into and out of the Defense-wide Working Capital Fund and any fuel- related supplemental appropriations received into the fund. In addition, we analyzed DOD budget-justification materials and other documentation to identify all changes to DOD’s standard price. We also interviewed officials from DOD and the military services to determine the effect on the services’ budgets of transfers and changes to the standard price. To determine the extent to which DOD has considered options for adjusting its approach for estimating bulk fuel costs and managing working capital funds, we reviewed related studies and recommendations that we identified through interviews with DOD officials and literature searches that discuss options available to DOD to adjust its approach to managing bulk fuel costs and working capital funds. For this review we focused on relevant studies that have been conducted since 2004. We interviewed DOD officials to determine the status of any findings and recommendations from these studies related to DOD’s bulk fuel pricing or management of the Defense-wide Working Capital Fund. We also reviewed documentation that describes DOD’s current approach for estimating bulk fuel costs, including budget-justification materials and DOD reports, and discussed the department’s approach with officials from the Office of the Under Secretary of Defense (Comptroller), DLA, and the Office of Management and Budget. We compared this information with cost-estimating practices established in GAO’s Cost Estimating and Assessment Guide and Office of Management and Budget and DOD guidance. We also interviewed officials from DOD, the Office of Management and Budget, and the Department of Energy to discuss current fuel market conditions and alternative approaches to estimating bulk fuel costs and reviewed Department of Energy reports describing current fuel market conditions. To better understand the fuel market conditions, we reviewed DLA fuel purchase data for fiscal years 2009 through 2013 and compared the amount of domestic fuel purchases with the amount of international fuel purchases. We also performed analysis on the relationship of the West Texas Intermediate (WTI) crude oil benchmark with other crude oil pricing benchmarks to determine whether DOD’s approach to setting its standard price reflects current market conditions. Further, we conducted an analysis on the relationship of crude oil prices with refined product costs, including the cost of commercial jet fuel. To determine the reliability of the fuel cost data provided to us by DOD, we obtained information on how the data were collected, managed, and used through interviews with and questionnaires to relevant officials. We assessed the reliability of the data collected by analyzing questionnaire responses from Office of the Under Secretary of Defense (Comptroller) and DLA officials, which included information on their data system management, data quality-assurance processes, and potential sources of errors and mitigations of those errors. To determine the reliability of monthly cash balances in the Defense-wide Working Capital Fund, we (1) obtained and analyzed reports containing detailed data on transactions affecting the Working Capital Fund cash balance including collections, disbursements, direct appropriations to the fund, and funds transferred into and out of the fund; (2) reconciled year-end cash balances between DOD reports and Department of the Treasury records; and (3) obtained and analyzed documentation supporting the amount of funds transferred in and out of the Working Capital Fund. To determine the reliability of DLA fuel purchase data, we compared DLA domestic and international fuel purchases against fuel purchase data provided in DOD’s budget- justification materials. To determine the reliability of the Energy Information Administration’s data on Brent, WTI, and commercial jet fuel prices, we reviewed information on its methodology and data quality guidelines in accordance with GAO guidance on assessing data from federal statistical databases. Based on our review of the data, we determined that the data presented in our findings were sufficiently reliable for the purposes of this report. We interviewed officials, and where appropriate obtained documentation, at the following DOD locations: Office of the Under Secretary of Defense (Comptroller); Office of the Assistant Secretary of Defense for Operational Energy Defense Logistics Agency, Energy Management Activity Group; Air Force Petroleum Agency; Office of the Secretary of the Air Force, Financial Management and Army Petroleum Center; Naval Supply Systems Command; and Headquarters, Marine Corps, Programs and Resources, Operations and Maintenance Budget Formulations Branch. We also interviewed other officials from the following federal agencies and other organizations: Office of Management and Budget; Department of Energy, Energy Information Administration; and Institute for Defense Analyses. We conducted this performance audit from November 2013 to July 2014, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix contains a list of six studies conducted since 2004 on the Department of Defense’s (DOD) bulk fuel pricing and management of the Defense-wide Working Capital Fund. Table 3 provides information on each study’s name and purpose, as well as any findings and recommendations, and DOD’s response to the recommendations or status of their implementation. Some of the studies listed below included information outside the scope of our review; however, we have only included findings and recommendations related to DOD’s bulk fuel pricing or management of the Defense-wide Working Capital Fund. In addition to the contacts named above, Gregory Pugnetti, Assistant Director; Matthew Ullengren, Assistant Director; Pedro Almoguera; Russell Bryan; Virginia Chanley; Stephen Donahue; Adam Hatton; Joanne Landesman; Amie Steele; and Michael Willems made key contributions to this report.","DOD purchases bulk fuel and sells it to customers, including the military services. Each fiscal year, DOD sets a standard price for budgeting purposes, endeavoring to closely approximate the price it will pay when it buys the fuel almost a year later. If this price is different than the standard price, DOD may need to take actions to manage its working capital funds—funds used to purchase fuel and other commodities that are reimbursed through sales. Senate Report 113-44, accompanying a bill for the National Defense Authorization Act for FY 2014, mandated GAO to review DOD's approach for establishing its bulk fuel pricing. This report discusses, among other things, (1) how estimated bulk fuel costs have compared to actual costs since FY 2009 and the factors that have contributed to any differences; and (2) the extent to which DOD has considered options for adjusting its approach to estimating bulk fuel costs and managing working capital funds in light of any differences between estimated and actual fuel costs. GAO compared estimated and actual fuel costs for FY 2009 through 2013 and analyzed DOD actions to manage working capital funds. During fiscal years 2009 through 2013, the Department of Defense's (DOD) actual costs for bulk fuel differed considerably from its budget estimates, largely because of fluctuations in fuel price in the open market. During this period, DOD underestimated its costs for 3 years and overestimated them for 2 years as shown below. GAO identified two factors that contributed to the differences between estimated and actual costs—(1) fuel price fluctuations and (2) differences between the military services' estimated fuel requirements and their actual fuel consumption. GAO's analysis showed that the differences between the price DOD paid for fuel and the price it charged its fuel customers—the standard price—accounted for, on average, 74 percent of the difference between estimated and actual costs. Specifically, of the three components of the standard price that DOD sets each fiscal year—crude oil, refinement markup, and nonproduct costs, such as transportation and facilities maintenance costs—differences in the price of crude oil accounted for most of the difference between estimated and actual fuel costs in fiscal years 2009 and 2010. In fiscal years 2011 through 2013, the refinement markup accounted for most of the difference. Differences between the services' estimated fuel requirements and actual fuel consumption accounted for an average of 26 percent of the difference between estimated and actual fuel costs. Since 2004, DOD has conducted reviews of aspects of its bulk fuel program to determine whether adjustments should be made, including managing acquisition strategies, managing working capital funds, and budgeting for cost fluctuations. However, it has not updated its approach to reflect current market conditions or documented its rationale for the assumptions it uses in estimating the standard price. GAO's Cost Estimating and Assessment Guide and Office of Management and Budget guidance state that a cost estimate should be updated regularly to reflect changes to assumptions and actual costs, so that it always reflects current conditions. Furthermore, cost estimates should be supported by detailed documentation that describes how they were derived. Reevaluating its approach for estimating the standard price would allow DOD to develop more informed estimates and better position it to minimize risks and uncertainty resulting from changing market conditions. Further, documenting the rationale for its assumptions would provide greater transparency and clarify for fuel customers and decision makers the process DOD uses to set the standard price. GAO recommends that DOD reevaluate its approach for estimating the components of the standard price and document the rationale for its assumptions. DOD agreed with the first recommendation and partially agreed with the second stating there is a closely-monitored, formal process. GAO continues to believe the recommendation remains valid as discussed in the report.",govreport
"DOD’s procurement process spans numerous Defense agencies and military services. This process provides for acquiring supplies and services from nonfederal sources and, when necessary, administering the related contractual instruments. It also provides for administering grants, cooperative agreements, and other transactions executed by contracting offices. The procurement process begins with the receipt of a requirement and ends at the contract closeout. (See fig. 1 for a simplified diagram of the procurement process, the interaction of this process with the logistics and financial management processes, and those functions within the procurement process that SPS is to support.) In November 1994, DOD’s Director of Defense Procurement (DDP) initiated the SPS program to acquire and deploy a single automated system to perform all contract management-related functions within DOD’s procurement process for all DOD organizations and activities. From 1994 to 1996, DOD defined SPS requirements and solicited commercially available vendor products for satisfying these requirements. DOD subsequently awarded a contract to American Management Systems (AMS), Incorporated, in April 1997, to (1) use its commercially available contract management system as the foundation for SPS, (2) modify this commercial product as necessary to meet the requirements, and (3) perform related services. DOD also directed the contractor to deliver SPS functionality in four incremental releases. The department later increased the number of releases across which this functionality would be delivered to seven; reduced the size of the increments; and allowed certain, more critical functionality to be delivered sooner. Over the last 4 years, DOD and AMS have deployed four releases to 773 locations in support of 21,900 users. The fifth release was delivered in February 2001 for acceptance testing; however, due to software deficiencies, this release was sent back to the vendor for rework and has not been deployed. AMS is expected to provide a second version of this release to DOD in July 2001 for additional testing. If accepted, the fifth release is to be deployed to about 4,500 users beginning in fiscal year 2002. DOD has not yet contracted for the sixth and seventh releases. (See table 2 for the status of the various software releases, and table 3 for the summary of SPS functionality by increment.) As planned, SPS is to be used to prepare contracts and contract-related documents and to support contracting staff in monitoring and administering them. SPS also is intended to standardize procurement business practices and data elements throughout DOD and to provide timely, accurate, and integrated contract information. Using SPS, the goal is that required contract and contract payment data will be entered once— at the source of the data’s creation—and be stored in a single database. As depicted in figure 1, SPS is to electronically interface with DOD’s logistics community, which is the source of goods and services requests, and with the Defense Finance and Accounting Service (DFAS), which is responsible for contract payments. DDP is organizationally within the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics. However, as shown in table 3, the management responsibility for SPS is shared among several organizations. Since 1996, DOD’s Office of the Inspector General (OIG) has issued three reports critical of SPS. In September 1996, the OIG reported that the needs of SPS users might not be met and that actual costs could exceed proposed costs because, among other things, the functional requirements were very broad, existing commercial software required substantial modification, and adequate development and operational test strategies had not been developed. The OIG later reported in May 1999 that SPS lacked critical functionality and concluded that the system may not meet mission needs with regard to standardizing procurement policy, processes, and procedures. The report also noted that users were receiving inadequate system training, guidance, and support, thereby forcing users to develop inefficient system workarounds. Finally, the report raised concerns about the cost- effectiveness of DOD’s contractual reliance on a single vendor to provide system support over the life of SPS, adding that an expanded license was needed to give DOD the ability to competitively compete support services. In March 2001, the OIG reported that lack of system functionality was still a serious program concern, productivity had not increased with the implementation of version 4.1, and users were generally dissatisfied with SPS. SPS program officials generally concurred with the OIG’s findings and agreed to issue guidance on the acquisition of commercial software for major automated information systems, support development of accurate life-cycle cost estimates for SPS, clarify responsibilities for the program office, the contractor, and the evaluate the cost and benefits of obtaining additional license rights and renegotiating the contract, require the program office to be aware of additional support contracts, and suggest that the component organizations provide funds to the program office to better integrate user needs, better coordinate training needs among the DOD component organizations, and require that before any future deployments of SPS, the DOD component organizations determine that the version meets their functional requirements and to identify the number of licenses required. Also, in response to the OIG’s March 2001 report, the SPS program office initiated its own study in June 2000 to assess the extent to which benefits will be realized as a result of its implementation of version 4.1 of SPS. The program office plans to publish the study results by October 2001. Federal information technology (IT) investment management requirements and guidance recognize the need to measure investment programs’ progress against commitments. In the case of SPS, DOD is not meeting key commitments and is not measuring whether it is meeting other commitments. According to the program manager, the program office is not responsible for ensuring that all program commitments are being met. Rather, the program office’s sole task is to acquire and deploy an SPS system solution that meets defined functional requirements. Given that SPS is a major Defense acquisition, the DOD CIO is the decisionmaking authority for SPS. However, according to officials in the CIO’s office, SPS has continued to be approved and funded regardless of progress against expectations on the basis of decisions made by individuals organizationally above the CIO’s office. Without measuring and reporting progress against program commitments and taking the appropriate actions to address significant deviations, DOD runs the serious risk of investing billions of dollars in a system that will not produce commensurate value. The Clinger-Cohen Act of 1996 and Office of Management and Budget (OMB) guidance emphasize the need to have investment management processes and information to help ensure that IT projects are being implemented at acceptable costs and within reasonable and expected time frames and that they are contributing to tangible, observable improvements in mission performance (i.e., that projects are meeting the cost, schedule, and performance commitments upon which their approval was justified). For programs such as SPS, DOD requires this cost, schedule, and performance information to be reported quarterly to ensure that programs do not deviate significantly from expectations. In effect, these requirements and guidance recognize that one cannot manage what one cannot measure. DOD has not met key SPS commitments concerning the timing of product delivery, user satisfaction with system performance, and the use of a commercial system solution, as discussed below: DOD committed to SPS’ being fully operational at all sites by March 31, 2000; however, this date has slipped by 3-½ years and is likely to slip further. Currently, DOD has established a September 30, 2003, milestone for making SPS fully operational, and the program manager attributed this delay to (1) problems encountered in modifying and testing the contractor’s commercial product to meet DOD’s requirements and (2) an increase in requirements. However, the SPS Joint Requirements Board chairperson stated that no additional requirements have been approved. Instead, the original requirements were clarified for the contractor to better ensure that the needs of the user would be met. However, satisfying even this revised commitment will be problematic for several reasons. First, the 2003 milestone does not recognize DOD components’ testing activities that need to occur before the system could be fully operational. For example, Department of the Air Force officials told us that they are typically 6 to 12 months behind the program office’s deployment milestones because of additional testing that the Air Force performs before it implements the software releases. Second, the 2003 milestone has not been updated to reflect the impact of events. For example, version 4.1, the latest deployed release, was recently changed from a single release to five subreleases to correct software problems discovered during operation of version 4.1; and version 4.2 recently failed acceptance testing, and the vendor is still attempting to correct identified defects. Third, the official responsible for SPS independent operational test and evaluation, as well as the official in DOD’s Office of Program Analysis and Evaluation who is responsible for reviewing the SPS economic analyses, told us that this milestone is likely to slip further. The reasons that these officials cited included incomplete system functionality, increased system complexity, and inadequate training. DOD committed to SPS’ satisfying the needs of its contracting community and meeting specified system requirements, ultimately increasing contracting efficiency and effectiveness. However, according to a recent DOD OIG report, approximately 60 percent of the user population surveyed was not satisfied with the system’s functionality and performance, resulting in the continued use of legacy systems and/or manual processes in lieu of SPS. Similarly, another DOD report describes SPS as unstable because the system frequently goes down, meaning that it is unexpectedly unavailable to users who are logged on and using the system, which, in turn, causes users to lose information. The report also notes that users complained that previously identified problems were not being resolved in later software releases, and that requested changes or enhancements were not being made. According to the program manager, at any one time, there was a backlog of 100 to 200 problems that needed to be addressed in order for SPS to meet specified requirements. In light of these challenges in meeting requirements and satisfying user needs, the official responsible for independent operational test and evaluation of SPS said that DOD should not invest in additional releases beyond version 4.2. In delivering SPS, DOD was to use a commercially available software product. However, the contractor has modified the commercial product extensively in an attempt to satisfy DOD’s needs; thus, SPS is now a DOD-unique system solution. According to the program manager, DOD knew when it selected the commercial product that the product provided only 45 percent of the functionality that DOD needed, and that extensive new software development and existing software modification were necessary. Nevertheless, the product was chosen because no commercial product was available that met DOD’s requirements, and, of the products available, DOD believed that AMS’ product and company would provide the best value. In accordance with industry best practices, software modifications to a commercial product should not exceed 10 to 15 percent. Beyond this degree of software change, experts generally consider development or acquisition of a custom system solution more cost-effective. Further, DOD guidance states that custom modifications to a commercial item, even if made and implemented by the commercial item’s vendor, result in custom system solutions. This guidance emphasizes the use of commercial items to reduce life-cycle costs and increase product reliability and availability. Since SPS is not a commercial product, DOD will not be able to take advantage of the reduced cost and risk associated with using proven technology that is used by a wide customer base. When it began the program, DOD promised that SPS would produce such benefits as (1) replacing 76 legacy systems and manual processes with a single system and thereby reducing procurement system operations and maintenance costs by an unspecified amount, (2) standardizing policies, processes, and procedures across the Department, and (3) reducing problem disbursements. However, DOD does not know the extent to which SPS is meeting each of these expectations, even though versions have been deployed to about 773 user locations. First, although DOD reports that it has retired two major legacy systems, neither the program office nor the DOD CIO office could provide us with information on what, if any, savings have been realized by doing so. Additionally, program officials told us that the number of legacy systems and manual processes that SPS is to replace is now significantly less than the 76 originally used to justify the program. In response to our inquiry, the SPS program manager recently surveyed the DOD component organizations to determine the number of legacy systems. According to the results of the survey, there were 55 legacy procurement systems. See table 4 for the status of these systems as of June 2001. According to the SPS program manager, 45 of the 55 systems remain, and 10 to 12 of these systems are to be replaced by SPS. However, another program official noted that SPS was always intended to replace only 14 major legacy systems. In either case, the latest economic analysis has not been updated to reflect this change in the number of systems to be replaced, and the associated cost savings are not known. Second, the standardization of policies, processes, and procedures benefit is not materializing because each military service is either in the process of developing, or has plans to develop, its own unique policies, processes, and procedures. Third, program officials were unable to provide evidence that implementing SPS has reduced problem disbursements or achieved the benefits outlined in the economic analysis. In fact, the latest economic analysis no longer even cites reducing problem disbursements as a benefit because the DOD components’ position was that SPS would not completely address this problem. According to the program manager and CIO officials, there is no DOD policy that requires them to assess whether the expected benefits are in fact being realized. When the SPS program began, DOD also committed to a system life-cycle cost of about $3 billion over a 10-year period. However, total actual program costs are not being accumulated and monitored against estimates, which in 2000 were revised to about $3.7 billion (a 28-percent increase). Thus, DOD does not know what has been spent on the program by all DOD component organizations. To date, the only actual program costs being collected and reported are those incurred by the SPS program office, which DOD reports to be about $322 million through September 30, 2000. To determine the total cost of the SPS program through September 30, 2000, we requested cost information from 18 Defense agencies and the four military services. These DOD components reported that they have collectively spent approximately $125 million through September 30, 2000. However, these reported costs are not complete because (1) 4 of the 22 DOD components did not respond, (2) components reported that SPS costs were being captured with other programs and could not be allocated accurately, and (3) all SPS costs, such as employee salaries and system infrastructure costs, were not included. According to program officials, no single DOD organization is responsible for accumulating the full DOD cost of SPS. Without knowing the extent to which SPS is meeting cost-and-benefit expectations, DOD is not in a position to make informed, and thus justified, decisions on whether and how to proceed further on the program. Such a situation introduces a serious risk of investing in a system that will not produce a positive net present value (i.e., estimated benefits to be realized would exceed estimated program costs). Federal IT investment management requirements and guidance, as well as DOD policy, recognize the need to economically justify IT projects before investing in them and to justify them in an incremental manner in an effort to spread the risk of doing many things over many years on large projects across smaller, more manageable subprojects. However, the department has not economically justified investing in SPS because its own analysis shows that expected life-cycle benefits are less than estimated life-cycle costs. Moreover, DOD is not approaching its investment in SPS on an incremental basis. Nevertheless, DOD continues to invest hundreds of millions of dollars in SPS each year, running the serious risk of spending large sums of money on a system that does not produce commensurate value. According to program and CIO officials, DOD continues to invest these funds because individuals above the CIO’s office decided that SPS was a departmental priority. The Clinger-Cohen Act of 1996 and OMB guidance provide an effective framework for IT investment management. Together, they set requirements for (1) economically justifying proposed projects on the basis of reliable analyses of expected life-cycle costs, benefits, and risks, (2) using these analyses throughout a project’s life cycle as the basis for investment selection, control, and evaluation decisionmaking, and (3) doing so for large projects (to the maximum extent practical) by dividing them into a series of smaller, incremental subprojects or releases. By doing so, the tremendous risk associated with investing large sums of money over many years in anticipation of delivering capabilities and expected business value far into the future can be spread across project parts that are smaller, of a shorter duration, and capable of being more reliably justified and more effectively measured against cost, schedule, capability, and benefit expectations. DOD policy also reflects these investment principles by requiring that investments be justified by an economic analysis and, more recently, that investment decisions for major programs, like SPS, be made incrementally by ensuring that each incremental part of the program delivers measurable benefit, independent of future increments. According to the policy, the economic analysis is to reflect both life-cycle cost and benefits estimates, including a return-on-investment calculation, to demonstrate that a proposal to invest in a new system is economically justified before that investment is made. DOD has developed three economic analyses for SPS—one in 1995 and two updates (one in 1997 and another in 2000). While the initial analysis reflected a positive net present value, the two updates did not. Specifically, the 1997 analysis estimated life-cycle costs and benefits to be $2.9 billion and $1.8 billion, respectively, which is a recovery of only 62 percent of costs; the 2000 analysis showed even greater costs ($3.7 billion) and fewer benefits ($1.4 billion), which is a recovery of only 37 percent of costs (see fig. 2). Nevertheless, these data were not reflected in the return-on-investment calculation in the analyses that were used as the basis for approving SPS. Instead, this return-on-investment calculation (1) included only those costs estimated to be incurred by the program office and (2) excluded the SPS implementation and operation and maintenance costs of DOD agencies and military services. According to program officials, the latter costs were excluded because either they would have been incurred anyway or the program office did not require them. For example, the officials stated that the DOD agencies and military services routinely upgrade their IT infrastructures to support existing systems; therefore, they assumed that the agencies and services would have purchased new infrastructures even if SPS had not been acquired. Also, program officials did not believe that training paid for by DOD agencies and military services should be included as a cost element because this is an elective expense (i.e., the program management office does not require this additional training). However, some DOD component officials told us that some of their infrastructure and other costs were being incurred solely to support implementation of SPS. Using DOD’s estimates, we calculated SPS’ net present value for fiscal years 1997 and 2000 to be about negative $174 million and negative $655 million, respectively. DOD’s Office of Program Analysis and Evaluation is responsible for, among other things, verifying and validating the reliability of economic analyses for major programs, such as SPS, and providing its results to the program approval authority, which in this case is the DOD CIO. According to Office of Program Analysis and Evaluation officials, although the economic analyses were reviewed, there are no written results of these reviews. These officials stated, however, that they orally communicated concerns about the analyses to program officials and to DOD CIO officials responsible for program oversight and control. They also stated that while they could not recall specific issues discussed, they concluded that the economic analyses provided a reasonable basis for decisionmaking. To be useful for informed investment decisionmaking, analyses of project costs, benefits, and risks must be based on reliable estimates. However, most of the cost estimates in the latest economic analysis are estimates carried forward from the 1997 economic analysis (adjusted for inflation). Only the costs being funded and managed by the SPS program office, which are 13 percent of the total life-cycle cost in the analysis, were updated in 2000 to reflect more current contract estimates and actual expenditures/obligations for fiscal years 1995 through 1999. The costs to be funded and incurred by DOD agencies and the military services were not updated to account for all program changes or to incorporate better information. In its review of the 2000 economic analysis, the Naval Center for Cost Analysis also noted that the DOD agencies and the military services’ cost information, which accounted for the majority of the program’s overall costs, had not been updated. In fact, only two cost elements were updated for the DOD component organizations in the 2000 economic analysis, and the estimates for these cost elements were based on estimates derived for just one service (the Air Force), and then extrapolated to all other DOD components. According to Departments of the Army, Navy, and Air Force component representatives, these original estimates of costs, as well as benefits, were highly questionable at best. However, this uncertainty was not reflected in the economic analysis by any type of sensitivity analysis (i.e., an analysis to explicitly present the return-on-investment implications associated with using estimates whose inherent imprecision could produce a range of outcomes). Such sensitivity analysis would disclose for decisionmakers the investment risk being assumed by relying on the calculations presented in the economic analysis. According to the SPS program manager, costs in the 2000 economic analysis were not updated because information for the DOD components was not readily available for inclusion. Additionally, updating DOD component costs was not viewed as relevant because the return-on- investment calculation cited in the latest economic analysis did not include these costs, and the updated analysis was done after DOD leadership had decided to increase funding and continue the program. However, by not using economic analyses that are based on reliable cost estimates, DOD is making uninformed, and thus potentially unwise, multimillion-dollar investment decisions. According to OMB guidance, analyses of investment costs, benefits, and risks should be (1) updated throughout a project’s life cycle to reflect material changes in project scopes and estimates and (2) used as a basis for ongoing investment selection and control decisions. To do less, risks continued investment in projects on the basis of outdated and invalid economic justification. The latest economic analysis (January 2000) is outdated because it does not reflect SPS’ current status and known risks associated with program changes. For instance, this analysis is based on a program scope and associated costs and benefits that anticipated four software releases, each providing more advanced features and functions. However, according to the program manager, SPS now consists of seven releases over which additional requirements are to be delivered. Estimates of the full costs, benefits, and risks relating to these additional three releases are not part of this latest economic analysis. Also, the 2000 economic analysis does not fully recognize actual and expected delays in meeting SPS’ full operational capability milestone. That is, the 2000 economic analysis assumed that this milestone would be September 30, 2003. However, as previously mentioned, this milestone date is unlikely to be met for a variety of reasons, such as user dissatisfaction with current system capabilities. According to the SPS program manager, the latest economic analysis has not been updated to reflect changes because the analysis is not used for managing the program and because there is no DOD requirement for updating an economic analysis when changes to the program occur. By not ensuring that the program is being proactively managed on the basis of current information about costs, benefits, and risks, DOD is unnecessarily assuming an excessive amount of investment risk. As we have previously reported, incremental investment management involves three fundamental components: (1) developing/acquiring a large system in a series of smaller projects or system increments, (2) individually justifying investment in each separate increment on the basis of costs, benefits, and risks, and (3) monitoring actual benefits achieved and costs incurred on completed increments and modifying subsequent increments or investments to reflect lessons learned. While DOD is acquiring and implementing SPS in a series of incremental releases (originally four and now seven), it is not making decisions about whether to invest in each release on the basis of the release’s costs, benefits, and risks, and it is not measuring whether it is meeting cost-and- benefit expectations for each release that is implemented. Instead, DOD is treating investment in SPS as one, monolithic investment decision, justified by a single, all-or-nothing economic analysis. Moreover, DOD has not measured whether the incremental software releases have produced expected business value, even though its economic analysis aligns expected benefits with the then four incremental releases. In June 2000, the SPS program office initiated a study in an attempt to validate the extent to which benefits would be realized as a result of DOD’s implementation of version 4.1 of the software. However, our review of the methodology and preliminary results revealed that the study was poorly planned and executed and that, while useful information may be compiled, DOD would be unable to use the study’s results to validate the accrual of benefits. As a result, DOD will have spent hundreds of millions of dollars on the entire system before knowing whether it is producing value commensurate with cost. The program manager told us that knowing whether SPS is producing such value is not the program office’s objective. Rather, its objective is to simply acquire and deploy the system. Similarly, DOD CIO officials told us that although the economic analysis promised a business value that would exceed costs, DOD is not validating that implemented releases are producing that value because there is no DOD requirement and no metrics defined for doing so. By not investing incrementally in SPS, DOD runs the serious risk of discovering too late (i.e., after it has invested hundreds of millions of dollars) that SPS is not cost-beneficial. DOD’s management of SPS is a lesson in how not to justify, make, and monitor the implementation of IT investment decisions. Specifically, DOD has not (1) ensured that accountability and responsibility for measuring progress against commitments are clearly understood, performed, and reported, (2) demonstrated, on the basis of reliable data and credible analysis, that the proposed system solution will produce economic benefits commensurate with costs before investing in it, (3) used data on progress against project cost, schedule, and performance commitments throughout a project’s life cycle to make investment decisions, and (4) divided this large project into a series of incremental investment decisions to spread the risks over smaller, more manageable components. Currently, DOD is not effectively performing any of these basic tenets of effective investment management on SPS, and, as a result, DOD lacks the basic information needed to make informed decisions about how to proceed with the project. Nevertheless, DOD continues to push forward in acquiring and deploying additional versions of SPS. Continuing with this approach to investment management introduces considerable risk. As a result, beyond possibly operating and maintaining already implemented releases for the remainder of fiscal year 2001 and meeting already executed contractual commitments, further investment in SPS has not been justified. We recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence, as the designated approval authority for SPS, to clarify organizational accountability and responsibility for measuring SPS progress against commitments and to ensure that these responsibilities are met. We further recommend that the Secretary direct the Assistant Secretary to make investment in each new release, or each enhancement to an existing release, conditional upon (1) validating that already implemented releases of the system are producing benefits that exceed costs and (2) demonstrating on the basis of credible analysis and data that (a) proposed new releases or enhancements to existing releases will produce benefits that exceed costs and (b) operation and maintenance of already deployed releases of SPS will produce benefits that exceed costs. Also, we recommend that the Secretary direct the Director, Program Analysis and Evaluation, to validate any analysis produced to justify further investment in SPS and to report any validation results to the Assistant Secretary of Defense for C3I. We also recommend that no further decisions to invest in SPS be made without these validation results. Additionally, we recommend that the Secretary direct the Assistant Secretary of Defense for C3I to take the necessary actions, in collaboration with the SPS program manager, to immediately determine the current state of progress against program commitments addressed in this report and to ensure that such information is used in all future investment decisions concerning SPS. Last, we recommend that the Secretary direct the Assistant Secretary of Defense for C3I to report by October 31, 2001, to the Secretary and to DOD’s relevant congressional committees on lessons learned from the SPS investment management experience, including what actions will be taken to prevent a recurrence of this experience on other system acquisition programs. In written comments on a draft of this report (reprinted in appendix II), the Acting Deputy Assistant Secretary of Defense for Command, Control, Communications, and Intelligence, who is also the DOD Deputy Chief Information Officer (CIO), agreed and partially agreed with our recommendations. In particular, the Deputy CIO agreed with our recommendation regarding the need to clarify organizational accountability and responsibility for measuring the program’s progress and ensuring that these responsibilities are met. The Deputy CIO also agreed to document lessons learned and have the Director of Program Analysis and Evaluation validate the results of any ongoing and future analyses of SPS’ return on investment. However, the Deputy CIO disagreed with our report’s overall finding that continued investment in SPS has not been justified, and disagreed with those elements of our recommendations that could delay development and deployment of SPS, specifically, acquiring and using the information we believe is needed to make informed investment decisions. To support its position, however, the Deputy CIO offered no new facts or analyses. Instead, the comments either cite information already in our report or claims that the demands of incremental investment management are “inefficient, costly, and overly intrusive” and will cause “unwarranted delays and disruption to the program” for no other reason than “to satisfy economists and accountants.” According to DOD’s comments, the latest SPS economic analysis and the existing efforts to measure progress against selected program commitments provide sufficient bases for continuing to invest hundreds of millions of dollars in SPS. In particular, DOD stated that it is making progress in improving its ability to standardize contracting for goods and services, adding that this standardization progress is not only saving operating costs by retiring legacy procurement systems, but is also providing a standard environment within DOD for the exchange of information and a consistent look and feel of contract information to companies doing business with the department. In light of these outcomes, DOD commented that one of its main goals under the program is the timely fielding of SPS capability. We disagree with these comments. As we describe in the report, incremental investment management practices are not only a best practice, but are also required by the Clinger-Cohen Act of 1996 and specified in OMB guidance and recently revised DOD acquisition policy. Therefore, DOD’s comments regarding incremental investment in SPS are at odds with contemporary practices and operative federal requirements and guidance. Additionally, the economic analysis that DOD’s comments refer to is not reliable for a number of reasons that are discussed in our report. Specifically, this analysis treats SPS as a single, monolithic system investment. Experience has shown that such an all-or-nothing economic justification is too imprecise to use in making informed decisions on large investments that span many years. This kind of approach for justifying investment decisions has historically resulted in agencies’ investing huge sums of money in systems that do not provide commensurate benefits, and thus has been abandoned by successful organizations. Further, the need to avoid this pitfall was a major impetus for the Clinger-Cohen Act investment management reforms. Also, as discussed in our report, the analysis highlights a return-on- investment calculation in its summary that does not include all relevant costs, such as the costs to be incurred by DOD components. Instead, the summary uses only SPS program office costs in this return-on-investment calculation. Further, this return-on-investment calculation does not reflect known changes in the program’s scope and schedule that would increase costs and reduce benefits. As our report points out, it does not, for example, reflect SPS’ change from four software releases to seven releases nor does it reflect the improbability of meeting a September 30, 2003, full operational capability date. DOD’s comments also promote continued spending on SPS without sufficient awareness of progress against meaningful commitments, such as reliable data measuring and validating whether return-on-investment projections are being met. In fact, DOD’s comments emphasize standardization and fast deployment as core commitments. However, neither factor is an end in and of itself. Unless SPS provides the capability to perform procurement and contracting functions better and/or cheaper, and does so to a degree that makes SPS a more attractive investment relative to the department’s other investment options, DOD will not have adequate justification for investing further in SPS. As our report demonstrates, the department presently does not have the information it needs to know whether this investment is justified, and the information that is available raises serious questions about SPS’ acceptance by its user community and its business value. Nevertheless, DOD’s comments indicate its intention to implement SPS as planned. Our recommendations are aimed at ensuring that the department obtains the information it needs to make informed SPS investment decisions before proceeding with additional acquisitions. DOD provided other clarifying comments that have been incorporated as appropriate throughout this report. The written comments, along with our responses, are reproduced in appendix II. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services; Senate Appropriations Subcommittee on Defense; House Armed Services Committee; House Appropriations Subcommittee on Defense; Subcommittee on Government Efficiency, Financial Management, and Intergovernmental Relations, House Committee on Government Reform; and Subcommittee on National Security, Veterans Affairs, and International Relations, House Committee on Government Reform. We are also sending copies of this report to the Director, Office of Management and Budget; the Secretary of Defense; the Acting Secretary of the Army; the Acting Secretary of the Navy; the Acting Secretary of the Air Force; the Acting Assistant Secretary of Defense Command, Control, Communications, and Intelligence/Chief Information Officer; the Under Secretary of Defense for Acquisition, Technology and Logistics; the Principal Deputy and Deputy Under Secretary for Management Reform; the Acting Director of Operational Testing and Evaluation; the Director of Program Analysis and Evaluation; the Director of Defense Procurement; the Director of the Defense Contract Management Agency; and the Director of the Defense Logistics Agency. If you have any questions on matters discussed in this report, please call me at (202) 512-3439 or Cynthia Jackson, Assistant Director, at (202) 512-5086. We can also be reached by e-mail at hiter@gao.gov and jacksonc@gao.gov, respectively. Key contributors to this assignment are listed in appendix III. Our objectives were to determine the progress that the Department of Defense (DOD) has made against the Standard Procurement System (SPS) program commitments and whether DOD has economically justified further investment in SPS. To determine the progress made, we first analyzed relevant legislative and Office of Management and Budget (OMB) requirements, associated federal guidance, and applicable DOD policy and guidance on investment management. We then analyzed relevant program management documents and interviewed program officials to identify estimates and expectations for SPS’ cost, schedule, and performance, including the system capabilities to be provided and benefits to be produced by these capabilities. Source documents for this information included, but were not limited to, the acquisition strategy and program baseline, acquisition decision memorandums, and the quarterly Defense Acquisition Executive Summary report. We then reviewed program management reports and briefings, interviewed program officials, and solicited information from the various DOD component organizations participating in SPS’ implementation to determine reported cost, schedule, and performance status. We compared this information against estimates and expectations to identify any variances. We did not independently validate the status information that we obtained. In cases where variances were found or status information was not available, we questioned program management and DOD’s Office of the Chief Information Officer (CIO) oversight officials. The DOD organizations that were part of our scope of contacts included the SPS program office within the Defense Contract Management Agency; the Office of the Director of Investments and Acquisition within the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (C3I)/Chief Information Officer; the Office of the Deputy Director (Strategic and Space Programs) within the Office of Program Analysis and Evaluation under the Office of the Undersecretary of Defense (Comptroller/Chief Financial Officer); the Office of Strategic and C3I Systems within the Office of the Director of Operational Test and Evaluation; and various offices within the Defense agencies and military services responsible for implementing SPS. To determine whether DOD had economically justified SPS, we reviewed relevant legislative requirements and associated OMB guidance, as well as DOD policy and guidance on preparing and using economic analyses (cost, benefit, and risk), to measure progress against information technology (IT) investment decisions and to do so using an incremental or modular approach. We then obtained the original economic analyses prepared for the program and the two subsequent updates and evaluated them in light of relevant requirements, policies, and guidance to identify strengths and weaknesses. We also reviewed program management documents and interviewed program and oversight officials to understand how these analyses were reviewed and used, and we compared the results to relevant requirements and guidance. We also calculated the program’s net present value using the 1997 and 2000 economic analyses. In addition, we interviewed officials from the SPS program office, DOD CIO’s office, and DOD’s Program Analysis and Evaluation Office to discuss our results and seek clarifying information. We reviewed the methodology and preliminary results for the productivity study being conducted by DOD to substantiate the benefits to be realized by implementing SPS. We also interviewed officials from the SPS program office, Vector Research Incorporated, and Logistics Management Institute to discuss the methodology (e.g., survey execution, sampling, and analysis plans) and our conclusions on the study. We conducted our work at DOD headquarters offices in Washington, D.C., and Alexandria, Virginia, and at American Management Systems, Incorporated, headquarters in Fairfax, Virginia, from October 2000 through June 2001 in accordance with generally accepted government auditing standards. 1. See comments 2 through 9. 2. We did not independently validate DOD-reported data on the number of sites and procurement personnel who have received SPS training, the number of personnel who are located at sites where some version of SPS has been deployed, or the number and dollar value of contract actions completed in fiscal year 2000 using SPS; thus we have no basis to comment on the accuracy of these data. However, we do not agree with this comment’s thrust that these data points, combined with statements about DOD’s “improving its ability to standardize,” “providing a standard environment,” and providing “a consistent look and feel,” are sufficient measures of progress against commitments. As the Clinger-Cohen Act and OMB guidance emphasize, and as we state in our report, investments in information technology need to contribute tangible, observable improvements in mission performance. Thus, standardization should not be viewed as an end in and of itself, but rather the means to an end, such as increased productivity and reduced costs. DOD’s comment on progress does not address such tangible, observable benefits. Instead, DOD states that SPS is saving operating costs by retiring legacy procurement systems, which, when SPS was initiated and justified, were to total 76 systems. However, as we also state in the report, only two legacy systems have been retired thus far as a result of the system’s being deployed to 773 sites, and DOD could not provide what, if any, savings were being realized by doing so. Moreover, the number of legacy systems that DOD eventually expects to be replaced by SPS has decreased to between 12 and 14. Further, while DOD states that SPS is providing standardization of contracting for goods and services for a segment of its procurement community, our report points out that each service is either in the process of developing, or has plans to develop, its own unique procurement policies, processes, and procedures. 3. For the reasons discussed in our report, we do not agree that DOD has justified further SPS investment in its 2000 economic analysis. For example, only the SPS costs funded and managed by the SPS program office, which are 13 percent of the total life-cycle cost in the analysis, were updated in 2000. The costs to be funded and incurred by DOD agencies and the military services were not updated to account for all program changes or to incorporate better information. Exacerbating this is the fact that only two cost elements were updated for the DOD component organizations in the 2000 economic analysis, and the estimates for these cost elements were based on estimates derived for just one service and extrapolated to all other DOD components. As another example, the analysis does not reflect the reduced number of legacy systems to be retired as well as recent evidence of user non- acceptance and non-use of the system, both of which drive benefit accrual. We also do not agree that the analysis documented that a $163 million additional investment by the SPS program office would result in additional benefits of $389.5 million (in net present value terms). Rather, the analysis shows that acquiring, operating, and maintaining SPS over its life cycle will cost about $17 million more, but will produce about $390 million more in benefits (in net present value terms) than operating and maintaining legacy procurement systems. However, the analysis also shows that SPS as planned is not a cost- beneficial investment, because estimated costs exceed expected program benefits. 4. We do not disagree with DOD’s comments regarding the major program designation of SPS and the many organizations involved in the program. Also, while we agree that SPS program officials prepared the Acquisition Program Baseline and have reported quarterly against the commitments that are contained in this baseline, the baseline commitments and the associated reporting do not extend to all the relevant program goals and objectives that we cite in the report as needing to be measured in order to effectively manage a program like SPS, such as what the system is actually costing DOD and whether promised business value is actually being realized. Additionally, the Acquisition Program Baseline is dated May 4, 1998, and thus the commitments in this baseline are out of date. We do not agree with DOD’s comments characterizing the timing of the 2000 economic analysis update. As we state in our report, this update was prepared after the increase in SPS funding had been approved. In fact, the Program Analysis and Evaluation official responsible for reviewing the analysis stated that it was for this reason that the review was perfunctory at best. 5. We do not agree with DOD’s comment that delaying investment in new SPS releases or enhancements until DOD validates that already implemented releases of the system are producing benefits in excess of costs is contrary to best practice and would delay and disrupt SPS in a way that is not warranted. As we state in our report, available evidence raises serious questions about the cost and benefit implications of users’ limited acceptance of already deployed versions as well as the cost implications of DOD’s limiting its maintenance options to a single vendor. Our point is that answers to these questions are needed in order to make informed investment decisions, and to proceed as planned with new investments without this information risks continuing to invest in the wrong system solution faster. We agree with the comment that the program office initiated a productivity study in the summer of 2000. As we state in our report, this study was undertaken in response to DOD Inspector General findings that raised questions about user acceptance of the system. However, we do not agree that this study will substantiate the SPS benefit estimates and quantitatively document the benefits of SPS implementation through 2000 because the study’s scope and methodology are limited. For example: According to the program official responsible for the study, the purpose of the study is to estimate expected benefits to be realized in fiscal year 2003, from implementation of version 4.1. The sample selected was not statistically valid, meaning that the results are not projectable to the population as a whole. Relative to the other services, the Air Force was not proportionally represented in the study, meaning that any results would not necessarily be reflective of Air Force sites. The study was based on the 1997 economic analysis instead of the more current 2000 economic analysis despite key differences between the two analyses. For example, the 1997 analysis shows 22 benefits valued at approximately $1.8 billion over the program’s 10-year life cycle, while the 2000 analysis contains only 19 benefits valued at approximately $1.4 billion. According to SPS program officials, the survey instrument was not rigorously pre-tested. Such pre-testing is important because it ensures that the survey (1) actually communicates what it was intended to communicate, (2) is standardized and will be uniformly interpreted by the target population, and (3) will be free of design flaws that could lead to inaccurate answers. The information being gathered does not map to the 22 benefit types listed in the 1997 SPS economic analysis. Instead, the study is collecting subjective judgments that are not based on predefined performance metrics for SPS capabilities and impacts. Thus, DOD is not measuring SPS against the benefits that it promised SPS would provide. In addition, the senior official responsible for SPS implementation in the Air Force stated that the Air Force plans to conduct its own, separate survey to determine whether the system is delivering business value, indicating component uneasiness about the reliability of the SPS program office’s study. 6. We disagree. As we state in the report, incremental investment management practices are not only a best practice, but are also required by the Clinger-Cohen Act of 1996 and specified in OMB guidance and recently revised DOD acquisition policy. Therefore, DOD’s comments regarding incremental investment in SPS are at odds with contemporary practices and operative federal requirements and guidance. Additionally, the economic analysis that DOD’s comments refer to is not reliable for a number of reasons that are discussed in our report. Specifically, this analysis treats SPS as a single, monolithic system investment. Experience has shown that such an all-or-nothing economic justification is too imprecise to use in making informed decisions on large investments that span many years. This kind of approach to justifying investment decisions has historically resulted in agencies investing huge sums of money in systems that do not provide commensurate benefits, and thus has been abandoned by successful organizations. Further, the need to avoid this pitfall was a major impetus for the Clinger-Cohen Act investment management reforms. DOD’s comments also promote continued spending on SPS without sufficient awareness of progress against meaningful commitments, such as reliable data measuring and validating that return-on- investment projections are being met. In lieu of such measures, DOD’s comments emphasize standardization and fast deployment as core commitments. However, neither of these is an end in and of itself. Unless SPS provides DOD with the capability to perform procurement and contracting functions better and/or cheaper, and does so to a degree that makes SPS a more attractive investment relative to the department’s other investment options, DOD is not justified in investing further in SPS. As our report demonstrates, and as discussed in comments 2 and 3 above, DOD presently does not have the kind of reliable information it needs to know whether this investment is justified, and the information that is available raises serious questions about SPS’ acceptance by its user community and its business value. With regard to the timely fielding of SPS, we note in our report that the program has already been delayed 3-1/2 years. In fact, delivery of version 4.1 of the software was 22 months overdue, and version 4.2 is already 5 months behind. While the impact of schedule delays and cost increases is a valid concern on any project, these factors are not the sole criteria. Introducing the wrong system solution faster and cheaper is still introducing the wrong solution no matter how it is presented. It is thus critically important that investment decisions be based on an integrated understanding of cost, benefit, and risk. 7. We do not dispute that the cited events have occurred, although we would add for additional context that we met with Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (C3I) officials on March 15, 2001, the day before the memorandum requesting the first program review, to share our concerns and seek clarification, and that we provided our draft report to DOD for comment on May 25, 2001. We do not agree with DOD’s comment that it is not necessary to have the Secretary of Defense direct the Assistant Secretary of Defense for C3I (DOD CIO) to determine the current state of SPS progress against commitments and to ensure that this information is used in future investiment decisions for several reasons. First, the recent reviews cited in the DOD comments were for the Defense Contract Management Agency, which is the Component Acquisition Executive, and the Office of the Director of Defense Procurement, which is the SPS functional sponsor. Neither of these entities is the DOD CIO, who is the designated decision authority for SPS milestones and thus under SPS’ management structure has ultimate accountability for SPS. Second, the recent reviews cited in DOD’s comments did not satisfy our recommendation for determining the current state of progress against the SPS commitments described in our report. In fact, we attended the April 27, 2001, review meeting, during which the senior attending official from the Defense Contract Management Agency stated that information being provided at this meeting was insufficient from a program management standpoint, lacking key information needed for informed SPS decision-making. Third, the March 16, 2001, memorandum cited in DOD’s comments acknowledges the need to update SPS’ economic justification in light of the program’s cost and schedule changes and to ensure compliance with Clinger-Cohen Act requirements. Fourth, the SPS program manager’s planned actions to respond to recent reviews are not sufficient to address the uncertainties surrounding SPS. According to the program manager, the acquisition program baseline would be updated to reflect the most recent program costs and expected schedule for full operational capability, but the program office had not planned any other actions. Last, DOD’s comment stating that the Office of the DOD CIO and the Office of the Director of Defense Procurement plan to conduct an independent review of SPS within the next 180 days does not satisfy our recommendation because (1) DOD’s schedule for SPS calls for issuing contract task orders for subsequent SPS releases during this 6-month period and (2) this commitment is only a vague statement to “plan to conduct” a review at some undetermined, potentially distant, future point in time rather than having a review scheduled to occur in time to effect meaningful investment management improvements. In light of DOD’s comments regarding this recommendation and for the reasons discussed above, we have modified our recommendation to specify that the recommended determination of the state of progress should occur immediately and should address each of the program commitments discussed in this report. 8. We acknowledge DOD’s agreement with the recommendation, but note that neither our recommendation nor DOD’s comment specifies when this report would be prepared. Accordingly, we have modified our recommendation to include a timeframe for reporting to the Secretary of Defense and relevant congressional committees on lessons learned and actions to prevent recurrence of those SPS experiences on other system acquisition programs. Additionally, we disagree with DOD’s comments about the findings and conclusions in our report. In our view, the totality of evidence presented in our report, along with the results of prior Defense Inspector General reviews, supports our conclusion that SPS is a lesson in how not to justify, make, and measure implementation of investment decisions. Also, as addressed in comments 2 and 3, we do not agree with DOD’s point that SPS has been justified by the 1997 and 2000 economic analyses. Last, we do not agree with DOD’s comments that we incorrectly calculated a negative return on investment for SPS and that our methodology for calculating net present value is incorrect. To calculate net present value, we used current OMB guidance, which requires that relevant life-cycle cost estimates be used. Additionally, we used DOD’s own life-cycle cost estimates from its economic analyses. While we acknowledge that SPS officials told us that these life-cycle cost estimates included the costs of operating legacy procurement systems, we also requested that these officials identify what these legacy system costs are so that we could back them out. However, SPS officials told us that they did not know the amount of these costs. As a result, our calculation is based on the best information that the SPS program office had available and could provide. 9. See comments 3 and 8. Also, we agree that applying our net-present- value calculation methodology to the SPS and status quo cost-and- benefit data provided in the January 2000 economic analysis show that SPS is cheaper than the status quo option. However, this calculation also shows that SPS as planned is not cost beneficial. Also, DOD’s comments compare only a small portion of SPS life-cycle costs (program office investment costs) against the difference between expected benefits under the SPS scenario and the status quo scenario. This comparison is illogical because it assumes that an arbitrary part of relevant investment costs can be associated with the total benefit difference between alternatives. Accordingly, we do not agree with DOD’s comment. While Appendix E of the January 2000 economic analysis contained some of the information provided in the tables contained in DOD’s comments, it did not provide a net present value calculation. Further, the Appendix E tables were not included in the economic analysis’ executive summary. Instead, the summary provided a benefits-to-costs ratio that excluded certain relevant costs. In addition to the person named above, Nabajyoti Barkakati, Harold J. Brumm, Jr., Sharon O. Byrd, James M. Fields, Sophia Harrison, James C. Houtz, Richard B. Hung, Barbarol J. James, and Catherine H. Schweitzer made key contributions to this report. Standard Procurement System Use and User Satisfaction, Office of the Inspector General, Department of Defense (Report No. D-2001-075, March 13, 2001). Defense Management: Actions Needed to Sustain Reform Initiatives and Achieve Greater Results (GAO/NSIAD-00-72, July 25, 2000). Department of Defense: Implications of Financial Management Issues (GAO/T-AIMD/NSIAD-00-264, July 20, 2000). Defense Management: Electronic Commerce Implementation Strategy Can Be Improved (GAO/NSIAD-00-108, July 18, 2000). Initial Implementation of the Standard Procurement System, Office of the Inspector General, Department of Defense (Report No. 99-166, May 26, 1999). Financial Management: Seven DOD Initiatives That Affect the Contract Payment Process (GAO/AIMD-98-40, January 30, 1998). Allegations to the Defense Hotline Concerning the Standard Procurement System, Office of the Inspector General, Department of Defense (Report No. 96-219, September 5, 1996).","This report reviews the Department of Defense's (DOD) ability to contract for goods and services by acquiring and implementing a standard procurement system (SPS). DOD's management of SPS is a lesson in how not to justify, make, and monitor the implementation of information technology investment decisions. Specifically, DOD has not (1) ensured that accountability and responsibility for measuring progress against commitments are clearly understood, performed, and reported; (2) demonstrated, on the basis of reliable data and credible analysis, that the proposed system solution will produce economic benefits commensurate with costs; (3) used data on progress against project cost, schedule, and performance commitments throughout a project's life cycle to make investment decisions; and (4) divided this large project into a series of incremental investment decisions to spread the risks over smaller, more manageable components. Because it has yet to effectively apply any of these basic tenets of effective investment management to SPS, DOD lacks the basic information needed to make informed decisions on how to proceed with the project. Nevertheless, DOD continues to push forward in acquiring and deploying additional versions of SPS. Continuing this approach involves considerable risk. GAO summarized this report in testimony before Congress; see DOD's Standard Procurement System: Continued Investment Has Yet to Be Justified, by Joel C. Willemssen, Managing Director for Information Technology Issues, before the Subcommittee on National Security, Veterans Affairs, and International Relations, House Committee on Government Reform. GAO-02-392T , Feb. 3 (13 pages).",govreport
"USCIS is responsible for processing millions of immigration benefit applications received each year for various types of immigration benefits, determining whether applicants are eligible to receive immigration benefits, and detecting suspicious information and evidence to refer for fraud investigation and possible sanctioning by other components or agencies. USCIS processes applications for about 50 types of immigration benefits. In fiscal year 2005, USCIS received about 6.3 million applications and adjudicated about 7.5 million applications. Figure 1 shows the percentage of applications completed by type of application in fiscal year 2005. To process these immigration benefit applications, in fiscal year 2005 USCIS had a staff of about 3,000 permanent adjudicators located in 4 service centers, where most applications are processed, and 33 district offices. In fiscal year 2004, for example, service centers adjudicated about 67 percent of all applications, and districts about 33 percent. In general, service centers adjudicate applications that do not require an interview with the applicant, using the evidence submitted with the applications. District offices generally adjudicate applications where USCIS requires an interview with the applicant (e.g., naturalization). USCIS also has eight offices that process applications for asylum in the United States. In fiscal year 2005, USCIS’s budget amounted to just under $1.8 billion, of which about $1.6 billion was expected from service fees and $160 million from congressionally appropriated funds. In fiscal year 2004, USCIS had a backlog of several million applications and has developed a plan to eliminate it by the end of fiscal year 2006. In June 2004, USCIS reported that it would have to increase production by about 20 percent to achieve its goal of adjudicating all applications within 6 months or less by the end of fiscal year 2005. At that time, it estimated that it would have to increase current annual processing from about 6 million to 7.2 million applications. Since USCIS did not plan for further increases in staffing levels, reaching its backlog goal would require some reduction in average application processing times, overtime hours, and adjudicator reassignments. With the creation of DHS in 2003, the immigration services and enforcement functions of the former INS transitioned to different organizations within DHS. USCIS assumed the immigration benefit functions and ICE assumed INS’s investigative and detention and removal of aliens functions. Within ICE’s Office of Investigations, the Identity and Benefit Fraud unit now conducts immigration benefit fraud criminal investigations and ICE’s Office of Detention and Removal Operations is responsible for identifying and removing aliens illegally in the United States. Because the immigration service and enforcement functions are now handled by separate DHS components, these components created two new units to, among other things, help coordinate the referral of suspected immigration benefit fraud uncovered by adjudicators to ICE’s Office of Investigations. First, USCIS created FDNS in 2003 to, among other things, receive fraud leads from adjudicators and determine which leads should be referred to ICE’s Office of Investigations. To accomplish this task, FDNS has Fraud Detection Units (FDU) at all four USCIS service centers and the National Benefits Center. When fraud is suspected, the applications are to be referred FDUs. The FDUs, comprised of Intelligence Research Specialists and assistants, are responsible for further developing suspected immigration fraud referrals to decide which leads should be referred to ICE for possible investigation. FDU staff are also to refer to ICE or other federal agencies applicants who may pose a threat to national security or public safety or who are potentially deportable. FDUs are responsible for following up on potential national security risks identified during background checks of immigration benefit applicants. FDUs also perform intelligence analysis to identify immigration fraud patterns and major fraud schemes. In addition to establishing FDUs, in January 2005 FDNS assigned 100 new Immigration Officers to USCIS district offices, service centers, and asylum offices to work directly with adjudicators to handle fraud referrals and conduct limited field inquiries. Second, ICE’s Office of Investigations created four new Benefit Fraud Units (BFU) in Vermont, Texas, Nebraska, and California located either at or near the four USCIS service centers. The ICE BFUs are responsible for reviewing, assessing, developing, and when appropriate, referring to ICE field offices for possible investigation immigration fraud leads and other public safety leads received from the FDUs and elsewhere. Specifically, the ICE BFUs are intended to identify those referrals that they believe warrant investigation, such as organizations and facilitators engaged in large-scale schemes or individuals who pose a threat to national security or public safety, and refer them to ICE field offices. In turn, ICE field offices will investigate and refer those cases they believe warrant prosecution to the U.S. Attorneys Offices. Figure 2 illustrates the typical immigration benefit fraud referral and coordination process. The Homeland Security Act of 2002 created the office of the Citizenship and Immigration Services Ombudsman. The ombudsman’s primary function is to: assist individuals and employers in resolving problems with USCIS; identify areas in which individuals and employers have problems in dealing with USCIS; and propose changes in the administrative practices of USCIS in an effort to mitigate problems. The ombudsman has issued two annual reports that have highlighted issues related to prolonged processing times, limited case status information, immigration benefit fraud, insufficient standardization in processing, and inadequate information technology and facilities. Other federal agencies also play important roles in the immigration benefit application process. The Department of State is responsible for approving and issuing a visa allowing an alien to travel to the United States. The Department of Labor’s (DOL) Division of Foreign Labor Certification provides national leadership and policy guidance to carry out the responsibilities of the Secretary of Labor under the Immigration and Nationality Act (INA) concerning foreign workers seeking admission to the United States for employment. DOL provides certifications for foreign workers to work in the United States, on a permanent or temporary basis, when there are insufficient qualified U.S. workers available to perform the work at wages that meet or exceed the prevailing wage for the occupation in the area of intended employment. The DOL Office of the Inspector General’s Office of Labor Racketeering and Fraud Investigations is responsible for investigating fraud related to these labor certifications. Fraudulent schemes used in several high-profile immigration benefit fraud cases sheds light on some aspects of the nature of immigration benefit fraud—particularly that it is accomplished by submitting fraudulent documents, that it can be committed by organized white-collar and other criminals, and that it has the potential to result in large profits for these criminals. The benefit fraud cases we reviewed involved individuals attempting to obtain benefits for which they were not eligible by submitting fraudulent documents or making false claims as evidence to support their applications. Fraudulent documents submitted included but were not limited to birth and marriage certificates, tax returns, financial statements, business plans, organizational charts, fictitious employee resumes, and college transcripts. For example, in what ICE characterized as one of the largest marriage fraud investigations ever undertaken, 44 individuals were indicted in November 2005 for their alleged role in an elaborate scheme to obtain fraudulent immigrant visas for hundreds of Chinese and Vietnamese nationals. According to a USCIS fraud bulletin, this scheme may have been ongoing for 10 years. Another major investigation revealed evidence that an attorney had filed about 350 applications on behalf of aliens seeking permanent employment as religious workers at religious institutions in the United States. Investigators found evidence that most of these aliens were unskilled laborers who were not pastors or other religious workers and had little or no previous affiliation with the religious institution. According to this investigation, some religious institutions appeared to specialize in obtaining legal status for aliens in the country who were not eligible for religious worker immigration benefits. In another investigation involving at least 2,800 apparently fraudulent marriage and fiancée applications identified in 2002 and investigated through 2004, a U.S. citizen appeared to have submitted multiple applications with as many as 11 different spouses. One USCIS Service Center prepared fraud bulletins using information from various State Department Consular posts overseas describing immigration fraud uncovered by these posts. Our analysis of the bulletins issued from July 2004 through December 2004 prepared by USCIS’s California Service Center revealed that aliens from 23 different countries were believed to have sought a variety of immigration benefits fraudulently. For example, individuals apparently sought to enter the United States through fraud by falsely claiming they were: (1) legitimately married to or a fiancé of a U.S. citizen; (2) a religious worker; (3) a performer in an entertainment group; (4) a person with extraordinary abilities, such as an artist, race car driver, or award winning photographer; (5) an executive with a foreign company; (6) a child or other relative of a citizen or permanent resident; or (7) a domestic employee of an alien legally in the United States, such as a diplomat or business executive. According to one of the bulletins, in one case State Department consular officers suspected illegal aliens were entering the United States under the guise of membership in a band. According to another bulletin, two individuals were suspected of smuggling children into the United States. In this case, the alleged parents submitted a non-immigrant visa application for their “daughter,” and provided a fraudulent birth certificate and passport for her. The “parents” eventually admitted to taking children to the United States as their own to reunite them with their illegally working family members. Some individuals seeking immigration benefits pose a threat to national security and public safety, and white collar and other criminals sometimes facilitate immigration benefit fraud. For example, according to FDNS, each year about 5,200 immigration benefit applicants are identified as potential national security risks, because their personal information matches information contained in U.S. Customs and Border Protection’s Interagency Border Inspection System, a database of immigration law violators and people of national security interest. Additionally, according to federal prosecutors, immigration benefit fraud may involve other criminal activity, such as income tax evasion, money laundering, production of fraudulent documents, and conspiracy. Also, organized crime groups have used sophisticated immigration fraud schemes, such as creating shell companies, to bring in aliens ostensibly as employees of these companies. In addition, a number of individuals linked to a hostile foreign power’s intelligence service were found to have been employed as temporary alien workers on military research. Investigations have revealed that perpetrating fraud on behalf of aliens can be a profitable enterprise. For instance, in 2003 and 2004, one USCIS service center identified about 2,800 apparently fraudulent marriage applications between low-income U.S. citizens and foreign nationals from an Asian country. The U.S. citizens appeared to have been paid between $5,000 and $10,000 for participating in the marriage fraud scheme. In another example from an investigation by DOL’s Inspector General, to fraudulently obtain the labor certifications needed to work in the United States, at least 900 aliens allegedly paid a recruitment firm an average of $35,000, with some aliens paying as much as $90,000, resulting in at least $31 million in revenue for this firm. In one of the largest labor certification fraud schemes ever uncovered, federal investigators found evidence that a prominent immigration attorney in the Washington, D.C., area submitted at least 1,436 and perhaps as many as 2,700 fraudulent employment applications between 1998 and 2002. According to the sworn testimony of a DOL special agent, this attorney and his associates are alleged to have made at least $11.4 million for the 1,400 applications that the agent reviewed, in all of which he found evidence of fraud, and perhaps as much as $21.6 million if all 2,700 applications were fraudulent, as he strongly suspected. In another case, an attorney allegedly charged aliens between $8,000 and $30,000 to fraudulently obtain employment-based visas to work in more than 200 businesses that included pizza parlors, auto parts stores, and medical clinics. Although the full extent of immigration benefit fraud is unknown, available USCIS data indicate that it is a serious problem. According to USCIS PAS data, in fiscal year 2005, USCIS denied just over 20,000 applications because USCIS staff detected fraudulent application information or supporting evidence during the course of adjudicating the benefit request. Three application categories accounted for more than three-quarters of the fraud denials: temporary work authorization (36 percent), application for permanent residency (30 percent), and application for a spouse to immigrate (14 percent). These three application types also accounted for almost half of all applications adjudicated by USCIS in fiscal year 2005. Moreover, in fiscal year 2005, USCIS denied approximately 800,000 applications for other reasons, such as ineligibility for the benefit sought or failure to respond to information requests. USCIS adjudications staff and officials told us that it is likely that some of these applications denied for other reasons also involved fraud. Information provided by State Department and DOL officials also indicates that fraud is a serious problem. Once USCIS approves a sponsor’s application on behalf of an alien to immigrate, the application is sent to the State Department’s National Visa Center, which forwards the application to the appropriate State Department overseas consulate post, which then interviews the alien to determine whether a visa should be issued. According to National Visa Center officials, out of 2,400 applications returned on average each month to USCIS by the National Visa Center, that are denied or withdrawn for various reasons, about 900 involve fraud or suspected fraud as determined by consular officers overseas. When the DOL Inspector General audited labor certification applications filed in 2001, it also found indications of a significant amount of fraud. According to the Inspector General, of the approximate 214,000 applications filed from January 1, 2001, through April 30, 2001, and not subsequently cancelled or withdrawn, 54 percent (about 130,000) contained false—possibly fraudulent—information. In June 2005, the FDNS completed the first in a series of fraud assessments. The results from this assessment of religious worker applications indicate that about 33 percent of the 220 sampled applications resulted in a preliminary finding of potential fraud. Based on a 33 percent rate, we estimate that, during the 6-month period of fiscal year 2004 from which the sample was drawn, about 660 out of approximately 2,000 applications may have been fraudulent. Of the 72 potential fraud cases discovered in the fraud assessment, about 54-percent (39 cases) showed evidence of tampering or fabrication of supporting documents; 44-percent (32 cases) of the petitioners’ addresses did not reveal a bona fide religious institution; about 42-percent (30 cases) may have misrepresented the beneficiaries’ qualifications; and 28-percent (20 cases) did not provide the salary noted in the application. The assessment also uncovered one case where law enforcement had identified an applicant as a suspected terrorist. Information from other investigations and prosecutions of benefit fraud also reveal that, in some cases, applicants may have submitted fraudulent documents and made false statements that were not detected before the applicant obtained an immigration benefit. For example, while investigating one fraud scheme, investigators identified more than 2,000 apparently fraudulent applications where there was evidence that some aliens, fraudulently claiming to be managers and executives of foreign companies with U.S. affiliates, acquired benefits that granted them the ability to work in the United States. To execute this scheme, organizers allegedly prepared application packages that included fraudulent business and employee related documents including financial statements, business plans, organizational charts, and fictitious employee resumes. One joint law enforcement investigation, previously mentioned, uncovered evidence that an attorney and his associate had filed at least 1,436 applications on behalf of legitimate companies—mostly local restaurants—that did not actually request these workers. In this case there was evidence that they forged the signatures of company management on the applications. Another investigation involving marriage fraud found evidence that U.S. citizens were recruited and paid to marry Vietnamese nationals. The fraud organizers appeared to have assisted the U.S. citizens in obtaining their passports, scheduled travel arrangements, and escorted them to Vietnam where they arranged introductions with Vietnamese nationals whom the citizens then married. These citizens then filed applications that facilitated these Vietnamese nationals’ entry into the United States as spouses even though it appeared that they did not intend to live together as husband and wife. Even when adjudicators rejected applications based on fraud, some of these applicants had already received interim benefits while their applications were pending final adjudication allowing them to live and work in the United States, and in some cases obtain other official documents, such as a driver’s license. Under current USCIS policy, for example, if USCIS cannot adjudicate an application for permanent residency and the accompanying application for work authorization within 90 days, the applicant is entitled to an interim work authorization, an interim benefit designed to let applicants work while awaiting a decision regarding permanent residency. According to the Citizenship and Immigration Services Ombudsman’s fiscal year 2004 and 2005 annual reports and our discussion with him, for many individuals the primary goal is to obtain temporary work authorization regardless of the validity of their application for permanent residency. That is, aliens can apply for temporary work authorization, knowing that they do not qualify for permanent residency, with the intent of exploiting the system to gain work authorization under false pretenses. Once a temporary work authorization is fraudulently obtained, an alien can use it to obtain other valid identity documents such as a temporary social security card and a driver’s license, thus facilitating their living and working in the United States. According to the FDNS Director, once such fraud scheme involved at least 2,500 individuals in Florida who allegedly filed frivolous applications for employment authorization and then used the receipt, showing they had filed an application, to obtain Florida State driver’s licenses or identification cards. ICE agents we interviewed also said that they suspected that many individuals apply for permanent residency fraudulently simply to obtain a valid temporary work authorization document. The interim benefit remains valid until it expires or until it is revoked by USCIS. In his 2005 report, the Ombudsman cites a DHS Office of Immigration Statistics estimate—which the ombudsman’s office confirmed with USCIS’s division of performance management—that about 85 percent of applicants for permanent residency also apply for temporary work authorization. As a result, according to the ombudsman, many aliens have received temporary work authorizations, for which they were later found to be ineligible. Our analysis of PAS data shows, for example, that from fiscal year 2000 through 2004, USCIS denied 26,745 applications due to fraud out of the approximately 3 million applications received for permanent residency. These data illustrate that, if aliens that filed fraudulent applications for permanent residency also requested temporary work authorization at a rate consistent with the 85 percent cited by the Office of Immigration Statistics, then thousands of aliens received temporary work authorization based on their fraudulent claims for permanent residency during fiscal year 2000 through 2004. To help it detect immigration benefit fraud, USCIS has taken some important actions consistent with activities prescribed by the Standards for Internal Control in the Federal Government and with recognized best practices in fraud control. Specifically, it has established an internal unit to act as its focal point for addressing immigration benefit fraud, outlined a strategy for detecting immigration benefit fraud, and is undertaking a series of fraud assessments to identify the extent and nature of fraud for certain immigration benefits. However, USCIS has not applied some aspects of internal control standards and fraud control best practices that could further enhance its ability to detect fraud. The Standards for Internal Control in the Federal Government provide an overall framework to identify and address, among other things fraud, waste, abuse, and mismanagement. Implementing good internal control activities and establishing a positive control environment is central to an agency’s efforts to detect and deter immigration benefit fraud. The standards address various aspects of internal control that should be continuous, built-in components of organizational operations, including the control environment, risk assessment, control activities, information and communications, and monitoring. As with work we have previously published related to managing improper payments, fraud control would typically require a continual interaction among these components in keeping with an agency’s various objectives. For example, internal controls that promote ongoing monitoring work together with risk assessment controls to provide a foundation for decision making. Also, as internal control standards advise, a precondition to risk assessment is the establishment of clear, consistent agency objectives. Once established, risk assessment controls must also work together with information and communication controls to ensure that that every level of the agency is cognizant of the commitment and approach to both controlling fraud and meeting other agency objectives. Similarly, conditions governing risk change frequently, and periodic updates are required to ensure that risk information—including threats, vulnerabilities, and consequences—stays current and relevant. Information collected through periodic assessment, as well as daily operations can inform the assessment, and particularly, the analysis of risk. As shown in figure 3, the control environment surrounds and reinforces the other components, but all components work in concert toward a central objective, which, in this case, is to minimize immigration benefit fraud. Other audit organizations have published guidance that includes discussion of sound management practices for controlling fraud that complement the internal control standards. Among these are the American Institute of Certified Public Accountants (AICPA) guidance on management of antifraud programs and controls to help prevent and deter fraud and a fraud control practices guide developed by the United Kingdom’s National Audit Office (NAO) entitled “Good Practices in Tackling External Fraud.” The NAO guidance outlines a risk-based strategic approach to combating fraud that also includes evaluating the effectiveness of sanctions. According to internal control standards, factors leading to a positive control environment include clearly defining key areas of authority and responsibility, establishing appropriate lines of reporting, and appropriately delegating authority and responsibility for operating activities. Similarly, the NAO fraud control guidance advises agencies to develop specific strategies to coordinate their fraud control efforts and to ensure that someone is fully responsible for implementing the plans in the way intended and that sufficient resources are in place. Consistent with internal control and best practice guidance, USCIS established the FDNS office to enhance its fraud control efforts by serving as its focal point for addressing immigration benefit fraud. Established in 2003, FDNS is intended to combat fraud and foster a positive control environment by pursuing the following objectives: develop, coordinate, and lead the national antifraud operations for oversee and enhance policies and procedures pertaining to the enforcement of law enforcement background checks on those applying for immigration benefits; identify and evaluate vulnerabilities in the various policies, practices and procedures that threaten the legal immigration process; recommend solutions and internal controls to address these vulnerabilities; and act as the primary USCIS conduit and liaison with ICE, U.S. Customs and Border Protection (CBP), and other members of the law enforcement and intelligence community. In September 2003, in support of its objectives, FDNS outlined a strategy for detecting immigration benefit fraud in USCIS’s National Benefit Fraud Strategy. According to the strategy, because most immigration benefit fraud begins with the filing of an application, a sound approach to fraud prevention begins at the earliest point in the process—the time an application is received. Accordingly, USCIS established FDNS Fraud Detection Units (FDU) in each of the service centers in order to help identify potential fraud and process adjudicator referrals. Subsequently, FDNS appointed staff to serve as Immigration Officers working directly with adjudicators at the service centers and district offices to identify potential fraud and, to some extent, verify fraud through administrative inquiries—once it was determined that ICE had declined to investigate a referral—in order to assist adjudicators in making eligibility determinations. The strategy also discusses various technological tools to help the FDUs detect fraud early in the process—in particular, by enabling FDNS staff to check databases to confirm applicant information and by developing new automated tools to analyze application system data using known fraud indicators and patterns to help identify potential cases of fraud. USCIS has hired a contractor to develop for FDNS an automated capability to screen incoming applications against known fraud indicators, such as multiple applications received from the same person. According to FDNS, it plans to deploy an initial data analysis capability by the third quarter of fiscal year 2006 and release additional data analyses capabilities at later dates, but could not predict when these latter capabilities would be achieved. However, according to an FDNS operations manager, the near and midterm plans are not aimed at providing a full data mining capability. In the long term, USCIS plans to integrate these data analyses tools for fraud detection into a new application management system being developed as part of USCIS’s efforts to transform its business processes for adjudicating immigration benefits, which includes developing the information technology needed to support these business processes. Also, in the long term, according to the FDNS Director, a new USCIS application management system would ideally include fraud filters to screen applications and remove suspicious applications from the processing stream before they are seen by adjudicators. FDNS has adopted as one of its objectives the identification and evaluation of vulnerabilities in USCIS policies, practices, and procedures that threaten the immigration benefit process. Consistent with this objective and good internal control practices, in February 2005, FDNS began to conduct a series of fraud assessments aimed at determining the extent and nature (i.e., how it is committed) of fraud for several immigration benefits that FDNS staff determined, based on past studies and experience, benefit fraud may be a problem. To conduct these assessments, FDNS first selected a statistically valid sample of applications. FDNS field staff then attempted to verify whether key information on the applications was true. They did this by doing such things as comparing information contained in benefit applications with information in USCIS data systems and law enforcement and commercial databases, conducting interviews with applicants, and, in some cases, visiting locations to verify, for example, whether a business actually existed. As of December 2005, FDNS had completed its assessment of the religious worker application and replacement of permanent resident card applications, and was in the process of completing the assessment of two immigrant worker application subcategories. As of December 2005, FDNS planned to initiate two other assessments in January 2006 and another at a later time. Although USCIS has taken some important steps consistent with internal control standards and other good fraud control practices, it has not yet implemented some aspects of internal control standards and fraud control best practices that could further enhance its ability to detect fraud. Specifically, it lacks (1) a comprehensive approach for managing risk, (2) a monitoring mechanism to ensure that knowledge arising from routine operations informs the assessment of policies and procedures, (3) clear communication regarding how to balance multiple agency objectives, (4) a mechanism to help ensure that adjudicators staff have access to important information, and (5) performance goals related to fraud prevention. Although FDNS has initiated a fraud assessment program that identifies vulnerabilities for the specific benefit being assessed, it does not employ a comprehensive risk management approach to help guide its fraud control efforts. That is, FDNS has not (1) developed a plan for assessing the majority of benefits that USCIS administers, (2) fully incorporated threat and consequence information as part of the assessment process, and (3) applied a risk-based approach to evaluating alternatives for mitigating identified vulnerabilities. A central component of the Standards for Internal Control in the Federal Government is risk assessment, which includes identifying and analyzing risks that agencies face from internal and external sources and deciding what actions should be taken to manage these risks. NAO’s fraud control guide also advises that in the fraud context, risk assessment involves such things as assessing the size of the threat from external fraud, the areas most vulnerable to fraud, and the characteristics of those who commit fraud. Moreover, we have consistently advocated a model of risk management that takes place in the context of clearly articulated goals and objectives and includes comprehensive assessments of threats, vulnerabilities, and consequences to help agencies evaluate and select among alternatives for mitigating risk in light of the potential for a given activity to be effective, the related cost of implementing the activity, and other relevant management concerns (including its impact on other agency objectives). FDNS fraud assessments are an initial step toward adopting a risk management approach. However, FDNS has no specific plans to assess the majority of the benefit types that it administers. FDNS’s current plan calls for assessing benefit types that represent only about 25 percent of the applications USCIS received in fiscal year 2004, for example, and do not include benefits like temporary work authorization which accounted for almost 30 percent of applications received in 2004, and which the CIS Ombudsman suspects may be a high risk for fraud, and for which PAS data show a high denial rate for fraud. FDNS officials told us that, although the fraud assessments have been valuable, they have taken more time and effort than originally planned. Likewise, FDNS has not established a strategy and methodology for prioritizing any future fraud assessments. Until it extends the assessments to additional benefit types, the fraud assessments offer only limited information about vulnerabilities to the immigration benefits system Moreover, the approach to risk management that we advocate calls for the assessment of threats and consequences, in addition to the vulnerability information provided by the current approach to fraud assessment. Currently, the fraud assessments do not incorporate a comprehensive threat assessment—that is, they do not draw on all available sources of threat information—for example, information that might be available from such sources as ICE’s Office of Intelligence and other DHS intelligence gathering efforts. Threat assessment might help FDNS identify, for example, whether terrorists might be more likely to try to exploit certain immigration benefits. Neither do the fraud assessments include an assessment of the consequences of granting a particular benefit to a fraudulent filer. Such an assessment might help USCIS determine the relative harm that granting such a benefit might pose to the United States and its immigration benefit system. Although ultimately any benefit obtained under false pretenses undermines the system established by U.S. immigration law, consideration of whether, for example, granting a specific benefit may also facilitate easier access for potential terrorists to critical infrastructure or pose a greater detriment to the U.S. economy could inform sound risk-based decision making. Equipped with a more comprehensive understanding of the risks it faces— particularly which benefits represent the highest risk, USCIS management would then be in a better position to select appropriate risk mitigation strategies and actions, particularly in situations where it is necessary to make resource trade-offs or to balance multiple agency objectives. For example, an obvious vulnerability to the immigration benefit system is the submission of false eligibility evidence. Currently, however, USCIS procedures do not include the verification of any eligibility evidence for any benefit, despite its potential to help mitigate vulnerability to fraud. Verification of such evidence—by comparing it to other information in USCIS databases, by checking it against external sources of information, or by interviewing applicants—is the most direct and effective strategy for mitigating this vulnerability. Employer wage data reported to state labor agencies, for example, could be a useful source of information to help determine if an employer has paid prevailing wages. Data from state motor vehicle departments can be used to verify that the two individuals claiming to be married live at the same address. We previously reported that USCIS could benefit from verifying employer related information with the Internal Revenue Service. USCIS adjudicators told us that access to commercial databases that provide identification and credential verification would be helpful in verifying information contained in benefit applications. Additionally, district office adjudicators told us that it was often only during interviews that fraud became evident, even when their earlier review had not raised suspicions. A successful State Department effort offers further evidence that the practice of verifying key information can be an effective mitigation strategy. Due to a high incidence of fraud in a program that allows foreign companies to bring executives into the United States, one State Department consular post in Latin America began verifying with local authorities two key pieces of evidence that applicants were required to submit. According to the post, it subsequently noticed a decrease in the number of potentially fraudulent applications for this benefit. On the other hand, verifying any applicant-submitted evidence in pursuit of its fraud-prevention objectives represents a resource commitment for USCIS and a potential trade-off with its production and customer service- related objectives. In fiscal year 2004, USCIS had a backlog of several million applications and has developed a plan to eliminate it by the end of fiscal year 2006. In June 2004, USCIS reported that it would have to increase monthly production by about 20 percent to achieve its legislatively mandated goal of adjudicating all applications within 6 months or less by the end of fiscal year 2006. According to USCIS, because it does not plan to increase its current overall staffing level, meeting its backlog reduction goal will require some combination of reductions in the standard processing time for various applications, overtime hours, and adjudicator reassignments. It would be impossible for USCIS to verify all of the key information or interview all individuals related to the millions of applications it adjudicates each year—approximately 7.5 million applications in fiscal year 2005—without seriously compromising its service-related objectives. Identifying situations and benefits that represent the highest risk to USCIS could help its management determine whether and under what circumstances verification is so vital to maintaining the integrity of the immigration benefits system that it outweighs any potential increase in processing time and costs. In this example, such an approach to risk management would inform selection among alternative verification strategies by considering (1) the risk of failing to detect fraud based on information provided by assessments of vulnerabilities, threats, and consequences, (2) the cost of conducting the verification (including its effect on other organizational objectives like service), and (3) the potential for the verification activities, given the current tools and information available, to actually detect fraud. In addition to procedural vulnerabilities like the verification example, a risk management approach could also guide USCIS in the evaluation of policies that strike a balance between two or more agency objectives and organizational priorities. For example, as previously discussed, USCIS’s policy of granting interim employment authorization documents to applicants whose adjustment of status applications have not been adjudicated within 90 days can be exploited by aliens seeking to gain work authorization under false pretenses and to use work authorization to obtain valid identity documents such as temporary social security cards and drivers licenses. In his 2004 and 2005 annual reports, the CIS Ombudsman identified this policy as a significant vulnerability in the immigration benefits process, because he contends that for many individuals the primary goal is to obtain temporary work authorization regardless of the validity of their applications for permanent residency. On the other hand, as we have previously reported, the reason for issuing temporary work authorization is to allow legitimate applicants to work as soon as possible, which according to USCIS, can serve to reduce the negative effects of delay on applicants and their families. Using more comprehensive risk information to evaluate policies that represent trade- offs between fraud control and other agency objectives may help USCIS management determine whether and to what extent unintended policy consequences like in this example place the integrity of the immigration benefits system at risk. This kind of risk management approach also would provide USCIS management an opportunity to evaluate and select among various approaches to balancing fraud control with other agency objectives. In the temporary work authorization example, USCIS could evaluate a variety of alternative strategies and select among them on the basis of all available information, including risk. These strategies might include: (1) maintaining the current policy if it is found to pose a tolerable level of risk, (2) seeking applicable regulatory changes, or (3) applying the policy disparately, to the extent allowed by law, across benefit types based on the level of risk each represents. In commenting on a draft of this report, DHS stated that a proposed regulatory change would clarify USCIS’s ability to withhold the adjudication of an application for employment authorization pending an ongoing investigation. Internal control standards advise that controls should be generally designed to ensure that ongoing monitoring occurs in the course of normal operations and is ingrained in the agency’s operations. FDNS’s fraud assessment program provides some information about how fraud is committed in the form of concentrated periodic assessments. However, currently USCIS does not have a mechanism to ensure routine feedback to FDNS about vulnerabilities identified during the course of normal operations and to incorporate it into adjudication policies and procedures. Besides information about vulnerabilities obtained from its operational experience adjudicating applications, additional information might be available to FDNS from external entities that also have responsibility for some aspect of controlling benefit fraud. One external source of fraud information that might inform USCIS operations is the U.S. Attorneys Office, which prosecutes immigration benefit fraud cases. For example, one U.S. Attorney, based on cases his office has prosecuted, has issued memoranda showing how underlying regulatory and adjudication processes have invited abuse of the immigration system. A March 2005 memorandum prepared by this office explained how a recent investigation revealed significant weaknesses in the asylum process that allowed ineligible aliens to obtain asylum, and made suggestions for reforming the process. The memorandum stated that these suggestions were intended to start a discussion among federal agencies with immigration responsibilities that could lead to needed reforms. In commenting on a draft of this report, DHS stated that USCIS is developing a plan of action to work with other DHS entities and the Executive Office of Immigration Review within the Department of Justice to respond to specific recommendations made by the U.S. Attorney that prepared the memorandum on asylum program weaknesses. Another source of information available to USCIS about fraud vulnerabilities are the criminal investigations conducted by ICE, DOL, and the DHS Office of Inspector General, which could reveal such information as the characteristics of those who commit fraud and how these individuals exploited weaknesses in the immigration benefit process to obtain benefits illegally. USCIS’s National Benefit Fraud Strategy does not mention incorporating lessons learned from investigative and prosecutorial activities into its fraud control efforts—specifically, how the knowledge ICE, DOL, and DHS investigators and U.S. Attorneys gained during the course of investigations and prosecutions could be collected and analyzed in order to become aware of opportunities to reduce fraud vulnerabilities. A mechanism to help ensure that information from these and related sources results in appropriate refinements to policies and procedures could enhance USCIS’s efforts to address fraud vulnerabilities. DOL, which plays an important role in the benefits process for some permanent employment benefits, has used external information to refine its procedures in this way. Specifically, it analyzed the results of major criminal investigations and prosecutions to evaluate and establish new procedures that require verifying key application information, such as the existence of a business. DOL found it was necessary to change its permanent labor certification procedures to require verification of basic application information in order to mitigate the risk of mistakenly approving permanent labor certification applications, and protect the fundamental integrity of the labor certification process from blatant abuse. Internal control standards advise that for agencies to manage their operations, they must have relevant, reliable, and timely communications. Furthermore, establishing a positive fraud control environment is central to an agency’s efforts to detect and deter immigration benefit fraud. The NAO guidance also advises management to ensure that all levels of the organization are made to share a concern about fraud. It is the stated mission of USCIS to provide the right benefit, to the right person, at the right time, and no benefit to the wrong person. Specifically, it aims to adjudicate all benefit requests within 6 months of receipt, without compromising the integrity of the process, nor significantly increasing staff. These objectives—speed, quality, and cost—are inherently in tension with one another. Therefore, it is particularly important, given USCIS’s multiple objectives, that it clearly communicates the importance of each of the objectives at every level of the organization, and provides clear guidance to adjudicators about how to balance them in the course of their daily duties. Although USCIS’s backlog elimination plan acknowledges the need to balance its focus on reducing the backlog with efforts to ensure adjudicative quality, some USCIS adjudicators we interviewed indicated that it was not clear to them how the agency expected them to balance fraud detection efforts and production goals during the course of their duties. Adjudicators we spoke with said that communications from management emphasized meeting production backlog goals almost exclusively. They said that management’s focused attention on reducing the backlog placed additional pressure on them to process applications faster, thereby increasing the risk of making incorrect decisions, including approving potentially fraudulent applications. For example, adjudicators at all four service centers we spoke with told us that operations management seemed to be almost exclusively focused on reducing the backlog in order to meet production goals. USCIS headquarters operations management responsible for overseeing adjudications at service centers and district offices told us that the adjudications operation is a “high-pressure” production environment and that they are seeking to increase production, but it was not their intention that this should come at the expense of making incorrect adjudication decisions. The FDNS Director told us that he had also discussed with operations management the need to strike a more balanced approach to meeting production goals and ensuring that the right eligibility decision is made. He acknowledged that until FDNS establishes an ability to proactively identify fraud through its automated analysis tools, adjudicators will continue to play a primary role in detecting fraud. Therefore, he acknowledged the importance of clear and balanced communications from operations management to adjudicators in support of USCIS’s new fraud detection process and the shared responsibilities in this regard. Nevertheless, adjudicators we interviewed told us that they have received guidance from different parts of the agency regarding the lengths to which they should go in confirming suspected fraud that they were uncertain how to interpret. For example, in December 2004, the FDNS Director issued guidance stating that adjudicators should obtain the evidence needed to support their suspicions of fraud before making a referral, including, if necessary, requesting additional evidence from applicants. According to adjudicators and FDU staff we interviewed, this guidance appears to conflict with a subsequent January 2005 memorandum, issued by the Director of Service Center Operations, which states that adjudicator requests for information should not be used as a device simply to “investigate” suspected fraud. Adjudicators we interviewed at one service center said that whenever operations management communicated with them about practicing more discretion in issuing requests for additional evidence, they believed it was primarily intended to put more pressure on them to process applications faster, which in turn they said puts additional pressure on them to not to request additional evidence when making eligibility decisions. Consequently, they were concerned about having to approve applications with less confidence in the correctness of their determinations. An FDNS Immigration Officer working in a service center echoed the adjudicators concerns about seemingly conflicting guidance, saying that interpreting such guidance from management made the job of adjudicators more difficult. However, he said that adjudicators and local managers would more likely heed the direction of USCIS operations management, their direct supervisors, rather than FDNS. Clear communications about the importance of both fraud prevention-related and service-related objectives and how they are to be balanced may help adjudicators ensure that they are appropriately supporting USCIS’s multiple objectives as they carry out their duties. In commenting on a draft of this report, DHS stated that the USCIS Director moved FDNS to a new directorate that reports directly to the USCIS Deputy Director. This will allow FDNS to provide focus and guidance to all USCIS operations. USCIS does not have a mechanism to help ensure that adjudicators have access to information related to detecting fraud they may need to carry out their responsibilities. Information regarding fraud trends can be provided in various forms including e-mails, intranet Web pages, and bulletin board notices. The adjudicators at the service centers and district offices we visited received some fraud-related information or training subsequent to their initial hire. Our interviews indicated, however, that the frequency and method for distributing ongoing information about fraud detection is not uniform across the service centers and district offices we visited; some adjudicators reported that more information or a more centralized information management system would better prepare them to detect fraud. At two service centers, adjudicators we interviewed told us that, after their initial training, they were provided with some information regarding fraud trends via e-mail. However, these adjudicators also reported difficulty with managing the information in this format. They said that providing this information through a different means—either through a Web-based system or through a training course that would summarize new knowledge related to fraud trends—would be easier and quicker to use. One of the service centers provided adjudicators with operating manuals—developed for specific benefit application types—that included information regarding typical fraud trends encountered by the service center, which adjudicators said they found useful in their efforts to detect fraud. At two other service centers, adjudicators we interviewed told us that they were not provided any fraud e-mail updates but received some limited information about fraud during general group meetings. Adjudicators at these two centers told us that receiving more specific and detailed information about fraud trends and practices would enhance their ability to detect fraud. At one service center, adjudicators suggested that having a method by which to incorporate the knowledge and lessons learned from experienced adjudicators would also help them to better detect fraud. Additionally, one of the district offices we visited provided an additional 2- day training course that included techniques for detecting fraud during an interview. Adjudicators we interviewed at this district office told us that the course helped prepare them to better detect fraud. USCIS headquarters officials responsible for field operations told us that there is no standard training regarding fraud trends and that fraud-related training varied across field offices. In addition to calling for relevant information to be shared internally, internal control standards require that management ensure that there are adequate means of communicating with and obtaining from external stakeholders information that may have a significant impact on achieving agency goals. During our audit work, USCIS and ICE, had not yet established a feedback mechanism for the timely sharing of information related to the status and outcomes of fraud referrals that is essential to the fraud referral process shared by USCIS and ICE. According to FDNS field staff we interviewed, information from ICE field offices on the status of USCIS referrals—for example, whether ICE has initiated an investigation in response to a referral—was sporadic and incomplete in some cases and non-existent in other cases. In addition, when ICE fails to accept a referral, FDNS may initiate an administrative inquiry to resolve an adjudicator’s suspicions of fraud. However, because ICE did not routinely provide information about its investigative decisions, it was difficult for FDNS to know when to initiate such inquiries or to plan for the staff time needed to conduct them. Moreover, according to FDNS staff and adjudicators we interviewed, without timely feedback about the investigative status of their referrals, adjudicators lacked the information needed to make more timely eligibility determinations, whether or not an investigation is opened by ICE. In November 2005, ICE and USCIS officials told us that ICE investigators were recently assigned to each of the FDUs, which may help increase communication and information sharing between USCIS and ICE. Additionally, according to the FDNS Director, having direct access to information stored in ICE’s case management information system, the Treasury Enforcement Communication System (TECS) maintained by Customs and Border Protection (CBP), would allow FDNS staff to determine with greater certainty whether someone who has filed for an immigration benefit is connected to any ongoing ICE criminal investigation. However, ICE officials told us they opposed allowing FDNS access to sensitive case management information. They said that there was a need to segregate sensitive law enforcement data about ongoing cases from non-law enforcement agencies like FDNS. In commenting on a draft of this report, DHS provided us with a February 14, 2006, memorandum of agreement between ICE and USCIS that established a mechanism for the sharing of information related to the status and outcomes of fraud referrals. In addition the agreement provides USCIS staff with access to TECS data so USCIS can determine whether someone who has filed for an immigration benefit is connected to any ongoing ICE criminal investigation. If properly implemented, this agreement should resolve USCIS’s concerns regarding the status and outcome of fraud referrals to ICE and access to TECS data. Internal control standards call for agencies to establish performance measures to monitor performance related to agency objectives. Measuring performance allows an organization to track progress made toward achieving its objectives and provides managers with crucial information on which to base management decisions. The Government Performance and Results Act (GPRA) of 1993 also requires that agencies establish long- term strategic and annual goals, measure performance against these goals, and report on the progress made toward meeting their missions and objectives. It calls for agencies to assess specific outcomes related to their missions and objectives, in addition to designing output measures to describe attributes of the goods and services produced by the agencies’ programs. USCIS’s 2005 Strategic Plan includes both a prevention theme—ensuring the integrity of the system, and a service theme—providing efficient and customer oriented services, along with related goals and objectives. However, DHS and USCIS have not established specific performance goals to assess benefit fraud activities. In fiscal year 2004 USCIS reported performance goals related to naturalization, legal permanent residency, and temporary residency to DHS for its annual Performance and Accountability Report. The objective for each of these three performance goals was to “provide information and benefits in a timely, accurate, consistent, courteous, and professional manner; and prevent ineligible individuals from receiving” the benefit. Although the objective includes preventing ineligible individuals from receiving the benefit, the related measure—achieve and maintain a 6-month cycle time goal—does not. There is no discussion in the strategic plan of how to balance its prevention objectives with its service objectives. Instead, USCIS’s long- term strategic approach appears to rely heavily on the development of an enhanced case management system, new fraud databases and data analyses tools, and automated information services to overcome the inherent tension between these prevention and services themes as they relate to the prevention of benefit fraud and reducing the backlog of immigration applications. Establishing output measures—for example, the number of cases referred to and accepted by FDNS—and outcome measures—for example, the percentage of fraudulent applications detected relative to targets established using baseline data from fraud assessments—could provide USCIS with more complete information about the effectiveness of its fraud control efforts in meeting its strategic goal objective to ensure the security and integrity of the immigration system. FDNS officials told us that they are now participating in USCIS’s Office of Policy and Strategy Performance Measurement Team’s efforts to develop performance metrics, and that FDNS is leading an effort to develop metrics related to USCIS’s strategic goal to ensure the security and integrity of the immigration system by increasing the detection of attempted immigration benefit fraud. However, specific DHS metrics regarding USCIS’s antifraud efforts have yet to be developed and approved by DHS. Although best practice guidance suggests that sanctions for those who commit benefit fraud are central to a strong fraud control environment, and the INA provides for criminal and administrative sanctioning, DHS does not currently actively use the administrative sanctions available to it. Fraud control best practices advise that a credible sanctions program, which incorporates a mechanism for evaluating its effectiveness, including the wider value of deterrence, is an integral part of fraud control. According to the AICPA’s fraud guidance, the way an entity reacts to fraud can send a strong message that helps reduce the number of future occurrences. Therefore, taking appropriate and consistent actions against violators is an important element of fraud control and deterrence. The guide further advises that a strong emphasis on fraud deterrence has the effect of persuading individuals that they should not commit fraud because of the likelihood of punishment. Similarly, the NAO guide states that a key element of a good fraud control program is to impose penalties and sanctions on those who commit fraud in order to penalize those who commit fraud and deter others from carrying out similar types of fraud. Data provided by USCIS indicates that most benefit fraud it uncovers and refers to ICE is not prosecuted. In fiscal year 2005, USCIS referred 2,289 immigration benefit fraud cases to ICE BFUs. However, 598, about 26 percent were accepted by the BFUs. Neither USCIS nor ICE provided us with information about which of the FDNS referrals accepted by the BFUs resulted in an ICE investigation. However, ICE officials said that the majority of ICE’s immigration benefit fraud investigations do not originate with USCIS referrals, but from other investigative sources. Given limits on its resources, ICE officials told us that they generally prioritize their investigative resources and assign them to cases involving individuals who are filing large numbers of fraudulent applications for profit, because these cases generally have a greater probability of being prosecuted by the U.S. Attorneys Offices. Therefore, the principal means of imposing sanctions on most immigration benefit fraud would be through administrative penalties. The INA provides both criminal and administrative sanctions for those who commit immigration benefit fraud. The act’s criminal provisions provide for fines and/or imprisonment for up to 5 years for a person who fails to disclose that they have, for a fee, assisted in preparing an application for an immigration benefit that was falsely made, and monetary fines and/or imprisonment for up to 15 years for a second such conviction. The act also provides for administrative penalties for applicants who make false statements or submit a fraudulent document to obtain an immigration benefit or enter into a marriage solely to obtain an immigration benefit. For document fraud committed after 1999, it provides monetary fines ranging from $275 to $2,200 per document subject to a violation for a first offense and from $2,200 to $5,500 per document for those who have previously been fined. Monetary penalties collected are to be deposited into the Immigration Enforcement Account within the Department of the Treasury. Funds from this account can be used for activities that enhance enforcement of provisions of the INA including: (1) the identification, investigation, apprehension, detention, and removal of criminal aliens; (2) the maintenance and updating of a system to identify and track criminal aliens, deportable aliens, inadmissible aliens, and aliens illegally entering the United States; and (3) for the repair, maintenance, or construction of border facilities to deter illegal entry along the border. In addition, under certain circumstances, individuals determined through the adjudication process to have committed fraud, are deemed inadmissible should they later try to file another immigration application. In some cases, aliens who are determined in a formal hearing to have committed fraud can be removed from the United States and be barred from entering in the future. DHS does not currently have a clear and comprehensive strategy for imposing sanctions or evaluating their effectiveness and is not actively enforcing the administrative penalties provided for by the INA. This is largely due to a 1998 federal appeals court ruling upholding a nationwide permanent injunction against the procedures used by INS to institute civil document fraud charges under the INA. The court found that INS provided insufficient notice to aliens regarding their right to request a hearing on the imposition of monetary fines and the immigration consequences of failing to do so, and that until proper notifications were included on the fine and hearing waiver forms, INS was enjoined from implementing civil penalties for document fraud. According to the Director of Field Operations for ICE’s Office of Principal Legal Advisor, after the court ruling, the government’s cost to investigate and prosecute an immigration fraud case administratively, including appeals costs, would not be offset by the monetary sum that might be obtained. Moreover, the director stated that even if successful, there was no guarantee that the government could collect its fine from the alien. Therefore, according to the director, ICE does not consider implementing the administrative penalties for document fraud to be cost-effective. Accordingly, DHS has not made updating the forms in response to the ruling a priority. Similarly, another USCIS attorney told us that the provision of INA that pertains to marriage fraud is rarely used because, due to the significant commitment of resources necessary to establish a finding of fraud, enforcing it might not be cost-effective. However, DHS has not conducted a formal analysis, which includes an attempt to value the benefit of deterrence, to determine the total costs and benefits of imposing sanctions. Senior USCIS officials we spoke with, however, told us that administrative sanctions are important to their fraud control efforts. According to the FDNS Director, without the credible threat of a penalty, individuals have no fear of filing future fraudulent applications. In this regard, he said that FDNS administrative investigations of fraud referrals not investigated by ICE are critical, and, in his estimation, the resulting denial of a benefit and potential removal of an alien offer an effective deterrent to immigration benefit fraud. However, the director said that although an alien who commits immigration benefit fraud might be removable from the United States and, therefore, has some disincentive to commit fraud, U.S. citizens, if they are not prosecuted criminally, have little disincentive because without the enforcement of administrative sanctions they are not likely to be penalized, even if their violations are detected. Additionally, according to the Chief of Staff for USCIS, a strategy for administratively sanctioning those who commit fraud is necessary for controlling and deterring fraud. Although DHS does not actively use its authorities to impose administrative penalties, Congress has continued to support the concept in legislation. In particular, the Real ID Act of 2005 allows the Secretary of Homeland Security, after notice and an opportunity for a hearing, to impose an administrative fine of up to $10,000 per violation on an employer for a substantial failure to meet any of the conditions of a petition for certain non-immigrant workers or a willful misrepresentation of a material fact in such a petition, and allows the secretary to deny petitions filed with respect to that employer for at least 1 year and not more than 5 years. However, without a strategy that includes a mechanism for assessing the effectiveness of sanctions and considers both the monetary value of fines collected and the value of deterrence, DHS will not be able to determine how and under what circumstances to best use the authority provided by the INA and other legislation to promote a credible threat of punishment in order to deter fraudulent filers. Although it lacks a strategy for imposing criminal and administrative sanctions, DHS, along with DOL, has proposed administrative rule changes that will help sanction those who commit fraud. Among other things, DHS has proposed that USCIS be able to deny, for a period of time, all applications from employers that DOL or DHS has found, respectively, to have submitted false information about meeting regulatory requirements or provided statements in their applications that were inaccurate, fraudulent or misrepresented a material fact. Final rules have not yet been published. In light of competing organizational priorities, institutionalizing fraud detection—so that it is a built-in part of the adjudications process and always a central part of USCIS’s planning, procedures, and methods—is vital to USCIS’s ability to accomplish its goals and objectives, particularly protecting the integrity of the immigration benefit system. USCIS has taken some important steps to implement internal controls, primarily through the activities of the Office of Fraud Detection and National Security. By strengthening existing controls and implementing additional fraud control practices, USCIS could enhance its ability to detect benefit fraud and gain greater assurance that its operations are designed to protect the integrity of the system, even as it strives to enhance service and meet its backlog reduction goals. Specifically, expanding the types of benefits it assesses, including assessments of consequence, and drawing on all available sources of threat information to develop current fraud assessment activities into a more comprehensive risk management approach would provide additional knowledge about fraud risks and put the agency in a better position to make risk-based evaluations of its policies, procedures, and programmatic activities. Also, a mechanism to ensure that information uncovered during the course of normal operations—in USCIS and related agencies—feeds back into USCIS policies and procedures would help to ensure that it addresses loopholes and procedural weaknesses. In addition, clear communication of the importance of fraud prevention-related objectives and how they are to be balanced, in practice, with service-related objectives would help USCIS adjudicators to ensure that they are supporting the agency’s multiple objectives as they carry out their duties. Moreover, the provision of the tools and the relevant information that its adjudicators need to help them detect fraud could help them make eligibility determinations with greater confidence of their accuracy. Finally, performance goals—that include output and outcome measures, along with associated targets—reflecting the status of fraud control efforts would provide valuable information for USCIS management to evaluate its various policies, procedures, and programmatic activities and a better understanding of both the progress made and areas requiring more focused management attention to enhance fraud prevention. By demonstrating sufficiently adverse consequences for individuals who perpetrate fraud, sanctions serve to discourage future fraudulent filings, as individuals observe that the potential costs of engaging in fraud are likely to outweigh the potential gains. It is important to any program that encounters fraud to have a credible sanctions program to penalize those who engage in fraud and deter others from doing so. Currently, DHS’s sanctions program for immigration fraud is not a threat to most perpetrators because relatively few are prosecuted criminally and administrative sanctions are not actively being used. Although DHS officials told us that administrative sanctions are not cost-effective, comparing only the costs of administering sanctions with the potential return from the collection of fines may undervalue their potential deterrent effects. Although developing a sound methodology to establish and determine the value of deterrence provided by sanctions will require effort, best practices call for cost-effective sanctions, and consideration of the full range of costs and benefits, financial and nonfinancial, is central to making a valid determination of cost-effectiveness. Developing and implementing a strategy for imposing sanctions that includes a mechanism for assessing effectiveness and that more fully evaluates costs and benefits, including nonfinancial benefits like the value of deterrence, could give DHS a better indication of how and under what circumstances administrative sanctions should be employed to enhance USCIS’s fraud deterrence efforts. In order to enhance USCIS’s overall immigration benefit fraud control environment, we recommend that the Secretary of Homeland Security direct the Director of USCIS to take the following five actions, which are consistent with internal control standards and best practices in the area of fraud control: Enhance its risk management approach by (1) expanding its fraud assessment program to cover more immigration application types; (2) fully incorporating threat and consequence assessments into its fraud assessment activities; and (3) using risk analysis to evaluate management alternatives to mitigate identified vulnerabilities. Implement a mechanism to help USCIS ensure that information about fraud vulnerabilities uncovered during the course of normal operations—by USCIS and related agencies—feeds back into and contributes to changes in policies and procedures when needed to ensure that identified vulnerabilities result in appropriate corrective actions. Communicate clearly to USCIS adjudicators the importance USCIS’s fraud-prevention objectives and how they are to be balanced with service-oriented objectives to help adjudicators ensure that both objectives are supported as they carry out their duties. Provide USCIS’s adjudicator staff with access to relevant internal and external information that bears on their ability to detect fraud, make correct eligibility determinations, and support the new fraud referral process—particularly ongoing updates regarding fraud trends and other information related to fraud detection. Establish output and outcome based performance goals—along with associated measures and targets—to assess the effectiveness of fraud control efforts and provide more complete performance information to guide management decisions about the need for any corrective action to improve the ability to detect fraud. In addition, in order to enhance DHS’s ability to sanction immigration benefit fraud, we recommend the Secretary of Homeland Security direct the Director of USCIS and the Assistant Secretary of ICE to: Develop a strategy for implementing a sanctions program that includes mechanisms for assessing its effectiveness and for determining its associated costs and benefits, including its deterrence value. We provided a draft of this report to the Departments of Homeland Security, State, Justice, and Labor for review. On March 1, 2006, we received written comments on the draft report from the Department of Homeland Security, which are reproduced in full in appendix II. The Departments of State, Justice, and Labor had no comments on our draft report. In its written comments, DHS stated that our report generally provided a good overview of the complexities associated with pursuing immigration benefit fraud and the need to have a program in place that proactively assesses vulnerabilities within the myriad of immigration processes. However, DHS stated that our report did not fully portray USCIS’s efforts to address immigration benefit fraud and provided other examples of efforts USCIS has undertaken or plans to undertake. Where appropriate, we revised the draft report to recognize these additional efforts by USCIS to address immigration benefit fraud. DHS noted that USCIS used GAO’s 2002 report on immigration benefit fraud as the foundation to build its antifraud program and believes that USCIS is on the right track to creating an effective antifraud program. We believe that USCIS is moving in the right direction and recognize that FDNS is in the beginning stages of developing and implementing a new antifraud program for USCIS. Overall, DHS agreed with and plans to take action to implement four of our six recommendations, and cited actions it has already taken to indicate that aspects of our other two recommendations are already in place. Specifically, regarding our recommendation that DHS enhance its risk management approach, DHS agreed that USCIS can enhance its risk management approach by expanding its fraud assessment program to cover more application types and plans to do so. DHS stated that its initial fraud assessments focused on benefits that were high risk, but that given existing resources it was not possible to conduct assessments on all benefit types within the first years of operation. DHS stated that USCIS believes that the benefit fraud assessments currently underway do provide a comprehensive risk analysis to identify vulnerabilities and measures to mitigate such vulnerabilities. DHS cites FDNS involvement in interagency anti-fraud efforts and that FDNS staff are assigned to various intelligence units as support that its fraud assessments draws on sources of strategic threat information. However, DHS did not provide evidence or explain how, if at all, these efforts systematically incorporated threat and consequences into its fraud assessment process. In addition, DHS did not explain or provide us with evidence of how USCIS will use the results of the fraud assessments as part of a continuous, built-in component of its operations to evaluate and adjust, as necessary, policies and procedures. Regarding our recommendation that DHS provide USCIS adjudicator staff relevant information, DHS agreed that it needs to provide USCIS staff access to relevant internal and external information and is initiating training for supervisory adjudication officers and is planning to provide adjudicators selective access to the State Department’s Consolidated Consular Database and other open source databases. Regarding our recommendation that DHS establish performance goals to assess the effectiveness of fraud control efforts, DHS stated that FDNS has created performance goals for the number of benefit fraud assessments conducted during the year and the number of recommended policy, procedural and regulatory changes. DHS agreed that additional output and outcome based performance goals and measures are needed but did not specify what action(s) they were planning to take. Regarding our recommendation that DHS develop a strategy for implementing a sanctions program, DHS agreed to study the costs and benefits of an administrative sanctions program though DHS believes that the process it has established to place aliens determined to have committed immigration fraud in removal proceedings is an effective deterrent. While this process may deter aliens from committing immigration fraud, this process does not impact citizens who may commit fraud and therefore a sanctions strategy for citizens is still needed. DHS stated that with regard to two of our recommendations, it has already take actions that are consistent with these two recommendations. Regarding our recommendation that USCIS implement a mechanism to feed back information uncovered during the course of its normal operations and those of related agencies about fraud vulnerabilities, DHS stated that it believes such a feedback loop already exists within the process. DHS stated that FDNS is currently developing its back-end processes, which include sharing information/lessons learned from routine operations and addressing shortcomings. For all major conspiracy cases, a report is to be prepared summarizing among other things, factors that lead to fraudulent applications being approved. USCIS also stated that based upon meetings that FDNS leadership had with a U.S. Attorneys Office regarding vulnerabilities in the asylum process, USCIS is developing a plan of action to respond to the recommendations made by the U.S. Attorney’s office. DHS also stated that USCIS is developing regulatory changes to mitigate vulnerabilities identified during the religious worker fraud assessment. Although these are all positive efforts, USCIS does not yet have policies and procedures that specify how information about fraud vulnerabilities uncovered during the course of normal operations—by USCIS and related agencies—is to be gathered—from which internal and external sources—and the process for evaluating this information and making decisions about appropriate corrective actions. Therefore, we continue to believe that USCIS needs to institutionalize through policies and procedures a feedback mechanism. Regarding our recommendation that USCIS clearly communicate the importance of USCIS’ fraud-prevention activities, DHS stated USCIS leadership clearly advocates balancing objectives related to timely and quality processing of immigration benefits. DHS stated that creation of FDNS and the recent move of FDNS to a new directorate that reports directly to the Deputy Director of USCIS allowing FDNS to provide focus and guidance to all USCIS operations as support that USCIS is focused on the integrity of USCIS’s data and processes. Although USCIS management believes these efforts demonstrate the importance of fraud prevention, our interviews with adjudicators in service centers and district offices indicate that this message may not be reaching USCIS’s adjudications staff. Therefore, we continue to believe that more is needed to clearly communicate the importance of fraud prevention and more specific guidance on how USCIS staff are to balance the fraud prevention and service oriented objectives. DHS disagreed with our recommendation that USCIS and ICE establish a mechanism for the sharing of information related to the status and outcomes of USCIS fraud referrals to ICE. DHS provided us a February 2006 memorandum of agreement between ICE and USCIS that establishes a mechanism for the sharing of information related to the status and outcomes of fraud referrals; therefore, we withdrew this recommendation. We are sending copies of this report to the Secretaries of Homeland Security, State, and Labor; the Attorney General; and other interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-8777 or Jonespl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To examine the extent and nature of immigration fraud, we reviewed the results of the Office of Fraud Detection and National Security’s (FDNS) ongoing fraud assessments. Regarding the fraud assessments, we interviewed the FDNS managers responsible for administering the assessment, reviewed documentation outlining the assessment’s design, implementation and initial results from two fraud assessments. To better understand the nature of immigration benefit fraud and to identify common fraud patterns, we analyzed examples of fraud case histories for several petition types planned to be assessed by FDNS. In addition, we analyzed information contained in fraud bulletins prepared by U.S. Citizen Immigration Services’ (USCIS) California Service Center that contained reports by various State Department overseas consular posts on immigration fraud these posts had uncovered. We also analyzed USCIS’s Performance Analysis System (PAS) data to determine trends in the volume of applications being processed, approved, and denied. We assessed the data derived from PAS and determined that these data were sufficiently reliable for the purposes of this review. We interviewed adjudications staff and field managers to evaluate the extent to which internal controls and practices for detecting fraud were incorporated into USCIS policies, procedures, and tools. We met with headquarters officials from USCIS operations and FDNS, as well as officials from the Departments of Labor and State responsible for fraud detection efforts. We conducted site visits or contacted staff at all four USCIS services centers—we visited three USCIS service centers in Laguna Niguel, California; Dallas, Texas; and St. Albans, Vermont; and conducted telephone interviews with USCIS staff at the Lincoln, Nebraska, service center. We also interviewed 59 adjudicators at the four USCIS service centers and two USCIS district offices with responsibility for and familiarity with adjudicating different types of applications in a group setting, which allowed us to identify points of consensus among the adjudicators. We also visited USCIS district offices in Dallas and Boston responsible for coordinating their fraud referrals with two of the four service centers we visited. USCIS service center and district office officials selected the adjudicators we interviewed based upon our request that we meet with adjudicators that had responsibility for and familiarity with adjudicating different types of applications. We also interviewed FDNS staff assigned to work with the four service centers and two district offices we visited or contacted. We also interviewed staff from Immigration and Custom Enforcement’s (ICE) Identity and Benefit Fraud Unit in Washington, D.C., and those agents assigned to Benefit Fraud Units (BFU) in California, Texas, and Vermont. As we did not select a probability sample of USCIS staff and ICE Office of Investigations agents to interview, the results of these interviews cannot be projected to all USCIS staff and ICE Office of Investigations officials nationwide. In addition, we reviewed efforts by the Department of Labor’s Inspector General to determine the extent of immigration fraud in the Permanent Labor Certification Program. We also met with the CIS Ombudsman to discuss his fiscal year 2004 and fiscal year 2005 reports. To determine what actions USCIS has taken to improve its ability to detect immigration benefit fraud, we reviewed USCIS’s efforts to improve its fraud detection capabilities, including resources devoted specifically to detecting fraud by FDNS. We also reviewed USCIS’s policies, adjudication procedures, and fraud detection processes as well as the tools used by adjudicators to detect fraudulent immigration benefit applications. To determine what actions have been taken to sanction those who commit fraud, we interviewed USCIS and ICE attorneys, identified the investigative resources that ICE had made available for immigration fraud investigations, and determined how USCIS and ICE coordinate the investigation of potential fraud. In addition, we examined fraud investigation and prosecution statistics, and analyzed USCIS statistics about the amount of fraud identified by its adjudicators. We also determined how ICE investigative efforts are coordinated with the U.S. Attorneys Offices and how their priorities affect the investigation and prosecution of immigration benefit fraud schemes of various types. For this portion of our review, we met with headquarters officials from ICE, and interviewed agents in four ICE field offices based in Boston, Dallas, Los Angeles, and San Antonio. We also interviewed representatives from the U.S. Attorneys Office for the Eastern District of Virginia and the Executive Office of the U.S. Attorneys within the Department of Justice. Finally, we examined the current sanctions for those who commit immigration benefit fraud and reviewed proposed fraud regulatory changes. To evaluate DHS efforts to detect and sanction immigration benefit fraud, we used the Standards for Internal Control in the Federal Government and with best practices advocated by the American Institute of Certified Public Accountants (AICPA) and by the United Kingdom’s National Audit Office (NAO). We conducted our work between October 2004 and December 2005 in accordance with generally accepted government auditing standards. In addition to the above, Joel Aldape, David Alexander, Jenny Chanley, Frances Cook, Michael P. Dino, Nancy Finley, Carlos Garcia, Kathryn Godfrey, Larry Harrell, and David Nicholson were key contributors to this report.","In 2002, GAO reported that immigration benefit fraud was pervasive and significant and the approach to controlling it was fragmented. Experts believe that individuals ineligible for these benefits, including terrorists and criminals, could use fraudulent means to enter or remain in the U.S. You asked that GAO evaluate U.S. Citizenship and Immigration Service's (USCIS) anti-fraud efforts. This report addresses the questions: (1) What do available data and information indicate regarding the nature and extent of fraud? (2) What actions has USCIS taken to improve its ability to detect fraud? (3) What actions does the Department of Homeland Security (DHS) take to sanction those who commit fraud? Although the full extent of benefit fraud is unknown, available evidence suggests that it is a serious problem. Several high-profile immigration benefit fraud cases shed light on aspects of its nature--particularly that it is accomplished by submitting fraudulent documents and can be facilitated by white collar and other criminals, with the potential for large profits. USCIS staff denied about 20,000 applications for fraud in fiscal year 2005. USCIS has established a focal point for immigration fraud, outlined a fraud control strategy that relies on the use of automation to detect fraud, and is performing risk assessments to identify the extent and nature of fraud for certain benefits. However, USCIS has not implemented important aspects of internal control standards established by GAO and fraud control best practices identified by leading audit organizations--particularly a comprehensive risk management approach, a mechanism to ensure ongoing monitoring during the course of normal activities, clear communication regarding how to balance multiple objectives, mechanisms to help ensure that staff have access to key information, and performance goals for fraud prevention. DHS does not have a strategy for sanctioning fraud. Best practices advise that a credible sanctions program, which includes a mechanism for evaluating effectiveness, is an integral part of fraud control. Because most immigration benefit fraud is not prosecuted criminally, the principal means of sanctioning it would be administrative penalties. Although immigration law gives DHS the authority to levy administrative penalties, the component of DHS that administers them does not consider them to be cost-effective and does not routinely impose them. However, DHS has not evaluated the costs and benefits of sanctions, including the value of potential deterrence. Without a credible sanctions program, DHS's efforts to deter fraud may be less effective, when applicants perceive little threat of punishment.",govreport
"Our objective was to assess IRS’ performance during the 1994 filing season. Specifically, we focused on IRS’ ability to (1) process income tax returns and refunds accurately and efficiently and (2) provide taxpayers access to forms, information, and electronic filing methods. To achieve our objective, we validated the results of 1 service center’s test of the accuracy and timeliness of refunds by reviewing 853 randomly selected refunds; analyzed filing season-related data from IRS’ Management Information System for Top Level Executives and IRS data on processing errors, including those involving the EIC; reviewed IRS reports on refund fraud; reviewed computer system availability reports and attended weekly operational meetings held by IRS’ National Office Command Center; assessed the availability of tax materials by visiting 10 walk-in sites; tested taxpayers’ access to ordering forms and publications from IRS’ 3 tax material distribution centers by placing phone calls to those centers; analyzed IRS’ toll-free telephone system accessibility data, telephone activity data for area distribution centers, and telephone accessibility reports for the TeleFile system; compiled trend data for various indicators of IRS’ filing season performance; and interviewed IRS National Office officials and IRS officials in the Atlanta; Cincinnati; Fresno, CA; and Kansas City, MO, Service Centers responsible for the various activities we assessed. We did our work from January through August 1994 in accordance with generally accepted government auditing standards. With the exception of the refund accuracy rate and refund timeliness measure, we did not test and verify statistical data provided by IRS. We discussed our findings and conclusions in an exit conference attended by cognizant IRS officials, including the National Director for Submission Processing, the Assistant Commissioner for Taxpayer Services, the Director for Taxpayer Service Design and Review, and the Chief of the Publishing Distribution Section. Their comments are presented and evaluated on page 15. Other changes resulting from their comments were made in the body of the report as appropriate. There were many positive aspects of the 1994 filing season. After an unexpected drop in individual income tax return filings in 1993, the number filed in 1994 went up, although not as much as IRS had originally anticipated; and more of those returns were filed through alternative methods like electronic filing. IRS’ computer systems generally performed well with intermittent problems causing only minor delays. IRS also exceeded its accuracy and timeliness goals for processing refunds and its accuracy goal for processing returns and took positive steps to improve its processing of tax receipts. However, there were some problems. The EIC continued to be a leading source of errors by taxpayers and tax practitioners in preparing returns, thus contributing to IRS’ error resolution workload; and the number of fraudulent refund claims identified by IRS continued to grow at a troubling pace. As of September 9, 1994, IRS had received 113.4 million individual income tax returns, compared to 112.7 million for the same period in 1993. In planning for the 1994 filing season, IRS had expected to receive 117.5 million individual returns—a projection that was based on historical growth rates. As shown in figure I.1 in appendix I, in the several years preceding 1993, the number of individual income tax returns filed increased consistently from year to year. However, there was an unexpected reduction in the number of returns filed in 1993. Because of the drop in the number of filers, IRS’ Research Division analyzed the shortfall in 1993 individual income tax returns. IRS determined that the major causes of this shortfall were (1) the IRS Reduce Unnecessary Filings program, (2) a drop in interest rates that reduced the income levels of certain taxpayers below filing requirement thresholds, and (3) the 1992 change in withholding rates that apparently left some individuals with an unanticipated balance due and who then did not file a return. On the basis of its analysis of the 1993 filing season, which was not completed until the spring of 1994—well into the 1994 filing season, IRS revised its projection model and dropped the expected 1994 filings to 114.5 million from the original 117.5 million. We did not review or test the assumptions IRS used to revise its projection model and, therefore, cannot comment on the reasonableness of the adjustment. As of September 9, however, the number of filings was still 1.1 million short of IRS’ revised expectations. Although the overall number of individual filers has not significantly increased, taxpayer use of the various alternative filing methods generally increased in 1994. IRS offers three types of filing alternatives to the traditional paper return: electronic, TeleFile, and 1040PC. Electronic and TeleFile use increased in 1994; 1040PC use declined slightly. In 1994, 13.5 million individual income tax returns were filed electronically—up from 12.3 million in 1993. As shown in figure I.2 in appendix I, this continues the consistent growth in electronic filing since it became available nationwide in 1990. Under TeleFile, certain taxpayers who are eligible to file a Form 1040EZ are allowed to file using a toll-free number on touch-tone telephones. In 1993, TeleFile was available to taxpayers in 1 state, and about 149,000 taxpayers used the system. IRS expanded the availability of TeleFile to 7 states in 1994, and the number of users grew to about 519,000. In 1995, IRS plans to expand TeleFile to all or parts of three more states and to double the number of telephone lines. IRS expects to further expand the system in 1996 and make it available nationwide in 1997. Under the 1040PC method, a filer uses personal computer software that produces tax returns in an answer-sheet format. The 1040PC shows the tax return line number and the data (dollar amount, name, etc.) on that line. Only lines on which the taxpayer has made an entry are included on the 1040PC. IRS received about 4.8 million 1040PC returns in 1993, but only about 4.2 million in 1994. IRS attributes the decline to a delay by a major return preparer in submitting its 1040PC software for IRS approval. The decline might also be attributed to problems with the 1040PC that were discussed during a September 1993 meeting of the Internal Revenue Commissioner’s Advisory Group. As reported in the September 3, 1993, issue of the Daily Tax Report, those problems involved taxpayers’ inability to interpret the 1040PC and use it as an aid in doing such things as (1) preparing state tax returns and (2) completing financial aid forms for children. IRS officials told us that steps have been taken to address these problems. In the future, 1040PC software packages will be required to provide the taxpayer with a legend explaining the lines on the 1040PC or a printed copy of the full return. IRS’ computer systems generally performed well during the 1994 filing season. However, some systems problems occurred that had operational impacts, such as downtime for IRS employees and short delays in refunds for taxpayers. Systems problems caused the computer systems at various locations to be unavailable to IRS personnel for generally short periods of time (less than 12 hours). According to IRS problem assessments, this limited downtime usually had a minimal impact on IRS’ overall operations. However, in 1 instance, a problem with the Automated Underreporter System at 1 service center caused IRS to lay off 270 temporary employees for about 1 week. IRS officials attributed this event to systemic problems in the software provided by the vendor. IRS had some intermittent systems problems that affected taxpayers. For example, one problem caused tax returns that were electronically filed at one service center on February 1, 1994, to not be processed on time. IRS estimated that the problem caused about a 1-week delay in processing those refunds. Two of IRS’ goals are to issue individual income tax refunds within an average of 40 days and with at least a 98-percent accuracy rate. IRS reports show that each of the 10 service centers met the timeliness goal, and the average issuance time for all 10 centers was 36 days. Also according to IRS data, 8 of the 10 centers met or exceeded the accuracy goal; the other 2 centers’ accuracy rates were within 1 percent of the goal. The average accuracy rate for all service centers was 98.6 percent. IRS measures refund accuracy by reviewing samples of nonelectronically filed returns with a refund due to the taxpayer. It compares the taxpayer’s name, address, and refund amount on the tax return with the same information on IRS’ master file, which is used to generate the refund check. By comparing this information, IRS can determine if an error was made and who made the error. IRS uses the same sample to measure refund timeliness. IRS computes the number of days from the return’s signature date to the date the taxpayer would have received the refund, allowing 2 days after issuance for the refund to reach the taxpayer. For the 1994 filing season, we examined the methodology IRS uses in measuring refund accuracy and timeliness. Using IRS criteria for testing accuracy and timeliness, we replicated its test at one service center using its four cluster samples. We selected and compared the results from a random sample of 853 refunds out of the service center’s 3,693 refunds used for its test. We agreed with 98.6 percent of the service center’s results. The 1.4-percent difference consisted of instances where service center personnel overlooked errors that our review caught. On the basis of these results, we concluded that the test conducted at one service center provides a valid measure of that service center’s accuracy and timeliness of refunds. In an effort to improve check processing and deposit tax receipts more timely, IRS (1) tested the use of lockboxes and (2) required each of the service centers to develop procedures for depositing revenues. Establishing lockboxes was not a new procedure for IRS. It has been using lockboxes for estimated tax payments since 1989. To assess taxpayers’ willingness to use different procedures for mailing tax payments associated with their returns, IRS conducted three lockbox tests during the 1994 filing season. For each test, IRS sent special Form 1040 packages to selected taxpayers. These packages included (1) mailing instructions that were different for each of the three tests and (2) a payment voucher that could be scanned by optical character recognition equipment. One test package contained a return envelope with two different tear-off address labels—one label addressed to the lockbox was to be used for a return with a tax balance due, while the other label addressed to the service center was to be used for a return with a refund due to the taxpayer. Taxpayers with balance-due returns were instructed to include the return, payment, and voucher in one envelope and to affix the label addressed to the lockbox. The bank that serviced the lockbox separated the return from the payment, deposited the payment, recorded the payment information on a computer tape, and forwarded the return and the computer tape to IRS for processing. Another test package used two envelopes—one addressed to the service center, the other addressed to the lockbox. All taxpayers were instructed to send only the return in the envelope addressed to the service center. However, taxpayers who owed a balance were to use the second envelope to send their payments and vouchers to the lockbox. The bank processed the payment and voucher as described above. The third test package also contained two envelopes. This test was no different from the other two-envelope test, except that these envelopes were postage paid. Thus, taxpayers incurred no expense by separating their returns from their payments and mailing them to the two addresses. On the basis of preliminary results of the three tests, IRS has decided to continue testing the two-label and two-envelope methods nationwide during the 1995 filing season. IRS plans to initiate some type of lockbox collection process nationwide in 1996. One measure of service center efficiency is the speed with which they deposit tax receipts. In response to our past recommendations, IRS required each service center to provide a plan on how they would expedite the identification and depositing of large dollar remittances during the peak filing season. Service centers were required to give priority handling to mail in oversized envelopes because IRS had determined that a high proportion of those envelopes contained large tax payments. However, because service centers were not required to separately track the amounts extracted from oversized envelopes, IRS could not determine the actual impact of this priority handling. In another effort to expedite deposits, IRS also required that all tax payments received with individual tax returns around the April 15th filing deadline be deposited by May 2, 1994. Nine of the 10 service centers met the goal; the other center was 1-day late. Service centers processed and deposited more tax payment revenues from individuals than in the previous year. Between April 15 and May 2, 1994, service centers deposited $41.5 billion compared to $36.2 billion during the same time period in 1993. In 1993, IRS began using a new system to measure the accuracy of its returns processing activity. The measure is derived from the Computer Assisted Pipeline Review (CAPR), which is a complete review of all returns identified by service centers’ computers as having math or other errors needing resolution before processing at the service centers can be completed. CAPR information identifies who was responsible for the error—service center staff or taxpayers, which includes tax practitioners—and what part of the return was in error. IRS had separate accuracy goals for the two service center groups that are primarily responsible for processing returns. The Code and Edit Section, whose staff review returns to ensure that all data are present and legible, had an accuracy goal of 94.4 percent in 1994. The goal for the Transcription Section, whose staff enter data from the returns into the computer, was 94.1 percent. As of the end of June 1994, according to IRS data the Code and Edit Sections in the 10 service centers had achieved a combined accuracy rate of 95.3 percent, up from 94 percent for the same period in 1993 and the Transcription Sections in the 10 centers had achieved a combined accuracy rate of 95.8 percent, up from 94.9 percent for the same period in 1993. IRS also measures the extent to which taxpayers or their representatives make errors in filling out their returns. That data, also as of the end of June 1994, showed an accuracy rate of 94.2 percent, well above IRS’ goal of 88.3 percent. Although these rates indicate that taxpayers correctly filed and IRS accurately processed the great majority of returns, CAPR data show that the EIC continues to cause particular problems for taxpayers and tax practitioners. As of July 2, 1994, 14.4 million taxpayers had received over $14.9 billion in EIC benefits—an increase compared to the 13.6 million taxpayers who had received almost $12.8 billion at the same point in time in 1993. The EIC continues to be a source of many mistakes by taxpayers and tax practitioners in preparing returns, which, in turn, increases IRS’ error resolution workload. Data from CAPR showed that in both 1993 and 1994, EIC-related mistakes were among the top errors made by taxpayers and tax practitioners when preparing returns. Other IRS data showed that IRS found a total of about 1 million Schedule EIC errors in 1994 and that taxpayers and practitioners had particular difficulty in figuring the amount of earned income and the basic credit and in determining “qualified” children. While acknowledging the many errors associated with the EIC, IRS officials noted that more than 90 percent of the over 14 million Schedule EICs filed in 1994 were processed without change. In an effort to reduce errors and better ensure that only qualified taxpayers received the EIC, IRS changed its procedures in 1993 by requiring taxpayers to submit a completed Schedule EIC with their returns when claiming the credit. However, in 1994, some taxpayers who claimed the credit did not submit the Schedule EIC. CAPR data showed that staff in the service centers’ Code and Edit Sections sometimes overlooked that taxpayers had not included the required Schedule EIC. According to IRS, when taxpayers do not include the proper schedules, the Code and Edit Section should send a notice instructing the taxpayer to submit the schedule in order for the credit to be granted and the return to be processed. When the Code and Edit Section overlooks the missing schedule, it is up to other departments to catch the error and correspond with the taxpayer. This delays the processing of the return, which then causes the eligible taxpayer a delay in receiving the benefit. In another effort to reduce errors, IRS officials said that IRS will make a greater effort in 1995 to encourage taxpayers to allow IRS to compute their EIC. As we have discussed in past reports and testimonies and as shown in table I.4 in appendix I, the number and dollar amount of IRS-detected fraudulent refund claims, on both electronic and paper returns, have been steadily increasing over the past several years. That trend continued in 1994. By the end of June 1994, IRS had identified 58,828 returns involving fraudulent refunds, twice as many as had been identified during the first 6 months of 1993. Of that total, 34,713 were paper returns and 24,115 were electronic returns. What is unclear is (1) how much of this growth is due to increased fraudulent activity rather than an improvement in fraud detection and (2) how much additional fraud might be going undetected. In an effort to better control filing fraud, IRS has taken several steps. For example, IRS has (1) added additional up-front computer checks in an attempt to prevent fraudulent returns from entering the electronic filing system, (2) added staff to its fraud detection teams in the service centers in an attempt to detect more fraudulent returns, (3) initiated studies in an attempt to better understand the fraudulent schemes confronting IRS, and (4) engaged the services of the Los Alamos National Laboratory in an attempt to improve IRS’ ability to identify fraudulent refund claims through the use of artificial intelligence and thus reduce expensive manual screening procedures. Also, at the request of the House Committee on Ways and Means and its Subcommittee on Oversight, the Secretary of the Treasury, in April 1994, established an interagency task force to investigate refund fraud. Additional steps are planned for 1995. For example, IRS has tightened the standards for electronic return originators—individuals and firms that are authorized to submit returns electronically. Among other things, new applicants will be required to submit fingerprints that can be used to obtain a criminal records check from the Federal Bureau of Investigation. Although it is unclear how such a procedure would work, IRS’ intent is consistent with a recommendation in our December 1992 report that IRS seek access to National Crime Information Center data for the purpose of checking the backgrounds of persons applying to be electronic return originators. IRS has also announced that it will be taking additional steps to ensure that taxpayers claiming refunds use the proper taxpayer identification number. In 1994, as in 1993, almost all of the fraudulent returns identified by IRS involved EIC claims. One of the studies undertaken by IRS in 1994 in an attempt to better understand fraudulent schemes involved a sample of about 1,000 returns that were electronically filed in January 1994 and that claimed the EIC. As part of its study, IRS contacted return preparers, taxpayers, and employers to confirm income, filing status, and the existence of dependents. As of September 1, 1994, IRS was still analyzing the study results. Recent expansion of the EIC under the Omnibus Budget Reconciliation Act of 1993 is expected to make about 6 million more persons eligible for the credit and could encourage even more attempts to defraud the system in 1995. Those legislative changes expanded eligibility for the EIC and increased the maximum credit amount. Taxpayers call IRS during the filing season for a variety of reasons. As we reported in the past, taxpayers have had problems reaching IRS by telephone to get answers to their questions. That problem worsened in 1994. Not only did the accessibility of IRS’ toll-free telephone assistance decline, but taxpayers calling IRS to order forms and taxpayers trying to use the TeleFile system also had problems getting through. A key indicator of filing season performance is how well IRS serves taxpayers who call toll-free telephone assistance to ask questions about their account, the tax law, or IRS procedures. Our analysis of IRS’ data on the toll-free telephone system shows that accessibility during the 1994 filing season was lower than in 1993 while accuracy of answers to tax law questions remained the same. Accessibility decreased primarily because of an increase in the number of calls received while the number of calls answered remained fairly constant. As in our reviews of previous filing seasons, we measured accessibility using information on actual calls from IRS’ Telephone Data Report. We computed accessibility by dividing the total number of calls answered by the total number of calls received, which we defined as the sum of (1) calls answered, (2) busy signals, and (3) calls abandoned by the caller before an assistor got on the line. For the period from January 2, 1994, through April 30, 1994, IRS received 87.9 million calls and answered 18.6 million calls—an accessibility rate of 21 percent. This rate indicates that about four out of five calls were not answered. As shown in figure I.3 in appendix I, the 1994 accessibility rate continued a downward trend since 1989 and was 3 percentage points below last year. On the other hand, IRS’ accuracy rate on answers to tax law questions during the 1994 filing season was 89 percent, the same rate as in 1993 and 26 percentage points higher than in 1989. Demand for telephone assistance has increased in recent years. Despite this trend, IRS’ fiscal year 1995 budget request included a decrease of about 40 staff years at the toll-free call sites. If demand continues to increase, this reduction in resources could exacerbate the accessibility problem. Taxpayers can obtain tax forms, instructions, and publications through telephone and mail orders placed with 1 of 3 IRS distribution centers or by visiting 1 of IRS’ over 600 walk-in sites. Over 90,000 banks, post offices, and libraries also stock the more commonly used forms and instructions. During the 1994 filing season, we conducted two limited tests of the level of service IRS provides to taxpayers seeking copies of tax forms and publications. Taxpayers were likely to find tax materials they needed if they visited a walk-in site, but they had to be persistent to order materials over the telephone. In one test, we placed calls to each of IRS’ three area distribution centers that provide tax materials to walk-in sites and fill taxpayers’ telephone and mail orders. These were toll-free telephone calls but the toll-free telephone number for ordering forms is different from the toll-free number taxpayers call when they have a tax law or account question. Each day, except Sunday, during a 2-week period in March 1994, we placed calls to the distribution centers from Washington, D.C.; Mission, KS; and San Francisco. We did not order any materials; our intention was to test access to the telephone order system. If we received a busy signal when making a call, we waited 1 minute after hanging up and then redialed. If after 9 redials (10 calls in total) we had not gotten through, we considered the attempt unsuccessful. Of 100 attempts to contact a distribution center, 75 were successful on the first try; 9 were successful after one redial; 11 were successful after 2 or more redials; 3 were aborted after 9 unsuccessful redials; and 2 (both placed from Washington, D.C., on a Saturday) were aborted after we let the phone ring for 2 minutes without receiving either a busy signal or an answer. Our 100 attempts to contact a distribution center required a total of 175 calls. Of those 175 calls, we succeeded in getting through to an IRS representative 95 times—a 54-percent accessibility rate. This result is consistent with data in IRS’ Telephone Activity for the Area Distribution Centers report. Using the actual number of busy signals and abandons from that report, we calculated an accessibility rate of 53 percent for the first half of 1994. We used the same method to calculate this rate as we did to calculate the accessibility rate for toll-free telephone assistance. While not disputing the accuracy of our 54-percent computation, IRS officials responsible for forms distribution activities said that they think the more meaningful result of our test was that 84 percent of our attempted contacts were successful after only one or two calls. In the second test of forms and publications accessibility, we visited 10 IRS walk-in sites in 6 states and Washington, D.C., during the week of March 21, 1994, to see whether they had the 101 tax forms, instructions, and publications that all walk-in sites were required to stock for the 1994 filing season. Of the 10 sites, 5 had all of the required items; 4 were missing 1 item each; and 1 was missing 4 items. We made follow-up visits during the next week to the five sites that were missing items and found that the site missing four items and three of the sites missing one item had received a new stock of those items. The other site missing one item received new stock of the item before the filing deadline of April 15. The results of our test of walk-in sites during the 1994 filing season were better than the results from the last time we conducted such a test in February 1992. At that time, we visited 10 different sites and found that no site had all of the required items; 4 sites were missing 1 item; and 6 sites were missing between 2 and 5 items. IRS mailed 4.7 million TeleFile tax packages to taxpayers in the 7 states participating in the program in 1994. IRS had projected that almost 519,000 returns would be filed through TeleFile in 1994. As of mid-April 1994, IRS had received TeleFile returns in line with its projection. The number of TeleFile returns might have been higher if the system were better able to handle the volume of calls. Using IRS data, we computed a TeleFile accessibility rate of 13 percent for the period January 13 through February 10, 1994, the peak period for TeleFile. We divided the total number of successful connections by the total number of calls received, which we defined as the sum of successful connections (about 547,000) and busy signals (about 3.8 million). There is no way to know how many individual taxpayers these busy signals represented or how many of them might have used TeleFile had they been able to get through. For the 1995 filing season, IRS will be expanding TeleFile to 3 more states and plans to double the number of phone lines to 288. IRS expects that the additional telephone lines will help handle the increased demand. IRS will not test the use of a voice signature in 1995, which should shorten the length of some calls and thus also help to increase IRS’ capacity. To further reduce busy signals, IRS plans to publicize the best times to reach the TeleFile system. Also in 1995, IRS expects to learn how many different phone numbers have been used to try to access the TeleFile system. This information may help IRS better estimate the number of taxpayers trying to use TeleFile to file their returns. A successful filing season requires that IRS effectively manage various programs. IRS achieved many of its goals for processing tax returns and assisting taxpayers and, in many respects, had a successful 1994 filing season. However, there continue to be some serious problems. Once again this year, the incidence of detected refund fraud has increased significantly. While that trend is troubling in and of itself, even more troubling is the uncertainty as to how much fraud might be going undetected. As IRS continues to add more controls and increase its fraud detection capabilities, it continues to find more fraud. The EIC continues to be a problem area for IRS and taxpayers. It is the source of many of the errors made by taxpayers and tax practitioners in preparing returns, and almost all of the refund fraud cases identified by IRS involve the EIC. That situation may only worsen in 1995 as more people become eligible to claim the credit. Taxpayers continue to experience considerable difficulty reaching IRS over the telephone, and those difficulties appear to be widening. According to IRS data, taxpayers in 1994 had problems not only accessing IRS’ toll-free telephone assistance but also contacting IRS to order forms and publications and to file their returns. An inability to contact IRS by telephone can heighten taxpayer frustration and contribute to a negative view of IRS. We are not making any recommendations to address these significant problems because (1) there are several efforts already underway and planned—such as the review being conducted by Treasury’s Fraud Task Force and IRS’ plan to increase the number of telephone lines for TeleFile—that should have a positive effect on these issues and (2) we have other work underway, which is specifically targeted at those issues and may help us better identify root causes. We met with IRS officials on September 26, 1994, to discuss a draft of this report. Except as noted below, they agreed with the matters discussed in the report. In some cases, they provided additional information on events that occurred in 1994 and IRS’ plans for 1995. We incorporated those comments where appropriate in the body of the report. IRS officials disagreed with our methodology for computing telephone accessibility. They said that we focused on the number of calls rather than the number of callers, thus overlooking the fact that many callers could be using features, such as automatic redial, that enable persons to continuously redial until they get through—thus inflating the real demand for IRS assistance. Although we agree that the number of callers trying to reach IRS would be less than the number of calls being made, IRS does not yet have a viable way to measure accessibility based on the number of callers. We have been working with IRS to develop a better measure of telephone accessibility. Until then, we will continue using the measure we have used in the past—the percent of incoming calls that are answered. We are sending copies of this report to various congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, the Director of the Office of Management and Budget, and other interested parties. Major contributors to this report are listed in appendix II. Please contact me on (202) 512-5407 if you have any questions. This is our ninth report on IRS’ tax filing season for the House Ways and Means Oversight Subcommittee. We first reviewed IRS’ performance during the 1985 filing season. In 1985, a combination of insufficient computer capacity, inefficient software, and inadequate training played a major role in creating returns processing backlogs and document control problems. As a result (1) more refunds were delayed in 1985 than in the past and interest payments on late refunds increased substantially, (2) many taxpayers had to file duplicate returns to expedite receipt of their refunds, (3) many erroneous taxpayers notices were issued, (4) correspondence and other inventories increased, (5) the number of telephone calls from taxpayers grew, (6) overtime costs increased, and (7) the productivity of service center personnel declined significantly. Since then, IRS’ service centers have acquired more computer hardware; and computer programs that took many hours to run in 1985 are now running more efficiently. IRS also improved its procedures for dealing with computer-related problems and implemented ways that taxpayers could file returns that bypass the labor intensive and error-prone paper processing system. IRS also established the National Office Command Center in 1986 to coordinate and monitor the resolution of hardware and software problems. The command center helps ensure that problems are addressed in a timely manner and helps identify problems involving multiple locations. As a result of these changes, IRS’ filing season performance has generally improved over the past several years. Receipts of unpostables, error resolution, and adjustments/correspondence cases have decreased (see tables I.1, I.2, and I.3), refund timeliness has increased, receipts of returns on other than paper have increased along with the overall increase in the number of returns received (see figs. I.1 and I.2), and telephone tax law accuracy has increased (see fig. I.3). However, not all of the trends are positive. The number of detected fraudulent refunds has increased dramatically (see table I.4), and telephone accessibility has decreased by 37 percentage points since 1989 (see fig. I.3). Table I.4: Number of Detected Fraudulent Refunds in Calendar Year 1986 Through 1994 Data as of June 1994. Doris J. Hynes, Evaluator-in-Charge H. Yong Meador, Evaluator Marge Vallazza, Reports Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) performance during the 1994 tax filing season, focusing on: (1) IRS individual income tax returns and refunds processing; and (2) taxpayer accessibility to IRS information. GAO found that: (1) during the 1994 filing season, the number of filed tax returns increased and taxpayers increased their use of alternative filing methods; (2) tax refunds were accurately and timely issued at one IRS service center; (3) IRS reduced the amount of rework and downtime by improving the accuracy of its returns processing and computer operations; (4) IRS fulfilled most taxpayer requests for tax forms and publications and provided accurate toll-free telephone assistance to taxpayers with tax law questions; (5) during the 1994 filing season, IRS identified twice as many fraudulent claims as in 1993; (6) it is unclear whether the growth in tax fraud was due to increased fraudulent activity or improved IRS monitoring and detection; (7) taxpayers' ability to reach IRS by telephone continued to decline during the 1994 filing season; (8) at the peak of the 1994 filing period, IRS answered only about 20 percent of its toll-free telephone assistance calls, 50 percent of the calls to its forms distribution centers, and 13 percent of the calls to its Telefile system; (9) the Earned Income Credit (EIC) provision continued to cause problems for IRS and taxpayers; (10) EIC was the source of many tax preparation errors and almost all of the refund fraud cases identified by IRS; and (11) EIC fraud could increase significantly as more taxpayers become eligible to claim EIC.",govreport
"Medicaid was established in 1965 as a jointly funded federal-state program providing medical assistance to qualified low-income persons. Each state designs and administers its own Medicaid program, subject to federal requirements for eligibility, services covered, and provider payments. States decide whether to cover optional services and how much to reimburse providers for a particular service. The federal government pays a portion of whatever qualifying expenditures a state Medicaid program incurs. At the federal level, the program is administered by the Health Care Financing Administration (HCFA), an HHS agency. In recent years, Medicaid costs have escalated. To control these costs, some states have sought to move some or most of their Medicaid population into a capitated managed care system. However, certain provisions of the Medicaid law—such as freedom of choice and the “75-25” beneficiary requirements—inhibit states’ use of managed care. States may obtain waivers of these provisions from HCFA under the authority of section 1115 of the Social Security Act. Section 1115 of the act offers HCFA the authority to waive a broad range of Medicaid requirements for state demonstration projects. In granting a waiver, HCFA requires the applying state to demonstrate that its proposal is budget neutral—that is, that federal expenditures for the entire demonstration project will not exceed costs projected for the existing Medicaid program. Until recently, budget neutrality was expected to be achieved in each year of the demonstration. However, HCFA now allows increased costs in some years as long as states achieve budget neutrality for the entire demonstration. HCFA may also require the state to implement improved quality assurance systems, which may include data collection on enrollee medical care utilization and an assessment of these data to determine the adequacy of enrollee access to and quality of medical care. As of June 1995, 10 states had HHS-approved statewide waivers, 8 had applications pending, and 5 had inquired about submitting waiver applications. In November 1993, 5 months after Tennessee submitted its 1115 waiver application, HHS approved it. On January 1, 1994, Tennessee became the first state to move its Medicaid program enrollees to a statewide demonstration project. To meet our reporting objectives, we interviewed officials and reviewed documents from the TennCare Bureau and HCFA’s Central Office in Baltimore and its Regional Office in Atlanta. In addition, we spoke with Tennessee officials from the Department of Finance and Administration and the Department of Commerce and Insurance, as well as officials from the Tennessee Medical Association (TMA), Tennessee Hospital Association, Tennessee Health Care Campaign, MCOs, federally qualified health centers, hospitals, physicians, and other advocacy groups. We also reviewed the results of provider and beneficiary surveys conducted by HCFA, the University of Tennessee, TMA, and the Tennessee Association of Legal Services and other available literature and studies. We also obtained financial data from MCOs and from financial reports filed with the Tennessee Department of Commerce and Insurance. Much of the MCO financial data were unaudited, and we did not attempt to verify them. Our work was performed between April 1994 and May 1995 in accordance with generally accepted government auditing standards. Tennessee’s demonstration project was designed to use a capitated managed care system to expand coverage to the uninsured population and to control total program and state costs. TennCare’s ceilings on total allowable federal funding are intended to be budget neutral—a requirement for HCFA approval of all demonstration projects. The state-federal sharing arrangements of the financing plan tend to favor the state since several waiver provisions allow it to effectively reduce its share of total spending. In addition, the waiver includes provisions to monitor and ensure enrollee access to quality care. TennCare was designed to expand health coverage by allowing non-Medicaid eligible persons to enroll and by extending the period of coverage for Medicaid-eligible persons. It also increased the scope of coverage by lifting restrictions on many services and by allowing additional types of services to all enrollees. In addition to including all Medicaid eligible persons, TennCare offered insurance to uninsured and uninsurable persons regardless of income who were not eligible for Medicaid. To qualify as an uninsured enrollee, a person must not have had access to health insurance on or after March 1, 1993. Therefore, a person must have been uninsured at least 10 months to qualify for TennCare as an uninsured person on January 1, 1994. To stay within budget ceilings, the state limited total enrollment to 1.3 million for the first year and 1.5 million in succeeding years. Tennessee expected enrollment of uninsured and uninsurables of 300,000 in the first year and 500,000 in succeeding years. The state expected that the 500,000 would include most of its uninsured. Under TennCare, enrollees who are not eligible for Medicaid and have incomes above the poverty level would be required to pay monthly premiums based on their income. At the MCO’s option, these enrollees also may be required to pay a deductible and make copayments for costs that exceed the deductible as medical costs are incurred. However, TennCare enrollees cannot be required to make deductible payments or copayments for preventive care, and copayments depend on the enrollee’s gross income. TennCare limits the total enrollee out-of-pocket expense. TennCare also extended the period of health coverage for many persons qualifying under Medicaid. Under TennCare, over 65 percent of Medicaid-eligible persons are effectively guaranteed 12 months of coverage at no cost to themselves because TennCare eligibility redeterminations are made only once every 12 months. If, after that time, these enrollees no longer qualify for Medicaid, they can continue in TennCare, subject to the same requirements as the formerly uninsured. In addition, TennCare expanded services to include inpatient psychiatric facility services for persons between 21 and 65 years old and outpatient substance abuse treatment programs. TennCare also lifted many restrictions and limitations, such as the allowable number of inpatient physician services, outpatient visits, home health visits, and prescriptions. To implement its prepaid managed care system, the state contracted with 12 MCOs to provide delivery of all Medicaid acute and primary care services and to handle claims processing in exchange for a monthly payment per enrollee. In addition to these monthly payments, MCOs having enrollees with high-cost chronic conditions and higher than average utilization rates would receive additional payments. Subject to the availability of unallocated TennCare funds, MCOs could also receive payments for the cost of providing the first 30 days of care to uninsured and uninsurable enrollees and one-time payments for financial difficulties attributed to TennCare start-up. MCOs are not responsible for long-term care services or for special services to the severely and persistently mentally ill or to Children’s Plan enrollees. TennCare contracts with health maintenance organizations (HMO) and preferred provider organizations (PPO) to operate as MCOs. The state requires HMOs to be licensed as such. The primary contractual distinctions between these types of organizations are that (1) administrative fees and operating profits are restricted for PPOs but not for HMOs and (2) the TennCare Bureau required on January 1, 1994, that HMOs assign each of their enrollees to a primary care physician responsible for managing and coordinating the enrollee’s care; the contract with PPOs allows them until January 1, 1997, to assign enrollees to primary care physicians. Most enrollees have a choice of four MCOs, and enrollees in metropolitan areas have a choice of as many as seven. Figure 1 shows the geographic divisions of the state and the number of MCOs participating in each division. The two largest MCOs, BlueCross BlueShield and Access MedPLUS, operate statewide and account for 73 percent of enrollees. Table 1 lists each MCO and shows the type of contract, number of enrollees, and percent of total enrollees. The table lists MCOs in descending order according to the percentage of total TennCare enrollees in the MCO. In addition to making capitated payments to MCOs, TennCare seeks to encourage managed care in several ways. TennCare requires that by 1997, all MCOs assign their enrollees to primary care physicians responsible for managing and coordinating enrollee care. As of February 1995, MCOs had assigned approximately half of all enrollees to primary care physicians. TennCare promotes continuity of care by requiring enrollees to stay with the same MCO for a year, by providing extended enrollment periods to many Medicaid eligibles, and by allowing persons to continue in TennCare as “uninsured” if they lose their Medicaid eligibility. TennCare also encourages preventive care by not allowing deductibles and copayments for preventive care services. TennCare provides for incentive payments to physicians and allows several types of supplemental payments to hospitals based on the availability of unallocated funds. TennCare’s design provides for two types of annual incentive payments to participating physicians: one to physicians that have a greater than average TennCare patient load and another to physicians whose practices are at least 10 percent TennCare to pay a portion of their malpractice insurance premiums. Subject to the availability of unallocated funds, TennCare may also make supplemental payments to hospitals for graduate medical education and care provided to those eligible for, but not enrolled in, TennCare as well as payments to hospitals that provide care to large numbers of TennCare or indigent persons. To finance expanded coverage while keeping Medicaid expenditures within the budget limits set by the waiver agreement, Tennessee set capitation rates that are substantially below historical Medicaid costs. Further, it discontinued its DSH program and established a smaller Primary Care Provider Fund. In setting capitation rates, the state began with the average annual cost per Medicaid-eligible person and then made “charity care” adjustments, which reduced the average capitation rate by 22 percent. The state’s rationale for making these adjustments was that the costs of charity care that had been built into the rates paid historically to providers would be significantly reduced by expanded insurance coverage. To save additional funds, Tennessee also discontinued its DSH program and established a smaller Primary Care Provider Fund. Under its Medicaid DSH program in state fiscal year 1993, the state provided $438 million in supplementary payments to hospitals that served large numbers of Medicaid enrollees or low-income persons. The Primary Care Provider Fund, budgeted for $185 million in state fiscal year 1994, was intended to provide essential provider payments, a reserve for MCO adverse selection of enrollees or other unforeseen circumstances, and payments to primary care physicians with large TennCare caseloads. Table 2 illustrates how savings from capitation discounts and the elimination of the DSH program offset the expected costs of expanded coverage and the new Primary Care Provider Fund. As shown in the table, savings from charity discounts and foregone DSH payments would more than offset the costs associated with the expanded coverage. In accordance with the requirement that demonstration waivers be budget neutral, the TennCare waiver agreement includes an overall available federal funding limit for the 5-year waiver period and sets interim limits on the availability of federal funding. The federal spending limits apply to the total TennCare program expenditures, including Medicaid expenditures for services not covered under capitated payments, such as long-term care. For the 5-year TennCare waiver period, the federal government will provide no more than $12.165 billion. For every $1 in TennCare expenditures, the federal government pays approximately $.67 and the state pays approximately $.33. The overall federal funding limit for the waiver period was established by estimating what the federal funding for Tennessee’s Medicaid program would have been during the first year without TennCare and increasing federal funding 8.3 percent or by the amount of the growth caps included in the President’s 1993 health care reform proposal, whichever is lower, each subsequent year. For the first year, HCFA estimated that federal expenditures under Tennessee’s existing Medicaid program would be slightly more than $2 billion, a 15.5-percent increase over the previous year’s federal funding. Increases in federal funding for the subsequent years would range from 5.1 to 8.3 percent. Table 3 shows the annual spending limits calculated for each year. However, because HCFA allows budget neutrality to be achieved over the waiver’s duration and not each year, the state has flexibility in annual spending. HCFA established cumulative federal funding targets that allow federal TennCare funding to exceed the spending limits as long as the cumulative annual spending limits are not exceeded by more than the set percentage. Table 4 shows the cumulative annual spending targets and the percentage by which they exceed the sum of the cumulative annual spending limits. If TennCare exceeds the cumulative limit for the first year, it must downsize the program or otherwise reduce expenditures. In its waiver application, Tennessee stated that it would control TennCare spending to stay within the available resources. The waiver provides for cost containment by beginning to restrict new enrollment of uninsured persons when enrollment reaches 85 percent of the limit. The federal spending limits apply to the entire TennCare program, which includes services that are not part of TennCare’s capitated managed care program. Long-term care and special services to severely and persistently mentally ill and Children’s Plan enrollees are not included in TennCare’s capitated program. The year before TennCare’s implementation, the increase in long-term care expenditures was over 18 percent. Our analysis of federal spending ceilings in the waiver agreement shows that the amount of federal spending allowed in the first year of TennCare exceeds the federal funds estimated to be spent if the state’s Medicaid program had continued. However, the amounts allowed in the second through fifth years are less than we estimate would be spent under Medicaid, and the federal spending limit of $12.165 billion for the entire waiver is less than would be spent if the state’s current Medicaid program had continued. TennCare’s financing mechanisms and program expansions have enabled Tennessee to reduce its revenue contributions while increasing the federal dollars it receives. The waiver agreement explicitly allows the state to claim losses incurred by some nonstate hospitals in caring for TennCare eligibles and to keep most of the premiums paid by TennCare participants. In addition, the waiver permits federal cost sharing for expenditures for services to enrollees in state mental hospitals that are not normally covered by Medicaid. The TennCare waiver provides other, indirect benefits to the state by expanding coverage for those not previously eligible under Medicaid but who received services through other state-funded programs, which allows the state to reduce its funding of such programs. In addition, since TennCare is a capitated program, the state obtains revenue from state taxes on capitation payments made to MCOs. The state is allowed to claim hospital losses incurred in caring for TennCare eligibles at certain public and private hospitals as TennCare expenses, which makes these claims eligible for federal cost sharing. However, the state is not required to forward any of the resulting federal payments to the hospitals. For the first 6 months of 1994, the state estimated that qualifying hospitals would incur total losses of approximately $64 million; however, these hospitals incurred only $34 million in such losses, according to a subsequent analysis by the Tennessee Office of the Comptroller of the Treasury. The federal government paid its share on the $34 million claim, which is approximately $23 million. The state is also allowed to keep most of the premiums paid by TennCare participants who are required to pay premiums—about half of the non-Medicaid TennCare enrollees. The state and HCFA agreed that for the first $75 million in premium revenues collected annually, the state gets $.90 of each dollar and shares the remaining $.10 with the federal government, according to the standard sharing rate. As revenue collections surpass $75 million, the percentage of premium revenue allowable as state share gradually decreases. The state initially estimated that it would collect $21 million for state fiscal year 1994 and an additional $101 million for state fiscal year 1995 but subsequently revised its state fiscal year 1995 estimate to $30 million. Actual collections to date have been less than estimated. The state benefits from federal funding provided to state mental hospitals for expanded TennCare coverage, some of which is not covered under Medicaid rules. Most significantly, Medicaid does not cover persons between the ages of 21 and 65 in state mental hospitals. TennCare allows short-term coverage of this population and reimburses mental hospitals directly for the actual costs of such services. Federal TennCare cost sharing for this population reduces the amount of state subsidy needed for state mental hospitals. As a result, Tennessee officials identified $69 million in annual state funding of state mental hospitals that could be used to fund TennCare. Indirect benefits to the state result from covering persons not previously included in Medicaid and making capitated payments to MCOs instead of fee-for-service reimbursements to individual providers. Covering the uninsured and uninsurable allows the state to reduce its funding for other state programs that had served these populations. Therefore, in addition to the state funding of mental hospitals, state officials identified $91 million in annual funding of other state programs that could be used to fund TennCare, which now provides such services to the uninsured. Most of this funding—$65 million—comes from reduced state funding of community mental health services. Also included is $5 million in reduced state funding for the Tennessee Comprehensive Health Insurance Program and $21 million for public health services, such as communicable diseases and hemophilia services. Making capitated payments to MCOs indirectly benefits the state because these payments are then subject to certain taxes; fee-for-service payments to providers generally were not. The state has a tax of 2 percent on payments made to HMOs and 1.75 percent on payments to PPOs. The tax on HMOs existed before TennCare, and a tax on accident and health insurers that existed before TennCare was extended to include PPOs. Although the HMO tax existed before TennCare, only one HMO, which covered about 25,000 Medicaid-eligible persons, had been subject to the tax for Medicaid revenues. Total capitation tax payments for 1994 were approximately $24 million, $16 million of which are essentially federal dollars returned to the state treasury. Under the waiver agreement, HCFA permitted new requirements to address enrollee access to care and systems to evaluate the quality of care provided to substitute for the usual Medicaid quality assurance requirements and systems. HCFA waived the requirement that beneficiaries have the freedom to choose any participating provider and the requirement that participating HMOs have at least 25 percent private enrollment. Under TennCare, HCFA requires the TennCare Bureau to ensure adequate enrollee access to providers and quality of care. HCFA further requires the state to submit quarterly progress reports on quality of care, access, utilization of health services, financial results, benefits packages, and other operational issues. HCFA’s primary care access standards for TennCare MCO networks include a minimum primary care provider to patient ratio (1 to 2,500), maximum travel distances and times (30 miles or 30 minutes for rural areas and 20 miles or 30 minutes for urban areas), and maximum allowable delays for scheduling and waiting for appointments (3 weeks for nonemergency scheduling and 45 minutes for waiting). In addition, TennCare has standards for specialty care, hospitalization, and other services. TennCare’s planned monitoring of these standards includes periodically evaluating the ratio of primary care providers to enrollees; surveying recipients, including measuring waiting periods for health care services; and measuring referral rates to specialist physicians. HCFA’s quality standards for TennCare include ensuring the implementation of quality monitoring programs and evaluating MCO data to assess quality of care. TennCare’s quality monitoring program derives from the National Committee for Quality Assurance quality monitoring program requirements for its MCO quality assurance programs. These requirements include credentialing of providers, grievance procedures, and utilization review. In addition, the state has included a required minimum data set of quality indicators. For the first year, TennCare essentially met its objectives of expanding coverage and controlling costs. The state had expanded eligibility to include 300,000 of the state’s uninsured, yet actual program costs for the state fiscal year ending June 30, 1994, were less than budgeted. However, the operation of a key monitoring system to determine the accessibility and quality of medical care provided through TennCare has been delayed. In January 1995, more than 400,000 uninsured persons and almost 800,000 Medicaid-eligible persons were enrolled in TennCare. The state expanded eligibility as of October 1, 1994, by allowing persons to enroll who had (1) lost private coverage from March 1993 to July 1994 or (2) insurance that offered limited coverage. However, on January 1, 1995, TennCare stopped new enrollment for most uninsured. Only persons who (1) had applications pending before January 1, 1995, or they would lose Medicaid eligibility or (2) could not obtain commercial insurance because of serious medical conditions continued to be eligible. Because of this, enrollment may decrease as the formerly uninsured leave the program and the currently uninsured are not allowed to enroll. During state fiscal year 1994, the first year in which the waiver became effective, TennCare expenditures were $2.7 billion, less than 1 percent over the prior year’s Medicaid expenditures and significantly less than the 10 percent increase in national Medicaid expenditures for federal fiscal year 1994. The state achieved these savings even though (1) Tennessee’s regular Medicaid program remained in effect for the first 6 months of the year, (2) enrollment increased by hundreds of thousands in the last 6 months of the year, and (3) long-term care costs increased 11 percent for the year. Our analysis shows that the overall increase in expenditures was attributable to lower than expected Medicaid expenditures during the first 6 months and the introduction of a capitated payment system on January 1, 1994, that paid rates far below historical Medicaid payments. Delays in the MCOs’ implementation of information systems have severely affected the state’s ability to monitor enrollee utilization, patient access, physician practice patterns, and enrollee medical outcomes for TennCare. The state has conducted other analyses that generally indicate that MCOs are in compliance with the required numbers of primary care physicians. Nonetheless, surveyed beneficiaries indicated access problems, and almost half of those surveyed with prior Medicaid said that the care they received was worse than under Medicaid. Advocacy groups also reported that access to care is a problem. An important part of the state’s quality assurance program is the analysis of encounter data (information on each enrollee’s use of services). Using such data, the state can analyze utilization, access, physician practice patterns, and medical outcomes. However, the state has had difficulty obtaining data from the MCOs and has conducted only limited analyses of available data. According to HCFA’s 1994 TennCare Monitoring Report, at the year’s end, three MCOs were still submitting data in a format not usable to the state. Additionally, the state had identified problems with the data from the other nine MCOs. During the first year of the program, the state withheld 10 percent of capitation payments for a varying number of months to all but one MCO for failure to comply with reporting requirements. To help ensure that the MCOs gather accurate data, the state is reviewing the MCOs’ data systems and providing technical assistance to them. The state estimates that data for the first year of TennCare’s operation will not be available before summer 1995. The state also reviewed MCO provider networks and contracted with a state university to conduct a beneficiary survey to assess access and quality of care. Although the TennCare Bureau reported that the MCOs generally had met the required standards for primary care, the state has not provided the data on all the access standards to HCFA. As a result, HCFA has been unable to validate the TennCare Bureau’s determination. Further, HCFA recommends that the state require the MCOs to provide data that ensure that provider networks have been validated as adequate and requests that the state submit provider lists whose accuracy has been validated. A beneficiary survey conducted for the state by the University of Tennessee in September 1994 also raised concerns about access and quality of care. The survey indicated that 45 percent of TennCare enrollees who had previously been on Medicaid said that the care they received under TennCare was worse than under Medicaid, citing limited choice of doctors and difficulty in finding providers as the most significant reasons. The survey also provided information on MCO adherence to HCFA’s access standards. Enrollees were able to schedule appointments generally within 3 weeks, the requirement for primary care; however, 12 percent responded that it took over 3 weeks for the first available appointment, and 21 percent said it took more than 3 weeks for a follow-up appointment. The survey results show that it took enrollees an average of 25 minutes to travel to their doctor’s office, but the survey did not indicate how often travel time exceeded the 30-minute requirement for primary care. In addition, average reported waiting time in physician offices was an hour longer than TennCare’s maximum waiting time of 45 minutes. Advocacy groups have also expressed concerns about the availability of medical care under TennCare. In October 1994, the Tennessee Association of Legal Services surveyed physicians who had been identified as participating in TennCare in an April 1994 survey. Of 461 physicians who said that their practices were accepting new patients, 144 or 31 percent said that they were not accepting new TennCare patients. In January 1995, a TennCare monitoring group—made up of patient advocates, health care providers, researchers, and others—expressed concerns about the inadequate numbers of both primary and specialty care physicians in some areas of the state. Several factors could jeopardize TennCare’s future. The capitation rates that have been set are questionable and may be insufficient to allow MCOs to operate profitably while paying reimbursement rates sufficient to enlist and sustain provider participation. Almost half of the MCOs, representing over 60 percent of TennCare enrollees, reported losses in the first year. Although the program’s financial impact on providers is inconclusive at this writing, hospitals have indicated that TennCare payments did not cover their estimated costs of treating TennCare patients, and physicians report that their practices are financially worse off than they were under Medicaid. Expected reductions in future supplemental payments from the TennCare Bureau will also negatively affect MCOs and providers. And although access and quality of care have not yet been fully analyzed, access to care will likely be inadequate if large numbers of providers choose to discontinue or drastically reduce their participation. TennCare’s success in expanding coverage and controlling costs stems primarily from its average capitation rates being substantially below adjusted historical Medicaid per capita fee-for-services costs. In its November 16, 1993, report, Milliman and Robertson, Inc., consultants to the state legislature, concluded that in the aggregate, the capitation rates were about 25 percent below projected 1994 fee-for-service Medicaid costs, even before capitation discounts, and did not account for regional cost variations. In addition, the report stated that the (1) capitation rates were not based on commonly accepted actuarial methods, (2) calculations had inconsistencies, and (3) bases for capitation rate reductions were not explicit or well documented. The report also estimated that since MCOs would incur administrative costs, which are not reflected in the capitation payment, they would have to significantly reduce medical costs to succeed financially. Despite these criticisms, state officials maintain that the capitation rates were reasonable. For example, the former Assistant Commissioner in charge of the TennCare Bureau indicated to us his belief that the health costs for the uninsured averaged less than those for Medicaid beneficiaries. He also stated that Medicaid had had a lot of overutilized services and that he believed the minimum savings from managed care was 15 percent. He further stated that historical cost was only one piece of information used in setting the capitation rates. The state used several factors and knowledge of the health care system to develop the rates. While HCFA officials said that they believed that the capitation rates were low, they believed that the willingness of several MCOs to contract for the capitation rate indicated that the rates were adequate. (A detailed discussion of the TennCare capitation rates and their actuarial soundness appears in app. I.) Financial data reported by MCOs for the first year of TennCare show that 5 of the 12 MCOs, which cover 60 percent of beneficiaries, experienced losses. BlueCross BlueShield, the largest MCO, reported an $8.8 million loss. And although Access MedPLUS, the second largest MCO, reported a slight gain, its financial condition may be worse than reported. In addition, the reported net income for some PPOs does not reflect the impact of capitation taxes or substantial deficits incurred for medical services costs. (A detailed discussion of MCOs’ financial performances appears in app. II.) The MCOs’ reported financial conditions would have been worse except for supplemental payments, which are likely to be reduced in 1995. Without these payments, all of the HMOs would have incurred losses. The MCOs’ 1994 financial statements included more than $100 million in both actual and anticipated supplemental payments for (1) a supplement to capitation rates paid for 1994, (2) the first 30 days of care to formerly uninsured enrollees, and (3) adverse selection. As of May 1995, the TennCare Bureau had paid MCOs the capitation rate supplement and some payments for the first 30 days of care for the formerly uninsured. However, although one-half of the MCOs had included anticipated adverse selection payments in their 1994 financial results, the TennCare Bureau had made no such payments as of May 1995, almost 1 year and 6 months since the MCOs began participating in the program. Only one PPO included the 1.75-percent capitation tax expense in its computation of net income, which, according to state officials, PPOs are required to pay. Officials from two of the five PPOs said that they were not aware that they were liable for the tax until they received a February 1995 notice. The additional cost of the capitation tax would reduce these PPOs’ net income or the amount available to pay for medical services by approximately $4 million. Two PPO financial reports included only the results from administrative operations and not the surplus or deficit for medical service expenses. One of these PPOs has a contractual arrangement with providers that puts them at risk for deficits resulting from excess medical costs. Officials from both PPOs indicated that their plans experienced a medical operating deficit of over $5 million representing about 7 percent of total capitation payments received by each plan. However, these medical deficits did not reduce these MCOs’ net incomes. One plan established an accounts receivable of over $5 million due from providers, while the other PPO did not reflect the excess medical costs on its financial statement because officials said it was the providers’ liability. TennCare’s financial impact on providers—hospitals, health centers, and physicians—is uncertain. Although available analyses suggest that TennCare has negatively affected providers, these analyses are not conclusive because they do not (1) compare TennCare reimbursements received with Medicaid reimbursement, (2) consider all TennCare reimbursement, or (3) provide actual financial data on which to base a conclusion. In addition, comparing physician reimbursement rates under BlueCross BlueShield, the largest TennCare MCO, and under the prior Medicaid system yields mixed results: the rates are generally lower under BlueCross BlueShield, except for office visits and consultations. Analyses conducted by the Tennessee Office of the Comptroller of the Treasury and the Tennessee Hospital Association (THA) of hospitals’ and federally qualified health centers’ costs under TennCare are inconclusive. The two analyses of hospital finances indicate that hospitals incurred losses under TennCare, but neither analysis compared the TennCare experience with the hospitals’ experience under Medicaid. A comparison of federally qualified health center finances under TennCare and under Medicaid showed that most of the centers’ profits were reduced under TennCare, but the Comptroller’s office expressed concerns about the reliability of the data submitted. Tennessee’s Comptroller’s office analyzed whether TennCare payments to publicly funded, nonstate hospitals covered the cost of caring for TennCare enrollees from January 1, 1994, through June 30, 1994. Even accounting for supplemental payments, 27 of 34 hospitals incurred $34 million in estimated losses by treating TennCare patients. All 34 hospitals would have reported losses, and total losses would have been much greater if the analysis had not accounted for supplemental TennCare payments. THA claimed that TennCare payments did not cover hospitals’ estimated costs of treating TennCare patients. But this analysis did not compare TennCare hospital reimbursement with prior Medicaid reimbursement. In addition, the THA analysis did not include supplemental payments made to hospitals for caring for large numbers of TennCare and indigent persons because the payments had not been made at the time of the study. THA officials told us that hospitals subsequently received $50 million in such supplemental payments. However, this is only half of the $100 million that hospitals had expected to receive from the state. As part of the state’s waiver agreement with HCFA, the Comptroller’s office reviewed cost reports from participating federally qualified health centers for the first 6 months of TennCare and concluded that, “it appears the clinics are not performing as well under TennCare compared to Medicaid.” However, the Comptroller’s office said that its analysis was not conclusive because it could not be sure that changes in costs were caused solely by TennCare nor that health centers accurately reported revenues, particularly pending payments. Our review of the Comptroller summary of the health centers’ data shows that although 14 of 20 health centers had reduced total clinic profits during the TennCare period, only 3 reported an overall loss. An opinion survey conducted by the TMA in October 1994 found that, compared with Medicaid, more than three-quarters of the physicians reported that their practices were somewhat or much worse off financially under TennCare. Because the TMA survey was an opinion survey, it does not provide financial data on physicians’ TennCare and Medicaid experiences. Further, a TMA official said that the physicians’ financial situations may be worse than the survey reported because the physicians may have included in their assessments supplemental payments from the TennCare Bureau that had not been received as promised. In addition, physicians may have expected MCOs to return withheld reimbursements for 1994, but much of these have not been returned. At the time of the survey, no supplemental TennCare payments had been made to the physicians, and withholds of physician reimbursement by the largest MCO had not been settled. The TennCare Bureau accrued $15 million in supplemental funds for payments to physicians for January to June 1994 but had not made any payments. As of March 1995, payments had still not been made. For state fiscal year 1995, $15 million has again been budgeted for supplemental physician payments. At least six MCOs withhold part of their physician reimbursements, ranging from 5 to 25 percent. We talked to two MCOs that used such withholds to offset excess costs, as necessary. According to their physician contracts, these MCOs assess their plan’s performance for the year and decide how much of the withhold to return, if any. BlueCross BlueShield had a 5-percent withhold on physician reimbursement and kept the entire amount for most of the providers. John Deere has a withhold of up to 25 percent of physician reimbursement and paid back approximately one-fourth of the withheld funds and may make further distributions. A TMA physician survey indicated that the reimbursement levels offered under TennCare had the most negative impact on physician practices. A comparison of BlueCross BlueShield TennCare reimbursements for selected services to Medicaid reimbursements shows that TennCare rates are generally lower than Medicaid rates, except for visits and consultations. In comparing selected BlueCross BlueShield TennCare rates to Medicaid rates, BlueCross BlueShield pays at least slightly better for visits and consultations and significantly less for other services. For example, BlueCross BlueShield reimbursement rates for office, inpatient, and outpatient visits and consultations are higher than Medicaid rates; however, BlueCross BlueShield rates for other selected surgery and radiology services are significantly less than Medicaid rates, with differences for many services ranging from 20 to 50 percent less than Medicaid rates. The impact on a particular physician practice depends on the frequency and type of services provided. The success of TennCare will also depend on the continued participation of the MCOs and providers for the duration of the 5-year demonstration. MCO officials are hesitant about continuing to participate in TennCare, given their financial performance in the first year; and providers—disconcerted about low reimbursement rates, heavy administrative burdens, payment delays, and lack of involvement in developing TennCare—could withdraw in large numbers. Although all participating MCOs have renewed their contracts for state fiscal year 1996, concerns remain. We talked to officials from three MCOs about TennCare’s future, and they expressed several concerns about operating without supplemental TennCare revenues, compensating for 1994 operations shortfalls, and maintaining an adequate provider network. The TennCare Bureau budgeted less for MCO supplemental payments for 1995 than were paid and accrued for 1994. In 1994, TennCare supplemental payments designated for MCOs totaled $128 million. However, only $76 million had been paid as of May 1995, although the TennCare Bureau says it will make additional payments. For 1995, the TennCare Bureau has designated only $40 million in supplemental payments to MCOs and plans a 5-percent increase in capitation payments effective July 1, 1995. BlueCross BlueShield officials told us that they incurred a loss of $8.8 million in 1994, and they forecast a loss of $35 million for their 1995 TennCare operations, even though they plan to implement cost-control measures during the year. BlueCross BlueShield’s projected deficit increase reflects expected reduced supplemental payments from the TennCare Bureau and higher utilization, which officials believe was low in 1994 due to the initial confusion over TennCare. To control costs, BlueCross BlueShield plans to (1) retain reimbursement rates at initial 1994 levels, (2) increase the percentage withheld from providers in some areas of the state, (3) control utilization by emphasizing outpatient visits over hospital admissions, and (4) aggressively address billing of unnecessary services. BlueCross BlueShield officials have indicated that the company does not intend to continue to lose money. They have said that unless capitation rates are increased 10 percent retroactively to January 1, 1995, BlueCross BlueShield will face a decision about its participation. Since BlueCross BlueShield had enrolled nearly 50 percent of the beneficiaries and is one of only two statewide MCOs, changes in its participation could significantly affect TennCare. Officials from two other MCOs that are holding providers responsible for their plans’ 1994 medical services operating deficits expressed uncertainty about whether these deficits can be recouped. Officials said that efforts to reduce provider reimbursement would jeopardize their providers’ continued participation. An official from one MCO said that if cost- containment efforts fail, the MCO will simply make payments until it can no longer do so. In early 1995, officials from THA, as well as from several major hospitals, expressed concern because the TennCare Bureau had announced that hospitals would not receive supplemental payments in 1995. Supplemental payments to hospitals for graduate medical education, care for TennCare eligible but not enrolled persons, and special payments to hospitals that cared for large numbers of TennCare and indigent persons totaled approximately $220 million for 1994. Subsequently, on the basis of a June 27, 1995, agreement with HCFA, the TennCare Bureau announced that it intends to make $55 million in one-time payments to two hospitals and resume medical education payments to hospitals. In addition to low reimbursement rates, other MCO actions may affect physician participation. For example, at least two other MCOs did not return all withholds to physicians on reimbursements for the first year of operation, and at least two MCOs held physicians liable for medical services deficits. As MCOs try to further control and contain costs, their network providers may assume additional administrative burdens as well as reduced reimbursement. These pressures will add to the dissatisfaction that providers already have with the program. An October 1994 TMA satisfaction survey of TennCare physicians reported that 86 percent of respondents felt dissatisfied with the program, and 77 percent felt that TennCare reimbursement was worse than under Medicaid. Physician dissatisfaction was evident from TennCare’s inception, when many doctors reported feeling coerced to participate. To guarantee a sufficient network, BlueCross BlueShield implemented a policy requiring physicians who participated in an existing network that operated for state employees and others to participate in TennCare. The policy, which became known as the “cram down” provision, prompted about a third of the 6,500 physicians in the existing network to drop out. Although most physicians returned to the network, their dissatisfaction with the cram down policy has persisted, and stakeholders and policymakers continually discuss eliminating it. If the policy were eliminated, BlueCross BlueShield officials believe many network providers might choose to stop treating TennCare patients. Tennessee’s capitated managed care program has enabled the state to control costs and provide health care coverage to hundreds of thousands of uninsured persons. In addition, it has established a system that enables persons who lose their Medicaid eligibility to keep health care coverage. But serious questions exist about the program’s future. The quality and accessibility of medical care are largely unknown, but early indications are that quality and access could be improved. Moreover, the rates paid to MCOs were substantially below prior Medicaid per beneficiary costs. Overall, MCOs lost money in the first year, even after receiving substantial one-time supplemental payments. In the absence of these supplements, MCOs may need to cut payment rates for providers and/or pressure providers to hold down costs to remain in the program. Most providers have already indicated that their financial situations are worse off under TennCare than they were under Medicaid. MCO cost-control efforts and the termination of large supplemental payments to hospitals will only exacerbate their condition. If providers decide to reduce their TennCare participation or leave the program in significant numbers, the viability of the MCOs and TennCare could be threatened. Both HCFA and the TennCare Bureau said that recent actions by the new state administration to address some of the problems we identified should be included in our report. We recognize that the organizational change regarding MCO financial oversight, forums for discussion and input provided by the TennCare Roundtable, and the proposed plan to provide MCO performance-based incentive payments of up to 4.5 percent of the capitation payments are potentially significant. However, because of the recency of the changes, their impact on the problems we identify is uncertain at this time. HCFA and the TennCare Bureau also pointed out that MCOs have renewed their contracts to participate in TennCare for at least the next 12 months. As a result, the TennCare Bureau said that our concern about the uncertainty of continued MCO participation is inconsistent with the MCOs’ behavior. Our concern is that MCOs continue to participate for the duration of the 5-year demonstration project and that MCOs’ financial difficulties not threaten TennCare enrollees’ access to and quality of care. On the basis of our review of MCO financial information, discussions with MCO officials, and the uncertainty of supplemental funding from the TennCare Bureau, we remain concerned about the continued participation of MCOs and their ability to maintain adequate provider networks. The TennCare Bureau also wanted our report to recognize that MCOs incurred start-up costs during the first year, writing that “the profits and losses in any business situation during the first year do not typically reflect what may result during ongoing operations.” Although we recognize that start-up costs were incurred and that they do contribute to reduced profits or increased losses for the year, other factors should be considered. First, MCOs shared in an unexpected $54 million in additional capitation supplements for 1994 to address MCO financial difficulties, as well as additional payments of more than $20 million for the first 30 days of care provided to the uninsured. Similar payments are not planned in the future. Second, start-up costs were offset to some extent by lower utilization resulting from beneficiary and provider confusion during the first few months. Third, system development and start-up-like costs will continue to be incurred by some MCOs; for example,BlueCross BlueShield officials said that they will incur an additional cost in 1995 to purchase an HMO information system to operate as a gatekeeper. Fourth, MCO officials we talked to expected to experience financial difficulty in the second year, both because of the medical costs they expect to incur and reduced supplemental TennCare funding they expect to receive so they saw the need to act to mitigate future losses. On the issue of cost sharing, HCFA officials reiterated several times that HCFA has not changed the federal matching rate in the TennCare demonstration. We agree with HCFA that the federal matching rate applied to qualifying TennCare expenditures has not changed. However, a number of waiver provisions effectively increased the federal cost-sharing rate by reducing the net financial contribution required of the state. In particular, certain hospital losses are treated as qualifying TennCare expenditures, although the state does not pay the hospitals for those losses. The state can also recoup a share of both its and the federal government’s contribution to MCO capitation payments through a tax on the capitation payment and by retaining 90 percent of premium collections. How such arrangements can effectively increase federal cost sharing is fully described in Medicaid: States Use Illusory Approaches to Shift Program Costs to the Federal Government (GAO/HEHS-94-133, Aug. 1, 1994). HCFA officials described the difficulties of the state staff and MCOs due to their lack of experience and having to simultaneously address their financial and organizational problems. HCFA officials also said that the state is working with an external organization to help fully implement quality programs at the MCOs. HCFA indicated that the state’s progress in implementing its quality assurance monitoring plan is slow and that HCFA is requiring the state to develop interim monitoring strategies to ensure access and quality. We agree with HCFA’s assessment and attribute the magnitude of these problems to inadequate planning and TennCare’s rapid implementation. (See apps. IV and V for comment letters from HCFA and the TennCare Bureau, respectively.) As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to the Secretary of Health and Human Services, Tennessee officials, and the chairmen and ranking minority members of congressional committees with an interest in these matters. We will make copies available to others on request. Please contact me on (202) 512-7123 if you or your staff have any questions. Major contributors to this report are listed in appendix VI. To control its health care costs, TennCare makes monthly capitation payments to MCOs for each of their enrollees. The state’s methodology for setting the capitation rates, however, has raised some concerns. For example, consultants to the state legislature reported that the aggregate capitation was understated by more than 25 percent. The capitation rates are based on historical Medicaid costs and set by enrollee type; the rates are then reduced by charity care deductions and enrollee cost sharing. Before the capitation rates were established, consultants to Tennessee’s Bureau of Medicaid reviewed the state’s historical Medicaid cost information. Although the consultants found this information to be generally acceptable, they recommended that the capitation rates (1) reflect historical costs for eligible months and (2) account for regional cost variations. The TennCare Bureau did not follow either recommendation. After the capitation rates were established, consultants to the state legislature reviewed the state’s rate-setting methodology and found it actuarially unsound. As a result, the consultants recommended that capitation rates be increased 20 percent, even when allowing for cost savings from potential utilization reductions. To set monthly capitation rates, Tennessee used 1992 Medicaid costs projected to 1994 for each enrollee type. These rates were then reduced for charity care, local government funding, and enrollee cost-sharing adjustments. The state also calculated an overall average capitation rate used for budgeting purposes and not for paying MCOs. The overall average rate for 1994 was $136.75 a month. After a reduction of $35.65 for charity care, local government expenditures, and coinsurance and deductibles, the rate was $101.10. Effective July 1, 1994, the TennCare Bureau increased capitation rates 5 percent. Tennessee set rates for eight categories of eligibles determined by factors such as age, gender, and whether the enrollee has a disability. Deductions to the capitation rates are based on various assumptions about charity care, local government funding, and medical costs incurred by the uninsured. The charity care deduction—meant to capture approximately one-half of the estimated cost of charity care provided in the state—was estimated at $595 million annually. The state assumed that Medicaid and other payers had been paying for charity care when medical providers shifted charity care costs to others. Because coverage of the uninsured would reduce charity care, the state reduced the capitation rate accordingly. On average, a monthly charity care deduction of $27.96 was applied to each monthly capitation rate on the basis of the state’s estimated upper limit of the total number of Medicaid and uninsured people. The deduction for local government funding—meant to capture an amount equal to the local government funding that would be expected to be provided without TennCare—was estimated at $50 million annually. On average, a local government deduction of $2.35 was applied to each monthly capitation on the basis of the state’s estimated upper limit of the total number of Medicaid and uninsured people. The third deduction, for copayments and deductibles, applies only for non-Medicaid eligible TennCare enrollees with incomes above the federal poverty level and is computed on an individual basis. For budget purposes, the state computed an average deductible and copayment deduction equal to $5.35 monthly. In calculating these deductions, the state assumes that everyone will exhaust their deductible and make copayments. For example, the monthly capitation rate for a non-Medicaid TennCare enrollee with income above the federal poverty level would be reduced for one-twelfth of the annual deductible and up to an additional 10 percent of the reduced capitation to account for expected copayments. Enrollees subject to cost sharing are required to pay the deductible and copayments to MCOs or providers as they incur medical costs. In May 1993, Peat Marwick, as consultants to the state’s Bureau of Medicaid, reviewed the historical Medicaid cost information on which the Bureau planned to base its capitation rates. Peat Marwick found that the data underlying the state’s cost projections were sound, except for an understatement of incurred claims. However, it made several recommendations on factors to include in setting rates. Among the recommendations was that claims data should be used to set monthly rates on the basis of eligible months rather than the number of eligibles participating in Medicaid for some period during the year. Peat Marwick also recommended that regional capitation rates be established. The state did recompute the capitation rates, but it used total number of eligibles to establish an annual cost regardless of eligible months, and it did not establish regional rates. When TennCare’s capitation rates were announced about 3 months after the Peat Marwick review, concerns were raised. To address these concerns, the Legislative Oversight Committee on TennCare contracted Milliman and Robertson, Inc. (in conjunction with Schubert & Associates) to review the TennCare Bureau’s capitation rate-setting methodology. In its November 1993 report, Milliman and Robertson stated that in the aggregate, the capitation rates were about 25 percent below projected 1994 fee-for-service Medicaid costs. Further, since MCOs would incur administrative costs not reflected in the capitation payment, Milliman and Robertson estimated that MCOs would have to significantly reduce medical costs to succeed financially. In addition, Milliman and Robertson agreed with Peat Marwick’s recommendation that rates should address regional variation and said that the variations were too significant to be ignored. According to Milliman and Robertson, the state’s analysis showed that costs by region were as low as 83 percent and as high as 122 percent of statewide average costs. The report made several conclusions: (1) the gross capitation rates were not based on commonly accepted actuarial methods, (2) inconsistencies existed between the Bureau’s reported methodology and the actual calculations, (3) no explicit assumptions existed on cost reductions in the gross capitation rate development, and (4) capitation rate reductions were not well documented. Milliman and Robertson found that the gross capitation rates were not based on commonly accepted actuarial methods because the state used the total number of people who received Medicaid during the year regardless of length of time on the program to determine capitation rates and ignored Medicaid cost variations by area. The state’s computation of capitation rates, in effect, assumed that every Medicaid recipient in 1992 was covered for the entire 12 months. Milliman and Robertson calculated that on average, Medicaid recipients were only enrolled for 8.72 months during 1992, which understated the aggregate capitation by 26.2 percent. Also, the state projected 1994 rates from 1992 data, on the basis of a 5.5 percent annual inflation rate. However, the state may have understated actual inflation increases since it had provided information in its TennCare application that showed an average annual increase of 8.7 percent from fiscal years 1988-1989 to 1991-1992. In addition, Milliman and Robertson said that the average gross capitation rate that TennCare used for budget purposes overstated the actual rates paid by eligibility category. This was due to an error in how Tennessee weighted the eligibility categories. In calculating each of the eight capitation rates, the state counted people equally regardless of how many months they had been in the program and whether they were in more than one capitation category. For example, a 9-month-old child qualifying for Medicaid halfway through the calendar year would be counted in determining the capitation rate for each of two categories—“less than one year of age” and “aged 1 to 13”—even though the child would have been in each category for only a few months. This understates the per capita costs because the child is treated, in effect, as having received services for an entire year in each capitation category. Milliman and Robertson calculated that the gross capitation rates by eligibility category were about 6.2 percent too low to achieve the TennCare Bureau’s reported average gross capitation rate because of this error. Milliman and Robertson also reported that no explicit assumptions existed about cost savings under TennCare. They said that the state’s utilization data indicated the potential for significant utilization reductions. Given this and other states’ experiences, Milliman and Robertson said that a 10-percent reduction assumption for 1994 would have been appropriate to apply to otherwise actuarially sound rates. Even when allowing for the utilization cost reduction, Milliman and Robertson said that an overall increase of 20 percent was still needed to address problems in the rate-setting methodology. Further, Milliman and Robertson noted that the Bureau did not provide them with the necessary information to evaluate the capitation reductions for charity care, local government funding, and enrollee cost-sharing adjustments. They also said that the data available to them suggested that the deductible reductions were too high because they are based on the assumption that all enrollees would incur costs exceeding the deductible. The overall financial performance of the five PPOs and seven HMOs that TennCare contracted with appears to have been weak for the first year of participation. According to its financial analysis, BlueCross BlueShield, the largest TennCare MCO, with almost half of the state’s TennCare enrollees, estimated that its losses on TennCare revenues total almost $9 million. These losses could be more than twice that amount if incurred claims expenses have been underestimated—even though the MCO withheld payments from providers and limited its administrative costs. The financial condition of Access MedPLUS, the second largest TennCare MCO, with nearly a quarter of the state’s TennCare enrollees, is unknown, but examiners of the HMO’s records have discovered weak controls in its financial reporting and have questioned its financial viability. For our review, we used the annual financial reports that HMOs submitted to the Tennessee Department of Commerce and Insurance, and we obtained financial reports from participating PPOs. Four PPOs provided us with unaudited information, and one PPO, BlueCross BlueShield, provided us with an audited report, although it contained little specific information on its TennCare operations and additional financial analyses. BlueCross BlueShield, the state’s largest PPO, estimated that it lost about $8.8 million on TennCare revenues of about $610 million even though it (1) retained about $17 million that it had withheld from providers to cover losses and (2) limited administrative costs to 7 percent of premiums plus the $9 million in premium taxes it paid. According to BlueCross BlueShield officials, the loss could be as much as $18.8 million if incurred claims expenses have been underestimated. In calculating its loss, BlueCross BlueShield included received and anticipated supplements to the capitation rate of $45.9 million. These consisted of a retroactive premium increase payment of $23.8 million, anticipated adverse selection payments of $9 million, and anticipated payments of $3 million for the first 30 days of care for formerly uninsured enrollees, as well as $10.1 million that had already been received for the first 30 days of care. Most of the data provided to us by the other four PPOs were unaudited or informally produced, and differences in their reporting methods preclude combining their results in a meaningful way. One PPO’s unaudited financial statements did not include income or expenses related to medical costs. Its income statement, which showed a net income of about $93,000, was limited to administrative costs because PPOs are not considered at risk for medical costs. The PPO’s financial statements only record the liabilities for medical services equal to the amount of available funds. A PPO official told us that approximately $5 million in excess medical services liabilities is not recorded because this is the medical providers’ liability. On the basis of discussions with a PPO official, the medical deficit could be reduced to less than $3 million if the PPO receives estimated adverse selection payments and additional payments for the first 30 days of care provided to uninsured enrollees. The PPO plans to recover the deficit through utilization reduction efforts during 1995; according to the official, providers would leave the network if the PPO reduced its fees. Officials from another PPO provided us with unaudited financial statements that showed a $77,212 loss for 1994, which did not account for the 1.75 percent state tax on capitation payments. However, the PPO’s deficit would have been $5.3 million higher had it not established a $5.3 million accounts receivable item for provider-shared risk. This item, which equals about 7 percent of the capitation payments received from the state, represents the amount of operating deficit to be recovered from future provider reimbursements. Officials from the first PPO gave several examples of plans to contain costs, but they were uncertain what impact their efforts would have. Officials from both PPOs expressed concern about maintaining their provider network. A third PPO reported a loss of over $2 million. However, according to the PPO TennCare contract, PPOs must account for their administrative and medical operations separately. Using the PPO’s unaudited financial statements, we computed that the PPO incurred about a $3 million loss, after taxes, even though it realized a gain of $1 million on its medical operations—of which 90 percent would have to be returned to the state and 5 percent distributed to providers, according to the contract provisions. Table II.1 shows the reported earnings for the first year of TennCare for the seven HMOs. John Deere Health Care/Heritage National Health Plan TLC Family Care Health Plan (1,016,839) ($4,301,614) Reports reviewed by the Department of Commerce and Insurance for the quarterly period ending June 30, 1994, indicated problems with the adequacy of reserves for three HMOs. The problem was eliminated for one HMO and largely eliminated for another when the Commissioner of Finance and Administration assured the Commissioner of Commerce and Insurance that the state would make adverse selection payments that would address the reserves question. However, financial problems of the third HMO—Access MedPLUS, which is one of the two statewide MCOs serving TennCare beneficiaries and about 2.3 times the size of all other HMOs combined—may not have been resolved. Examiners for the Department of Commerce and Insurance have raised questions about Access MedPLUS’ financial viability. They reported that a major asset—advance payments to medical providers—on the MCO’s financial statements, representing about half of Access MedPLUS assets, was questionable. They also could not reconcile the data in the financial statements to the MCO’s general ledger and noted that the MCO did not appear to have sufficient management and accounting controls to ensure that funds were available to pay claims. They recommended that the MCO be placed under the supervision of the Department of Commerce and Insurance. Further efforts to determine the financial performance of Access MedPLUS have been problematic. According to Department of Commerce and Insurance records, a Deloitte & Touche LLP review of the MCO, contracted through the state, included determining (1) claims processing ability, (2) amounts owed to providers, and (3) solvency or the degree of insolvency. We sought the results of this review, but the State Attorney General’s office would not release the report without a subpoena, maintaining that the documents are confidential in accordance with state law and that the report and its confidentiality were the subject of pending litigation. To avoid the delay and expense that could result from issuing and enforcing a subpoena, we decided not to use GAO’s statutory authority to subpoena such records and to proceed without them. State officials subsequently advised us that they were committed to ensuring that MCOs are in full compliance with all statutory and contractual requirements mandated by their participation in the TennCare program. They stated that if any MCO is found not in compliance, the state will either act to bring the MCO into compliance or pursue other remedies to protect TennCare. They noted that, at this point, the state has taken no action to place Access MedPLUS under supervision. Less than 7 months after submitting its waiver application to HCFA, Tennessee placed its entire Medicaid population in a statewide prepaid managed care program and opened enrollment to the uninsured. Before TennCare, the state Medicaid program had little capitated managed care experience nor a model to follow since Tennessee was the first state to place its Medicaid population into such a program. Rapid program implementation and lack of managed care experience led to several problems, such as confusion among enrollees, providers, and MCOs; provider resistance; and delays in enrollment, claims processing, and premium payments. Although many of these problems have been addressed to some degree, the Assistant Commissioner in charge of the TennCare Bureau testified in March 1995 that TennCare continues to experience several problems as does any program in its “infancy.” TennCare introduced a prepaid, capitated system, in which the TennCare Bureau makes monthly payments to MCOs for enrollee care, and the Bureau assumes responsibility for MCO oversight. The state Medicaid program had primarily operated a fee-for-service reimbursement system. As a result, state staff were inexperienced with the characteristics and complexities of MCOs, and the state’s relationship with physicians and hospitals changed dramatically under TennCare. Despite this lack of experience and the magnitude of these changes, Tennessee began operating its statewide program within 9 months of announcing it. According to TennCare Bureau officials, they met with parties interested in contracting as TennCare MCOs beginning in the summer of 1993. However, interested parties did not enter into TennCare contracts until late November, little more than a month before actual enrollment was to begin. Of the 12 contracted MCOs, only 1 had experience serving the Medicaid population before TennCare, and most of the MCOs developed their TennCare products in response to TennCare. This inexperience caused confusion for the contracted MCOs as well as TennCare beneficiaries and participating providers. TennCare reported that after program start-up, the state’s hotline averaged 50,000 calls a day, from beneficiaries, MCOs, and providers—compared with 9,000 calls a day in the following quarter. For all parties involved, the transition to TennCare was “traumatic,” according to a National Association of Public Hospitals (NAPH) report in April 1994. The state reported general start-up problems for MCOs, such as inability to handle the large volume of enrollee calls, adjusting to the increased enrollment, and claims processing problems. According to the NAPH report, the MCOs were unprepared to assume many of the contractual responsibilities for TennCare. One MCO’s enrollment grew overnight from 35,000 to over 260,000, and officials from the MCO reported receiving 2,000 calls each hour in the first days of implementation. In addition, HCFA Region IV’s 1994 Monitoring Report found that during the first months of TennCare, multiple changes to enrollment and eligibility—some retroactive—further burdened the MCOs. The president of one MCO said that enrollment changed by over a third in 1 week. Officials from the MCOs we visited found that verifying participant enrollment was nearly impossible in the first months of the program. In December 1993, the Tennessee Medical Association (TMA) filed an injunction to stop TennCare’s implementation. The court dismissed the case, but TMA appealed the ruling. TMA opposed TennCare in part because it had been implemented without opportunity for public comment on its development and payment rates for providers were inadequate. TMA also opposed BlueCross BlueShield’s “cram down” provision, which required physicians who participated in a network that operated for state employees and others to participate in TennCare. The provision prompted about a third of the 6,500 providers in the network to drop out in the early months of TennCare and providers in some parts of the state, particularly rural Western Tennessee, to boycott the program. The state, however, characterized initial problems with provider participation as the providers’ unwillingness to accept change. Several start-up problems have been attributed to poor communication and outreach, which affected providers and TennCare beneficiaries alike. HCFA reported that (1) provider directories were not available to enrollees, (2) information on operational guidelines for the general Medicaid population was insufficient, and (3) notifications of MCO enrollment were delayed. As a result, beneficiaries were confused about the number and type of plans and the available providers, and some families signed up with more than one MCO, exacerbating difficulties in managing enrollment. Some beneficiaries were further frustrated when they found that their primary care physicians were not participating in TennCare. A TMA satisfaction survey of physicians in October 1994 reported lack of patient understanding of TennCare as a major problem and recommended better efforts by MCOs to educate and manage patients. In its 1994 monitoring report, HCFA recommended expanding education and outreach efforts to raise awareness of the availability of services and the method of obtaining these services as well as frequent mailings to enrollees to explain benefits and services. Delays in signing providers with MCO networks and assigning patients to primary care providers also presented several problems. To complicate matters, providers—like the MCOs—had difficulty in obtaining information on patient eligibility and identifying with which TennCare MCO a patient was enrolled. Providers we talked to reported problems getting through by phone to the state and MCOs to verify patient information. As a result, providers needed to hire additional staff to manage the increased administrative burden in dealing with more than one MCO. Delays in claims processing and collecting premium payments have been a problem. According to the state, MCOs had difficulty fully developing their claims processing systems. For example, Access MedPLUS initially was processing claims manually, which delayed provider reimbursement. In addition, state external review organization reports from July to November 1994 reported that 5 of the 12 MCOs exceeded the state 30-day requirement to process claims. The largest discrepancy reported was a 76-day average from receipt of claim to the payment date. The state initially estimated that it would collect premiums from qualifying uninsured people of about $21 million during the first 6 months of TennCare; however, it collected only $2.4 million. Over the next 12 months (state fiscal year 1995), TennCare initially estimated collections of $101 million and subsequently reduced this estimate to $30 million. However, as of March 1995, with less than 4 months left in the state fiscal year, only $10 million had been collected. These collection shortfalls were due in part to the state’s delay in establishing its premium billing process. Although enrollment of uninsured people began in January 1994, the initial billings were not mailed until June 1994. In addition, enrollees were given two alternatives to reduce the burden of paying the full accumulated premiums for the prior months: (1) pay reduced premiums by retroactively changing from a low cost-sharing plan to a cost-sharing plan with a higher deductible and higher total out-of-pocket liability or (2) pay no premiums by changing their effective enrollment dates to June 1, 1994. Enrollees were to receive premium booklets and begin scheduled monthly payments in July 1994. However, the state contractor failed to mail some of the booklets, and this error was not discovered until November 1994. In February 1995, the TennCare Bureau sent letters to nearly 60,000 TennCare households notifying them of past due premiums totaling $31 million. As of June 1995, a TennCare Bureau official said it had terminated TennCare coverage of approximately 62,000 people for not paying premiums. In addition, 17,000 family units are now on a payment plan to pay past due premiums. Robert Hughes, Assistant Director Daniel S. Meyer, Evaluator-in-Charge, (312) 220-7683 Richard N. Jensen, (202) 512-7146 Karin A. Lennon Betty J. Kirksey Karen Sloan The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed Tennessee's Medicaid capitated managed care program (TennCare), focusing on: (1) TennCare's basic design and objectives; (2) the degree to which the program is meeting these objectives; and (3) the experiences of TennCare insurers and medical providers and their implications for TennCare's future. GAO found that: (1) TennCare's objectives are to expand health care coverage to the state's uninsured and to control program costs by mandating that Medicaid participants enroll in managed care organizations (MCO) and covering certain uninsured, Medicaid-ineligible persons; (2) Tennessee has cut costs by setting its capitation rates below historical Medicaid costs, applying an additional discount based on the assumption that extensive insurance coverage would reduce charity care costs, and discontinuing certain supplemental payments; (3) in granting the Medicaid waiver, the Health Care Financing Administration has required Tennessee to implement measures to monitor and ensure access to quality care and has limited federal payments over the 5 years to ensure that federal costs do not exceed what they would have been without the waiver; (4) despite the increased number of participants, federal and state TennCare expenditures have increased much less than the national average for Medicaid programs and program costs have actually declined when uncapitated administrative and long-term care costs are excluded; (5) access to and quality of care could not be measured because Tennessee and MCO have not yet set up their monitoring systems, but a survey of beneficiaries revealed significant dissatisfaction with the new program because of the limited choice of doctors and difficulty in finding providers; (6) many MCO and providers lost money in 1994 despite receiving supplemental payments from TennCare; and (7) although TennCare has met its initial objectives, its long-term success is uncertain.",govreport
"The rapid and widespread increase in the use of crack—a smokable form of cocaine—in the 1980s has frequently been referred to as a drug epidemic. To identify emerging drug use problems, researchers and government agencies look for changing patterns in drug use, some of which may signal the onset of an epidemic. Primary among these patterns are the use of a new illicit drug; a change in how a drug is taken, such as smoking rather than inhaling—or “snorting”—cocaine; a change in the level of use of an existing drug among populations that routinely abuse drugs; and the use of a drug by a new population group or in a different geographic area. Some experts argue that national drug epidemics are rare, and many agree that local areas more frequently experience emerging drug crises or epidemics before they spread. Many federal agencies fund activities and programs that implement the nation’s drug control strategy (see app. II). According to ONDCP, about 25 percent of federal drug control resources are for grants-in-aid or other forms of assistance provided to state and local governments and private entities, which commingle such funds with resources from other sources. In fiscal year 1997, federal funding for drug control efforts was over $15 billion, and the fiscal year 1998 request was for $16 billion. The President has requested about $17 billion in funding for fiscal year 1999. About two-thirds of federal drug control funds are channeled into efforts to reduce the supply of illicit drugs; the remaining one-third supports efforts to reduce drug demand. The Department of Justice obtains the largest proportion—about 45 percent—and HHS gets about 16 percent. Within HHS, NIDA and SAMHSA currently have primary responsibility for health-related drug control problems. The Drug Abuse Office and Treatment Act of 1972 (P.L. 92-255) created NIDA (effective in 1974) and gave it broad responsibilities over most aspects of drug research, prevention, and treatment activities. Essentially, NIDA was responsible for planning and administering drug abuse prevention, treatment, and rehabilitation programs and for developing and conducting comprehensive research and research training (teaching professionals about conducting substance abuse research). The act also gave NIDA responsibility for creating a national community-based treatment system to respond to the drug abuse problem. In 1974, the same year NIDA was established, ADAMHA was created as an umbrella agency to oversee the functions and operations of NIDA and two other research institutes. In 1981, ADAMHA was given additional responsibility for (1) administering demonstration programs related to the prevention and treatment of alcohol and drug abuse and mental health disorders and (2) providing assistance and information about such disorders to other federal agencies, states, health care providers, and public and private organizations. The Alcohol, Drug Abuse, and Mental Health Services (ADMS) block grant program was also created in 1981 to provide funds to states for planning, establishing, and evaluating programs for the development of more effective prevention, treatment, and rehabilitation services. In 1992, the ADAMHA Reorganization Act (P.L. 102-321) created a new agency, SAMHSA, to replace ADAMHA and transferred NIDA and the two other research institutes to NIH. NIDA retained primary responsibility for substance abuse research activities, while SAMHSA assumed primary responsibility for the service programs and some drug use detection functions. SAMHSA also assumed responsibility for overseeing state administration of the block grant programs. In the 1970s, NIDA sponsored several surveys and convened a work group of epidemiologists from cities around the country to help identify and monitor changes in drug use patterns. Through these mechanisms, NIDA was able to detect that cocaine was being smoked as well as snorted—the more common method of cocaine use up to that time. This change was later associated with the emergence of the crack epidemic. NIDA was not able to collect information on the national prevalence of crack use in the general household population until the late 1980s because the survey NIDA used to collect these data was not conducted annually and did not allow for timely reporting of crack use. There also were other limitations in the drug detection mechanisms NIDA used. In the 1970s and 1980s, NIDA sponsored four major ongoing drug detection mechanisms: the National Household Survey on Drug Abuse (NHSDA), Monitoring the Future (MTF), the Drug Abuse Warning Network (DAWN), and the Community Epidemiology Work Group (CEWG). (For other drug use detection mechanisms sponsored by public health and law enforcement agencies before the mid-1980s, see app. III.) While the drug detection mechanisms were designed to collect information on the use of a variety of drugs, including cocaine, they generally targeted different populations and covered different geographic locations and time periods. A description of the drug detection mechanisms NIDA sponsored follows. NHSDA, a nationally representative household survey established in 1972, was used to estimate drug use in the general population on the basis of a sample of permanent household members aged 12 and older. The survey was administered periodically, generally every 2 to 3 years, and covered past-month, past-year, and lifetime use of more than 10 drug types. MTF, a nationally representative survey established in 1975 and administered annually to 12th-grade students, measured drug use, attitudes toward drugs, and perceptions about their availability and ability to harm. Like NHSDA, it covered past-month, past-year, and lifetime use of more than 10 drug types. DAWN, established in 1972 by the Drug Enforcement Agency (DEA) and transferred to NIDA in 1980, initially comprised a random sample of hospital emergency departments within selected metropolitan areas and medical examiners in metropolitan areas who volunteered to participate. Emergency department information captured types of drugs used, motives for use, and whether the patient was treated. Medical examiner data also captured drug type, as well as the form in which the drug was used and whether the use was accidental or intentional. CEWG, established in 1976, was originally composed of epidemiologists from 18 major metropolitan areas. Three other metropolitan areas were later added. The group was established to provide ongoing community-level surveillance of drug use through the collection and analysis of epidemiologic and ethnographic (culture-related) data. Changes in drug use patterns are often captured by CEWG through its use of law-enforcement surveillance data, street surveillance, and other local public health drug detection sources. Between the 1970s and early 1980s, NIDA tracked the change in cocaine use through information reported by DAWN and CEWG. This change in drug use pattern (from only snorting to also smoking cocaine) would later be recognized as an early warning sign of the emergence of crack cocaine. From DAWN data, NIDA found that, between 1976 and 1982, cocaine smoking accounted for about 2 percent of cocaine-related emergency department episodes; however, by 1985, cocaine smoking accounted for 8 percent of such episodes. It was not until the late 1980s, however, that adjustments were made to DAWN data that differentiated between freebasing—another form of cocaine smoking—and crack cocaine smoking. Moreover, CEWG began reporting increased use of smokable cocaine in three major cities as early as 1981. In 1985—when crack first became generally recognized as a specific form of smokable cocaine—crack use was reported to have spread to at least seven of the CEWG coverage areas. Just 1 year later, CEWG reported that crack use had spread to 17 of the metropolitan areas covered. Although NIDA was aware of the rapid spread of crack use from CEWG reports starting in the mid-1980s, the national prevalence of crack use in the general household population was not measured until the late 1980s. (Prevalence of use data are utilized, in part, by decisionmakers to establish drug control policy.) The 1985 NHSDA did not include questions specific to crack use. Because the survey is conducted generally every 2 to 3 years, questions about crack were not included until the 1988 survey. As a result, survey data on the national prevalence of crack use were not available until 1989—3 years after reports of the spread of crack to 17 major metropolitan areas. Results from NHSDA showed that about 1 percent of household populations had used crack in the past year. In two congressional hearings held in July 1986, a number of concerns were raised about the data that had been collected through the NIDA-sponsored drug detection mechanisms. Specifically, NHSDA data showed a leveling off of cocaine use nationally, while other sources were indicating that local areas were experiencing epidemic use of the drug. There was also a lack of data on crack use in the general population. In addition, the latest NHSDA data being reported had been collected 4 years earlier, in 1982. These and other concerns about the adequacy of drug use data reflected key limitations in each of the NIDA-sponsored mechanisms used to measure drug use. Specifically, there were gaps in populations surveyed that affected NIDA’s prevalence of drug use estimates. For example, NHSDA excluded institutionalized and homeless populations. Similarly, high school dropouts—another high-risk population—were excluded from MTF, thereby potentially lowering national drug use estimates. NHSDA and MTF also relied on self-reported drug use data, which were not validated. There were also potential limitations in DAWN—one of the mechanisms used to identify early warning signs of emerging drugs. For example, since DAWN relied on hospital emergency personnel to record patient mentions of substance abuse, there was concern about the accuracy of the data, given the typically fast pace in hospital emergency departments. In addition, there were concerns that, by the mid-1980s, DAWN no longer provided a representative sample of emergency departments, since many of the hospitals that had participated in DAWN had either merged, closed down, or dropped out of the study. Moreover, while CEWG was instrumental in reporting early warning signs of crack use in the metropolitan areas it covered, it did not collect and report information on rural areas or cities with smaller population bases. The federal public health response to crack in the 1980s primarily focused on cocaine in general instead of on crack specifically. NIDA’s research was aimed at developing “best practice” prevention and treatment approaches. The agency also launched several education and outreach efforts specific to cocaine. Up to the late 1980s, there was no significant change in block grant funding for state drug prevention and service delivery activities. Federal involvement in service delivery was through ADAMHA’s oversight of state administration of the ADMS block grant until congressional actions changed the organization within ADAMHA to focus more on administering prevention and treatment programs. NIDA’s research activities related to prevention and treatment practices did not make clear distinctions between powdered cocaine and its crystallized form, crack. According to NIDA officials, the agency did not see a need to differentiate treatment practices for powder cocaine and crack or to develop separate prevention approaches for each of these drugs. NIDA officials stated that results from later research on efficacy of treatment for cocaine and crack cocaine showed that similar treatments were effective for both forms of cocaine. NIDA’s research activities included testing medications for reducing cocaine craving and withdrawal symptoms. The agency also investigated approaches for treating cocaine abuse, such as family therapy, group psychotherapy, and therapeutic communities. As with its research efforts, NIDA did not initially target its education and outreach efforts to address the use of crack. In the 1980s, as concerns about cocaine use increased, NIDA developed several public education campaigns against drug use in general and cocaine use in particular. The Drug Abuse Prevention Media Campaign, launched in 1983, was targeted to people aged 18 to 35 and was intended to motivate parents to learn about drugs, talk to their children about problems associated with drug use, and join with other parents to fight drug abuse in their communities. The initiative also sought to help young people resist peer pressure and to just say “no” to drugs, which became the theme of the campaign. In 1985, NIDA introduced a second phase of this campaign that targeted inner-city youth aged 10 to 14 and their families. In 1986, NIDA launched “Cocaine: The Big Lie,” a public education campaign that focused on the dangers of cocaine and specifically targeted young adults, aged 18 to 35, in college and the workplace. The following year, the campaign targeted crack as well as cocaine, sponsoring discussions of the effects of crack on the brain and respiratory and cardiovascular systems, as well as available treatments. NIDA also established a national cocaine treatment hot line in 1985 to provide a toll-free referral service for people addicted to cocaine and their families who sought treatment or counseling as well as educational information about illicit drugs. Within the first year of operation, more than 50,000 calls were received. In addition, NIDA sponsored two national conferences, one in 1986 and one in 1987, that collectively included sessions on drug abuse prevention, research, and treatment. The purpose of these conferences was to share information with drug epidemiologists, health care providers, and the broader research community on the use of illicit drugs. In 1981, before crack cocaine use was considered an epidemic, the Congress consolidated its categorical and formula grant programs into a substance abuse and mental health block grant to give states greater flexibility in their use of funds for prevention and treatment activities. This ADMS block grant program in effect limited the federal role in service delivery to overseeing the administration of the program and providing less direct assistance to states. The 1982 initial appropriation for the ADMS block grant was $428 million—a decrease of about 26 percent from the prior year’s appropriation for the categorical programs. Total funding of the ADMS block grant program varied by less than 10 percent from fiscal years 1982 through 1988. However, starting in fiscal year 1989, a greater proportion of block grant funding began to shift to substance abuse. From fiscal year 1988 to fiscal year 1992, the allocation of ADMS block grant funds for substance abuse increased from 51 percent of the total ADMS funding to 80 percent, as the proportion for mental health decreased. Over this period, funding for substance abuse increased from $249 million to more than $1 billion. Some of the concerns raised at the July 1986 congressional hearings on crack cocaine focused on the adequacy of federal responsiveness to drug use problems. With the creation of the ADMS block grant program, NIDA no longer had a leadership role in deciding with the states what prevention and treatment activities to fund. While many in the research community welcomed this change, others felt it left a gap in federal leadership for prevention and treatment services. Under the previous categorical and formula grant programs, the federal government directly funded specific demonstration programs related to prevention and treatment services. With the creation of the ADMS block grant, however, states were given the flexibility to design and fund programs specific to the needs of their local communities. However, this change resulted in a smaller federal role in deciding which drug abuse services to fund in a given geographic area. Despite this shift, service-related constituency groups continued to look to ADAMHA, which had been given responsibility for overseeing state administration of the block grant, for national leadership on substance abuse policy issues. To focus more on service programs at the federal level, the Congress authorized additional demonstration and service programs for special populations to be administered by ADAMHA. ADAMHA’s Office of Substance Abuse Prevention (OSAP)—which was established by the Anti-Drug Abuse Act of 1986 to strengthen the federal role in effective drug abuse prevention—began awarding demonstration grants to community agencies to provide prevention services to youth at high risk of substance abuse. The Anti-Drug Abuse Act of 1988 (P.L. 100-690) raised OSAP to a status equal to ADAMHA’s institutes and authorized demonstrations that would support, among other efforts, a major prevention services program for substance-abusing pregnant women and improved treatment for substance abusers. The act also authorized, for the first time, a federal set-aside from the ADMS block grant program to be used by ADAMHA to conduct service demonstrations and health services research and to collect data and provide technical assistance to states. The 1988 legislation also resulted in the creation of the Office for Treatment Improvement (OTI) to administer many of these new programs as well as the ADMS block grant program. To better identify and monitor changes in drug use activity, including potential crises such as the crack cocaine epidemic experienced in the 1980s, NIDA modified its drug detection mechanisms, and new federal mechanisms were created. The modifications and additions aimed at addressing some of the coverage, timeliness, and methodological concerns raised by the Congress and others. The creation of ONDCP and organizational changes to HHS’ drug abuse agencies since the late 1980s were intended to strengthen the federal response to drug abuse problems. The Anti-Drug Abuse Act created ONDCP and charged it with, among other things, developing and coordinating a national drug control strategy. SAMHSA was created 4 years later and charged with establishing and implementing a comprehensive program to improve the provision of prevention- and treatment-related services for substance abuse. At the same time, NIDA was transferred to NIH to allow NIDA to concentrate on research, research training, and public health information dissemination related to the prevention and treatment of drug abuse. Recognizing the need to improve research on the infrastructure that delivers treatment, the Congress mandated in 1992 that NIDA obligate at least 15 percent of its budget to fund research that studies the impact of the organization, financing, and management of health services on issues such as access and quality of services. While these changes were intended to strengthen the federal ability to detect and respond to changing drug use patterns, the effectiveness of these changes will depend largely on how well the agencies carry out their roles and responsibilities. Under the Government Performance and Results Act of 1993 (the Results Act) federal agencies are required to set goals, measure performance, and report on the degree to which the goals are met. The legislation was enacted to increase program effectiveness and public accountability by having federal agencies focus on results and service quality. During the crack crisis of the 1980s, limitations in the drug detection system hampered the identification and monitoring of drug use activity in many geographic areas and for some high-risk populations. Timely analysis and dissemination of drug use prevalence data were also problems. Since the mid-1980s, a number of changes have been made to the drug use detection mechanisms to address some surveillance and monitoring limitations. New information sources have also been added. (For many of the drug detection mechanisms now available to the federal public health service agencies and others, see app. III.) The changes to the NIDA-sponsored drug use detection mechanisms were intended to improve geographic and population coverage and timeliness of drug use data. To obtain and help ensure a representative sample of hospital emergency departments in DAWN, a new representative sample was drawn and provisions were made for including new hospitals in the sampling frame each year. Adjustments for nonresponse patterns were also made. MTF was expanded to include a representative sample of 8th- and 10th-grade students in addition to the 12th-graders and young adults already being surveyed. NHSDA was expanded to include civilians living on military bases and people living in noninstitutional quarters, such as college dormitories, rooming houses, and shelters. NHSDA was also expanded to include Alaska and Hawaii. To provide more timely national data, since 1990 NHSDA has been conducted every year, instead of every 2 to 3 years. There are also plans, promoted by ONDCP, to expand NHSDA to collect state-level drug use prevalence data. This expansion is expected to provide annual estimates for each state’s household population and, specifically, for the population aged 12 to 17 and 18 to 25. Steps were also taken toward improving the reliability of data by correcting some of the problems with drug use prevalence estimates. Drug use prevalence estimates had been dramatically affected by an estimation technique known as “logical imputation” and by weighting the estimates for certain drugs. Logical imputation calls for revising a survey participant’s initially negative drug use response if one or more subsequent responses related to the same drug are positive. For example, in the 1990 NHSDA, 40 percent, or 53 of 131 past-month positive cocaine use responses, were imputed—changed from an initial response indicating no cocaine use. The initial “no drug use” response was changed because of an apparently conflicting response to another question in the survey. Although the problem with logical imputation is still a concern, the probability of a logical imputation error in estimating drug use has been lowered somewhat by reducing the number of questions being asked about the same drug on the survey, according to SAMHSA officials. Weighted estimates of the national prevalence of drug use have also been questioned in the past, given the limited number of surveyed cocaine and heroin users from which to make projections. For example, in a study in which the 1991 NHSDA age variable was weighted to account for subject sampling probabilities and nonresponse rates, it was discovered that, when projected to the nation, one 79-year-old woman accounted for an estimated 142,000 heroin users, or about 20 percent of all people who used heroin in the past year. SAMHSA officials said that they have taken steps to try to limit such effects of weighted estimates by assessing each outlier on a case-by-case basis and using their judgment to decide when to truncate or reduce the weights. In addition to changes in DAWN, MTF, and NHSDA, several new drug use detection mechanisms have been developed. SAMHSA has cited the particular importance of two of these mechanisms: the Arrestee Drug Abuse Monitoring (ADAM) program and the Treatment Episode Data Set (TEDS). ADAM, formerly the Drug Use Forecasting program, comprises an ongoing quarterly study of the drug use patterns of new arrestees at booking facilities in approximately 20 cities across the country. TEDS is a database of substance abuse client admissions to those publicly funded substance abuse treatment programs that receive some of their funding through a state alcohol and drug agency. In commenting on this report, SAMHSA officials stated that their Violence Data Exchange Teams (VDET) are in the process of creating a local-level system to track trends and changes in substance abuse-related violence. When fully operational, VDETs will assist local communities in the detection of drug abuse patterns as they are manifested through violence-related data. SAMHSA officials believe that such data can be used to serve as an early warning system. In 1992, ONDCP initiated “Pulse Check,” a telephone survey (as well as a report of the survey results), to provide a quick and current snapshot of drug use and drug markets across the country. According to ONDCP officials, “Pulse Check,” which was initially published quarterly but was changed to a biannual report, typically includes information on the availability of drugs, their purity, and their street prices; user demographics; methods of use; and user primary drug of choice. These data are obtained from different sources, including telephone interviews with drug ethnographers and epidemiologists, law enforcement agents, drug treatment providers across the nation, and CEWG reports. ONDCP officials said that surveillance data from “Pulse Check” and other sources have increased ONDCP’s capability to perform quick analyses and special studies of changing drug use patterns as well as to identify problems in certain population groups and geographic areas. Before the Anti-Drug Abuse Act of 1988, which created ONDCP, each federal agency involved with drug control had its own set of goals, objectives, targets, and measures, as well as congressional mandates. To coordinate the federal drug control effort, ONDCP was charged with developing an annual national drug control strategy. ONDCP’s 1997 strategy provided a common set of goals and objectives for drug control agencies to use in addressing drug use problems and included a 10-year federal commitment to reduce illicit drug use, which was supported by 5-year budgets of the participating agencies. ONDCP officials have pointed out that achieving the goals will depend not only on federal agencies but also on state, local, and foreign governments; private entities; and individuals. To assess the effectiveness of its national drug control strategy in limiting drug use, drug availability, and the consequences of drug use, ONDCP has established, in consultation with federal drug control agencies, a national performance measurement system to assess results. According to ONDCP officials, their approach to developing goals, objectives, and performance measures for the national drug control strategy is similar to the approach required by the Results Act for individual federal agencies. ONDCP has established a new program evaluation office to oversee the design and implementation of its performance measurement system over the next several years. Consistent with the Results Act, ONDCP’s fiscal year 1997 to 2002 strategic plan lists five long-range goals and objectives. Goals 1 and 3 are in part designed to reduce the demand for illegal drugs by educating and enabling youth to reject illegal drugs and to reduce the health and social costs of illegal drug use, respectively. While the objectives of goal 1 generally focus on prevention activities, a goal 3 objective is to support and promote effective, efficient, and accessible drug treatment to ensure the development of a system that is responsive to emerging trends in drug use. ONDCP’s performance targets and measures for these goals and objectives are discussed in Performance Measures of Effectiveness. Two of ONDCP’s programs focus on addressing the trend in drug use primarily among youth: a national media campaign and the Drug-Free Communities Support Program. Moreover, ONDCP has taken the initiative to help focus attention on some recent changes in drug use trends that have emerged as potentially problematic. For example, ONDCP responded to changes in methamphetamine use in certain geographic areas by publishing a special issue of “Pulse Check” on these trends and cosponsoring a methamphetamine conference. In addition, ONDCP is now developing a national methamphetamine strategy. ONDCP officials admit, however, that they have no systematic approach or strategy for specifically addressing emerging drug use problems. SAMHSA was created to address concerns related to the availability and quality of drug prevention and treatment services. Specifically, SAMHSA was to develop national goals and model programs; coordinate federal policy related to providing prevention and treatment services; and evaluate the process, outcomes, and community impact of prevention and treatment services. In addition, SAMHSA was to ensure, through coordination with NIDA, the dissemination of relevant research findings to service providers to improve the delivery and effectiveness of prevention and treatment services. To carry out these responsibilities, SAMHSA initially established demonstration grant programs that supported individual grants, cooperative agreements, and contracts. SAMHSA also assumed responsibility for administering the separate Substance Abuse Prevention and Treatment (SAPT) block grant program. In 1995, SAMHSA developed the Knowledge Development and Application (KD&A) program, consolidating SAMHSA’s individual demonstration grant programs. According to SAMHSA officials, the program offers improved ways of generating and disseminating knowledge on the prevention and treatment of problems related to drug use and how to apply that knowledge to delivering services. In fiscal year 1997, 17.4 percent of SAMHSA’s budget was devoted to KD&A program activities. Since fiscal year 1992 when the SAPT block grant was established, funding for substance abuse has continued to increase. SAPT block grant funds to states gradually increased from about $1.04 billion in fiscal year 1993 to more than $1.15 billion in fiscal year 1996. In fiscal year 1997, the funding increased by $126 million. According to SAMHSA officials, the agency is not yet adequately positioned to deter emerging drug use that might result in future epidemics. They told us that the SAPT block grant, which currently comprises 60 percent of SAMHSA’s funding, is not designed to provide a rapid response to emerging drug problems. They also stated that it is difficult to determine when an increase in a certain type of drug use warrants attention and the type of response needed. SAMHSA officials said, however, that they have planned several initiatives to address emerging drug use trends. For example, CSAP plans to continue its support of the HHS Secretary’s Youth Substance Abuse Prevention Initiative—including budgeting $5.0 million for two new State Incentive Grant (SIG) programs. SIGs are competitive grants to states to coordinate disparate funding streams and facilitate the development of effective local drug prevention strategies targeted to youth. These programs serve as an incentive for governors to examine and synchronize statewide prevention strategies with private and community-based organizations. Additionally, CSAT plans to test the feasibility of implementing new approaches in treatment settings. For example, more individuals— particularly on the West Coast and in the Southwest—are seeking treatment for methamphetamine dependence; but, according to CSAT, there are no well-established treatment approaches for this drug. CSAT’s Replicating Effective Treatment for Methamphetamine Dependence study is designed to develop knowledge of psychosocial treatment for methamphetamine dependence as well as to provide an opportunity to determine the problems involved in transferring this knowledge. To help states put the infrastructure in place to respond to emerging drug use trends, CSAT plans to further strengthen its partnerships with state and local governments as well as with community-based treatment providers and the private sector to solve common problems. For example, the Targeted Treatment Capacity Expansion Program is designed to award grants to states, cities, and other government entities to create and expand comprehensive substance abuse treatment services and promote accountability. CSAT plans to support states, cities, and other partners in their efforts to identify gaps in the delivery system and, where current capacity within a treatment modality is insufficient, provide for expanded access to treatment. In an effort to disseminate information to service providers and others, SAMHSA operates the National Clearinghouse for Alcohol and Drug Information. SAMHSA, NIDA, and other public health agencies provide posters, brochures, reports, booklets, audiotapes, and videotapes to aid in drug abuse prevention and awareness efforts. Under the Results Act, HHS is required to show that the use of federal funds is yielding results by measuring how well HHS’ programs and efforts are working. In HHS’ fiscal year 1999 Results Act performance plan, however, SAMHSA does not provide sufficient information about how it plans to meet some of its performance goals. For example, under the general goal of providing funding to states in support of the public sector substance abuse treatment system, one performance measure is to increase to 80 percent the proportion of block grant applications that include needs assessment data. However, SAMHSA provides no information about the strategies it will use to increase the proportion of states that will include needs assessment data or how the validity of the data will be assessed. Further, SAMHSA’s performance plan does not mention how it will address emerging drug use problems. With its transfer to NIH, NIDA was relieved of most of its direct service delivery functions with the intent of having it focus on conducting research on drug abuse and addiction. However, according to NIDA officials, the nature of research and the research grant approval process (which is often lengthy) limits the agency’s immediate response to emerging drug problems. That is, it takes time to generate grants in a new priority area, conduct the research, publicize the research findings, and move these findings from the “lab” into practice. NIDA has a key role to play both in generating research-based prevention and treatment approaches and in training research scientists who potentially can be useful to the public health community in addressing drug control problems. The move to NIH also gave NIDA the opportunity to focus more on developing initiatives in public education and research training. According to ONDCP’s National Drug Control Strategy, 1977, NIDA’s ongoing research portfolio supports more than 85 percent of the world’s research on the health aspects of drug abuse and addiction. Most of the NIDA-funded research is conducted through extramural research programs. However, a portion of NIDA’s resources is dedicated to its intramural program—that is, research conducted by NIDA researchers. Currently, NIDA’s research activities are organized into four extramural research divisions and an intramural research program, each of which plays a role in addressing issues relevant to emerging drug problems. For example, both the intramural research program and the Division of Clinical and Services Research are investigating the relationship of brain functions (through neuroimaging techniques) to drug craving. Results of such research may be useful in helping drug users reduce the craving or need for specific illicit drugs. NIDA’s Division of Medications Development has been investigating the utility of cocaine medications for the treatment of users of methamphetamine as well as examining the clinical utility of buprenorphine to reduce the spread of heroin use among youth and newly addicted individuals. The Division of Epidemiology and Prevention Research continues to sponsor both MTF and CEWG and funds promising treatment research in prevention. NIDA’s basic research division explores those behavioral and biomedical mechanisms associated with drug abuse and addiction. NIDA officials have indicated, however, that quickly focusing research on newly emerging drug problems is difficult, in part, because of the time it takes to generate grant applications and award grants in a new priority area. The extramural research grant application approval process has multiple stages and can take several months to complete. In some cases, NIDA can reduce the time consumed with the grant award process by administratively awarding supplements to existing grants. These supplements must not exceed 25 percent or $100,000 of a grantee’s base award, unless an exception is approved by the National Advisory Council on Drug Abuse. This approach was recently used to encourage research related to the rise in marijuana use among adolescents. In addition, NIH has made available a l-percent set-aside for special research initiatives. Using this set-aside, NIDA applied for and obtained an extra $2 million in funding to support additional methamphetamine activities directed at averting a crisis. NIDA also supports research training activities to help build a resource knowledge base for research on illicit drug use. Between 1986 and 1997, NIDA’s research training budget grew sharply, from a total of $1.43 million in 1986 to $11.7 million in 1997. However, NIDA’s research training budget, as a percentage of total extramural research funds, has consistently been lower than those of both NIMH and NIH throughout the 12-year period. In 1997, NIDA dedicated 2.6 percent of its extramural research budget to research training, as compared with NIMH’s 6.1 percent and NIH’s 4.1 percent. NIDA also conducts a number of public education activities to inform the general public, providers, and researchers about ongoing efforts to prevent and treat drug abuse. Moreover, NIDA provides research updates through various publications—such as the research monograph series, “NIDA Notes,” and information booklets on the various drugs. Recently, NIDA distributed more than 150,000 copies of a research-based guide on preventing drug use among children and adolescents to help control the rise in drug use among youth. NIDA has also presented its findings at national drug conferences, CEWG meetings, congressional hearings, and town meetings, as well as on the Internet. The agency recently released Assessing Drug Abuse Within and Across Communities, a science-based guide to helping communities detect, quantify, and categorize local drug abuse problems. In addition, as part of NIDA’s Treatment Initiative program, the agency intends to hold workshops with researchers, the treatment community, and the general public to exchange information about the treatment of drug abuse. The agency also plans to distribute research-based treatment manuals to community-based treatment providers. NIDA has the opportunity to evaluate the effectiveness of its activities under the Results Act. Because many of NIDA’s efforts to address changes in drug use patterns are research-oriented, however, the results of the agency’s performance could take a long time to materialize. Similarly, the impact that NIDA’s research efforts would have on an immediate response to newly emerging drug problems is questionable. On the basis of our work on implementing the Results Act in science agencies, we concluded that measuring the performance of science-related projects can be difficult because many factors determine whether research will result in benefits.Nevertheless, the Results Act provides a vehicle for NIDA to measure its performance and improve its effectiveness. Despite changes to federal drug detection mechanisms and congressional efforts to better position federal public health agencies to respond to emerging drug crises, concerns remain. While federal entities now have an array of tools to detect drug use, there is concern about the overall efficiency and effectiveness of these efforts. In addition, questions remain about when and how to best respond to emerging drug use trends. This is also an issue for state and local substance abuse authorities, who are challenged with allocating resources to address both current and emerging drug use problems. Given competing demands on federal, state, and local resources, it is important that the most appropriate drug prevention and treatment strategies are developed and effectively implemented. While a number of drug use detection mechanisms are now available, the ONDCP-established Subcommittee on Data, Evaluation, and Interagency Coordination of the Committee on Drug Control Research, Data, and Evaluation; our expert panel; and others have raised questions about the need for and quality of some of the data that are collected. Under the Violent Crime Control and Law Enforcement Act of 1994, ONDCP is required to assess the quality of mechanisms used to measure supply and demand reduction activities and to determine the adequacy of existing mechanisms to measure national drug use by the casual drug user population and populations at risk for drug use. The act also requires ONDCP to describe the actions it will take to correct any deficiencies and limitations identified. In 1995, ONDCP tasked the Subcommittee, composed of representatives from 19 federal agencies, with evaluating the adequacy and ability of federal drug-related data systems to inform the drug control policy planning process. In its July 1997 draft report, the Subcommittee concluded that a systematic approach for gathering drug-related data must be developed to ensure that policymakers and analysts have useful information for making public policy decisions. The Subcommittee recommended that duplication of effort in drug-related systems be identified and eliminated and that better use be made of regional-, state-, and local-level data. The Subcommittee saw a need for more accurate and complete information on chronic, hardcore drug users and for increased or enhanced information on illicit drug consumption and the risks and consequences of drug use, including expansion of such indicators beyond those obtained from hospital emergency departments, arrestees, and domestic violence records. The Subcommittee also recommended that data be made more available to researchers to encourage more in-depth analyses of existing data sets and broaden the dissemination of results. Our expert panel raised some of the same issues about the nation’s drug detection system that led to the Subcommittee’s recommendations. Moreover, officials in the several states and cities we visited raised similar—and additional—issues about the use of drug detection data, including the limited usefulness of federally generated drug detection information in monitoring most local changes in drug use patterns and the poor use of drug detection information generated by state and local substance abuse authorities. In commenting on this report, ONDCP officials stated that they have already begun implementing some of the “principles” in the Subcommittee’s draft report. Other assessments of the nation’s drug data collection efforts conducted in the early 1990s similarly concluded that drug-related data systems could be improved. For example, a RAND study found that policymakers have been handicapped by inconsistent and fragmented information. A University of California at Los Angeles Drug Abuse Research Center report concluded that the data systems were limited by inadequate coverage of people at high risk of drug use. In a 1993 report, we also raised concerns about gaps in coverage and methodological limitations of three major federal drug data collection mechanisms. Each of these three studies also questioned the validity of self-reported drug use information.Moreover, NIDA recently released a monograph that raises questions about the accuracy of some self-reported data on drug use. The usefulness of better and more timely information on emerging drug use problems is, in part, a function of the nation’s ability to respond to those problems, which itself is affected by demands on federal, state, and local resources to address ongoing substance abuse concerns. Still, a more defined strategy for responding is needed. While we learned of different approaches the federal government uses to respond to changing drug use patterns, some of which address emerging drugs, we found that no overall defined strategy for specifically addressing emerging drug use problems exists. Also, there is no agreed-upon set of operational definitions for key terms, such as “drug epidemic” or “drug crisis.” The experts we spoke with agree that determining an appropriate response to emerging drug use problems involves considering the timing of a response to a detected change in drug use patterns; the nature of the response—that is, the most effective prevention and treatment approaches to address a drug use problem at different stages; and the magnitude of the response, taking into account resource limitations and uncertainties about the potential scale of the problem. Determining the timing of a response is complicated by uncertainty about what point above the normative pattern of use warrants a response, either in a specific geographic area or nationwide. According to our expert panel, several factors—including availability of information, public opinion, and political sensitivity—play a role in determining the timing of a response to a detected change in drug use patterns. In addition, the most accurate and useful data are not always available for immediate decisions on when to respond to a particular change. Determining the nature of the response requires a better understanding of the extent to which various prevention and treatment approaches are effective in controlling specific drug use problems. A rise in marijuana use among youth and a shift in heroin use from injecting to smoking may require different approaches because of the drug, the population, or both. In a 1997 report, we highlighted the varying prevention approaches and limitations in our knowledge about the effectiveness of these strategies.Similarly, as we reported earlier this year, knowledge about the types of treatment interventions that are most effective for specific drugs and populations varies. Even with limited knowledge, decisions about the nature of a response must be made. Determining the magnitude of a response is complicated by the risk of misallocating scarce federal, state, and local resources to combat a problem that may not warrant the investment. There is also the risk of inadvertently promoting the use of a drug to risk-takers by creating too much publicity addressing its dangers. Consideration must also be given to the capacity of the system to treat those who currently seek or will seek treatment. Our expert panel told us that states and local communities barely have sufficient resources to meet the present demand for drug treatment and thus might devote less focused attention to addressing emerging drug use problems or potential future epidemics. Moreover, we heard from SAMHSA and officials in some of the cities we visited that there is a large demand for substance abuse treatment. In two of the three cities we visited, officials are trying to implement a treatment-on-demand program to provide services for drug users when they need them most and are most receptive to treatment; however, there is uncertainty about how many drug users will seek help and the cost of providing them treatment. Some researchers believe that to improve the chances of deterring the spread of emerging drug problems or epidemics, greater attention must be given to changes in drug use patterns at the local level, where such problems typically originate. Although SAMHSA has relationships with states through the block grant program, experts in the drug field describe less than adequate linkages between state and local communities and the three major federal agencies involved in drug abuse demand reduction efforts. ONDCP, SAMHSA, and NIDA do not currently have a well-established network with the many local entities associated with reducing drug use, and their relationships with states and local communities might not facilitate a response to an emerging drug problem at the local level. A defined strategy for addressing emerging drug problems would benefit from better linkages with state and local entities to capitalize on their experiences with local drug crises or epidemics. Although addressing drug use problems is not necessarily the same as addressing infectious diseases, the networks and linkages with state and local entities that have been established by CDC may be worth considering for detecting and responding to emerging drug use problems. CDC is responsible for detecting and responding to potential health crises, such as outbreaks of infectious and chronic diseases. The agency has established relationships with states and local entities through a number of efforts, some of which follow: CDC’s Epidemic Intelligence Service enables the agency to maximize its investigative capabilities. According to CDC officials, each year the Service trains approximately 75 epidemiological investigators and requires that they engage in at least one investigation at the state level and at headquarters during a 2-year follow-up period. At any given time, CDC has up to 150 epidemiologists to call on to assess a potential public health epidemic or crisis. Through direct on-site public health surveillance, CDC can gain rapid and in-depth understanding of the initiation and spread of a public health problem. These investigations enable CDC to target specific individuals and groups affected and likely to be affected, identify the circumstances under which infections take place and spread, track the movement of the problem across geographic areas, and establish the time parameters governing the infection of each subsequent target group. Through collaboration with the Council of State and Territorial Epidemiologists, CDC is able to ensure broad geographic coverage, since the group includes representatives from all 50 states and the U.S. territories. CDC has established procedures with states for quick responses to perceived health crises. If a state public health agency is experiencing a problem in either identifying or managing a public health problem, CDC can be called on to provide immediate guidance and support. According to a CDC official, if the problem is not one that can be handled over the telephone, CDC is able to quickly dispatch appropriate staff to the scene to provide on-site public health surveillance and response support. The public health agencies’ approach to addressing drug use problems in the United States has changed since the mid-1980s. Given changes made in the drug use detection mechanisms, organizational changes in HHS’ drug control agencies, and the creation of ONDCP, the federal capability to address emerging drug use problems has been enhanced. However, the benefits of these changes depend largely on how drug data are used and how well the agencies carry out their roles and responsibilities. For example, the complement of drug use detection mechanisms available to public health agencies and others now provides more timely data and broader geographic and population coverage. However, ONDCP’s Subcommittee on Data, Evaluation, and Interagency Coordination; our expert panel; and others have pointed out weaknesses that need to be addressed to improve the accuracy of drug data and to increase the efficiency and effectiveness of the nation’s drug data collection systems. ONDCP, NIDA, and SAMHSA officials report that some of their efforts are addressing emerging drug problems. However, these agencies have no overall defined strategy that addresses factors such as how to determine the timing, nature, and magnitude of a response to new patterns of drug use identified through the nation’s surveillance systems. In addition, maintaining ongoing mechanisms with the capacity to link surveillance knowledge from local and national sources with knowledge about effective demand reduction approaches should increase our nation’s capability to deter future drug crises. We recognize that developing a defined strategy for addressing emerging drug problems will be challenging because of data uncertainties and other factors, such as engaging federal, state, and local entities in collaborative response actions. However, the CDC approach to responding to emerging infectious diseases might offer some insights on establishing linkages with state and local entities and developing response protocols. Since ONDCP is responsible for developing and coordinating a national drug control strategy, it could take the lead in improving the nation’s drug data collection system and coordinating the development of a strategy to address future emerging drug use problems. To improve the nation’s drug use detection and response capability, we recommend that the Director of ONDCP implement any additional changes that would improve the completeness, accuracy, and overall usefulness of data generated by the nation’s drug data collection mechanisms; take action to further improve the federal drug data collection system by determining what data should be collected and developing a systematic approach for gathering, analyzing, and disseminating information; and develop a defined strategy for determining the timing, magnitude, and nature of actions needed to appropriately respond to potential drug crises or epidemics, taking into consideration that emerging drug problems surface as local phenomena. We obtained comments on a draft of this report from ONDCP, SAMHSA, NIDA, and CDC, as well as from most of our expert panel members. With the exceptions noted below, the reviewers generally agreed with the findings, conclusions, and recommendations in the report. Some of them provided additional information and clarification and suggested technical changes, which we incorporated where appropriate. While concurring with the report’s recommendations, ONDCP expressed concern about the way the report framed some issues. Specifically, the agency was concerned that the report and two of its recommendations suggested that no action had been taken on the ONDCP Subcommittee’s recommendations to improve the nation’s drug data collection system. ONDCP commented that it has begun taking some actions to change and evaluate certain drug use detection and monitoring mechanisms even though its Subcommittee’s report is still in draft form. We were unaware of specific actions taken on the Subcommittee’s recommendations at the time of our review, and we commend these initial steps. We continue to believe, however, that ONDCP should take additional actions as recommended to address the concerns raised about the accuracy and usefulness of the data and the overall effectiveness of the federal drug data collection system. ONDCP agreed with our recommendation that calls for a defined strategy for addressing emerging drug problems and said that its Performance Measures of Effectiveness system will possibly provide a framework for developing such a strategy. SAMHSA agreed with many of the findings in the report but raised a concern that our recommendation to improve the completeness and accuracy of drug data did not address the importance of maximizing the usefulness of the data. We agree that the overall usefulness of the data is important, and we modified our recommendation accordingly. SAMHSA also wanted to elaborate on its statement to us that the agency was not adequately positioned to deter emerging drug use that might result in future epidemics. We added the information the agency provided in the text of the report. SAMHSA disagreed with our statement that it had not provided sufficient information in HHS’ Results Act annual performance plan about how SAMHSA would meet its performance goals. However, the agency did not provide any information to support its contention. NIDA expressed some concern about issues that were not addressed in this report. For example, NIDA stated that the report did not sufficiently speculate on how the different entities involved in drug control enhance or impede addressing emergent issues or how law enforcement and interdiction agencies affect federal efforts to detect and respond to emerging drug use problems. The agency also stated that the report does not specify what the appropriate role of each level of government should be. Although these issues were beyond the scope of our review, we acknowledge that there are multiple entities involved in detecting and responding to emerging drug problems and that how their roles, responsibilities, and efforts play out in an overall strategy for addressing the problems is unclear. We recommended that ONDCP take the lead in developing a defined strategy for addressing emerging drug problems. This would give the entities involved in drug control activities an opportunity to determine the appropriate roles each should play. Both NIDA and SAMHSA reacted to our suggestion that CDC’s approach to addressing public health issues, which involves state and local entities, might be a useful approach to consider in developing a strategy for addressing emerging drug problems. NIDA thought that the suggestion was reasonable but that developing networks and linkages to deal with drug problems would not be quickly or easily accomplished. SAMHSA felt that the CDC approach would be very expensive to replicate and that there are factors associated with drug abuse that do not fit the CDC model. SAMHSA concluded that adopting the CDC approach would be an unwise expenditure of funds, although it did not provide any cost analysis or other data to support its statements. While we agree that the cost and other implications, such as differences between drug abuse and other disease models, should be taken into account, we continue to believe that the CDC approach serves as a useful example of how linkages among federal, state, and local entities can facilitate the detection of and response to a problem. We are sending copies of this report to appropriate congressional committees, the Director of ONDCP, the Secretary of HHS, and other interested parties. We will also make copies available to others on request. Please contact me on (202) 512-7119 or James O. McClyde, Assistant Director, on (202) 512-7152 if you or your staff have any questions. Other major contributors to this report include Thomas J. Laetz, Jared A. Hermalin, Andrea K. Kamargo, and Karen M. Sloan. Erwin W. Bedarf contributed to the design of the project. An essential component of our research effort was an expert panel that provided advice and offered opinions on the nation’s preparedness to address changing drug use patterns. The following experts composed the panel: M. Douglas Anglin, Ph.D., Director UCLA Drug Abuse Research Center John S. Gustafson, Executive Director National Association of State Alcohol and Drug Abuse Directors James Hall, Executive Director Up Front Drug Information Center Bruce Johnson, Ph.D., Director Institute for Special Populations Research National Development and Research Institutes Henrick Harwood The Lewin Group Herbert Kleber, M.D. Executive Vice President and Medical Director Center on Addiction and Substance Abuse, Columbia University, and Professor of Psychiatry, Columbia University College of Physicians and Surgeons A. Thomas McLellan, Ph.D., Scientific Director DeltaMetrics in Association With Treatment Research Institute University of Pennsylvania Before convening the panel, we sent each panelist a discussion paper containing a brief description of the current array of detection mechanisms used by the public health service agencies and the Office of National Drug Control Policy (ONDCP); the legislative responsibilities of the National Institute on Drug Abuse (NIDA), the Substance Abuse and Mental Health Services Administration (SAMHSA), and ONDCP to address illicit drug use problems; and information these agencies gave us about how they implement their responsibilities and respond to changes in drug use patterns. During the session, we asked the panelists to discuss the effectiveness of the current detection mechanisms—that is, whether new or modified mechanisms and data information sources are needed to detect changes in illicit drug use patterns more quickly and accurately. We also asked the panelists to discuss whether NIDA, SAMHSA, and ONDCP were individually, and in conjunction, responding appropriately to detected drug use patterns to prevent, deter, or better manage potential drug epidemics and crises. Next, we asked the panelists to comment on the extent to which past legislative changes had improved or hampered federal response capacity and whether additional legislative or mission statement changes were needed to guide the activities of these agencies. Finally, we asked the panelists to review a synthesis of the comments made during the session and to offer any additional suggestions and recommendations to improve the nation’s drug detection and response system. Federal Bureau of Investigation (FBI) Bureau of Justice Statistics (BJS) Drug Enforcement Agency (DEA) Department of Defense (DOD) Bureau of Labor Statistics (BLS) Centers for Disease Control and Prevention (CDC) Prisoners entering and leaving prison and parolees (continued) Bureau of Prisons (BOP) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO reviewed the efforts of the federal public health agencies to detect the spread of drug use in the United States and their ability to respond to potential drug crises, focusing on: (1) how the public health service agencies have detected and responded to the crack cocaine epidemic; (2) any changes made to improve the nation's drug detection and response capability; and (3) any remaining issues that could compromise the nation's ability to detect and respond to emerging drug problems. GAO noted that: (1) despite certain limitations in its sources of information, the National Institute on Drug Abuse (NIDA) was able to track the use of a number of illicit drugs, including cocaine, during the late 1970s and early 1980s; (2) two drug detection mechanisms NIDA used as a part of that effort helped detect the emergence of crack--a smokable form of cocaine; (3) NIDA had become aware of the rapid spread of crack in 17 metropolitan areas by 1986, but the prevalence of crack use in the national household population was not known until the late 1980s; (4) federal public health agencies primarily directed their response efforts to the problem of cocaine and drug abuse in general, rather than to crack specifically; (5) the response, orchestrated largely by NIDA, focused primarily on drug abuse research and education; (6) the Alcohol, Drug Abuse, and Mental Health Administration provided funding to state and local entities for substance abuse prevention and treatment services through the federal block grant program during the 1980s; (7) following the height of the crack epidemic around 1985, concerns were raised in Congress about efforts to detect and respond to the problem--in particular about the timeliness and accuracy of drug use data, lack of data on certain populations and geographic areas, limited availability of certain treatment programs, limited monitoring of the block grant program, and lack of a coordinated national drug control strategy; (8) in response, the responsible federal agencies made changes to improve drug detection capability--changes that included adding new detection mechanisms; (9) also, to help strengthen the federal response to drug problems, Congress legislated changes in the organization of the Department of Health and Human Services' major drug control agencies: the Substance Abuse and Mental Health Services Administration was created as a separate agency to focus on prevention and treatment services, and, to emphasize its research focus, NIDA was moved to the National Institutes of Health; (10) in addition, Congress created the Office of National Drug Control Policy (ONDCP) to develop a national drug control strategy and coordinate the national drug control effort; (11) despite these changes, concerns remain about the nation's ability to detect and respond to emerging drug problems; (12) ONDCP established a group to study the use of drug data that has recommended ways to improve the nation's drug data collection system; and (13) in addition, experts agree on the need for an overall strategy among key drug control agencies for managing emerging drug problems.",govreport
"Beginning in the mid-1970s, major structural changes took place in the American economy, as advances in technology, international competition, plant closings, and corporate streamlining resulted in the dislocation of thousands of workers from their jobs. Some of these individuals possessed skills that were no longer in demand; others suffered from a lack of job search skills. In the 1980s and early 1990s, demonstration projects were conducted in New Jersey, Nevada, Minnesota, and Washington. The New Jersey and Minnesota projects showed the efficacy of using statistical methods and administrative data to identify those who are likely to experience long periods of joblessness. For example, the New Jersey demonstration project screened claimants with various eligibility requirements and found that the screening allowed the state to direct services to those who generally faced reemployment difficulties. Further, results from all four states showed that providing more intensive job search assistance to this population reduced the duration of insured unemployment and UI expenditures. In response to these events, the Clinton administration proposed legislation to implement worker profiling in 1993. In the same year, Congress enacted the Unemployment Compensation Amendments, amending the Unemployment Insurance program legislation. The law requires that states establish and utilize a system of profiling all new claimants for UI regular compensation. The system must identify those claimants that will be likely to exhaust regular compensation and refer them to reemployment services, such as job search assistance services. Typically, such claimants receive services at one of the local “one-stop” employment services centers that exist throughout the nation. States are required to collect information on the type of services claimants receive, their participation, and their subsequent employment outcomes. The last could include such information as whether referred claimants obtained new jobs and the related wage levels. In 1994, Labor issued guidance to help states establish profiling tools and provide necessary reemployment services. In profiling claimants, Labor required that states consider factors that include whether the claimant has a date for being recalled to work, union status, first unemployment benefit payment, and previous industry or occupation of employment. Labor recommended also considering some additional factors such as claimants’ education, tenure at previous job, and the state unemployment rate. Labor outlined recommended processes for providing reemployment services to referred claimants, including (1) an orientation session for claimants that would, among other things, explain the availability and benefit of reemployment services; (2) an assessment of the specific needs of each claimant, if appropriate; and (3) based on the assessment, development of an individual plan for services that would guide a claimant’s further services. (See fig. 1.) Under the law, states must also require that claimants who have been referred to reemployment services participate in those services as a condition of eligibility for receiving compensation. Labor may withhold UI administrative grants from a state if Labor finds, after notice and an opportunity for a hearing, that a state has failed to comply with worker-profiling requirements. These include identifying claimants most likely to exhaust benefits, referring claimants to reemployment services, and collecting follow-up information on services received and subsequent employment outcomes. The law required that Labor report to Congress on the operation and effectiveness of the profiling system within three years of its enactment. Labor issued a report to Congress in March 1997, and published a final report in 1999 on the program’s implementation and operation nationwide and the effectiveness in six early implementation states. Labor has published no studies on the effectiveness of the initiative since then. The agency’s strategic plan for fiscal years 2006 through 2011, in providing an overview of program evaluation, includes no ongoing or future research topics addressing the impact of the worker-profiling initiative. Labor has conducted impact evaluations as part of its program evaluations in the past. In fiscal year 2007, Labor was appropriated $17.7 million for pilots, demonstrations, and research. Funding for the worker-profiling program is provided from a variety of sources. Federal funding for the creation and maintenance of profiling models can come from UI administrative funds, which are financed by a federal UI tax on employers. Reemployment services can be funded through a variety of sources. For example, states can use Wagner-Peyser Employment Services grants as well as other state sources of funding to provide reemployment services to profiled UI claimants. From 2001 to 2005, Labor also provided Reemployment Services grants to all states in order to enhance and target services to claimants through the nation’s network of one-stop employment service centers. The large majority of states use statistical models to identify unemployment recipients who are most likely to exhaust benefits. However, many states have not recently adjusted their models, risking the possibility that these models may lose predictive accuracy over time. Forty-five states use statistical models to identify and rank clients by their likelihood to exhaust benefits, while 7 states use characteristic screens that do not rank claimants. One state—Florida—allows the local areas to decide whether to use statistical models or screening tools. Among the states using statistical models, the detailed specifications of these models vary considerably from state to state. Further, many states do not regularly update their models, a fact that can lead to a loss of predictive accuracy over time. A survey of the states reveals that many have not revised or updated their models in many years. Officials in states we contacted explained that they face a number of impediments to doing so. Under worker profiling, state UI agencies are to identify claimants who are most likely to exhaust benefits in two steps. States screen claimants in order to eliminate claimants who are unemployed but job-attached or would otherwise not qualify for referral to services from the profiling process. After the initial screening, states profile remaining claimants— that is, they consider a range of personal and economic variables related to a claimant and determine whether or not he or she is likely to exhaust benefits. Although states have considerable flexibility in determining what variables to use, Labor has recommended the use of five variables, as outlined in table 1. We found that states used one of two methods to identify claimants who are most likely to exhaust benefits—the statistical model or characteristics screening. Both of these look at a range of personal and economic factors that help predict exhaustion. Forty-five of the 53 states and territories use statistical models to identify clients likely to exhaust benefits. (See fig. 2.) Using various statistical techniques, these models consider the combined quantitative influence of various personal and labor market characteristics and produce a measurement of a claimant’s likelihood to exhaust. In statistical models, each characteristic—commonly referred to as a variable—is associated with a specific mathematical weight that quantifies the variable’s contribution to the claimant’s probability of exhaustion. If, for example, a claimant’s last job was in a steeply declining industry, the industry variable would have a positive effect on the score, indicating a claimant’s likelihood to exhaust. Conversely, if a claimant’s last job was in an expanding industry, it would have the opposite effect. Essentially a statistical model produces a weighted average of the effect of all the variables combined. As a result, states that use statistical models can rank claimants from greatest to least likelihood of exhaustion, and target reemployment services to claimants with the greatest likelihood of exhausting. According to an official of the Upjohn Institute for Employment Research, such models, if properly developed and maintained, are a powerful and effective means of identifying particular populations for a range of social service programs. Seven of the 8 remaining states use characteristic screens that do not allow them to rank claimants. One state, Florida, delegates the selection of profiling tools to the local areas because state officials believe profiling can be done more accurately at that level. Like statistical models, characteristic screens may consider various factors associated with the likelihood to exhaust benefits, but treat them as yes-no decision points. Either the claimant has the attribute or does not. The relative importance of any one variable in relation to others is not considered. Claimants selected through this process must have each of the screening criteria. For example, the characteristic screen used by Delaware considers whether or not a claimant meets specific criteria relating to industry, occupation, and job tenure. In Delaware, a claimant passes the job tenure screen if he or she has 2 or more years of tenure with his or her last employer. However, since claimants cannot be ranked, states using screens must develop a method, such as random assignment, to refer identified claimants to services if they are unable to serve all claimants that pass the screens. For example, Delaware used to refer claimants who passed the screen on a random basis, but now refers all claimants who pass the screen. Labor encourages the use of statistical models over characteristic screens because they are more efficient and precise in identifying claimants likely to exhaust. Although all statistical models are supposed to identify claimants who are likely to exhaust benefits, the states can vary in how they specifically define this exhaustion. The model originally proposed by Labor is designed to predict the probability of exhaustion as a yes-or-no outcome— exhaustion or no exhaustion—and the claimant’s profiling score would reflect the probability of the yes outcome. Most states have adopted this definition. However, as Labor explained in 1998 guidance, this approach does not distinguish between claimants who almost exhaust benefits and those who do not come close to exhausting benefits. This is significant, because the claimant with nearly exhausted benefits may be in greater need of reemployment services than the clamant who uses a comparatively small portion of his or her benefits. Consequently, some states predict exhaustion as the amount of benefits a claimant will potentially use. For example, the profiling score produced by Kentucky’s model produces a number between 1 and 20. A claimant with a score of 20 is likely to use 95 to 100 percent of benefits; a claimant with a score of 19 is likely to use 90 to 95 percent of benefits, and so on. State models can differ considerably in how they define similar variables, including those corresponding to the factors recommended by Labor. For example, California uses six categories to measure the job tenure variable, ranging from 1 year or less on the low end to more than 15 years on the high end. In contrast, Texas uses only two categories—job tenure of less than 1 year on the low side and tenure of more than 10 years on the high end. The Kentucky model, on the other hand, measures job tenure on a continuous scale—specifically, the length of time that a claimant held his or her last job. The definitions of variables associated with education, industry, and other variables can also differ among state models. For example, Kentucky includes “completed vocational education” as part of its education variable, while Wisconsin does not. The number and nature of the additional variables can also differ significantly by state. The large majority of states using statistical models (34 of 45) use models that consider factors in addition to the five factors recommended by Labor, while about one-quarter do not. (See fig. 2.) Among the 6 states that we contacted that use statistical models, the number of additional variables used ranged from 1 in California to over 50 in Kentucky. For example, 2 of the 7 states we contacted—Texas and Illinois—consider the time lapse between the loss of a job and the application for UI benefits. According to Texas officials and Labor, delays in filing a claim are indicative of a difficult job search, thus increasing the likelihood of benefit exhaustion. While Labor has recommended that states update models periodically to reflect changes in economic conditions, many states have not done so in many years. If not periodically updated, statistical models can lose predictive accuracy over time because of changes in the labor market, the general economy, or other factors. Labor has emphasized the importance of updating models, and noted in 1998 guidance that models represent the historical period in which they were developed, and that old models become increasingly unrealistic and less useful over time. Labor has further recommended that models be assessed, and if necessary adjusted, approximately every 3 years. Officials in some of the 7 states we contacted also stressed the importance of updating models from time to time. For example, Washington officials noted that although a 2002 analysis of their model update showed that it accurately identified the majority of claimants who exhausted, this adjustment of their model was based on data collected in 1999 and 2000, and subsequent changes in their labor market and the general economy have made the model outdated. Also, a 2003 California study found that the state’s model underestimated benefit exhaustion and recommended an update to the model. Similarly, an official of the Upjohn Institute for Employment Research told us that the institute’s analysis of 1 state’s model found that before the model was updated, its results were little better than random selection of claimants. Officials in Washington and California told GAO that the models would be updated in the next year. Models can be adjusted by modifying the mathematical weights associated with specific variables, and by adding, deleting, or redefining variables to enhance a model’s predictive power. This is necessary over time because, although a particular variable—such as a claimant’s industry—can remain an important predictor of exhaustion, its relative importance in the model can change significantly. For example, if a variable’s weight was estimated based on data from a historical period of large changes of employment levels in a particular industry or industries, the model might produce misleading results if used in a period of greater industrial and employment stability. Similarly, a variable that once served as an important predictor in a model may lose predictive value as the labor market and economic circumstances change, and conversely, other variables that may not have been relevant in one time period may become important at another time. For example, Texas deleted education as a variable from the model used in that state. According to a Texas official, statistical work performed for the model update revealed that the education variable did not measurably add to its predictive power. Factors other than the labor market and general economy can affect the reliability of models as well. For example, in the past 10 years standardized coding used to identify both industries and occupations has changed, and some of the states we contacted had not updated their model to reflect this change. Illinois’ analysis of its model showed that while the model had generally retained predictive accuracy, areas of concern existed. For example, as a result of outdated occupational codes, certain occupations associated with greater likelihood of exhaustion were no longer being targeted, while others not associated with exhaustion were. Although Labor has taken a number of actions to encourage and assist states in updating their profiling models, some states have not done so for many years. Labor has noted the importance of updating models in written guidance, sponsored occasional seminars where best modeling practices are shared with state staff, and provides on-demand technical assistance to states. However, Labor has not established requirements for updating models, and has not undertaken ongoing monitoring of state models. A recent Labor-commissioned survey revealed that many states have not updated their profiling models in recent years. (See figs. 3 and 4.) For example, although 21 states reported taking actions such as adjusting variable weights since 2003, many others have not. Specifically, 18 states have not done so since 1999 or before, and 12 of these reported never having done so. According to Labor’s survey results, states have been even less inclined to adjust their models by taking actions such as changing or redefining variables in the models. As figure 4 shows, 30 states reported that they had not made such changes since implementation, and 23 states reported having done so. Only 11 of these 23 states reported having done so since 2003. Labor’s survey did not inquire about factors influencing the frequency with which states update their models, but our contacts with 7 states reveal a variety of reasons that some states have not updated their models. Officials in California said that they had more pressing priorities for UI administrative funds, and thus would have difficulty funding model updates. Wisconsin officials said that revising the models required expertise that they did not have, either in-house or from other sources, such as a state university. Although Labor provides technical guidance and advice, and has offered seminars on updating models, state officials indicated they still need more continuous access to expertise in order to keep models updated. A Texas official said that sometimes historical data needed to determine a variable’s impact on exhaustion of benefits are not available, and so the variable cannot be included in the model. Relatedly, if the necessary data on claimants are not collected, or cannot be transmitted and used by the model, the related variable cannot be used. For example, a Texas official told us that certain variables, such as the number of a claimant’s dependents or spousal income, might be good predictive variables. However, the standard Texas application form for UI benefits does not ask about the number of dependents or spousal income, so these variables cannot be used. Labor data provide a limited picture of states’ implementation of worker profiling, and some aspects of these data were not reliable. Further, 6 of our 7 study states did not offer the in-depth approach to services prescribed by Labor. These states generally referred claimants to services, held them accountable for attending the services, and provided them with an orientation and some instruction on job search skills. However, 6 of the 7 states did not adhere to Labor’s guidance recommending an in-depth individual needs assessment and a tailored reemployment service plan for referred UI claimants. Between 2002 and 2006, about 94 percent of the UI claimants who received a first payment were profiled. To the extent that reemployment services are available, Labor requires that states refer profiled claimants to these services. Of those profiled, an average of 15 percent were referred to services, with states ranging from 5-year averages of 1 percent (Wyoming) to 52 percent (Washington) (See fig. 5.) While 3 states referred between 29 and 52 percent of profiled claimants to services, 28 states referred 14 percent or fewer. Further, of those claimants profiled, an average of 11 percent completed services, with states ranging from 1 percent (Arkansas, Colorado, Idaho, Michigan, and Wyoming) to 39 percent (Texas). (See fig. 6.) In 2 states, more than 27 percent of profiled claimants completed services. However, in 33 states, 13 percent or fewer of claimants did so. See appendix II for the average percentages of profiled claimants referred to and completing services by state from 2002 to 2006. Labor’s data are not sufficiently reliable to provide any information on the specific services provided to claimants—such as orientation, counseling, job search workshops, or job clubs. Specifically, Labor and state officials told us that definitions of these services can vary across states and within states over time as they change the content of their programs. For example, California officials told us that the state’s definitions of services provided were established over 10 years ago and that the nature of the services may have changed since then. We found that 6 of the 7 study states had, as required by Labor, referred profiled claimants to services and made claimants ineligible for benefits if they failed to attend reemployment services. In contrast, officials in 1 state told us that referrals had been delegated to local workforce areas, and that they did not know whether claimants were being referred to services statewide. We subsequently contacted some local workforce development offices in this state and learned that several had not been referring UI profilees to reemployment services for years. In addition, officials in this state told us that there are no consequences for those who fail to attend reemployment services. They further said they do not track information at the state level on whether claimants attend services. While Labor requires that states hold claimants ineligible for benefits for any week in which they fail to attend services, Delaware goes further and holds the UI benefits of claimants who do not attend services until they reschedule. Some of the study states took additional steps to ensure compliance with service referrals, while others did not. Of the states that referred claimants to services, Delaware and Washington required that claimants reschedule if they failed to attend required services, while Texas and Wisconsin attempted to reschedule claimants in some cases and the remaining states did not do so. Officials in Delaware reported that they go so far as to have staff call claimants early during the week of their scheduled orientation to remind them to attend; officials in Washington said that some local workforce centers do this. Officials cited the large flow of claimants into the program, the complexity of the rescheduling process, and the scarcity of staff resources as reasons they did not reschedule referred claimants. The reemployment services offered in the states we contacted generally did not conform to the robust service process originally outlined by Labor. Labor’s 1994 guidance states that after initial orientation, the service provider should determine the specific needs of each worker through an assessment process, such as vocational testing. Only one of our study states, Delaware, required that case managers conduct an initial assessment to determine what services claimants might need, such as Workforce Investment Act (WIA) training, depending on their job readiness level. Washington and Wisconsin required that claimants complete a self-assessment. For example, claimants at one one-stop center were expected to complete a one-page self-assessment that asks questions, including what educational level they attained, whether they had a current résumé, and whether they had difficulty filling out a job application. The 4 other states we studied required no assessment of any kind. According to state officials, our study states also generally did not require, as recommended by Labor, that local offices develop or document a reemployment services plan that could serve as the basis for determining satisfactory participation. Only Delaware required case managers to develop service plans and meet with claimants on a monthly basis after each claimant’s assessment. In California and Wisconsin, claimants developed their own plans, which involved selecting an additional service session on a topic the claimants felt would be most helpful. For example, California required that UI claimants attend an orientation and choose an additional service, such as a WIA service or job club, that would constitute their individual reemployment plan. All 7 study states cited lack of or declining funding as an issue that affected the provision of reemployment services. Specifically, some states mentioned the loss of Labor’s Reemployment Services grants, which had been awarded to all states between 2001 and 2005 to enhance and target integrated core services to claimants through the one-stop centers and were used by some states to fund program-related services. A Wisconsin official said that when the grant funds end in summer 2007, the state would only be providing worker profiling services in 6 to 12 of its 75 local workforce development offices. State officials also mentioned continuing declines in Wagner-Peyser, or Employment Services, funding. A local workforce manager in Washington said that there is a vast gap between the need for services and the resources and that the state only has resources for about 5 percent of the 50,000 to 60,000 UI claimant population. In order to help address this issue, officials in Washington told us that a special surtax is applied to UI taxes, and a small portion of this is diverted to worker-profiling service activities. While state officials were concerned with the availability of funding, Labor officials said that the purpose of the worker-profiling initiative is to target the funding that does exist to those claimants who need it most and that the program does not mandate that states serve any claimants they did not serve prior to its implementation. Officials also cited various day-to-day challenges in providing effective reemployment services. A single services session can include claimants ranging from former upper management employees to construction and factory production workers, according to a Kentucky official. The same official said that pitching the class so that it is effective for both types of claimants can be difficult. Claimants’ language skills also can be a challenge. However, California addresses this by excusing non-English speakers from the session, and directing them to job service centers or community-based partners that provide reemployment services in their own language, unless the orientation is available in their native language. Little is known about the current effectiveness of the worker-profiling initiative. Research studies, while generally finding that profiling and a referral to services had a positive impact on claimants, used data from the early implementation of the initiative—1994 to 1996. Although Labor collects data on the outcomes of those profiled and referred to services, we found portions of it to be unreliable. In addition, state officials said they do not use Labor’s data for evaluation purposes. Five methodologically sound studies looking at the impacts of the worker- profiling initiative after it was first implemented found that the program had some desired effects. Examining data from 1994 to 1996, the studies generally indicated that a referral to services under worker profiling led to a reduction in claimants’ duration on UI, a reduction in the amount of UI benefits that were paid out, and an increase in subsequent employment earnings. Though the methodologies varied, all the studies evaluated the impacts of the referral to services using statistical analyses to compare the outcomes of claimants who were referred to services against those of claimants who were not. As table 3 indicates, these studies cover a total of only 7 states, and no national study exists. Further, no study using current data exists. Labor sponsored the two multistate studies published in 1997 and 1999, but has not published any subsequent studies. According to Labor officials, the agency has no current plans to study the effects of profiling. Because data in all the studies were from the period when worker profiling was first implemented, the profiling process and reemployment services provided then may not reflect what states are currently offering. While these early studies showed positive impacts for referred claimants with regard to reducing duration, reducing amount of UI benefits, and increasing employment earnings, there were mixed results for whether the program reduced the percentage of claimants who exhausted their benefits or improved subsequent employment rates (See table 4.) According to the studies, claimants who were referred to services had a decreased UI duration and received lower total amounts of UI benefits. Most of the studies found that claimants who were referred to services increased earnings in the year following the UI claim. However, the largest multistate study was unable to draw any conclusions about the impact on earnings because of contradictory data. Evidence that a referral to services reduced the percentage of claimants who exhausted their UI benefits was mixed. For example, one study showed a decrease in the percentage of claimants who exhausted their UI benefits in 3 states, but an increase in 2 states. The effect of a referral to services on employment rates was also inconclusive. According to the two multistate studies, the effect was minimally positive for one state, but the other 6 states showed insignificant or contradictory results. Most of the studies, however, did not examine subsequent employment rates. Research studies of other work search programs corroborate the generally favorable results found in the impact evaluation studies of the worker- profiling initiative. Though the methodologies varied, these studies demonstrated that work search assistance reduced the duration claimants received UI benefits, among other beneficial impacts. In two demonstration projects, UI claimants who received job search assistance received fewer weeks of UI benefits. The reemployment services offered in these demonstration projects, however, were more robust; for example, in one study, claimants were required to attend an orientation, testing, a job search workshop, and a one-on-one assessment interview. As such, they may not reflect what is offered through the states’ worker-profiling programs currently. Even though they were unable to provide supporting data, officials from our study states said that worker profiling was a useful program for UI claimants. They said it had enabled states to advertise their job search and training services and target claimants who are most likely to exhaust their UI benefits. In the process of referring claimants to services, states are also educating the community on the many services and resources available at the one-stop service centers. They also said the initiative was a way to focus resources on those who would benefit from job search assistance the most. Due to reliability issues, Labor’s claimant outcomes data are of limited value. Labor’s claimant outcomes data were sufficiently reliable for us to report only certain outcomes, including benefits exhaustion, weeks of benefit receipt, and reemployment. Those data showed that less than half of profiled claimants exhausted benefits, that on average they received benefits for about two-thirds of the typical maximum time allowed, and that about half found employment within 1 year of the referral to services (see table 5). In addition to reliability issues, other characteristics, such as the lack of a comparison group and long time lags, limit the usefulness of both the reemployment services data and claimant outcomes data for states. First, the outcomes data reflected only the experience of those who were referred to services, and did not include an adequate point of comparison. It was therefore impossible to know if these outcomes were different than they would have been had the claimants not been referred to or completed reemployment services. Second, according to Labor officials, the data were originally intended for states to evaluate the effectiveness of the worker-profiling initiative. However, we found that neither Labor nor the states used the data for this purpose. Several state officials said the time lag and aggregated nature of the data were insufficient for program management purposes. The claimant outcomes data were not reported for more than a year after claimants were referred to services, and some state officials said they needed more timely data. Both the reemployment services and claimant outcomes data were aggregated to the state level, and some state officials said that local-level data would better meet their management needs. Four of our seven study states indicated that they did not utilize the reemployment services data or claimant outcomes data, and some only reported them because it was required by Labor; the remaining states said they used the reemployment services data for nonevaluative purposes, such as determining how many services were provided to claimants or the volume of claimants served under the worker-profiling program. In light of these data limitations, several state officials said they developed their own program performance measures and reports instead of using the reemployment services data and claimant outcomes data. For example, Washington developed its own data warehouse system that links data on UI benefits, reemployment services, and claimant wages. According to officials, on a monthly basis they review performance indicators, such as the number of UI claimants that find employment and the amount of time it takes before finding employment. Our findings suggest that although states continue to profile and refer claimants to reemployment services, the worker-profiling initiative is not a high priority at the federal level or in many states. In the past Labor has set out broad guidelines for states on the design and maintenance of profiling models. However, our analyses indicate that these have been inadequate. Labor’s 2006 survey of state profiling techniques revealed that many states had not updated their profiling models for many years. As a result, it is possible that many models have lost predictive accuracy, and are referring claimants to services who are not in need of them, or failing to refer claimants that are in need of them. However, the worker-profiling program is required by law, and if there is to be a continued federal mandate, it may be that a more assertive federal role is necessary to ensure the integrity of those models. A long time has passed since Labor articulated its vision of reemployment services, and our review of seven states indicates that what is being practiced is a diminished version of that vision. While the states we studied indicated they provided orientation sessions that seemed to convey important information, including job search skills, Labor’s guidance implies a more tailored and in-depth approach to services. It may be that the original vision is no longer realistic or perhaps, in the states’ experience, necessary. Absent clarification at the federal level, it will remain unclear what Labor expects from the states. The national data on the worker-profiling initiative is of very limited usefulness as a measure of program activity, outcomes, and effectiveness. Many of the data are not usable because of inconsistent or incorrect reporting, and neither Labor nor the states we contacted use the data for evaluating the worker-profiling initiative. Further, even if all the outcomes data were reported consistently and accurately, these data cannot, by themselves, be used to measure the impact of the program. In the end, by requiring the submittal of data that are of such limited reliability and value, Labor is potentially wasting both its own and the states’ resources. Finally, absent information about the program’s current impact, Labor may find it more difficult to make decisions regarding the best means for returning the unemployed to work more quickly. To better ensure that claimants who need and could benefit from reemployment services are referred, and to ensure that resources are not unnecessarily expended on claimants not needing them, we recommend that the Secretary of Labor: 1. Reevaluate the agency’s worker-profiling data collection to determine whether it is sufficient for its intended purpose. The agency might assess gaps in data, evaluate data consistency, confer with states on what data would be beneficial to them, determine the purpose of the data collection and for whose benefit the data are collected, and modify what Labor requires states to collect. 2. Ensure that the Employment and Training Administration takes a more active role to help ensure the accuracy of the state profiling models. The agency might track states’ management of their models and actively encourage review and updating of models in specific states where there have been no efforts to adjust the model for a number of years. The agency could also assess whether an expanded technical assistance effort is needed, and, if so, take the lead in developing one. 3. Encourage states to adhere to Labor’s vision for in-depth reemployment services, such as conducting individualized needs assessments and developing individual service plans, or issue updated guidance if this original vision would be too burdensome for the states. 4. Evaluate the impact of the worker-profiling program on the reemployment of UI recipients to ensure the benefits are commensurate with the resources invested. We provided a draft of this report to Labor for review and comment. In general, Labor agreed with our findings and recommendations. Labor’s formal comments are reproduced in appendix V. Labor also provided technical comments on the draft report, which we have incorporated where appropriate. We are sending copies of the report to interested congressional committees and members, and the Secretary of Labor. We will also make copies available to others upon request. In addition, our report will be available at no charge on GAO’s Web site at http://www.gao.gov. A list of related GAO products is included at the end of the report. If you or your staff has any questions about this report, please contact me at (202) 512-7215. You may also reach me by e-mail at nilsens@gao.gov. Key contributors to this report are listed in appendix VI. Our objectives were to answer the following questions: 1. How do states identify unemployment claimants who are most likely to exhaust benefits? 2. To what extent do states provide reemployment services as recommended by Labor? 3. What is known about the effectiveness of the worker-profiling initiative in accelerating the reemployment of unemployment insurance claimants? To answer the first question, we reviewed Labor’s guidance about the worker-profiling initiative, and reviewed literature and interviewed experts with the Department of Labor and the Upjohn Institute for Employment Research regarding profiling techniques. We also obtained and analyzed the results of a 2006 Department of Labor-sponsored survey of the 53 states and territories. This survey made numerous inquiries about the structural and operational aspects of the profiling tools—such as statistical models or characteristic screens—in use in the states. Finally, we contacted officials in 7 states—California, Delaware, Illinois, Kentucky, Texas, Washington, and Wisconsin. We selected some states to ensure that we included certain aspects of worker profiling; for example, we selected Kentucky because it had a very complex statistical model with numerous variables, and we selected Delaware because it was one of the few states that profiled claimants using a characteristic screen instead of a statistical model. We also selected these states because they ensured geographic dispersion and a range of populations sizes. In each of these states, we reviewed documents describing the profiling model that the state uses, and interviewed knowledgeable officials about the variables used in the model, the degree to which the model has been assessed and updated, and other matters. To answer the second question, we reviewed Labor guidance regarding reemployment services provided to Unemployment Insurance (UI) claimants referred through the worker-profiling initiative, and obtained and analyzed national data collected by the Department of Labor from states on the Employment and Training Administration (ETA) 9048 Worker Profiling and Reemployment Services Activity report. In this report, states submit to Labor, by quarter, information such as the number of UI claimants profiled, referred to services, and completing services. During our contacts with the 7 states mentioned above, we also obtained and reviewed state documents describing policies about referral and reemployment services for claimants profiled under the worker-profiling initiative. We also interviewed knowledgeable state officials about these policies, including referral and notification of claimants, enforcement of participation requirements, and the type of reemployment services that are offered to claimants. In 6 of these states, we also contacted officials at local one-stop offices or regional offices to discuss how reemployment services are managed and delivered. In 4 of these states, we also attended the initial reemployment services session for claimants referred through the worker-profiling initiative and recorded our observations on a standard template. To answer the third question, we identified and reviewed six research studies that evaluated the impact of profiling and the referral to services on claimant outcomes. All the studies used regression techniques to estimate the impact of a referral to services on a claimant’s UI claims experience or the subsequent earnings and employment activities. A GAO economist reviewed these studies and determined whether each study's findings were generally reliable by evaluating the methodological soundness of the studies and validity of the results and conclusions that were drawn. On the basis of this assessment, we determined that five of the six studies were methodologically rigorous enough to use in this report. We confirmed with Labor and national experts on unemployment insurance that these remaining five studies constituted the definitive work done to date on the impact of the worker-profiling initiative. Additionally, we reviewed these studies to assess the reemployment services offered under the worker-profiling initiative. Finally, we reviewed several studies on other work search programs that also evaluated impacts on claimant outcomes. We also obtained and analyzed national data collected by Labor from states via the ETA 9049 Worker Profiling and Reemployment Services Outcomes report. In this report, states report to Labor on a quarterly basis information on the outcomes of referred claimants, such as the average duration claimants received UI benefits and the number of claimants that found employment in the year following referral. Finally, in our contacts with the 7 states mentioned above, we interviewed knowledgeable officials regarding the data collected by Labor and their general views about the worker-profiling initiative, and in particular whether they believed the initiative was having the intended outcomes. We conducted a data reliability assessment on the ETA 9048 and ETA 9049 reports data, which included electronically checking the data and interviewing Labor and state officials on the reliability of the data. On the basis of our reliability assessment and interviews, we found that some of the ETA 9048 and ETA 9049 reports had missing or inaccurate data. As a result, we took the following actions to ensure the accuracy of the data. First, because Labor instituted data edit checks starting in 2002, we limited the time frame of our analysis to 2002 to the most recent available, September 2006 and March 2005 for the ETA 9048 and ETA 9049, respectively. Second, we disregarded data from states that had excessive amounts of missing data reports. Specifically, from the ETA 9048, we excluded Louisiana, New Mexico, Puerto Rico, and the Virgin Islands, and for the ETA 9049, we also excluded Idaho and New Jersey, in addition to those states dropped for the ETA 9048. Third, we estimated data values, if possible, for states that had sporadically missing reports or data that were anomalous or illogical, for example, when the number of claimants who found employment exceeded the number referred to services. Of the data we reported from the ETA 9048 and ETA 9049, we estimated approximately 1 percent of these data; because of this small proportion, we believe that any errors arising from our estimation process did not significantly affect the state and national averages we reported. Some possible issues resulting from our estimation process were the following: We utilized logical relationships between data to estimate values, and at times, these values were based on other estimated data. Any errors resulting from the previous estimation would be carried over to the following estimated value. Some states had volatile data, and as our estimation process was based on the existing state data, it is uncertain how accurate our estimates were. At times, our estimated values were the highest or the lowest in the data series, and it is possible that the estimation procedure resulted in an inaccurate value. Fourth, we excluded data from states that we confirmed were reported incorrectly. Specifically, for the ETA 9049, California and Georgia were excluded from calculations using the number of claimants who become employed, and Illinois was dropped from all analyses of both the ETA 9048 and ETA 9049 data. Last, we did not use any of the detailed reemployment services data, such as the number of claimants that completed an orientation, assessment, and so forth, because both Labor and state officials said these data were not comparable within and between states. Length of time referred claimants receive UI benefits (2002-2006) (2002-2006) (2002-2005) Referred claimants who become employed (2002-2005) Length of time referred claimants receive UI benefits (2002-2006) (2002-2006) (2002-2005) Referred claimants who become employed (2002-2005) (weeks) (2002- 2005) GAO analysis based on 47 states and the District of Columbia. Black, Dan A., Jeffrey A. Smith, Mark C. Berger, and Brett J. Noel. “Is the Threat of Reemployment Services More Effective than the Services Themselves? Evidence from Random Assignment in the UI System.” The American Economic Review, Vol. 93, No. 4 (November 2003). Black, Dan A., Jose Galdo, and Jeffrey A. Smith. “Evaluating the Worker Profiling and Reemployment Services System Using a Regression Discontinuity Approach.” Paper presented at the American Economic Association conference in January 2007. Submitted to The American Economic Review for the May 2007 Papers and Proceedings Issue. Dickinson, Katherine P., Suzanne D. Kreutzer, and Paul T. Decker. “Evaluation of Worker Profiling and Reemployment Services Systems: Report to Congress.” U.S. Department of Labor, Employment and Training Administration (March 1997). Dickinson, Katherine P., Suzanne D. Kreutzer, Richard W. West, and Paul T. Decker. “Evaluation of Worker Profiling and Reemployment Services: Final Report.” U.S. Department of Labor, Employment and Training Administration Research and Evaluation Report Series 99-D (1999). Noel, Brett J. “Two Essays on Unemployment Insurance: Claimant Responses to Policy Changes.” Dissertation submitted for the degree of Doctor of Philosophy at the Graduate School of the University of Kentucky, UMI Number: 9922624 (1998). CT, ME, NJ: Reduced by 1.4 to 4.3 percentage points SC, KY: Increased by 1.1 to 4.1 percentage points Dates indicate when claimants filed their UI claim or received their first UI benefit payment. Unpublished dissertation. Delaware was included in this study, but its sample size was too small to detect any significant impacts. Patrick di Battista, Assistant Director, and Michael Hartnett, managed this engagement. Shannon Groff, Rosemary Torres Lerma, and Winchee Lin also made significant contributions throughout the engagement. Susan Bernstein helped develop the report’s message. Jay Smale, Stuart Kaufman, Rhiannon Patterson, Robert Dinkelmeyer, and Greg Dybalski contributed to the analysis of Labor data and reviews of external studies. Jessica Botsford provided legal support. Workforce Investment Act: Employers Found One-Stop Centers Useful in Hiring Low-Skilled Workers; Performance Information Could Help Gauge Employer Involvement. GAO-07-167. Washington, D.C.: December 22, 2006. Unemployment Insurance: States’ Tax Financing Systems Allow Costs to Be Shared among Industries. GAO-06-769. Washington, D.C.: July 26, 2006. Unemployment Insurance: Enhancing Program Performance by Focusing on Improper Payments and Reemployment Services. GAO-06-696T. Washington, D.C.: May 4, 2006. Unemployment Insurance: Factors Associated with Benefit Receipt and Linkages with Reemployment Services for Claimants. GAO-06-484T. Washington, D.C.: March, 15, 2006. Unemployment Insurance: Factors Associated with Benefit Receipt. GAO-06-341. Washington, D.C.: March 7, 2006. Workforce Investment Act: Labor and States Have Taken Actions to Improve Data Quality, but Additional Steps Are Needed. GAO-06-82. Washington, D.C.: November 14, 2005. Unemployment Insurance: Better Data Needed to Assess Reemployment Services to Claimants. GAO-05-413. Washington, D.C.: June 24, 2005. Workforce Investment Act: Labor Should Consider Alternative Approaches to Implement New Performance and Reporting Requirements. GAO-05-539. Washington, D.C.: May 27, 2005. Unemployment Insurance: Information on Benefit Receipt. GAO-05-291. Washington, D.C. March 17, 2005. Workforce Investment Act: Employers Are Aware of, Using, and Satisfied with One-Stop Services, but More Data Could Help Labor Better Address Employers’ Needs. GAO-05-259. Washington, D.C.: February 18, 2005. Workforce Investment Act: States and Local Areas Have Developed Strategies to Assess Performance, but Labor Could Do More to Help. GAO-04-657. Washington, D.C.: June 1, 2004. Workforce Investment Act: One-Stop Centers Implemented Strategies to Strengthen Services and Partnerships, but More Research and Information Sharing Is Needed. GAO-03-725. Washington, D.C.: June 18, 2003.","Changes to the U.S. economy have led to longer-term unemployment. Many unemployed workers receive Unemployment Insurance (UI), which provided about $30 billion in benefits in 2006. In 1993, Congress established requirements--now known as the Worker Profiling and Reemployment Services (WPRS) initiative--for state UI agencies to identify claimants who are most likely to exhaust their benefits, and then refer such claimants to reemployment services. To assess the implementation and effect of the initiative, GAO examined (1) how states identify claimants who are most likely to exhaust benefits, (2) to what extent states provide reemployment services as recommended by the Department of Labor (Labor), and (3) what is known about the effectiveness of the initiative in accelerating reemployment. To answer these questions, we used a combination of national data; review of seven states, including visits to local service providers in four states; and existing studies and interviews with Labor and subject matter experts. Forty-five of the 53 states and territories use statistical models that facilitate the ranking of claimants by their likelihood to exhaust benefits, while 7 states use more limited screening tools that do not facilitate a ranking. Florida delegates the selection of profiling tools to local areas in the state. Factors used to determine the probability of exhaustion include a claimant's education, occupation, and job tenure. Many states have not regularly maintained their models, and as a result, the models in some states may not be accurately identifying claimants who are likely to exhaust benefits. Although Labor data provide a limited picture of states' implementation of the worker-profiling initiative, 6 of the 7 states we studied did not provide the in-depth approach to services as recommended by Labor. Overall, an average of 15 percent of profiled UI claimants were referred to reemployment services, and 11 percent completed these services between 2002 and 2006. Six of the 7 states we contacted referred claimants to services, held them accountable for attending the services, and provided an orientation. However, only 1 of the 7 states provided individualized needs assessments, and developed service plans, as recommended. Little is known about the effectiveness of the worker-profiling initiative as it is currently operating. Although studies using data from the 1990s generally indicated that claimants who were referred to services had reduced reliance on UI, there are no more up-to-date studies. Further, some of the program data collected by Labor are not reliable, and the data are not being used by Labor or states to evaluate the initiative.",govreport
"The military health system has three missions: (1) maintaining the health of active-duty service members; (2) maintaining readinessthe capability to treat wartime casualties; and (3) providing care to the dependents of active-duty personnel, retirees and their families, and survivors of military personnel. In fiscal year 1999, DOD’s annual appropriations included about $16 billion for health care, of which over $1 billion funded the care of seniors. In the mid-1990s, DOD implemented the TRICARE framework for military health care in response to rapidly rising costs and beneficiary concerns about access to military care. Its goals were to improve beneficiary access and quality while containing costs. TRICARE provides care through over 600 MTFs and a network of civilian providers managed by outside contractors. TRICARE offers three options: TRICARE Prime, a managed care option; TRICARE Extra, a preferred provider option; and TRICARE Standard, a fee-for-service option. TRICARE covers inpatient services, outpatient services such as physician visits and lab tests, and skilled nursing facility and other post-acute care. TRICARE also covers prescription drugs, which are available at MTFs, through DOD’s national mail order pharmacy (NMOP), and at civilian pharmacies. Medicare is a federally financed health insurance program that covers health care expenses of the elderly, some people with disabilities, and people with end-stage kidney disease. Military retirees aged 65 or older are eligible for Medicare on the same basis as civilian retirees. Medicare enrollees receive part A benefits and are eligible for optional part B benefits if they pay a monthly premium. Under traditional Medicare, beneficiaries choose their own providers, and Medicare reimburses those providers on a fee-for-service basis. Beneficiaries who receive care through traditional Medicare are responsible for paying a share of the costs for services. Most beneficiaries have supplemental coverage that pays for many of the costs not covered by Medicare. Major sources of this coverage include employer-sponsored health insurance, “Medigap” policies sold by private insurers to individuals, and state Medicaid programs. Beneficiaries have an alternative to traditional Medicare, the Medicare+Choice option. Medicare+Choice allows beneficiaries to enroll in private managed care plans and other types of health plans. Managed care plans provide all traditional Medicare benefits and typically offer additional benefits, such as prescription drug coverage. Plan members generally pay less out-of-pocket than under traditional Medicare. When choosing a plan, beneficiaries must weigh these benefits against other features of managed care. For example, beneficiaries enrolled in Medicare managed care plans generally must use the physicians in a plan’s network and often must obtain plan approval before they can see a specialist. Older military retirees who enroll in Medicare+Choice plans may choose to supplement the care they receive through the plan with space-available care provided by MTFs in their areas. The space-available care they receive saves the plan money if it otherwise would have provided the care. Similarly, MTF care provided to older retirees who are in traditional Medicare reduces Medicare spending. Today, there are about 1.5 million retired military personnel, dependents, and survivors aged 65 or older residing in the United States who are eligible for certain military health care services. About 600,000 of these seniors live within about 40 miles of an MTF. Retirees have access to all MTF and network services through TRICARE until they turn age 65 and become eligible for Medicare. Subsequently, they can only use military health care on a space-available basis, that is, when MTFs have unused capacity after caring for younger beneficiaries. In the 1990s, downsizing and changes in access policies led to reduced space-available care throughout the military health system. Some retirees aged 65 or older rely heavily on military facilities for their health care, but most do not, and over 60 percent do not use military health care facilities at all. Sweeping changes in retiree benefits and military health care are occurring in 2001 as a result of the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001. This legislation gave older retirees two major benefits: Pharmacy benefit. Beginning April 1, 2001, military retirees from the uniformed services aged 65 or older have access to prescription drugs through TRICARE’s NMOP and at civilian pharmacies, as well as through pharmacies at MTFs. TRICARE eligibility. On October 1, 2001, older retirees enrolled in Medicare part B became eligible for TRICARE coveragecommonly termed TRICARE For Life. As a result, TRICARE is now a secondary payer for these retirees’ Medicare-covered servicespaying most of the required cost-sharing. In addition, older retirees can enroll in TRICARE Plusa program that provides MTF primary care. The Medicare subvention demonstration permitted DOD to create managed care organizations that participate in the Medicare+Choice program and enroll older retirees. Medicare may pay DOD for enrollees’ care, but only after DOD has spent an amount equal to what it has spent historically on care for all older retirees. Under the demonstration, enrolled retirees receive their Medicare-covered benefits and additional TRICARE benefits (notably prescription drugs) through TRICARE Senior Prime, the DOD-run managed care organizations set up by the demonstration. To be eligible for Senior Prime, retirees must reside in one of the six geographic areas covered by the demonstration, be enrolled in both Medicare part A and part B, and be eligible for military health care benefits. They also must have either (1) used a military treatment facility before July 1, 1997, or (2) turned age 65 on or after July 1, 1997. Senior Prime is based on TRICARE Prime, DOD’s managed care program for active-duty personnel, family members, and retirees under age 65. Although DOD could charge enrollees a premium for Senior Prime, as any Medicare+Choice organization can, it has chosen not to do so. Services can be provided, at Senior Prime’s option, at an MTF or by a civilian network provider. Copayments differ by where the service was provided. For example, inpatient care is free at the MTF, but a copayment is charged for care at a civilian hospital. Senior Prime gives its members priority for treatment at MTFs over other older military retirees (that is, nonenrollees). Like enrollees in private Medicare managed care plans, Senior Prime enrollees agree that the plan will be the sole source of their Medicare benefits. Enrollees who use civilian providers without authorization are responsible for the full charge. Senior Prime began delivering care at its first site in September 1998 and was delivering care at all sites by January 1999. Sites differ in the numbers of older retirees in their area and enrollment (see table 1), as well as by geographic region, size of military health facility, and managed care penetration in the local Medicare market. The demonstration sites were not representative of all military health care service areas. This was because sites’ ability to support the demonstration was a factor in site selection. Military health care resources were greater in demonstration areas than in other military health care service areas. At the start of the demonstration, about 80 percent of older retirees in the demonstration areas lived near a military medical center—a teaching hospital with multiple specialty clinics—whereas in service areas that were not in the demonstration, only 30 percent of older retirees were served by a nearby medical center. The BBA authorized the demonstration for a 3-year period beginning on January 1, 1998, and ending on December 31, 2000. The Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 extended the demonstration for another year—through 2001. DOD has announced that Senior Prime will end on December 31, 2001, because the new TRICARE For Life program will provide expanded health care coverage to older military retirees. In establishing the demonstration, the BBA also established rules for Medicare to follow in paying DOD. The monthly Senior Prime capitation rate was set at 95 percent of the Medicare+Choice capitation rate, consistent with a belief that DOD could provide care at lower cost than the private sector. The rate was further adjusted by excluding the part of the Medicare+Choice rate that reflects graduate medical education (GME) and disproportionate share hospital (DSH) payments, as well as a percentage of payments made for hospitals’ capital costs. The GME and capital costs exclusions took into account the fact that GME and capital costs in the military health system are funded by DOD appropriations, and the DSH exclusion recognizes that DOD medical facilities do not treat the low- income patients for whom DSH payments compensate hospitals. The law directed the Health Care Financing Administration (HCFA) and DOD to determine the amount of the capital adjustment, and the two agencies agreed to exclude two-thirds of the capital costs reflected in the Medicare+Choice rate. The total amount that Medicare could pay DOD for the demonstration was capped at $50 million in 1998, $60 million in 1999, and $65 million in 2000. The BBA also required that participating MTFs maintain their “level of effort” (LOE). That is, they had to spend as much on care for older retirees as they did prior to the demonstration before Medicare could make any payment. This provision ensured that the government would not pay for the same care twice—through both the DOD appropriations and Medicare. (Appendix III explains how LOE works in practice and how Medicare’s final payment to DOD is determined.) DOD’s costs of providing care to Senior Prime enrollees were considerably higher in 1999 than what Medicare could pay Senior Prime or any other managed care organization. This difference was not because Senior Prime enrollees were sicker than other Medicare beneficiaries. Instead, it was mostly due to Senior Prime enrollees’ heavy use of services. A smaller part of the difference reflected DOD’s coverage of prescription drugs. Contrary to initial expectations, DOD was unable to provide care to enrollees within the capitated rate. In 1999 DOD’s monthly costs for Senior Prime members were $586 per person. Senior Prime’s monthly capitated rate was $320 per person—a difference of $266. (See fig. 1.) Even if DOD had been paid the full Medicare+Choice rate, the monthly difference would still have been over $200 per person. Although part of the difference was due to DOD’s coverage of prescription drugs, the main reason for the difference was Senior Prime enrollees’ higher utilization. Compared to similar Medicare fee-for-service beneficiaries, enrollees were hospitalized 41 percent more often and had 58 percent more outpatient visits. (See table 2.) If Senior Prime had matched Medicare fee-for-service utilization, its monthly costs would have dropped by more than $150 per person. The higher utilization probably had several sources, including lower cost-sharing by Senior Prime enrollees and weak incentives to limit inappropriate utilization. However, their separate impacts cannot be quantified. Officials at several demonstration sites stated that Senior Prime enrollees had high utilization because they were less healthy than other patient groups. Although some sites had sicker enrollees than others, overall the demonstration’s enrollees were not in poorer health than comparable Medicare beneficiaries. In fact, they were somewhat healthier. In contrast to the high utilization of services by Senior Prime enrollees, Senior Prime’s drug coverage played a small role. Prescription drugs for enrollees—not included in the Medicare benefit package—cost DOD on average $55 per month per enrollee. Without the demonstration, Medicare in 1999 would have spent 55 percent of the Senior Prime capitation rate on retirees enrolled in Senior Prime. In part, this was because Senior Prime enrollees were somewhat healthier— and therefore somewhat less costly—than other Medicare beneficiaries with the same demographic characteristics. However, the primary reason was that Medicare would have paid for only part of their care. Much of their care would have been provided by MTFs and would have been free to Medicare. We estimate that, without the demonstration, Medicare would have spent on the average enrollee $144 per month less than the Senior Prime rate. Most of this difference reflects the care that fee-for-service beneficiaries would have received from MTFs—care that was free to Medicare. Enrollees who before they enrolled in Senior Prime had been fee-for- service beneficiaries would have cost Medicare $91 per month—$229 less than the Senior Prime rate. By contrast, enrollees who were former health maintenance organizations (HMO) beneficiaries would have cost Medicare, on average, the full Medicare+Choice capitation rate—$63 per month more than the Senior Prime rate. The BBA payment rules for the demonstration limited what Medicare could pay DOD for care rendered to Senior Prime enrollees, reflecting the fact that DOD had an additional source of funds for retiree health care—its appropriations. Contrary to expectations, however, these rules resulted in Medicare owing DOD nothing for the care provided to enrollees during 1999. The BBA set a ceiling on Medicare’s payment to DOD, consistent with the expectation that the payment might be sizable. In 1999 Medicare’s payment to DOD was capped at $60 million for enrollee care. Because DOD allowed 30,228 retirees to enroll and provided them over 305,000 months of care in 1999, the most that DOD could have been paid was $196 per enrollee per month, or 61 percent of the Senior Prime capitation rate which was $320 per month. Any Medicare payment would have supplemented DOD’s appropriated funds. The BBA payment rules resulted in Medicare actually paying DOD nothing for care provided to Senior Prime enrollees during 1999. Under these rules, DOD was required to spend as much as it had historically spent on all seniors in the demonstration areas before it could be paid by Medicare. Otherwise, the government would have paid twice for the same care— both through Medicare and the DOD appropriations. The rules also required that the payment be adjusted upward or downward according to whether Senior Prime enrollees were sicker or healthier than comparable Medicare beneficiaries. Together, these two requirements resulted in Medicare owing DOD nothing. DOD expenditures on care for all retirees (enrolled and not enrolled) in the demonstration areas exceeded its level of effort requirement by $79 million. These additional expenditures, which reflect DOD’s high utilization and high costs, were paid with appropriated health care funds. Using these funds for Senior Prime meant that less was available for other purposes. Under the demonstration, Senior Prime enrollees’ utilization of care was substantially higher than that of comparable Medicare beneficiaries. As a result, DOD’s costs were so high that the full Senior Prime capitation rate could not have covered its costs. Without the demonstration, Medicare would have spent less than the Senior Prime capitation rate on enrollees. This would have occurred because military retirees who used fee-for-service providers would have obtained much of their care for free from MTFs and therefore would have cost Medicare substantially less than the capitation rate. The BBA rules prevented the government from paying twice for the same care and protected the Medicare program from a large increase in its spending for Senior Prime enrollees. However, DOD incurred greater costs for seniors due to the demonstration and covered these costs by redirecting funds from other uses. DOD and CMS reviewed a draft of this report. DOD said that the report adequately described the financial complexities it faced in implementing, administering, and managing the Medicare subvention demonstration. However, DOD found that the report addressed neither the details of the agreement with CMS concerning LOE nor the annual reconciliation process that determined the amount of Medicare’s final payment for Senior Prime care. According to DOD, these features resulted in an extremely complicated payment mechanism that was difficult for DOD managers to understand and execute. In response to our reference to the high cost of DOD’s care, DOD stated that a contributing factor to the high cost of care was the design of the health care benefit provided by Senior Prime. The agency cited an estimate by an actuarial consulting firm that the Senior Prime benefit was worth $105 more per member per month than the typical Medicare+Choice plan. It stated that the burden of providing this benefit and the requirement to maintain fiscal year 1996 Indirect Medical Education (IME) rules made it difficult for DOD to attain its LOE target. In response to our discussion of the effect of risk adjustment on the final Medicare payment, DOD noted that the latest risk adjustment calculation shows that the Senior Prime enrollee population is healthier than the fee-for-service Medicare populations in the demonstration areas. As a result, DOD received no payment from CMS for Senior Prime care provided in 1999. Regarding our concluding observation that DOD incurred greater costs to support Senior Prime and had to cover the shortfall, the agency observed that the report does not state whether the federal government as a whole spent more or less as a result of the demonstration. Finally, DOD suggested that the Hierarchical Coexisting Conditions (HCC) method for determining beneficiaries’ costliness may have resulted in risk scores that overstated the health of the enrollees, due to the HCC method’s use of ambulatory data, which in DOD’s case may be incomplete and may also contain data coding errors. In an earlier report, we described in detail the LOE mechanism and the annual reconciliation process that determines Medicare’s final payment. We also noted in that report that the payment mechanism created uncertainty for DOD managers. Concerning the burden placed on DOD in meeting the LOE requirement, we observe that the Senior Prime benefit included both Medicare-covered services and non-Medicare-covered services. The LOE requirement applied only to Medicare-covered services, for which DOD incurred high costs. We agree that maintaining the fiscal year 1996 IME rules made it more difficult for DOD to meet its LOE requirement, but the effect was very small. Regarding the 1999 final payment by Medicare to DOD, the estimate in our draft report was based on preliminary information from CMS and DOD. We have incorporated into the published report information from the final accounting recently completed by the agencies that shows that there was no payment by Medicare for DOD’s 1999 Senior Prime care. Although the issue of whether the federal government as a whole spent more or less as a result of the demonstration is outside of the scope of this report, our analyses indicate that the demonstration’s impact on total federal costs for the demonstration population was negligible. We share DOD’s concern about the completeness and reliability of ambulatory care data, but doubt that these data weaknesses had any substantial effect on the risk adjustment calculation. We performed the risk adjustment calculation using a method based only on inpatient data and obtained a result comparable to that obtained using the HCC method. CMS found the conclusions of the report to be appropriate. The agency noted that our findings pertained to the initial phase of the demonstration. CMS observed that start-up conditions in the first year of a demonstration may affect the findings. The agency therefore recommended that we include a statement noting that our results are from the initial phase of the demonstration. We make a statement to this effect in the beginning of the report. In addition, CMS noted that there were considerable problems encountered with the DOD cost and use data. We were aware of the limitations of DOD data during our analysis and have described them in appendix I. CMS also suggested technical changes to the report, which we incorporated where appropriate. DOD’s and CMS’s comments appear in appendixes IV and V, respectively. We are sending copies of this report to the Secretary of Defense and the Administrator of the Centers for Medicare and Medicaid Services. We will make copies available to others upon request. If you or your staffs have questions about this report, please contact me at (202) 512-7114. Other GAO contacts and staff acknowledgments are listed in appendix VI. This appendix summarizes the methods and data underlying our analysis of Senior Prime financial issues. Specifically, we analyzed the effect of the Medicare subvention demonstration on DOD’s total costs for enrolled and nonenrolled retirees at the demonstration sites. In addition, we analyzed DOD’s costs per Senior Prime enrollee because, under the demonstration’s rules, the size of these costs has implications for the size of the payment that DOD receives. The total costs of the demonstration to DOD—its actual costs of caring for enrollees and nonenrollees in the demonstration areas—have four components: MTF care. Most hospital stays and outpatient visits by Senior Prime enrollees occurred in MTFs. We based our MTF cost calculations on DOD’s allocation of the costs for an entire facility to the enrolled retirees. This allocation of MTF costs is necessary because DOD’s cost accounting systems do not record or generate cost data for each MTF patient. For the demonstration MTFs, DOD extracted the facility costs from its accounting system for MTF costs (the Medical Expense and Performance Reporting System). Using an elaborate set of cost-allocation rules it had developed,DOD split an MTF’s costs of caring for all users—whether in Prime, Senior Prime, or space-available care—between Senior Prime enrollees and all other users. Civilian network care. Senior Prime also paid for enrollees’ admissions to civilian hospitals and visits to civilian physicians in the Senior Prime network. These network providers submitted claims to TRICARE, which DOD summed to obtain network costs of inpatient care and of outpatient care for enrollees. Pharmacy. For enrollee prescriptions filled at civilian pharmacies, DOD’s costs were recorded like other network claims. For prescriptions filled at MTF pharmacies, DOD reported its costs based on data from local MTF pharmacy information systems. For enrollees’ prescriptions from DOD’s national mail order pharmacy system, DOD extracted cost information from NMOP’s separate information system. Administrative overhead. We used DOD’s figures for Senior Prime’s administrative costs associated with its managed care support contractors. DOD officials told us that DOD does not have a central system for collecting and reporting the administrative costs of MTF care. As a result, our estimate somewhat understates Senior Prime’s total overhead costs. We calculated total costs to DOD of the demonstration for enrollees, nonenrollees, and all older retirees. For enrollees, we calculated DOD’s total costs by summing the MTF, network, pharmacy, and overhead costs reported by DOD for 1999. For nonenrollees, we used the total cost estimates reported by DOD for 1999. To determine DOD’s total costs for all older retirees, we summed the total costs of enrollees and nonenrollees at the demonstration sites. To calculate the change in total cost for older retirees (enrolled and nonenrolled) due to the demonstration, we compared DOD’s 1999 health care costs for older retirees in the demonstration areas to its historical LOE. We analyzed DOD’s per-enrollee costs because they affect the size of Medicare’s final payment to DOD even though they are not an explicit factor in the calculation of this payment. We calculated monthly costs per Senior Prime enrollee for 1999 as total Senior Prime costs—MTF, civilian network, pharmacy, and administrative overhead—divided by total member months in 1999. Total monthly costs per enrollee for Senior Prime were $586. This represents the cost to DOD of providing the combined Medicare and TRICARE Prime benefit package to Senior Prime enrollees. In contrast, under the demonstration’s payment rules, in 1999 DOD was credited for Senior Prime enrollment at a Medicare capitation rate of $320 per month per enrollee. We found that DOD’s costs for delivering the Senior Prime benefit package (which includes prescription drug coverage) to enrollees were over 80 percent higher than the Senior Prime capitation rate. DOD’s higher costs partly reflected Senior Prime’s coverage of prescription drugs, but even net of drug expenses Senior Prime’s costs still were high. Table 3 presents Senior Prime costs in three ways: the first (total costs) is comprehensive and measures DOD’s costs of providing the Senior Prime benefit package; the second measures DOD’s costs of providing the Medicare benefit package, which does not include prescription drug coverage; and the third (in effect, medical claims) measures DOD’s costs of providing the Medicare benefit package, net of the overhead costs associated with DOD’s managed care support contractors for Senior Prime. Even if one of the less comprehensive measures is selected, DOD’s costs for Senior Prime enrollees were much higher than the Senior Prime capitation rate. For example, the difference between the narrowest view of Senior Prime costs (net of drugs and overhead) and the capitation rate is $1,964 annually. We examined the relative health status of enrollees because people with higher medical care costs are usually less healthy. Our analysis showed that Senior Prime enrollees were healthier on average than their fee-for- service counterparts. We used the HCC method to determine the costliness of each beneficiary, based on that person’s clinical diagnoses and demographic traits, relative to the average Medicare fee-for-service beneficiary in the United States. Beneficiaries with lower scores are healthier than beneficiaries with higher scores, and the average Medicare fee-for-service beneficiary in the United States has an HCC score of 1.00. In 1999, Senior Prime enrollees had an average HCC score of 0.94 while Medicare fee-for-service beneficiaries in the demonstration areas had an average HCC score of 1.19. We analyzed enrollees’ relative utilization of services because people who use more services generally have higher costs. In 1999, Senior Prime enrollees averaged 0.367 inpatient stays per person and 16.7 outpatient visits per person. To control for differences by age, sex, and health status, we estimated a statistical model of inpatient utilization for Medicare fee- for-service beneficiaries in the demonstration areas. Using the coefficients from this model, we projected the inpatient utilization for fee-for-service beneficiaries with the same demographic and health traits as Senior Prime enrollees. We also estimated a similar model for outpatient utilization, which we used to project outpatient utilization for fee-for-service beneficiaries with the same characteristics as Senior Prime enrollees. Our analysis showed that Medicare fee-for-service beneficiaries similar to the Senior Prime enrollees would have averaged 0.261 inpatient stays per person and 10.6 outpatient visits per person in 1999. Consequently, we found that Senior Prime enrollees were hospitalized 41 percent more often than similar Medicare fee-for-service beneficiaries and had 58 percent more physician and other outpatient visits than similar Medicare fee-for- service beneficiaries. This appendix summarizes the data and methods used in our analysis of Medicare spending during the demonstration. We estimated what Medicare would have spent without the demonstration for beneficiaries who—before they enrolled in Senior Prime—were covered by Medicare fee-for-service. We did this by projecting historical spending patterns of this population into the demonstration period. We also calculated what Medicare would have spent on Senior Prime enrollees who were previously members of managed care plans. We constructed a database of monthly spending for Medicare beneficiaries spanning January 1994 through December 1999. It included variables that made it possible to aggregate the data for each month by demonstration site, age, and sex, or any combination of these characteristics. We also included data on (1) older military retirees at the eight control sites used in the RAND evaluation of the demonstration and (2) a sample of nondual eligibles—Medicare beneficiaries not eligible for military health care—at both the demonstration and RAND control sites. Constructing the database involved four major steps: 1. Identifying the Populations. To identify the population of Medicare- eligible military retirees, we obtained quarterly files from DOD for the period 1994 through 1999 that included all military retirees and their dependents aged 65 or older who were eligible for military health care. We matched a master list of these individuals to Medicare’s Enrollment Data Base to produce a national file of all Medicare-eligible military retirees. This file was used to create separate lists for the demonstration and RAND control sites using Medicare data on beneficiaries’ current and previous residences. To select comparison samples of Medicare beneficiaries not eligible for military health care, we created a master list of all nondual eligibles for each site. To do this, we matched a list of zip codes for the demonstration and RAND control sites to Medicare’s annual master lists of beneficiary characteristics and excluded the dual eligibles. Finally, we selected a random sample of 30,000 beneficiaries for each site.2. Determining Monthly Medicare Payments for Several Populations. We used the list of older retirees and the sample of nondual eligibles at both the demonstration and RAND control sites to extract all Medicare fee-for-service claims for these individuals in the years spanning 1993 through 1999. The payment amount of each claim was prorated among the months spanning the beginning and end dates of the period during which the service was provided. The prorated claims were then summed by month for each beneficiary. From the same lists of beneficiaries we also identified all former Medicare HMO enrollees. For each year spanning 1994 through 1999, we used HCFA’s HMO rate calculation methodology to calculate the capitation rate for every month during which a beneficiary was enrolled in a Medicare HMO. These data were then merged with the monthly fee-for-service payments to create a file of all Medicare payments by month. 3. Creating Variables That Describe Beneficiaries’ Characteristics. We created a separate file of monthly beneficiary characteristics from Medicare and DOD data. These included age, sex, Medicare part A and part B enrollment status, eligibility for DOD health care, and residence at a demonstration or RAND control site. For Senior Prime enrollees we also added variables indicating their monthly enrollment status, their Senior Prime capitation rate, and the final Medicare payments to DOD per enrollee for 1998 and 1999. 4. Creating the Master File and Time-Series Variables. We created the master file by merging the monthly beneficiary characteristics file with the monthly Medicare payments file. We used the master file to create two time-series variables—average real monthly Medicare payments and the number of beneficiaries. For demonstration sites, these segments included all enrollees, enrollees who were fee-for- service beneficiaries before the demonstration, nonenrollees, and nondual eligibles. For the RAND control sites, these segments included all older retirees and nondual eligibles. We used a standard statistical method (ordinary least-squares regression) to estimate forecasting equations of average monthly real Medicare spending for the population segments included in the database. A common feature of time-series data is that each period’s value is likely to be correlated with previous periods’ values. We therefore used a standard correction in our estimates to counteract the forecasting error that would otherwise be introduced. We assessed the forecasting accuracy of several alternative forecasting equations. To do this, we estimated an equation for a shortened version of the average spending series that omitted the 12 months preceding the demonstration. This equation was then used to forecast the spending variable for the omitted months. Finally, the actual spending during those months was compared to the forecast. The equation with the best forecasting accuracy has two independent variables—a time trend and average monthly real Medicare payments for nondual eligibles. We used this equation to estimate spending during the predemonstration period for 1999 Senior Prime enrollees and nonenrollees. We tested the forecasting accuracy of the equation using data from the RAND control sites. In this case, the forecast period was the demonstration period itself (September 1998 through December 1999). The resulting forecast error was 1.9 percent, indicating that the equation produces reasonable forecasts for a comparable set of sites. We used the forecasting equation to project the 1999 monthly average Medicare spending for enrollees who were former fee-for-service beneficiaries. We defined this population as enrollees who were not HMO enrollees at any time during the 6-month period preceding their enrollment in Senior Prime. The BBA required DOD to maintain its level of effort (LOE) in providing care to older military retirees. That is, DOD must spend as much on care for older retirees as it did historically before it could receive any payment from Medicare. This provision ensured that the government would not pay for the same care twice—through both the DOD appropriations and Medicare. In establishing the LOE requirement, DOD and HCFA defined LOE as the amount DOD spent on space-available care for retirees 65 and over in 1996—the most recent year for which complete data were available. To receive Medicare payments, DOD must exceed the 1996 LOE, which was approximately $172 million for all the demonstration sites combined. The LOE threshold remained constant throughout the demonstration with no adjustment for inflation. In measuring DOD’s spending for the LOE test, care provided to Senior Prime enrollees and to nonenrolled retirees are valued differently. According to rules that DOD and HCFA agreed to, for each month a retiree is enrolled, DOD is credited with the Senior Prime capitation rate regardless of the services the retiree received. In 1999 this rule magnified the effect of the LOE requirement because the Senior Prime rate was much less than what enrollees’ care cost DOD. The capitation rates are adjusted if there is “compelling” evidence that enrollees are healthier or sicker than their fee-for-service Medicare counterparts. Nonenrollees’ care is credited at DOD’s estimated cost of the actual Medicare-covered services they receive. In each year Senior Prime enrollees’ care must account for a minimum percentage of LOE—30 percent in 1998, 35 percent in 1999, and 47.5 percent in 2000. In principle, the entire LOE could be met by care provided to enrollees; there is no required minimum amount for space- available care provided to nonenrollees. If DOD meets its LOE and enrolled care requirements it receives a Medicare payment equal to the difference between the amount credited for care provided to all older retirees and the LOE requirement. If this amount is less than the spending cap specified in the BBA—$60 million for 1999— then DOD gets the full amount; otherwise it gets the cap. The payment rules resulted in Medicare owing DOD nothing for care provided in 1999. Table 4 shows how this amount was calculated. DOD was credited $98 million for care provided to enrollees. This included an adjustment for the health status of enrollees, who were found to be significantly healthier than Medicare fee-for-service beneficiaries with the same demographic characteristics. DOD was also credited $72 million for care provided to nonenrollees, so the total credited amount of care provided to older retirees was $170 million. This amount was then compared to the LOE requirement of $172 million. Since DOD fell short of this target, the final payment from Medicare was zero. Contributors to this report were Eric Wedum, Martha Wood, Dae Park, Jessica Farb, Robert DeRoy, Wayne Turowski, and Judy Chesley. Medicare Subvention Demonstration: Greater Access Improved Enrollee Satisfaction but Raised DOD Costs (GAO-02-68, October 31, 2001). Medicare Subvention Demonstration: DOD’s Pilot Appealed to Seniors, Underscored Management Complexities (GAO-01-671, June 14, 2001). Medicare Subvention Demonstration: Enrollment in DOD Pilot Reflects Retiree Experiences and Local Markets (GAO/HEHS-00-35, Jan. 31, 2000). Medicare Subvention Demonstration: DOD Start-up Overcame Obstacles, Yields Lessons, and Raises Issues (GAO/GGD/HEHS-99-161, Sept. 28, 1999). Medicare Subvention Demonstration: DOD Data Limitations May Require Adjustments and Raise Broader Concerns (GAO/HEHS-99-39, May 28, 1999).","The Balanced Budget Act of 1997 authorized the Department of Defense (DOD) to conduct the Medicare subvention demonstration for a three-year period. Under this demonstration, DOD formed Medicare managed care organizations--collectively called TRICARE Senior Prime--at six sites that provided the full range of Medicare-covered services as well as additional DOD-covered services, notably prescription drugs. The Medicare program was to pay DOD for Medicare-covered care of the enrolled military retirees if DOD continued to spend on all aged military retirees at least as much as it had historically. Under the subvention demonstration, Senior Prime enrollees' care in 1999 cost DOD far more than the Medicare capitation rate that was established for the demonstration. This mainly resulted from enrollees' heavy use of medical services, but DOD coverage of prescription drugs--not included in the Medicare benefit package--also contributed to its high costs. Without the demonstration, Medicare spending in 1999 for retirees who enrolled in Senior Prime would have been, on average, about 55 percent of the Senior capitation rate. The Balanced Budget Act's payment rules resulted in no Medicare payment to DOD in 1999. This was because they were designed to prevent the government from paying twice for the same care--once through DOD appropriations and again through Medicare. The rules also required that the payment be adjusted to account for Senior Prime enrollees' health status.",govreport
"Overall, NTSB has fully implemented or made significant progress in following leading management practices in all eight areas that our recommendations addressed in 2006 and 2008—communication, strategic planning, IT, knowledge management, organizational structure, human capital management, training, and financial management. We made 15 management recommendations in these areas based on leading agency management practices that we identified through our governmentwide work. Although NTSB is a relatively small agency, such practices remain relevant. Figure 1 summarizes NTSB’s progress in implementing our management recommendations. NTSB had fully implemented three of our management recommendations as of our report in April 2008—our recommendations to (1) facilitate communication from staff to management, (2) align organizational structure to implement a strategic plan, and (3) correct an Antideficiency Act violation related to purchasing accidental death and dismemberment insurance for employees on official travel. In addition, NTSB has made further progress on eight of our management recommendations since 2008. First, it fully implemented our recommendations on communication by reporting to Congress on the status of our recommendations by including the actions it has taken to address them in its Annual Report to Congress. In addition, it has fully implemented our recommendation on strategic planning by linking all five mission areas in its goals and objectives and seeking external stakeholder comments. NTSB has also taken steps to implement all three of our IT-related recommendations: NTSB has fully implemented an IT strategic plan that addresses our comments. Moreover, in compliance with the Federal Information Security Management Act of 2002 (FISMA), NTSB has undergone annual independent audits, hiring outside contractors to perform security testing and evaluation of its computer systems. We performed limited testing to verify that NTSB has implemented our recommendation to install encryption software. Agency officials confirmed, however, that while encryption software is operational on 410 of the agency’s approximately 420 laptop computers, the remaining laptops do not have encryption software installed because they do not include sensitive information and are not removed from the headquarters building. NTSB has made significant progress in limiting local administrator privileges while allowing for employees to add software and print from offsite locations as necessary. NTSB has also drafted a strategic training plan that, when finalized, would address GAO guidance on federal strategic training and development efforts and establish the core competencies needed for investigators and other staff. In addition, two modal offices have developed core curricula that relate specifically to their investigators. In addition, NTSB obligated $1.3 million in September 2009 to the National Business Center—an arm of the Department of the Interior that provides for-fee payroll services to federal agencies—to develop a full cost accounting system for NTSB based on a statement of work. NTSB officials said that the first phase of the cost accounting system will be implemented late in fiscal year 2010. When the system is completed to permit recording of the time and costs of investigations and other activities, including training, this action will fully implement our recommendation. The remaining four management recommendations have not yet been fully implemented. However, NTSB has initiated actions that could lead to their full implementation. For example, NTSB has continued to improve its knowledge management by developing a plan to capture, create, share, and revise knowledge, and the agency is deploying Microsoft SharePoint® to facilitate the sharing of useful information within NTSB. In April 2008, we reported that NTSB had made significant progress in implementing our human capital planning recommendation by issuing a human capital plan that incorporated several strategies on enhancing the recruitment process. However, we also said the plan was limited in some areas of diversity management. As we have previously reported, diversity management is a key aspect of strategic human capital management. Developing a workforce that includes and takes advantage of the nation’s diversity is a significant part of an agency’s transformation of its organization to meet the challenges of the 21st century. The most recent version of NTSB’s human capital plan establishes goals for recruiting, developing, and retaining a diverse workforce, and NTSB provided diversity training to 32 of its senior managers and office directors in May 2009. Table 1 compares the diversity of NTSB’s fiscal year 2008 workforce with that of the federal government and the civilian labor force. As the table shows, the percentages of NTSB’s fiscal year 2008 workforce that were women and minorities were lower than those of the federal government. Under the Office of Personnel Management’s regulations implementing the Federal Equal Opportunity Recruitment Program, agencies are required to determine where representation levels for covered groups are lower than for the civilian labor force and take steps to address those differences. Additionally, as of fiscal year 2008, 9 percent of NSTB’s managers and supervisors were minorities and 24 percent were women (see fig. 2). Furthermore, according to NTSB, none of its current 15-member career Senior Executive Service (SES) personnel were members of a minority group, and only 2 of them were women. As we have previously reported, diversity in the SES corps, which generally represents the most experienced segment of the federal workforce, can strengthen an organization by bringing a wider variety of perspectives and approaches to policy development and decision making. NTSB has undertaken several initiatives to create a stronger, more diverse pool of candidates for external positions. These initiatives include the establishment of a Management Candidate Program that has attracted a diverse pool of minority and female candidates at the GS 13/14 level. NTSB’s Executive Development Program focuses on identifying candidates for current and future SES positions at the agency. Despite these efforts, NTSB has not been able to appreciably change the diversity profile of its senior management. NTSB’s current workforce demographics may present the agency with an opportunity to increase the diversity of its workforce and management. According to NTSB, in 3 years, more than 50 percent of its current supervisors and managers will be eligible to retire, as will over 25 percent of its general workforce. Furthermore, 53 percent of its investigators and 71 percent of those filling critical leadership positions are at least 50 years old. Although actual retirement rates may be lower than retirement eligibility rates, especially in the present economic environment, consideration of retirement eligibility is important to workforce planning. We previously made four recommendations to NTSB to improve the efficiency of its activities related to investigating accidents, such as identifying criteria for selecting which accidents to investigate and tracking the status of its recommendations, and increasing its use of safety studies (see fig. 3). NTSB is required by statute to investigate all civil aviation accidents and selected accidents in other modes—highway, marine, railroad, pipeline, and hazardous materials. Since our April 2008 report, NTSB has fully implemented our recommendation to develop transparent policies containing risk-based criteria for selecting which accidents to investigate. The recently completed highway policy assigns priority to accidents based on the number of fatalities, whether the accident conditions are on NTSB’s “Watch List,” or whether the accidents might have significant safety issues, among other factors (see fig. 4). For marine accidents, NTSB has a memorandum of understanding (MOU) with the U.S. Coast Guard that includes criteria for selecting which accidents to investigate. In addition, NTSB has now developed an internal policy on selecting marine accidents for investigation. This policy enhances the MOU by providing criteria to assess whether to launch an investigation when the Coast Guard, not NTSB, would have the lead. In April 2008, we reported that NTSB had also developed a transparent, risk-based policy explaining which aviation, rail, pipeline, and hazardous materials accidents to investigate. The remaining three recommendations have not yet been fully implemented. However, NTSB has initiated actions that could lead to closure of two of the recommendations. NTSB’s deployment of an agencywide electronic information system based on Microsoft SharePoint will allow NTSB to streamline and increase its use of technology in closing out recommendations and in developing reports. When fully implemented, this system should serve to close these two recommendations. NTSB has also made significant progress in implementing our recommendation to increase its use of safety studies, which are multiyear efforts that result in recommendations. They are intended to improve transportation safety by effecting changes to policies, programs, and activities of agencies that regulate transportation safety. While we, the Department of Transportation, and nongovernmental groups, like universities, also conduct research designed to improve transportation safety, NTSB is mandated to carry out special studies and investigations about transportation safety, including studies about how to avoid personal injury. Although NTSB has not completed any safety studies since we made our recommendation in 2006, it has three studies in progress, one of which is in final draft, and it has established a goal of developing two safety study proposals and submitting them to its board for approval each year. NTSB officials told us that because the agency has a small number of staff, it has difficulty producing large studies in addition to processing many other reports and data inquiries. NTSB officials told us they would like to broaden the term “safety studies” to include not only the current studies of multiple accidents, but also the research done for the other, smaller safety-related reports and data inquiries. Such a term, they said, would better characterize the scope of their efforts to report safety information to the public. NTSB also developed new guidelines to address its completion of safety studies. We made two recommendations for NTSB to increase its own and other agencies’ use of the Training Center and to decrease the center’s overall operating deficit (see fig. 5). The agency increased use of the center’s classroom space from 10 percent in fiscal year 2006 to 80 percent in fiscal year 2009. According to NTSB, it has sublease agreements with agencies of the Department of Homeland Security (DHS) to rent approximately three- quarters of the classroom space located on the first and second floors. The warehouse portion of the Training Center houses reconstructed wreckage from TWA Flight 800, damaged aircraft, and other wreckage. The Training Center provides core training for NTSB investigators and trains others from the transportation community to improve their practice of accident investigation. Furthermore, NTSB has hired a Management Support Specialist whose job duties include maximizing the Training Center’s use and marketing its use to other agencies or organizations. The agency’s actions to increase the center’s use also helped increase Training Center revenues from about $635,000 in fiscal year 2005 to about $1,771,000 in fiscal year 2009. By reducing the center’s leasing expenses—for example, by subleasing classrooms and office space at the center to other agencies—NTSB reduced the Training Center’s annual deficit from about $3.9 million to about $1.9 million over the same time period. NTSB has made significant progress in achieving the intent of our recommendation to maximize the delivery of its core investigator curriculum at the Training Center by increasing the number of NTSB- related courses taught at the Training Center (fig. 6). For example in 2008, 49 of the 68 courses offered at the Training Center were solely for NTSB employees. NTSB has fully implemented our recommendation to increase use of the Training Center. NTSB subleased all available office space at its Training Center to the Federal Air Marshal Service (a DHS agency) at an annual fee of $479,000. NTSB also increased use of the Training Center’s classroom space and thereby increased the revenues it receives from course fees and rents for classroom and conference space. From fiscal year 2006 through fiscal year 2009, NTSB increased other agencies’ and its own use of classroom space from 10 to 80 percent, and increased revenues by over $1.1 million. For example, according to NTSB, it has a sublease agreement with DHS to rent approximately one-third of the classroom space. NTSB considered moving certain staff from headquarters to the Training Center, but halted these considerations after subleasing all of the Training Center’s available office space. NTSB decreased personnel expenses related to the Training Center from about $980,000 in fiscal year 2005 to $507,000 in fiscal year 2009 by reducing the center’s full-time-equivalent positions from 8.5 to 3.0 over the same period. As a result of these efforts, from fiscal year 2005 through fiscal year 2009, Training Center revenues increased by 179 percent while the center’s overall deficit decreased by 51 percent. (Table 2 shows direct expenses and revenues for the Training Center in fiscal years 2004 through 2009.) However, the salaries and other personnel-related expenses associated with NTSB investigators and managers teaching at the Training Center, which would be appropriate to include in the Training Center’s costs, are not included. NTSB officials told us that they believe the investigators and managers teaching at the Training Center would be teaching at another location even if the Training Center did not exist. Once NTSB has fully implemented its cost accounting system, it should be able to track and report these expenses. As part of the reauthorization process, NTSB has proposed both substantive and technical changes to its existing authorizing legislation. Among the substantive changes sought by NTSB are the statutory authority to investigate incidents in addition to its current authority to investigate accidents in all transportation modes and to reduce its current requirements for investigating rail and maritime accidents. Figure 7 illustrates the five transportation modes for which NTSB has investigative authority. The proposed technical changes would serve various purposes, including clarifying particular provisions contained in NTSB’s current authorizing legislation. The proposed substantive change that would allow NTSB to investigate incidents would affect all modes by providing explicit authority to investigate not only accidents, as currently prescribed, but also “incidents not involving destruction or damage, but affecting transportation safety, as the Board may prescribe or Congress may direct.” This addition does not set forth specific criteria for selecting incidents to investigate, thereby increasing the agency’s discretion. According to NTSB, this change would codify the agency’s current practice in all modes. For example, NTSB investigated and reported the facts of the Northwest Airlines overflight of Minneapolis, Minnesota, on October 21, 2009, even though it did not meet the statutory definition of an accident. Other proposed substantive changes would reduce NTSB’s current requirements for investigating maritime and rail accidents. Specifically, one change would eliminate the current requirement for NTSB or the Coast Guard to investigate all accidents involving public vessels or any other vessel and would provide discretion to determine whether and which of these accidents to investigate. Similarly, another proposed change would limit NTSB’s responsibility for investigating rail accidents by establishing more stringent criteria for triggering the requirement to investigate. However, the proposed criteria do not include definitions of certain terminology and would thus effectively give NTSB the discretion to decide which rail accidents to investigate. Giving NTSB expanded investigatory discretion with the explicit authority to investigate incidents without specific criteria, while simultaneously limiting requirements for rail and maritime investigations, would allow the agency to use its professional judgment to determine which investigations would have the greatest potential to improve safety and make the most effective use of its resources. At the same time, however, it is important that NTSB be transparent in providing information about investigation criteria in order to assure Congress and the public that the agency’s resources are being used to address priorities in accordance with its mission. Striking the right balance between discretionary and criteria based investigations will be important to ensure that NTSB’s resources can be used for the work with the greatest potential to enhance transportation safety. Other proposed substantive changes are intended to more clearly define NTSB’s and the U.S. Coast Guard’s respective roles and responsibilities for maritime accident investigations, which are currently governed by a December 2008 MOU with the Coast Guard and jointly issued regulations. These changes could affect a number of existing agreements and the current governing framework, as well as the agencies involved. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D. at (202) 512-2834 or by e-mail at dillinghamg@gao.gov or Gregory C. Wilshusen at (202) 512-6244 or wilshuseng@gao.gov. Individuals making key contributions to this testimony include Keith Cunningham, Assistant Director; Lauren Calhoun; Peter Del Toro; George Depaoli; Elizabeth Eisenstadt; Fred Evans; Steven Lozano; Mary Marshall; Charles Vrable; Jack Warner; and Sarah Wood. National Transportation Safety Board: Reauthorization Provides an Opportunity to Focus on Implementing Leading Management Practices and Addressing Human Capital and Training Center Issues. GAO-10-183T. Washington, D.C.: October 29, 2009. National Transportation Safety Board—Application of Section 1072 of the Federal Acquisition Streamlining Act (41 U.S.C. 254) to Real Property Leases. B-316860. Washington, D.C.: April 29, 2009. National Transportation Safety Board: Progress Made in Management Practices, Investigation Priorities, Training Center Use, and Information Security, but These Areas Continue to Need Improvement. GAO-08-652T. Washington, D.C.: April 23, 2008. National Transportation Safety Board—Insurance for Employees Traveling on Official Business. B-309715. Washington, D.C.: September 25, 2007. National Transportation Safety Board: Observations on the Draft Business Plan for NTSB’s Training Center. GAO-07-866R. Washington, D.C.: June 14, 2007. National Transportation Safety Board: Progress Made, Yet Management Practices, Investigation Priorities, and Training Center Use Should Be Improved. GAO-07-118. Washington, D.C.: November 22, 2006. National Transportation Safety Board: Preliminary Observations on the Value of Comprehensive Planning, and Greater Use of Leading Practices and the Training Academy. GAO-06-801T. Washington, D.C.: May 24, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","The National Transportation Safety Board (NTSB), whose reauthorization is the subject of today's hearing, plays a vital role in advancing transportation safety by investigating accidents, determining their causes, issuing safety recommendations, and conducting safety studies. To support the agency's mission, NTSB's Training Center provides training to NTSB investigators and others. NTSB's 2006 reauthorization legislation mandates an annual review by GAO, and from 2006 through 2008, GAO made 21 recommendations to NTSB that address its management, information technology (IT), accident investigation criteria, safety studies, and Training Center use. This testimony addresses NTSB's progress in implementing GAO's recommendations that it (1) follow leading management practices, (2) conduct aspects of its accident investigations and safety studies more efficiently, and (3) increase the use of its Training Center. The testimony also discusses (4) changes NTSB seeks in its 2010 reauthorization proposal. This testimony is based on GAO's assessment from July 2009 to January 2010 of plans and procedures NTSB developed to address these recommendations. NTSB provided technical comments that GAO incorporated as appropriate. NTSB has fully implemented or made significant progress in adopting leading management practices in all areas where GAO made prior recommendations. Since 2008, NTSB has revised several of its planning documents, including its agencywide strategic plan; improved information security; and obligated money to implement a full cost accounting system. NTSB has also taken steps to improve the diversity of its workforce and management. However, women and minorities were less well represented in NTSB's fiscal year 2008 workforce than in the federal government, and no minorities are among NTSB's 15 senior executives. A lack of diversity among top managers can limit the variety of perspectives and approaches to policy development and decision making at an agency. With the adoption of criteria for selecting highway and marine accidents to investigate, NTSB has established criteria for all transportation modes. NTSB is also streamlining and increasing its use of technology in closing out recommendations. NTSB has three safety studies in progress and would like to broaden the term ""safety studies"" to include not only its current studies of multiple accidents, but also the research it does for other, smaller safety-related reports and data inquiries. NTSB has continued to increase the use of its Training Center--from 10 percent in fiscal year 2006 to 80 percent in fiscal year 2009. As a result, revenues have increased and the center's overall deficit has declined from about $3.9 million in fiscal year 2005 to about $1.9 million in fiscal year 2009. In its 2010 reauthorization proposal, NTSB seeks substantive changes to its existing authorizing legislation, including explicit statutory authority to investigate incidents in all modes and reduced statutory requirements for investigating rail and maritime accidents. Both changes would increase NTSB's investigatory discretion. Such discretion would allow NTSB to select incidents with the greatest potential to improve safety, yet decisions based on discretion may be less transparent than those based on criteria. Striking the right balance between discretionary and criteria-based investigations will be important to ensure that NTSB's resources can be used for the work with the greatest potential to enhance transportation safety.",govreport
"GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies’ major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the president’s budget, provide a direct linkage between an agency’s longer-term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies’ performance reports, due by March 31, represents a new and potentially more substantive phase in the implementation of GPRA—the opportunity to assess federal agencies’ actual performance for the prior fiscal year and to consider what steps are needed to improve performance, and reduce costs in the future. With over 18,000 employees and an annual budget of approximately $7 billion, EPA funds diverse regulatory, research, enforcement, and technical assistance programs and activities that are directed toward controlling pollution of the air, land, and water. The nation’s annual costs to comply with environmental regulations are substantial and have been growing, and costs were estimated at about $148 billion in 2000. A key aspect of EPA’s performance management involves working cooperatively with its state partners in managing environmental programs. As authorized by environmental statutes, the agency has delegated to the states the responsibility for day-to-day implementation of most federal environmental programs; thus, EPA’s working relationships with the states can directly affect the achievement of many of the agency’s strategic goals. Over the past few years, we have identified weaknesses and made a number of recommendations designed to improve EPA’s working relationships with the states. This section discusses our analysis of the EPA’s performance in achieving its selected key outcomes and the strategies the agency has in place, particularly strategic human capital management and information technology, for achieving these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provided assurance that the performance information that it is reporting is credible. EPA reported making progress toward achieving its long-term goal of safe and healthy air in communities. Specifically, the agency reported achieving its goals of improving air quality in areas that do not meet the National Ambient Air Quality Standards (NAAQS) established by EPA under the Clean Air Act. For example, the number of areas attaining air quality standards for carbon monoxide, sulfur dioxide, nitrogen dioxide, and lead pollutants increased from 46 to 56, affecting 27.7 to 31.1 million people, respectively. EPA reported progress in reducing airborne toxic emissions that pose serious adverse health effects, including cancer, and expected to exceed its goal for fiscal year 2000. The agency also reported that it was on schedule to reach its goals for reductions of sulfur dioxide and nitrogen oxide emissions from utility sources under the Acid Rain Program. The performance report acknowledges that there are some data limitations with the Aerometric Information Retrieval System for reporting NAAQS progress. For example, the report states that data demonstrating improvement in national ambient air quality standards may be limited by inaccuracies due to imprecise measurement and recording and inconsistent or nonstandard methods of data collection and processing. On the other hand, the report states that monitoring stations providing data must meet certain requirements for accurate data gathering and reporting, and reviews are conducted to ensure requirements are met. (In commenting on a draft of this report, an official of EPA’s Office of Air and Radiation stressed that the agency has quality assurance and control procedures so that legal determinations can be made about areas’ attainment status.) Further, EPA’s reported progress for its annual performance goal related to toxic air pollutant emissions relies on calculations and estimates. The performance report notes that the data to confirm reductions in toxic emissions will not be available until 2004 because of time lags associated with reporting and analysis. Similarly, for reductions in sulfur dioxide and nitrogen oxide from utility sources, the data to confirm the reported progress will not be available until the end of calendar year 2001. Speeding the collection and verification of emissions data would enhance the agency’s ability to report its actual performance and to support its claims of progress toward these goals by the required date for annual reports. However, according to EPA, the time taken to perform data quality assurance for both the toxic air pollutants and Acid Rain Program will result in continued data-reporting lags. EPA’s strategy for achieving its goal of improving air quality is to work with states, tribes, and local governments to achieve compliance with NAAQS for six principal pollutants—carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter, and sulfur dioxide. Specifically, EPA required selected states to develop implementation plans to reduce nitrogen oxide emissions and is working with states to collect information on particulate matter. For toxic air pollutants, EPA has developed a monitoring strategy with the assistance of states and local regulators and is beginning to implement this strategy. The agency is also conducting a national assessment focusing on 33 air toxics that present the greatest threat to human health in urban areas, and is planning to establish a monitoring network for toxic pollutants similar to the network for the NAAQS pollutants. EPA’s strategy for achieving its goal of improving air quality appears clear and reasonable. One of the agency’s strategies for clean air is the continued implementation of the Acid Rain Program, which is focused on reducing sulfur dioxide and nitrogen oxide emissions at the highest-emitting power plants in the nation. In a March 2000 report, we observed that trends in nitrate levels in lakes affected by acid rain highlighted the significance of nitrogen oxide emissions and that because the Acid Rain Program (as authorized by the Clean Air Act) requires relatively little reduction in nitrogen oxide emissions, the prospects are uncertain for the recovery of already acidified lakes and for preventing further acidification. As noted above, EPA has taken other action, outside of the Acid Rain Program, to reduce nitrogen oxide emissions. EPA reported that it is making strides in achieving its goal of safe and clean drinking water. The agency reported that it achieved its goal of having 91 percent of the population, served by community drinking water systems, receiving drinking water that meets all health-based standards that were in effect as of 1994. The agency further reported that it achieved its goal of reducing exposure to contaminated recreational waters by increasing information available to the public and decisionmakers. For example, the agency made electronic information available on the condition of 1,981 beaches, which enabled the public to locate beach closings and reduce its exposure to contaminated recreational waters. Concluding that both of these goals have been achieved, however, relies on information from sources with data limitations acknowledged by EPA. For example, the Safe Drinking Water Information System is the main data source for states’ implementation of and compliance with drinking water regulations. EPA notes that there are recurrent reports of discrepancies between national and state databases and misidentifications, resulting in EPA designating the system data as an agency weakness in 1999 under the Federal Managers’ Financial Integrity Act. To help correct these discrepancies, EPA developed and implemented state-specific training for data entry and developed transaction processing and tracking reports. Similarly, beach condition information is voluntarily reported into a database for public access. EPA notes that there are no rigorous quality checks on data quality and, because reporting is voluntary, data are incomplete. However, EPA officials stated that data are checked for completeness and questions about missing data are resolved with state or local officials. EPA’s strategy for ensuring that water is safe for drinking involves several approaches, and relies heavily on actions by the states. (Under the Safe Drinking Water Act Amendments of 1996, the states are responsible for implementing programs to help ensure that drinking water systems have the financial, technical, and managerial ability to comply with regulations and for overseeing water systems’ compliance with regulations on specific contaminants.) While these are reasonable strategies to accomplish EPA’s goals, we have identified opportunities for the agency to implement them more effectively. For example: First, the agency uses a regulatory approach by issuing standards that address acceptable levels of contaminants in drinking water. For example, within the past year the agency established a new standard for arsenic in drinking water. (The agency recently delayed the effective date of the arsenic standard until February 2002.) EPA conducts research to support these standards. We have recommended, and EPA subsequently concurred, that the agency improve its planning for this research to ensure that it will be adequately funded and research results will be available when needed. Second, the agency provides funding to states for drinking water revolving funds. While the state revolving funds are primarily directed at financing local infrastructure, the states, at their option, may reserve up to 31 percent of their annual allotments for related program activities, such as training water system operators. In an August 2000 report, we observed that, even with the funding available from EPA, state-level spending constraints could impair the states’ ability to meet future program requirements, and concluded that it will become imperative to address the factors that have thus far affected the states’ ability to implement their programs. Finally, the agency addresses state drinking water sources through the Source Water Assessment and Prevention Program. Under this program states conduct assessments of public water supplies in helping to determine the susceptibility of contamination. While we have not specifically evaluated the source water assessment program, we have identified difficulties EPA and the states have faced in assessing the quality of surface waters. EPA reported that it made progress in cleaning up hazardous waste sites and that most long-term commitments for the Superfund program were on track or ahead of schedule. The agency reported that it exceeded its fiscal year 2000 goal of completing construction cleanup at 85 Superfund sites by having 87 sites with construction cleanup complete, which the agency defines as the point at which a cleanup remedy is in place. While reaching this point may take many years, more time may be needed before all cleanup standards are achieved and some remaining long-term threats are addressed at the site. Therefore, we have reported that “construction complete” should not be construed as an indicator that all cleanup work is completed and the sites can be returned to economic use. Accordingly, while EPA attained its goal, this should not be construed that the sites are cleaned up and no further actions are necessary. The agency fell short of its annual performance goal for reaching interagency agreements with other federal agencies that are responsible for site contamination and clean up. Of the six agreements targeted for completion in fiscal year 2000, only two were completed but the agency reported that two more were completed since the beginning of fiscal year 2001. For nonfederal sites, the agency reported that it nearly attained its goal for securing cleanup commitments from responsible parties for 70 percent of the new construction starts and for recovering costs from responsible parties when EPA spends $200,000 or more for site cleanups. EPA works in partnership with state and tribal governments to clean up Superfund sites and ensure that parties responsible for the site contamination pay a fair share of the cleanup costs. EPA may compel parties responsible for the contamination to perform the cleanup, or it may pay for the cleanup and attempt to recover the costs. EPA may also enter into settlements with responsible parties to clean up sites or recover costs. The agency must initiate cost recovery actions within time periods specified in the statute of limitations, and EPA’s goal is to take action on all cases with cleanup costs of $200,000 or more within those timeframes. We previously found that EPA had excluded certain indirect cost items in recovering amounts from responsible parties; however, in October 2000, EPA adopted a new indirect cost rate that should increase recoveries and make more funds available for the program. EPA’s strategy for reaching interagency agreements for site cleanups with other federal agencies is less clear without more specific information in the performance report. The agency reported that it will continue to compel federal parties to complete the agreements but did not elaborate on a strategy for achieving this goal in the performance report. Without more specific information on interagency activities it is unclear how EPA will accomplish this performance goal. EPA reported making progress in ensuring that food is free from unsafe pesticide residues, especially where children are concerned. The agency continues to register new pesticides for use that pose lower risk to human health and the environment than some older pesticides. For example, the agency reported that it met its goal of approving 6 new chemicals that are safe for use in pesticides; exceeded its goal for reduced risk chemicals by approving 16; and approved 427 new uses in fiscal year 2000. EPA also reported on its efforts to reassess the safety of existing allowable pesticide residue levels (tolerances) to ensure that they are safe as required in the 1996 Food Quality Protection Act. EPA reassessed 121 tolerances, well short of its goal of 1,250 for fiscal year 2000. As of September 2000, the agency reported that it had completed reassessments for 3,551 tolerances and that it was on track to complete 6,415 tolerances by August 2002, and 9,721 by August 2006, as mandated by the act. As we noted in a September 2000 report, however, the only tolerances that EPA counted as “reassessed” for the high-risk organophosphate pesticides—which account for more than half of all food crop insecticides used in this country—were ones that were canceled voluntarily by the manufacturers, without the need for extensive EPA work. EPA’s reported strategies to accomplish the agency’s goal that food does not have unsafe pesticide residues appear clear and reasonable, and involve EPA evaluating test data on pesticide ingredients before it registers a product for sale and use. The test data include studies on the effects products will have on humans, animals, and plants. The agency is also developing and evaluating improved methods to estimate human exposure risk from pesticides. For example, the agency sought public comment on 14 guidelines or policy papers on evaluating pesticide topics and consulted with stakeholders through the Tolerance Reassessment Advisory Committee. To reassess tolerances as required under the Food Quality Protection Act, the agency has focused on tolerance assessments involving high-risk organophosphate pesticides. EPA views this activity as a major step in risk reduction and we believe this is a reasonable approach. Because this class of chemical has a common method of toxicity, EPA must also perform a cumulative risk assessment as required by the Food Quality and Protection Act. EPA reports that when a cumulative risk policy is issued by the end of fiscal year 2001, the number of completed reassessments will surge. The agency’s report mentions, but does not elaborate on, difficulties in developing a cumulative risk policy as planned and steps that are needed to attain completion of the policy by the end of fiscal year 2001. While the agency reports that it is making progress in attaining the future reassessment goals, the uncertainty surrounding the development of a cumulative risk policy raises questions as to whether the goals will be ultimately achieved. For the selected key outcomes, this section describes major improvements or remaining weaknesses in EPA’s (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report, and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. It also discusses the degree to which the agency’s fiscal year 2000 report and fiscal year 2002 plan addresses concerns and recommendations by the Congress, GAO, the EPA’s OIG, and others. EPA has made several improvements to its fiscal year 2000 report from the prior year. Some of these changes are in direct response to concerns that we raised in our June 2000 report on EPA’s fiscal year 1999 performance report. These concerns included the need for the performance report to discuss the prior fiscal year’s performance, actions taken by other organizations to attain goals, and actions taken to validate data on performance. In its fiscal year 2000 report, EPA made the following improvements: Included relevant information on actual performance under the fiscal year 1999 plan, in addition to performance relative to the goals for fiscal year 2000. Identified actions by other federal, state, and local agencies that affect attainment of its goals, as well as the type of automated systems and databases that were used to capture information and measure performance towards meeting the stated goals. Identified actions taken to identify or validate the quality of data being provided by the agency along with data limitations, and audits or reviews of the data. Presented tables of results by individual strategic goal, rather than a consolidated table for all goals. The 2000 performance report could also be easily compared to the fiscal year 2002 performance plan because the report was organized by goal and objective. EPA’s performance report states that in setting future annual performance goals and targets, it will focus on developing outcome-based program goals where possible. The agency has heretofore relied more on output- oriented performance measures, rather than end outcome measures directly related to environmental conditions. In analyzing EPA’s performance plan for fiscal year 2000, for example, we found that 16 percent of the agency’s performance goals and measures focused on end- outcomes. EPA’s fiscal year 2002 performance plan reflects numerous changes to the performance goals and the related objectives from the 2001 performance plan. EPA notes in the fiscal year 2002 plan that strategic goals and objectives are based on the strategic plan as revised in fiscal year 2000 and may differ from those associated with the previous strategic plan. While the agency has maintained the titles of goals for the key outcomes we reviewed, the definition of the safe food goal was changed in the fiscal year 2002 plan by emphasizing all subpopulations that are particularly susceptible to pesticides (the fiscal year 2001 plan emphasized only children even though the program addressed the vulnerability of all susceptible subpopulations). “By 2005, EPA and its partners will reduce or control the risk to human health and the environment at over 375,000 contaminated Superfund, Resource Conservation and Recovery Act (RCRA), Underground Storage Tank (UST), and brownfield sites.” “By 2005, EPA and its federal, state, tribal, and local partners will reduce or control the risk to human health and the environment at more than 374,000 contaminated Superfund, RCRA, and UST and brownfields sites and have the planning and preparedness capabilities to respond successfully to all known emergencies to reduce the risk to human health and the environment.” EPA’s revised strategic plan does not indicate why changes were made to various goals and objectives. In our report on EPA’s fiscal year 2001 performance plan, we concluded that the plan fell short on providing specifics on crosscutting goals and measures. For example, we reported that EPA did not describe how other federal agencies’ goals complement or supplement EPA’s goals. The agency’s fiscal year 2002 performance plan also falls short in this regard. For example, the section of the plan describing coordination with other agencies on safe drinking water is virtually the same as in the prior year’s plan and does not discuss other federal agency goals that complement or supplement EPA’s goals. GAO has identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, we found that the agency’s performance report did describe its progress in resolving human capital challenges and EPA’s performance plan did have a goal and measures related to human capital. For example, the report identifies human capital strategy implementation as a management challenge and states that it has a blueprint in place for initial and long-term steps needed to address the weakness. However, we found in a January 2001 report that the strategy did not contain information on specific steps to address human capital issues related to each of EPA’s 10 strategic goals. We also reported that while the agency has developed a strategy for assessing its human capital needs, it has not yet implemented the strategy. EPA’s performance plan sets forth human capital performance measures, but does not clearly convey the rationale for specific measures or relate them to program-related goals such as those for clean air or safe drinking water. For example, one performance measure is to have 40 participants in the SES Candidate Program, but it is unclear how this measure relates to the growing number of individuals eligible for retirement or to the needs of any particular program area. With respect to information security, we found that the agency’s performance report does describe its progress in resolving its information security challenges and EPA’s performance plan does have goals and measures related to information security. We have identified four major management challenges facing EPA. Two of these involved the governmentwide high-risk areas of human capital and information security. The third challenge involves EPA-state working relationships and the fourth challenge involves environmental and performance information management. EPA’s performance report discusses the agency’s progress in resolving all of these challenges. For example, the report discusses EPA’s working relationships with the states and the need to establish a central authority for its National Environmental Performance Partnership System. Of the four major management challenges that we identified, EPA’s performance plan has four goals and seven measures that are directly related to three of the challenges—human capital, information security, and environmental and performance information management. For example, in the area of information security, the agency has a goal for improving the quality of environmental information and under that goal is an objective to improve agency information infrastructure and security. The performance measure for this objective is directed at completion of risk assessments for information systems. There are no specific goals or measures related to the major management challenge of improving working relationships with the states. We provided copies of a draft of this report to EPA for its review and comment. The agency generally agreed with the findings in the report and suggested several technical clarifications, which we incorporated, as appropriate, into the report. These comments were provided by EPA officials from the Office of Air and Radiation, Office of Water, Office of Solid Waste and Emergency Response, Office of Pollution Prevention, Pesticides, and Toxic Substances, and Office of the Chief Financial Officer. Our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from the Office of Management and Budget (OMB) for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of EPA’s operations and programs, our identification of best practices concerning performance planning and reporting, and our observations on EPA’s other GPRA-related efforts. We also discussed our review with agency officials in various EPA headquarters offices. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Governmental Affairs Committee as important mission areas for the agency. The major management challenges confronting EPA, including the governmentwide high-risk areas of strategic human capital management and information security, were identified by GAO in our January 2001 performance and accountability series and high risk update, and were identified by EPA’s Office of Inspector General in December 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of EPA’s performance data. We conducted our review from April 2001 through June 2001 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Administrator, Environmental Protection Agency, and the Director, Office of Management and Budget. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report were Willie Bailey, Bernice Dawson, Alice London, Ron Parker, Colleen Phillips, John Wanska, and Greg Wilshusen. The following table identifies the major management challenges confronting the Environmental Protection Agency (EPA), which includes the governmentwide high-risk areas of human capital and information security. The first column of the table lists the management challenges that we and/or EPA’s Office of Inspector General (OIG) have identified. The second column discusses what progress, as discussed in its fiscal year 2000 performance report, EPA made in resolving its challenges. The third column discusses the extent to which EPA’s fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and the EPA’s OIG identified. We found that EPA’s performance report discussed the agency’s progress in resolving its challenges. Of the agency’s nine major management challenges, its performance plan had (1) four that were directly related to goals and measures, (2) three that were indirectly applicable to goals and measures, and (3) two that had no related goals and measure but discussed strategies to address them.","This report reviews the Environmental Protection Agency's (EPA) fiscal year 2000 performance report and fiscal year 2002 performance plan required by the Government Performance and Results Act of 1993 (GPRA) to assess the agency's progress in achieving selected key outcomes that are important to EPA's mission. EPA reported reasonable progress in achieving its key outcomes. Specifically, EPA reported (1) attaining air quality standards in more areas of the country and reducing emissions of toxic pollutants, (2) making strides in achieving its goal of safe and clean drinking water, (3) making progress in cleaning up hazardous waste sites, and (4) making progress in ensuring that food is free from unsafe pesticide residues. Although EPA made several improvements to its fiscal year 2000 performance report, it still falls short in providing information on crosscutting goals and measures. EPA's 2002 performance plan's goals and performance measures address some, but not all, major management challenges.",govreport
"The Department of Defense (DOD), faced with constraints on its budget, is seeking ways to improve operations and manage resources more efficiently. The Corporate Information Management (CIM) initiative is a major part of that effort. DOD launched CIM in 1989 as a way to improve business practices, make better use of information technology, and eliminate duplicative information systems across seven administrative areas, including civilian payroll, materiel management, and medical. Initial DOD efforts to implement CIM focused on eliminating separate service systems and providing integrated systems across DOD. Since that time, the CIM scope has broadened dramatically to include all DOD functional areas, including procurement, logistics, finance, and command and control. Today, its primary objective is to significantly improve business processes of all functional areas through such techniques as business process reengineering and continuous process improvements. Nevertheless, standardization and improvement of DOD’s supporting information systems remains a major CIM objective. CIM has its origins in the recommendations of the President’s Blue Ribbon Commission on Defense Management (the Packard Commission). The Commission’s overall objectives were to identify ways to streamline and restructure DOD business operations. In July 1989, the Secretary of Defense issued the Defense Management Report (DMR) to implement the Commission’s recommendations. DMR estimated that DOD could save about $70 billion by improving its management and organization. In October 1989, DOD initiated CIM as a management method for achieving DMR objectives. In November 1989, the Deputy Secretary of Defense issued the DMR Decision 925, which announced the initiative. He said, “Corporate Information Management (CIM) will enhance the availability and standardization of information in common areas and provide for the development of integrated management information systems.” He characterized CIM activities as a unique opportunity to capture savings while at the same time dramatically improving efficiency and effectiveness of operations. By eliminating separate service information systems and providing integrated systems across DOD, it expected to avoid the cost of developing and supporting redundant systems designed to perform the same basic functions. For example, each service had developed its own process and system for paying active military personnel. While there were procedural differences that had evolved among the services, there was no justification for the multiple systems that perform the same function. On February 26, 1990, the Deputy Secretary of Defense convened the Executive Level Group of high-level industry and DOD officials to evaluate DOD’s business practices and suggest an overall direction for the DOD. The group noted that government agencies had traditionally viewed information management as merely automating existing business methods in order to cut costs. Little effort was made to improve the methods, themselves. The group recommended that DOD adopt a management philosophy that emphasized continuous improvement of business methods before identifying specific computing and communication technologies. It stated, “Forward-looking organizations took a path which put primary emphasis on continuously improved business methods. Computing and communication technology played a subordinate role, and only now is being applied to the superior business methods that have evolved.” In January 1991, the Deputy Secretary of Defense endorsed a plan where DOD would “reengineer,” or thoroughly study and redesign, its business processes before it standardized its information systems. DOD believed this CIM implementation concept would emphasize the importance of improving the way it does business rather than merely standardizing old, inefficient business processes. DOD expected this new focus on business improvement to offer opportunities for substantial savings. In April 1992, DOD projected that these efficiency and productivity improvements would account for $36 billion of the more than $70 billion in anticipated DMR savings. A number of studies have since found that these DMR and CIM projections were overly optimistic. DOD now acknowledges that this $36 billion estimate is obsolete and no longer projects CIM savings. There is agreement, however, that CIM improvements can save DOD tens of billions of dollars over the next 10 years. In November 1992, DOD shifted CIM’s implementation emphasis back to information systems. Looking for ways to offset significant defense budget reductions, the DOD Comptroller recommended that CIM implementation efforts in the logistics functional area focus on selecting standard, or “migrating,” information systems that could be used departmentwide. Under this new implementation strategy, business process improvements would be done concurrently with the selection and implementation of the migration systems. DOD has since implemented this CIM migration strategy across all CIM efforts. The Assistant Secretary of Defense for Command, Control, Communication, and Intelligence (C3I) is responsible for providing overall technical direction for the CIM effort. Principal Staff Assistants (PSA) are responsible for providing guidance and oversight for implementing the initiative within their assigned functional areas. PSAs are to develop a “corporate” view of their areas and identify major changes to improve business processes. DOD believes that this top-down review offers the best opportunity for innovative improvements that have the greatest potential for significant cost savings. Meanwhile, under the DOD enterprise model, service and Defense Logistics Agency (DLA) managers are taking a bottom-up look at their organizations to identify and implement business process improvements that have service or agencywide application. While such improvements have smaller cost savings potential, they usually can be achieved sooner. They also help achieve acceptance of CIM changes by actively involving more managers and staff in the change process. In November 1991, the PSA for logistics established the Joint Logistics System Center (JLSC) to achieve CIM goals for the materiel management and depot maintenance business areas. Simply stated, JLSC’s charter is to work with the services and DLA to identify business process improvements and the appropriate application of information systems. Under this concept, JLSC serves primarily as a facilitator; the services and DLA design, develop, integrate, and implement the new corporate logistics systems. Recognizing the importance of active participation by the services and DLA in the CIM process, the PSA staffed JLSC with about 250 personnel from all four military services and DLA. In addition, the services and DLA provide experts to ensure JLSC fully addresses mission requirements. JLSC expects that improvements to DOD’s logistics functions will provide most of the CIM-related cost savings. Logistics is the acquisition, management, movement, and maintenance of the material in the DOD inventory. This report focuses on two logistics functions: materiel management and depot maintenance. Materiel management includes deciding what supply items to stock, determining how many of each are needed, purchasing needed items from private vendors or manufacturing agencies within DOD, storing the items, and tracking them from the time they are ordered until they are used. Depot maintenance includes manufacturing, overhauling, and repairing parts, assemblies, subassemblies, and end items such as aircraft, ships, and tanks. The Chairman of the Senate Committee on Governmental Affairs asked us to review DOD’s implementation of the CIM initiative. In response to his request, we focused our review on the logistics functions of materiel management and depot maintenance because the Committee had expressed particular interest in materiel management and because one organization, JLSC, had been established to oversee the implementation of CIM in these two areas. Our specific objectives were to identify (1) CIM improvements made to business processes and supporting information systems and (2) impediments, if any, to achieving expected CIM results. To identify CIM improvements in materiel management and depot maintenance, we analyzed implementation plans, project information maintained by JLSC managers, and progress briefings given to senior DOD officials. Further, we interviewed DOD officials who are implementing CIM across DOD, officials who are managing CIM efforts in the logistics areas, and project managers responsible for specific efforts under the initiative. We also examined analyses that JLSC used to establish cost and benefit projections, budget documents, and updates of cost and benefit estimates. We did not independently validate JLSC’s savings estimates for its initiatives. To identify major impediments to achieving expected CIM results, we reviewed guidance provided by the Deputy Under Secretary of Defense (Logistics), including DOD’s logistics objectives, strategic business plans, the Logistics CIM Migration Master Plan, and DOD memorandums establishing and implementing the initiative. Also, we interviewed JLSC officials responsible for the overall progress of the implementation and reviewed correspondence and briefings concerning delays. We also reviewed independent studies and prior audits and held discussions with DOD officials responsible for overall CIM implementation, as well as those responsible for logistics processes. We performed our work at the Office of the Assistant Secretary of Defense for C3I, Washington, D.C.; the Office of the Assistant Secretary of Defense for Production and Logistics, Alexandria, Virginia; and the Joint Logistics Systems Center, Wright-Patterson Air Force Base, Ohio. We conducted our work between October 1992 and July 1994 in accordance with generally accepted government auditing standards. When activated, JLSC took actions to achieve quick, identifiable cost savings through CIM, primarily by facilitating the deployment of business processes and supporting information systems from one of the services or DLA—where they had been successfully implemented—to the others. JLSC identified 20 of these near-term projects during late 1992 and early 1993 and had begun implementing 7 of them before it was directed by DOD to refocus its efforts. As directed by DOD, JLSC focused its CIM implementation efforts on selecting and testing migration information systems for materiel management and depot maintenance. This strategy runs counter to expert advice received by DOD concerning how to best improve its business practices. DOD believes the selection and implementation of migration systems is necessary to achieve quick cost savings and critical to forming a foundation upon which major business process improvements can be made. While we have no basis to question the need for migration systems, we are concerned that the implementation strategy may delay significant improvement of the logistics processes, result in the deployment of information systems that do not meet services’ and DLA’s operational requirements, and divert funds from ongoing improvement projects. In March 1992, JLSC identified 20 improvement projects—15 in materiel management and 5 in depot maintenance—that it termed near-term initiatives. JLSC selected these projects because they could make current business processes more efficient and effective and because they were doable; that is, they could be quickly implemented at a few service and DLA sites to achieve quick cost savings. According to JLSC, it was also important to have some early successes to get the services and DLA to accept the CIM concept. These projects primarily involved the expanded deployment of business processes and supporting information systems that were used successfully by one service or DLA. Overall, JLSC projected that implementation of the 20 projects would save the services more than $2 billion over time periods ranging from 5 to 20 years. As of October 1992, JLSC had begun implementing seven of the near-term initiatives (five materiel management and two depot maintenance). Before JLSC could implement the remaining 13 near-term initiatives, however, DOD officials questioned the viability of the near-term strategy and redirected JLSC’s implementation approach to CIM. According to JLSC, the initiatives had saved at least $7.7 million and located previously lost or unaccounted government assets worth about $12.7 million by October 1993. Although additional savings may have accrued, JLSC had not validated all cost and benefit projections. Following are two examples of the seven near-term initiatives that have been implemented. (App. I describes all seven initiatives.) This initiative is a materiel management productivity aid for DOD catalogers. When DOD introduces a new supply item into its inventory, the item is listed in a catalog provided to the services and DLA. Currently, catalogers use paper technical drawings, specifications, vendor catalogs, guidebooks, procedural manuals, and regulations to complete cataloging steps such as writing a brief description of the supply item, using drawings, and assigning it a stock number. Cataloging Tools On-Line, a DLA system, enables the cataloger to electronically access reference documents, simultaneously compare technical data with drafted descriptions, and automatically check for errors. Catalogers using this automated aid are expected to create catalog entries much faster and more accurately than is currently done. JLSC projects that the 10 new sites receiving the Cataloging Tools On-Line system will save about $71.7 million over the next 8 years through the elimination of manual processes, reduced rejection rates of transactions, and better availability of and access to cataloging information. This depot maintenance initiative is intended to reduce the amount of money maintenance depots spend for hazardous materials such as paint thinner, oils, and chlorine. Currently, the depots spend more than $300 million each year to buy hazardous materials used in the repair and maintenance of end items. Officials acknowledge that a significant portion of these materials is wasted. In 1992, the Air Force implemented the Depot Maintenance—Hazardous Material Management System at its Ogden Air Logistics Center to provide information about who received hazardous materials; which and how much they received; and when, where, and how the materials were used. With this information, Ogden managers identified wasteful practices, such as workers receiving more material than needed for the job. In addition, they found that workers were storing excess material in their lockers and that stored materials were being improperly sealed. Depot management subsequently changed the methods for handling hazardous materials. For example, materials are now issued only in the amount needed. As a result, Ogden reduced the amount of hazardous materials purchased in 1992 by nearly 39 percent, or a $7.7 million net cost savings. JLSC plans to install the Depot Maintenance—Hazardous Material Management System at 27 maintenance depots and projects that they will save between $83.3 million and $202.3 million over a 6-year period. As of September 1993, the system had been installed at seven sites. In October 1992, the Acting DOD Comptroller (responsible for reviewing the justification for any requests for capital budget funding) expressed concern that JLSC’s CIM approach would not produce the cost savings needed to help offset significant defense budget reductions. He favored an approach where JLSC would quickly select and implement standard information systems. By doing this, the Comptroller hoped that DOD could transition to a standard logistics system within a reasonable period of time at an affordable cost. The Comptroller recommended that JLSC immediately select a functionally and technically integrated information system from those being operated by one of the services and DLA for each of the materiel management and depot maintenance business areas. In November 1992, the PSA for logistics (at that time the Assistant Secretary of Defense for Production and Logistics) issued the Logistics CIM Migration Master Plan. This plan established the selection of migration systems as the CIM implementation strategy within the logistics area. As a result, JLSC shifted its focus from implementing the near-term initiatives to selecting migration systems for materiel management and depot maintenance. Although JLSC continued to implement the 7 near-term initiatives it had started, it incorporated the remaining 13 projects into the analysis used to select migration systems. JLSC also developed a three-step strategy designed to gradually evolve the services and DLA from their multiple and often redundant materiel management and depot maintenance business practices to a single, or corporate, DOD logistics process. As presented in its DOD Logistics CIM Migration Plan, the three steps of the migration strategy are as follows: Select and deploy migration systems—either single information systems or groups of information systems—in each functional area. The systems are to be linked together to satisfy users’ total requirements. Improve current business processes and add new functions to fill voids. Combine the improved and new business processes with the new information systems to form a corporate logistics process. Once the selected migration systems are deployed (step 1 of the strategy), JLSC plans to work with the services and DLA to add needed functions and make incremental improvements to logistics business processes (step 2). Developing a corporate logistics process (step 3) is where JLSC expects to use such tools as reengineering to identify and implement major and innovative changes in the logistics area. While the strategy appears to be sequential, JLSC is concurrently working on all three steps. Later in this report, we discuss JLSC’s work to identify how to improve current materiel management and depot maintenance business processes. In October 1993, the Deputy Secretary of Defense, noting the necessity to offset declining resources, reemphasized the priority given to information systems by directing that senior DOD managers accelerate the selection and deployment of migration systems. The Deputy Secretary stated, “We must accelerate the pace at which we define standard baseline process and data requirements, select and deploy migration systems, implement data standardization and conduct functional process improvements, reviews and assessments (business process re-engineering) within and across all functions of the Department.” Although he stated that the acceleration of all these actions was key to containing the functional costs of performing the DOD mission within constrained budgets, he established specific milestones only for the selection and implementation of migration systems and the completion of data standardization. The Secretary stated that “our near-term strategy requires: the selection of migration systems within six months, with follow-on DOD-wide transition to the selected systems over a period not to exceed three years.” He also stated that data standardization was to be accomplished within 3 years. The remaining activities such as functional process improvement were to continue on an expedited basis, but their completions were not to be “prerequisites” to implementation of the migration systems and data standardization acceleration strategy. Because JLSC’s migration strategy would take 7 to 8 years to complete, the Deputy Under Secretary of Defense (Logistics) in March 1994 proposed changing JLSC’s management structure and mission. He recommended the replacement of JLSC with a Logistics Standard Systems Joint Program Office. This new office would be staffed with personnel specializing in automated information systems to provide intensive focus on information systems improvement and deployment. At the end of our audit work in July 1994, the services and DLA were commenting on this proposal. Industry experts who have studied organizations that have successfully improved their business practices advised DOD to focus its efforts on reengineering its business processes before improving the automated information systems supporting these processes. Reengineering, these experts believe, offers DOD the best opportunity to move to a new plateau of performance As stated in chapter 1, this was articulated by the Executive Level Group in November 1989, when CIM was being initiated. The group recommended that DOD adopt a management philosophy that emphasized continuous improvement of business methods before identifying specific computing and communications technologies. This recommendation was endorsed by the Information Technology Association of America, in its July 1993 study on “enterprise integration” within DOD. According to the study, companies that had experience in enterprise integration took steps to ensure that their corporatewide focus was on process improvement first and on technology improvements last. They stated that “Reengineered business processes reflect how the corporation truly functions. Automation was applied only after processes were analyzed and cross-functional integration achieved.” In reviewing the CIM initiative, the association observed that DOD’s definition of enterprise integration did not differ from the industry’s. DOD’s view on implementation and objectives, however, is different. The association stated, “For instance, the Corporate Information Management initiative in DOD seems to be primarily driven by cost avoidance, rather than on BPR in order to meet mission requirements.” Noting DOD’s migration phase focused on near-term cost avoidance, the association recommended that DOD accelerate out of this migration phase as quickly as possible and move directly into their target objective phase. According to the association, the sooner DOD makes this move the more money it will save and the sooner war-fighting capability will be enhanced. We also reported on potential problems DOD faces if too much emphasis is placed on improving information systems, rather than business process reengineering. In our 1992 report, we concluded that business improvements needed to be made concurrent with technology selection. To select technology alone invited risk and created only an illusion of progress. We also concluded that by selecting information systems before improving business processes, DOD may be wasting money modifying and implementing systems to support old, inefficient ways of doing business. DOD, in its early estimates, acknowledged that business process improvements held the greatest potential for significant cost savings. In April 1992, DOD officials projected that CIM-related business process improvements would provide about $30 billion, or 83 percent, of cost savings expected, whereas better use of information technology would account for only $6 billion, or 17 percent, of these savings. Although DOD no longer projects CIM savings, it concluded in the January 1994 DOD enterprise model that information systems alone could not yield the dramatic business improvements necessary to achieve a new plateau of performance required to respond to major new challenges of the post-Cold War era. Yet, DOD continues to focus on information technology and migration systems. As described in the following section, DOD believes that selecting a common set of information systems is necessary to make functional integration and interoperability possible so that all DOD activities can work together more efficiently and effectively. In its Logistics CIM Migration Master Plan, DOD gives two reasons why the selection and implementation of migration systems are critical first steps toward business process improvement. First, they provide needed quick cost recoveries. Second, they establish a common business environment to reengineer business processes. According to JLSC, the CIM migration strategy resulted from a request from the service secretaries. The service secretaries, concerned about the slow progress of the CIM effort and the amount of funding stripped from their fiscal years 1993 through 1997 budgets as a result of multiple DMR savings targets, asked the DOD Comptroller to come up with a technique for getting more immediate cost savings. This request was the genesis for the CIM strategy of studying current information systems and selecting a few for use across DOD. DOD officials have stated that the vast number of different logistics processes and supporting information systems in DOD must be reduced before it can make significant improvements. For example, the Deputy Director for Materiel and Logistics Functional Information Management stated, “While it is the intent of the Corporate Information Management (CIM) program to determine the Business Process Improvements (BPI) prior to automation efforts, in the case of the Logistic systems, we must first ’standardize’ the existing process to be improved.” The Deputy Director cited the experience of General Telephone and Electronics Corporation as support for this position. He said that in moving toward an integrated system the company first selected a single migration system. JLSC supports the migration system concept as a necessary tool to eliminate multiple information systems supporting the same business functions. According to the migration plan, standard information systems will form the foundation upon which significant improvements to current logistics practices can be made. This foundation of migratory systems will eliminate the need to implement significant changes across the multitude of systems and processes that exist throughout the services and DLA. More importantly, the resulting standardization of the best of the existing logistics processes across DOD will, in itself, result in significant business process improvements. Although DOD and JLSC believe that selecting migration systems is a necessary first step in the reengineering process, we have several concerns about this strategy. First, people familiar with business process reengineering believe that the focus should be on process improvement first and on technology improvements last. We believe that by doing otherwise DOD increases the risk of locking itself into inefficient ways of doing business and not achieving the cost savings that it needs in the current environment of shrinking budgets. Second, DOD’s requirement to select and implement migrating systems within 3 years adds a new dimension of risk to the CIM process. Without some flexibility in this schedule, the services and DLA may have to implement migration systems that are not capable of meeting their needs. DLA officials told us, for example, that the migration system for materiel management—as currently configured—does not meet its operational requirements. Unless additional capabilities are added to this system to handle DLA’s requirements, these officials predicted that it will be a major failure. Nevertheless, JLSC believes that the accelerated migration system schedule is what the CIM initiative needed. The JLSC Commander stated that the accelerated schedule forced JLSC and others to stop their analysis and actually begin to implement change. He conceded that the first versions of the migration systems will not likely include all the capabilities the services and DLA need or desire. His goal, however, is to make the systems functional for all users before they are deployed in 3 years. Under CIM’s continuous improvement concept, additional capabilities can be incorporated in later versions of the systems. As discussed previously, DOD has proposed a major reorganization of JLSC to meet its accelerated CIM schedule. Under this proposal, the number of personnel assigned to the new joint program office would be reduced from about 250 (JLSC staffing) to 120. It is unclear how this new smaller office will be able to deploy materiel management and depot maintenance migration systems in half the time planned by JLSC. Third, some DLA managers also believe that CIM in general, and JLSC’s focus on selecting and implementing migration systems in particular, is affecting their ability to implement business process improvements. DLA, for example, is attempting some innovative pilot projects to find better, more efficient ways of doing business. Encouraged by a series of reports we issued over the past 3 years, which compared DLA practices to the best in the private sector, DLA is looking at concepts such as direct vendor delivery and supplier parks. If these concepts prove successful, DLA could significantly reduce its inventories, storage space requirements, and the number of supply depots. Eventually, DLA may be able to eliminate supply depots altogether—at least as DOD knows them today. To effectively carry out the pilot projects, however, DLA officials said they will need funds to develop supporting information systems or help from JLSC to ensure the selected migration systems satisfy their new process requirements. At the time we met with DLA officials, however, they said that JLSC had not provided assistance. They were concerned that the pilot projects might have to be stopped or significantly curtailed. Subsequent to our meeting with DLA officials, JLSC officials told us they had met with DLA officials and were taking steps to arrive at a mutual solution to the problem. As directed by DOD, JLSC selected migration systems for materiel management and depot maintenance functions. JLSC also began documenting current logistics processes to identify opportunities for improvements, although it has not yet made major changes to current processes. Finally, in accordance with its mandate, JLSC eliminated service and DLA funding requests ($22.7 million in 1993 and $320.6 million in 1994) for information system projects that it deemed redundant. By June 1994, JLSC—in cooperation with teams of service and DLA experts—had selected 32 migration systems from among the more than 200 information systems currently being used to support major materiel management and depot maintenance business processes. Before the systems were selected, JLSC gave each service and DLA the opportunity to identify the system (or combination of systems) that it used to support its logistics business area. Service and DLA experts for materiel management and depot maintenance presented their candidate systems in an open forum for consideration. These presentations included detailed information on their systems’ capabilities, interfaces with other logistics systems, and other information, such as cost, benefit, and technical data. On the basis of this information, service, DLA, and JLSC representatives reached consensus on 32 candidate systems—24 for materiel management and 8 for depot maintenance. The selections of these systems was later approved by Deputy Under Secretary of Defense for Logistics. (App. II describes each of the 32 selected systems.) The 24 migration systems for materiel management support the four major materiel management business processes: asset management, supply and technical data, and requirements determination. Together, they form what JLSC calls the Materiel Management Standard System. JLSC planned to deploy the first version—functional release 1—of this combined system at one site—the Marine Corps Logistics Base, Albany, Georgia—beginning in July 1994. Upon successful deployment of this first version, JLSC will assist the services and DLA in implementing the new DOD standard system at additional sites. As of September 1993, on the basis of a preliminary functional economic analysis, JLSC projected that improved business processes and reductions in the number of systems would help the services and DLA recover as much as $12 billion over a 10-year period ending in fiscal year 2005. While we did not review the support behind this estimate, JLSC cautioned that it is their first look at potential savings. JLSC must do much additional data collection and analysis before cost recoveries can be predicted with any certainty. However, it believes that the standard system will eventually result in numerous improvements to materiel management business processes, primarily because it incorporates general business improvements from DOD initiatives such as DMR, prior CIM efforts, and a compilation of best practices identified in numerous DOD, service, and DLA initiatives. The eight migration systems selected for depot maintenance support the three major depot maintenance business processes of project management (planning and allocating labor, material, and capital resources for repairing major end items, such as airplanes, ships, and tanks), reparables management (activities for making labor and equipment more productive on the shop floor), and specialized support (various individual functions such as tracking hazardous materials, tools and test samples). These eight migration systems, along with a system yet to be selected, form the Depot Maintenance Standard System. JLSC plans to test this combined system at the Warner-Robbins Air Logistics Center beginning in January 1995. Upon successful completion of the test, JLSC will assist the services’ and DLA’s implementation of the new system at additional sites. On the basis of a preliminary functional economic analysis completed in January 1994, JLSC expected that improvements to depot maintenance processes and reductions in the number of systems would help the services and DLA recover as much as $4 billion over the period ending in fiscal year 2003. This estimate, however, assumed a 7-year implementation period, not the 3-year period later mandated by DOD. While it facilitated the selection of migration systems under the first step of its CIM implementation strategy, JLSC also took preliminary steps to identify how it could improve current materiel management and depot maintenance business processes—the second step of its CIM implementation strategy. As of September 1993, JLSC, in conjunction with service and DLA representatives, had developed models documenting 484 logistics practices used by the services and DLA to accomplish materiel management and depot maintenance activities. Service and DLA officials are now analyzing these JLSC models to further define their current business environment, establish business requirements, and identify the best business practices. When complete, these models are to serve two purposes. In the near term, they form a basis for understanding and discussing logistics processes, evaluating their effectiveness, and identifying opportunities for improvement. In the longer term, JLSC plans to use the models to help reengineer business processes, control this evolution, integrate new technologies, and communicate new functions of reengineered business processes. As part of the CIM strategy, the Assistant Secretary of Defense for Production and Logistics gave JLSC review authority over the services’ and DLA’s budget requests for development of new materiel management and depot maintenance information systems. Under this authority, JLSC is to identify funding that could be eliminated from a budget request for any information system development project that duplicates a project or operational system of another service. JLSC reviewed the services’ and DLA’s requests and justifications for fiscal year 1993 project funds and compared the proposed new information systems to those (1) already existing or being developed by other services and (2) selected by JLSC as near-term initiatives. As shown in table 3.1, JLSC reduced the requests by $22.7 million, or about 36 percent. In 1993, JLSC performed the same type of analysis on fiscal year 1994 budget requests from the services and DLA. The only difference was that JLSC analyzed these requests to determine if any systems overlapped with the systems selected as the migration systems for materiel management and depot maintenance. As shown in table 2.2, JLSC reduced the budget requests by $320.6 million, or about 96 percent. According to JLSC officials, the reduction of these requests may not directly equate to cost savings of the same amount because (1) the requests could have been overstated (which sometimes happens early in a budget request cycle), (2) the requested funds may not have been approved by DOD under the traditional budget process, and (3) the services or DLA may have received funding for their projects through other budget submissions. JLSC, however, believes this type of drastic reduction in budget requests can be sustained only for a short period of time—2 or 3 years. According to the JLSC commander, the downsizing of DOD has resulted in the services and DLA having fewer people to run their current business processes. Over the short term, he believes that the services and DLA can manage the situation. It cannot, however, be sustained over the longer term. For this reason, the commander said that JLSC must provide more efficient materiel management and depot maintenance information systems to the services and DLA or, once again, allow them some amount of funding to improve or replace their existing systems. Three critical impediments are jeopardizing JLSC’s ability to successfully implement its strategy for improving business practices. First, some DOD functional and technical managers have not fully accepted CIM. Second, DOD has not integrated its various CIM efforts, including those of JLSC. Third, program management authority is unclear because of confusing DOD guidance. These impediments are not confined to materiel management and depot maintenance but cut cross DOD’s overall management of the CIM initiative. To help resolve these impediments, DOD has taken several actions, including issuance of a strategic plan to demonstrate top-level support for the initiative and guide its implementation and creation of a board chaired by the Deputy Secretary of Defense to exchange views about cross-functional issues. These actions are good “first steps,” but more must be done. Private companies that have successfully reengineered their business operations generally agree that changing their organizational cultures to support new ways of doing business was critical to their success. While DOD recognizes that it needs to change its organizational culture to overcome CIM’s impediments, it has been slow to make these changes. Independent studies have shown that for major improvement initiatives such as CIM to succeed, employees from all levels in an organization must accept and actively participate in the changes. For example, the Information Technology Association of America, in its July 1993 report, said that DOD must ensure that all parties buy into the enterprise integration effort and are willing to work wholeheartily to form and implement the enterprise integration plan. Similarly, the Policy Analysis Center of the Institute of Public Policy, in its November 1993 report, Functional Process Improvement Implementation: Public Sector Reengineering, stated that even the best constructed improvement plans are likely to fail unless employees are involved at all stages of the reengineering effort. Recognizing that “buy in” was a critical success factor, JLSC took actions to involve the services and DLA in implementing CIM. For instance, more than 250 logistics personnel from the services and DLA were brought together to work at JLSC. Also, JLSC has tried to maintain a continual dialogue with the Office of the Secretary of Defense, service, and DLA managers responsible for DOD logistics. Nevertheless, JLSC officials said they have still encountered a strong institutional bias against the changes posed by CIM, primarily because managers view these changes as a threat to their authority over logistics business decisions. This lack of acceptance, according to JLSC officials, has slowed implementation of CIM. For example, during the evaluation of the Air Force’s Combat Ammunition System as a proposed migration system, JLSC representatives visited the Air Force program office developing the system to obtain needed cost and requirements data. However, program management officials were unwilling to provide the data because, according to the JLSC Deputy Commander, Air Force officials would have to relinquish some of their authority and control over the system’s development. Air Force officials eventually provided the data but only after the JLSC Commander notified them that due to the lack of cooperation JLSC intended to select a competing Army system. JLSC officials did not estimate the length of delay caused by this lack of cooperation. “Based on our interviews with both functional and technical areas managers, we found there is no clear and consistent definition or understanding of the CIM initiative and its respective elements . . . While they accept the broad precepts of the CIM Initiative, they are reluctant to give full support until they see and fully understand the complete CIM plan. That reluctance manifested itself in two broad areas—support for organizational realignments and for selection of technical solutions.” Because this impediment appeared to affect more than JLSC’s efforts within materiel management and depot maintenance, we discussed it with DOD officials responsible for implementing CIM across logistics areas, as well as those responsible for all CIM efforts. These officials confirmed that service and DLA managers agree with the intent of CIM, which is to improve business operations, but not with the manner in which it was being implemented. DOD officials in C3I agree that for CIM to succeed, employees should understand the nature of the changes that must be made. They did not agree, however, that the lack of consensus and support for the overall CIM initiative by DOD managers was hampering its implementation. They said that executive level commitment, involvement, and authority were sufficient for CIM to succeed and that the Secretary of Defense, the Deputy Secretary of Defense, their Principal Staff Assistants, and the military departments strongly supported the initiative. On October 13, 1993, for example, the Deputy Secretary of Defense issued a memorandum that reemphasized top-level support for CIM and required senior managers to take specific actions within established milestones to help implement the initiative. DOD officials also noted that clear, top-level support and guidance for the initiative were given in the CIM Strategic Plan issued on June 13, 1994. While DOD may have top-level management support and commitment for CIM, which are critical prerequisites for a major reengineering effort, we do not believe that is enough to overcome the type of cultural barriers impeding the initiative. If CIM is to succeed, we believe that DOD needs to change its management strategy to get service and DLA managers, particularly the service Chiefs of Staff and DLA Director, more actively involved in managing CIM and leading the reengineering efforts. This action is particularly important for DOD to undertake because service secretaries and other top-level managers in the Office of the Secretary of Defense, who are currently leading the CIM initiative, typically change on a regular basis. Because CIM is a long-term effort that will likely transcend many management reorganizations, it is important to have support of CIM principles and ideals throughout all levels of the organization, particularly in the military services and DLA. In February 1992, for example, we reported that private companies that had undergone massive changes (such as DOD is proposing in its CIM initiative) had to overcome cultural barriers. Those companies that succeeded in changing their cultures not only had top-management support and commitment but also created specific management styles and organizational structures that were compatible with and reinforced their desired visions and goals. They also trained their employees to instill in them the organizations’ new missions, values, and guiding principles. Our studies of organizational change also support more active participation by functional managers in major reengineering efforts. In our April 1994 report on the CIM initiative, for example, we stated that “unless Defense’s executive-level leadership and mid-level managers take a more active and visible role, broad acceptance and understanding of CIM will not occur and cultural opposition to change will continue.” The importance of functional managers to the overall success of major reengineering efforts was again highlighted in a recent executive guide we prepared on using information technology to improve mission performance. We observed that in every successful organization studied, senior executives realized that getting managers to work differently meant putting them in charge of the change process. The Information Technology Association of America in its study on enterprise integration in DOD also noted that in the view of functional managers, CIM efforts are being directed by DOD’s information technology offices. In private industry, information technology is used as a tool to facilitate enterprise integration, not as an end in itself. Functional managers must lead the effort with the information technology community in support. DOD, in its June 13, 1994, strategic plan and elsewhere, has recognized the need to change its culture and management strategy to build consensus throughout the Department, but implementation (and actual change) has been slow. For example, today the Assistant Secretary of Defense for C3I is responsible for implementing CIM—overseeing and integrating business process innovation within and across all DOD functional areas. The Assistant Secretary, however, is also the Senior Information Management Official for DOD. We believe that this has contributed to functional managers’ misunderstanding of the CIM initiative and has reenforced their view that CIM is primarily an information technology initiative. In addition to changing the CIM management strategy and providing training to all employees, DOD may need to rename the initiative. Contrary to what its name implies to many DOD managers, CIM is much more than an information technology initiative. As designed, CIM is supposed to be a major effort to reengineer business processes, with information technology being a necessary support function. As discussed previously, however, many defense managers view it as either a budget-cutting or information technology initiative and have not given it their full support and cooperation. While top-level support, strategic planning, changing management strategy, and training would help solve this problem, we believe a name change would also give the improvement effort a fresh start. In draft CIM guidance dated January 1993, DOD recognizes that no DOD function can be accomplished in isolation from other functions. For example, improvements to weapon systems management could cut across several business areas, including logistics, finance, and procurement. Consequently, when trying to improve DOD functions, it is important to address all related business areas. We found that the CIM improvement efforts are to a great extent being made in isolation from one another. According to JLSC officials, there is continual overlap of CIM issues across the efforts underway in the different DOD business areas. However, the integration requirements of the related business areas have not been fully identified and established. Nor is any one office overseeing the integration of CIM business process improvements across these areas. While JLSC has sought to resolve integration issues among CIM efforts and maintains liaisons with offices responsible for CIM efforts in finance and procurement, it does not have the authority to arbitrate disputes between CIM efforts or enforce integration decisions. Because of this isolation, or “stovepiping,” CIM improvements made in one business area can duplicate or conflict with those made in another business area even though the function being improved is common to both. According to JLSC officials, stovepiping impeded its progress in selecting migration systems for the materiel management and depot maintenance business areas. For example, JLSC reviewed the practices involved in buying supply items. Functions involved in preparing procurement requests, such as determining the type and amount of supplies needed, fall under the logistics CIM effort. Functions performed after a supply contract is awarded are the responsibility of the procurement CIM effort. In consultation with service and DLA representatives, JLSC chose the Integrated Technical Item Management and Procurement information system as the migration system for supply contract pre-award practices. However, the Procurement CIM Council reviewed the practices performed after a supply contract is awarded and chose the Defense Procurement and Contracting System. Although the pre-contracting and post-contracting activities are part of the larger procurement process, the logistics and procurement CIM efforts were not integrated. While they did not estimate the resources involved, JLSC officials stated that much time has been spent working on such integration issues with various service and DLA representatives. Without some direct attention by top-level management in this area, we believe that DOD will likely develop, deploy, operate, and maintain two automated systems to provide information on different parts of the procurement process. Such a result would be inconsistent with the stated CIM purpose of streamlining business processes and standardizing their supporting information systems. Recognizing the need to integrate CIM efforts, DOD established a number of boards and councils to facilitate their integration, but these efforts have not succeeded. For example, DOD established the Information Policy Council to facilitate the integration of information management functions, activities, and systems. According to DOD officials, this Council was not successful because it did not meet frequently enough and did not include in its membership the officials needed to decide integration issues, nor did it have decision-making authority. Also, in January 1992, the Assistant Secretary of Defense for C3I established the Corporate Functional Integration Board to build more active CIM participation. While this Board has identified some cross-functional issues, DOD said that a higher level body with decision-making authority was needed to successfully resolve integration issues. DOD, in April 1994, established the Enterprise Integration Executive Board, chaired by the Deputy Secretary of Defense, to resolve cross-functional integration issues. As established, this Board and its supporting Enterprise Integration Corporate Management Council are to exchange information and views about cross-functional management concepts, policies, and plans to achieve CIM goals. With membership of DOD senior-level managers, service secretaries, and the Chairman of the Joint Chiefs of Staff, this Board has the membership and authority to make decisions on cross-functional and integration issues. Commenting on a draft of this report, DOD officials stated that DOD is moving aggressively to integrate its CIM efforts. They cited the Deputy Secretary of Defense’s issuance of the DOD Enterprise Integration Implementing Strategy to support the CIM Strategic Plan as evidence of actions being taken. These latest actions, we believe, are important steps toward resolving cross-functional issues. According to DOD officials, the success of the Enterprise Integration Executive Board and its supportive Enterprise Integration Corporate Management Council will depend on the level of interest and commitment from the members, as well as the quality and implementation of their decisions. Success of additional actions also will depend on their quality and implementation. With the establishment of JLSC, DOD created two separate lines of authority for managing the development of logistics information systems. DOD Directives 5000.1, “Defense Acquisition,” and 5000.2, “Defense Acquisition Management Policies and Procedures,” grant service program managers sole authority for managing their assigned programs. However, under authority granted by the Assistant Secretary of Defense for Production and Logistics, JLSC is to manage the design, development, implementation, and maintenance of logistics information systems and to exercise funding control over these acquisitions. According to JLSC officials, this dual authority has resulted in dissension between JLSC and program offices about which office has overall authority over the development and implementation of information systems. For example, the Air Force’s Depot Maintenance Management Information System was selected as a migration system to be installed at the Warner-Robbins Air Logistics Center test site in January 1995. The Air Force project manager, however, believed that the development project is under the Air Force acquisition program and, as such, must follow the direction of the senior project manager. Under this direction, the new information system could not be exported to other installations until it passed 90 days of operational testing and evaluation and obtained approval from the Major Automated Information Systems Review Council. The operational tests, originally scheduled for August 1993, were delayed until December 1993. As of April 1994, the data collection phase of the test was complete but the final report had not been issued and reviewed by the Major Automated Information Systems Review Council. According to the Deputy Under Secretary of Defense (Logistics) official responsible for logistics CIM, this program authority problem will be remedied by making JLSC, not the Air Force, responsible for managing the system project. In late 1993, a DOD logistics review group found that current program management direction divides the responsibility and accountability for developing CIM migration systems. The core issue, the review group said, was the need to “minimize management layering and delegate review and milestone approval authority commensurate with the resources and risks involved.” Although the group reviewed the problem within logistics, it identified four options for assigning program management responsibilities in all CIM efforts to a particular organizational unit or senior DOD manager. In its comments on a draft of this report, DOD officials said they did not agree that the current guidance was conflicting; it was just misunderstood by those responsible for implementing it. However, DOD cited the issuance of its CIM Strategic Plan as a recent effort that should clarify program authority under the CIM initiative. Private industry and our studies show that a strategic plan that clearly articulates responsibilities and describes how the initiative fits with other organizational priorities is critical. We have stated in the past that the Office of Secretary of Defense would need to provide strong leadership and establish a stable organization with clear lines of authority and accountability for CIM to succeed. To the extent that DOD’s CIM Strategic Plan establishes clear lines of authority, we believe that it can successfully resolve conflicts over who manages projects to develop migratory information systems. The impediments JLSC faces illustrate fundamental problems in DOD’s management of the overall CIM initiative. While DOD has taken some important steps to address these problems, more needs to be done. First, DOD needs to ensure that functional service and DLA managers actively participate in the management and implementation of the initiative with the information technology community in support. Private companies that have reengineered their business operations cite the active participation of their line managers as critical to their success. Second, DOD needs to take specific action to build the support and commitment of all DOD employees for the cultural changes that must be made to implement CIM. Although DOD has taken actions to demonstrate top-level support and commitment to the initiative, the DOD employees are the ultimate key to CIM’s success. As private companies have learned by implementing massive changes in their organizations, employee support and commitment is essential to overcome deeply entrenched barriers to change. To build this support and commitment, employees must be trained to ensure that they understand why business practices need to be changed, how changes will improve business operations, and what they must do to implement needed changes. While training may be the most comprehensive method for ensuring employee understanding, renaming the initiative could greatly increase its acceptance. Because of the evolution of the initiative and the shifts in its emphasis, many employees are confused and misunderstand CIM’s primary purpose. Renaming the initiative to clearly communicate its primary objectives, would help remove employees’ confusion and serve as a first step for building their support and commitment. To overcome the fundamental weaknesses in the management of the CIM initiative and to further encourage cultural changes needed to support the new DOD business operations, we recommend that the Secretary take the following actions: Revise the CIM management strategy to ensure that functional managers, particularly the service Chiefs of Staff and DLA Director, actively participate and lead efforts to reengineer DOD’s business processes under the CIM initiative. Train DOD employees at all levels to promote understanding and acceptance of changes needed to their current ways of doing business. Change the name of the CIM initiative to lessen the confusion created as the initiative has evolved and to more accurately communicate the primary CIM objective. DOD appreciated our overall support for the CIM initiative and our recognition that JLSC had made progress toward developing logistics standard systems and reengineering processes in support of the materiel management and depot maintenance functions. DOD, however, was concerned about the tone of the report and the differences between our and its interpretation of CIM plans, expert advice, and reviews. Consequently, we modified our draft report where appropriate. A number of modifications were designed to present a balanced view of the CIM initiative while others were made to clarify our interpretation of CIM plans, expert advice, and reviews. When differences in interpretation remained, we added DOD’s view to the report. Finally, DOD has taken several actions since we completed our audit work that addressed strategies to management and implement CIM. In view of these actions, we deleted two recommendations and modified a third to more precisely identify the actions we believe the Secretary should take. DOD concurred with our recommendation on training but did not concur with our recommendation on renaming the initiative. According to DOD, renaming the initiative would create confusion because it would signal a change in the initiative or in management that has not taken place. Our review showed, however, that DOD managers are already confused about the initiative’s primary objective. This confusion has resulted in a negative perception about CIM and the failure by many service and DLA managers to fully accept and support the effort. Despite DOD arguments, we continue to believe that renaming the initiative to more accurately communicate its primary objective would promote understanding and acceptance. The risk of creating some additional confusion is more than offset by the advantages that a name change should produce. Additional DOD comments and our responses appear in appendix III.","Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) implementation of its Corporate Information Management (CIM) initiative, focusing on: (1) DOD progress in improving the logistics functions and depot maintenance under the initiative; and (2) impediments to further progress in achieving CIM goals. GAO found that: (1) CIM has had little effect on improving DOD materiel management and depot maintenance business practices; (2) DOD reengineering efforts have been delayed because the Joint Logistics Systems Center (JLSC) has been focusing on selecting standard logistics information systems that it believes are necessary in the reengineering process; (3) DOD believes that improving migration systems will generate quick cost savings that are needed to offset budget reductions; (4) the mandated 3-year milestone for implementing the migration systems may not allow enough time to ensure that the systems meet the services' and the Defense Logistics Agency's operational requirements; (5) JLSC has selected some migration systems, begun preliminary work on improving business processes, and reduced budget requests for redundant migration systems development projects; (6) impediments to CIM implementation include the reluctance of some DOD managers to accept CIM, DOD failure to integrate its CIM efforts, and confusing DOD guidance on CIM management authority; and (7) DOD has developed a strategic plan for improving business operations and clarifying authority over systems development, and a mechanism to handle cross-functional issues.",govreport
"As part of our undercover investigation, we produced counterfeit documents before sending our two teams of investigators out to the field. We found two NRC documents and a few examples of the documents by searching the Internet. We subsequently used commercial, off-the-shelf computer software to produce two counterfeit NRC documents authorizing the individual to receive, acquire, possess, and transfer radioactive sources. To support our investigators’ purported reason for having radioactive sources in their possession when making their simultaneous border crossings, a GAO graphic artist designed a logo for our fictitious company and produced a bill of lading using computer software. Our two teams of investigators each transported an amount of radioactive sources sufficient to manufacture a dirty bomb when making their recent, simultaneous border crossings. In support of our earlier work, we had obtained an NRC document and had purchased radioactive sources as well as two containers to store and transport the material. For the purposes of this undercover investigation, we purchased a small amount of radioactive sources and one container for storing and transporting the material from a commercial source over the telephone. One of our investigators, posing as an employee of a fictitious company, stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detectors. Suppliers are not required to exercise any due diligence in determining whether the buyer has a legitimate use for the radioactive sources, nor are suppliers required to ask the buyer to produce an NRC document when making purchases in small quantities. The amount of radioactive sources our investigator sought to purchase did not require an NRC document. The company mailed the radioactive sources to an address in Washington, D.C. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their rental vehicle. Our investigators – acting in an undercover capacity – drove to an official port of entry between Canada and the United States. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our investigators were signaled to drive through the radiation portal monitors and to meet the CBP inspector at the booth for their primary inspection. As our investigators drove past the radiation portal monitors and approached the primary checkpoint booth, they observed the CBP inspector look down and reach to his right side of his booth. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them where they lived. One of our investigators on the two-man undercover team handed the CBP inspector both of their passports and told him that he lived in Maryland while the second investigator told the CBP inspector that he lived in Virginia. The CBP inspector also asked our investigators to identify what they were transporting in their vehicle. One of our investigators told the CBP inspector that they were transporting specialized equipment back to the United States. A second CBP inspector, who had come over to assist the first inspector, asked what else our investigators were transporting. One of our investigators told the CBP inspectors that they were transporting radioactive sources for the specialized equipment. The CBP inspector in the primary checkpoint booth appeared to be writing down the information. Our investigators were then directed to park in a secondary inspection zone, while the CBP inspector conducted further inspections of the vehicle. During the secondary inspection, our investigators told the CBP inspector that they had an NRC document and a bill of lading for the radioactive sources. The CBP inspector asked if he could make copies of our investigators’ counterfeit bill of lading on letterhead stationery as well as their counterfeit NRC document. Although the CBP inspector took the documents to the copier, our investigators did not observe him retrieving any copies from the copier. Our investigators watched the CBP inspector use a handheld Radiation Isotope Identifier Device (RIID), which he said is used to identify the source of radioactive sources, to examine the investigators’ vehicle. He told our investigators that he had to perform additional inspections. After determining that the investigators were not transporting additional sources of radiation, the CBP inspector made copies of our investigators’ drivers’ licenses, returned their drivers’ licenses to them, and our investigators were then allowed to enter the United States. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their vehicle. Our investigators drove to an official port of entry at the southern border. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our two-person undercover team was signaled by means of a traffic light signal to drive through the radiation portal monitors and stopped at the primary checkpoint for their primary inspection. As our investigators drove past the portal monitors and approached the primary checkpoint, they observed that the CBP inspector remained in the primary checkpoint for several moments prior to approaching our investigators’ vehicle. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them if they were American citizens. Our investigators told the CBP inspector that they were both American citizens and handed him their state-issued drivers’ licenses. The CBP inspector also asked our investigators about the purpose of their trip to Mexico and asked whether they were bringing anything into the United States from Mexico. Our investigators told the CBP inspector that they were returning from a business trip in Mexico and were not bringing anything into the United States from Mexico. While our investigators remained inside their vehicle, the CBP inspector used what appeared to be a RIID to scan the outside of the vehicle. One of our investigators told him that they were transporting specialized equipment. The CBP inspector asked one of our investigators to open the trunk of the rental vehicle and to show him the specialized equipment. Our investigator told the CBP inspector that they were transporting radioactive sources in addition to the specialized equipment. The primary CBP inspector then directed our investigators to park in a secondary inspection zone for further inspection. During the secondary inspection, the CBP inspector said he needed to verify the type of material our investigators were transporting, and another CBP inspector approached with what appeared to be a RIID to scan the cardboard boxes where the radioactive sources was placed. The instrumentation confirmed the presence of radioactive sources. When asked again about the purpose of their visit to Mexico, one of our investigators told the CBP inspector that they had used the radioactive sources in a demonstration designed to secure additional business for their company. The CBP inspector asked for paperwork authorizing them to transport the equipment to Mexico. One of our investigators provided the counterfeit bill of lading on letterhead stationery, as well as their counterfeit NRC document. The CBP inspector took the paperwork provided by our investigators and walked into the CBP station. He returned several minutes later and returned the paperwork. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. We conducted corrective action briefings with CBP and NRC officials shortly after completing our undercover operations. On December 21, 2005, we briefed CBP officials about the results of our border crossing tests. CBP officials agreed to work with the NRC and CBP’s Laboratories and Scientific Services to come up with a way to verify the authenticity of NRC materials documents. We conducted two corrective action briefings with NRC officials on January 12 and January 24, 2006, about the results of our border crossing tests. NRC officials disagreed with the amount of radioactive material we determined was needed to produce a dirty bomb, noting that NRC’s “concern threshold” is significantly higher. We continue to believe that our purchase of radioactive sources and our ability to counterfeit an NRC document are matters that NRC should address. We could have purchased all of the radioactive sources used in our two undercover border crossings by making multiple purchases from different suppliers, using similarly convincing cover stories, using false identities, and had all of the radioactive sources conveniently shipped to our nation’s capital. Further, we believe that the amount of radioactive sources that we were able to transport into the United States during our operation would be sufficient to produce two dirty bombs, which could be used as weapons of mass disruption. Finally, NRC officials told us that they are aware of the potential problems of counterfeiting documents and that they are working to resolve these issues. Mr. Chairman and Members of the Subcommittee, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or kutzg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","Given today's unprecedented terrorism threat environment and the resulting widespread congressional and public interest in the security of our nation's borders, GAO conducted an investigation testing whether radioactive sources could be smuggled across U.S. borders. Most travelers enter the United States through the nation's 154 land border ports of entry. Department of Homeland Security U.S. Customs and Border Protection (CBP) inspectors at ports of entry are responsible for the primary inspection of travelers to determine their admissibility into the United States and to enforce laws related to preventing the entry of contraband, such as drugs and weapons of mass destruction. GAO's testimony provides the results of undercover tests made by its investigators to determine whether monitors at U.S. ports of entry detect radioactive sources in vehicles attempting to enter the United States. GAO also provides observations regarding the procedures that CBP inspectors followed during its investigation. GAO has also issued a report on the results of this investigation (GAO-06-545R). For the purposes of this undercover investigation, GAO purchased a small amount of radioactive sources and one secure container used to safely store and transport the material from a commercial source over the telephone. One of GAO's investigators, posing as an employee of a fictitious company located in Washington, D.C., stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detection pagers. The purchase was not challenged because suppliers are not required to determine whether prospective buyers have legitimate uses for radioactive sources, nor are suppliers required to ask a buyer to produce an NRC document when purchasing in small quantities. The amount of radioactive sources GAO's investigator sought to purchase did not require an NRC document. Subsequently, the company mailed the radioactive sources to an address in Washington D.C. The radiation portal monitors properly signaled the presence of radioactive material when our two teams of investigators conducted simultaneous border crossings. Our investigators' vehicles were inspected in accordance with most of the CBP policy at both the northern and southern borders. However, GAO's investigators, using counterfeit documents, were able to enter the United States with enough radioactive sources in the trunks of their vehicles to make two dirty bombs. According to the Centers for Disease Control and Prevention, a dirty bomb is a mix of explosives, such as dynamite, with radioactive powder or pellets. When the dynamite or other explosives are set off, the blast carries radioactive material into the surrounding area. The direct costs of cleanup and the indirect losses in trade and business in the contaminated areas could be large. Hence, dirty bombs are generally considered to be weapons of mass disruption instead of weapons of mass destruction. GAO investigators were able to successfully represent themselves as employees of a fictitious company present a counterfeit bill of lading and a counterfeit NRC document during the secondary inspections at both locations. The CBP inspectors never questioned the authenticity of the investigators' counterfeit bill of lading or the counterfeit NRC document authorizing them to receive, acquire, possess, and transfer radioactive sources.",govreport
"DOD relies on its research laboratories and test facilities as well as industry and academia to develop new technologies and systems that improve and enhance military operations and ensure technological superiority over adversaries. Yet, historically, DOD has experienced problems in bringing technologies out of the lab environment and into real use. At times, technologies do not leave the lab because their potential has not been adequately demonstrated or recognized. In other cases, acquisition programs—which receive the bulk of DOD’s funding in research, development, testing and evaluation of technology—are simply unwilling to fund final stages of development of a promising technology, preferring to invest in other aspects of the program that are viewed as more vital to success. Other times, they choose to develop the technologies themselves, rather than rely on DOD labs to do so—a practice that brings cost and schedule risk since programs may well find themselves addressing problems related to technology immaturity that hamper other aspects of the acquisition process. And often, DOD’s budgeting process, which requires investments to be targeted at least 2 years in advance of their activation, makes it difficult for DOD to seize opportunities to introduce technological advances into acquisition programs. In addition, it is challenging just to identify and pursue technologies that could be used to enhance military operations given the very wide range of organizations inside and outside of DOD that are focused on technology development and the wide range of capabilities that DOD is interested in advancing. In recognizing this array of challenges, DOD and Congress have established a number of “technology transition” programs, each with a particular focus. (See table 1.) The Advanced Concept Technology Demonstration (ACTD) program, for example, was initiated by DOD in 1994 as a way to get technologies that meet critical military needs into the hands of users faster and at less cost than the traditional acquisition process. Under this program, military operators test prototypes that have already been developed and matured in realistic settings. If they find the items to have military utility, DOD may choose to buy additional quantities or just use the items remaining after the demonstration. In 1980, DOD established the Foreign Comparative Testing (FCT) Program to identify, evaluate, and procure technologies that have already been developed and tested in other countries—saving DOD the costly burden of maturing the technology itself. Other programs include those that seek to quickly identify and solve production problems associated with technology transition (the Manufacturing Technology Program—MANTECH) and to partner with the commercial sector in completing projects that are useful to both military and industry (the Dual Use Science and Technology program). Even taken together, however, these programs represent a very small portion of DOD dollars spent on applied research and advanced technology development—about $9 billion annually—and considerably less of total money spent on the later stages of technology development, which includes an additional $60 billion spent on advanced component development and prototypes, largely within weapons acquisition programs. As such, they cannot single-handedly overcome transition problems, but rather demonstrate various ways to ease transition and broaden participation from the industrial base. Three of the more recent initiatives include the TTI and DACP, both established by Congress in fiscal year 2003, and the Quick Reaction Fund, established by DOD the same year. TTI is focused on speeding the transition of technologies developed by DOD’s S&T programs into acquisition programs, while DACP is focused on introducing innovative and cost-saving technologies developed inside and outside DOD. The Quick Reaction Fund is focused on field testing technology prototypes. All three programs are managed by DOD’s Office of Defense Research and Engineering, which reports to the Under Secretary of Defense for Acquisition, Technology and Logistics. Together, these three programs received about $64 million in fiscal year 2005–a fraction of the $9.2 billion DOD invested in applied research and advanced technology development the same year and a relatively small budget compared to some of the other transition programs. Nevertheless, DOD has been increasing its investment in these programs and plans to further increase it over the next few years. (See figure 1.) Table 2 highlights similarities and differences between DACP, TTI, and Quick Reaction Fund. Table 3 provides examples of projects that have already been funded. The three transition programs, which are being implemented consistent with congressional intent, reported that benefits can already be seen in many projects, including improvements to performance, affordability, manufacturability, and operational capability for the warfighter. While such benefits may have eventually been achieved through normal processes, program officials believe the three transition programs enabled DOD to realize them sooner due to the immediate funding that was provided to complete testing and evaluation as well as attention received from senior managers. DOD officials also emphasized that these programs are calling attention to emerging technologies that have the potential to offer important performance gains and cost savings but, due to their size and relative obscurity, may otherwise be overlooked when competing against other, larger-scaled technologies and/or technologies already deemed as vital to a particular acquisition program’s success. Another benefit cited with the DACP is an expansion of the Defense industrial base, because the program invites participation from companies and individuals that have not been traditional business partners with DOD. Nevertheless, it is too early for us to determine the impact that these programs have had on technology transition. At the time we selected projects to review, few projects had been completed. In addition, the programs had limited performance measures to gauge success of individual projects or track return on investment over time. The following examples highlight some of the reported benefits of individual projects. Host Weapons Shock Profile Database—DOD spends a significant amount of time and resources to test new accessories (e.g., night vision scopes) for Special Operations Forces weapons. Currently, when new accessories are added, they must go through live fire testing to determine if they work properly and will meet reliability standards. This process could take several months to complete as the acquisition office must schedule time at a test range to complete the testing. Program officials must also identify and pay for an expert to conduct the testing and pay for ammunition that will be used in the test. The DACP is funding the test and evaluation of a database that will simulate the vibration or shock of various machine guns in order to test new accessories for that gun. This will eliminate almost all of the testing costs mentioned above and greatly reduce the amount of time needed for testing. The project office estimates that it will save almost $780,000 per year in ammunition costs alone. Enhanced Optics for the Rolling Airframe Missile—The Rolling Airframe Missile is part of the Navy’s ship self-defense system to counter attacks from missiles and aircraft. However, the missile experiences operational deficiencies in certain weather conditions, and the program has had problems producing components for the optics. The DACP is providing funding to a small business to test and evaluate a new sapphire dome and optics for the missile to resolve these problems. Program officials estimate that program funding will accelerate the development of a solution 1 to 2 years earlier than anticipated. If the DACP project is successful, an added benefit will be that the dome material will be readily available from manufacturers in the United States instead of a single overseas supplier, as is currently the case. Water Purification System— For tactical situations in which deployed troops do not have quick and easy access to potable water, the pen will allow soldiers to treat up to 300 liters of any available, non-brackish water source on one set of lithium camera batteries and common table salt. The pen eliminates the risk of the soldiers’ exposure to diseases and bio-chemical pollutants. TTI funding was used to purchase approximately 6,600 water pens for distribution to the military services. In addition, TTI funding enabled this item to be placed on a General Services Administration schedule, where approximately 8,600 additional water pens have been purchased by DOD customers. DOD and the company that produces the pen donated hundreds of these systems to the tsunami relief effort in Southeast Asia. Dragon Eye—The Dragon Eye is a small, unmanned aerial vehicle with video surveillance capabilities used by the marines. To address the concerns over a chemical and biological threat to troops in Iraq, the Quick Reaction Fund funded the integration of a small chemical detection and biological collection device on the Dragon Eye. The low- flying Dragon Eye can tell troops in real time where and when it is collecting samples, and in cases where a plume is detected, it can determine the direction the plume is moving. According to program officials, Quick Reaction funding allowed the chemical and biological detection capability to be developed 2 years ahead of schedule. The technology was available to a limited number of Special Operations Forces at the beginning of the Iraqi conflict. Despite the evident benefits of certain projects, it is too early to determine the programs’ impact on technology transition. At the time we selected projects for review, only 11 of 68 projects started in fiscal years 2003 and 2004 had been completed, and, of those, only 4 were currently available to warfighters. These include one TTI project—a miniaturized water purification system that is now being offered through a General Services Administration schedule to the warfighter—and three projects under the Quick Reaction Fund, including the Dragon Eye chemical and biological sensor, planning software used by Combatant Commanders dealing with weapons of mass destruction targets, and special materials that strengthen unmanned aerial vehicles. Since the time we selected projects, 20 have been reported as completed and 13 have been reported as available to warfighters. The latest project completion information by program is shown in Table 4. It is important to note that, even though 20 TTI and Quick Reaction Fund projects are considered to be complete, not all of the capabilities have reached the warfighter. For example: The T58 Titanium Nitride Erosion Protection is a TTI project that has transitioned to an acquisition program but has not yet reached the warfighter. The project is being developed to improve the reliability of T-58-16A helicopter engines used in Iraq. While the compressor blades are designed for 3000 operating hours, the Marine Corps has had to remove engines with fewer than 150 operational hours due to sand ingestion. The project received funding from the TTI in fiscal years 2003 and 2004 to develop a titanium nitride coating for engine blades that would significantly mitigate erosion problems in a desert environment. According to program documents, blades with the new coating will be included in future production lots beginning in July 2005. Modification kits will also be developed for retrofitting engines already produced. Program officials expect the project will double the compressor life of the engine in a sand environment and save about $12 million in life-cycle costs through fiscal year 2012. The Ping project, funded by the Quick Reaction Fund, is an example of a project that is considered complete, but a prototype was never field tested by the warfighter. The Air Force had hoped to broaden the capability of the microwave technology it used to identify large objects such as tanks or cars to also detect concealed weapons or explosives— such as suicide vests. However, the project was cancelled after some initial testing revealed that the technology was not accurate enough to determine the microwave signatures of small arms or suicide vests that could have numerous configurations and materials. DOD officials stated that, even though the project was unsuccessful, they gained a better understanding of microwave technologies and are continuing to develop these technologies for other applications. The long-term impact of the programs will also be difficult to determine because the technology transition programs have a limited set of metrics to gauge project success or the impact of program funding over time. While each funded project had to identify potential impact in terms of dollar savings, performance improvements, or acceleration to the field as part of the proposal process, actual impact of specific projects as well as the transition programs as a whole is not being tracked consistently. The value of having performance measures as well as DOD’s progress in adopting them for these transition programs is discussed in the next section of this report. To ensure that new technologies can be effectively transitioned and integrated into acquisitions, transition programs need to establish effective selection, management and oversight, and assessment processes. For example, programs must assure that proposals being accepted have established a sound business case, that is, technologies being transitioned are fairly mature and in demand and schedules and cost for transition fit within the program’s criteria. Once projects are selected, there needs to be continual and effective communication between labs and acquisition programs so that commitment can be sustained even when problems arise. To assure that the return on investment is being maximized, the impact of programs must be tracked, including cost and time savings as well as performance enhancements. Our work over the past 7 years has found that high-performing organizations adopt these basic practices as a means for successfully transitioning technologies into acquisitions. Moreover, several larger DOD technology transition programs, such as the ACTD program and some Defense Advanced Research Projects Agency (DARPA) projects, embrace similar practices and have already developed tools to help sustain commitment, such as memorandums of agreement between technology developers and acquirers. Both DARPA and ACTD manage budgets that are considerably larger than the programs included in this review. As such, the level of detail and rigor associated with their management processes may not be appropriate for TTI, DACP, or Quick Reaction Fund. However, the concepts and basic ingredients of their criteria and guidance could serve as a useful starting point for the smaller programs to strengthen their own processes. The three programs we reviewed adopted these practices to varying degrees. Overall, the DACP had disciplined and well-defined processes for selecting and managing, and overseeing projects. The TTI had disciplined and well-defined processes for selecting projects, but less formal processes for management and oversight. The Quick Reaction Fund was the least formal and disciplined of all three, believing that success was being achieved through flexibility and a high degree of senior management attention. All three programs had limited performance measures to gauge progress and return on investment. Generally, we found that the more the programs adopted structured and disciplined management processes, the fewer problems they encountered with individual efforts. Success in transitioning technologies from a lab to the field or an acquisition program hinges on a transition program’s ability to choose the most promising technology projects. This includes technologies that can substantially enhance an existing or new system either through better performance or cost savings and those with technologies at a fairly mature stage, in other words, suitable for final stages of testing and evaluation. A program can only do this, however, if it is able to clearly communicate its purpose and reach the right audience to submit proposals in the first place. It is also essential that a program have a systematic process for determining the relative technical maturity of the project as well as for evaluating other aspects of the project, such as its potential to benefit specific acquisition programs. Involving individuals in the selection process from various functions within an organization—e.g., technical, business, and acquisition—further helps to assure that the right projects are being chosen and that they will have interested customers. An analytical tool that can be particularly useful in selecting projects is a technology readiness level (TRL) assessment, which assesses the maturity level of a technology ranging from paper studies (level 1), to prototypes that can be tested in a realistic environment (level 7), to an actual system that has proven itself in mission operations (level 9). Our prior work has found TRLs to be a valuable decision-making tool because it can presage the likely consequences of incorporating a technology at a given level of maturity into a product development. As further detailed in table 5, the DACP program has a fairly robust selection process. The program relies on internet-based tools to communicate its goals and announce its selection process and ensure a broad audience is targeted. As a result, it receives a wide array of proposals from which the program office assesses their potential for generating improvements to existing programs as well as actual interest from the acquisition community. The DACP also solicits technical experts from inside and outside DOD to assess potential benefits and risks. Once the number of projects is whittled down, the program takes extra steps to secure commitments from acquisition program managers as well as program executive officers. The program’s popularity, however, has had some drawbacks. For example, the sheer number of proposals have tended to overwhelm DACP staff and slowed down the selection process, particularly in the first year. In addition, while technology benefits and risks are assessed in making selection decisions, DACP does not formally confirm the technology readiness levels being reported. The TTI program also has a fairly rigorous selection process, with specific criteria for selection, including technology readiness, and a team of representatives of higher-level DOD S&T officials in charge of disseminating information about the program in their organization, assessing their organization’s proposals based on TTI criteria as well as other criteria they developed, and ranking their top proposals. The program, which is focused on reaching DOD’s S&T community rather than outside industry, had been communicating in a relatively informal manner and it was unclear during our review the extent to which the TTI was reaching its intended audience. The program, however, has been taking steps to strengthen its ability to reach out to the S&T community. In addition, TTI does not confirm TRLs. At the time of our review, the Quick Reaction Program selection process was much less structured and disciplined than DACP and TTI. This was by design, because the program wants to select projects quickly and get them out to the field where they can be of use in military operations in Iraq, Afghanistan, and elsewhere. However, the program experienced problems related to selection and as a result—for example, significant gaps in knowledge about technology readiness led to the cancellation of one project. To program officials, the risk associated with less formal selection is worth the benefit of being able to move rapidly evolving technologies into an environment where they can begin to immediately enhance military operations and potentially save lives. Nevertheless, the program is now taking steps to strengthen selection processes. Selecting promising projects for funding is not enough to ensure successful transition. Program managers must also actively oversee implementation to make sure that project goals are being met and the program is working as intended and to identify potential barriers to transition. They must also sustain commitment from acquirers. Moreover, the transition program as a whole must have good visibility over progress and be positioned to shift attention and resources to problems as they arise. A tool that has proven particularly useful for other established DOD technology transition programs is designating individuals, preferably with experience in acquisitions or operations and/or the S&T world, as “deal brokers” or agents to facilitate communication between the lab and the acquisition program and to resolve problems as they arise. DARPA employs such individuals, for example, as well as some Navy-specific transition programs. Both have found that these agents have been integral to transition success. Another tool that is useful for sustaining commitment from the acquirers is a formal agreement. Our previous work found that best practice companies develop agreements with cost and schedule targets to achieve and sustain buy-in and that the agreements are modified as a project progresses to reflect more specific terms for accepting or rejecting a technology. DARPA develops similar agreements that describe how projects will be executed and funded as well as how projects will be terminated if the need arises. The agreements are signed by high-level officials, including the director of DARPA and senior-level representatives of the organizations DARPA is working with. The ACTD program develops “implementation directives” that clarify roles and responsibilities of parties executing an ACTD, time frames, funding, and the operational parameters by which military effectiveness is to be evaluated. The agreements are also signed by high-level officials. DACP has fairly robust management and oversight mechanisms. Status is monitored via formal quarterly reporting as well as interim meetings which, at a minimum, involve the customer, the developer, and the DACP project manager. The meetings provide an opportunity to ensure the acquisition program is still committed to the project and to resolve problems. Though formal memoranda of agreements are not usually employed, the program establishes test and evaluation plans that detail pass/fail criteria so that funding does not continue on projects that experience insurmountable problems. TTI also employs periodic status reports and meetings; however, communication has not been as open. In two cases, projects ran into significant problems, such as loss of acquisition program office support in one case and logistics issues that had not been addressed to transition a technology smoothly in the other, which had not come to the attention of the TTI program office. As a result, the TTI office thought the projects had transitioned when in actuality, significant problems still needed to be addressed. Per legislation, TTI had also established a formal council comprised of high-level DOD officials to help oversee the program; however, the Council has only met once in 2 years, while the act requires that it meet at least semiannually. In addition, there is some confusion among Council members and others we spoke with as to what the purpose of the Council should be—that is, focused on TTI only or broader transition issues. Congressional officials expressed that they intended for the Council to focus on broader transition issues and how best to solve them. Although the Quick Reaction Fund does not require status reports to assess progress, project managers are required to submit after-action reports. However, these were not regularly reviewed by the office. We identified several problems that arose during transition that were not known to the Quick Reaction Fund program manager. The program manager is currently taking steps to improve the management and oversight of projects. For example, a website has been developed to help monitor and execute the program. Among other things, the website will allow for the automatic collection of monthly status reports. Though the transition programs we reviewed are relatively small in scale compared to other transition programs in DOD, the government’s investment is still considerable and it will continue to grow if DOD’s funding plans for the programs are approved. As a result, it is important that these programs demonstrate that they are generating a worthwhile return on investment—whether through cost savings to acquisition programs, reduced times for completing testing and evaluation and integrating technologies into programs, and/or enhanced performance or new capabilities. Developing such information can enable transition program managers to identify what is or is not working well within a program; how well the program is measuring up to its goals, as well as to make trade-off decisions between individual projects. On a broader level, it can enable senior managers and oversight officials to compare and contrast the performance of transition programs across DOD. Finding the right measures to use for this purpose is challenging, however, given the wide range of projects being pursued, the different environments to which they are being applied, and difficulties associated with measuring certain aspects of return on investment. For example, measuring long-term cost savings could be problematical because some projects could have impacts on platforms and systems that were not part of the immediate transition effort. As a result, the best place to start may be with high-level or broad metrics or narratives that focus on the spectrum of benefits and cost savings being achieved through the program, complemented by more specific quantifiable metrics that do not require enormous efforts to develop and support, such as time saved in transition or short-term cost savings. At this time, however, the transition programs have limited measures to gauge individual project success and program impact or return on investment in the long term. At best, they are collecting after action reports that describe the results of transition projects, and occasionally identify some cost savings, but not in a consistent manner. In addition, there are inconsistencies in how the reports are being prepared, reviewed, and used. The Quick Reaction Fund program manager, in fact, had trouble just getting projects to submit after action reports. Officials from all three transition programs we reviewed as well as higher level officials agreed that they should be doing more to capture information regarding return on investments for the programs. They also agreed that there may already be readily available starting points within DOD. For example, the Foreign Comparative Testing Program has established metrics to measure the health, success, and cost-effectiveness of the program and has developed a database to facilitate return on investment analyses. The program also captures general performance enhancements in written narratives. The program has refined and improved its metrics over time and used them to develop annual reports. The specific metrics established by the FCT program may not be readily transferable to DACP, TTI, or the Quick Reaction Fund because the nature of FCT projects is quite different—technologies themselves are more mature and costs savings are achieved by virtue of the fact that DOD is essentially avoiding the cost of developing the technologies rather than applying the technologies to improve larger development efforts. However, the process by which the program came to identify useful metrics as well as the automated tools it uses could be valuable to the other transition programs. In addition, DOD has asked the Naval Post Graduate School to study metrics that would be useful for assessing the ACTD program. The results of this study may also serve as a starting point for the transition programs in developing their own ways to assess return on investment. The ability to spur and leverage technological advances is vital to sustaining DOD’s ability to maintain its superiority over others and to improve and even transform how military operations are conducted. The three new transition programs are all appropriately targeted on what has been a critical problem in this regard—quickly moving promising technologies from the laboratory and commercial environment into actual use. Moreover, by tailoring processes and criteria to focus on different objectives, whether that may be saving time or money or broadening the industrial base, DOD has had an opportunity to experiment with a variety of management approaches and criteria that can be used to help solve transition problems affecting the approximately $69 billion spent annually on advanced stages of technology development. Already, it is evident that an element missing from all three programs is good performance measurement. Without having this capability, DOD will not be able to effectively assess which approaches are working best and whether the programs individually or as a whole are truly worthwhile. In addition, it is evident that having well-established tools for selecting and managing projects as well as communicating with technology developers and acquisitions helps programs to reduce risk and achieve success, and that there are opportunities for all three programs for strengthening their capabilities in this regard. In light of its plans to increase funding for the three programs, DOD should consider actions to strengthen selection and management capabilities, while taking into account resources needed for implementing them as well as their impact on the ability of the programs to maintain flexibility. We recommend that the Secretary of Defense take the following five actions: To optimize DOD’s growing investment in the Technology Transition Initiative, the Defense Acquisition Challenge Program, and the Quick Reaction Fund, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to develop data and measures that can be used to support assessments of the performance of the three transition programs as well as broader assessments of the return on investment that would track the long-term impact of the programs. DOD could use measures already developed by other transition programs, such as FCT, as a starting point as well as the results of its study on performance measurement being conducted by the Naval Post Graduate School. To complement this effort, we recommend that DOD develop formal feedback mechanisms, consisting of interim and after action reporting, as well as project reviews if major deviations occur in a project. Deviations include, but are not limited to, changes in the technology developer, acquirer, or user, or an inability for the technology developer to meet cost, schedule, or performance parameters at key points in time. We also recommend that the Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to implement the following, as appropriate, for each of the transition programs: (1) formal agreements to solidify up-front technology development agreements related to cost, schedule, and performance parameters that must be met at key points in time and (2) confirmation of technology readiness levels as part of the proposal acceptance process. In addition, we recommend that DOD identify and implement mechanisms to ensure that transition program managers, developers, and acquirers are able to better communicate to collectively identify and resolve problems that could hinder technology transition. There may be opportunities to strengthen communication by improving the structure and content of interim progress meetings and possibly even designating individuals to act as deal brokers. Lastly, as DOD considers solutions to broader technology transition problems, we recommend that Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to assess how the Technology Transition Council can be better used. DOD provided us with written comments on a draft of this report. DOD partially concurred with four of the five recommendations and concurred with one recommendation. The reason DOD only partially concurred with four of the recommendations is because it does not believe the Quick Reaction Fund fits the definition of a transition program. However, we continue to believe it is important for DOD to institute better management controls and have better visibility of the Quick Reaction Fund as it increases its investment in this program over the next several years. DOD comments appear in appendix I. DOD partially concurred with our recommendation that the programs develop data and measures that can be used to support assessments of the performance of the three transition programs as well as broader assessments of return on investment that would track the long term impact of the programs. DOD agreed that performance measures for the DACP and TTI programs could be improved but does not believe that measuring the impact of the Quick Reaction Fund is necessary because it does not technically fit the definition of a transition program. We disagree. DOD should track the progress of its various programs to determine if the programs are worthwhile and should be continued, if the program should receive additional funding, or if changes should be made in the selection or implementation process that could result in better outcomes. Further, failure to track even the most basic information, such as the number of projects completed, could result in a lack of ability to manage the program properly and poor stewardship of taxpayer money. DOD partially concurred with our recommendation that the three programs develop formal feedback mechanisms consisting of interim and after action reporting, as well as project reviews if major deviations occur in a project. DOD agrees that the TTI and DACP can be improved and has recently taken steps in this regard. However, DOD believes that due to the limited scope and duration of Quick Reaction Fund projects, formal feedback mechanisms may not be necessary for this program. We believe that regular feedback on the progress of each program is important to help program managers mitigate risk. As stated in the report, the Quick Reaction Fund program manager was unaware that one project ran out of funding prior to field testing the technology. Had the program manager been aware of the problem, money that had not yet been allocated could have been used to finish the project. In addition, based upon our discussions with the current program manager, DOD is planning to require monthly status reports for funded projects. DOD partially concurred with our recommendation that the programs implement, as appropriate: (1) formal agreements to solidify up-front technology development agreements related to cost, schedule, and performance parameters that must be met at key points in time and (2) confirmation of technology readiness levels as part of the proposal acceptance process. DOD indicated that it recently implemented Technology Transition Agreements for the TTI, and the DACP program also uses formal agreements. However, DOD does not believe formal agreements are necessary for the Quick Reaction Fund because it is not intended to be a transition program. Also, it does not believe TRLs should be a factor in the proposal acceptance process. As stated in the report, we agree that formal agreements may not be appropriate for Quick Reaction Fund projects. However, TRLs should be considered during the selection process. Since the goal of this particular program is to prototype a new technology in 12 months or less, it is important that DOD has some assurance that the technology is ready to be field tested. As discussed in the report, the Quick Reaction Fund had to cancel one project, after $1.5 million had already been spent, because it had only achieved a TRL 3. Had the selecting official known the TRLs of each proposed project during the selection phase, he may have decided to fund another, more mature project instead. DOD also partially concurred with our recommendation that the programs identify and implement mechanisms to ensure that transition program managers, developers, and acquirers better communicate and collectively identify and resolve problems that could hinder technology transition. DOD established a Transition Overarching Integrated Product Team earlier this year to provide the necessary oversight structure to address this issue, but does not believe this recommendation applies to the Quick Reaction Fund program. We believe that if DOD receives monthly status reports on the Quick Reaction Fund, as planned by the program manager, it should be in a good position to identify and resolve problems that could hinder the testing of new technology prototypes. DOD concurred with our recommendation that the Under Secretary of Defense (Acquisition, Technology and Logistics) assess how the Technology Transition Council can be better used as DOD considers solutions to broader technology transition problems. Although DOD did not indicate how it plans to do this, the Deputy Under Secretary of Defense (Advanced Systems and Concepts) has a goal that the Council not limit itself to just the TTI program, but look at broader technology transition issues across DOD. We are sending copies of this report to the Secretary of Defense, the Director of the Office of Management and Budget, and interested congressional committees. We will also make copies available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (937) 258-7915. Key contributors to this report were Cristina Chaplain, Cheryl Andrew, Art Cobb, Gary Middleton, and Sean D. Merrill.","The Department of Defense (DOD) and Congress both recognize that Defense technology innovations sometimes move too slowly from the lab to the field. Three new programs have been recently created in DOD to help speed and enhance the transition of new technologies. A report accompanying the fiscal year 2003 National Defense Authorization Act required GAO to review two of these programs--the Technology Transition Initiative (TTI) and Defense Acquisition Challenge Program (DACP). The first is designed to speed transition of technologies from DOD labs to acquisition programs and the second is designed to introduce cost-saving technologies from inside and outside DOD. We were also asked to review the Quick Reaction Fund, which is focused on rapidly field testing promising new technology prototypes. We assessed the impact the programs had on technology transition and the programs' selection, management and oversight, and assessment practices. The ability to spur and leverage technological advances is vital to sustaining DOD's ability to maintain its superiority over others and to improve and even transform how military operations are conducted. The three new transition programs we reviewed are all appropriately targeted on what has been a critical problem in this regard--quickly moving promising technologies from the laboratory and commercial environment into actual use. Moreover, by tailoring processes and criteria to focus on different objectives, whether that may be saving time or money or broadening the industrial base, DOD has had an opportunity to experiment with a variety of management approaches and criteria that can be used to help solve transition problems affecting the approximately $69 billion spent over the past 3 years on later stages of technology development. However, it is too soon for us to determine the impact the three new DOD technology transition programs are having. At the time of our review, the programs--the TTI, DACP, and Quick Reaction Fund--had completed only 11 of 68 projects funded in fiscal years 2003 and 2004; of those, only 4 were providing full capability to users. Additionally, the programs have limited measures to gauge success of individual projects and return on investment. Nonetheless, reports from the programs have pointed to an array of benefits, including quicker fielding of technological improvements, cost savings, and the opportunity for DOD to tap into innovative technologies from firms that are new to defense work. Some sponsored technologies are bringing benefits to warfighters, such as a small, unmanned aircraft that can detect chemical and biological agents, and a device the size of an ink pen that can be used to purify water on the battlefield or in disaster areas. Furthermore, DOD officials credit the programs with giving senior leaders the flexibility to rapidly address current warfighter needs and for highlighting smaller technology projects that might otherwise be ignored. Long-term success for the programs likely will depend on how well the programs are managed and overseen. The programs must have effective processes for selecting the best projects, and management and oversight processes that will catch potential problems early. Thus far, of the three programs, the DACP has adopted the most disciplined and structured process for selecting and managing projects, and has encountered few problems managing projects. However, the program has had some difficulties processing the large number of proposals it receives. The TTI has also established selection criteria and processes, but it is unclear the extent to which it is reaching its intended audience and has had less success in tracking its projects. The Quick Reaction Fund has the least structured processes of the three programs--a deliberate approach seen as providing the flexibility needed to field innovations rapidly. It has had some difficulty selecting, managing and tracking projects.",govreport
"The MAF is a data file that contains a list of all known living quarters in the United States and Puerto Rico. The Bureau uses the MAF to support the decennial census as well as the American Community Survey and other ongoing demographic surveys. The MAF contains address information, census geographic location codes, and source and history data. In conjunction with the MAF, the TIGER contains spatial geographical information that allows information from the MAF to be mapped. For the 2010 Census, the Bureau updated the MAF through a complete address canvassing that verified virtually every existing MAF address and added new addresses and deleted those that no longer exist. While full address canvassing helped ensure the accuracy of the address list, we believe it was also very costly. According to Bureau decision documents leading up to the 2010 Census, the Bureau canceled planned research on the feasibility of targeting its canvassing when prioritizing its research agenda early in the decade given its funding levels. As part of the Bureau’s effort to conduct the 2020 Census at a cost lower than the 2010 Census, the Bureau is researching the feasibility of conducting targeted address canvassing, verifying addresses in only select areas that are more likely to require updates to the address list. To support targeted address canvassing, the Bureau plans to increase its reliance on other previously used sources of updates, including U.S. Postal Service files, commercial database files, and significant input from state and local governments. For example, GSS-I is working to allow government agencies at all levels to more regularly share and update their address lists with the Bureau throughout the decade (rather than solely 2 years prior to the decennial, as had been the case in prior decennial censuses) so that fewer areas need to be fully canvassed. The life cycle for 2020 Census preparation is divided into five phases, as illustrated in figure 1. The Bureau intends to use the early research and testing phase through fiscal year 2015 to develop a proposal for conducting targeted address canvassing that considers both cost and quality implications. By the end of the early research and testing phase, the Bureau plans to complete decisions about preliminary operational designs rather than continuing critical research and testing until the end of the decade as it did for the 2010 Census. The Bureau faces legally mandated deadlines for delivering census tabulations. Effective scheduling is critical for ensuring that the Bureau adheres to a timeline that meets these deadlines. The Bureau relies on schedules to help monitor progress of its many interdependent activities. The schedules are essential to help manage the risks to preparing and implementing a successful decennial census. Certain dates within the schedule could be subject to change or activities may be canceled as a result of time or budget constraints. As dates change from the original schedule or there are significant changes to the work planned, there could be an associated increase in risk as the Bureau may have less time than originally planned to complete future activities in time to make decisions needed to execute the 2020 Census. We determined that a schedule not only provides a road map for systematic execution of a program, but also provides a means by which to gauge progress, identify and address potential problems, and promote accountability. In the GAO Schedule Assessment Guide,four characteristics of a reliable schedule. A schedule should be: Comprehensive: The schedule should identify all activities and resources necessary to accomplish the project. The schedule should cover the scope of work to be performed so that the full picture is available to managers. Well constructed: Activities should be logically sequenced and critical activities that would affect the timelines of the schedule should be identified. Credible: All schedules should be linked to a complete master schedule for managers to reference and analyzed for how risk impacts the outcome of the schedule. Controlled: There should be a documented process for changes to the schedule so that the integrity of the schedule is assured. For a schedule to be reliable, it must substantially or fully meet all criteria for these four characteristics. These characteristics and their criteria are described in more detail in appendix II. We found that the Bureau’s 2020 Research and Testing and GSS-I schedules exhibit some of the characteristics of a reliable schedule, yet important weaknesses remain. Each of the schedules substantially met one of the four characteristics (controlled) and minimally or partially met the other three characteristics (comprehensive, well constructed, and credible) (see table 1). Examples of the extent to which these characteristics were met are provided below. For a more detailed explanation, see appendix III. The Bureau is using a work breakdown structure to guide the activities of the 2020 Research and Testing and GSS-I schedules. A work breakdown structure defines in detail the work necessary to accomplish a program’s objectives. However, not all activities listed in the work breakdown structure are included in the 2020 Research and Testing and GSS-I schedules. For example, in the GSS-I schedule, 20 of the 28 projects have very few activities in them, indicating a lack of detail. Additionally, two MAF-related projects in the 2020 Research and Testing schedule, the MAF Business Rules Improvement project and the Frame Extract Evaluation project, do not have activities assigned to them. If research activities—or any other activities relevant to developing the MAF—are not listed in a schedule, managers may not be able to readily identify causes of delay. According to the Bureau, the schedules are still evolving, these two projects have not yet started or been staffed, and activities and detail will continue to be added to the schedule. For both schedules, the Bureau appeared to record reasonable durations for most activities, helping to ensure that managers can understand the time activities are expected to take and can hold staff who are executing these activities accountable for meeting deadlines. However, neither schedule included information about what levels of resources are required to complete the planned work. Information on resource needs and availability in each work period assists with forecasting the likelihood that activities will be completed as scheduled. Bureau officials stated that they hope to begin the exercise of identifying the resources needed for each activity in both schedules by early 2014 and are waiting for decisions and guidance from the Bureau’s effort to standardize cost estimation practices enterprise-wide. In 2012 we recommended, and the Bureau agreed, that the Bureau establish and communicate a timeline for all enterprise activity However, the Bureau so that decennial managers can plan accordingly.has not yet produced this timeline. In both of the schedules, the Bureau logically linked many of the activities in a sequence. This helps staff identify next steps as they progress through MAF development activities and helps managers identify the impact of changes in one activity on subsequent activities. Yet in both schedules, the Bureau did not identify the preceding and following activity for a number of activities (20 percent for the GSS-I schedule and 9 percent for the 2020 Research and Testing schedule). Scheduling staff were unable to explain why this information was missing. Without this logic, the effect of a change in one activity on future activities cannot be seen in the schedule. For example, in the GSS-I schedule, the “delivery of the targeted address canvassing recommendation report” to managers has no predecessor. According to the Bureau, this report is to outline the research findings, impacts, operational considerations, and benefits of conducting a targeted address canvassing. For those activities that lack predecessors in the schedule, the real effects of changes or delays in preceding activities would not be visible in the schedule, potentially resulting in unforeseen delays in the recommendation report. The Bureau used a large number of constraints which, if used inappropriately, can affect the reliability of the schedule. Activities for which constraints would be justified are Census Day and the delivery of the Apportionment Count, because they have legally mandated deadlines. But, for example, the Bureau also placed a constraint on the delivery of a draft targeted address canvassing report. Such an activity would likely not need a constraint because delays in preceding activities could affect the actual timing of the delivery of the draft report. Placing a constraint on this type of activity would mask in the schedule the effects of any changes or delays that would affect the true delivery date. While our schedule guide states that documenting the justification for constraints is important, the Bureau has not provided justifications in the schedule for its use of constraints. The Bureau told us that justifications are in meeting notes and e-mails, rather than the schedule. If this information is not included in the schedule, the justification for constraints remains unclear to those who did not have access to the meeting notes or e-mails. Also, leaving constraints within the schedule beyond when the schedule is being tested can make the schedule unreliable for other purposes. Additionally, inappropriately used constraints make it difficult to identify the schedules’ “critical path”—the sequence of steps needed to achieve the end goal that, if they slip, could negatively affect the overall project completion date. The absence of a critical path or a poorly constructed one calls into question the reliability of the calculated schedule dates, such as estimates of when research results will be available. When certain constraints are placed on an activity, this can automatically trigger the schedule software to place an activity on the calculated critical path when it might otherwise not be. Because the Bureau used so many constraints and the schedule is missing logic about preceding and following activities, it is possible that the calculated critical path includes activities that are not necessarily germane to the true critical path. Eliminating the unnecessary constraints and including additional logic would provide a more accurate picture of the degree of criticality in the schedule. Until the Bureau can produce a true critical path, it will not be able to provide reliable timeline estimates of effects of schedule changes. This undermines the Bureau’s ability to focus on activities that will have detrimental effects on the progress of designing targeted address canvassing and other 2020 Census decisions. Finally, a critical path with so many activities appearing on it is not useful to managers in identifying what is truly necessary to develop the MAF in a timely manner. For example, within the 2020 Research and Testing schedule, 52 percent of activities not yet completed appear on the calculated critical path. Similarly, for the GSS-I schedule, 19 percent of the activities appear on the calculated critical path, almost half of which could be because constraints are placed on them. Such a large share of activities appearing on the critical path can reduce the flexibility managers have to complete activities in parallel with each other or to reallocate resources when the same resource is needed for multiple activities on the path. The schedules have shortcomings with (1) the integration into management reporting and (2) the ability to automatically change as activities within the schedule change. First, management documents from the 2020 Research and Planning Office indicate the Bureau does not always derive information on milestones from the schedule. For example, two documents dated July 2013 cite the same baseline date from the schedule list major milestones, but the documents indicate a different date for the same part of the research and testing schedule; one states that the research and testing milestones for the current phase will be complete in September 2014, while the other states that these milestones will be completed in September 2015. Bureau managers acknowledged that the planning milestones within the schedule had not been updated to reflect ongoing Bureau management decisions about reprioritizing research and testing plans in light of budget uncertainty during fiscal year 2013. Without keeping the schedule current and using the most recent information to derive information for management such as schedule milestones, there are limited assurances that management is receiving reliable information. Second, we tested the schedules to determine how they changed when dates within the schedule were changed. In our test, the Research and Testing schedule responded automatically to changes in dates of activities, following best practices. However, the GSS-I schedule did not respond in the same way: When we adjusted the date of an activity, subsequent related activities appearing necessary to achieve the milestone did not change, even though the ultimate milestone date changed based on the date shift. More importantly, though, the Bureau is not in a position to carry out systematic quantitative risk analysis on its schedule. A quantitative risk analysis relies on statistical simulation to predict the level of confidence in meeting a program’s completion date. The Bureau has identified risks to MAF development efforts, but a quantitative risk analysis would have the advantage of illustrating the impact of risks on the schedule and how that would affect the Bureau’s ability to meet milestones and provide a measure of how much time contingency should be built in the schedule to help manage certain risks. Bureau officials said they were waiting for decisions about scheduling software before making decisions about conducting a schedule risk analysis. Without a more credible schedule, the Bureau cannot determine the likelihood that information will be available in time to inform decisions about building the MAF; moreover, the Bureau may not be able to fully understand which risks could affect when information will be available to make decisions and the likelihood that the risks could occur. Both schedules were baselined—creating a comparison schedule to measure, monitor, and report the project’s progress—in March 2013, and there is evidence the Bureau has a schedule management process in place and a method for logging changes to the schedule that is in line with best practices. By baselining the schedule, the Bureau helps provide some accountability and transparency to the measurement of the program’s progress. The Bureau has implemented a formal change control process which helps ensure the measurement of meaningful progress through comparisons to past versions of the schedule. The Bureau clearly documented its criteria for justifying changes. A team of senior managers is to approve the change and Bureau teams are to acknowledge the change’s effect if the schedule indicates they will be affected by the change. The Bureau provides narratives that go along with some schedule updates and includes these in monthly status reports, ensuring that management are informed of schedule changes on a regular basis in accordance with leading practices. This practice helps Bureau officials use their schedules to produce reports that can be used to identify work that should have started or finished by that time. Bureau managers acknowledged that not all changes reflecting Bureau decisions on dealing with budget uncertainty have been processed and reflected yet in the schedule. Yet with processes in place—and being used—that ensure the schedule is updated, management can be reasonably assured that it is looking at current data when examining the schedule, contingent upon the accuracy of the updates. In conversations with Bureau officials responsible for managing the 2020 Research and Testing and GSS-I schedules, they said that they had not although staff received training or certification in scheduling practices,have received training in the software they are using for scheduling and many staff have been trained in project management. The scheduling managers referred to GAO’s Schedule Assessment Guide as a key resource for their efforts; however, staff answers to interview questions about leading practices demonstrated a lack of knowledge of the practices. For example, staff explained the presence of the large number of constraints in the schedule they provided to us was related to their occasional “testing” of the schedule, but guidelines for a baselined schedule state that it represents the original configuration of the program plan, and would, thus, not include temporary changes such as the staff described. Both the 2020 Research and Planning Office and the Geography Division have contracted for scheduling support in recent years, and maintain that their contractors have a number of certifications in the advanced use of appropriate software and project management methods. Further, Bureau officials described high turnover and extended vacancies in the management team over the 2020 Research and Planning Office’s scheduling contractors and staff until shortly before we began our audit and obtained a copy of their schedule to review. After we completed our audit work at the Bureau, officials told us that subject to the availability of funding, schedule team members will pursue professional certification to further develop and refine their project scheduling skills. Geography Division managers also stressed to us their commitment to schedule management. GAO, Human Capital: Key Principles for Effective Strategic Workforce Planning, GAO-04-39 (Washington, D.C.: Dec. 11, 2003). We developed the key principles of workforce planning by reviewing documents from organizations with expertise in workforce planning models and federal agencies with promising workforce planning practices, as well as our past work. to achieve programmatic goals. A key principle for strategic workforce planning includes systematically identifying gaps in competencies in staff with the goal of minimizing or eliminating these gaps. Our prior work has shown that organizations can use methods such as training, contracting, staff development, and hiring to help align skills in order to eliminate gaps in competencies needed for mission success. By conducting a workforce planning process that includes an analysis of skills and training needed, such as what the Bureau describes for its scheduling staff in the future, and the identification of gaps to be addressed, the Bureau can better ensure that staff who manage the schedules understand the leading practices and the importance of adhering to them. Thus, the Bureau can better ensure it has the capacity to develop schedules able to support key management decisions. Several divisions are involved in efforts to build the 2020 MAF, making collaboration critical to ensuring that participating divisions work together to achieve the Bureau’s goals. In our past work, we identified leading practices to foster collaborative relationships across organizational boundaries. We determined that four of these practices were directly relevant to the Bureau’s internal efforts to build its MAF. Table 2 identifies and describes these four practices and shows our assessment of the extent to which Bureau documentation demonstrates the Bureau engaged in these leading practices. The Bureau has documented its goals for building a more cost-effective MAF as part of its strategic plans. The Bureau’s 2020 Census Strategic Plan set forth Bureau-wide goals for the MAF and the 2020 Census. These goals provide a common rationale for Bureau teams to work across organizational boundaries. Specifically, the Bureau has documented its intention to improve the coverage and accuracy of the address list; continuously update the address list through the decade; and improve the cost-effectiveness of the address list. The Geography Division and the 2020 Research and Planning Office have incorporated these common outcomes as part of their individual efforts. Officials in these units indicated an understanding of these goals and communicated them to us. Each also documented these goals in their planning documents. For example, the Geography Division’s governance document for GSS-I connects its purpose to working towards building the 2020 MAF. Moreover, in the 2020 Research and Planning Office’s Research and Testing management plan, the Bureau sets goals for the division’s research associated with improving the accuracy and cost-effectiveness of the MAF. The Bureau, through its strategic plan, has set goals for the 2020 MAF, communicating these to organizational units in a way that will help focus the work in support of upcoming design decisions. Similar to its goals, the Bureau has established and documented joint strategies as part of its strategic plans. These strategies help outline how the Bureau will achieve the goals of an accurate, continuously updated and cost-effective MAF. The Bureau’s 2013-2017 Strategic Plan and 2020 Census Strategic Plan specifically identify these strategies for achieving its goals for the MAF: defining components of error in the MAF; assessing how rules for using addresses contained in the MAF should implementing targeted address canvassing; change to accommodate new address sources; and identifying more effective approaches to incorporate addresses from state, local, and tribal governments. The Bureau is executing five research projects related to these strategies. The Bureau is also reinforcing implementation of these strategies by creating new coordination groups as well as placing staff from relevant units on MAF-related research projects. For example, the MAF error model research team has representation from the Geography Division, the Decennial Statistical Studies Division, and the Field Division, among others. The importance of having joint strategies clearly documented is underscored by the differences in perspectives that these divisions can bring to common challenges they may work on together, such as developing a proposal for targeted address canvassing. For example, the Geography Division is responsible for, among other things, administering geographic and cartographic activities needed for the 2020 Census. Its research when working with other teams will focus on geographic concepts, methods, and standards needed for the 2020 Census. Meanwhile, the Field Division, with its responsibility for effectively deploying field personnel to support efficient field data collection, will focus on the “on the ground” feasibility and challenge of targeting certain types of housing units for address canvassing. In addition, coordination bodies are working to share information. In May 2013, relevant Bureau officials began to meet regularly to discuss issues related to implementing targeted address canvassing. Bureau officials involved in these meetings said that the team acts as a vehicle to provide status updates across organizational boundaries. Another team working to identify models to predict where addresses were most in need of being updated was chartered in May 2013. The charter indicated that membership was to include representation from staff in the Field Division and would work with relevant research projects. By defining strategies and reinforcing the collaborative nature of these strategies through such actions as coordination groups and matrixed research teams, the Bureau is helping to align the activities and resources of various divisions to achieve the goals of the 2020 MAF. The Bureau’s 2013-2017 Census Strategic Plan identifies relevant divisions within the Bureau with responsibilities related to developing a more cost-effective 2020 MAF and implementing targeted address canvassing. The 2020 Research and Planning Office has identified the relevant divisions participating in active research projects and coordination groups through documents such as charters. For example, the Targeted Address Canvassing Research, Model, and Area Classification team—a coordination team headed by the Geography Division—was chartered in May 2013 and defines what is both in and out of the scope of its activities. Members are responsible for analyzing potential datasets to be used for targeted address canvassing, but are not responsible for analyzing the costs of targeted address canvassing. In addition, the Bureau recently established memorandums of understanding between the 2020 Research and Planning Office and other relevant divisions, generally finalizing them in May 2013 and signing them in June and July 2013. These agreements are not limited to MAF building efforts, but they provide the broad framework for working together and defining coordination. The agreements define the responsibilities of the 2020 Research and Planning Office and the relevant divisions and include provisions for communication between the two organizational units, resource sharing, and modifying agreements as changes in work dictate. However, the Bureau has not taken advantage of some opportunities to use its schedules to reinforce roles or clarify responsibilities. Detailed schedules for 2020 Research and Testing and GSS-I do not completely reflect roles and responsibilities of other divisions or organizational units, such as by reflecting dependencies of activities or handing off to each other. Information on dependencies between projects is available in the project plans for research projects, but such dependencies are not reflected in the schedules. Bureau officials said they would address this by directing project teams to more clearly identify dependencies on various divisions, and review activities to be flagged as having “external” dependencies within the Research and Testing schedule. The Bureau reinforces individual accountability for collaborative activities through individual performance expectations including both broad ones and others specific to MAF development efforts. Bureau-wide, individuals are rated on their “customer service,” a work competency that includes their performance working in collaboration with those outside of their division to respond to internal and external needs. Managers we spoke with said that collaboration across units within the Bureau is assessed within this competency. Bureau officials also provided examples of performance management plans where staff were to be rated specifically on collaboration. For example, one staff member was expected to attend interdivisional coordination meetings and to implement new projects based on these meetings. The inclusion of specific performance expectations and metrics dependent on collaborative activity can reinforce synergy across organizational boundaries within the Bureau. This should help ensure that individuals with responsibility for developing the MAF have a vested interest in achieving the overall goals set by the Bureau. As the Bureau moves to testing and implementation, roles and responsibilities will change, and the respective roles of divisions may also change in prominence. Continued management attention to follow leading practices for collaboration will help to ensure that collaboration across units is occurring as the Bureau strives to achieve its goal of a more cost- effective 2020 MAF and Census. Planning efforts related to targeted address canvassing and building a more cost-effective MAF are important to the Bureau’s efforts to control the costs of the 2020 decennial. As key design decisions are to be made in the coming years, it is important that the Bureau has a reliable schedule in place upon which management can depend to make those decisions. Our analysis of two Bureau schedules key to MAF development efforts indicates that there are problems with the schedules’ reliability. It will be important to ensure that schedules are comprehensive in order for management to be reasonably assured that they have complete information to make decisions. Similarly, problems with the schedules’ construction mean that the progression of critical events could be unclear to management. Finally, the schedules lack credibility, meaning that risks, including those the Bureau has already identified, could impact the schedules in ways not yet considered. Some of the identified deficiencies indicate that staff and managers have not been available and prepared to sufficiently construct and maintain the schedules. Conducting a workforce planning process of staff working on MAF schedules could help the Bureau to identify staff skills needed to help ensure related gaps are addressed. Without staff knowledge of the leading practices and the importance of adhering to them, the schedules may prove problematic for decennial managers’ ability to assess progress, make decisions, identify future risks, or anticipate potential delays. With its planning documents, memorandums of understanding, and various charters, the Bureau has put in place a framework to support collaborative efforts following leading practices, particularly in recent months, which will aid the efforts. These methods could be bolstered by building collaboration into the schedule. By improving practices in the area of constructing a schedule, the Bureau can help address these gaps. As the Bureau continues its implementation efforts up to and beyond key decisions about how to build a cost-effective MAF, it is vital to ensure that the practices incorporated into Bureau planning documents and processes thus far are continued. To help maintain a more thorough and insightful 2020 Census development schedule in order to better manage risks to a successful 2020 Census, the Secretary of Commerce and Undersecretary of Economic Affairs should direct the U.S. Census Bureau to improve its scheduling practices in three areas: the comprehensiveness of schedules, including ensuring that all relevant activities are included in the schedule; the construction of schedules, including ensuring complete logic is in place to identify the preceding and subsequent activities as well as a critical path that can be used to make decisions; and the credibility of schedules, including conducting a quantitative risk assessment. In addition, we recommend that the Director of the U.S. Census Bureau initiate a robust workforce planning process for those working on schedules related to the Master Address File, including actions such as an analysis of skills needed, to identify and address gaps in scheduling skills. We provided a draft of this report to the Department of Commerce and received the department’s written comments on November 5, 2013. The comments are reprinted in appendix IV. The Department of Commerce concurred with our findings and recommendations and provided several clarifications, which are reflected in this report as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Commerce, the Under Secretary of Economic Affairs, the Director of the U.S. Census Bureau, and interested congressional committees. The report also is available at no charge on GAO’s website at http://www.gao.gov. If you have any questions about this report please contact me at (202) 512-2757 or goldenkoffr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. The GAO staff that made major contributions to this report are listed in appendix V. This report (1) assesses the reliability of the schedules for two key Master Address File (MAF) development programs, and (2) examines the extent to which the Census Bureau (Bureau) is following leading practices for collaboration for its MAF development work. To determine the extent to which the Bureau is following leading practices for scheduling as identified in the GAO Schedule Assessment Guide, we analyzed the Geographic Support System Initiative (GSS-I) schedule and the 2020 Research and Planning Office (Research and Testing) schedule. We scored each scheduling best practice on a five-point scale ranging from “not met” to “fully met.” To determine the extent to which the Bureau’s key efforts to build a cost-effective MAF/Topologically Integrated Geographic Encoding and Referencing (MAF/TIGER) incorporate leading practices for collaboration, we identified leading practices to apply to intra-agency collaborative efforts based on our past work on leading collaboration We identified organizational units and activities relevant to practices.building a cost-effective MAF in consultation with the Bureau. We also identified documentation of their research projects. We reviewed key management documents for content pertaining to collaboration, including the Bureau’s strategic plan for the decennial and current (2013-2017) strategic plan. In addition, we reviewed documents directly addressing coordination efforts, such as charters and meeting minutes from coordination groups and memorandums of understanding between divisions. We compared the documented plans and activities to best practices in order to rate the extent to which leading practices were incorporated or were intended to be incorporated into Bureau documents. We rated each practice on a three-point scale from “Not Documented” to “Generally Documented.” Not Documented: The Bureau provided no documentary evidence that satisfies any of the criteria. Partially Documented: The Bureau provided documentary evidence that satisfies a portion of the criteria. Generally Documented: The Bureau provided documentary evidence that satisfies all or nearly all of the criteria. We then interviewed Bureau officials in the Geography and 2020 Research and Planning Office divisions to discuss schedules and their collaboration efforts. Additionally, regarding scheduling and collaboration, we spoke with relevant officials in the Center for Administrative Records Research and Applications, Decennial Statistical Studies Division, and Field Division. These divisions are participating in some MAF development activities with the Geography and 2020 Research and Planning Office divisions. Our review of scheduling and collaboration practices was limited to 2020 Decennial Census activities and focused on MAF development activities and cannot be generalized to other, non- decennial Bureau activities and operations. Description A schedule should reflect all activities defined in the project’s work breakdown structure and include all activities to be performed by the government and contractor. The schedule should realistically reflect the resources (i.e., labor, material, and overhead) needed to do the work, whether all required resources will be available when needed, and whether any funding or time constraints exist. The schedule should reflect how long each activity will take to execute. The schedule should be planned so that all activities are logically sequenced in the order they are to be carried out. The schedule should identify the critical path, or those activities that, if delayed, will negatively impact the overall project completion date. The critical path enables analysis of the effect delays may have on the overall schedule. The schedule should identify float—the amount of time an activity can slip in the schedule before it affects other activities—so that flexibility in the schedule can be determined. As a general rule, activities along the critical path have the least amount of float. The detailed schedule should be horizontally traceable, meaning that it should link products and outcomes associated with other sequenced activities. The integrated master schedule should also be vertically traceable—that is, varying levels of activities and supporting subactivities can be traced. Such mapping or alignment of levels enables different groups to work to the same master schedule. The schedule should include a schedule risk analysis that uses statistical techniques to predict the probability of meeting a completion date. A schedule risk analysis can help management identify high priority risks and opportunities. Progress updates and logic provide a realistic forecast of start and completion dates for program activities. Maintaining the integrity of the schedule logic at regular intervals is necessary to reflect the true status of the program. To ensure that the schedule is properly updated, people responsible for updating should be trained in critical path method scheduling. A baseline schedule represents the original configuration of the program plan and is the basis for managing the project scope, the time period for accomplishing it, and the required resources. Comparing the current status of the schedule to the baseline can help managers target areas for mitigation. Verifying that the schedule is traceable horizontally and vertically Conducting a schedule risk analysis Updating the schedule with actual progress and logic Legend:  Fully Met: The Bureau provided complete evidence that satisfies the entire criteria. ◕ Substantially Met: The Bureau provided evidence that satisfies a large portion of the criteria. ◓ Partially Met: The Bureau provided evidence that satisfies about half of the criteria. ◔ Minimally Met: The Bureau provided evidence that satisfies a small portion of the criteria.  Not Met: The Bureau provided no evidence that satisfies any of the criteria. Assigning resources to all activities Establishing the durations of all activities Confirming that the critical path is valid Verifying that the schedule is traceable horizontally and vertically Conducting a schedule risk analysis Updating the schedule with actual progress and logic Legend:  Fully Met: The Bureau provided complete evidence that satisfies the entire criteria. ◕ Substantially Met: The Bureau provided evidence that satisfies a large portion of the criteria. ◓ Partially Met: The Bureau provided evidence that satisfies about half of the criteria. ◔ Minimally Met: The Bureau provided evidence that satisfies a small portion of the criteria.  Not Met: The Bureau provided no evidence that satisfies any of the criteria. Other key contributors to this report include Ty Mitchell, Assistant Director; Tom Beall; Juaná Collymore; Rob Gebhart; David Hulett; Andrea Levine; Jeffrey Niblack; Karen Richey; and Timothy Wexler.","According to the Bureau, it is committed to limiting its per household cost for the 2020 Census to that of the 2010 Census, and believes that reducing the cost of updating the MAF can be of significant help. Because of tight deadlines and the involvement of several different Bureau units in this effort, effective scheduling and collaboration practices are important for the entire process to stay on track. GAO was asked to examine scheduling and collaboration in the Bureau's efforts to develop a more cost-effective MAF. GAO (1) assessed the reliability of the schedules for two key MAF development programs, and (2) examined the extent to which the Bureau is following leading practices for collaboration for its MAF development work. GAO analyzed the schedules for the two programs most relevant to developing the address list, and reviewed strategic plans and other documents establishing coordination mechanisms and compared them to leading practices for intra-agency collaborative efforts. The Census Bureau (Bureau) is not producing reliable schedules for the two programs most relevant to building the Master Address File (MAF)--the 2020 Research and Testing program and the Geographic Support System Initiative. The Bureau did not include all activities in either schedule. The schedules appeared to have reasonable durations for most activities, but they did not include information about required resources. For both schedules, the Bureau logically linked many activities in a sequence. Yet in both schedules the Bureau did not identify the preceding and following activity for a significant number of activities. Without this logic, the effect of a change in one activity on future activities cannot be seen in the schedule, potentially resulting in unforeseen delays. The Bureau is not in a position to carry out a quantitative risk analysis on the schedules. As a result of these issues, the schedules are producing inaccurate dates, which could mislead Bureau managers to falsely conclude that all of the work is on schedule when it may not be. Without reliable schedule information, such as valid forecasted dates and the amount of flexibility remaining in the schedule, management faces challenges in assessing the progress of MAF development efforts and determining what activities most need attention. Staff managing the schedules said that they had not received thorough training or certification on scheduling best practices, and, according to schedule managers, staff turnover contributed to the issues GAO identified. Workforce planning and training can help the Bureau have the skills in place to ensure that characteristics of a reliable schedule are met to support key management decisions. The Bureau has documented collaboration activities that follow many leading practices for collaboration. Because several divisions are involved in efforts to develop the MAF, collaboration across these divisions is critical. In recent months, the Bureau has put in place a variety of mechanisms to aid coordination, such as crosscutting task teams. For example, research projects relevant to developing the MAF have representation from multiple divisions. The Bureau has also established memorandums of understanding across divisions to provide a broad framework for working together. Continued management attention to collaboration practices will help to ensure that collaboration across units is occurring as MAF development continues. GAO recommends that the Census Director take a number of actions to improve the reliability of its schedules, including steps to ensure that all relevant activities are included in the schedules, complete scheduling logic is in place, and a quantitative risk assessment is conducted. In addition, GAO recommends a robust workforce planning effort to identify and address gaps in scheduling skills for staff that work on schedules. The Department of Commerce concurred and suggested several clarifications, which GAO included in the report as appropriate.",govreport
"The Clean Air Act, a comprehensive federal law that regulates air pollution from stationary and mobile sources, was passed in 1963 to improve and protect the quality of the nation’s air. The act was substantially overhauled in 1970 when the Congress required EPA to establish national ambient air quality standards for pollutants at levels that are necessary to protect public health with an adequate margin of safety and to protect public welfare from adverse effects. EPA has set such standards for ozone, carbon monoxide, particulate matter, sulfur oxides, nitrogen dioxide, and lead. In addition, the act directed the states to specify how they would achieve and maintain compliance with the national standard for each pollutant. The Congress amended the act again in 1977 and 1990. The 1977 amendments were passed primarily to set new goals and dates for attaining the standards because many areas of the country had failed to meet the deadlines set previously. The act was amended again in 1990 when several new themes were incorporated into it, including encouraging the use of market-based approaches to reduce emissions, such as cap-and-trade programs. The major provisions of the 1990 amendments are contained in the first six titles. As requested, this report addresses EPA’s actions related to Titles I, III, and IV: Title I establishes a detailed and graduated program for the attainment and maintenance of the national ambient air quality standards; Title III expands and modifies regulations of hazardous air pollutant emissions and establishes a list of 189 hazardous air pollutants to be regulated; Title IV establishes the acid deposition control program to reduce the adverse effects of acid rain by reducing the annual emissions of pollutants that contribute to it. Although the Clean Air Act is a federal law, states and local governments are responsible for carrying out certain portions of the statute. For example, states are responsible for developing implementation plans that describe how they will come into compliance with national standards set by EPA. EPA must approve each state’s plan, and if an implementation plan is not acceptable, EPA may assume enforcement of the Clean Air Act in that state. Once EPA sets a national standard, it is generally up to state and local air pollution control agencies to enforce the standard, with oversight from EPA. For example, state air pollution control agencies may hold hearings on permit applications by power or chemical plants. States may also fine companies for violating air pollution limits. According to EPA, by many measures, the quality of the nation’s air has improved in recent years. Each year EPA estimates emissions that impact the ambient concentrations of the six major air pollutants for which EPA sets national ambient air quality standards. EPA uses these annual emissions estimates as one indicator of the effectiveness of its air programs. As figure 1 shows, according to EPA, between 1970 and 2004, gross domestic product, vehicle miles traveled, energy consumption, and U.S. population all grew; during the same time period, however, total emissions of the six principal air pollutants dropped by 54 percent. Despite this progress, large numbers of Americans continue to live in communities where pollution sometimes exceeds federal air quality standards for one or more of the six principal air pollutants. For example, EPA reported in April 2004 that 159 million people lived in areas of the United States where air pollution sometimes exceeds federal air quality standards for ground-level ozone. According to EPA, exposure to ozone has been linked to a number of adverse health effects, including significant decreases in lung function; inflammation of the airways; and increased respiratory symptoms, such as cough and pain when taking a deep breath. Moreover, in 2003, 62 million people lived in counties where monitors showed particle pollution levels higher than national particulate matter standards, according to a December 2004 EPA report. Long-term exposure to particle pollution is associated with problems such as decreased lung function, chronic bronchitis, and premature death. Even short-term exposure to particle pollution—measured in hours or days—is associated with such effects as cardiac arrhythmias (heartbeat irregularities), heart attacks, hospital admissions or emergency room visits for heart or lung disease, and premature death. EPA identified 452 actions required to meet the objectives of Titles I, III, and IV of the Clean Air Act Amendments of 1990. About half of these required actions were included under Title III, which also included the largest number of requirements with statutory deadlines. As shown in table 1, the 1990 amendments specified statutory deadlines for 338 of the Title I-, III-, and IV-related requirements. The numerous actions required to meet the objectives of Titles I, III, and IV of the 1990 amendments vary in scope and complexity. For example, Title I of the Clean Air Act requires EPA to periodically review and revise, as appropriate, the national health- and welfare-based standards for air quality. After EPA revises any one of these standards, states are responsible for developing plans that detail how they will achieve the revised standard. EPA then must review the individual state plans for each standard and decide whether to approve them. While EPA must review and approve all individual state plans submitted, each set of reviews is only counted as one action. Other Title I requirements, on the other hand, only require EPA to publish reports on air quality and emission trends. While the reports may represent a significant amount of effort, the steps required to implement national ambient air quality standards are inherently more difficult to accomplish and often require parties independent of EPA, such as state and local agencies, to pass legislation and issue, adopt, and implement rules. Comparing the requirements among titles also shows how they vary in complexity. For example, Title IV required EPA to develop a new market-based cap and trade program to reduce emissions of sulfur dioxide and a rate-based program to reduce emissions of nitrogen oxides from power plants. While developing the cap and trade program was a large undertaking on EPA’s part, it involved regulating a specified number of stationary sources in a single industry. In contrast, under Title III, EPA is required to implement technology-based standards for 174 separate categories of sources of hazardous air pollutants, involving many industries. As shown in table 2, a large portion of the requirements with statutory deadlines related to Titles I, III, and IV were met late. That is, 256 of the 338 requirements with statutory deadlines have been completed but were late. Of the 114 requirements without statutory deadlines, all but 3 of the requirements have been completed. On average, EPA met the requirements related to Titles I, III, and IV about 24, 25, and 15 months after their statutory deadlines, respectively. Of the 256 requirements that EPA met late, 162 were met within 2 years of their statutory deadline and 94 were completed more than 2 years after their deadlines (see table 3). Consequently, improvements in air quality associated with some of these requirements may have been delayed. EPA officials cited several factors to explain why the agency missed deadlines for so many requirements. Among these factors was an emphasis on stakeholders’ review and involvement during regulatory development, which added to the time needed to issue regulations. For example, according to an EPA official, the process to develop an early technology rule under Title III involved protracted negotiations among EPA, industry groups, a labor union, and environmental groups. The rule was finalized in October 1993, 10 months after its statutory deadline. In addition, EPA officials mentioned the need to set priorities among the tremendous number of new requirements for EPA resulting from the 1990 amendments, which meant that some of these actions had to be delayed. Moreover, competing demands caused by the workload associated with EPA’s responses to lawsuits challenging some of its rules caused additional delays. For example, the time needed to respond to litigation of previous rules impinged on EPA staff’s ability to develop new rules, according to agency officials. In addition, at the time of our 2000 report, EPA officials also attributed delays to the emergence of new scientific information that led to major Clean Air Act activities unforeseen by the 1990 amendments. For example, the emergence of new scientific information regarding the importance of regional ozone transport led to an extensive collaborative process between states in the eastern half of the country to evaluate and address the transport of ozone and its precursors. As of April 2005, 45 of the requirements related to Titles I, III, and IV with statutory deadlines that had passed have not been met. Thus, any improvements in air quality that would result from EPA meeting these requirements remain unrealized. The majority of the unmet requirements related to Title I are activities involving promulgating regulations that limit the emissions of volatile organic compounds from different groups of consumer and commercial products. According to EPA officials, these rules were never completed because EPA shifted its priorities toward issuing the Title III technology-based standards. Additionally, EPA officials noted that many states have implemented their own rules limiting emissions of volatile organic compounds from these products, and these state rules are achieving the level of emissions reductions that would be achieved by a national rule passed by EPA. However, EPA is currently being sued because it did not implement these rules by their statutory deadlines. According to an EPA official, the agency and the litigant have agreed on the actions to be taken to address the requirements, but they could not reach agreement on completion dates. As a result, EPA is currently awaiting court-issued compliance dates. In addition, 21 Title III requirements have yet to be met. Most of these are “residual risk” reviews of technology-based standards with deadlines prior to April 2005. That is, within 8 years of setting each technology-based standard, EPA is required to assess the remaining health risks (the residual risk) from each source category to determine whether the standard appropriately protects public health. Applying this “risk-based” approach, EPA must revise the standards to make them more protective of health, if necessary. EPA completed its first review and issued the first set of these risk-based amendments in March 2005. Two actions required by Title IV have not been met, but, according to EPA, the agency has decided not to pursue these actions further. The requirements were to (1) promulgate an opt-in regulation for process sources and (2) conduct a sulfur dioxide/nitrogen oxides inter-pollutant trading study. According to EPA officials, the agency decided not to promulgate the opt-in regulation because it determined that the federal resources needed to develop the rule would be well in excess of those available and the implementation of this provision would not reduce overall emissions. EPA officials also said that the rule would not be cost-effective due to these factors and the limited number of sources expected to use the opt-in option. EPA officials said that the agency decided not to pursue the sulfur dioxide/nitrogen oxides inter-pollutant study because of the lack of a trading ratio that would capture the complex environmental relationship between sulfur dioxide and nitrogen oxides and because an inter-pollutant trading program would be complex and unlikely to result in environmental benefits. The list of specific actions EPA is required to take to meet the objectives of Titles I and III of the Clean Air Act Amendments of 1990 includes requirements for periodic assessments of some of the standards related to these titles. Under the Clean Air Act, EPA is required every 5 years to review the levels at which it has set national ambient air quality standards to ensure that they are sufficiently protective of public health and welfare. If EPA determines it is necessary to revise the standard, the agency undertakes a rulemaking to do so. Each new national ambient air quality standard, in turn, will trigger a number of subsequent EPA actions under Title I, such as setting the boundaries of areas that do not attain the standards and approving state plans to correct nonattainment. As a result, the set of required actions related to Title I tends to repeat over time. Title III also includes requirements for periodic assessments of its technology-based standards. In addition to the residual risk assessments discussed above, the Clean Air Act requires that EPA review the technology-based standards every 8 years, and, if necessary, revise them to account for improvements in air pollution controls and prevention. The first round of these recurring reviews will occur concurrently with the first round of residual risk assessments, according to an EPA official. Moreover, EPA’s workload related to its air programs may increase as a result of recommendations for regulatory reform compiled by the Office of Management and Budget. For example, in response to a recommendation to permit the use of new technology to monitor leaks of volatile air pollutants, EPA plans to propose a rule or guidance in March 2006. The Clean Air Act Amendments of 1990 constituted a significant overhaul of the Clean Air Act, and notable reductions in emissions of air pollutants have been attained as a result of the many actions these amendments required of EPA, states, and other parties. Currently, EPA has completed most of the 452 actions required by the 1990 amendments related to Titles I, III, and IV. The number, scope, and complexity of the required actions under each of these titles varied widely, and these differences, along with other challenges EPA faced, led to varying timeliness in implementing these requirements. Although EPA did not meet the statutory deadlines in many cases, we believe that the deadlines played an important role in EPA’s implementation of the myriad and diverse actions mandated in the 1990 amendments by providing a structure to guide and support the agency’s efforts to complete them. As EPA and the Congress now move on to addressing the remaining air pollution problems that pose health threats to our citizens, some points from our 2000 report on the implementation of the 1990 amendments bear repeating. First, some of the stakeholders we interviewed representing environmental groups and state and local government agencies expressed a preference for legislation and regulations that describe specific amounts of emissions to be reduced, provide specific deadlines to be met, and identify the sources to be regulated. Second, we, along with many of these stakeholders, concluded in that report that the acid rain program under Title IV could offer a worthwhile model for some other air quality problems because it set emission-reduction goals and encouraged market-based approaches, such as cap-and-trade programs, to attain these goals. While EPA officials noted that emissions-trading programs may not be suitable for all air pollutants, the agency has applied this approach to several pollutants since 2000. Specifically, EPA has issued final rules using cap-and-trade programs to achieve further reductions in sulfur dioxide and nitrogen oxides and to require reductions of mercury emissions for the first time. However, whether EPA can apply the cap-and-trade model to hazardous air pollutants such as mercury in the absence of express statutory authority to do so is unclear, particularly in light of the lawsuit that has been filed challenging EPA’s March 2005 rule on mercury emissions. We provided EPA with a draft of this report for its review and comment. EPA generally agreed with the findings presented in the report and provided supplemental information about the air quality, public health, and environmental benefits associated with implementation of the Clean Air Act Amendments of 1990 and comments related to its future challenges. The agency also provided technical comments, which we incorporated where appropriate. Appendix V contains the full text of the agency’s comments and our responses. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies of this report to the appropriate congressional committees; the Administrator, EPA; and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report are listed in appendix VI. The Clean Air Act requires that all areas of the country meet national ambient air quality standards (NAAQS), which are set by EPA at levels that are expected to be protective of human health and the environment. NAAQS have been established for six “criteria” pollutants: ozone, carbon monoxide, nitrogen dioxide, sulfur oxides, particulate matter, and lead. The act further specifies that EPA must assess the level at which the standards are set every five years and revise them, if necessary. To accomplish the objectives of Title I of the Clean Air Act Amendments of 1990, EPA identified 171 requirements. The specific requirements contained in Title I direct EPA to perform a variety of activities, many of which are related to implementing the NAAQS. Implementation of the standards involves several stages, many requiring efforts by both EPA and states. For example, once EPA has determined the appropriate air quality level at which to set a standard, the agency then goes through a designation process during which it identifies the areas of the country that fail to meet the standard. After the nonattainment areas are identified, states have primary responsibility for attaining and maintaining the NAAQS. To do this, states develop state implementation plans (SIPs) that specify the programs that states will develop to achieve and maintain compliance with the standards. Once a state submits a SIP to EPA, EPA is responsible for reviewing it and either approving or disapproving the plan. To assist states in developing their plans, EPA develops guidance documents that help states interpret the standards and provide information on how to comply. For example, EPA established several alternative control techniques documents for various sources that emit nitrogen oxides. These documents provide suggestions for states and industry on different techniques that can be used to reduce nitrogen oxides emissions. In some circumstances, EPA may provide guidance to the state and local air pollution control agencies through the issuance of EPA guidance and/or policy memos. For example, although designating areas as nonattainment or attainment is a complex and time-consuming process, EPA issued guidance through policy memos on the factors and criteria EPA used to make decisions for designating areas of the country as nonattainment. As of April 2005, EPA had completed 146 of the requirements that the agency must implement to meet the objectives of Title I. Sixty-one requirements that EPA had met by April 2005 had statutory deadlines. As table 4 shows, EPA met 16 of these requirements on time and missed the deadlines for 45 of them. EPA also completed 85 of the 88 requirements that did not have statutory deadlines. On average, Title I-related requirements that were met late were completed 24 months after their statutory deadline. As table 5 shows, the length of time by which requirements were met late for Title I varied. For example, 24 of the late requirements were met within 1 year of their statutory deadline while 8 requirements were completed more than 3 years late. According to EPA, the agency missed deadlines for Title I-related requirements for a number of reasons, such as (1) having to review a larger quantity of scientific information than was available in the past; (2) competing demands placed on agency staff who had to work concurrently on more than one major rulemaking; and (3) engaging in longer, more involved interagency review processes. According to agency officials, many of the requirements that EPA completed late arose due to issues beyond EPA’s control. For example, in implementing the ozone and particulate matter NAAQS, the emergence of new scientific information regarding the importance of regional ozone transport led to an extensive collaborative process between states in the eastern half of the country to evaluate and address the transport of ozone and its precursors. This information was then taken into account in the review and subsequent revision of the ozone NAAQS in 1997. In addition, EPA was sued on both the 1997 ozone and particulate matter standards, which delayed EPA’s action to designate areas as nonattainment. Moreover, the ongoing review of the particulate matter NAAQS has been significantly extended as a consequence of the unprecedented amount of new scientific research that has become available since the last review, according to EPA. Currently, EPA has not completed 22 requirements related to Title I with statutory deadlines (see table 6). Fifteen of these requirements call for rules involving different groups of consumer and commercial products, six involve reviewing the NAAQS for the criteria pollutants, and one requires EPA to finalize approving the state implementation plans for ozone and carbon monoxide. The outstanding rules involving the consumer and commercial products are to limit volatile organic compound emissions from various products, such as cleaning products, personal care products, and a variety of insecticides. The 1990 amendments specified that the rules be promulgated in four groups, based on a priority ranking established by EPA that includes a number of factors, such as the quantity of emissions from certain products. While EPA completed the first group of rules by September 1998, the agency had not done anything further to implement the remaining three groups of rules. According to EPA officials, no further work had been done to implement the rules because EPA shifted its priorities toward issuing the Title III technology-based standards. Additionally, EPA officials noted that many states have implemented their own rules limiting emissions of volatile organic compounds from these products, and these state rules are achieving the level of emissions reductions that would be achieved by a national rule passed by EPA. An EPA official stated that a national rule would not provide much of an additional benefit in the areas where emissions of volatile organic compounds are a problem and that a national rule would be fought by industry in states where emissions of volatile organic compounds are not a problem. However, promulgating these rules is a requirement under the 1990 amendments, and according to EPA officials, the agency is currently being sued by the Sierra Club, an environmental advocacy group, for not promulgating them by their statutory deadline. EPA and the litigant have agreed on the actions to be taken to address the requirements, however, they could not reach agreement on the completion dates and are currently awaiting court-issued compliance dates. In addition, the other six unmet requirements related to Title I involve potentially revising the NAAQS for the criteria pollutants. While EPA has been involved in litigation regarding four of these standards, litigation is still ongoing only regarding the lead NAAQS. EPA is being sued for not reviewing since 1991 the lead NAAQS that was originally issued in October 1978. According to EPA officials, the agency did not undertake this review because it shifted its focus to controlling other sources of lead, such as drinking water and hazardous waste facilities. As shown in table 6, EPA expects to complete the required reviews for four of the criteria pollutants by 2009. In addition to the unmet requirements discussed above, EPA has three requirements related to Title I without statutory deadlines that have not yet been completed. The first is to develop a proposed particulate matter implementation rule, which EPA expects to complete in summer 2005. The second is the promulgation of methods for measurement of visible emissions; EPA has not yet set a completion date for this action. The third is the promulgation of phase II of the 8-hour ozone implementation rule, expected in summer 2005. Title III of the Clean Air Act Amendments of 1990 established a new regulatory program to reduce the emissions of hazardous air pollutants, specifying 189 air toxics whose emissions would be controlled under its provisions. The list includes organic and inorganic chemicals, compounds of various elements, and numerous other toxic substances that are frequently emitted into the air. Title III was intended to reduce the population’s exposures to these pollutants, which can cause serious adverse health effects such as cancer and reproductive dysfunction. After identifying the pollutants to be regulated, Title III directs EPA to impose technology-based standards, or Maximum Achievable Control Technology (MACT) standards, on industry to reduce emissions. These technology- based standards require the maximum degree of reduction in emissions that EPA determines achievable for new and existing sources, taking into consideration the cost of achieving such reduction, health and environmental impacts, and energy requirements. The process for developing each MACT standard may include surveying impacted industries, visiting sites, testing emissions, and conducting public hearings. As a second step, within 8 years after completing each technology-based standard, EPA is to review the remaining risks to the public and, if necessary, issue health-based amendments to each of the MACT rules to address such risks. The first set of these “residual risk” standards was finalized in March 2005; residual risk standards for the remaining MACT rules have not been completed. Finally, the Clean Air Act requires that EPA review and, if necessary, revise the technology-based standards at least every 8 years, to account for improvements in air pollution controls and prevention. The first round of these recurring reviews will occur concurrently with the first round of residual risk assessments, according to an EPA official. EPA identified 237 requirements—either with statutory deadlines prior to April 2005 or without statutory deadlines—that accomplish the objectives of Title III of the Clean Air Act Amendments of 1990. Most of the specific requirements under Title III direct EPA to promulgate MACT standards for various sources of hazardous air pollutants, such as dry cleaning facilities, petroleum refineries, and the printing and publishing industry. Title III also requires EPA to issue a variety of studies and reports to the Congress. For example, EPA has issued a series of studies on the deposition of air pollutants to the Great Lakes and other bodies of water. In addition, Title III also directs EPA to issue guidance on a number of subjects, including, for example, guidance regarding state air toxics programs. As of April 2005, EPA had met almost all of the requirements it identified to fully implement the objectives of Title III of the Clean Air Act Amendments of 1990, as shown in table 7. EPA’s most recent data show that it has taken the required action to meet 216 of the 237 Title III requirements, although 195 of these were met late, as shown in table 7. As shown above, the vast majority of Title III requirements were met late. On average, Title III requirements met late were completed 25 months after their statutory deadline. However, the length of time by which requirements were met late varied. As shown in table 8, 116 of the 195 requirements met late were completed within the first 2 years after the statutory deadline, while 29 were not completed until more than 3 years after the deadline. In explaining why requirements under Title III were met late, an EPA official discussed several factors. For example, the official said that the vast majority of the requirements involved the development of the MACT standards, which requires a significant amount of time and effort. The official also confirmed the reasons that requirements were met late provided by EPA officials at the time of our 2000 report, which included the need to prioritize, given resource limitations, the time needed to develop the policy framework and infrastructure of the MACT program, and the need for stakeholder participation in the rulemaking processes for certain MACT standards. In addition, the EPA official pointed out that in the past, litigation on issued rules has imposed additional demands on EPA staff working to meet outstanding requirements, leading to delays. There are 21 requirements under Title III that EPA had not met as of April 2005, most of which involve the residual risk reviews required after EPA has set technology-based standards (see table 9). Specifically, EPA has not yet reviewed residual risk for 19 MACT standards with deadlines prior to April 2005. EPA completed its first review and issued the first set of these risk-based amendments, for the coke oven batteries MACT standard, on March 31, 2005. In addition to the residual risk reviews, EPA has not yet completed its urban area source standards. The other unmet requirement under Title III calls for EPA to promulgate standards for solid waste incinerators not previously regulated under the title. According to an EPA official, the agency has focused its resources on regulating major solid waste incinerators, while this requirement consists of a “catch-all” to pick up remaining sources. Part of the challenge to completing this action has involved identifying what these other sources might be, according to the official. In addition to the unmet requirements above, EPA has not yet completed residual risk reviews for 76 MACT standards whose deadlines fall later than April 2005. Because these residual risk reviews are not due until 8 years after the completion of each technology standard, some of these residual risk reviews are not due until 2012. Title IV of the Clean Air Act Amendments of 1990 established the acid deposition control program. This program was designed to provide environmental and public health benefits through reductions in emissions of sulfur dioxide and nitrogen oxides, the primary causes of acid rain. The program provides an alternative to traditional “command and control” regulatory approaches by using a market-based trading program that allocates sulfur dioxide emission allowances to affected electric utilities. The program creates a cost-effective way for utilities to achieve their required sulfur dioxide emission reductions in the manner that is most suitable to them. Utilities can choose to buy, sell, or bank their allowances, as long as their annual emissions do not exceed the amount of allowances (whether originally allocated to them or purchased) that they hold at the end of the year. The nitrogen oxides program, on the other hand, does not cap emissions of nitrogen oxides, nor does it utilize an allowance trading system. Rather, this program, which focuses on emissions of nitrogen oxides from coal-fired electric utility boilers, provides flexibility for utilities in meeting emission limits by focusing on the emission rate to be achieved and providing options for compliance. To accomplish the objectives of Title IV of the Clean Air Act Amendments of 1990, EPA identified 44 requirements. Many of the required activities had to do with setting up the acid rain program—for example, conducting allowance auctions, issuing allowances to utilities, and establishing an allowance trading system. Additionally, EPA developed requirements for utilities to continuously monitor their emission levels to properly account for allowances. As of April 2005, EPA had completed 42 of the 44 requirements to meet the objectives of Title IV. There were 26 requirements in Title IV with statutory deadlines—EPA met 8 of them on time and missed 16; 2 others were unmet. There were 18 requirements that did not have statutory deadlines, and EPA has completed all of them. (See table 10.) On average, for the 16 requirements EPA met late, they were completed within approximately 15 months of their deadlines. As shown in table 11, 10 were met within 1 year of their deadline and 1 was met more than 3 years late. According to EPA officials, the agency was late with some of the requirements because interagency review and consultation with the Acid Rain Advisory Committee added time to the process. Officials consider this time spent worthwhile because it allowed for more stakeholder input into the rulemaking process, which may have made the rules less controversial. In fact, EPA officials stated that Title IV has been subjected to less litigation than other titles. According to the officials, litigation, however, did cause a delay in the effective date of the first phase of the acid rain nitrogen oxides reduction program by 1 year. EPA officials said the second phase of this program affected approximately three times more units and was implemented on schedule. EPA officials stated that since implementation of the acid rain program, changes have been necessary to keep the program up to date and successful. For example, EPA revised the continuous emission-monitoring rule in 1999 and 2002. According to EPA, these updates were necessary because of changes in the industry, such as technological advances and growth in the number of sources. Two Title IV requirements that EPA has not completed have statutory deadlines that have passed. The two requirements are (1) promulgating the opt-in regulation for process sources and (2) conducting a sulfur dioxide/nitrogen oxides inter-pollutant trading study. After conducting preliminary work for the first action, which was to have been completed by May 1992, EPA determined that the federal resources required to accomplish it were well in excess of those available. Additionally, according to an EPA official, there was evidence of very limited use of the opt-in election for other sources. Given these two factors, and EPA’s view that implementation of this provision would not reduce overall emissions, the agency determined that it would not be cost-effective to promulgate the regulation. Finally, EPA officials said that the agency decided not to pursue the second action, which was to have been completed by January 1994, for three reasons. Specifically, according to EPA officials, (1) they lacked a trading ratio that would capture the complex environmental relationship between sulfur dioxide and nitrogen oxides; (2) if the ratio issue could be resolved, an annual allowance system for nitrogen oxides would need to be created with which to trade sulfur dioxide allowances; and (3) it was not clear that implementing inter-pollutant trading would result in a net environmental benefit as there are multiple and complex health and environmental impacts of both sulfur dioxide and nitrogen oxides requiring a comprehensive analysis of impacts and cost-effectiveness beyond available resources. The objective of this review was to determine the extent to which the Environmental Protection Agency (EPA) has completed the various actions required to meet the objectives of Titles I, III, and IV of the Clean Air Act Amendments of 1990. These titles, which respectively address national ambient air quality standards, hazardous air pollutants, and acid deposition control, are the most relevant to proposed legislation and recently finalized regulations that address emissions of air pollutants by power plants. To obtain information on the status of EPA’s implementation of requirements related to Titles I, III, and IV of the Clean Air Act Amendments of 1990—both those with and without statutory deadlines— we obtained lists of these requirements used for GAO’s 2000 report, Air Pollution: Status of Implementation and Issues of the Clean Air Act Amendments of 1990 (GAO/RCED-00-72) and held discussions with EPA officials knowledgeable about EPA’s workload required to meet the objectives of these titles. EPA officials verified the list of requirements related to each of the three titles for accuracy and completeness and provided documentation for any changes and additions made to the list. To determine how late the requirements were met, we compared the statutory deadline for each requirement to the month in which the requirement was met. For regulations that appeared in the Federal Register, for example, we considered the date the Federal Register issue was published to be the date the requirement was met, as agreed with EPA officials. In addition, we obtained explanations for why a large number of requirements were met after their statutory deadlines from two sources—our 2000 report and through discussions with EPA officials. For requirements that had not been met as of April 2005, we obtained additional information from EPA officials, including actions taken to date. To ensure the reliability of the information provided by EPA, we requested documentation for any changes EPA made to the list of requirements developed for our previous report and checked the documentation to ensure it matched the description of the requirement. In addition, we reviewed the information EPA submitted to ensure there were no duplicate entries or apparent inconsistencies; for any entries that appeared questionable, we followed up with EPA officials and usually obtained additional documentation. In certain cases, in particular with regard to Title III requirements, we also independently verified the status of the requirements. In all cases, EPA provided confirmation for the conclusions we reached as well as, in some cases, additional documentation. We determined that the data we obtained about the status of EPA’s implementation of required actions were sufficiently reliable for the purposes of this report. We also reviewed the methodology of two EPA studies that contained information about areas of the United States impacted by ground-level ozone and particulate matter. We determined that these studies were sufficiently methodologically sound to present their results in this report as background information. While this report addresses the extent to which EPA has met its requirements related to Titles I, III, and IV of the 1990 amendments, it does not address the status of requirements under other titles of the amendments or show the extent to which states have implemented applicable requirements. We conducted our work from January 2005 to May 2005 in accordance with generally accepted government auditing standards. The following are GAO’s comments on EPA’s letter dated May 18, 2005. 1. As background, our report states that while air quality in the United States has steadily improved over the last few decades, more than a hundred million Americans continue to live in communities where pollution causes the air to be unhealthy at times, according to EPA. EPA has apparently interpreted this statement as implying that missed deadlines described in the report are responsible for the scope of the current particulate matter and ozone nonattainment problems. However, our report does not make that link. 2. EPA provided us several examples of cases in which a delay in the implementation of certain specific requirements did not lead to a delay in improvements in air quality. While our draft report indicated that requirements met late delayed improvements in air quality, we did not mean to suggest that all late requirements delayed improvements in air quality. Therefore, we revised the report to say that delays in implementation of some of the requirements may have led to delays in improvements in air quality. 3. During the course of our work, we discussed our proposed methodology with EPA officials and they agreed with our plan to use the Federal Register publication date as the completion date for relevant requirements. In commenting on the draft report, however, the agency stated that its Office of Air and Radiation generally considers that it has met its statutory obligation to issue a rule on the date on which a final rule is signed and disseminated to the public, which is likely to be earlier than the publication of that rule in the Federal Register. Although we agree with EPA’s assessment that using the signature date, rather than the Federal Register publication date, would not change the report’s conclusions, we revised the report to include EPA’s comment. 4. We revised report language throughout to reflect the fact that certain actions originally included as requirements of Title I of the Clean Air Act Amendments of 1990 were established earlier but are related to these amendments. John B. Stephenson, (202) 512-3841 (stephensonj@gao.gov) Christine Fishkin, (202) 512-6895 (fishkinc@gao.gov) In addition to the individuals named above, Nancy Crothers, Christine Houle, Karen Keegan, Judy Pagano, and Nico Sloss made key contributions to this report.","While air quality in the United States has steadily improved over the last few decades, more than a hundred million Americans continue to live in communities where pollution causes the air to be unhealthy at times, according to the Environmental Protection Agency (EPA). The Clean Air Act, first passed in 1963, was last reauthorized and amended in 1990, when new programs were created and changes were made to the ways in which air pollution is controlled. The 1990 amendments included hundreds of requirements for EPA, as well as other parties, to take steps that will ultimately reduce air pollution. The amendments also established deadlines for many of these requirements. Since the 1990 amendments, various actions have been proposed to either amend the Clean Air Act or implement its provisions in new ways. GAO was asked to report on the current status of EPA's implementation of requirements under Titles I, III, and IV of the 1990 amendments. These titles, which address national ambient air quality standards, hazardous air pollutants, and acid deposition control, respectively, are the most relevant to proposed legislation and recently finalized regulations addressing emissions of air pollutants by power plants. As of April 2005, EPA had completed 404 of the 452 actions required to meet the objectives of Titles I, III, and IV of the Clean Air Act Amendments of 1990. Of the 338 requirements that had statutory deadlines prior to April 2005, EPA completed 256 late: many (162) 2 years or less after the required date, but others (94) more than 2 years after their deadlines. Consequently, improvements in air quality associated with some of these requirements may have been delayed. The numerous actions required to implement these titles varied in scope and complexity. For example, these actions included reviewing numerous state plans to comply with national health- and welfare-based air quality standards for six major pollutants, setting technology-based standards to reduce emissions from sources of hazardous air pollutants, and developing a new program to reduce acid rain. EPA officials cited several reasons for the missed deadlines, including the emphasis on stakeholders' involvement during regulatory development, which added to the time needed to issue regulations; the need to set priorities among the tremendous number of new responsibilities EPA assumed as a result of the 1990 amendments, which meant that some actions had to be delayed; and competing demands caused by the workload associated with EPA's response to lawsuits challenging some of its rules. Of the 48 requirements EPA had not met as of April 2005, 45 had associated deadlines, and 3 did not. The unmet requirements include 15 Title I requirements to promulgate regulations to limit the emissions of volatile organic compounds from a number of consumer and commercial products, such as household cleaners and pesticides. According to EPA officials, these rules were not completed because EPA shifted its priorities toward issuing standards related to the emissions of hazardous air pollutants regulated under Title III. However, the unmet requirements also include actions under Title III to periodically assess whether EPA's emissions standards for sources that emit significant amounts of hazardous air pollutants appropriately protect public health. These ""residual risk"" assessments are to be made within 8 years of the setting of each of the emissions standards, and 19 of these assessments are now past the 8-year mark. EPA completed the first of these residual risk assessments in March 2005. Any improvements in air quality that would result from EPA meeting these requirements remain unrealized. In commenting on a draft of this report, EPA generally agreed with our findings and provided supplemental information, primarily on the benefits of the Clean Air Act Amendments of 1990 and the reasons for implementation delays.",govreport
"With an overall goal of developing research that communities need to make sound decisions about how best to prevent and reduce girls’ delinquency, OJJDP established the Girls Study Group (Study Group) in 2004 under a $2.6 million multiyear cooperative agreement with a research institute. OJJDP’s objectives for the group, among others, included identifying effective or promising programs, program elements, and implementation principles (i.e., guidelines for developing programs). Objectives also included developing program models to help inform communities of what works in preventing or reducing girls’ delinquency, identifying gaps in girls’ delinquency research and developing recommendations for future research, and disseminating findings to the girls’ delinquency field about effective or promising programs. To meet OJJDP’s objectives, among other activities, the Study Group identified studies of delinquency programs that specifically targeted girls by reviewing over 1,000 documents in relevant research areas. These included criminological and feminist explanations for girls’ delinquency, patterns of delinquency, and the justice system’s response to girls’ delinquency. As a result, the group identified 61 programs that specifically targeted preventing or responding to girls’ delinquency. Then, the group assessed the methodological quality of the studies of the programs that had been evaluated using a set of criteria developed by DOJ’s Office of Justice Programs (OJP) called What Works to determine whether the studies provided credible evidence that the programs were effective at preventing or responding to girls’ delinquency. The results of the group’s assessment are discussed in the following sections. OJJDP’s effort to assess girls’ delinquency programs through the use of a study group and the group’s methods for assessing studies were consistent with generally accepted social science research practices and standards. In addition, OJJDP’s efforts to involve practitioners in Study Group activities and disseminate findings were also consistent with the internal control standard to communicate with external stakeholders, such as practitioners operating programs. According to OJJDP research and program officials, they formed the Study Group rather than funding individual studies of programs because study groups provide a cost-effective method of gaining an overview of the available research in an issue area. As part of its work, the group collected, reviewed, and analyzed the methodological quality of research on girls’ delinquency programs. The use of such a group, including its review, is an acceptable approach for systematically identifying and reviewing research conducted in a field of study. This review helped consolidate the research and provide information to OJJDP for determining evaluation priorities. Further, we reviewed the criteria the group used to assess the studies and found that they adhere to generally accepted social science standards for evaluation research. We also generally concurred with the group’s assessments of the programs based on these criteria. According to the group’s former principal investigator, the Study Group decided to use OJP’s What Works criteria to ensure that its assessment of program effectiveness would be based on highly rigorous evaluation standards, thus eliminating the potential that a program that may do harm would be endorsed by the group. However, 8 of the 18 experts we interviewed said that the criteria created an unrealistically high standard, which caused the group to overlook potentially promising programs. OJJDP officials stated that despite such concerns, they approved the group’s use of the criteria because of the methodological rigor of the framework and their goal for the group to identify effective programs. In accordance with the internal control standard to communicate with external stakeholders, OJJDP sought to ensure a range of stakeholder perspectives related to girls’ delinquency by requiring that Study Group members possess knowledge and experience with girls’ delinquency and demonstrate expertise in relevant social science disciplines. The initial Study Group, which was convened by the research institute and approved by OJJDP, included 12 academic researchers and 1 practitioner; someone with experience implementing girls’ delinquency programs. However, 11 of the 18 experts we interviewed stated that this composition was imbalanced in favor of academic researchers. In addition, 6 of the 11 said that the composition led the group to focus its efforts on researching theories of girls’ delinquency rather than gathering and disseminating actionable information for practitioners. According to OJJDP research and program officials, they acted to address this issue by adding a second practitioner as a member and involving two other practitioners in study group activities. OJJDP officials stated that they plan to more fully involve practitioners from the beginning when they organize study groups in the future and to include practitioners in the remaining activities of the Study Group, such as presenting successful girls’ delinquency program practices at a national conference. Also, in accordance with the internal control standard, OJJDP and the Study Group have disseminated findings to the research community, practitioners in the girls’ delinquency field, and the public through conference presentations, Web site postings, and published bulletins. The group plans to issue a final report on all of its activities by spring 2010. The Study Group found that few girls’ delinquency programs had been studied and that the available studies lacked conclusive evidence of effective programs; as a result, OJJDP plans to provide technical assistance to help programs be better prepared for evaluations of their effectiveness. However, OJJDP could better address its girls’ delinquency goals by more fully developing plans for supporting such evaluations. In its review, the Study Group found that the majority of the girls’ delinquency programs it identified—44 of the 61—had not been studied by researchers. For the 17 programs that had been studied, the Study Group reported that none of the studies provided conclusive evidence with which to determine whether the programs were effective at preventing or reducing girls’ delinquency. For example, according to the Study Group, the studies provided insufficient evidence of the effectiveness of 11 of the 17 programs because, for instance, the studies involved research designs that could not demonstrate whether any positive outcomes, such as reduced delinquency, were due to program participation rather than other factors. Based on the results of this review, the Study Group reported that among other things, there is a need for additional, methodologically rigorous evaluations of girls’ delinquency programs; training and technical assistance to help programs prepare for evaluations; and funding to support girls’ delinquency programs found to be promising. According to OJJDP officials, in response to the Study Group’s finding about the need to better prepare programs for evaluation, the office plans to work with the group and use the remaining funding from the effort— approximately $300,000—to provide a technical assistance workshop by the end of October 2009. The workshop is intended to help approximately 10 girls’ delinquency programs prepare for evaluation by providing information about how evaluations are designed and conducted and how to collect data that will be useful for program evaluators in assessing outcomes, among other things. In addition, OJJDP officials stated that as a result of the Study Group’s findings, along with feedback they received from members of the girls’ delinquency field, OJJDP plans to issue a solicitation in fiscal year 2010 for funding to support evaluations of girls’ delinquency programs. OJJDP has also reported that the Study Group’s findings are to provide a foundation for moving ahead on a comprehensive program related to girls’ delinquency. However, OJJDP has not developed a plan that is documented, is shared with key stakeholders, and includes specific funding requirements and commitments and time frames for meeting its girls’ delinquency goals. Standard practices for program and project management state that specific desired outcomes or results should be conceptualized, defined, and documented in the planning process as part of a road map, along with the appropriate projects needed to achieve those results, supporting resources, and milestones. In addition, government internal control standards call for policies and procedures that establish adequate communication with stakeholders as essential for achieving desired program goals. According to OJJDP officials, they have not developed a plan for meeting their girls’ delinquency goals because the office is in transition and is in the process of developing a plan for its juvenile justice programs, but the office is taking steps to address its girls’ delinquency goals, for example, through the technical assistance workshop. Developing a plan for girls’ delinquency would help OJJDP to demonstrate leadership to the girls’ delinquency field by clearly articulating the actions it intends to take to meet its goals and would also help the office to ensure that the goals are met. In our July report, we recommended that to help ensure that OJJDP meets its goals to identify effective or promising girls’ delinquency programs and supports the development of program models, the Administrator of OJJDP develop and document a plan that (1) articulates how the office intends to respond to the findings of the Study Group, (2) includes time frames and specific funding requirements and commitments, and (3) is shared with key stakeholders. OJP agreed with our recommendation and outlined efforts that OJJDP plans to undertake in response to these findings. For example, OJJDP stated that it anticipates publishing its proposed juvenile justice program plan, which is to include how it plans to address girls’ delinquency issues, in the Federal Register to solicit public feedback and comments, which will enable the office to publish a final plan in the Federal Register by the end of the year (December 31, 2009). Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have. For questions about this statement, please contact Eileen R. Larence at (202) 512-8777 or larencee@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Mary Catherine Hult, Assistant Director; Kevin Copping; and Katherine Davis. Additionally, key contributors to our July 2009 report include David Alexander, Elizabeth Blair, and Janet Temko. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.","This testimony discusses issues related to girls' delinquency--a topic that has attracted the attention of federal, state, and local policymakers for more than a decade as girls have increasingly become involved in the juvenile justice system. For example, from 1995 through 2005, delinquency caseloads for girls in juvenile justice courts nationwide increased 15 percent while boys' caseloads decreased by 12 percent. More recently, in 2007, 29 percent of juvenile arrests--about 641,000 arrests--involved girls, who accounted for 17 percent of juvenile violent crime arrests and 35 percent of juvenile property crime arrests. Further, research on girls has highlighted that delinquent girls have higher rates of mental health problems than delinquent boys, receive fewer special services, and are more likely to abandon treatment programs. The Office of Juvenile Justice and Delinquency Prevention (OJJDP) is the Department of Justice (DOJ) office charged with providing national leadership, coordination, and resources to prevent and respond to juvenile delinquency and victimization. OJJDP supports states and communities in their efforts to develop and implement effective programs to, among other things, prevent delinquency and intervene after a juvenile has offended. For example, from fiscal years 2007 through 2009, Congress provided OJJDP almost $1.1 billion to use for grants to states, localities, and organizations for a variety of juvenile justice programs, including programs for girls. Also, in support of this mission, the office funds research and program evaluations related to a variety of juvenile justice issues. As programs have been developed at the state and local levels in recent years that specifically target preventing girls' delinquency or intervening after girls have become involved in the juvenile justice system, it is important that agencies providing grants and practitioners operating the programs have information about which of these programs are effective. In this way, agencies can help to ensure that limited federal, state, and local funds are well spent. In general, effectiveness is determined through program evaluations, which are systematic studies conducted to assess how well a program is working--that is, whether a program produced its intended effects. To help ensure that grant funds are being used effectively, you asked us to review OJJDP's efforts related to studying and promoting effective girls' delinquency programs. We issued a report on the results of that review on July 24, 2009. This testimony highlights findings from that report and addresses (1) efforts OJJDP has made to assess the effectiveness of girls' delinquency programs, (2) the extent to which these efforts are consistent with generally accepted social science standards and federal standards to communicate with stakeholders, and (3) the findings from OJJDP's efforts and how the office plans to address the findings. This statement is based on our July report and selected updates made in October 2009. With an overall goal of developing research that communities need to make sound decisions about how best to prevent and reduce girls' delinquency, OJJDP established the Girls Study Group (Study Group) in 2004 under a $2.6 million multiyear cooperative agreement with a research institute. OJJDP's objectives for the group, among others, included identifying effective or promising programs, program elements, and implementation principles (i.e., guidelines for developing programs). Objectives also included developing program models to help inform communities of what works in preventing or reducing girls' delinquency, identifying gaps in girls' delinquency research and developing recommendations for future research, and disseminating findings to the girls' delinquency field about effective or promising programs. OJJDP's effort to assess girls' delinquency programs through the use of a study group and the group's methods for assessing studies were consistent with generally accepted social science research practices and standards. In addition, OJJDP's efforts to involve practitioners in Study Group activities and disseminate findings were also consistent with the internal control standard to communicate with external stakeholders, such as practitioners operating programs. The Study Group found that few girls' delinquency programs had been studied and that the available studies lacked conclusive evidence of effective programs; as a result, OJJDP plans to provide technical assistance to help programs be better prepared for evaluations of their effectiveness. However, OJJDP could better address its girls' delinquency goals by more fully developing plans for supporting such evaluations.",govreport
"Before 1991, the military services maintained separate finance and accounting operations that were duplicative and inefficient. DFAS was created to standardize DOD finance and accounting policies, procedures, and systems. Military services and defense agencies generally use operations and maintenance appropriations to pay for DFAS services. Before fiscal year 1991, the military services and defense agencies each had their own financial management structure, consisting of a headquarters comptroller organization; finance and accounting centers; and accounting, finance, and disbursing offices at military bases. Each service and agency developed its own processes and systems that were geared to its particular mission. In many instances, the military services and defense agencies interpreted governmentwide and DOD-level finance and accounting policies differently. According to DOD, these variances sometimes resulted in managers being provided conflicting information. Over the years as greater emphasis was placed on joint operations, financial management system incompatibility and lack of standardization (even within a military service) became more apparent. For example, there was only one pay schedule for military personnel, yet DOD maintained and operated dozens of different pay systems. These types of conditions produced business practices that were complex, slow, and error prone. According to DOD officials, no matter how skilled the people operating them, DOD’s financial management systems and processes were inherently handicapped in their efficiency and effectiveness. Furthermore, DOD officials stated that there was an inherent inefficiency in having multiple organizations perform virtually identical functions. Given these problems; changes in the economic, political, and management environments; and advances in technology, DOD officials became convinced they needed to improve the economy and efficiency of their finance and accounting operations. After assessing how finance and accounting activities were performed, DOD determined that consolidating these activities offered a number of potential advantages, including increasing DOD-wide oversight; improving consistency in the application of accounting principles, policies, procedures, systems, and standards throughout DOD; eliminating the costs of maintaining and operating multiple financial operations and systems; improving decision making by providing DOD managers with more timely, meaningful, and accurate financial information; and accelerating the implementation of standard DOD-wide financial systems. The establishment of DFAS in January 1991 was the first step taken by DOD directed at fundamentally reforming finance and accounting operations. DFAS was formed by consolidating into a single agency under DOD’s Comptroller, the large finance and accounting centers that belonged to the military services and the Defense Logistics Agency. Recognizing that additional economies and efficiencies could be achieved, the Deputy Secretary of Defense, in December 1991, directed DFAS to assume control of existing finance and accounting operations and personnel at the command and installation levels within the military services. By 1994, DFAS had assumed responsibility for many of the finance and accounting activities at 332 offices (in the continental United States, Alaska, Hawaii, Guam, Puerto Rico, and Panama) and had announced plans to consolidate these activities at a limited number of DFAS locations. To focus DOD management’s attention on managing the cost of finance and accounting activities, DFAS was designated a Defense Business Operations Fund (DBOF) business area in fiscal year 1992. The concept of DBOF is to promote total cost visibility by charging customers (primarily the military services and defense agencies) for the full cost of providing goods and services. By doing this, DOD hoped that all levels of management would focus their attention on the total costs of carrying out certain critical DOD business operations. DOD anticipated that this would encourage managers to become more conscious of operating costs and make fundamental improvements in how DOD conducts business. In fulfilling DBOF’s concept, DFAS sets the prices it charges the military services and defense agencies and bills them to cover the full cost of its operations. The military services and defense agencies pay for these services primarily with funds from their operations and maintenance appropriations. The 1997 Defense Authorization Act required DOD to conduct a comprehensive study of DBOF and present an improvement plan to the Congress for approval. Pending the results of this study, DOD’s Comptroller, on December 11, 1996, dissolved DBOF and created four working capital funds: (1) Army Working Capital Fund, (2) Navy Working Capital Fund, (3) Air Force Working Capital Fund, and (4) Defense-wide Working Capital Fund. DFAS is part of the Defense-wide Working Capital Fund. The four working capital funds will continue to operate under the revolving fund concept—using the same policies, procedures, and systems as they did under DBOF—and charge customers the full costs of providing goods and services to them. Over the past few years, DOD’s finance and accounting organization and management structure has undergone major changes. For example, DFAS and the military services now share the finance and accounting responsibilities that previously belonged to the military services. Most significantly, however, DFAS has developed a new concept of operations that involves performing most of its finance and accounting operations at consolidated sites rather than at local bases and installations. This has allowed it to reduce the number of locations and personnel needed to perform these operations and to begin standardizing its accounting systems and processes. This section describes the current organizational structure of DOD’s finance and accounting activities and the status of various changes with respect to finance and accounting locations, personnel, budgets, and systems. DFAS and the military services are jointly responsible for carrying out DOD finance and accounting activities. DFAS negotiated a division of responsibility with each military service. Finance and accounting operations are performed by two chains of command within DOD. On one side is DFAS, which reports to the Under Secretary of Defense Comptroller/Chief Financial Officer within the Office of the Secretary of Defense. On the other side are the military services, which are headed by their respective secretary. Each service secretary has an assistant secretary for financial management who directs and manages financial management activities consistent with policies prescribed by the Chief Financial Officer and the service’s implementing directives. As shown in figure 1, the Under Secretary has no direct line of authority to any of the financial management staff within the military services, defense agencies, and DOD field activities. Those staff report through their own organizational structure to their respective unit heads. The Under Secretary and the unit heads report to the Secretary of Defense. The Under Secretary, however, does issue policies, instructions, regulations, and procedures relating to financial management matters and the production of financial statements, which are binding on all DOD activities. The National Defense Authorization Act for Fiscal Year 1994 designated the Comptroller as DOD’s Chief Financial Officer. Specific duties of the Comptroller/Chief Financial Officer as specified in the Chief Financial Officers Act include directing, managing, and providing policy guidance and oversight of agency financial management personnel, activities, and operations; developing and maintaining integrated accounting and financial monitoring the financial execution of the agency budgets in relation to actual expenditures and preparing and submitting timely performance reports; and overseeing the recruitment, selection, and training of personnel to carry out agency financial management functions. As mentioned, each service secretary has an assistant secretary for financial management who reports to the service secretary and directs and manages financial management activities consistent with policies prescribed by the Chief Financial Officer and the service’s implementing directives. The assistant secretary for financial management position in each service was established in the National Defense Authorization Act for Fiscal Year 1989. The act delineated many of the responsibilities of the office, including managing financial management activities and operations; directing the preparation of budget estimates; approving any asset management systems, including cash and credit collecting debts; and accounting for property and inventory systems. Because of potentially overlapping responsibilities, DFAS met several times with the military services’ financial managers and their staffs during 1994 to reach agreement on their respective finance and accounting roles. These meetings resulted in “responsibility matrices” that identify the specific activities that will be performed by DFAS and each military service. According to DFAS, the responsibility matrix agreements were driven, to a large extent, by the number of finance and accounting personnel each service had transferred to DFAS. Prior to the negotiations in 1994, for example, the Army had transferred about 75 percent of its finance and accounting people to DFAS. According to Army officials, it kept only a small contingent of managerial accountants at each installation and major command location to interpret accounting reports provided by DFAS to the installation or major command and provide advice to the commander on proper stewardship of public funds. As a result, DFAS and the Army agreed that DFAS would perform just about all of the Army’s financial activities. On the other hand, Air Force and Navy officials stated that they transferred smaller percentages of their staffs (50 and 29 percent, respectively). They took this approach to maintain control of activities they felt were essential to providing service to their military personnel and families, such as computing travel pay or helping uniformed personnel solve pay-related problems. Travel payment, a finance function, is an example where DFAS provides different levels of service to its military customers. In this case, authorization, computation, disbursement, and accounting are performed by either the military services or DFAS. Table 3 identifies the responsible party for each of these steps. DFAS assumed control over the military services' finance centers and some of the activities at 332 military installations. DFAS is currently consolidating all its activities into 5 centers and not more than 21 operating locations. The military services continue to perform their remaining activities at most of the 332 installations. When DFAS was established, it opened a headquarters office in Arlington, Virginia, and assumed management control over the six large finance centers that belonged to the military services and defense agencies. One of these centers was subsequently closed, but the others continue to support the military service or defense agency they supported prior to the formation of DFAS. According to the Director of DFAS, this was done primarily to ensure that support levels to the military services and defense agencies remained at an acceptable level. DFAS also assumed control over many of the people and functions at 332 small finance and accounting offices around the world. To improve operational efficiencies and reduce costs, DFAS has focused a great deal of attention on consolidating the personnel and workload at a small number of locations. In May 1994, for example, the Deputy Secretary of Defense announced plans to move the DFAS workload and many of the people at these 332 locations to either the existing 5 centers or 20 new operating locations. As of September 1996, DFAS had closed 230 (or about 70 percent) of the small accounting offices and opened 17 operating locations. Figure 2 shows the number of finance and accounting offices that DFAS plans to close through fiscal year 1998, when the consolidation is now expected to be completed. Announced for fiscal year 1997 Three of the planned operating locations—Lexington, Kentucky; Newark, Ohio; and Rantoul, Illinois—have not been formally scheduled for opening at this time. The fourth planned operating location, at Memphis, Tennessee, will be under the cognizance of the U.S. Army Corps of Engineers until the Corps completes its consolidation of finance and accounting operations around fiscal year 1999. At that time, the Corps will transfer the activity to DFAS. Except for Honolulu, Hawaii; Norfolk, Virginia; Orlando, Florida; and San Antonio, Texas, each operating location provides services to a single military service. Honolulu serves all of the military services; Norfolk serves Navy and Army customers; and both Orlando and San Antonio serve Army and Air Force customers. In addition, Charleston, South Carolina; Pensacola, Florida; and Omaha, Nebraska, provide civilian pay service to all military services and defense agencies. Figure 3 shows the locations of the 5 centers and 21 existing or planned operating locations as of September 30, 1996. The primary customer (military service or defense agency) of each center is shown in parentheses in the figure. Not opened as of September 30, 1996. As discussed in the previous section, each of the military services retained certain functions (e.g., managerial accounting, travel claim computation, and customer service) in order to support local commanders and customers. To do this, the services have maintained some staff at most of the 332 installation-level finance offices. Although there are interfaces and exchanges of information between the staff at these offices and DFAS, organizationally they are not part of DOD’s Comptroller or DFAS’ communities. Rather, they report to and receive budgetary support from the base or installation commander. Civilian and military personnel at these activities are paid from operations and maintenance and military personnel appropriations, respectively. DOD estimated it had 46,000 people performing finance and accounting activities in 1994 and has 40,800 performing these today. 28,000 people were transferred into DFAS, leaving the military services with 18,000 people. DFAS currently has 23,500 employees. The military services do not track the number of finance and accounting personnel they employ, but estimate there are about 17,300. In May 1994, when the Deputy Secretary of Defense announced plans to consolidate finance and accounting operations, he said that the number of people performing these activities should drop from about 46,000 to 23,000 by 1999. As of September 1996, DOD estimates show that there were about 40,800 people performing finance and accounting activities—about 5,200 less than estimated in 1994. However, there is some uncertainty about these numbers primarily because the military services do not centrally budget for or manage finance and accounting operations. As a DBOF entity that is now part of the new Defense-wide Working Capital Fund, DFAS tracks the number of personnel it employs so that it can accurately charge its customers for the full cost of operations. Therefore, it generally knows how many people it inherited from the military services and its current on-board strength. DFAS officials told us, for example, that by 1994 DFAS had assumed control of 28,000 personnel—about 10,000 at the 5 large finance centers and about 18,000 at the 332 small, installation-level finance and accounting offices. As of September 1996, this workforce had been reduced to 23,500 and DFAS has plans to eliminate another 3,500 positions by the year 2000. According to DOD, most of these reductions are (or will be) made possible by economies of scale achieved by closing the 332 small finance and accounting offices and consolidating activities at the 5 centers and 21 operating locations. Finance and accounting personnel and activities in the military services, however, are budgeted for and controlled at the installation level. Consequently, service representatives said there were no specific plans to centrally assess or reduce the size of their finance and accounting network. For this reason, they were also uncertain of the number of people that remained after DFAS assumed control of resources in 1994 or that are currently onboard. According to DOD, however, there should have been about 18,000 finance and accounting personnel left with the military services in 1994. In 1992, DFAS and the military services issued a data call to all installation-level finance offices, and in 1994, estimated that the total number of people in DOD’s network was about 46,000. On the basis of this estimate, DFAS assumed control of 28,000 people, leaving about 18,000 people in the military services. To determine the number of people in the current military service network, the services (at our request) either issued another data call to their installations or prepared an estimate based on other available information. They reported to us that, as of September 30, 1996, approximately 17,300 people were performing finance and accounting activities in the military services. On the basis of a comparison of the original data call and the current estimate, about 700 fewer people are performing finance and accounting activities now than DOD officials believe were doing so when DFAS completed its transfer process in 1994. Figure 4 shows the number of finance and accounting personnel reported to us by DFAS and the military services as of September 30, 1996. This includes 589 personnel in the Marine Corps. The total budget for DOD finance and accounting activities is unknown but exceeds $2 billion. DFAS' 1996 budget was $1.64 billion. The military services estimate their personnel costs for fiscal year 1996 at $598 million. The vast majority of the funds come from operations and maintenance appropriations. Information that was provided by DFAS and the military services indicates that DOD budgeted at least $2 billion in fiscal year 1996 to support finance and accounting activities. This estimate includes all DFAS costs plus estimated personnel costs in the military services. Because military service finance and accounting activities are budgeted at local installations and bases in various appropriation accounts, the military services were unable to estimate other finance and accounting-related costs such as training, equipment, supplies, and overhead. As part of the new Defense-wide Working Capital Fund, DFAS does not receive an appropriation. Instead, it bills customers, primarily the military services, for the cost of operations. These bills include charges for direct labor costs related to the performance of finance and accounting functions; indirect costs, such as systems support and depreciation expenses; and overhead costs, such as management support and electricity bills. The bills may also include additional charges or reductions to make up for prior year losses or gains. The military services use their operations and maintenance appropriations to pay the bills. Figure 5 shows DFAS’ financial operations budget from fiscal years 1991 through 1996 and the projected budget for fiscal years 1997 through 2000—the numbers are in constant 1996 dollars. As shown in figure 5, DFAS’ budget for finance and accounting increased from $339 million (in 1996 dollars) in fiscal year 1991 to about $1.64 billion in fiscal year 1996, primarily as a result of an increase in its scope of operations. In fiscal year 1991, for example, DFAS was in operation for only 9 months and was only supporting the finance centers. In fiscal year 1992, DFAS became a DBOF entity and began to identify and charge the military services for the full cost of its operations. For example, system support (e.g., computer hardware and software) costs that had been part of the Defense Information Systems Agency budget in the past were included in the DFAS budget. In fiscal year 1993, DFAS began to assume control of the 332 installation-level finance and accounting offices, and in 1994, DFAS began renovating buildings at the new operating locations. Between fiscal years 1996 and 2000, DFAS estimates its budget will decrease by about 10 percent—from $1.64 billion in fiscal year 1996 to $1.47 billion in 2000 in constant 1996 dollars. According to DFAS officials, the decrease reflects a leveling off of depreciation expenses associated with capital expenditures (such as new computer systems), a drop in workload as DOD continues to downsize its military force structure, and the completion of personnel and workload consolidations from the small finance and accounting offices to DFAS centers and operating locations. The military services’ finance and accounting activities are funded through annual operation and maintenance appropriations. Because these appropriations are allocated to many different budget categories at the installation level, military service officials were not able to estimate the total amount budgeted to support their finance and accounting activities. On the basis of the estimated number of personnel that are currently performing finance and accounting activities, the services estimated that for fiscal year 1996 they budgeted about $598 million in personnel costs. Figure 6 shows the personnel costs each of the military services estimated it incurred during fiscal year 1996. DFAS is responsible for reducing the number of finance and accounting systems used throughout DOD. Since 1991, the number of DOD's reported finance and accounting systems has been reduced from 324 to 217. The military services continue to operate hundreds of feeder systems for which DFAS has no responsibility. As part of its mission, DFAS is responsible for standardizing the finance and accounting systems used throughout DOD. When it was established, for example, DFAS reported that it inherited 127 finance and 197 accounting systems that were in use throughout DOD. In general, DOD defines finance systems as those used to process payments to DOD personnel, retirees, annuitants, and contractors, and accounting systems as those relied on to track appropriations and record operating and capital expenses. In accordance with DOD Financial Management Regulations (DOD 7000.14-R, Volume 1), DFAS, however, does not recognize or include in its inventory several hundred “feeder systems”—systems used to initially record financial data, such as logistics, inventory, and personnel systems—as finance and accounting systems. Yet these feeder systems, which are under the control and operations of the military services and defense agencies, are the source of much of the information that is needed to adequately account for DOD’s assets and operations. DFAS embarked on what it calls a migration system strategy to reduce the number of DFAS finance and accounting systems. Under this strategy, which is depicted in figure 7, DFAS plans to gradually reduce the number of systems used in each functional area (e.g., civilian payroll, military payroll, and accounting) until it eventually arrives at systems that would be used DOD-wide for each finance and accounting area. While the completion of this strategy varies by system and functional area, DFAS estimates that about 49 percent of its current systems (107 of 217) will be eliminated by 2000. . . . . . . This migration strategy typically involves (1) selecting one of the legacy systems from each service, (2) implementing the system servicewide, (3) selecting the best interim migratory system to be DOD’s standard migratory system, and (4) enhancing the migratory system until it meets all DOD requirements. As shown in table 4, DFAS has reduced the reported number of finance systems from 127 to 67 (a 47-percent reduction) and accounting systems from 197 to 150 (a 24-percent reduction). By the year 2000, DFAS estimates that the number of systems will be further reduced to 110—43 finance and 67 accounting systems. Table 4 also shows the number of finance and accounting locations where these systems were used as of September 30, 1996. On the basis of the information presented in table 4, DFAS has been successful in reducing the number of systems in several areas, particularly those where the military services had already consolidated activities at a small number of locations. When DFAS was formed, for example, each of the military services was already operating standard retiree and annuitant pay systems at its respective finance centers. After evaluating the relative capabilities of these systems, DFAS selected the Navy’s retiree pay system and the Air Force’s annuitant pay system as DOD-wide migratory systems. DFAS subsequently integrated these two systems into one system and pays all retirees from the Cleveland center and all annuitants from the Denver center. DFAS and the military services account for monies from four primary sources. Finance and accounting operations are divided into nine functional areas. DOD’s $240-billion appropriation for fiscal year 1996 was used to pay about 6 million people and about 17 million invoices charged to nearly 12 million contracts. The appropriation also supported the operation of 13 DBOF (now working capital fund) business areas such as depot maintenance, commissaries, distribution depots, and DFAS. In addition, in fiscal year 1996, DOD received about $10 billion through its foreign military sales programs and about $12 billion through the operation of base activities such as child care facilities, golf courses, and the Armed Forces Exchanges. To process financial transactions and account for the receipt and expenditure of funds, DFAS and military services’ finance and accounting operations are generally divided into nine functional activities. Table 5 lists these activities, the reported number of DFAS personnel involved in the activity, and the reported total cost for DFAS to process the transactions in fiscal year 1996. The military services were unable to provide us with comparable information. A more detailed description of the sources and uses of DOD funds and the finance and accounting responsibilities of DFAS and the military services is presented in appendix I. We requested comments on a draft of this report from the Secretary of Defense. On January 15, 1997, officials from the Office of the Under Secretary of Defense Comptroller/Chief Financial Officer and representatives of DFAS, the Air Force, the Army, and the Navy met with us to discuss the report. In general, DOD officials agreed with our description of DOD’s finance and accounting structure and organization. They provided us with some suggested changes, which we have incorporated in our final report where appropriate. We performed our review from July 1996 through January 1997 in accordance with generally accepted government auditing standards. Appendix II contains a description of our scope and methodology. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations; Senate Committee on Armed Services; House Committee on National Security; Senate Committee on Governmental Affairs; House Committee on Government Reform and Oversight; the Director, Office of Management and Budget; the Secretary of Defense; and other interested parties. We will make copies available to others on request. If you or your staff have any questions concerning this report, please contact either James E. Hatcher on (513) 258-7959 or Geoffrey B. Frank on (202) 512-9518. Major contributors to this report are listed in appendix III. This appendix provides an overview of the Department of Defense’s (DOD) finance and accounting operations. DOD has focused its accounting operations primarily on monitoring and controlling the obligation and expenditure of budgetary resources. As discussed in the following sections, DOD carries out these accounting operations for four types of funds —general, working capital, nonappropriated, and security assistance. With the enactment of the Chief Financial Officers Act (CFO) of 1990, the Congress called for audited agency financial statements that would more fully disclose a federal entity’s financial position and results of operations beginning with fiscal year 1996. Such statements are intended to provide for (1) better information for more informed decisions on allocation of budgetary resources and (2) an annual assessment of an agency’s financial performance, including the effectiveness of its execution of its stewardship responsibilities. DOD officials have forthrightly acknowledged that serious financial management problems severely hamper their ability to effectively carry out the full range of accounting and financial reporting responsibilities called for in the CFO Act. DOD has struggled to put in place the financial management operations and controls required to produce the information it needs to ensure adequate accountability and to support decision making. For example, few of DOD’s accounting systems are now integrated with its finance systems or with other systems or databases relied on to carry out its accounting and financial reporting responsibilities. Consequently, DOD prepares required financial reports to account for an estimated 80 percent of its physical assets based on management systems that were not intended for such accounting and financial reporting. The absence of a fully integrated general ledger-controlled system necessitates DOD’s reliance on labor-intensive, error-prone processes to ascertain whether all required items are accounted for and reported. Largely as a result of the CFO Act and other recent legislative initiatives directed at increasing financial management discipline throughout the federal government, DOD has recently begun efforts to broaden the focus of and to bring greater discipline to its accounting operations. DOD’s Chief Financial Officer stated that the CFO Act “has contributed to the recognition and understanding of the scope and depth of the financial management problems that DOD faces and has defined a standard by which the Department can measure its progress.” DOD has characterized its blueprint for financial management reform as the most comprehensive reform of financial management systems and practices in its history. In its efforts to improve its accounting activities, DOD is guided by a set of comprehensive standards that were developed by the Federal Accounting Standards Advisory Board. This Board, which was established in October 1990 by the Comptroller General of the United States, the Director of the Office of Management and Budget, and the Secretary of the Treasury Department, recommends accounting standards after considering the financial and budgetary information needs of the Congress, executive agencies, and other users and comments from the public. The Office of Management and Budget, Treasury, and GAO then decide whether to adopt the recommended standards; if they do, the standards are published by the Office of Management and Budget and GAO and become effective. Recently, a set of comprehensive accounting standards was approved by the three agencies. The new accounting standards and accompanying reporting concepts are central to effectively meeting the financial management improvement goals of the CFO Act of 1990, as amended. Also, improved financial information is necessary to support the strategic planning and performance measurement requirements of the Government Performance and Results Act of 1993. DOD accounting personnel are responsible for accounting for funds received through congressional appropriations, the sale of goods and services by working capital fund businesses, revenue generated through nonappropriated fund activities, and the sales of military systems and equipment to foreign governments or international organizations. Figure I.1 shows the types of funds and the sources and uses of the funds. General funds, the largest category of funds the Defense Finance and Accounting Service (DFAS) must account for, involve monies provided to DOD through congressional appropriations for military personnel; operation and maintenance; military construction; procurement; and research, development, test and evaluation. The Congress appropriated over $240 billion to DOD for fiscal year 1996. Because some of these appropriations involve multiyear funds, DFAS accounted for $338.5 billion in obligated and unobligated balances in general funds monies during fiscal year 1996. As of September 30, 1996, DFAS was required to account for $74.6 billion in obligated and unobligated balances generated by 13 working capital fund (formally DBOF) business areas. These business areas include such activities as depot maintenance, commissaries, distribution depots, and DFAS. In general, these business activities are intended to operate by selling goods and services to the military services and defense agencies at the cost incurred in providing the good or service. Many of the services provided through these business areas, such as the overhaul of ships, tanks, and aircraft, are essential to maintaining the military readiness of our country’s weapon systems. Working capital fund customers pay for the goods and services, primarily, with operations and maintenance funds appropriated by the Congress. DOD’s nonappropriated funds result primarily from the sale of goods and services to DOD military personnel, their dependents, and other qualified persons. Nonappropriated fund activities are divided into two major types—morale, welfare, and recreation activities and the Armed Forces Exchanges. In fiscal year 1995, DOD reported morale, welfare, and recreation activities and Armed Forces Exchanges revenues of $2.5 billion and $9.4 billion, respectively (according to a DOD official, 1996 revenues are expected to be about the same). DFAS, however, has accounting responsibility for only a limited portion of the nonappropriated activities. In fiscal year 1996, DFAS accounted for about $500 million in nonappropriated funds. Morale, welfare, and recreation activities are essentially small businesses such as libraries, gyms, golf courses, child care centers, and officers’ clubs that operate at numerous military installations worldwide. Armed Forces Exchanges are located on military installations worldwide and operate similarly to commercial retail outlets. The exchanges offer a variety of goods and services from military uniforms to fast food. DFAS has accounting responsibility only for a portion of the Army morale, welfare, and recreation workload. The Air Force, the Navy, and the Marine Corps account for these activities through their own nonappropriated fund organizations that are not part of the military service finance and accounting offices. The Armed Forces Exchanges are not included in DFAS’ or the military services’ finance and accounting office workload. DOD also has responsibility for security assistance funds used for congressionally approved sales of military weapon systems and equipment to foreign governments. In some cases, funds accounted for in the security assistance program are received from foreign governments. In addition, the Congress appropriates funds that countries can use as loans or grants to make these purchases. In fiscal year 1996, DOD reported that the security assistance program generated almost $10 billion in new sales. Because many foreign military sales involve procurements over a number of years, in total, DFAS accounted for about $28 billion in obligated and unobligated balances in security assistance funds in fiscal year 1996. DOD’s finance activities generally involve paying the salaries of its employees, paying retirees and annuitants, reimbursing its employees for travel-related expenses, paying contractors and vendors for goods and services, and collecting debts owed to DOD. This section describes DFAS’ and the military services’ involvement in each of these activities. Includes 28 locations and 21 Foreign National Civilian pay systems. Currently, DFAS pays the salaries of 826,000 civilians and about 3 million military personnel. In order for DFAS to pay DOD personnel, it receives information from three sources—military and civilian personnel offices, customer service representatives, and field finance offices or timekeepers within the employee’s unit. Figure I.2 shows an overview of the process by which DFAS obtains information to disburse and account for salary payments made to all DOD employees. The civilian and military pay processes begin with the military service’s personnel office establishing a record in its personnel system for a new hire or recruit by entering personal data such as name, address, and salary. Since the majority of the military services’ personnel systems are not integrated with the payroll systems DFAS uses, entitlement data are sent to DFAS payroll systems through an electronic interface. This interface allows DFAS to establish a pay account for the civilian or military employee. Throughout a person’s employment with DOD, timekeepers, who are usually administrative support personnel or supervisors in a military unit or office, or field finance office staff, submit time and attendance information directly to DFAS. This information is used by DFAS to compute the amount each employee should be paid. After payments are made, the payroll system transmits disbursement information to DFAS accounting units where accounting records are updated and management and budgetary reports are distributed to DOD and external agencies. DFAS also receives information that affects civilian and military pay from customer service representatives. DFAS and the military services’ finance personnel share the responsibility of providing customer service to civilian employees and military members. Customer service duties include input of employee initiated transactions such as bonds, tax withholdings, and address changes; resolving pay-related problems; and responding to inquiries on all aspects of the payment process, such as pay computation and the recording and balancing of annual and sick leave. DFAS assumed retiree and annuitant pay responsibilities from the military services upon its establishment in 1991. In fiscal year 1996, DFAS processed payments to about 2 million retirees and annuitants. Figure I.3 provides an overview of the retiree and annuitant payroll process, identifying duties specific to DFAS and the military services. The military services’ personnel offices process the paperwork required for establishing a retiree pay account. This information is sent electronically to the DFAS Cleveland center where personnel in retired pay operations verify that the retiree’s account has been deleted from the military pay systems (to avoid dual payments to the retiree); compute the retiree’s pay; disburse payment to the retiree; and forward pay information to a DFAS accounting unit that updates accounting records and distributes management and budgetary reports. Upon receipt of a death notice, retired pay operations personnel in Cleveland will suspend or terminate the retirement pay account and electronically transfer the case to the Denver center. Denver personnel in the annuity pay office maintain the annuitant’s pay account, issue surviving annuity payment, provide customer service support, and update accounting records. These personnel also annually verify the annuitant’s eligibility status. Factors that affect entitlement eligibility include, but are not limited to, changes in Social Security benefits, remarriage, and age of children. The travel payment process for both DOD civilian and military employees can be broken down into three stages—travel authorization, actual travel, and travel settlement. Military service finance personnel are involved in the travel authorization process and, in some cases, the travel settlement process. DFAS performs the majority of the responsibilities in the travel settlement step in which the traveler is reimbursed. Annually, DFAS processes about 2.1 million travel settlements. Figure I.4 provides an overview of the travel payment process, distinguishing between activities performed by DFAS and the military services. The travel pay process begins when a DOD employee or supervisor identifies a need for travel. The employee prepares and submits a travel request and cost estimate to the appropriate superior for approval. The administrative support staff within the organization reviews the approved request, obligates funds, and issues a travel order. The administrative support staff includes personnel who have authority to input obligations into the record and may, for example, be personnel in the finance, resource management, or budget offices. At this time, the employee makes travel arrangements and may receive a travel advance through the use of an official government travel card or, when no other means is available, from the appropriate disbursement office. Upon completion of travel, the employee submits a travel voucher to his/her supervisor for reimbursement of expenses, attaching supporting documentation such as receipts. Once the supervisor approves the claim, it is sent to either a DFAS travel pay office or the military service’s finance office where the traveler’s entitlement is computed and an audit is conducted. After entitlement is computed, DFAS or the appropriate military disbursement office makes payment, and DFAS updates the accounting records to reflect the disbursement. DOD finance and accounting personnel are also responsible for making payments to contractors for goods and services such as the production of weapon systems, the purchase of computer equipment, and the shipment of freight and personal property. DFAS has the primary responsibility for processing the transactions, paying the contractor or vendor, and accounting for the disbursement of funds. Military service finance personnel are involved to the extent that they verify that funds are available for use and they enter information into accounting systems to show that funds have been committed or obligated for various goods and services. In fiscal year 1996, DFAS employees made payments on approximately 17 million invoices submitted by contractors and vendors. As shown in figure I.5, while variations exist, the process of acquiring goods and services starts outside of the finance and accounting community, usually with a program manager issuing a request for a procurement of an item or the shipment of freight. Once a requirement for a good or service has been identified, personnel from a military service finance office are contacted to ensure that funds are available for use. If funds are available, the finance personnel set up a commitment on their accounting system. If the supply office has the needed item, it is issued to the requestor. If it is not available through a supply office, the contracting office awards a contract for high-dollar value items or the military service finance office establishes a purchase order for lower value items. For the movement of freight and personal property, DOD either provides the service using its own resources or generates a government bill of lading for the service. Once a supply item is ordered or service has been contracted for, the vendor delivers or performs the service and sends an invoice to the appropriate DFAS office for payment. A receiving report is sent by the requestor to the same office to show that the delivery was received. Personnel at each DFAS location are responsible for matching contract, invoice, and receiving report information prior to making a payment to a contractor/vendor. After a payment is made, accounting personnel at the operating locations are responsible for activities such as matching payment information against obligations and providing status of funds information to the military services. $183 million Federal law requires that all government agencies pursue collection action against individuals or contractors that owe the government money. Within DOD, these debts can result from a wide variety of transactions such as defaulted loans (education or small business) or for various overpayments of pay and benefits. If an individual is employed by DOD or receiving any compensation payment, the military service finance offices attempt to collect the money or process an offset against the individual’s pay account. If the individual is no longer employed by DOD or is not receiving any compensation payment, it is considered an out-of-service debt and DFAS personnel are responsible for collecting the debt. DFAS is also responsible for collecting all debts owed by contractors. As of September 30, 1996, about 319,000 military and civilian debtors owed DOD $464 million and approximately 2,500 contractors owed DOD about $3.5 billion. DFAS personnel closed about 116,000 cases as of the end of fiscal year 1996 during which time they collected approximately $238 million. The military services perform debt management activities at each of their installations. However, we were unable to obtain information related to the number of cases that were processed during fiscal year 1996. Figure I.6 provides an overview of the process used by DOD to collect debts. Upon the initial identification of a debt, many military installation-level organizations, such as a hospital, attempt to collect the debt. If the debt is determined to be uncollectible and is owed by a contractor or someone no longer working for DOD, it is sent to a DFAS center for collection. DFAS is required to send three letters—30 days apart—to debtors in an attempt to collect the money. Then, if the money has not been collected, it can be turned over to a private agency for collection or to the Internal Revenue Service for a potential tax refund offset. The debt may also be sent to the Department of Justice for legal action if research shows the debtor has the ability to pay. If DFAS determines that an individual debtor is employed by another federal agency, it can obtain payment for the outstanding debt through payroll deductions. At any time during the process, the debt can be collected in full, compromised to a lesser amount with the remainder written off, or written off in total if the debt falls below established dollar thresholds. DFAS updates its accounting records to reflect any of these events and reports the information back to the military services. If any debt is collected, it is refunded to the military service that incurred the debt or deposited into the Treasury Miscellaneous Receipts Account. The Subcommittee on Defense, Senate Committee on Appropriations, asked us to provide an overview of DOD finance and accounting activities. We focused our work on describing how DOD is organized to perform finance and accounting, the size of the finance and accounting infrastructure, and the various activities that are performed by DFAS and the military services. To determine how DOD is organized to perform finance and accounting activities, we reviewed documents that discussed the rationale for centralizing accounting activities within DFAS and DFAS and military service finance and accounting organizational charts. We also discussed the organizational structure with officials at DFAS Headquarters and the military services’ Office of the Assistant Secretary for Financial Management. To determine the current size of DOD’s finance and accounting infrastructure, we obtained and reviewed budget, personnel, workload, and cost figures provided by DFAS. The military services did not have comparable information readily available. Therefore, officials from the Army’s and the Marine Corps’ financial management offices sent out a data call to their respective installations to obtain information on the number of personnel currently performing finance and accounting activities. The Air Force updated personnel figures obtained from DOD’s central personnel database. The Navy updated its personnel figures using a variety of Navy reports and DOD’s central personnel database. From these numbers, each of the services estimated the amount of money it spends on personnel costs to perform finance and accounting activities. Given our overall assignment objectives and the descriptive nature of our report, we did not verify the data provided to us by either DFAS or the military services. For purposes of this report, we did not obtain information from defense agencies related to how many personnel are currently performing finance and accounting activities. This decision was based on the lack of a single focal point within DOD that could provide us with the needed information from approximately 24 defense agencies and the small number of personnel involved with defense agency finance and accounting activities prior to the establishment of DFAS in 1991. To determine the type of activities DOD finance and accounting personnel are responsible for performing, we reviewed DOD’s Chief Financial Officer Financial Management 5-Year Plan, the DFAS Customer Service Plan, the responsibility matrices negotiated by DFAS with each of the military services, and work flow descriptions for each finance and accounting activity. To supplement information included in formal reports, we interviewed headquarters and field officials at the following locations: DFAS headquarters in Arlington, Virginia; DFAS centers in Cleveland, Ohio; Columbus, Ohio; Denver, Colorado; and Indianapolis, Indiana; the Army’s and the Navy’s Office of the Assistant Secretary for Financial Management in Arlington, Virginia; the Air Force’s Secretary of the Air Force (Financial Management and Plans) in Arlington, Virginia; and the Marine Corps’ Office of the Deputy Chief of Staff for Program and Resources in Arlington, Virginia. Financial Management: DOD Needs to Lower the Disbursement Prevalidation Threshold (GAO/AIMD-96-82, June 11, 1996). DOD Procurement: Millions in Contract Payment Errors Not Detected and Resolved Promptly (GAO/NSIAD-96-8, Oct. 6, 1995). Financial Management: Status of Defense Efforts to Correct Disbursement Problems (GAO/AIMD-95-7, Oct. 5, 1994). DOD Procurement: Overpayments and Underpayments at Selected Contractors Show Major Problem (GAO/NSIAD-94-245, Aug. 5, 1994). DOD Procurement: Millions in Overpayments Returned by DOD Contractors (GAO/NSIAD-94-106, Mar. 14, 1994). Financial Management: Navy Records Contain Billions of Dollars in Unmatched Disbursements (GAO/AFMD-93-21, June 9, 1993). Financial Management: Air Force Systems Command Is Unaware of Status of Negative Unliquidated Obligations (GAO/AFMD-91-42, Aug. 29, 1991). Defense Business Operations Fund: DOD Is Experiencing Difficulty in Managing the Fund’s Cash (GAO/AIMD-96-54, Apr. 10, 1996). Defense Business Operations Fund: Management Issues Challenge Fund Implementation (GAO/AIMD-95-79, Mar. 1, 1995). Defense Business Operations Fund: Improved Pricing Practices and Financial Reports Are Needed to Set Accurate Prices (GAO/AIMD-94-132, June 22, 1994). Financial Management: DOD’s Efforts to Improve Operations of the Defense Business Operations Fund (GAO/T-AIMD/NSIAD-94-146, Mar. 24, 1994). Financial Management: Status of the Defense Business Operations Fund (GAO/AIMD-94-80, Mar. 9, 1994). Financial Management: Opportunities to Strengthen Management of the Defense Business Operations Fund (GAO/T-AFMD-93-6, June 16, 1993). Financial Management: Defense Business Operations Fund Implementation Status (GAO/T-AFMD-92-8, Apr. 30, 1992). Defense’s Planned Implementation of the $77 Billion Defense Business Operations Fund (GAO/T-AFMD-91-5, Apr. 30, 1991). Financial Management: DOD Inventory of Financial Management Systems Is Incomplete (GAO/AIMD-97-29, Jan. 31, 1997). DOD Accounting Systems: Efforts to Improve System for Navy Need Overall Structure (GAO/AIMD-96-99, Sept. 30, 1996). Navy Financial Management: Improved Management of Operating Materials and Supplies Could Yield Significant Savings (GAO/AIMD-96-94, Aug. 16, 1996). CFO Act Financial Audits: Navy Plant Property Accounting and Reporting Is Unreliable (GAO/AIMD-96-65, July 8, 1996). CFO Act Financial Audits: Increased Attention Must Be Given to Preparing Navy’s Financial Reports (GAO/AIMD-96-7, Mar. 27, 1996). Financial Management: Challenges Facing DOD in Meeting the Goals of the Chief Financial Officers Act (GAO/T-AIMD-96-1, Nov. 14, 1995). Financial Management: Challenges Confronting DOD’s Reform Initiatives (GAO/T-AIMD-95-146, May 23, 1995). Financial Management: Challenges Confronting DOD’s Reform Initiatives (GAO/T-AIMD-95-143, May 16, 1995). Financial Management: Control Weaknesses Increase Risk of Improper Navy Civilian Payroll Payments (GAO/AIMD-95-73, May 8, 1995). Financial Management: Financial Control and System Weaknesses Continue to Waste DOD Resources and Undermine Operations (GAO/T-AIMD/NSIAD-94-154, Apr. 12, 1994). Financial Management: Strong Leadership Needed to Improve Army’s Financial Accountability (GAO/AIMD-94-12, Dec. 22, 1993). Financial Management: Army Real Property Accounting and Reporting Weaknesses Impede Management Decision-Making (GAO/AIMD-94-9, Nov. 2, 1993). Financial Management: Defense’s System for Army Military Payroll Is Unreliable (GAO/AIMD-93-32, Sept. 30, 1993). Financial Management: DOD Has Not Responded Effectively to Serious, Long-Standing Problems (GAO/T-AIMD-93-1, July 1, 1993). Financial Audit: Examination of the Army’s Financial Statements for Fiscal Years 1992 and 1991 (GAO/AIMD-93-1, June 30, 1993). Financial Audit: Examination of the Army’s Financial Statements for Fiscal Year 1991 (GAO/AFMD-92-83, Aug. 7, 1992). Financial Management: Immediate Actions Needed to Improve Army Financial Operations and Controls (GAO/AFMD-92-82, Aug. 7, 1992). Financial Audit: Aggressive Actions Needed for Air Force to Meet Objectives of the CFO Act (GAO/AFMD-92-12, Feb. 19, 1992). Financial Audit: Status of Air Force Actions to Correct Deficiencies in Financial Management Systems (GAO/AFMD-91-55, May 16, 1991). Financial Audit: Financial Reporting and Internal Controls at the Air Logistics Centers (GAO/AFMD-91-34, Apr. 5, 1991). Financial Audit: Air Force’s Base-Level Financial Systems Do Not Provide Reliable Information (GAO/AFMD-91-26, Jan. 31, 1991). Financial Audit: Financial Reporting and Internal Controls at the Air Force Systems Command (GAO/AFMD-91-22, Jan. 23, 1991). DOD Infrastructure: DOD Is Opening Unneeded Finance and Accounting Offices (GAO/NSIAD-96-113, Apr. 24, 1996). DOD Infrastructure: DOD’s Planned Finance and Accounting Structure Is Not Well Justified (GAO/NSIAD-95-127, Sept. 18, 1995). Military Bases: Analysis of DOD’s 1995 Process and Recommendations for Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995). Defense Infrastructure: Enhancing Performance Through Better Business Practices (GAO/T-NSIAD/AIMD-95-126, Mar. 23, 1995). Military Bases: Analysis of DOD’s Recommendations and Selection Process for Closures and Realignments (GAO/NSIAD-93-173, Apr. 15, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO provided information on the Department of Defense's (DOD) management of its financial operations, focusing on: (1) DOD's rationale for creating the Defense Finance and Accounting Service (DFAS); (2) the current size of the DOD finance and accounting infrastructure; and (3) the various finance and accounting activities performed by DOD personnel. GAO reported that: (1) Before fiscal year 1991, the military services and defense agencies independently managed their finance and accounting operations. Because these decentralized operations were highly inefficient and failed to produce reliable information for decision makers, DOD created DFAS to consolidate, standardize, and integrate finance and accounting operations. DFAS inherited 26,000 finance and accounting personnel but about 18,000 personnel remained with the military services to perform managerial accounting and customer service activities at local installations and bases. (2) By the end of fiscal year 1998, DFAS expects that all 332 installation-related finance and accounting offices will be closed and their operations transferred to 5 large centers and no more than 21 new operating locations. This consolidation will help DFAS, between fiscal years 1996 and 2000, reduce its budget from $1.64 billion to about $1.47 billion (in constant 1996 dollars); its personnel from 23,500 to about 20,000; and the number of finance and accounting systems from 217 to about 110. The military services reported that they still have close to 17,000 personnel in their finance and accounting network and are not planning any specific reductions. (3) DOD's finance and accounting activities are generally divided into 9 functional areas (accounting, payroll, contract payments, etc.). Improving these areas is an enormous task, involving the replacement of many antiquated systems and processes. The task is even move difficult considering the volume of transaction that must be continued while improvements are being made. Annually, for example, DOD disburses around $260 billion on 17 million invoices, 6 million payroll accounts, and 2 million travel vouchers.",govreport
"The Federal Reserve Act established the Federal Reserve to operate collectively as the country’s central bank. The Federal Reserve Act established the Federal Reserve as an independent agency with a decentralized structure to ensure that monetary policy decisions would be based on a broad economic perspective from all regions of the country. The Federal Reserve’s monetary policy decisions do not have to be approved by the President, the executive branch of the government, or Congress. However, the Federal Reserve is subject to oversight by Congress and conducts monetary policy so as to promote the long-run objectives of maximum employment, stable prices, and moderate long- term interest rates in the United States, as specified by law. The Federal Reserve operates in a unique public and private structure. It consists of the Board of Governors (a federal agency), the 12 Reserve Banks (federally chartered corporations), and FOMC. Board of Governors. The Board of Governors is an independent regulatory federal agency located in Washington, D.C., and has broad interest in monitoring and promoting the stability of financial markets. The Board of Governors’ authorities include: supervising bank and thrift holding companies, state-chartered banks that are members of the Federal Reserve, and the U.S. operations of foreign banking organizations; reviewing and determining discount rates for lending to depository institutions; conducting monetary policy (in cooperation with FOMC); and providing general supervision over the operations of the Reserve Banks. The top officials of the Board of Governors are the seven members who are appointed by the President and confirmed by the Senate. Moreover, the Federal Reserve Act requires the Board of Governors to submit written reports to Congress twice each year containing discussions of the conduct of monetary policy and economic developments and prospects for the future. The act also requires the Chair of the Board of Governors to testify on the conduct of monetary policy twice each year in connection with the monetary policy report, as well as economic development and prospects for the future. Reserve Banks. The Federal Reserve is divided into 12 districts, with each district served by a regional Reserve Bank. In most cases, each regional Reserve Bank also operates one or more branch offices (see fig. 1). The Reserve Banks are not federal agencies; rather, each Reserve Bank is a federally chartered corporation with a board of directors and member banks that are stockholders. Under the Federal Reserve Act, Reserve Banks are subject to the general supervision of the Board of Governors. The Reserve Banks were established by Congress as the operating arms of the Federal Reserve, and they combine both public and private elements in performing a variety of services and operations. These functions include participating in formulating and conducting monetary policy; providing payment services to depository institutions, including transfers of funds, automated clearinghouse services, and check collection; distributing coin and currency; performing fiscal agency functions for Treasury, certain federal agencies, and other entities; providing short-term loans to depository institutions; serving consumers and communities by providing educational materials and information on financial consumer protection rights and laws and information on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign banking organizations, and designated financial market utilities pursuant to authority delegated by the Board of Governors. In addition, certain services are provided to foreign and international monetary authorities, primarily by the Federal Reserve Bank of New York. State-chartered member banks are subject to supervision by the state in which they are chartered and the Board of Governors (through a regional Reserve Bank) as a condition of membership. National banks are chartered and supervised by OCC. State nonmember banks are supervised by the state in which they are chartered and by FDIC. See figure 2 for a chart displaying the number and percentage of commercial banks supervised by each prudential regulator. FOMC. FOMC plays a central role in the execution of the Federal Reserve’s monetary policy mandate to promote price stability, maximum employment, and moderate long-term interest rates in the United States. FOMC is responsible for directing open market operations—the purchase and sale of securities in the open market by a central bank—to influence the total amount of money and credit available in the economy. FOMC has authorized and directed the Federal Reserve Bank of New York to conduct open market operations by engaging in purchases or sales of certain securities, typically U.S. government securities, in the secondary market. FOMC also plays a central role in monetary policy strategy and communication. Reserve Banks derive income from various sources, maintain surplus accounts, and remit earnings in excess of expenses to Treasury. The Reserve Banks derive income primarily from the interest on their holdings of U.S. government securities, agency mortgage-backed securities, and agency debt acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the Reserve Banks; interest on loans to depository institutions; reimbursements for services performed as fiscal agent for Treasury and other agencies; and fees received for payment services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations. However, Reserve Banks are not operated for profit. The Reserve Banks use earnings to pay operational expenses and dividends to member banks and to fund their capital surplus accounts. The surplus account is primarily intended to cushion against the possibility that total Reserve Bank capital would be depleted by losses incurred through Federal Reserve operations. Until enactment of the FAST Act, Federal Reserve policy as established in the Financial Accounting Manual for Federal Reserve Banks required the Reserve Banks to retain a surplus balance equal to the 3 percent that commercial banks pay in to purchase Reserve Bank stock. Due to this matching provision, as the value of member banks’ capital and surplus increased over time, so did the values of the Federal Reserve’s surplus account (see fig. 3). The Reserve Banks then transfer earnings in excess of expenses to Treasury. About 95 percent of the Reserve Banks’ net earnings have been transferred to Treasury since the Federal Reserve began operations in 1914. The transfers, known as remittances, have been above historic levels since the 2007—2009 financial crisis (see fig. 4). Under the Federal Reserve Act, a member bank (a national bank or state- chartered bank that applies and is accepted to the Federal Reserve) must subscribe to capital stock of the Reserve Bank of its district in an amount equal to 6 percent of the member bank’s capital and surplus. The member bank will pay for one-half of this subscription upon approval by the Reserve Bank of its application for capital stock (with the remaining half of the subscription subject to call by the Reserve Bank). The capital stock of each Reserve Bank is valued at $100 per share. When a member bank increases its capital stock or surplus, it must subscribe for an additional amount of Reserve Bank stock equal to 6 percent of the increase with half of the stock paid in. Conversely, when a member bank reduces its capital stock or surplus it is to surrender the same amount of stock to its regional Reserve Bank. Shares of the capital stock of Reserve Banks owned by member banks do not carry with them the typical features of control and financial interest conveyed to holders of common stock in for-profit organizations. For example, member banks cannot transfer or sell Reserve Bank stock or pledge it as collateral; voting rights do not change with the number of shares held; and each member bank has only a single vote in those director elections in which they are eligible to vote. Currently, stock ownership provides a dividend payment and the right to vote for two classes of Reserve Bank directors, as discussed later. Under the original Federal Reserve Act, the annual dividend rate was 6 percent on paid-in capital stock and was cumulative. Therefore, member banks would earn a dividend of 0.5 percent per month on the amount of their paid-in capital stock. The Reserve Banks’ long-standing practice is to make dividend payments on the last business days of June and December (that is, a dividend payment of 3 percent twice a year). Provisions in the FAST Act effective January 1, 2016, altered the dividend rate that some member banks receive on paid-in capital. For banks with more than $10 billion in consolidated assets, the dividend rate was reduced from 6 percent per annum to the lesser of 6 percent or the highest accepted yield at the most recent auction of 10-year Treasury notes before the dividend payment date. The high yield of the 10-year Treasury note auctioned on June 30, 2016 (the last auction before the dividend payment) was 1.702 percent, and on December 30, 2016, was 2.233 percent. The dividend rate for member banks with less than $10 billion in consolidated assets remains at 6 percent. The Reserve Banks continue to make dividend payments semiannually. The composition of boards of directors for Reserve Banks is statutorily determined and intended to ensure that each board represents both the public and member banks in its district. The Federal Reserve Act established nine-member boards of directors to govern all 12 Reserve Banks. Each board is split equally into three classes of directors. Class A directors represent the member banks, while Class B and C directors represent the public. For Class B and C directors, the Federal Reserve Act requires “due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.” The Federal Reserve Act also requires that member banks elect Class A and Class B directors and that the Board of Governors appoints Class C directors. The Federal Reserve Act provides that the chairman of the board, like all Class C directors, cannot be an officer, director, employee, or stockholder of any bank. The principal functions of Reserve Bank directors are to play a role in the conduct of monetary policy; oversee the general management of the Reserve Bank, including its branches; and act as a link between the Reserve Bank and the community. The boards of directors of Reserve Banks play a role in the conduct of monetary policy in three primary ways: (1) by providing input on economic conditions to the Reserve Bank president (all 12 Reserve Bank presidents attend and participate in deliberations at each FOMC meeting); (2) by participating in establishing discount rate recommendations (interest rate charged to commercial banks and other depository institutions on loans received from their regional Reserve Bank’s discount window) for Board of Governors’ review and determination; and (3) for the Class B and C directors, by appointing Reserve Bank presidents with the approval of the Board of Governors. A large amount of research has been produced on the attributes and effects of central bank independence. According to the research, a high level of central bank independence is generally considered to be desirable. The research has generally found that countries with high central bank independence have been able to maintain lower levels of inflation. Central bank independence can be divided into three categories (political, instrument, and financial independence), as described in the following bullets. Political independence is based on a central bank’s capacity to define monetary policy strategy (goals) without political interference. Political independence encompasses appointing procedures, relationships with the government, and formal responsibilities. Instrument independence is based on a central bank’s capacity to define monetary policy instruments without political interference. Instrument independence for a central bank includes the ability to avoid financing public spending by money creation, autonomy in setting interest rates, and ability to conduct monetary policy without banking sector oversight responsibilities. Financial independence is based on a central bank’s capacity to govern its own budget. Financial independence encompasses conditions for capitalization and recapitalization, determination of the central bank budget, and arrangements for profit distribution and loss coverage. Independence in the implementation of monetary policy can be a function of the degree of independence in all three categories: political, instrument, and financial. Lower degrees of independence in any of these areas can affect monetary policy independence. Existing research shows that the Federal Reserve is relatively independent overall compared to central banks in other advanced economies. The level of political independence is lower for the Federal Reserve than its instrument or financial independence due in part to existing appointment procedures for the Board of Governors, whose members are appointed by the President and confirmed by the Senate. However, Board of Governors officials stated that Federal Reserve political independence is strengthened by the fact that Reserve Bank presidents are not political appointees. In addition, the instrument independence of the Federal Reserve is high, and the financial independence of the Federal Reserve is also relatively high. According to legislative history and historical accounts that we reviewed, the stock purchase requirement in the Federal Reserve Act established an ownership and control arrangement at Reserve Banks to facilitate a balance of power between the Board of Governors and private interests, capitalized the Reserve Banks, and helped support the new national currency created by the act. Based on our interview with a past Federal Reserve historian and historical accounts, the dividend rate of 6 percent was intended to compensate member banks for the requirement to provide funds to the Reserve Banks to begin operations and the risk of the Federal Reserve not succeeding, as well as to attract state-chartered banks to the Federal Reserve. According to the legislative history and historical accounts related to the Federal Reserve Act, debate over the creation of the Federal Reserve focused on the balance of power among economic regions of the United States and between the private sector and government. The resultant corporate structure of Reserve Banks was intended to help balance the influence of government over the central bank, of different regions, and of small versus large banks, as well as to help fund the Federal Reserve. Many Americans were resistant to the creation of a central bank (dating back to the nation’s founding); thus, early drafts of proposals for a central bank did not include the term “central bank.” However, there was strong recognition that the nation needed a central bank to forestall and mitigate financial panics. There was considerable disagreement about how it should be structured, including considerations about the role of private bankers versus government officials, how centralized the new bank should be, and the extent of its powers. The Federal Reserve Act as proposed in January 1913 by Representative Carter Glass generally was viewed as occupying the middle ground between positions advocating for government control over the Federal Reserve and positions advocating for more control by private commercial banks. The Glass bill proposed creating up to 15 Reserve Banks and the Board of Governors. The Reserve Banks were modeled after clearinghouses or “banker’s banks” and some European central banks in that they would be funded by selling stock shares to commercial banks. In particular, the design adopted for the Federal Reserve was federated, with independent Reserve Banks overseen by the Board of Governors. Under the bill, each Reserve Bank was required to have minimum capital to begin business. According to a past historian of the Federal Reserve, proponents in Congress of a central bank did not want to fund it, but needed to raise cash for capital and gold to back Federal Reserve notes that would serve as the national currency. The original proposal required member banks to purchase stock equal to 20 percent of their paid-in and unimpaired capital, with one-half paid on joining the Reserve Bank and one-half callable from the member bank. The Senate and conference committees agreed to change the capital of the Federal Reserve to 6 percent of member banks’ capital and surplus rather than 20 percent of capital alone as provided in the Glass bill. This change yielded almost the same total capital but satisfied small banks claiming that the Glass bill discriminated against them. Member banks had to pay for the stock in gold or gold certificates, which concentrated gold deposits in the Reserve Banks to support Federal Reserve notes. The bill also required that each national bank subscribe to the stock of the Reserve Bank in its district. Only national banks were compelled to subscribe because their charters were issued by the federal government. State-chartered banks were not required to purchase Reserve Bank stock but were permitted to join the Federal Reserve if they met certain requirements. State-chartered banks opposed mandatory membership because they did not want to be subject to supervision by a federal regulator. The mandatory nature of national bank membership and stock ownership was controversial when the Federal Reserve Act was under debate. But for Glass, “the compulsory and pro rata capital contribution were ‘means to the achievement of a democratic organization constituted by the democratic representation of the several institutions which are members and stockholders of a reserve bank’” and also “considered necessary for the establishment of corporate entities that would act ‘primarily in the public interest.’” In addition, Senator Robert Owen, primary sponsor of the Federal Reserve Act in the Senate, supported the stock purchase requirement because he believed it would ensure that commercial banks would have an incentive to safeguard the Federal Reserve. The rationales for paying a 6 percent dividend rate included compensating banks for opportunity costs for providing capital and reserves to the Reserve Banks and attracting state-chartered banks to Federal Reserve membership. According to the legislative history and other information we reviewed, notable proposals for creating a central bank included stock and dividend payments. One of the early proposals for a central bank was written in 1910 by Paul Warburg and included dividends on central bank stock of 4 percent. The original Federal Reserve Act proposed by Representative Glass provided for a dividend rate of 5 percent. Glass stated in his report on the 1913 bill that 5 percent represented the normal rate of return from current bank investments “considering the high character of the security offered.” Debate in the Senate and conference committee resulted in a 6 percent dividend rate on Reserve Bank stock. This rate was comparable to those of European central banks of the time. Based on our interviews with a past Federal Reserve historian, one of the rationales for creation of the 6 percent dividend rate was to compensate member banks for the opportunity costs of the capital they invested in the Reserve Bank stock. National banks and state-chartered banks that chose to join the Federal Reserve were required to purchase the stock and therefore could not invest this capital in other instruments that might earn a higher return. Also, the 6 percent dividend rate included a risk premium associated with the stock of this new institution. While the Reserve Banks are seen as safe today, during the debates over the Federal Reserve Act there was worry that they would fail, particularly smaller Reserve Banks in rural regions of the country that had less initial capital. However, concerns were raised about making the dividend rate so attractive that member banks would pull too much bank capital away from the local community. Lastly, the dividend was intended to help induce state-chartered banks to join the Federal Reserve. As noted earlier, state-chartered banks were not required to join the Federal Reserve and purchase Reserve Bank stock and therefore would not be subject to supervision by the Federal Reserve. As a result, a low percentage of state-chartered banks initially joined the Federal Reserve and there was a gap in the Board’s knowledge of the safety and soundness of the banking system. Thus, the 6 percent dividend rate was intended as an incentive for state-chartered banks to voluntarily join the Federal Reserve. To examine the comparative value of a dividend rate of 6 percent since the enactment of the Federal Reserve Act, we examined rate of return information on Treasury and certain corporate bonds. (See appendix I for information about our data sources and methodology.) As shown in figure 5, returns on investment-grade and medium-grade corporate bonds and Treasury bonds varied widely from 1900 through 2015. Before enactment of the Federal Reserve Act in 1913, returns for investment-grade corporate bonds and Treasury bonds were around 4 percent and stayed in that range until about 1960, when they began to rise dramatically. Returns for each of the instruments (medium-grade corporate bond data were recorded from the mid-1940s) were consistently above 6 percent from the early 1970s to the early 1990s, and peaked around 1980 at about 16 percent. Returns for each of the bond categories above are now below 6 percent. In addition, we reviewed U.S. stock data and found total returns to average about 6.5 percent over more than a century. However, stocks can pose higher variability in returns than corporate bonds and Treasury securities. We also compared the 6 percent Reserve Bank dividend rate to the federal funds rate and 1-year nominal interest rates. We analyzed the federal funds rate—the interest rate at which depository institutions trade federal funds (balances held at Reserve Banks) to other depository institutions overnight—to consider a member bank’s opportunity costs of holding a share of Reserve Bank stock. The federal funds rate represents a market of interbank lending at low risk. We collected data on the federal funds rate since 1954. In addition, we analyzed a nominal interest rate series to understand opportunity costs prior to 1954. As shown in figure 6, nominal interest rates were between 4 percent and 6 percent in 1913, but dipped dramatically during the Great Depression and World War II. Rates reached 6 percent again in the late 1960s and then peaked around 18 percent in the early 1980s. The federal funds rate has been near zero since the 2007—2009 financial crisis. Based on our interviews with Federal Reserve officials, the cap on the aggregate Reserve Banks’ surplus account had little effect on Federal Reserve operations, and we found that the modification to the Reserve Bank stock dividend rate has had no immediate effect on membership. While it is debatable whether transferring funds from the Federal Reserve to Treasury when the FAST Act also funded specific projects should be viewed any differently than the recurring transfers that occur on a regular basis, some stakeholders raised concerns about future transfers that could ultimately affect, among other things, the Federal Reserve’s financial independence and consequently, autonomy in monetary policy decision making (instrument independence). Although commercial banks and Federal Reserve officials we interviewed raised a number of concerns about the stock dividend rate change, it appears to have had no effect on Reserve Bank membership as of December 2016. According to Board of Governors officials, the statutory requirement to cap the surplus account and transfer excess funds has not impeded Federal Reserve operations as of December 2016. However, according to current and former Federal Reserve officials we interviewed, the nature of the transfer of funds, which were added to Treasury’s General Fund and used as an offset to make up a shortfall in the Highway Trust Fund, raises questions about the possibility of future transfers. They also raised questions that the cap could negatively affect the Federal Reserve’s independence in monetary policy decision making by rendering it dependent on Treasury for recapitalization in the event that total Reserve Bank capital is depleted. The FAST Act, which authorized the Highway Trust Fund for fiscal year 2016 through fiscal year 2020, requires that the aggregate of the Reserve Banks’ surplus funds not exceed $10 billion and directed that amounts in excess of $10 billion be transferred to Treasury’s General Fund. The excess of Reserve Bank surplus over the $10 billion limitation as of the December 4, 2015, enactment date of the FAST Act was $19.3 billion, which was transferred to Treasury on December 28, 2015. The $19.3 billion transferred from the surplus account was part of $117 billion in earnings the Federal Reserve transferred to Treasury in 2015. The FAST Act transferred a total of $70 billion from Treasury’s General Fund to make up a projected shortfall in the Highway Trust Fund through fiscal year 2020. In addition to its annual remittances, the Congressional Budget Office estimates that the Federal Reserve’s transfers to Treasury will be increased by a total of $53.3 billion from 2016 to 2025 as a result of capping the surplus account balance at $10 billion. As we found in our 2002 report on the surplus account, reducing the Federal Reserve capital surplus account creates a one-time increase in federal receipts, but the transfer by itself will have no significant long-term effect on the federal budget or the economy. Because the Federal Reserve is not included in the federal budget, amounts transferred to Treasury from reducing the capital surplus account are treated as a receipt under federal budget accounting but do not produce new resources for the federal government as a whole. The surplus account cap reduces future Reserve Banks’ earnings because the Reserve Banks would hold a smaller portfolio of securities. As a result, the cap reduces their transfers to Treasury in subsequent periods. Since the one-time transfer from the Federal Reserve also increases Treasury’s cash balance over time, Treasury would sell fewer securities to the public and thus pay less interest to the public. Over time, the lower interest payments to the public approximately offset the lower receipts from Federal Reserve earnings. According to Board of Governors officials, the cap on the surplus account had little effect on Federal Reserve operations as of December 2016, and the chances of the cap impeding operations in the long term appear to be small. This is because Federal Reserve operations are funded before remaining excess funds are transferred to the surplus account. In addition, if Reserve Bank earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and maintaining the $10 billion surplus account balance, remittances to Treasury are suspended. A deferred asset is recorded in the Federal Reserve’s accounts to represent the amount of net earnings a Reserve Bank will need to realize before remittances to Treasury resume. In our September 2002 report, we found no widely accepted, analytically based criteria to show whether a central bank needs capital as a cushion against losses or how the level of such an account should be determined. However, according to Board of Governors officials, if a central bank exhausts its capital cushion or its capital position is negative, realized losses that result from asset sales or draining of monetary liabilities would further exacerbate the capital deficiency. According to Federal Reserve officials and academics we interviewed, transferring Federal Reserve funds to address a budgetary shortfall might lead the public and financial markets to question if the Federal Reserve was independent from the executive and legislative branches. In their view, if these actions set a precedent, the public and financial markets might conclude that the central bank was not conducting monetary policy aimed solely at achieving the monetary policy objectives set forth in the Federal Reserve Act (price stability, maximum employment, and moderate long-term interest rates in the United States). Instead, some might believe that the Federal Reserve had been directed to take policy actions that would help fund government spending. Whether transferring funds from the Federal Reserve to address budgetary shortfalls should be viewed any differently than the annual remittances is debatable. Congress has transferred money from the surplus account to Treasury’s General Fund on other occasions, most recently with the Consolidated Appropriations Act of 2000 that directed the Reserve Banks to transfer to Treasury additional surplus funds of $3.752 billion during fiscal year 2000. These transfers are deposited in Treasury’s General Fund and available for appropriation and use for general support of the government. Nevertheless, Federal Reserve officials, an industry association, and some commercial banks we interviewed believed the requirement to transfer funds from the surplus account, which many see as specifically intended to support the Highway Trust Fund, was different and set a worrying precedent. In particular, Board of Governors officials stated that prior transfers from the Reserve Banks to Treasury did not place a cap on the amount of the surplus accounts that could be retained by the Reserve Banks. Several academic experts with whom we spoke noted that countries with independent central banks have strict provisions against transfers of central bank funds by the legislative branch. However, as long as rules regarding the transfer of central bank earnings to the government are clearly defined, such transfers are consistent with best practices associated with central bank financial independence. As we discuss later, concerns may arise if subsequent transfers reduce the capital surplus to zero, which could lead to dependence on Treasury for capital integrity. Since capital integrity is required to support monetary policy autonomy, reliance on Treasury could diminish the independence of the Federal Reserve. As we discuss later in this report, there are ways to preserve Federal Reserve independence under varying capital structures. The FAST Act’s modification of the Reserve Banks’ stock dividend rate for large member banks from 6 percent to a rate pegged at the lesser of 6 percent or the 10-year Treasury rate, which was below 6 percent in June 2016, increased federal receipts and reduced revenues for large member banks, but has had no immediate effect on Federal Reserve membership. In 2015, the Federal Reserve made dividend payments to member banks totaling more than $1.7 billion. Board of Governors officials told us that dividend payments to member banks in 2016 totaled $711 million. The modified dividend rate for the larger member banks reduced the dividend payment for the first half of 2016 by nearly two-thirds from the payment for the first half of 2015 (from approximately $850 million to approximately $300 million). More specifically, the difference between what larger member banks received at June 30, 2015, and what they received at June 30, 2016, ranged from about $185,000 to about $112 million less. While the current interest rate environment is historically low, the difference in dividend income earned by large banks due to the dividend rate modification would decline in a higher interest rate environment, because the 10-year Treasury rate could increase over time to 6 percent (the ceiling on the dividend rate for member banks with more than $10 billion in consolidated assets). Commercial banks and Federal Reserve officials we interviewed expressed some concerns about the dividend rate modification. We interviewed 17 member and nonmember commercial banks, including 6 of the 85 Federal Reserve member banks that held more than $10 billion in assets as of December 31, 2015, and 11 smaller member banks. Four of the 6 large member banks stated that they would likely act to recoup this lost revenue. For example, some mentioned employee layoffs and increased fees on consumers as potential options to recoup the lost revenue. Two large member banks noted that the dividend rate modification was made at a time when these institutions were adjusting to changes in the regulatory and financial environment, and incorporating the revenue cut made adjusting to these changes even more challenging. However, these factors also make it difficult to link the dividend rate modification to any specific effects on employees or consumers. Most of the member and nonmember banks we interviewed argued that the selection of the 10-year Treasury note as a benchmark for the dividend rate does not appropriately compensate member banks. Several commercial banks noted that the decision to use the 10-year Treasury note did not account for the illiquidity of Reserve Bank stock (it cannot be traded while 10-year Treasury notes can). They added that this illiquidity should be accounted for by the addition of a premium to the rate paid on Reserve Bank stock (an illiquidity premium). Additionally, several commercial banks reported that shifting from a fixed dividend rate to a floating rate determined during the month when dividends are paid increased the uncertainty surrounding their business decisions. Several commercial banks also stated that they would have preferred that the dividend rate modification were considered on its own merits rather than utilized to help pay for transportation projects. The American Bankers Association stated in a comment letter on the interim final rule implementing the dividend rate modification that the change represented a breach of contract between the Federal Reserve and member banks and amounted to “an unconstitutional taking of member banks’ property without compensation.” It further stated that the “Takings Clause of the Fifth Amendment provides that ‘private property’ shall not ‘be taken for public use, without just compensation’” and the dividend rate change was in violation of the Fifth Amendment. On February 9, 2017, the American Bankers Association filed a lawsuit against the United States which included a Fifth Amendment Taking Clause claim. Certain Federal Reserve officials with whom we spoke were concerned about increased membership attrition as a result of the dividend rate modification. However, as of December 2016 there was no evidence that banks had dropped their Federal Reserve membership as a result of lower dividend payments. According to data provided by the Board of Governors and Reserve Banks, membership in the Reserve Banks dropped by about 2 percent (46 banks) from December 31, 2015, to June 30, 2016. The Reserve Banks generally attributed this drop to normal attrition and consolidation in the industry. This decrease is consistent with the general decline in the number of banks supervised by the Federal Reserve from 2010 through 2015 (as shown in fig. 2). FDIC officials stated in May 2016 that they had seen no impact of the dividend rate modification on state-chartered member and nonmember banks. OCC officials stated that it was too early to determine the impact of the dividend rate modification on national banks. However, OCC officials noted that the costs associated with changing membership can be significant and can be a decision-making factor. For example, industry association officials said that such costs could include those associated with changing the institution’s name. Furthermore, of the 14 member banks with which we spoke, including 6 banks with assets of more than $10 billion, none indicated that they would drop Federal Reserve membership as a result of the dividend rate modification. But several of the banks with less than $10 billion in assets stated that they were worried that the dividend rate modification would set a precedent for future transfers from the Reserve Banks, and that they would reconsider Federal Reserve membership if the dividend rate threshold were reduced to include banks in their asset range. Modifying the Reserve Bank stock ownership requirement could have a number of wide-ranging policy implications on the structure of the Federal Reserve. We examined potential implications of three scenarios for modifying the purchase requirement: (1) permanently retiring Reserve Bank stock and eliminating the stock ownership requirement, (2) making ownership of Reserve Bank stock voluntary for member banks, and (3) modifying the capital requirement associated with the stock to allow member banks to hold the entire 6 percent capital contribution as callable capital. In scenario 1, permanently retiring Reserve Bank stock could change the existing corporate structure of the Reserve Banks. In scenario 2, Federal Reserve membership would not require stock ownership; however, Reserve Bank stock would remain available for purchase by member banks. In scenario 3, the full capital contribution would be retained by member banks, could be called at any time by the Reserve Banks, and could be available for use by the member bank. The primary benefit to making any of the changes to the stock purchase requirement is that member banks would gain more control over the capital currently committed to ownership of Reserve Bank stock. Banking associations that we interviewed said that the capital contribution for the stock places a burden on member banks. Specifically, the capital is illiquid and cannot be used as collateral, so it represents a significant opportunity cost to member banks. Despite the cost associated with the capital requirement, 11 of the 17 banks we interviewed indicated that the capital requirement is either not an important factor or only somewhat of an important factor in their decision on Federal Reserve membership. More frequently, familiarity with their Reserve Bank as a supervisor was more important to their decision to join the Federal Reserve. The three scenarios are not an exhaustive representation of possible modifications to the structure of the Federal Reserve, nor does our analysis account for all of the potential consequences of such modifications. Our discussion of the implications of each scenario should not be interpreted as a judgment on how or whether the Federal Reserve should be restructured. Instead, our intent is to identify policy implications that warrant full consideration and additional research should changes to the Federal Reserve stock requirement and therefore, the Federal Reserve’s structure, be made. Furthermore, the discussion of the impacts of the three scenarios is limited without identification of the exact replacement structures, which is beyond the scope of this study. As each scenario has a number of potential structures, each structure would have to be evaluated on its own merits to assess its ability to better ensure the benefits Congress seeks to achieve in the central bank, such as price stability and maximum employment. This discussion assumes that the goals reflected in the original construction of the Federal Reserve remain (independence, balance of power, and geographical diversity). Reserve Bank and Board of Governors officials with whom we spoke said that changes to the stock ownership requirement should not be evaluated in isolation because any changes would have ripple effects on the governance structure, financial independence, and Reserve Bank operations that would warrant consideration in any discussion. In the following discussion, we focus on the impacts of modifying the purchase requirement that were of primary concern to regulators, commercial banks, and academics. Many were concerned that such modifications could undermine the governance of a central bank with a combined private and public structure—key attributes of the current structure designed to construct some barriers to political pressures and provide nationwide input for monetary policies. Nevertheless, these governance elements could be maintained through legislation and other mechanisms if the current Federal Reserve structure were altered. Retiring Reserve Bank stock could have a number of implications, including disrupting the Federal Reserve’s public and private balance, but other mechanisms could be used to preserve the structure’s key attributes. As discussed previously, the stock purchase requirement reflects the desire of the founders of the Federal Reserve to strike a balance between control by commercial banks and government control of the Federal Reserve. Under the Federal Reserve Act, the Reserve Banks were established as corporate entities after national banks subscribed to the minimum amount of Reserve Bank stock. Therefore, a structural change could result if Congress decided to retire the stock and the corporate structure of the Reserve Banks were not preserved. The corporate structure, which includes a board of directors to oversee operations, enables the Reserve Banks to maintain a degree of autonomy from the Board of Governors. Furthermore, the stock ownership requirement enables the Federal Reserve to maintain financial independence from the federal government because it allows the Reserve Banks to maintain a capital base that is not funded at the discretion of the government. Retirement of Reserve Bank stock could have implications for the autonomy of the Reserve Banks, the independence of the Federal Reserve, and the operations of the Reserve Banks, all of which would warrant consideration. Diminished Reserve Bank autonomy. One of the policy goals of the Federal Reserve’s structure is to provide Reserve Banks with a degree of autonomy or regional authority in relation to the Board of Governors. Eliminating Reserve Bank stock would have implications for this goal. According to Reserve Bank officials, all else being equal, retirement of the stock coupled with elimination of the current corporate structure of the Reserve Banks could result in removal of Reserve Bank boards of directors or limit the benefits currently provided by their participation. The existence of the boards of directors is tied to member banks’ equity ownership in their regional Reserve Bank. Specifically, this action could limit the diversity of views in monetary policy by weakening the link to regional input in FOMC discussions. Reserve Bank officials said that Reserve Bank boards serve an important function in the Federal Reserve, including providing important business advice and perspectives to the Reserve Banks. In our 2011 report on Federal Reserve governance, we found that directors of the Reserve Bank boards provide a link to the regions that the Reserve Banks serve, and give information on economic conditions to the Reserve Bank presidents who may use it to inform FOMC discussions about regional conditions. With the loss of member bank equity ownership and the absence of Reserve Bank boards, advisory boards or advisory councils are mechanisms that could be used to serve the same function. However, according to Reserve Bank officials and directors, this approach might not be as effective as a formal corporate board. They said that, as appointed directors of a Reserve Bank board, they have a fiduciary responsibility to perform their duties and place the interests of the Reserve Bank and the nation ahead of personal interests. They noted that it may be difficult to attract high-caliber members to an advisory council or board in a different, more removed relationship. However, we found in our 2011 report that existing Reserve Bank branch boards and advisory councils are sometimes a source of director candidates for the Reserve Banks. Reserve Bank officials and directors also said that the level of commitment and engagement from members of an advisory board or council would be less than that of directors of a formal corporate board. Many different mechanisms could be employed to mitigate the effects of eliminating Reserve Bank boards, but without further analysis on specific mechanisms it is difficult to determine whether those mechanisms would be feasible. Reserve Bank officials, academics, and banks said that another potential consequence of retiring Reserve Bank stock and eliminating the incorporated entities could be diminished Reserve Bank autonomy in relation to the Board of Governors. For example, retirement of Reserve Bank stock could result in eliminating the current corporate structure, and one structural option that we examined was to convert the Reserve Banks into field offices of the Board of Governors—that is, Reserve Banks would become part of a federal agency. Reserve Bank presidents currently are appointed by and accountable to Reserve Bank boards of directors. Some officials we interviewed believed that Reserve Bank presidents might feel less comfortable voicing dissenting opinions in FOMC meetings if they were leading field offices directly accountable to the Board of Governors. Therefore, a loss of autonomy could limit the diversity of views in FOMC meetings. More importantly, it could concentrate power and influence within the Board of Governors—for example, by centralizing FOMC decision making in the hands of the Board of Governors. The diversity of economic views that Reserve Bank presidents bring to FOMC meetings is illustrated by dissenting votes at FOMC meetings from July 1996 to July 2016. In that time, Reserve Bank presidents cast 80 dissenting votes while members of the Board of Governors cast 2 dissenting votes. Some academics with whom we spoke pointed out that eliminating the Reserve Bank stock purchase requirement could remove the perception of undue influence from member banks. For example, such perceptions might be removed if member banks (shareholders) no longer vote on Class A and B directors of Reserve Bank boards. We previously reported that the requirement to have representatives of member banks on the Federal Reserve Bank boards creates an appearance of a conflict of interest because the Federal Reserve has supervisory authority over state-chartered member banks and bank holding companies. Conflicts of interest involving directors historically have been addressed through both federal law and Federal Reserve policies and procedures, such as by defining roles and responsibilities and implementing codes of conduct to identify, manage, and mitigate potential conflicts. Federal Reserve officials said that the Board of Governors already restricts Reserve Bank directors’ participation in banking supervision and, therefore, a field-office structure would address perception, not practice. For example, Reserve Bank directors cannot access member banks’ confidential supervisory information. Any application of a Class A director’s financial institution that requires Federal Reserve approval may not be approved by the director’s Reserve Bank, but instead is acted on by the Secretary of the Board of Governors. Class A directors cannot be involved in the selection, appointment, or compensation of Reserve Bank officers whose primary duties involve banking supervision. And Class B directors with certain financial company affiliations are subject to the same prohibition. Class A directors are also not involved in the selection of the Reserve Bank President or First Vice President. To the extent that Congress values the benefits conferred by the current structure characterized by the balance of power and Reserve Bank autonomy, mechanisms would need to be devised to provide assurance these benefits remained if the Reserve Bank stock were retired. Eight of the 14 member banks that we interviewed said that Reserve Bank autonomy is either important or very important. For example, one bank stated that Reserve Bank autonomy is “hyper–important” because it creates a system of checks and balances, limits politicization of monetary policy, and ensures that viewpoints from across the nation are considered. Five of the member banks that we interviewed said that the structural option of converting the Reserve Banks to field offices would diminish the Reserve Banks’ autonomy and some said that the change would harm connections to the local communities. But only 1 of the 14 member banks with which we spoke said that they would be likely or very likely to drop membership if the Reserve Banks became field offices of the Board of Governors. Diminished Federal Reserve financial independence. One of the policy goals of the Federal Reserve System’s structure was to provide it with independence within the federal government. As noted earlier, financial independence supports monetary policy autonomy, which research has shown is important to low levels of inflation. Eliminating Reserve Bank stock, without a mechanism to re-establish financial autonomy, would have implications for this goal. The Reserve Banks’ income is generated primarily through interest on their investments and loans and through fees received for services provided to depository institutions. Reserve Bank officials said that historically the Federal Reserve has received enough income to fund its operations and therefore would be able to capitalize itself. According to the Federal Reserve, if losses were incurred remittances to Treasury would be suspended and a deferred asset would be recorded that represents the amount of net earnings a Reserve Bank would need to realize before remittances to Treasury could resume. Therefore, Reserve Banks do not need capital to fund operations. However, operating without a capital base could exacerbate negative perceptions that the Federal Reserve is insolvent. Alternatively, Treasury could capitalize the Federal Reserve through Treasury-owned stock, which would allow the Reserve Banks to maintain a corporate structure but would result in a central bank dependent, in part, on government funding. Depending on how it is structured, dependence on Treasury for capitalization could diminish the financial independence of the Federal Reserve. In particular, Federal Reserve independence would be diminished if recapitalization (in the event of capital base depletion) were at the discretion of Treasury. One academic we interviewed said that the $10 billion surplus cap introduced under the FAST Act increased the likelihood of the depletion of the Federal Reserve’s capital. Some academics have written that if Treasury capitalized the Federal Reserve, Congress could include provisions for automatic recapitalization of the Federal Reserve in the event that its capital were depleted and provide stronger capital buffers by increasing the surplus account cap. These provisions would preserve the independence of the Federal Reserve by removing the discretion of Treasury in recapitalizing the Federal Reserve. Moreover, according to research, 8 of 166 central banks are capitalized, in whole or in part, by private shareholders. The remaining 158 central banks, some of which are considered to be highly independent, are capitalized by their governments. None of the 17 member and nonmember banks that we interviewed said they would be likely or very likely to change their membership status if Reserve Bank stock were permanently retired. The banks said that the stock ownership is not a major factor in membership considerations. Member banks cited familiarity with and reputation of their regulator, consistency of regulation across the holding company, and their bank structure as the most important factors for making a membership choice. Hindered ability to conduct Reserve Bank operations. The Federal Reserve Act authorized the Federal Reserve Banks to act as depositories and fiscal agents of the United States government, at the direction of the Secretary of the Treasury. Eliminating Reserve Bank stock could have implications for the Reserve Banks’ ability to perform these functions, depending on how the Reserve Banks’ structures and authorities were revised. For example, converting the Reserve Banks to field offices could preclude them from conducting critical banking functions, and the activities they could undertake as fiscal agents for the government if they were to become government entities are unclear. Banking activities conducted by the Reserve Banks, including executing monetary policy through open market operations and providing short-term loans to institutions, are essential to the functioning of the Federal Reserve. Some Reserve Bank officials said that without the stock, the Reserve Banks would no longer be corporations and might not be able to conduct certain banking activities, depending on how the replacement structure and authorities were configured. If the Reserve Banks were to become field offices of the Board of Governors, they would no longer be able to perform certain activities related to their function as Treasury’s fiscal agent because the Board of Governors currently is not authorized to provide these services. Some also said that having the Board of Governors act as Treasury’s fiscal agent could present a conflict of interest. However, other Reserve Bank officials said that the current corporate structure could be maintained without the stock, but would at least require legislation amending the Federal Reserve Act to allow continuing conduct of banking activities. Reserve Bank officials noted that Treasury directs the Reserve Banks, as fiscal agents, to conduct auctions on its behalf and it is unclear whether Treasury could direct another federal agency to do so. Reserve Bank officials also pointed out that the Reserve Banks hold accounts for foreign central banks and it is unclear whether the federal government could hold an account for another government. As discussed earlier, capitalization by Treasury would allow the Reserve Banks to maintain their current corporate structure, through Treasury-owned stock. This could preserve the ability of Reserve Banks to conduct banking operations; however, as discussed earlier, this involves many issues that would need to be considered. Eliminating the current corporate structure and converting the Reserve Banks into field offices of the Board of Governors could lead to more centralized functions, which could further improve the net efficiency of Reserve Bank operations. However, Reserve Bank officials said that innovation often comes from having private-sector voices on their boards. Moreover, Reserve Bank officials said that despite their autonomous structure they have been able to achieve efficiencies in their operations by consolidating certain activities such as retail payment (check and Automated Clearing House) processing, which is conducted through the Federal Reserve Bank of Atlanta; wholesale payment operations (Fedwire funds and securities services) and open-market operations, which are primarily conducted through the Federal Reserve Bank of New York, or information technology and payroll services, which are primarily conducted by the Federal Reserve Bank of Richmond. In contrast, we have reported that some efficiencies in Reserve Bank operations were achieved partly because of external factors such as legislation. Making stock ownership voluntary could have a number of policy implications. Voluntary ownership likely would not significantly affect Federal Reserve membership, but according to Reserve Bank officials, the implications could include concentration of stock ownership and voting rights and a need for more resources to plan for and manage increased fluctuations in paid-in capital. Voluntary ownership of Reserve Bank stock could take many forms. Currently, only nationally chartered banks and state-chartered banks that opt to join the Federal Reserve are required to purchase stock. Such a scenario could entail no ownership requirement for membership and an option for member banks to purchase (or redeem) stock in their regional Reserve Bank at any time. As with permanent retirement of the stock, we did not find evidence that voluntary stock purchase would have a significant impact on Federal Reserve membership. Member banks that we interviewed suggested that making stock ownership voluntary would not affect their Federal Reserve membership decision, but stock ownership could become volatile in certain interest rate environments, as the following examples illustrate. Thirteen of the 14 member banks that we interviewed said that they likely would not change their Federal Reserve membership status if the ownership of stock became voluntary for member banks. Of these 13, all 6 member banks with more than $10 billion in assets also said that they likely would not purchase stock if ownership were voluntary for members. Of those 13, 6 of the 7 member banks with assets below $10 billion indicated they likely would (ranging between somewhat likely, likely, and very likely) purchase the stock if it were voluntary. They added that if they could make a better return than 6 percent on the capital committed to the stock in a higher interest-rate environment, they would redeem the stock. Two of the three nonmember banks that we interviewed said that they likely would not change their Federal Reserve membership status if the ownership of stock became voluntary for member banks. The remaining banks (one member, one nonmember) said that they would be somewhat likely to change their membership status. In a high interest rate environment stock ownership by member banks could be low, because banks could receive a higher return by investing the capital in securities other than the Reserve Bank stock. This would result in a high concentration of voting rights; however, this might not differ much from current practices. Reserve Bank officials stated that if voting rights remained with stock ownership, not membership, and if stock ownership among member banks were low, then the votes to elect board members would be concentrated in just a few banks. Some Reserve Bank officials said that the concentration of votes could lead to undue influence from a few banks. We previously found that, under the current mandatory stock ownership structure, member bank voter turnout was often low during some Reserve Banks’ elections. In these cases, assuming current participation rates persist, voting patterns under voluntary stock ownership might not significantly differ from those of the current arrangement. Reserve Bank officials also said that high volatility of stock ownership would require a higher level of management of the stock. Officials said that the processes for issuing, monitoring, and redeeming the stock would become significantly more complex as a result of a likely increase in the volume of transactions and require additional personnel. While a voluntary stock ownership structure is more complicated than the current structure, it would involve similar stock ownership characteristics as publicly traded stocks and publicly traded companies have systems to manage stock ownership. Reserve Bank officials pointed out that volatility in stock ownership among member banks also would result in fluctuation in the level of paid- in capital held at the Reserve Banks, which could make it more difficult for Reserve Banks to predict and manage their capital. If a large number of member banks chose not to purchase the stock, which member banks suggested would be likely in a high-interest rate environment, then the potential public perception issues associated with having a low capital base, as discussed previously, could apply. However, as we have discussed, the Reserve Banks could operate without capital, or Treasury could capitalize the Reserve Banks. Allowing member banks to hold the full capital contribution on call could have a number of implications. For instance, allowing member banks to hold the entire capital contribution on call would allow Reserve Banks to maintain their current corporate structure, since the member banks would retain their equity stakes. However, this scenario would eliminate the dividend payment to member banks because there would be no Reserve Bank stock outstanding for which dividend payments would be owed. Also, it could cause public perception problems and, in theory, exacerbate financial distress in stressful economic times. Currently, member banks are required to purchase stock in their regional Reserve Bank equal to 6 percent of their capital and surplus, with 3 percent paid-in and 3 percent on call by the Reserve Bank. This scenario would make the entire 6 percent purchase requirement callable, so that member banks would not have to contribute any capital to the Reserve Banks on joining the Federal Reserve. This modification would allow the Reserve Banks to keep their current corporate structure and preserve their ability to conduct banking operations. The change would also eliminate the dividend payment to member banks since the capital associated with the Reserve Bank stock would no longer be paid-in, so there would no longer be a basis to pay member banks a dividend. Similar to the scenario of retiring the stock or making its purchase voluntary for members, the Reserve Banks’ capital base would be reduced—in this case, to the amount of capital held in each Reserve Bank’s surplus account. Reserve Bank officials and some academics said that Reserve Banks can operate without a capital base but, as discussed previously this could cause a public perception problem. Specifically, Reserve Bank officials said that if Reserve Banks incurred losses and called in capital from member banks, the call could send a signal to the broader markets that the Reserve Banks were insolvent. In turn, this perception could lead to negative ripple effects throughout the economy. That is, Reserve Bank officials said that situations in which Reserve Banks would incur losses and need to call capital likely would be situations of economic stress for banks. If banks could not quickly raise sufficient funds to meet the Reserve Bank’s capital call, their lending capacity could fall and a credit crunch could follow. Calling in capital from member banks at such a time could have a procyclical effect; that is, the call would exacerbate financial distress experienced by the member banks. Reserve Bank officials added that because of the potentially severe systemic effects such a capital call would be highly unlikely. Officials pointed out that the Reserve Banks have never called in the 3 percent capital at member banks and that Reserve Banks currently do not have procedures for calling the 3 percent capital held at member banks. As discussed earlier, if losses were incurred remittances to Treasury would be suspended. If the Reserve Banks incurred losses over multiple periods and their capital base were depleted, then the method for recapitalization would need to be addressed (which, as discussed earlier, involves many issues that would need to be considered). Based on our interview responses, most banks would be unlikely to change their membership status as a result of making the entire capital contribution callable. All three of the nonmember banks that we interviewed said that they likely would not become members or would be only somewhat likely to become members in response to this change. Member banks likely would not drop membership as a result of this modification because, as some banks noted, it removes a potential barrier to membership (paying in 3 percent of capital). We provided a draft of this report to FDIC, the Federal Reserve, OCC, and Treasury for review and comment. None of the agencies provided written comments on the draft report. FDIC and the Federal Reserve provided technical comments, which we have incorporated, as appropriate. We are sending copies of this report to FDIC, the Federal Reserve, OCC, and Treasury. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or evansl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. In this report, we (1) examine the historical rationale for the Reserve Banks’ stock purchase requirement and 6 percent dividend, (2) assess the potential implications of capping the Reserve Banks’ aggregate surplus account and modifying the Reserve Bank stock dividend rate, and (3) analyze the potential policy implications of modifying the Reserve Bank stock ownership requirement for member banks under three scenarios. To address our first objective, we conducted a literature search on the history of the Federal Reserve System (Federal Reserve), including a review of the legislative history of the Federal Reserve Act. See appendix II for a selected bibliography of literature we reviewed. We interviewed a past Federal Reserve historian and selected academics. We also conducted a literature search on rates of return on selected investment products. We specifically identified the following data sources: Roger Ibbotson, 2013 Ibbotson SBBI Classic Yearbook: Market Results for Stocks, Bonds, Bills, and Inflation1926–2012 (Chicago, Ill.: Morningstar, 2013).—We reviewed information describing the rates of return for a number of basic asset classes including large company stocks, small company stocks, long-term corporate bonds, long-term government bonds, intermediate-term government bonds, and Treasury bills. The return rate data include information from 1926 through 2012. Robert Shiller, Market Volatility (Cambridge, Mass.: MIT Press, 1989). —We reviewed annual data on the U.S. stock market specifically concerning prices, dividends, and earnings from 1871 to the present with associated interest rate, price level and consumption data. Frederick R. Macaulay, The Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856 (New York: National Bureau of Economic Research, 1938).—We reviewed commercial paper rates in New York City from January 1857 to January 1936. Sidney Homer and Richard Sylla, A History of Interest Rates, 4th ed. (Hoboken, N.J.: John Wiley & Sons, 2005).—We reviewed data on interest rates and yields from prime corporate bonds, medium-grade corporate bonds, and long-term government securities from 1899 to 1989. We determined that these sources were sufficiently reliable for the purposes of our reporting objectives. Our data reliability assessment included reviewing the methodologies employed by the authors of each source and cross-checking certain data from the sources against each other. First, we analyzed return data on investment-grade and medium- grade corporate bonds, and Treasury bonds. We selected these instruments for comparison with Reserve Bank stock because they generally present low risk of default and have relatively long maturity periods. Corporate bonds can be classified according to their credit quality. Medium-grade corporate bonds can indicate a strong capacity to meet financial commitments but also can still be vulnerable to a changing economy. Investment grade corporate bonds are considered more likely than noninvestment grade bonds to be paid on time and have lower investment risk. Treasury bonds are obligations by the U.S. government and are considered to have low investment risk. Second, we analyzed return data on interest rates based on commercial paper and certificates of deposit, and the federal funds rate. We selected these return data for analysis because they are common measures of the value of money in the markets. Commercial paper consists of short-term, promissory notes issued primarily by corporations that mature in about 30 days on average, with a range up to 270 days. A certificate of deposit is a savings account that holds a fixed amount of money for a fixed period of time, such as 6 months, 1 year, or 5 years, and in exchange, the issuing bank pays interest. The federal funds rate is the central interest rate in the U.S. financial market and is the interest rate at which depository institutions trade federal funds with each other overnight. We determined not to include rate of return information on stocks and agency mortgage-backed securities. Stock is a more volatile investment product than Reserve Bank stock, with wide variation in prices from year to year. In addition, stock is a relatively liquid investment product compared to Reserve Bank stock, which cannot be sold or otherwise posted as collateral. Agency mortgage-backed securities are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. We found that agency mortgage-backed securities generally return higher yields than Treasury bonds, but not as high as corporate bonds, which have higher risk. Therefore, by discussing Treasury and corporate bonds, we are illustrating a complete range of possible returns. To assess the potential implications of capping the aggregate Reserve Banks’ surplus account, we reviewed past GAO, Congressional Research Service, and Congressional Budget Office reports and Federal Reserve financial documents on the status of the surplus account. We interviewed Federal Reserve officials, including from the Board of Governors and the Reserve Banks; former members of the Board of Governors who had written about the changes in the Fixing America’s Surface Transportation Act (FAST Act); academics who had written extensively about the Federal Reserve; other federal bank regulators, including the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC); and, banking industry associations. To assess the potential implications of modifying the Reserve Bank stock dividend rate, we reviewed Board of Governors financial documents as of June 30, 2016, for dividend payment information. We conducted structured interviews with 17 commercial banks (including 14 member and 3 nonmember banks) to obtain their perspectives on the dividend rate modification and if it would affect their membership decisions or status. We selected commercial banks for these interviews to ensure representation for all size categories and primary federal banking regulator, using data from SNL Financial. We assessed the reliability of the data by reviewing information about the data and systems that produced them, and by reviewing assessments we did for previous studies. We determined that the data we used remain sufficiently reliable for the purposes of our reporting objectives. To assess the potential implications of modifying the stock ownership requirement, we reviewed academic literature on the structure and independence of central banks. We also interviewed selected academics and economists who had written extensively on central bank independence; the chairpersons of all the Reserve Banks’ boards of directors, who may not be affiliated with commercial banks; officials from FDIC and OCC; and banking industry associations. In the structured interviews with selected commercial banks described above, we also sought to learn what factors might influence the banks’ choice to become a member of the Federal Reserve, and whether potential modifications to the Reserve Banks’ stock ownership structure would affect their choice. We presented three scenarios (of changes to the stock ownership requirement and therefore the Federal Reserve’s structure) in the interviews to which respondents could react and discuss implications. The scenarios are illustrative and do not represent all of the ways in which the Federal Reserve structure might be altered nor does our analysis account for all of the potential consequences of stock ownership modifications. Furthermore, our discussion of the range of consequences is limited to the respondents’ responses and the strategy in the interview, without knowledge of the mechanisms that could be put in place to retain the benefits of the current structure or mitigate any negative effects of the changes. We conducted this performance audit from February 2016 to February 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Alesina, Alberto, and Lawrence H. Summers. “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence.” Journal of Money, Credit and Banking, vol. 25, no. 2 (May 1993): 151–162. Arnone, Marco, Bernard J. Laurens, Jean-Francois Segalotto. “The Measurement of Central Bank Autonomy: Survey of Models, Indicators, and Empirical Evidence.” International Monetary Fund Working Paper 06/227 (October 2006). Calomiris, Charles, Matthew Jaremski, Haelim Park, and Gary Richardson. “Liquidity Risk, Bank Networks, and the Value of Joining the Federal Reserve System.” National Bureau of Economic Research Working Paper 21684 (October 2015). Clifford, A. Jerome. The Independence of the Federal Reserve System. Philadelphia, Penn.: University of Pennsylvania Press, 1965. Conti-Brown, Peter. The Power and Independence of the Federal Reserve. Princeton, N.J.: Princeton University Press, 2016. Cukierman, Alex. “Central Bank Finances and Independence – How Much Capital Should a Central Bank Have?” in The Capital Needs of Central Banks, S. Milton and P. Sinclair eds. Sue Milton and Peter Sinclair. London, England and New York, NY: Routledge, 2011. Cukierman, Alex, Steven B. Webb, and Bilin Neyapti. “Measuring the Independence of Central Banks and Its Effects Policy Outcomes.” World Bank Economic Review, vol. 6, no. 3 (September 1992): 353-398. Gorton, Gary. “Clearinghouses and the Origin of Central Banking in the United States.” The Journal of Economic History, vol. 45, no. 2 (June 1985): 277-283. Homer, Sidney and Richard Sylla. A History of Interest Rates. 4th ed. Hoboken, N.J.: John Wiley & Sons, 2005. Ibbotson, Roger. Ibbotson SBBI Classic Yearbook 2013: Market Results for Stocks, Bonds, Bills, and Inflation 1926-2012. Chicago, Ill.: Morningstar, March 2013. Lowenstein, Roger. America’s Bank: The Epic Struggle to Create the Federal Reserve. New York, N.Y.: Penguin Press, 2015. Masciandaro, Donato. “More Than the Human Appendix: Fed Capital and Central Bank Financial Independence.” BAFFI CAREFIN Centre Research Paper 2016-35 (September 2016). Macaulay, Frederick R., The Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856. New York: National Bureau of Economic Research, 1938. Moen, Jon R., and Ellis W. Tallman. “Lessons from the Panic of 1907.” Federal Reserve Bank of Atlanta, Economic Review, May/June 1990, pp. 2-13. National Monetary Commission. Report of the National Monetary Commission. Washington, D.C.: Government Printing Office, 1912. Rossouw, Jannie, and Adele Breytenbach. “Identifying Central Banks with Shareholding: A Review of Available Literature.” Economic History of Developing Regions, vol. 26, supplement 1 (January 2011): 123-130. Shiller, Robert J., Market Volatility. Cambridge, Mass.: MIT Press, 1989 (as updated). Stella, Peter, and Åke Lönnberg. “Issues in Central Bank Finance and Independence.” International Monetary Fund working paper 08/37 (Feb. 2008). Timberlake, Richard H., Jr. “The Central Banking Role of Clearinghouse Associations.” Journal of Money, Credit, and Banking, vol. 16, no. 1 (February 1984): 1-15. Todd, Tim. The Balance of Power: The Political Fight for an Independent Central Bank, 1790-Present. 1st ed. Kansas City, Mo.: Federal Reserve Bank of Kansas City, 2009. Warburg, Paul M. The Federal Reserve System: Its Origin and Growth. 2 vols. New York, N.Y.: MacMillan, 1930. GAO staff who made major contributions to this report include Karen Tremba (Assistant Director), Philip Curtin (Analyst-in-Charge), Farrah Graham, Cody Knudsen, Risto Laboski, Barbara Roesmann, Christopher Ross, Jessica Sandler, Jena Sinkfield, and Stephen Yoder.","Member banks of the Federal Reserve must purchase stock in their regional Reserve Bank, but historically received a 6 percent dividend annually on paid-in stock. A provision of the 2015 FAST Act modified the dividend rate formula for 85 larger member banks—and currently reduces the amount these banks receive. The FAST Act also capped the surplus capital the Reserve Banks could hold and directed that any excess be transferred to Treasury's general fund. Congress offset payments into the Highway Trust Fund by, among other things, instituting the Reserve Bank surplus account cap. GAO was asked to report on the effects of these changes and the policy implications of modifying the stock ownership requirement. Among its objectives, this report (1) examines the effects of capping the Reserve Banks' aggregate surplus account and reducing the Reserve Bank stock dividend rate, and (2) evaluates the potential policy implications of modifying the stock ownership requirement for member banks under three scenarios. GAO reviewed legislative history and relevant literature about the Federal Reserve, prior GAO reports, and interviewed academics and current and former officials of the Board of Governors, Reserve Bank, other banking regulators, and industry associations. In addition, GAO conducted structured interviews with 17 commercial banks, selected based on bank size and regulator. GAO makes no recommendations in this report. GAO requested comments from the banking regulators and Treasury, but none were provided. According to Federal Reserve System (Federal Reserve) officials, capping the surplus account had little effect on Federal Reserve operations, and GAO found that modifying the stock dividend rate formula had no immediate effect on membership. Reserve Banks fund operations, pay dividends to member banks, and maintain a surplus account before remitting excess funds to the Department of the Treasury (Treasury). Whether the transfers to Treasury's General Fund in the Fixing America's Surface Transportation Act (FAST Act) when the act also funds specific projects should be viewed any differently than the recurring transfers of Reserve Bank earnings to Treasury is debatable. Some stakeholders raised concerns about setting a precedent—future transfers could affect the Federal Reserve's independence and, consequently, autonomy in monetary policymaking. Dividend payments to 85 banks decreased by nearly two-thirds (first half of 2016 over first half of 2015), but GAO found no shifts in Reserve Bank membership as of December 2016. Some member banks affected by the rate change told GAO they had a few concerns with it and some said they might try to recoup the lost revenue, but none indicated they would drop membership. Assuming that the policy goals—independence, balance of power, and geographical diversity—reflected in the original private-public Federal Reserve structure remain important, the implications of modifying the stock ownership requirement and therefore the Federal Reserve structure could be considerable. The scenarios discussed in this report are illustrative and do not represent all the ways in which the Federal Reserve structure might be altered. Also, the discussion of effects is limited because exact replacement structures are unknown. Retiring the stock could result in changes to the existing corporate structure of the 12 Reserve Banks. These changes could diminish Reserve Bank autonomy in relation to the Board of Governors of the Federal Reserve System (Board of Governors) by removing or changing Reserve Banks' boards of directors, which could limit the diversity of economic viewpoints in monetary policy discussions and centralize monetary policy decision making in the hands of the Board of Governors, eliminate the private corporate characteristics of Reserve Banks and convert them to government entities (such as field offices of the Board of Governors), which could lead to less private sector involvement and reduced financial independence of the Federal Reserve, and remove the authority the Reserve Banks currently have to conduct activities critical to the Federal Reserve, such as executing monetary policy through open market operations and those related to the Reserve Banks' role as fiscal agents for the federal government. Making stock ownership voluntary could increase fluctuations in outstanding shares, affecting Federal Reserve governance and complicating the Reserve Banks' processes for managing their balance sheets. While modifying the stock ownership requirement could give member banks greater control of the capital tied to the stock, member and nonmember banks with which GAO spoke indicated that they likely would not change their membership in response to any modifications discussed in this report.",govreport
"According to 1992 congressional testimony, thieves turn stolen cars into money in three ways. The most common way is for a thief to take a car to a “chop shop,” where the car is dismantled and its parts are sold as replacement parts for other vehicles. The second way is for a thief to obtain an apparently valid title for the car and then sell it to a third party. Finally, the third way is for a thief to export the vehicles for sale abroad. The 1992 Act contains several approaches for dealing with these criminal activities. Title I directed the establishment of, among other things, a task force to study problems that may affect motor vehicle theft and created a new federal crime for armed car jacking. The task force was to be made up of representatives of related federal and state agencies and associations. Title II called for establishment of the National Motor Vehicle Title Information System to enable state departments of motor vehicles to check the validity of out-of-state titles before issuing new titles. Title II authorized grants up to 25 percent of a state’s start-up costs, with a limit of $300,000 per state. Title III expanded the parts marking program established in the Theft Act of 1984. The program was intended to reduce the selling of stolen parts. Major component parts of designated passenger motor vehicles are to be marked with identification numbers so that stolen parts can be identified. Title III also required the Attorney General to develop and maintain a national information system, known as the National Stolen Passenger Motor Vehicle Information System (NSPMVIS), that is to contain the identification numbers of stolen passenger motor vehicles and stolen passenger motor vehicle component parts. This system is to be maintained within the Federal Bureau of Investigation’s (FBI) National Crime Information Center (NCIC), unless the Attorney General determines that it should be operated separately. The 1992 Act also required that the Departments of Justice and Transportation prepare studies on various sections of the 1992 Act. To determine the implementation status of the marking and information systems parts of the 1992 Act, we reviewed the 1992 Act, including its legislative history, and the Theft Act of 1984. We also interviewed officials and reviewed documentation from the Departments of Justice and Transportation, the federal agencies responsible for implementing the 1992 Act’s marking and information systems provisions. Specifically, we obtained information from Justice’s FBI, National Institute of Justice, Criminal Division, and Office of Legislative Affairs and from Transportation’s National Highway Traffic Safety Administration (NHTSA). We also interviewed officials from the American Association of Motor Vehicle Administrators (AAMVA) and the National Insurance Crime Bureau (NICB), which are involved in developing information systems called for in the 1992 Act’s provisions. To identify any issues that may impede the implementation or influence the effectiveness of the marking and information systems parts of the 1992 Act, we developed a list of possible issues affecting the implementation or effectiveness of these parts of the act by reviewing documents and interviewing the same officials from these agencies. We then discussed this list with the officials and revised it on the basis of their comments. We did not determine the validity of these issues or verify the data provided to us. We performed our work in Washington, D.C., from November 1995 to February 1996 in accordance with generally accepted government auditing standards. On February 27, 1996, we requested comments on a draft of this report from the Attorney General, the Secretary of Transportation, the NICB Project Manger, and the AAMVA Director of Vehicle Services. We discussed this report, separately, with representatives of these organizations, including NHTSA’s Highway Safety Specialist; AAMVA Director of Vehicle Services; Executive Director of NICB-FACTA, Inc.; and the Director, Justice’s Audit Liaison Office; on March 7, 11, and 14, 1996, respectively. They generally agreed with the factual information in the report. Their comments have been incorporated where appropriate. The 1992 Act required Transportation to, among other things establish a task force by April 25, 1993, to study problems related to motor vehicle titling, registration, and salvage, which may affect motor vehicle theft, and to recommend (1) ways to solve these problems, including obtaining any national uniformity that it determines is necessary in these areas and related resources and (2) other needed legislative or administrative actions; review by January 1, 1994, state systems for motor vehicle titling and determine each state’s costs for providing a titling information system; and establish the title information system by January 31, 1996, unless Transportation determines that an existing system meets the statute’s requirement, and by January 1, 1997, report to Congress on those states that elected to participate in the information system and on those states not participating, including the reasons for nonparticipation. The title information system is intended to enable states and other users (e.g., law enforcement officials) to instantly and reliably determine, among other things, (1) the validity of title documents, (2) whether an automobile bearing a known identification number is titled in a particular state, and (3) whether an automobile titled in a particular state is, or has been, junked or salvaged. The task force, established in April 1993, reported in February 1994 its recommendations on the legislative and administrative actions needed to address problems in the areas of titling, registration, and controls over salvage to deter motor vehicle theft. The task force recommended, among other things, (1) the passage of federal legislation that would require uniform definitions for terms such as salvage vehicles and uniform methods for titling vehicles, (2) possible funding sources to pay for and maintain the titling system, and (3) penalties to enforce compliance by the participating states. The recommendations are detailed in appendix I. According to the task force chairman, the recommendations would have to be implemented to achieve the uniformity needed to ensure that the titling system would operate as envisioned. In October 1994, Transportation accepted most of the task force’s recommendations (see app. I regarding Transportation’s views on the task force recommendations). NHTSA contracted with AAMVA to identify the states’ costs for a titling system. AAMVA surveyed the 50 states and the District of Columbia to obtain their estimated costs for implementing the titling system. On January 31, 1994, NHTSA’s survey report stated that for the 37 states that provided cost estimates, the cost ranged from zero (1 state) to $12.2 million. For example, some states would have to modify their existing titling systems. In March 1996, AAMVA officials estimated that about $19 million in federal grants would be needed to fund states’ implementation costs. NHTSA officials said that since 13 states and the District of Columbia did not provide a cost estimate, they did not believe that the total costs to the states could be accurately determined. AAMVA pointed out that about 80 percent of the nation’s motor vehicle population is in the states that responded to the survey. In May 1994, Transportation sent proposed legislation to Congress to allow the Secretary of Transportation to extend the target date (from January 1996 to October 1997) for implementation of the national title information system. According to NHTSA officials, the proposed legislation was not introduced in Congress. Transportation requested the authority to extend the implementation date for the titling system because it understood that AAMVA was planning a pilot study of a titling information system, using only state and private sector funds and resources, and Transportation wanted to evaluate the study results. Subsequently, AAMVA requested funding from NHTSA for the pilot. In December 1994, NHTSA denied AAMVA’s request for funds to conduct a pilot study because, in NHTSA’s view, such a study would have been premature without first having uniformity in state titling laws and regulations. However, Congress provided $890,000 for a pilot study by NHTSA as part of Transportation’s fiscal year 1996 appropriation. NHTSA officials said that AAMVA would have responsibility for the pilot. According to AAMVA officials, as of January 1996, they were in the process of acquiring contractors to conduct the pilot, using AAMVA’s commercial driver’s license information system as the pilot’s model. According to NHTSA, the pilot should assist in determining the feasibility of a national titling system and identifying any needed uniform titling requirements for an efficient and cost-effective system. In addition, NHTSA expects the pilot to assist in determining the estimated costs for full implementation, the time frame to implement a nationwide system, the current status of titling information exchange between states, and possible barriers, in particular the absence of uniform system definitions, that could impede the states from participating in a national system. NHTSA said that the pilot study may not be able to identify all costs associated with a national titling system. It also said the complexity of implementing a titling system on a nationwide basis may call for additional resources above those identified in the pilot. NHTSA prepared legislation in response to the task force’s recommendations. Its Office of Safety Assurance submitted a legislative proposal to NHTSA’s Office of Chief Counsel in October 1994. The NHTSA Administrator approved the draft legislation for review by Transportation in May 1995. According to NHTSA, the draft legislative package contains two bills. One bill would provide (1) uniform definitions for categories of severely damaged passenger cars and their titles and (2) titling requirements for rebuilt salvage passenger vehicles. The other bill would remove the January 1996 implementation date and instead make the system contingent upon uniformity in state laws regarding the titling and control of severely damaged passenger vehicles. As of February 1, 1996, the bills were being reviewed by Transportation officials. Legislation (H.R. 2803, Anti-Car Theft Improvements Act of 1995), introduced in December 1995 by the Chairman and the Ranking Minority Member of the House Judiciary Subcommittee on Crime and others would, among other things, (1) transfer Transportation’s responsibilities for the titling area to Justice, (2) extend the implementation date of the titling system from January 31, 1996, to October 1, 1997, and (3) provide immunity for those participants (e.g., system operators, insurers, and salvagers) who make good faith efforts to comply with the 1992 Act’s titling requirements. On the basis of discussions with NHTSA and AAMVA officials, issues that may affect the 1992 Act’s implementation or effectiveness are concerns about the size and scope of the pilot study, uniformity, funding for the states, responsibility for the titling system, and other factors, including states’ willingness to participate and the complexity of the titling system. NHTSA officials said that the pilot study needs to develop information on the ability to establish a national system and operate the system. For example, NHTSA and AAMVA officials told us that the congressionally authorized pilot may demonstrate whether the titling system can be implemented without the uniformity recommended by the task force. However, NHTSA officials noted that the size and scope of the pilot study could limit the amount of information the pilot will be able to provide. The size and scope are to be determined by the number of participating states and system operators. Therefore, the study may not enable NHTSA to identify or resolve all barriers or problems that would arise in creating and operating a national system. NHTSA said that it will have to ensure to the best of its ability that the lessons learned will enable it to develop a national system that meets the 1992 Act’s requirements. NHTSA and AAMVA officials also stated that the pilot study could provide more information on other possible impediments to full implementation of the national title information system. According to NHTSA officials, the task force recommendations have not been implemented. NHTSA officials said that a national titling system should not be implemented until uniformity existed among the states. NHTSA added that the titling system would be inherently defective without uniformity in titling definitions and titling control procedures. Also, according to NHTSA, uniform definitions and motor vehicle titling procedures need to be addressed by all states before a national titling system could function effectively. AAMVA and NICB, however, said that uniformity among the states is not necessary to implement the titling system. AAMVA officials said that a titling system can be 85 to 90 percent effective without the existence of uniform definitions and motor vehicle titling procedures. AAMVA also said that the existence of a titling system would cause states to implement uniform definitions and motor vehicle titling procedures. AAMVA officials added that they have experience dealing with systems containing nonuniform data, including the commercial driver’s license information system upon which the pilot is to be based. NHTSA and AAMVA officials identified lack of federal and state funding as an impediment to full implementation of the titling information system. The 1992 Act placed a $300,000 limit on federal funds that could be granted to each state for start-up costs for the new titling system. H.R. 2803 would eliminate this limit and allow the Attorney General to make “necessary and reasonable” grants to the states that implement the system. However, according to NHTSA officials, no funds had been provided by the federal government to the states for implementing the titling system. NHTSA added that federal resources for system development, start up, and ongoing operations are harder to find each year. NHTSA officials told us that they are proceeding with the 1992 Act’s implementation, even though the responsibility for the titling area may be transferred to Justice. However, they pointed out that the question of responsibility for the 1992 Act could be an emerging issue regarding its implementation. As of January 1996, neither Transportation nor Justice had adopted an official position on the transfer of responsibilities. Other issues that may affect the 1992 Act’s implementation or effectiveness are as follows: Prosecution Immunity: NHTSA said concern outside Transportation has been raised about providing immunity to those individuals (e.g., system operators, insurers, and salvagers) acting in good faith to comply with the 1992 Act. H.R. 2803 could grant such immunity. AAMVA emphasized that the immunity language was intended for system operators, not participants such as salvagers. AAMVA told us that the need for immunity would not be an issue unless it affected a state’s decision to participate in the system. NICB officials stated that immunity is needed for all participants who will participate in any activities related to the database. Major Vehicle Damage Disclosure: Consumer groups may not support implementation of the titling system if the system, besides disclosing whether a vehicle had been previously junked or salvaged, does not identify vehicles that have sustained major damage. NHTSA said that the titling task force did not address this issue other than to note further study was needed. States’ Participation: Presently, the 1992 Act does not mandate the participation of the states. In NHTSA’s view, all states need to participate in the system to ensure the 1992 Act’s effectiveness in preventing title fraud. NHTSA noted that the uniformity needs of the system would require many states to enact legislation at a time when they have strongly opposed federal “mandates” and “burdens.” AAMVA officials said that it does not believe that states will need to pass new legislation to implement a titling system. Technological Challenges: According to NHTSA officials, the system envisioned by the 1992 Act would be extraordinarily complex. They said that the technology required to implement a large-scale system, which provides instantaneous response to inquiries, may take additional time or call for additional resources beyond those currently estimated. AAMVA officials said they recognize the complexity of the system but said that, by modeling the pilot after the commercial driver’s license information system, many potential concerns would be lessened. They said that the pilot will identify the necessary requirements, technology, and costs to process the anticipated larger volume of transactions of the national titling system in a timely manner. NICB officials pointed out that proven technology exists to develop and implement the system. Therefore, the challenge is not technical but is procedural and philosophical—i.e., states will need to establish policies and procedures to act on identified problems and correct them. The Theft Act of 1984 identified the parts subject to marking and allowed NHTSA to identify others that were to be marked. NHTSA issued regulations on marking major original and replacement component parts of high-theft lines of passenger motor vehicles. NHTSA could exempt some lines from marking if the vehicles included antitheft devices that NHTSA determined were likely to be as effective as marking in deterring thefts. The 1992 Act broadened and extended the 1984 Act’s marking provisions. Specifically, the 1992 Act broadened the definition of the types of passenger motor vehicles to be marked to include any multipurpose vehicle and light duty trucks rated at 6,000 pounds (gross vehicle weight) or less. It extended the marking requirement to designated vehicles, except for light duty trucks, regardless of their theft rate. However, the trucks could be subject to marking if the major parts were interchangeable with high-theft passenger vehicles. No limit was placed on the number of parts that NHTSA could require to be marked, except that the marking costs are not to exceed $15 per vehicle (in 1984 dollars). According to an NHTSA official, local law enforcement officials look for markings when investigating stolen vehicles and parts. The additional marking of passenger vehicles was to be done in two phases. By October 25, 1994, NHTSA was to issue regulations governing the marking for half of these additional passenger motor vehicles (excluding the light duty trucks), and by October 25, 1997, for the remaining additional vehicles. These regulations were to be issued provided the Attorney General did not determine that further marking would not be effective (i.e., would not substantially inhibit chop shop operations and motor vehicle thefts). Justice’s National Institute of Justice will be responsible for conducting the required study upon which the Attorney General will make the determination concerning effectiveness. Like the earlier legislation, the 1992 Act also permitted exemptions from marking. The 1992 Act required a number of additional evaluations. NHTSA was required to report on theft rate-related issues and marking effectiveness by October 25, 1995, and October 25, 1997, respectively. (The 1984 Act contained similar reporting requirements for Transportation.) Furthermore, the Attorney General is to report by December 31, 1999, on the long-range effectiveness of parts marking and on the effectiveness of the antitheft devices permitted as alternatives to marking. NHTSA issued the regulations for the first phase on December 13, 1994. With respect to the study that was due on October 25, 1995, NHTSA was preparing its report for public comment as of January 1996. According to an NHTSA official responsible for the marking requirements, the results will not be made public until about May or June 1996. According to the National Institute of Justice, it was to receive grant proposals to carry out its study on March 29, 1996. The Institute expects work to begin on this study in May 1996. A determination of the effectiveness of the marking of major components of passenger motor vehicles is not expected to be made until the Justice and Transportation reports are completed. However, on the basis of a study done in response to the 1984 Act’s reporting requirements, NHTSA reported that it was unable to statistically prove that marking reduced motor vehicle thefts. NHTSA noted, however, that there was wide support for parts marking in the law enforcement community. Further, according to NHTSA and FBI officials, marking effectiveness could be adversely affected by confusion that exists within the law enforcement community regarding those vehicles whose parts are to be marked. This confusion could occur when law enforcement officials investigate stolen vehicles and parts, for example, at chop shops. The NHTSA official said that during discussions with some federal prosecutors, the prosecutors were not aware of the marking provisions. The official said that NHTSA will provide guidance when requested by law enforcement officials. NHTSA and FBI officials also noted that some of the markings for certain major component parts were able to be removed from the parts, thus preventing checking the part against NSPMVIS. The NHTSA marking official told us that the manufacturer of the involved marking stickers had agreed to fix the problem. The 1992 Act required that by July 25, 1993, the Attorney General establish and maintain in NCIC an information system that was to contain vehicle identification numbers and other related data for stolen passenger motor vehicles and parts. If the Attorney General determined that NCIC was not able to perform the required functions, then the 1992 Act permitted the Attorney General to enter into an agreement for the operation of the system separate from NCIC. The Attorney General is to prescribe procedures for the NSPMVIS verification system under which persons/entities intending to transfer vehicles or parts would check the system to determine if the vehicle or part had been reported as stolen. These persons/entities include insurance carriers when transferring titles to junk or salvage vehicles and motor vehicle salvagers, dismantlers, recyclers, or repairers when selling, transferring, or installing a major part marked with an identification number. The 1992 Act also required the Attorney General to establish an advisory committee by December 24, 1992, which was to issue a report by April 25, 1993, with recommendations on developing and carrying out NSPMVIS. The effectiveness of this system may also be addressed in the NHTSA studies that are to be completed on parts marking by October 25, 1995, and October 25, 1997, respectively. The Attorney General authorized NICB to operate NSPMVIS on January 18, 1995. The FBI said that the authorization was the result of the Attorney General’s approval of the final report and recommendations of the NSPMVIS Federal Advisory Committee. (The advisory committee recommendations are detailed in app. II.) According to FBI officials, all of the advisory committee’s recommendations, including system administration activities, system security, theft status determination, and visual sight checks were addressed during the pilot study, as described below. However, according to the FBI, several of the recommendations cannot be implemented until regulations are developed to implement the system nationwide. According to the FBI, NICB received approval from the NCIC Advisory Policy Board in June 1993 to receive a copy of the NCIC vehicle file to establish the system. According to the FBI, the resulting system became operational in June 1994, providing the NICB with the capability to process vehicle identification numbers against the NCIC vehicle records. In March 1995, Justice established a 6-month pilot study in Texas to examine the concept and feasibility of implementing NSPMVIS nationwide. In July 1995, the pilot was extended another 6 months and included another state, Illinois. According to the FBI, the pilot study was completed in December 1995. As of April 1, 1996, the FBI said that its report is to be issued by mid-to-late April 1996. FBI officials said that the pilot showed that the system is feasible but many issues, such as funding, will have to be addressed. FBI also said it will not proceed with implementing the system until further direction is provided by Congress. On the basis of discussions with FBI officials and review of the advisory committee report and FBI-provided information, a number of issues were identified regarding NSPMVIS. According to the FBI, these issues are related to the system’s feasibility and effectiveness and will be addressed in its pilot study report. The FBI added that the response by law enforcement to NSPMVIS thefts is a state and local issue. It is impossible to predict the level of response from law enforcement to NSPMVIS thefts because the response is likely to vary on a case-by-case basis. However, there is no provision in the 1992 Act to fund NSPMVIS, including parts inspections, salvage vehicle inspections, or law enforcement participation and assistance. NICB officials stated that local law enforcement officials would need more resources to report stolen parts and follow up on possible thefts identified through NSPMVIS. Also, according to FBI officials, the implementation of NSPMVIS might have an adverse economic impact on insurance companies and smaller businesses involved in vehicle parts. For example, insurance carriers would have to identify the vehicle identification number of each vehicle part that is disposed. The FBI added that the insurance industry is concerned about the cost of inspecting parts. The insurance industry cooperated with the FBI throughout the pilot study and conducted parts inspections. owever, the FBI stated that industry officials have said that it may be too time-consuming and costly for insurance adjustors to inspect vehicle identification numbers on all total-loss, high-theft vehicles. According to FBI officials, the parts inspections are a major concern to all of the affected industries because of the potential costs associated with the process. NICB officials stated that the pilot study should not be the basis for assuming that the entire insurance industry would not support a parts identification process. According to FBI and NICB officials, there is a need to provide immunity from prosecution to participants acting in good faith to comply with the NSPMVIS requirements. H.R. 2803 would grant such immunity. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies to the Departments of Justice and Transportation, AAMVA, and NICB and make copies available to others upon request. The major contributors to this report are listed in appendix III. If you need additional information, please contact me on (202) 512-8777. The following information is based on the Final Report of the Motor Vehicle Titling, Registration, and Salvage Task Force, dated February 10, 1994. (1) Uniform Definitions: The task force recommended the enactment of federal legislation to require the following definitions be used nationwide to describe seriously damaged vehicles and to require all states to use these definitions. Salvage Vehicle: Any vehicle that has been wrecked, destroyed, or damaged to the extent total estimated or actual cost to rebuild exceeds 75 percent of the vehicle retail value as set forth in a nationally recognized compilation of retail values approved by Transportation. Salvage Title: Issued by the state to the owner of a salvage vehicle. The title document will be conspicuously labeled with the word “salvage” across its front. Rebuilt Salvage Title: Issued by the state to the owner of a vehicle that was previously issued a salvage title. The vehicle has passed antitheft and safety inspections by the state. The title document will be conspicuously labeled with the words “rebuilt salvage - inspections passed” across its front. Nonrepairable Vehicle: A vehicle incapable of safe operation and has no resale value other than as source for parts or scrap only. Such vehicle will be issued a nonrepairable vehicle certificate and shall never be titled or registered. Nonrepairable Vehicle Certificate: Issued for nonrepairable vehicle. The certificate will be conspicuously labeled with “nonrepairable” across its front. Flood Vehicle: Any vehicle that has been submerged in water over door sill. Any subsequent titles will carry brand “flood.” (2) Titling and Control Methods: The task force recommended the enactment of federal legislation to require the following. If an insurance company is not involved in a damage settlement, the owner must apply for a salvage title or nonrepairable vehicle certificate. If an insurance company is involved, it must apply. State records shall be noted when nonrepairable vehicle certificate is issued. When a vehicle has been flattened, baled, or shredded, the title or nonrepairable vehicle certificate is to be returned to the state. State records will show the destruction, and no further ownership transactions for the vehicle will be permitted. State records shall be noted when a salvage title is issued. The vehicle cannot be titled without a certificate of inspection. After a vehicle with a salvage title has passed antitheft and safety inspections, a decal will be affixed to left front door, and a certificate will be issued indicating that inspections were passed. Owner of a vehicle with a salvage title may obtain a rebuilt salvage title by presenting the salvage title and certificate that inspections were passed. (3) Duplicate Title Issuance: The task force recommended the states strengthen and have uniform controls on the issuance of duplicate titles as follows. If duplicate titles are issued over the counter, they will be issued only to the vehicle owner and only after proof of ownership and personal identification are presented. Applications for duplicate titles should be multipart forms with sworn statements as to truth of the contents. When power of attorney is involved, the duplicate title should be mailed to a street address, and not to a post office box. Also, states should consider mailing one part of the multipart application form to the owner of record. Fees are to be set to offset costs of adoption of these recommendations. Criminal penalty for offenses in this area should be a felony crime. Duplicate titles should be conspicuously marked as duplicate. (4) National Uniform Antitheft Inspection for Rebuilt Salvage Vehicles: The Task Force recommended the following specific steps. Requesters for inspections provide declaration of vehicle damages and replacement parts, supported by vehicle titles, etc. Component parts and/or vehicles, if unidentified, having an altered, defaced, or falsified vehicle identification number be contraband and destroyed. Provide minimum selection and training standards for certified inspectors who are employed by the states. The inspectors should be afforded immunity when acting in good faith. Inspection program should be self-supported by fees. (5) National Uniform Safety Inspection for Rebuilt Salvage Vehicles: The Task Force recommended the following. All states institute a safety inspection for rebuilt salvage vehicles. (The Task Force recommended criteria that it said should be considered as the minimum standards.) If contracted to a private enterprise, the entity must meet Transportation-established training and equipment standards. The vehicles be inspected and certified with respect to individual repair and inspections, but not with respect to the states’ obligation to license and audit the performance of private enterprise chosen as licensees. (6) Exportation of Vehicles: The task force recommended the following. No exportation without proof of ownership being provided U.S. Customs Service. Customs will provide vehicle identification numbers to the titling information system. (7) Funding: The task force recommended that the federal, state, and local costs be funded from the following sources: — federal appropriations and grants, — state revenues and user fees, — federally mandated fees, and — money obtained from enforcement penalties and from sale of seized contraband. (8) Enforcement: The task force recommended the following. Investigative authority and sanctions should parallel those contained in Title IV of the Motor Vehicle Information and Cost Savings Act. A portion of federal highway funds should be withheld if a state does not comply with federal legislation implementing the task force’s recommendations, within 3 years after enactment. Transportation agreed with all task force recommendations except the exportation (recommendation 6) and highway fund sanctions recommendations (part of recommendation 8). It took no position on the exportation recommendations, saying that was the responsibility of the U.S. Customs Service. Transportation opposed using the highway fund as an enforcement tool. The following information was excerpted from the Final Report of the National Stolen Auto Part Information System (NSAPIS) Federal Advisory Committee, dated November 10, 1994. (1) The Committee recommends that the National Insurance Crime Bureau (NICB) serve as the System Administrator for NSAPIS, and the Attorney General enter into an agreement with NICB, at no cost or a nominal cost to the government, for the operation of NSAPIS. The Committee believes that NICB possesses the necessary resources, skills, and infrastructure to successfully maintain and administer NSAPIS. (2) The Committee recommends that a written agreement be developed that clearly defines the role, responsibilities, and requirements for NICB as the NSAPIS Administrator. (3) The Committee recommends that Congress enact legislation establishing an Oversight Committee to work with NICB to develop and maintain NSAPIS. The Committee recommends that the NSAPIS Oversight Committee be formed immediately. In addition, the Committee recommended a list of pre-and post-implementation functions that the NSAPIS Oversight Committee should handle. (4) The Committee strongly recommends that the Oversight Committee have representation from all affected elements of the automobile industry, insurance industry, and law enforcement. Specific industries and organizations the Committee believes should have representation on the Oversight Committee include the NSAPIS Administrator, Justice, NHTSA, Consumer Affairs Group, and two members each representing the Automobile Recycling Industry, Automobile Repair Industry, Automobile Insurance Industry, Law Enforcement Agencies, and Automobile Parts Rebuilders Industry. (5) The Committee recognizes that NICB may establish a Vehicle Parts History File. The Committee said that tracking recycled parts data may deter using stolen auto parts in repairing vehicles. The information in the NICB’s Vehicle Parts History File would be supplied to law enforcement for investigative purposes. (6) The Committee recommends that any organization serving as the NSAPIS Administrator be prohibited from engaging in a parts locating service. The Committee wants to ensure that the NSAPIS Administrator does not compete with current parts locating services as a result of their NSAPIS association and activity. (7) The Committee recommends that the FBI, in conjunction with Transportation and affected associations, engage in a comprehensive training and awareness program to educate manufacturers, repairers, insurers, safety inspectors, and law enforcement officials on relevant issues, which affect the success of NSAPIS, such as parts marking regulations and enforcement tactics. (1) The Committee recommends that NSAPIS provide automatic notification to a law enforcement agency having investigative jurisdiction over the locality in which the inquiring NSAPIS user is located, on stolen vehicle and vehicle part NSAPIS hits. The notification should include a message to the law enforcement agency to “confirm the current theft status through NCIC and conduct a logical investigation.” (2) The Committee recommends, in the case of an NSAPIS hit, the following message be sent to the person attempting to sell, transfer, or install the vehicle part: “THE VEHICLE OR PART QUERIED HAS BEEN REPORTED STOLEN AND THE SALE, TRANSFER, OR INSTALLATION OF THIS VEHICLE OR PART MUST BE TERMINATED. YOUR LOCAL LAW ENFORCEMENT AGENCY HAS BEEN PROVIDED THE DETAILS OF THIS TRANSACTION.” (3) The Committee recommends, in the case where there is no NSAPIS hit, that the person or organization attempting to sell, transfer, or install the vehicle or part receive an NSAPIS-generated authorization number. (1) The Committee recommends that NSAPIS, at minimum, meet the C2 level security requirements as stated in the Department of Defense Trusted Computer System Evaluation Criteria (DOD 5200.28-STD), commonly referred to as the Orange Book. (1) The Committee recommends that manufacturers be encouraged to provide updated information to NICB, including component numbering sequences. (2) The Committee recommends that efforts be undertaken to further encourage law enforcement officials to dutifully report and verify data for the NCIC Vehicle file. (3) The Committee recommends that NSAPIS documentation include information that informs inquirers of what occurs following both a positive and a negative hit from NSAPIS. (1) The Committee suggests that any vehicle that sustains damage equal to or greater than 100 percent of its predamaged actual cash value be declared “unrepairable - parts only.” The NSAPIS Committee said that the number of motor vehicle thefts can be significantly reduced by eliminating the availability of salvage and junk vehicle identification numbers and related paperwork. (1) The Committee recommends that the theft status determination occur through an electronic verification process that provides an NSAPIS-generated authorization number to the inquirer. (2) The Committee recommends that the only exception to electronic verification be in those instances where NSAPIS cannot provide a response within a “timely manner.” (3) The Committee recommends that in those instances where NSAPIS cannot provide insurers a theft status verification in a timely manner, a certificate be provided to the insurer, or a contracting agent for the insurer, which allows for the sale or transfer of the vehicle or part. The certificate shall be generated by the NSAPIS Administrator. The Committee listed specific information that at a minimum should be contained on the certificate. (4) The Committee recommends that Congress enact legislation that would provide for limited immunity (e.g., persons or organizations authorized to receive or disseminate information from NSAPIS) to protect NSAPIS participants acting in good faith. (1) The NSAPIS Committee recommends that any person engaged in business as an insurance carrier shall, if such carrier obtains possession of and transfers a junk motor vehicle or a salvage motor vehicle (a) verify, after performing a visual sight check on all applicable major parts, whether any of those major parts are reported stolen. The applicable major parts are those parts that have been designated by NHTSA. (b) provide verification to whomever such carrier transfers or sells any such salvage or junk motor vehicle. (2) The Committee recommends that insurers be allowed to contract out the verification tasks, but the insurer must still be identified on the certificate, when necessary, to the purchaser. (3) The Committee recommends that all self-insured entities be required to perform vehicle and parts verifications in the same manner that insurance companies are required to do. (4) The Committee recommends that salvage and junk vehicles that are impounded and to be sold at government auction be verified through NSAPIS before any sale or transfer takes place. Nancy M. Donnellan, Information Systems Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.","Pursuant to a congressional request, GAO provided information on the implementation of the Anti-Car Theft Act, focusing on the: (1) status of national information systems on motor vehicle titles and stolen passenger cars and parts; (2) marking of major component parts of passenger cars with identification numbers; and (3) issues that may impede the act's implementation. GAO found that: (1) the Department of Justice (DOJ) and the Department of Transportation (DOT) have begun developing information systems and DOT has issued initial parts-marking regulations; (2) a DOT task force has made recommendations on the legislative and administrative actions needed to address problems in titling, registration, and controls over salvage to deter motor vehicle theft; (3) states need about $19 million in federal grants to implement their part of the titling system; (4) the National Highway Traffic Safety Administration has proposed legislation to implement the task force's recommendations; (5) issues affecting the implementation or effectiveness of the proposed titling information system include prosecution immunity, major vehicle damage disclosure, the system's complexity, and state participation, funding, and responsibility; (6) the association that DOJ authorized to set up the stolen vehicle and parts database and complete a pilot study on the database's concept and maintenance feasibility expects to begin studying parts-marking effectiveness in May 1996; and (7) potential barriers to the implementation or effectiveness of the act's parts marking provisions include state funding for the database, confusion over what vehicles and parts are to be marked, whether local law enforcement agencies have the resources necessary to follow up on identified stolen vehicles and parts, and the potential adverse economic impact on insurance companies and small businesses.",govreport
"The distribution of and payment for prescription drugs involves interactions among multiple entities. These entities include drug wholesalers, independent pharmacies, PSAOs, and third-party payers and their PBMs. Interactions among these entities facilitate the flow of and payment for drugs from manufacturers to consumers. Drug wholesalers (hereafter referred to as wholesalers) purchase bulk quantities of drugs from pharmaceutical manufacturers and then distribute them to pharmacies, including independent pharmacies. For example, a wholesaler may fill an order from an independent pharmacy for a specified quantity of drugs produced by manufacturers and deliver the order to the pharmacy. In addition to supplying drugs, some wholesalers offer ancillary services to independent pharmacies such as helping them manage their inventory. Three wholesalers—AmerisourceBergen Corporation, McKesson Corporation, and Cardinal Health Inc.— accounted for over 80 percent of all drug distribution revenue in the United States in 2011. Independent pharmacies are a type of retail pharmacy with a store-based location—often in rural and underserved areas—that dispense medications to consumers, including both prescription and over-the- counter drugs. In this report, we define independent pharmacies as one to three pharmacies under common ownership. Approximately 21,000 independent pharmacies constituted almost 34 percent of the retail pharmacies operating in the United States in 2010. Although independent pharmacies offer other products such as greeting cards and cosmetics, prescription drugs account for the majority of independent pharmacy sales. These sales accounted for almost 17 percent of the $266 billion in prescription drug sales in the United States in 2010. In addition to products, independent pharmacies provide patient-care services such as patient education to encourage patients’ appropriate use of medications. According to a 2009 survey of pharmacists, independent pharmacies spend the majority of their time dispensing prescription drugs and providing patient-care services. Independent pharmacies primarily purchase drugs from wholesalers (although they may also purchase them directly from manufacturers) and represented slightly over 15 percent of wholesalers’ total sales to retail pharmacies in 2010. Independent pharmacies are an important part of a wholesaler’s customer portfolio because, in addition to purchasing drugs, independent pharmacies may also pay the wholesaler to provide logistical functions and ancillary services such as direct delivery of drugs to individual stores and inventory management. Thus, a wholesaler’s relationship with an independent pharmacy may result in multiple business opportunities for the wholesaler and administrative efficiencies for the pharmacy. After receipt of drugs from a wholesaler or manufacturer, pharmacies then fill and dispense prescriptions to consumers, such as health plan enrollees. These latter prescriptions are dispensed according to contractual terms agreed upon with each enrollee’s health plan, that is, with each third-party payer or its PBM. According to the National Community Pharmacists Association (NCPA), payments based on the contractual terms of third-party payers or their PBMs significantly affect the financial viability of independent pharmacies. Consequently, these pharmacies must carefully choose which contracts to accept or reject. Accordingly, most independent pharmacies rely on PSAOs to negotiate directly, or to make recommendations for negotiating contracts on their behalf with third-party payers or their PBMs. When a PSAO enters into a contract with a third-party payer or its PBM, the pharmacies in its network gain access to the third-party payer or PBM contract—and the individuals it covers—by virtue of belonging to the PSAO’s network. Third-party payers accounted for almost 80 percent of drug expenditures in 2010, which represents a significant shift from 30 years ago when payment from individual consumers accounted for the largest portion of expenditures. Third-party payers include private and public health plans such as those offered by large corporations and the federal government through Medicare and the FEHBP, many of which use PBMs to help them manage their prescription drug benefits. As part of the management of these benefits, PBMs assemble networks of retail pharmacies, including independent pharmacies, where the health plan’s enrollees can fill prescriptions.or its PBM’s network by entering into an agreement with the third-party payer or its PBM. It does so either directly or through a PSAO that has negotiated with that third-party payer or its PBM on the pharmacy’s behalf. Contract terms and conditions may include specifics about A pharmacy becomes a member of a third-party payer’s reimbursement rates (how much the pharmacy will be paid for dispensed drugs), payment terms (e.g., the frequency with which the third-party payer or its PBM will reimburse the pharmacy for dispensed drugs), and audit provisions (e.g., the frequency and parameters of audits conducted by the third-party payer, its PBM, or designee), among other things. The reimbursement rate that third-party payers or their PBMs pay pharmacies significantly affects pharmacy revenues. Retail pharmacies participating in a PBM’s network are reimbursed for prescriptions below the level paid by cash-paying customers (those whose prescriptions are not covered by a third-party payer). In addition, pharmacies must undertake additional administrative tasks related to transactions for customers who are covered by third-party payers that are not required for cash-paying customer transactions. For example, for customers covered by third-party payers, pharmacy staff must file claims electronically and may be required to counsel them on their health plan’s benefits. However, most retail pharmacies participate in PBM networks because of the large market share PBMs command, which represents potential pharmacy customers. The five largest PBMs operating in the first quarter of 2012 represented over 330 million individuals.benefit from the prescription and nonprescription sales generated by customers that PBMs help bring into their stores. (See fig. 1 for a diagram of the network of entities in the distribution of and payment for pharmaceuticals.) At least 22 PSAOs, which varied in the number and location of pharmacies to which they provided services, were in operation in 2011 or 2012. In total, depending on different data sources, these 22 PSAOs represented or provided other services to between 20,275 and 28,343 pharmacies in 2011 or 2012. (See table 1.) The number of pharmacies contracted with each PSAO across these sources ranged from 24 to 5,000 pharmacies; however, according to NCPDP data most contracted with fewer than 1,000 pharmacies. The largest 5 PSAOs combined contracted with more than half of all pharmacies that were represented by a PSAO in 2011 or 2012. Because pharmacies may change their PSAO, the number of pharmacies contracting with each PSAO fluctuates as For example, according to one PSAOs enroll and disenroll pharmacies.PSAO, member pharmacies will change PSAOs whenever they think that another PSAO can negotiate better contract terms with third-party payers or their PBMs. Some PSAOs contracted primarily with pharmacies located in a particular region. These PSAOs generally represented fewer pharmacies than PSAOs representing pharmacies across the United States. For example, the Northeast Pharmacy Service Corporation represented 250 independent pharmacies while the RxSelect Pharmacy Network represented from 451 to 569 independent pharmacies. According to NCPDP data, PSAOs provide services primarily to independent pharmacies. Of the 21,511 pharmacies associated with PSAOs in the 2011 NCPDP database, 18,103 were identified as independent pharmacies. These independent pharmacies represent nearly 75 percent of the total number of independent pharmacies in the 2011 NCPDP database. This is close to an estimate reported by NCPA and the HHS OIG, both of which conducted surveys in which approximately 80 percent of responding independent pharmacies were represented by PSAOs. In addition to independent pharmacies, some PSAOs also contracted with small chains and franchise pharmacy members.small chain pharmacies ranging in size from 25 to 150 pharmacies under For example, Managed Care Connection provides services to common ownership, and the Medicine Shoppe only offers its PSAO services to its franchise pharmacies. PSAOs provide a broad range of services to independent pharmacies including negotiating contractual agreements and providing communication and help-desk services. These and other services are intended to achieve administrative efficiencies for both independent pharmacies and third-party payers or their PBMs. Most PSAOs charge a monthly fee for a bundled set of services and separate fees for additional services. While PSAOs provide a broad range of services to independent pharmacies and vary in how they offer these services, we found that PSAOs consistently offer contract negotiation, communication, and help- desk services. Several entities, including industry experts, trade associations, and PSAOs we spoke with, referred to one or all of these services as a PSAO’s “key service(s)”—meaning that a PSAO can be distinguished from other entities in the pharmaceutical industry by its provision of these services. In addition, PSAOs may provide many other services that assist their member pharmacies—the majority of which are independent pharmacies—in interacting with third-party payers or their PBMs, although those PSAOs we spoke with did not provide these other services as consistently as their key services. On behalf of pharmacies, PSAOs may negotiate and enter into contracts with third-party payers or their PBMs. Both the HHS OIG and an industry study reported that small businesses such as independent pharmacies generally lack the legal expertise and time to adequately review and negotiate third-party payer or PBM contracts, which can be lengthy and complex.independent pharmacies that we reviewed indicated, and all of the PSAOs we spoke with stated, that the PSAO was explicitly authorized to negotiate and enter into contracts with third-party payers on behalf of member pharmacies. By signing the agreement with the PSAO, a member pharmacy acknowledges and agrees that the PSAO has the right to negotiate contracts with third-party payers or their PBMs on its behalf. All of the model agreements between PSAOs and PSAOs we spoke with had different processes for negotiating and entering into contracts with third-party payers or their PBMs. These processes included following guidance or parameters established by a governing body such as a board of directors composed partially or entirely of representatives from the PSAO’s member pharmacies. In addition, some PSAOs’ decisions about entering into contracts are made by their contracting department or executive staff that base the decision on factors such as analyses of the contract’s proposed reimbursement rate and the efficiencies and value that the PSAO’s member pharmacies would provide to the particular market in which the contracts are offered. Decisions about entering into contracts may also include consultation with a PSAO’s advisory board composed of representatives from the PSAO’s member pharmacies. While PSAOs may review and negotiate a wide range of contract provisions, PSAOs we spoke with reported negotiating a variety of provisions including reimbursement rates, payment terms, audits of pharmacies by third-party payers or their PBMs, price updates and appeals, and administrative requirements.areas, PBMs and PSAOs we spoke with reported that audits and reimbursement rates were of particular concern to pharmacies. One Regarding these contract PSAO reported that its negotiations about a contract’s audit provisions were intended to minimize member pharmacies’ risks and burdens as audit provisions can include withholding reimbursement on the basis of audit findings. In addition, according to some PSAOs that we spoke with, reimbursement rates to pharmacies have decreased over time, and PSAOs and other sources we spoke with reported that PSAOs’ ability to negotiate reimbursement rates has also decreased over time. Over half of the PSAOs we spoke with reported having little success in modifying certain contract terms as a result of negotiations. This may be due to PBMs’ use of standard contract terms and the dominant market share of the largest PBMs. Many PBM contracts contain standard terms and conditions that are largely nonnegotiable. According to one PSAO, this may be particularly true for national contracts, in which third-party payers or their PBMs have set contract terms for all pharmacies across the country that opt into the third-party payer’s, or its PBM’s network. For example, a national contract exists for some federal government programs, such as TRICARE. In addition, several sources told us that the increasing consolidation of entities in the PBM market has resulted in a few PBMs having large market shares, which has diminished the ability of PSAOs to negotiate with them, particularly over reimbursement rates. In contrast, PBMs we spoke with reported that PSAOs can and do negotiate effectively. PBMs and PSAOs reported that several factors may affect negotiations in favor of PSAOs and their members, including the number and location of pharmacies represented and the services provided by those pharmacies in relation to the size and needs of the third-party payer or its PBM. For example, a third-party payer or its PBM may be more willing to modify its contract terms in order to sign a contract with a PSAO that represents pharmacies in a rural area in order to expand the PBM’s network in that area. In addition, a third-party payer or its PBM may be more willing to negotiate in order to add pharmacies in a PSAO’s network that offer a specialized service such as diabetes care needed by a health plan’s enrollees. One PSAO also reported that small PBMs wishing to increase their network’s size may be more willing to negotiate contract terms. We found that PSAOs vary in their requirements for their member pharmacies. Two PSAO-pharmacy model agreements that we reviewed stated that member pharmacies must participate in all contracts in which the PSAO entered on behalf of members. These PSAOs and six additional PSAOs we spoke with reported that their member pharmacies must participate in all contracts between the PSAO and third-party payers or their PBMs. The remaining two PSAOs we spoke with reported that they build a portfolio of contracts from which member pharmacies can choose. These PSAOs negotiate contracts with various third-party payers or their PBMs and member pharmacies review the terms and conditions of each contract and select specific contracts to enter into. Most of the PSAO-pharmacy model agreements we reviewed contained provisions expressly authorizing member pharmacies to contract with a third-party payer independent of the PSAO. Two additional PSAOs we spoke with confirmed that they do not restrict member pharmacies from entering into contracts independent of the PSAO. All three PBMs we spoke with confirmed that pharmacies may contract with them if their PSAO did not sign a contract with them on the pharmacies’ behalf. PSAOs serve as a communication link between member pharmacies and third-party payers or their PBMs. Such communication may include information regarding contractual and regulatory requirements as well as general news and information of interest to pharmacy owners. All of the PSAOs we spoke with provided communication services to pharmacies such as reviewing PBMs’ provider manuals to make member pharmacies Communication with pharmacies was provided aware of their contents.by means of newsletters and the PSAOs’ Internet sites. In addition to communicating contractual requirements, PSAOs may also communicate applicable federal and state regulatory updates. For example, one PSAO we spoke with told us that it provides its member pharmacies with regulatory updates from the Centers for Medicare & Medicaid Services by publishing this information in its newsletter. Another PSAO we spoke with provided regulatory analyses that included examining and briefing its member pharmacies on durable medical equipment accreditation requirements, and fraud, waste, and abuse training requirements. According to the PSAO, this was to ensure that its member pharmacies were taking the right steps to comply with applicable regulations. PSAOs provide general assistance to pharmacies and assistance with issues related to third-party payers and their PBMs such as questions about claims, contracting, reimbursement, and audits. PSAOs may provide such assistance by means of a help-desk (or customer service department) or a dedicated staff person. For example, one PSAO we spoke with reported that it provides general pharmacy support services to help pharmacies with any needs they may have in the course of operating their businesses. This PSAO also had a staff person responsible for providing support services to member pharmacies including answering their questions about claims and each contract’s reimbursement rate or payment methodology. A PSAO may also help a pharmacy identify why a certain claim was rejected. PSAOs provide many other services that assist member pharmacies in interacting with third-party payers or their PBMs. For example, PSAOs may provide services that help the pharmacy with payment from a third- party payer or its PBM, comply with third-party payer requirements, or develop services that make the pharmacy more appealing to third-party payers or their PBMs. (See table 2 for a list and description of these services.) The PSAOs we spoke with varied in their provision of these other services although 9 of the 10 PSAOs we spoke with provided central payment and reconciliation services or access to reconciliation vendors that provided the service. However, other services were not provided as consistently across PSAOs. For example, only 1 PSAO reported that it provided inventory management or front store layout assistance. PSAO services have changed over time to meet member pharmacies’ interests. In some cases, this has meant adding new services, while in other cases PSAOs have expanded existing services. Several PSAOs we spoke with reported adding services intended to increase cost efficiencies and member pharmacies’ revenues. For example, three PSAOs we spoke with reported that they began offering central pay services and two of these PSAOs and an additional PSAO reported that they began offering reconciliation services. PSAOs we spoke with also reported expanding existing services. For example, one PSAO reported adding electronic funds transfers, while two other PSAOs reported that although they were already providing electronic funds transfers, they increased the frequency of transfers to five days per week. This increase was made to improve pharmacies’ cash flow by giving them quicker access to funds owed them by third-party payers or their PBMs. Two PSAOs we spoke with reported adding certification programs, particularly vaccination/immunization certification programs, because of the needs of third-party payers or their PBMs for this service to be provided through their network pharmacies. PSAOs provide services intended to achieve administrative efficiencies for both independent pharmacies and third-party payers or their PBMs. PSAO services enable pharmacy staff, including pharmacists, to focus on patient-care services rather than administrative issues that pharmacists may not have the time to address. PSAO services also reduce the number of resources that PBMs must direct toward developing and maintaining relationships with multiple independent pharmacies. PSAO services are intended to help independent pharmacies achieve efficiencies particularly in contract negotiation. For example, independent pharmacies and PBMs we spoke with told us that PSAO contract negotiation services eased their contracting burden and allowed them to expand the number of entities with which they contracted. As a member of a PSAO, pharmacies may no longer have to negotiate contracts with multiple third-party payers or their PBMs operating in any given market. Independent pharmacies also told us that PSAOs provide other services that create both administrative and cost efficiencies for them. For example, one pharmacist told us that the marketing services provided by his PSAO relieved him of advertising costs because the PSAO provided advertising circulars to its PSAO-franchise members. Another independent pharmacy reported that its PSAO provides services such as claims reconciliation less expensively than the pharmacy could perform on its own. Similar to independent pharmacies, PBMs we spoke with reported that PSAO services create administrative efficiencies for them, including efficiencies in contracting, payment, and their call centers. PSAO services create contracting efficiencies because they provide PBMs with a single point through which they can reach multiple independent pharmacies. For example, the PBMs we spoke with each had over 20,000 independent pharmacies in their networks, however, each PBM only negotiated contracts with 15 to 19 PSAOs, representing a majority of the pharmacies in its network. PBMs also reported that PSAO services create payment efficiencies when PSAOs provide central payment services. One PBM reported that instead of mailing checks to hundreds of individual pharmacies, the PBM made one electronic funds transfer to the PSAO, which then distributed the payments to its members. Finally, PBMs benefit from reduced call center volume because PSAOs often provide similar support directly to member pharmacies. For example, a call that may have gone to the PBM about a claim that was not paid may instead go to the pharmacy’s PSAO, which will help the pharmacy understand any issues with the claim. PSAOs may also aggregate member pharmacies’ issues and contact the PBM to discuss issues on behalf of multiple pharmacies and relay pertinent information back to those pharmacies. While creating efficiencies by acting on behalf of multiple pharmacies, PSAOs must ensure that their arrangements do not unreasonably restrain trade, thereby raising antitrust concerns. The FTC and the Antitrust Division of the Department of Justice (DOJ) are the federal agencies responsible for determining whether a particular collaborative arrangement may be unlawful and for enforcing applicable prohibitions. According to FTC officials, such a determination is dependent on multiple factors including the geographic region that a PSAO is operating in and the health care program (e.g., Medicare Part D) with which a PSAO is contracting. These factors affect the PSAO’s ability (and the abilities of the pharmacies the PSAO represents) to affect the terms of a contract or the pricing of a good. For example, a group of rural pharmacies may more effectively influence contract negotiations than a single pharmacy operating in an urban area with many competitors. PSAOs we spoke with were aware of potential antitrust issues and reported taking measures to minimize them. For example, two of the PSAOs we spoke with reported developing their PSAO’s organizational structure to ensure compliance with antitrust laws. Although PSAOs’ charges to member pharmacies for their services may vary depending on how the services are provided, 8 of the 10 PSAOs we spoke with charged a monthly fee for a bundled set of services. For example, 1 PSAO charged $40 to $80 per month for a bundle of services that included contract negotiation, communication with member pharmacies, help-desk services, business advice, and limited audit support. In comparison, another PSAO’s monthly fee ranged from $59 to $149 per month depending on the combination of services that the pharmacy requested. One of the remaining PSAOs we spoke with charged an annual fee rather than a monthly fee, while the other PSAO did not charge any fees for its PSAO services. The latter PSAO provided PSAO services as a value-added service to members of its group purchasing organization, for which it charged a monthly fee. Other services that are offered by most, but not all, PSAOs we spoke with are either provided within the bundle or as separate add-on services. PSAOs may also charge fees for individual services that are based on the type or value of that service. Virtually all of the fees for PSAO services are paid for by member pharmacies. All of the PSAOs we spoke with reported that they did not receive any type of fees from other entities such as an administrative fee from a third-party payer or its PBM. Similarly, all of the PBMs we spoke with told us that they did not pay PSAOs for their services. However 1 of the 3 PBMs we spoke with reported that it paid part of a pharmacy’s dispensing fee to 1 of the 16 PSAOs with which it contracted rather than to the pharmacy. The majority of PSAOs in operation in 2011 or 2012 were owned by wholesalers and independent pharmacy cooperatives.PSAO owners varied as to whether they require member pharmacies to also use the non-PSAO services they offer. Wholesalers and independent pharmacy cooperatives owned the majority of the PSAOs in operation in 2011 or 2012. Specifically, of the 22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were owned by independent pharmacy cooperatives (“member-owned”), 4 were owned by group purchasing organizations, and 3 were stand- alone PSAOs owned by other private entities. (See table 3.) Three of the 5 largest PSAOs were owned by the 3 largest wholesalers in the U.S.: AmerisourceBergen Corporation, Cardinal Health Inc., and McKesson Corporation. Across all sources included in our review, the PSAOs owned by these wholesalers represented 9,575 to 12,080 pharmacies, and PSAOs owned by independent pharmacies represented 4,883 to 8,882 pharmacies. According to one industry report, the services provided by member-owned PSAOs are similar to those offered by wholesaler-owned PSAOs. One PBM we spoke with noted that because of the financial backing of wholesaler-owned PSAOs, their PSAOs generally offer central payment services more often than PSAOs owned by other types of entities. This strong financial backing is necessary to offer these services because there is a considerable liability and risk in providing a central payment service. PSAO owners may operate PSAOs for a number of reasons, including to benefit another, non-PSAO line of their business. The wholesalers we spoke with provided various reasons for offering PSAO services, such as wanting to assist independent pharmacies in gaining access to third-party payer or PBM contracts, or to help pharmacies operate more efficiently. Additionally, one wholesaler noted that it created its PSAO because third- party payers and independent pharmacies indicated there was a need for PSAO services in the market. These third-party payers wanted a sole source for reaching multiple pharmacies, while independent pharmacies wanted a facilitator to assist them with reviewing third-party payer contracts. Other pharmaceutical entities noted that wholesalers may have an interest in developing relationships with independent pharmacies, which are potential customers of the wholesaler’s drug distribution line of business. By obtaining multiple services from a wholesaler, an independent pharmacy may be less likely to switch wholesalers. Additionally, by having their PSAOs assist independent pharmacies with entering multiple third-party payer or PBM contracts, wholesalers may benefit from the increased drug volume needed by independent pharmacies to serve the third-party payer’s or PBM’s enrollees. Other types of PSAO owners also provided a number of reasons for providing PSAO services, for instance, a number of these owners stated that they began offering PSAO services as a market-driven response to the growth of third-party payers and PBMs. In fact, one PSAO owner we spoke with stated that it reluctantly began offering these services at the request of customers of its group purchasing services, who wanted help navigating the issues and complexities of third-party payer and PBM contracting. The owners of PSAOs we spoke with varied as to whether they require PSAO member pharmacies to also use services from a separate non- PSAO line of their business. Of the nine PSAO owners we spoke with that had a separate non-PSAO line of business (e.g., drug distribution or group purchasing), six did not require their PSAO member pharmacies to use services from that non-PSAO line of business. Of the remaining three, one wholesaler-owned PSAO limited its offer of services to pharmacies that were existing customers of its drug distribution line of business, while two member-owned PSAOs reported requiring their PSAO member pharmacies to join their group purchasing organizations. Officials from the wholesaler-owned PSAO stated that their limiting the availability of PSAO services to existing customers ensures that their PSAO already has basic information about their member pharmacies and a salesperson who serves as each member pharmacy’s point of contact. While most PSAO owners do not require their member pharmacies to use services from their primary line of business, member pharmacies may choose to do so. In this case, a pharmacy must contract and pay for PSAO and other services separately. In fact, according to one wholesaler we spoke with, approximately 36 percent of its drug distribution customers were also members of its PSAOs. required to submit an application to join a PSAO network. PSAO applications we reviewed requested information about the pharmacy’s licensing, services provided, and insurance. Additionally, applications asked pharmacies to indicate whether they had been investigated by the HHS OIG, had filed for bankruptcy, or had their pharmacy’s state license limited, suspended, or revoked. PSAOs stated they used the information provided in applications to verify that the pharmacies applying for membership in their network are licensed by their state and in good standing. Pharmacies may choose to obtain PSAO services from their wholesaler, but not all do so. Instead, some pharmacies may choose to join another PSAO. Most PSAOs we spoke with operated their PSAO separately from any separate non-PSAO line of business. For example, most wholesalers we spoke with stated their PSAO staff and drug distribution staff are distinct and do not interact. One of these wholesalers reported its PSAO has a distinct corporate structure, management team, sales organization and financial component from its drug distribution line of business. However, nearly all of the PSAO owners we spoke with operate their PSAO as a subsidiary of their non-PSAO line of business. For example, two PSAOs were organized as subsidiaries of a member-owned buying group, while another PSAO operated as a branded service under the owner’s non- PSAO line of business. Most PSAO owners reported that PSAO services are not a profitable line of business. Only 1 of the 10 PSAO owners we spoke with stated that its PSAO service was profitable. Other PSAO owners reported little to no profit earned from the PSAO services they provided. For those PSAOs that are not profitable, the cost of operating them may be subsidized by the owner’s non-PSAO lines of business. As previously noted, it may be the case that offering PSAO services may benefit the owner’s non-PSAO line of business even if the PSAO service itself is not profitable. For example, one member-owned PSAO we spoke with also owned a group purchasing organization to which its members must belong in order to obtain PSAO services. The group purchasing organization may benefit from increased membership driven by pharmacies that want to obtain its PSAO services. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Chairman of the Federal Trade Commission, and interested congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have questions about this report, please contact John E. Dicken at (202) 512-7114 or DickenJ@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix I. In addition to the contact named above, Rashmi Agarwal and Robert Copeland, Assistant Directors; George Bogart; Zhi Boon; Jennel Lockley; Laurie Pachter; and Brienne Tierney made key contributions to this report.","Independent pharmacies dispensed about 17 percent of all prescription drugs in the United States in 2010. To obtain, distribute, and collect payment for drugs dispensed, pharmacies interact with a network of entities, including drug wholesalers and third-party payers. With limited time and resources, independent pharmacies may need assistance in interacting with these entities, particularly with third-party payers that include large private and public health plans. Most use a PSAO to interact on their behalf. PSAOs develop networks of pharmacies by signing contractual agreements with each pharmacy that authorizes them to interact with third-party payers on the pharmacy's behalf by, for example, negotiating contracts. While specific services provided by PSAOs may vary, PSAOs can be identified and distinguished from other entities in the pharmaceutical distribution and payment system by their provision of intermediary or other services to assist pharmacies with third-party payers. GAO was asked to review the role of PSAOs. In this report, GAO describes: (1) how many PSAOs are in operation and how many pharmacies contract with PSAOs for services; (2) the services PSAOs offer and how they are paid for these services; and (3) entities that own PSAOs and the types of relationships that exists between owners and the pharmacies they represent. GAO analyzed data on PSAOs in operation in 2011 and 2012, reviewed literature on PSAOs and model agreements from 8 PSAOs, and interviewed federal agencies and entities in the pharmaceutical industry. At least 22 pharmacy services administrative organizations (PSAO), which varied in the number and location of the pharmacies to which they provided services, were in operation in 2011 or 2012. In total, depending on different data sources, these PSAOs represented or provided other services to between 20,275 and 28,343 pharmacies in 2011 or 2012, most of which were independent pharmacies. While the number of pharmacies with which each PSAO contracted ranged from 24 to 5,000 pharmacies, most PSAOs represented or provided other services to fewer than 1,000 pharmacies. Additionally, some PSAOs contracted with pharmacies primarily located in a particular region rather than contracting with pharmacies located across the United States. While PSAOs provide a broad range of services to independent pharmacies, and vary in how they offer these services, PSAOs consistently provide contract negotiation, communication, and help-desk services. All of the model agreements between PSAOs and independent pharmacies that GAO reviewed stated that the PSAO will negotiate and enter into contracts with third-party payers on behalf of member pharmacies. PSAOs may also contract with pharmacy benefit managers (PBM), which many third-party payers use to manage their prescription drug benefit. In addition to contracting, PSAOs also communicate information to members regarding contractual and regulatory requirements, and provide general and claims-specific assistance to members by means of a help-desk or a dedicated staff person. They may also provide other services to help member pharmacies interact with third-party payers or their PBMs, such as managing and analyzing payment and drug-dispensing data to identify claims unpaid or incorrectly paid by a third-party payer. PSAO services are intended to achieve administrative efficiencies, including contract and payment efficiencies for both independent pharmacies and third-party payers or their PBMs. Most PSAOs charge a monthly fee for a bundle of services and may charge additional fees for other services provided to its member pharmacies. Virtually all of the fees paid for PSAO services are paid by member pharmacies, with PSAOs receiving no administrative fees from other entities such as third-party payers or their PBMs. The majority of PSAOs in operation in 2011 or 2012 were owned by drug wholesalers and independent pharmacy cooperatives. Of the 22 PSAOs we identified, 9 PSAOs were owned by wholesalers, 6 were owned by independent pharmacy cooperatives, 4 were owned by group purchasing organizations, and 3 were stand-alone PSAOs owned by other private entities. These owners varied in their requirements for PSAO member pharmacies to also use services from their separate, non-PSAO line of business. Three PSAO owners GAO spoke with required PSAO members to also use their non-PSAO services. For example, one wholesaler-owned PSAO limited its offer of PSAO services to existing customers of its drug distribution line of business. All but one PSAO owner GAO spoke with reported that their PSAO line of business earned little to no profit. However, PSAO owners may operate PSAOs for a number of reasons, including helping pharmacies gain access to third-party payer contracts and to provide benefits to the owner's non-PSAO line of business.",govreport
"An enterprise architecture is a blueprint that describes the current and desired state of an organization or functional area in both logical and technical terms, as well as a plan for transitioning between the two states. Enterprise architectures are a recognized tenet of organizational transformation and IT management in public and private organizations. Without an enterprise architecture, it is unlikely that an organization will be able to transform business processes and modernize supporting systems to minimize overlap and maximize interoperability. The concept of enterprise architectures originated in the mid-1980s; various frameworks for defining the content of these architectures have been published by government agencies and OMB. Moreover, legislation and federal guidance requires agencies to develop and use architectures. For more than a decade, we have conducted work to improve agency architecture efforts. To this end, we developed an enterprise architecture management maturity framework that provides federal agencies with a common benchmarking tool for assessing the management of their enterprise architecture efforts and developing improvement plans. An enterprise can be viewed as either a single organization or a functional area that transcends more than one organization (e.g., financial management, homeland security). An architecture can be viewed as the structure (or structural description) of any activity. Thus, enterprise architectures are basically systematically derived and captured descriptions—in useful models, diagrams, and narrative. More specifically, an architecture describes the enterprise in logical terms (such as interrelated business processes and business rules, information needs and flows, and work locations and users) as well as in technical terms (such as hardware, software, data, communications, and security attributes and performance standards). It provides these perspectives both for the enterprise’s current or “as-is” environment and for its target or “to- be” environment, as well as a transition plan for moving from the “as-is” to the “to-be” environment. The importance of enterprise architectures is a basic tenet of both organizational transformation and IT management, and their effective use is a recognized hallmark of successful public and private organizations. For over a decade, we have promoted the use of architectures, recognizing them as a crucial means to a challenging end: optimized agency operations and performance. The alternative, as our work has shown, is the perpetuation of the kinds of operational environments that burden most agencies today, where a lack of integration among business operations and the IT resources supporting them leads to systems that are duplicative, poorly integrated, and unnecessarily costly to maintain and interface. Employed in concert with other important IT management controls (such as portfolio-based capital planning and investment control practices), architectures can greatly increase the chances that the organizations’ operational and IT environments will be configured so as to optimize mission performance. During the mid-1980s, John Zachman, widely recognized as a leader in the field of enterprise architecture, identified the need to use a logical construction blueprint (i.e., an architecture) for defining and controlling the integration of systems and their components. Accordingly, Zachman developed a structure or framework for defining and capturing an architecture, which provides for six perspectives or “windows” from which to view the enterprise. Zachman also proposed six abstractions or models associated with each of these perspectives. Zachman’s framework provides a way to identify and describe an entity’s existing and planned component parts and the parts’ relationships before the entity begins the costly and time-consuming efforts associated with developing or transforming itself. Since Zachman introduced his framework, a number of frameworks have emerged within the federal government, beginning with the publication of the National Institute of Standards and Technology (NIST) framework in 1989. Since that time, other federal entities have issued frameworks, including the Department of Defense (DOD) and the Department of the Treasury. In September 1999, the federal Chief Information Officers (CIO) Council published the Federal Enterprise Architecture Framework (FEAF), which was intended to provide federal agencies with a common construct for their architectures, thereby facilitating the coordination of common business processes, technology insertion, information flows, and system investments among federal agencies. The FEAF described an approach, including models and definitions, for developing and documenting architecture descriptions for multi-organizational functional segments of the federal government. More recently, OMB established the Federal Enterprise Architecture Program Management Office (FEAPMO) to develop a federal enterprise architecture according to a collection of five reference models (see table 1). These models are intended to facilitate governmentwide improvement through cross-agency analysis and the identification of duplicative investments, gaps, and opportunities for collaboration, interoperability, and integration within and across government agencies. OMB has identified multiple purposes for the Federal Enterprise Architecture, such as the following: informing agency enterprise architectures and facilitating their development by providing a common classification structure and vocabulary; providing a governmentwide framework that can increase agency awareness of IT capabilities that other agencies have or plan to acquire, so that they can explore opportunities for reuse; helping OMB decision makers identify opportunities for collaboration among agencies through the implementation of common, reusable, and interoperable solutions; and providing the Congress with information that it can use as it considers the authorization and appropriation of funding for federal programs. Although these post-Zachman frameworks differ in their nomenclatures and modeling approaches, each consistently provides for defining an enterprise’s operations in both logical and technical terms, provides for defining these perspectives for the enterprise’s current and target environments, and calls for a transition plan between the two. Several laws and regulations address enterprise architecture. For example, the Clinger-Cohen Act of 1996 directs the CIOs of major departments and agencies to develop, maintain, and facilitate the implementation of information technology architectures as a means of integrating agency goals and business processes with information technology. Also, OMB Circular A-130, which implements the Clinger-Cohen Act, requires that agencies document and submit their initial enterprise architectures to OMB and that agencies submit updates when significant changes to their enterprise architectures occur. The circular also directs OMB to use various reviews to evaluate the adequacy and efficiency of each agency’s compliance with the circular. We began reviewing federal agencies’ use of enterprise architectures in 1994, initially focusing on those agencies that were pursuing major systems modernization programs that were high risk. These included the National Weather Service systems modernization, the Federal Aviation Administration (FAA) air traffic control modernization, and the Internal Revenue Service tax systems modernization. Generally, we reported that these agencies’ enterprise architectures were incomplete, and we made recommendations that they develop and implement complete enterprise architectures to guide their modernization efforts. Since then, we have reviewed enterprise architecture management at other federal agencies, including the Department of Education (Education), the Customs Service, the Immigration and Naturalization Service, the Centers for Medicare and Medicaid Services, FAA, and the Federal Bureau of Investigation (FBI). We have also reviewed the use of enterprise architectures for critical agency functional areas, such as the integration and sharing of terrorist watch lists across key federal departments and DOD financial management, logistics management, combat identification, and business systems modernization. These reviews continued to identify the absence of complete and enforced enterprise architectures, which in turn has led to agency business operations, systems, and data that are duplicative, incompatible, and not integrated; these conditions have either prevented agencies from sharing data or forced them to depend on expensive, custom-developed system interfaces to do so. Accordingly, we made recommendations to improve the respective architecture efforts. In some cases progress has been made, such as at DOD and FBI. As a practical matter, however, considerable time is needed to completely address the kind of substantive issues that we have raised and to make progress in establishing more mature architecture programs. In 2002 and 2003, we also published reports on the status of enterprise architectures governmentwide. The first report (February 2002) showed that about 52 percent of federal agencies self-reported having at least the management foundation that is needed to successfully develop, implement, and maintain an enterprise architecture, and that about 48 percent of agencies had not yet advanced to that basic stage of maturity. We attributed this state of architecture management to four management challenges: (1) overcoming limited executive understanding, (2) inadequate funding, (3) insufficient number of skilled staff, and (4) organizational parochialism. Additionally, we recognized OMB’s efforts to promote and oversee agencies’ enterprise architecture efforts. Nevertheless, we determined that OMB’s leadership and oversight could be improved by, for example, using a more structured means of measuring agencies’ progress and by addressing the above management challenges. The second report (November 2003) showed the percentage of agencies that had established at least a foundation for enterprise architecture management was virtually unchanged. We attributed this to long-standing enterprise architecture challenges that had yet to be addressed. In particular, more agencies reported lack of agency executive understanding of enterprise architecture and the scarcity of skilled architecture staff as significant challenges. OMB generally agreed with our findings and the need for additional agency assessments. Further, it stated that fully implementing our recommendations would require sustained management attention, and that it had begun by working with the CIO Council to establish the Chief Architect Forum and to increase the information OMB reports on enterprise architecture to Congress. Since then, OMB has developed and implemented an enterprise architecture assessment tool. According to OMB, the tool helps better understand the current state of an agency’s architecture and assists agencies in integrating architectures into their decision-making processes. The latest version of the assessment tool (2.0) was released in December 2005 and includes three capability areas: (1) completion, (2) use, and (3) results. Table 2 describes each of these areas. The tool also includes criteria for scoring an agency’s architecture program on a scale of 0 to 5. In early 2006, the major departments and agencies were required by OMB to self assess their architecture programs using the tool. OMB then used the self assessment to develop its own assessment. These assessment results are to be used in determining the agency’s e- Government score within the President’s Management Agenda. In 2002, we developed version 1.0 of our Enterprise Architecture Management Maturity Framework (EAMMF) to provide federal agencies with a common benchmarking tool for planning and measuring their efforts to improve enterprise architecture management, as well as to provide OMB with a means for doing the same governmentwide. We issued an update of the framework (version 1.1) in 2003. This framework is an extension of A Practical Guide to Federal Enterprise Architecture, Version 1.0, published by the CIO Council. Version 1.1 of the framework arranges 31 core elements (practices or conditions that are needed for effective enterprise architecture management) into a matrix of five hierarchical maturity stages and four critical success attributes that apply to each stage. Within a given stage, each critical success attribute includes between one and four core elements. Based on the implicit dependencies among the core elements, the EAMMF associates each element with one of five maturity stages (see fig. 1). The core elements can be further categorized by four groups: architecture governance, content, use, and measurement. Stage 1: Creating EA awareness. At stage 1, either an organization does not have plans to develop and use an architecture, or it has plans that do not demonstrate an awareness of the value of having and using an architecture. While stage 1 agencies may have initiated some enterprise architecture activity, these agencies’ efforts are ad hoc and unstructured, lack institutional leadership and direction, and do not provide the management foundation necessary for successful enterprise architecture development as defined in stage 2. Stage 2: Building the EA management foundation. An organization at stage 2 recognizes that the enterprise architecture is a corporate asset by vesting accountability for it in an executive body that represents the entire enterprise. At this stage, an organization assigns enterprise architecture management roles and responsibilities and establishes plans for developing enterprise architecture products and for measuring program progress and product quality; it also commits the resources necessary for developing an architecture—people, processes, and tools. Specifically, a stage 2 organization has designated a chief architect and established and staffed a program office responsible for enterprise architecture development and maintenance. Further, it has established a committee or group that has responsibility for enterprise architecture governance (i.e., directing, overseeing, and approving architecture development and maintenance). This committee or group membership has enterprisewide representation. At stage 2, the organization either has plans for developing or has started developing at least some enterprise architecture products, and it has developed an enterprisewide awareness of the value of enterprise architecture and its intended use in managing its IT investments. The organization has also selected a framework and a methodology that will be the basis for developing the enterprise architecture products and has selected a tool for automating these activities. Stage 3: Developing the EA. An organization at stage 3 focuses on developing architecture products according to the selected framework, methodology, tool, and established management plans. Roles and responsibilities assigned in the previous stage are in place, and resources are being applied to develop actual enterprise architecture products. At this stage, the scope of the architecture has been defined to encompass the entire enterprise, whether organization-based or function-based. Although the products may not be complete, they are intended to describe the organization in terms of business, performance, information/data, service/application, and technology (including security explicitly in each) as provided for in the framework, methodology, tool, and management plans. Further, the products are to describe the current (as-is) and future (to-be) states and the plan for transitioning from the current to the future state (the sequencing plan). As the products are developed and evolve, they are subject to configuration management. Further, through the established enterprise architecture management foundation, the organization is tracking and measuring its progress against plans, identifying and addressing variances, as appropriate, and then reporting on its progress. Stage 4: Completing the EA. An organization at stage 4 has completed its enterprise architecture products, meaning that the products have been approved by the enterprise architecture steering committee (established in stage 2) or an investment review board, and by the CIO. The completed products collectively describe the enterprise in terms of business, performance, information/data, service/application, and technology for both its current and future operating states, and the products include a plan for transitioning from the current to the future state. Further, an independent agent has assessed the quality (i.e., completeness and accuracy) of the enterprise architecture products. Additionally, evolution of the approved products is governed by a written enterprise architecture maintenance policy approved by the head of the organization. Stage 5: Leveraging the EA to manage change. An organization at stage 5 has secured senior leadership approval of the enterprise architecture products and a written institutional policy stating that IT investments must comply with the architecture, unless granted an explicit compliance waiver. Further, decision makers are using the architecture to identify and address ongoing and proposed IT investments that are conflicting, overlapping, not strategically linked, or redundant. As a result, stage 5 entities avoid unwarranted overlap across investments and ensure maximum systems interoperability, which in turn ensures the selection and funding of IT investments with manageable risks and returns. Also, at stage 5, the organization tracks and measures enterprise architecture benefits or return on investment, and adjustments are continuously made to both the enterprise architecture management process and the enterprise architecture products. Attribute 1: Demonstrates commitment. Because the enterprise architecture is a corporate asset for systematically managing institutional change, the support and sponsorship of the head of the enterprise are essential to the success of the architecture effort. An approved enterprise policy statement provides such support and sponsorship, promoting institutional buy-in and encouraging resource commitment from participating components. Equally important in demonstrating commitment is vesting ownership of the architecture with an executive body that collectively owns the enterprise. Attribute 2: Provides capability to meet commitment. The success of the enterprise architecture effort depends largely on the organization’s capacity to develop, maintain, and implement the enterprise architecture. Consistent with any large IT project, these capabilities include providing adequate resources (i.e., people, processes, and technology), defining clear roles and responsibilities, and defining and implementing organizational structures and process management controls that promote accountability and effective project execution. Attribute 3: Demonstrates satisfaction of commitment. Satisfaction of the organization’s commitment to develop, maintain, and implement an enterprise architecture is demonstrated by the production of artifacts (e.g., the plans and products). Such artifacts demonstrate follow through—that is, actual enterprise architecture production. Satisfaction of commitment is further demonstrated by senior leadership approval of enterprise architecture documents and artifacts; such approval communicates institutional endorsement and ownership of the architecture and the change that it is intended to drive. Attribute 4: Verifies satisfaction of commitment. This attribute focuses on measuring and disclosing the extent to which efforts to develop, maintain, and implement the enterprise architecture have fulfilled stated goals or commitments of the enterprise architecture. Measuring such performance allows for tracking progress that has been made toward stated goals, allows appropriate actions to be taken when performance deviates significantly from goals, and creates incentives to influence both institutional and individual behaviors. The framework’s 31 core elements can also be placed in one of four groups of architecture related activities, processes, products, events, and structures. The groups are architecture governance, content, use, and measurement. These groups are generally consistent with the capability area descriptions in the previously discussed OMB enterprise architecture assessment tool. For example, OMB’s completion capability area addresses ensuring that architecture products describe the agency in terms of processes, services, data, technology, and performance and that the agency has developed a transition strategy. Similarly, our content group includes developing and completing these same enterprise architecture products. In addition, OMB’s results capability area addresses performance measurement as does our measurement group, and OMB’s use capability area addresses many of the same elements in our governance and use groups. Table 3 lists the core elements according to EAMMF group. Most of the 27 major departments and agencies have not fully satisfied all the core elements associated with stage 2 of our maturity framework. At the same time, however, most have satisfied a number of core elements at stages 3, 4, and 5. Specifically, although only seven have fully satisfied all the stage 2 elements, the 27 have on average fully satisfied 80, 78, 61, and 52 percent of the stage 2, 3, 4, and 5 elements, respectively. Of the core elements that have been fully satisfied, 77 percent of those related to architecture governance have been fully satisfied, while 68, 52, and 47 percent of those related to architecture content, use, and measurement, respectively, have been fully satisfied. Most of the 27 have also at least partially satisfied a number of additional core elements across all the stages. For example, all but 7 have at least partially satisfied all the elements required to achieve stage 3 or higher. Collectively, this means efforts are underway to mature the management of most agency enterprise architecture programs, but overall these efforts are uneven and still a work- in-progress and they face numerous challenges that departments and agencies identified. It also means that some architecture programs provide examples from which less mature programs could learn and improve. Without mature enterprise architecture programs, some departments and agencies will not realize the many benefits that they attributed to architectures, and they are at risk of investing in IT assets that are duplicative, not well-integrated, and do not optimally support mission operations. To qualify for a given stage of maturity under our architecture management framework, a department or agency had to fully satisfy all of the core elements at that stage. Using this criterion, three departments and agencies are at stage 2, meaning that they demonstrated to us through verifiable documentation that they have established the foundational commitments and capabilities needed to manage the development of an architecture. In addition, four are at stage 3, meaning that they similarly demonstrated that their architecture development efforts reflect employment of the basic control measures in our framework. Table 4 summarizes the maturity stage of each architecture program that we assessed. Appendix IV provides the detailed results of our assessment of each department and agency architecture program against our maturity framework. While using this criterion provides an important perspective on the state of department and agency architecture programs, it can mask the fact that the programs have met a number of core elements across higher stages of maturity. When the percentage of core elements that have been fully satisfied at each stage is considered, the state of the architecture efforts generally shows both a larger number of more robust architecture programs as well as more variability across the departments and agencies. Specifically, 16 departments and agencies have fully satisfied more than 70 percent of the core elements. Examples include Commerce, which has satisfied 87 percent of the core elements, including 75 percent of the stage 5 elements, even though it is at stage 1 because its enterprise architecture approval board does not have enterprisewide representation (a stage 2 core element). Similarly, SSA, which is also a stage 1 because the agency’s enterprise architecture methodology does not describe the steps for developing, maintaining, and validating the agency’s enterprise architecture (a stage 2 core element), has at the same time satisfied 87 percent of all the elements, including 63 percent of the stage 5 elements. In contrast, the Army, which is also in stage 1, has satisfied but 3 percent of all framework elements. Overall, 10 agency architecture programs fully satisfied more than 75 percent of the core elements, 14 between 50 and 75 percent, and 4 fewer than 50 percent. These four included the three military departments. Table 5 summarizes for each department and agency the percentage of core elements fully satisfied in total and by maturity stage. Notwithstanding the additional perspective that the percentage of core elements fully satisfied across all stages provides, it is important to note that the staged core elements in our framework represent a hierarchical or systematic progression to establishing a well-managed architecture program, meaning that core elements associated with lower framework stages generally support the effective execution of higher maturity stage core elements. For instance, if a program has developed its full suite of “as- is” and “to-be” architecture products, including a sequencing plan (stage 4 core elements), but the products are not under configuration management (stage 3 core element), then the integrity and consistency of the products will be not be assured. Our analysis showed that this was the case for a number of architecture programs. For example, State has developed certain “as-is” and “to-be” products for the Joint Enterprise Architecture, which is being developed in collaboration with USAID, but an enterprise architecture configuration management plan has not yet been finalized. Further, not satisfying even a single core element can have a significant impact on the effectiveness of an architecture program. For example, not having adequate human capital with the requisite knowledge and skills (stage 2 core element), not using a defined framework or methodology (stage 2 core element), or not using an independent verification and validation agent (stage 4 core element), could significantly limit the quality and utility of an architecture. The DOD’s experience between 2001 and 2005 in developing its BEA is a case in point. During this time, we identified the need for the department to have an enterprise architecture for its business operations, and we made a series of recommendations grounded in, among other things, our architecture management framework to ensure that it was successful in doing so. In 2005, we reported that the department had not implemented most of our recommendations. We further reported that despite developing multiple versions of a wide range of architecture products, and having invested hundreds of millions of dollars and 4 years in doing so, the department did not have a well-defined architecture and that what it had developed had limited utility. Among other things, we attributed the poor state of its architecture products to ineffective program governance, communications, program planning, human capital, and configuration management, most of which are stage 2 and 3 foundational core elements. To the department’s credit, we recently reported that it has since taken a number of actions to address these fundamental weaknesses and our related recommendations and that it is now producing architecture products that provide a basis upon which to build. The significance of not satisfying a single core element is also readily apparent for elements associated with the framework’s content group. In particular, the framework emphasizes the importance of planning for, developing, and completing an architecture that includes the “as-is” and the “to-be” environments as well as a plan for transitioning between the two. It also recognizes that the “as-is” and “to-be” should address the business, performance, information/data, application/service, technology, and security aspects of the enterprise. To the extent these aspects are not addressed in this way, the quality of the architecture and thus its utility will suffer. In this regard, we found examples of departments and agencies that were addressing some but not all of these aspects. For example, HUD has yet to adequately incorporate security into its architecture. This is significant because security is relevant to all the other aspects of its architecture, such as information/data and applications/services. As another example, NASA’s architecture does not include a plan for transitioning from the “as-is” to the “to-be” environments. According to the administration’s Chief Enterprise Architect, a transition plan has not yet been developed because of insufficient time and staff. Looking across all the departments and agencies at core elements that are fully satisfied, not by stage of maturity, but by related groupings of core elements, provides an additional perspective on the state of the federal government’s architecture efforts. As noted earlier, these groupings of core elements are architecture governance, content, use, and measurement. Overall, departments and agencies on average have fully satisfied 77 percent of the governance-related elements. In particular, 93 and 96 percent of the agencies have established an architecture program office and appointed a chief architect, respectively. In addition, 93 percent have plans that call for their respective architectures to describe the “as-is” and the “to-be” environments, and for having a plan for transitioning between the two (see fig. 2). In contrast, however, the core element associated with having a committee or group with representation from across the enterprise directing, overseeing, and approving the architecture was fully satisfied by only 57 percent of the agencies. This core element is important because the architecture is a corporate asset that needs to be enterprisewide in scope and accepted by senior leadership if it is to be leveraged for organizational change. In contrast to governance, the extent of full satisfaction of those core elements that are associated with what an architecture should contain varies widely (see fig. 3). For example, the three content elements that address prospectively what the architecture will contain, either in relation to plans or some provision for including needed content, were fully satisfied about 90 percent of the time. However, the core elements addressing whether the products now contain such content were fully satisfied much less frequently (between 54 and 68 percent of the time, depending on the core element), and the core elements associated with ensuring the quality of included content, such as employing configuration management and undergoing independent verification and validation, were also fully satisfied much less frequently (54 and 21 percent of the time, respectively). The state of these core elements raises important questions about the quality and utility of the department and agency architectures. The degree of full satisfaction of those core elements associated with the remaining two groups—use and measurement—is even lower (see figs. 4 and 5, respectively). For example, the architecture use-related core elements were fully satisfied between 39 and 64 percent of the time, while the measurement-related elements were satisfied between 14 and 71 percent. Of particular note is that only 39 percent of the departments and agencies could demonstrate that IT investments comply with their enterprise architectures, only 43 percent of the departments and agencies could demonstrate that compliance with the enterprise architecture is measured and reported, and only 14 percent were measuring and reporting on their respective architecture program’s return on investment. As our work and related best practices show, the value in having an architecture is using it to affect change and produce results. Such results, as reported by the departments and agencies include improved information sharing, increased consolidation, enhanced productivity, and lower costs, all of which contribute to improved agency performance. To realize these benefits, however, IT investments need to comply with the architecture and measurement of architecture activities, including accrual of expected benefits, needs to occur. In those instances where departments and agencies have not fully satisfied certain core elements in our framework, most have at least partially satisfied these elements. To illustrate, 4 agencies would improve to at least stage 4 if the criterion for being a given stage was relaxed to only partially satisfying a core element. Moreover, 11 of the remaining agencies would advance by two stages under such a less demanding criterion, and only 6 would not improve their stage of maturity under these circumstances. A case in point is Commerce, which could move from stage 1 to stage 5 under these circumstances because it has fully satisfied all but four core elements and these remaining four (one each at stages 2 and 4 and two at stage 5) are partially satisfied. Another case in point is the SSA, which has fully satisfied all but four core elements (one at stage 2 and three at stage 5) and has partially satisfied three of these remaining four. If the criterion used allowed advancement to the next stage by only partially satisfying core elements, the administration would be stage 4. (See fig. 6 for a comparison of department and agency program maturity stages under the two criteria.) As mentioned earlier, departments and agencies can require considerable time to completely address issues related to their respective enterprise architecture programs. It is thus important to note that even though certain core elements are partially satisfied, fully satisfying some of them may not be accomplished quickly and easily. It is also important to note the importance of fully, rather than partially, satisfying certain elements, such as those that fall within the architecture content group. In this regard, 18, 18, and 21 percent of the departments and agencies partially satisfied the following stage 4 content-related core elements, respectively: “EA products describe ‘as-is’ environment, ‘to-be’ environment and sequencing plan”; “Both ‘as-is’ and ‘to-be’ environments are described in terms of business, performance, information/data, application/service, and technology”; and “These descriptions fully address security.” Not fully satisfying these elements can have important implications for the quality of an architecture, and thus its usability and results. Seven departments or agencies would meet our criterion for stage 5 if each was to fully satisfy one to five additional core elements (see table 6). For example, Interior could achieve stage 5 by satisfying one additional element: “EA products and management processes undergo independent verification and validation.” In this regard, Interior officials have drafted a statement of work intended to ensure that independent verification and validation of enterprise architecture products and management processes is performed. The other six departments and agencies are HUD and OPM, which could achieve stage 5 by satisfying two additional elements; Commerce, Labor, and SSA, which could achieve the same by satisfying four additional elements; and Education which could be at stage 5 by satisfying five additional elements. Of these seven, five have not fully satisfied the independent verification and validation core element. Notwithstanding the fact that five or fewer core elements need to be satisfied by these agencies to be at stage 5, it is important to note that in some cases the core elements not being satisfied are not only very important, but also neither quickly nor easily satisfied. For example, one of the two elements that HUD needs to satisfy is having its architecture products address security. This is extremely important as security is an integral aspect of the architecture’s performance, business, information/data, application/service, and technical models, and needs to be reflected thoroughly and consistently across each of them. The challenges facing departments and agencies in developing and using enterprise architectures are formidable. The challenge that most departments and agencies cited as being experienced to the greatest extent is the one that having and using an architecture is intended to overcome— organizational parochialism and cultural resistance to adopting an enterprisewide mode of operation in which organizational parts are sub- optimized in order to optimize the performance and results of the enterprise as a whole. Specifically, 93 percent of the departments and agencies reported that they encountered this challenge to a significant (very great or great) or moderate extent. Other challenges reported to this same extent were ensuring that the architecture program had adequate funding (89 percent), obtaining staff skilled in the architecture discipline (86 percent), and having the department or agency senior leaders understand the importance and role of the enterprise architecture (82 percent). As we have previously reported, sustained top management leadership is the key to overcoming each of these challenges. In this regard, our enterprise architecture management maturity framework provides for such leadership and addressing these and other challenges through a number of core elements. These elements contain mechanisms aimed at, for example, establishing responsibility and accountability for the architecture with senior leaders and ensuring that the necessary institutional commitments are made to the architecture program, such as through issuance of architecture policy and provision of adequate resources (both funding and people). See table 7 for a listing of the reported challenges and the extent to which they are being experienced. A large percentage of the departments and agencies reported that they have already accrued numerous benefits from their respective architecture programs (see table 8). For example, 70 percent said that have already improved the alignment between their business operations and the IT that supports these operations to a significant extent. Such alignment is extremely important. According to our IT investment management maturity framework, alignment between business needs and IT investments is a critical process in building the foundation for an effective approach to IT investment management. In addition, 64 percent responded that they have also improved information/knowledge sharing to a significant or moderate extent. Such sharing is also very important. In 2005, for example, we added homeland security information sharing to our list of high-risk areas because despite the importance of information to fighting terrorism and maintaining the security of our nation, many aspects of homeland security information sharing remain ineffective and fragmented. Other examples of mission-effectiveness related benefits reported as already being achieved to a significant or moderate extent by roughly one-half of the departments and agencies included improved agency management and change management and improved system and application interoperability. Beyond these benefits, departments and agencies also reported already accruing, to a significant or moderate extent, a number of efficiency and productivity benefits. For example, 56 percent reported that they have increased the use of enterprise software licenses, which can permit cost savings through economies of scale purchases; 56 percent report that they have been able to consolidate their IT infrastructure environments, which can reduce the costs of operating and maintaining duplicative capabilities; 41 percent reported that they have been able to reduce the number of applications, which is a key to reducing expensive maintenance costs; and 37 percent report productivity improvements, which can free resources to focus on other high priority matters. Notwithstanding the number and extent of benefits that department and agency responses show have already been realized, these same responses also show even more benefits that they have yet to realize (see table 8). For example, 30 percent reported that they have thus far achieved, to little or no extent, better business and IT alignment. They similarly reported that they have largely untapped many other effectiveness and efficiency benefits, with between 36 and 70 percent saying these benefits have been achieved to little or no extent, depending on benefit. Moreover, for all the cited benefits, a far greater percentage of the departments and agencies (74 to 93 percent) reported that they expect to realize each of the benefits to a significant or moderate extent sometime in the future. What this suggests is that the real value in the federal government from developing and using enterprise architecture remains largely unrealized potential. Our architecture maturity framework recognizes that a key to realizing this potential is effectively managing department and agency enterprise architecture programs. However, knowing whether benefits and results are in fact being achieved requires having associated measures and metrics. In this regard, very few (21 percent) of the departments and agencies fully satisfied our stage 5 core element, “Return on EA investment is measured and reported.” Without satisfying this element, it is unlikely that the degree to which expected benefits are accrued will be known. If managed effectively, enterprise architectures can be a useful change management and organizational transformation tool. The conditions for effectively managing enterprise architecture programs are contained in our architecture management maturity framework. While a few of the federal government’s 27 major departments and agencies have fully satisfied all the conditions needed to be at stage 2 or above in our framework, many have fully satisfied a large percentage of the core elements across most of the stages, particularly those elements related to architecture governance. Nevertheless, most departments and agencies are not yet where they need to be relative to architecture content, use, and measurement and thus the federal government is not as well positioned as it should be to realize the significant benefits that a well-managed architecture program can provide. Moving beyond this status will require most departments and agencies to overcome some significant obstacles and challenges. The key to doing so continues to be sustained organizational leadership. Without such organizational leadership, the benefits of enterprise architecture will not be fully realized. To assist the 27 major departments and agencies in addressing enterprise architecture challenges, managing their architecture programs, and realizing architecture benefits, we recommend that the Administrators of the Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, Small Business Administration, and U.S. Agency for International Development; the Attorney General; the Commissioners of the Nuclear Regulatory Commission and Social Security Administration; the Directors of the National Science Foundation and the Office of Personnel Management; and the Secretaries of the Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, Interior, Labor, State, Transportation, Treasury, and Veterans Affairs ensure that their respective enterprise architecture programs develop and implement plans for fully satisfying each of the conditions in our enterprise architecture management maturity framework. We received written or oral comments on a draft of this report from 25 of the departments and agencies in our review. Of the 25 departments and agencies, all but one department fully agreed with our recommendation. Nineteen departments and agencies agreed and six partially agreed with our findings. Areas of disagreement for these six centered on (1) the adequacy of the documentation that they provided to demonstrate satisfaction of certain core elements and (2) recognition of steps that they reported taking to satisfy certain core elements after we concluded our review. For the most part, these isolated areas of disagreement did not result in any changes to our findings for two primary reasons. First, our findings across the departments and agencies were based on consistently applied evaluation criteria governing the adequacy of documentation, and were not adjusted to accommodate any one particular department or agency. Second, our findings represent the state of each architecture program as of March 2006, and thus to be consistent do not reflect activities that may have occurred after this time. Beyond these comments, several agencies offered suggestions for improving our framework, which we will consider prior to issuing the next version of the framework. The departments’ and agencies’ respective comments and our responses, as warranted, are as follows: Agriculture’s Associate CIO provided e-mail comments stating that the department will incorporate our recommendation into its enterprise architecture program plan. Commerce’s CIO stated in written comments that the department concurred with our findings and will consider actions to address our recommendation. Commerce’s written comments are reproduced in appendix V. DOD’s Director, Architecture and Interoperability, stated in written comments that the department generally concurred with our recommendation to the five DOD architecture programs included in our review. However, the department stated that it did not concur with the one aspect of the recommendation directed at the GIG architecture concerning independent verification and validation (IV&V) because it believes that its current internal verification and validation activities are sufficient. We do not agree for two reasons. First, these internal processes are not independently performed. As we have previously reported, IV&V is a recognized hallmark of well managed programs, including architecture programs, and to be effective, it must be performed by an entity that is independent of the processes and products that are being reviewed. Second, the scope of the internal verification and validation activities only extends to a subset of the architecture products and management processes. The department also stated that it did not concur with one aspect of our finding directed at BEA addressing security. According to DOD, because GIG addresses security and the GIG states that it extends to all defense mission areas, including the business mission area, the BEA in effect addresses security. We do not fully agree. While we acknowledge that GIG addresses security and states that it is to extend to all DOD mission areas, including the business mission area, it does not describe how this will be accomplished for BEA. Moreover, nowhere in the BEA is security addressed, either through statement or reference, relative to the architecture’s performance, business, information/data, application/service, and technology products. DOD’s written comments, along with our responses, are reproduced in appendix VI. Education’s Assistant Secretary for Management and Acting CIO stated in written comments that the department plans to address our findings. Education’s written comments are reproduced in appendix VII. Energy’s Acting Associate CIO for Information Technology Reform stated in written comments that the department concurs with our report. Energy’s written comments are reproduced in appendix VIII. DHS’s Director, Departmental GAO/OIG Liaison Office, stated in written comments that the department has taken, and plans to take, steps to address our recommendation. DHS’s written comments, along with our responses to its suggestions for improving our framework, are reproduced in appendix IX. DHS also provided technical comments via e-mail, which we have incorporated, as appropriate, in the report. HUD’s CIO stated in written comments that the department generally concurs with our findings and is developing a plan to address our recommendation. The CIO also provided updated information about activities that the department is taking to address security in its architecture. HUD’s written comments are reproduced in appendix X. Interior’s Assistant Secretary, Policy, Management and Budget, stated in written comments that the department agrees with our findings and recommendation and that it has recently taken action to address them. Interior’s written comments are reproduced in appendix XI. DOJ’s CIO stated in written comments that our findings accurately reflect the state of the department’s enterprise architecture program and the areas that it needs to address. The CIO added that our report will help guide the department’s architecture program and provided suggestions for improving our framework and its application. DOJ’s written comments, along with our responses to its suggestions, are reproduced in appendix XII. Labor’s Deputy CIO provided e-mail comments stating that the department concurs with our findings. The Deputy CIO also provided technical comments that we have incorporated, as appropriate, in the report. State’s Assistant Secretary for Resource Management and Chief Financial Officer provided written comments that summarize actions that the department will take to fully satisfy certain core elements and that suggest some degree of disagreement with our findings relative to three other core elements. First, the department stated that its architecture configuration management plan has been approved by both the State and USAID CIOs. However, it provided no evidence to demonstrate that this was the case as of March 2006 when we concluded our review, and thus we did not change our finding relative to architecture products being under configuration management. Second, the department stated that its enterprise architecture has been approved by State and USAID executive offices. However, it did not provide any documentation showing such approval. Moreover, it did not identify which executive offices it was referring to so as to allow a determination of whether they were collectively representative of the enterprise. As a result, we did not change our finding relative to whether a committee or group representing the enterprise or an investment review board has approved the current version of the architecture. Third, the department stated that it provided us with IT investment score sheets during our review that demonstrate that investment compliance with the architecture is measured and reported. However, no such score sheets were provided to us. Therefore, we did not change our finding. The department’s written comments, along with more detailed responses, are reproduced in appendix XIII. Treasury’s Associate CIO for E-Government stated in written comments that the department concurs with our findings and discussed steps being taken to mature its enterprise architecture program. The Associate CIO also stated that our findings confirm the department’s need to provide executive leadership in developing its architecture program and to codify the program into department policy. Treasury’s written comments are reproduced in appendix XIV. VA’s Deputy Secretary stated in written comments that the department concurred with our recommendation and that it will provide a detailed plan to implement our recommendation. VA’s written comments are reproduced in appendix XV. EPA’s Acting Assistant Administrator and CIO stated in written comments that the agency generally agreed with our findings and that our assessment is a valuable benchmarking exercise that will help improve agency performance. The agency also provided comments on our findings relative to five core elements. For one of these core elements, the comments directed us to information previously provided about the agency’s architecture committee that corrected our understanding and resulted in us changing our finding about this core element. With respect to the other four core elements concerning use of an architecture methodology, measurement of progress against program plans, integration of the architecture into investment decision making, and management of architecture change, the comments also directed us to information previously provided but this did not result in any changes to our findings because evidence demonstrating full satisfaction of each core element was not apparent. EPA’s written comments, along with more detailed responses to each, are reproduced in appendix XVI. GSA’s Administrator stated in written comments that the agency concurs with our recommendation. The Administrator added that our findings will be critical as the agency works towards further implementing our framework’s core elements. GSA’s written comments are reproduced in appendix XVII. NASA’s Deputy Administrator stated in written comments that the agency concurs with our recommendation. NASA’s written comments are reproduced in appendix XVIII. NASA’s GAO Liaison also provided technical comments via e-mail, which we have incorporated, as appropriate, in the report. NSF’s CIO provided e-mail comments stating that the agency will use the information in our report, where applicable, for future planning and investment in its architecture program. The CIO also provided technical comments that we have incorporated, as appropriate, in the report. NRC’s GAO liaison provided e-mail comments stating that the agency substantially agrees with our findings and describing activities it has recently taken to address them. OPM’s CIO provided e-mail comments stating that the agency agrees with our findings and describing actions it is taking to address them. SBA’s GAO liaison provided e-mail comments in which the agency disagreed with our findings on two core elements. First, and notwithstanding agency officials’ statements that its architecture program did not have adequate resources, the liaison did not agree with our “partially satisfied” assessment for this core element because, according to the liaison, the agency has limited discretionary funds and competing, but unfunded, federal mandates to comply with that limit discretionary funding for an agency of its size. While we acknowledge SBA’s challenges, we would note that they are not unlike the resource constraints and competing priority decisions that face most agencies, and that while the reasons why an architecture program may not be adequately resourced may be justified, the fact remains that any assessment of the architecture program’s maturity, and thus its likelihood of success, needs to recognize whether adequate resources exist. Therefore, we did not change our finding on this core element. Second, the liaison did not agree with our finding that the agency did not have plans for developing metrics for measuring architecture progress, quality, compliance, and return on investment. However, our review of documentation provided by SBA and cited by the liaison showed that while such plans address metric development for architecture progress, quality, and compliance, they do not address architecture return on investment. Therefore, we did not change our finding that this core element was partially satisfied. SSA’s Commissioner stated in written comments that the report is both informative and useful, and that the agency agrees with our recommendation and generally agrees with our findings. Nevertheless, the agency disagreed with our findings on two core elements. First, the agency stated that documentation provided to us showed that it has a methodology for developing, maintaining, and validating its architecture. We do not agree. In particular, our review of SSA provided documentation showed that it did not adequately describe the steps to be followed relative to development, maintenance, or validation. Second, the agency stated that having the head of the agency approve the current version of the architecture is satisfied in SSA’s case because the Clinger-Cohen Act of 1996 vests its CIO with enterprise architecture approval authority and the CIO has approved the architecture. We do not agree. The core element in our framework concerning enterprise architecture approval by the agency head is derived from federal guidance and best practices upon which our framework is based. This guidance and related practices, and thus our framework, recognize that an enterprise architecture is a corporate asset that is to be owned and implemented by senior management across the enterprise, and that a key characteristic of a mature architecture program is having the architecture approved by the department or agency head. Because the Clinger-Cohen Act does not address approval of an enterprise architecture, our framework’s core element for agency head approval of an enterprise architecture is not inconsistent with, and is not superseded by, that act. SSA’s written comments, along with more detailed responses, are reproduced in appendix XIX. USAID’s Acting Chief Financial Officer stated in written comments stated that the agency will work with State to implement our recommendation. USAID’s written comments are reproduced in appendix XX. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Administrators of the Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, Small Business Administration, and U.S. Agency for International Development; the Attorney General; the Commissioners of the Nuclear Regulatory Commission and Social Security Administration; the Directors of the National Science Foundation and the Office of Personnel Management; and the Secretaries of the Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, Interior, Labor, State, Transportation, Treasury, and Veterans Affairs. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions concerning this information, please contact me at (202) 512-3439 or by e-mail at hiter@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix XXI. Department- and agency-reported data show wide variability in their costs to develop and maintain their enterprise architectures. Generally, the costs could be allocated to several categories with the majority of costs attributable to contractor support and agency personnel. As we have previously reported, the depth and detail of the architecture to be developed and maintained is dictated by the scope and nature of the enterprise and the extent of enterprise transformation and modernization envisioned. Therefore, the architecture should be tailored to the individual enterprise and that enterprise’s intended use of the architecture. Accordingly, the level of resources that a given department or agency invests in its architecture is likely to vary. Departments and agencies reported that they have collectively invested a total of $836 million to date on enterprise architecture development. Across the 27 departments and agencies, these development costs ranged from a low of $2 million by the Department of the Navy to a high of $433 million by the Department of Defense (DOD) on its Business Enterprise Architecture (BEA). Department and agency estimates of the costs to complete their planned architecture development efforts collectively total about $328 million. The department and agencies combined estimates of annual architecture maintenance costs is about $146 million. These development and maintenance estimates, however, do not include the Departments of the Army and Justice because neither provided these cost estimates. Figures 7 through 9 depict the variability of cost data reported by the departments and agencies. All of the departments and agencies reported developing their architecture in-house using contractor support. All but two of the departments and agencies allocated their respective architecture development costs to the following cost categories: contractor support, agency personnel, tools, methodologies, training, and other. These 26 agencies accounted for about $741 million of the $836 million total development costs cited above. The vast majority (84 percent) of the $741 million were allocated to contractor services ($621 million), followed next by agency personnel (13 percent or $94 million). The remaining $26 million were allocated as follows: $12 million (2 percent) to architecture tools; $9 million (1 percent) to “other” costs; $4 million (1 percent) to architecture methodologies; and $2 million (less than 1 percent) to training. (See fig. 10.) The departments and agencies allocated the reported $621 million in contractor-related costs to the following five contractor cost categories: architecture development, independent verification and validation, methodology, support services, and other. Of these categories, architecture development activities accounted for the majority of costs— about $594 million (87 percent). The remaining $85 million was allocated as follows: $51 million (7 percent) to support services, $13 million (2 percent) to “other” costs, $11 million (2 percent) to independent verification and validation, and $10 million (1 percent) to methodologies. (See fig. 11.) Departments and agencies reported additional information related to the implementation of their enterprise architectures. This information includes architecture tools and frameworks. As stated in our enterprise architecture management maturity framework, an automated architecture tool serves as the repository of architecture artifacts, which are the work products that are produced and used to capture and convey architectural information. An agency’s choice of tool should be based on a number of considerations, including agency needs and the size and complexity of the architecture. The departments and agencies reported that they use various automated tools to develop and maintain their enterprise architectures, with 12 reporting that they use more than one tool. In descending order of frequency, the architecture tools identified were System Architect (18 instances), Microsoft Visio (17), Metis (12), Rational Rose (8), and Enterprise Architecture Management System (EAMS) (4). In addition, 21 departments and agencies reported using one or more other architecture tools. Figure 12 shows the number of departments and agencies using each architecture tool, including the other tools. The departments and agencies also reported various levels of satisfaction with the different enterprise architecture tools. Specifically, about 75 percent of those using Microsoft Visio were either very or somewhat satisfied with the tool, as compared to about 67 percent of those using Metis, about 63 percent of those using Rational Rose, about 59 percent of those using System Architect, and 25 percent of those using EAMS. This means that the percentage of departments and agencies that were dissatisfied, either somewhat or very, with their respective tools ranged from a high of 75 percent of those using EAMS, to a low of about 6 percent of those using System Architect. No departments or agencies that used Metis, Rational Rose, or Microsoft Visio reported any dissatisfaction. See table 9 for a summary of department and agency reported satisfaction with their respective tools. As we have previously stated, an enterprise architecture framework provides a formal structure for representing the architecture’s content and serves as the basis for the specific architecture products and artifacts that the department or agency develops and maintains. As such, a framework helps ensure the consistent representation of information from across the organization and supports orderly capture and maintenance of architecture content. The departments and agencies reported using various frameworks to develop and maintain their enterprise architectures. The most frequently cited frameworks were the Federal Enterprise Architecture Program Management Office (FEAPMO) Reference Models (25 departments and agencies), the Federal Enterprise Architecture Framework (FEAF) (19 departments and agencies), and the Zachman Framework (17 departments and agencies), with 24 reporting using more than one framework. Other, less frequently reported frameworks were the Department of Defense Architecture Framework (DODAF), the National Institute of Standards and Technology (NIST) framework, and The Open Group Architecture Framework (TOGAF). See figure 13 for a summary of the number of departments and agencies that reported using each framework. Departments and agencies also reported varying levels of satisfaction with their respective architecture. Specifically, about 72 percent of those using the FEAF indicated that they were either very or somewhat satisfied, and about 67 and 61 percent of those using the Zachman framework and the FEAPMO reference models, respectively, reported that they were similarly satisfied. As table 10 shows, few of the agencies that responded to our survey reported being dissatisfied with any of the frameworks. Our objective was to determine the current status of federal department and agency enterprise architecture efforts. To accomplish this objective, we focused on 28 enterprise architecture programs relating to 27 major departments and agencies. These 27 included the 24 departments and agencies included in the Chief Financial Officers Act. In addition, we included the three military services (the Departments of the Army, Air Force, and Navy) at the request of Department of Defense (DOD) officials. For the DOD, we also included both of its departmentwide enterprise architecture programs—the Global Information Grid and the Business Enterprise Architecture. The U.S. Agency for International Development (USAID), which is developing a USAID enterprise architecture and working with the Department of State (State) to develop a Joint Enterprise Architecture, asked that we evaluate its efforts to develop the USAID enterprise architecture. State officials asked that we evaluate their agency’s enterprise architecture effort based the Joint Enterprise Architecture being developed with USAID. We honored both of these requests. Table 11 lists the 28 department and agency enterprise architecture programs that formed the scope of our review. To determine the status of each of these architecture programs, we developed a data collection instrument based on our Enterprise Architecture Management Maturity Framework (EAMMF), and related guidance, such as OMB Circular A-130 and guidance published by the federal Chief Information Officers (CIO) Council, and our past reports and guidance on the management and content of enterprise architectures. We pretested this instrument at one department and one agency. Based on the results of the pretest, we modified our instrument as appropriate to ensure that our areas of inquiry were complete and clear. Next, we identified the Chief Architect or comparable official at each of the 27 departments and agencies, and met with them to discuss our scope and methodology, share our data collection instrument, and discuss the type and nature of supporting documentation needed to verify responses to our instrument questions. On the basis of department and agency provided documentation to support their respective responses to our data collection instrument, we analyzed the extent to which each satisfied the 31 core elements in our architecture maturity framework. To guide our analysis, we defined detailed evaluation criteria for determining whether a given core element was fully satisfied, partially satisfied, or not satisfied. The criteria for the stage 2, 3, 4, and 5 core elements are contained in tables 12, 13, 14, and 15 respectively. To fully satisfy a core element, sufficient documentation had to be provided to permit us to verify that all aspects of the core element were met. To partially satisfy a core element, sufficient documentation had to be provided to permit us to verify that at least some aspects of the core element were met. Core elements that were neither fully nor partially satisfied were judged to be not satisfied. Our evaluation included first analyzing the extent to which each department and agency satisfied the core elements in our framework, and then meeting with department and agency representatives to discuss core elements that were not fully satisfied and why. As part of this interaction, we sought, and in some cases were provided, additional supporting documentation. We then considered this documentation in arriving at our final determinations about the degree to which each department and agency satisfied each core element in our framework. In applying our evaluation criteria, we analyzed the results of our analysis across different core elements to determine patterns and issues. Our analysis made use of computer programs that were developed by an experienced staff; these programs were independently verified. Through our data collection instrument, we also solicited from each department and agency information on enterprise architecture challenges and benefits, including the extent to which they had been or were expected to be experienced. In addition, we solicited information on architecture costs, including costs to date and estimated costs to complete and maintain each architecture. We also solicited other information, such as use of and satisfaction with architecture tools and frameworks. We analyzed these additional data to determine relevant patterns. We did not independently verify these data. The results presented in this report reflect the state of department and agency architecture programs as of March 8, 2006. We conducted our work in the Washington, D.C., metropolitan area, from May 2005 to June 2006, in accordance with generally accepted government auditing standards. Table 16 shows USDA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. version 1.1 of GAO’s EAMMF. Table 18 shows Army’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 19 shows Commerce’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 20 shows the BEA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 21 shows the GIG’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 22 shows Education’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 23 shows Energy’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 24 shows HHS’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 25 shows DHS’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 26 shows HUD’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 27 shows DOI’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 28 shows DOJ’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 29 shows Labor’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 30 shows Navy’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 31 shows State’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 32 shows Transportation’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 33 shows the Treasury’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 34 shows VA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 35 shows EPA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 36 shows GSA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 37 shows NASA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 38 shows NSF’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 39 shows NRC’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 40 shows OPM’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 41 shows SBA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 42 shows SSA’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. Table 43 shows USAID’s satisfaction of framework elements in version 1.1 of GAO’s EAMMF. 1. We do not agree for two reasons. First, DOD’s internal processes for reviewing and validating the Global Information Grid (GIG), while important and valuable to ensuring architecture quality, are not independently performed. As we have previously reported, independent verification and validation is a recognized hallmark of well-managed programs, including architecture programs. To be effective, it should be performed by an entity that is independent of the processes and products that are being reviewed to help ensure that it is done in an unbiased manner and that is based on objective evidence. Second, the scope of these internal review and validation efforts only extends to a subset of GIG products and management processes. According to our framework, independent verification and validation should address both the architecture products and the processes used to develop them. 2. While we acknowledge that GIG program plans provide for addressing security, and our findings relative to the GIG reflect this, this is not the case for DOD’s Business Enterprise Architecture (BEA). More specifically, how security will be addressed in the BEA performance, business, information/data, application/service, and technology products is not addressed in the BEA either by explicit statement or reference. This finding relative to the BEA is consistent with our recent report on DOD’s Business System Modernization. 1. We acknowledge this recommendation and offer three comments in response. First, we have taken a number of steps over the last 5 years to coordinate our framework with OMB. For example, in 2002, we based version 1.0 of our framework on the OMB-sponsored CIO Council Practical Guide to Federal Enterprise Architecture, and we obtained concurrence on the framework from the practical guide’s principal authors. Further, we provided a draft of this version to OMB for comment, and in our 2002 report in which we assessed federal departments and agencies against this version, we recommended that OMB use the framework to guide and assess agency architecture efforts. In addition, in developing the second version of our framework in 2003, we solicited comments from OMB as well as federal departments and agencies. We also reiterated our recommendation to OMB to use the framework in our 2003 report in which we assessed federal departments and agencies against the second version of the framework. Second, we have discussed alignment of our framework and OMB’s architecture assessment tool with OMB officials. For example, after OMB developed the first version of its architecture assessment tool in 2004, we met with OMB officials to discuss our respective tools and periodic agency assessments. We also discussed OMB’s plans for issuing the next version of its assessment tool and how this next version would align with our framework. At that time, we advocated the development of comprehensive federal standards governing all aspects of architecture development, maintenance, and use. In our view, neither our framework nor OMB’s assessment tool provide such comprehensive standards, and in the case of our framework, it is not intended to provide such standards. Nevertheless, we plan to continue to evolve, refine, and improve our framework, and will be issuing an updated version that incorporates lessons learned from the results of this review. In doing so, we will continue to solicit comments from federal departments and agencies, including OMB. Third, we believe that while our framework and OMB’s assessment tool are not identical, they nevertheless consist of a common cadre of best practices and characteristics, as well as other relevant criteria that, taken together, are complementary and provide greater direction to, and visibility into, agency architecture programs than either does alone. 1. See DHS comment 1 in appendix IX. Also, while we do not have a basis for commenting on the content of the department’s OMB evaluation submission package because we did not receive it, we would note that the information that we solicit to evaluate a department or agency against our framework includes only information that should be readily available as part of any well-managed architecture program. 2. We understand the principles of federated and segmented architectures, but would emphasize that our framework is intentionally neutral with respect to these and other architecture approaches (e.g., service-oriented). That is, the scope of the framework, by design, does not extend to defining how various architecture approaches should specifically be pursued, although we recognize that supplemental guidance on this approach would be useful. Our framework was created to organize fundamental (core) architecture management practices and characteristics (elements) into a logical progression. As such, it was intended to fill an architecture management void that existed in 2001 and thereby provide the context for more detailed standards and guidance in a variety of areas. It was not intended to be the single source of all relevant architecture guidance. 3. We agree, and believe that this report, by clearly identifying those departments and agencies that have fully satisfied each core element, serves as the only readily available reference tool of which we are aware for gaining such best practice insights. 1. We acknowledge the comment that both CIOs approved the configuration management plan. However, the department did not provide us with any documentation to support this statement. 2. We acknowledge the comment that the architecture has been approved by State and USAID executive offices. However, the department did not provide any documentation describing to which executive offices the department is referring to allow a determination of whether they were collectively representative of the enterprise. Moreover, as we state in the report, the chief architect told us that a body representative of the enterprise has not approved the current version of the architecture, and according to documentation provided, the Joint Management Council is to be responsible for approving the architecture. 3. We acknowledge that steps have been taken and are planned to treat the enterprise architecture as an integral part of the investment management process, as our report findings reflect. However, our point with respect to this core element is whether the department’s investment portfolio compliance with the architecture is being measured and reported to senior leadership. In this regard, State did not provide the score sheets referred to in its comments, nor did it provide any other evidence that such reporting is occurring. 1. We agree and have modified our report to recognize evidence contained in the documents. 2. We do not agree. The 2002 documents do not contain steps for architecture maintenance. Further, evidence was not provided demonstrating that the recently prepared methodology documents were approved prior to the completion of our evaluation. 3. We do not agree. While we do not question whether EPA’s EA Transition Strategy and Sequencing Plan illustrates how annual progress in achieving the target architectural environment is measured and reported, this is not the focus of this core element. Rather, this core element addresses whether progress against the architecture program management plan is tracked and reported. While we acknowledge EPA’s comment that it tracks and reports such progress against plans on a monthly basis, neither a program plan nor reports of progress against this plan were provided as documentary evidence to support this statement. 4. We do not agree. First, while EPA’s IT investment management process provides for consideration of the enterprise architecture in investment selection and control activities, no evidence was provided demonstrating that the process has been implemented. Second, while EPA provided a description of its architecture change management process, no evidence was provided that this process has been approved and implemented. 1. We do not agree. Neither the governance committee charter nor the configuration management plan explicitly describe a methodology that includes detailed steps to be followed for developing, maintaining, and validating the architecture. Rather, these documents describe, for example, the responsibilities of the architecture governance committee and architecture configuration management procedures. 2. We do not agree. The core element in our framework concerning enterprise architecture approval by the agency head is derived from federal guidance and best practices upon which our framework is based. This guidance and related practices, and thus our framework, recognize that an enterprise architecture is a corporate asset that is to be owned and implemented by senior management across the enterprise, and that a key characteristic of a mature architecture program is having the architecture approved by the department or agency head. Because the Clinger-Cohen Act does not address approval of an enterprise architecture, our framework’s core element for agency head approval of an enterprise architecture is not inconsistent with, and is not superseded by, that act. In addition to the person named above, Edward Ballard, Naba Barkakati, Mark Bird, Jeremy Canfield, Jamey Collins, Ed Derocher, Neil Doherty, Mary J. Dorsey, Marianna J. Dunn, Joshua Eisenberg, Michael Holland, Valerie Hopkins, James Houtz, Ashfaq Huda, Cathy Hurley, Cynthia Jackson, Donna Wagner Jones, Ruby Jones, Stu Kaufman, Sandra Kerr, George Kovachick, Neela Lakhmani, Anh Le, Stephanie Lee, Jayne Litzinger, Teresa M. Neven, Freda Paintsil, Altony Rice, Keith Rhodes, Teresa Smith, Mark Stefan, Dr. Rona Stillman, Amos Tevelow, and Jennifer Vitalbo made key contributions to this report.","A well-defined enterprise architecture is an essential tool for leveraging information technology (IT) to transform business and mission operations. GAO's experience has shown that attempting to modernize and evolve IT environments without an architecture to guide and constrain investments results in operations and systems that are duplicative, not well integrated, costly to maintain, and ineffective in supporting mission goals. In light of the importance of enterprise architectures, GAO developed a five stage architecture management maturity framework that defines what needs to be done to effectively manage an architecture program. Under GAO's framework, a fully mature architecture program is one that satisfies all elements of all stages of the framework. As agreed, GAO's objective was to determine the status of major federal department and agency enterprise architecture efforts. The state of the enterprise architecture programs at the 27 major federal departments and agencies is mixed, with several having very immature programs, several having more mature programs, and most being somewhere in between. Collectively, the majority of these architecture efforts can be viewed as a work-in-progress with much remaining to be accomplished before the federal government as a whole fully realizes their transformational value. More specifically, seven architecture programs have advanced beyond the initial stage of the GAO framework, meaning that they have fully satisfied all core elements associated with the framework's second stage (establishing the management foundation for developing, using, and maintaining the architecture). Of these seven, three have also fully satisfied all the core elements associated with the third stage (developing the architecture). None have fully satisfied all of the core elements associated with the fourth (completing the architecture) and fifth (leveraging the architecture for organizational change) stages. Nevertheless, most have fully satisfied a number of the core elements across the stages higher than the stage in which they have met all core elements, with all 27 collectively satisfying about 80, 78, 61, and 52 percent of the stage two through five core elements, respectively. Further, most have partially satisfied additional elements across all the stages, and seven need to fully satisfy five or fewer elements to achieve the fifth stage. The key to these departments and agencies building upon their current status, and ultimately realizing the benefits that they cited architectures providing, is sustained executive leadership, as virtually all the challenges that they reported can be addressed by such leadership. Examples of the challenges are organizational parochialism and cultural resistance, adequate resources (human capital and funding), and top management understanding; examples of benefits cited are better information sharing, consolidation, improved productivity, and reduced costs.",govreport
"AU.S. free trade agreement (FTA) with Oman was concluded on October 13, 2005, after seven months of negotiation, and was signed by U.S. Trade Representative (USTR) Bob Portman and Omani Minister of Commerce and Industry Maqbool bin Ali Sultan on January 19, 2006. The U.S.-Oman (FTA) is the fifth U.S. bilateral free trade agreement with a country in the proposed Middle East Free Trade Area (MEFTA). MEFTA would consist of 16 entities in the Middle East and four in North Africa. The entire proposed MEFTA is included in the map in Figure 1 , with Oman, heavily shaded, in the lower right hand corner. Completion of a MEFTA by 2013 was proposed by President George W. Bush in 2003, as part of a plan to fight terrorism by supporting Middle East economic growth and democracy through trade. To date, besides Oman, the Administration has negotiated and Congress has implemented free trade agreements with four other MEFTA political entities: Israel and Jordan (before MEFTA was announced), Morocco, and Bahrain. A sixth FTA is being negotiated with the United Arab Emirates (UAE). Congressional consideration of the U.S.-Oman FTA is governed by the timeline set forth in the Trade Act of 2002 ( P.L. 107-210 ). Under this law, which lays out the President's trade promotion authority (TPA), the President must give Congress a 90-day prenotification of his intent to enter into the trade agreement. After that, the President must submit to Congress—under no particular time constraints, but on a day when both houses of Congress are in session—both the agreement itself and the implementing legislation. Any House or Senate committees to which the legislation is referred will have 45 days to report (or not report) the bill; and each house has 15 days after the bill is reported (or the 45 days expire) to consider the legislation. If the House passes its bill to the Senate, the Senate has an additional 15 days to consider the legislation. Floor debate in either house is limited to 20 hours, divided equally between supporters and opponents. For final passage, both houses must vote the legislation up or down by a simple majority, and neither the implementing legislation nor the agreement itself may be amended. Figure 1. Oman's Geographic Location in the Proposed MEFTASource: Map Resources. Adapted by CRS. U.S. interest in Oman stems from a number of factors. Oman is a small exporter of oil and natural gas that is strategically located at the entrance to the Persian Gulf, 35 miles directly opposite Iran. It is not a member of the Organization of the Petroleum Exporting Countries (OPEC). Oman is a moderate Islamic country which has sought to maintain good relations with all Middle East countries. It also has a 170 year history of political and economic cooperation with the United States, and has supported the U.S. war on terrorism. Oman is an important gateway to the Persian Gulf region. Oman has many reasons for wanting to negotiate an FTA with the United States. It is a country whose proven oil reserves could be exhausted within 15 or 20 years; yet, almost 40% of the country's GDP, two-thirds of its export earnings and three-fourth of its government revenues currently come from oil revenues. It is therefore trying to liberalize and diversify its trade regime as it seeks to broaden economic opportunities for a fast-growing workforce. As a result, it is looking to expand its economy beyond oil and gas exports. It sees the United States as an important ally in the venture to prepare itself for a time when its economic and social challenges intersect. Oman is a small U.S. trade partner, ranking 88 th among all U.S. trade partners. Total U.S.-Oman trade at $1 billion in 2005 ($593 million in U.S. exports and $555 million in U.S. imports) accounts for 0.04% (four one-hundredths of one percent) of all U.S. trade. As a trading partner it is also 11 th among the 20 MEFTA entities, which together represent 4% of U.S. trade for 2005. The United States, on the other hand, ranks fourth in importance among Oman's trading partners, behind the United Arab Emirates (UAE), Japan, and the United Kingdom for 2004 (most recent data). In 2005, the most important U.S. imports from Oman (see Table 1 ) were oil and natural gas (75%, constituting 1% of all U.S. oil and gas imports from MEFTA countries), and apparel (10%). The most important U.S. exports to Oman were various types of transport equipment and road vehicles (totaling 56%), and various types of machinery (24%). Since 2001, U.S. exports to Oman have almost doubled to $593 million, for various reasons, while U.S. imports from Oman, at $555 million, have increased by about a third, primarily because of increases in the price of petroleum imports. As a result, for 2005, the United States had a small trade surplus with Oman. Total U.S. foreign direct investment in Oman was $358 million in 2003, nearly double the $193 million investment in 2002. The Bureau of Economic Analysis does not report on investment by sector for Oman, when investment is highly concentrated in a small number of investors, and such reporting might reveal the identity of individual investors. However, most of it is likely invested in oil and gas-related facilities. However, the Department of Commerce's Country Commercial Guide for Oman reported that the largest investor in Oman is Royal Dutch Shell Oil which holds 34% of Petroleum Development in Oman, the state oil company, and 30% of Oman Liquid Natural Gas. In addition, U.S. firms, Gorman Rupp (water pumps) and FMC (wellhead equipment), have entered into industrial joint ventures with Omani firms, and Dow Chemical announced a joint venture with Oman Oil Company and the government of Oman in July 2004 to develop a large petrochemical plant in Sohar. The Country Commercial Guide for Oman also reported that total investment in listed Omani companies with foreign participation was $2.4 billion in September 2004, of which 8.94% ($215 million) was (worldwide) foreign investment. Foreign capital also constituted 7.5% of all capital invested in finance, 3% of all capital invested in manufacturing, and 9% of all capital invested in insurances and services. The FTA with Oman is similar to other recent FTAs with MEFTA countries (Morocco and Bahrain), with slight variations. The U.S.-Oman FTA has three basic parts: new tariff schedules for each country, broad commitments to open markets and provisions to support these commitments, and protections for labor and the environment. The USITC argues that the economic effect of the agreement on the U.S. economy is expected to be small but positive, and that the impact on U.S. workers is likely to be minimal because trade with Oman is low. U.S. apparel workers are a group that is potentially adversely affected. Apparel imports from Oman declined by 57% in 2005 over 2004, because the World Trade Organization (WTO) Agreement on Clothing and Textiles (ACT) expired in January of 2005, ending the trade quota system among WTO partner countries. The USITC reports that tariff reductions and elimination under the U.S.-Oman FTA should restore some of the competitiveness of Oman's apparel exports among U.S. purchasers—and estimates that the resulting increase in imports would come at the expense of workers elsewhere in the world, not U.S. workers. Under the U.S.-Oman FTA, the United States and Oman will provide each other immediate duty-free access for tariff lines covering almost all consumer and industrial goods, with special provisions for agriculture and textiles and apparel. For agricultural products, Oman will provide immediate duty-free access for current U.S. exports in 87% of agricultural tariff lines; and the United States will provide immediate duty-free access for 100% of Oman's current exports of agricultural products to the United States. Both countries will phase out all tariffs on the remaining eligible goods within 10 years. Textile and apparel products are divided into three categories. Most U.S. imports from Oman are category A (cotton and manmade fibers) for which duties will be eliminated immediately so long as the goods meet the FTA rules of origin requirements. On category B products (home furnishings—mainly bed and kitchen linens) tariffs will be reduced over five years, and for category C products (wool goods), tariffs will be reduced over 10 years. Most apparel must be assembled in an FTA party from inputs (yarn and fabric) made in an FTA party. At present, virtually all U.S. textile and apparel imports from Oman are dutiable, with an average tariff rate of 15.4% in 2005. At the same time, only 11% of U.S. agricultural imports from Oman are dutiable. These dutiable products carried an average tariff of 10.4% in 2005. Most U.S. exports to Oman incurred the common external Gulf Communications Council (GCC) tariff of 5% to all non-GCC members. The GCC includes, besides Oman, Bahrain, Kuwait, Qatar, Saudi Arabia, and the UAE. The U.S.-Oman FTA contains broad commitments to open markets in sectors such as banking, insurance, securities, and telecommunications. It also includes protections for U.S. investors, and for holders of copyrights, trademarks, patents, and trade secrets. It includes enforcement measures for intellectual property rights infringement. In addition it contains transparent sanitary and phytosanitary measures, government procurement disciplines, streamlined and transparent customs procedures, commitments to combat bribery, and tools to enforce the trade agreement. More specifically: Oman provides market access across its entire services regime, including audiovisual, express delivery, telecommunications, computer, distribution, and healthcare; and services incidental to mining, construction, architecture and engineering. The agreement will enhance Oman's commitment to the WTO General Agreement on Trade in Services (GATS). Annexes I and II of the agreement indicate the exceptions to the coverage of the agreement that each country has reserved for itself in the case of services. U.S. financial service suppliers have the right to establish subsidiaries, branches, and joint ventures in Oman, to expand their operations throughout Oman, and to offer the full range of financial services. Annex III of the agreement lists the exceptions to the coverage of the agreement that each county has reserved for itself in the area of trade in financial services. All forms of investment are protected under the agreement, including enterprises, debt concessions, contracts, and intellectual property. U.S. investors will have, in most circumstances, the right to establish, acquire, and operate investments in Oman on an equal footing with Omani investors and with investors of other countries. Annexes I and II of the agreement indicate the exceptions to the coverage of the agreement that each country has reserved for itself in the case of foreign investment. U.S. phone companies will have the right to interconnect with a dominant carrier in Oman at nondiscriminatory rates. U.S. firms seeking to build a physical network in Oman will have nondiscriminatory access to key facilities such as telephone switches and submarine cable landing stations. Each government commits to nondiscriminatory treatment of digital products and agrees not to impose customs duties on digital products transmitted electronically. Each government commits to protect copyrighted works, including phonograms, for extended terms consistent with U.S. standards and international trends. Grounds for revoking a patent are limited to the same grounds required to originally refuse a patent, thus protecting against arbitrary revocation. Patent terms can be adjusted to compensate for unreasonable delays in granting the original patent, consistent with U.S. practice. The FTA applies the principle of ""first-in-time, first-in-right"" to trademarks and geographical indications, so the first person who acquires a right to a trademark or geographical indication will be the person who has the right to use it. Each government will be required to establish transparent procedures for the registration of trademarks. The FTA requires each government to criminalize end-user piracy, providing a strong deterrence against piracy and counterfeiting. The FTA mandates both statutory and actual damages under Omani law for IPR violations. Oman commits to a science-based regime for sanitary and phytosanitary measures and to transparent procedures for developing and implementing technical regulations. U.S. suppliers are granted nondiscriminatory rights to bid on contracts to supply most Omani government entities; and Omani government purchasers may not discriminate against U.S. firms or in favor of Omani firms when making government purchases above a threshold monetary level. The FTA requires transparency and efficiency in customs administration, including publication of laws and regulations on the Internet and procedural certainty and fairness. Each government will publish its laws and regulations governing trade, and will publish proposed measures in advance, and provide an opportunity for public comment on them. Each government will ensure that a trader from the other country can obtain prompt and fair review of a final administrative decision affecting its interest. Each government is required to prohibit bribery, including bribery of foreign officials, and to establish appropriate criminal penalties to punish violators. All core obligations of the FTA, including enforceable labor and environmental provisions, are subject to the dispute settlement provisions of the agreement. Dispute panel proceedings are subject to requirements for openness and transparency. Each government is required to effectively enforce its own labor laws, as with other FTAs negotiated under the presidential trade promotional authority or ""fast track"" authority of the Trade Act of 2002 ( P.L. 107-210 ). This is the only labor provision enforceable through the agreement's dispute resolution process, and the maximum penalty for each violation is limited to $15 million per violation per year. If the Party complained against fails to pay a monetary assessment, the complaining Party can take other steps to collect the assessment (or otherwise secure compliance), including by the suspension of tariff benefits under the FTA. However, the labor section of the U.S.-Oman FTA also contains other provisions, which are subject to consultation rather than actual enforcement: Each country agrees not to weaken or reduce its labor laws to attract trade and investment. Each government reaffirms its obligations as a member of the International Labor Organization (ILO, which requires it to uphold ILO core labor standards) and commit to ""strive to ensure"" that its laws provide for labor standards consistent with internationally recognized labor rights (which are defined in the FTA to reflect U.S. trade law, and are slightly different from ILO core labor standards.) Labor ministries together with other appropriate agencies agree to establish priorities and develop specific cooperative activities. (See section below on ""The Labor Debate"" for a discussion of most recent labor issues.) Each government is required to effectively enforce its own environmental laws. This is the only environmental provision enforceable through the agreement's dispute resolution process, and as with labor provisions, the maximum fine is limited to $15 million per violation per year. Each country also agrees not to weaken or reduce its environmental laws to attract trade and investment. As a complement to the agreement, the governments sign a Memorandum of Understanding on Environmental Cooperation that establishes a Joint Forum on Environmental Cooperation, develop a plan of action, and set priorities for future environment-related projects. Support for the agreement is broad in the business community. Among businesses, support is led by the National Foreign Trade Council and the Business Council for International Understanding which heads up the Middle East Free Trade Coalition (MEFTC), an alliance of about 120 companies and associations including the U.S. Chamber of Commerce, and the National Association of Manufacturers. Support also comes from 24 out of 27 trade advisory committees representing business labor, environment, state and local government, agriculture, various industries, and functional areas (e.g., consumer goods, distribution services, small and minority businesses, customs matters, intellectual property, and standards and technical trade barriers.) Congressional support on the House side was led by the Congressional Middle East Economic Partnership Caucus (MEEPC), a bipartisan group of lawmakers which began with 16 members and six co-chairs including Representatives Ben Chandler, Phil English, Darrell Issa, William Jefferson, Gregory Meeks, and Paul Ryan. Congressional support on the Senate side was led by Senator Charles Grassley, Chairman of the Senate Finance Committee, and by Senator Craig Thomas, Chairman of the Subcommittee on International Trade, which held hearings on the U.S.-Oman FTA on March 6, 2006. USTR Portman asserted that the U.S.-Oman FTA will contribute to economic growth and trade between both countries, generate export opportunities for U.S. companies, farmers, and ranchers, help create jobs in both countries, and help American consumers save money while offering them greater choices. He pointed out that in addition to eliminating tariffs on U.S. exports, Oman will provide substantial market access across the entire services regime, provide a secure, predictable legal framework for U.S. investors operating in Oman, provide for effective enforcement of labor and environmental laws, and protect intellectual property. Furthermore, he argues that this agreement will support and accelerate the market liberalization that Oman started as part of its accession to the WTO in 2000. Portman contends that joint U.S.-Omani efforts will advance economic growth and democracy, raise living standards and promote peace and economic stability in the Middle East—a region of almost 350 million people and a $70 billion trading relationship with the United States. The overall Advisory Committee for Trade Policy Negotiations (ACTPN) also notes that the agreement will strengthen the likelihood of additional agreements in the region and improve and strengthen overall U.S. relations with the countries of the Middle East. In addition, those in favor of the agreement assert that Oman is one of the most ""open"" countries in the Middle East. Economic Freedom of the World, 2005 , published by Canada's Fraser Institute, reports (p. 4) that when measures of economic freedom and democracy are included in a statistical study, economic freedom is about 50 times more effective than democracy in diminishing violent conflict. Economic Freedom ranked Oman 17 th out of 127 countries in terms of degree of economic freedom afforded in five basic areas. The only MEFTA country it ranked higher was the UAE, which tied for 9 th place (with Australia, Luxemburg, and Estonia.) Other MEFTA country rankings were Bahrain (24 th ), Jordan (25 th ), Israel ( 50 th ), and Egypt, (tied for 78 th with Iran and Morocco.) In 2003, Oman passed a new labor law extending its labor protections for domestic workers to foreign workers (who predominate in the private sector). In response to some calls to strengthen the Omani labor law further, Chuck Ditrich, National Foreign Trade Council vice president, urges patience, acknowledging that Oman still has some areas that may need further legislation, but argues that Omani laws must be viewed in the context of a ""very traditional society"" that is committed to modernization. For example, the government of Oman reportedly recognizes the need for more explicit provisions for collective bargaining in its laws. Moreover, Oman has reportedly undertaken consultation with the ILO for technical assistance in complying with ILO core labor standards. Three of the 27 reports by trade advisory committees mandated under the trade promotion authority language of the Trade Act of 2002 have some criticisms of the U.S.-Oman FTA: those committees on the environment, intergovernmental affairs, and labor. Most members of the Trade Policy and Environment Committee agreed that the environment and public participation provisions were acceptable; however, they noted that the U.S.-Oman FTA lacks some environmental provisions which have appeared in other agreements and which would have been appropriate. Examples of such provisions are the extensive public participation framework from the Central America Free Trade Agreement (CAFTA) and some basic environmental provisions which appeared in the FTAs with Chile and Singapore. The Intergovernmental Advisory Policy Committee, in principle, supported the trade liberalization objectives of the agreement. However, the committee stressed the need for trade agreements to continue to respect the authority of state and local governments to regulate in areas under their jurisdiction. They also stressed the need for ongoing consultations with sub-federal governments. The labor groups are the most vocal critics. They argue that potential losers from the agreement would be workers in Oman who would miss out on the opportunity to be more fully protected by labor standards. Other implied losers would be U.S. workers for whom the agreement does little to ""level the playing field."" Main arguments against the FTA offered by labor interests are concentrated primarily on two basic issues: weaknesses in the agreement, and weaknesses in Omani laws and enforcement, for which the agreement does not adequately compensate. Labor critics point out that the Trade Act of 2002 requires U.S. negotiators to ""seek provisions that treat U.S. principal negotiating objectives equally with respect to both: (1) the ability to resort to dispute settlement; and (2) the availability of equivalent dispute settlement procedures and remedies. However, critics argue, the agreement does not do this. Further, they argue, the FTA is a step backward from protections offered Oman under the Generalized System of Preferences: Not All Labor Provisions Are Treated Equally . The U.S.-Oman FTA identifies three basic labor commitments for partner countries: (1) commitments to comply with ILO standards; (2) commitments to enforce their own labor standards; (3) and commitments to not derogate from those standards in order to attract trade and investment. However, critics argue, only the second of these three commitments is enforceable through the dispute resolution procedures of the U.S.-Oman FTA. This treatment, they argue, contrasts with provisions of the U.S.-Jordan FTA which makes all three commitments enforceable through the dispute resolution process. Unequal Treatment of Labor Compared to Most Non-Labor Provisions . Second, there are different dispute resolution procedures for labor and non-labor (e.g., intellectual property) violations, For labor (and environmental) violations, the potential penalty for the one labor (and environmental) violation (failure to enforce one's own laws) that is open to the dispute resolution procedures is capped at $15 million per violation per year. For non-labor (and non-environmental) violations, there is no cap on any monetary assessment. A Step Back from GSP . In addition, the AFL-CIO sees the U.S.-Oman FTA as being a step back from the Generalized System of Preferences (GSP) program. Under GSP, trade preferences for developing countries including Oman are dependent on such countries' taking steps to afford their workers internationally recognized worker rights. A challenge to GSP eligibility for any country begins with a petition to the Office of the USTR documenting that a country is not taking steps to afford its workers such rights. In June of 2005, the AFL-CIO petitioned the USTR to remove Oman from GSP status, arguing that it was not affording its workers internationally recognized worker rights. The USTR subsequently rejected the petition and Oman continues to hold GSP status. When there are weaknesses in the agreement, critics argue, if a country's basic laws and enforcement of those laws are strong enough, workers can still be protected. Oman, critics argue, lacks protections in certain areas. First, as of the date of this report, according to the ILO website, Oman has ratified conventions relating to only two of the four basic ILO core labor standards (enumerated in a footnote on p. 7): those protecting against child labor, and those prohibiting forced labor. Oman has not ratified conventions related to the right to organize and bargain collectively and the elimination of employment discrimination. Furthermore, various sources suggest that Omani labor laws and/or enforcement do not fully cover certain aspects of the following areas relating to core labor standards/internationally recognized worker rights: Right to Organize and Bargain Collectively . The State Department's Country Reports on Human Rights Practices, 2004, finds in the area of ""right to organize and bargain collectively,"" that Omani law does not provide workers with the right to form or join ""unions"" but does permit them to form representation committees with the goal of taking care of their interests. The LAC reports that where representation committees exist, however, they are by law, not authorized to discuss wages, hours, or conditions of employment. Country Reports for 2005 adds an unofficial estimate that 25 representation committees, representing 9.1% of employees in the private sector, have been registered since 2004 and reports that provisions of the law apply to [Omani] women and foreign workers [as well as Omani men]. Right to Strike . Furthermore, according to Country Reports for 2004, the Omani law does not address strikes or explicitly provide for the right to collective bargaining. However, it reports that the 2003 Omani labor law removed a 1973 prohibition on strikes and details procedures for dispute resolution. Country Reports for 2005 also indicates that, while labor unrest was rare, there were four reported strikes during the year. The most significant one closed the largest seaport for two days. Prohibition of Forced or Compulsory Labor . Country Reports for 2004 also finds that the Omani law prohibits forced or compulsory labor, including that of children. Country Reports for 2004 further notes that even though the protections of the 2003 Omani labor law apply equally to foreign and domestic workers, at times foreign workers (who account for 80% of private sector workforce and 50% of all workers in Oman) were placed in situations amounting to forced labor. Country Reports for 2005 echoes the finding that some situations amounted to forced labor and adds that employers sometimes withheld documents that would release workers from employment contracts and allow them to change employers. Without such documents, a foreign worker must continue to work for his current employer or become technically unemployed and consequently a candidate for deportation. Country Reports for 2005 further reports that many foreign workers were not aware of their right to take such disputes to the Labor Welfare Board, which ""in most cases"" released the worker from the service contract without deportation, awarded compensation for time worked under compulsion, reimbursed the worker for back wages, and subjected the guilty employer to fines. However, Country Reports 2005 states, there were no available statistics on the number of disputes filed or resolutions by the end of 2005. Before the U.S.-Oman FTA and implementing legislation were formally submitted to Congress, both House and Senate committees held preliminary hearings. The House Ways and Means Committee held full committee hearings on April 5, 2005. The International Trade Subcommittee of the Senate Finance Committee held hearings on March 6, 2006. Then, on May 10, the House Ways and Means Committee held ""mock"" markup hearings on the Administration's draft implementing legislation and approved the bill without amendment on a party-line vote of 23-11. On May 18, 2006, the Senate Finance Committee held its ""mock"" markup, adopting an amendment before passing the bill unanimously. The amendment reflected recent concerns about sweatshop conditions in Jordan (see section below), and implications for production under the U.S.-Oman FTA. On June 28, the Senate Finance committee approved the draft implementing legislation ( S. 3569 ) for the U.S.-Oman FTA by a vote of 10 to 3. On June 29, the Senate passed the bill by a vote of 60 to 34. On June 29 the House Ways and Means Committee also approved the draft implementing legislation ( H.R. 5684 ) by a vote of 23 to 15. On July 20 the House passed the bill by a vote of 221 to 205. On September 19 the Senate reconsidered the implementing legislation and passed the House version of the same bill by a vote of 63 to 31. This action was necessary because the Constitution requires that all revenue-raising legislation, which encompasses trade bills, since they affect tariffs, originate in the House. The bill was signed by the President and became P.L. 109-283 on September 26, 2006. A report of alleged sweatshop conditions in plants in Jordan producing for export to the United States has been issued by the National Labor Committee (NLC), a nonprofit organization that promotes worker rights around the world. The 161-page report has raised concerns within Congress that similar conditions might exist or occur in other MEFTA countries, including Oman if the U.S.-Oman FTA were to go into effect. The NLC report entitled U.S.-Jordan Free Trade Agreement Descends into Human Trafficking and Involuntary Servitude, released in May of 2006, documents conditions in 28 separate factories in Jordan in foreign trade zones, where clothing is produced by Jordanian and foreign guest workers, mostly for export to the United States. The report estimates that tens of thousands of foreign guest workers who entered employment willingly were subsequently stripped of their passports and trapped in involuntary servitude, sewing clothing in factories for companies including Wal-Mart, K-Mart, Gloria Vanderbilt, Target, Kohl's, J.C. Penney, Victoria's Secret, and L. L. Bean. The Senate Finance Committee responded to the concerns on May 18, 2006, by unanimously adopting an amendment in its mock markup of the Administration's U.S.-Oman FTA draft implementing legislation. The amendment, offered by Senator Kent Conrad, would prohibit any products made in Oman ""with slave labor (including under sweatshop conditions so egregious as to be tantamount to slave labor) or with the benefit of human trafficking,"" from benefitting from the agreement. Committee Republicans, including Chairman Chuck Grassley, joined Democrats in voting for the conceptual amendment. The committee then unanimously approved the U.S.-Oman draft implementing bill as amended. Any amendments passed by a committee during the mock markup process are advisory in nature, rather than obligatory. The Administration responded that while they would consider the amendment, they had some concerns. First, they argued, the amendment might fall outside the scope of the provision in the Trade Act of 2002 , P.L. 107-210 , Sec. 2103(b)(3)(ii), requiring that any new statutory language be ""necessary or appropriate"" to implement the trade agreement. Second, the Administration argued, Sec. 307 of the Tariff Act of 1930 already prohibits the importation of merchandise produced in whole or in part through prison, forced, or indentured labor, including by those who voluntarily entered into employment but were later subject to de facto slave working conditions. In response to the Administration's argument, Senator Conrad pointed out that Sec. 307 of the Tariff Act of 1930 may not be applicable to apparel produced under slave labor conditions in Oman. This, he argued, is because apparel is no longer made in great quantities in the United States; and Sec. 307 does not apply to goods produced under forced or indentured labor if those goods are not domestically produced in quantities that meet the consumption demands of the United States. Third, the Administration argued that the amendment may be unnecessary because FTA language requiring Oman to enforce its own labor laws, which prohibit forced labor, is strong enough or enforceable enough to discourage or affect its practice. In addition, the Administration pointed out, Oman has approved core labor standards prohibiting forced or compulsory labor and has made commitments to strengthening its labor standards still further. These Omani commitments came from the Omani Minister of Labor as part of an exchange of letters between House Democrats, the Omani Minister, and the USTR. The Omani Minister made eight commitments in March and ten further commitments regarding forced labor and child labor in May. In those commitments Oman promised to issue Royal Decrees and Ministerial Decisions to strengthen the country's labor laws in response to congressional concerns by no later than October 31, 2006. While some Republicans argued that Oman needs time to craft new laws with technical support from the ILO, some Democrats argued for changes in Omani laws before the U.S.-Oman FTA implementing legislation is considered by Congress. On July 8, 2006, the Sultan of Oman issued a Royal Decree (74/2006) amending provisions of Omani labor law to provide some labor rights consistent with ILO core labor standards. As amended by the decree, Omani law would permit the right to form unions, the right to bargain collectively, and to engage in other union activities. The law would also prohibit employers and others from imposing any compulsory or forced labor with specific penalties for noncompliance. Penalties are provided for those who would interfere with union activity, or decline to provide the necessary facilitation or information. The Royal Decree delegates promulgation of regulations to the Ministry of Manpower; therefore, specific details regarding its implementation and enforcement are yet to be determined. Meanwhile, a few days after the Senate Finance Committee markup hearing, Jordan's trade minister Sharif Zu'bi indicated that the NLC report had incorrectly identified three sweatshops that are not even in Jordan, and that three others had been closed before the report was released in May. In addition, he noted that the Jordanian government had formed nine inspections teams to investigate the entire garment trade in the country, and is working with the International Labor Organization, U.S. labor committees, the USTR, the State Department, and U.S. and Jordanian apparel companies to address the challenges and improve their monitoring system. In the Spring of 2006, the U.S. interagency ""Committee on Foreign Investment in the United States"" raised no objections to the acquisition and continued operation of contracts by the Dubai-owned ""Dubai Ports World"" company from a British firm that managed port facilities in several cities including New York, New Jersey, Baltimore, New Orleans, Miami, and Philadelphia. After several members of Congress expressed opposition to the $9 billion merger on the grounds that the company might not be as vigilant on port security as required, the company agreed to a 45-day review of its operations at those ports. On March 9, the House Appropriations Committee voted 62-2 on a provision in the FY2006 supplemental funding bill for Iraq and Afghanistan war operations and other costs that would have effectively prevented DP World from operating in the United States. The following day DP World officials announced that they would divest the newly-acquired U.S. port operations to an American owner. A provision in the Oman FTA became the focus of increased attention. Some argue that this provision could obligate the United States to open up landside aspects of its port activities to operation by companies such as DP World. Others argue that the provision is not new to bilateral trade agreements, and does not change current U.S. policy. The provision, contained in Annex II of the U.S.-Oman FTA, addresses cross-border services and investment in the area of transportation. More specifically, the provision sets out two categories of transportation activities: those for which the United States reserves the right to adopt or maintain any measures, and those activities for which the United States does not reserve the right to adopt or maintain any measures—those activities which are exclusions from the above list. The list for which the United States reserves the right to maintain any measure includes requirements for investment in, ownership and control of, and operation of drill rigs, U.S. flagged vessels, fishing vessels; plus requirements related to documenting a vessel under the U.S. flag, promotional programs, certification licensing, and citizenship requirements, programs, certification licensing and citizenship requirements, manning requirements, and all matters under the jurisdiction of the Federal Maritime Commission. The excluded list, for which the United States does not reserve the right to adopt or maintain any measure, includes two categories of activities—one unconditional, and one conditional. The first category (a) is vessel construction and repair. On this category the United States reserves no right to adopt or maintain any measure. The second category (b), for which the United States waives its right to adopt or maintain any of the listed measures on the condition that comparable market access in these sectors is obtained from Oman, includes the following activities: landside aspects of port activities including operation and maintenance of docks; loading and unloading vessels directly to or from land; marine cargo handling; operation and maintenance of piers; ship cleaning; stevedoring; transfer of cargo between vessels and trucks, trains, pipelines, and wharves; waterfront terminal operations; boat cleaning; canal operation; dismantling of vessels; operation of marine railways for drydocking; maritime surveyors, except cargo; marine wrecking of vessels for scrap; and shift classification societies. Some in Congress argue that the provision excluding the above activities from the U.S. government's ""right to adopt or maintain any measure"" should be removed from the agreement because it poses a potential security risk to the United States. Others are arguing that the provision merely restates what is already the situation in the United States, and is not a problem. The arguments on both sides follow. Those arguing that the provision excluding certain activities from the U.S. ""right to adopt or maintain any measure"" should remain in the agreement argue that: A basic obligation of free trade agreements such as the U.S.-Oman FTA is the obligation (subject to specified exceptions) to treat service suppliers and investors of other parties no less favorably than the United States treats its own service suppliers and investors. This provision meets those requirements. This provision is already included in other agreements, including the North American Free Trade Agreement (NAFTA), the Dominican Republic-Central America Free Trade Agreement, and FTAs with Australia, Bahrain, Chile, and Morocco. Proponents argued that Omani companies are presumably already able to acquire contracts for and perform these services. Currently there are no U.S. laws that prevent either an Omani-owned company or any other foreign-owned company from contracting with port owners to perform ""landside aspects of port activities"" in the United States. The U.S. Coast Guard and Customs and Border Protection play an integral role in ensuring security at U.S. ports; and nothing in the agreement amends or diminishes the authority of these agencies. While Oman already provides market access to U.S. service suppliers and investors, the USTR is not aware of any Omani companies that are currently involved in any U.S. port operations or that might be interested in such operations in the future. According to proponents, if an Omani company were to express such interest in the future, the ""essential security"" (or ""national security"") exception (explained below) could arguably be invoked to ""fully"" protect U.S. national security needs. If non-Omani persons set up an enterprise in Oman that was merely a ""shell""—i.e., that was engaged in no substantial business activities in Oman—and that enterprise sought to make an investment in the United States, the FTA contains specific language that would arguably permit the United States to deny the FTA's investment-and services-related benefits to that enterprise. Moreover, even if the enterprise set up in Oman had ""substantial business activity"" in Oman, the United States could deny FTA benefits to it if its owners were nationals of countries subject to U.S. sanctions. Finally, the U.S. government retains the authority to block any potential investment pursuant to the ""essential security"" exception described below. Chapter 21 of the U.S.-Oman FTA contains several exceptions to the agreement. Article 21.2 addresses ""essential security"" and provides that: Nothing in the agreement shall be construed: (a) to require a Party to furnish or allow access to any information ... which it determines to be contrary to its essential security interests; or (b) to preclude a Party from applying measures it considers necessary for the fulfillment of its obligations [for] the maintenance or restoration of international peace or security or the protection of its own essential security interests. An ""essential security"" exception has been included in all U.S. trade agreements dating back to the 1947 General Agreement on Tariffs and Trade (GATT). The United States, among other countries, has consistently interpreted this language (worded similarly to Article 21 of the U.S.-Oman FTA) to be self-judging, and therefore that national security matters are not appropriate for adjudication in a third-party dispute settlement mechanism. In other words, under these provisions it can be argued that nothing in an agreement can prevent the United States from applying measures that it considers necessary for the protection of essential security interests. Moreover, proponents will argue that review of national security claims by international tribunals are without precedent and are highly unlikely because, arguably, no tribunal would accept jurisdiction over the question of what constitutes a country's ""national security."" In addition, U.S. law—in particular the Exon-Florio Amendment to the Defense Production Act of 1950 —authorizes the President to block proposed foreign investment in the United States that threatens national security. The President has delegated to the interagency Committee on Foreign Investment in the United States (CFIUS) the responsibility to continuously monitor foreign investment in the United States to ensure against threats to national security; and a CFIUS review could still be performed at the discretion of CFIUS. While it is theoretically possible for Oman to bring a legal challenge to the actions of the United States before a third-party tribunal, proponents argued, the United States would appear to be on solid legal grounds for asserting not only that the panel does not have the legal authority to determine the validity of such a matter, but also that the inconsistent measure is permitted and justifiable given the broad ""self-judging"" language of the national security exception. Those arguing that the exception provision of Annex II should not have been included in the U.S.-Oman FTA argue that such a provision could pose a serious threat to Congress' ability to ensure the security of U.S. port infrastructure. Specific arguments against the provision are as follows: This is because language in Annex II regarding landside port operations introduces new rights of establishment for foreign companies to own sensitive U.S. infrastructure. These FTA provisions arguably subject U.S. laws or policies (whether enacted by Congress, the Executive, or the States) that restrict foreign ownership to a challenge in dispute resolution and/or to suit under the investor-state enforcement provisions. Under the FTA, this right is conditional upon obtaining comparable market access in this sector from Oman. However, this right covers the very port activities about which Congress expressed national security concerns during the Dubai Ports World debate. Generally, the service sectors to which the ""right to establish"" for foreign companies applies in these FTAs is the same as the service sectors that the United States agreed to in the 1994 WTO's General Agreement on Trade in Services (GATS). However, opponents argue, the Oman FTA adds to the U.S. commitments by specifically including (or by not specifically excluding) ""landside operations of ports."" The reason for this, they argue, is that neither the GATT agreement nor the FTA expressly exempts these provisions from review by an international tribunal. Nor can either country limit the number or size of such services, or require specific forms of ownership (i.e., require U.S. partners or require that it be a non-profit organization). Under the FTA, such disputes can be brought in two fora, both of which raise concerns: Government-to-government dispute resolution cases are not heard in U.S. courts, but in three-person trade tribunals under procedures agreed to in Article 20 of the FTA. In these cases, each country in the dispute may select one ""judge"" from its country and these two tribunalists would choose a third ""judge""—from a list of trade experts provided by each country. In such a scenario, ""judges"" with a narrow trade expertise and perspective including non-U.S. individuals would be empowered to balance competing U.S. interests—national security needs against U.S. trade commitments—to decide which comes first. Investor-state enforcement is enumerated in Chapter 10 of the U.S.-Oman FTA. Under these provisions, even if the Omani government were not to initiate a case, an actual investor/company has the right to privately initiate its own case against the United States. Such a case, if brought, would seek a judgement requiring that the United States pay monetary damages equal to part of the expected future profits it would be denied by an adverse U.S. action. The case would be adjudicated by United Nations or World Bank tribunalists, who would be empowered to ""second guess"" a national security claim, and possibly order the U.S. government to pay the foreign company for its lost future profits. If the U.S. were to raise the ""essential security"" exception included in Chapter 21, Article 21.2 as a defense before a trade tribunal and a CFIUS review had been completed without a finding of a security threat (as in the case of Dubai World Ports), opponents argue, there is no doubt that an FTA panel would not permit use of the FTA's ""essential security"" exception to excuse consequent government action that interfered with the FTA investor right to establish port operations. However, the converse is not necessarily true: If a CFIUS review did determine that an acquisition were not in the national security interest of the United States, opponents argued, this would not terminate an FTA claim. This is because the FTA sets out procedures for responding to validly raised claims. Thus, even with a CFIUS review, it is argued that the United States would still be required to respond in a United Nations or World Bank tribunal, essentially requiring litigation on the ""essential security"" defense. Oman joins four other MEFTA countries with FTAs, and the proposed MEFTA is now one-quarter of the way complete. An agreement with Oman could be a pathway to create private sector jobs for Oman's burgeoning population and a gateway to more openness in the Middle East. If Congress had not approved the U.S.-Oman FTA, any one of a number of things could have happened. On one hand, Oman could have just continued trading with the United States as usual. On the other hand, Oman could have looked elsewhere to countries such as China, Russia, or India for support in diversifying beyond the production of oil which could run out in roughly 15-20 years. In addition, had the U.S.-Oman FTA not been approved, there might have been broader implications. For example, Oman has been letting the United States use several military facilities. While many argued that it would have been be in Oman's interest to continue to cooperate with the United States military, Oman might have been tempted to put further restrictions on the U.S. use of these facilities. Oman might also have shrunk back from its cooperation on counterterrorism which is said to have included sharing/providing tips on intelligence about possible Al Qaeda suspects operating in the Persian Gulf or Oman itself.","In aiming to fight terrorism with trade, the United States negotiated and the President signed on January 19, 2006, the U.S.'s fifth bilateral free trade agreement (FTA) in the proposed 20-entity Middle-East-Free Trade Area (MEFTA). This FTA is with Oman. Other U.S.-FTAs are with Israel, Jordan, Morocco, and Bahrain. A sixth is being negotiated with the United Arab Emirates. Oman is a small oil-exporting U.S. trade partner that has been supportive of U.S. policies in the Middle East and is strategically located at the mouth of the Persian Gulf. Because its oil reserves could be exhausted within 15-20 years, Oman is trying to liberalize and diversify its trade regime beyond oil and gas to provide economic opportunities for its fast growing workforce. Supporters of the agreement typically cite political and economic reasons. Opponents typically point to labor and human rights issues. The FTA with Oman is similar to other MEFTA FTAs and has three basic parts: new tariff schedules, broad commitments to open markets and provisions to support those commitments, and protections for labor and the environment. It provides immediate duty-free access for almost all consumer and industrial goods, with special provisions for agriculture and textiles and apparel. Among all U.S. trade partners, Oman ranks 88th for the United States, while the United States ranks third for Oman (after the United Arab Emirates and Japan). U.S.-Oman trade at about $1 billion for 2005 represents 0.04% (four-one hundredths of one percent) of total U.S. trade. In 2005, the most important U.S. imports from Oman were oil and natural gas (75%), and apparel (10%). The most important U.S. exports to Oman were transport equipment (56%), and machinery (24%). The U.S. International Trade Commission (USITC) predicts that the economic effect of the U.S.-Oman FTA is likely to be minimal since trade levels are low; and any increase in U.S. imports of apparel would come at the expense of workers elsewhere in the world, not in the United States. Total U.S. foreign direct investment in Oman was $358 million in 2003, up from $193 million in 2002. Supporters argue that the U.S.-Oman FTA will contribute to bilateral economic growth and trade, generate export opportunities for U.S. companies, farmers, and ranchers, and help create jobs in both countries. Critics argue that labor protections are inadequate for Omani workers, and that the FTA will not help level the playing field for Omani and U.S. workers. Critics also argue that a provision in Annex II of the FTA could obligate the United States to open up landside aspects of its port activities to operation by companies doing business in Oman—activities about which Congress expressed national security concerns during the Dubai Ports World debate. After the President submitted the agreement and the implementing legislation to Congress, relevant committees had 45 days to consider (or not consider) it, and either chamber had 15 more days to vote the legislation up or down without amendment to the agreement itself or the legislation. The Senate passed implementing legislation on June 29, 2006 (S. 3569); the House passed it (H.R. 5684) on July 20; the Senate re-passed it under the House number on September 19, and it became P.L. 109-283 on September 26, 2006. This report will be updated as events warrant.",govreport
"Concerns about hate crimes have become increasingly prominent among policymakers at all levels of government in recent years. A hate crime is defined as ""[a] criminal offense against a person or property motivated in whole or in part by the offender's bias against a race, religion, disability, ethnic/national origin, or sexual orientation."" Congress has recognized the special concerns and effects of hate crimes by enacting several laws such as the Civil Rights Act of 1968, the Hate Crimes Statistics Act of 1990, and the Hate Crimes Sentencing Enhancement Act of 1994. Current federal law permits prosecution of hate crimes committed on the basis of a person's race, color, religion, or national origin when engaging in a federally protected activity. On October 28, 2009, the President signed the Matthew Shepard and James Byrd, Jr. Hate Crimes Prevention Act into law. The law expands the scope of hate crime victims to include gender, sexual orientation, gender identity and disability. In addition, the law broadens the circumstances under which the federal government would assert jurisdiction to prosecute such crimes. In light of the United States Supreme Court decision in United States v. Morrison , there are questions as to what underlying authority Congress may utilize to expand the scope of hate crimes to cover violence based on gender, sexual orientation, gender-identity and/or disability. The commerce clause, section 5 of the 14 th Amendment, and section 2 of the 13 th and 15 th Amendments are the grants of power most often mentioned when discussing Congress's authority to proscribe hate crimes and to enact other forms of civil rights legislation. Article I, Section 8, Clause 4 of the United States Constitution authorizes Congress to ""regulate Commerce with foreign Nations, and among the several States."" There are three categories of activities subject to congressional regulation under the commerce clause. Congress may regulate the use of the channels of interstate commerce, or persons or things in interstate commerce, although the threat may come only from intrastate activities. Finally, Congress may regulate those activities having a substantial relation to interstate commerce (i.e., those activities that substantially affect interstate commerce). The Court narrowed the ""affects interstate commerce"" category with its decision in Morrison by rejecting the argument that Congress may regulate ""non-economic, violent criminal conduct based solely on that conduct's aggregate effect on interstate commerce."" In this case, the Court considered a suit brought by a former student of The Virginia Polytechnic Institute who alleged that two university football players raped her. The defendants and the university argued that the Violence Against Women Act, which allowed victims of gender-motivated violence to bring federal civil suits for damages, exceeded Congress's authority under the commerce clause. The Court agreed with the defendants despite the congressional findings that gender-motivated violence deterred interstate travel, diminished national productivity, and increased medical costs. The Court concluded that upholding the Violence Against Women Act would open the door to federalization of virtually all serious crime as well as family law and other areas of traditional state regulation. The Court said that Congress must distinguish between ""what is truly national and what is truly local,"" and that its power under the commerce clause reaches only the former. As such, it would appear that any attempts to broaden the scope of hate crime legislation tied to findings and the general nature and consequences of hate crimes under the commerce clause are constitutionally suspect. However, it would appear that hate crimes that involve interstate travel continue to be within the commerce clause's reach. While the expansion of hate crime legislation may be suspect under the commerce clause, it may be within the scope of other legislative powers such as the legislative clauses of the 13 th , 14 th , and 15 th Amendments. The legislative clauses of the aforementioned amendments give Congress the power to enforce the Amendments by appropriate legislation. Morrison addresses the breadth of Congress's legislative power under section 5 of the 14 th Amendment. Under section 5 the Congress is vested with ""power to enforce, by appropriate legislation, the [Amendment's] provisions."" However, in Morrison, the Court pointed out that state action, not private, is covered. As such, Section 5 does not authorize legislation ""directed exclusively against the action of private persons, without reference to the laws of the state, or their administration by her officers."" Therefore, hate-driven denials by state officers or those acting under the color of law of equal protection or due process, or the right to vote fall within the scope of the legislative sections of the 14 th and 15 th Amendments. Conversely, it would appear that hate crimes committed by private individuals not acting under the color of law are beyond the scope of amendments. However, Section 2 of the 13 th Amendment may be a more viable option of broadening hate crime legislation. Unlike the 14 th Amendment, the 13 th Amendment proscribes slavery and involuntary servitude without reference to federal, state or private action. The Court has observed that ""the varieties of private conduct that"" Congress ""may make criminally punishable ... extend far beyond the actual imposition of slavery or involuntary servitude ... Congress has the power under the 13 th Amendment rationally to determine what are the badges and incidents of slavery, and the authority to translate that determination into effective legislation."" Section 2 of the 13 th Amendment envisions legislation for the benefit of those who bore the burdens of slavery and their descendants (race and/or color). But, it is unclear as to whether it is an appropriate authority for Congress to expand the range of victims of hate crimes (e.g., religion, national origin, etc.). Two questions come to mind: First, does violence based on bigotry constitute a ""badge and/or incident of slavery?"" Second, if so, must the remedial legislation be limited to the descendants of those for whose principal benefit the amendments were adopted? In a series of cases, the Court has observed that section 2 ""clothes Congress with power to pass all laws necessary and proper for abolishing all badges and incidents of slavery in the United States."" One could argue that due to the Court's decision in Morrison demonstrating a reluctance to expand Congress's use of the commerce clause to address gender-motivated violence, it is unclear as to whether the Court would consider the same violence as a ""badge or incident of slavery"" under the 13 th Amendment. However, the Court has not yet addressed the issue of how broad this congressional authority is. In construing the civil rights statutes enacted contemporaneously with the 13 th , 14 th , and 15 th Amendments, the Court held that Arabs and Jews would have been considered distinct ""races"" at the time the statutes were passed and the Amendments, drafted, debated and ratified. As this case addressed the issue of race, the question of whether religion can be used as a race indicator remains unanswered. In other words, would a Roman-Catholic, Methodist, or Episcopalian be considered a distinct ""race"" in the 19 th century? As such, it is unclear as to whether this would be considered sufficient to embrace all religious discrimination. There are other constitutional limits upon the manner in which Congress and/or states may enact hate crime legislation. The Court has considered constitutional challenges regarding state hate crime statutes under both the 1 st and 6 th Amendments. The 1 st Amendment declares that ""Congress shall make no law ... abridging the freedom of speech."" The 14 th Amendment's due process clause imposes the same restriction upon the states, many of whose constitutions have a comparable limitation on state legislative action. Under the 1 st Amendment, the Court has decided several cases which provide the framework in which states must act to protect the constitutionality of hate crime legislation. Generally, the constitutional distinction boils down to the difference between conduct and speech. If the statute's aim is to punish conduct, then it will generally be upheld; however, if the intent behind the statute is to punish speech, thought, or expression, then courts are more apt to strike down the statute. For example in R.A.V. v. City of St. Paul , the Court struck down a local ordinance as being overbroad and because the regulation was ""content-based,"" proscribing only activities which conveyed messages concerning particular topics. However, in Wisconsin v. Mitchell , the Court found that a Wisconsin statute providing sentence enhancement for bias-motivated crimes did not violate a defendant's 1 st Amendment right as the statute was directed towards the defendant's conduct and not expression. Most recently, in Virginia v. Black , the Court found that the 1 st Amendment permits a state to outlaw cross burnings done with the intent to intimidate because ""burning a cross is a particularly virulent form of intimidation."" However, in a separate ruling, the Court found that the Virginia statute banning all cross burnings is facially invalid as it impermissibly shifts the burden of proof to the defendant to demonstrate that he or she did not intend the cross burning as intimidation. The 6 th Amendment also provides constitutional limits on hate crime statutes. The 6 th Amendment provides defendants a right to a jury trial. In Apprendi v. New Jersey , the Court struck down New Jersey's hate crime law, which allowed a judge to increase a sentence to double the statutory maximum if he or she found, by a preponderance of the evidence, that the defendant acted with a purpose to intimidate an individual or group of individuals because of race. In reversing the lower court's decision, the Court declared that the jury trial and notification clauses of the 6 th Amendment and the due process clauses of the 5 th and 14 th Amendments embody a principle that insists that, except in the case of recidivists, a judge could not on his own findings sentence a criminal defendant to a term of imprisonment greater than the statutory maximum assigned for which he had been convicted by the jury. In other words, ""other than the fact of a prior conviction, any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be submitted to a jury, and proved beyond a reasonable doubt.""","Federal and state legislators recognize the special concerns and effects of hate crimes. Although there is some federal legislation in place, many states have enacted some form of ethnic intimidation law or bias-motivated sentence-enhancement factors in attempts to curtail hate crimes. Several United States Supreme Court cases provide the framework in which states must legislate to ensure the constitutionality of hate crime legislation. After these landmark cases, the real questions for states involve identifying permissible ways to curtail hate crimes without infringing on any constitutionally protected rights. On the federal level, in light of U.S. Supreme Court cases, the question remains as to what extent Congress can broaden the classes of individuals subject to hate crime legislation. This report discusses constitutional considerations facing both individual states and Congress in enacting hate crime legislation. It will be updated as events warrant.",govreport
"T he exchange rate policies of some East Asian nations—in particular, China, Japan, and South Korea—have been sources of tension with the United States in the past and remain so in the present. Some analysts and Members of Congress maintain that some countries have intentionally kept their currencies undervalued for a period of time in order to keep their exports price competitive in global markets. Some argue that these exchange rate policies constitute ""currency manipulation"" and violate Article IV, Section 1(iii) of the Articles of Agreement of the International Monetary Fund , which stipulates that ""each member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."" The Trade Facilitation and Trade Enforcement Act of 2015 ( P.L. 114-125 ) requires the Department of the Treasury to ""undertake an enhanced analysis of exchange rates and externally‐oriented policies for each major trading partner that has (1) a significant bilateral trade surplus with the United States, (2) a material current account surplus, and (3) engaged in persistent one‐sided intervention in the foreign exchange market."" In its semiannual report to Congress released in April 2017, ""Treasury has found in this Report that no major trading partner met all three criteria."" Treasury did, however, identify six major trading partners to include on its ""Monitoring List"": China, Germany, Japan, South Korea, Switzerland, and Taiwan. Four of the six trading partners are East Asian economies. This report examines the de facto foreign exchange rate policies adopted by the monetary authorities of East Asian governments. At one extreme, Hong Kong has maintained a ""linked"" exchange rate with the U.S. dollar since 1983, under which the Hong Kong Monetary Authority (HKMA) is required to intervene to keep the exchange rate between 7.75 and 7.85 Hong Kong dollars (HKD) to the U.S. dollar (USD). Such an arrangement is often referred to as a ""fixed"" or ""pegged"" exchange rate. At the other extreme, Japan, the Philippines, and South Korea have reportedly allowed their currencies to float freely in foreign exchange (forex) markets over the last few years—an exchange rate arrangement often referred to as a ""free float."" However, all three nations—like the United States—have intervened in international currency markets to influence fluctuations in the exchange rate. Most of East Asia's governments, however, have chosen exchange rate policies between these two extremes in the form of a ""managed float."" There are a number of different types of exchange rate policies that a nation may adopt, depending on what it perceives to be in its best interest economically and/or politically. At one extreme, a country may decide to allow the value of its currency to fluctuate relative to other major currencies in international foreign exchange (forex) markets—a policy commonly referred to as a ""free float."" One advantage of a ""free float"" policy over other exchange rate policies is that it permits the nation more autonomy with its domestic monetary policy. However, disadvantages of a ""free float"" policy include greater exchange-rate risk for international transactions, potentially destabilizing balance sheet effects, and possible rapid shifts in capital flows. At the other extreme, a nation may decide to fix the value of its currency relative to another currency or a bundle of currencies—usually referred to as a ""pegged"" exchange rate policy. Pegged exchange rate policies can take several forms. The pegged exchange rate may be set by law, without special provisions to defend the value of the currency. Alternatively, a nation may create a ""currency board""—a monetary authority that holds sufficient reserves to convert the domestic currency into the designated reserve currency at a predetermined exchange rate. The currency board utilizes those reserves to intervene in international forex markets to maintain the fixed exchange rate. For example, Hong Kong's three designated currency-issuing banks—The Bank of China, HSBC, and Standard Chartered Bank—must deposit with the Hong Kong Monetary Authority sufficient U.S.-dollar-denominated reserves to cover their issuance of Hong Kong dollars at the designated exchange rate of HKD 7.80 = USD 1.00. Some economies that are heavily dependent on trade—such as Hong Kong and Singapore—perceive extensive currency volatility as a burden to trading enterprises, and manage their currencies to avoid it. An advantage of a pegged exchange rate is that it virtually eliminates exchange-rate risk. Disadvantages are the loss of autonomy in domestic monetary policy, potentially rapid changes in domestic prices (including fixed asset values), and exposure to speculative attacks on the pegged exchange rate. A third common exchange rate policy is a ""managed float."" A nation that adopts a ""managed float"" allows the value of its domestic currency to fluctuate in international forex markets until certain designated economic indicators reach critical levels. In some cases, the country may designate a band around a determined exchange rate, and intervene in international forex markets if its currency hits the upper or lower value limits. One special form of a managed float is a ""crawling peg,"" in which the nation allows its currency gradually to appreciate or depreciate in value against one or more other currencies over time. China initiated a ""crawling peg"" policy on July 21, 2005, which it maintained until the summer of 2008, a period in which the renminbi appreciated 21% against the U.S. dollar. Other forms of managed float policies do not rely on the exchange rate but on other economic factors such as the trade balance, current account balance, inflation, and overall economic growth. Contemporary economic theory asserts that a nation cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. If a nation wishes to peg its currency and allow free capital movement (for example, Hong Kong) it must tie its monetary policy to that of the reserve currency nation (for Hong Kong, the United States). Many nations with pegged exchange rates choose to restrict the movement of capital to allow them greater autonomy in their monetary policies (such as anti-inflation measures, interest rate adjustments, or regulating the money supply). Table 1 lists the current de facto exchange rate policies of East Asia according to the International Monetary Fund (IMF) as of April 30, 2016. According to the IMF, only Japan allows its currency, the yen, to float freely on international foreign exchange (forex) markets. Five nations allow their currencies to float, but they reserve the right to intervene in forex markets to maintain stability. Seven countries manage their exchange rates according to certain economic objectives, such as domestic price stability or moderate swings in the forex rate relative to one or more currencies. Brunei and Hong Kong operate a currency board system that effectively pegs their exchange rates. The Hong Kong dollar is pegged to the U.S. dollar; the Brunei dollar is pegged to the Singaporean dollar. Categorizing a government's exchange rate policy can be complicated, particularly during periods of financial turbulence, as was seen, for example, during the global financial crisis of 2008. For example, according to South Korea's central bank, the Bank of Korea, the nation's official exchange rate policy has been a free floating system since December 1997. However, it was reported that the South Korean government sold about $1 billion for won on March 18, 2008, to stop a ""disorderly decline"" in the value of Korea's currency (see Figure 1 ). There were also reports that Korea sold more dollars for won in early April 2008. At the time, some forex analysts claimed that the new South Korean government had adopted a de facto pegged exchange rate policy of holding the exchange rate between the won and the U.S. dollar at 975-1,000 to 1. The value of the won declined further to nearly 1,500 won to the U.S. dollar in the spring of 2009, before gradually recovering over the next four years to about 1,100 won to the U.S dollar. Allegations of South Korea's intervention into forex markets reappeared in 2015 and 2016, when the won experienced another period of sustained depreciation against the U.S. dollar. The U.S. Treasury's Report to Congress on International Economic and Exchange Rate Policies , released on October 19, 2015, indicated that South Korea appeared to have attempted to resist the appreciation of the won in early 2015, only to switch to efforts to prevent the won's depreciation in July and August. In February 2016, the Bank of Korea stated that the recent declines in the value of the won were ""excessive"" and that it was concerned about possible ""herd behavior"" in forex markets, contributing to speculation that Bank of Korea would intervene in forex markets to support the won. Claims that South Korea was intervening in forex markets resurfaced in early 2017; the South Korean government sent a letter to the Financial Times , denying claims that it was managing exchange rates to prevent the won's appreciation. One South Korean think tank conjectured (incorrectly) that the Department of the Treasury might identify South Korea as a currency manipulator in its April 2017 report, given President Trump's statements about currency manipulation and its alleged negative effects on the U.S. economy. Another source of complication arises when there is a seeming discrepancy between the official exchange rate policy and observed forex market trends. For example, China officially maintained a ""crawling peg"" policy prior to the global financial crisis that allowed its currency—the renminbi—to adjust in value with respect to an undisclosed bundle of currencies within a specified range each day. In theory, this allowed the renminbi to appreciate or depreciate in value gradually over time, depending on market forces. After the global financial crisis began in late 2007, however, the renminbi was comparatively stable in value relative to the U.S. dollar from July 2008 to May 2010 (see Figure 1 ). Initially, this led some analysts to assert that China had abandoned the crawling peg in favor of a pegged exchange rate. Other analysts maintained that the stability of the renminbi with respect to the U.S. dollar was an artifact of the basket of currencies being used by China. Because some major currencies strengthened against the U.S. dollar while others weakened, the weighted average used by China in determining the band for the crawling peg has resulted in a relatively unchanged value when compared to the U.S. dollar. On June 19, 2010, China's central bank, the People's Bank of China, announced it would ""proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility,"" implying that it had been intentionally maintaining a stable exchange rate during the global economic downturn. Starting from the summer of 2010, the RMB once again gradually strengthened against the U.S. dollar to around 6.13 yuan to the U.S. dollar as of February 2015. Since then, the renminbi has weakened against the dollar. As of March 31, 2017, the exchange rate was 6.89 yuan = 1.0 U.S. dollar. Japan's yen has undergone major shifts in value relative to the U.S. dollar over the past 10 years, ranging from a low of 125.35 yen to the U.S. dollar in June 2015 to a high of 76.14 yen to the U.S. dollar in February 2012 (see Figure 1 ). The fluctuations in the value of the yen have also shown some major shifts, such as its strong appreciations in late 2008 and early 2016, or its major depreciations in the winter of 2012-2013, the autumn of 2014, and the end of 2016. Analysts differ on the causes for the shifting value of the Japanese yen. Financial news reports during that time generally maintained that the fluctuations in the value of the yen reflected market confidence (or lack thereof) in Japan's economy and the Bank of Japan's monetary policy. According to these accounts, the weakening of the yen is the result of expansionary fiscal and monetary policies, part of the government's program to stimulate economic growth in Japan (""Abenomics""). However, some U.S. business leaders assert that the decline in the value of the yen in 2015 was the result of Japanese government intervention in foreign exchange markets. The Abe government and the Bank of Japan repeatedly denied claims that they were actively attempting to lower the value of the yen relative to the U.S. dollar, asserting their economic policies are designed to stimulate growth and end price deflation. The last confirmed time Japan intervened in foreign exchange markets was in 2011. There are indications that some East Asian monetary authorities monitor the region's exchange rates and attempt to keep the relative value of their currencies in line with the value of selected currencies in the region. These ""competitive"" adjustments in exchange rates are allegedly made to maintain the competitiveness of a nation's exports on global markets. Some observers have speculated that competitive adjustments are particularly an issue in Southeast Asia, especially countries with closer economic ties to China. For example, one scholar noted in 2007 that, ""Countries that trade with China and compete with China in exports to the third market are keen not to allow too much appreciation of their own currencies vis-à-vis the Chinese RMB [renminbi]."" The scholar, Taketoshi Ito, also speculated, ""China most likely is more willing to accept RMB appreciation if neighboring countries, in addition [South] Korea and Thailand, allow faster appreciation."" Trends in selected Southeast Asian exchange rates over the last 10 years have led some analysts to surmise that a ""renminbi bloc"" emerged in 2007 and early 2008, and reemerged between 2011 and 2013 (see Figure 2 ). In 2007 and until March 2008, the currencies of Malaysia, Singapore, and Thailand generally followed the appreciation of China's RMB against the U.S. dollar. As the 2008 global financial crisis spread in 2008, first the Thai bhat, then the Malaysian ringgit, and finally the Singaporean dollar began to weaken relative to the U.S. dollar, while China's RMB remained relatively fixed in value. Starting in late 2010 and continuing until the spring of 2013, the currencies of Indonesia, Malaysia, the Philippines, Singapore, and Thailand seemingly once again followed the gradual strengthening of China's RMB against the U.S. dollar. Since then, the Southeast Asian currencies have all weakened relative to the U.S. dollar, while the renminbi continued to strengthen until August 2015. The more recent divergence in exchange rates could be interpreted as a weakening of what some analysts previously had suggested were signs of an emerging ""renminbi bloc."" In addition to the apparent similar movements in the value of their currencies relative to China's renminbi, there is other anecdotal evidence consistent with the existence of a ""renminbi bloc"" in Southeast Asia, at least for a period of time. According to International Monetary Fund trade data, China has emerged as the largest trading partner for many Asian nations, including Indonesia, Malaysia, the Philippines, Singapore, and Thailand. China has also been actively promoting the use of the renminbi to settle trade payments, as well as to arrange currency swap agreements. While the apparent weakening in 2008 of what some analysts had suggested was an emerging ""renminbi bloc"" may have been attributable to the global financial crisis, the more pronounced divergence of exchange rates in 2013 and thereafter is not as readily explained. More recently, some observers speculate that slower economic growth in China and tightening monetary policy in the United States led to slower growth for the Southeast Asian economies and applied downward pressure on their currencies. Meanwhile, China's RMB continued its gradual appreciation relative to the U.S. dollar until August 2015. For nearly 30 years, the Department of the Treasury has been required to provide biannual reports to Congress on the exchange rate policies of foreign countries. The Omnibus Trade and Competitiveness Act of 1988 ( P.L. 100-418 ) required the Secretary of the Treasury to analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. The act also stipulated that the Secretary of the Treasury shall submit to the Committee on Banking, Finance and Urban Affairs of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate, on or before October 15 of each year, a written report on international economic policy, including exchange rate policy. The Secretary shall provide a written update of developments six months after the initial report. The first report was provided to Congress in October 1988. Since the act was enacted, the Department of the Treasury has identified South Korea and Taiwan in 1988 and China in 1992 for manipulating their currencies under the Trade Act's terms. In February 2016, Congress passed the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA; P.L. 114-125 ), which, in addition to other provisions, requires the Secretary of the Treasury to ""submit to the appropriate committees of Congress a report on the macroeconomic and currency exchange rate policies of each country that is a major trading partner of the United States."" These reports are due every 180 days; the ""appropriate committees"" are the Committee on Banking, Housing, and Urban Affairs and the Committee on Finance of the Senate; and the Committee on Financial Services and the Committee on Ways and Means of the House of Representatives. The TFTEA also requires the report contain an enhanced analysis of macroeconomic and exchange rate policies for each country that is a major trading partner of the United States that has— (I) a significant bilateral trade surplus with the United States; (II) a material current account surplus; and (III) engaged in persistent one-sided intervention in the foreign exchange market. The latest report was released on April 14, 2017. According to its analysis, ""Treasury has found in this Report that no major trading partner met all three criteria for the current reporting period [August-December 2016]."" The report did, however, place six major trading partners—China, Germany, Japan, South Korea, Switzerland, and Taiwan—on a ""Monitoring List"" of ""major trading partners that merit close attention to their currency practices."" Four of the six major trading partners are in East Asia. Among the report's observations on these four major trading partners were the following: China —""China has a long track record of engaging in persistent, large-scale, one-way foreign exchange intervention, doing so for roughly a decade to resist renminbi (RMB) appreciation even as its trade and current surpluses soared."" The report, however, also noted that China has allowed the renminbi to appreciate in recent years, and ""China's recent intervention in foreign exchange markets has sought to prevent a rapid RMB depreciation [emphasis in original text] that would have negative consequences for the United States, China, and the global economy."" Japan —""Japan has a significant bilateral trade surplus with the United States, with a goods surplus of $69 billion [in 2016]. Japan has not intervened in the foreign exchange market, however, in five years."" South Korea —""Korea has a track record of asymmetric foreign exchange interventions, highlighting the urgency of authorities durably limiting foreign exchange intervention only to circumstances of disorderly exchange market conditions and making foreign exchange operations more transparent. In its last analysis of the won, the IMF maintained its assessment that the won is undervalued."" Taiwan —""Taiwan has a track record of asymmetric foreign exchange interventions.… Treasury urges Taiwan's authorities to demonstrate a durable shift to a policy of limiting foreign exchange interventions to only exceptional circumstances of disorderly market conditions, and to increase the transparency of foreign exchange market intervention and reserve holdings."" While U.S. policy has generally supported the adoption of ""free float"" exchange rate policies, many East Asian governments consider a ""managed float"" exchange rate policy more conducive to their overall economic goals and objectives. In part, East Asian governments may be resistant to a ""free float"" policy because of the commonly held view in Asia that the economies with more liberal exchange rate policies suffered more during the 1997-1998 Asian financial crisis than the economies that moved more forcefully to maintain pegged or managed exchange rates. As a result, there may be skepticism about U.S. recommendations for adoption of ""free float"" exchange rate policies. In addition, it is uncertain if the adoption of ""free float"" exchange rate policies by more monetary authorities in East Asia would significantly reduce the U.S. trade deficits with countries in the region. The United States generally runs trade deficits with East Asia. Among economists, there is no consensus that the resulting appreciation of East Asian currencies against the U.S. dollar would either significantly increase overall U.S. exports or reduce U.S. imports. However, for some price-sensitive industries where U.S. companies are competitive, the appreciation of a competing nation's currency may stimulate U.S. export growth and/or a decline in U.S. imports. The debate over foreign exchange rate policies of other nations and its impact on the U.S. economy continues in the 115 th Congress. The Currency Reform for Fair Trade Act ( H.R. 2039 ) would amend the Tariff Act of 1930 (19 U.S.C. chapter 4) to permit the imposition of countervailing duties on the imports of countries whose currency is determined to be ""fundamentally undervalued."" The act also stipulates that a currency is to be determined undervalued if 1. The government of the country ""engages in protracted, large-scale intervention in one or more foreign exchange markets""; 2. The real effective exchange rate of the currency is undervalued by at least 5%; 3. The country has experienced ""significant and persistent global current account surpluses""; and 4. The foreign asset reserves held by the government of the country exceed the amount necessary to repay the government's debt obligations for the next 12 months; 20% of the country's money supply; and t he value of the country's imports for the previous four months. ","According to the International Monetary Fund (IMF), monetary authorities in East Asia (including Southeast Asia) have adopted a variety of foreign exchange rate policies, varying from Hong Kong's currency board system which links the Hong Kong dollar to the U.S. dollar, to the ""independently floating"" exchange rates of Japan, the Philippines, and South Korea. Most Asian monetary authorities have adopted ""managed floats"" that allow their currency to fluctuate within a limited range over time as part of a larger economic policy. Regardless of their exchange rate policies, monetary authorities on occasion may intervene in foreign exchange (forex) markets in an effort to dampen destabilizing fluctuations in the value of their currencies. Legislation has been introduced during past Congresses designed to pressure nations seen as ""currency manipulators"" to allow their currencies to appreciate against the U.S. dollar. The Trade Facilitation and Trade Enforcement Act of 2015 (P.L. 114-125) requires the Secretary of the Treasury to provide Congress every 180 days with ""enhanced analysis of macroeconomic and exchange rate policies"" for each major trading partner that has a significant trade surplus with the United States, a current account surplus, and ""engaged in persistent one-sided intervention in the foreign exchange market."" In its latest report, Treasury determined that ""no major trading partner met all three criteria for the current reporting period."" Treasury did place six major trading partners—China, Germany, Japan, South Korea, Switzerland, and Taiwan—on its ""Monitoring List."" Four of those six major trading partners are in East Asia. In the 115th Congress, the Currency Reform for Fair Trade Act (H.R. 2039) would allow the imposition of countervailing duties on goods imported from a foreign country whose currency is determined to be ""fundamentally undervalued"" in accordance with the provisions of the act. Most East Asian monetary authorities consider a ""managed float"" exchange rate policy conducive to their economic goals and objectives. A ""managed float"" can reduce exchange rate risks, which can stimulate international trade, foster domestic economic growth, and lower inflationary pressures. It can also lead to serious macroeconomic imbalances if the currency is, or becomes, severely overvalued or undervalued. A managed float usually means that the nation has to impose restrictions on the flow of financial capital or lose some autonomy in its monetary policy. Over the last 10 years, the governments of East Asia have differed in their response to the fluctuations in the value of the U.S. dollar. China, for example, allowed its currency, the renminbi, gradually to appreciate against the U.S. dollar between 2007 and 2015, and has been actively intervening in foreign exchange (forex) markets since then to prevent the depreciation of its currency. Indonesia, however, has allowed its currency, the rupiah, to depreciate in value relative to the U.S. dollar over the last decade. Between 2011 and 2013, some Southeast Asia nations—such as Malaysia, the Philippines, Singapore, and Thailand—appeared to have adopted exchange rates regimes to keep their currencies relatively stable with respect to China's renminbi. This supposed ""renminbi bloc"" may have emerged because those nations' economic and trade ties were increasingly with China. In addition, China was actively promoting the use of its currency for trade settlements, particularly in Asia. Exchange rate patterns for the last four years, however, have led some analysts to suggest the ""renminbi bloc"" may have weakened. This report will be updated as events warrant.",govreport
"In recent years, congressional attention has been drawn to the roles and responsibilities of U.S. ambassadors who serve as Chiefs of Mission in U.S. embassies abroad. The death of Ambassador Christopher Stevens in Benghazi, Libya, in September 2012 highlighted the dangers that ambassadors may encounter as the front-line face of U.S. diplomacy, and the availability of resources, leadership, and communication relative to those dangers. The ongoing debate on interagency reform for missions abroad stresses the need to improve coordination among all U.S. agencies, a key responsibility of U.S. ambassadors. The State Department and United States Agency for International Development (USAID) 2010 Quadrennial Diplomacy and Development Review (QDDR) emphasized the need to equip ambassadors to better perform that role. In addition to these specific concerns, congressional interest stems from Congress's part in selecting U.S. ambassadors (as the U.S. Senate advises and consents on their appointment), providing the resources they need to accomplish their missions, and overseeing their conduct of those missions. This report addresses the role and effectiveness of U.S. ambassadors and others who serve as a Chief of Mission (COM) abroad, particularly their responsibility for coordinating interagency activities and their control over U.S. forces operating in their countries of assignment. After a background section on the history of COM roles and a section on the sources of COM legal authority, this report addresses four commonly asked questions regarding the scope and exercise of COM authority. It concludes with a discussion of two prominent congressional concerns: (1) how effective is COM authority in practice? and (2) how might the exercise of COM authority be improved? It will be updated as warranted. ""Chief of Mission,"" or COM, is the title conferred on the principal officer in charge of each U.S. diplomatic mission to a foreign country, foreign territory, or international organization. Usually the term refers to the U.S. ambassadors who lead U.S. embassies abroad, but the term also is used for ambassadors who head other official U.S. missions and to other diplomatic personnel who may step in when no ambassador is present. The U.S. Constitution authorizes the President to appoint ambassadors with the advice and consent of the Senate, that is to say, subject to Senate confirmation. In circumstances where no presidentially appointed ambassador is currently serving at a U.S. mission abroad, legislation further authorizes the President to appoint a career U.S. foreign service officer as a chargé d'affaires or ""otherwise as the head of a mission ... for such period as the public interest may require."" An ambassador or other foreign service official may hold the COM position within a given U.S. mission abroad. Appointed by the President, each COM serves as the President's personal representative, leading diplomatic efforts for a particular mission or in the country of assignment under the general supervision of the Secretary of State and with the support of the regional assistant secretary of state. The role of the COM has expanded considerably since World War II. With the postwar expansion of U.S. foreign assistance around the world, COMs assigned to head U.S. embassies or other country-based diplomatic missions abroad have been charged with responsibility for overseeing nearly all U.S. government activities in their country of assignment, with the primary exception of military operations. Most often, they exercise this authority through their leadership of the embassy's ""country team,"" the membership of which includes the chief representative of each U.S. government agency undertaking activities in a host country or other mission. The State Department/USAID 2010 Quadrennial Diplomacy and Development Review (QDDR) casts ambassadors as chief executive officers or ""CEOs"" of multi-agency missions, not only conducting traditional diplomacy, but also leading and overseeing civilians from multiple federal agencies in other work. The QDDR highlights the key role of country teams and ambassadors in the conduct of foreign policy and assistance, and sets forth ways in which the Obama Administration would try to improve the knowledge and skills of COMs and their ability to lead country teams. Civilian agencies ""possess some of the world's leading expertise on issues increasingly central to our diplomacy and development work,"" the QDDR states. ""The United States benefits when government agencies can combine their expertise overseas as part of an integrated country strategy,"" when ""implemented under Chief of Mission authority, and when those agencies build lasting working relationships with their foreign counterparts."" At the time of the QDDR's release, then-Secretary of State Clinton also announced that Chiefs of Mission were to play a role in integrating country-level strategic plans and budgets. The authorities and responsibilities of COMs are explained primarily in the Foreign Service Act of 1980, as amended (FSA 1980; P.L. 96-465 ). (This legislation also explains the responsibility of all U.S. government officials operating under a U.S. mission abroad to report to the COM and abide by COM directives.) Section 207 of FSA 1980 serves as a codification in legislation of many of the provisions in previous executive orders setting out and developing COM authority as U.S. government activities abroad increased throughout the latter half of the 20 th century. COM authority is also shaped by executive branch directives, which include executive orders and other presidential directives and State Department regulations, some of which provide more extensive authority than FSA 1980. According to State Department regulations, COM authority derives originally from the President's general constitutional powers in foreign affairs. Because of this constitutional basis for COM authority, according to the State Department, the President's letter of instruction (see "" Letter of Instruction ,"" below) providing greater detail to COMs is of greater significance in determining a COM's authority than the pertinent legislative provisions relating to such authority. Section 207 of the FSA 1980 (22 U.S.C. §3927) sets out the three main components of COM authority: (1) the COM's responsibilities, (2) the COM's authority over the personnel stationed at the embassy and in the country of assignment, and (3) the obligations of U.S. government personnel and agencies to that COM. Each component is outlined below. COM Responsibilities . Section 207(a)(1) of FSA 1980 states that, under the direction of the President, a COM ""shall have full responsibility for the direction, coordination, and supervision of all Government executive branch employees in that country,"" except for Voice of America (VOA) correspondents on official assignment and employees under the command of a U.S. Geographic Combatant Commander (GCC). (Recent Presidential Letters of Instruction exclude personnel on the staff of an international organization, but do not reference VOA correspondents, see below.) Pursuant to Section 207(a)(2), the COM is also responsible for keeping "" fully and currently informed with respect to all activities and operations of the Government within that country, and shall insure that all Government executive branch employees in that country (except for Voice of America correspondents on official assignment and employees under the command of a United States area military commander) comply fully with all applicable directives of the chief of mission."" A principal duty of each U.S. Chief of Mission in a foreign country, under Section 207(c) is ""the promotion of United States goods and services for export to such country."" COM Authority o ver Personnel . Section 207(b) of FSA 1980 states that any executive branch agency with employees in a foreign country ""shall insure that all of its employees in that country"" (except for VOA correspondents on official assignment and those under the command of a GCC) ""comply fully with all applicable directives"" of the COM. Obligation to Keep COM Fully Informed. Subsection (b) also provides that any executive branch agency with employees in a foreign country ""shall keep the chief of mission to that country fully and currently informed with respect to all activities and operations of its employees in that country…."" Section 207 of FSA 1980 limits COM authority to coordinate and supervise U.S. government activities in a host country to executive branch agencies. In general, representatives of the judicial and legislative branches, including Members of Congress and their staffs, are not subject to the same coordinating and supervisory authorities of the COM. In addition to and in accordance with the relevant legislative mandates, COM authority derives from an array of executive branch orders and directives, explained below. Presidents provide their primary directives in a Letter of Instruction to each COM, setting out each COM's role and responsibilities as the President's personal representative at each U.S. mission abroad. Although the State Department stresses the distinction between the constitutional and legislative sources of COM authority, the Letter of Instruction and Section 207 of FSA 1980 contain similar language on the central points of COM authority. They do not contradict each other in their explanation of responsibilities of the COM and the obligations of other U.S. agency representatives to adhere to the COM's directives in each host country. One difference with the FSA 1980 is the personnel excluded from COM authority. The FSA 1980 excludes VOA correspondents on assignment and personnel under the command of a GCC, as mentioned above. The template of an Obama Administration Letter of Instruction excludes personnel on the staff of an international organization. Another difference is that Letters of Instruction (as indicated by templates of presidential Letters of Instruction of two administrations) state that ambassadors have the right to see ""all communications to and from Mission elements,"" except those exempted by law or executive decision. Executive orders have gradually expanded the authority and responsibilities of COMs. The requirement that COMs coordinate all U.S. government activities in a host country and be kept informed of all activities by U.S. government personnel dates back at least to the early years after World War II, when concerns surfaced about the management of U.S. humanitarian and security assistance to various Western European countries. In 1952, President Harry S. Truman issued Executive Order 10338, which directed the Chief of Mission to coordinate the activities carried out by representatives of U.S. government agencies under the Mutual Security Act of 1951. This included the activities of chiefs of economic missions, military assistance, advisory groups, and other representatives of U.S. government agencies. The COM was also tasked with responsibility ""for assuring the unified development and execution of the said program in each country."" To that end, the representatives of U.S. agencies covered by the order were directed to ""keep the respective Chief of United States Diplomatic Missions and each other fully and currently informed on all matters, including prospective plans, recommendations, and actions relating to the programs under the Act…."" Subsequent executive orders conferred on each COM to a country broader authority over U.S. government agencies' activities in that country, not specifically including or excluding any agency or type of activity. Section 201 of Executive Order 10893 of 1960, which remains in force, states, Sec. 201. Functions of Chiefs of United States Diplomatic Missions . The several Chiefs of the United States Diplomatic Missions in foreign countries, as the representatives of the President and acting on his behalf, shall have and exercise, to the extent permitted by law and in accordance with such instructions as the President may from time to time promulgate, affirmative responsibility for the coordination and supervision over the carrying out by agencies of their functions in the respective countries. National Security Decision Directive 38 of June 1982 (NSDD-38) provides that a COM's approval is required before executive agencies may change the size, composition, or mandate of the staff at a diplomatic post. NSDD-38 states that the COM shall make such decisions through a process determined by the President. Current legislation requires the Secretary of State to direct each COM to review at least every five years ""every staff element under chief of mission authority, including staff from other departments or agencies"" and recommend approval or disapproval of each element pursuant to the ""NSDD-38 process."" NSDD-38 disputes concerning staffing between the COM and executive agency representatives are resolved by the decision of the COM or of the President. Agreement concerning mission structure and individual agency presence and activities in a host country are often set out in a memorandum of understanding (MOU) executed by a COM and a U.S. government agency operating in the mission. In General. The Foreign Affairs Manual (FAM) and the Foreign Affairs Handbook (FAH) provide further detail on COM authority based on legislative and executive directives. Many pertinent provisions relate to the COM's overall authority over a given U.S. diplomatic mission abroad, stating that the COM ""determines the precise structure of a mission, in light of local circumstances and the specific nature and scope of function assigned to the post."" As per the President's Letters of Instruction, FSA 1980, and E.O. 10893, each COM is charged with integrating all mission activities at all posts within a host country, and attachés from other executive branch agencies, including Department of Defense attachés and other military personnel attached to a U.S. Embassy, perform their duties under the direction of the COM. The FAM also specifies that while the COM is the President's personal representative in a foreign country or international organization, the Secretary of State supervises the COM generally, and the pertinent regional Assistant Secretary of State is tasked with providing support to the COM. Security. As explained above, COM authority over coordination and supervision of U.S. government activities in a host country extends only to the executive branch, and not generally to the legislative and judicial branches. The Secretary of State, however, is tasked with ensuring the security of all U.S. government personnel, including all branches of the federal government, pursuant to the Omnibus Diplomatic Security and Antiterrorism Act of 1986, as amended ( P.L. 99-399 ; 22 U.S.C. §4801 et seq.). According to the FAH, the COM is also responsible for the security of personnel ""by extension,"" except for VOA personnel and employees under the command of a GCC. The State Department and DOD in 1997 executed a comprehensive memorandum of understanding on the security of DOD personnel in foreign countries. Supplementary memoranda of agreement (MOAs) must be executed between the State Department and DOD in each country to carefully delineate between personnel under the security protection of the COM and the GCC. VOA personnel are required to inform the COM of their presence in a host country and receive a security briefing, but are otherwise treated like other U.S. journalists, due to journalistic independence requirements in U.S. law. Personnel. The NSDD-38 process ensures that the COM is informed of, reviews, and approves all changes in the size, composition, and mandate of each executive agency operating in a host country. The FAM and the FAH provide additional information concerning staffing decisions for each mission abroad. The COM must approve entry into a host country by all personnel, including personnel assigned to temporary duty in a country. The COM maintains supervisory authority over all personnel, including full-time, non-full-time, non-permanent, and non-direct-hire personnel operating in a foreign country or at a U.S. mission abroad. Decisions as to additions or subtractions of such personnel are also subject to COM approval under the NSDD-38 process. In general, contractors working for commercial firms engaged by executive agencies in a host country are not under COM coordinating and supervisory authority, but any such engagement that would change the composition of an agency's presence in a host country is subject to COM approval. A number of questions are often raised regarding the scope and exercise of COM authority. This section responds to four of the most common questions: 1. Does COM authority extend to Department of Defense (DOD) personnel? 2. Who exercises COM authority in a country without a U.S. embassy or U.S. diplomatic presence? 3. Is COM authority in effect in countries where the United States is engaging in hostilities? 4. What is the COM's authority over Members of Congress, legislative branch employees, and congressional foreign travel? COM authority extends to all DOD personnel in a country except those under the command of a GCC. An ambassador is also charged with responsibility for the activities of in-country military personnel by a variety of statutes, presidential directives, and executive branch arrangements, as well as the President's Letter of Instruction. The following is an overview of key aspects of the COM relationship with GCCs and military personnel, but it is not exhaustive. In practice, this relationship may vary because of personalities, special circumstances, or different perceptions of COM responsibilities. As mentioned earlier in this report, Section 207 of the FSA 1980 place under COM authority, that is to say, subject to a COM's ""direction, coordination, and supervision,"" all executive branch personnel, with specified exclusions, including those under the command of an ""area military commander"" (now referred to as a geographic combatant commander). This FSA 1980 exclusion is reiterated in the Presidential Letter of Instruction that each ambassador receives when assigned to a post. Thus, COM authority extends to military personnel such as Marine security guards, the Defense Attaché, personnel serving in Security Cooperation Organizations (SCOs) in-country who plan and implement U.S. military assistance programs under specified provisions of the FAA and under the Arms Export Control Act (AECA), and a number of other military personnel. The FSA 1980 COM authority is augmented by other provisions of law that create overlapping or additional COM responsibilities regarding certain military personnel stationed abroad. The Foreign Assistance Act of 1961, as amended (FAA 1961), places under COM ""direction and supervision"" military personnel serving in a SCO. These personnel, as well as other military personnel stationed in-country, including Marine security guards, are subject to NSDD 38 of June 1982, mentioned earlier, which requires the COM's approval before executive agencies may change the size, composition, or mandate of their staff at a diplomatic post. In addition, the FAA 1961 charges the COM with responsibility for seeing that the recommendations of DOD representatives ""pertaining to military assistance (including civic action) and military education and training programs are coordinated with political and economic considerations, and his comments shall accompany such recommendations if he so desires."" Special COM authorities are conveyed by presidential order or directive. For instance, National Security Policy Directive 36 (NSPD-36) of May 11, 2004, charged the Secretary of State with responsibility for ""the continuous supervision and general direction"" of all assistance for Iraq. At the same time, it charged the commander of the U.S. Central Command (USCENTCOM) with responsibility for directing ""all U.S. government efforts"" and coordination of ""international efforts in support of organizing, equipping, and training all Iraqi security forces."" NSPD-36 mandated that the Commander was to exercise his responsibility ""with the policy guidance of the Chief of Mission."" It also instructed the Commander and the COM to ""ensure the closest cooperation and mutual support"" in all activities. COMs have no authority over GCCs, who are responsible by law to the President and Secretary of Defense, but the COM and the GCC are expected to maintain a cooperative relationship. The FSA 1980 requirement that executive branch agencies with employees in a foreign country keep the COM ""fully and currently informed with respect to all activities and operations of its employees in that country,"" applies to the GCC. In addition, templates of presidential Letters of Instruction of two administrations indicate that presidents expect such communication to flow both ways and differences of opinion to be reported to Washington. ""You [the Ambassador] and the area military commander must keep each other currently and fully informed and cooperate on all matters of mutual interest,"" according to the more recent template. ""Any difference that cannot be resolved in the field will be reported to the Secretary of State and the Secretary of Defense."" As directed by legislation and presidential directive, the Secretary of State, and by extension COMs, are responsible for the security of all U.S. government personnel on official duty abroad and their accompanying dependents, except for personnel under the command of a U.S. area military commander and Voice of America correspondents on official assignment. By definition, this includes DOD personnel serving under COM authority. However, the law allows the Secretary of State to delegate operational responsibilities to the heads of agencies. Thus, responsibility for DOD personnel under COM authority may be delegated to the GCC if so negotiated in a memorandum of agreement (MOA) between the GCC and the COM. A COM's relationship to Special Operations Forces (SOF) in-country depends on the activity being performed and under whose command they are operating. When operating abroad, SOF will generally be under the command of the GCC. These personnel are performing activities that the GCC is explicitly given authority to oversee. Like other GCC personnel, SOF forces deployed under the GCC are not subject to COM authority. However, SOF forces may operate under COM authority when performing certain functions or conducting certain activities. In addition, in some cases, the Special Operations Command (SOCOM) commander, who is not a GCC, may exercise command of a special operations mission at the direction of the President or Secretary of Defense. These are limited circumstances authorized by the President where SOF personnel are deployed outside of COM or GCC authority. In such cases the relationship with the COM would generally be clarified in the President's authorizing directive. The COM's position as the eyes, ears, and hands on the ground of the President and the Secretary of State, with responsibility for the overall bilateral relationship with a country, may have implications for the role that the COM plays in relation to military activities. Presidential Letters of Instruction make clear that the Secretary of State is responsible, under the direction of the President and to the fullest extent provided by law, for the overall coordination of U.S. government activities abroad. The FAA 1961 charges the Secretary of State with responsibility for the ""continuous supervision and general direction of ... military assistance"" (an undefined term). Some perceive the COM as the best-placed person to exercise these responsibilities on behalf of the Secretary. In effect, a COM sometimes carries out this role, but there appears to be no consistency in practice or consensus on when and how this should occur. In a number of cases, Congress has mandated in law a COM role regarding specific military activities or DOD has written such a role into its guidance for an activity that falls under the command of the GCC. For instance, Congress requires COM concurrence (i.e., approval) for Special Operations Forces to provide support to ""foreign forces, irregular forces, groups, or individuals"" that assist or facilitate U.S. military operations to combat terrorism. In a case of DOD policy guidance, SOCOM Directive 350-3 ""specifies that planners coordinate with ambassadors and country teams during the planning process"" for Title 10 Section 2011 Joint Combined Exchange Training (JCET) events ""and with State during the approval process.... "" Congress amended Section 207 of the FSA 1980 in 2002, exempting Voice of America (VOA) correspondents from COM authority. In explaining this decision, the conference report accompanying the Foreign Relations Authorization Act, Fiscal Year 2003 ( P.L. 107-228 ) stated, Although VOA correspondents are on the federal payroll, they are unique in that they are working journalists. Accordingly, their independent decisions on when and where to cover the news should not be governed by other considerations. This exemption is in accord with legislation authorizing VOA broadcasts and U.S. international broadcasting in general, which requires such broadcasting to comport with journalistic standards of objectivity and independence. The United States does not maintain an embassy or even a diplomatic presence in all countries and political entities due to severed or strained diplomatic relations, contested sovereignty claims in a given geographic area, autonomous, semi-autonomous, or other special status of entities or regions, or geographic remoteness, among other reasons. Nevertheless, in most cases there are fully authorized COMs assigned to such countries and entities. COMs assigned to such countries exercise COM authority regarding diplomatic relations and U.S. government activities in such countries and political entities, despite the limited nature of such activities when access is restricted. For instance, in the case of Cuba, with which the United States has no diplomatic relations, the principal officer of the U.S. Interests Section in Havana has been designated a COM. Also, with the February 2012 closure of the U.S. embassy in Damascus, the current U.S. ambassador exercises his COM authority via the U.S. Interests Section of the Czech Republic's Damascus embassy. Consuls general leading the U.S. consulates in Jerusalem and Hong Kong also possess COM authority. Some ambassadors are appointed to cover a number of states at one time and therefore exercise COM authority over a number of countries at once; for example, the U.S. ambassador to Fiji is also U.S. ambassador to Kiribati, Nauru, Tonga, and Tuvalu. In some cases, online websites function as virtual diplomatic posts to extend a U.S. diplomatic presence to those countries lacking a physical U.S. diplomatic presence, such as the Virtual Embassy of the United States for Tehran. In the case of a country experiencing an irregular change of government or the collapse of government, COM's authority does not appear to change under U.S. law and practice. The State Department's Foreign Affairs Manual states that ""diplomatic relations are maintained between states, not governments. The absence of a government that has clear control or that has obtained power through legitimate means does not automatically result in a rupture of diplomatic relations."" In the case of a change in government or other political or social upheaval in a foreign country resulting in a U.S. government policy of non-recognition, the COM is tasked with establishing guidelines for U.S. government communications with the country's officials in accordance with that policy, and all U.S. government representatives are required to abide by those guidelines. COM authority in a specific country is not necessarily terminated or curtailed if the United States engages in hostilities with that country or within that country's borders. Only if hostilities lead to the permanent withdrawal of an ambassador, permanent closure of U.S. diplomatic facilities, and evacuation of diplomatic mission personnel and dependents, does COM authority effectively cease. A COM may decide to suspend operations of a U.S. diplomatic mission in a foreign country in emergency circumstances, including circumstances of armed hostilities, whether the United States is participating in such hostilities or not. A U.S. diplomatic mission officially closes upon termination of diplomatic relations between the United States and the pertinent foreign country. In all circumstances, the President makes the final decision to close any U.S. diplomatic mission. In both Iraq and Afghanistan during the recent conflicts in those two countries, U.S. ambassadors and chargés d'affaires acted with COM authority contemporaneously with ongoing U.S. military operations, although it can be noted that these COMs were installed only after the success of the initial invasions in toppling each of the governments of these two countries. As discussed above, a COM in a foreign country where U.S. armed forces are conducting military operations must coordinate with the pertinent GCC on many matters. A non-permissive security environment in a foreign country where armed conflict is taking place may limit a COM's options otherwise available in carrying out COM roles and responsibilities. When Congress declares war under its constitutional powers, or some state of armed conflict otherwise prevails between the United States and a foreign country, the ambassador or other COM to that country can be expected to be recalled, and the diplomatic mission closed or substantially curtailed. For instance, Ambassador Joseph Grew left Japan in 1942, soon after Japan attacked Pearl Harbor and Congress declared war on Japan. Although the United States occupied Japan after the war, no ambassador in the role of the COM was appointed until 1952, after the Allied handover of control to the Japanese government. As explained above, COM authority to approve or supervise U.S. government personnel in a foreign country does not extend to the legislative branch. State Department guidelines nonetheless assert the primacy of the COM as the President's representative to a foreign government. Given the presidential prerogative concerning the conduct of foreign relations, the guidelines suggest that any relations with a foreign government must be coordinated through the COM, including those undertaken by the legislative branch. Members of Congress and their staffs may travel to foreign countries without specific COM approval, but accepted practice includes notification to (rather than clearance by) the COM concerning congressional travel to a foreign country. The State Department's Bureau of Legislative Affairs is tasked with informing U.S. missions abroad of planned visits by Members of Congress and their staffs. The COM will advise on current local conditions within a host country in relation with such travel, and the COM remains responsible for the security of Members and other legislative branch personnel in the host country. With regard to employees of the Government Accountability Office (GAO), the State Department and the GAO have executed an MOU that places GAO personnel under the authority of the COM except with regard to their overseas audit, investigation, and evaluation-related activities. Library of Congress personnel stationed abroad are subject to COM authority, pursuant to an MOU executed between the Library and the State Department. Congress plays an important role in setting standards for the exercise of COM authority and providing COMs with the resources—training, personnel, monetary—to promote its effective exercise. The following two sections address current concerns regarding the effectiveness of COM authority in practice and possible options to improve COM performance. The State Department's 2010 QDDR stressed the need for capable COMs to act as CEOs of U.S. embassies. Although there have not been systematic studies of the exercise of COM powers, recently some analysts have raised questions concerning the effectiveness of individual ambassadors and other COMs in managing their embassies and exerting their authority. In a report released in September 2012, weaknesses in COM leadership and management were discerned by the State Department's Office of Inspector General (OIG), which reportedly have caused ""reduced productivity, low morale, and stress-related curtailments"" of tours of duty at approximately 25% of posts abroad. These findings, based on surveys of personnel at a select grouping of diplomatic posts abroad, do not clearly spell out the exact weaknesses of COMs, but state that they are related to ""basic leadership or management principles and the failure to observe [these] basic principles.... "" Assessing the ability of COMs to carry out a key function, the coordination of the activities of all U.S. government agencies in a country, one former U.S. ambassador has asserted that COMs cannot count on State Department officials to support their efforts to assert and protect their authority over other executive branch representatives, and thus are discouraged from exercising the authority granted to them as the President's representative. He found that the authority provided by statutes and hierarchical position can easily be undermined by actual practices: Solid backing from [the Department of] State in a difference of opinion with another agency's representatives, for example, cannot be depended upon. Messages from the department on the subject, often distributed to other agencies, sometimes dismiss legitimate concerns in an offhand manner. Similarly cables addressed to chiefs of mission, often prepared by individuals not in the proximate chain of command, do not always convey the impression that the COM's authorities or views are of particular importance. If State does not treat chiefs of mission as personal representatives of the president, especially in open communications, it cannot expect others to do so—or respect their authority in the interagency process. Over the past several years, a number of institutions, including think tanks and government agencies, have advanced proposals to improve the exercise of COM authority. These have included selecting potential ambassadors and others in line for COM posts for interagency experience, expertise, and inclination, and standardizing the education and training of potential ambassadors. With regard to COM education and training, the Foreign Service Institute (FSI) has taken steps to enhance its two-week training course for new COMs. In response to suggestions in the QDDR, FSI has created a new handbook on COM interagency leadership, and has stressed COM authority with regard to coordination and supervision of all U.S. government activities related to a mission, NSDD-38 procedures, and diplomatic security responsibilities. The ""ambassador as CEO"" concept found in the QDDR has been integrated into COM training, and interagency panels conducted during the training educate new COMs on the many interagency aspects of COM authority. The State Department OIG, in the report mentioned above, cited a lack of management and leadership guidance in the FAM and FAH, and called for creating a new handbook for COMs focusing on post management. OIG also recommended instituting a performance assessment system across U.S. missions abroad to consistently monitor COM performance, identify trouble spots, and inform COM training and best practices, through regular confidential surveys of post personnel. Nevertheless, some analysts doubt that such steps will suffice if an ambassador or other COM does not have the support of officials in Washington at the appropriate time to overcome the pull of agency interests and pressures on a country team. A COM's ability to manage and coordinate effectively depends on respect for an ambassador's authority and expertise within the State Department itself, and the Department's direct support for a COM's position when necessary, as well as recognition of the COM's role with respect to other agencies. In line with these concerns, it has been recommended that documents on COM authority be provided to all regional assistant and deputy assistant secretaries in order to improve relations between Department bureaus in Washington and COMs in the field. It has also been suggested that State representatives to DOD training facilities make presentations explaining the extent and importance of COM authority. U.S. ambassadors and others exercising COM authority are by law the cornerstone of U.S. foreign policy coordination in their respective countries. Their jobs are highly complex, demanding a broad knowledge of the U.S. foreign policy toolkit and the ability to oversee the activities and manage the representatives of from many U.S. government entities, which in some embassies number about 40 U.S. departments and agencies. Understanding the position and core authorities of U.S. Chiefs of Mission is a key element to appreciating the conduct of U.S. foreign policy abroad. Moreover, Members of Congress may wish to examine whether current efforts to improve COM effectiveness in ensuring interagency coordination are sufficient. Specific questions might include whether (1) the two-week FSI training course required for new ambassadors is adequate; (2) interagency experience should be a standard expectation for prospective COMs; (3) FSI career-long leadership training courses are sufficient to build effective leaders and managers at the COM and Deputy COM level; (4) agency representatives on country teams, and their supervisors in Washington, fully understand and comply with their obligations to the COM; and (5) State Department leaders provide the needed backing, support, and resources.","""Chief of Mission,"" or COM, is the title conferred on the principal officer in charge of each U.S. diplomatic mission to a foreign country, foreign territory, or international organization. Usually the term refers to the U.S. ambassadors who lead U.S. embassies abroad, but the term also is used for ambassadors who head other official U.S. missions and to other diplomatic personnel who may step in when no ambassador is present. Appointed by the President, each COM serves as the President's personal representative, leading diplomatic efforts for a particular mission or in the country of assignment. U.S. ambassadors and others exercising COM authority are by law the cornerstone of U.S. foreign policy coordination in their respective countries. Their jobs are highly complex, demanding a broad knowledge of the U.S. foreign policy toolkit and the ability to oversee the activities and manage the representatives of many U.S. government entities, with some exceptions for those under military command. Congress plays an important role in setting standards for the exercise of COM authority and providing COMs with the resources—training, personnel, monetary—to promote its effective exercise. A number of recent developments have increased congressional attention to issues associated with the roles and responsibilities of COMs. The statutory basis for COM authority and responsibilities is the Foreign Service Act of 1980, as amended (FSA 1980; P.L. 96-465), which states that the COM has ""full responsibility for the direction, coordination, and supervision of all Government executive branch employees in that countries,"" with some exceptions; and for keeping ""fully and currently informed"" about all government activities and operations within that country. COM authority is also conferred by other sources of legal authority, which include executive orders and other presidential directives and State Department regulations, some of which provide more extensive authority than the FSA 1980. The Chief of Mission role in conducting and coordinating diplomacy abroad was also invoked in the first Quadrennial Diplomacy and Development Review (QDDR), released by the State Department in 2010. The scope and exercise of COM authority, both generally and in specific instances, have been of ongoing interest and concern to Congress. This report summarizes the current legal authority of Chiefs of Mission to include relevant legislation and executive branch directives and regulations. It includes brief discussion of common questions related to COM authority such as: Does COM authority extend to Department of Defense (DOD) personnel? Who exercises COM authority in countries without a U.S. embassy or diplomatic presence? Is COM authority in effect in countries where the United States is engaging in hostilities? What is the COM's authority over the legislative branch? Finally, specific concerns, possible options, and reform proposals for improving COM authority and effectiveness are explored. This report may be updated as events warrant.",govreport
"China's economy is heavily dependent on global trade and investment flows. In 2007, China overtook the United States to become the world's second-largest merchandise exporter after the European Union (EU). China's net exports (exports minus imports) contributed to one-third of its GDP growth in 2007. China's exports of goods and services as a share of GDP rose from 9.1% in 1985 to 37.8% in 2008 (see Figure 1 ). The Chinese government estimates that the foreign trade sector employs more than 80 million people, of which 28 million work in foreign-invested enterprises. Foreign direct investment (FDI) flows to China have been a major factor behind its productivity gains and rapid economic growth. FDI flows to China in 2007 totaled $75 billion, making it the largest FDI recipient among developing countries and the third largest overall, after the EU and the United States; FDI flows to China in 2008 were $92 billion. The current global economic slowdown (especially among its major export markets—the United States, the EU, and Japan) is having a significant negative impact on China's export sector and industries that depend on FDI flows. The Chinese economy slowed sharply in 2008 and early 2009. China's fourth-quarter 2008 real GDP growth (year-on-year basis) was 6.8%, and its 1 st quarter 2009 growth (year-on-year basis) was 6.1% (reportedly, the slowest quarterly growth in 10 years). Some analysts contend annual economic growth of less than 8% could lead to social unrest in China, given that an estimated 20 million people seek jobs every year (including migrant workers who move to urban centers and high school and college graduates). According to the International Monetary Fund (IMF), China was the single most important contributor to world economic growth in 2007. Thus, a Chinese economic slowdown (or recovery) could also have significant global implications. The extent of China's exposure to the current global financial crisis, in particular from the fallout of the U.S. sub-prime mortgage problem, is unclear. On the one hand, China places numerous restrictions on capital flows, particularly outflows, in part so that it can maintain its managed float currency policy. These restrictions limit the ability of Chinese citizens and many firms to invest their savings overseas, compelling them to invest those savings domestically, (such as in banks, the stock markets, real estate, and business ventures), although some Chinese attempt to shift funds overseas illegally. Thus, the exposure of Chinese private sector firms and individual Chinese investors to sub-prime U.S. mortgages is likely to be small. Moreover, Chinese government entities, such as the State Administration of Foreign Exchange, the China Investment Corporation (a $200 billion sovereign wealth fund created in 2007), state banks, and state-owned enterprises, may have been more exposed to troubled U.S. mortgage securities. Chinese government entities account for the lion's share of China's (legal) capital outflows, much of which derives from China's large and growing foreign exchange reserves. These reserves rose from $403 billion in 2003 (year end) to $2.1 trillion as of June 2009. In order to earn interest on these holdings, the Chinese government invests in overseas assets. A large portion of China's reserves are believed to be invested in U.S. securities, such as long-term (LT) Treasury debt (used to finance the federal deficit), LT U.S. agency debt (such as Freddie Mac and Fannie Mae mortgage-backed securities), LT U.S. corporate debt, LT U.S. equities, and short-term (ST) debt. The Treasury Department estimates that, as of June 2008, China's holdings of U.S. securities totaled $1,205 billion (up from $922 billion in June 2007), making it the second-largest foreign holder of such securities (after Japan). Of this total, $527 billion were in LT U.S. agency securities, $522 billion were in LT Treasury securities, $100 billion in LT equities, $26 billion in LT corporate securities, and $30 billion in ST debt. If China held troubled sub-prime mortgage backed securities, they would likely be included in the corporate securities category and certain U.S. equities (which include investment company share funds, such as open-end funds, closed-end funds, money market mutual funds, and hedge funds) which may have been invested in real estate. However, these were a relatively small share of China's total U.S. securities holdings. China's holdings of Fannie Mae and Freddie Mac securities (though not their stock) were likely to have been more substantial, but less risky (compared to other mortgage-backed securities), especially after these two institutions were placed in conservatorship by the Federal Government in September 2008 and thus have government backing. The Chinese government generally does not release detailed information on the holdings of its financial entities, although some of its banks have reported on their level of exposure to sub-prime U.S. mortgages. Such entities have generally reported that their exposure to troubled sub-prime U.S. mortgages has been minor relative to their total investments, that they have liquidated such assets and/or have written off losses, and that they (the banks) continue to earn high profit margins. For example, the Bank of China (one of China's largest state-owned commercial banks) reported in March 2008 that its investment in asset-backed securities supported by U.S. sub-prime mortgages totaled $10.6 billion in 2006 (accounting for 3.5% of its investment securities portfolio). In October 2008, it reported that it had reduced holdings of such securities to $3.3 billion (1.4% of its total securities investments) by the end of September 2008, while its holdings of debt securities issued or backed by Freddie Mac and Fannie Mae were at $10 billion. Fitch Ratings service reported that the Bank of China's exposure to U.S. sub-prime-related investments was the largest among Asian financial institutions, and that further losses from these investments were likely, but went on to state that the Bank of China would be able to absorb any related losses ""without undue strain."" However, China's economy has not been immune to effects of the global financial crisis, given its heavy reliance on trade and foreign direct investment (FDI) for its economic growth. Numerous sectors were hard hit. To illustrate: The real estate market in several Chinese cities experienced a sharp slowdown in construction, falling prices and growing levels of unoccupied buildings. This increased pressure on the banks to lower interest rates further to stabilize the market. The value of China's main stock market index, the Shanghai Stock Exchange Composite Index, lost nearly two-thirds of its value from December 31, 2007, to December 31, 2008. China's trade and FDI plummeted sharply, as indicated in Figure 2 . Exports and imports from January-July 2009 were down 22.0% and 23.6%, respectively on a year-on-year basis; they declined 10 straight months beginning in November 2008. FDI flows to China from January-July 2009 were down 20.4%; they declined for 10 consecutive months beginning in October 2008 (year-on-year basis). The Chinese government in January 2009 estimated that 20 million migrant workers alone had lost their jobs in 2008 because of the global economic slowdown. During the first four months of 2009, industrial output rose by 5.5% year-on-year, well below the 12.9% growth rate in 2008. China has taken a number of steps to respond to the global financial crisis. On September 27, 2008, Chinese Premier Wen Jiabao reportedly stated that ""what we can do now is to maintain the steady and fast growth of the national economy, and ensure that no major fluctuations will happen. That will be our greatest contribution to the world economy under the current circumstances."" In addition to cutting interest rates and boosting bank lending, China has implemented a number of policies to stimulate and rebalance the economy, increase consumer spending, restructure and subsidize certain industries, and boost incomes for farmers and rural poor. On November 9, 2008, the Chinese government announced it would implement a two-year, 4 trillion yuan ($586 billion) stimulus package (equivalent to 13.3% of China's 2008 GDP), largely dedicated to infrastructure projects. The package would finance public transport infrastructure (including railways, highways, airports, and ports) affordable housing, rural infrastructure (including irrigation, drinking water, electricity, and transport), environmental projects, technological innovation, health and education, and rebuilding areas hit by disasters (such as areas that were hit by the May 12, 2008 earthquake, primarily in Sichuan province). China's stimulus, if fully implemented, would likely constitute one of the largest economic stimulus packages (both in spending levels and as a percent of GDP) that have been announced by the world's major economies to date, although it is unclear to what extent the stimulus package represents new spending versus projects that were already in the works before the economic downturn hit China. Table 1 provides a breakdown of the stimulus program spending priorities. The Chinese stimulus program includes steps the government intends to take to assist 10 pillar industries (i.e., industries deemed by the government to be vital to China's economic growth) to promote their long-term competitiveness. These industries include autos, steel, shipbuilding, textiles, machinery, electronics and information, light industry (such as consumer products), petrochemicals, non-ferrous metals, and logistics. Government support policies for the 10 industries are expected to include tax cuts and incentives (including export tax rebates), industry subsidies and subsidies to consumers to purchase certain products (such as consumer goods and autos), fiscal support, directives to banks to provide financing, direct funds to support technology upgrades and the development of domestic brands, government procurement policies, the extension of export credits, and funding to help firms invest overseas. On April 7, 2009, the Chinese government announced plans to spend $124 billion over the next three years to create a universal health care system. The plan would attempt to extend basic coverage to most of the population by 2011, and would invest in public hospitals and training for village and community doctors. A number of efforts have been made to boost rural incomes and spending levels and to narrow the gap in living standards between rural and urban citizens (as well as between coastal and western regions of the country). For example, since February 2009, an estimated 900 million Chinese rural residents have been eligible to receive a 13% rebate for purchase of home appliances. Public housing projects, education, and infrastructure projects are largely targeted to rural areas. The government has also announced plans to boost agricultural subsidies to farmers. On June 24, 2009, China's State Council launched a new pilot rural pension program that will initially cover 10 percent of China's counties beginning in October 2009 (Currently most rural farmers are not covered by pension system). Chinese officials contend that their economic policy efforts are beginning to produce results. They note a number of positive developments: GDP in the second quarter of 2009 grew by 7.9%, compared to 6.1% growth in the first quarter 2009, on a year-on-year basis. Several economic forecasting firms have recently predicted a strong Chinese economic recovery. For example, Global Insight in August 2009, predicted China's real GDP would grow 8.0% in 2009 and 10.1% in 2010, while the Economist Intelligence Unit projected real growth at 8.0% for both years. China's Shanghai Stock Exchange Composite Index has risen by 67.3% since the beginning of the year (through August 14, 2009. A number of sectors have enjoyed healthy growth during the first seven months of 2009. Although they have not achieved levels that occurred before the global economic crisis, they could signify that a recovery is taking place. For example, retail sales were up 15% (6.7 percentage points lower than in the previous, urban fixed-asset investment rose 32.9% (0.7% percentage points lower), and industrial output rose by 7.5% (8.6 percentage points lower). Real estate prices in major cities have also begun to rise over the past few months. Although there are many indicators of a Chinese economic recovery (with the exception of trade and FDI flows), there are numerous concerns over long-term growth prospects. Many analysts note that much of the recent economic growth that has occurred has resulted from large-scale bank lending and infrastructure spending projects, rather than consumer spending. In addition, many analysts have raised concerns that the large level of borrowing by local governments and state-owned enterprises could lead to a sharp rise in non-performing loans on the balance sheets of China's major banks, and could cause local governments to be become heavily indebted. Many analysts are also concerned that the stimulus policies that China has implemented to date could slow efforts to further reform the economy, especially in regards to state-owned enterprises and the banking system. Some have charged that China has rolled backed some it its economic reforms by boosting industrial subsidies and increasing trade and investment barriers, in order to assist firms deemed by the government to be vital to future development. China has also imposed ""buy China"" regulations to prevent participation by foreign firms and ensure that stimulus money benefit only Chinese firms. Many economists contend that China's long-term economic growth prospects will likely depend on the ability of the government to rebalance the economy by promoting greater domestic consumption and to deepen market-oriented economic reforms. Thus, China's current economic recovery could be short-lived. Analysts debate what role China might play in responding to the global financial crisis, given its huge foreign exchange reserves (at over $2 trillion) but its relative reluctance to become a major player in global economic affairs and its tendency to be cautious with its reserves. Some have speculated that China may, in order to help stabilize its most important trading partner (the United States), boost purchases of U.S. securities (especially Treasury securities) in order to help fund the hundreds of billions of dollars that are expected to be spent by the U.S. government to purchase troubled assets and stimulate the economy. Additionally, China might try to shore up the U.S. economy by buying U.S. stocks (or might do so to take advantage of relatively low prices). During her visit to China on February 21, 2009, Secretary of State Hillary Rodham Clinton stated that she appreciated ""greatly the Chinese government's continuing confidence in the United States Treasuries,"" and she urged the government to continue to buy U.S. debt. Some contend that taking an active role to help the United States (and other troubled economies) would boost China's image as a positive contributor to world economic stability, similar to what occurred during the 1997-1998 Asian financial crisis when it offered financial aid to Thailand and pledged not to devalue its currency. On the other hand, there are a number of reasons why China might be reluctant to significantly increase its investments of U.S. assets. One concern could be whether increased Chinese investments in the U.S. economy would produce long-term economic benefits for China. Some Chinese investments in U.S. financial companies have fared poorly, and Chinese officials could be reluctant to put additional money into investments that were deemed to be too risky. Secondly, a sharp economic downturn of the Chinese economy would likely increase pressure to invest money at home, rather than overseas. Many analysts (including some in China) have questioned the wisdom of China's policy of investing a large volume of foreign exchange reserves in U.S. government securities (which offer a relatively low rate of return) when China has such huge development needs at home. China's holdings of U.S. securities at the end of 2008 are estimated to have been roughly equivalent to over $1,000 per person in China, a significant figure for a country with a per capita GDP of about $3,190 (2008). On March 13, 2009, Wen Jiabao at a news conference stated that he was ""a little bit worried"" about the safety of Chinese assets in the United States On March 24, 2009, the governor of the People's Bank of China, Zhou Xiaochuan, published a paper calling for the replacing the U.S. dollar as the international reserve currency with a new global system controlled by the International Monetary Fund. Many analysts (including some in China) have questioned the wisdom of China's policy of investing a large level of foreign exchange reserves in U.S. government securities, which offer a relatively low rate of return when China has such huge development needs at home. While additional large-scale Chinese purchases of U.S. securities might provide short-term benefits to the U.S. economy and may be welcomed by some policymakers, they could also raise a number of issues and concerns. Some U.S. policymakers have expressed concern that China might try to use its large holdings of U.S. securities as leverage against U.S. policies it opposes. For example, various Chinese government officials reportedly suggested on a number of occasions in the past that China could dump (or threaten to dump) a large share of its holdings in order to counter U.S. pressure (such as threats of trade sanctions) on various trade issues (such as China's currency policy). In exchange for new purchases of U.S. debt, China would likely want U.S. policymakers to lower expectations that China will move more rapidly to reform its financial sector and/or allow its currency to appreciate more substantially against the dollar. Some analysts have suggested that China could choose to utilize its reserves to buy stakes in various distressed U.S. industries. However, this could also raise concerns in the United States that China was being allowed to buy equity or ownership in U.S. firms at rock bottom prices, that technology and intellectual property from acquired firms could be transferred to Chinese business entities (boosting their competitiveness vis-a-vis U.S. firms), and that becoming a large stakeholder in major U.S. companies could give the Chinese government increased political influence in the United States. U.S. policymakers in the past have sometimes opposed attempts by Chinese firms to acquire shares or ownership of U.S. firms. While attending the G-20 summit in London on the global financial crisis on April 1, 2009, President Obama and President Hu met and pledged ""to work together to resolutely support global trade and investment flows, ""resist protectionism,"" and to resume high-level cooperation on long-term economic issues under the Strategic and Economic Dialogue (S&ED). The first round of the S&ED was held in Washington, D.C. on July 27-28, 2009. The two sides agreed to continue cooperation on a number of economic fronts, including promoting balanced economic growth and financial reforms. It is unclear to what extent the global financial crisis will affect U.S.-Chinese economic ties. Prior to the crisis, U.S. officials urged China to adopt economic reforms, especially in terms of the financial system, in ways that would emulate the U.S. economic model. Once the economic crisis hit, China was quick to blame U.S. economic policies for the crisis, and thus, U.S. influence with China on economic issues may have waned somewhat. China's increased use of subsides, ""buy China"" procurement regulations, and trade and investment barriers could increase pressure in the United States to utilize U.S. trade laws against unfair trade practices and/or to provide temporary relief to U.S. firms and workers injured by import surges from China. Chinese officials have countered with their own complaints over rising U.S. ""protectionism."" Although China has attempted to diversify its large foreign exchange holdings and to make its currency more convertible in international exchange markets (such as through currency swap arrangements with various countries), it is unlikely ( at least in the near term) to make major changes to its heavy reliance on the dollar as its main source of foreign exchange reserves (and investments in dollar-denominated assets), nor is China in a position to make its currency fully convertible in international exchange rate markets (due to the relative weakness of its banking system). However, Chinese officials are deeply concerned over the security of their dollar holdings if the dollar undergoes a sharp depreciation against major currencies in the future (possibly arising from rising U.S. public debt). Such concerns may also spur the Chinese government to take more steps to promote domestic consumption, and lessen dependence on trade and FDI flows, as a source of economic growth.","Over the past several years, China has enjoyed one of the world's fastest-growing economies and has been a major contributor to world economic growth. However, the current global financial crisis has significantly slowed China's economy; real gross domestic product (GDP) fell from 13.0% in 2007 to 8.0% in 2008. Several Chinese industries, particularly the export sector, have been hit hard by crisis, and millions of workers have reportedly been laid off. This situation is of great concern to the Chinese government, which views rapid economic growth as critical to maintaining social stability. China is a major economic power and holds huge amounts of foreign exchange reserves, and thus its policies could have a major impact on the global economy. The Chinese government has stated that it plans to rebalance the economy by lessening its dependence on exports for economic growth while boosting domestic demand. In November 2008, the Chinese government announced a $586 billion spending package to help stimulate the domestic economy, largely geared towards new infrastructure projects. In addition, the government ordered banks to sharply expand loans to local governments and businesses to expand investment. The government has also offered a number of programs to stimulate domestic consumption of consumer products (such as cars and appliances), especially in the rural areas. As a result, China's economy has shown some improvement. For example, its GDP in the second quarter of 2009 grew by 7.9%, compared to 6.1% growth in the first quarter 2009, on a year-on-year basis. However, from January to July 2009, China's trade was down 23% over the same period in 2008, while foreign direct investment fell 18%. Some analysts have criticized various aspects of China's economic stimulus policies. Some contend that China, in an effort to assist firms impacted by the global economic slowdown, has imposed numerous new trade-distorting policies, such as extensive industrial subsidies and trade and investment restrictions on foreign firms. In addition, many analysts warn that the easy lending policies of Chinese state-owned banks may later lead to a sharp increase in the level of non-performing loans by these banks if loans go to investments that fail to produce long-term returns. China's efforts to stabilize its economy are of major concern to U.S. policy makers. If successful, such policies could boost Chinese demand for U.S. products. In addition, China is a major purchaser of U.S. Treasury securities, which help fund the Federal Government's borrowing needs, and thus its decision whether or not to continue to purchase U.S. debt could impact the U.S. economy. U.S. policy makers also want to ensure that, despite the sharp downturn in the Chinese economy from the effects of current global economic downturn, China will continue to reform its economy and liberalizes its trade regime and refrain from imposing policies that restrict or distort trade.",govreport
"A variety of interrelated statutes and agency regulations govern leasing and permitting foroil and gas development on federal lands. The national mining and minerals policy fosters andencourages the following activities: private enterprise in ... the development of economicallysound and stable domestic mining, minerals, metal and mineral reclamation industries [and] theorderly and economic development of domestic mineral resources, reserves, and reclamation ofmetals and minerals to help assure satisfaction of industrial, security and environmental needs. (1) The Bureau of Land Management (BLM) -- part of the U.S. Department of the Interior -- managesmost federal mineral development and is largely responsible for implementing this policy. (2) BLM also manages a largeamount of federal lands. Federal land in the National Forest System (NFS) is under the jurisdictionof the Forest Service, which is part of the U.S. Department of Agriculture. The Forest Service playsa role in authorizing mineral development on NFS lands. This report addresses the leasing and permitting of onshore, federal public domain lands. ""Public domain lands"" encompass lands obtained ""by treaty, conquest, cession by States, and[certain] purchase[s]."" (3) The historical distinction between public domain lands and other federal lands is reflected in thedifferent statutes that apply to the different types of lands. This report first analyzes the legal framework for oil and gas leasing and permitting onfederal public domain lands managed by BLM and the Forest Service. Second, this report assesseshow the recently enacted Energy Policy of 2005 affects these laws. Finally, this report analyzesselected judicial and administrative decisions regarding what steps federal environmental lawsrequire agencies to take before issuing coalbed methane leases. Coalbed methane is a type of naturalgas that is trapped in coal seams by water pressure; it is leased separately from the coal. At the dawn of the twentieth century, private entities could explore, develop, and purchasefederal public domain lands containing oil with relative ease. The federal government permittedmineral exploration of such lands without any charge. Oil could be developed as a placermineral. (4) Full ownershipof oil lands ""could be obtained for a nominal amount."" (5) However, Congress's enactment of the Mineral Lands Leasing Actof 1920 (MLLA) ended the private acquisition of title to federal oil lands by authorizing theSecretary of the Interior (Secretary) to issue permits for exploration and to lease lands containing oiland gas and other defense-related minerals. (6) The first section of this report details the legal framework for suchoil and gas leasing. ""Public domain lands"" encompass lands obtained ""by treaty, conquest, cession by States, and[certain] purchase[s]."" (7) The historical distinction between public domain lands and other federal lands is reflected in thedifferent statutes that apply to the various types of lands. The scope of this report does not encompass ""acquired lands,"" which are lands ""granted or sold to the United States by a State orcitizen."" (8) The MLLA authorizes the Secretary to lease oil and gas deposits and onshore public domainlands containing oil and gas deposits, with the federal government retaining title to the lands. (9) This leasing authority appliesto National Forest System (NFS) lands that are reserved from the public domain, and to mostreserved subsurface mineral estates. (10) However, it excludes numerous categories of lands such asnational parks and monuments, as well as lands in incorporated cities, towns, and villages. (11) Areas within the NationalWilderness Preservation System cannot be leased, but valid rights existing as of 1984 arepreserved. (12) In sum,all public lands subject to the Secretary's authority under MLLA ""which are known or believed tocontain oil or gas deposits may be leased by the Secretary."" (13) However, the Secretary of the Interior cannot issue any lease for National Forest Systemlands reserved from the public domain if the Secretary of Agriculture objects. (14) In addition, the U.S. ForestService has issued separate regulations governing certain aspects of leasing and permitting for oiland gas development on lands within its jurisdiction. The Secretary is also authorized to withdraw public lands managed by BLM so that some orall potential land uses are proscribed on those lands. (15) A withdrawal involves ""withholding an area of Federal landfrom settlement, sale, location, or entry, under some or all of the general land laws, for the purposeof limiting activities under those laws in order to maintain other public values in the area or reservingthe area for a particular public purpose or program."" (16) However, limitations on the Secretary's withdrawal authorityexist. (17) For example,Congress can make withdrawals, and the Secretary may not modify or revoke a congressionalwithdrawal. (18) U.S. Department of the Interior The BLM manages approximately 262 million acres of public lands under the Federal LandPolicy and Management Act of 1976 (FLPMA). (19) The Secretary of the Interior must develop and revise ""land useplans"" for the public lands -- officially known as Resource Management Plans (RMPs) -- thatconsider the present and potential future uses for public lands managed by BLM. (20) These RMPs serve as theinitial determinant of which lands may be subject to leasing. All activities performed on these landsmust be consistent with the RMPs. (21) Thus, an RMP must allow oil and gas development in an areain order for it to take place there. (22) The Secretary generally must apply ""multiple use"" and ""sustained yield"" principles whendeveloping RMPs. (23) ""Multiple use"" principles involve judiciously managing lands in a manner that takes into account theenvironmental, historical, and natural resource values of the lands and prevents their permanentimpairment. (24) ""Sustained yield"" means maintaining ""high-level annual or regular periodic output of the variousrenewable resources of the public lands."" (25) In addition, the Secretary is required to provide opportunitiesfor the public and various levels of government to participate in the development of RMPs. (26) This can includeprocedures such as holding public hearings, when appropriate. (27) Regulations require thepreparation of an Environmental Impact Statement (EIS) or an Environmental Assessment (EA)when producing an RMP. (28) The Secretary's mandate to formulate and revise RMPs extends to all BLM-managed publiclands, no matter how they had been classified before the enactment of FLPMA in 1976. (29) The land use provisionsalso apply to lands that had previously been withdrawn. (30) In addition, FLPMA requires that public lands within BLM'sjurisdiction be inventoried and identified on a continuing basis. (31) U.S. Forest Service The Forest Service also manages its lands under multiple use and sustained yieldpolicies. (32) It developsland management plans for NFS lands by considering the desired conditions, objectives, suitabilityof areas for various uses, and other criteria. (33) As with the Department of the Interior's planning process, thelaws governing Forest Service land management and implementation require public notification andopportunities for public participation. (34) When analyzing Forest Service lands for potential leasing, theForest Service classifies lands into three categories: (1) lands that will be ""[o]pen to development subject to the terms andconditions of the standard oil and gas lease form"" (2) lands that will be ""[o]pen to development but subject to constraints that willrequire the use of lease stipulations"" (3) lands that will be ""[c]losed to leasing, distinguishing between those areasthat are being closed through exercise of management direction, and those closed by law, regulation,etc."" (35) The Forest Service must also comply with the National Environmental Policy Act of 1969(NEPA) when analyzing NFS lands for potential leasing. (36) Once the Forest Service has completed its analysis of which NFSlands will be available for leasing, it notifies BLM of its decisions. (37) Forest Serviceauthorization for BLM to lease specific lands may follow. (38) The MLLA authorizes both competitive and noncompetitive leasing procedures. Usuallylands go through the competitive leasing process first. When BLM posts a list of lands available forcompetitive leasing, private entities may respond by submitting nominations for parcels to beauctioned. (39) No unitbeing auctioned can exceed 2,560 acres, except in Alaska, where the maximum unit acreage is 5,760acres. (40) In addition,each unit must be ""as nearly compact as possible."" (41) The Secretary must provide forty-five days notice before offering public lands for leasing,including a thirty-day period for receiving public comments after notice is published in the FederalRegister. (42) Competitive bidding must be held on a quarterly basis in each state where public lands are availablefor leasing. (43) TheSecretary may also authorize additional opportunities for bidding if he considers them to benecessary. (44) Once the public notice requirements have been satisfied, the public lands are offered forcompetitive leasing through an oral auction. (45) A national minimum acceptable bid of $2 per acre applies to theauction. (46) Any bidsfor less than the national minimum bid must be rejected. (47) A competitive bid constitutes a legally binding commitment andcannot be withdrawn. (48) The MLLA requires the Secretary to accept the highest bid from a responsible qualified bidderwhose bid meets or exceeds the national minimum acceptable bid. (49) The winning bidder at a competitive auction must submit the following payments on the dayof sale, unless otherwise specified: (1) the minimum bonus bid of $2 per acre; (2) the first year'srental payment; and (3) a $75 per parcel administrative fee. (50) Then, the balance of thebonus bid, if applicable, is due within ten working days. (51) The lease is issued within sixty days of payment of the remainderof the bonus bid. (52) Thelease is also conditioned upon a royalty payment of at least 12.5% in amount or value of theproduction that is removed or sold from the lease, (53) unless the Secretary suspends, waives, or reduces theroyalty. (54) If no bids are received at a competitive bidding auction -- or if all bids submitted are for lessthan the national minimum acceptable bid -- the land will be offered for noncompetitive leasingwithin thirty days. (55) This noncompetitive leasing remains available for two years after the competitive biddingauction. (56) The first qualified person who applies for a noncompetitive lease and pays the $75application fee is entitled to receive the lease without having to competitively bid. (57) All noncompetitive offersreceived during the first business day after the last day of the competitive auction are considered tohave been submitted simultaneously; in such cases, a lottery determines the lease winner. (58) Unlike competitive bids,noncompetitive offers may be withdrawn by the offeror within sixty days of filing the offer if nolease has yet been signed on the government's behalf. (59) As with competitive leases, a noncompetitive lease isconditioned upon payment of a 12.5% royalty in amount or value of the oil or gas removed or soldfrom the lease. (60) Additionally, there are minimum and maximum acreage limitations for noncompetitive leases. (61) If these criteria are met,BLM will issue the lease within sixty days of the Secretary identifying a qualified applicant. (62) If no application for a noncompetitive lease is submitted during the two years that the landis available for noncompetitive leasing, the process for leasing the land will again be a competitiveoral auction. (63) NEPA applies to the competitive and noncompetitive leasing processes, possibly requiringpreparation of a supplemental EIS (SEIS) or a new EA or EIS, unless reliance on old documents issufficient or the agency issues a FONSI. (64) General Statutory Restrictions In addition to the processes affecting where leasing can take place (discussed above), generalrestrictions on leasing address who can lease and how much land they can lease. First, public landscontaining oil and gas deposits may only be leased to U.S. citizens, associations of U.S. citizens,corporations organized under U.S. laws or the laws of any State, and municipalities. (65) In addition, citizens of acountry that denies similar privileges to U.S. citizens and corporations may not control any interestin federal leases. (66) Second, no entity is permitted to own or control oil or gas leases (including options for such leases)under MLLA in excess of 246,080 acres in any one State other than Alaska. (67) Other aggregate acreagelimitations include limitations pertaining to options (68) and to combined direct and associational/corporate stockholderinterests. (69) Payment Terms: Royalties and Rentals Leases are conditioned upon payment to the Government of a royalty of at least 12.5% inamount or value of oil or gas production that is removed or sold from the leased land. (70) Leases subject to rates ineffect after December 22, 1987 must generally pay a 12.5% royalty, but this percentage can increaseif a lease is cancelled because of late payments and then reinstated. (71) The Secretary also has thepower to reduce the royalty on a noncompetitive lease if he deems it equitable to do so or ifcircumstances could ""cause undue hardship or premature termination of production"" absent such areduction. (72) For oiland gas leases, the royalty must be paid in value unless the Department of the Interior specifies thata royalty payment-in-kind is required. (73) Once the royalty has been paid, the Secretary is required to sellany royalty oil or gas ""except whenever in his judgment it is desirable to retain the same for the useof the United States."" (74) In addition to royalties, leases are conditioned upon payment of annual rentals. (75) Generally, the rental ratefor the first five years of a lease is $1.50 per acre per year, with the rate increasing to $2 per acre foreach additional year of the lease. (76) However, there is some variation in rental amounts for certainspecific categories of lands. (77) For leases issued after December 22, 1987, a minimum royaltyin lieu of the rental is due once oil or gas has been discovered on the leased land. (78) The amount of thisminimum royalty is equal to the annual rental that would otherwise have been due. (79) Perhaps most important,rental payments are not due on acreage for which royalties or minimum royalties are being paid,""except on nonproducing leases when compensatory royalty has been assessed in which case annualrental as established in the lease shall be due in addition to compensatory royalty."" (80) The Secretary is authorized to waive, suspend, or reduce rentals and royalties under certainconditions. (81) Moneyreceived from royalties and rentals is initially paid into the U.S. Treasury. (82) Fifty percent of the fundsthen go to the State where the land or mineral deposit is located. (83) Forty percent of the fundsare allocated into the Reclamation Fund under the Reclamation Act of 1902 for projects that providewater to arid Western states. (84) Because Alaska is not served by the Reclamation Fund, 90percent of the funds collected from federal leases in Alaska are allocated to the State of Alaska. (85) Length of Leases, Extensions, and Cancellations The primary term for competitive and noncompetitive leases is ten years. (86) Leases can be extendedbecause of, inter alia , drilling operations or oil or gas production. The existence of an approvedcooperative plan can also affect extensions. First, a lease will be extended for two years because of drilling if three criteria aresatisfied: (87) (1) actual drilling operations began before the end of the primary leaseterm; (2) actual drilling operations are being ""diligently prosecuted"" (88) at the end of the primarylease term; and (3) rental was timely paid. Second, a lease that meets these criteria will be extended ""so long as oil or gas is being produced in paying quantities."" (89) A lease that has been extended because of production does notterminate simply because production stops, as long as the lessee starts reworking or drillingoperations within sixty days after production ceases and conducts them with reasonable diligenceduring the non-productive period. (90) Furthermore, if a lease initially extended because of drillingbegins yielding oil or gas in paying quantities during the two-year drilling extension, the lease canbe extended again. (91) Finally, lessees may collectively adopt and operate under a cooperative or unit plan for aparticular area if the Secretary considers such a plan to be in the public interest. (92) All leases subject to sucha plan will be extended if any of the leases covered by the plan qualify for a drilling or productionextension. (93) Any MLLA lease can be cancelled or forfeited if the lessee fails to comply with MLLAprovisions, the lease's provisions, or regulations promulgated pursuant to MLLA. (94) In some situations theSecretary has the authority to cancel the lease, but some circumstances require a judicial proceedingto cancel the lease. (95) In addition, MLLA provides for automatic termination ""upon failure of a lessee to pay rental on orbefore the anniversary date of the lease, for any lease on which there is no well capable of producingoil or gas in paying quantities."" (96) However, the Secretary may reinstate automatically terminatedleases in some cases. (97) Operators (98) must submit an Application for a Permit to Drill (APD) for each oil or gas well. (99) Without an approvedAPD, operators cannot begin drilling operations or cause surface disturbances that are preliminaryto drilling. (100) Infact, the APD process must begin at least thirty days prior to the commencement of operations. (101) A complete APD must include the following: (102) a drilling plan; a surface use plan of operations, including drillpad locations and plans forreclaiming the surface; evidence of bond coverage; Form 3160-3; and any other information that may be required. Once BLM receives an APD, it must post information for public inspection for at least thirtydays before it may act on the APD. (103) Another pre-approval requirement is that BLM must preparean environmental record of review or an environmental assessment. (104) Based on thesedocuments, BLM decides whether an EIS is required. (105) Additionally, an adequate bond or other financial arrangementis required before the operator begins any surface-disturbing activities. (106) Within five working days of the end of the public notice period, BLM must choose one offour options: (107) (1) approve the application as submitted; (2) approve the application with modifications and/orconditions; (3) disapprove the application; or (4) delay final action. BLM must approve a surface use plan of operations addressing proposed surface-disturbingactivities before a permit to drill on lands BLM manages may be granted. (108) BLM and the ForestService have proposed joint regulations regarding surface use plans of operations. (109) An approved surface use plan of operations addressing proposed surface-disturbing activitiesis also required before a permit to drill on NFS lands may be granted and before anysurface-disturbing operations may begin. (110) The operator must submit its proposed surface use plan ofoperations to BLM as part of its APD. (111) When the proposal pertains to NFS lands, BLM forwards theproposed surface use plan of operations to the Forest Service. (112) The level of detail required in a proposed plan varies depending upon the ""type, size, andintensity of the proposed operations and the sensitivity of the surface resources that will be affectedby the proposed operations."" (113) When evaluating a proposed surface use plan of operations,the Forest Service must ensure that the proposal is consistent with the ""approved forest land andresource management plan"" for that area of land. (114) During the evaluation process, the Forest Service must alsocomply with NEPA, as well as appropriate Forest Service regulations and policies. (115) In addition, the ForestService can require that the operator increase the amount of its bond if it ""determines [that] thefinancial instrument held by [BLM] is not adequate to ensure complete and timely reclamation andrestoration"" of the NFS lands. (116) Ultimately, the Forest Service must decide among four options: (117) (1) approve the plan (2) approve the plan ""subject to specified conditions"" (3) disapprove the plan (4) delay the plan because additional time is needed to reach adecision Once it has made its decision regarding the proposed surface use plan of operations, theForest Service forwards the decision to BLM. (118) In August 2005, the Congress passed and the President signed the Energy Policy Act of 2005(2005 EPACT). (119) This comprehensive law touches upon many aspects of U.S. energy regulation, and among itsprovisions were several changes to the law governing federal oil and gas leases on public domainlands. This section of the report highlights selected provisions from the 2005 EPACT relating tothese topics. It also addresses selected provisions that were included in either the House or Senatebill, but were not included in the final legislation. The topics addressed by this section can beclassified into four categories: (1) streamlining and expediting oil and gas development processes;(2) a NEPA-related provision; (3) the Arctic National Wildlife Refuge; and (4) miscellaneousprovisions. The 2005 EPACT requires the Secretary of the Interior and the Secretary of Agriculture toenter into a memorandum of understanding regarding issues such as the establishment of proceduresto ""ensure timely processing"" of oil and gas lease applications, surface use plans of operation, andAPDs. (120) Thismemorandum must also ensure that lease stipulations are consistently applied and are ""only asrestrictive as necessary to protect the resource for which the stipulations are applied."" (121) The Secretary of the Interior -- in consultation with the Secretary of Agriculture when NFSlands are involved -- must also conduct an internal review of Federal onshore oil and gas leasing andpermitting practices and subsequently submit a report to Congress detailing steps to improve theprocess. (122) TheSecretary of the Interior is also required to establish a Federal Permit Streamlining Pilot Project. (123) Under the 2005 EPACT, the Secretary of the Interior is required to ensure expeditiouscompliance with 42 U.S.C. § 4332(2)(C), which is the NEPA provision that requires the preparationof an EIS for major Federal actions that significantly affect the quality of the humanenvironment. (124) More specifically, the Secretary of the Interior must propose regulations containing deadlines formaking decisions on RMPs, lease applications, surface use plans of operations, and APDs. (125) The 2005 EPACT alsorequires the Secretary of Agriculture to ""ensure expeditious compliance with all applicableenvironmental and cultural resources laws."" (126) The 2005 EPACT establishes that certain actions taken by either the Secretary of the Interioror by the Secretary of Agriculture (when NFS lands are involved) ""shall be subject to a rebuttablepresumption that the use of a categorical exclusion under [NEPA] would apply if the activity isconducted pursuant to [MLLA] for the purpose of exploration or development of oil or gas."" (127) The House bill had included a provision that differed from the NEPA provision adopted bythe Conference Committee. The House bill had declared that certain actions that the Secretary ofthe Interior takes ""for the purpose of exploration or development of a domestic Federal energysource"" are not subject to the NEPA provision requiring the preparation of an EIS. (128) Exempted actionswould have included drilling an oil or gas well where drilling had previously occurred and drillingan oil or gas well ""within a developed field for which an approved land use plan or anyenvironmental document prepared pursuant to [NEPA] analyzed such drilling as a reasonablyforseeable activity."" (129) One much-debated difference between the House and Senate energy bills had been the Housebill's provisions requiring the Secretary of the Interior to establish a competitive oil and gas leasingprogram in the Arctic National Wildlife Refuge (ANWR). (130) The 2005 EPACT does not include these provisions. However, several of the key ANWR provisions under the House billare detailed in the following paragraph, and may be relevant to future legislative proposals. Under the House bill, ANWR lands would have been available for leasing to any personqualified to obtain a lease under MLLA. (131) Bids would have been submitted as sealed competitivebids. (132) Two uniqueANWR provisions in the House bill included (1) a provision requiring the first lease sale to be forat least 200,000 acres, with additional sales to be conducted as long as there is sufficient interest indevelopment (133) and(2) a provision directing that the State of Alaska would receive 50 percent of ANWR leasingrevenues, with the remainder being divided between a Coastal Plain Local Government Impact AidAssistance Fund and miscellaneous receipts within the U.S. Treasury. (134) Miscellaneous relevant provisions contained in the 2005 EPACT include the following: The Secretary of the Interior must reduce the royalty rate for oil and gasproduction on ""marginal properties"" (i.e., leases or units producing less than a specified amount),under certain conditions. (135) The Secretary of the Interior may reinstate leases that were terminated becauseof the lessee's failure to timely pay the rental amount due, under certain modified conditions. (136) The Secretary of the Interior must determine that receiving royalties in-kindwould provide greater or equal benefits than receiving royalties in-value before accepting anyroyalties in-kind. (137) The Secretary of the Interior must conduct a study regarding split estates. (138) The Secretary of Energy must conduct a study of petroleum and natural gasstorage capacity and operational inventory levels. (139) Coalbed methane (CBM) is a natural gas that is trapped in coal seams by water pressure. Developers extract CBM by pumping water into coal seams to decrease the water pressure, therebyreleasing the CBM. (140) In the second half of the 1990s, CBM production ""increaseddramatically to represent a significant new source of natural gas for many Western states."" (141) In 1999, the SupremeCourt held that CBM could be leased separately from coal. (142) Recently,environmental groups, developers, and BLM have litigated issues surrounding what actionsconstitute compliance with FLPMA and NEPA in the context of CBM development. These issueshave developed through several cases adjudicated by federal courts and the Interior Board of LandAppeals (IBLA), which is part of the U.S. Department of the Interior. In one prominent case, environmental groups challenged a BLM decision to issue CBMleases to Pennaco, an energy developer. (143) When it auctioned the leases, BLM relied on two documentsto purportedly satisfy NEPA requirements: (144) (1) an RMP and EIS that were prepared before theleases were issued, but did not specifically address CBM extraction (""the BuffaloRMP/EIS"") (2) a draft EIS (DEIS) that was prepared after the leaseswere issued, but did address the potential environmental impacts of CBM development (""theWyodak DEIS"") The BLM also determined that the Pennaco leases conformed with the Buffalo RMP, thus satisfyingFLPMA. (145) However, environmental groups alleged that the environmental impacts from CBM developmentwere different than the impacts from conventional oil and gas development. (146) Thus, they argued thatBLM did not take the requisite ""hard look"" at the potential environmental impacts of issuing thePennaco leases. (147) The Interior Board of Land Appeals sided with the environmental groups by finding thatNEPA had not been satisfied and remanding to BLM for ""additional appropriate action."" (148) The IBLA found theBuffalo RMP/EIS to be inadequate because it did not specifically address CBM development, whichthe IBLA considered to be significantly different than the conventional development analyzed by theBuffalo RMP/EIS. (149) For example, the IBLA concluded that water production resulting from CBM extraction issignificantly greater than water production from conventional oil and gas development and that CBMdevelopment posed unique air quality concerns. (150) Further, the IBLA explained that the Wyodak DEIS did notsatisfy NEPA because it was a post-leasing analysis. (151) In particular, because it was a post-leasing analysis, theWyodak DEIS ""did not consider reasonable alternatives available in a leasing decision, includingwhether specific parcels should be leased [and] appropriate lease stipulations."" (152) Although the IBLA'sdecision was reversed by a federal district court, (153) the Tenth Circuit Court of Appeals agreed with the IBLA. (154) In Pennaco Energy,Inc. v. United States Department of the Interior , the Tenth Circuit held that ""the IBLA gave dueconsideration to the relevant factors and that the IBLA's conclusion was supported by substantialevidence in the administrative record."" (155) Pennaco appears to be the key Circuit Court decision on the merits of a case applyingFLPMA and NEPA to CBM development in this context. However, a variety of other judicial andadministrative decisions have addressed similar issues. These cases often turn on fact-intensive,case-by-case determinations. Several such decisions are briefly summarized below. In Northern Plains Resource Council, Inc. v. United States Bureau of Land Management ,BLM had amended an RMP and prepared an EIS to address the impacts of oil and gas leasing inseveral areas. (156) These documents analyzed and allowed small-scale exploratory CBM drilling. (157) However, they statedthat ""further environmental studies would have to be completed before commercial production wouldbe allowed."" (158) Years later, after receiving APDs for the covered land, BLM completed EAs and made FONSIs fornumerous CBM wells. (159) Based on the FONSIs, BLM approved the APDs withoutpreparing an EIS. (160) BLM later recognized the energy industry's intention to engage in full-field CBM development onsome land, prompting it to prepare a new statewide EIS and proposed RMP amendments addressingthe environmental impacts of large-scale CBM development. (161) The United StatesDistrict Court for the District of Montana rejected the plaintiff's argument that the original RMP andEIS were inadequate, thus violating FLPMA and NEPA. (162) It held that the disputed APDs were all for test wells and thusfell within the scope of the exploratory drilling contemplated by the original documents. (163) Further, the courtexplained that once BLM had begun preparing a new EIS to address full-field development, ""it wasnot required to halt lease sales, as long as [the leases] were in conformance with the existingplan."" (164) The NinthCircuit Court of Appeals affirmed this decision on procedural grounds because the plaintiff'schallenge was barred by the statute of limitations. (165) In subsequent litigation, the same plaintiff challenged the new statewide EIS and proposedRMP amendments, which authorized full-field CBM development in some areas. (166) The United StatesDistrict Court for the District of Montana agreed with one of the plaintiff's two primaryarguments. (167) Itheld that BLM should have considered a ""phased development alternative"" as an alternative tofull-field CBM development. (168) However, it also held that BLM was justified in conductingtwo separate studies of the area, rather than conducting one larger study. (169) In San Juan Citizens ' Alliance v. Babbitt , plaintiffs argued that BLM had acted arbitrarily andcapriciously -- thus violating NEPA -- by approving CBM wells at twice the density that wascontemplated by existing environmental documents. (170) Prior to approving the challenged CBM wells, BLM hadissued a statewide EIS as well as preparing an EA and making a FONSI for a smaller area within thestate. (171) However,the plaintiffs claimed that BLM should have either created a new EIS or a supplemental EIS (SEIS)to sufficiently address the cumulative environmental impacts of the existing wells combined withthe impacts of the newly approved wells. (172) Plaintiffs asserted that new information shedding light on theenvironmental impacts of CBM development had become available since the issuance of the originaldocuments. (173) Plaintiffs also argued that BLM had violated FLPMA by approving CBM development that allegedlydid not conform to the RMP. (174) The defendants moved to dismiss, and the United StatesDistrict Court for the District of Colorado denied the motion. (175) Several IBLA decisions also address similar issues. In the 2003 matter of Wyoming OutdoorCouncil , the IBLA ruled that BLM had not taken the NEPA-mandated ""hard look"" at water qualityissues associated with CBM development in one area. (176) The IBLA found the BLM's water quality analysis to beinadequate because it was based on only one CBM well sample and neither of BLM's EAs addressed""any deleterious impact of CBM discharge water due to its chemical composition."" (177) The IBLA also foundthat BLM should have considered the cumulative environmental impacts of the new wells combinedwith some nearby wells that met ""the geographical proximity test for inclusion in a cumulativeimpacts analysis."" (178) In the 2004 matter of Western Slope Environmental Resource Council , the IBLA stated: [T]he appropriate time for considering the potentialimpacts of oil and gas exploration and development is when BLM proposes to lease public lands foroil and gas purposes because leasing, at least without [no surface occupancy stipulations], constitutesan irreversible and irretrievable commitment to permit surface-disturbing activity. (179) The IBLA went on to hold that the appellants had not proven that the environmental impacts of CBMdevelopment in the disputed area would be different from the impacts of conventional oil and gasdevelopment. (180) Even though the unique environmental impacts of CBM had been recognized in some cases, theIBLA emphasized that the appellants had not met their burden of proof in this particular case. (181) Evidence indicatedthat the disputed coalbeds were located far beneath the surface and that there was a ""lack oftransmissivity of the coal."" (182) According to the IBLA, this evidence suggested that CBMextraction in this area would not produce a large amount of water, thus limiting the environmentalimpacts that would occur. (183) ","A variety of statutes and agency regulations govern leasing and permitting for oil and gasdevelopment on federal lands. This report first explains the legal framework for oil and gas leasingand development on federal ""public domain"" lands, which involves an overview of the following: laws and regulations affecting which public domain lands are potentiallysubject to oil and gas leasing; development of Resource Management Plans; competitive and noncompetitive oil and gas leasingprocesses; terms and conditions of oil and gas leases; and the process surrounding applications for permits to drill. Second, this report assesses how the recently enacted Energy Policy Act of 2005 ( P.L.109-58 ) will affect preexisting oil and gas development laws. The third section of the reportanalyzes selected judicial and administrative decisions regarding what steps federal environmentallaws require agencies to take before issuing leases for coalbed methane leases. Coalbed methane isa type of natural gas that is trapped in coal seams by water pressure. This report will be updated as developments warrant.",govreport
"Reforming or limiting itemized tax deductions for individuals has gained the interest of policymakers as one way to increase federal tax revenue, increase the share of taxes paid by higher-income tax filers, simplify the tax code, or reduce incentives that might lead to inefficient economic behavior. However, limits on deductions, in the views of some, would have adverse economic effects or changes in the distributional burden of the federal income tax code. Discussions about itemized tax deduction reform are informed by analysis of tax filer data. This report analyzes the most recently available public data from the Internal Revenue Service's (IRS's) Statistics of Income (SOI) to provide an overview of who claims itemized deductions, what they claim them for, and the amount in deductions claimed. In addition, the revenue loss associated with several of the larger deductions is presented using data from the Joint Committee on Taxation's (JCT's) tax expenditure estimates. This report concludes with a brief discussion of the implications of various policy options to reform or limit itemized deductions. More in-depth discussion on options for reforming itemized tax deductions, as a whole or individually, can be found in other CRS reports. Individual income tax filers have the option to claim either a standard deduction or the sum of their itemized deductions on the federal income tax. The standard deduction is a fixed amount, based on filing status, available to all taxpayers. Alternatively, tax filers may claim itemized deductions . Tax filers who itemize must report each item separately on their tax returns and be able to provide documentation in the event of an IRS audit. Whichever deduction a tax filer claims—standard or itemized—the deduction amount is subtracted from adjusted gross income (AGI) to determine taxable income. AGI is the broad measure of income under the federal income tax and is the income measurement before itemized deductions and personal exemptions are taken into account. Generally, only individuals with aggregate itemized deductions greater than the standard deduction would find it worthwhile to itemize. The tax benefit of choosing to itemize is the amount that their itemized deductions exceed the standard deduction multiplied by their top marginal income tax rate. Some itemized deductions can only be claimed if they meet or exceed minimum threshold amounts (also known as a floor) to simplify tax administration and compliance. Floors usually come in the form of a limit based on a percentage of AGI. For example, eligible extraordinary medical and dental expenses must amount to at least 10% of AGI for most tax filers to claim an itemized deduction; total expenses less than this floor are not eligible for an itemized deduction. In addition, some itemized deductions are subject to a cap (also known as a ceiling) in benefits or eligibility. Caps are meant to reduce the extent that tax provisions can distort economic behavior, limit revenue losses, or reduce the availability of the deduction to higher-income tax filers. For example, the itemized deduction for home mortgage interest can only be claimed for the value of interest payments made on the first $1 million of mortgage debt. This section of the report uses publicly available tax data from the IRS to provide a profile of itemizers and some insight into trends among various itemized deduction provisions. Itemized deductions are often grouped together in broader discussions of tax policy, in part because they are grouped together on the tax Form 1040. But, itemized deductions exist for a variety of reasons and are designed in ways such that they target (or exclude) certain types of tax filers. Analysis of data on these deductions can inform these discussions over reforming one or more itemized deduction provisions. Specifically, the data analysis in this report intends to identify who claims itemized deductions, for how much, and for which provisions. This analysis might be relevant to the 115 th Congress, as there has been growing congressional interest in reforming or limiting itemized tax deductions for individuals. Some see reforming itemized tax deductions as one way to increase federal tax revenue (and possibly contribute to deficit reduction), increase the share of taxes paid by higher-income tax filers, simplify the tax code, or reduce incentives that might lead to inefficient economic behavior. In 2014, 30% of all tax filers chose to itemize their deductions rather than claim the standard deduction. Of this 30% of tax filers, a greater share of higher-income individuals chose to itemize their deductions compared with lower-income individuals. Table 1 shows the share of tax filers who chose to itemize their deductions and the average sum of those deductions in 2014 by AGI. Higher-income tax filers chose to itemize their deductions more often than lower-income tax filers in 2014. As shown in Table 1 , the share of tax filers who chose to itemize in income ranges above $200,000 remained virtually the same (over 90%), although the average sum of itemized deductions claimed increases substantially as income rises. For taxpayers with an AGI greater than $200,000, the share that itemized ranged from 91% to 93% and the average sum of itemized deductions claimed per itemizer ranged from $43,131 to $424,864. In contrast, 77% of tax filers with an AGI between $100,000 and $200,000 chose to itemize their deductions in 2014, with an average of $25,598 in deductions claimed. Five percent of tax filers with an AGI less than $20,000 chose to itemize their deductions in 2014, with an average of $15,857 in deductions claimed. Figure 1 shows the distribution, by AGI, of total itemizers and total itemized deduction claimed in 2014. Although higher-income tax filers both tended to itemize at higher rates and claim a larger average total of itemized deductions, the majority of itemizers (56.2%) had incomes less than $100,000, and 86.8% of itemizers had an AGI less than $200,000. Compared with the distribution of itemizers, the distribution of total itemized deduction claim amounts was more even across income ranges. As shown in Figure 1 , a majority (63.6%) of total itemized deduction claims (amounts, in dollars) were made by itemizers with an AGI greater than $100,000. Although tax filers with an AGI more than $1 million comprised 0.8% of itemizers, they claimed 13.1% of all itemized tax deductions in 2014. Similarly, tax filers with an AGI between $500,000 and $1 million accounted for 1.8% of itemizers, but they claimed 5.3% of all itemized deductions. Tax filers with an AGI between $50,000 and $100,000 accounted for 33.6% of all itemizers, but they claimed 23.5% of all itemized deductions. Another way to analyze tax data on itemized deductions is to look at specific deductions. Specific deductions tend to benefit different types of itemizers based on their income. In addition to differences in the income of the itemizer, the variation in itemized deduction claims can also be explained, in part, by the structure of certain provisions (e.g., floors or ceilings that are designed to limit claims). Tax filers in different income ranges tended to claim specific itemized deductions in different frequencies. Table 2 shows the average amount claimed in 2014 for selected deductions and the share of total tax filers who itemized in each income class that claimed a particular deduction. Tax filers in higher-income ranges claimed deductions for charitable gifts, state and local income taxes, and real estate property taxes at higher rates than tax filers in lower-income ranges. For example, the deduction for charitable gifts was claimed by 37% of tax filers with an AGI between $50,000 and $100,000; 68% of tax filers with an AGI between $100,000 and $200,000; and more than 86% of tax filers in each of the income ranges over $200,000. Fewer tax filers in the highest income group (with an AGI greater than $1 million) than in the $100,000-$1 million income groups claimed the home mortgage interest deduction, possibly due to a greater ability for some individuals to pay for home purchases with cash (i.e., they did not have a mortgage). On the other hand, higher-income individuals might have preferred taking a mortgage out on their house, rather than paying in cash, if they believed that their investments would yield a higher rate of return than the cost of the interest on the mortgage. Few tax filers, in general, claimed the deduction for extraordinary medical and dental expenses —particularly at the highest income ranges . The 10% of AGI floor required for most tax filers to claim the deduction in 2014 limited the amount of taxpayers that could be eligible for this provision. Average tax deduction values indicate which provisions had the largest effects in reducing different tax filers' taxable incomes. The mortgage interest deduction was, on average, the largest single deduction, by amount, claimed by tax filers with an AGI less than $500,000 (aside from the medical expenses deduction). In contrast, the deduction for state and local income taxes was the largest average deduction amount claimed for any deduction by tax filers with an AGI greater than $500,000 (aside from the infrequent instance where a tax filer claimed the itemized deduction for extraordinary medical expenses). The average deduction for charitable gifts also increases sharply for tax filers with an AGI of $1 million or above. The average amount of the charitable gift deduction claimed by tax filers with an AGI between $500,000 and $1 million was $18,615. In contrast, the average amount of the charitable gift deduction for tax filers with an AGI greater than $1 million was $172,529 in 2014. Figure 2 shows the how the distribution of various specific deductions as a share of all itemized deductions varies across income classes. These data illustrate several trends. The home mortgage interest deduction comprised the largest share of total itemized deductions for itemizers with an AGI between $20,000 and $200,000. The deduction for state and local income taxes comprised the largest share of total itemized deductions for itemizers with an AGI greater than $200,000. The deductions for state and local income taxes and charitable contributions composed a larger share of total deductions claimed as income rise. Table 3 shows the amounts claimed for certain itemized deductions as a share of the total income of itemizers. Itemized deduction claims are high when measured as a share of income for lower-income itemizers (although, as noted in Table 1 , tax filers with lower income choose to itemize at relatively lower rates). Total itemized deduction claims as a share of income decline as income increases. Across all itemizers, deductions claims amounted to 18.9% of AGI. In terms of specific deductions, total claims for the deduction for home mortgage interest comprised the largest share of income among itemizers with less than $200,000 in AGI. For itemizers with an AGI greater than $200,000, the claims for state and local income taxes comprised the largest single deduction as measured as a share of income. Some itemized deductions are classified as tax expenditures, or losses in federal tax revenue. Table 4 shows the Joint Committee on Taxation (JCT) estimates for the top four itemized deductions that are expected, under current law, to contribute most to annual tax expenditures in FY2018. Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 ( P.L. 93-344 ) as ""revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability."" The four itemized deductions that are projected to contribute most to tax expenditures in FY2018 are estimated to account for 17.8% ($241.2 billion) of the approximately $1.36 trillion in net individual tax expenditures. As shown in Table 4 , the deduction for state and local income or sales taxes is estimated to be the itemized deduction with the largest tax expenditure estimate in FY2018, accounting for 5.5% ($74.1 billion) of all individual tax expenditures in FY2018. The deduction for state and local income or sales taxes is also the fifth-largest individual tax expenditure overall in FY2018. The deduction for home mortgage interest is estimated to account for 5.3% ($72.1 billion) of FY2018 tax expenditures, followed by charitable gifts (4.3%) and real estate taxes (2.7%). Congress might consider policies further limiting itemized deductions. Some view these limits as one way to increase federal revenue, increase the progressive structure of the federal income tax code, simplify the tax code, or reduce economic distortions in the tax code. When a tax filer loses the ability to take deductions, then their taxable income increases (absent other behavioral changes). Others seek to limit itemized deductions to increase progressivity in the tax code, where tax filers with higher incomes pay a larger share of their income in taxes than those with less income. Arguments against broad limits to itemized deductions vary. The economic effects of limiting itemized tax deductions might be undesirable for some. Those who are willing to accept the economic consequences of limits on itemized tax deductions might argue for reform of individual provisions, rather than broader limits, because the rationale for itemized deductions varies. For example, some might find the deduction for charitable contributions desirable but not the deduction for state and local income taxes. Others argue that higher-income tax filers already provide most of the revenue collected through the individual federal income tax, and might oppose further efforts to increase the progressivity of the federal income tax code. Some proposals to reform or limit itemized deductions include a flat, dollar-value cap or percentage-of-income cap on total deductions; a limit on the tax rate at which deductions can be valued; converting deductions into credits; and various others. Although this report does not assess these policies in depth, it provides insights from the data analysis on itemized tax deductions that might be useful for informing the debate concerning reform options. First, efforts to target limits on itemized tax deductions toward higher-income tax filers are restricted in the amount of revenue that can be raised. Some have suggested a fixed dollar amount cap as one possible way to target revenue raised from primarily higher-income households. However, to avoid increasing the taxable income of most households, the cap on total deductions would need to be set high enough such that it would not be lower than the average deduction values for those in the middle or lower portion of the income distribution. For example, Table 1 suggests that a cap of $25,000 would affect the average itemizer with an AGI less than $200,000. However, higher caps could have more limited ability to raise revenue. Even though those at the top of the income range have high average itemized deduction claim totals, data from Table 1 indicate that 87% of itemizers have an AGI less than $200,000 (or 97% have less than $500,000 in AGI), and Figure 1 indicates that these tax filers account for 65% of itemized deductions claimed (or 82% for itemizers with less than $500,000 in AGI). Second, the form of a limit on itemized deductions might affect which deductions a tax filer might claim. If a tax filer potentially has deductions that exceed a flat-dollar value cap, then the tax filer must choose which deductions to claim. Table 2 provides some estimates of which deductions may ""fill"" up a taxpayer's cap, if that cap is based on a fixed amount, whereas Table 3 provides estimates under a limit in the form of a share of AGI. A reduction in the tax benefit derived from activities eligible for tax deduction can affect tax filer behavior. Deductible activities that are more easily adjustable in the short run (e.g., charitable giving) could be reduced after enactment of a limit on deductions in favor of activities that are more difficult to adjust or plan for in the short run (e.g., state and local income or sales taxes, or extraordinary medical expenses). Over time, tax filers might adjust their behavior to accommodate for limits in itemized deductions (e.g., renting a residence might be more preferable for some, if they can no longer deduct mortgage interest). However, a tax filer might still engage in particular activities for other reasons (although possibly to a lesser extent) even without a tax benefit. Figure 2 shows what share of a tax filer's itemized deductions is composed of individual itemized deductions. In contrast, limits that are not tied to fixed amounts could be structured in a way that does not cause a trade-off among tax-deductible activities. For example, these limits could be capped based on a share of the tax filer's income. Although these limits would be less likely to cause a trade-off between tax-deductible activities, they may reduce the tax-beneficial value of these activities. By reducing the value of those activities (in terms of tax liability), a tax filer might choose to claim a smaller deduction related to a certain activity (based on the behavioral response for each activity). Third, the extent to which a limit on itemized deductions increases revenue depends on its structure. Limits on itemized deductions increase the amount of income of itemizers that is subject to taxation (and also potentially tax more of that income under a higher marginal income tax bracket), thereby increasing revenue. Certain combinations of deduction limits may shift some tax filers to claim the standard deduction instead of itemizing. In this case, the revenue increase by limiting itemized deduction would be partially offset by more tax filers claiming the standard deduction.","Reforming or limiting itemized tax deductions for individuals has gained the interest of policymakers as one way to increase federal tax revenue, increase the share of taxes paid by higher-income tax filers, simplify the tax code, or reduce incentives that might lead to inefficient economic behavior. However, limits on deductions could cause adverse economic effects or changes in the distributional burden of the federal income tax code. This report is intended to identify who claims itemized deductions, for how much, and for which provisions. This report analyzes data to inform the policy debate about reforming itemized tax deductions for individuals. In 2014, 30% of all tax filers chose to itemize their deductions rather than claim the standard deduction. In addition, the data indicate that both the share of tax filers who itemized their deductions and the amount claimed by each tax filer increased as adjusted gross income (AGI) increases. AGI is the basic measure of income under the federal income tax and is the income measurement before itemized deductions and personal exemptions are taken into account. Although higher-income tax filers were more likely to itemize their deductions and claim a larger amount of itemized deductions than lower-income tax filers, the majority of itemizers (56.2%) had an AGI less than $100,000, and 86.8% of itemizers had an AGI less than $200,000. Tax filers in different income ranges tended to claim different itemized deductions in different frequencies. In 2014, tax filers in higher income ranges claimed deductions for charitable gifts, state and local income taxes, and real estate taxes at higher rates than tax filers in lower income ranges. For example, the deduction for charitable gifts was claimed by 37% of itemizing tax filers with an AGI between $50,000 and $100,000, whereas it was claimed by 68% to 87% of itemizing tax filers with an AGI above $100,000. Deductions for state and local income taxes and the deduction for charitable gifts comprised a larger share of itemized deductions as income rose. The four largest itemized deductions are estimated to account for 17.8% ($241.2 billion) of the approximately $1.4 trillion in tax expenditures in FY2018. These deductions were for state and local income or sales taxes, home mortgage interest, charitable gifts, and real estate taxes. These findings have several implications for reforming or limiting itemized tax deductions. First, efforts to target itemized tax deduction limits on the highest income class analyzed in this report (+$1 million in AGI) are limited in the amount of revenue that can be raised. Although tax filers with an AGI greater than $1 million claimed a larger average amount of deductions ($424,864), 87% of itemizers had an AGI less than $200,000 (or 97% have less than $500,000 in AGI) and they accounted for 65% of itemized deductions claimed (or 82% for itemizers with less than $500,000 in AGI). Second, the structure of a limit on itemized deductions could affect which deductions a tax filer might claim. A limit based on a percentage reduction in the overall tax benefits of itemized deductions would not likely change the relative choice of deduction claims. However, limits using a flat-dollar amount likely would alter deduction claims and possibly tax filer behavior. A tax filer who has deductions that exceed a flat-dollar value cap must choose which deductions to claim. Even if a tax filer chooses not to claim a particular deduction because of the dollar cap, the tax filer might still engage in the activity for other reasons (although possibly to a lesser extent). Third, the structure of a limit on itemized deductions also has an effect on its capacity to raise revenue. Limiting deductions might raise the taxable income of some individuals, and tax a higher share of their income at a higher marginal tax rate. However, certain combinations of deduction limits may shift some tax filers to claim the standard deduction instead of itemizing. In this case, the revenue increase by limiting itemized deduction would be partially offset by more tax filers claiming the standard deduction.",govreport
"The Pacific Islands region, also known as the South Pacific or Southwest Pacific, presents Congress with a diverse array of policy issues. It is a strategically important region that encompasses U.S. Pacific territories. U.S. relations with Australia and New Zealand include pursuing common interests in the Southwest Pacific, which also has attracted Chinese diplomatic attention and economic engagement. Congress plays key roles in approving and overseeing the administration of the Compacts of Free Association that govern U.S. relations with the Marshall Islands, Micronesia, and Palau (also referred to as the Freely Associated States or FAS). The United States has economic interests in the region, particularly fishing. The United States provides foreign assistance to Pacific Island countries, which are among those most affected by climate change, particularly in the areas of climate change adaptation and mitigation. The Southwest Pacific covers 20 million square miles of ocean and 117,000 square miles of land area (roughly the size of Cuba). The region includes 14 sovereign states with approximately 9 million people, including three countries in ""free association"" with the United States—the Marshall Islands, Micronesia, and Palau. Papua New Guinea (PNG), the largest country in the Southwest Pacific, constitutes 80% of region's land area and 75% of its population. (See Table 1 .) The region's gross domestic product (GDP) totals around $32 billion (about the size of Albania's GDP). Per capita incomes range from lower middle income (Solomon Islands at $2,000 per capita GDP) to upper middle income (Nauru and Palau at $14,200). According to many analysts, since gaining independence during the post-World War II era, many Pacific Island countries have experienced greater political than economic success. Despite weak political institutions and occasional civil unrest, human rights generally are respected and international observers largely have regarded governmental elections as free and fair. Of 12 Pacific Island states ranked by Freedom House for political rights and civil liberties, eight are given ""free"" status, while Fiji, Papua New Guinea, and the Solomon Islands—the three largest countries in the region—are ranked as ""partly free."" Most Pacific Island countries, with some exceptions such as Fiji, Papua New Guinea, and the Solomon Islands, have limited natural and human resources upon which to launch sustained development. Many small atoll countries in the region are hindered by lack of resources, skilled labor, and economies of scale; inadequate infrastructure; poor government services; and remoteness from international markets. In addition, some areas also are threatened by frequent weather-related natural disasters and rising sea levels related to climate change. The Pacific Islands Forum (PIF), which was known as the South Pacific Forum until 1999, seeks to foster cooperation between member states. It is comprised of 18 states and territories. The PIF's 16 states are Australia, Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Palau, Papua New Guinea, the Republic of the Marshall Islands, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. Its two territories are French Polynesia and New Caledonia. The PIF Secretariat is located in Suva, Fiji. Key issues addressed by the PIF include climate change, regional security, and fisheries. American Samoa, Guam, and the Northern Marianas have observer status with the PIF. The Melanesian Spearhead Group (MSG), founded in 1986, includes the following Melanesian countries and organizations: Fiji, the Kanak Socialist Liberation Front (FLNKS) of New Caledonia, Papua New Guinea, the Solomon Islands, and Vanuatu. The MSG seeks to have ""common positions and solidarity in spearheading regional issues of common interest, including the FLNKS cause for political independence in New Caledonia."" In 2015, the MSG granted the United Liberation Movement for West Papua observer status and Indonesia associate member status. On the whole, the United States enjoys friendly relations with Pacific Island countries and has benefitted from their support in the United Nations. This is especially true of the Freely Associated States, particularly Palau, which in 2014 reportedly voted with the United States 90% of the time. (See "" Compacts of Free Association "" below.) The United States has worked with Australia, the preeminent power in the Southwest Pacific, to help advance shared strategic interests, maintain regional stability, and promote economic development, particularly since the end of the Cold War in the early 1990s. New Zealand also has cooperated with U.S. initiatives in the region, been a major provider of foreign aid, and helped lead peacekeeping efforts. France and Japan also maintain significant interests in the region. China has become a diplomatic force, major source of foreign aid, and leading trade partner in the Southwest Pacific. In addition, more recently, other nations, including Russia, India, and Indonesia, have made efforts to expand their engagement in the region. The Pacific Islands generally can be divided according to four spheres of influence, those of the United States, Australia, New Zealand, and France. The American sphere extends through parts of the Micronesian and Polynesian subregions. (See Figure 1 .) In the Micronesian region lie the U.S. territories Guam and the Northern Mariana Islands as well as the Freely Associated States. In the Polynesian region lie Hawaii and American Samoa. U.S. security interests in the Micronesian subregion, including military bases on Guam and Kwajalein Atoll in the Marshall Islands, constitute what some experts call a defensive line or ""second island chain"" in the Pacific. The first island chain includes southern Japan, Taiwan, and the Philippines. Some analysts in China have viewed the island chains as serving to contain China and the Chinese navy. The region also was a key strategic battleground during World War II, where the United States and its allies fought against Japan. Australia's interests focus on the islands south of the equator, particularly the relatively large Melanesian nations of Papua New Guinea, which Australia administered until PNG gained its independence in 1975, the Solomon Islands, and Vanuatu. New Zealand has long-standing ties with its territory of Tokelau, former colony of Samoa (also known as Western Samoa), and the Cook Islands and Niue, two self-governing states in ""free association"" with New Zealand. Australia and New Zealand often cooperate on regional security matters such as peacekeeping. France continues to administer French Polynesia, New Caledonia, and Wallis and Futuna. U.S. policymakers have emphasized the importance of the Pacific Islands region for U.S. strategic and security interests. In testimony before the Subcommittee on Asia and the Pacific of the House Committee on Foreign Affairs, former Deputy Assistant Secretary of State Matthew Matthews emphasized the changing strategic context of the Pacific Islands region: The Pacific Island region has been free of great power conflict since the end of World War II, we have enjoyed friendly relations with all of the Pacific island countries. This state of affairs, however, is not guaranteed.... Our relations with our Pacific partners are unfolding against the backdrop of shifting strategic environment, where emerging powers in Asia and elsewhere seek to exert a greater influence in the Pacific region, through development and economic aid, people-to-people contacts and security cooperation. There is continued uncertainty in the region about the United States' ... willingness and ability to sustain a robust forward presence. During the hearing, then-Chairman of the Subcommittee on Asia and the Pacific former Representative Matt Salmon stated that the countries of the region deserve U.S. attention ""for the important roles that they play in regional security, as participants in international organizations, and as the neighbors to our own U.S. territories of American Samoa, Guam and the Commonwealth of the Northern Mariana Islands."" Some analysts have expressed concerns about the long-term strategic implications of China's growing engagement in the region. Other experts have argued that China's diplomatic outreach and economic influence have not translated into significantly greater political sway over South Pacific countries, and that Australia, a U.S. ally, remains the dominant power and provider of development assistance in the region. Some observers also have contended that Chinese military assistance and cooperation in the region remain modest compared to that of Australia, and that China has not actively sought to project ""hard power."" Broad U.S. objectives and policies in the region have included promoting sustainable economic development and good governance, addressing the effects of climate change, administering the Compacts of Free Association, supporting regional organizations, projecting a presence in the region, and cooperating with Australia and regional aid donors. Other areas of concern and cooperation include combating illegal fishing, supporting peacekeeping operations, and responding to natural disasters. Areas of particular concern to Congress include overseeing U.S. policies in the Southwest Pacific and the administration of the Compacts of Free Association; regional foreign aid programs and appropriations; approving the U.S.-Palau agreement to provide U.S. economic assistance through 2024; and supporting the U.S. tuna fleet. The Obama Administration asserted that as part of its ""rebalancing"" to the Asia-Pacific region, it had increased its level of engagement in the Southwest Pacific, including expanding staffing and programming and increasing the frequency of high-level meetings with Pacific leaders. Other observers contended that the rebalancing policy had not included a corresponding change in the level of attention paid to the Pacific Islands region. U.S. diplomatic outreach to the region includes the following: In 2011, then-President Obama met with Pacific Island leaders on the margins of the Asia Pacific Economic Cooperation (APEC) Leaders Meeting. In 2012, Hillary Clinton attended the Pacific Islands Forum annual summit, the first Secretary of State to do so, in the Cook Islands, where she noted U.S. assistance to the region and highlighted three U.S. objectives: trade, investment in energy, and sustainable growth; peace and security; and women's empowerment. In 2013, then-Secretary of State John Kerry met with Pacific Island leaders at the United Nations and pledged to work with the region to address climate change. In 2014, then-Secretary Kerry visited the Solomon Islands following devastating floods there. In 2015, then-President Obama met with leaders of Kiribati, the Marshall Islands, and Papua New Guinea at the Paris Climate Conference. In September 2016, then-Assistant Secretary of State for East Asian and Pacific Affairs Daniel Russel led a U.S. delegation to the 28 th Pacific Islands Forum in Pohnpei, Micronesia. Main topics of discussion included climate change, management and conservation of fisheries and other marine resources, sustainable development, regional economic integration, and human rights in West Papua. The region depends heavily upon foreign aid. In terms of official development assistance (ODA) as defined by the Organization for Economic Cooperation and Development (OECD), which focuses on grant-based assistance, OECD members Australia, New Zealand, the United States, France, and Japan are the principal aid donors in the Southwest Pacific. Major multilateral sources of ODA include the World Bank's International Development Association and the Asian Development Bank. According to the OECD, in 2014, the most recent year for which full data are available, the leading aid donors committed ODA to the region as follows: Australia, $850 million; New Zealand, $374 million; the United States, $277 million; France, $126 million; and Japan, $107 million. Although the United States remains one of the largest providers of ODA to the region by some measures, U.S. assistance remains concentrated among the Freely Associated States. China has become a major source of foreign assistance, but Chinese aid differs from traditional ODA due to its heavy emphasis on concessional loans and infrastructure projects (see "" China's Foreign Assistance and Trade "" below). The U.S. government administers foreign assistance to Pacific Island countries through the U.S. Agency for International Development (USAID) Office for the Pacific Islands (based in the Philippines) and Pacific Islands Satellite Office (based in Papua New Guinea). U.S. foreign assistance activities include regional environmental programs; military training; disaster assistance and preparedness; fisheries management; HIV/AIDS prevention, care, and treatment programs in Papua New Guinea; and strengthening democratic institutions in Papua New Guinea, Fiji, and elsewhere. U.S. assistance also aims to help strengthen Pacific Islands regional fora. USAID has partnered with Pacific Islands regional organizations to carry out a five-year program to coordinate responses to the adverse impacts of climate change. Through the Coastal Community Adaptation Program, USAID supports local-level climate change interventions in nine Pacific Island countries. The United States supports natural disaster mitigation and response capabilities and weather and climate change adaptation programs in the Marshall Islands and Micronesia, two low-lying atoll nations, and elsewhere in the Pacific Islands region. USAID's Regional Development Mission-Asia (RDM/A) carries out several environmental programs in the region, particularly in Papua New Guinea. The United States conducts International Military Education and Training (IMET) programs related to peacekeeping operations, strengthening national security, responding to natural and man-made crises, developing democratic civil-military relationships, and building military and police professionalism in Fiji, Papua New Guinea, Samoa, and Tonga. The Obama Administration requested $1 million in Foreign Military Financing (FMF) for FY2016 for a regional program to promote peacekeeping activities, English language capabilities, and professionalism in the military. (See Table 2 .) For FY2017, U.S. assistance aims to expand engagement with the PIF and other regional bodies to improve democratic development and governance in the region. Funding provided pursuant to the South Pacific Tuna Treaty (SPTT) constitutes a major source of U.S. assistance to some Pacific Island countries. Under the SPTT, in force since 1988, Pacific Island parties to the treaty provide access for U.S. tuna fishing vessels to fishing zones in the Southwest Pacific, which supplies one-third of the world's tuna. In exchange, the American Tunaboat Association pays licensing fees to Pacific Island parties to the treaty. In addition, as part of the agreement, the United States provides economic assistance to the Pacific Island parties totaling $21 million per year. In January 2016, the United States temporarily withdrew from the agreement, arguing that the terms were ""no longer viable"" for the U.S. tuna fleet. The U.S. fleet argued that it could no longer pay quarterly fees due to sharply declining prices for tuna and competition from other countries, some of which was illegal. U.S. boats resumed fishing in the region in March 2016 but with fewer fishing days allotted than in 2015. Talks to renegotiate the SPTT resulted in an agreement in principle in June 2016 that aims to ""establish more flexible procedures for commercial cooperation between Pacific Island Parties and US industry."" Congress plays roles in approving and overseeing the administration of the Compacts of Free Association that govern U.S. diplomatic, economic, and military relations with the Marshall Islands, Micronesia, and Palau. U.S. economic commitments to the Freely Associated States—totaling nearly $200 million in FY2015 —are administered by the Department of the Interior. The Compact of Free Association Review Agreement, signed by the United States and the Republic of Palau in 2010, awaits congressional approval. Since 2000, the Republic of the Marshall Islands has unsuccessfully sought additional compensation for damages related to U.S. nuclear testing on Marshall Islands atolls during the 1940s and 1950s. In 1947, the Marshall Islands, the Federated States of Micronesia, Palau, and the Northern Marianas, which had been under Japanese control during part of World War II, became part of the U.S.-administered United Nations Trust Territory of the Pacific Islands. In the early 1980s, the Marshall Islands and Micronesia rejected the option of U.S. territorial or commonwealth status and instead chose free association with the United States. Compacts of Free Association were negotiated and agreed by the governments of the United States, the Marshall Islands, and Micronesia, and approved by plebiscites in the Trust Territory districts and by the U.S. Congress in 1985 ( P.L. 99-239 ). Congress approved the Compact with Palau in 1986 ( P.L. 99-658 ), which Palau ratified in 1994. The Compacts were intended to establish democratic self-government and to advance economic development and self-sufficiency through U.S. grant and federal program assistance, and to further the national security of the Freely Associated States (FAS) and the United States in light of Cold War geopolitical concerns. Under the Compacts, the FAS are sovereign nations that conduct their own foreign policy, but the United States and the FAS are subject to certain limitations and obligations regarding international security and economic relations. The United States is obligated to defend the Freely Associated States against attack or threat of attack. The United States may block FAS government policies that it deems inconsistent with its duty to defend the FAS (the ""defense veto""), and it has the prerogative to reject the strategic use of, or military access to, the FAS by third countries (the ""right of strategic denial""). The United States also may establish military bases in the FAS, and the Marshall Islands is home to a premier U.S. military facility (the Ronald Reagan Ballistic Missile Defense Test Site [RTS], also known as the Kwajalein Missile Range). The Freely Associated States and their citizens are eligible for various U.S. federal programs and services. FAS citizens are entitled to reside and work in the United States and its territories as ""lawful non-immigrants"" and are eligible to volunteer for service in the U.S. armed forces. Several hundred FAS citizens serve in the U.S. military and roughly 12 FAS citizens serving in the U.S. armed forces died in the Iraq and Afghanistan war efforts. The Marshall Islands, Micronesia, and Palau were members of the U.S.-led coalition that launched Operation Iraqi Freedom in 2003. The FAS economies depend heavily on U.S. support. The Department of the Interior provides direct economic or grant assistance to the FAS. Its Office of Insular Affairs is responsible for administering the Compacts. The Compacts with the Marshall Islands and Micronesia provided economic assistance totaling roughly $2.5 billion between 1987 and 2003, including payments for damages and personal injuries caused by U.S. nuclear testing on Marshall Islands atolls during the 1940s and 1950s. In December 2003, the Compacts were amended in order to extend economic assistance for another 20 years and establish trust funds that aim to provide sustainable sources of government revenue after 2023. Projected U.S. grant assistance and trust fund contributions to the Marshall Islands for the 2004-2023 period total $629 million and $235 million, respectively. Projected grant assistance and trust fund contributions to Micronesia for the same period total $1.4 billion and $442 million, respectively. In 1986, the United States and Palau signed a 50-year Compact of Free Association. The Compact was approved by the U.S. Congress but not ratified in Palau until 1993 (entering into force on October 4, 1994). The U.S.-Palau Compact provided for 15 years of direct economic assistance, the construction of a 53-mile road system, a trust fund, services of some U.S. federal agencies such as the U.S. Postal Service and the National Weather Service, and eligibility for some U.S. federal education, health, and other programs. Between 1995 and 2009, U.S. assistance totaled over $850 million, including grant assistance, road construction, and the establishment of a trust fund ($574 million), Compact federal services ($25 million), and discretionary federal program assistance ($267 million). Under the Compact, direct economic assistance was to terminate in 2009 while annual distributions from the trust fund were to increase, to help offset the loss of economic assistance. However, Palauan leaders and some U.S. policymakers argued that continued assistance to Palau beyond 2009 was necessary. Furthermore, the value of the Compact trust fund fell from nearly $170 million to $110 million in 2008-2009 due to the global financial crisis, although it rebounded and was valued at approximately $184 million in 2015. In September 2010, the United States and Palau agreed to renew Compact economic assistance, but it awaits approval by Congress. (See Table 3 .) The 2010 accord provided for $215.75 million in direct economic assistance over an additional 15-year period (2011-2024). According to some estimates, U.S. support, including both direct economic assistance and projected discretionary program assistance, would total approximately $427 million between 2011 and 2024. In addition, the agreement committed Palau to undertake economic, legislative, financial, and management reforms. Although there has been bipartisan support for continued assistance, Congress has yet to approve the renewal agreement, also known as the Compact of Free Association Review Agreement, largely for budgetary reasons. From FY2010 to FY2016, the U.S. government continued annual direct economic assistance to Palau at 2009 levels ($13.1 million), pending congressional approval of the 2010 agreement and resolution of funding issues. Other U.S. assistance pursuant to the agreement, however, remained unfunded. During the 114 th Congress, two bills were introduced in support of the agreement to extend Compact assistance to Palau. S. 2610 , A Bill to Approve an Agreement Between The United States and the Republic of Palau, would not significantly alter total U.S. economic assistance to Palau from the levels specified in the 2010 renewal agreement, although the assistance would be allocated in different increments due in part to the delay in implementing the agreement. H.R. 4531 , To Approve an Agreement Between the United States and the Republic of Palau, and for Other Purposes, would provide an additional $31.8 million as well as reschedule U.S. assistance. In addition, the conference report ( H.Rept. 114-840 ) to accompany S. 2943 , The National Defense Authorization Act for Fiscal Year 2017, included the following statement: ""The conferees believe that enacting the Compact Review Agreement is important to United States' national security interests and, as such, believe that the President should include the Compact Review Agreement in the Fiscal Year 2018 budget request."" From 1946 to 1958, the United States conducted 67 atmospheric atomic and thermonuclear weapons tests on the Marshall Islands atolls of Bikini and Enewetak. In 1954, ""Castle Bravo,"" the second test of a hydrogen bomb, was detonated over Bikini atoll, resulting in dangerous levels of radioactive fallout upon the populated atolls of Rongelap and Utrik. Between 1957 and 1980, the residents of the four northern atolls returned to their homelands (Rongelap and Utrik in 1957; Bikini in 1968; and Enewetak in 1980). However, the peoples of Bikini and Rongelap were re-evacuated to other islands in 1978 and 1985, respectively, after the levels of radiation detected in the soil were deemed unsafe for human habitation. Although diving and tourist facilities have operated on Bikini on and off since 1996, and the U.S. government had declared some parts of Rongelap safe for human habitation following a $45 million cleanup effort, neither atoll has been resettled. Some experts claim that remediation techniques, primarily replacing surface soil in populated areas and adding potassium chloride fertilizer to agricultural areas, has made resettlement possible, although most of the displaced people have refused to return. The Compact of Free Association established a Nuclear Claims Fund of $150 million and a Nuclear Claims Tribunal (NCT) to adjudicate claims. Investment returns on the Fund were expected to generate revenue for personal injury and property damages awards, health care, resettlement, trust funds for the four atolls, and quarterly distributions to the peoples of the four atolls for hardships suffered. In all, the United States reportedly has provided over $600 million for nuclear claims, health and medical programs, and environmental cleanup and monitoring. The Compact deems the Nuclear Claims Fund as part of a ""full and final settlement"" of legal claims against the U.S. government. However, the Fund was depleted by 2009 and was not sufficient to cover the NCT's awards of $96 million to approximately 2,000 individuals for compensable injuries. In addition, the Tribunal awarded, but was unable to pay, approximately $2.2 billion to the four atoll governments for remediation and restoration costs, loss of use, and consequential damages. The Marshall Islands government and peoples of the four most-affected atolls long have argued that greater U.S. compensation was justified for loss of land, personal injuries, and property damages. They have claimed that the nuclear tests caused high incidences of miscarriage, birth defects, and weakened immune systems, as well as high rates of thyroid, cervical, and breast cancer. In addition, some experts contend that more than a dozen Marshall Islands atolls, rather than only four, were affected. Some experts have disputed the Marshall Islands claims, pointing to some earlier studies. In September 2000, the government of the Republic of the Marshall Islands (RMI) submitted to the U.S. Congress a Changed Circumstances Petition requesting additional compensation of roughly $1 billion for personal injuries, property damages, public health infrastructure, and a health care program for those exposed to radiation. The Petition based its claims upon the ""changed circumstances"" provision of Section 177 of the Compact, arguing that ""new and additional"" information, such as greater radioactive fallout than previously known or disclosed and revised radiation protection standards, constituted ""changed circumstances"" and that existing compensation was ""manifestly inadequate."" In November 2004, the George W. Bush Administration released a report evaluating the Petition, Report Evaluating the Request of the Government of the Republic of the Marshall Islands Presented to the Congress of the United States of America , concluding that there was no legal basis for considering additional compensation payments. In April 2006, the peoples of Bikini and Enewetak atolls filed lawsuits against the United States government in the U.S. Court of Federal Claims seeking additional compensation related to the U.S. nuclear testing program. The court dismissed both lawsuits on August 2, 2007. The U.S. Court of Appeals for the Federal Circuit upheld the lower court ruling on January 30, 2009, finding that Section 177 of the Compact removed U.S. jurisdiction. In April 2010, the Supreme Court declined to hear the case. In April 2014, the RMI filed suits in the United States and the International Court of Justice in the Hague against the United States and eight other nuclear powers, claiming their failure to meet their obligations toward nuclear disarmament under Article VI of the Nuclear Non-Proliferation Treaty. The lawsuits did not seek compensation but rather action on disarmament. On February 3, 2015, a federal court in California dismissed the RMI suit against the United States, on the grounds that the RMI lacked standing to bring the case and that the case was resolvable by the political branches of government rather than the courts. Some policymakers, including Members of Congress, have expressed concerns about China's growing influence in the region. China has become a growing political and economic actor in the Southwest Pacific, and some observers contend that it aims to promote its interests in a way that potentially displaces the influence of traditional actors in the region such as the United States, Australia, and New Zealand. In the view of one analyst, ""China clearly does seek to become at least a leading power in the Western Pacific and perhaps the leading power in the Western Pacific."" One expert reports that China's principal strategic activity in the region is signals intelligence monitoring. Toward this end, China reportedly has regularly sent vessels to the region that both track satellites and ballistic missiles and also gather intelligence. Other analysts argue that Beijing does not consider the South Pacific to be of key strategic importance, and note that Australian assistance remains significantly larger than that provided by Beijing. Some believe that although many Pacific Island leaders say they appreciate China's economic engagement and diplomatic policy of ""non-interference"" in domestic affairs, the region maintains strong ties to Australia and the West that are rooted in shared history and culture as well as migration. Beijing's engagement in the region has been motivated largely by a desire to garner support in international fora and find sources of raw materials. According to some analysts, China began to fill a vacuum created by waning U.S. attention following the end of the Cold War. While the United States does not maintain an embassy in several Pacific Islands countries, for example, Beijing has opened diplomatic missions in all eight of the Pacific Island countries with which it has diplomatic relations. China-Taiwan ""dollar diplomacy,"" in which the two entities competed for official diplomatic recognition through offers of foreign aid, has been a declining factor since the late 2000s. China is one of the top providers of foreign assistance in the Southwest Pacific, providing $150 million in foreign assistance per year on average during the past decade. China has held two China-Pacific Island Countries Economic Development and Cooperation Forums (2006 and 2013), where Chinese officials announced large aid packages, including pledges of preferential loans ($376 million in 2006 and $1 billion in 2013). In November 2014, Chinese President Xi Jinping travelled to Fiji to establish a strategic partnership between China and eight Pacific Island countries. China also has provided support to the Pacific Islands Forum and has helped finance some of the organization's activities and initiatives. Despite China's rise, Australia remains the dominant foreign aid donor in the region. Between 2006 and 2014, Australia reportedly provided approximately $7.7 billion in foreign aid to the region, compared to the United States ($1.9 billion), China ($1.8 billion), New Zealand ($1.3 billion), Japan ($1.2 billion), and France ($1.0 billion). In terms of grant-based aid, China's foreign assistance is relatively small. Unlike other major donors, which provide mostly grant assistance, nearly 80% of Chinese aid reportedly has been provided in the form of preferential loans, generally to finance infrastructure projects that use Chinese companies and labor. China's foreign assistance to the Southwest Pacific, like its economic assistance to many other regions, largely consists of concessional loans, infrastructure and public works projects, and investments in the extraction of natural resources. Papua New Guinea is the largest Pacific recipient of Chinese aid, having received 35% of Chinese assistance to the region. Other major recipients include Fiji, Vanuatu, and Samoa. China's foreign assistance has resulted in 218 projects since 2006, including Chinese-built roads, sea ports, airports, hydropower facilities, mining operations, hospitals, government buildings, educational facilities, sports stadiums, and other public works. Other Chinese assistance areas include public health, education, fisheries conservation, the environment, and financial support for Fiji's elections in 2014. Recent, smaller forms of aid reportedly include rowing machines for Samoa, water supply systems for small towns in Tonga, and quad bikes for Cook Islands legislators. Beijing also reportedly has provided modest military equipment and training to Fiji, Papua New Guinea, and Tonga. Some observers have criticized Chinese assistance, arguing that some infrastructure projects are poor in quality and that some Chinese loans and aid activities lack transparency and exacerbate corruption, increase debt burdens, or harm the environment. Other concerns are that some Chinese economic projects and investments do not employ local labor or that they are not directly aimed at reducing poverty. Some experts contend that Chinese aid has reduced the regional influence of Australia, the United States, and European countries, while others dispute this contention. Another issue is the relatively recent influx of Chinese traders and shop owners in some urban areas, which reportedly has caused resentment among some native residents. China is a major trading partner in the region, surpassing even Australia, and has economic interests in the following sectors: energy production (hydro power and gas), mining, fisheries, timber, agriculture, and tourism. (See Table 3 .) The largest Chinese investment project is the $1.6 billion Ramu Nickel mine in Papua New Guinea. China also has become a major source of tourists and is the only non-Pacific Island nation to be a member of the South Pacific Tourism Organization. The United States has relied upon Australia, and to a lesser extent New Zealand, to help advance shared strategic interests, maintain regional stability, and promote economic development in the Southwest Pacific. Australia has played a critical role in helping to promote security in places such as Timor-Leste, which gained its independence from Indonesia following a 1999 referendum that turned violent, the Solomon Islands, and Bougainville, which is part of Papua New Guinea. The 2016 Australia Defence White Paper articulates Australia's approach to the South Pacific: The South Pacific region will face challenges from slow economic growth, social and governance challenges, population growth and climate change. Instability in our immediate region could have strategic consequences for Australia should it lead to increasing influence by actors from outside the region with interests inimical to ours. It is crucial that Australia help support the development of national resilience in the region to reduce the likelihood of instability. This assistance includes defence cooperation, aid, policing and building regional organisations.... We will also continue to take a leading role in providing humanitarian and security assistance where required. New Zealand's Pacific identity, derived from its geography and growing population of New Zealanders with Polynesian or other Pacific Island ethnic backgrounds, as well as its historical relationship with the South Pacific, undergirds its relationship with the region. The June 2016 New Zealand Defence White Paper articulates New Zealand's ongoing interest in the South Pacific: Given its strong connections with South Pacific countries, New Zealand has an enduring interest in regional stability. The South Pacific has remained relatively stable since 2010, and is unlikely to face an external military threat in the foreseeable future. However, the region continues to face a range of economic, governance, and environmental challenges. These challenges indicate that it is likely that the Defence Force will have to deploy to the region over the next ten years, for a response beyond humanitarian assistance and disaster relief. New Zealand will continue to protect and advance its interests by maintaining strong international relationships, with Australia in particular, and with its South Pacific partners, with whom it maintains a range of important constitutional and historical links. New Zealand works closely with Pacific Island states on a bilateral and multilateral basis. It has played a key role in promoting peace and stability in the Southwest Pacific in places such as Timor-Leste, the Solomon Islands, and Bougainville, and Papua New Guinea. Approximately 60% of New Zealand's foreign assistance goes to the Southwest Pacific. In September 2015, Wellington pledged to increase foreign assistance to the region by $100 million to reach a total of $1 billion in expenditures over the next three years. New Zealand also has provided development and disaster assistance to the region. In 2015, New Zealand's then-Prime Minister John Key reaffirmed New Zealand's support for the Pacific Islands Forum and sustainable South Pacific economic development, including for sustainable fisheries. An estimated $2 billion worth of fish is taken legally from the waters of the 14 PIF countries, with an additional $400 million worth of fish thought to be taken illegally each year. France's decision to stop nuclear testing in the South Pacific in 1996 opened the way for improved relations with the region. Although much of France's regional military presence was withdrawn following its decision to stop nuclear testing, France continues to have a military presence that reportedly includes 2,800 personnel and 7 ships, including surveillance frigates and patrol vessels. France is also a member of the Quadrilateral Defense Coordination Group, along with the United States, Australia, and New Zealand, which seeks to coordinate maritime security in the South Pacific. France recently signed a $39 billion deal to provide 12 new submarines to the Australian Navy. Other external actors are becoming more active in the Southwest Pacific. Russia reportedly has sent a shipment of weapons with advisors to help train the Fijian military in the use of recently delivered equipment. India reportedly is exploring the possibility of establishing a satellite monitoring station in Fiji. Indonesia, too, has become more interested in the region, often with regards to its relations with the Melanesian countries. Indonesia has been a dialogue partner of the Pacific Islands Forum since 2001. Indonesian objectives related to the PIF include repositioning Indonesia's foreign policy towards a ""look east policy"" and getting ""closer to the countries of the Pacific region,"" maintaining ""the integrity of the unitary Republic of Indonesia,"" and improving the ""image of Indonesia."" The PIF and Melanesian countries have criticized human rights abuses in West Papua, Indonesia, which has a large, ethnically Melanesian indigenous population. Alleged human rights violations include the harassment of human rights groups and arbitrary arrests of independence activists. Some Melanesian countries have supported self-determination for West Papua and its inclusion in the Melanesian Spearhead Group. Indonesia has responded that it is a democratic country that is committed to human rights. It has resisted ""interference in its domestic affairs"" and in 2015 refused to accept a PIF fact-finding mission to investigate human rights violations. Pacific Island countries have sought international support for helping them to cope with the impacts of climate change, reduce greenhouse gas (GHG) emissions, and increase renewable energy use and energy efficiency. U.S. assistance efforts in the region have focused on climate change adaptation and strengthening governmental capacity to attract international financing and successfully implement environmental programs. Many experts view the Pacific Islands as highly vulnerable to the effects of climate change and other environmental problems, such as sea level rise, ocean acidification, invasive species, and extreme weather events. These environmental issues can have adverse effects on agriculture, drinking water supplies, fisheries, and tourism. A report by the U.S. Fish and Wildlife Service states Climate change presents Pacific Islands with unique challenges including rising temperatures, sea-level rise, contamination of freshwater resources with saltwater, coastal erosion, an increase in extreme weather events, coral reef bleaching, and ocean acidification. Projections for the rest of this century suggest continued increases in air and ocean surface temperatures in the Pacific, increased frequency of extreme weather events, and increased rainfall during the summer months and a decrease in rainfall during the winter months. Some areas of the region lie only 15 feet above sea level, and if sea levels continue to rise as projected, Kiribati, Tokelau, and Tuvalu may be uninhabitable by 2050. Some experts predict that many Pacific Islanders face displacement over the coming decades. Kiribati reportedly is buying land in Fiji in case its population needs to relocate. Much of the Republic of the Marshall Islands is less than six feet above the sea, and some experts say that rising sea levels may make many areas of the country unfit for human habitation in the coming decades . Bikini Islanders, with the support of the U.S. Department of the Interior, have asked to be allowed to resettle in the United States. They claim that Kili and Ejit, the islands to which Bikini Islanders were relocated before and after the nuclear tests of the 1940s and 1950s and where about 1,000 of them currently live, can no longer sustain them, due to a lack of resources and a greater frequency of bad weather. Recurrent flooding from storms and high tides has disrupted water supplies and destroyed crops. The Department of the Interior has proposed that the U.S. resettlement fund set up for Bikini Islanders help to support their relocation to the United States. Pacific Island states were very active in seeking to influence the outcome of the U.N. Climate Change Conference of the Parties (COP) in Paris, France, in 2015. The Paris Agreement includes several outcomes sought by Pacific Island countries, such as a commitment to limit temperature rise. The Agreement reaffirms ""the goal of limiting global temperature increase well below 2 degrees Celsius, while urging efforts to limit the increase to 1.5 degrees."" Twelve Pacific Island countries signed the Paris Agreement on April 22, 2016. The Pacific Islands Forum 2016 annual meeting continued the organization's focus on climate change. The Forum Communique included the following statement: Leaders reiterated the importance of the Pacific Islands Forum in maintaining a strong voice considering the region's vulnerabilities to the impact of climate change. Leaders welcomed the Paris Agreement and reinforced that achieving the Agreement goal of limiting global temperature increases to 1.5°C above pre-industrialised levels is an existential matter for many Forum Members which must be addressed with urgency. Leaders congratulated the eight Forum countries that have ratified the Agreement and encouraged remaining Members and all other countries to sign and ratify the Agreement before the end of 2016 or as soon as possible. Leaders called for ambitious climate change action in and across all sectors and encouraged key stakeholders to prioritise their support for the implementation of key obligations under the Agreement. Climate change and sea level rise are not the only environmental challenges ""substantially enhanced"" by anthropogenic activity facing the region. Ocean acidification is likely to have a severe impact on Pacific Island states. According to some experts, carbon dioxide, absorbed by seawater, creates acidification which in turn reduces the ability of many marine organisms, such as coral, from regenerating. Coral reefs play a key role in supporting fisheries and tourism which are two key components of the economy of many Pacific Island states. A recent study has found that coral cover in the Great Barrier Reef off the coast of Australia has declined by 50% over the past 30 years. Various studies have predicted that if current trends continue, ocean reefs will ""be the first major ecosystem in the modern era to become ecologically extinct"" by the end of the century. Others predict an earlier demise . The Southwest Pacific straddles the largest tuna fisheries in the world. According to one advocacy group, over half of the tuna consumed in the world is harvested from the Western and Central Pacific Ocean at an unsustainable rate. Many of the Pacific Islands states lack the capacity to effectively monitor and patrol their fisheries resources. In one example, Palau, a nation with a land area of 177 square miles and a maritime exclusive economic zone (EEZ) of 230,000 square miles, has a maritime police division of 18 personnel and one patrol ship. The global black market for seafood is estimated to be worth $20 billion with one in five fish caught illegally . As a result, poaching of fisheries is a major problem in the Pacific. In order to minimize poaching, the United States and nine Pacific Island states have entered into ship rider agreements. Under the program, enforcement officials from Pacific I sland states may ride U.S. Coast Guard ships while they are patrolling the EEZs of those states. U.S . Coast Guard ships are empowered to enforce the laws of the host nation . New Caledonia, a territory of France, and Bougainville, which is part of Papua New Guinea, are to hold referenda on independence in 2018 and 2019. Issues and areas of possible concern to Congress include U.S. assistance for the administration of free and fair elections, the building of political institutions, and the mitigation of potential conflict. Developments in Bougainville also may affect U.S. relations with Papua New Guinea. The French Overseas Territory of New Caledonia, annexed by France in 1853 and formerly used as a penal colony for French convicts, may become the world's next state. An estimated 39% of New Caledonia's 260,000 people are Kanaks while 27% are European, with the balance composed of ""mixed race"" persons and others from elsewhere in the Asia-Pacific. In the 1980s, the indigenous Kanaks clashed with pro-France settlers. In a referendum in 1987, which was boycotted by local independence groups, New Caledonians voted to remain with France. Under the Noumea Accord of 1998, signed by France, the Kanak Socialist Liberation Front, and the territory's anti-independence RCPR Party, a referendum on independence must be held by the end of 2018. The Bougainville conflict between the Papua New Guinea Defense Force and the pro-independence Bougainville Revolutionary Army began over disputes related to the Panguna copper mine on Bougainville in the late 1980s. Key grievances related to the mine included the influx of workers from elsewhere in Papua New Guinea and Australia, environmental damage caused by the mine, and Bougainville islanders' dissatisfaction with their share of mine revenue. Tensions over the mine and secessionist sentiment led to a decade-long, low-intensity war in which an estimated 10,000 to 20,000 government troops, militants, and civilians died. Peace between the government and rebels was restored in 1997 under a New Zealand-brokered agreement. Under the terms of the agreement, a referendum on self-determination is to be held by mid-2020. A target date of June 2019 has now been agreed to by the Papua New Guinea government and Bougainville regional government. Some factions reportedly have held onto their weapons out of concern that the PNG government will not go through with the referendum. ","The Pacific Islands region, also known as the South Pacific or Southwest Pacific, presents Congress with a diverse array of policy issues. It is a strategically important region with which the United States shares many interests with Australia and New Zealand. The region has attracted growing diplomatic and economic engagement from China, a potential competitor to the influence of the United States, Australia, and New Zealand. Congress plays key roles in approving and overseeing the administration of the Compacts of Free Association that govern U.S. relations with the Marshall Islands, Micronesia, and Palau. The United States has economic interests in the region, particularly fishing, and provides about $38 million annually in bilateral and regional foreign assistance, not including Compact grant assistance. This report provides background on the Pacific Islands region and discusses related issues for Congress. It discusses U.S. relations with Pacific Island countries as well as the influence of other powers in the region, including Australia, China, and other external actors. It includes sections on U.S. foreign assistance to the region, the Compacts of Free Association, and issues related to climate change, which has impacted many Pacific Island countries. The report does not focus on U.S. territories in the Pacific, such as Guam, the Northern Mariana Islands, and American Samoa. The Southwest Pacific includes 14 sovereign states with approximately 9 million people, including three countries in ""free association"" with the United States—the Marshall Islands, Micronesia, and Palau. New Caledonia, a territory of France, and Bougainville, which is part of Papua New Guinea (PNG), are to hold referenda on independence in 2018 and 2019. U.S. officials have emphasized the diplomatic and strategic importance of the Pacific Islands region to the United States, and some analysts have expressed concerns about the long-term strategic implications of China's growing engagement in the region. Other experts have argued that China's mostly diplomatic and economic inroads have not translated into significantly greater political influence over South Pacific countries, and that Australia remains the dominant power and provider of development assistance in the region. Major U.S. objectives and responsibilities in the Southwest Pacific include promoting sustainable economic development and good governance, administering the Compacts of Free Association, supporting regional organizations, helping to address the effects of climate change, and cooperating with Australia, New Zealand, and other major foreign aid donors. U.S. foreign assistance activities include regional environmental programs, military training, disaster assistance and preparedness, fisheries management, HIV/AIDS prevention, care, and treatment programs in Papua New Guinea, and strengthening democratic institutions in PNG, Fiji, and elsewhere. Other areas of U.S. concern and cooperation include illegal fishing and peacekeeping operations. Congressional interests include overseeing U.S. policies in the Southwest Pacific and helping to set the future course of U.S. policy in the region, approving the U.S.-Palau agreement to provide U.S. economic assistance through 2024, and funding and shaping ongoing foreign assistance efforts. The Obama Administration asserted that as part of its ""rebalancing"" to the Asia-Pacific region, it had increased its level of engagement in the region. Other observers contended that the rebalancing policy had not included a corresponding change in the level of attention paid to the Pacific Islands.",govreport
"The Endangered Species Act (ESA) provides for the listing and protection of species that are endangered or threatened with extinction. Listing a species results in limitations on activities that could affect that species and in penalties for the taking (as defined in the ESA) of individuals of a listed species. Federal agencies are also required to use their existing authorities to further the purposes of the act. Under certain circumstances, federal agency actions may be exempted from the act. The exemption process and its history are the subject of this report. Federal agencies are required to consult with either the Fish and Wildlife Service (FWS) or the National Marine Fisheries Service (NMFS) (together, the Services ) to determine whether an agency project might jeopardize the continued existence of listed species or destroy or adversely modify a species' critical habitat. This process is known as consultation . The consultation concludes with the appropriate Service issuing a biological opinion (BiOp) as to the harm the project poses. If a project could jeopardize a species, a jeopardy opinion is released along with any reasonable and prudent alternatives (RPAs) to the agency action that would avoid jeopardy. To excuse any incidental taking of listed species, the Services issue an incidental take statement that includes reasonable and prudent measures (RPMs) to minimize the effects of the project. When a federal action cannot be conducted without jeopardizing species, and the federal agency believes that the RPAs would thwart the project, the federal agency, the governor of the state where the project would occur, or the licensees or permittees involved in the project may seek an exemption. Very rarely, the Service(s) may find that jeopardy would occur and that there is no RPA that would avoid jeopardy. The exemption process is also available for this circumstance. The exemption process offers the opportunity to consider extraordinary economic circumstances in the list of factors used in evaluating federal actions, and provides an opportunity for economic factors to override jeopardy to the species. However, an exemption is for a federal project, license, or action, rather than for a species—a key distinction. In more than four decades since the ESA was enacted, there have been only six instances in which an exemption was sought, and only two in which it was granted. Appendix A , Appendix B , Appendix C , and Appendix D provide discussions and histories of the six attempts to secure exemptions under the ESA. If there are future applications for exemptions, the historical prologue as seen through these past applications may prove useful, because this process is used so rarely. In addition, in the controversy over California water projects, there were proposals in the mid - and late-2000s to seek an exemption from the ESA. Appendix E provides a discussion and history of the California water conflict. The controversy over Tellico Dam in Tennessee in the 1970s set the stage for Congress's creation of the exemption process. As originally enacted in 1973, the ESA prohibited all activities detrimental to listed species with very few exceptions. In the 1970s, when the prospective impoundment of water behind the nearly completed Tellico Dam in Tennessee threatened to eradicate the only known population of the snail darter (a small fish related to perch), the Supreme Court concluded that the ""plain language"" of the ESA mandated that the gates of the dam not be closed. In Tennessee Valley Authority (TVA) v. Hill , the Court stated: One would be hard pressed to find a statutory provision whose terms were any plainer than those in § 7 of the [ESA]. Its very words affirmatively command all federal agencies ""to insure that actions authorized , funded , or carried out by them do not jeopardize the continued existence"" of an endangered species or ""result in the destruction or modification of habitat of such species.... "" This language admits of no exception.... Concededly, this view of the Act will produce results requiring the sacrifice of the anticipated benefits of the project and of many millions of dollars in public funds. But examination of the language, history, and structure of the legislation under review here indicates beyond doubt that Congress intended endangered species to be afforded the highest of priorities. After this Supreme Court decision, Congress amended Section 7 of the ESA to include a process by which economic impacts could be weighed and government projects exempted from the restrictions that otherwise would apply. The process they created is shown in Figure 1 . The Tellico Dam controversy also illustrated a common theme in ESA controversies: the protection of threatened and endangered species is rarely the chief issue. A species' need for a particular dwindling habitat and its resources often parallels human desires for the same dwindling resources. The parties to the debate have often struggled for years over the basic allocation of those resources, from Tellico River, to the Edwards Aquifer in Texas, to prairie grasslands, to water allocation in San Francisco Bay. The debate over ESA and species protection typically signals an intensification of an underlying and usually much larger struggle. In broad outline, Congress created a committee of top government officials who could pass judgment on federal projects by balancing the national interest in protecting listed species against the national interest in proceeding with an important federal project. Congress limited the parties who could apply for exemptions, and required that successful parties would be required to pay the costs of mitigating the project's effects. Because projects are exempted, rather than species, the ESA still requires that species affected by the exempted project must be conserved in their remaining habitat. While there have been a few amendments to this process in later years, the basic structure formed after Tellico Dam remains the same, and is described below. The Endangered Species Committee (ESC) reviews applications for exemptions, and is responsible for the ultimate decision. It may conduct additional fact-finding. The ESC is composed of the following members: the Secretary of the Interior (who serves as the chair), the Secretary of Agriculture, the Secretary of the Army, the Chairman of the Council of Economic Advisors, the Administrator of the Environmental Protection Agency, the Administrator of the National Oceanic and Atmospheric Administration, and one individual from each affected state. (If multiple states are involved, each state has an appropriate fraction of a vote. ) Application for an exemption is limited to three eligible entities: the federal agency proposing the action, the governor of the state in which the action is proposed, or the permit or license applicant (if any) related to that agency action. The term permit or license applicant is defined in the ESA as a person whose application to a federal agency for a permit or license has been denied primarily because of the application of the prohibitions in Section 7(a), which requires that federal agency actions avoid jeopardy or destruction or adverse modification of critical habitat. These restrictions of the exemption process clarify that the exemption process is used after a Section 7 consultation has been completed, and that the exemption process is not open to just any interested party. (See Figure 1 , Steps 3 and 7.) An exemption application must describe the consultation process already carried out between the federal agency and the Secretary (of Commerce or the Interior, as appropriate) and must include a statement explaining why the action cannot be altered or modified to conform to the requirements of the statute. (See Figure 1 , Step 9.) All applications must be submitted to the Secretary not later than 90 days after completing the consultation (i.e., issuance of a BiOp finding jeopardy to the species or destruction or adverse modification of its designated critical habitat) if the exemption applicant is the federal agency or state, or within 90 days of denial of the permit or license if the exemption applicant is a permit or license applicant. An application must set out the reasons the applicant considers an exemption warranted, include relevant documents such as a biological assessment (BA) and BiOp, and describe any alternatives to the project. Additional application requirements are contained in the relevant regulations. The Secretary may deny the application within 10 days if these initial requirements have not been completed. If the application is complete, the Secretary will publish a notice of receipt of the application in the Federal Register and notify the governor of each affected state (as determined by the Secretary), so that state members can be appointed to the ESC. The Secretary also must notify the State Department, so that its review for potential conflicts with international treaties or agreements can begin. The Secretary determines whether the federal agency and/or the exemption applicant have met three criteria: consulted in good faith and reasonably and responsibly considered modifications or any RPAs; conducted any biological assessment required; and refrained from irreversibly or irretrievably committing resources that would foreclose on the implementation of any reasonable and prudent measures to avoid jeopardy to the species or adverse modification of its critical habitat. The Secretary has 20 days from receipt of the completed application to make a finding that the exemption applicant has met the criteria. A denial for failing to meet the criteria in this stage of the application is deemed a final agency action, meaning that it has reached a stage eligible to be challenged in federal court. The last criterion, whether there has been an irreversible or irretrievable commitment of resources, harkens back to the consultation process. The statute prohibits those initiating consultation from making such a commitment of resources if it would have ""the effect of foreclosing the formulation or implementation of any reasonable and prudent alternative measures."" This serves to prevent waste of federal resources (such as time and money) on a project that may turn out to violate a federal statute. It also allows a project to be halted before any harm to listed species or their habitats occurs. Because the agency presumably is not carrying out the proposed project while the consultation occurs, it appears that the reference to commitments of resources in the exemption process refers to activities after consultation has concluded. Otherwise, after a jeopardy opinion, an agency that continued to work on a project might seek an exemption, but leave the ESC faced with a fait accompli—the loss of the species in violation of the act. Within 140 days of determining that the exemption applicant has met the requirements described above, the Secretary, in consultation with the other members of the ESC, must convene a formal hearing on the application and prepare a report. (See Figure 1 , Step 17.) The hearing is to collect evidence regarding the exemption. The formal hearing is conducted by an independent administrative law judge (ALJ), and can include witness testimony, offers of proof, and interveners. The purpose is to develop a full evidentiary record to provide a basis for the Secretary's report. If deemed necessary, the ALJ may subpoena records and testimony for the hearing. Service employees who participated in the consultation may not participate in the hearing (e.g., as advisors), but may be witnesses. By law, the Secretary's report must discuss the following: the availability of reasonable and prudent alternatives; the nature and extent of the benefits of the agency action; the nature and extent of alternative actions consistent with conserving the species or the critical habitat; a summary of whether the action is in the public interest and is nationally or regionally significant; appropriate reasonable mitigation and enhancement measures that should be considered by the ESC; and whether the applicant has made any irreversible or irretrievable commitment of resources. The ESC is required to determine whether to grant an exemption within 30 days of receiving the Secretary's report. (See Figure 1 , Step 18.) If the ESC decides more information is required, it may conduct additional fact-finding, including hosting oral presentations. The ESC has subpoena powers for obtaining information it deems necessary to reach its decision. The ESC meetings, hearings, and records are open to the public, and a notice of the hearings and meetings is published in the Federal Register . The ESC shall grant an exemption if, based on the evidence, it determines that (i) there are no reasonable and prudent alternatives to the agency action; (ii) the benefits of such action clearly outweigh the benefits of alternative courses of action consistent with conserving the species or its critical habitat, and such action is in the public interest; (iii) the action is of regional or national significance; and (iv) neither the Federal agency concerned nor the exemption applicant made any irreversible or irretrievable commitment of resources prohibited in subsection (d) of this section. [See discussion above on commitments of resources.] The second and third items give the ESC the opportunity to weigh economic impacts of an exemption and of any alternative courses of action on a national or regional scale. An exemption requires five affirmative votes (out of seven) on the committee. If it approves the exemption, the ESC is required to specify mitigation and enhancement measures in its written decision. The mitigation and enhancement measures that are required to be established by the ESC must be reasonable and ""necessary and appropriate to minimize the adverse effects"" of the approved action on the species or its critical habitat. (See Figure 1 , Step 20.) The measures can include live propagation, transplantation, and habitat acquisition and improvement. The exemption applicant (whether federal agency, governor, or permit or license applicant) is responsible for carrying out and paying for the mitigation, although the applicant may request that the Secretary carry out the mitigation or enhancement measures. If so, the applicant must fund the measures carried out by the Secretary. The cost of mitigation and enhancement measures specified in an approved exemption must be included in the overall costs of continuing the proposed action, and the applicant must report annually to the Council on Environmental Quality on compliance with mitigation and enhancement measures. Mitigation costs could be considerable and may deter applicants from seeking an exemption. An exemption from the ESC is permanent unless the Secretary later finds, based on the best scientific data available, that the exemption would result in the extinction of a species that was not the subject of consultation nor identified in a biological assessment and the ESC then determines within 60 days of the Secretary's finding that the exemption should not be permanent. In cases where the Secretary does not find that extinction will result, the exemption is permanent even with respect to species not identified in a biological assessment (BA), provided that a BA was prepared during the consultation. The ESA expressly states that the penalties that would normally apply to the taking of an endangered or threatened species do not apply to takings resulting from actions that are exempted. Exemptions apply to the specific federal agency action in the exemption application, not to the species. Consequently, even if an agency action is exempted, FWS or NMFS is still obligated to recover the species. So, for example, if the exempted action causes some portion of the range of a species to become uninhabitable (as happened with the Tellico Dam), any remaining range would become more important because there was less of it. In that remaining habitat, federal actions might receive more intense scrutiny due to the harm to the species caused by the exempted action, and the frequency of jeopardy opinions might increase. Alternatively, if the total habitat area would be unchanged, but quality of the species' habitat would be degraded under the exemption, then more scrutiny might be given to federal actions that affect the habitat (e.g., water temperature, timing, or quantity), as changes might add to the stress on the population and further slow the recovery of the species. Similarly, if the exempted action affects a critical food source, the Services might seek to enhance another food source, and so on. There are limits on the ESC's authority. (See Figure 1 , Steps 10 and 13.) The ESC cannot grant an exemption for an agency action if the Secretary of State, after a hearing and a review of the proposed agency action, certifies in writing that carrying out the action would violate a treaty or other international obligation of the United States. For example, if the species in jeopardy is a migratory bird and the action is prohibited under the Migratory Bird Treaty, then the Secretary of State may find that the action would violate that treaty, and no exemption could be granted. The Secretary of State must make this determination within 60 days ""of any application made under this section."" (The determination could be difficult, however, because the Interior Secretary's report that would fully describe the agency action would not be due for an additional 80 days, well after the deadline for the Secretary of State.) In contrast, the ESC must grant an exemption if the Secretary of Defense finds that the exemption is necessary for national security. (See Figure 1 , Step 13.) The language of this section does not make clear whether the ESC would still have to meet and vote, even though the result would already have been determined. While there have been a number of controversies over the years in which conflicts between military readiness and the ESA have been alleged, there have been no instances in which the Defense Department (DOD) has availed itself of this provision, even though the ESC result would be a certainty. DOD has claimed that the exemption provision is too cumbersome and time-consuming for its use, given the geographic array of its actions and their frequency. If there is a presidentially declared disaster, the ESA provides another option for an exemption under this process. ESA (16 U.S.C. §1536(p)) authorizes the President, after such a disaster, to make the determinations that would have been made by the Secretary and the ESC. The presidential exemption may be granted only to projects to replace or repair public facilities. To grant the exemption, the President must determine that the project is necessary to prevent the recurrence of a natural disaster and that the emergency situation does not allow ordinary procedures to be followed. The ESA provides that the ESC ""shall accept the determinations of the President."" It is unclear whether this provision means that the ESC must still be convened, even though acceptance of the determination is pre-ordained. This section of the law has not been invoked to date. If an agency action receives an exemption and avoids the penalties that otherwise would apply under the ESA, other underlying issues related to natural resources may still exist. Such conflicts often involve not only the listed species protected under the ESA but also species protected under other federal laws, state protections, and multiple levels of government, as well as a number of interest groups. As a result, the underlying conflict is rarely centered solely on threatened or endangered species. For example, in a controversy regarding river and dam management in the San Joaquin River basin and the federal Central Valley Project (CVP) in California, multiple lawsuits have been filed over the years based on both federal and state laws. These lawsuits have addressed a host of issues, such as irrigation water supply, fish and wildlife management, recreation, and the environment. The federal court decisions that formed the impetus for the San Joaquin River Restoration Settlement agreement were based not only on the ESA but also on a state law requiring dam owners to provide sufficient water for downstream fish habitat. In this and other CVP-related cases, water-flow restrictions due to ESA requirements are only one piece of the regulatory puzzle. State water quality flow requirements often limit management of pumps before ESA requirements are triggered, particularly during drought. Thus, at certain times of the year and under certain hydrological circumstances, an ESA exemption would not necessarily result in more water being pumped. In general, with respect to the ESA's interaction with state laws, where ESA requirements are stricter than state requirements or otherwise incompatible with them, then the ESA requirements will preempt the state requirements. However, in other instances, such as the aforementioned CVP-related cases, some state requirements are additional to and compatible with those of the ESA and both sets of requirements apply simultaneously. As outlined above, the exemption process is a complex affair, and even without extensions, could take 280 days. Because the resulting decision risks causing the extinction of a species, some would argue a rigorous process is appropriate; others still may find it onerous. But even if the process were simple, any potential exemption applicant would face these challenges: The applicant must fund any required mitigation measures; the funding obligation lasts for the life of the action—potentially forever, depending on the nature of the action. Because the exemption applies to the action and not to the species, FWS or NMFS must continue to attempt to recover the species. Consequently, the burden of conservation and recovery may fall more heavily elsewhere. A governor, trying to balance the interests of an entire state, might find this a particularly difficult obstacle. If conservation of a listed species is only one of various statutory obligations under federal or state laws, then an exemption from ESA for the action may not advance the action, because those other statutory obligations may still be required. Many parties to a dispute may be reluctant to appear publicly to side with the extinction of a species, no matter how uncharismatic. Moreover, if the increased risk of extinction provides only modest advancement for the action, the rewards of a successful exemption application may not seem worth the effort. As a practical matter, the consultation process itself offers federal agencies many opportunities to modify their actions to avoid jeopardizing species or adversely modifying their designated critical habitats, yet still proceed with their actions. The well-known implications of an ESA conflict generally prompt agencies to consider ESA consequences at a very early stage in their actions to avoid conflict later, and specifically to avoid the need for an exemption. Prospective applicants, whether a federal agency, a governor, or a license applicant, must balance the costs of the process described above with benefits (and costs) of winning an exemption. Even so, in many cases, some land and water resource users believe ESA protections for species to be onerous. The protection of threatened and endangered species is often only one of many complex issues surrounding debates over land use, water allocation, energy extraction, energy corridors, and the like. Parties to such debates have commonly struggled for years or even decades over the basic allocation of these resources, as illustrated by the conflicts over water resource management in California; water use in the Apalachicola-Chattahoochee basin in Alabama, Florida, and Georgia; river basin flooding in Tennessee's Tellico River; and timber harvest in the Pacific Northwest, to name only a few. But because the ESA has strong legal protections for listed species, it tends to force decisions on issues that have long been in conflict. When an exemption is considered, potential applicants may be unaware of the stringency of the process, the fact that the exemptions apply to the action rather than the species, the need for the applicant to fund potentially costly permanent mitigation, and the fact that after an exemption is granted, the burden of conservation may fall more heavily on any other areas that the species inhabits or on other resources that the species requires. These considerations likely have played a strong role in limiting interest in the exemption process. (See Appendix A , Appendix B , Appendix C , and Appendix D .) In addition, perhaps the consultation and negotiation stages provided for in the ESA accomplish the purpose of modifying proposed actions early in the planning and development stages and so avoid harm to listed species. These cautions may help explain why the exemption process has rarely been invoked in any recent case. If those involved in a project decide to proceed with an exemption application, the first step is to decide who can and should apply, and for what action. Then the exemption process described above may begin. The Secretary and then the ESC would have to make all of the required findings on which an exemption rests. Even if all of the required findings were made in favor of the applicant, mitigation determined (and the applicant, whether the action agency, the governor, or any permit applicant has the means to pay for it), and an exemption granted, controversy and legal challenges may continue. Other laws may still be in play and, as a result, conflicts may remain. Appendix A. Exemption Denied for Tellico Dam, Tennessee A dam on the Little Tennessee River was proposed by the Tennessee Valley Authority (TVA), based on arguments that it would aid navigation, power generation, and economic development. Opposition to the project arose early in the planning for the dam, because of concern over fishing, recreation, Native American religious sites, and loss of agricultural land. After discovery of the snail darter, project opponents had to decide whether to abandon their old arguments and pin their hopes on a small fish. According to one observer, ""opponents would have preferred a weapon like a bald eagle or a bear or a buffalo. But what they had was [a] fish."" Appendix B. Exemption for Grayrocks Dam, Wyoming and Nebraska The Platte River, in its lower reaches in Nebraska, is a major stopover site in the migration of endangered whooping cranes between southern Texas and north central Canada. FWS determined that the federal action agencies involved in permits for construction of the nonfederal Grayrocks Dam and Reservoir in Wyoming, along with existing projects in the Platte River basin, would have jeopardized the downstream habitat of cranes. Specifically, a reduction in instream flow as a consequence of the project as originally designed could have damaged the cranes' resting sites. (The reduction in total flow would also have threatened Nebraska irrigation interests, and caused the state to oppose Wyoming's plans.) The federal action agencies were the U.S. Army Corps of Engineers, because the dam's developers needed to obtain a Corps permit pursuant to the Clean Water Act, and the Rural Electrification Administration, which had guaranteed loans to the dam's developer. Appendix C. Exemption for BLM Timber Sales, Oregon Throughout the 1980s and 1990s, controversy abounded in the Pacific Northwest over timber harvests from federal lands. The various players included hikers, large and small timber companies, commercial fishermen and recreational anglers, Indian tribes, hunters, motorized recreation interests, water users, birders, and others. Key federal laws included the National Environmental Policy Act, the National Forest Management Act, and the Federal Land Policy and Management Act. And though the litigation history under these statutes regarding timber management in the Northwest is rich and complex, not until the listing of the northern spotted owl as threatened on June 26, 1990, was the ESA a major factor in the debate. The conflict arose because this species is heavily dependent in its entire life cycle on old growth forests of the type found in the Cascades in southern British Columbia, Washington, Oregon, and northern California. The same forest characteristics that make an area valuable to this species also make it valuable to the timber industry. The Bureau of Land Management (BLM) manages large tracts of old growth forest in Oregon, where conflicts over resource management had arisen many times; the presence of the threatened spotted owl was a new complication. BLM submitted its proposed FY1991 timber sale program to FWS for Section 7 consultation. The history below contains lawsuits and actions based on the ESA, but omits the many legal actions based on other statutes (e.g., the initial lawsuits against Forest Service timber sales under the National Forest Management Act). Appendix D. Three Attempts at an Exemption In addition to the three completed applications, there were three other instances in which applications were filed, but the applications were withdrawn or abandoned. Pittston Refinery, Eastport, Maine The Pittston Company wished to build an oil refinery at Eastport, ME, in the mouth of the Bay of Fundy, an area with one of the world's greatest tidal fluctuations (over 20 feet). In its BiOp on an EPA permit, FWS held that the refinery would jeopardize bald eagles, and NMFS held that the project would endanger whales. Initially, EPA denied Pittston's application for a permit to discharge effluent. In 1979, the company responded with two actions. First it sought an administrative appeal of the denial. Second, it applied for an exemption under ESA for its discharge permit. The company felt it was forced to take the two actions simultaneously because the ESA required an application to be filed within 90 days of the denial of a permit. In January 1979, the various parties agreed to suspend the exemption process while a compromise was sought. The effort at compromise was not successful. Environmental groups sued, asking an injunction to stop the exemption application. They argued that the case was brought prematurely, before the issue had finished with the administrative appeals process. In effect, they argued that the ESA itself was poorly written, in that it forced the applicant to carry out two procedures (appeal and exemption) simultaneously. The U.S. Justice Department agreed that the law was unclear and that the exemption process should not run concurrently with an appeal. The court eventually agreed that the exemption process could not begin until the appeals process was finished. This confusion, and apparent conflict, was addressed by Congress in the 1982 amendments to ESA. These amendments clarified that the exemption process was to be invoked only after the issuance of a BiOp and after other means of compliance had failed. In the case of a permit or license, the exemption process must also wait until after an agency formally denies the permit or license. The applicant may not simultaneously seek an administrative appeal and an exemption. Docking Area, Mound City, Illinois The Consolidated Grain and Barge Company (CGBC) sought to build a docking area for barges on the Ohio River at Mound City, IL. The area was habitat for the endangered orange-footed pearly mussel, Plethobasus cooperianus . CGBC had sought a permit from the Army Corps of Engineers (Corps) under the Rivers and Harbors Act of 1899 to construct the docking area. FWS issued a jeopardy BiOp to the Corps which denied the permit on that basis. Initially, the owner of the property agreed to provide funds for the exemption application, although CGBC was not willing to commit similar funds. On November 6, 1985, FWS published notice of the exemption application in the Federal Register . On December 6, 1985, FWS published a Federal Register notice of a hearing to be held in St. Louis, MO, on January 28, 1986. The notice indicated that the DOI Secretary agreed that the threshold criteria for beginning the exemption process (see Box 12, Figure 1 ) had been met, and set the details for the next stage of the process, that is, the hearing. The notice also reminded interested parties that the applicant had the burden of proof in the proceedings. At a pre-hearing conference with an administrative law judge on January 8, 1986, CGBC sent no one to represent its interests. A partner in a law firm of the lawyer hired by the landowner was present, but said he had limited information concerning the issue. He had no list of witnesses on which to call. The lawyer asked for a one-week extension of the hearing, but before it was held, the exemption application was withdrawn. Dredging Alligator Pass in Suwanee Sound, Florida On July 30, 1986, the consulting engineer of the Suwanee River Authority (SRA) applied for an exemption for a project to dredge Alligator Pass in Suwanee Sound, FL, an area that provided habitat for the endangered manatee. It is not clear that the consulting engineer had authority from the SRA to apply on its behalf. The project needed a permit from the Corps, which had denied it, primarily on the grounds of the presence of manatees. On August 12, 1986, the board of the SRA refused to ratify the actions of the consulting engineer and asked that the exemption application be withdrawn. In a letter on his own stationery, the engineer asked that the application be continued. After a further exchange of contradictory letters, the withdrawal stood. Appendix E. California Central Valley Project and State Water Project (Delta Pumping) Two existing federal BiOps affect coordinated operation of the federal Central Valley Project (CVP) and the California State Water Project (SWP), two of the largest water resource projects in the country. Of particular concern to many Members of Congress has been the effect of ESA pumping restrictions on water supplies available from these projects to water users in central and southern California. Many water users saw dramatically reduced supplies during a multiyear drought—in some years, receiving no water from the CVP. Whereas some parties have advocated eliminating or otherwise relaxing these pumping restrictions, others have voiced concerns about such efforts on the multiple threatened and endangered species in question, such as the Delta smelt and various salmon and other species. Although other factors, such as state water quality regulations and hydrologic limitations, play a role in how much water can be pumped and made available to water users, much attention has been paid to restrictions on project operations due to implementation of the ESA. In 2009, some parties advocated for petitioning the governor and the President to begin the ESA exemption process in response to reasonable and prudent alternatives (RPAs) developed during the ESA consultation process on the coordinated operation of the CVP and SWP. Since then, most action has been aimed at developing legislation to address the ESA restrictions. In the 114 th Congress, legislative activity focused primarily on H.R. 2898 S. 1894 , and S. 2533 . While all three bills contained provisions pertaining to pumping levels and threatened and endangered fish species, none included provisions seeking or supporting exemptions under the ESA exemption process. Provisions allowing increased pumping beyond the RPA limits under certain conditions were included in S. 612 , the Water Infrastructure Improvements for the Nation (WIIN) Act, which was signed into law on December 16, 2016 ( P.L. 114-322 ). New legislation in the 115 th Congress also could address CVP and SWP operations and implementation of the ESA.","The Endangered Species Act (ESA) is designed to protect species from extinction, but it includes an exemption process for those unusual cases where the public benefit from an action is determined to outweigh the harm to the species. This process was created by a 1978 amendment to the ESA, but it is rarely used. This report will discuss the exemption process for an agency action, with examples from past controversies, and its potential for application to actions that may affect current controversies, such as water supply. The ESA mandates listing and protecting species that are endangered or threatened with extinction. Listing a species limits activities that could affect that species and provides penalties for taking individuals of that species. The ESA also requires federal agencies to consult with the Fish and Wildlife Service or the National Marine Fisheries Service (together, the Services) to determine whether a federal action may jeopardize the continued existence of a species or harm its critical habitat. The consultation process may lead to an opinion by one of the Services that the action will jeopardize listed species or harm their critical habitats unless certain reasonable and prudent alternatives are included in the action. Rarely, the federal action agency may hold that those alternatives are inconsistent with the agency action. In other extremely rare cases, the Services may find that no alternatives are available that would allow the project to proceed and still prevent jeopardy. In either case, the following are the categories of potential applicants that can apply for an exemption for a federal action despite its effects on listed species or their critical habitat: the federal action agency interested in proceeding with the action, an applicant for a federal license or permit whose application was denied primarily because of the prohibitions of ESA requiring that federal agency actions avoid jeopardy to threatened or endangered species or harm to their critical habitats, or the governor of the state where the action was to have occurred. An exemption application is considered by a specially convened committee which may exempt the federal agency's action from the prohibitions of the ESA. The exemption process allows major economic factors to be judged to outweigh the ESA's mandate to recover a species when the federal action is found to be in the public interest and is nationally or regionally significant. The exemption process has been invoked with a dam on the Tellico River (TN), a water project in the Platt River (WY and NE), and timber sales (OR). In three other instances, the process was begun but was aborted before a decision was reached. In addition, there has been interest over the years in invoking the process in light of controversies over management of federal and state water resource projects in California, although no application has ever been filed. When a project achieves such levels of controversy, Congress is sometimes asked to intervene in the outcome, as it did in the case of the Tellico Dam and an endangered fish in the late 1970s.",govreport
"Since the enactment of the individual income tax in 1913, the appropriate taxation of capital gains income has been a perennial topic of debate in Congress. Every session, numerous bills are introduced that would change the way capital gains income is taxed. Congress has also shown a continuing interest in the tax treatment of capital losses. With the financial turmoil and the volatile stock market, many have proposed increasing the limit on capital losses that can be deducted against ordinary income (the loss limit). Some proposals would increase the loss limit to $10,000 or to $15,000 from its current $3,000. A limit on the deductibility of capital losses against ordinary income has long been imposed, in part because gains and losses are taxed or deducted only when realized. An individual who is actually earning money on his portfolio can achieve tax benefits by realizing losses and not gains (and can hold assets with gains until death when no tax will ever be paid). The loss limit prevents this selective realization of losses from being a significant problem. The problem of losses is further exacerbated by the current tax system, where the treatment of capital gains and losses is asymmetrical. Long-term gains are taxed at a maximum rate of 15%. Long-term losses are deductible without limit against short-term capital gains and net long-term losses are deductible against $3,000 of ordinary income. Both short-term capital gains and ordinary income can be taxed at rates of up to 35%. This differential allows taxpayers to time their gains and losses so as to minimize income taxes. (For example, by realizing and deducting losses in one tax year at 35% while waiting until the next tax year to realize and pay taxes on gains at 15%). Increasing the net capital loss deduction would increase the rewards of gaming the system. The empirical evidence indicates that capital gains income is heavily concentrated in the upper income ranges. It is probable that large capital losses are also concentrated in the same income ranges. Taxpayers in the middle income ranges tend to hold capital gains producing assets as part of tax favored retirement savings plans. The assets in these plans are not affected by the net loss restrictions. As a consequence, the benefits of increasing the net loss deduction would tend to accrue to taxpayers in the upper income ranges. It is also unclear whether increasing the net loss deduction would stimulate the economy. Economic analysis suggests that measures to stimulate the economy should focus on spending or on tax cuts likely to be spent, that will directly increase aggregate demand. An expanded deduction for capital losses has a tenuous connection to expanded spending; thus, presumably, the argument is that such a tax benefit will benefit the stock market. However, it is not at all certain that an increase in loss deduction would increase the stock market; it might increase sales of poorly performing stocks and depress these markets further. This report provides an overview of these issues related to the tax treatment of capital losses. It explains the current income tax treatment of losses, describes the historical treatment of losses, provides examples of the tax gaming opportunities associated with the net loss deduction, examines the distributional issues, and discusses the possible stimulative effects of an increase in the net loss deduction. Under current income tax law, a capital gain or loss is the result of a sale or exchange of a capital asset (such as corporate stock or real estate). If the asset is sold for a higher price than its acquisition price, then the sale produces a capital gain. If the asset is sold for a lower price than its acquisition price, then the sale produces a capital loss. Capital assets held longer than 12 months are considered long-term assets while assets held 12 months or less are considered short-term assets. Capital gains on short-term assets are taxed at regular income tax rates. Gains on long-term assets sold or exchanged on or after May 6, 2003, and before January 1, 2013, are taxed at a maximum tax rate of 15%. For these assets, the maximum long-term capital gains tax rate is 0% for individuals in the 10% and15% regular marginal income tax rate brackets. Losses on the sales of capital assets are fully deductible against the gains from the sales of capital assets. (Losses on the sale of a principal residence are not deductible and losses on business assets are treated as ordinary losses and deductible against business income.) However, when losses exceed gains, there is a $3,000 annual limit on the amount of capital losses that may be deducted against other types of income. Determining the amount of capital losses under the federal individual income tax involves a multi-step process. First, short-term capital losses (on assets held less than 12 months) are deducted from short-term capital gains. Second, long-term capital losses (on assets held for more than 12 months) are deducted from long-term capital gains. Next, net short-term gains or losses are combined with net long-term gains or losses. If the combination of short-term and long-term gains and losses produces a net loss, then that net loss is deductible against other types of income up to a limit of $3,000. Net losses in excess of this $3,000 limit may be carried forward indefinitely and deducted in future years, again subject to the $3,000 annual limit. Historically, Congress has repeatedly grappled with the problem of how to tax capital gains and losses. Ideally, a tax consistent with a theoretically correct measure of income would be assessed on real (inflation-adjusted) income when that income accrues to the taxpayer. Conversely, real losses should be deducted as they accrue to the taxpayer. However, putting theory into practice has been a difficult exercise. Since 1913, there has been considerable legislative change in the tax treatment of capital gains income and loss. To provide perspective for the current debate, a brief overview of the major legislative changes affecting capital losses follows. Between 1913 and 1916, capital losses were deductible only if the losses were associated with a taxpayer's trade or business. Between 1916 and 1918, capital losses were deductible up to the amount of any capital gains, regardless of whether the gains or losses were associated with a taxpayer's trade or business. From 1918 to 1921, capital losses in excess of capital gains were deductible against ordinary income. The Revenue Act of 1921 significantly changed the tax treatment of capital gains and losses. Assets were divided into short and long-term assets. Short-term gains were taxed at regular income tax rates and excess short-term losses were deductible against ordinary income. Long-term gains were eligible for tax at a flat rate of 12.5%. Net excess long-term losses were deductible against other types of income at ordinary income tax rates which, including surtax rates, went as high as 56%. This system created an asymmetrical treatment of long-term gains and losses. Excess long-term losses could be deducted at much higher tax rates than the rates applied to long-term gains. This asymmetry was rectified by the Revenue Act of 1924, which instituted a tax credit of 12.5% for net long-term losses. This approach remained in effect, with only minor modifications, between 1924 and 1938. The Revenue Act of 1938, however, introduced changes in the tax treatment of gains and losses from the sale of capital assets. Gains and losses were classified as short-term if the capital asset had been held 18 months or less and long-term if the asset had been held for longer than 18 months. Short-term losses were deductible up to the amount of short-term gains. Short-term losses in excess of short-term gains could be carried forward for one year and used as an offset to short-term gains in that succeeding year. The carryover could not exceed net income in the taxable year the loss was incurred. Net short-term gains were included in taxable income and taxed at regular tax rates. For assets held more than 18 months but less than 24 months, 66.66% of the gain or loss was recognized. For assets held longer than 24 months, 50% of the gain from the sale of that asset was recognized and included in taxable income. Net recognized long-term losses could be deducted against other forms of income without limit. This treatment, however, introduced a new inconsistency into the tax system because while only 50% of any long-term capital gain was included in the tax base, 100% of any net long-term loss was deductible from the tax base. The next significant change in the tax treatment of capital losses occurred during World War II. The Revenue Act of 1942 changed the tax treatment of capital losses in two significant ways. First, it consolidated the tax treatment of short- and long-term losses. Second, it established a $1,000 limit on the amount of ordinary income that could be offset by combined short- and long-term net capital loss. Finally, it created a five-year carry forward for net-capital losses that could be used to offset capital gains and up to $1,000 of ordinary income in succeeding years. Once again, this change introduced an inconsistency into the tax treatment of gains and losses because it allowed taxpayers to use $1 in net long-term losses to offset $1 in net short-term gains. Since only 50% of a net long-term gain was included in taxable income, including 100% of a net long-term loss created an asymmetry. For instance, if a taxpayer had a net long-term loss of $100, then it could be used to offset $100 of net short-term gains. Symmetrical treatment of long-term gains and losses, however, would allow only 50% of a net long-term loss to be deducted against net short-term gains ($100 of net long-term loss could only offset $50 of net short-term gain). This asymmetry was corrected in the Revenue Act of 1951 which eliminated the double counting of net long-term losses. The Revenue Act of 1964 repealed the five-year loss carryover for capital losses and replaced it with a unlimited loss carryover. Net losses, however, were still deductible against only $1,000 of ordinary income in any given year. The Tax Reform Act of 1969 also removed a dichotomy in the tax treatment of long-term gains and losses that had existed since 1938 by imposing a 50% limitation on the amount of net long-term losses that could be used to offset ordinary income. Under prior law, even though only 50% of net long-term gains were subject to tax, net long-term losses could be deducted in full and used to offset up to $1,000 of ordinary income. The 1969 Act repealed this provision and established a new 50% limit on the deductibility of net long-term losses, subject to the same $1,000 limit on ordinary income (hence, it took $2 of long-term loss to offset $1 of ordinary income). In addition, the law specified that the nondeductible portion of net long-term losses could not be carried forward to be deducted in succeeding years. The Tax Reform Act of 1976 increased the capital loss offset against ordinary income. Under prior law, net capital losses could offset up to $1,000 of ordinary income. The 1976 Act increased the capital loss offset limit to $2,000 in 1977 and $3,000 for tax years starting after 1977. The Revenue Act of 1978 reduced the tax rate on long-term capital gains income by increasing the exclusion from tax for long-term capital gains from 50% to 60%. The 1978 Act, however, did not reduce the limit on the deductibility of net long-term losses. Hence, while only 40% of long-term gains were included in the tax base, 50% of losses were excluded from the tax base. The Tax Reform Act of 1986 repealed the net capital gain deduction for individuals. Both short-term and long-term capital gains income were included in taxable income and taxed in full at regular income tax rates. Regular statutory income rates under the act were reduced from a maximum of 50% to 33% (28% statutory rate plus a 5% surcharge). The tax treatment of capital losses was changed by eliminating the 50% limitation on deductibility of net long-term losses. Losses could be netted against gains and any excess losses, whether short or long term, could be deducted in full against up to $3,000 of ordinary income. Net losses in excess of this amount could be carried forward indefinitely. Gradually changes were made that caused capital gains to be tax favored again. When tax rates were revised in 1990 to eliminate the ""bubble"" arising from the surcharge, a maximum rate of 28% was set for capital gains, slightly lower than the top rate of 31%. When tax rates were increased in 1993 for very high income individuals (adding a 36% and 39.6% rate), this 28% top tax rate on long-term gains was maintained, causing a wider gap between taxation of ordinary income and capital gains income. The growing asymmetry between taxes on capital gains and losses was not addressed. The Taxpayer Relief Act of 1997 was the latest major change in the tax treatment of capital gains and losses. It established the current law treatment of gains by lowering the maximum tax rate on long-term capital gains income to 20% (and creating a 10% maximum capital gains tax rate for individuals in the 15% tax bracket). The act did not change the tax treatment of capital losses. The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the 10% and 20% long-term capital gains tax rates to 5% and 15% for tax years before 2009. The reduced rates were extended through to the end of tax year 2010 by the Tax Increase Preventive and Reconciliation Act of 2005. Neither act changed the treatment of capital losses. The tax treatment of capital gains and losses has changed repeatedly over the years. Some of the legislative changes that occurred in the past were attempts to reestablish symmetry between the tax treatment of capital gains and capital losses. Under current law, asymmetries between the tax treatment of capital gains and losses remain. Currently, net long-term losses are deductible against net short-term gains without limit. This rule introduces inconsistencies because net long-term gains are taxed at a maximum rate of 15% while net long-term losses can be deducted against short-term gains which can be taxed at rates up to 35%. Additionally, net long-term losses can be deducted against up to $3,000 of ordinary income even though the maximum rate on ordinary income is 35% while the maximum rate on long-term gains is 15%. The recent downturn in the stock market has prompted some analysts to suggest increasing the net capital loss limitation as a means of softening the downturn for some investors. However, simply increasing the loss limitation would tend to increase the dichotomy between the tax treatment of gains and losses. Given these suggestions, a review of the rationale behind the net loss limitation may prove valuable. The loss limitation was originally enacted because taxpayers have control over the timing of the realization of their capital gains and losses. They can elect to sell assets with losses and hold assets with gains, thus minimizing their capital income tax liabilities. When capital gains income is taxed more lightly than other types of income, allowing capital losses to offset other income without limit increases a taxpayer's ability to minimize income taxes by altering the timing of the realization of gains and losses. For example, consider the case of a taxpayer who, on the last day of a tax year, wishes to sell two assets. The sale of the first asset would produce a long-term gain of $20,000 while the sale of the second asset would produce a long-term loss of $20,000. If the taxpayer sold both assets in the same tax year, then the two sales would net to zero and there would be no taxes owed on the transactions. However, if there were no loss limitation, then the taxpayer could significantly reduce his taxes by realizing the gain this tax year and postponing the realization of the loss until the next tax year (or vice versa). Realization of the $20,000 long-term gain in the current tax year would cost the taxpayer $3,000 in federal income taxes (15% maximum long-term capital gains tax rate times the $20,000 capital gain). By waiting and taking the loss the next tax year, the taxpayer could reduce his federal income taxes by $7,000 (35% maximum tax rate on ordinary income times the $20,000 long-term loss). Hence, with no capital loss limitation, the taxpayer could reduce his net federal income taxes by $4,000 simply by changing the timing of the realizations of gains and losses. It should be noted that current law allows for an unlimited carry forward of excess losses. Hence, taxpayers do not forfeit the full value of excess losses because they can deduct those losses in future years. The actual cost to the taxpayer of forgoing the full loss in the current year is the interest that would have been earned on the additional tax reduction that would have been realized had there been no excess loss limitation. For example, consider a scenario where a taxpayer has a net long-term capital loss of $20,000. If there were no loss limitation, the taxpayer could deduct the entire loss against other income in the first year and, assuming the highest marginal tax rate of 35%, reduce his income tax liability by $7,000 ($20,000 times 0.35). Now consider the situation with a $3,000 annual loss limitation. If the taxpayer had no net capital gains in any subsequent year, then it would take the taxpayer seven years to deduct the full $20,000 capital loss ($3,000 loss deduction for six years and a $2,000 loss deduction in the seventh year). Once again assuming the taxpayer faces the highest marginal tax rate of 35% (and that the rate does not change over the seven year period) the taxpayer will reduce his taxes over the period by $7,000. Since money has a time value, however, the $7,000 in tax savings taken over seven years is not as valuable as the $7,000 in tax savings taken in the first year when there was no loss limitation. If an interest rate of 5% is assumed, then the present value of the $7,000 in tax savings over seven years is $6,118. So under this worst case scenario, in present value terms, the annual capital loss limitation would reduce the tax savings in this example by approximately $882. It is also worth noting that if the tax rate on long-term gains and losses were symmetrical at 15%, then the full deduction of a $20,000 net long-term loss would reduce the taxpayer's income tax liability by only $3,000 ($20,000 loss times 15% tax rate). Hence, even with the annual loss limitation, taxpayers with net long-term capital losses receive more tax savings under the current system than if there were a symmetrical tax rate on long-term gains and losses. (In the preceding example where the $20,000 was deducted at regular income tax rates over seven years the present value of the tax savings was $6,118 versus a $3,000 tax savings if there were a 15% symmetrical tax rate on both capital gains and losses). In most cases, the current system, even without indexing the $3,000 loss for inflation, is more generous than the system that existed in 1978. The empirical evidence establishes that capital gains are concentrated at the higher end of the income range. In 2006, the top 3% of taxpayers with over $200,000 in adjusted gross income earned 91% of schedule D capital gains. It has also long been recognized that these concentrations are somewhat overstated because large capital gains realizations tend to push individuals into higher brackets and an annual snapshot can overstate the concentration. One way to correct for this effect is to sort individuals by long-term average incomes which requires special tax tabulations. The most recent study to do so (using a somewhat different measure of income, but reporting by population share) indicated that the top 1% who earned over $200,000 from 1979-1988 received 57% of gains, and the top 3% who earned over $100,000 received 73% of the gains. By interpolation, we can see that about two-thirds of gains are received by the top 2% of the income distribution. The distortion relating to gains works in the opposite direction in the case of losses, understates the share of losses going to high income individuals, and may be much more serious. Thus, looking at losses by income class may not be very meaningful. For example, the top 3% accounted for about 30% of losses. However, there are significant losses in very low income classes that are almost certainly people whose incomes are normally high. For example, another 10% of losses are realized by individuals with no adjusted gross income. Since gains are normally much larger than losses, this distortion can be quite serious and calculations such as these probably do not tell us very much. A better calculation is the permanent capital gains share, which suggests, as noted above, that about two-thirds of gains are realized by individuals in the top 2% of the permanent income distribution, and a similar finding is probably appropriate for losses. There are other reasons to expect that lower and middle income taxpayers are unlikely to be much affected by the expansion of capital losses. First, relatively few low and middle income families directly hold stock. About 14% of families with income below $75,000 directly own corporate stock and about 35% of families with income between $75,000 and $100,000 directly own stock. Secondly, many of their assets are held (and are increasingly being held) in tax favored forms. In 2001, 29% of equities held by individuals were held in pensions (either private or state and local); moreover about of 8% of stock is held in individual retirement accounts. Assets held in these accounts are not affected by loss restrictions because in the case of traditional IRAs and pension plans the original contributions have already been deducted from income. Hence, any possible loss on the original investment has been pre-deducted from taxable income. In the case of Roth IRAs, since gains on investments are not subject to tax upon withdrawal, losses on investments should not be deducted from income. Another 7% are held in life insurance plans which are also not subject to tax. Altogether, these assets account for over 40% of equities and they are likely to be proportionally much more important for the middle class. In addition, moderate income taxpayers are more likely to hold equities in mutual funds that have mixed portfolios and typically do not report losses because they hold so many types of stocks. Only about 25% of distributions from mutual funds are reported on tax returns because the remainder of distributions occur in pension and retirement accounts. The major sources of realized capital losses for 1999 (the latest year for which this information is available) are shown in Table 1 . The largest source of losses is the sale of corporate stock, which accounts for 61% of losses reported in 1999. Other securities (for example, mutual fund shares and options) accounted for another 15%. In general, most of the capital losses are realized on assets that are predominantly owned by higher income taxpayers. Most taxpayers with incomes below $200,000 do not file a schedule D and thus have no capital losses (see Table 2 ). In contrast, over 90% of taxpayers with income over $1 million file a schedule D. Direct evidence from tax returns does suggest that only a small fraction of taxpayers experience a net capital loss (less than 7% in total). Excluding the ""No Income"" class, about 6% have any loss at all. Even among very high income taxpayers, less than 20% report a net capital loss on their schedule D. These shares would probably be even smaller for population arrayed according to lifetime income. Taxpayers with net capital losses can deduct up to $3,000 against ordinary income, but about 60% are subject to the loss limit and have to carryover the excess losses to subsequent years. Evidence indicates that of individuals who could not deduct their losses in full, two thirds were able to fully deduct losses within two years and more than 90% in six years. One study concluded that in 2003 more than half of the benefit of raising the exclusion to $6,000 would be received by tax filers with incomes over $100,000, who account for 11% of tax filers. Thus, the evidence suggests that raising the capital loss limit would benefit a relative small proportion of high income individuals. The primary objective of recent economic proposals is to stimulate the economy. Normally a tax benefit that favors individuals with high permanent incomes (as does a capital gains tax cut) is a relatively ineffective way to stimulate the economy because these individuals tend to have a higher propensity to save, and it is spending, not saving, that stimulates the economy. The most effective economic stimulus is one that most closely translates dollar for dollar into spending. Direct government spending on goods and services would tend to rank as the most effective, followed by transfers and tax cuts for lower income individuals. One argument that might be made for providing capital gains tax relief is that it would increase the value of the stock market and thus investor confidence. Indeed, such an argument has been made for a capital gains tax cut in the past. Such a link is weaker and more uncertain than a direct stimulus to the economy via spending increases or cuts in taxes aimed at lower income individuals. Indeed, it is not altogether certain that capital gains tax relief would increase stock market values—the evidence is mixed. Stock markets rise when increases in offers to buy exceed increases in offers to sell. Capital gains tax revisions may be more likely to increase sales than purchases in the short run through an unlocking effect, and this effect could be particularly pronounced in the case of an expanded capital loss deduction. Although these benefits may stimulate the stock market because they make stocks more attractive investments, they also create a short-term incentive to sell—and an incentive to sell the most depressed stocks. Thus, if the method of stimulating the economy is expected to work via an increase in stock prices, such a tax revision whose effect is expected via a boost in the stock market could easily depress stock prices further. Overall, it is a uncertain method of stimulating the economy. Several reasons have been advanced to increase the net capital loss limit against ordinary income: as part of an economic stimulus plan, as a means of restoring confidence in the stock market, and to restore the value of the loss limitation to its 1978 level. An increase in the net capital loss limit may not be an effective device to stimulate aggregate demand. In the short run, an increase in the loss limitation could produce an incentive to sell stock, which could depress stock prices and erode confidence even further. Furthermore, the empirical evidence suggests that the tax benefits of an increase in the net capital loss limitation would be received by a relatively small number of higher income individuals. The restoration of the value of the loss limitation to its 1978 level is more complicated to address, but two important comments may be made. First, there is no way to determine that a particular time period had achieved the optimal net capital lost limitation, although historically, the loss limit has been quite small. Second, while correcting the $3,000 loss limit to reflect price changes since 1978 would increase its value to about $10,000 in 2010 dollars, net long-term capital losses are generally treated more preferentially than they were prior to 1978 because of the asymmetry between loss and gain, which was never addressed during recent tax changes. Restoration of historical treatment would also require an adjustment for asymmetry. This problem with asymmetry has been growing increasingly important through the tax changes of 1990, 1993, 1997, and 2003. Raising the limit on losses without addressing asymmetry will expand opportunities to game the system. Achieving full symmetry in the system requires that the tax rate differential between short and long-term gains and losses be accounted for during the netting process. The current rate differential is approximately two to one (35% maximum tax rate on ordinary income and short-term capital gains versus an 15% maximum tax rate on long-term capital gains). Given this rate differential, symmetry could be achieved in the netting process through the following steps: In the case of a net short-term gain and a net long-term loss, $2 of net long-term losses should be required to offset $1 of short-term gain. If a net loss position remains, $2 of long-term losses should be required to offset $1 of ordinary income up to the net loss limitation. Any remaining net loss would be carried forward. In the case of a net short-term loss and a net long-term loss the simplest way is to begin with short-term losses which can be used on a dollar for dollar basis to offset ordinary income. If short-term losses exceed the limit they would be carried forward along with all long-term losses. If net short-term losses are less than the loss limitation, then $2 of net long-term loss can be used to offset each $1 remaining in the net loss limitation. Any remaining net long-term loss would be carried forward. In the case of a net short-term loss and a net long-term gain each $1 of net short-term loss should offset $2 of net long-term gain. Any net loss remaining should offset ordinary income on a dollar for dollar basis up to the net loss limitation. Any remaining net loss would be carried forward. Although the netting principles outlined above may appear complicated, they are no more complicated to implement on tax forms than the current netting procedures. Another method for achieving symmetry would be to institute a tax credit of 15% (or whatever the maximum capital gain tax rate is) for capital losses. The tax credit could be capped and the cap could be indexed to inflation. This will benefit taxpayers in the 10% and 15% tax brackets because the maximum capital gains tax rate is 0% for these taxpayers (until 2013). But these taxpayers mostly do not report capital gains and losses. This is the basic approach taken between 1924 and 1938.","Several reasons have been advanced for increasing the net capital loss limit against ordinary income: as part of an economic stimulus plan, as a means of restoring confidence in the stock market, and to restore the value of the loss limitation to its 1978 level. Under current law, long-term and short-term losses are netted against their respective gains and then against each other, but if any net loss remains it can offset up to $3,000 of ordinary income each year. Capital loss limits are imposed because individuals who own stock directly decide when to realize gains and losses. The limit constrains individuals from reducing their taxes by realizing losses while holding assets with gains until death when taxes are avoided completely. Current treatment of gains and losses exhibits an asymmetry because long-term gains are taxed at lower rates, but net long-term losses can offset income taxed at full rates. Individuals can game the system and minimize taxes by selectively realizing gains and losses, and for that reason the historical development of capital gains rules contains numerous instances of tax revisions directed at addressing asymmetry. The current asymmetry has grown as successive tax changes introduced increasingly favorable treatment of gains. Expansion of the loss limit would increase ""gaming"" opportunities. In most cases, this asymmetry makes current treatment more generous than it was in the past, although the capital loss limit has not increased since 1978. Capital loss limit expansions, like capital gains tax benefits, would primarily favor higher income individuals who are more likely to hold stock. Most stock shares held by moderate income individuals are in retirement savings plans (such as pensions and individual retirement accounts) that are not affected by the loss limit. Statistics also suggest that only a tiny fraction of individuals in most income classes experience a loss and that the loss can usually be deducted relatively quickly. One reason for proposing an increase in the loss limit is to stimulate the economy, by increasing the value of the stock market and investor confidence. Economic theory, however, suggests that the most certain method of stimulus is to increase spending directly or cut taxes of those with the highest marginal propensity to consume, generally lower income individuals. Expanding the capital loss limit is an indirect method, and is uncertain as well. Increased capital loss limits could reduce stock market values in the short run by encouraging individuals to sell. Adjusting the limit to reflect inflation since 1978 would result in an increase in the dollar limit to about $10,000. However, most people are better off now than they would be if the $3,000 had been indexed for inflation if capital losses were excludable to the same extent as long-term capital gains were taxable. For higher income individuals, restoring symmetry would require using about $2 in long-term loss to offset each dollar of ordinary income. Fully symmetric treatment would also require the same adjustment when offsetting short-term gains with long-term losses. This report will be updated to reflect legislative developments.",govreport
"The National Labor Relations Act (NLRA or ""the Act"") recognizes the right of employees to engage in collective bargaining through representatives of their own choosing. By ""encouraging the practice and procedure of collective bargaining,"" the Act attempts to mitigate and eliminate labor-related obstructions to the free flow of commerce. Although union membership has declined dramatically since the 1950s, congressional interest in the NLRA remains significant. In the 112 th Congress, over 30 bills have been introduced to amend the NLRA. Some of these bills address the timing of union representation elections, while others are concerned with varying aspects of the NLRA, such as the activities of the National Labor Relations Board (NLRB), which implements and administers the Act. Since the NLRA's enactment in 1935, the NLRB and the courts have considered a variety of issues arising under the Act. This report reviews selected decisions of the NLRB and the courts that involve topics that continue to be relevant for employers and unions during the collective bargaining process. The right to engage in collective bargaining under the NLRA does not apply to all individuals employed by an employer. Rather, the right extends only to ""employees."" Section 2(3) of the NLRA states that an employee ""shall include any employee ... but shall not include any individual ... employed as a supervisor."" An employee's job title does not determine whether an individual is a supervisor for purposes of the NLRA. Instead, the term ""supervisor"" is defined by the Act to include any individual with the authority to perform any one of 12 specified functions, if the exercise of such authority requires the use of independent judgment and is not merely routine or clerical. Section 2(11) of the NLRA states: The term ""supervisor"" means any individual having authority, in the interest of the employer, to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees, or responsibly to direct them, or to adjust their grievances, or effectively to recommend such action, if in connection with the foregoing the exercise of such authority is not of a merely routine or clerical nature, but requires the use of independent judgment. Because the 12 functions and the term ""independent judgment"" are not further defined, the NLRB and U.S. Supreme Court have sought to provide meaning to this language. In NLRB v. Kentucky River Community Care, Inc ., the Court considered whether certain nurses should be classified as supervisors for purposes of the NLRA when their judgment was informed by professional or technical training or experience. Kentucky River Community Care, the operator of a care facility for individuals with mental retardation and illness, sought to exclude six registered nurses (RNs) from a bargaining unit on the grounds that they were supervisors. The NLRB concluded that the nurses were not supervisors because they failed to exercise sufficient independent judgment. According to the NLRB, the nurses used ""ordinary professional or technical judgment"" in directing less-skilled employees to deliver services in accordance with employer-specified standards. The U.S. Court of Appeals for the Sixth Circuit rejected the NLRB's position, and the Court ultimately affirmed the Sixth Circuit's decision. The Kentucky River Court understood section 2(11) of the NLRA to set forth a three-part test for determining supervisory status. Employees will be considered supervisors if (1) they hold the authority to engage in any one of the twelve supervisory functions identified in section 2(11) of the NLRA; (2) their exercise of authority is not of a ""merely routine or clerical nature, but requires the use of independent judgment,"" and (3) their authority is held in the interest of the employer. At issue in Kentucky River , was the second part of the test. Although the Court recognized the NLRB's discretion to clarify the meaning of the term ""independent judgment,"" it maintained that it was inappropriate for the NLRB to characterize judgment that reflects ""ordinary professional or technical judgment"" as failing to be independent judgment. The Court believed that the NLRB's reference to ""ordinary or technical judgment"" established a ""startling categorical exclusion"" that was not suggested by the NLRA's statutory text. The Court observed: What supervisory judgment worth exercising, one must wonder, does not rest on 'professional or technical skill or experience?' If the Board applied this aspect of its test to every exercise of a supervisory function, it would virtually eliminate 'supervisors' from the Act. In addition, the Court indicated that it was unaware of any NLRB decision that concluded that a supervisor's judgment ceased to be independent judgment because it depended on the supervisor's professional or technical training or experience. The Court maintained that when an employee exercises one of the functions identified in section 2(11) with judgment that possesses a sufficient degree of independence, the NLRB ""invariably finds supervisory status."" Four justices dissented from the majority's position on independent judgment. The dissent maintained that the NLRB's interpretation of independent judgment was fully rational and consistent with the NLRA. The dissent noted: ""The term 'independent judgment' is indisputably ambiguous, and it is settled law that the NLRB's interpretation of ambiguous language in the [NLRA] is entitled to deference. In 2006, the NLRB revisited the issue of supervisory status in Oakwood Healthcare, Inc . Oakwood Healthcare employed approximately 181 RNs in 10 patient care units at an acute care hospital. Many of these nurses served as charge nurses who were responsible for overseeing their patient care units and assigning other RNs, technicians, and medical personnel on their shifts. Some of the RNs worked permanently as charge nurses, while others rotated into the charge nurse position. Oakwood Healthcare sought to exclude both the permanent and the rotating charge nurses from a proposed bargaining unit on the grounds that they were supervisors within the meaning of section 2(11). Oakwood Healthcare maintained that the charge nurses were supervisors because they ""used independent judgment in assigning and responsibly directing employees."" The NLRB viewed Oakwood Healthcare, Inc . as an opportunity to define the terms ""assign,"" ""responsibly to direct,"" and ""independent judgment"" as they are used in section 2(11) of the NLRA. With each term, the NLRB considered the language used by Congress, as well as the NLRA's legislative history, applicable policy considerations, and Supreme Court precedent. The NLRB concluded that the term ""assign"" should be construed to refer to the act of designating an employee to a place (such as a location or department), appointing an employee to a time, or giving significant overall duties or tasks to an employee. The NLRB noted that in the health care setting, the term ""encompasses the charge nurses' responsibility to assign nurses and aides to particular patients."" The term would not apply, however, to an individual who simply chooses the order in which an employee will perform discrete tasks within an assignment. Citing the legislative history of section 2(11), the NLRB interpreted the term ""responsibly to direct"" to apply to individuals who not only oversee the work being performed, but are held responsible if the work is done poorly or not at all. The NLRB observed: [F]or direction to be 'responsible,' the person directing and performing the oversight of the employee must be accountable for the performance of the task by the other, such that some adverse consequence may befall the one providing the oversight if the tasks performed by the employee are not performed properly. This interpretation of 'responsibly to direct' is consistent with post- Kentucky River Board decisions that considered an accountability element for 'responsibly to direct.' According to the NLRB, to establish accountability for purposes of responsible direction, it must be shown that the employer delegated to the putative supervisor the authority to direct the work and the authority to take corrective action. The possibility of adverse consequences for the putative supervisor must also be established. With regard to the term ""independent judgment,"" the NLRB maintained that at a minimum an individual must act or effectively recommend action that is ""free of the control of others and form an opinion or evaluation by discerning and comparing data."" The NLRB further elaborated that a judgment is not independent if it is dictated or controlled by detailed instructions in company policies, the verbal instructions of a higher authority, or the provisions of a collective bargaining agreement. The NLRB sought to interpret the term ""independent judgment"" in light of the phrase ""not of a merely routine or clerical nature,"" which appears before ""independent judgment"" in section 2(11). The NLRB stated: If there is only one obvious and self-evident choice ... or if the assignment is made solely on the basis of equalizing workloads, then the assignment is routine or clerical in nature and does not implicate independent judgment, even if it is made free of the control of others and involves forming an opinion or evaluation by discerning and comparing data. Applying the new definitions for the terms ""assign,"" ""responsibly to direct,"" and ""independent judgment,"" the NLRB concluded that 12 permanent charge nurses assigned to five of the 10 patient care units were supervisors for purposes of the NLRA. The NLRB declined to find that any of the charge nurses responsibly directed other employees. The NLRB noted that the charge nurses were not subject to discipline or lower evaluations if employees who were subject to the nurses failed to adequately performed their tasks. However, in five of the 10 patient care units, the NLRB found that the charge nurses did assign employees within the meaning of the NLRA. These nurses assigned employees to patients and assigned overall tasks to the employees. The charge nurses in the five units were unlike emergency room charge nurses who simply placed staff in geographic areas within the emergency room. The NLRB determined that the 12 charge nurses exercised independent judgment in accordance with section 2(11). The charge nurses made assignments in light of the skill sets of employees and the nursing time patients would require on a given shift. The NLRB noted that the ""process of equalizing work loads at the hospital involves independent judgment."" While Oakwood Healthcare maintained a written policy for assigning nursing personnel to deliver care to patients, the NLRB observed that charge nurses were given considerable latitude in making decisions on how to assign nursing personnel. Ultimately, the NLRB concluded that when a charge nurse makes an assignment based on the skill, experience, and temperament of nursing personnel and the patients, that nurse has ""exercised the requisite discretion to make the assignment a supervisory function 'requir[ing] the use of independent judgment.'"" In addition to recognizing the right of employees to engage in collective bargaining, the NLRA prohibits certain misconduct by both employers and unions that interferes with that right. Section 8(a)(1) of the Act states that it shall be an unfair labor practice for an employer to ""interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7."" Similarly, section 8(b)(1)(A) of the NLRA provides that it shall be an unfair labor practice for a labor organization or its agents to ""restrain or coerce ... employees in the exercise of the rights guaranteed in section 7 ..."" Although the NLRB has suggested in the past that Congress did not intend for section 8(b)(1)(A) to be given the broad application sometimes accorded to section 8(a)(1), section 8(b)(1)(A) appears to be viewed generally as a counterpart to section 8(a)(1). Indeed, in Capital Service, Inc. v. NLRB , a 1953 case involving a union boycott of goods manufactured by employees who resisted unionization, the U.S. Court of Appeals for the Ninth Circuit observed that it was ""inconceivable"" that the NLRA ""intended the identical words 'restrain or coerce' of 8(a)(1) and 8(b)(1) to have a different meaning when applied to a labor organization from that when applied to an employer."" To determine whether an unfair labor practice has been committed under either subsection, a reviewing court asks the same question: whether the misconduct ""reasonably tends"" to restrain or coerce employees in the exercise of their rights under the NLRA. Courts have emphasized that the actual effect of the misconduct is immaterial. In Int'l Union of Operating Engineers, AFL-CIO v. NLRB , a 1964 case involving picketing and the right of employees to refrain from union activities, the Third Circuit maintained: ""That no one was in fact coerced or intimidated is of no relevance. The test of coercion and intimidation is not whether the misconduct proves effective."" Section 8(a)(1) of the NLRA prohibits not only the use or threatened use of violence against an employee for exercising his rights under section 7 of the Act, but also verbal threats to adversely affect an employee's employment status or working conditions. In NLRB v. Gissel Packing Co., Inc ., the Supreme Court explained: [A]n employer is free to communicate to his employees any of his general views about unionism or any of his specific views about a particular union, so long as the communications do not contain a 'threat of reprisal or force or promise of benefit.' He may even make a prediction as to the precise effects he believes unionization will have on his company. In such a case, however, the prediction must be carefully phrased on the basis of objective fact to convey an employer's belief as to demonstrably probable consequences beyond his control or to convey a management decision already arrived at to close the plant in case of unionization. Whether an employer's communication to its employees constitutes an unlawful threat for purposes of section 8(a)(1) is generally fact-specific and requires consideration of the totality of the circumstances. The Gissel Court noted that any assessment of the precise scope of employer expression ""must be made in the context of its labor relations setting"" and must take into account the economic dependence of the employees on their employers. An employer's interrogation of its employees as to union sympathy and affiliation may also violate section 8(a)(1) of the Act because such an interrogation has a ""natural tendency to instill in the minds of employees fear of discrimination on the basis of the information the employer has obtained."" In Blue Flash Express, Inc ., the NLRB indicated that it would consider five factors when determining whether an interrogation reasonably tends to restrain or interfere with the exercise of rights guaranteed by the NLRA: the timing of the interrogation; the place of the interrogation; the information sought during the interrogation; the identity of the interrogator; and the employer's conceded preference with respect to the subject of the interrogation. Using these factors, the Board found a violation of section 8(a)(1) when an employer interrogated an employee after a performance review, despite resistance by the employee. The Board also found a violation when an interrogation was conducted by a high-level supervisor, without a legitimate purpose, and without any assurances against reprisals. The use or threatened use of violence by a union or one of its agents is similarly considered an unfair labor practice under section 8(b)(1)(A) of the NLRA. Other acts by unions have been found to violate section 8(b)(1)(A), including encouraging employees to quit their jobs because they were not members of the union, and threatening discharge for failure to sign union authorization cards. In Local Union No. 697 (UE & C Catalytic, Inc.) , the NLRB found a violation of section 8(b)(1)(A) when a local union engaged in a pattern of misconduct to get members of other unions employed at an Amoco refinery, identified as ""travelers,"" to abandon their jobs because they were not members of the local union and because a large number of local members were out of work. The pattern of misconduct included repeated requests and suggestions that the travelers quit their jobs and volunteer for layoffs. The local also devised a credentialing system just for the travelers and refused to renew some of the credentials. The NLRB concluded that the local's efforts were coercive and meant to intimidate the travelers into leaving the refinery: ""It wanted the travelers to leave the Amoco jobsite because they were not members of [the local] and because members were out of work."" The NLRB has indicated that section 8(b)(1)(A) ""broadly interdicts any union conduct threatening job security of employees because of the employees' refusal or failure to abide by union membership conditions."" By telling employees that they must sign a union authorization card or be subject to termination, a union makes ""an implied threat of reprisal calculated to interfere with the employees' statutory right to refrain from any and all union activities."" Unions have been found to violate section 8(b)(1)(A) by engaging in other misconduct, including attempting to cause an employer to discharge employees because they opposed the union leadership, refusing to refer dissident union members for jobs, and threatening employees with the loss of employment if they contested a union election. While section 8(a)(1) of the NLRA does prohibit an employer from interfering with the right of employees to engage in collective bargaining, the NLRB has long maintained that an employer may make antiunion, but noncoercive, speeches to their employees on company time and on company property without allowing a union an equal opportunity to reply. In Livingston Shirt Corp ., the NLRB noted: [W]e find nothing in the statute which even hints at any congressional intent to restrict an employer in the use of his own premises for the purpose of airing his views. On the contrary, an employer's premises are the natural forum for him just as the union hall is the inviolable forum for the union to assemble and address employees. We do not believe that unions will be unduly hindered in their right to carry on organizational activities by our refusal to open up to them the employer's premises for group meetings, particularly since this is an area from which they have traditionally been excluded, and there remains open to them all the customary means for communicating with employees. Last-minute speeches made by employers, however, have been distinguished from other pre-election speeches. In Peerless Plywood Co ., decided the same day as Livingston Shirt , the NLRB declared that employers and unions are prohibited from making election speeches on company time to massed assemblies of employees within 24 hours before an election. The NLRB maintained that such speeches interfere with a free election by creating a ""mass psychology which overrides arguments made through other campaign media and giv[ing] an unfair advantage to the party, whether employer or union, who in this manner obtains the last most telling word."" In 1956, the Court considered whether an employer could prohibit the distribution of union literature on its company-owned parking lots by nonemployee union organizers. In NLRB v. Babcock & Wilson Co ., the employer contended that it had a consistent policy against all pamphleteering and that it was not attempting to impede its employees' collective bargaining rights when it restricted the distribution of union literature on company property. The Court maintained an employer cannot be compelled to allow the distribution of union literature on its premises if a union can reach employees through other channels of communication. If, however, the employer's location and the employees' residences place the employees beyond the reach of reasonable union efforts to communicate with them, the employer must allow the union to approach its employees on its property. In Babcoc k , the Court ultimately found that the employer's restrictions were permissible because its plants were close to the communities where a large percentage of employees lived, and various methods of communication were available to the union. In Lechmere v. NLRB , a 1992 case involving the efforts of the United Food and Commercial Workers Union, AFL-CIO, to organize employees at a retail store, the Court reaffirmed its holding in Babcock . Rejecting the NLRB's conclusion that there were no reasonable, alternative means for the union to communicate with Lechmere's employees, the Court emphasized that Babcock requires access to an employer's property only when the employer's location and the employees' residences place the employees beyond the reach of reasonable union efforts to communicate with them. The Court identified logging camps, mining camps, and mountain resort hotels as ""classic examples"" where union access would be permitted. The Court further noted that the union has the heavy burden of establishing employee isolation and showing that no other reasonable means of communicating with employees exists. As in Babcock , the Court in Lechmere found that the union did have reasonable access to the retail employees and that this accessibility was suggested by the union's success in contacting a substantial percentage of them directly via mailings, phone calls, and home visits.","The National Labor Relations Act (NLRA or ""the Act"") recognizes the right of employees to engage in collective bargaining through representatives of their own choosing. By ""encouraging the practice and procedure of collective bargaining,"" the Act attempts to mitigate and eliminate labor-related obstructions to the free flow of commerce. Although union membership has declined dramatically since the 1950s, congressional interest in the NLRA remains significant. In the 112th Congress, over 30 bills have been introduced to amend the NLRA. Some of these bills address the timing of union representation elections, while others are concerned with varying aspects of the NLRA, such as the activities of the National Labor Relations Board (NLRB), which implements and administers the Act. Since the NLRA's enactment in 1935, the NLRB and the courts have considered a variety of issues arising under the Act. This report reviews selected decisions of the NLRB and the courts on three of them. Determining when an employee may be deemed a supervisor for purposes of coverage under the Act is important because the right to engage in collective bargaining is extended only to employees under the NLRA. Employees who are properly classified as supervisors are not afforded collective bargaining rights. Both employers and unions are prohibited from restraining or coercing employees in the exercise of the rights guaranteed to them under the Act. In general, to determine whether an unfair labor practice has been committed by either an employer or union, a reviewing court asks whether the misconduct ""reasonably tends"" to restrain or coerce employees in the exercise of their rights under the NLRA. Courts have emphasized that the actual effect of the misconduct is immaterial. Finally, pre-election communication with employees may influence the outcome of a representation election. While the NLRA does prohibit an employer from interfering with an employee's collective bargaining rights, decisions discussed in this report indicate that an employer does not violate the Act in all cases when it denies a union access to its property.",govreport
"Banks play a central role in the financial system by connecting borrowers to savers and allocating capital across the economy. As a result, banking is vital to the health and growth of the U.S. economy. In addition, banking is an inherently risky activity involving extending credit and taking on liabilities. Therefore, banking can generate tremendous societal and economic benefits, but banking panics and failures can create devastating losses. Over time, a regulatory system designed to foster the benefits of banking while limiting risks has developed, and both banks and regulation have coevolved as market conditions have changed and different risks have emerged. For these reasons, Congress often considers policies related to the banking industry. Recent years have been a particularly transformative period for banking. The 2008-2009 financial crisis threatened the total collapse of the financial system and the real economy. Many assert only huge and unprecedented government interventions staved off this collapse. Others argue that government interventions were unnecessary or potentially exacerbated the crisis. In addition, many argue the crisis revealed that the financial system was excessively risky and the regulatory system had serious weaknesses. Many regulatory changes were made in response to perceived weaknesses in the financial regulatory system, including to bank regulation. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act ( P.L. 111-203 ; Dodd-Frank Act) in 2010 with the intention of strengthening regulation and addressing risks. In addition, U.S. and international bank regulators agreed to the Basel III Accords—an international framework for bank regulation—which called for making certain bank regulations more stringent. In the ensuing years, some observers have raised concerns that the potential benefits of the regulatory changes (better-managed risks, increased consumer protection, greater systemic stability, etc.) are outweighed by the potential costs (e.g., reduced credit availability for consumers and businesses, and slower economic growth). Meanwhile, market forces and economic conditions continue to affect the banking industry coincident with the implementation of new regulation. This report provides a broad overview of selected banking-related issues, including prudential regulation, consumer protection, ""too big to fail"" (TBTF) banks, community banking, regulatory agency structures and independence, and recent market and economic trends. It is not an exhaustive look at all bank policy issues, nor is it a detailed examination of any one issue. Rather, it provides concise background and analyses of certain prominent issues that have been the subject of recent discussion and debate. In addition, this report provides a list of Congressional Research Service reports that examine specific bills—including the Financial CHOICE Act ( H.R. 10 ) and the Economic Growth, Regulatory Relief, and Consumer Protection Act ( S. 2155 ). Bank failures can inflict large losses on stakeholders, including taxpayers via government ""safety nets"" such as deposit insurance and Federal Reserve lending facilities. Furthermore, some argue that in the presence of deposit insurance, commercial banks may be subject to moral hazard —a willingness to take on excessive risk because of external protection against losses. In addition, failures can cause systemic stress and sharp contraction in economic activity if they are large or widespread. To make such failures less likely—and to reduce losses when they do occur—regulators utilize prudential regulation. These ""safety and soundness"" regulations are designed to ensure banks are safely profitable and to reduce the risk of failure. This section provides background on these regulations and analyzes selected issues related to them, including regulatory requirements related to capital ratios, including leverage ratios and risk-weighted capital ratios; and restrictions on permissible activities, such as the Volcker Rule (which restricts proprietary trading). A bank's balance sheet is divided into assets, liabilities, and capital. Assets are largely the value of loans owed to the bank and securities owned by the bank. To make loans and buy securities, a bank secures funding by either issuing liabilities or raising capital. A bank's liabilities are largely the value of deposits and borrowings the bank owes savers and creditors. Capital is raised through various methods, including issuing equity to shareholders or issuing special types of bonds that can be converted into equity. Capital—unlike liabilities—does not require repayment of a specified amount of money, and so its value can fluctuate. Banks profit in part because many of their assets are generally riskier, longer-term, and more illiquid than their liabilities, which allows the banks to earn more interest on their assets than they pay on their liabilities. The practice is usually profitable, but does expose banks to risks that can potentially lead to failure. While the value of bank assets can decrease, liabilities generally cannot. Capital, though, gives the bank the ability to absorb losses. When asset value declines, capital value does as well, allowing the bank to meet its rigid liability obligations and avoid failure. Based on these balance sheet characteristics, failures can be reduced if (1) banks are better able to absorb losses or (2) they are less likely to experience unsustainably large losses. To increase the ability to absorb losses, regulators can require banks to hold a minimum level of capital, liquidity, or stable funding. These levels are expressed as ratios between items on bank balance sheets and are called regulatory ratio requirements . To reduce the likelihood and size of potential losses, regulators prohibit banks from activities that could create excessive risks, implementing permissible activity restrictions . Banks have been subject to ratio requirements for decades. U.S. bank regulators first established explicit numerical ratio requirements in 1981. In 1988, they adopted the Basel Capital Accords proposed by the Basel Committee on Banking Supervision (BCBS)—an international group of bank regulators that sets international standards—which were the precursor to the ratio requirement regime used in the United States today. Those requirements—now known as ""Basel I""—were revised in 2004, establishing the ""Basel II"" requirements that were in effect at the onset of the crisis in 2008. In 2010, the BCBS agreed to the ""Basel III"" standards. Pursuant to this agreement, U.S. regulators finalized new capital requirements in 2013, with full implementation expected by 2019; finalized a liquidity requirement for large banks in 2014, with full implementation expected in 2017; and proposed a funding ratio for large banks in 2016. Restrictions on permissible activities have also evolved over time and generally were made more stringent following the crisis to address potential weaknesses. Historical examples of such restrictions are found in Sections 16, 20, 21, and 32 of the Banking Act of 1933 (P.L. 73-66)—commonly referred to as the Glass-Steagall Act. Glass-Steagall generally prohibited certain deposit-taking banks from engaging in certain securities markets activities associated with investment banks, such as speculative investment in equity securities. Over time, regulators became more permissive in their interpretation of Glass-Steagall, allowing banks to participate in more securities market activities, directly or through affiliations. In 1999, the Gramm-Leach-Bliley Act repealed two provisions of Glass-Steagall, further expanding permissible activities for certain banks. The financial crisis elevated the debate over what activities banks should be allowed to engage in. Certain provisions in Dodd-Frank placed restrictions on permissible activities to reduce banks' riskiness. Section 619 of Dodd-Frank—often referred to as the ""Volcker Rule""—differs from Glass-Steagall provisions in important ways. However, it was generally designed to achieve a similar goal of separating proprietary trading —owning and trading securities for the bank's own portfolio with the aim of profiting from price changes—from depository banking. Banks are required to satisfy several different regulatory ratio requirements. A detailed examination of how these ratios are calculated is beyond the scope of this report. This examination of the policy issue only requires noting that capital ratios fall into one of two main types—a leverage ratio or a risk-weighted ratio. A leverage ratio treats all assets the same, requiring banks to hold the same amount of capital against the asset regardless of how risky each asset is. A risk-weighted ratio assigns a risk weight—a number based on the riskiness of the asset that the asset value is multiplied by—to account for the fact that some assets are more likely to lose value than others. Riskier assets receive a higher risk weight, which requires banks to hold more capital—to better enable them to absorb losses—to meet the ratio requirement. In regard to the simple leverage ratio, most banks are required to meet a 4% leverage ratio. The required risk-weighted ratios depend on bank size and capital quality (some types of capital are considered to be less effective at absorbing losses than other types, and thus considered lower quality). Most banks are required to meet a 4.5% risk-weighted ratio for the highest-quality capital and a ratio of between 6% and 8% for lower-quality capital. Banks are then required to have an additional 2.5% of high-quality capital on top of those levels as part of the ""capital conservation buffer."" The largest banks are required to hold more capital than smaller, less complex banks. These ratios for large banks will be covered in the "" Enhanced Prudential Regulation "" section below. Some observers argue that it is important to have both a risk-weighted ratio and a leverage ratio because the two complement each other. Riskier assets generally offer a greater rate of return to compensate the investor for bearing more risk. Without risk weighting, banks would have an incentive to hold riskier assets because the same amount of capital must be held against risky and safe assets. Therefore, a leverage ratio alone may not fully account for a bank's riskiness because a bank with a high concentration of very risky assets could have a similar ratio to a bank with a high concentration of very safe assets. However, others assert the use of risk-weighted ratios should be limited. Risk weights assigned to particular classes of assets could potentially be an inaccurate estimation of some assets' true risk, especially since they cannot be adjusted as quickly as asset risk might change. Banks may have an incentive to overly invest in assets with risk weights that are set too low (they would receive the high potential rate of return of a risky asset, but have to hold only enough capital to protect against losses of a safe asset), or inversely to underinvest in assets with risk weights that are set too high. Some observers believe that the risk weights in place prior to the financial crisis were poorly calibrated and ""encouraged financial firms to crowd into"" risky assets, exacerbating the downturn. For example, banks held highly rated mortgage-backed securities (MBSs) before the crisis, in part because those assets offered a higher rate of return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses during the crisis. Another criticism is that the risk-weighted system involves ""needless complexity"" and is an example of regulator micromanagement. The complexity could benefit the largest banks that have the resources to absorb the added regulatory cost compared to small banks that could find compliance costs more burdensome. Community bank compliance issues will be covered in more detail in the "" Regulatory Burden on Community Banks "" section later in the report. In addition to the specific issue of whether to use both leverage and risk-weighted ratios or just a leverage ratio, the role regulatory ratios in general play in bank regulation is a broader issue. Prudential regulation involves requirements besides capital ratios, such as liquidity requirements, asset concentration guidelines, and counterparty limits. Some argue that capital is essential to absorbing losses and, as long as sufficient capital is in place, banks should not be subject to some of these additional regulatory restrictions. However, others believe that the different components of prudential regulation each play an important role in ensuring the safety and soundness of financial institutions and are essential complements to bank capital. Finally, whether the benefits of prudential regulation—such as the increase in bank safety and the increase in financial system stability—are outweighed by the potential costs of reduced credit availability and economic growth is an issue subject to much debate. Capital is typically a more expensive source of funding for banks than liabilities. Thus, requiring banks to hold higher levels of capital may make funding more expensive, and so banks may choose to reduce the amount of credit available. Some studies indicate this could slow economic growth. However, no economic consensus exists on this issue, because a more stable banking system with fewer crises and failures may lead to higher long-run economic growth. In addition, estimating the value of regulatory costs and benefits is subject to considerable uncertainty, due to difficulties and assumptions involved in complex economic modeling and estimation. Therefore, this issue is unlikely to be conclusively resolved quickly or easily. If Congress decides to reduce regulatory reliance on risk-weighted ratios, it could provide a statutory exemption for banks that otherwise demonstrate they are operating in a safe manner from being subject to risk-weighted ratios. These banks' regulatory burden could be further reduced by exempting them from other prudential regulation, such as liquidity requirements, stress-testing, and dividend limitations. Exempted banks could include those that satisfy a higher simple leverage ratio, or receive a high safety and soundness rating from the bank's prudential regulator. Another possible set of changes would be to change the risk weights assigned to specific asset classes. For example, in the case that an asset type was assigned a risk weight that was too high and would likely cause unwanted market distortions, Congress could mandate that asset type be assigned a lower weight. The Volcker Rule generally prohibits depository banks from engaging in proprietary trading or sponsoring a hedge fund or private equity fund. Proponents argue that proprietary trading would add further risk to the inherently risky business of commercial banking. Furthermore, because other types of institutions are very active in proprietary trading and better suited for it, bank involvement is unnecessary for the financial system. Finally, proponents assert moral hazard is problematic for banks in these risky activities. Because deposits—an important source of bank funding—are insured by the government, a bank could potentially take on excessive risk without concern about losing this funding. Thus, support for the Volcker Rule has often been posed as preventing banks from ""gambling"" in securities markets with taxpayer-backed deposits. Some observers doubt the necessity of the Volcker Rule. They assert that proprietary trading at commercial banks did not play a role in the financial crisis, noting that issues that played a direct role in the crisis—including failures of large investment banks and insurers and losses on loans held by commercial banks—would not have been prevented by the rule. The effectiveness of the Volcker Rule in reducing bank risk is also disputed. While the activities prohibited under the Volcker Rule pose risks, it is not clear whether they pose greater risks to bank solvency and financial stability than ""traditional"" banking activities, such as mortgage lending. Furthermore, taking on additional risks in different markets might diversify a bank's risk profile, making it less likely to fail. Some suggest that restricting certain activities only at depository bank subsidiaries and allowing them at completely separate nonbank subsidiaries may appropriately protect deposits while allowing diversification in the larger organization. Some contend that the Volcker Rule imposes a regulatory burden that could affect banks' involvement in beneficial trading activities and reduce financial market efficiency. The rule includes exceptions for when bank trading is deemed appropriate—such as when a bank is hedging against risks and market-making. This poses practical supervisory problems. For example, how can regulators determine whether a broker-dealer is holding a security for market-making, as a hedge against another risk, or as a speculative investment? Differentiating among these motives creates regulatory complexity and compliance costs that could affect bank trading behavior. In addition, whether relatively small banks should be exempt from the rule is a debated issue. Some observers contend that the vast majority of community banks do not face compliance obligations under the rule and do not face an excessive burden by being subject to it. They argue that community banks subject to compliance requirements, those with traditional hedging activities, can comply simply by having clear policies and procedures in place that can be reviewed during the normal examination process. In addition, they assert the community banks that are engaged in complex trading should have the expertise to comply with the Volcker Rule. Others argue that the act of evaluating the Volcker Rule to ensure banks' compliance is burdensome in and of itself. They support a community bank exemption so that community banks and supervisors would not have to dedicate resources to complying with and enforcing a regulation whose rationale is unlikely to apply to smaller banks. Several different approaches are available if Congress decided to amend the prohibitions mandated by the Volcker Rule. If it is determined that any ban on proprietary trading by commercial banks is unnecessary, unduly burdensome, or too difficult to enforce, then Congress could repeal the rule and not replace it with different prohibitions. If instead the issue is that the rule as currently formulated is problematic, then Congress could repeal the rule and replace it with different provisions, perhaps similar to those in the Glass-Steagall Act. Finally, if it is only the rule's applicability to small banks that is problematic, Congress could enact an exemption for a certain class of banks. Financial products can be complex and potentially difficult for consumers to fully understand. Also, consumers seeking loans or financial services could be vulnerable to deceptive or unfair practices. To reduce the occurrence of bad outcomes, laws and regulations have been put in place to protect consumers. This section provides background on consumer protection and analyzes issues related to it, including the degree to which the Consumer Financial Protection Bureau's (CFPB's) authorities, structure, regulations, and enforcement actions have struck the appropriate balance between protecting consumers and the availability of credit; and whether certain mortgage lending rules have struck the appropriate balance between protecting consumers and the availability of credit. Financial transactions are subject to various state and federal laws designed to protect consumers and ensure that lenders use fair lending practices. Federal laws and regulations take a variety of approaches and address different areas of concern. Disclosure requirements are intended to ensure consumers adequately understand the costs and other features and terms of financial products. Unfair, deceptive, or abusive acts and practices are prohibited. Fair lending laws prohibit discrimination in credit transactions based upon certain borrower characteristics, including sex, race, religion, or age, among others. In addition, banks are subject to consumer compliance regulation, intended to ensure that banks are in compliance with relevant consumer-protection and fair-lending laws. For many observers, the onset of the financial crisis revealed weaknesses in the regulatory system as it related to consumer protection. In particular, many observers assert mortgages that were made using weak underwriting standards and arguably deceptive practices precipitated the crisis when the borrowers defaulted at increasingly high rates. In response, the Dodd-Frank Act established the CFPB—a new regulatory agency focused on consumer protection in financial transactions with wide-reaching authorities to regulate consumer financial products such as mortgages. In addition, other Dodd-Frank provisions directed agencies—including banking regulators and the CFPB—to implement new mortgage lending rules and amend existing ones. Prior to the Dodd-Frank Act, federal banking regulators—the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation—were charged with the two-pronged mandate of regulating for both safety and soundness (prudential regulation, discussed in previous sections) as well as consumer compliance. The CFPB was established with the single mandate to implement and enforce federal consumer financial law while ensuring consumers can access financial products and services. The CFPB also works to ensure the markets for consumer financial services and products are fair, transparent, and competitive. To achieve these outcomes, the CFPB was granted certain regulatory authorities over banks, as well as certain other nonbank providers of consumer products and services. Those powers vary based on whether a bank holds more or less than $10 billion in assets. Regulatory authorities related to consumer compliance fall into three broad categories: supervisory , which includes the power to examine and impose reporting requirements on financial institutions; enforcement of various consumer-protection laws and regulations; and rulemaking , which includes the power to prescribe regulations pursuant to federal consumer-protection laws that govern a broad and diverse set of consumer financial activities and services. For banks with more than $10 billion in assets, the CFPB is the primary regulator for consumer compliance, whereas safety and soundness regulation continues to be performed by the prudential regulator. As a regulator of larger banks, the CFPB has rulemaking, supervisory, and enforcement authorities. A large bank, therefore, has different regulators for consumer protection and safety and soundness. For banks with $10 billion or less in assets, the rulemaking, supervisory, and enforcement authorities for consumer protection are divided between the CFPB and a prudential regulator. The CFPB may issue rules that apply to smaller banks, but the prudential regulators maintain primary supervisory and enforcement authority for consumer protection. The CFPB has limited supervisory and enforcement powers over small banks. It can participate in examinations performed by the prudential regulator on a sampling basis. Also, the CFPB may refer potential enforcement actions against small banks to the banks' prudential regulators, but the prudential regulators are not bound to take any substantive steps beyond responding to the referral. The CFPB has been a controversial product of the Dodd-Frank Act. Some observers question if the CFPB as an institution is structured appropriately to achieve the correct balance between independence on the one hand and transparency and accountability on the other. The CFPB is led by a director rather than a board and is funded by the Federal Reserve rather than the traditional appropriations process. Some argue that a single director leads to a lack of diversity of viewpoints, and that funding outside the traditional appropriations process could result in a lack of accountability at an agency. The CFPB's relatively narrow mandate and the ""for cause"" removal protection for its director are also contentious issues. However, supporters of the CFPB argue other aspects of its structure provide sufficient transparency and accountability, including the director's biannual testimony before Congress and the cap on CFPB funding. They further argue it is important to ensure the CFPB is somewhat insulated from political pressures and can focus on the technical aspect of policymaking. This issue as it relates to all financial regulators is further examined in the section entitled "" Regulatory Agency Design and Independence "" found later in this report. Another policy issue is whether the CFPB's rulemaking and enforcement have struck an appropriate balance between protecting consumers and ensuring that consumers have access to financial products. The CFPB has implemented rules mandated by the Dodd-Frank Act, but regulations it has promulgated under its general authorities—such as oversight of auto lending and a rule that extends credit card-like protections to prepaid cards—are at the center of this debate. Some observers assert lenders have been subject to unduly burdensome regulations and overzealous enforcement by the CFPB in recent years, resulting in costs that outweigh the benefits. They argue that CFPB regulation increases the cost of providing certain financial products to the point that institutions reduce the availability of needed credit sources. However, the CFPB came under new leadership on November 27, 2017, and has indicated it will review aspects of its regulation and enforcement. Some observers have since asserted that certain alterations in CFPB regulation and enforcement since the leadership change have made the agency too lenient toward certain financial service providers and unduly weakened consumer protections. Other observers believe the CFPB has struck an appropriate balance in its rulemaking between protecting consumers and ensuring that credit availability is not restricted due to overly burdensome regulations on financial institutions. Analysis of whether or the degree to which recent rulemakings have restricted the availability of credit is complicated by the concurrent effects of economic conditions and the financial crisis on credit conditions. Also, many significant CFPB rulemakings have been in effect only since early 2014 or later, and the lack of a track record and data is an additional barrier to conclusive examination of the issue. A third issue is whether the $10 billion asset threshold at which the CFPB becomes a bank's primary regulator for consumer compliance is set at an appropriate level. Many think having two separate agencies handle supervision for prudential regulation and consumer protection compliance would be unnecessarily burdensome for small banks. However, there is disagreement over the size at which that becomes the case. Supporters of raising the threshold argue it would appropriately reduce the regulatory burden on banks that are still relatively small, and ""would still be examined by their primary regulators who are required by law to enforce the CFPB rules and regulations,"" and the change would only mean banks ""wouldn't have to go through yet another exam with the CFPB in addition to the ones they already have to go through with their primary regulators."" Critics of raising the threshold argue it exempts large institutions that warrant closer supervision. They note that banks that were ""some of the worst violators of consumer protections"" in the housing bubble were fairly close to that threshold, with IndyMac at approximately $30 billion in assets being a highlighted example. Broadly, if Congress decided to restrict the CFPB's regulatory authority in financial markets, it could alter its mandate, structure, or authorities. If it is determined that the CFPB is overly focused on consumer protection to the extent that it is restricting credit availability, the agency's mandate could be expanded to a dual mandate that includes the goal of expanding consumer credit availability. Agency accountability could be increased by bringing it into the appropriations process or altering features of its leadership (e.g., by removing the director's ""for cause"" protections or replacing the directorship with a commission or board). In addition, CFPB rulemaking, supervisory, or enforcement authorities could be altered or removed. During the early 2000s, housing prices and sales—and the origination of home mortgages to finance the sales—increased rapidly. However, the housing boom subsequently was revealed to be a ""bubble""—the real economic forces that should underpin the housing market did not warrant the rapid expansion. In 2007, home prices began falling resulting in reduced household wealth, which in turn resulted in a surge in mortgage defaults, delinquencies, and foreclosures. Ultimately, the bursting of the bubble would play a significant role in the cascade of events that culminated in the financial crisis. Many factors contributed to the housing bubble and its collapse, and there is significant debate about the underlying causes even a decade later. Many observers, however, point to relaxed mortgage underwriting standards, an expansion of nontraditional mortgage products, and misaligned incentives among various participants as underlying causes. These features arguably led to too many mortgages being made imprudently by lenders to borrowers who would not repay them. Mortgage lending has long been subject to regulations intended to protect homeowners and to prevent risky loans, but the issues evident in the financial crisis spurred calls for reform. The Dodd-Frank Act made a number of changes to the mortgage system. For example, the law required lenders to use certain documented and verified information to determine whether a prospective borrower had the ability to repay the loan and increased the amount of data lenders would have to report under the Home Mortgage Disclosure Act ( P.L. 94-200 ). A long-standing issue in the regulation of mortgages and other consumer financial services is the perceived trade-off between protecting consumers and the availability of credit. Providers of financial goods and services may incur costs to ensure they are complying with all applicable laws and regulations. If regulation intended to protect consumers increases the cost of providing a financial product, a company may—depending on market factors and business considerations—reduce how much of that product it is willing to provide, and may provide it more selectively. Those who still receive the product may benefit from the enhanced disclosure or added legal protections of the regulation, but that benefit may result in a higher price for the product. Some policymakers generally believe that the postcrisis mortgage rules have struck the appropriate balance between protecting consumers and ensuring that credit availability is not restricted due to overly burdensome regulations. They contend that the regulations are intended to prevent those unable to repay their loans from receiving credit and have been appropriately tailored to ensure that those who can repay are able to receive credit. Critics counter that some rules have imposed compliance costs on lenders of all sizes, resulting in less credit available to consumers and restricting the types of products available to them. Some assert this is especially true for certain types of mortgages, such as mortgages for homes in rural areas or for manufactured housing. They further argue that the rules for certain types of lenders, usually small lenders, are unduly burdensome. No consensus exists on whether or to what degree mortgage rules have unduly restricted the availability of mortgages, in part because it is difficult to isolate the effects of rules and the effects of broader economic and market forces. A variety of experts and organizations attempt to measure the availability of mortgage credit, and although their methods vary, it is generally agreed that mortgage credit is tighter than it was in the years prior to the housing bubble and subsequent housing market turmoil. However, whether this should be interpreted as a desirable correction to precrisis excesses or an unnecessary restriction on credit availability is subject to debate. If Congress finds that certain mortgage lending rules limit mortgage availability more than is justified by the realized benefits of consumer protection, it could amend certain provisions in Dodd-Frank that mandate those rules or otherwise direct regulators to relax certain rules. Some bank holding companies (BHCs) have hundreds of billions or trillions of dollars in assets and are deeply interconnected with other financial institutions. A bank may be so large that the leadership of the bank and market participants may believe that the government would save it if it became distressed. This belief could arise from the determination that the institution is so important to the country's financial system—and that its failure would be so costly to the economy and society—that the government would feel compelled to avoid that outcome. An institution of this size and complexity is said to be ""too big to fail"" (TBTF). TBTF institutions may have incentives to be excessively risky, gain unfair advantages in the market for funding, and expose taxpayers to losses. This section provides background on TBTF institutions and analyzes some prominent issues related to them, including enhanced prudential regulation for large banks, including enhanced cap i tal requirements , liquidity requirements , living wills , and stress-testing ; and measures taken to reduce market expectation of government support for failing institutions, such as the Orderly Liquidation Authority (OLA). Several market forces likely drive banks and other financial institutions to grow in size and complexity, thereby potentially increasing efficiency and improving financial and economic outcomes. For example, marginal costs can be reduced through economies of scale; consumers could be offered convenient ""one-stop shopping"" for a variety of financial products and services; and bank risk can be diversified by spreading exposures over multiple business lines and geographic markets. These market forces—along with the relaxation of certain regulations—likely drove some banks to become very large and complex in the years preceding the crisis. At the end of 1997, two insured depository institutions held more than $250 billion in assets, and together accounted for about 9.3% of total industry assets. By the end of 2007, six banks held 40.9% of industry assets. The trend has generally continued, and at the end of 2016, nine banks held more than $250 billion in assets, accounting for 50.3% of industry assets. However, many observers assert that when a financial institution exceeds a certain size, complexity, or interconnectedness, the institution—as well as its creditors and investors—may be incented to take on excessive risk. Companies in a market economy are generally restrained in their risk-taking by market discipline —market forces create incentives to carefully assess and appropriately manage potential losses. Shareholders and creditors want the likelihood of loss to be appropriately balanced with potential returns. However, banks of a certain size or complexity may create moral hazard —a situation in which a person or company is willing to take on outsized risks, because it believes it can profit from the potential gains while being protected from the potential losses. In the case of large banks, this perceived protection against loss comes from a belief that a large bank will receive government support in the event it becomes distressed. Very large institutions may be deeply interconnected with other financial institutions, and stress at one institution could quickly spread throughout the financial system. The resultant contagion effects could potentially cause devastating economic and social outcomes. If a TBTF bank believed government would intervene in such an event, the TBTF bank may take on excessive risks. Also, a TBTF institution could enjoy lower funding costs than competitors, as investors and creditors also may have expectations of government support for the institution. Many assert that certain events of the financial crisis of 2008-2009 were a demonstration of TBTF-related problems. Large institutions had taken on large risks, and when they resulted in large losses, the institutions came under threat of failure. In some cases, the U.S. government took actions to stabilize the financial system and individual institutions. Large bank-related actions included capital injections to nine of the largest banks conducted by the Treasury under the Troubled Asset Relief Program, and the government-assisted acquisition of Wachovia by Wells Fargo. In general, two approaches have been used through Dodd-Frank provisions and the Basel III Accords to reduce or eliminate the problem of TBTF. One is to reduce potentially excessive risk-taking at large, complex, and interconnected financial institutions—including banks—through enhanced prudential regulation . Another is to reduce the need for and market expectations of government support in the event such an institution were failing. Aspects of both of these measures are subject to policy debate. Enhanced prudential regulation is intended to reduce the likelihood of large bank failure through measures that include higher capital ratios, enhanced liquidity standards, and Federal Reserve stress-testing for the nation's largest banks. As explained in the "" Regulatory Ratio Requirements "" section, capital ratios are a measure of a bank's ability to absorb losses. Generally, U.S. banks and BHCs holding more than $50 billion in assets are required to hold more capital than other banks. Enhanced liquidity standards require certain large BHCs to maintain enough liquid assets—assets that can be easily converted into cash at low cost—sufficient to cover net cash outflows that might occur during a 30-day period during a time of financial stress. Federal Reserve stress-testing involves the Federal Reserve evaluating the ability of large banks to remain adequately capitalized during hypothetical economic and financial downturns. Living will requirements involve periodically preparing resolution plans for review by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). Enhanced prudential regulation is a rules-based approach to addressing TBTF problems. One's assessment of the efficacy and efficiency of a rules-based approach is likely to largely depend on one's assessment of whether rules-based or market-discipline-based risk assessments—to whatever degree they may or may not be distorted by TBTF incentives—can more accurately identify risk and incent firms to appropriately react to and manage those risks. Proponents of enhanced prudential regulation note that market forces failed to restrain large institutions from taking risks leading up to the financial crisis that would ultimately result in the institutions facing failure. Furthermore, proponents argue that even if market participants are better able to identify risk accurately than are regulators, market participants have a higher tolerance for risk than society as a whole because they are unlikely to internalize the systemic risks associated with a TBTF firm's failure. In addition, regulators potentially have greater access to relevant information on risk than creditors and counterparties of large, complex, and potentially opaque firms. Finally, proponents assert that the practices required by the enhanced prudential regulation are ""best practices"" that any sophisticated, well-managed bank should follow to prudently manage risk. Opponents argue that regulators are not effective in curtailing risk-taking, and point to several potential shortcomings. They cite regulator inability or unwillingness to prevent excessive risk-taking at certain firms leading up to the crisis. In addition, they argue that regulators may have adapted to weaknesses raised by the last crisis, whereas the next crisis is likely to pose a novel set of problems. Some argue that large firms are ""too complex to regulate,"" meaning regulators are incapable of identifying or understanding the risks inherent in complicated transactions and corporate structures. This has implications for whether simple or complex rules would be more effective. One response to addressing this complexity is to make the regulatory regime more sophisticated, but some critics argue that this approach is likely to backfire and simple regulations are more likely to be robust. Others have argued that large firms are ""too big to jail,"" meaning regulators cannot take effective supervisory actions against firms if those actions would undermine the firm's financial health, and thus its financial stability. Furthermore, critics argue that creating a special prudential regulatory regime is counterproductive. They contend that placing a bank in the regime is signaling to market participants that the bank has a protected status and would not be allowed to fail. Thus, the government is in effect making TBTF status explicit, which potentially exacerbates the moral hazard problem. Instead of increasing the cost of being TBTF, firms in the special regulatory regime could end up borrowing at a lower cost than other firms (because, in effect, these firms would enjoy a lower risk of default). Even if an enhanced prudential regime worked at reducing large bank risk-taking as planned, from a systemic risk perspective it could partly backfire in other ways. If financial intermediation and risky financial activities are pushed out of banks that are regulated for safety and soundness, the activity may simply migrate to more lightly regulated institutions and markets. The result could be a less regulated, less systemically stable financial system. This issue is discussed in more detail in the "" Potential Migration to Shadow Banking "" section. Enhanced prudential regulation of large banks may face similar questions concerning cost and benefit trade-offs covered in the "" Regulatory Ratio Requirements "" section: the benefits of safer banks and a more stable system may come at the cost of credit availability and economic growth. The issue is further complicated in relation to TBTF banks because if their funding costs are too low in the absence of enhanced regulation, then increasing costs for these institutions may correct a TBTF market distortion. Finally, observers debate what the appropriate thresholds that trigger enhanced regulation should be. Critics of the $50 billion asset threshold argue that many banks above that range are not systemically important. In particular, critics distinguish between regional banks (which tend to be at the lower end of the asset range and, it is claimed, have a traditional banking business model comparable to community banks) and Wall Street banks (a term applied to the largest, most complex organizations that tend to have significant nonbank financial activities). Others dispute this characterization, arguing that some regional banks are involved in sophisticated activities, such as being swap dealers, and have large off-balance-sheet exposures. If critics are correct that some banks that are currently subject to enhanced prudential regulation are not systemically important, then there may be little societal benefit from subjecting them to enhanced regulation, making that regulation unduly burdensome to them. Opponents of enhanced prudential regulation for large banks offer a variety of alternative policy approaches. Congress could create exemptions from certain enhanced prudential regulations to reduce regulatory burden and increase reliance on market discipline. Some have proposed breaking up big banks, either by establishing asset limits or imposing capital requirements so stringent on banks that reach a certain size that they would have a strong incentive to break up into separate businesses. Another proposed alternative is to impose restrictions on mixing commercial banking and certain investment activities—perhaps similar to those previously required under the Glass-Steagall Act—and so limit how complex an institution can become. Other proposals are based on the assessment that the enhanced regulation is not problematic per se; rather, that it has been applied too broadly and includes institutions that are not large or complex enough to be considered TBTF. If so, Congress could raise the threshold above $50 billion or switch to a designation process in which banks of a certain size had an opportunity to be assessed more on a case-by-case basis. In addition, some think the regulations as currently formulated are more burdensome than is necessary, in which case Congress could alter certain regulations to provide regulatory relief, such as by reducing the frequency with which banks are subject to stress tests or must submit living wills—plans to resolve the bank—to the Federal Reserve. The TBTF problem can also be addressed by credibly reducing or eliminating the possibility that government will save a failing institution, and ensuring that losses resulting from a failure would be borne by shareholders and creditors. Other industries generally resolve failing firms through bankruptcy. However, some observers assert that part of what makes some financial firms too big to fail is that the bankruptcy process is not amenable to resolving a large financial institution without disrupting the financial system. They argue a firm that dominates important financial market segments cannot be liquidated without disrupting the availability of credit, and the deliberate pace of the bankruptcy process is not equipped to avoid the runs and contagion inherent in the failure of a financial firm. Also, the effects on systemic risk are not taken into account when decisions are made in the bankruptcy process. Government commitments to let financial firms fail may not be credible if that failure is likely to be disruptive and destabilizing to the financial system and the economy. Another Dodd-Frank reform was the creation of an alternative resolution regime for certain financial firms outside of bankruptcy. An example of such a regime existed prior to the crisis in which the FDIC had the authority to resolve deposit-taking institutions that failed. However, the pre-Dodd-Frank Act authority may not be sufficient to resolve very large banking organizations due to their complex nature. Many of the largest financial institutions are organized as bank-holding companies (BHCs)—parent companies that own many (sometimes thousands) of subsidiary companies that include at least one deposit-taking commercial bank as well as other subsidiaries, such as broker-dealers, asset managers, and investment advisors. A BHC could possibly become distressed at the holding-company level, or distress at a nondeposit-taking subsidiary could spread to the holding-company level. In these cases, it is not clear if the authority to resolve deposit-taking subsidiaries could prevent a chaotic, disruptive failure with systemic implications. The Orderly Liquidation Authority (OLA) created by the Dodd-Frank Act gives the FDIC authority to resolve large BHCs, as well as certain nonbank financial institutions. Proponents argue that such a resolution regime offers an alternative to propping up a failing BHC with government assistance or suffering the systemic consequences of a protracted and messy bankruptcy. They point to the similarities between the OLA and the FDIC's resolution regime, and note the successes of the FDIC's resolution process of large depositories—such as Wachovia and Washington Mutual—during the crisis. Those failures arguably were less disruptive to the financial system than the failure of Lehman Brothers—a nondepository that went through the bankruptcy process—even though Wachovia and Lehman Brothers were similar in size. Neither FDIC resolution involved government assistance. Losses were imposed on stockholders and unsecured creditors in the resolution of Washington Mutual. In the case of Wachovia, the FDIC arranged for Wells Fargo to acquire the failing bank. Critics argue that the resolution of a depository—even a large one—is substantially different from the resolution of a very large, very complex BHC and its affiliated subsidiaries, and voice doubts that the OLA could be used to smoothly resolve such an institution. In addition, critics assert that the OLA gives policymakers too much discretionary power, which could result in higher costs to the government and preferential treatment of favored creditors during the resolution. In other words, it could enable ""backdoor bailouts"" that could allow government assistance to be funneled to the firm or its creditors beyond what would be available in bankruptcy, perpetuating the moral hazard problem. The normal FDIC resolution regime minimizes the potential for these problems through statutory requirements of least-cost resolution and prompt corrective action, but some expect that a resolution regime for TBTF firms would at times be required to subordinate a least-cost principle to systemic risk considerations. Therefore, a resolution could be more beneficial to creditors than the bankruptcy process. As an alternative to a special resolution regime, some observers call for amending the bankruptcy code to create a special chapter for complex financial firms to address problems that have been identified, such as a speedier process and the ability to reorganize. To some extent, these concerns are addressed in the bankruptcy code. But unlike Title II, the bankruptcy process cannot—for better or worse—base decisions on financial stability concerns or ensure that a financial firm has access to the significant sources of liquidity it needs. Until a TBTF firm fails, it is an open question as to whether a special resolution regime could successfully achieve what it is intended to do—shut down a failing firm without triggering systemic disruption or exposing taxpayers to losses. Given the size of the firms involved and the unanticipated transmission of systemic risk, it is not clear if the government could impose losses on creditors via OLA without triggering contagion. Acting as receiver in a future failure, the FDIC could face the same short-term incentives to limit creditor losses in order to contain systemic risk that caused policymakers to rescue firms in the recent crisis. If those short-term incentives spur the receiver to avoid creditor losses, the only difference between a resolution regime and a ""bailout"" might be that shareholder equity is wiped out, which may not generate enough savings to avoid costs to the government. The Federal Reserve imposes a ""total loss absorbing capacity"" (TLAC) requirement—a minimum level of capital and long-term debt—on certain large banks in part to create the expectation that shareholders and creditors will bear the losses in a failure. In addition, a mandatory funding mechanism exists in Title II to recoup losses to taxpayers. However, because that mechanism is not ""prefunded,"" there could be at least temporary taxpayer losses. Opponents to the OLA assert that large BHCs should be resolved through bankruptcies to instill market discipline in TBTF banks and protect the taxpayers from potential losses, especially if weaknesses related to large BHCs in the bankruptcy process are addressed. If Congress decides to take this approach, it could repeal the FDIC's OLA authorities and amend the Bankruptcy Code. While some banks hold a very large amount of assets, are complex, and operate on a national or international scale, the vast majority of U.S. banks are relatively small, have simple business models, and operate within a local area. This section provides background on these smaller, simpler banks—often called community bank s —and analyzes issues related to them, including regulatory relief for community banks, and the long-term decline in the number of community banks. Banks are often classified as community banks based on their total asset size—the value of the loans, securities, and other assets they hold. However, many have observed that most small banks are generally different from large banks in a variety of ways besides asset size. Smaller institutions often are more concentrated in core bank businesses of making loans and taking deposits and less involved in other, more complex activities and products more typically performed by large banks. Small banks also tend to operate within a smaller geographic area. In addition, small banks are generally more likely to practice relationship lending wherein loan officers and other bank employees have a longer-standing and perhaps more personal relationship with borrowers. Due in part to these characteristics, proponents of community banks assert that these banks are particularly important credit sources to local communities and otherwise underserved groups, as big banks may be unwilling to fulfill the credit needs of a small market of which they have little knowledge. Finally, relative to large banks, small banks are likely to have fewer employees, to have less resources to dedicate to regulatory compliance, and to individually pose less of a systemic risk to the broader financial system. There is no standard, commonly accepted definition or asset size threshold of what constitutes a small bank or a community bank. Statutes and regulations identify exempted banks by various asset size thresholds, such as those with under $10 billion or $50 billion in assets. The Federal Reserve defines community banks as those banks with less than $10 billion in assets. The Office of the Comptroller of the Currency (OCC) defines community banks as generally having $1 billion or less in assets. Others define community banks by combining size with a focus on relationship-based services, such as lending, with the local community. The FDIC has a research definition of community banking organizations, which it defines as (1) banks with less than $1 billion in assets as long as the bank makes loans and takes deposits, does not hold a large share of foreign assets, and is not a specialty bank; or (2) banks with more than $1 billion in assets that meet certain criteria, such as having more than one-third of their assets in loans, core deposits equal to at least half of their assets, and a limited geographic presence. By this definition, not all community banks are small banks, although the two are closely related. Because there is no widely accepted definition, this report uses the terms ""small bank"" and ""community bank"" interchangeably, generally referring to relatively small banks focused on serving the credit needs of people and businesses within a particular area using simple financial products. A central question about the regulation of banks in general is whether an appropriate trade-off has been struck between the benefits and costs of regulation. The costs associated with government regulation and its implementation are referred to as regulatory burden . A regulation could be a net positive for society if the benefits of the regulation exceed the cost. In contrast, regulation could be a net negative if costs exceed benefits—sometimes referred to as unduly burdensome regulation. Critics of recent regulation assert that when applied to community banks, certain realized benefits (such as increased systemic stability) are likely to be relatively small, whereas certain realized costs (such as compliance expenses for banks with limited resources and reduced credit for certain communities) are likely to be relatively large. Other observers assert that the regulatory burden facing small banks is appropriate, and note that small banks are given special regulatory consideration to minimize their regulatory burden. Many regulations, including some regulations resulting from Dodd-Frank, include an exemption for small banks or are tailored to reduce the cost for small banks to comply. In addition, during the rulemaking process, bank regulators are required to consider the effect of rules on small banks under the Regulatory Flexibility Act (RFA) of 1980 ( P.L. 96-354 ) and the Riegle Community Development and Regulatory Improvement Act ( P.L. 103-325 ). Supervision is also structured to pose less of a burden on small banks than larger banks, such as by requiring less-frequent bank examinations for certain small banks. One argument for easing the regulatory burden for community banks is that regulation intended to increase systemic stability need not be applied to community banks. Due to the role of large institutions in the crisis, policymakers have been particularly focused on the systemic risk posed by large banks and ensuring that they are not ""too big to fail."" As previously noted, the Dodd-Frank Act attempted to address this problem by imposing heightened prudential regulatory standards on the largest banks relative to small and medium-sized banks. Sometimes the argument is extended to assert that because small banks did not cause the crisis and pose less systemic risk, they need not be subject to new regulations. Opponents of these arguments note that systemic risk is only one of the goals of regulation, along with prudential regulation and consumer protection. They contend that precrisis prudential regulation for small banks was not stringent enough, as hundreds of small banks failed during and after the crisis. Another potential rationale for easing regulations on small banks would be if there are economies of scale to regulatory compliance costs. While regulatory compliance costs are likely to rise with size, those costs as a percentage of overall costs or revenues are likely to fall. In particular, as regulatory complexity increases, compliance may become relatively more costly for small firms. To give a simplified example, imagine a bank with $100 million in assets and 25 employees and a bank with $10 billion in assets and 1,250 employees each determine they must hire an extra employee to ensure compliance with new regulations. The relative burden is larger on the small institution that expands its workforce by 4% than on the large bank that expands by less than 0.1%. From a cost-benefit perspective, if regulatory compliance costs are subject to economies of scale, then the balance of costs and benefits of a particular regulation will differ depending on the size of the bank. For the same regulatory proposal, economies of scale could potentially result in costs outweighing benefits for smaller banks. Empirical evidence on whether compliance costs are subject to economies of scale is mixed. Some argue for reducing the regulatory burden on small banks on the grounds that they provide greater access to credit or offer credit at lower prices than large banks for certain groups of borrowers. These arguments tend to emphasize potential market niches small banks occupy that larger banks may be unwilling to fill, such as low-income or rural communities and other underserved markets. Empirical evidence is also mixed. Data that support these arguments include the fact that community banks held 71% of total deposits in rural counties in 2011, compared with 19% of overall deposits nationwide. Similarly, it is argued that small banks are better situated to engage in types of transactions that depend on ""relationship banking"" (i.e., personalized knowledge of risks), and that rigid regulations with standardized criteria are not well suited for the relationship banking model. Due to a lack of a clear, consensus definition, setting exemption thresholds and criteria is an issue of calibration. Should they be set so that regulations apply only to the very largest, most complex banks, as well as internationally active banks with substantial nonbank subsidiaries? Should the thresholds be set relatively low, so that only very small banks are exempt? Often at issue in this debate are the so-called regional banks —banks that are larger and operate across a greater geographic market than the community banks that have less than $10 billion or $1 billion in assets, but also smaller and less complex than the largest, most complex organizations with hundreds of billions or trillions of dollars in assets. If Congress decides that additional regulatory relief should be provided for small banks, it could continue to be provided under the current system of ad hoc exemptions. As new laws and regulations are adopted, policymakers can decide to use size-based exemptions or tailoring more often and at higher size thresholds. In addition, exemptions can be retroactively added, or thresholds of existing exemptions could be raised. An alternative to the current system would be a single, consistent exemption based on size or other criteria set by statute. Another would be setting criteria that automatically exempt certain institutions, and granting regulators discretion to exempt any other institutions they deem appropriate. Small banks, under almost any common definition, have seen their numbers decline and their collective share of banking industry assets fall in the United States in recent decades. Overall, the number of FDIC-insured institutions fell from a peak of 18,083 in the first quarter of 1986 to 5,913 in 2016. The number of institutions with less than $1 billion in assets fell from 18,045 to 5,799 in that time period, and the share of industry assets held by those banks fell from 72% to 18%. Meanwhile, the number of banks with more than $10 billion in assets rose from 36 to 114 from 1986 to 2016, and the share of total banking industry assets held by those banks increased from 28% to 82%. The decrease in the number of banks occurred through three main methods. Most of the decline in the number of institutions in the last 30 years was due to mergers, which averaged over 400 a year from 1990 to 2016. Failures were minimal from 1999 to 2007, but played a larger role in the decline during the financial crisis and recession. As economic conditions have improved more recently, failures have declined, but the number of n ew r eporters —new chartered institutions providing information to the FDIC for the first time—has been extraordinarily small in recent years and was zero in 2016. Observers have cited several possible causes for this industry consolidation. As covered in more detail in the previous section, "" Regulatory Burden on Community Banks ,"" some argue it indicates that the regulatory burden on small banks is too onerous, driving smaller banks to merge to create or join larger institutions. However, mergers—the largest factor in consolidation—could occur for a variety of reasons. For example, a bank that is struggling financially may look to merge with a stronger bank in order to stay in business. Alternatively, a small bank that has been outperforming its peers may be bought by a larger bank that wants to benefit from its success. In addition, other fundamental changes besides regulatory burden in the banking system could be driving consolidation, making it difficult to isolate the effects of regulation. Through much of the 20 th century, federal and state laws restricted banks' ability to open new branches and banking across state lines was restricted; branching and banking across state lines was not substantially deregulated at the federal level until 1997 through the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ( P.L. 103-328 ). These restrictions meant many individual, small banks were needed to serve every community. When these restrictions were relaxed, it became easier for small banks to consolidate or for mid-size and large banks to spread operations to other markets. In addition, there may be economies of scale (cost advantages due to size or volume of output) to banking, and they may be growing over time, which would also drive industry consolidation. For example, information technology has become more important in banking (e.g., cybersecurity and mobile banking), and certain information technology systems may be subject to economies of scale. Finally, the slow growth coming out of the most recent recession, and macroeconomic conditions more generally (such as low interest rates), may make it less appealing for new firms to enter the banking market. To the degree that regulatory burden is causing consolidation in the bank industry, regulatory relief for community bank policies such as those discussed in "" Legislative Alternatives "" found in the section above could potentially address the decline in the number of community banks. Financial regulatory agencies are invested with the authority to regulate, and most of them are referred to as independent regulatory agencies , allowing them to operate with a relatively high degree of independence from the President and Congress. This raises the issue of how they should be held accountable for the regulations they implement and the actions they take. This section provides background on the issue of agency independence and issues related to creating an appropriate degree of accountability, including whether the agency is self-funding or funded through appropriations; whether the agency is led by an individual or a bipartisan commission; what regulatory analysis requirements the agency faces in the rulemaking process; and to what extent agency rulemaking is subject to congressional review. Financial regulators conduct rulemaking, supervision, and enforcement to implement law and supervise financial institutions. A list of federal financial regulators is provided in Table 1 . These agencies—along with certain other regulatory agencies—have been given certain characteristics that generally make them more independent from the President and Congress than most executive agencies. Their independence results from characteristics including their leadership structure, ability to self-fund outside the appropriations process, and rulemaking requirements. While this independence allows technical rules to be designed by experts who are to some degree insulated from political considerations, it also results in rules being implemented by individuals who arguably are not directly accountable to the electorate. Whether an appropriate balance between independence and accountability of these agencies has been achieved is a matter of debate. Some observers argue that better regulatory outcomes would be achieved if agencies were more accountable. Others feel that independence is necessary for agencies to effectively regulate and should not be reduced. Self-funding is one characteristic that provides certain financial regulators with a relatively high degree of independence. The annual appropriations process and periodic reauthorization legislation provide Congress with opportunities to influence the size, scope, priorities, and activities of an agency. However, most federal bank regulators generate income from other sources, such as the collection of fees or assessments from the entities that they oversee, and are not subject to the appropriations process. Those who believe financial regulator independence has become excessive often assert that ending self-funding and bringing financial regulators into the appropriations and authorization processes would result in a more appropriate level of accountability. Doing so would provide Congress with regular opportunities to evaluate an agency's performance. During these processes, Congress also might influence the activities of these agencies by legislating provisions that reallocate resources or place limitations on the use of appropriated funds to better reflect congressional priorities. Through line-item funding, bill text, or accompanying committee report text, Congress could encourage, discourage, require, or forbid specific activities at the agency, including rulemaking. Alternatively, Congress could adjust an agency's overall funding level if Congress is supportive or unsupportive of the agency's mission or conduct. Thus, congressional control over an agency's funding reduces its independence from (and increases its accountability to) Congress. However, opponents argue that reduced independence would produce worse regulatory outcomes, because—as mentioned previously—it may politicize regulators' policymaking at the expense of allowing experts to write technical rules. Congress could end financial regulatory agency self-funding or bring the regulators into the appropriations and authorization processes if it seeks to reduce agency independence and increase accountability to Congress. Each bank regulatory agency was created at a different time and in a different policy context, and so each agency's leadership has different structural features, as shown in Table 2 . Currently, some regulatory agencies are led by a single leader and some are led by multimember boards. In each case where there is a board structure, the board has a chairman, whose powers vis-à-vis other members vary by agency. Different arguments are made in favor of which leadership structure would be most appropriate for the various agencies. Vesting power in a board arguably encourages a diversity of views to be represented, which may lead to more durable policy decisions. On the other hand, vesting power in one individual arguably could create stronger, more unified leadership and a single point of accountability, perhaps leading to faster and more numerous decisions. Different leadership structures also raise issues related to the independence versus accountability trade-off. Where an agency is headed by a single individual, the appointee's views are more likely to reflect the views of the appointing President and his or her party; the leadership is unitary and no consensus is necessary. In contrast, the collegial structure is thought to increase the independence of an agency from the President. Therefore, observers who believe agencies should have more independence from the President are often proponents of replacing the leadership structure at agencies headed by a director with multimember commissions. Other characteristics of leadership positions may enhance independence from Congress and the President. For example, independence is thought to increase when leadership term length exceeds the length of a presidential term and is staggered and nonrenewable; when nominees are required to have issue expertise; and when agency heads can be removed only ""for cause."" The leadership of financial regulatory agencies generally has such features, although notably the Comptroller of the Currency does not have ""for cause"" removal protections. Congress could change financial regulatory agencies' structures in various ways to alter the balance between agency independence and accountability. For example, Congress could make agencies headed by a director more accountable by eliminating ""for cause"" removal protections or replacing the director with a multimember board or commission. One method of maintaining accountability is statutorily requiring agencies to perform a cost-benefit analysis (CBA) —a systematic examination, estimation, and comparison of the economic costs and benefits potentially resulting from the implementation of a proposed new rule—as part of the rulemaking process. In this way, the agency demonstrates that it has given reasoned consideration to the necessity and efficacy of a rule and the effects it will have on society. However, a fully quantified and monetized analysis with results that have a high degree of precision is not always feasible. Predicting future outcomes requires making assumptions that are subject to a degree of uncertainty. Accounting for human behavioral responses to a regulation poses challenges. Some effects are difficult to quantify and monetize. Relevant data are not always available and accurate. This raises questions about the appropriate scope, level of detail, and degree of quantification that should be required of analyses performed in the rulemaking process. Overly lenient requirements could risk overly burdensome regulation with limited benefit being implemented by an unaccountable agency without due consideration of consequences. On the other hand, overly onerous analytic requirements could risk impeding the implementation of necessary, beneficial regulation because performing the analysis would be too time-consuming, too costly, or simply not possible. Debate over appropriate CBA requirements for financial regulators involves an additional complication. Currently, most financial regulators, as independent regulatory agencies, are not subject to certain executive orders, such as E.O. 12866, which directs the CBA performed by most executive departments and agencies. This exemption generally gives financial regulators a relatively high degree of discretion in the parameters of the CBAs they perform. However, experts disagree over whether greater discretion for financial regulators is appropriate. Some observers assert financial regulators should not be subject to a rigid legal structure when performing CBA. They claim that attempts to quantify the effects of financial regulation are imprecise and unreliable. These attempts entail making causal assumptions that are contestable and uncertain, and often face issues concerning data availability and accuracy. Also, financial regulation intends to induce behavioral, microeconomic, and macroeconomic responses, and these effects may be harder to quantify than regulations in other industries that lead to more measurable effects. Others assert that financial regulators should be subject to stricter CBA requirements than they are now. They argue that requisite, quantitative CBA—when it might yield a wide range of estimates or disagreements over accuracy between technical experts—is necessary because it disciplines agencies in regard to what rules they implement, and allows for an objective assessment of whether a regulation is likely to achieve its goals and at what cost. Some claim that the challenges of performing CBA for financial regulations are not greater than for regulations for other industries, arguing that estimations of benefits and costs—although challenging—are possible. Congress has several alternatives available if it decided to change CBA requirements for financial regulators. Congress could require that certain effects—such as those on financial product cost or national employment—be examined as part of the analyses. Similarly, Congress could require a certain degree of quantification be part of the analysis. In addition, certain findings in these CBAs could trigger a requirement to get a waiver from Congress before the rule can go forward. Another alternative would be to authorize the President to extend executive orders related to CBA to independent regulatory agencies, including subjecting the CBAs to review by the Office of Information and Regulatory Affairs. The Congressional Review Act (CRA) provides a mechanism to increase banking regulatory agencies' accountability. CRA is an oversight tool that Congress can use to invalidate a final rule issued by a federal agency. It was enacted in response to concerns expressed by Members of both parties about Congress's ability to control what many viewed as a rapidly growing body of administrative rules. Many felt that as Congress delegated more power to agencies to implement law, the traditional oversight tools Congress possessed were not adequate. The CRA requires agencies to report to Congress on their rulemaking activities and provides Congress with a special set of expedited parliamentary procedures that can be used to consider legislation striking down agency rules it opposes. These ""fast track"" parliamentary procedures, which are available primarily in the Senate, limit debate and amendment on a joint resolution disapproving a rule and ensure that a simple majority can reach a final up-or-down vote on the measure. Members of Congress have specified time periods in which to submit and act on a joint resolution of disapproval invalidating the rule. If both houses agree to such a joint resolution, it is sent to the President for his signature or veto. If a CRA joint resolution of disapproval is enacted, either by being signed by the President or by being enacted over his veto, the agency final rule in question ""shall not take effect (or continue)."" The act also provides that if a joint resolution of disapproval is enacted, a new rule may not be issued in ""substantially the same form"" as the disapproved rule unless the rule is specifically authorized by a subsequent law. The CRA prohibits judicial review of any ""determination, finding, action, or omission under"" the act. Observers have argued that the structure of the CRA disapproval process often renders the CRA largely unworkable as an oversight mechanism. A President is most likely to veto a joint resolution that attempts to strike down a final rule proposed by his or her own Administration or by a like-minded independent agency, and a supermajority is necessary to override a presidential veto—something that has been historically rare. Therefor e, Congress typically has the opportunity to successfully block rules from taking effect only in period s between the start of a new Admin i stration —and only when the new Administration's regulatory policy positions are more aligned with those of the sitting Congress than those of the previous A dministration—and the expiration of the specified time period Congress has to act on a CRA resolution. The beginning of the 115 th Congress generally meets those criteria, and 14 disapproval resolutions had been enacted as of May 18th, 2017, but only one disapproval resolution had been enacted in the preceding 20 years. If Congress decided to alter the CRA disapproval mechanism, it could change it from a resolution of disapproval to a resolution of approval . Such a change would mean that instead of rules automatically going into force unless Congress enacted a measure stopping them, some or all rules would become effective only upon the enactment of a law approving them. This mechanism would increase congressional oversight of which regulations would go into effect, but may politicize or unduly slow the promulgation of technical rules that would, on net, benefit society. In addition to issues related to regulation, banking is also continually affected by market and economic conditions and trends. This section analyzes certain issues related to trends that may concern banks, including migration of financial activity from banks into nonbanks or the ""shadow banking"" system; increasing capabilities and market presence of financial technology (""fintech""); increasing interest rates in the future; and competitive and regulatory issues related to institutions with different charters but similar business models—such as banks, thrifts, and credit unions. Because these issues involve the interactions between several broad market forces, specific legislative alternatives will not be examined in this section. Credit intermediation is a core banking activity and involves transforming short-term, liquid, safe liabilities into relatively long-term, illiquid, higher-risk assets. In the context of traditional banking, credit intermediation is done by taking deposits from savers and using them to fund loans to borrowers. Because bank assets are illiquid, an otherwise-solvent bank might experience difficulty meeting short-term obligations without having to sell assets, possibly at ""fire sale"" prices. Also, if depositors begin to feel their deposits are not safe, many of them may choose to withdraw their funds at the same time. Such a ""run"" on a bank could cause it to fail. Long-established government programs mitigate liquidity- and run-risk. The Federal Reserve is authorized to act as a ""lender of last resort"" for a bank experiencing liquidity problems, and the FDIC insures depositors against losses. Banks are also subject to prudential regulation—as discussed in the "" Prudential Regulation "" section—to ensure that risks are well managed and kept at reasonable levels. However, certain financial markets and instruments allow nonbank institutions to also perform similar credit intermediation to banks. Some observers are concerned that this nonbank credit intermediation—sometimes called shadow banking —poses significant risks, because it can be performed without the government ""safety nets"" available to banks or the prudential regulation required of them. The lack of an explicit government safety net in shadow banking means that taxpayers are less explicitly or directly exposed to risk, but also means that shadow banking may be more vulnerable to a panic that could trigger a financial crisis. Furthermore, some argue that the increased regulatory burden placed on banks in response to the financial crisis—such as the changes in bank regulation mandated by Dodd-Frank or agreed to in Basel III—could result in a decreasing role for banks in credit intermediation and an increased role for relatively lightly regulated nonbanks. Many contend the financial crisis demonstrated how these risks in the shadow banking sector can create or exacerbate systemic distress. Money market mutual funds are deposit-like instruments that are managed with the goal of never losing principal and that investors can convert to cash on demand. Institutions can also access deposit-like funding by borrowing through short-term funding markets—such as by issuing commercial paper and entering repurchase agreements. These instruments can be continually rolled over as long as funding providers have confidence in the solvency of the borrowers. During the crisis, all these instruments—which investors had previously viewed as safe and unlikely to suffer losses—experienced run-like events as funding providers withdrew from markets. Also, nonbanks can take on exposure to long-term loans through investing in mortgage-backed securities (MBS) or other asset-backed securities (ABS). During the crisis as firms faced liquidity problems, the value of these assets decreased quickly, possibly in part as a result of fire sales. Since the crisis, many regulatory changes have been made related to certain money market, commercial paper, and repurchase agreement markets and practices. However, some observers are still concerned that shadow banking poses risks. Furthermore, because banks now face more stringent prudential regulation, certain credit intermediation activities may ""migrate"" to nonbanks and the shadow banking system, where institutions are less burdened by regulation. Fintech usually refers to technologies with the potential to alter the way certain financial services are performed. Banks are affected by technological developments in two ways: (1) they face choices over how much to invest in emerging technologies and to what extent they want to alter their business models in adopting technologies, and (2) they potentially face new competition from new technology-focused companies. Such technologies include online marketplace lending, crowdfunding, blockchain and distributed ledgers, and robo-advising, among many others. Certain financial innovations may create opportunities to improve social and economic outcomes, but there is also potential to create risks or unexpected financial losses. Potential benefits from fintech are greater efficiency in financial markets that creates lower prices and increased customer and small business access to financial services. These can be achieved as innovative technology replaces traditional processes that have become outdated. For example, automation may be able to replace employees, and digital technology can replace physical systems and infrastructure. Cost savings from removing inefficiencies may lead to reduced prices, making certain services affordable to new customers. Some customers that previously did not have access to services—due to such things as lack of information about creditworthiness, or geographic remoteness—could also potentially gain access. Increased accessibility may be especially beneficial to traditionally underserved groups, such as low-income, minority, and rural populations. Fintech could also create or increase risks. Many fintech products have only a brief history of operation, so it can be difficult to predict outcomes and assess risk. It is possible certain technologies may not in the end function as efficiently and accurately as intended. Also, the stated aim of a new technology is often to bring a product directly to consumers and eliminate a ""middle-man."" However, that middle-man could be an experienced financial institution or professional that can advise consumers on financial products and their risks. In these ways, fintech could increase the likelihood that consumers engage in a financial activity and take on risks that they do not fully understand. Certain innovations can likely be integrated into the financial system with little regulatory or policy action. Technology in finance largely involves reducing the cost of producing existing products and services, and the existing regulatory structure was developed to address risks from these financial activities. Existing regulation may be able to accommodate new technologies while adequately protecting against risks. However, there are two other possibilities. One is that some regulations may be stifling beneficial innovation. Another is that existing regulation does not adequately address risks created by new technologies. Some observers argue that regulation could potentially impede the development and introduction of beneficial innovation. Companies incur costs to comply with regulations. In addition, companies are sometimes unsure how regulators will treat the innovation once it is brought to market. A potential solution being used in other countries is to establish a regulatory ""sandbox"" or ""greenhouse"" wherein companies that meet certain requirements work with regulators as products are brought to market. Some are concerned that existing regulations may not adequately address certain risks posed by new technologies. Regulatory arbitrage—conducting business in a way that circumvents unfavorable regulations—may be a concern in this area. Fintech potentially could provide an opportunity for companies to claim they are not subject to certain regulations because of a superficial difference between how they operate compared to traditional companies. Another group of issues posed by fintech relates to cybersecurity. As activity increasingly utilizes digital technology, sensitive data are generated. Data can be used to accurately assess risks and ensure customers receive the best products and services. However, data can be stolen and used inappropriately, and there are concerns over privacy issues. This raises questions over ownership and control of the data—including the rights of consumers and the responsibilities of companies in accessing and using data—and whether companies that use and collect data face appropriate cybersecurity requirements. The Federal Reserve's monetary policy response to the financial crisis, the ensuing recession, and subsequent slow economic growth was to keep interest rates unusually low for an extraordinarily long time. It accomplished this in part using unprecedented monetary policy tools such as quantitative easing —large-scale asset purchases that significantly increased the size of the Federal Reserve's balance sheet. Recently, as economic conditions have improved, the Federal Reserve has begun to raise its target rate, and increased attention has been given to how and when the Federal Reserve will normalize monetary policy. A rising interest rate environment—especially following an extended period of unusually low rates achieved with unprecedented monetary policy tools—is an issue for banks because they are exposed to interest rate risk . A portion of bank assets have fixed interest rates with long terms until maturity, such as mortgages, and the rates of return on these assets do not increase as current market rates do. However, many bank liabilities are short-term, such as deposits, and can be repriced quickly. So although certain interest revenue being collected by banks is slow to rise, the interest costs paid out by banks can rise quickly. In addition to putting stress on net income, rising interest rates can cause the market value of fixed-rate assets to fall. Finally, banks incur an opportunity cost when resources are tied up in long-term assets with low interest rates rather than being used to make new loans at higher interest rates. The magnitude of interest rate risks should not be overstated, as rising rates can increase bank profitability if they result in a greater difference between long-term rates banks receive and short-term rates they pay—referred to as net interest margin . Nonetheless, banks and regulators recognize the importance of managing interest rate risk, carefully examine the composition of bank balance sheets, and plan for different interest rate change scenarios. While banks are well practiced at interest rate risk management through normal economic and monetary policy cycles, managing bank risk through the next period of interest rate growth could be more challenging because rates have been so low for so long and achieved through unprecedented monetary policy tools. Because rates have been low for so long, many loans made in different interest rate environments that preceded the crisis have matured. Meanwhile, all new loans made in the last eight years have been made in a low interest rate environment. This presents challenges to getting a mix of loans with different rates. In addition, because the Federal Reserve has used new monetary policy tools and grown its balance sheet to unprecedented levels, accurately controlling the pace of interest rate growth may be challenging. An institution that makes loans and takes deposits—the core activities of traditional commercial banking—can have one of several types of charters, including a national bank charter, a state bank charter, a federal savings association (also called a ""thrift"") charter, or a credit union charter. Each charter type determines what activities are permissible for the institution, what activities are restricted, and which agency will be the institution's primary regulator (see Table 3 ). A rationale for this system is that it gives institutions with different business models and ownership arrangements the ability to choose a regulatory regime appropriately suited to the institution's business needs and risks. The differences between institution business models and the attendant regulations are numerous, varied, and beyond the scope of this report. This examination of the issue only requires noting that (1) under each charter, an institution is subject to regulatory treatment and restrictions that differ from other charter types in certain ways and (2) these various institutions are to some degree in competition with each other for business, because although the business models may vary, all involve taking deposits and making loans. As a result, each type of institution has a stake in proposed changes to regulation related to all charter types. Institutions may assert some regulation that they are subject to puts them at a competitive disadvantage, whereas the other types of institutions oppose these assertions. Often, an effort by institutions of one type to relax their regulations will be resisted by institutions of other types. The friction between credit unions and community banks is an illustrative example. The two types of institutions are similar in certain ways—notably, they typically serve a small group of customers and engage in relationship banking, which involves familiarity with customers and local market conditions. However, there are key differences. For example, credit unions are not-for-profit cooperatives with the purpose of serving the financial needs of members. Banks provide services to the general public for profit. On the basis of the differences, regulation of credit unions and banks differs. For example, credit unions face limits on the amount of member business lending they can do, whereas banks have no equivalent limitation. Meanwhile, banks are subject to regulatory evaluation under the Community Reinvestment Act ( P.L. 95-128 ) to determine how well they are meeting the credit needs of the community in which they operate. When credit unions advocate for easing business lending restrictions, banks object, arguing that it would allow credit unions to engage in activity beyond their mandate and expand into a business line more appropriate to banks. When banks argue that the Community Reinvestment Act should be extended to other types of institutions, credit unions object, arguing they already serve the credit needs of the community. These regulatory differences between these institutions are just two of many examples of institutions with different charter types disagreeing on what appropriate regulation should be. A broader and long-standing issue underlying these debates is to what degree the government should offer different charters—with different benefits and responsibilities—for businesses that engage in similar activities and whether the difference between the charters should be narrowed. The banking regulators try to minimize their regulatory differences through joint rulemaking and coordination through the Federal Financial Institutions Examinations Council—an interagency body that prescribes uniform principles, standards, and report forms—and commercial banks and thrifts no longer have separate regulators. However, differences remain between their regulations that Congress has considered addressing. A comprehensive listing and analysis of all proposed legislation related to bank issues is beyond the scope of this report. However, such information can be found in other CRS products, including the following: CRS Report R44839, The Financial CHOICE Act in the 115th Congress: Selected Policy Issues , by [author name scrubbed] et al. This report examines H.R. 10 introduced in the 115 th Congress. H.R. 10 proposes wide-ranging changes to the financial regulatory system, and it contains provisions related to banking issues, including provisions found in Titles I, III, V, VI, VII, and IX. Many of these provisions are similar to those found in other bills. CRS Report R45073, Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) and Selected Policy Issues , coordinated by [author name scrubbed]. This report examines S. 2155 , which was reported by the Committee on Banking, Housing, and Urban Affairs on December 18, 2017. S. 2155 proposes wide-ranging changes to the financial regulatory system, and it contains provisions related to banking issues, including provisions found in Titles I, II, and IV. Many of these provisions are similar to those found in other bills. CRS Report R44035, ""Regulatory Relief"" for Banking: Selected Legislation in the 114th Congress , coordinated by [author name scrubbed]. This report examines numerous bills related to regulatory relief for banks introduced in the 114 th Congress. CRS Report R41350, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Background and Summary , coordinated by [author name scrubbed]. This report examines provisions enacted into law in the Dodd-Frank Act, and it provides background and analysis of these reforms to the financial regulatory system that are in place today. Provisions related to banking are found in Title I, II, III, VI, X, and XIV.","The financial crisis and the ensuing legislative and regulatory responses greatly affected the banking industry. Many new regulations—mandated or authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) or promulgated under the authority of bank regulators—have been implemented in recent years. In addition, economic and technological trends continue to affect banks. As a result, Congress is faced with many issues related to the bank industry, including issues concerning prudential regulation, consumer protection, ""too big to fail"" (TBTF) banks, community banks, regulatory agency design and independence, and market and economic trends. For example, the Financial CHOICE Act (H.R. 10) and the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) propose wide-ranging changes to the financial regulatory system, and include provisions related to many of these banking issues. Prudential Regulation. This type of regulation is designed to ensure banks are safely profitable and unlikely to fail. Regulatory ratio requirements agreed to in the international agreement known as the Basel III Accords and the Volcker Rule are examples. Ratio requirements require banks to hold a certain amount of capital on their balance sheets to better enable them to avoid failure. The Volcker Rule prohibits certain trading activities and affiliations at banks. Proponents argue the rules appropriately balance the need for safety and soundness with regulatory burden. Opponents argue that current rules are overly complex, unduly burdensome, and difficult to enforce. Consumer Protection. Certain laws and regulations protect consumers from unfair, deceptive, or abusive acts and practices. Regulations promulgated by the Consumer Financial Protection Bureau (CFPB) and certain mortgage lending rules are contentious issues in this area. Observers disagree over whether CFPB authorities, structure, regulations, and enforcement actions appropriately balance the benefit of protecting consumers and the potential costs of unnecessarily burdening banks and restricting credit availability. A similar debate is about whether mortgage rules appropriately protect consumers and effectively align certain market incentives or unnecessarily reduce the availability of mortgages. ""Too Big To Fail"" Banks. Regulators also regulate for systemic risks, such as those associated with TBTF financial institutions that may contribute to systemic instability. Dodd-Frank Act provisions include enhanced prudential regulation for TBTF banks and changes to resolution processes in the event one failed. Proponents of these changes assert they will eliminate or reduce excessive risk-taking at, and bailouts for, these large banks. Opponents assert that market forces and bankruptcy law are more effective and less distortionary than the new regulations and resolution authorities. Community Banks. The number of relatively small banks has declined substantially in recent decades. Some analysts assert market forces and removal of regulatory barriers to interstate branching and banking are having a large effect, given that small banks are exempt from many recent regulations and have been consolidating for decades. Others assert small institutions have limited resources and are being unnecessarily burdened by regulation, especially because such banks are unlikely to contribute to systemic risk. Regulatory Agency Design and Independence. How regulatory agencies are structured and promulgate rules are also issues. Some assert that financial agencies' relatively high degree of independence from the President and Congress results in too little accountability in rulemaking; thus, their leadership structures, funding, and rulemaking procedures should be altered. Opponents of such measures maintain that financial regulator independence should be maintained because it allows regulations to be promulgated by technical experts with some insulation from political considerations. Recent Market and Economic Trends. Changing economic forces may also pose issues to the banking industry. Increases in regulation could drive certain financial activities into a relatively lightly regulated ""shadow banking"" sector. Innovative financial technology may alter the way certain financial services are delivered. Interest rates are likely to begin rising soon after a long period of low rates, which could present risks to banks. Competition and regulatory differences between banks and nonbanks with different charter types is an ongoing issue.",govreport
"On December 29, 2007, the President signed S. 2499 , the Medicare, Medicaid, and SCHIP Extension Act of 2007 ( P.L. 110-173 ). This Act was passed by the House on December 19, 2007, and by a voice vote in the Senate on December 18, 2007. The Act makes changes to the nation's three major health programs, Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP), as well as other federally funded programs. Perhaps the most prominent provisions of the Act were to (1) suspend the Medicare physician payment cut scheduled to take effect and (2) provide SCHIP funding through March 2009. The update formula for Medicare physician payment would have required a reduction in the fee schedule for physician reimbursement of 10.1% as of January 1, 2008, and by roughly 5% annually thereafter. SCHIP needed to be reauthorized because Title XXI of the Social Security Act, as established by the Balanced Budget Act of 1997 (BBA 97, P.L. 105-33 ), specified national appropriation amounts only from FY1998 to FY2007. The President vetoed two bills prior to P.L. 110-173 ( H.R. 976 , H.R. 3963 ) that would have provided federal funding for SCHIP in FY2008 through FY2012. In response to these vetoes, four continuing resolutions ( P.L. 110-92 , P.L. 110-116 , P.L. 110-137 , and P.L. 110-149 ) appropriated $5 billion for federal SCHIP allotments in FY2008 through December 31, 2007. P.L. 110-173 mandates a 0.5% increase in the Medicare physician fee schedule for the six-month period from January 1, 2008, through June 30, 2008, and provides FY2008 and FY2009 SCHIP allotments through March 31, 2009. It also redistributes any FY2006 funds that are unspent by FY2008 to states that are projected to experience shortfalls. For 2008, the Act provides up to $1.6 billion to shortfall states and additional sums to territories. For the first two quarters of FY2009, up to $275 million is appropriated for the same purpose. The Act also extends a number of expiring provisions and programs. These extensions affect Medicare plans and providers and Medicaid payments and programs. The Act also includes funding for some miscellaneous activities. Regarding Medicare Advantage plans, the Act allows Medicare Special Needs Plans to continue to restrict their enrollment to Medicaid-entitled institutionalized beneficiaries and other specified individuals until January 1, 2010. Also, cost-based plans under Medicare may continue to operate in an area with two local or two regional Medicare Advantage plans until January 1, 2009. Extensions that affect Medicare payments for certain providers and services include, among others, extending the secretarial authority to reclassify certain hospitals to areas with higher wage index values. The Act allows qualified rural hospitals that provide clinical diagnostic laboratory services to continue to be reimbursed under a reasonable cost system rather than a fee schedule. The Act also extends exceptions to annual per beneficiary payment limits on outpatient physical therapy services and speech language pathology services for the next six months. Certain pathology laboratories are allowed to continue billing hospitals directly for their services. The Act extends the Medicare incentive payment program for certain physicians providing services in scarcity areas and Medicare payments for the accommodation of physicians ordered to active duty in the Armed Services. The Act also extends cost reimbursement for brachytherapy services and cost reimbursement to therapeutic radiopharmaceuticals. Many extensions also affect certain Medicaid payments and programs. The Act extends increased payments for Medicaid disproportionate hospital share (DSH) allotments for Tennessee and Hawaii to provide additional assistance to certain hospitals that provide a disproportionate share of care to low-income patients with special needs. It also continues Medicaid benefits through June 30, 2008, for certain low-income families that would otherwise lose coverage because of changes in their income under the Transitional Medical Assistance (TMA) program. Medicaid's coverage of Medicare part B premiums under the Qualifying Individual (QI) program is extended through June 2008, including an allocation of $200 million for this program. S. 2499 also prohibits the Secretary from taking action to restrict Medicaid coverage of school-based, health-related services, including transportation and administrative activities for the next six months. Miscellaneous activities include providing additional funds under the State Health Insurance Assistance Programs to assist Medicare-eligible individuals in obtaining information and counseling on enrollment in health insurance. Medicare funds are also used to make grants for Area Agencies on Aging and Aging and Disability Resource Centers for FY2008 and FY2009. The Act also includes provisions that extend the Title V Abstinence Education block grant through June 30, 2008, and amend the Public Health Service Act to provide for research into the prevention of Type I diabetes. Grants for the prevention and treatment of diabetes among American Indians and Alaskan Natives are also provided. In addition, the Medicare Payment Advisory Commission (MedPAC) will become a congressional agency. Finally, additional funds are provided to the Current Population Survey to improve the collection of data on state populations of low-income children Because the pay-go rule as reestablished by the 110 th Congress requires all considered bills to neither have the net effect of increasing the deficit nor reducing the surplus, the Act includes a number of offsets to pay for the aforementioned provisions. These offsets include a reduction in federal payments for the Medicare Advantage stabilization fund in 2012. The Act also strengthened procedures and additional funding for the determination of Medicare's responsibility as a secondary rather than a primary payer for covered services. The market basket update for certain discharges is eliminated, and the compliance requirements for payment are modified for Inpatient Rehabilitation Facilities (IRFs) for FY2008 and FY2009. Another offset requires the Secretary of Health and Human Services (HHS) to use constant volume weighting in the computation of the average sales price (ASP) for the payments for most Medicare part B drugs. Payment rates for certain diagnostic laboratory tests are also changed. Finally, the Act modifies the statutory definition of and requirements for Long-Term Care Hospitals that participate in Medicare and authorizes a study on the establishment of a national long-term care hospital facility and patient criteria, among other purposes. The Congressional Budget Office (CBO) estimated that S. 2499 would result in a net savings to the federal government of $100 million between FY2008 and FY2012. Included in this calculation is an estimate of a spending increase for certain SCHIP, Medicaid, and miscellaneous provisions that would total approximately $1.8 billion. It also includes an estimate of approximately $1.8 billion in savings as a result of the direct effects of the Medicare provisions (saving approximately $1.6 billion) and the interactions between provisions (saving approximately $200 million). This report provides short descriptions of the provisions contained in S. 2499 . For additional assistance, please contact a CRS specialist or analyst. Contact information for these individuals is included in the table. The Medicare, Medicaid, and SCHIP programs are briefly described below. More complete and detailed descriptions of the programs are available from CRS. Medicare is the nation's health insurance program for persons aged 65 and over and certain disabled persons. In FY2008, the program will cover an estimated 44.6 million persons (37.3 million aged and 7.3 million disabled) at a total cost of $456.3 billion. Federal costs (after deduction of beneficiary premiums and other offsetting receipts) will total $389.7 billion. In FY2007, federal Medicare spending will represent approximately 13% of the total federal budget and 3% of GDP. Medicare is an entitlement program, which means that it is required to pay for all covered services provided to eligible persons, so long as specific criteria are met. Medicare consists of four distinct parts: Part A (Hospital Insurance, or HI); Part B (Supplementary Medical Insurance, or SMI); Part C (Medicare Advantage, or MA); and Part D (the new prescription drug benefit added by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, P.L. 108-173 ). The program is administered by the Centers for Medicare and Medicaid Services (CMS) in the Department of HHS. Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services, as well as long-term care, to more than 63 million people at an estimated cost to the federal and state governments of roughly $317 billion. Each state designs and administers its own version of Medicaid under broad federal rules. State variability in eligibility and covered services, and how those services are reimbursed and delivered, is the rule rather than the exception. In the federal budget, Medicaid is an entitlement program that constitutes a large share of mandatory spending. Federal Medicaid spending is open-ended, with total outlays dependent on the spending levels of state Medicaid programs. SCHIP is authorized under Title XXI of the Social Security Act. In general, this program allows states to cover targeted low-income children with no health insurance in families with income that is above Medicaid eligibility levels. As of July 2006, the highest upper-income eligibility limit under SCHIP had reached 350% of the federal poverty level (FPL) in one state. States may enroll targeted low-income children in an SCHIP-financed expansion of Medicaid, create a new separate state SCHIP program, or devise a combination of both approaches. States choosing the Medicaid option must provide all mandatory benefits and all optional services covered under the state plan, and must follow the nominal Medicaid cost-sharing rules (with some exceptions). In general, separate state programs must follow certain coverage and benefit options outlined in SCHIP law. While some cost-sharing provisions vary by family income, the total annual aggregate cost-sharing (including premiums, copayments, and other similar charges) for a family may not exceed 5% of total income in a year. Preventive services are exempt from cost-sharing. In the Balanced Budget Act of 1997, nearly $40 billion was appropriated for SCHIP for FY1998 to FY2007. Appropriations for FY2007 equaled about $5.7 billion. Annual allotments among the states are determined by a formula that is based on a combination of the number of low-income children and low-income uninsured children in the state, and includes a cost factor that represents the average health service industry wages in the state compared with the national average. Like Medicaid, SCHIP is a federal-state matching program. While the Medicaid federal medical assistance percentage (FMAP) ranged from 50% to 75.89% in FY2007, the enhanced SCHIP FMAP ranged from 65% to 83.12% across states. All states, the District of Columbia, and five territories have SCHIP programs. As of November 2006, 17 use Medicaid expansions, 18 use separate state programs, and 21 use a combination approach. Approximately 6.7 million children were enrolled in SCHIP during FY2006. In addition, 12 states reported enrolling about 700,000 adults in SCHIP through program waivers. This provision increases the physician payment update factor, modifies the amounts available in the Physician Assistance and Quality Initiative (PAQI) Fund, and extends the Physician Quality Reporting System. The current update formula for Medicare physician payment would have required a reduction in the fee schedule for physician reimbursement of 10.1% in 2008 and by roughly 5% annually for at least several years thereafter. This provision averts this reduction and mandates a 0.5% increase in the physician fee schedule for the six-month period from January 1, 2008, through June 30, 2008. The conversion factor for the remaining six months of 2008 and afterwards will be computed as if the modification to the conversion factor for the first six months of 2008 had never applied. The Tax Relief and Health Care Act of 2006 (TRHCA; P.L. 109-432 ) authorized $1.35 billion for FY2008 for the PAQI Fund, which is to be available to the Secretary of HHS for physician payment and quality improvement initiatives. This provision modifies the amounts that will be available in the PAQI Fund and the years in which the monies can be spent. However, there are provisions in the Department of Labor, Health and Human Services, and Education and Related Agencies Appropriations Act of 2008 (division G of the Consolidated Appropriations Act of 2008) that also affect the PAQI Fund. The net effect of these two laws is that no funds remain available in the PAQI Fund for the years 2008 through 2012, and $4.96 billion are available in 2013. This provision requires that the amount available for expenditures during 2013 be available only for an adjustment to the update of the conversion factor for that year. The amount of money that would have been available in the PAQI Fund for payment with respect to physicians' services furnished prior to January 1, 2013, is to be deposited into the Federal Supplementary Medical Insurance Trust Fund, and these funds are to be made available for expenditures. The provision also extends and modifies the existing Physician Quality Reporting System for physicians and other health care professionals under Medicare for FY2008 and FY2009. The CMS Program Management Account is authorized to be appropriated $25 million for FY2008 and FY2009 to carry out the Physician Quality Reporting System. Current law provides a 5% bonus payment for certain physicians providing services in scarcity areas for the period January 1, 2005, through December 31, 2007. The provision extends the add-on payments through June 30, 2008. During the extension period, the Secretary is required to use the primary care scarcity counties and specialty care scarcity counties that the Secretary was using on December 31, 2007. Medicare makes payment for physician services under the fee schedule. Three factors enter into the calculation of the fee schedule payment amount: the relative value for the service, a geographic adjustment, and a national dollar conversion factor. The geographic adjustments are indexes that reflect cost differences among areas compared with the national average in a ""market basket"" of goods. These geographic adjustments are made in 89 distinct payment localities; 34 are statewide and include urban and rural areas. A value of 1.00 represents expenses equal to the average across all areas. A value less than 1.00 represents expenses below the national average. Current law includes a temporary provision under which the value of any work geographic index under the physician fee schedule that is below 1.00 is increased to 1.00 for services furnished on or after January 1, 2004, and before January 1, 2008. The provision extends the floor through June 30, 2008. The provision extends through June 30, 2008, the temporary provision that allows independent laboratories providing services to hospitals to continue to bill directly for such services. The provision is limited to laboratories that had agreements with hospitals on July 22, 1999, to bill directly for the technical component of pathology services. The Balanced Budget Act of 1997 established annual per beneficiary payment limits for all outpatient therapy services provided by non-hospital providers. The limits applied to services provided by independent therapists, as well as to those provided by comprehensive outpatient rehabilitation facilities (CORFs) and other rehabilitation agencies. The limits did not apply to outpatient therapy services provided by hospitals. The Deficit Reduction Act of 2005 required the Secretary to implement an exceptions process for 2006 for cases in which the provision of additional therapy services was determined to be medically necessary. The exceptions process was slated to end December 31, 2007. The provision extends the exceptions process through the first six months of 2008. MMA required Medicare's outpatient prospective payment system to make separate payments for specified brachytherapy sources. As mandated by the TRHCA, until January 1, 2008, this separate payment will be made using hospitals' charges adjusted to their costs. The provision extends cost reimbursement for brachytherapy services until July 1, 2008. Therapeutic radiopharmaceuticals will be paid using this methodology for services provided on or after January 1, 2008, and before July 1, 2008. Generally, hospitals that provide clinical diagnostic laboratory services under Part B are reimbursed using a fee schedule. Hospitals with under 50 beds in qualified rural areas (certain rural areas with low population densities) receive 100% of reasonable cost reimbursement for the clinical diagnostic laboratories covered under Part B that are provided as outpatient hospital services. This provision extends reasonable cost reimbursement for clinical laboratory services provided by qualified rural hospitals through June 30, 2008. Special Needs Plans (SNPs) are Medicare Advantage (MA) plans that exclusively serve special needs beneficiaries. Special needs beneficiaries are defined as eligible enrollees who are institutionalized, are entitled to Medicaid, or would benefit from enrollment in a SNP (as determined by the Secretary of HHS). This provision allows SNPs to restrict enrollment to one or more class of special needs beneficiaries until January 1, 2010. The provision also restricts the Secretary from designating other MA plans as SNPs and imposes a moratorium on new SNP plans until January 1, 2010. Cost-based Medicare plans are those managed care plans that are reimbursed by Medicare for the actual cost of furnishing covered services to Medicare beneficiaries. After January 1, 2008, any cost-based plan operating within the service area of either two local or two regional MA plans would not have its contract with Medicare renewed. This provision extends for one year—from January 1, 2008, to January 1, 2009—the length of time a cost-based plan can continue operating in an area with two local or two regional MA plans. The Secretary is required to establish an MA Regional Plan stabilization fund to provide incentives for plan entry and plan retention in MA regions. Funding for the stabilization fund was to be $1.6 billion in 2012 and $1.79 billion in 2013, with additional funds available in an amount equal to 12.5% of the average per capita monthly savings from regional plans. This provision eliminates the $1.6 billion in funds available for the stabilization fund in 2012. Generally, Medicare is the ""primary payer""—that is, it pays health claims first, and if a beneficiary has other insurance, that insurance may fill in all or some of Medicare's gaps. However, in some situations, the Medicare Secondary Payer (MSP) rules prohibit Medicare from making payments for any item or service when payment has been made or can reasonably be expected to be made by a third-party payer. The law authorizes several methods to identify cases when an insurer other than Medicare is the primary payer and to facilitate recoveries when incorrect Medicare payments have been made. This provision requires an insurer or third-party administrator for a group health plan (and in the case of a group health plan that is self-insured and self-administered, a plan administrator or fiduciary) to (1) secure from the plan sponsor and participants information required by the Secretary for the purpose of identifying situations where the group health plan is or has been a primary plan to Medicare, and (2) submit information specified by the Secretary. If an insurer or third-party administrator for a group health plan fails to comply, then a $1,000 per day civil monetary penalty will be imposed for each individual for which information should have been submitted. The provision requires the Secretary to share information on Medicare Part A entitlement and Part B enrollment with entities, plan administrators, and fiduciaries. The Secretary may share this information with other entities and may share information as necessary for the proper coordination of benefits. An applicable plan (defined as laws, plans, or other arrangements, including the fiduciary or administrator for liability insurance, no fault insurance, and worker's compensation law or plans) is required to determine whether a claimant is entitled to benefits under Medicare on any basis, and if so, to submit required information to the Secretary, including (1) the claimant's identity and (2) other information specified by the Secretary to enable an appropriate determination concerning coordination of benefits and any applicable recovery claims. Failure to comply will result in a $1,000 per day civil monetary penalty for each claimant. The Secretary can share this information as necessary for proper coordination of benefits. For purposes of using this new information to ensure appropriate Medicare payments, the Secretary will transfer, in appropriate parts, from the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund $35 million to the CMS Program Management Account for fiscal years 2008, 2009, and 2010. MMA revised the way Part B pays for covered drugs. Payments for most Part B drugs are based on an average sales price (ASP) payment methodology; the Secretary has the authority to reduce the ASP payment amount if the widely available market price is significantly below the ASP. Alternatively, beginning in 2006, drugs can be provided through the competitive acquisition program (CAP). Each year, each physician is given the opportunity either to receive payment using the ASP methodology or to obtain drugs and biologicals through the CAP. Under the ASP methodology, Medicare's payment for Part B equals 106% of the applicable price for a multiple source drug or single source drug, subject to the beneficiary deductible and coinsurance. Applicable prices are derived from data reported by manufacturers under the Medicaid program. The applicable price for multiple source drugs is the volume-weighted average of the ASPs calculated by National Drug Code (NDC) for each calendar quarter. The applicable price for single source drugs is the lesser of the volume-weighted ASP or the wholesale acquisition cost. MMA included language specifying how to calculate a volume-weighted ASP based on information reported by manufacturers. The reporting unit was the lowest identifiable quantity of the drug (e.g., one milliliter, one tablet). However, the MMA allowed the Secretary, beginning in 2004, to use a different reporting unit. The Secretary used his discretion and changed to the amount of the drug represented by the NDC. The amount of the drug represented by one NDC may differ from the amount represented by another NDC. In February 2006, the Office of the Inspector General (OIG) of the Department of HHS issued a report (OEI-03-05-00310) which stated that the method used by CMS was incorrect because it did not use billing units consistently throughout the equation. It stated that although CMS used billing units to standardize ASPs across NDCs for each Healthcare Common Procedure Coding System (HCPCS) code, it did not similarly standardize sales volume across NDCs. The HCPCS, established by the American Medical Association, is the set of health care procedure codes used by Medicare, Medicaid, and other insurers to process insurance claims. The provision requires the Secretary to use constant volume weighting in the computation of the ASP, using the formula recommended by the February 2006 Inspector General's report; this requirement applies with respect to payment for multiple source and single source drugs and biologicals furnished on or after April 1, 2008. For all drug products included within the same multiple source billing and payment code, the provision defines the numerator of the volume-weighted average of the average sales price as the sum of the products (for each NDC assigned to such drug products) of (1) the manufacturer's average sales price, as determined by the Secretary without dividing such price by the total number of billing units for the NDC for the billing and payment code, and (2) the total number of units sold. The numerator is then divided by the denominator, which is defined as the sum of the products (for each NDC assigned to such drug products) of (1) the total number of units sold and (2) the total number of billing units for the NDC for the billing and payment code. The provision defines the ""billing unit"" as the identifiable quantity associated with a billing and payment code, as established by the Secretary. Beginning on April 1, 2008, for each multiple source drug or biological and for each single source drug or biological that is treated as a multiple source drug because it is pharmaceutically equivalent or bioequivalent to another drug, the payment amount will be the lowest price option available to the Secretary. Glycosylated hemoglobin (HbA1c) is used to monitor how well blood glucose levels are controlled in diabetes patients. The current Medicare payment rate for HbA1c is tied to two HCPCS codes: 83036 and 83037. HCPCS code 83037 was developed in 2006 to cover the testing for HbA1c by a device approved by the Food and Drug Administration (FDA) for home use; 83036 is the default code, used for the majority of glycosylated hemoglobin tests, and not limited to specific methodology. This provision changes the Medicare payment rate for HCPCS code 83037 to the rate established for 83036, for HbA1c tests that are furnished on or after April 1, 2008. A long-term care hospital (LTCH) is an acute care general hospital that has a Medicare inpatient average length of stay greater than 25 days. Since 2002, LTCHs have been paid under their own prospective payment system (LTCH-PPS). Provisions establishing this PPS are contained in Section 123 of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA; P.L. 106-113 ) and Section 307 of the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA; P.L. 106-554 ). These LTCH-PPS provisions have not been incorporated into the Social Security Act (SSA). Each year, the LTCH base rate (per discharge payment amount) is updated. Presently, LTCHs are not explicitly permitted in statute to be units of other facilities. CMS established a new LTCH policy for cost reporting periods beginning on or after July 1, 2007, for determining whether a freestanding LTCH was acting as a unit of independent host hospitals. The regulation had originally been applied only to those LTCHs established as hospitals-within-hospitals (HwHs) or satellite hospitals. The policy (referred to as the ""25% rule"") limits the proportion of patients who can be admitted from a co-located or host hospital during a cost reporting period and be paid under the LTCH-PPS. After the threshold is reached, the LTCH is paid the lesser of the LTCH PPS rate or the acute hospital PPS rate. The HwH threshold for most admissions from its host hospital for rate year (RY) 2008 is 25%. The expansion of the policy to freestanding LTCHs will occur on a phased-in basis over a three-year transition period. There are some exceptions to the 25% rule. Generally, for rural HwHs, the applicable percentage is 50%. Urban single HwHs or those located in metropolitan statistical areas (MSAs) with dominant hospitals—those with one-fourth or more of acute care cases for the MSA—also have a threshold of 50%. A short-stay outlier under the LTCH-PPS is a discharge for stays that are considerably shorter than the average length of stay for a long-term care DRG (five-sixths of the geometric average length of stay for each DRG). These short-stay outliers have an adjustment made to their payment that allows Medicare to pay less than cases that receive a full episode of care. Recent policy changes added a new class of short-stay outliers. Under CMS policy, the Secretary reviews the payment system and may make a one-time prospective adjustment to the long-term care hospital prospective payment system rates on or before July 1, 2008, so that the effect of any significant difference between actual payments and estimated payments for the first year of the long-term care hospital prospective payment system is not perpetuated in the prospective payment rates for future years. This provision establishes section 1861(ccc) in the SSA that would define an LTCH as an institution that (1) is primarily engaged in providing inpatient services by or under the supervision of a physician to Medicare beneficiaries whose medically complex conditions require a long hospital stay and programs of care provided by a LTCH; (2) has a Medicare inpatient average length of stay greater than 25 days; (3) satisfies Medicare's hospital definition; and (4) meets certain facility criteria, including a patient review process with patient validation within 48 hours of admission. Also, the institution will have active physician involvement with patients, an organized medical staff, on-site physician availability on a daily basis, and consulting physicians on call and accessible. The institution is required to have interdisciplinary teams, including physicians, to prepare and treat patients using individualized patient treatment plans. The Secretary is required to conduct a study on the establishment of national long-term care hospital facility and patient criteria. Not later than 18 months from enactment, the Secretary will submit a report to Congress including recommendations for legislation and administrative actions. During a three-year moratorium period beginning with the enactment of this provision, the Secretary will not apply the 25% rule or a similar policy to freestanding LTCHs or certain LTCH HwHs (referred to as ""grandfathered LTCHs"") that have been considered to be freestanding. The admission threshold for HwHs or satellite facilities in rural areas or LTCHs that are co-located with an urban single or MSA dominant hospital will increase from 50% to 75%. For other HwHs or satellite facilities, the admission threshold from a co-located hospital will be set at 50%. The Secretary is not able to apply the new short-stay outlier policy during a three-year moratorium period that begins on the date of enactment. The Secretary is not able to make the one-time prospective adjustment to LTCH prospective payments during a three-year moratorium period that begins on the date of enactment. The Secretary will impose a temporary moratorium on the certification of new LTCHs, satellite facilities, long-term care hospital, and satellite facility beds for a three-year period beginning at the enactment date. The moratorium does not apply to an LTCH hospital, satellite facility, or additional beds that are under development as of the enactment date. The moratorium does not apply to an existing LTCH bed increase request where there is closure of an LTCH or a significant decrease in the number of LTCHS beds in a state where there is only one other LTCH. There is no administrative or judicial review of a Secretary's decision on these exceptions. This provision establishes 1886(m) of the SSA entitled ""Prospective Payment for Long Term Care Hospitals,"" which would provide specific references to the sections of BBRA and BIPA that contain the LTCH-PPS provisions. The base rate for LTCH's rate year (RY) 2008 (from July 1, 2007, through June 30, 2008) is the same as that used for discharges in RY2007 (from July 1, 2006, through June 30, 2007). The provision does not apply to discharges starting July 1, 2007, and before April 1, 2008. Starting for discharges on October 1, 2007, the Secretary will contract with fiscal intermediaries or Medicare administrative contractors to review the medical necessity of LTCH admissions and continued stays. These reviews will be conducted annually and will provide a statistically valid sample (at a 95% confidence interval) and guarantee that at least 75% of the overpayments are identified and recovered. The Secretary will establish an error rate that would require further review. These medical necessity reviews will stop for discharges after October 1, 2010, unless otherwise determined by the Secretary. To carry out these activities, $35 million will be appropriated from the Treasury into the Program Management Account of CMS in FY2008 and FY2009. The costs of the medical necessity reviews will be funded from the aggregate overpayments recouped from the LTCHs; such amounts will not exceed 40% of such recovered overpayments. Starting January 1, 2002, payments to inpatient rehabilitation facilities (IRFs) are made under a discharge-based prospective payment system where one payment covers capital and operating costs. Each year, the per discharge payment amount is increased by an update factor based on the increase in the market basket index. The provision establishes the IRF update factor at 0% in FY2008 and FY2009, starting for discharges on April 1, 2008. Starting for cost reporting periods on or after July 1, 2007, the IRF compliance threshold (which determines whether a facility is an IRF or an acute care hospital) is established as no greater than the 60% compliance rate that became effective for cost reporting periods beginning July 1, 2006; comorbidities are included as qualifying conditions. No later than 18 months from enactment, the Secretary will consult with certain parties and submit a report to the committees with jurisdiction over Medicare. The study will analyze access to medically necessary rehabilitation services and alternatives to the IRF compliance thresholds. Medicare payment may be made to a physician for services furnished by a second physician to patients of the first physician provided certain conditions are met. In general, the services cannot be provided by the second physician for more than 60 days. P.L. 110-54 (enacted August 3, 2007) permitted, for services provided prior to January 1, 2008, reciprocal billing over a longer period in cases where the first physician was called or ordered to active duty as a member of a reserve component of the Armed Forces. The provision extends this accommodation through June 30, 2008. Under IPPS, a hospital (or group of hospitals) can increase its Medicare payments though administrative reclassification (by the Medicare Geographic Classification Review Board or MGCRB) to a different area with a higher wage index value. These reclassifications are budget-neutral. Other hospitals have been reclassified by legislation. Section 508 of MMA provided $900 million for a one-time, three-year geographic reclassification of certain hospitals that were otherwise unable to qualify for administrative reclassification to areas with higher wage index values. These reclassifications were extended from March 31, 2006, to September 30, 2007, by TRHCA. This extension was exempt from any budget neutrality requirements. Under this legislation, Section 508 reclassifications are extended until September 30, 2008. Hospitals that were reclassified through the Secretary's authority to make exceptions and adjustments during the FY2005 rulemaking process will have their reclassification extended until September 30, 2008. A hospital that has been reclassified under Section 508 (as extended) will not prevent the group reclassification of otherwise eligible hospitals during FY2008. Those Section 508 reclassifications, which were extended until September 30, 2007, where the applicable wage index was lower during the six-month extension (from April 1 2007 until September 30, 2007) than the wage index applied to the hospital from October 1, 2006, through March 31, 2007, will have the higher wage index used for the entire FY2007 period. Any additional Medicare payments will be paid to the hospitals within 90 days after settlement of the applicable cost report. State Health Insurance Assistance Programs (SHIPs) provide information, counseling, and assistance to Medicare-eligible individuals on obtaining adequate and appropriate health insurance. State Area Agencies on Aging and State Aging and Disability Resource Centers also conduct health insurance outreach to Medicare-eligible individuals, in addition to administering elder rights programs, providing legal services to the elderly, and coordinating information about long-term care services. This provision requires the Secretary to transfer $15,000,000 from the Medicare Part A and B Trust Funds to the CMS program management account to provide grants to state SHIP programs for FY2008. The provision also requires the Secretary to transfer $5,000,000 from the CMS program management account to provide grants to Area Agencies on Aging and Aging and Disability Resource Centers for FY2008 and FY2009. Title XXI of the Social Security Act specifies national appropriation amounts from FY1998 to FY2007 for SCHIP. Continuing Resolutions ( P.L. 110-92 , P.L. 110-116 , P.L. 110-137 ) have provided through December 21, 2007, the same level of SCHIP appropriations for FY2008 as was appropriated initially for FY2007 ($5.0 billion for the states and territories, plus an additional $40 million for the territories). The national appropriation available to states is allotted using a formula based on the estimated number of low-income children and low-income uninsured children in each state, adjusted slightly by a geographic cost factor. Allotments are available for three years, after which any unspent funds are redistributed to other states. Under S. 2499 , $5.04 billion is appropriated in FY2008 and in FY2009 for SCHIP allotments, as in FY2007. The formula for allotting the funds among the states and territories is unchanged. The FY2009 allotments are available only through March 31, 2009 (or the date of enactment of legislation to reauthorize SCHIP, whichever comes first). Allotments unspent after three years are redistributed to other states. Under the Continuing Resolutions, FY2005 allotments unspent at the end of FY2007 were to be redistributed to states projected to exhaust all of their SCHIP funds in FY2008. The redistributed FY2005 funds would be provided, until exhausted, to states in the order in which their shortfalls occur. This methodology for redistribution was to be in effect until December 21, 2007, unless legislation was enacted beforehand to reauthorize SCHIP. Under S. 2499 , the methodology specified in the Continuing Resolutions for redistributing unspent FY2005 federal SCHIP funds is made permanent. In addition, under S. 2499 , FY2006 allotments unspent at the end of FY2008 will be redistributed to states projected to exhaust all of their SCHIP funds in FY2009 before March 31, 2009. The redistributed FY2006 funds will be provided, until exhausted, to states in the order in which those shortfalls occur. In early FY2006, several states were projected to exhaust their federal SCHIP funds during the year, with a shortfall projected at $283 million. Congress appropriated $283 million in the Deficit Reduction Act of 2005 ( P.L. 109-171 ) for the purpose of eliminating states' shortfalls in FY2006, with 1.05% of the appropriation provided to the territories. To eliminate shortfalls of some states' federal SCHIP funds in FY2007, Congress appropriated such sums as necessary, not to exceed $650 million, in the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 ( P.L. 110-28 ). The territories received no portion of this appropriation. Under S. 2499 , such sums as necessary, not to exceed $1.6 billion, are appropriated in FY2008: (1) to eliminate states' shortfalls of federal SCHIP funds and (2) to provide 1.05% of states' projected shortfall amounts to the territories. These funds are available only for FY2008, and unspent funds are not available for redistribution. If the $1.6 billion appropriation is insufficient to cover states' shortfalls and the associated payments to the territories, then the payments to the states and territories would be reduced proportionally. Based on states' latest projections, the total FY2008 shortfalls are projected at less than $1.2 billion. Under S. 2499 , such sums as necessary, not to exceed $275 million, are appropriated in FY2009: (1) to eliminate states' shortfalls of federal SCHIP funds in the first two quarters of FY2009 and (2) to provide 1.05% of states' projected shortfall amounts to the territories. These funds are available only for the first two quarters of FY2009, and unspent funds are not available for redistribution. If the $275 million appropriation is insufficient to cover states' shortfalls and the associated payments to the territories, then the payments to the states and territories would be reduced proportionally. Based on states' latest projections, the total FY2009 shortfalls through March 31, 2009, are projected at approximately $200 million. Eleven states (Connecticut, Hawaii, Maryland, Minnesota, New Hampshire, New Mexico, Rhode Island, Tennessee, Vermont, Washington, and Wisconsin) are considered ""qualifying states"" for purposes of using SCHIP funds under §2105(g) for some children enrolled in Medicaid. For qualifying states, federal SCHIP funds may be used to pay the difference between SCHIP's enhanced FMAP and the Medicaid FMAP that the state is already receiving for children above 150% of poverty who are enrolled in Medicaid. Qualifying states are limited in the amount they can claim for this purpose to the lesser of (1) 20% of the state's original SCHIP allotment amounts (if available) from FY1998-FY2001 and FY2004-FY2008, with the ability to use the FY2008 allotment linked to the December 21, 2007, termination date in the latest Continuing Resolution, and (2) the state's available balances of those allotments. The statutory definitions for qualifying states capture most states that had expanded their upper-income eligibility levels for children in their Medicaid programs to 185% of poverty prior to the enactment of SCHIP. Under S. 2499 , the ability of qualifying states to use their FY2008 allotments for expenditures under §2105(g) is made permanent; their ability to use FY2009 allotments under §2105(g) is permitted through March 31, 2009. States are required to continue Medicaid benefits for certain low-income families that would otherwise lose coverage because of changes in their income. This continuation is called transitional medical assistance (TMA). Federal law permanently requires four months of TMA for families that lose medicaid eligibility because of increased child or spousal support collections, as well as those that lose eligibility because of an increase in earned income or hours of employment. Congress expanded work-related TMA under Section 1925 of the Social Security Act in 1988, requiring states to provide TMA to families that lose medicaid for work-related reasons for at least six and up to 12 months. Since 2001, work-related TMA requirements under Section 1925 have been funded by a series of short-term extensions, most recently through December 31, 2007. P.L. 104-193 , the 1996 welfare reform law, provided $250 million in federal funds specifically for an abstinence education program ($50 million per year for each of five years, FY1998 through FY2002). This program is referred to as the Title V Abstinence Education block grant. Funds must be requested by states when they solicit Title V Maternal and Child Health (MCH) block grant funds and must be used exclusively for teaching abstinence. To receive federal funds, a state must match every $4 in federal funds with $3 in state funds. This means that if maximum federal funding is provided, funding for Title V Abstinence Education must total at least $87.5 million annually. Although the Title V Abstinence Education block grant has not yet been reauthorized, the latest temporary extension continues funding through December 31, 2007. This provision extends both TMA and the Title V Abstinence Education block grant through June 30, 2008. Certain low-income individuals are eligible to have their Medicare part B premiums paid for by Medicaid under the Medicare Savings Program (MSP). One eligible group is Qualifying Individuals (QIs). These persons have incomes between 120% and 135% of poverty. Federal spending under the QI program is subject to annual limits. The program was slated to terminate December 31, 2007. The provision extends the program through June 2008 and specifies that the amount available for allocation for the six-month period beginning January 1, 2008, is $200 million. When establishing hospital payment rates, state Medicaid programs are required to recognize the situation of hospitals that provide a disproportionate share of care to low-income patients with special needs. Total federal reimbursement for each state's DSH payments, however, are capped at a statewide ceiling, referred to as the state's DSH allotment. Those amounts are specified in statute. As part of TRHCA, allotments for only one year, 2007, for the states of Tennessee and Hawaii were raised. Tennessee's DSH allotment for the year was to be based on a formula, and Hawaii's was set at $10 million. After that, allotments for those states would have reverted to former, lower amounts. S. 2499 extends those special allotment provisions, so that for the portion of FY2008 that ends on June 30, 2008, Tennessee's DSH allotment is set at three-quarters of the 2007 level, and the allotment for Hawaii is equal to $7.5 million. Because of concerns about inadequate sample sizes in the Current Population Survey (CPS) for making estimates of states' number of low-income children, for purposes of determining states' federal SCHIP allotments, $10 million was appropriated in SCHIP statute annually beginning in FY2000. S. 2499 provides $20 million, instead of $10 million, in SCHIP statute for the CPS in FY2008. Medicaid can cover school-based, health-related services required under the Individuals with Disabilities Education Act (IDEA), including transportation, as well as related administrative activities (e.g., outreach for Medicaid enrollment purposes, medical care coordination/monitoring). Medicaid also covers rehabilitation services for eligible beneficiaries in a wide variety of settings. The Bush Administrative issued proposed rules affecting rehabilitation and school-based services in August and September 2007, respectively. Relative to policies in place on July 1, 2007, S. 2499 prohibits the Secretary of HHS from taking any action to further restrict Medicaid coverage or payments for rehabilitation services and for school-based transportation and administrative activities. This moratorium would be in effect until June 30, 2008. The Medicare Payment Advisory Commission (MedPAC) is an independent federal body established by the Balanced Budget Act of 1997 to advise the U.S. Congress on issues affecting the Medicare program. The commission's statutory mandate is (1) to advise Congress on payments to private health plans participating in Medicare and providers in Medicare's traditional fee-for-service program and (2) to analyze access to care, quality of care, and other issues affecting Medicare. This provision would establish MedPAC as an agency of Congress. As specified in Section 330B of the Public Health Service Act, the Secretary, directly or through grants, must provide for research into the prevention and cure of Type I diabetes. Appropriations are set at $150 million per year during the period FY2004 through FY2008. As specified in Section 330C of the Public Health Service Act, the Secretary must make grants for providing services for the prevention and treatment of diabetes among American Indians and Alaskan Natives. Appropriations are set at $150 million per year during the period FY2004 through FY2008. For each of these two grant programs, S. 2499 provides $150 million for FY2009.","On December 29, 2007, the President signed S. 2499, the Medicare, Medicaid, and SCHIP Extension Act of 2007 (P.L. 110-173). This Act was passed by the House on December 19, 2007, and by a voice vote in the Senate on December 18, 2007. The Act makes changes to the nation's three major health programs, Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP), as well as other federally funded programs. The most prominent provisions in the Act were to (1) suspend the Medicare physician payment cut scheduled to take effect and (2) provide SCHIP funding through March 2009. P.L. 110-173 mandates a 0.5% increase in the Medicare physician fee schedule for the six-month period from January 1, 2008, through June 30, 2008, and provides FY2008 and FY2009 SCHIP funding allotments through March 31, 2009. The Act also extends a number of expiring provisions and programs. These extensions affect Medicare plans and providers and Medicaid payments and programs. The Act also includes funding for some miscellaneous activities. The Act's Medicare extensions include incentive payments for certain physicians, and extensions of current law provisions for Medicare Special Needs Plans and cost-based plans. A variety of extensions also affect how long-term care, rural, and acute care hospitals are paid or classified. Other extensions affect Medicare payments for certain services and providers, outpatient physical therapy services, speech language pathology services, certain pathology laboratories, brachytherapy services, and therapeutic radiopharmaceuticals. The Act also includes Medicaid provisions designed to extend certain payments and programs, such as Medicaid disproportionate hospital share (DSH) allotments for Tennessee and Hawaii, the Transitional Medical Assistance (TMA) program, and the Qualifying Individual (QI) program, among other provisions. Miscellaneous provisions include using Medicare funds to make grants to State Health Insurance Assistance Programs, Area Agencies on Aging, and Aging and Disability Resource Centers. The Act also establishes the Medicare Payment Advisory Commission (MedPAC) as a congressional agency. The Act provides a number of offsets to pay for the spending increases, including a reduction in the Medicare Advantage stabilization fund in 2012. The Act also includes provisions affecting Medicare's responsibility as a secondary payer for covered services, Medicare payments for Inpatient Rehabilitation Facilities (IRFs), payments for most Medicare part B drugs, payments for certain diagnostic laboratory tests, and Medicare Long-Term Care Hospitals. This report provides short descriptions of the provisions contained in P.L. 110-173.",govreport
"At the beginning of each Congress, the House adopts its rules of procedure for that Congress. Although it usually readopts most provisions of its rules from the previous Congress, the House also changes some aspects of its procedures for each new Congress. Rules X-XIII are the primary House rules that govern the authority and operations of House committees and subcommittees. Because the committees are the agents of the House, they are obligated to comply with all House directives that apply to them. However, in some respects the House allows each of its committees to decide for itself how to conduct its business. For this purpose, each committee is required to adopt written rules of procedure within the limitations of House rules. This report identifies and summarizes the provisions of the House's standing rules and certain other directives that affect committee powers, authority, activities, and operations. It does not address party conference rules, the rules adopted by individual committees that supplement House rules, or committee practices on matters not covered by House rules. The report is organized under seven headings: (1) general, (2) establishment and assignments, (3) hearings, markups, and other meetings, (4) reporting, (5) oversight and investigations, (6) funding, staff, and travel, and (7) other duties. This report primarily covers requirements and prohibitions contained in the Rules of the House of Representatives that are of direct and general applicability to most or all House committees. The report does not encompass most other provisions of law or the House's rules that apply only to one committee, such as the Intelligence or Standards of Official Conduct Committee, or House rules governing certain appropriations hearings and the content of appropriations measures. The summaries presented here are not intended to capture every nuance and detail of the rules themselves. Members and staff are advised to consult the text of the appropriate standing rule or provision of law. Rule XI, clause 1(a)(1)(A) Rule XI provides that, in general, the rules of the House ""are the rules of its committees and subcommittees so far as applicable."" In addition to this general principle; see "" Motions to Recess "" and "" Reading Measures During Markups . "" Although this provision is clear in principle, it is not always obvious how it is to be applied in practice. There are various rules, for example, that govern how the House may consider measures on the floor, but this clause does not specify which of these rules is to be applicable to committees and subcommittees. In the commentary accompanying Rule XI, the House Parliamentarian observes that: [t]he procedures applicable in the House as in the Committee of the Whole generally apply to proceedings in committees of the House of Representatives, except that since a measure considered in committee must be read for amendment, a motion to limit debate under the five-minute rule in committee must be confined to the portion of the bill then pending. The previous question may only be moved on the measure in committee if the entire measure has been read, or considered as read, for amendment. The Parliamentarian continues: ""Committees generally conduct their business under the five-minute rule, but may employ the ordinary motions which are in order in the House...and may also employ the motion to limit debate under the five-minute rule on a proposition which has been read."" Rule XI, clause 1(a)(2) The rules of a committee apply to its subcommittees, ""so far as applicable."" Furthermore, subcommittees are subject to the authority and direction of the committee of which they are a part. Rule XI, clause 2(a)(1) Each committee is required to adopt written rules that ""may not be inconsistent"" with House rules and applicable rule-making provisions of law. For convenience, the committee's rules are to incorporate applicable provisions of clause 2 of Rule XI. The meeting at which the committee adopts its rules is to be open to the public unless in open session the committee votes, by roll call and with a quorum present, to close part or all of the meeting. Rule XI, clause 2(a)(2) The rules that a committee adopts are to be published in the Congressional Record not later than thirty days after the committee members are elected at the beginning of a Congress. Rule XI, clause 1(d) At the end of the Congress, each committee is to submit to the House a report on its activities during the preceding two years. The activities report is to differentiate between the committee's legislative and oversight activities. A committee chair may file an activities report after the adjournment of Congress sine die and without formal approval by the committee, provided the report has been available to committee members for at least seven calendar days for inclusion of supplemental, minority, and additional views. Rule XI, clause 2(e)(2) The records of a committee must be kept separate from the personal office records of the chair of the committee. Committee records are the property of the House and all its Members shall have access to them; however, certain records of the Committee on Standards of Official Conduct are not available to non-committee Members without the prior approval of the committee. Rule VII, clauses 1, 2, and 6 The noncurrent records of each committee are to be preserved at the National Archives and Records Administration. At the end of each Congress, the chair of each committee is to transfer the noncurrent records of the committee to the Clerk of the House. The Clerk then delivers these records to the Archivist of the United States for preservation at the Archives, but the records continue to be the property of the House. A committee ""record"" is defined as ""an official, permanent record of the committee (including any record of a legislative, oversight, or other activity of such committee or subcommittee thereof)."" Rule VII, clauses 3 and 5(a)-(b) In general, the Archivist makes archived records publicly available under the following rules (and any orders of the House). First, any record that a committee makes publicly available before its delivery to the Archivist is to be available immediately. Second, the following records will be available after 50 years: (1) investigative records containing personal data on living individuals, (2) personnel records, and (3) records of closed hearings. Third, a committee order that specifies the time, schedule, or condition for availability of committee records shall govern, except as otherwise provided by order of the House. Finally, records other than those covered above are to be available after 30 years. The Committee on House Administration may establish guidelines and regulations governing the applicability and implementation of House Rule VII on noncurrent records, and this rule does not supersede other House rules or authorize disclosure if prohibited by law or executive order. Rule VII, clause 4 An archived record of a committee is not to be available to the public if the Clerk of the House determines that availability would be ""detrimental to the public interest or inconsistent with the rights and privileges of the House."" The Clerk is to notify in writing the chairman and ranking minority member of the Committee on House Administration of such determination. A committee may change any such determination by a later order. Rule VII, clause 5(c) For official use, a committee may temporarily withdraw a record from the Archives. Rule XI, clause 2(e)(3) As part of its written rules, each committee is to include standards for availability of archived records. The standards are to specify the committee's procedures for adopting orders (under House Rule VII) relating to the time, schedule, or condition for availability of its records, including those the Clerk of the House initially determines shall not be available to the public. The rules also should contain a requirement that nonavailability of a committee's record for a period longer than required by House rules requires committee approval. Rule XI, clause 2(e)(4) ""To the maximum extent feasible,"" committees are to make their publications available to the public in electronic form (i.e., on the Internet). Rule X, clause 1 Nineteen standing committees are established, and the subjects within the jurisdiction of each committee are listed. Measures and matters are to be referred to committees based on these jurisdictions. Rule X, clause 5(d); H.Res. 5 , 109 th Congress In general, a House committee may not create more than five subcommittees, or six subcommittees if one of the six is an oversight subcommittee, except that Appropriations may have not more than 13 subcommittees and the Committee on Government Reform may not have more than seven subcommittees. In addition, H. Res. 5, adopted by the House of Representatives on January 4, 2005, waived Rule X, clause 5(d) to allow up to six subcommittees each on the Transportation and Infrastructure and Armed Services Committees and up to seven subcommittees on the Committee on International Relations in the 109 th Congress. Rule XII, clause 2 The Speaker is to refer a measure or other matter to each standing committee that has jurisdiction over the subject matter of any provision(s), to the maximum extent feasible. The Speaker has authority to refer a matter to more than one committee. In such cases, he is to designate a primary committee and also may refer a measure sequentially to other committees, with time limitations for consideration of provisions within their jurisdiction, or refer portions of the measure to one or more additional committees. Rule XII, clause 2 (c)(1) permits the Speaker, under ""extraordinary circumstances"" to designate more than one committee as primary when making referrals if he believes review by more than one committee as though primary is justified. He also may create a special ad hoc committee to consider a matter, appointing Members with House approval and with Members from the committees of jurisdiction. The Speaker also may make other referral arrangements he deems appropriate. Rule X, clause 5(a)(1) and 5(e) Members are elected to standing committees by the House based on nominations by the party caucuses as contained in resolutions. The resolutions are privileged for floor consideration, and Members must be elected to committees within seven calendar days after the beginning of a Congress. Vacancies in standing committees also are filled by election of the House on the basis of nominations by the party conferences. Rule X, clause 5(b)(2) No Member may serve on more than six standing panels: two standing committees and four of their subcommittees. However, the chair or ranking member of a full committee may serve ex officio on all its subcommittees. Any other exceptions (waivers of the rule) must be recommended by the pertinent party conference and approved by the House. Rule X, clause (5)(c)(1) The House elects the chair of each standing committee on the basis of a nomination submitted by the majority party conference. In case of the temporary absence of the chairman, the next ranking majority party member acts as chairman. In case of a permanent vacancy, the House elects a new committee chairman. In general, a Member may not chair the same standing committee or subcommittee for more than three consecutive Congresses. This limitation does not apply to the chair of the House Committee on Rules. Rule I, clause 11, and Rule III, clause 3(b) The Speaker is authorized to appoint members of select and conference committees, and may remove members or appoint additional members at any time. He may appoint the Resident Commissioner from Puerto Rico and the Delegates to any select or conference committee. To the maximum extent feasible in naming conferees, the Speaker is to (1) appoint no less than a majority of Members who generally supported the House position, (2) name the Members who were primarily responsible for the legislation, and (3) include the principal proponents of the major provisions of the measure as passed by the House. Rule X, clause 5(b)(1) Membership on standing committees during a Congress is contingent upon continued membership in the party conference to which the Member belonged when assigned to committees. If a Member ceases to be a member of a particular party, the Member automatically loses his or her committee assignments. Rule III, clause 3(a) The Delegates and the Resident Commissioner from Puerto Rico are elected to standing committees by the same procedures, and have the same ""powers and privileges"" in committees, as other members of the committee. Rule XI, clause 2(m)(1)(A) To carry out its authorized functions and duties, each committee and subcommittee is empowered ""to sit and act at such times and places within the United States, whether the House is in session, has recessed, or has adjourned, and to hold such hearings as it considers necessary. . . ."" Rule XI, clause 2(I) No committee of the House may meet during a joint session of the House and Senate or during a recess when a joint meeting of the House and Senate is in progress. Rule XI, clause 2(d) The committee chairman may designate a member of the majority party to be the vice chairman of the committee or one of its subcommittees. The vice chairman shall preside over the committee or subcommittee in the temporary absence of its chairman. In the absence of the chairman and the vice chairman, the most senior member of the majority party shall preside. Rule XI, clause 1(a)(1)(B) In committee and subcommittee, a motion to recess from day to day or to recess subject to the call of the chair within 24 hours is privileged and nondebatable. Rule XI, clause 4 Any committee or subcommittee meeting or hearing that is open to the public also is open to still photography and to radio and television coverage. A committee may adopt, as part of its written rules, procedures regulating photography and broadcasts of its meetings and hearings, but these committee rules must conform with the requirements and stipulations laid out in this clause of House Rule XI. Among other issues, these requirements pertain to coverage of sessions without commercial sponsorship; positions and placement of television cameras and location of photographers; installation and removal of media equipment; lighting; allocation of the number of still photographers; accreditation by the press galleries; and conduct of media personnel. Rule XI, clause 2(e)(1)(A) Hearing and markup transcripts kept by a committee must be substantially verbatim. A person may make only technical, typographical, and grammatical corrections in his or her remarks. Rule XI, clause 2(g)(3) A committee is to give at least one week's public notice of the date, place, and subject of any hearing. If the committee, or the chair with the concurrence of the ranking minority member, decides that there is ""good cause"" to begin the hearing in less than a week, the public announcement should be made as soon as possible. The announcement is to appear in the ""Daily Digest"" section of the Congressional Record and is to be ""made available in electronic form."" These requirements do not apply to the House Committee on Rules. Rule XI, clause 2(k)(1) In an opening statement, the chair is to announce the subject of the hearing. Rule XI, clause 2(h)(2) Each committee may set its own quorum for taking testimony and receiving evidence, so long as that quorum is at least two members. Rule XI, clause 2(m) A committee or subcommittee may subpoena witnesses or any materials necessary to carry out its authorized responsibilities. A subpoena may be authorized and issued by a committee or subcommittee with a majority quorum present, but this authority may be delegated to the committee chair in accordance with any limitations or rules the committee may establish. The chair, or any Member designated by the committee, signs authorized subpoenas. Compliance with a subpoena may be enforced only by the House. Rule XI, clause 2(j)(1) The minority party members of a committee are entitled to call witnesses of their choice ""during at least one day of hearing"" on a measure or matter, but only if a majority of the committee's minority party members make such a request of the chairman ""before the completion of the hearing."" Rule XI, clause 2(m)(2) ""The chairman of the committee, or a member designated by the chairman, may administer oaths to witnesses."" Rule XI, clause 2(g)(4) To the extent practicable, each witness is to submit a written statement before he or she testifies, and to present only a summary as his or her oral testimony. As part of the written statement, a non-governmental witness is required to include a curriculum vitae and information on federal grants and contracts received by the witness or the organization being represented during the current and previous 2 fiscal years. Rule XI, clause 2(j)(2) In general, each committee member shall have five minutes to question each witness until all committee members have had that opportunity. However, a committee may extend the time for questioning witnesses by adopting a rule or motion to allow a specified number of its majority and minority party members to question a witness for no more than a total of one hour, with the time to be equally divided between the parties. Similarly, a committee may adopt a rule or motion allowing its majority and minority staff to question a witness for equal periods of time, not to exceed one hour in total. Rule XI, clause 2(k) Upon request, witnesses are entitled to receive a copy of the committee's rules and clause 2 of House Rule XI. Witnesses also may be accompanied by counsel ""for the purpose of advising them concerning their constitutional rights."" The chair may punish ""breaches of order and decorum, and of professional ethics"" by counsel, and a committee may cite an offender to the House for contempt. At the discretion of the committee, a witness may submit a sworn, written statement for inclusion in the hearing record. A witness may obtain a transcript of testimony given in open session, but needs the authorization of the committee for a copy of testimony presented in closed session. Rule XI, clauses 2(g)(2) and 2(k)(5) Each committee and subcommittee hearing is to be open to the public unless the committee or subcommittee votes in open session, by roll call and with a majority present , to close part or all of the hearing on that day. A committee or subcommittee may vote to close part or all of a hearing if disclosure of the matters to be considered at the session ""would endanger national security, would compromise sensitive law enforcement information, or would violate a law or rule of the House."" A majority of whatever quorum a committee requires to conduct a hearing may vote to close a hearing (1) whenever a member of the committee has asserted that the anticipated testimony ""may tend to defame, degrade, or incriminate any person,"" or (2) whenever a witness has asserted that his or her testimony ""may tend to defame, degrade, or incriminate"" that witness, or (3) solely to discuss whether there is a cause, pursuant to clause 2 of Rule XI, to resume the hearing in closed session. If a committee member asserts that testimony may tend to defame, degrade or incriminate a person who is not a witness, that person shall have the opportunity to appear as a witness and to request that the committee subpoena additional witnesses. In other cases, the chair receives and the committee disposes of requests to subpoena witnesses. Evidence or testimony taken in closed session may not be made public without the approval of the committee. By these procedures, most committees or subcommittees may vote to close a particular day of hearing and one subsequent day of hearing. The Appropriations and Armed Services Committees and the Permanent Select Committee on Intelligence, and their subcommittees, may vote to close up to 5 additional consecutive days of hearings. Members of the House may attend, but not participate in, hearings of committees or subcommittees (except the Committee on Standards of Official Conduct) on which they do not serve, unless the House votes to authorize a committee or subcommittee to use the procedures for closing hearings to the public (clause 2(g)(2)) to close one or more hearings on a particular measure or subject to non-committee members. See also "" Broadcasting Sessions "" and "" Open Meetings . "" Rule XI, clause 1(c) Each committee is authorized to have its hearings printed and bound. Rule XIII, clause 4(b) ""A committee that reports a measure or matter shall make every reasonable effort to have its hearings thereon (if any) printed and available for distribution to Members, Delegates and the Resident Commissioner before the consideration of the measure or matter in the House."" Sec. 141 of the Legislative Reorganization Act of 1946, codified as amended at 2 U.S.C. 145a At the end of each session of Congress, each committee's printed hearings are to be bound by the Library of Congress. Rule XI, clause 2(g)(5) A point of order cannot be made on the House floor on the grounds that the committee reporting the measure in question had not complied with all the requirements concerning hearings in clause 2 of Rule XI unless (1) the point of order is made on the floor by a member of the reporting committee, and (2) the point of order had been properly made in committee but had been ""improperly disposed of in the committee."" Rule XI, clause 2(b) As part of its written rules, each standing committee is to adopt a regular meeting day, which is to be at least once each month. The committee is to meet on each of its regular meeting days ""unless otherwise provided by written rule adopted by the committee."" The latter provision allows the committee to dispense with meetings when there is no business that is ready to be transacted. Committee rules can authorize the chairman to dispense with such a meeting or fix some other procedure for the same purpose. Rule XI, clause 2(c) The chairman of a committee is authorized to convene additional meetings to consider legislation or to transact other committee business. In addition, three members of a committee may make a written request that the chairman call a special meeting only for a specified purpose. If, within three days of receiving the request, the chairman does not schedule the requested meeting to take place within seven days after the request was made, a majority of the committee can call the special meeting by submitting to the committee office a written notice giving the date and time of the meeting and the measure or matter to be considered. Rule XI, clause 2(g)(1) The requirement that hearings be open to the public, unless closed under specified procedures, applies to meetings as well. A committee or subcommittee may vote in open session, by roll call and with a majority present, to close part or all of the day's meeting, but only for certain reasons. A committee or subcommittee may vote to close part or all of a meeting only if disclosure of the matters to be considered at the meeting ""would endanger national security, would compromise sensitive law enforcement information, would tend to defame, degrade or incriminate any person, or otherwise would violate a law or rule of the House."" If the committee or subcommittee votes to close part or all of a meeting, it may be attended only by committee members and by such non-members, committee staff, and ""departmental representatives as the committee may authorize. See also "" Open Hearings "" and "" Broadcasting Sessions . "" Rule XI, clause 2(h)(3) A committee may set its own quorum requirement for transacting most kinds of business, so long as that quorum is not less than one-third of the committee's members. (Other provisions of House rules require a majority quorum to order a measure or matter to be reported, to authorize a subpoena, or to close a session to the public.) This provision does not apply to the Appropriations, Budget, and Ways and Means Committees. See also "" Quorum at Hearing . "" Rule XI, clause 1(a)(1)(B) In committee and subcommittee, a motion to dispense with the first reading of a measure is privileged and nondebatable, but only if ""printed copies"" of the measure are available. When a committee or subcommittee begins to mark up a measure, it is to be read in full unless the reading is dispensed with by unanimous consent or by use of this motion. Rule XI, clause 2(f) Proxy voting is prohibited in House committees and subcommittees. Rule XI, clause 2(e)(1) As part of its records, the committee shall maintain a record of all rollcall votes. The committee shall make this information available for public inspection in its offices. The information on each rollcall vote shall include a description of the question as well as the names of members voting for and against it and those present but not voting. Rule XI, clause 2(h)(4) Committees may adopt a rule which allows the chairman of a committee or subcommittee to postpone votes on approving a measure or on adopting an amendment and to resume proceedings on a postponed question at any time after reasonable notice. An underlying proposition shall remain subject to further debate or amendment to the same extent as when the question was postponed. Rule XI, clause 2(a) Committees may adopt a rule directing the chairman of the committee to offer a privileged motion to go to conference at any time the chairman deems it appropriate during a Congress. Rule XI, clause 2(h)(l) ""A measure or recommendation may not be reported by a committee unless a majority of the committee is actually present."" This provision also applies to subcommittees, and requires that the majority be present during the vote to order the measure or matter reported. Rule XIII, clause 2(b) After a committee has ordered a measure reported, the chair is required to ensure that it is reported ""promptly"" to the House, and ""to take or cause to be taken steps necessary to bring the measure or matter to a vote."" If a majority of a committee's members so request in writing, the report on a measure the committee has approved must be filed within 7 more calendar days (excluding days when the House is not in session). The latter procedure does not apply to reports of the Rules Committee on the House's rules or its order of business on the floor (i.e., ""special rules"") or to reports on resolutions of inquiry. Rule XXI, clause 4 and clause 5(a) ""A bill or joint resolution carrying an appropriation may not be reported by a committee not having jurisdiction to report appropriations...."" ""A bill or joint resolution carrying a tax or tariff measure may not be reported by a committee not having jurisdiction to report tax or tariff measures...."" Sec. 306 of the Congressional Budget Act, codified as amended at 2 U.S.C. 637 Measures (and in general amendments, motions, or conference reports) dealing with matter within the jurisdiction of the Budget Committee will be considered in the House only if reported by (or discharged from) the Budget Committee. Sec. 425 of the Congressional Budget Act, as amended by P.L. 104-4 , the Unfunded Mandates Reform Act of 1995, 109 Stat 50 The House is not to consider a bill or joint resolution that would increase ""the direct costs of Federal intergovernmental mandates"" by certain amounts unless the measure also satisfies certain qualifications specified in the same section of the law. Rule XIII, clause 4(a) With several exceptions, it is not in order for the House to consider a measure or matter until at least the third calendar day (excluding weekends and legal holidays) on which the committee report on it has been available to Members. This ""three-day rule"" does not apply to (1) resolutions reported by the Rules Committee, which are subject to a one-day layover requirement (clause 6(a) of Rule XIII), (2) concurrent budget resolutions reported by the Budget Committee, for which there is a three-day layover requirement (Section 305(a)(1) of the Congressional Budget Act, as amended), (3) resolutions presenting questions of the privileges of the House, (4) measures declaring war or a national emergency, and (5) resolutions of disapproval (legislative veto resolution). It always is in order for the House to consider a resolution, reported by the Rules Committee, that specifically waives the three-day rule. Such a resolution is not subject to the one-day layover rule of Rule XIII, clause 6(a). Rule XIII, clause 7 If a committee fails to report a resolution of inquiry addressed to the head of an executive department within 14 legislative days after it is introduced, a privileged motion is in order to discharge a committee from further consideration of the resolution. Rule XI, clause 2(l); Rule XIII, clause 2(c) At the time a committee votes to approve any measure or matter, any committee member may give notice of his or her intention to file ""supplemental, minority, or additional views."" If such notice is given, the member then has at least 2 calendar days after the day of the notice (excluding weekends and legal holidays) to submit those views in writing to the committee. A committee may arrange to file its report up to one hour after the two days permitted for filing views, or sooner if the committee has received all views. If any views are submitted within the deadline, they are to be printed as part of the committee's report on the measure or matter. Rule XIII, clause 3(b) The committee report on any public ""measure or matter"" shall include the names and numbers of committee members voting for and against, as well as the total number of votes cast, during any rollcall votes that took place in committee on reporting the measure or matter or on adopting amendments to it. This requirement does not apply to votes taken in executive session by the Committee on Standards of Official Conduct. Rule XIII, clauses 3(c)(3) and 3(d)(2)-(3); Sec. 403 of the Congressional Budget Act, codified as amended at 2 U.S.C. 653 Under Sec. 403 of the Congressional Budget Act, as amended, the Congressional Budget Office (CBO) is to prepare, ""to the extent practicable,"" a cost estimate for any public bill or resolution reported by any House or Senate committee except the Appropriations Committees. The estimate is to project the cost of implementing the measure during the fiscal year in which it would take effect and each of the next 4 fiscal years. CBO also is to estimate, for the same fiscal years, the costs that State and local governments would incur in implementing or complying with a ""significant"" public bill or resolution. (""Significant"" is defined in Section 403©.) Finally, CBO is to compare its cost estimates with other estimates made by the reporting committee or by ""any Federal agency."" Sec. 403 and clause 3(c) of Rule XIII require a committee to include such a CBO cost estimate in the committee's report on a measure if CBO submits its estimate in time for the committee to include it. Under clause 3(d)(2) of Rule XIII, in the absence of a CBO cost estimate, the committee is to prepare and include in its report its own estimate of how much it will cost to implement a public bill or joint resolution during the fiscal year in which it is reported and in each of the 5 following fiscal years. If a committee is required to prepare its own estimate, it shall include a comparison of (1) the committee's cost estimate with any other estimate that the committee receives from ""a Government agency"" (defined in clause 3(d)(3)(A)), and (2) the funding levels proposed by the measure with any corresponding levels under current law. This clause does not apply to the Committees on Appropriations, House Administration, Rules, and Standards of Official Conduct. Rule XIII, clause 3(c)(2); Sec. 308(a)(1) of the Congressional Budget Act, codified as amended at 2 U.S.C. 639 In addition to estimating the cost of legislation (described above), CBO is to furnish information on providing for the cost of the legislation. Specifically, Section 308(a) directs CBO to prepare a statement on the budgetary and fiscal impact of any reported measure or committee amendment, if it provides new budget authority, new spending authority (under Section 401(c)(2) of the act), new credit authority, or an increase or decrease in revenues or tax expenditures. The statement shall: (1) show the impact of the measure on the applicable sub-allocations under Section 302(b) of the act; (2) identify any new spending authority under Section 401(c)(2), which defines entitlements, and explain why the committee chose that funding mechanism in preference to annual appropriations; (3) project the measure's impact on new budget authority, outlays, spending authority, revenues, tax expenditures, direct loan obligations, or primary loan guarantee commitments under existing law for the fiscal year in which the measure would become effective and each of the 4 following fiscal years; and (4) estimate the level of new budget authority the measure provides for assistance to State and local governments. The committee is to include this statement in its report on the measure (or make it available to the House in the case of a committee amendment that is not reported to the House). The latter two components of the statement are to be included in the committee's report only if either or both are ""timely submitted before such report is filed."" These requirements do not apply to continuing resolutions. Clause 3(c)(2) of Rule XIII reiterates the requirement for these CBO statements to be included in committee reports, and adds that, with respect to new budget authority, they ""shall include, when practicable, a comparison of the total estimated funding level for the relevant programs to the appropriate levels under current law."" Rule XIII, clause 3(e) When a committee reports a bill or joint resolution that would repeal or change all or part of some existing law, the accompanying committee report shall reprint the portion of existing law that would be repealed and show, by using different typographical devices, how existing law would be amended to read if the measure were to be enacted. However, if the committee reports the measure with one or more amendments, this requirement applies to the committee amendment(s), not to the measure as introduced. This requirement is popularly known as the ""Ramseyer Rule"" in honor of former Representative Ramseyer of Iowa, who served in the House from 1915-1933. The comparative print sometimes is simply known as ""the Ramseyer."" Rule XIII, clause 3(c)(1) The committee report on any measure is to include any pertinent oversight findings and recommendations by the committee, pursuant to clause 2(b)(1) of Rule X. This requirement does not apply to the Appropriations Committee. Rule XIII, clause 3(c)(4) The committee report on any measure also is to include ""[a] statement of general performance goals and objectives, including outcome-related goals and objectives, for which the measure authorizes funding."" Rule XIII, clause 3(d)(1) The committee report on a public bill or joint resolution shall include a statement citing the specific powers granted to Congress by the Constitution to enact the proposed law. Section 102(b)(3) of P.L. 104-1 , the Congressional Accountability Act of 1995; 109 Stat 6 The committee report accompanying a bill or joint resolution ""relating to terms and conditions of employment or access to public services or accommodations"" is to describe how the provisions of the measure apply to Congress or why they do not. A point of order can be made against House consideration of a bill if the accompanying report does not comply with this requirement, but the requirement may be waived by majority vote. Sections 423-426 of the Congressional Budget Act, as amended by P.L. 104-4 , the Unfunded Mandates Reform Act of 1995, 109 Stat 50 The Unfunded Mandates Reform Act of 1995, P.L. 104-4 , added to the Budget Act new Sections 423-426 concerning committee reports on public bills and joint resolutions that may contain Federal mandates. The committee is to prepare and print in its report a statement on the matters required by Section 423, and also to include (or have printed in the Congressional Record ) any statement prepared and submitted by CBO pursuant to Section 424. Under Section 425, it is not in order for the House to consider a measure if the accompanying report fails to include any required CBO statement. Section 426 governs waivers of Section 425. Section 5(b) of the Federal Advisory Committee Act of 1972, codified as amended at 5 U.S.C Appendix In considering legislation to establish or authorize a Federal advisory committee, a House or Senate committee is to determine ""and report such determination"" as to whether the functions of the proposed committee are or could be performed by an existing agency or advisory committee or by ""enlarging the mandate"" of an existing advisory committee. Rule XIII, clause 3(a) The cover of the committee report on a measure or matter shall so indicate whenever it includes any supplemental, minority, or additional views, or whenever it contains the CBO cost estimate or oversight findings and recommendations made by the Committee on Government Reform. Rule XIII Clauses (f)(g) and (h) Clauses(f)(g) and (h) of Rule XIII place additional content requirements on the reports of certain House Committees. A report from the Committee on Appropriations on a general appropriations bill must include a concise statement describing the effect of any provision of the bill that directly or indirectly changes existing law. The report must also include a list of all appropriations contained in the bill for expenditures not authorized by law (except classified intelligence or national security programs) along with a statement of the last year such expenditures were authorized, the level of authorization, and actual expenditure for that year. A separate section of the report must also be included listing any rescissions or transfers included in the bill. Whenever the Committee on Rules reports a resolution proposing to repeal or amend a standing rule of the House, it must include in its report: (1) the text of the rule or part of the rule that is proposed to be repealed, and (2) a comparative print that shows, by using different typographical devices, how that rule would be amended to read if the measure were to be enacted. Finally, it is not in order to consider a bill or joint resolution reported by the Committee on Ways and Means that amends the Internal Revenue Code of 1986 unless the report includes a macroeconomic impact analysis, and a statement from the Joint Committee on Internal Revenue Taxation explaining why a macroeconomic impact analysis can not be calculated. These provisions do not apply if the chairman of the Committee on Ways and Means causes a macroeconomic analysis to be printed in the Congressional Record prior to consideration of the legislation. Rule X, clause 2(b) Standing committees are charged with continually overseeing the ""application, administration, execution, and effectiveness"" of laws and programs within their jurisdictions, as well as the agencies responsible for administering or executing these laws and programs. Committees also must review the need for new legislation, and conduct future research and forecasting within their jurisdictions. This clause does not apply to the Committee on Appropriations. Rule X, clause 3 Several committees, including the Committees on Appropriations, Budget, Energy and Commerce, Education and the Workforce, Government Reform, Homeland Security, have special specified oversight duties, primarily to oversee issues that fall within the purview of multiple standing committees. Rule X, clause 2(c) Standing committees are to review and study the impact or the probable impact of tax policies affecting subjects within their jurisdictions. Rule X, clause 2(d)(1) Each standing committee is required to adopt an oversight plan for each Congress. In developing the plan, to the maximum extent feasible each committee must consult and coordinate with other committees; give priority of review to permanent laws, programs, or agencies; and look to review significant laws, programs, or agencies at least every 10 years. In developing its plan, each committee is to ""review specific problems with federal rules, regulations, statutes, and court decisions that are ambiguous, arbitrary, or nonsensical, or that impose severe financial burdens on individuals...."" The oversight plan must be adopted in open session by February 15 of the first session of a Congress, and must be submitted to both the Committee on Government Reform and the Committee on House Administration. After consultation with the leadership, the Committee on Government Reform must report these plans to the House by March 31 together with any recommendations to promote effective and coordinated oversight. Rule X, clauses 2(b) and 5(d) Most standing committees with more than 20 members must either create separate oversight subcommittees or require their subcommittees (if any) to conduct oversight within their respective jurisdictions. An oversight subcommittee does not count against the limit of five subcommittees that most committees may establish pursuant to Rule X, clause 5(d). Rule X, clause 2(e) With the approval of the House, the Speaker may appoint ad hoc oversight committees to review matters that fall within the jurisdiction of two or more standing committees. Rule XI, clause 1(b)(1) Each committee is authorized to conduct studies and investigations at any time, and to incur related expenses. Rule XI, clause 1(b)(2) An oversight or investigative report will be considered as read in committee if it has been available to the members for at least 24 hours prior to its consideration. Weekends and legal holidays are excluded, unless the House is in session. Rule XI, clause 1(b)(3) A report on an investigation or study conducted by two or more committees can be filed jointly. Each committee must independently comply with all requirements for approving and filing the report. Rule XI, clause 1(b)(4) An oversight or investigative report may be filed after the adjournment of Congress sine die , provided that members who make timely requests have at least seven calendar days for inclusion of supplemental, minority, and additional views. Rule X, clause 6(a) and 5(c) Committees are to be authorized funds for each Congress through a ""primary expense resolution"" reported by the Committee on House Administration. The resolution may be considered in the House only if the report thereon has been available for one calendar day. The report must contain the total level of funds to be provided to the committee, and to the extent practicable should contain statements on expenses for the committee's anticipated activities and programs. The Committee on Appropriations is exempt from this process. Further, the provision does not apply to (1) any interim resolution providing funds from the beginning of a first session of Congress until the adoption of the primary expense resolution, and (2) any resolution providing additional equipment, stamps, supplies, or staff for all standing committees that contains an authorization for these items subject to enactment of the resolution as permanent law. Rule X, clause 6(a) A primary expense resolution may contain a reserve fund for unanticipated needs of committees. Funds from the reserve may be allocated to a committee only with the approval of the Committee on House Administration. Rule X, clause 7 Committees are provided automatic interim funding until the adoption of a primary funding resolution. From January 3 until March 31 of each new Congress, committees are authorized funds from the salary and expenses account of the House at a monthly rate of 9% of the last session's level or at a lower level set by the Committee on House Oversight. Interim funds shall be spent in accordance with regulations prescribed by the Committee on House Administration. Payment of expenses is to be made on vouchers authorized by the committee, signed by the chair, and approved by the Committee on House Administration. However, until the election of committee members at the beginning of a Congress, a committee's vouchers are to be signed by the chair in the last Congress or, if that individual is no longer a Member, the ranking majority party member returning to Congress. These provisions apply to select committees established by resolution in the preceding Congress if (1) no resolution terminating the funding of the select committee was agreed to during the previous Congress, and (2) a resolution to reestablish the select committee has been introduced. Further, they apply to all committees only insofar as they are ""not inconsistent with"" any resolution reported by the Committee on House Administration and agreed to after the adoption of House rules. Rule X, clauses 6(b) and 6(c) After its initial authorization of funds, a committee may receive supplemental funds through a resolution reported by the Committee on House Administration. This resolution may be considered in the House only if the report thereon has been available for one calendar day. The report must contain the amount of additional funds to be provided, the purpose(s) of those funds, and the reason(s) the funds were not provided in the primary expense resolution. As with the provision on biennial funds, this provision does not apply to any interim funding resolution at the outset of a Congress, and any resolution providing specified items and funds for the same to all committees, subject to enactment as permanent law. Rule X, clause 9(a)(1) and 9(d) By majority vote, each standing committee may appoint not more than 30 professional staff. These staff are assigned to the chair and the ranking minority member ""as the committee deems advisable."" This provision does not apply to the Committee on Appropriations, which sets its own staff level subject to appropriations of funds (under clause 9(d)). Rule X, clause 9(a)(2), 9(f), and 9(h) By majority vote, the minority party members on a standing committee may select one-third (up to ten) of the professional staff, unless ten individuals satisfactory to them have already been assigned. When staff are chosen by the minority, they will be appointed if acceptable to a majority of the committee. If any is deemed unacceptable, the minority party members make another selection. If the minority party requests the appointment of a staff member and none of the 30 professional slots is vacant, the individual will serve as an additional professional staff member until an appropriate vacancy arises. Minority staff are assigned to committee work by the minority party members. These provisions do not apply to the Committee on Standards of Official Conduct and the Permanent Select Committee on Intelligence. Rule X, clause 9(g) Minority staff are to be given ""equitable treatment"" with respect to pay, assignment of work facilities, and accessibility of committee records. Rule X, clause 9(I) By vote of a majority of each party, a committee may employ non-partisan staff in lieu of or in addition to staff designated exclusively for the majority or the minority party. Rule X, clauses 9(b)(1) and 9(b)(2) Professional staff may work only on committee business. This requirement does not apply to ""associate"" staff or ""shared"" staff not paid exclusively by the committee, so long as the chair certifies that the salary paid by the committee is commensurate with work performed for the committee. Rule X, clause 9(b)(3) A committee's use of ""associate"" or ""shared"" staff is subject to the review of the Committee on House Administration, and to any terms, conditions, or limitations established by this Committee in connection with its report of a funding resolution. This provision does not apply to the Committee on Appropriations. Rule X, clause 9(c) The chair of a standing committee sets the annual salary of each staff member of the committee; such salary may not exceed the maximum set in law. Rule X, clause 9(e) Staff may not be detailed to a committee from any Government agency or department without the written permission of the Committee on House Administration. Rule X, clause 6(d) From the funds available for staff, the chair of each committee is to ""ensure that sufficient staff is made available to each subcommittee"" and that the committee's minority party members are ""treated fairly in the appointment of such staff."" Sections 303-304 of the Legislative Reorganization Act of 1970, codified as amended at 2 U.S.C. 72(a) (I) and (j) With the approval of the Committee on House Administration, standing committees may hire consultants and obtain specialized training for professional staff. Rule XXIII, clause 13 Before a Member, Delegate, Resident Commissioner, officer, or employee of the House may have access to classified information, they must first execute an oath swearing (or affirming) not to disclose it in violation of House rules. Copies of the executed oaths are retained by the Clerk of the House and a list of those Members who signed the oath during a week shall be published in the Congressional Record on the last legislative day of that week. Rule XXIV, clause 10 Committee funding resolutions may not pay for the travel expenses of committee members (1) after the date of the general election, if they are defeated, or (2) after the earlier of the date of the general election or the date of sine die adjournment, if they are not seeking re-election. Local currencies owned by the United States may not be used to pay foreign travel expenses of committee members under the same circumstances. Rule X, clause 8(a) Committees may use local currencies owned by the United States when carrying out official duties outside the United States, its territories, or possessions. A committee may not use appropriated funds for expenses in any country if local currencies are available for this purpose. Rule X, clause 8(b) On any day of foreign travel, committee Members and staff may not receive or spend more local currency than the maximum per diem in law. Similarly, where local currencies are unavailable, committee Members and staff may not receive reimbursement for expenses (other than transportation) in excess of the maximum per diem contained in law. In addition, any reimbursement for foreign travel expenses will be at the lesser of the per diem rate or the level of actual expenses (other than transportation). Rule X, clause 8(c)(3) Committee Members and staff may be reimbursed for the cost of transportation related to foreign travel only if they have ""actually paid for the transportation."" Rule X, clause 8(b)(3) Within 60 days of completing travel to a foreign country, each committee Member or staffer must file a report listing the dates of travel, the amount of per diem and transportation furnished and spent, and funds expended for any other official purpose. The reports are to be filed with the committee chair and to be open for public inspection. Rule X, clause 4(e) In general each standing committee is to ensure that continuing programs and activities are appropriated annually, and must review programs that are not appropriated annually to determine whether changes would allow them to be. Rule X, clause 4(f)(1) Each standing committee must submit to the Committee on the Budget its views and estimates on spending within its jurisdiction. These statements are to be submitted no later than six weeks after the President submits his budget or at such time as the Budget Committee requests. Rule X, clause 4(a)-4(e) The clause assigns particular functions and duties to the Committees on Appropriations, Budget, Government Reform, and House Administration.","The rules of the House of Representatives, especially Rules X-XIII, govern the authority and operations of its committees and subcommittees. In many respects, the House allows each of its committees to decide for itself how to conduct its business. However, the House does impose various requirements and prohibitions on its committees; and because the committees are the agents of the House, they are obligated to comply with all House directives that apply to them. This report identifies and summarizes the provisions of the House's standing rules and certain other directives that affect committee powers, authority, activities, and operations. It is organized under seven headings: (1) general, (2) establishment and assignments, (3) hearings, markups, and other meetings, (4) reporting, (5) oversight and investigations, (6) funding, staff, and travel, and (7) other duties.",govreport
"The Association of Southeast Asian Nations (ASEAN) is Southeast Asia's primary multilateral organization, a 10-member grouping of nations with a combined population of 580 million and an annual gross domestic product (GDP) of around $1.5 trillion. Established in 1967 to foster regional dialogue during the turbulent post-colonial, Cold War period, it has grown into one of the world's largest regional fora, representing a strategically and economically important region that spans some of the world's most critical sea lanes and accounted for around 5% of the United States' total trade in 2008. The Obama Administration is pursuing a policy of expanding and upgrading U.S. relations with Southeast Asia, and with ASEAN itself. Although the Bush Administration took steps to develop ties with the region, it was widely perceived among members of ASEAN as narrowly focused on terrorism, neglectful of other issues, and not sufficiently committed to multilateral dialogue. By contrast, the Obama Administration has explicitly expressed an intent to pay greater attention to Southeast Asia, listen more carefully to regional concerns, and work with multilateral organizations, particularly ASEAN, to cooperate on issues of mutual interest. The United States has deep-seated interests in Southeast Asia, such as maritime security, the promotion of democracy and human rights, the encouragement of liberal trade and investment regimes, counterterrorism, the combating of illegal trafficking of narcotics and human trafficking, and many others. As China has deepened its economic and cultural ties in Southeast Asia, and even taken some steps to build security ties, some analysts believe the region has also become an important site of ""soft power"" rivalry, in which the long-standing leadership role of the United States could be challenged by a rising China. Other external powers also have shown renewed or greater interest in the region, including Japan, the EU, and India. Engagement with ASEAN has presented the United States with an important foreign policy dilemma. Despite considerable U.S. security, economic, and foreign assistance initiatives in the region, particularly at the bilateral level, in recent years a perception has developed among Southeast Asian elites that the United States has placed relatively little priority on ASEAN itself and has, thereby, demonstrated a lack of commitment to Southeast Asia as a whole. Southeast Asian diplomats frequently note that other nations, including China and Japan, have given ASEAN meetings a considerably higher diplomatic commitment than has the United States. Indeed, in some ASEAN countries, one of the largest irritants to bilateral relations with the United States is the fact that it is perceived as insufficiently engaged with the multilateral body of ASEAN. The United States has long had close bilateral relations with many of Southeast Asia's nations. Two ASEAN members, Thailand and the Philippines, are U.S. treaty allies, and a third, Singapore, is a close security partner. Indonesia and Malaysia have long had strong ties with Washington, and both are seen as important models of progressive governance and economic development in majority Muslim nations. In recent years, Vietnam has also become an increasingly important voice in regional affairs, and the United States has moved to normalize and deepen ties with its one-time adversary. Some feel that these strong sets of bilateral ties are sufficient to anchor the U.S. role in the region, arguing moreover that ASEAN's consensus-based decision-making makes it difficult for the organization to accomplish much, given its broad membership, which includes highly developed financial centers, vibrant developing-nation democracies, and impoverished military dictatorships. Still, symbolic commitment is particularly important in a region that places a heavy emphasis on process and informal networking. Many observers argue that the United States needs to ""show up"" more frequently and at higher official levels, lest it lose influence in the region and risk being cut out of emerging Asian diplomatic and economic architectures. Recent actions by the Obama Administration suggest that it accepts this argument, at least on a symbolic level. The United States has been steadily expanding and deepening its relations with ASEAN since the middle of the decade. A common goal of both the Bush and the Obama Administrations appears to be to increase the multilateral dimension of U.S. policy in Southeast Asia, which traditionally has been organized along bilateral lines. However, many of the Bush Administration's initiatives—which included becoming the first country to appoint an ambassador to ASEAN, providing assistance to the ASEAN Secretariat to upgrade its capabilities, and launching the US-ASEAN Trade and Investment Framework Agreement (TIFA)—were undermined by a belief among Southeast Asian elites that the United States lacked a strong commitment to ASEAN and Southeast Asia. The piece of evidence cited most often by critics was former Secretary of State Condoleezza Rice's decision to not attend two of the four ASEAN Regional Forum (ARF) Foreign Ministerial meetings during her tenure. Considerable attention was focused on President Bush's decision to cancel the scheduled US-ASEAN Summit in September 2007 to focus on the security situation in Iraq. A number of countries have regular summits with ASEAN leaders, including China, Japan, South Korea, and India. The Obama Administration has taken steps with ASEAN that some see as explicitly designed with symbolic diplomacy in mind. In February 2009, Secretary of State Hillary Clinton visited the ASEAN Secretariat in Jakarta, a first for a U.S. Secretary of State. In July 2009, during Clinton's second visit to Southeast Asia to participate in the ARF Foreign Ministerial in Thailand, the United States acceded to ASEAN's Treaty of Amity and Cooperation (TAC), which promotes the settlement of regional differences or disputes by peaceful means and is one of the organization's core documents. President Obama attended a first-ever U.S.-ASEAN leaders meeting on the sidelines of the November 2009 Asia-Pacific Economic Cooperation (APEC) forum summit in Singapore. In a joint statement, the leaders pledged continued or enhanced dialogue and cooperation in many areas, including engagement with the government of Burma (Myanmar), human rights, trade, regional security, nuclear non-proliferation and disarmament, counterterrorism, energy, climate change, educational exchanges, and support for the Lower Mekong Basin countries (Cambodia, Laos, and Vietnam). They agreed to hold a second meeting in 2010. The Obama Administration has taken other potentially noteworthy steps. Divergent U.S. and ASEAN approaches to Burma have also been an irritant to U.S.-ASEAN relations since Burma became a member of the organization in 1997. The United States has pursued a policy of diplomatically shunning the Burmese military regime and imposing stringent economic sanctions against the country—creating difficulties in engaging both politically and economically with a grouping that includes it. In the fall of 2009, the State Department announced a new Burma policy, in which the United States would hold dialogues with the Burmese leadership while still maintaining U.S. sanctions. This move, which brings Washington closer to ASEAN policy, could help to improve U.S.-ASEAN ties. Additionally, on the sidelines of the July 2009 ARF meeting, Secretary Clinton met with the foreign ministers of the lower Mekong countries, excluding Burma (i.e., Vietnam, Cambodia, Laos, and Thailand), in the first-ever U.S.-Lower Mekong Ministerial Meeting. The ministers issued a joint statement outlining the wide-ranging areas of discussion, which included responses to climate change, fighting infectious disease, and education policy. President Obama plans to visit Indonesia and Australia in March 2010. His talks with Indonesian President Yudhoyono will likely focus on trade and security ties as well as raise the profile of the region's largest and arguably most democratic nation. Taken together, the message of the Administration's symbolic and substantive moves appears to be that the United States intends to engage with ASEAN and Southeast Asian countries at a higher level, and do so more persistently. There remain questions about how far this change in approach will persist, particularly as it raises expectations in Southeast Asia. For instance, will the U.S.-ASEAN leaders' meeting be regularized, as many Southeast Asian leaders hope? On the other hand, by raising the profile of U.S.-ASEAN ties, the United States likely will place new pressures on ASEAN to increase its own utility in resolving regional crises and addressing security and economic issues in a more concerted manner, lest a more activist United States eventually bypass it. The Association of Southeast Asian Nations was founded on August 8, 1967, with the adoption of the ASEAN Declaration in Bangkok, Thailand. Originally, the association had five members—Indonesia, Malaysia, Philippines, Singapore, and Thailand—and expanded to its current 10 members during the 1980s and 1990s with the addition of Brunei Darussalam, Vietnam, Laos, Burma, and Cambodia. Colonial experiences led to a strong desire by the original members to prevent the domination of the region by any single power. Furthermore, the formation of the organization reflected an attempt to forge independent foreign policies in the context of Cold War pressures. As stated in the ASEAN Declaration, the association was created to achieve joint goals including those related to economic growth; regional peace and security; collaboration and mutual assistance in a number of development areas; trade promotion; and linkages with other regional organizations. On February 24, 1976, ASEAN created the ASEAN Secretariat, located in Jakarta, Indonesia, an administrative body consisting of representatives of each ASEAN member nation. The Secretariat is headed by a secretary-general, who serves a term of five years. Since its creation, the structure and the duties of the Secretariat have been changed on several occasions. As of 2009, the secretary-general's main responsibilities are to organize the annual foreign ministers' meeting; initiate, advise, coordinate, and implement ASEAN activities; serve as spokesman and representative of ASEAN on all matters; and oversee the operations of the ASEAN Secretariat. ASEAN remains, to a large degree, an informal organization. The ASEAN Secretariat is lightly staffed, without the deep administrative resources and responsibilities of some multilateral organizations such as the European Union. Its current secretary-general is Surin Pitsuwan, a former Thai foreign minister, who has sought to institutionalize many of ASEAN's practices and has pushed the introduction of the ASEAN Charter. Still, much of the diplomatic activity that occurs at meetings of ASEAN leaders and senior officials occurs on the sidelines rather than at the formal level. ASEAN has traditionally operated on principles of consensus and non-interference in the internal affairs of members, which has led to considerable difficulty in the group operating in formal concert. Many analysts note that ASEAN's expansion to include underdeveloped nations such as Laos, Cambodia, and Burma has created a wide range of interests within the group that make formal security and economic moves difficult to agree upon. Although ASEAN is starting to play a more active role in dealing with its members' differences—most notably over Burma's human rights record—much of what the group does is still done through informal channels. A new ASEAN Charter went into effect on December 15, 2007, superseding the ASEAN Declaration as the organizing document for the organization. The charter is effectively a constitution for ASEAN, committing the member nations to the formation of an ""ASEAN Community in furtherance of peace, progress and prosperity of its peoples."" Some aspects of the charter may signal a greater willingness to discuss and comment on the internal affairs of the organization's members. Such a potential institutional development may help the organization to deal with members such as Burma that have caused troublesome policy issues both within the region and with ASEAN's relations with outside states. The new charter establishes a number of goals for ASEAN, including: Maintenance of peace, stability, and security in the region; Promotion of greater political, security, economic; and socio-cultural cooperation; Preservation of Southeast Asia as an area free of weapons of mass destruction, including nuclear weapons; Creation of a just, democratic, and harmonious environment in the region; Formation of a single market and production base in which there is free flow of goods, services, and investment, as well as facilitated movement of business persons, professionals, talents and labor, and the freer flow of capital; Alleviation of poverty and the narrowing of the development gap in the region; and Promotion of sustainable development so as to ensure the protection of the region's environment. According to the new charter, there are to be two ASEAN summits each year, attended by the members' heads of state or their designated representatives. In addition, the foreign ministers of the ASEAN members are to meet at least twice a year. The ASEAN Charter also creates three Community Councils, dealing with political and security, economic, and socio-cultural issues, respectively, plus preserves the institutions of the ASEAN Secretary-General and the ASEAN Secretariat as the administrative bodies for the association. Article 14 of the charter calls for the establishment of an ASEAN human rights body, a new development for ASEAN, which has traditionally refrained from commenting on the human rights situation in member nations. The first meeting of the ASEAN human rights body—formally called the ASEAN Intergovernmental Commission on Human Rights (AICHR)—took place on October 23, 2009, in Cham-Am, Thailand, following an ASEAN summit. ASEAN is at the center of several other security- and trade-related groupings in the Asia-Pacific region. The ASEAN Regional Forum (ARF), established in 1994 with 26 Asian and Pacific states plus the European Union, was formed to facilitate dialogue on political and security matters in the region. The ASEAN + 3 (China, Japan, and South Korea) was created in 1997, partly as a response to the Asian financial crisis, and partly as a way to balance the northeast Asian powers in the security dialogue process with ASEAN. Created in 2005, the East Asia Summit (EAS) which, in addition to the ASEAN + 3 members, includes Australia, New Zealand, and India, represented an effort by some countries in the region, particularly Japan, to balance China's influence in the region through the inclusion of additional, non-East Asian powers. More recently, the geopolitical discussion in Asia has turned to the issue of the formation of an EU-style association of Asian nations. While this discussion is in its early stages, there are already advocates for the creation of a pan-Asian entity—the East Asian Community (EAC)—that would include closer economic and trade relations among its members, possibly even the creation of a single Asian currency. At the same time, there has been a separate ongoing discussion about greater regional economic and trade integration in Asia taking place in various fora. The Asia-Pacific Economic Cooperation (APEC) forum was formed in 1989 with the express mission of accelerating regional economic integration and fostering greater trade and investment liberalization through a process known as ""open regionalism."" ASEAN has also formed the core at periodic meetings of ASEAN + 3 and the EAS to consider ways and means of fostering closer economic and trade ties. For its own part, ASEAN has been pursuing ways to expedite closer economic ties amongst its 10 member nations with the goal of creating an ASEAN Economic Community. While security concerns were downplayed in the original ASEAN Declaration, the importance of regional peace and security was a major purpose behind ASEAN's formation. ASEAN has sought to maximize its security interests by developing a set of norms for its members, and beyond that has increasingly relied on consensus building and discussion as the preferred means of conflict resolution. That said, all is not tranquil among ASEAN members or between ASEAN states and external powers. There continue to be bilateral tensions among ASEAN states, as recently demonstrated by the border clashes between Cambodia and Thailand near the 11 th -century Preah Vihear Temple, and maritime disputes between Indonesia and Malaysia over the energy-rich Ambalat sea bloc in the Sulawesi Sea. Nevertheless, it does appear that ASEAN has played a key role in promoting a normative order that has minimized interstate conflict in Southeast Asia since the group's formation during the Cold War. ASEAN's key strategic value emanates from its geographic position as well as its economic development. ASEAN is situated astride the key sea lanes that link the energy-rich Persian Gulf and the economic power centers of East Asia. Maintaining the free flow of goods and energy through the strategically vital Malacca, Sunda, and Lombok Straits is a key geostrategic interest for ASEAN members, as well as the United States, Japan, China, and South Korea. Energy reserves in and around the South China Sea, Indonesia, and Burma also give the region added strategic importance. While ASEAN has been a key player in the creation of emerging economic and strategic architectures in Asia, such as the ASEAN + 3 and the East Asia Summit, it faces the increasingly challenging task of maintaining strategic balance and its pivotal role in this process. The emergence of China and India as great powers in an increasingly multi-polar world, and the continued engagement of the United States, present diplomatic challenges for ASEAN as it seeks to shape an international order that will promote peace and stability for the region. The United States and ASEAN share a mutual interest in preventing conflict and maintaining the independence of regional states. ASEAN as an organization will likely seek to balance external actors in the region while seeking to avoid antagonizing great powers. America's military posture in Asia supports ASEAN's goal of ensuring that no hegemon can arise that could dominate the region. As such, America is generally a valued offshore balancer relative to the perceived rising influence of China, though some ASEAN members—Laos, Cambodia, and Burma, in particular—are relatively closer to China than others. China also acts as a balancer to American presence in the region. While securing sea lanes of communication and trade that transit maritime Southeast Asia is of mutual importance among all interested states, there is the potential that increasingly intense competition for energy resources could lead to increased tensions. This could be the case should Chinese efforts to secure energy resources and routes entangle China and India in a security dilemma where ""defensive"" moves by one party are viewed as ""offensive,"" or threatening, by the other. This could also be the case should Chinese activity in Burma intensify. China is interested in developing an energy and trade corridor from Sittwe, Burma, to Kunming, China, which could be viewed as a means of lessening China's strategic vulnerability at the Strait of Malacca. Some in India are increasingly concerned that this move by China in Southeast Asia could be part of a larger strategy to encircle India. Territorial disputes in the South China Sea have been at the center of some of ASEAN's most active security-related diplomacy in recent decades—but also serve as an illustration of the difficulty of marshaling the group's diverse membership to act in concert. For decades, the Paracel and Spratly Islands have been the site of regional competition for control of the South China Sea among ASEAN members and China, and between individual ASEAN members themselves. The source of competition over this region is the desire to extend sovereignty over sea beds by establishing claims to the islands and thereby control important fishing areas and what are thought to be rich energy reserves beneath the sea. In the late 1990s and early 2000s, ASEAN's push for a Code of Conduct on the South China Sea to promote the norms of peaceful resolution of conflict—which resulted in the Declaration on the Conduct of Parties in the South China Sea signed by ASEAN's members and China in November 2002—can be viewed as one of the group's successes in acting in concert to promote common security interests of organization members. In 1992, following a series of incidents including China's sinking of three Vietnamese vessels near Fiery Cross Reef in the Paracels in 1988, ASEAN issued a declaration on the South China Sea, calling for a mutual code of conduct for nations navigating in the waters. This led to a decade of active diplomacy in which the organization's members largely held together to promote multilateral security in the area. By acting as a group, ASEAN states arguably have collectively more weight when dealing with any outside actor than they do when acting individually. However, the continuation of flare-ups in these waters is also an illustration of the limits of ASEAN's ability or willingness to act in concert to deal with external powers. In recent years, continued Chinese disputes with Vietnam and the Philippines have been kept largely bilateral, with ASEAN as a grouping opting not to lend formal support to its members in their disputes with China. This has had an effect on U.S. interests. In 2008, for instance, China warned international oil firms, including ExxonMobil, against exploring for energy resources in blocks leased by the Vietnamese government. Of ASEAN states, only Thailand was able to maintain a fair degree of political autonomy throughout the colonial period in Southeast Asia. The later colonial period witnessed the domination of Indo-China by France; Burma, Malaya, and Singapore by the United Kingdom; Indonesia by the Netherlands; and the Philippines by Spain and the United States. During World War II, the region came under the control of imperial Japan. These experiences led to a strong desire of ASEAN members to prevent their newly independent states from being dominated by any single power, as Japan did during WWII, and to preserve and expand their independence of action from external great powers. ASEAN was formed through the Bangkok Declaration of 1967 at the height of the Cold War, when external powers were directly or indirectly militarily engaged in the region. ASEAN was created largely as a reaction to Cold War pressures on the region. At the time, the United States was deeply engaged in the war in Vietnam, and the ongoing global struggle between the West and the Soviet bloc was intense. Small Southeast Asian states also sought in part to bring Indonesia into a regional grouping as a way of curbing its previously demonstrated ability to threaten regional neighbors, as it did with Malaya under its policy of Konfrontasi, which included a guerilla war on Borneo from 1963 to 1966 against British, Australian, New Zealand, and Malay security forces. While the Cold War is now history, ASEAN continues to be faced with the diplomatic, strategic and foreign policy challenges of how to deal with external great power actors in its region. Today, Soviet influence has faded and Chinese influence has expanded while the United States has sought to remain engaged in the region. ASEAN-China relations have become deeper, as China has engaged in a ""charm offensive"" since the late 1990s, seeking better diplomatic and trade relations with Southeast Asian states. The potential for larger Indian engagement with the region is also developing, as demonstrated by India's inclusion in the East Asia Summit. Some regional states continue to have outside bilateral or multilateral defense ties, some of which can be viewed as legacies of the colonial, post-WWII, and Cold War periods. These security relationships include the Five Power Defense Agreement between the United Kingdom, Malaysia, Singapore, Australia, and New Zealand and the U.S. alliances with the Philippines and Thailand that were originally part of the San Francisco system formed in the early 1950s. In addition, Indonesia has moved on somewhat from its non-aligned position by developing bilateral security ties with Australia. While there are some relatively low-level security concerns either between ASEAN states or at the sub-state level, as is the case with insurgents in Southern Thailand and the Southern Philippines, the largest threats to stability in the region as a whole emanate largely from outside the region and relate to the evolving correlates of power in Asia as a whole. It is for this reason that much of ASEAN's diplomatic activity and initiative has been focused at establishing a new Asian or trans-Pacific economic and strategic group that can seek to prevent or ameliorate conflict between the extra-regional powers that are active in the region, including the United States, China, Japan, South Korea, and India. For example, a conflict between China and the United States over Taiwan would likely have a devastating impact on regional trade and would place unwanted pressure on ASEAN states to pick sides. The general trend in recent decades of re-conceptualizing security as more than simply the realm of cross border conflict between the armed forces of sovereign nation states, or internal counterinsurgency operations, is clearly evident in Southeast Asia. This is evident from the negative impact of terrorist groups active in the region, such as Jemaah Islamiya and Abu Sayyaf, as well as from the relatively high incidence of piracy in maritime Southeast Asia. Jemaah Islamiya in Indonesia and Abu Sayyaf in the Philippines are two key terrorist groups that are a threat to Americans and Western interests in the region. Counterterrorism efforts by ASEAN states working with the United States and Australia have done much to hunt down regionally based terrorists. While the cultural heart of Islam is Mecca, the demographic heart of Islam is closer to Southeast Asia, as Indonesia has the world's largest Muslim population. Indonesia and Malaysia generally recognize a more tolerant and less fundamentalist form of Islam, which some argue could be a good starting point for increased engagement by the United States in the Muslim world. Contemporary security interests also encompass other sub-national and trans-regional levels of conflict in addition to interstate conflict. The conflicts that Indonesia has had in East Timor, Aceh, the Moluccas, and Papua, some of them still festering; ongoing insurgencies in Muslim areas of Thailand and the Philippines; and Burma's restive minority groups can be viewed in this context. ASEAN's reluctance to become involved in the internal affairs of its members has largely kept such issues from becoming the business of the group as a whole. Concepts of human security have also brought many analysts of security dynamics in the region to increasingly focus on the negative impacts of environmental degradation and the impact that climate change may have on the region. The ""haze"" generated by the burning of forests after logging operations brought this to the attention of regional governments concerned over public health risks in 1997. The damming of the upper reaches of the Mekong in China has also raised concerns over the long-term viability of that river system as a source of food for the region. Increased temperatures associated with climate change may undermine regional food production and cause sea level rise that would negatively impact low-lying coastal areas where many in the region live. Piracy in Southeast Asia has been a relatively large problem as compared with other areas of the world, with the exception of the Gulf of Aden and the Arabian Sea in recent years. Human and narcotics trafficking and the plight of refugees in the region are other human security issues worthy of attention. The ASEAN economies have become a major regional hub for globalized manufacturing. According to official ASEAN statistics, ASEAN's total merchandise trade exceeded $1.7 trillion (see Table 1 ). A little more than one-quarter of its trade was between ASEAN members. Another third was with the European Union (EU-25), Japan, and the United States. Trade with China claimed about one-tenth of the association's merchandise trade. The rest of ASEAN's trade was distributed around the world. In terms of the types of goods and commodities traded by ASEAN in 2008, three different groups far surpassed all other categories—electrical machinery, mineral fuels and oils, and mechanical appliances (see Table 2 ). Taken together, these items account for nearly 60% of ASEAN's exports and almost two-thirds of its imports. This pattern can be partially explained by ASEAN's role in the globalized manufacturing of electrical machinery and mechanical appliances. As described in a number of studies, the production of home appliances, computers, telecommunications equipment and other products that fall into these two categories has become a multi-country process, with components and parts being shipped between nations for final assembly in multiple competing countries. Much of ASEAN's intra-regional trade in intermediate goods ends up as components used in final assembly work done in China. While this multi-country assembly process is comparatively mobile and fluid, in recent years, the ASEAN nations—along with China—have become regionally integrated manufacturing hubs for selected products. According to official U.S. trade statistics, ASEAN's trade with the United States—like with the rest of the world—is dominated by electrical machinery (HTS 85) and mechanical appliances (HTS 84) (see Table 3 ). Over 40% of U.S. imports from ASEAN and nearly half of U.S. exports to ASEAN are in these two categories. Knit and non-knit clothing (HTS 61 and 62), plus rubber and articles made of rubber (HTS 40) are also major products imported from ASEAN. Other top-five U.S. exports to ASEAN are aircraft (HTS 88); optical and scientific equipment (HTS 90); and mineral fuels and oils (HTS 27). U.S. trade statistics show a larger U.S. trade deficit with ASEAN than ASEAN's statistics. Since the early 1990s, the ASEAN members have been gradually moving toward the creation of a free trade area encompassing the 10 members of the association. The ASEAN Free Trade Area (AFTA) is to be fully implemented in 2010 by six ASEAN countries and 2015 for the remaining signatories. Under AFTA's Common Effective Preferential Tariff (CEPT) Scheme, more than 99% of the product categories will have their intra-ASEAN tariff rates reduced to below 5%. In addition, the 10 ASEAN members have agreed to the goal of creating an ASEAN Economic Community (AEC) by 2015. During the ASEAN summit held in Cha-Am, Thailand on October 23-25, 2009, there was a recommitment to the 2015 goal for the creation of the AEC, as well as discussion of alternative ways of forming closer economic and trade ties with several Asian nations, including China, India, Japan, and South Korea. ASEAN's efforts to create the AEC have been complemented by its interest in negotiating trade agreements with key Asian nations. The United States is the only major power in the region that has not agreed to some form of formal free trade agreement (FTA) with ASEAN. As of October 2009, ASEAN had concluded trade agreements with the following countries: Australia and New Zealand —On February 29, 2009, ASEAN, Australia, and New Zealand signed the ASEAN-Australia-New Zealand Free Trade Area (AANZTA) Agreement. The agreement commits the parties to the progressive reduction of tariff and non-tariff trade barriers. China —On November 5, 2002, ASEAN and China set the goal of establishing an ASEAN-China Free Trade Area (ACFTA) within 10 years. The two sides subsequently signed an Agreement on Trade in Goods in 2004, and an Agreement on Trade in Services was entered into force in 2007. Under ACTFA, ASEAN and China began reducing tariff lines on a range of goods on January 1, 2010. On the ASEAN side, Singapore, Malaysia, Indonesia, the Philippines, Thailand, and Brunei agreed to begin reductions in 2010, while Vietnam, Laos, Cambodia and Burma aren't expected to begin reductions until 2015. There has been early resistance within ASEAN to the tariff reductions, most sharply in Indonesia, where the government sought in January 2010 to postpone import tariff reductions on some 228 product lines, arguing that it needs to cushion domestic industries from Chinese competition. India —On August 13, 2009, ASEAN and India concluded an agreement on trade in goods that provides for the gradual reduction of tariff and non-tariff trade barriers, plus commits the parties to the establishment of an ASEAN-India Free Trade Area (AIFTA). Japan —In April 2008, ASEAN and Japan concluded negotiations for the creation of an ASEAN-Japan Free Trade Area (AJFTA). South Korea —On August 24, 2006, ASEAN and the Republic of Korea concluded the ASEAN-Korea Free Trade Agreement (AKFTA). The original document covered trade in goods. Since then ASEAN and South Korea have extended their trade arrangement to cover investment as well. ASEAN has also held talks with the European Union (EU) about a possible free trade agreement, but progress has been slow and prospects are unclear. Beyond its efforts to negotiate bilateral trade agreements with selected countries, ASEAN has also been actively promoting the creation of a larger, Asia-based free trade area. This possible regional economic association has been referred to by different names at different times, including the more recent East Asian Community (EAC). In some cases, the discussants have been limited to ASEAN + 3. In other cases, the group of nations has been expanded include the EAS (ASEAN + 6). During the East Asia Summit held in Hua-Hin, Thailand, on October 25, 2009, there was discussion about the nature of a possible EAC as well as which nations ought to be members. While there appeared to be some consensus to create a regional free trade area by 2020, there was no agreement on which nations should he part of such an arrangement. In particular, there were apparently sharp differences of opinion over the inclusion of the United States in the free trade area. Similarly, although Russia has applied for membership in the East Asia Summit, it is unclear if Russia is being considered for inclusion in the EAC. While some have suggested the possibility of an ASEAN-U.S. Free Trade Agreement, there are several structural problems to negotiating such an agreement. First, the United States would probably require that the trade agreement comply with the U.S. model FTA, a condition that ASEAN may not find acceptable. Second, the United States has a comprehensive ban on direct trade with Burma. Third, the ASEAN economies vary in their level of economic and legal development, which would make the FTA's compliance requirements difficult to specify. The Obama Administration's revision of U.S. policy toward Burma has coincided with a similar review by ASEAN of its stance on relations with the ruling junta, the State Peace and Development Council (SPDC). While the new U.S. policy may be viewed as a tacit admission that sanctions alone were not sufficient to effect change in Burma, recent statements and actions by ASEAN may indicate that their past policy of ""constructive engagement"" had proven equally ineffective. As a result, there may be an opportunity for ASEAN and the United States to confer and coordinate their policies toward Burma. During the U.S.-ASEAN leaders' meeting in November 2009, in which President Obama sat four chairs away from Burma's representative, Prime Minister Thein Sein, the United States raised the issue of human rights abuses in Burma and the need for democratic reforms and genuine dialogue with opposition leaders, and called upon the military government to release all political prisoners, including Nobel Peace Laureate Aung San Suu Kyi. The joint statement issued at the summit expressed the hope that the renewed dialogue between the United States and Burma, as well as ASEAN's efforts to work with the Burmese government, will ""contribute to broad political and economic reforms."" There was also a call for the government to conduct the proposed general election in 2010 in ""a fair, free, inclusive and transparent manner."" However, there was no mention of political prisoners or the release of opposition leaders. Although there was interest in including Burma as an original member of ASEAN in 1967, it did not join the association until 1997. From the start, ASEAN as an organization adopted a policy of ""constructive engagement"" toward Burma, refraining from public comments in its ""internal affairs,"" while some members sought closer economic, trade, and investment relations with Burma. Some of the strongest supporters of ASEAN's policy of ""constructive engagement"" toward Burma have been the governments of Thailand, Indonesia, Malaysia, and Singapore, for slightly different reasons. Thailand has had an ambivalent view of Burma. Burmese domestic unrest has adverse direct impacts on Thailand, and Thailand suffers from the flow of both narcotics and refugees out of Burma. However, successive governments in Bangkok have felt an interest in maintaining at least some ability, even if limited, to deal with the Burmese regime, and to foster stability in Burma, with which Thailand shares a long border. Under the Suharto regime, the Indonesian government shared some ideological views with Burma's military government that led to its support of Burma's ASEAN membership and closer relations, although Jakarta has taken a harder line as the country has democratized. Malaysia at the time was concerned about both Chinese and U.S. influence in the region, and found similar views among Burma's military rulers. The Singaporean government saw economic opportunity in closer relations with Burma, and for a time was a major supplier of equipment and arms for the Burmese military, as well as a major investor in the country. The adoption of a new ASEAN Charter in 2007 may signal a greater willingness to address issues such as human rights and democracy. As previously mentioned, the new charter states that among ASEAN's purposes are strengthening democracy and protecting human rights, and mandated the establishment of an ""ASEAN human rights body."" However, among ASEAN's founding principles is a commitment to ""non-interference in the internal affairs of ASEAN Member States."" In practice, under the new charter, ASEAN has shown a greater willingness to express its opinion about the situation in Burma. In response to the conviction of Aung San Suu Kyi in August 2009, ASEAN's chairman issued a statement expressing ASEAN's ""deep disappointment"" at the verdict, calling for the immediate release of Aung San Suu Kyi and other political prisoners, and asserting that ""such actions will contribute to national reconciliation among the people of Myanmar, meaningful dialogue and facilitate the democratization of Myanmar."" In addition, ASEAN has indicated that the junta's treatment of opposition groups and ethnic minorities will affect how the election results will be perceived by the Association. Although ASEAN appears to be more willing to publicly criticize Burma's military government, it has not shown a greater willingness to impose economic sanctions on the country. Malaysia, Singapore, and Thailand are major trading partners with Burma, and may be reluctant to forswear the economic benefits of bilateral trade and investment. Indonesia's civilian government may be more willing to consider economic pressure on Burma, in part because of its history of military rule and in part because of its concern about Burma's Muslim minority. The conduct and outcome of Burma's 2010 parliamentary elections may prove critical to ASEAN's future relationship with Burma. While few expect a free and fair election, if the results provide some space for opposition views in the government and indicate a possible shift in power to civilian rule, then ASEAN will likely continue its policy of modified ""constructive engagement."" If, however, the election results provide only a veil of cover to the continuation of military rule, then ASEAN may be willing to consider adopting a tougher policy. In one of the first signs that the elections may lack credibility, in March 2010, the Burmese government enacted rules that require political parties to expel any members who are imprisoned, thus barring Aung San Suu Kyi from participating. U.S. assistance for Southeast Asian multilateral efforts focuses on trade facilitation, counterterrorism, security sector reform, and the environment. Other program areas include good governance, combating transnational crime, and education. U.S. funding for East Asia Pacific regional programs, a large portion of which supports ASEAN, ARF, and APEC objectives, totaled an estimated $20 million in 2009. In the area of security, U.S. foreign assistance supports the Counter-terrorism Regional Strategy Initiative, which focuses on transnational aspects of terrorism and regional responses. U.S. assistance to ARF includes funding for regional programs in counter-terrorism, combating transnational crime, disaster preparedness, and non-proliferation. USAID's Regional Development Mission Asia (RDMA) supports efforts to strengthen the capacity of the ASEAN Secretariat, develop regional economic institutions, and enhance ASEAN's Food Security Information System. RDMA also provides trade-related technical assistance and supports U.S. commitments under the ASEAN-U.S. Enhanced Partnership. In terms of bilateral assistance, the United States provided an estimated $526 million in FY2009 to nine ASEAN countries (Brunei Darussalam does not receive U.S. assistance). Since 2001, the Philippines and Indonesia have received large increases in U.S. assistance, largely for counterterrorism programs. Vietnam also has received large growth in U.S. aid, reflecting significant funding for HIV/AIDS programs. Among providers of bilateral official development assistance (ODA) as measured by the Organization for Economic Cooperation and Development (OECD), Japan is by far the largest donor in the region, followed by the United States, although Japanese ODA includes a relatively large loan component. France, Germany, the United Kingdom, and Australia also provide significant ODA in the region. China has become a key source of financing and assistance for infrastructure, energy, and industrial development in Southeast Asia. ASEAN's most critical external relations continue to be with the United States, the region's primary security guarantor; Japan, the major provider of development assistance; and China, a rising source of aid, trade, and, according to some, strategic influence in the region. Many analysts argue that China's ""soft power""—global influence attained through economic, diplomatic, cultural, and other non-coercive means—has grown significantly in the past decade. Furthermore, many observers contend that China's diplomatic outreach, including building links to ASEAN, has surpassed that of the United States during the past several years. Most Southeast Asian leaders and foreign policy experts have welcomed engagement from both the United States and China because of the benefits that strong relations bring; they do not want a single foreign influence to dominate the region, and excluding either power is ""not an option."" Although Japan is a close development partner in the region, some Southeast Asians would welcome a more robust Japanese diplomatic and security presence. Many analysts view India as an ascendant but still nascent regional power that has an interest in balancing China's rise in the region. The United States exerts the most established and forceful military presence in the region, including alliances with the Philippines and Thailand (Major Non-NATO Allies), strong security cooperation with Singapore, counterterrorism cooperation with Indonesia and Malaysia, and military education programs in Vietnam, Cambodia, and Laos. The United States is also engaged economically. It is ASEAN's fourth-largest trading partner, having been surpassed by China in recent years. The United States is a larger export market than China and the third-largest source of FDI from outside the region after the EU and Japan, followed by China (including Hong Kong) and South Korea. In terms of diplomacy and trade, many in ASEAN considered Washington neglectful of the organization under the Bush Administration, although some foundations were established upon which the Obama Administration has developed its policy of engagement. The United States was the first country to nominate an ambassador to ASEAN (2008). In 2009, the United States acceded to the Treaty of Amity and Cooperation (TAC), which was seen by many as a symbolic recognition of the value of a multilateral approach to regional security issues. The United States was the last major power in the region to sign the treaty. Although the United States has met the requirements for joining the EAS through its accession to the TAC, the Obama Administration remains undecided about its intent to do so. In 2005, the United States created a framework for U.S. assistance to ASEAN—the ASEAN-U.S. Enhanced Partnership—encompassing cooperation on political, security, economic, and development issues. This initiative was followed in 2007 by the ASEAN Development Mission Vision to Advance National Cooperation and Economic Integration (ADVANCE). Among the goals of the mission are to help ASEAN and its members work toward an ASEAN community, support the Enhanced Partnership, and promote the U.S.-ASEAN Trade and Investment Framework Agreement (TIFA), signed in 2006, which could be a precursor to a possible FTA with ASEAN. China's ties with ASEAN have reflected attempts to defuse security tensions in the South China Sea, promote economic integration, support infrastructure development, and cultivate diplomatic influence. Some experts argue that China's power projection in the region amounts to a coordinated attempt to dominate the region economically and ultimately militarily. Others contend that although China's influence is growing, in part due to declining American engagement, Beijing has neither the will nor the capacity to aggressively pursue such a strategy, and is content with the U.S. security role in the region, at least in the medium term. Moreover, many Southeast Asian countries remain wary of China's power and intentions and may seek ways to engage China while hedging against its rise. In 2002, China and ASEAN agreed to the Declaration on Conduct of Parties in the South China Sea as well as several other agreements on economic and agricultural cooperation and non-traditional security threats. China reportedly has favored the ASEAN + 3 (ASEAN, Japan, China, and South Korea) summit process, inaugurated in 1997, over other forums such as the ASEAN Regional Forum and the East Asia Summit. Nonetheless, China has become more active in ARF, which focuses on security issues and dialogue, exceeding U.S. involvement in recent years, according to some analysts. The formation of the EAS in 2005 represented an effort by some countries in the region, including Japan, to balance China's influence by including powers that generally are more aligned with the United States than China on security matters. However, some analysts perceive the U.S. absence in the grouping as working to China's advantage. In 2003, the PRC became the first country to accede to ASEAN's Treaty of Amity and Cooperation. China committed relatively early to a free trade agreement with ASEAN, signing a framework agreement in 2002 that set a 10-year deadline for an FTA, and then negotiating an actual trade pact that came into force in January 2010. In August 2009, China and ASEAN signed a new Investment Agreement to accompany the FTA. A major provider of bilateral development financing in the region and economic assistance to Laos, Cambodia, and Burma, in particular, Chinese leaders announced in April 2009 a plan to set up a $10 billion China-ASEAN Fund on Investment Cooperation to support new infrastructure. Other assistance promised at the time included $15 billion in loans to ASEAN countries to be allocated over three to five years, nearly $40 million to Cambodia, Laos, and Burma ""to meet urgent needs,"" $5 million for the China-ASEAN Cooperation Fund, and rice for a regional emergency rice reserve. Japan has been a close partner to ASEAN and the principal provider of development assistance to Southeast Asia, but its role has been relatively low-profile. In the past few years, Japanese governments have pledged to strengthen ties to the organization and to Indonesia, in part to balance China's rising influence. In November 2009, Japanese Prime Minister Yukio Hatoyama pledged $5.5 billion in assistance to the Mekong Delta region, in large part to bolster Japan's role in a part of Southeast Asia that is becoming economically integrated with China. Tokyo has long been actively involved in the three major satellite groupings—ASEAN + 3, ARF, and the EAS. While stressing the importance of Japanese ties with the United States, Japanese governments have supported the formation of an East Asian Community, which may include members of the EAS (ASEAN + 6) as its core (excluding the United States). ASEAN reportedly is divided over whether to include the United States in such a grouping. Japan acceded to the TAC in 2004 and appointed an ambassador to ASEAN in 2008. In 2005, the Japanese government reportedly pledged $70 million for ASEAN regional integration projects. Cooperation and aid activities with ASEAN have included counterterrorism, environmental protection, and preventing the spread of infectious diseases. In addition to the Japan-ASEAN FTA, Tokyo has signed Economic Partnership Agreements with Singapore, Thailand, Indonesia, Malaysia, and the Philippines, which involve not only trade liberalization but also the areas of labor movement, investment, intellectual property rights, and cultural and educational cooperation. Much of the congressional activity concerning Southeast Asia deals with bilateral relations and issues with individual Southeast Asian nations. In recent years, however, Congress has also sometimes played a leadership role in initiatives toward ASEAN. In 2006, Senator Richard Lugar introduced the U.S. Ambassador for ASEAN Affairs Act ( S. 2697 ), urging the Bush Administration to name an ambassador to the grouping. Its passage helped lead to the naming of Scot Marciel as the first U.S. Ambassador to ASEAN and the first ambassador to the organization from outside the region. There are several ways in which shifts in the U.S. approach toward ASEAN could be of importance to Congress. Congress may also seek to provide further assistance to support ASEAN's Secretariat and organizational capacity building. In trade policy, Congress may consider, on the one hand, pushing for further economic engagement and the passage of FTAs or other agreements with ASEAN and/or its member countries. In October 2009, Senator Richard Lugar introduced S.Res. 311 , calling for the start of discussions on a free trade agreement with ASEAN. Stalled FTA discussions with Malaysia and Thailand could potentially be considered by Congress, although this does not appear to be on the near-term agenda. On the other hand, Congress could prevent further FTA negotiations with Southeast Asian countries or ensure that labor and environmental concerns are addressed in such negotiations. Shifts in U.S. policy toward Burma and the implications for relations with ASEAN have been a major focus in 2009 and will likely continue to be of congressional interest. Senator Jim Webb, chair of the Senate East Asia and Pacific Affairs Subcommittee, in August 2009 became the first Member of Congress in 10 years to visit Burma. Senator Webb also traveled to Thailand, Cambodia, Laos and Vietnam, where he reportedly told leaders that ASEAN should call for the release of Aung San Suu Kyi. Over recent years, Congress has been a leader of the U.S. sanctions policy toward the Burmese regime through legislation such as the Burmese Freedom and Democracy Act of 2003 and the Tom Lantos Block Burmese JADE (Junta's Anti-Democratic Efforts) Act of 2008. The conduct and outcome of parliamentary elections set to be held in Burma in 2010 may play a significant role in how the Obama Administration implements its new Burma policy, and in its relations with ASEAN vis-à-vis Burma. Congress may seek to play an active role in the development of U.S. policy toward Burma and ASEAN, both before and after Burma's elections. The development of ASEAN's human rights body may also merit attention. Congress has frequently considered legislation and resolutions concerning human rights conditions in Southeast Asia, and ASEAN's emerging human rights approaches may be of interest in future consideration of how to promote human rights in the region.","The Association of Southeast Asian Nations (ASEAN) is Southeast Asia's primary multilateral organization. Established in 1967, it has grown into one of the world's largest regional fora, representing a strategically important group of 10 nations that spans critical sea lanes and accounts for 5% of U.S. trade. This report discusses U.S. diplomatic, security, trade, and aid ties with ASEAN, analyzes major issues affecting Southeast Asian countries and U.S.-ASEAN relations, and examines ASEAN's relations with other regional powers. Much U.S. engagement with the region occurs at the bilateral level, but this report focuses on multilateral diplomacy. The United States has deep-seated ties in Southeast Asia, and it has viewed ASEAN as a useful organization since its inception during the Cold War. Today, U.S. policy toward ASEAN and Southeast Asia is cast against the backdrop of great power rivalry in East Asia, and particularly China's emergence as an active diplomatic actor in its geographic backyard. Some worry that the United States, preoccupied with other priorities, has been neglectful of ASEAN and of Asian multilateral diplomacy in recent years. The Obama Administration has expressed an intent to work more closely with multilateral organizations, particularly ASEAN. A number of steps in this direction include Secretary of State Hillary Clinton's visit to the ASEAN Secretariat in Jakarta in February 2009, the U.S. accession to ASEAN's Treaty of Amity and Cooperation (TAC) in July 2009, and President Obama's attendance at the ASEAN leaders meeting in November 2009. Congress has frequently played an important role in shaping U.S. diplomatic, security, and economic relations with Southeast Asia and ASEAN. Major U.S. and congressional interests in Southeast Asia include maritime security, the promotion of democracy and human rights, the encouragement of liberal trade and investment regimes, counterterrorism, combating narcotics trafficking, environmental preservation, and many others. In October 2009, Senator Richard Lugar introduced S.Res. 311, calling for the start of discussions on a free trade agreement with ASEAN. In August 2009, Senator Jim Webb visited five countries in mainland Southeast Asia and was the first Member of Congress in 10 years to visit Burma. The United States exerts a strong military and economic presence in Southeast Asia, and through diplomacy it seeks to remain a major power—perhaps the major power—in the region. ASEAN, however, has been active in recent years in exploring a variety of diplomatic architectures for East Asia and the Pacific. ASEAN is at the center of several broader security- and trade-related groupings in the Asia-Pacific region, through which it has aimed to maintain regional multi-polarity or a balance of powers among itself and other states including the United States, China, and Japan. ASEAN is also the nexus for discussion of regional economic integration. ASEAN has launched an internal free trade accord, the ASEAN Free Trade Agreement (AFTA), which will go into full effect in 2015. ASEAN has also concluded FTAs with many external trade partners, though not with the United States. ASEAN has also been exploring ways to advance the ultimate creation of a broader European Union-like East Asia Community. Some within the group—but not all—support the inclusion of the United States in such a community. Human rights conditions, particularly in some ASEAN members such as Burma, have long been a source of friction between the organization and the United States. ASEAN's new Charter, enacted in 2007, attempts to bring more pressure to bear upon recalcitrant member states. However, ASEAN still operates on principles of consensus and non-interference in the internal affairs of its members, so it remains unclear how active an actor it will be in this area.",govreport
"The ""state sponsors of terrorism list"" is mandated under Section 6(j) of the Export Administration Act of 1979, as amended ( P.L. 96-72 ; 50 U.S.C. app. 2405(j)), under which the Secretary of State makes a determination when a country ""has repeatedly provided support for acts of international terrorism."" Cuba has remained on the list since 1982, and at present there are four other countries on the list—Iran, North Korea, Sudan, and Syria. Under various provisions of law, certain trade benefits, most foreign aid, support in the international financial institutions, and other benefits are restricted or denied to countries named as state sponsors of international terrorism. Under the authority of Section 6(j) of the Export Administration Act, validated licenses are required for exports of virtually all items to countries on the terrorism list, except items specially allowed by public law, such as informational materials, humanitarian assistance, and food and medicine. Being listed as a sponsor of international terrorism also restricts bilateral assistance in annual foreign assistance appropriations acts, as required most recently in Section 527 of the Foreign Operations, Export Financing and Related Programs Appropriations Act, 2006 ( P.L. 109-102 ). Section 502 of the Trade Act of 1974 ( P.L. 93-618 ; 19 U.S.C. 2462) makes a country ineligible for the Generalized System of Preferences (GSP) if it is on the Section 6(j) terrorism list. Section 620A of the Foreign Assistance Act of 1961 (P.L. 87-195; 22 U.S.C. 2371) also prohibits assistance authorized under the act to the government of a country that ""has repeatedly provided support for acts of international terrorism."" Likewise, Section 40 of the Arms Export Control Act (P.L. 90-629; 22 U.S.C. 2780) prohibits the export or other provision of munitions to a country if the government ""has repeatedly provided support for acts of international terrorism."" Cuba's retention on the terrorism list has received more attention in recent years in light of increased support for legislative initiatives to lift some U.S. economic sanctions under the current embargo. Should U.S. sanctions be removed, a variety of trade and aid restrictions would nonetheless remain in place because of Cuba's retention on the terrorism list. At this juncture, however, sanctions have not been removed and Cuba remains subject to a comprehensive U.S. trade and financial embargo (pursuant to the Trading with the Enemy Act and the Foreign Assistance Act of 1961). In addition to the terrorism list sanctions imposed by the Export Administration Act, Section 40A of the Arms Export Control Act (P.L. 90-629; 22 U.S.C. 2781) prohibits the sale or export of defense articles and defense services if the President determines and certifies to Congress, by May 15 of each year, that the country ""is not cooperating fully with United States antiterrorism efforts."" This list has been issued annually since 1997, and currently includes Cuba, as well as Iran, North Korea, Syria, and Venezuela. Under Section 6(j) of the Export Administration Act, a country's retention on the terrorism list may be rescinded in two ways. The first option is for the President to submit a report to Congress certifying that 1) there has been a fundamental change in the leadership and policies of the government of the country concerned; 2) the government is not supporting acts of international terrorism; and 3) the government has provided assurances that it will not support acts of international terrorism in the future. The second option is for the President to submit a report to Congress, at least 45 days before the proposed recision will take effect, justifying the recision and certifying that 1) the government concerned has not provided any support for international terrorism during the preceding six-month period; and 2) the government has provided assurances that it will not support acts of international terrorism in the future. Over the years, three countries have been removed from the terrorism list. South Yemen was removed in 1990 when it ceased to exist upon merging with North Yemen. Iraq was removed from the list in 1982 and again in 2004 (after having been added back in 1990). Libya was removed in May 2006. Although Section 6(j) does not set forth a procedure for Congress to block the President's removal of a country from the terrorism list, Congress could pass legislation on its own to block the removal. In contrast, Section 40 of the Arms Export Control Act, which prohibits the export of munitions to governments repeatedly providing support for international terrorism, sets forth a specific procedure for Congress to consider a joint resolution to block the President's removal of a country from the terrorism list. In addition, both Section 40 of the Arms Export Control Act and Section 620A of the Foreign Assistance Act of 1961 (which prohibits most assistance to countries supporting international terrorism) provide presidential waiver authority for national security interests or humanitarian reasons. Effective March 1, 1982, the Reagan Administration added Cuba to the list of state sponsors of terrorism pursuant to Section 6(j) of the Export Administration Act of 1979. Press reports at the time indicated that the Commerce Department notified Congress on February 26, 1982, that Cuba was being added to the list of countries that sponsor international terrorism, but that no explanation for the addition was given. The Commerce Department published an interim rule in the Federal Register on April 19, 1982, stating that it was amending the export control regulations, with an effective date of March 1, 1982, to add a statement that ""Cuba has been designated by the Secretary of State as a country that has repeatedly provided support for acts of international terrorism."" The addition of Cuba was not considered significant at the time since the United States already had comprehensive economic sanctions on Cuba dating back to the early 1960s; as a result, the economic sanctions associated with being added to the terrorism list would have had no practical significance. Although the Administration provided no explanation in the Federal Register notice as to why Cuba was added to the terrorism list, various U.S. government reports and statements under the Reagan Administration in 1981 and 1982 alleged Cuba's ties to international terrorism. In addition, a 1998 State Department chronology on U.S.-Cuban relations and a 2003 State Department document provide further explanation of why Cuba originally was designated a state sponsor of terrorism. The Central Intelligence Agency's Patterns of International Terrorism 1980 , published in June 1981, stated: ""Havana openly advocates armed revolution as the only means for leftist forces to gain power in Latin America, and the Cubans have played an important role in facilitating the movement of men and weapons into the region. Havana provides direct support in the form of training, arms, safe havens, and advice to a wide variety of guerrilla groups. Many of these groups engage in terrorist operations."" In January 1982, President Reagan stated in his State of the Union address: ""Toward those who would export terrorism and subversion in the Caribbean and elsewhere, especially Cuba and Libya, we will act with firmness."" In February 1982, the Department of State published a research paper on ""Cuba's Renewed Support for Violence in Latin America,"" originally presented in December 1981 to the Subcommittee on Western Hemisphere Affairs of the Senate Foreign Relations Committee, which detailed Cuba's support for armed insurgencies and terrorist activities in Latin America and the Caribbean. The State Department asserted in the paper that Cuba has ""encouraged terrorism in the hope of provoking indiscriminate violence and repression, in order to weaken government legitimacy and attract new converts to armed struggle."" The paper maintained that Cuba was most active in Central America, especially Nicaragua, where it wanted to exploit and control the revolution, and El Salvador and Guatemala, where it wanted to overthrow the governments. Cuba also was reported ""to provide advice, safe haven, communications, training, and some financial support to several violent South American organizations."" This included training Colombian M-19 guerrillas, with the objective of establishing a ""people's army."" The State Department's Patterns of International Terrorism: 1982 stated that ""both Cuba and the Soviet Union continue to provide financial and logistical support and training to leftist forces in the area [Central America] that conduct terrorist activity."" The report further stated: ""In its efforts to promote armed revolution by leftist forces in Latin America, Cuba supports organizations and groups that use terrorism to undermine existing regimes. In cooperation with the Soviets, the Cubans have facilitated the movement of people and weapons into Central and South America and have directly provided funding, training, arms, safe haven, and advice to a wide variety of guerrilla groups, and individual terrorists."" A 1998 State Department chronology of U.S.-Cuban relations from 1958 to 1998 notes that the United States added Cuba to the terrorist list in 1982 because of its support for the M-19 guerrilla group in Colombia. In January 1982, State Department officials asserted that Cuba was involved in providing arms to the M-19 in exchange for facilitating U.S.-bound drug smuggling. M-19 was responsible for hijacking a plane from Colombia in January 1982; the incident ended when the hijackers were given safe passage to Cuba. A 2003 State Department document broadened the explanation of why Cuba was designated a state sponsor of terrorism in 1982. Reflecting the rationale set forth in the documents from 1981 and 1982 described above, the State Department maintains that Cuba was added to the list because of its support for terrorist groups in Latin America. It contends that Cuba was providing support for terrorist organizations at the time, including the Puerto Rican nationalist group known as the Armed Forces of National Liberation (FALN), the Farabundo Marti National Liberation Front (FMLN) in El Salvador, and the Sandinista National Liberation Front (FSLN) in Nicaragua. It also asserts that ""Cuba helped transship Soviet arms to Nicaragua and El Salvador for use by terrorist organizations, trained anti-American insurgents elsewhere in Latin America, and supported insurgencies or war efforts in Angola and Ethiopia."" According to the State Department's Country Reports on Terrorism 2005 report (issued in April 2006), Cuba has ""actively continued to oppose the U.S.-led Coalition prosecuting the global war on terror and has publicly condemned various U.S. polices and actions."" The report also asserted that ""Cuba did not undertake any counterterrorism efforts in international and regional fora."" The State Department report also noted that Cuba maintains close relationships with other state sponsors of terrorism such as Iran and North Korea and asserted that it has provided safe haven for members of several Foreign Terrorist Organizations. The report maintained that Cuba provides safe haven to various Basque ETA members from Spain and to members of two Colombian insurgent groups, the Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army (ELN), although the report also maintained that there is no information concerning terrorist activities of these or other organizations in Cuba. The State Department's 2002 and 2003 terrorism reports acknowledged that Colombia acquiesced to this arrangement and that Colombia publicly said that it wanted Cuba's continued mediation with the ELN in Cuba. The 2005 report also maintained that Cuba continues to permit U.S. fugitives from justice to live legally in Cuba but noted that ""Cuba has stated that it will no longer provide safe haven to new U.S. fugitives who may enter Cuba."" The report asserted that the U.S. government periodically requested Cuba to return wanted fugitives to the United States but that Cuba continues to be non-responsive. (The 2004 terrorism report contended that more than 70 fugitives from U.S. justice were in Cuba.) Many of the fugitives are accused of hijacking or committing violent actions in the United States, including Joanne Chesimard, who is wanted for the murder of a New Jersey State Trooper in 1973. Most of the of the fugitives entered Cuba in the 1970s. The report also noted that Cuba publicly demanded return of five of its agents convicted of espionage in the United States, the so-called ""Cuban Five."" The 2005 reported noted that Cuba demanded that the United States surrender to Cuba Luis Posada Carriles, alleged to be responsible for a plot to assassinate Fidel Castro in 2000 and for the 1976 bombing of a Cubana Airlines plane in 1976. In May 2005, Posada was arrested by the U.S. Immigration and Customs Enforcement (ICE) and charged with entering the United States illegally. He remains at a federal immigration facility in El Paso, Texas. A Department of Homeland Security press release indicated that ICE does not generally deport people to Cuba or countries believed to be acting on Cuba's behalf. Posada had been imprisoned in Venezuela for the bombing of the Cuban airliner but reportedly was allowed to ""escape"" from prison in 1985 after his supporters paid a bribe to the prison warden. In November 2000, Posada had been imprisoned and ultimately convicted in Panama, along with three Cuban Americans, for weapons charges in the plot to kill Fidel Castro. In August 2004, however, then Panamanian President Mireya Moscoso pardoned Posada along with the three U.S. citizens. (For more on the Posada case, see CRS Report RL32488, Venezuela: Political Conditions and U.S. Policy , by [author name scrubbed].) Until the 2005 terrorism report, past State Department annual reports on global terrorism did not mention controversial allegations first made by some State Department officials in 2002 that Cuba has been involved in developing biological weapons. The 2005 report, however, asserted that while Cuba invests heavily in biotechnology, ""there is some dispute about the existence and extent of Cuba's offensive biological weapons program."" The controversial allegations date back to May 2002, when then Under Secretary of State for Arms Control and International Security John Bolton stated that ""the United States believes that Cuba has at least a limited offensive biological warfare research-and-development effort"" and ""has provided dual-use technology to other rogue states."" Bolton called on Cuba ""to cease all BW-applicable cooperation with rogue states and to fully comply with all of its obligations under the Biological Weapons Convention."" When questioned on the issue, Secretary of State Powell maintained that Under Secretary Bolton's statement was not based on new information. Powell asserted that the United States believes Cuba has the capacity and the capability to conduct research on biological weapons but emphasized that the Administration had not claimed that Cuba had such weapons. Some observers viewed Powell's statement as contradicting that of Under Secretary Bolton. In late June 2003, news reports stated that an employee of the State Department's Bureau of Intelligence and Research maintained that Under Secretary Bolton's assertions about Cuba and biological weapons were not supported by sufficient intelligence. In March 30, 2004, congressional testimony before the House International Relations Committee, Under Secretary of State John Bolton asserted that ""Cuba remains a terrorist and BW threat to the United States."" According to Bolton: ""The Bush Administration has said repeatedly that we are concerned that Cuba is developing a limited biological weapons effort, and called on Fidel Castro to cease his BW aspirations and support of terrorism."" Bolton went on to add a caveat, however, that ""existing intelligence reporting is problematic, and the Intelligence Community's ability to determine the scope, nature, and effectiveness of any Cuban BW program has been hampered by reporting from sources of questionable access, reliability, and motivation."" The New York Times reported on September 18, 2004, that the Bush Administration, using more stringent intelligence standards, had ""concluded that it is no longer clear that Cuba has an active, offensive bio-weapons program."" An August 2005 State Department report to Congress indicated that while observers agree that Cuba has the technical capability to pursue some aspects of offensive biological warfare, there is disagreement over whether Cuba has an active biological warfare effort now or even had one in the past. In general, those who support keeping Cuba on the terrorism list argue that there is ample evidence that Cuba supports terrorism. They point to the government's history of supporting terrorist acts and armed insurgencies in Latin America and Africa. They point to the government's continued hosting of members of foreign terrorist organizations and U.S. fugitives from justice. Critics of retaining Cuba on the terrorism list maintain that it is a holdover of the Cold War. They argue that domestic political considerations keep Cuba on the terrorism list, and maintain that Cuba's presence on the list diverts U.S. attention from struggles against serious terrorist threats. Those who concur with the Administration's current rationale for keeping Cuba on the state sponsor of terrorism list point to strong anti-American statements made by Fidel Castro and other Cuban officials. Fidel Castro stated that the September 11, 2001 terrorist attacks in the United States were in part a consequence of the United States having applied ""terrorist methods"" for years. Cuba's subsequent statements became increasingly hostile, with Cuba's mission to the United Nations describing the U.S. response to the U.S. attacks as ""fascist and terrorist"" and asserting that the United States was using the attack as an excuse to establish ""unrestricted tyranny over all people on Earth."" Castro himself said that the U.S. government was run by ""extremists"" and ""hawks"" whose response to the attack could result in an ""infinite killing of innocent people."" Those who question Cuba's retention on the terrorism list point out that Cuba has ratified all 12 international counterterrorism conventions in. They further point to Cuba's expression of sympathy and offer of support to the United States in the aftermath of the World Trade Center and Pentagon attacks in 2001, including the offer of medical and humanitarian assistance and the use of airspace and airports to receive planes headed to the United States. (Cuba's critics view these offers as gratuitous.) Those questioning Cuba's retention on the terrorism list also contend that Cuba has made repeated offers to the United States since November 2001 for a bilateral agreement to fight terrorism, but that the United States has not responded. Some who question the Administration's rationale for keeping Cuba on the terrorism list, while acknowledging Cuba's history of supporting revolutionary movements and governments in Latin America and Africa point to several versions of the State Department's Patterns of Global Terrorism report in the 1990s that stated that Cuba no longer actively supported armed struggle in Latin America or other parts of the world. In reference to the Administration's allegations that Cuba hosts members of foreign terrorist organizations, some observers maintain that this is line with Cuba's long-time hostility toward the United States and the remnants of its very active involvement in supporting terrorist groups in the past. On the other side, some observers maintain that Cuba has shed its past as a supporter of terrorist and insurgent groups, and members of terrorist organizations who reside in Cuba do so pursuant to agreements or the acquiescence of the home countries of the terrorist organizations. Some observers maintain the presence of Basque ETA members in Cuba stems from a 1984 agreement with the Spanish and Panamanian governments. Cuba asserts that the ETA members have never used Cuban territory for terrorist activities against Spain or any other country and that the issue is a bilateral matter between Cuba and Spain. On the other side, some observers maintain that after the 1984 agreement, some 20 ETA members sought by the Spanish authorities for killings in Spain were known to have found refuge and support in Cuba. Moreover, the Spanish government requested the extradition of an ETA suspect from Cuba in August 2003, and according to the State Department, publicly requested Cuba to deny ETA members sanctuary in November 2003. With regard to Colombian guerrilla group members in Cuba, the State Department annual reports on global terrorism for 2002 and 2003 acknowledged that Colombia acquiesced to the presence of Colombian guerrillas in the country, and has publicly said that it wants Cuba's continued mediation with the ELN in Cuba. The Cuban government maintains that it has been actively involved in hosting peace talks, and that its contributions to peace talks have been acknowledged by Colombia and the United Nations. On the other hand, some observers contend that Cuba's role in supporting the terrorist activities of the FARC was demonstrated by the arrest of three alleged Irish Republican Army (IRA) operatives in Colombia in August 2001—one of whom, Niall Connolly, had lived in Havana as Sinn Fein's representative since 1996. The three went into hiding in June 2004 after they had been acquitted by a lower court on charges of training the FARC in bombing techniques. In December 2004, however, they were subsequently convicted of the charges by a Colombian appeals court in absentia and sentenced to 17 years in prison. Connolly, who has denied being an IRA member, maintains that he was in Colombia to observe the conflict resolution process. The three announced that they were back in Ireland in early August 2005, days after the IRA announced that it was ending its armed campaign. Supporters of keeping Cuba on the terrorist list point to the more than 70 fugitives from U.S. justice residing in Cuba. These include such fugitives as: Joanne Chesimard, who was convicted for the killing of a New Jersey state trooper in 1973; Charles Hill and Michael Finney, wanted for the killing of a state trooper in new Mexico in 1971; Victor Manuel Gerena, member of a militant Puerto Rican separatist group, wanted for carrying out the robbery of a Wells Fargo armored car in Connecticut in 1983; and Guillermo Morales, another member of a Puerto Rican militant group, who was convicted of illegal possession of firearms in New York in the 1970s. Those who oppose this rationale for keeping Cuba on the terrorist list argue that this has nothing to do with terrorism and that many countries (e.g. Mexico and El Salvador) harbor fugitives from U.S. justice, but are not on the terrorist list. Moreover, they argue that Cuba has expressed interest in considering negotiation of the mutual extradition of fugitives. For example, Cuba would like to see the extradition of Orlando Bosch, a Miami resident, and Luis Posada Carriles. Both are accused of responsibility for the bombing a Cuban airliner in 1976, while Posada, as described above, was imprisoned in Panama for several years on weapons charges in a plot to assassinate Fidel Castro. Opponents of this rationale also point out that Cuba has vowed not to allow new U.S. fugitives from justice to live in Cuba. Several years ago it deported two fugitives from justice to the United States; U.S. drug fugitive Jesse James Bell was deported in January 2002, and William Joseph Harris, wanted on child abuse charges, was deported in December 2001. The level of terrorist activity by countries on the state sponsors of terrorism list varies considerably. As noted above, in addition to Cuba, there are four other countries on the list—Iran, Syria, Sudan, and North Korea. Iran is considered the most active state sponsor of terrorism, while countries believed to be less active supporters of terrorism include Sudan and Cuba. Given this wide range of activity, some suggest that there should be a tiered approach with sanctions calibrated to the degree of support for terrorism, while others maintain that any level of support for terrorism is unacceptable and must be met with strong sanctions. Some suggest that should there be more flexibility in the ability to add and remove countries from the terrorism list in order to bring about behavioral changes in the states that are involved in terrorist activities; others believe that there is already sufficient flexibility in the legislative conditions set forth in the Export Administration Act for the Administration to add and remove countries according to their behavior.","Cuba was first added to the State Department's list of states sponsoring international terrorism in 1982, pursuant to Section 6(j) of the Export Administration Act of 1979 (P.L. 96-72). At the time, numerous U.S. government reports and statements under the Reagan Administration alleged Cuba's ties to international terrorism and its support for terrorist groups in Latin America. Cuba had a history of supporting revolutionary movements and governments in Latin America and Africa, but in 1992 Fidel Castro stressed that his country's support for insurgents abroad was a thing of the past. Cuba's policy change was in large part a result of Cuba's diminishing resources following the breakup of the Soviet Union and the loss of billions of dollars in annual subsidies to Cuba. Cuba remains on the State Department's terrorism list with four other countries: Iran, Syria, Sudan, and North Korea. According to the State Department's Country Reports on Terrorism 2005 (issued in April 2006), Cuba has ""actively continued to oppose the U.S.-led Coalition prosecuting the global war on terror and has publicly condemned various U.S. polices and actions."" The State Department report also asserted that Cuba maintains close relationships with other state sponsors of terrorism such as Iran and North Korea and contended that Cuba has provided safe haven for members of several Foreign Terrorist Organizations. The report also maintained that Cuba continues to provide safe haven to U.S. fugitives from justice but noted that ""Cuba has stated that it will no longer provide safe haven to new U.S. fugitives who may enter Cuba."" Cuba's retention on the terrorism list has received more attention in recent years in light of increased support for legislative initiatives to lift some U.S. sanctions under the current economic embargo. Should U.S. restrictions be lifted, a variety of trade and aid restrictions would remain in place because of Cuba's retention on the terrorism list. Supporters of keeping Cuba on the terrorism list argue that there is ample evidence that Cuba supports terrorism. They point to the government's history of supporting terrorist acts and armed insurgencies in Latin America and Africa. They stress the government's continued hosting of members of foreign terrorist organizations and U.S. fugitives from justice. Critics of retaining Cuba on the terrorism list maintain that the policy is a holdover from the Cold War and that Cuba no longer supports terrorism abroad. They argue that domestic political considerations are responsible for keeping Cuba on the terrorism list and question many of the allegations made in the State Department report. For additional information on Cuba, see CRS Report RL32730, Cuba: Issues for the 109th Congress, by [author name scrubbed]. For further information on state-sponsored terrorism and U.S. policy, see CRS Report RL33600, International Terrorism: Threat, Policy, and Response, by [author name scrubbed]; and CRS Report RL32417, The Department of State's Patterns of Global Terrorism Report: Trends, State Sponsors, and Related Issues, by [author name scrubbed].",govreport
"The AMT provides for an alternative tax calculation on a broader tax base than theregular tax. Individuals add back a variety of provisions including not only business provisions but certain itemized deductions (mainly state and local taxes, some medicalexpenses and miscellaneous deductions), the standard deduction, and personal exemptions. After an exemption of $45,000 for joint returns and $33,750 for single returns, the first$175,000 is taxed at 26% and the remainder is taxed at 28%. Exemptions are phased out. Theindividual compares AMT liability and regular tax liability and pays the higher one. Whilethe AMT base is broader than the regular tax base, there are many provisions that are notincluded in its base, notably the benefits of lower capital gains tax rates and the exclusion fortax exempt bonds, and the itemized deduction for home mortgage interest. Indeed, theelimination of the capital gains exclusion in 1986 caused a significant contraction in thenumber of taxpayers subject to the AMT; the current rate preferences are not part of the AMT. Credits are automatically included in the base (i.e., effectively disallowed), although underprovisions adopted as part of H.R. 1836 , this rule does not apply to the mostimportant credit, the child credit. (1) However, unlike the rest of the income tax, the AMT exemptions are not indexed to inflation. The result has been an increase in the number of taxpayers who are covered by theAMT. (2) In 1987, about 140,000 returns paid the AMT, constituting 1/10 of one percent of allreturns filed. This number was below the 4/10 of a percent of returns that paid the tax in 1984and fell largely because the deduction for capital gains was eliminated by the 1986 tax act andtherefore automatically affected coverage under the AMT. Inflation, however, took its toll. By 1999, the AMT covered 823,000 returns, constituting 6/10 of a percent of all returns filed,an increase in percentage share of 600% between 1987 and 1999. This effect occurred eventhough the exemptions were increased in 1990. More growth is ahead, however. In 2009, the Joint Tax Committee projects that over 9 million taxpayers will pay the AMT, constituting 6.3% of all tax returns filed, an increase inpercentage share of over a thousand percent from 1990 to 2009. The AMT would probablyconstitute a larger share of joint returns filed, since incomes are higher for these returns thanfor single returns. The AMT would also constitute a larger portion of returns with tax liability;since typically about a quarter of returns filed pay no tax, taxpayers on the AMT wouldconstitute over 8% of returns with tax payments. Another 6 million returns would have been subject to limits on tax credits, such as the child credit and education credits enacted in 1997;this surge in the AMT coverage would have occurred in large part in 2002, but H.R. 1836 made the most important credit (the child credit) permanently availaleunder the AMT. While the AMT will still be concentrated among higher income individuals, it will gradually reach further down into the income distribution. This shift in the distribution isshown in Table 1. Note that this table understates the coverage of the AMT and its reach intothe middle income classes, because it does not include those taxpayers whose credits are stilllimited by the AMT (such as education tax credits). But it does illustrate how the failure toindex exemptions will substantially expand the AMT. As this table illustrates, the shift of exposure to the AMT from the very highest income classes to the middle and upper middle income classes is dramatic over time even withoutthe tax cuts in H.R. 1836 . In 1998, almost half of AMT taxpayers fell into the1.6% of tax-filers with adjusted income over $200,000; and over three-quarters fell into thetop 8% of taxpayers who had income over $100,000. In 2008, less than 15% of AMTtaxpayers have incomes over $200,000 and about half have incomes of $100,000 or more. Moreover, these effects occur despite the fact that taxpayers in these income classes areaccounting for a larger share of total taxpayers as incomes rise over time. Table 1: Percentage Distribution of AMT Taxpayers by Income Class (Excluding the Effects of Limits on Credits), Prior to H.R.1836 Source: Data from and CRS calculations based on data from Joint Committee on Taxation. A comparison of the fraction of taxpayers on the AMT in each income bracket shows a similar dramatic shift. While the shares increase in all of the middle and upper brackets, thedramatic changes are in the middle income brackets. For example, the share of taxpayers onthe AMT at income between $75,000 and $100,000, which most people would consider in themiddle class would increase from 1% to 20%. These effects understate the shift of the influence of the AMT toward the middle classthat is expected in the future because they do not include the interaction with the tax creditsthat were adopted in 1997. Under the AMT provisions, credits are limited to the excess ofregular tax over AMT liability except for the child credit which is now specifically excluded. For 2008, there would have been another 6 million returns that are constrained by the taxcredit; however, most of these will probably no longer be affected because they reflect effectsof the child credit. The Treasury Department recently completed a study of the AMT that showed a significant growth in the share of AMT taxpayers, inclusive of the effects of the credit. (3) Table2 shows these effects for 2000, 2005. and 2010. Overall, 15.7% of taxpayers will be coveredby the AMT in 2010, and the shares rise to as much as 64%. These numbers will be smallerafter considering the effects of H.R. 1836 , because of the adjustment in thecredit, but larger because of the lower rates and other tax cut provisions. Table 2: Percentage Distribution of AMT Taxpayers by Income Class (Including the Effects of Limits on Credits), Prior to H.R.1836 a - greater than 75% b - less than 0.05% Source: Treasury Department The cost of correcting the AMT is significant. According to data from the Joint Committee on Taxation, indexing AMT exemptions would cost $13.9 billion by 2008. Thiscost would be larger in the wake of the recent tax changes. Eliminating the credit limitprovision would cost about $1 billion currently, but would cost many billions of dollars by2008 or 2009. Eliminating the credit limit provision and adding standard deductions wouldcost the U.S. Treasury $26 billion by 2009 and $96 billion for the period 1999-2009. (4) According to the Treasury study AMT tax liability was projected projected to rise from $6.4billion in 2001 to $38.2 billion in 2010 before considering H.R. 1836 , with atotal amount of $182 billion over the ten year period. This number will now be higher dueto the rate reductions and marriage penalty provisions in H.R. 1836 . Clearly, the AMT will become increasingly important in the years to come, in the number of taxpayers covered and revenue cost of altering the AMT. And any tax cut thatreduces regular tax liabilities and does not also alter the AMT will interact with the AMT intwo ways: it will increase the number of taxpayers on the AMT and the number affected bythe credit limit, and it will cause some or all of the tax cut not to be received by certainfamilies. Tax provisions that are aimed at reducing taxes for joint returns may particularly interact with the AMT because married couples have a greater number of dependents, which increasesthe likelihood that taxpayers will be under the AMT. Married couples also tend to havehigher incomes and, while their AMT exemptions are also higher, may be more likely to beaffected by the AMT. The interaction is also affected by how the tax change is distributedacross the income classes, since only joint returns with more than $45,000 of taxable incomeare potentially subject to the AMT. Treasury data show that 21% of joint returns will beaffected by the AMT in 2010, compared to 15.7% for the overall taxpaying population. Forjoint returns with dependents, the share affected by the AMT rises to 39%. Thus, tax cutsdirected at joint returns are particularly likely to be restricted due to the AMT. A marriage penalty arises for some families because family income is combined andsubject to progressive tax rates. Since the standard deductions and rate brackets, while largerthan those of singles, are not twice as large, marriage can cause the loss of standarddeductions and cause some income to be taxed at higher rates. Other couples, however,experience bonuses; this outcome tends to arise when earnings are relatively unequal or whenthere is only one earner, because the exemption amounts and rate brackets are larger for thejoint returns filed by married couples than for singles' returns. H.R. 1836 proposed to address the marriage penalty for most taxpayers, granting bonuses to many taxpayers who formerly had penalties and expanding the bonusesof those with bonuses. (5) About 60% of joint returns are in the 15% bracket and would have any penalties that did exist eliminated (and bonuses increased) merely through increasing the standard deductionto twice that of single returns. Under H.R. 6 , a stand alone marriage penalty billpassed earlier this year by the House, this provision was estimated to cost $6.3 billion by2009. Another 26% are in the 28% bracket and would have the remainder of any penaltieseliminated (and bonuses increased) through both the standard deduction and the widening ofthe first bracket to twice that of single returns. This provision would have cost $ 26.3 billionby 2009. Thus, 86% of joint returns, ignoring the earned income tax credit and the AMT,would be covered by these provisions. There were also some provisions for partially reducingthe marriage penalty for the earned income tax credit, costing $1.4 billion by 2009. Someindividuals whose income is taxed above the 28% bracket currently would also have had theirpenalties eliminated, and since the next rate bracket is only slightly higher (31%) thisapproach would have also most marriage penalties for the vast majority of married couples(96% are in the 31% bracket or below). (6) These numbers do not take into account the rate reductions and the effect of thosereductions on the AMT. H. R. 1836, which included the provisions in H.R. 6 ,will have a slower phase-in and also a sunset. Because the estimates are calculated with asignificant rate reduction, the cost will be smaller, reaching about $3.1 billion for the standarddeduction and $4.7 billion for the increase in the 15% bracket. The increase in the bracketwidth would shift income from a 15% bracket to a 28% bracket under current law and to a25% bracket with the proposed rate revisions. Adjusting for this effect would make the costunder the new rate structure 10/13 of the cost under the old and reduce the estimate to $20billion, only accounting for a small part of the difference. About one fourth of the current15% bracket is being shifted to a 10% rate, lowering the cost of the standard deduction ($6.3billion) to at least 0.1375/0.15 under the new system compared to the old. But thisadjustment would shift the cost to $5.7 billion not the $3.1 billion reported. The cost of theearned income credit provisions is actually higher under H.R. 1836 than under H.R. 6 . The only remaining explanation is that large numbers of joint returnswill shift into the AMT because of the new rate schedule and will not become eligible formarriage penalty relief. A large part of this effect is that more individuals will be pushed into the Alternative Minimum Tax because of the rate reductions and these individuals will not benefit from themarriage penalty relief. As a result, many joint returns will not receive marriage penaltyreduction benefits. Marriage penalties still exist for higher income taxpayers as well. However, the flatter rates themselves would also reduce marriage penalties for thoseindividuals who remain on the regular tax. The Senate marriage penalty proposal in the 106th Congress initially proposed to expand the 28% bracket, which would increase the coverage of high income taxpayers. An even largerfraction of this group would ultimately fall under the AMT. The amount by which marriage penalties are reduced by the proposed legislation will declined over time because of the AMT. If a taxpayer is on the AMT, marriage penalty reliefprovisions would not have benefitted these taxpayers. Moreover, for taxpayers subject tocredit limits, a change in the regular tax would have been offset by a loss in the credit, so thetaxpayer would not have benefitted from the tax revision. And, the tax cuts in the marriagepenalty legislation were likely to substantially increase the number of taxpayers on the AMT,a number that, as noted earlier, is already growing rapidly. In 2000, the Treasury Department has estimated that the marriage penalty alone (from the stand alone provisions) would have increased the number of taxpayers on the AMT orconstrained by it via credits by 49% by 2010, raising the total number from 17 million to 25million. (Of the 17 million taxpayers already affected, 12.6 million are on the AMT and theremainder constrained by the credit). Since there were 91 million taxable returns in 1996,which would probably not grow much over 1% or 2% per year, 22% to 24% of taxpayerswould then be on the AMT or affected by the credit - a provision that currently affects lessthan one percent of taxpayers. Thus, it is clear that the growth in the AMT coverage wouldhave been sharply increased by this legislation. The revenue collected by the AMT would alsohave increased, by about 48%, from $38.2 billion per year to $46.5 billion. These resultswould have been even larger with the rate cuts. Treasury estimates indicate that 28% of the marriage penalty tax cuts in the 106th Congress's version of H.R. 6 over the next ten years are taken back by the AMT,making the net budget effect $67 billion smaller. (7) This take-back rate rises rapidly andreaches 44% by 2008. Thus, absent revisions to the AMT, about half the tax cuts in themarriage penalty legislation would have disappeared after ten years. Eight years after thelegislation is enacted, more than 47% of couples with two children would have been on theAMT. These effects are mitigated by provisions that allow personal credits to be offset against the AMT but increased by the rate reductions. This analysis of H.R. 6 in the 106th Congress shows how a tax proposal that affects many ordinary income taxpayers has powerful interactions with the AMT. Dependingon the nature of the legislation, the interactions can be larger or smaller. Proposals that lowertax rates or narrow brackets across the board would also be expected to have significantinteractions with the AMT because they tend to affect higher income taxpayers proportionallymore. Taxpayers already on the AMT would get no tax cut, and some taxpayers would beshifted to the AMT. For example, even in the year 2000, 44% of taxpayers with incomesover $50,000 would have received less than the full 10% tax cut in H.R. 3 , anacross-the-board tax cut proposal in the 106th Congress. (8) Tax cuts that add to credits or otherprovisions disallowed by the AMT would also interact with the AMT. Tax cuts that aredirected primarily at lower or middle income individuals would be less affected by AMTinteraction, at least in the near future. Left unchecked over a very long period of time, ofcourse, virtually all taxpayers will eventually fall under the AMT provisions as theexemptions erode in value. There were offsetting effects in the initial Senate Finance Committee proposal for the marriage penalty ( S. 2346 , S. 2839 ). This proposal also made theability to offset credits, such as the child credit, against the AMT permanent. This changewould have reduced the number of middle and upper middle income taxpayers who would have their credits limited as a result of the marriage penalty or who would be switched to theAMT. The expansion of the 28% rate bracket, however, would have expanded the interactionbetween the marriage penalty legislation and the AMT. For tax year 2000, the top of the 28%rate was $105,950, while twice the top of the single bracket is $124,900. Since adjusted grossincome is higher than taxable income, this change will affect many higher income individuals. The final proposal adopted by both houses, H.R. 4810 , included the credit offsets and not the 28% bracket expansion, so the effects of the AMT in limiting these tax cutswould have been smaller in this legislation. While the previous analysis describes the importance of AMT interaction with proposedtax cuts, there are a variety of approaches that could be taken to dealing with the AMT. However, one important point to note is that cutting taxes without altering the AMT, byincreasing the coverage of the AMT, makes proposals to slow or reverse its growth inimportance more costly in terms of revenue loss. The Congress has considered the most urgent issue that of dealing with the lack of offset of the credits adopted in 1997, which immediately catapulted many middle class taxpayersinto an interaction with the AMT that reduced their credits. Legislation temporarily correctingthat problem had already been enacted, and this provision was made permanent in the caseof child credits. Child credit provisions in H.R. 1836 eventually cost about $25billion per year, but this number reflects both a doubling of the credit and the AMT provision.Earlier estimates suggest eliminating the credit limit provision would cost about $1 billioncurrently, but would cost many billions of dollars by 2008 or 2009. Estimates for the Senateversion of the 1999 tax cut bill, H.R. 2488 , indicated a $1 billion cost currentlyfor both eliminating the restriction and allowing some small additional exemption, a cost thatgrew to become $26 billion in the tenth year. According to Joint Committee data, indexing AMT exemptions would cost $13.9 billion by 2008. Indexing the exemptions is the step that would be necessary to begin to keep theAMT more or less fixed in relative importance in the tax system, assuming that no otherchanges in the regular tax structure occurred. Some might see the AMT as a desirable, relatively-flat alternative tax with a wider base, and consider the expansion of the AMT desirable. If that is the case, of course, then the AMTstructure itself might be examined in light of general tax principles. (9) The exemption levelsin the AMT are not adjusted for family size or for head of household status; there are marriagepenalties within the AMT structure, and tax preferences are not uniformly included orexcluded. For example, while the AMT base disallows certain itemized deductions (mainlytaxes) and business preferences, it leaves other important preferences intact (capital gainsdifferentials, home mortgage interest deductions, exclusions for tax exempt interest on generalobligation state and local bonds, and exclusions for employer-paid fringe benefits). And, ifthere is concern about the marriage penalty in the regular tax, there is also an issue about themarriage penalty in the AMT. Others might see the AMT as an unnecessary and complicating feature of the current tax system. Under this view, adjustments to limit tax preferences should be directed at thepreferences themselves and not some overall restrictions on their use as embodied in the AMTapproach. These individuals might like to see not only corrections to allow the 1997 creditsto be used against the AMT and indexation of the AMT exemption levels, but also steps toeventually eliminate the AMT. Some steps in this direction were already taken for thecorporate AMT in 1997, where depreciation rules were brought more in line with regulardepreciation. Others want to see the AMT continue as a general back-up mechanism to keep tax preferences from being overused, but limited to a small fraction of the population. For them,several issues arise. While the indexation for price inflation of the exemption levels is clearlyappropriate to maintain the relative importance of the AMT, other questions are not as easilyanswered. They include questions as to whether the current base of the AMT is appropriateto its purpose, and how to adjust the AMT in tandem with regular tax changes to ensure thatit fulfills its role. The preferences taken away by the AMT are selective. They include, for example, itemized deductions for state and local taxes, but not for mortgage interest, even though a casemight be made that the former is not a preference, while almost everyone agrees that the latteris a preference. They do not include the major investment subsidies (capital gainspreferences and tax exempt bond interest), although they include a variety of business relatedpreferences. They include personal exemptions and standard deductions, although therationale for this inclusion is that the AMT flat exemption is much larger than the sum of thestandard deductions and personal exemptions. How the AMT should be altered as regular tax changes are made is also unclear. For example, if the principal purpose of the AMT is to limit the use of preferences, there is noapparent reason why changes in the basic structure of the tax system (wider brackets, lowerrates, larger standard deductions) should trigger additional coverage under the AMT. It wouldbe appropriate to simultaneously adjust the AMT deductions, brackets and rates to conformto the rate changes. In that case, if the standard deduction increases by $500, the AMTexemption should increase by that same amount. However, the adjustments in the AMT are limited and imperfect. For example, there is no adjustment for family size and no adjustment for head of household status. There are onlytwo rate brackets and the width of the first bracket does not bear a close relationship to thewidth of the regular income brackets. The exemption is phased out at high income levels. Thus, in the marriage penalty proposal, while it might make sense to increase the AMTexemption by the increase in the standard deduction, it is not clear what, if any, conformingchange the expansion of the 15% rate bracket should induce. Thus, it is not clear that changesof these nature should trigger conforming changes in the AMT. Also, under this view of the AMT there appears no clear reason to allow credits under the AMT although there is a reason to adjust the AMT for the expansion of the standarddeduction in the marriage penalty legislation. A case might be made for an adjustment in thechild credits, on the grounds that these credits are the equivalent of increasing personalexemptions and that such credits should be allowed against the AMT. There is less of ajustification for other types of credits, and the case for the child credits is complex becauseonly some taxpayers receive those credits, but the AMT exemption is uniform (distinguishingonly between single and joint returns). The growth in the AMT has been considered a potential problem for some time, and itsimportance increases with tax cuts, such as those passed in 1997 and 2001. Because of the AMT, not all taxpayers receive the full amount, or even any, tax cut. Moreover, every reduction in the regular tax that is not accompanied by adjustments in theAMT increases the number of taxpayers who pay the AMT and the complications for thosetaxpayers in filing their tax return. The marriage penalty legislation, as well as the ratereductions, cause a significant expansion of the fraction of the fraction of families. And eachtime this issue is not addressed, the higher the cost grows for doing so at some future time. ","Tax cuts have been addressed recently. Rate reductions and across the board tax cuts were part of the H.R. 1836 , the tax cut signed by the President on June 7. Thisbill includes the changes in standard deductions and rate brackets relating to the marriagepenalty and also included in H.R. 6 , passed earlier by the House. The Alternative Minimum Tax (AMT) provides for an alternative tax calculation, on a broader base but with a large exemption and a two-tier rate that is below the top tax rates inthe regular tax structure. It is paid when the tax liability figured using the AMT base and ratesis higher than regular tax liability. The AMT is expected to grow rapidly and extend furtherinto the middle class because the exemptions in the AMT are not indexed for inflation. Inaddition, the tax credits (such as the child credit) enacted in 1997 would have caused manymiddle class taxpayers to be affected by the AMT. A temporary provision allowing thesecredits to be taken against the AMT was adopted last year, and was made permanent for thechild credit by H.R. 1836 . The marriage penalty legislation, and other proposals for cutting taxes will be limited in their effects for some individuals unless changes are also made in the alternative minimumtax (AMT). Individuals who pay the AMT are not affected by cuts in the regular tax andindividuals who switch to the AMT will not receive the full tax cut. This constraint will growover time. For example, about 28 % of the tax cuts over the next ten years, in a bill similarto H.R. 6 considered in the 106th Congress would not have been received bytaxpayers because of the AMT. This effect grows over time; by 2008, 44% of the tax cut willnot have been received. Cuts in regular tax, without also addressing the AMT, would cause more and more taxpayers to the subject to the complexities of the AMT, and also increase the revenue costsof future measures to restrain the growth of the AMT. H.R. 1836 partiallyaddressed this issue, by making the child credit apply against the AMT. The bill alsoincreased the exemptions by $2,000 for singles and $4,000 for joint returns, but theseprovisions sunset in 2004. There are a number of different policy options that might be considered in evaluating the AMT and its interaction with the regular tax. For some, a priority has been in making theexclusion for credits permanent, while for others indexing may be the most important priority. Both of these approaches will be costly in the future (about $26 billion for the credit ten yearsfrom now and about $14 billion for indexing). Others might wish to eventually phase out theAMT, which will raise about $37 billion by 2010. One can also make a case for expandingthe coverage of the AMT as an eventual flat tax, although in some ways the AMT does notconform to certain design principles (such as adjusting exemptions for family size). Anotherissue is how to adjust the AMT as changes in the regular tax system are made, to keep therelative position and original purpose of the AMT intact. In the latter case, the AMT mightbe adjusted when fundamental changes are made in the regular tax (rates, bracket widths,standard deductions) but not for proposals that provide special subsidies. This report will beupdated to reflect legislative developments.",govreport
"The Transportation, Housing and Urban Development, and Related Agencies (THUD) Appropriations Subcommittees in the House and Senate are charged with drafting bills to provide annual appropriations for the Department of Transportation (DOT), the Department of Housing and Urban Development (HUD), and six small related agencies. Title I of the annual THUD appropriations bill generally funds DOT. The department is primarily a grant-making and regulatory organization. Its programs are organized roughly by mode of transportation, providing grants to state and local government agencies to support the construction of highways, transit, airport, and intercity passenger rail infrastructure, while overseeing safety in all modes of transportation. The Federal Aviation Administration (FAA) is exceptional among DOT's large sub-agencies in that the largest portion of its budget is not for grants but for operating the U.S. air traffic control system. In support of that task, it employs over 80% of DOT's total workforce, roughly 46,000 of DOT's approximately 56,000 employees. Title II of the annual THUD appropriations bill generally funds HUD. The department's programs are primarily designed to address housing problems faced by households with very low incomes or other special housing needs. These include several programs of rental assistance for persons who are poor, elderly, and/or have disabilities. Three rental assistance programs—Public Housing, Section 8 Housing Choice Vouchers, and Section 8 project-based rental assistance—account for the majority of the department's funding. Two block grant programs—the HOME Investment Partnerships Program and Community Development Block Grants (CDBG)—help communities finance a variety of housing and community development activities designed to serve low-income families. Other, more specialized grant programs help communities meet the needs of homeless persons, including those with AIDS. HUD's Federal Housing Administration (FHA) insures mortgages made by lenders to homebuyers with low down payments, often first-time homebuyers, and to buyers and developers of multifamily rental buildings containing relatively affordable units. Title III of the THUD appropriations bill generally funds a collection of agencies involved in transportation or housing and community development. They include the Access Board, the Federal Maritime Commission, the National Transportation Safety Board, the Amtrak Office of Inspector General (IG), the Neighborhood Reinvestment Corporation (often referred to as NeighborWorks), the U.S. Interagency Council on Homelessness, and the costs associated with the government conservatorship and regulation of the housing-related government-sponsored enterprises, Fannie Mae and Freddie Mac. The Surface Transportation Board, formerly an agency of DOT, was made independent of DOT in 2015 legislation, and now appears in Title III of the THUD bill. Title IV of the THUD appropriations bill typically sets out general provisions applicable to the bill. They can range from, for example, restrictions placed on funding in the bill to supplemental funding for disasters. Most of the programs and activities in the THUD bill are funded through regular annual appropriations , also referred to as discretionary appropriations. This is the amount of new funding allocated each year by the appropriations committees. Appropriations are drawn from the general fund of the Treasury. For some accounts, the appropriations committees provide advance appropriations , or regular appropriations that are not available until the next fiscal year. In some years, Congress will also provide emergency appropriations , usually in response to disasters. These funds are sometimes provided outside of the regular appropriations acts—often in emergency supplemental spending bills. Although emergency appropriations typically come from the general fund, they may not be included in the discretionary appropriation total reported for an agency. Most of DOT's budget is in the form of contract authority . Contract authority is a form of mandatory budget authority based on federal trust fund resources, in contrast to discretionary budget authority, which is based on resources in the general fund. Contract authority controls spending from the Highway Trust Fund and the Airport and Airway Trust Fund. While the amount of contract authority is typically set in DOT authorizing legislation, appropriators have the final say in the amount of contract authority available each year by establishing a limitation on obligations (i.e., a limit on how much contract authority can be obligated). Total annual discretionary budget authority for THUD is typically around half of the total funding provided in the bill, with the remainder made up of DOT's mandatory contract authority. Congressional appropriators are generally subject to limits on the amount of new nonemergency discretionary funding they can provide in a year. One way to stay within these limits is to appropriate no more than the allocated amount of discretionary funding in the regular annual appropriations act. Another way is to find ways to offset a higher level of discretionary funding. A portion of the cost of regular annual appropriations for the THUD bill is generally offset in two ways. The first is through rescissions , or cancellations of unobligated or recaptured balances from previous years' funding. The second is through offsetting receipts and collections , generally derived from fees collected by federal agencies, the largest source being fees collected from the FHA mortgage insurance programs at HUD. Table 1 and Figure 1 show recent funding trends for the primary THUD agencies, DOT and HUD, in both nominal and constant dollars (excluding emergency supplemental funding). In real terms, DOT and HUD funding declined for several years after FY2010, and even in FY2017 their funding was still below their FY2010 levels. Table 2 provides a timeline of legislative action on the FY2018 THUD appropriations bill. The annual budget resolution includes spending and revenue levels for the upcoming fiscal year, including spending allocations to House and Senate committees. These levels are enforceable by points of order. After the House and the Senate Appropriations Committees receive their discretionary spending allocations from the budget resolution (referred to as 302(a) allocations), they divide their allocations among their 12 subcommittees (referred to as the 302(b) suballocations). Each subcommittee is responsible for developing and reporting one of the 12 regular appropriations bills. Once the Appropriations Committees reports these suballocations to their respective chamber, these levels are also enforceable by points of order. While these suballocations alone cannot be used to determine how much funding any individual account or program will receive, they do set the parameters within which decisions about funding for individual accounts and programs can be made. The House and Senate did not agree to a budget resolution for FY2018 ( H.Con.Res. 71 ) until October. By that point, the House and Senate Appropriations Committees had each already taken action on THUD appropriations. In July of 2017, both committees released an informal suballocation for THUD. While such informal suballocations cannot be enforced by points of order, it was stated by the House Appropriations Committees that that the levels were being issued in order ""to continue developing the 12 fiscal year 2018 appropriations bills ... given a concurrent resolution for the budget for fiscal year 2018 has yet to be adopted."" Subsequently, the House and Senate Appropriations Committee each reported their FY2018 THUD appropriations bills at the level noted in their interim suballocations. Table 3 shows the discretionary funding provided for THUD in FY2017, the Trump Administration request for FY2018, and the informal suballocations made by the House and Senate Appropriations Committees to the THUD subcommittees. Table 4 lists the total funding provided for each of the titles in the bill for FY2017 and the amount requested for that title for FY2018. As discussed earlier, much of the funding for this bill is in the form of contract authority, a type of mandatory budget authority. Thus the discretionary funding provided is only about half of the total funding provided in this bill. As shown in Table 4 , the Trump Administration's FY2018 budget included $106.65 billion for the programs in the THUD bill, $9.7 billion less than the $116.3 billion provided in FY2017. The request represented a reduction of roughly $2 billion for DOT and $7.5 billion for HUD. The DOT reduction came from zeroing out the Essential Air Service program and the TIGER (National Infrastructure Improvements) grant program and cutting funding for the New Starts program in DOT; the HUD reduction came from reducing funding for most HUD programs and eliminating funding for several large grant programs, including the CDBG and HOME programs. The House-passed H.R. 3354 would provide $115.3 billion for THUD; this represents a reduction of less than 1% from the comparable figure for FY2017. The Senate-reported S. 1655 recommended $119.1 billion for THUD; this represents an increase of just over 2% over FY2017 funding. With inflation forecast at 1.9% for FY2018, the House bill would result in a reduction of roughly 3% in real THUD funding, while the Senate bill would result in a slight increase in real funding, compared to FY2017. This situation is explored further in the next section of this report and in Table 5 . In the case of the THUD bill, net discretionary budget authority (which is the level of funding measured against the 302(b) allocation) is typically not the same as the amount of new discretionary budget authority made available to THUD agencies, due to budgetary savings available from rescissions and offsets. Each dollar available to the subcommittees in rescissions and offsets enables the subcommittee to provide an additional dollar of funding that does not count against the 302(b) allocation limit. As shown in Table 5 , in FY2017, due to rescissions and offsets, the THUD subcommittees were able to provide $10.1 billion in discretionary appropriations to THUD agencies above the net discretionary budget authority level. The amount of these budget savings generally vary from year to year, meaning that the ""cost"" in terms of 302(b) allocation of appropriating a given level of gross budget authority varies as well. The largest source of budgetary savings for the THUD subcommittees is generally HUD's FHA insurance fund. Estimates of FHA offsets change from year to year based on estimates of the number of mortgages that FHA will insure and how much those mortgages are expected to earn in fees versus cost in insurance payouts. Those estimates, in turn, are based on expectations about the housing market, the economy, the credit quality of borrowers, and changes to FHA's fee structure, most of which are factors outside of the immediate control of policymakers. Table 6 presents FY2018 appropriations totals and selected accounts for DOT, compared to FY2017 enacted levels. A brief summary of key highlights follows the table. For an expanded discussion, see CRS Report R44915, Department of Transportation (DOT): FY2018 Appropriations , by [author name scrubbed]. The Trump Administration requested a $1.1 billion reduction in DOT from FY2017 levels, chiefly by zeroing out the Essential Air Service program (-$150 million) and the TIGER (National Infrastructure Investments) grant program (-$500 million) and reducing funding for the transit New Starts program by $400 million. The House-passed bill would provide DOT an increase of less than 1% from FY2017. The Senate-reported bill recommends a 2% increase for DOT over FY2017. The increase is chiefly for highways ($1.0 billion) and FAA programs ($563 million). In addition to providing more funding than in the House-passed bill, the Senate bill includes several policy provisions different from those in the House bill. These include authorizing an increase in the passenger facility charge that airports can charge passengers to help pay for airport improvements, from the current limit of $4.50 (limited to two charges per one-way ticket) to $8.50 (limited to the originating airport; an airport through which the passenger is connecting would still be limited to a $4.50 charge). The bill would also authorize DOT to ban cell phone calls by passengers in flight. It also would appropriate considerably less funding for the Federal Railroad Administration State of Good Repair grant program than does the House bill, which may signal a disagreement over funding for Amtrak's Hudson Tunnel Replacement project. Table 7 presents account-level funding information for HUD, comparing FY2017 with FY2018 congressional action. The President's FY2018 budget request for HUD included the following: $40.7 billion in gross discretionary appropriations for HUD, not accounting for savings from offsets and other sources. That amount is about $7.3 billion (15%) less than was provided in the final FY2017 appropriations law. $31.2 billion in net discretionary appropriations for HUD, accounting for the effect of offsets, rescissions, and other savings. A proposal to eliminate funding for several HUD grant programs. Most notable among these are HUD's two largest block grant programs for states and localities, the CDBG and HOME programs, as well as grants funded in the Self-Help Homeownership Opportunity (SHOP) account (i.e., funding for sweat-equity programs, like Habitat for Humanity, and certain capacity building programs). Large funding reductions for public housing, including a 68% cut relative to FY2017 for the capital fund and elimination of funding for the Choice Neighborhoods program. Funding reductions for most other accounts relative to FY2017, with the exception of the Housing for the Elderly account (2% increase). Several policy proposals, including an increase in the share of rent paid by certain recipients of HUD-assisted housing from 30% of family income to 35% and an elimination of utility reimbursements paid to families in assisted housing. As reported by the House Appropriations Committee, H.R. 3353 would have provided the following for HUD: $48.0 billion in gross discretionary appropriations for HUD, which is about $7.3 billion (15%) more than was requested by the President and only slightly (<1%) less than was enacted for FY2017. ($38.3 billion in net discretionary funding.) Small increases in funding for the tenant-based rental assistance account (+1%) and project-based rental assistance account (+2%) relative to FY2017. The public housing operating fund would receive level funding, and the capital fund would be cut by 5%. Funding reductions for major HUD grant programs, but not an elimination of funding, as proposed in the President's budget. Relative to FY2017, the bill would have cut the SHOP account by 17%, HOME by 11%, and CDBG by 3%. During floor consideration of H.R. 3354 , which includes as Division H the text of H.R. 3353 , HUD-related floor amendments were approved: Increasing funding for: CDBG, SHOP, Public Housing Capital Fund, Housing for Persons with AIDS, and Housing for the Elderly (Section 202). Offsetting those increases with decreases for: Public Housing Operating Fund, Information Technology, FHA administrative expenses, and Research and Technology. Making policy changes to block HUD's implementation of some manufactured housing regulations and guidance (Sec. 424) and to allow for the study of certain foundation materials (amendment to the Community Development Fund account). As reported by the Senate Appropriations Committee, S. 1655 would provide the following for HUD: $49.9 billion in gross discretionary appropriations for HUD's programs and activities, which is 4% more than was enacted for FY2017 and 23% more than was proposed by the President ($40.2 billion in net discretionary appropriations). Increases in funding for the Section 202 Housing for the Elderly program (+14% over FY2017 enacted), the project-based rental assistance account (+6%), and the tenant-based rental assistance account (+5%). Level funding, relative to FY2017, for the grant programs slated for elimination in the President's budget request (CDBG, HOME, and the programs included in the SHOP account). Several new policy changes, including an expansion of the Rental Assistance Demonstration (eliminating the cap on the number of units that may convert, modifying the terms of conversion for some properties and expanding the program to Section 202 Housing for the Elderly properties (Section 236 of the General Provisions)) and new penalties for HUD if the agency does not issue reports to the committee about properties that fail inspection (Section 202 of the General Provisions). Table 8 shows appropriations levels for the various related agencies funded within the Transportation, HUD, and Related Agencies appropriations bill. The Surface Transportation Board was transferred from the DOT title to the Related Agencies title starting with FY2017. The President's FY2018 budget request included that Congress begin the process of winding down the Interagency Council on Homelessness (USICH) , which was created in 1987 to coordinate across government agencies to reduce and end homelessness. The requested funding level—$57 a more than 80% reduction from FY2017—is intended to cover salaries, benefits, and operational costs for permanently closing the agency by November 2017. The USICH has a statutory sunset date—currently, October 1, 2018—that has generally been extended in annual appropriations acts. The House committee bill would adopt the President's request, allowing for the termination of the USICH; the Senate committee bill would not, funding the USICH at FY2017 levels and permanently eliminating the statutory sunset. The President's FY2018 budget also included a request that Congress begin the process of winding down federal funding for the Neighborhood Reinvestment Corporation (commonly known as NeighborWorks America ), which was created via federal charter in 1978 to support affordable housing and neighborhood revitalization nationwide. The requested funding level of $27 million is intended to cover personnel, administrative, and other costs associated with winding down existing commitments. Both the House and Senate committee bills would continue to fund NeighborWorks at the FY2017 level.","The House and Senate Transportation, Housing and Urban Development, and Related Agencies (THUD) Appropriations Subcommittees are charged with providing annual appropriations for the Department of Transportation (DOT), Department of Housing and Urban Development (HUD), and related agencies. THUD programs receive both discretionary and mandatory budget authority; HUD's budget generally accounts for the largest share of discretionary appropriations in the THUD bill, but when mandatory funding is taken into account, DOT's budget is larger than HUD's budget. Mandatory funding typically accounts for around half of the THUD appropriation. The Trump Administration requested net new budget authority of $106.65 billion (after scorekeeping adjustments), including $47.9 billion in discretionary funding, for the departments and agencies funded in the THUD bill for FY2018, $9.65 billion (8%) less than the FY2017 level. The House Appropriations Committee reported its version of an FY2018 THUD appropriations bill on July 17, 2017 (H.R. 3353). It recommended $115.3 billion ($56.5 billion in discretionary funding), less than 1% below the FY2017 level. The text of that bill was incorporated into a consolidated appropriations bill (H.R. 3354), amended (with no change in total funding for THUD, but changes in some accounts within THUD), and passed by the House on September 14, 2017. The Senate Appropriations Committee reported its version of an FY2018 THUD bill on July 27, 2017 (S. 1655). It recommended $119.1 billion ($60.1 billion in discretionary funding), 2.4% more than FY2017. With inflation forecast at 1.9% for FY2018, the House bill would result in a roughly 3% decrease in real THUD funding, while the Senate bill would result in a slight increase in real funding, compared to FY2017. With no agreement on FY2018 funding, Congress passed a continuing resolution (H.R. 601) to provide funding through December 8, 2017, for federal agencies. That act extended FY2017 funding levels for the THUD agencies, less an across-the board rescission 0.6791%. DOT: The Trump Administration requested $75.1 billion in net new budgetary authority for DOT for FY2018. That was about $2 billion less than the comparable figure ($77.1 billion) for FY2016, with significant cuts requested for transit and rail programs. Both the House and Senate bills largely rejected the proposed cuts; the House approved $77.5 billion in new funding, and the Senate Appropriations Committee recommended $78.6 billion. HUD: The Trump Administration requested $31.4 billion in net new budget authority for HUD for FY2018, $7.4 billion less than FY2017 (-19%). It requested no funding for several major grant programs, including the Community Development Block Grant (CDBG) program and the HOME Investment Partnership program. The House bill proposed $38.3 billion, a small increase in overall funding relative to FY2017 (-1.3%), and did not include the proposed eliminations of HOME and CDBG funding. The Senate committee bill recommended $40.2 billion, a 4% increase over FY2017. Related Agencies: The Trump Administration requested $226 million for the agencies in Title III of the THUD bill (the Related Agencies). This was about $113 million less than was provided in FY2017. The major change in funding from FY2017 levels in the request was proposals to terminate funding for the Neighborhood Reinvestment Corporation (NRC) and the Interagency Council on Homelessness (ICH). The President's budget requested only enough funding to close out the commitments of those two entities. Neither the House nor Senate committee bills included the President's proposal to wind down funding for the NRC; the House bill, but not the Senate committee-passed bill, would eliminate funding for the ICH.",govreport
"A July 2005 Joint Statement resolved to establish a U.S.-India ""global partnership"" through increased cooperation on economic issues, on energy and the environment, on democracy and development, on non-proliferation and security, and on high-technology and space. U.S. policy is to isolate Iran and to ensure that its nuclear program is used for purely civilian purposes. India has never shared U.S. assessments of Iran as an aggressive regional power. India-Iran relations have traditionally been positive and, in January 2003, the two countries launched a ""strategic partnership"" with the signing of the ""New Delhi Declaration"" and seven other substantive agreements. Indian leaders regularly speak of ""civilizational ties"" between the two countries, a reference to the interactions of Persian and Indus Valley civilizations over a period of millennia. As U.S. relations with India grow deeper and more expansive in the new century, some in Washington believe that New Delhi's friendship with Tehran could become a significant obstacle to further development of U.S.-India ties. However, India-Iran relations have not evolved into a strategic alliance and are unlikely to derail the further development of a U.S.-India global partnership. At the same time, given a clear Indian interest in maintaining positive ties with Iran, especially in the area of energy commerce, New Delhi is unlikely to abandon its relationship with Tehran, or accept dictation on the topic from external powers. Many in Congress voice concern about India's relations with Iran and their relevance to U.S. interests. Some worry about New Delhi's defense relations with Tehran and have sought to link this with congressional approval of U.S.-India civil nuclear cooperation. There are further U.S. concerns that India plans to seek energy resources from Iran, thus benefitting financially a country the United States seeks to isolate. Indian firms have in recent years taken long-term contracts for purchase of Iranian gas and oil, and India supports proposed construction of a pipeline to deliver Iranian natural gas to India through Pakistan. The Bush Administration expresses strong opposition to any pipeline projects involving Iran, but top Indian officials insist the project is in India's national interest. Some analysts believe that geostrategic motives beyond energy security, including great power aspirations, drive India's pursuit of closer relations with Iran. Of immediate interest to some Member of Congress are press reports on Iranian naval ships visiting India's Kochi port for ""training."" Indian officials downplayed the significance of the port visit, and Secretary Rice challenged the report's veracity, although she did state that, ""The United States has made very clear to India that we have concerns about their relationship with Iran."" Such concerns include the proposed gas pipeline. Secretary of Energy Sam Bodman, visiting New Delhi in March 2007, reiterated U.S. opposition to the pipeline project. According to the 2006-2007 annual report of the Indian Ministry of External Affairs, India's relations with Iran are underlined by historical, civilizational and multifaceted ties. The bilateral cooperation has acquired a strategic dimension flourishing in the fields of energy, trade and commerce, information technology, and transit. During 2006-07, relations with Iran were further strengthened through regular exchanges. Past reports have lauded ""further deepening and consolidation of India-Iran ties,"" with ""increased momentum of high-level exchanges"" and ""institutional linkages between their National Security Councils."" Iranian leaders, always looking for new allies to thwart U.S. attempts to isolate Iran, reciprocate New Delhi's favorable view and insist that warming U.S.-India relations will not weaken their own ties with New Delhi. However, there are signs that, following the 2005 launch of a U.S.-India ""global partnership"" and plans for bilateral civil nuclear cooperation, New Delhi intends to bring its Iran policy into closer alignment with that of the United States. Yet India is home to a sizeable constituency urging resistance to any U.S. pressure that might inhibit New Delhi-Tehran relations or which prioritize relations with the United States in disregard of India's national interests. While top Indian leaders state that friendly New Delhi-Tehran ties will continue concurrent with—or even despite—a growing U.S.-India partnership, some observers see such rhetoric as incompatible with recent developments. The Indian government has made clear that it does not wish to see a new nuclear weapons power in the region and, in this context, it has aligned itself with international efforts to bring Iran's controversial nuclear program into conformity with Non-Proliferation Treaty and IAEA provisions. At the same time, New Delhi's traditional status as a leader of the ""nonaligned movement,"" its friendly links with Tehran, and a domestic constituency that includes tens of millions of Shiite Muslims, have presented difficulties for Indian policymakers. There are also in New Delhi influential leftist and opposition parties which maintain a high sensitivity toward indications that India is being made a ""junior partner"" of the United States. These political forces have been critical of proposed U.S.-India civil nuclear cooperation and regularly insist that India's closer relations with the United States should not come at the expense of positive ties with Iran. The current Indian National Congress-led coalition government has thus sought to maintain a careful balance between two sometimes conflicting policy objectives. India's main opposition, the Bharatiya Janata Party, has voiced its approval of the present government's policy toward Iran's nuclear program. There were reports in 2005 that India would oppose bringing Iran's nuclear program before the U.N. Security Council and was likely to abstain on relevant IAEA Board votes. However, on September 24, 2005, in what many saw as the first test of India's position, New Delhi did vote with the majority (and the United States) on an IAEA resolution finding Iran in noncompliance with its international obligations. The vote brought waves of criticism from Indian opposition parties and independent analysts who accused New Delhi of betraying a friendly country by ""capitulating"" to U.S. pressure. In January 2006, the U.S. ambassador to India explicitly linked progress on proposed U.S.-India civil nuclear cooperation with India's upcoming IAEA vote, saying if India chose not to side with the United States, he believed the U.S.-India initiative would fail in the Congress. New Delhi rejected any attempts to link the two issues, and opposition and leftist Indian political parties denounced the remarks. Yet, on February 4, 2006, India again voted with the majority in referring Iran to the Security Council, even as it insisted that its vote should not be interpreted as detracting from India's traditionally close relations with Iran. Overt U.S. pressure may have made it more difficult for New Delhi to carry out the policy it had already chosen. Some independent observers saw India's IAEA votes as demonstrating New Delhi's strategic choice to strengthen a partnership with Washington even at the cost of its friendship with Tehran. In July 2006, the House passed legislation ( H.R. 5682 ) to enable proposed U.S. civil nuclear cooperation with India. The bill contained non-binding language on securing India's cooperation with U.S. policy toward Iran (an amendment seeking to make such cooperation binding was defeated by a vote of 235-192). The Senate version of enabling legislation ( S. 3709 ) contained no language on Iran. The resulting ""Hyde Act,"" which became P.L. 109-401 in December, preserved the House's ""statement of policy"" language and added a prerequisite that the President provide to Congress, inter alia , a description of India's efforts to participate in U.S. efforts to prevent Iran from obtaining weapons of mass destruction. In their explanatory statement ( H.Rept. 109-721 ), congressional conferees called securing India's participation ""critical"" and they emphasized an ""expectation"" of India's full cooperation on this matter. In recent years there have been occasional revelations of Indian transfers to Iran of technology that could be useful for Iran's purported weapons of mass destruction (WMD) programs. These transfers do not appear to be part of an Indian-government-directed policy of assisting Iran's WMD, but could represent unauthorized scientific contacts that have resulted from growing India-Iran energy and diplomatic ties. Some Indian persons have been sanctioned by the Bush Administration under the Iran Non-Proliferation Act (INA, P.L. 106-178 ). According to determinations published in the Federal Register, in 2003 an Indian chemical industry consultancy was sanctioned under the Iran-Iraq Arms Nonproliferation Act ( P.L. 102-484 ). In a September 2004 determination, two Indian nuclear scientists, Dr. Chaudhary Surendar and Dr. Y.S.R. Prasad, were sanctioned under the INA. The two formerly headed the Nuclear Power Corp. of India and allegedly passed to Iran heavy-water nuclear technology. Surendar denied ever visiting Iran and sanctions against him were ended in December 2005. In that same December determination, two Indian chemical companies were sanctioned under the INA for transfers to Iran. In August 2006, the United States formally sanctioned two additional Indian chemical firms under the INA for sensitive material transactions with Iran. The firms denied any WMD-related transfers and New Delhi later said the sanctions were ""not justified."" In February 2007, India moved to impose restrictions on nuclear-related exports to Iran in accordance with U.N. Security Council Resolution 1737 of December 2006. India and Iran have established steady but relatively low level defense and military relations since the formation of an Indo-Iran Joint Commission in 1983, three years after the start of the Iran-Iraq war. There is no evidence that India provided any significant military assistance to Iran during that war, which ended in 1988. Iran reportedly received some military advice from Pakistan during the conflict. Following the war, Iran began rebuilding its conventional arsenal with purchases of tanks, combat aircraft, and ships from Russia and China. No major purchases from India were reported during this time. However, Iran reportedly turned to India in 1993 to help develop batteries for the three Kilo-class submarines Iran had bought from Russia. The submarine batteries provided by the Russians were not appropriate for the warm waters of the Persian Gulf, and India had substantial experience operating Kilos in warm water. There have been expectations that Iran-India military ties would further expand under the 2003 ""New Delhi Declaration,"" in which the two countries ""decided to explore opportunities for cooperation in defense and agreed areas, including training and exchange of visits."" Some experts see this as part of broad strategic cooperation between two powers in the Persian Gulf and Arabian Sea, but the cooperation has generally stalled since it was signed and has not evolved into a noteworthy strategic alliance. Instead, the cooperation appears to represent a manifestation of generally good Indo-Iranian relations and an opportunity to mutually enhance their potential to project power in the region. India had reportedly hoped the Declaration would pave the way for Indian sales to Iran of upgrades of Iran's Russian-made conventional weapons systems. Major new Iran-India deals along these lines have not materialized to date, but Iran reportedly has sought Indian advice on operating Iran's missile boats, refitting Iran's T-72 tanks and armored personnel carriers, and upgrading Iran's MiG-29 fighters. Under the Declaration, the two countries have held some joint naval exercises, most recently in March 2006. The first joint exercises were in March 2003. In March 2007, apparently at Iran's request, the two countries formed a joint working group to implement the 2003 accord, which Iran apparently feels has languished. During a visit of the commander of Iran's regular Navy—the first such high level exchange since 2003—India reportedly deferred specific Iranian requests, such as an exchange of warship engineers. India-Iran commercial relations are dominated by Indian imports of Iranian crude oil, which alone account for some 90% of all Indian imports from Iran each year. The value of all India-Iran trade in the fiscal year ending March 2007 topped $9 billion (by comparison, U.S.-India trade was valued at about $32 billion in 2006). Iran possesses the world's second-largest natural gas reserves, while India is among the world's leading gas importers. With a rapidly growing economy, India is building energy ties to Iran, some of which could conflict with U.S. policy and the Iran Sanctions Act (ISA). ISA requires certain sanctions on investments over $20 million in one year in Iran's energy sector. Under a reportedly finalized 25-year, $22 billion deal, the state-owned Gas Authority of India Ltd. (GAIL) is to buy 5 million tons of Iranian liquified natural gas (LNG) per year. To implement the arrangement, GAIL is to build an LNG plant in Iran, which Iran does not now have. Some versions of the deal include development by GAIL of Iran's South Pars gas field, which would clearly constitute an investment in Iran's energy sector. India currently buys about 100,000-150,000 barrels per day of Iranian oil, or some 7.5% of Iran's oil exports. It is also widely reported that Indian refineries supply a large part of the refined gasoline that Iran imports. Gasoline is heavily subsidized and sells for about 40 cents per gallon in Iran, and Iranian refining capacity is insufficient to meet demand. The purchase of Iranian petroleum product is not generally considered an ISA violation. A major aspect of the Iran-India energy deals is the proposed construction of a gas pipeline from Iran to India via Pakistan, with a possible extension from Pakistan to China. Some of the Indian companies that reportedly might take part in the pipeline project are ONGC, GAIL, Indian Oil Corporation, and Bharat Petroleum Corporation. Iran, India, and Pakistan have repeatedly reiterated their commitment to the $4 billion-$7 billion project, which is tentatively scheduled to begin construction later in 2007 and be completed by 2010. Pakistani President Musharraf said in January 2006 that there is enough demand in Pakistan to make the project feasible, even if India declines to join it. Since January 2007, the three countries have agreed on various outstanding issues, including a pricing formula, and the Indian and Pakistani split of the gas supplies, but talks continue on several unresolved issues, including the pipeline route, security, transportation tariffs, and related issues. During her March 2005 visit to Asia, Secretary of State Rice expressed U.S. concern about the pipeline deal. Other U.S. officials have called the project ""unacceptable,"" but no U.S. official has directly stated that it would be considered a violation of ISA. Successive administrations have considered pipeline projects that include Iran as meeting the definition of ""investment"" in ISA. India and Iran are tacitly cooperating to secure their mutual interests in Afghanistan. Iran has perceived the Sunni Islamic extremism of the Taliban regime as a threat to Iran's Shiite sect. India saw the Taliban as a manifestation of Islamic extremism that India is battling in Kashmir, and which is held responsible for terrorist attacks in India. India and Iran both supported Afghanistan's minority-dominated ""Northern Alliance"" against the Taliban during 1996-2001 (in contrast to Pakistan, which supported the Taliban). Both countries also seek to prevent a Taliban return to power and have each given substantial economic aid to the U.S.-backed government in Kabul. India's presence in Afghanistan is viewed by Pakistan as a potential security threat as a policy of ""strategic encirclement.""","India's growing energy needs and its relatively benign view of Iran's intentions will likely cause policy differences between New Delhi and Washington. India seeks positive ties with Iran and is unlikely to downgrade its relationship with Tehran at the behest of external powers, but it is unlikely that the two will develop a broad and deep strategic alliance. India-Iran relations are also unlikely to derail the further development of close and productive U.S.-India relations on a number of fronts. See also CRS Report RL33529, India-U.S. Relations, and CRS Report RL32048, Iran: U.S. Concerns and Policy Responses. This report will be updated as warranted by events.",govreport
"Low farm milk prices and declining dairy farm incomes in 2009 renewed congressional interest in imposing new import barriers on milk protein concentrates (MPCs), which generally include casein, the main protein found in milk, and caseinates, a soluble form of casein. MPCs are derived from raw milk and are used in a variety of food products, animal feed, and industrial products. Currently, U.S. imports of MPCs have limited or no trade restrictions while many other dairy product imports are restricted by tariff-rate quotas. Advocates of stricter import controls on MPCs say they would prevent the unlimited importation of milk protein, which would encourage the use of domestically produced protein and raise milk prices for dairy farmers. Opponents respond that the prospective move would increase their costs and result in higher retail food prices. Major foreign suppliers of MPCs to the U.S. market would likely seek compensation under World Trade Organization (WTO) rules for new U.S. restrictions on MPC imports. Concerns about MPC imports have periodically surfaced since import levels rose sharply in the late 1990s. At that time, the U.S. price of nonfat dry milk, which competes on some level with MPC as a protein ingredient, was above the price for milk proteins in the international market, making the U.S. market an attractive destination. When the world and domestic prices began to converge in 2001, MPC imports dropped off significantly and have since remained at or below peak levels reached in 2000. Milk is comprised mostly of water, measured at 87.4% of total weight. The remaining 12.6% is called ""milk solids,"" which is split four ways: fat (3.7% of total weight), protein (3.4%), lactose or sugar (4.8%), and minerals (0.7%). Milk protein is of two basic types: casein (2.8% of total weight or 82% of total protein) and whey protein (lactalbumin) (0.6% of total weight or 18% of total protein). Casein is extracted from milk by injecting a certain enzyme or acid into skim milk. Historically, casein was used in both industrial applications such as for glue and paper coatings, and in foods, mainly as an ingredient for ""nondairy foods"" such as imitation cheese, coffee creamers, and margarine. Whey protein is found in liquid whey, which is a by-product of the cheese manufacturing process that must be further processed to retrieve the protein. Whey protein is also used in a variety of food products. A ""milk protein concentrate"" (MPC) contains both casein and whey protein, and is often identified by its protein content, such as MPC42 for a product with 42% protein. MPCs are manufactured by ultrafiltration (use of membranes to separate larger molecules from smaller molecules in skim milk), blending (combinations of two or more products, such as skim milk powder and casein), or co-precipitation (a procedure similar to casein extraction). Protein concentrates have wide-ranging applications in the food manufacturing industry. Products that contain protein concentrates include infant formula, processed cheese products, imitation cheese, cultured products, frozen desserts, and specialty sports and medical nutrition products. Various protein levels are used in different products: MPC42-MPC56 are generally used in non-standardized cheeses (e.g., brie, ricotta), while MPC70-MPC85 are used in sports drinks and nutritional supplements. MPC90 is used in lactose-free or sugar-free products. Aside from the level of protein, some food manufacturers cite better ""functionality"" for MPC as an ingredient compared with nonfat dry milk (approximately 35% protein). Some typical functional characteristics include solubility, viscosity, water-binding, whipping and foaming, gelling, and heat stability. Also, processors favor MPC where exact product composition is important or where lactose (present in nonfat dry milk) is not needed or wanted. The United States produces very little casein or milk protein concentrates. Some dairy economists suggest that the federal dairy policies, particularly the Dairy Product Price Support program, have encouraged the production of nonfat dry milk (NDM) at the expense of milk protein concentrate or casein by assuring a buyer (i.e., the government) for NDM. Producers and others counter that foreign subsidies for exports of dairy products have at times limited U.S. production of protein products. U.S. imports of dairy products were valued at just over $3 billion in 2008 as measured by the USDA's Foreign Agricultural Service ( Table 1 ), with cheese accounting for the largest share at 38%. MPCs and casein/caseinates combined represented 35% of total import value. The United States also imports butter, lactose, and a variety of other dairy products such as chocolate milk drinks, pudding, and milk components for food manufacturing. Constraints on dairy product imports are affected by import barriers (see "" Import Barriers ""), which are needed to maintain the integrity of the domestic dairy program. The U.S. dairy program supports prices of dairy products and pays farmers subsidies when milk prices decline below certain levels. Unlimited market access would leave open the potential for import surges that could result in large purchases by the federal government under the price support program and/or lower farm prices that would drive up payments under the Milk Income Loss Contract (MILC) program. Dairy imports are modest relative to domestic production. The U.S. Department of Agriculture (USDA) estimated import quantities during 2000-2004 at about 3% of milk production, driven primarily by cheese imports. More recent figures indicate little change since then. During most of the last decade, total U.S. imports of MPCs and casein/caseinates have hovered around 150,000 metric tons or less ( Figure 1 ). Since the sharp rise in the late 1990s, there has been no discernible import trend, with a sharp decline in 2009 (reportedly related to weak demand) following a rise in 2008. Primary U.S. suppliers include New Zealand, Australia, and the European Union ( Figure 2 and Figure 3 ). Until 1995, imports of almost all dairy products (butter, cheese, dry milk) were subject to section 22 import quotas. Section 22 of the Agricultural Adjustment Act of 1933 (7 U.S.C. 624(f)) requires the President to impose quantitative limitations or fees on imports that the President finds are being, or are practically certain to be, imported under such conditions and in such quantities as to render or tend to render ineffective, or materially interfere with, any USDA domestic support or stabilization program. Dairy products that were not covered by section 22 quotas included casein, caseinates, whey, and soft-ripened cow's milk cheese (e.g., brie). The 1995 WTO Uruguay Round Agreement on Agriculture converted section 22 quotas (including dairy product quotas) into tariff rate quotas (TRQs). (The United States also agreed to progressive reductions in the quantity and value of export subsidies under the Dairy Export Incentive Program or DEIP.) Importers of dairy products under the low tariff in a TRQ must apply for a license from USDA. No license is required for over-quota imports which are subject to a higher tariff. Since MPCs and casein imports had not been restricted under section 22, they were not subject to TRQs, nor were they subject to licensing requirements. Legislation to implement the WTO Uruguay Round Agriculture Agreement ( P.L. 103-465 ) amended section 22 to prohibit the application of quantitative import limitations or fees on products from other WTO members. Imports of MPCs are classified under the Harmonized Tariff Schedule of the United States (HTS) under subheadings 0404.90.10 for imports with a protein concentration of 40% to 90% and under 3501.10.10 for imports with a protein concentration of 90% or more. Imports of casein and caseinates are classified under subheadings 3501.10.50 and 3501.90.60. MPCs are subject to a very low tariff of 0.37 cents per kilogram. Imports of casein (under 3501.10.50) are duty free; other casein derivatives have a tariff of 0.37 cents per kilogram. During the early 2000s, milk producers and their supporters in Congress tried to change the tariff treatment of MPCs by petitioning the U.S. Customs Service to change the tariff classification of MPCs and by introducing legislation that would have established TRQs for MPCs. In 2002, the U.S. Customs Service (now Customs and Border Protection (CBP)) received a petition from the National Milk Producers Federation (NMPF) to review the tariff classification of MPCs and to change the classification from a non-quota to a quota classification. In its petition, the NMPF contended that dairy products classified under HTS 0404.90.10 did not meet the statutory definition of MPCs and were therefore not classifiable under that subhead of the HTS. They should instead, according to NMPF, be classified under heading 0402 which covers ""milk and cream, concentrated or containing added sugar or other sweetening matter."" If so classified, MPCs would become subject to TRQs and also in many cases would require import licenses. NMPF contended that to be properly classified as MPCs, a product must have been produced using the process of ultrafiltration and must contain casein and lactalbumin (whey protein) in the same proportion as found in milk. CBP responded, however, that the statutory language (Additional U.S. Note 13 to Chapter 4 of the HTS) refers to ""any complete milk protein (casein plus lactalbumin) concentrate that is 40% or more protein by weight."" Congress in the Additional Note had not specified a manufacturing process nor had it prohibited any blend or mix that met the 40% protein content by weight criterion. Thus, according to CBP, MPCs imported under 0404.90.10 met the statutory conditions provided in Additional Note 13 and were properly classified. During early 2003, bills were introduced in the 108 th Congress ( H.R. 1160 , S. 560 ) that would have accomplished the same purposes as legislation that has been introduced in the 111 th Congress (see "" New Legislative Import Restrictions Proposed ""). Both H.R. 1160 and S. 560 languished in committee. The Milk Import Tariff Equity Act ( S. 1542 ) was introduced on July 30, 2009, to limit imports of MPCs, casein, and caseinates. A companion bill was introduced in the House ( H.R. 3674 ) on September 29, 2009, with slight differences in aggregate quantities of permitted MPCs under the new tariff designations. S. 1542 would introduce two separate TRQs. The first would be for MPCs classified under HTS subheading 0404.90.10 for imports with a protein concentration of 40% to 90%. Annual imports in excess of 18,488 metric tons would be assessed a duty of $1.56/kg ($0.708/lb.). The second TRQ would be for the combined imports of three products: milk protein concentrate (90% protein), casein, and caseinates (HTS 3501.10.10, 3501.10.50, and 3501.90.60, respectively). Annual imports in excess of 55,477 metric tons would be assessed a duty of $2.16/kg ($0.98/lb.). The duty on import quantities below each quota would remain at the current low level ($0.0037/kg or $0.0017/lb.), except for imports under HTS 3501.10.50, which would remain free. More than half the annual trade in MPCs and casein/caseinates would be affected by the new, higher duties. Imports under HTS 0404.90.10 averaged 51,000 metric tons during 2006-2008 compared with 18,499 metric tons under the proposed TRQ. Similarly, imports of casein products averaged 108,000 metric tons compared with 55,477 metric tons under the proposed TRQ. Enactment of the proposed legislation likely would entail the United States' entering into compensation negotiations with WTO member countries that are major suppliers of MPCs to the U.S. market. S. 1542 authorizes the President to enter into such negotiations (Section 3). Article XXVIII of the original General Agreement on Tariffs and Trade (GATT 1947) provides the mechanism for WTO member countries to negotiate compensation when a tariff concession (in this case the current low tariff for MPC imports) is modified or withdrawn. Article XXVIII allows member countries to increase tariffs or set new TRQs, but in exchange for withdrawing or modifying a concession compensation must be provided to affected member countries. Compensation does not mean a monetary payment; it means, in this case, that the United States is supposed to offer a benefit or concession such as a tariff reduction which is equivalent to the benefits which the United States has withdrawn or modified. Formulas for determining the amount of compensation are provided in the Understanding on the Interpretation of Article XXVIII that is part of the 1994 WTO Uruguay Round Agreements (GATT 1994). The Understanding on Article XXVIII provides that when an unlimited tariff concession is replaced by a TRQ, the amount of compensation provided should exceed the amount of the trade actually affected by the modification. The basis for the calculation of compensation is the amount by which future trade prospects exceed the level of the quota. The calculation spelled out in the Understanding says that the calculation of future trade prospects should be based on the greater of: (a) the average annual trade in the most recent representative three-year period, increased by the average annual growth rate of imports in that same period, or by 10%, whichever is the greater, or (b) trade in the most recent year increased by 10%. Based on these formulas and recent trade data, the aggregate amount of compensation for which the United States might be liable could be an estimated $500 million. Compensation could be in the form of tariff reductions on other products or other benefits. Article XXVIII negotiations would be held on a bilateral basis. That would mean that negotiations would be conducted with such principle suppliers as New Zealand, the European Union, India, and Australia. A major issue would be quota allocation. Current quotas for most dairy products are distributed on an historical basis, while importers must apply for licenses to import dairy products. On February 7, 2006, the Canadian Minister of Agriculture announced that Canada would be initiating negotiations under GATT Article XXVIII to restrict imports of MPCs. This trade policy move came after a year of work by a Canadian government-initiated technical working group composed of producers and processors failed to reach agreement on a common approach to challenges facing the Canadian dairy industry. Main suppliers of MPCs to the Canadian market are New Zealand and the European Union. It appears, according to USDA's Foreign Agricultural Service, that the Article XXVIII process would not be applicable to Canada's NAFTA partners (the United States and Mexico). The main dairy producer group, Dairy Farmers of Canada (DFC), is the major supporter of the move to restrict Canadian imports of MPCs. Canadian dairy processors, again according to FAS, have worked to restrict the scope of new restrictions to items imported under HTS of Canada Chapter 35, MPCs with a milk protein content equal to or greater than 85% by weight. If import restrictions on MPC were broadened beyond Chapter 35, the expectation among some observers is that Canadian dairy processors would shift operations to the United States. The Canada Gazette reported that the Article XXVIII negotiations were concluded in June of 2008 and that Canada would include in its tariff schedule a TRQ for MPCs with protein content of 85% or more by weight. Within quota quantities of MPC 85+ will enter free of duty, while over quota amounts will be subject to a 270% ad valorem tariff. The TRQ does not apply to NAFTA countries and other countries with which Canada has free trade agreements. U.S. milk producers in general support legislation to limit imports of MPCs. The National Milk Producers Federation (NMPF), the largest trade organization representing dairy farmers, supports the proposed legislation ""in order to close a loophole in the U.S. dairy sector allowing certain dairy proteins ... to enter the U.S. and disrupt farm-level prices."" Similarly, the National Farmers Union supports restrictions on MPCs. Although the NMPF supports the legislation, the organization has stated that imports are not the cause of the economic problem the industry is currently facing and cautions against taking import measures that could harm prospects for U.S. dairy exports. The International Dairy Foods Association (IDFA), representing dairy product processors and manufacturers, is adamantly opposed to more restrictions on dairy imports. IDFA is concerned that such a move would increase production costs for food manufacturers, raise prices for consumer products, and put at risk recent gains in U.S. dairy exports. They also argue that domestic production of MPCs is not sufficient to meet demands of food manufacturers, and MPCs are not interchangeable with domestically produced nonfat dry milk. The potential price impact of imposing TRQs depends on the level of farm prices relative to the implied level of support under the Dairy Product Price Support Program (DPPSP). In general, if dairy product prices (and hence, farm milk prices) are low relative to USDA's purchase price levels, resulting in USDA purchases of dairy products from manufacturers, the impact of additional imports falls primarily on the dairy program (i.e., higher government purchases and program costs) rather than on farm prices. Hence, stricter import controls could result in reduced government purchases of dairy products (and lower outlays). Conversely, if product prices are well above DPPSP purchase prices and the program becomes inactive, the impact shifts to the market. USDA purchased surplus dairy products from October 2008 to October 2009, primarily nonfat dry milk, with the pace slowing considerably in late summer 2009. This leaves open the question whether imposing TRQs on MPCs and caseins/caseinates would have affected farm prices. Dairy product prices have since moved above support levels. To the extent product prices remain above purchase prices in the DPPSP, the magnitude of the impact on farm milk prices would depend on: (a) the amount of product not imported because of the TRQ, and (b) how this quantity (in milk equivalent) relates to overall U.S. milk production. Using the proposed TRQ levels and average imports from 2006-2008, the amount of over-quota imports would total 85,000 metric tons. Converted to farm milk equivalent, the over-quota imports would equate to approximately 1.2 billion pounds of farm milk or about 0.7% of average U.S. milk production during 2006-2008. By itself, this amount of milk equivalent, if made unavailable to the U.S. market, would have a relatively small effect on average U.S. farm milk prices. However, some view it as part of a larger set of policies that would help address the current financial situation for U.S. dairy farmers. ","Low farm milk prices and declining dairy sector income in 2009 renewed congressional interest in imposing new import barriers on milk protein concentrates (MPCs), which generally include casein, the main protein found in milk, and caseinates, a soluble form of casein. To limit U.S. imports of MPCs, the Milk Import Tariff Equity Act was introduced in the Senate (S. 1542) on July 30, 2009, and in the House (H.R. 3674) on September 29, 2009. Advocates of stricter import controls on MPCs say they would prevent the unlimited importation of milk protein, which would encourage the use of domestically produced protein and raise milk prices for dairy farmers. Opponents, including dairy product manufacturers, respond that the prospective move would increase their costs and result in higher retail food prices. MPCs are used in a variety of food products (e.g., infant formula, processed cheese products, and specialty sports and medical nutrition products), animal feed, and industrial products. Currently, U.S. imports of MPCs are assessed very low or no tariffs while many other dairy product imports are restricted by tariff-rate quotas (TRQs), which impose low import duties on quantities inside a quota while quantities above the quota are charged higher duty rates. During most of the last decade, total imports of MPCs have hovered around 150,000 metric tons or less. Imports fill a gap in limited domestic production. Until 1995, imports of almost all dairy products (butter, cheese, and dry milk) were subject to import quotas, which were established under Section 22 of the Agricultural Adjustment Act of 1933 to prevent imports from interfering with USDA domestic support programs. Dairy products that were not covered by section 22 quotas included casein, caseinates, whey, and soft-ripened cow's milk cheese (e.g., brie). The 1995 Uruguay Round Agreement on Agriculture converted section 22 quotas (including dairy product quotas) into TRQs. Since MPCs and casein imports had not been restricted under section 22, they were not subject to TRQs. The proposed bills in the 111th Congress, which are similar to previously introduced legislation, would establish two separate TRQs for (1) MPCs with a protein concentration of 40% to 90%, and (2) the combined imports of three products: milk protein concentrate (90% protein), casein, and caseinates. Based on recent trade data, more than half the annual trade in MPCs and casein/caseinates would be affected by the new, higher duties. Under World Trade Organization (WTO) rules for any new U.S. restrictions on imports, enactment of the proposed legislation likely would entail the United States' entering into compensation negotiations with WTO member countries that are major suppliers of MPCs to the U.S. market. The amount of compensation for which the United States might be liable would be on based on WTO formulas, recent trade data, and bilateral negotiations with principal suppliers. Farm-level impacts of new TRQs depend on whether dairy product prices are below or above federal price support levels. If below, farm milk prices would likely not be affected because they would already be supported above market-clearing levels, and trade restrictions would simply limit government purchases of dairy products under the price support program. If above, farm prices would likely increase to the extent that product is withheld from the market. Based on recent trade data, this quantity is estimated to represent about 0.7% of U.S. milk production. The pace of USDA dairy product purchases slowed considerably in late summer 2009, leaving open the question of whether imposing TRQs on MPCs would have affected farm prices at that time. Market prices for dairy products have since moved above support levels.",govreport
"In October 2000, a coalition of democratic parties defeated Serbian strongman Slobodan Milosevic in presidential elections, overturning a regime that had plunged the country into bloody conflicts in the region, economic decline, and international isolation in the 1990s. The country's new rulers embarked on a transition toward Western democratic and free market standards, but success has been uneven. Serbia has held largely free and fair elections, according to international observers. A new constitution adopted in 2006 marked an improvement over the earlier, Socialist-era one. However, the global economic crisis dealt a setback to Serbia's economy. Organized crime and high-level corruption remain very serious problems. Serbia has set integration in the European Union as its key foreign policy goal, but its prospects have been clouded by concerns of some EU countries that it has not done enough to normalize relations with its former Kosovo province, which declared independence in 2008. U.S.-Serbian relations, although positive in many respects, have also been negatively affected by the leading role played by the United States in promoting Kosovo's independence. Serbia's most recent parliamentary, presidential, and local elections were held on May 6, 2012. In the parliamentary vote, a coalition of parties led by the nationalist Serbian Progressive Party (SNS) won 73 seats in the 250-seat Serbian parliament. A pro-EU coalition led by the Democratic Party (DS) won 68 seats. In the biggest surprise of the vote, a coalition led by the Socialist Party of Serbia (SPS) won 45 seats, significantly more than expected. The strongly nationalist Democratic Party of Serbia (DSS) won 20 seats, as did a coalition led by the Liberal Democratic Party, which favors a less nationalist approach than the DS. The United Regions of Serbia group won 16 seats. Most of the remaining seats were won by representatives of national minorities. In the presidential election, outgoing President Tadic of the DS faced Tomislav Nikolic from the SNS, as well as candidates from smaller parties. Tadic took first place with 26.7% of the vote. Nikolic came in a close second with 25.5%. The other candidates trailed far behind. As no candidate received a majority, a runoff election was held between Tadic and Nikolic on May 20. In a result that surprised almost all observers, Nikolic defeated Tadic, winning 49.55% to Tadic's 47.3%. Voter turnout was 46.37%. Analysts believe that Tadic's defeat may have been due to low turnout among his supporters, some of whom may have wished to punish him for the poor economic situation in the country and persistent government corruption. The powers of the Serbian presidency are modest, but the presence of the Progressives in the government will likely strengthen his hand greatly. Until a few years ago, Nikolic held extreme nationalist views, but he has moved closer to the center and now advocates stances close to those of the DS, including on European Union membership. Negotiations on forming a new government were difficult. At first, it appeared that former President Tadic would head the new government as Prime Minister, renewing the DS's alliance with the Socialists. However, these efforts failed, and the Socialists decided instead to form a government with the Progressives and the United Regions of Serbia. Unusually, despite having secured many more seats that the Socialists, the Progressives ceded the position of Prime Minister to Socialist leader Ivica Dacic. Indeed, some observers assert that this was a key reason, among others, for the Socialists' switch of alliances. Aleksandar Vucic, who became acting leader of the Progressives after Nikolic became President, is Defense Minister, and also oversees the intelligence services. The Foreign Minister is Ivan Mrkic, a career diplomat who served as ambassador to Cyprus during the regime of Serbian strongman Slobodan Milosevic. The speaker of the Serbian parliament is Nebojsa Stefanovic, from the Progressives. The Serbian parliament approved the new government on July 27, 2012. The continuing economic crisis in Serbia remains the key problem for the government, one lacking an easy solution. However, the government boosted its popularity (and especially that of Vucic) by launching an anti-corruption drive. The campaign has implicated former and current government ministers and Miroslav Miskovic, a prominent businessman with powerful political connections. Observers have lauded the government's first steps in fighting corruption, but caution that the rule of law must be preserved in all investigations and trials. Moreover, they note that it will be at least as important to institute lasting changes in the current political and legal systems to make corruption less likely to occur in the future. Another political controversy in Serbia has been the powers of the autonomous region of Vojvodina in northern Serbia, with some local authorities (often affiliated with the opposition in Belgrade) demanding more powers, and the central government wishing to keep a tight rein on the province. Serbia has faced some problems with the Presevo Valley region in southern Serbia. This ethnic Albanian majority region bordering Kosovo has been relatively quiet since a short-lived guerrilla conflict there in 2000-2001 between ethnic Albanian guerrillas and Serbian police, in the wake of the war in Kosovo. However, there have been sporadic incidents and problems since then, some resulting in injuries to Serbian police. Local Albanians claim discrimination and a lack of funding from Belgrade. Some local ethnic Albanian leaders have called for the region to be joined to Kosovo, perhaps in exchange for Serbian-dominated northern Kosovo. The United States and the international community have strongly opposed this idea. After the signature of an agreement between Serbia and Kosovo in April 2013, ethnic Albanian leaders in the Presevo valley have demanded the same rights for their area as Serbs in northern Kosovo would receive from the agreement. Until the global economic crisis hit in late 2008, Serbia experienced substantial economic growth. This growth was fueled by loose monetary and fiscal policies (in part keyed to election cycles), including increases in pensions and public sector salaries. The international economic crisis had a negative impact on Serbia's growth, and recovery has been slow due to continuing weakness in the EU, which is Serbia's main export market. After a decline of 1.7% in 2012, the International Monetary Fund expects Serbia's real Gross Domestic Product (GDP) to rise by 2% in 2013, and by the same percentage in 2014. Serbia's unemployment rate in 2012 was 23.1%, and will likely remain very high for the foreseeable future. Serbian net salaries are low, at roughly $488 a month in March 2013. Serbia's currency, the dinar, has depreciated sharply as a result of the economic crisis. This has aggravated inflation, leading the central bank to keep a tight rein on the money supply. Serbia is seeking a precautionary loan arrangement with the IMF. Serbia might not need to draw on the loan, as it has been successful in borrowing in the Eurobond market, but the loan agreement would signify IMF approval for Serbia's policies. This could keep the costs of borrowing in private markets relatively inexpensive and could encourage foreign investment. However, the IMF wants Serbia to make more credible efforts to cut its budget deficit and public debt before it commits itself to a new program. The economic crisis has caused a drop in foreign direct investment in Serbia. In early 2012, international investors sold their stakes in two key Serbian firms to the government. US Steel sold the Smederovo steel works, the country's largest exporter, to the Serbian government for the nominal price of $1. Declining steel prices and heavy competition made the plant unprofitable. The Serbian government bought the steel works to prevent large job losses, and hopes to resell it to another international investor. The Serbian government also bought the Greek telecom company OTE's 20% share in Telekom Srbija, with hopes of selling a stake in the company to a strategic investor. Serbia's budgetary problems have resulted in increased pressure from the IMF to privatize inefficient state-owned firms, whose losses amount to 2.5%-3.5% of GDP. However, the Serbian government has been reluctant to do so, fearing an increase in unemployment. One of Serbia's most difficult political and foreign policy challenges in recent years has been its relations with its former Kosovo province. Belgrade strongly opposed Kosovo's declaration of independence in February 2008. Serbia won an important diplomatic victory when the U.N. General Assembly voted in October 2008 to refer the question of the legality of Kosovo's declaration of independence to the International Court of Justice (ICJ). However, Serbia's diplomatic strategy suffered a setback when the ICJ ruled in July 2010 that Kosovo's declaration of independence did not contravene international law. After the ICJ ruling, under strong EU pressure, Serbia agreed to hold talks with Kosovo under EU mediation. The dialogue, which began in March 2011, at first focused on technical issues, although it has been difficult to separate technical issues from the main political one—Kosovo's status as an independent state. In an effort to make better progress in the talks, talks were moved to a higher political level in October 2012, when Prime Minister Dacic and Kosovo Prime Minister Hashim Thaci met. Such meetings became a regular feature of the negotiations in the following months. The technical agreements reached so far have included ones on free movement of persons, customs stamps, mutual recognition of university diplomas, cadastre (real estate) records, civil registries (which record births, deaths, marriages, etc. for legal purposes), integrated border/boundary management (IBM), and on regional cooperation. Implementation of most of these accords has lagged. A technical protocol on IBM went into effect at the end of 2012, with the opening of several joint Kosovo/Serbia border/boundary posts. The two sides also agreed to exchange liaison personnel (to be located in EU offices in Belgrade and Pristina) to monitor the implementation of agreements and address any problems that may arise. An issue that has proved particularly difficult to solve has been the status of the four Serbian-majority municipalities in northern Kosovo. The area, which borders directly on Serbia, is overwhelmingly ethnically Serbian. Prime Minister Dacic and other senior Serbian leaders have raised the possibility that Kosovo could be partitioned. Most observers have said that the line of partition would likely follow the current line of de facto control at the Ibar River, between the Serbian-dominated north and the Albanian-dominated south. In the past, some Serbian officials even suggested that they might discuss swapping the Albanian-dominated parts of the Presevo valley for northern Kosovo. However, the Kosovo government is strongly opposed to partition. The United States and the international community also oppose it, fearing that it could touch off the disintegration of Bosnia and Macedonia, which both have ethno-territorial tensions of their own. Serbian leaders have refrained from raising the idea of partition in recent months, due to strong pressure from the United States, Germany, and other EU countries that have recognized Kosovo. The key EU countries have made clear to Serbia that continuing to discuss partition as a viable option would jeopardize Belgrade's EU membership prospects. Belgrade currently exercises de facto control over northern Kosovo through what the Kosovo government, the United States, and many EU countries call ""parallel institutions."" These range from municipal governments to healthcare and educational facilities to representatives of Serbian military and intelligences agencies, although the last of these are not formally acknowledged to be deployed there. In the EU-mediated dialogue, the Kosovo government has demanded the dissolution of the parallel institutions and insists that the region come under its control. Kosovar leaders claimed that the area would enjoy the same level of decentralization enjoyed by Serb-majority municipalities in the rest of Kosovo under Kosovo's constitution. The United States, Germany, and other countries that have recognized Kosovo have demanded the dismantling of Serbian military and intelligence structures in Kosovo. They have called on Belgrade to make its funding of healthcare, education, and other institutions in northern Kosovo more transparent. In December 2012, EU member states agreed that any agreement should ensure that Kosovo has a ""single institutional and administration set-up."" For its part, Serbia pushed for the linking of Serb-dominated municipalities in northern Kosovo with Serbian enclaves in ethnic Albanian-dominated southern Kosovo in an association of Serb municipalities that would have executive powers. Kosovar leaders didn't dispute the right to form such an association but rejected giving it significant powers. Otherwise, Kosovar leaders feared, the association could result in the de facto partition of Kosovo, much as some observers see the existence of the Republika Srpska, the Serb-dominated largely autonomous ""entity"" within Bosnia and Herzegovina. On April 19, 2013, in the 10 th round in their EU-mediated dialogue, Serbian Prime Minister Ivica Dacic and Kosovo Prime Minister Hashim Thaci initialed a ""First Agreement of Principles Governing the Normalization of Relations"" between Kosovo and Serbia. The 15-point agreement calls for the creation of an ""Association/Community of Serbian-majority municipalities"" in Kosovo. This ""Association/Community"" will have ""full overview"" of the areas of economic development, education, health, urban and rural planning, and any others that Kosovo's central government in Pristina grants. The police in northern Kosovo will form part of Kosovo's unified police force, and will be paid only by Pristina. The police commander in the north will be a Kosovo Serb selected by Pristina from a list of nominees provided by the mayors of the four Serb municipalities in the north. The ethnic composition of the local police in the north will reflect the ethnic composition there. The situation in the judicial system is to be resolved in a similar manner. The judicial system in northern and southern Kosovo will operate under Kosovo's legal framework, but the Appellate Court in Pristina will have a panel composed of a majority of Kosovo Serb judges to deal with all Kosovo Serb-majority municipalities. A division of the Appellate Court will be based in northern Mitrovica, the largest town in northern Kosovo. The agreement also calls for new municipal elections in the north in 2013, under Kosovo law and with the assistance of the Organization for Security and Cooperation in Europe. The two sides agreed that ""neither side will block, or encourage others to block, the other side's progress in their respective EU path."" On April 21, Kosovo's parliament overwhelmingly approved the agreement. The Serbian government approved the agreement on April 22. Initial opposition in Serbia to the agreement was very sharp but limited in scope. The agreement was denounced by the Holy Synod of the Serbian Orthodox Church, and by many Kosovo Serb leaders. Several thousand people have held peaceful demonstrations against the accord in Belgrade and northern Kosovo. Nevertheless, the Serbian parliament approved the government's report on the negotiations with Kosovo on April 29 by an overwhelming vote of 173-24. In addition to support from the government parties, the report was also approved by most of the opposition parties as well. Opposing it was the nationalist Democratic Party of Serbia, and several other members of parliament, mainly those from Kosovo. Despite approving the agreement, Serbia still refuses to recognize Kosovo as an independent state, considering it to be an autonomous province of Serbia. Belgrade's position could be viewed perhaps as a convoluted effort to present the ""Association/Community"" of Serbian-majority municipalities in Kosovo (at least to itself) as an autonomous entity within another autonomous entity within Serbia. For their part, Pristina and the Serbian government's opponents have portrayed the agreement as Serbia's de facto recognition of Kosovo as an independent country. The agreement faces serious challenges to its implementation, including the strong opposition of most Serb leaders in northern Kosovo. Kosovo Serb leaders in northern Kosovo have rejected even a symbolic Kosovo government presence in the area. In February 2012, Kosovo Serb leaders in the north organized a local referendum (which was not monitored by international observers) that rejected Kosovo government institutions by an overwhelming margin. Prime Minister Dacic has said that, although he wants northern Kosovo leaders to voluntarily agree to implementation, the government also has the ability to bring pressure to bear, such as by cutting off salaries to those who refuse to cooperate. Dacic and other Belgrade leaders warn that the implementation process must be well underway before the end of June, when the EU Council will decide on whether to grant Serbia a date to begin membership negotiations. Key EU countries are particularly insistent that progress be made as soon as possible on dismantling Serbian security structures in Kosovo. Holding new local elections in northern Kosovo later this year under Kosovo laws also appears challenging. Turnout among Serbs may be very low, which could impair the perceived legitimacy of those institutions. KFOR, the NATO-led peacekeeping force in Kosovo, is expected to play an important role in the agreement's implementation. During the talks, Serbia demanded that Kosovo pledge not to deploy the Kosovo Security Force (a quasi-military force) or its special police units in northern Kosovo without the consent of local leaders. Pristina has not made such a formal pledge, but Prime Minister Dacic has said that during the talks he received a letter from NATO Secretary General Anders Fogh Rasmussen pledging that such deployments would not be made without KFOR's consent, and then only in cases of natural disaster and in consultation with local Serbian leaders. Since 2008, Serbia's foreign policy has focused on two main objectives—integration into the European Union and hindering international recognition of the independence of Serbia's former Kosovo province by legal and diplomatic means. To this end, Serbia has focused on seeking good relations with the EU, in order to achieve its long-term goal of EU membership. It has tried to avoid conflicts with the 22 EU countries that have recognized Kosovo's independence, while cultivating the five states whose non-recognition of Kosovo serves to block a closer formal relationship between the EU and Kosovo. Serbia has also bolstered ties with Russia and China, partly in an effort to secure loans, investment, and other economic advantages and partly to ensure they maintain their opposition to Kosovo's independence. U.S.-Serbian ties have improved since U.S. recognition of Kosovo's independence in February 2008, but appear not to play a central role in either country's foreign policy at present. Although the United States has offered to ""agree to disagree"" with Serbia over Kosovo, the issue may continue to affect relations, particularly as the United States remains Kosovo's most powerful international supporter. The European Union signed a Stabilization and Association Agreement (SAA) with Serbia in April 2008. The agreement grants trade concessions to Serbia. It provides a framework for enhanced cooperation between the EU and Serbia in a variety of fields, including help in harmonizing local laws with EU standards, with the perspective of EU membership. The Netherlands blocked implementation of provisions of the SAA until all EU countries agreed that Serbia is cooperating with the International Criminal Tribunal for the former Yugoslavia (ICTY). Serbia made substantial progress in this regard when it detained indicted war criminal Radovan Karadzic on July 21, 2008, and later transferred him to the ICTY. In an effort to show its strong support for EU integration, Serbia unilaterally began to implement trade provisions of the SAA in February 2009, lowering tariff barriers for EU goods to enter Serbia. After a largely favorable report on Serbia's cooperation with the ICTY from the Tribunal's chief prosecutor, the EU decided in December 2009 to allow the key trade provisions of the SAA to be implemented before ratification. In June 2010, after another favorable report on Serbia's ICTY cooperation, the Netherlands lifted its veto on submitting the SAA to ratification by EU member governments. As of April 2013, 26 of the 27 EU countries have ratified the accord, with only Lithuania remaining. Serbia submitted its application for EU membership in December 2009. However, it was not until November 2010 that the EU took the first step in the process, giving Serbia a detailed questionnaire on its qualifications as a membership candidate. Serbia's EU membership prospects are clouded by several factors. One concern is the difficulty of meeting the EU's stringent requirements and growing ""enlargement fatigue"" in many EU countries. Perhaps the most intractable problem is the issue of Kosovo. Twenty-two of the 27 EU countries have recognized Kosovo (including key countries such as Britain, France, Germany, and Italy). Five EU countries (Greece, Cyprus, Slovakia, Romania, and Spain) have declined to recognize Kosovo's independence. These countries are either traditional allies of Serbia, or have minority populations for whom they fear Kosovo independence could set an unfortunate precedent, or both. Serbian leaders have said that they will reject EU membership if it is conditioned on recognizing Kosovo's independence. Given the sensitivity of the issue for Serbian public opinion and the EU's own divisions, such an explicit condition is unlikely. However, since 2008 the EU has successfully pressed Serbia to cooperate with the EULEX law-and-order mission in Kosovo, to drop its efforts to have the U.N. General Assembly condemn Kosovo's independence as illegitimate, and to hold talks with the Kosovo government. Leaders of many EU member states are reluctant to ""import"" an unresolved territorial question such as Kosovo into the EU, as it did when it admitted Cyprus. Serbia may therefore gradually be pressed by the most influential EU states into de facto (if not de jure) recognition of Kosovo's independence or be forced to give up its membership hopes. In October 2011, the European Commission released a report on Serbia's qualifications to become a member of the EU. Noting the progress made in the EU-brokered talks with Kosovo, the Commission recommended that Serbia be given the status of a membership candidate if it re-engages in the dialogue with Kosovo and implements in good faith agreements already reached. The Commission recommended that Serbia be given a date to begin membership negotiations if it achieves further steps in normalizing its relations with Kosovo. These include ""fully respecting the principles of inclusive regional cooperation; fully respecting the provisions of the Energy Community Treaty; finding solutions for telecommunications and mutual acceptance of diplomas; by continuing to implement in good faith all agreements reached; and by cooperating actively with EULEX in order for it to exercise its functions in all parts of Kosovo."" In February 2012, Serbia and Kosovo reached agreement on Kosovo's participation in regional institutions. The deal will permit Kosovo to participate in the institutions under the name ""Kosovo*,"" with the asterisk referring to both U.N. Security Council Resolution 1244 (which Serbia says recognizes Kosovo as part of its territory) and a 2010 International Court of Justice ruling that Kosovo's declaration of independence did not contravene international law. The two sides also reached a technical protocol on Integrated Border Management. In response to the conclusion of these agreements, in March 2012 the EU accepted Serbia as a membership candidate. However, the EU made clear that the granting of a date for the EU to begin negotiations with Serbia will depend upon reaching agreements on energy and telecommunications and implementation of the accords already agreed to. On April 22, 2013, in part as a result of the signing of the April 19 normalization agreement with Kosovo, the European Commission recommended that the EU grant Serbia a starting date for its EU membership talks. EU member states will make a decision based on this recommendation at their next EU Council summit in late June 2013. The Council's decision will likely be based in part on the implementation of Kosovo-Serbia agreements. Since December 2009, the EU has permitted Serbian citizens to travel visa-free to the EU. Many Serbs may see the decision as the most tangible (and most prized) benefit they have received so far from the Serbian government's pro-EU policy. A surge of asylum-seekers from Serbia and elsewhere led the EU in May 2011 to adopt a policy allowing visa-free travel to be temporarily suspended if there is a surge in illegal immigration from a given country. This policy has not been applied to Serbia as yet, in part due to measures by Serbia to clamp down on illegal migrants. The government has reportedly focused on areas of the country inhabited by ethnic Albanians and Roma, considered by Serbia to be major sources of such illegal migrants. In December 2006, Serbia joined NATO's Partnership for Peace (PFP) program. PFP is aimed at helping countries come closer to NATO standards and at promoting their cooperation with NATO. Serbia's government has pledged to enhance cooperation with NATO through the PFP program, including through joint exercises and training opportunities. Serbia has generally supported KFOR, the NATO-led peacekeeping force in neighboring Kosovo, while sometimes criticizing it for allegedly not doing enough to protect Serbs there. Serbia is also unhappy with NATO's role in overseeing the Kosovo Security Force (seen by both Serbia and ethnic Albanians in Kosovo as a de facto Kosovo army in the making). Serbian leaders have expressed support for the NATO membership aspirations of all of the other countries in the region, but are not seeking NATO membership for Serbia. Due in part to memories of NATO's 1999 bombing of Serbia and anger at the U.S. role in Kosovo's independence, public support for NATO membership is low. Public opinion polls have repeatedly shown that less than 20% of the Serbian public favor NATO membership. Serbia's relations with the other countries in its region have improved markedly in recent years, but tensions remain over some issues; Croatia and Bosnia filed cases with the International Court of Justice (ICJ) charging Serbia with genocide during the wars of the 1990s. (Ruling in the Bosnia case in 2007, the ICJ cleared Serbia of genocide, but found Serbia in violation of international law for not preventing the Srebrenica massacre, and other failings.) In 2009, Serbia countered with an ICJ suit of its own against Croatia. Serbian and Croatian leaders have discussed the possibility of both sides dropping their suits. Some Bosnian leaders, mainly from the Bosniak (Muslim) ethnic group, have complained that Serbian leaders have done little to rein in Bosnian Serb leader Milorad Dodik's perceived efforts to undermine the effectiveness of Bosnia's central government institutions. Serbia asserts that it respects Bosnia's sovereignty and territorial integrity and abides fully by the terms of the Dayton Peace Agreement that established Bosnia's current governmental system. In March 2010, at the urging of President Tadic, the Serbian parliament passed a resolution condemning the crimes committed by Serbian forces in Srebrenica in Bosnia in 1995. President Nikolic has also made a statement expressing strong regret for the crimes committed in Srebrenica. On the other hand, Nikolic has made other statements that have unsettled relations with Bosnia. Serbia has played a key role in U.S. policy toward the Balkans since the collapse of the former Yugoslavia in 1991. U.S. officials came to see the Milosevic regime as a key factor behind the wars in the region in the 1990s, and pushed successfully for U.N. economic sanctions against Serbia. On the other hand, the United States drew Milosevic into the negotiations that ended the war in Bosnia in 1995. The United States bombed Serbia in 1999 to force Belgrade to relinquish control of Kosovo, where Serbian forces had committed atrocities while attempting to suppress a revolt by ethnic Albanian guerrillas. U.S. officials hailed the success of Serbian democrats in defeating the Milosevic regime in elections in 2000 and 2001. The United States has seen a democratic and prosperous Serbia, at peace with its neighbors and integrated into Euro-Atlantic institutions, as an important part of its key policy goal of a Europe ""whole, free, and at peace."" U.S. aid to Serbia has declined sharply in recent years, perhaps reflecting overall U.S. budgetary stringency, changing U.S. global priorities, and Serbia's EU membership candidacy, which is expected to result in greater EU aid to the country. In FY2011, Serbia received $45 million in U.S. aid for political and economic reforms, $1.896 million in Foreign Military Financing (FMF), $0.9 million in IMET military training funds, and $1.15 million in Nonproliferation, Antiterrorism, Demining and Related (NADR) aid. In FY2012, Serbia was expected to receive $33.5 million in aid for political and economic reform for Serbia, $2 million in FMF, $0.9 million in IMET, and $2.65 million in NADR funding. For FY2013, the Administration requested $19.913 million to aid Serbia's political and economic reforms in the Economic Support Fund (ESF) account, $3 million in International Narcotics Control and Law Enforcement funding (INCLE), $0.9 million in IMET, and $1.8 million in FMF. For FY2014, the Administration aid request for Serbia includes $16.103 million in ESF assistance, $3 million in the INCLE account, $1.05 million in IMET aid, and $1.8 million in FMF. The goal of U.S. aid for political reform is to strengthen democratic institutions, the rule of law, and civil society. It includes programs to strengthen the justice system, support local governments, help fight corruption, foster independent media, and increase citizen involvement in government. Aid is being used to help Serbia strengthen its free market economy by reforming the financial sector and promote a better investment climate. Other U.S. aid is targeted at strengthening Serbia's export and border controls, including against the spread of weapons of mass destruction. U.S. military aid helps Serbia participate in NATO's Partnership for Peace program and prepare for international peacekeeping missions. The signing of a Status of Forces Agreement with Serbia in September 2006 has permitted greater bilateral military cooperation between the two countries, including increased U.S. security assistance for Serbia as well as joint military exercises and other military-to-military contacts. The Ohio National Guard participates in a partnership program with Serbia's military. However, despite U.S. urging, Serbia declined to contribute troops to the NATO-led ISAF peacekeeping force in Afghanistan. In 2005, the Administration granted duty-free treatment to some products from Serbia under the Generalized System of Preferences (GSP). The most serious cloud over U.S.-Serbian relations is the problem of Kosovo. The United States recognized Kosovo's independence on February 18, 2008. On the evening of February 21, 2008, Serbian rioters broke into the U.S. Embassy in Belgrade and set part of it on fire. The riot, in which other Western embassies were targeted and shops were looted, took place after a government-sponsored rally against Kosovo's independence. The embassy was empty at the time. Observers at the scene noted that Serbian police were nowhere to be found when the incident began, leading to speculation that they had been deliberately withdrawn by Serbian authorities. Police arrived later and dispersed the rioters at the cost of injuries on both sides. One suspected rioter was later found dead in the embassy. U.S. officials expressed outrage at the attack and warned Serbian leaders that the United States would hold them personally responsible for any further violence against U.S. facilities. President Tadic condemned the attack and vowed to investigate why the police had allowed the incident to occur. In April 2013, 12 persons went on trial in Belgrade for the attack. The United States also continues to raise with Serbian authorities the case of the Bytyqi brothers. During the 1999 war in Kosovo, the three U.S. citizens were murdered by Serbian Interior Ministry troops, who were never brought to justice. In May 2009, Vice President Joseph Biden set the tone for the Obama Administration's policy toward Serbia, in a trip to the region that also included Kosovo and Bosnia, in addition to Serbia. Biden said the United States wanted to improve ties with Serbia. He acknowledged that Serbia must play ""the constructive and leading role"" in the region for the region to be successful. He expressed the belief that the United States and Serbia could ""agree to disagree"" on Kosovo. Biden stressed that the United States did not expect Serbia to recognize Kosovo's independence, and would not condition U.S.-Serbian ties on the issue. However, he added that the United States expects Serbia to cooperate with the United States, the European Union, and other key international actors ""to look for pragmatic solutions that will improve the lives of all the people of Kosovo,"" including the Serbian minority. Biden said the United States also looks to Serbia to help Bosnia and Herzegovina become ""a sovereign, democratic, multi-ethnic state with vibrant entities."" U.S. officials have often asked Serbia to use its influence with Bosnian Serb leaders to persuade them to cooperate with international officials there. Finally, Biden called on Belgrade to cooperate fully with the International Criminal Tribunal for the Former Yugoslavia. Biden said that the United States ""strongly supports Serbian membership in the European Union and expanding security cooperation between Serbia, the United States, and our allies."" He called for strengthening bilateral ties, including military-to-military relations, economic ties, and educational and cultural exchanges. More recently, in February and March 2012, Secretary of State Clinton praised progress in the Serbia-Kosovo negotiations and hailed the EU's subsequent granting of EU membership candidate status to Serbia. In June, she congratulated Nikolic on his victory in the presidential election and said that the United States wanted to cooperate with Serbia. She said Serbia should continue its path toward EU integration and establish open and transparent relations with Kosovo. In the wake of the surprising decision of the Progressives and Socialists to form a new government, Deputy Assistant Secretary of State Philip Reeker visited Belgrade in early July 2012, followed by Assistant Secretary Gordon a few days later. Serbian press sources claimed that the U.S. diplomats were trying to break up the coalition, or at least to secure the participation in it of the Democrats. Gordon denied these claims, saying the visit was intended to reinforce the message that the new government should continue on the path of EU integration and normalizing relations with Kosovo, including the implementation of existing agreements. He said Serbia must dismantle the Serbian security presence in northern Kosovo, although some Serbian government civilian infrastructure such as healthcare facilities could remain. Secretary of State Hillary Clinton visited the region again in late October and early November 2012, stopping in Bosnia, Serbia, Kosovo, Croatia, and Albania. In a move that underlined the U.S. focus on coordination with the EU, she visited Bosnia, Serbia, and Kosovo jointly with EU foreign policy chief Baroness Catherine Ashton. At every stop, Clinton emphasized the solidarity between Brussels and Washington on Balkan policy. During visits to Serbia and Kosovo, Clinton stressed the importance for both sides to negotiate in good faith in the EU-brokered talks aimed at normalizing their relationship so that they can integrate with the European Union. Clinton stressed that the United States regards Kosovo's sovereignty and territorial integrity as completely non-negotiable. Although most EU countries would agree with the statement, Ashton could not make such a comment, as the EU is divided on the issue of Kosovo's independence. On April 19, 2013, Secretary of State John Kerry issued a statement hailing the agreement on northern Kosovo, and calling on both sides to speedily implement it and the other agreements they have reached. Kerry also commended Baroness Ashton for her role in facilitating the talks. He said the United States remained deeply committed to seeing Serbia and Kosovo and the region achieve their goals of integrating into a Europe whole, free, and at peace. On April 24, the Subcommittee on Europe, Eurasia, and Emerging Threats of the House Foreign Affairs Committee held a hearing on Kosovo-Serbia relations. Acting Deputy Assistant Secretary of State Jonathan Moore expressed strong Administration support for the April 19 agreement and underlined that close U.S.-EU policy coordination helped bring it about. Subcommittee Chairman Representative Dana Rohrabacher expressed strong skepticism about the viability of the agreement. He reiterated his long-standing support for referendums to be held in Serb-majority areas of northern Kosovo and ethnic Albanian-majority areas of southern Serbia on which country the populations there want to belong to. Such referendums would likely result in a swap of territories between the two countries. Moore repeated the Administration's opposition to this approach, claiming it could lead to further conflict in the region.","Serbia faces an important crossroads in its development. It is seeking to integrate into the European Union (EU), but its progress has been hindered by tensions with the United States and many EU countries over the independence of Serbia's former Kosovo province. The global economic crisis poses serious challenges for Serbia. Painful austerity measures have been required for Serbia by the International Monetary Fund and other international financial institutions. Serbia held parliamentary and presidential elections in May 2012. One party in the former government, the Socialist Party, did much better than anticipated in the parliamentary vote. In another surprise, in the presidential vote the incumbent president Boris Tadic was defeated by Tomislav Nikolic of the nationalist Progressive Party. After protracted negotiations, in July 2012 the Progressives formed a new government with the Socialists and another group, the United Regions of Serbia. Socialist leader Ivica Dacic was elected as Prime Minister. Serbia has vowed to take all legal and diplomatic measures to preserve its former province of Kosovo as legally part of Serbia. Nevertheless, nearly 100 countries, including the United States and 22 of 27 EU countries, have recognized Kosovo's independence. Russia, Serbia's ally on the issue, has used the threat of its Security Council veto to block U.N. membership for Kosovo. After the International Court of Justice ruled in July 2010 that Kosovo's declaration of independence did not contravene international law, the EU pressured Serbia to hold talks with Kosovo starting in March 2011. Serbia's other key foreign policy objective is to secure membership in the European Union. In March 2012, the EU accepted Serbia as a candidate for membership after having judged that Belgrade has made sufficient progress in reaching and implementing agreements with Kosovo on a series of practical issues. In April 2013, the EU Commission recommended that the EU give Serbia a date for the start of the talks. Even if talks formally begin late this year, many years of negotiations will be required before Serbia can join the EU. In December 2006, Serbia joined NATO's Partnership for Peace (PFP) program. PFP is aimed at helping countries come closer to NATO standards and at promoting their cooperation with NATO. Although it supports NATO membership for its neighbors, Serbia is not itself seeking NATO membership. This may be due to such factors as memories of NATO's bombing of Serbia in 1999, U.S. support for Kosovo's independence, and a desire to maintain close ties with Russia. U.S.-Serbian relations have improved since the United States recognized Kosovo's independence in February 2008, when Serbia sharply condemned the U.S. move and demonstrators sacked a portion of the U.S. Embassy in Belgrade. During a 2009 visit to Belgrade, Vice President Joseph Biden stressed strong U.S. support for close ties with Serbia. He said the countries could ""agree to disagree"" on Kosovo's independence. He called on Serbia to transfer the remaining war criminals to the former Yugoslavia war crimes tribunal (since accomplished), promote reform in neighboring Bosnia, and cooperate with international bodies in Kosovo. The United States has strongly supported the EU-led talks between Kosovo and Serbia, while making clear that it plays no direct role in them. The United States has applauded the agreements reached by the two sides, including a key one on normalizing relations in April 2013.",govreport
"The Supreme Court decided four search and seizure cases during its October 2012 term. Florida v. Jardines involved the question of ""[w]hether a trained narcotics-detection dog's sniff at the front door of a suspected [marijuana] grow house is a Fourth Amendment search."" Florida v. Harris related to whether an alert by a trained drug-detection dog is sufficient to establish probable cause for a search of a vehicle. Bailey v. United States concerned the question of whether ""the detention of an individual who has just left premises to be searched under warrant is permissible when the individual is detained out of view of the house as soon as possible."" Missouri v. McNeely addressed whether ""the natural metabolization of alcohol in the bloodstream presents a per se exigency that justifies an exception to the Fourth Amendment's warrant requirement for nonconsensual blood testing in all drunk-driving cases."" Is a dog sniff at the front door of a suspected grow house by a trained narcotics-detection dog a Fourth Amendment search requiring probable cause? Last term in Jones , five Justices declared that a Fourth Amendment ""search"" occurs when ""the Government obtains information by physically intruding on a constitutionally protected area."" This term, the Court declared that a search occurs when the police obtain information on the basis of the performance of a drug-sniffing dog on the front porch of a private house. Although the answer might seem something of a departure from the Court's past treatment of dog sniffing cases, those cases relied upon the ""expectation of privacy rationale"" rather than the alternative Jones ""property intrusion"" rationale. On November 3, 2006, Miami-Dade Police received an unverified ""crime stoppers"" tip that Jardines was growing marijuana in his house. A month later, as part of an elaborate multi-agency enterprise, authorities descended on Jardines's house at dawn. They saw no activity in the house. The blinds were drawn. The driveway was empty. The air conditioning was running. An officer and a trained drug-sniffing dog entered the front porch, where the dog ""alerted"" for the presence of drugs, most emphatically at the front door. A second officer then stepped to the front door to conduct a ""knock and talk."" He received no response. He used the dog's reaction to obtain a search warrant. A subsequent search turned up marijuana growing in the house. On appeal, the Florida district court overturned the trial court's suppression of the evidence seized at Jardines's house. The Florida Supreme Court in turn reversed the district court's decision, concluding that the dog's use under the circumstances constituted a warrantless search. It also endorsed the trial court's determination that without the dog-sniffing evidence, authorities had presented insufficient evidence to establish the probable cause necessary for issuance of the search warrant. Drug-sniffing dogs first appear in the Court's jurisprudence in Place . There, federal agents, suspicious of Place's conduct when he arrived in New York on a flight from Miami, stopped him, questioned him, and seized his luggage. A trained dog eventually alerted to the presence of drugs in one of the bags. Place sought to suppress evidence found in the bag. The Court concluded that the 90-minute delay between when the luggage was seized and when it was sniffed by the dog exceeded the delay permissible under Terry for detention of the luggage detained solely on reasonable suspicion. In doing so, however, the Court observed that ""the particular course of investigation that the agents intended to pursue here—exposure of respondent's luggage, which was located in a public place, to a trained canine—did not constitute a 'search' within the meaning of the Fourth Amendment."" Again in Edmond , the use of dogs was not an issue. But again, the Court noted in passing that use of drug-sniffing dogs in a public area was something less than a typical Fourth Amendment search. Edmond objected to the City's suspicionless drug checkpoint program that had ensnarled him. The program featured a drug-sniffing dog walking around each of the cars stopped at the checkpoint. The Court held the drug-interdiction, law enforcement purpose precluded the program's claim to the ""special needs"" exception necessary to excuse the checkpoint seizures without either probable cause or a warrant. In the course of its opinion, the Court pointed out that ""[i]t is well established that a vehicle stop at a highway checkpoint effectuates a seizure within the meaning of the Fourth Amendment. The fact that officers walk a narcotics-detection dog around the exterior of each car ... does not transform the seizure into a search, see United States v. Place ."" Nevertheless, the Court went out of its way to emphasize that the case was not about the use of dogs: ""The Chief Justice's dissent also erroneously characterizes our opinion as holding that the 'use of a drug-sniffing dog ... annuls what is otherwise plainly constitutional under our Fourth Amendment jurisprudence.' Again, the constitutional defect of the program is that its primary purpose is to advance the general interest in crime control."" In Caballes , the dog sniff was the issue, that is, ""[w]hether the Fourth Amendment requires reasonable, articulable suspicion to justify using a drug-detecting dog to sniff a vehicle during a legitimate traffic stop."" The Court said no: ""A dog sniff conducted during a concededly lawful traffic stop that reveals no information other than the location of a substance that no individual has any right to possess does not violate the Fourth Amendment."" The proposition that the use of a dog, trained to detect drugs, carries no Fourth Amendment implications seemed to bode ill for Jardines's claim. The Florida Supreme Court held that the use of a drug-sniffing dog on Jardines's front porch constituted a search and that such a search required probable cause before it could be conducted. The court distinguished the case at hand from the United States Supreme Court precedents on several grounds. It noted that the sniff tests conducted in Place , Edmond , and Caballes were all conducted in a ""minimally intrusive manner upon objects ... that warrant no special protection."" The Jardines sniff test was a ""public spectacle"" conducted at a private home, an area entitled to the highest level of Fourth Amendment protection. Then, the court pointed out that ""[a]ll the tests were conducted in an impersonal manner that subjected the defendants to no untoward level of public opprobrium, humiliation or embarrassment."" The Jardines sniff test involved the presence of multiple police vehicles and many officers that produced a spectacle ""in a residential neighborhood [that would] invariably entail a degree of public opprobrium, humiliation and embarrassment for the resident ... for such dramatic government activity in the eyes of many—neighbors, passers-by, and the public at large—[would] be viewed as an official accusation of crime."" Finally, the court emphasized that the Place , Edmond , and Caballes tests were conducted under circumstances in which they ""were not susceptible to being employed in a discriminatory or arbitrary manner."" In contrast, ""if government agents can conduct a dog 'sniff test' at a private residence without any prior evidentiary showing of wrongdoing, there is simply nothing to prevent the agents from applying the procedure in an arbitrary or discriminatory manner, or based on whim and fancy, at the home of any citizen."" The concurring justices offered another factor: ""the lack of a uniform system of training and certification for drug-detection canines ... [:] conditioning and certification programs vary widely in their methods, elements, and tolerances of failure ... [; and] dogs themselves vary in their abilities to accept, retain, or abide by their conditioning in widely varying environments and circumstances."" In the absence of exigent circumstances or non-law enforcement special needs, the court concluded that the dog sniff searches such as the one that occurred in Jardines may only be conducted on the basis of probable cause. The dissenters contended that the majority opinion flew in the face of binding United States Supreme Court precedent. Beyond Place , Edmond , and Caballes , they mention the Court's observation in Kyllo to the effect that ""'a Fourth Amendment search does not occur—even when the explicitly protected location of a house is concerned—unless the individual manifested a subjective expectation of privacy in the object of the challenged search and society is willing to recognize that expectation as reasonable.'"" Couple this with the Court's statement ""that government conduct that only reveals the possession of contraband compromises no legitimate privacy interest,"" and the position of the majority opinion becomes untenable, the dissenters suggested. The justices of the Florida Supreme Court, however, did not have the advantage of the United States Supreme Court's Jones decision. There, a majority of the Court made clear that a Fourth Amendment search occurs whenever the government physically intrudes upon constitutionally protected property. The ""expectation of privacy"" concept, born of Katz , supplements, it does not condition, the traditional protection of the Amendment. The United States Supreme Court may have had Jones in mind when it agreed to hear Jardines . In any event, for five Justices, the principle announced in Jones dictated the result in Jardines . If anything, Jardines seems to present a clearer example of the Jones principle than does Jones . Jones , after all, involved placing a tracking device on a car parked in a public parking lot, while Jardines involved a home. On the other hand, Jardines did not involve an intrusion into the home itself, but rather the use of a drug-detecting dog at the front door and on the porch of the home. Justice Scalia began the opinion for the Court with the observation that a Fourth Amendment search occurs when the government ""obtains information by physically intruding"" upon constitutionally protected areas of person, houses, papers, or effects. He pointed out that the curtilage—the area immediately surrounding the house, including any porch—is afforded the same protection as a house. In the case of the front door, however, the Court stated that the householder is thought to have granted an implicit license for some level of intrusion by the public and government alike. Yet the license is limited as to place and purpose. A license to knock and talk is not a license to conduct a search at the front door and certainly not on the porch. The suggestion that the Court's earlier dog sniff cases demanded a different result were unavailing. Justice Scalia explained that ""The Katz reasonable-expectations test has been added to, not substituted for, the traditional property-based understanding of the Fourth Amendment, and so is unnecessary to consider when the government gains evidence by physically intruding on constitutionally protected areas."" Consequently, ""[t]he government's use of trained police dogs to investigate the home and its immediate surrounding [was] a search within the meaning of the Fourth Amendment, [and] [t]he judgment of the Supreme Court of Florida [was] therefore affirmed."" Although they joined the opinion for the Court in full, Justice Kagan with Justices Ginsburg and Sotomayor would also have affirmed the judgment of the Florida Supreme Court on ""expectation of privacy grounds."" From their perspective, the Court's thermal imaging Kyllo case controlled the expectation of privacy analysis. Applying the Kyllo rule, ""[t]he police officers [in Jardines] conducted a search because they used a 'device ... not in general public' (a trained drug-detection dog) to 'explore details of the home' (the presence of certain substances) that they would not otherwise have discovered without entering the premises."" The dissenters, Justice Alito with Chief Justice Roberts as well as Justices Kennedy and Breyer, could not accept the notion that the officer's presence at Jardines's front door became a Fourth Amendment search simply because he was accompanied by his dog. Nor did they believe that Jardines had a reasonable expectation of privacy with respect to the smell of marijuana escaping from the house and detectable at the front door, a place open to the public. Has the Florida Supreme Court decided an important question in a way that conflicts with established Fourth Amendment precedent of the U.S. Supreme Court by holding that an alert by a well-trained narcotics-detection dog certified to detect illegal contraband is insufficient to establish probable cause to search a vehicle? The Florida Supreme Court's Jardines decision was perhaps not surprising in light of its earlier decision in Harris . It refused to accept a trained drug-detection dog's positive reaction as per se probable cause in Harris . Instead, it listed a host of criteria under which a trained dog's alert might be considered probable cause. Neither the per se standard nor the Florida court's list seemed consistent with the ""totality of the circumstances"" standard that the United States Supreme Court had favored. A canine officer pulled Harris's truck over for a traffic violation. His trained dog alerted to the presence of narcotics. A search of the truck, however, did not yield the drugs the dog had been trained to detect. Nevertheless, it did lead to the discovery of precursor chemicals. Two months later, the same canine team again pulled Harris over for a traffic violation with the same result. The dog reacted positively to the presence of drugs, but none were found. The trial court denied Harris's motion to suppress the evidence seized following the first search. The district court affirmed. The Florida Supreme Court reversed, holding that ""the fact that a drug-detection dog has been trained and certified to detect narcotics, standing alone, is not sufficient to demonstrate the reliability of the dog"" and thereby establish probable cause to conduct a search. Probable cause to believe that the search will reveal contraband or evidence of a crime is a prerequisite for the issuance of a search warrant. And probable cause permits police to search a car or truck without a warrant. Probable cause exists when ""there is a fair probability that contraband or evidence of a crime will be found in a particular place."" Whether that standard has been met is a common sense assessment of all of the circumstances in a particular case. At one point, the Court held that bare, conclusionary statements to a magistrate that officers had reliable information from a credible source, without indicating why the tip was reliable or the source credible, did not constitute probable cause. Shortly thereafter, the Court refused to find probable cause to secure a warrant in a case in which the informant's tip was offered without evidence of the information's reliability or of the tipster's credibility, even in the presence of some corroboration of the tip's accuracy. The two cases, Aguilar and Spinelli , led some to believe that an informant's tip might serve as the basis for probable cause only with evidence of the information's reliability and tipster's credibility. The Court found this too restrictive a test in Illinois v. Gates . Better instead, it held, to rely upon a ""totality of the circumstances"" standard that permits a common sense assessment of the individual facts presented in a particular case. Since Gates , the federal courts of appeals have usually held that the positive reaction of a reliable dog trained to detect the presence of narcotics is sufficient to establish probable cause. The Florida Supreme Court concluded that in Harris the state had failed to show that, taking all the circumstances into account, the alert of a trained dog to the door of a truck entitled an officer to believe that there was a fair probability that the truck contained illicit drugs. The suppression hearing featured apparently uncontradicted evidence that the dog had twice reacted positively to the door of the truck when in fact the truck had none of the drugs the dog was trained to detect. The court did not feel that the state had offered sufficient evidence to explain away the factors that might have contributed to such a result: false alerts attributable to environmental factors, handler cuing or error, or the dog's inability to distinguish between odors attributable to the current presence of narcotics on the one hand, and residual odors attributable to the presence of narcotics minutes, hours, days, or weeks earlier, on the other. It held that [T]o meet its burden of establishing that the officer had a reasonable basis for believing the dog to be reliable in order to establish probable cause, the State must present the training and certification records, an explanation of the meaning of the particular training and certification of that dog, field performance records, and evidence concerning the experience and training of the officer handling the dog, as well as any other objective evidence known to the officer about the dog's reliability in being able to detect the presence of illegal substances within the vehicle. To adopt the contrary view that the burden is on the defendant to present evidence of the factors other than certification and training in order to demonstrate that the dog is unreliable would be contrary to the well-established proposition that the burden is on the State to establish probable cause for a warrantless search. In addition, since all of the records and evidence are in the possession of the State, to shift the burden to the defendant to produce evidence of the dog's unreliability is unwarranted and unduly burdensome. The dissent objected that the court demanded certainty where the Fourth Amendment required only probability: ""[T]he majority demands a level of certainty that goes beyond what is required by the governing probable cause standard.... The majority here ... imposes evidentiary requirements which can readily be employed to ensure that the police rely on drug-detection dogs only when the dogs are shown to be virtually infallible."" The United States Supreme Court unanimously reversed the judgment in the Florida Supreme Court's decision. The Florida court had simply disregarded the common sense, ad hoc, totality-of-the-circumstances standard that the Supreme Court's Fourth Amendment precedents demanded. The test ""is whether all the facts surrounding a dog's alert, viewed through the lens of common sense, would make a reasonably prudent person think that a search would reveal contraband or evidence of a crime. A sniff is up to snuff when it meets that test."" Justice Kagan, speaking for the Court, noted that a defendant must be afforded the opportunity to challenge a dog's reliability, but that the prosecution had presented substantial evidence of the dog's proficiency at detecting drugs, which Harris had chosen not to contest in the lower court. Harris instead concentrated on the fact that the dog signaled the presence of drugs where they were not to be found. Yet in the eyes of the Court, this confirmed rather than undermined the dog's reliability, since Harris regularly touched the truck's door handle and readily admitted that he regularly handled methamphetamine. The smell of drugs was there. The dog signaled that the smell of drugs was there. Consequently, the officer had probable cause to believe that a search would find drugs there. Whether, under Michigan v. Summers , 452 U.S. 692, 705 (1981), the detention of an individual who has just left the premises to be searched under warrant is permissible when the individual is detained out of view of the house as soon as practicable. The Fourth Amendment prohibits unreasonable searches and seizures. Searches and seizures are presumptively unreasonable, unless they are conducted pursuant to a warrant issued by a neutral magistrate upon a sworn showing of probable cause. Nevertheless, there are circumstances under which authorities enjoy limited authority to detain an individual without a warrant and with less than probable cause to believe the individual has committed a crime. One such instance occurs when officers seek to execute a search warrant. Then, said the Supreme Court in Michigan v. Summer , ""a warrant to search for contraband founded on probable cause implicitly carries with it the limited authority to detain the occupants of the premises while a proper search is conducted."" Some of the lower federal courts had permitted detention only within the letter of the Summers rule; others had permitted detention consistent with what they considered its spirit. The Supreme Court granted certiorari in Bailey to consider the question, and held that under the Summers rule the occupants must be taken into custody in the immediate vicinity of the premises to be searched. The First District Court of New York issued a warrant for the search of the basement apartment at 103 Lake Drive and for a ""chrome .380 handgun"" believed to be found there. Shortly before execution of the warrant, narcotics detectives saw two men come up the stairs from the basement of the building and drive away. Both men, later identified as Bailey and a companion, matched the informant's general description of the resident of the apartment. The officers followed them, and pulled them over after they had travelled about a mile. They patted down the two men, handcuffed them, and seized Bailey's wallet and keys. The detectives called for a patrol car that carried Bailey and his companion back to the apartment. They returned Bailey's wallet, but used his keys to drive his car back to the apartment. Once there, officers, who had executed the warrant in the meantime, disclosed that they had discovered a handgun and drugs in plain view. Then, they arrested Bailey. At some point, Bailey was turned over to federal authorities. He was charged with possession of cocaine, possession of a firearm by a felon, and possession of a firearm during and in furtherance of drug trafficking. His pre-trial motion to suppress the evidence he claimed was seized in violation of the Fourth Amendment was denied. He was convicted and sentenced to prison for 30 years and to five years of supervised release. He unsuccessfully petitioned for relief in the nature of habeas corpus based on a claim of ineffective assistance of counsel. The Second Circuit Court of Appeals considered the appeal of the denial of petition together with the appeal of his conviction. It affirmed both his conviction and the denial of relief under Section 2255. Speaking with regard to the Fourth Amendment issue, the Second Circuit declared that "" Summers applies with equal force when, for officer safety reasons, police do not detain the occupant on the curbside, but rather wait for him to leave the immediate area and detain him as soon as practicable."" That is, Summers imposes upon police a duty based on both geographic and temporal proximity; police must identify an individual in the process of leaving the premises subject to search and detain him as soon as practicable during the execution of the search. The Supreme Court disagreed. In Summers , the police arrived to execute a search warrant for narcotics as Summers was leaving the house to be searched and coming down the steps. They detained him until after they had entered the house and then brought him inside. When the search uncovered suspected narcotics in the cellar, they arrested him. They discovered a packet of heroin in his pocket in a search incident to his arrest. The Supreme Court held that ""a warrant to search for contraband founded on probable cause carries with it the limited authority to detain the occupants of the premises while a proper search is conducted."" Several considerations influenced the Court's decision. First, detaining Summers would reduce the risk of flight should the search reveal incriminating evidence. Second, detaining Summers would reduce the risk that he or someone in the premises whom he might warn would destroy evidence. Third, detaining Summers would reduce the risk of harm to the officers, particularly if incriminating evidence were discovered. Last, Summers's presence during the execution of a search warrant might assist in the orderly completion of the search. Two decades later, the Court pointed out in Muehler v. Mena that the Summers rule implies the authority to use reasonable force to detain occupants, including handcuffing them in some instances. The use of handcuffs may be particularly appropriate when firearms are the object of the search and risk of violence is real. The Court mentioned but placed no significance on the fact that, unlike Summers , Muehler involved a search warrant for evidence rather than for contraband. The Second Circuit acknowledged that the federal courts of appeals are divided over the question of whether the Summers rule may be extended. Like the Second Circuit, the Fourth, Sixth, Seventh, and Eighth Circuits admit the possibility of some extension of the rule. The Fifth and Tenth Circuits have declined to expand it. The Second Circuit's Bailey decision would have permitted off-site detention incident to the execution of a search warrant under some conditions. The Second Circuit understood that a decision must be supported by the Summers rule factors: officer safety, preservation of evidence, and prevention of flight. It misunderstood how and when the factors should be weighed. Justice Kennedy, writing for six Justices, made three points: the Second Circuit misunderstood the Summers rule factors; it failed to recognize the limits the Fourth Amendment places on intrusions upon individual liberty; and the facts of the cases suggested that Bailey's detention or arrest may have been justified under rules other than the Summers rule. Summers rested in part on the risk of harm to officers posed by those present during the execution of the search warrant. The breadth of the authority that the Court confirmed in Muehler (handcuffing occupants for several hours) ""counsel[ed] caution before extending the power to detain persons stopped or apprehended away from the premises where the search is being conducted."" The Summers observation that occupants might assist officers in the search hardly applied in the case of remote detention. The Summers flight risk concern arose ""not because of the danger of flight itself but because of the danger that potential flight can cause to the integrity of the search."" Moreover, the Summers rule stands as a narrow exception to the Fourth Amendment's limit on intrusions on personal liberty. Detention within one's residence involves a minimum of public stigma and inconvenience; not so with off-site apprehension and transportation in public view. Finally, Justice Kennedy noted that after Bailey left his apartment he might have been followed, stopped, and questioned under the authority of Terry . He might also have been arrested on probable cause based on the discovery of the gun and drugs in his apartment. Justice Kennedy left for another day the determination of what constitutes the ""immediate vicinity"" for purposes of the Summers rule. Justice Scalia, joined by Justices Ginsburg and Kagan, endorsed the majority opinion, but wrote separately to emphasize that a Summers rule inquiry need go no further than to ask whether detention occurred in the immediate vicinity of the premises to be searched. The three dissenters, Justice Breyer with Justices Thomas and Alito, would have found the police conduct in Bailey reasonable based on the circumstances of the case and the Second Circuit's determination that ""(1) the premises [were] subject to a valid search warrant, (2) the detained persons were seen leaving those premises, and (3) the detention [was] effected as soon as reasonably practicable ."" Whether the natural metabolization of alcohol in the bloodstream presents a per se exigency that justifies an exception to the Fourth Amendment's warrant requirement for nonconsensual blood testing in all drunk-driving cases. The Fourth Amendment insists that in most instances officials secure a search warrant before they search a person's house, papers, effects, or person. There are exceptions. The Supreme Court recognized one such exception in Schmerber v. California , a case that involved a warrantless blood test ordered for a drunk driving suspect. Later state courts were unable to agree on whether the rate at which alcohol disappears from the blood alone constitutes exception or whether other factors must be considered. The police stopped Tyler McNeely for speeding and driving erratically. He admitted he had been drinking. He smelled of alcohol. He slurred his speech, and he performed poorly on the roadside sobriety tests. After McNeely refused to take a breathalyzer test, the officer transported McNeely to the hospital for a blood test. No effort was made to secure a search warrant, although the officer knew that the necessary prosecutor and magistrate were both available. The test showed that McNeely's blood alcohol level was well above the legal limit, and he was charged with driving while intoxicated. The trial court granted McNeely's motion to suppress the results of the blood test. The state appealed. The Missouri Supreme Court refused to accept a per se exception to the Fourth Amendment's warrant requirements. It held that the officer had violated McNeely's Fourth Amendment rights when he ordered the blood test without first obtaining a warrant. The Supreme Court granted certiorari to resolve the split among the state courts. The United States Supreme Court agreed with the Missouri Supreme Court in a 5-4 decision in which only Justice Thomas would have endorsed a per se rule. Three members of the Court who dissented and concurred in part—Chief Justice Roberts, Justices Breyer and Alito—would have endorsed a per se rule as long as there was insufficient time to obtain a search warrant before conducting the blood test. The majority went no further than to reject a per se rule. Justice Sotomayor, the author of the opinion for the Court, explained that the general rule that a search can only be executed pursuant to a warrant is particularly compelling when the search involves an intrusion upon bodily integrity. Nevertheless, the rule yields to exceptions when it encounters certain emergency circumstances. One such exception exists when compliance with the warrant requirement would result in loss of the evidence that the warrant seeks. The existence of this ""destruction of the evidence"" exception, however, can only be determined on a case-by-case basis, taking into account all the relevant facts presented in a specific case. So it was in Schmerber . First, the ""evidence could have been lost because 'the percentage of alcohol in the blood begins to diminish shortly after drinking stops, as the body functions to eliminate it from the system.'"" Yet in addition in that case, because ""'time had to be taken to bring the [injured] accused to the hospital and to investigate the scene of the accident, there was no time to seek out a magistrate and secure a warrant.'"" Consistent with its understanding of Schmerber , the Court held ""that in drunk-driving investigations, the natural dissipation of alcohol in the bloodstream does not constitute an exigency in every case sufficient to justify conducting a blood test without a warrant."" Four of the Justices who joined in the majority—Justices Sotomayor, Scalia, Ginsburg and Kagan—would have specifically rebutted, in the name of the Court, arguments raised by the dissenters. Nevertheless, Justice Kennedy, upon whose concurrence the majority depended, would go no further than to reject a per se exception.","The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized. U.S. Const. Amend. IV. This term, the Supreme Court decided that (1) deploying a drug-detecting dog at the front door of a house qualifies as a Fourth Amendment search (Florida v. Jardines); (2) the positive reaction of a trained, drug-detecting dog constitutes probable cause per se (Florida v. Harris); (3) the rationale which permits the warrantless, suspicionless detention of individuals found in a place covered by a search warrant also permits the warrantless, suspicionless off-site apprehension and return of individuals who have recently left a place covered by a search warrant (Bailey v. United States); and (4) the body's capacity to absorb blood alcohol, without more, does not constitute a ""destruction of evidence"" exigency justifying a per se exception to the warrant requirement (Missouri v. McNeely). The Supreme Court has said in the past that walking a drug-detecting dog around a car pulled over on the highway or around luggage in an airport is not a Fourth Amendment search. Nevertheless, the Court in Jardines noted that those cases were decided under the ""expectation of privacy"" rationale. Under the alternative ""property intrusion"" rationale, a Fourth Amendment search occurred when police used a trained dog to test for the smell of marijuana on Jardines's porch. Probable cause exists when there is a fair probability that contraband or evidence of a crime will be found in the place to be searched. The Supreme Court has held that informers' tips, used to establish probable cause, need not be subjected to uniform, rigid reliability standards. The Florida Supreme Court in Harris held that the prosecution had not established the existence of probable cause because it had failed to satisfy court-mandated standards for the reliability of drug-detecting dogs and their handlers. The U.S. Supreme Court declared in Harris that the Florida court was in error for failure to apply the traditional common sense, totality-of-the-circumstances standard. In order to minimize the risk of harm to the officers, the destruction of evidence, or the flight of suspects, officers executing a search warrant for contraband may detain individuals found on the premises to be searched. They may do so though they have no probable cause to arrest the individuals. The Supreme Court in Bailey held that this exception to the Fourth Amendment's usual requirements does not permit officers to allow individuals to leave the premises to be searched before apprehending them off-site and returning them to the place being searched. Exigent circumstances will sometimes excuse strict compliance with Fourth Amendment requirements. One such instance arises when the evidence sought will likely be lost by the time officers secure a search warrant. The Supreme Court in McNeely held destruction of the evidence exceptions are judged using a totality of the circumstances standard. The natural dissipation of alcohol from the blood, by itself, does not permit warrantless blood tests in drunk driving cases.",govreport
"The federal government first supported a program for energy storage and electric power system technology during the 1970s, before the establishment of the Department of Energy (DOE). In those early days, the program was focused mainly on energy storage—especially to even out the variable power production from rapidly growing use of wind and solar technologies—but also to support large coal and nuclear power plants. The advancement of computer capacity, miniaturization, and industrial controls has expanded the ability of grid operators to monitor and control electric power flows. The subsequent increase in networking of computerized devices for grid data collection and control advanced the ability of operators to anticipate, avoid, and otherwise mitigate potential power crises, such as blackouts. However, in more recent years, Internet-connected networks have become vulnerable to unwanted computer-driven intrusions and disruptions, revealing a new cybersecurity challenge for electric power systems. The nation's energy infrastructure is diverse. It includes a variety of transmission and distribution system network structures (electricity, oil, and natural gas), an array of operating models (public and private), and a variety of hardware and software. The energy sector consists of thousands of electricity, oil, and natural gas assets that are dispersed geographically. Thus, interdependency within the sector and across the nation's critical energy infrastructure sectors is significant. Coordinating the security and resilience of energy assets is complicated by the virtually borderless nature of energy use and the reliance on predominantly privately-owned infrastructure. Key challenges and opportunities facing the electric power industry include a changing power generation mix, replacing aging infrastructure (transmission, storage, distribution, and generation); modernizing and securing communication networks (e.g., analog to digital); accommodating new end-use technologies (for solar and other distributed resources); planning for increased interdependencies of natural gas, water, and electricity systems; and devising business models to manage the challenges while providing reliable and affordable electricity. These activities are constrained by the need for cost control, physical security, cybersecurity, improved system resiliency, and the flexibility to adapt to weather and market uncertainties. Further opportunities arise from growing use of shale gas production and decreasing costs for information technologies which allow improved grid control and more opportunities for customer management of power use. The DOE Office of Electricity Delivery and Energy Reliability (OE) is charged with a mission to support more economically competitive, environmentally responsible, secure, and resilient U.S. energy infrastructure. To achieve that mission, OE supports electric grid modernization and resiliency through research and development (R&D), demonstration projects, partnerships, facilitation, modeling and analytics, and emergency preparedness and response. OE is the federal government's lead entity for energy sector-specific responses to national energy security emergencies which are due to either hardware (infrastructure) or software (cybersecurity) problems. OE leads DOE's efforts to strengthen, transform, and improve our energy infrastructure so that consumers have access to reliable, secure, and clean sources of energy. To accomplish this mission, the Office works with a variety of stakeholders, including private industry and federal, state, local, and tribal governments on a variety of initiatives to modernize the electric grid. Grid modernization is needed to address aging infrastructure, achieve public policy objectives, sustain economic growth, support environmental stewardship, and mitigate risks. OE's goal for the future grid is to support economic growth and energy innovation through delivery of reliable, affordable, and clean electricity to consumers where, when, and how they want it. The largest share of OE funding (e.g., about 80% of the FY2016 appropriation) goes to R&D on technology development. The remainder of OE funding (e.g., about 20% of the FY2016 appropriation) goes to a variety of planning and other operational areas. OE divides these responsibilities into five general areas: R&D and Deployment—pursues technologies to improve grid reliability, efficiency, flexibility, functionality, and security. OE makes investments and sponsors demonstration projects to help bring new and innovative technologies to maturity and to help the technologies transition to market. Much of this activity takes place through partnerships with private firms that provide matching funds. Modeling and Analytics—develops core analytic, assessment, and engineering capabilities that can evolve as the technology and policy needs mature to support decisionmaking within DOE and for stakeholders. Also OE supports analyses to explore complex interdependencies among infrastructure systems, such as between electricity and natural gas systems. Institutional Support and Technical Assistance—builds capacity in industry and convenes stakeholders to coordinate grid transformation efforts. Also, OE provides technical assistance to states and regions to improve policies, utility incentives, state laws, and programs that facilitate modernization of electric infrastructure. Coordination of Federal Transmission Permits—streamlines permits, special use authorizations, and other approvals required under federal law to site electric transmission facilities. Emergency Preparedness and Response—pursues enhancements to the reliability, survivability, and resiliency of energy infrastructure, and facilitates faster recovery from disruptions to energy supply. In 2007, DOE established an independent Assistant Secretary for OE and, thereby, elevated the office to an administrative status equal to that for the major energy technologies (nuclear, fossil, renewables). OE currently has five deputy assistant secretaries, each of whom reports to the Assistant Secretary. The corresponding five offices are: Power Systems Engineering R&D, National Electricity Delivery, Infrastructure Security and Energy Restoration, Energy Infrastructure Modeling and Analysis, and Advanced Grid Integration. OE's mission is guided mainly by two key DOE planning documents: the Quadrennial Technolo gy Review and the Grid Modernization Multi-Year Program Plan . DOE's second (2015) Quadrennial Technology Review (QTR) outlined key elements of the department's strategy for grid modernization. The report concluded that: Fundamental changes in both supply and demand technologies are placing new requirements on the electric power system... Accompanying these changes is a convergence of digital communications and control systems (""smart grid"" technologies) to improve performance and engage consumers... These trends create new technical requirements for a grid that is more flexible and agile, with the ability to dynamically optimize grid operations in near-instant time frames."" Further, from DOE's cross-cutting programs viewpoint, the report stressed the R&D aspects of grid modernization: The electric grid is transitioning from a centrally-controlled, predictable system with one-way power flows in distribution to a much more distributed, stochastic, and dynamic system with bi-directional flows in distribution... Grid-related technologies need to evolve with the changing supply and end-use technologies landscape. Simultaneously, the RDD&D [research, development, demonstration, and deployment] associated with technologies that connect to the grid (e.g., renewable power supplies, efficient motor controllers, and smart loads) should consider the evolving interface with the grid. If electricity displaces petroleum and natural gas in electric vehicles and heating applications, respectively, the grid may serve an even more central role in the future energy system. DOE's 2015 Grid Modernization MYPP describes its vision for ""a future electric grid that provides a critical platform for U.S. prosperity, competitiveness, and innovation by delivering reliable, affordable, and clean electricity to consumers where they want it, when they want it, how they want it."" To help achieve this vision, DOE aims at three key national targets: A 10% reduction in the economic costs of power outages by 2025. A 33% decrease in the cost of reserve margins while maintaining reliability by 2025. A 50% decrease in the net integration costs of distributed energy resources by 2025. Progress toward the targets will be assessed by looking at RD&D efforts in individual technical areas and by looking at three integrated demonstrations, referred to in the MYPP as ""major technical achievements."" They are: (1) a transmission and distribution system operating reliably on a lean reserve margin, (2) resilient distribution feeders with high percentages (50%) of low-carbon distributed energy resources, and (3) an advanced modern grid planning and analytics platform. The MYPP states that multiple demonstrations will be conducted across various regions of the country to underpin these ""major technical achievements."" OE programs are aligned with the Obama Administration's priorities, as documented in A Policy Framework for the 21 st Century Grid: Enabling Our Secure Energy Future (June 2011), the President's Climate Action Plan (June 2013), and other DOE efforts to address energy infrastructure needs and challenges. The FY2017 OE request aimed to support the Obama Administration's ""all-of-the-above"" energy strategy and emphasized priorities that increase electric grid resilience—through managing risks, increasing system flexibility and robustness, increasing visualization and situational awareness, and deploying advanced control capabilities. Historically, electric systems technology development programs have supported all four major types (nuclear, fossil, renewable, efficiency) of energy technology. For most of DOE's funding history, OE programs received a relatively small portion of funding, compared to the portion provided for the energy technology programs. However, the OE program received a major one-time boost in funding—$4.5 billion—from the American Recovery and Reinvestment Act of 2009 (Recovery Act, P.L. 111-5 ). The funding was targeted for ""grid modernization."" Thus, much of it was used to provide grants to the electric utility industry to deploy smart grid technologies to modernize the electric grid. As a part of these programs, independent system operators (ISOs), regional transmission organizations (RTOs), and electric utilities installed about 1,100 synchrophasors and other related technologies in their electric power transmission systems. That deployment of synchrophasors, however, covered only a small portion of the total national grid. Figure 1 provides a condensed visual summary of the relative portion of funding for electric systems in three different historical time periods. Since 2005, the Energy and Water Development (E&W) appropriations bill has funded all DOE programs, including those operated by OE. The office mainly conducts R&D, which is often performed in funding partnership with industry. OE administers a wide range of R&D programs, each with its own set of goals and objectives. Since FY2011, DOE has requested sizeable increases in OE spending each year, but Congress did not significantly boost spending until FY2016. DOE's FY2016 request for OE sought $270 million, nearly double the FY2015 level of $147 million. The final appropriation for FY2016 was $206 million. Table 1 , below, shows the recent pattern of OE requests and final appropriation levels. DOE presented its FY2017 budget request on February 9, 2016. The request for OE sought $262 million, which would have been a $56 million, or 27%, increase over the FY2016 level. As part of that requested increase, DOE proposed to fund three new programs: a Grid Institute, State Distribution-Level Reform, and State Energy Assurance. The two largest increases for existing programs would have gone to the Energy Storage and Transformer Resilience programs. The Cybersecurity program would have gotten the largest cut in funding. About $44 million (79%) of the requested OE increase would have been spread almost equally across these three new programs. The other large increases are sought for the Energy Storage (up $24 million) and the Infrastructure Security (up nearly $9 million) programs. The Cybersecurity program would have been cut by nearly $17 million. FY2017 request also notes that OE plays the central role in two of DOE's broad cross-cutting initiatives: grid modernization and cybersecurity. In FY2017, the Budget Request proposed to: Issue a funding opportunity for a new institute, focused on grid applications to help transition innovative materials processes and production technologies to industry. This Grid Institute would become part of the National Network for Manufacturing Innovation (NNMI). Enable transformational R&D on advanced distribution management systems, synchrophasor applications, and, especially, energy storage technologies to modernize and enhance the resilience of the nation's electric grid backbone. Advance cybersecurity technologies and operational capabilities to fortify grid security. Launch two new state programs to facilitate reliable and flexible grid modernization by addressing distribution system challenges (State Distribution‐Level Reform) and energy assurance planning (State Energy Assurance). This section presents the key OE-requested program funding changes and describes some highlights for the largest requested changes. DOE sought funding changes for several programs and proposes the creation of three new programs for FY2017. Table 2 shows all requested program increases in dollar amounts and percentages, relative to the FY2016 levels. Table 2 shows that the largest requested increases are for Energy Storage and three new programs—State Distribution-Level Reform, State Energy Assurance, and Grid Institute. The largest requested cuts are sought for Cybersecurity and for Clean Energy Transmission and Reliability. A discussion of the planned FY2017 activities in these areas follows. The CETR program aims to improve energy system decisionmaking by fostering the development of system measurement, modeling, and risk analysis. The program provides tools and analyses needed to assess risks, inform decisions, and improve system performance, planning, and policy. CETR is focused on ensuring the reliability and resiliency of the U.S. electric grid through R&D focused on measurement and control of the electricity system and risk assessment to address challenges across integrated energy systems. It is OE's main program for energy modeling and analysis. CETR also brings together energy stakeholders from government, industry, and academia to generate ideas and develop solutions to the nation's energy infrastructure challenges. CETR activities are organized into three R&D subprograms: Transmission Reliability, Advanced Modeling Grid Research, and Energy Systems Risk and Predictive Capability. This program focuses mainly on developing innovative technologies, tools, and techniques to modernize the distribution portion of the electric delivery system. Distribution infrastructure takes power from the transmission system and delivers it to individual businesses and homes. The Smart Grid program aims to improve reliability, operational efficiency, resiliency, and faster outage recovery. It builds on previous and ongoing grid modernization efforts, including the 2009 Recovery Act's Smart Grid Investment Grants and Smart Grid Regional Demonstrations. The Smart Grid program strengthens distribution system modernization by accommodating greater numbers of distributed energy resources (solar photovoltaics, combined heat and power, energy storage, electric vehicles, etc.), enabling higher levels of demand-side management and control practices, and enhancing reliability and resiliency during both normal operations and extreme weather events. Information and communication technologies play a key role in Smart Grid goals to address technical challenges such as rising demand and supply variability, two-way power flow, data management and security, interoperability between new and legacy technologies, and the increasing linkages of distribution and transmission operations. This program aims to strengthen the energy infrastructure against current and future cyber threats. The energy sector, which includes both the electricity and oil and natural gas sectors, has been subjected to a dramatic increase in focused cyber probes, data exfiltration, and malware development for potential attacks in recent years. The sophistication and effectiveness of these intrusions mark the transition to an era of nation-state level threats to the United States. Reliable and resilient energy infrastructure is essential to the nation's economic vitality, national security, and public health and safety. Energy delivery system cybersecurity is one of the nation's most vital grid modernization and infrastructure security issues. Innovative solutions designed to meet the unique requirements of high-reliability energy delivery systems are needed to ensure the success of grid modernization and transformation of the nation's energy systems to meet future needs for economic growth. As the energy sector-specific agency (SSA), DOE has the mission and domain expertise to work with industry to mitigate risks resulting from the cyber-physical environment. DOE's long history of collaboration with industry has created integral relationships to activities that expand situational awareness (of activities such as data exfiltration) and information sharing to reduce cyber risk. OE contends that effective solutions must be based on industry best practices, sound risk management processes, and improved situational awareness, and will require multidisciplinary collaborations and shared expertise in power systems engineering, computer science, and cybersecurity. In meeting the SSA requirement for DOE, the CEDS program supports activities with four key objectives: (1) researching technologies to improve energy reliability and resilience, (2) accelerating information sharing to enhance situational awareness, (3) expanding implementation of the Cybersecurity Capability Maturity Model and Risk Management Process, and (4) developing innovative solutions for reconstitution after a large-scale cyber event. This program develops and demonstrates new and advanced energy storage technologies (e.g., batteries, pumped hydro, flywheels) that will enable the stability, resiliency, and reliability of the future electric grid. Also, Energy Storage enables increased deployment of variable renewable energy resources such as wind and solar power generation. The Energy Storage program focuses on accelerating the development and deployment of energy storage in the electric grid through directly addressing the four principal challenges identified in the 2013 DOE Strategic Plan for Grid Energy Storage : (1) cost competitive energy storage technology, (2) validated reliability and safety, (3) equitable regulatory environment, and (4) industry acceptance. Storage technology still needs to make substantial improvements in safety, cycle life, energy density, and cost before becoming fully competitive. The Energy Storage program supports technology cost reductions, performance improvements, and reliability and safety validations. The program works toward an equitable regulatory environment and industry acceptance. The FY2017 request sought three to four new highly leveraged, cost‐shared demonstrations with states, which were designed to encompass more than 5 megawatts of energy storage assets. Transformers, power lines, and substation equipment are often exposed to the elements and are vulnerable to an increasing number of natural and man-made threats. To ensure a reliable and resilient electric power system, next-generation grid hardware needs to be designed and built to withstand and recover from the impact of lightning strikes, extreme terrestrial or space weather events, electrical disturbances, accidents, equipment failures, deliberate attacks, and other as yet unknown threats. The TRAC program supports modernization and resilience of the grid by addressing the unique challenges facing transformers and other critical components (i.e., grid hardware) that are responsible for carrying and controlling electricity from where it is generated to where it is needed. As the electric power system evolves to enable a more resilient and clean energy future, R&D and testing will be needed to understand the physical impact these changes have on transformers and other vital grid components and to encourage adoption of new technologies and approaches. Development of advanced components aims to provide the physical capabilities required in the future grid and help avoid infrastructure lock-in with outdated technologies that are long-lived and expensive. TRAC increases investments in the development of technologies and assessments to mitigate system vulnerabilities such as geomagnetic disturbances and electromagnetic pulses. Planned activities would also focus on developing next‐generation transformers to fill a critical gap identified in the 2015 Quadrennial Technology Review . Research efforts are to address the unique challenges associated with high power levels (voltage and current), high reliability requirements (25 to 40 years in field operation), and high costs of critical components. The National Electricity Delivery (NED) program helps state, regional, and tribal entities to develop, refine, and improve their programs, policies, and laws related to electricity while mitigating market failures. The scope of this activity includes facilitating the development and deployment of reliable and affordable electricity infrastructure, whether generation, transmission, storage, distribution, or demand-side electricity resources. In addition, NED implements a number of legal requirements, such as coordination of transmission permitting by federal agencies, periodic transmission congestion studies, permitting of cross-border transmission lines, and authorization of electricity exports. This program leads efforts for securing the U.S. energy infrastructure against all hazards, reducing the impact of disruptive events, and responding to and facilitating recovery from energy disruptions, in collaboration with industry and state and local governments. The three main areas of ISER activities are: (1) executing effective emergency preparedness, response, and restoration operations; (2) providing reliable energy infrastructure tactical analysis (event analysis) and situational awareness to all stakeholders; and (3) encouraging a risk-based approach to energy system assurance. ISER enables the security and resilience of the nation's energy infrastructure (electricity, petroleum, and natural gas) through implementation of the National Preparedness System to help achieve the National Preparedness Goal: ""a secure and resilient nation with the capabilities required across the whole community to prevent, protect against, mitigate, respond to, and recover from the threats and hazards that pose the greatest risk."" ISER is the DOE office responsible for executing DOE's Energy Sector Specific Agency (SSA) role, executing DOE's Emergency Support Function-12 (ESF-12) (Energy) role and providing DOE's support to the Infrastructure Systems Recovery Support Function (IS-RSF). ISER facilitates the creation of a favorable security and resilience environment by delivering analysis, training, data (which includes situational awareness and modeling data), tools, and validation exercises to assist its partners with executing Preparedness activities across the five mission areas specified in Presidential Policy Directive 8: National Preparedness . ISER's development and delivery of these capabilities is informed by coordination with energy infrastructure stakeholders by virtue of its SSA authorities and through active participation with its sister agencies. This allows ISER to serve as a point of entry for energy infrastructure security and resilience stakeholders at all levels, including the private sector, to DOE and the federal government. The proposed Grid Clean Energy Manufacturing Innovation Institute was designed to focus on projects that help transfer to industry innovative material processes and production technologies for grid infrastructure application. The Institute would have focused on technologies related to critical metals for grid application, and advances would be broadly applicable in multiple industries and markets. The Grid Institute would have become part of the larger multi-agency National Network for Manufacturing Innovation (NNMI). The NNMI implementation model promotes collaboration, complements university research, and supports innovation to increase the competitiveness of U.S. manufacturers. Manufacturing institutes are a partnership among government, industry, and academia, supported with cost-share funding from federal and non-federal sources. Within five years of its launch, the Grid Institute was intended to become financially independent and sustainable using only private sector and other sources without further federal funding. Industry estimates that about $1.1 trillion will be needed to expand, upgrade, and, as necessary, replace the U.S. electric delivery infrastructure through 2040. The process of modernizing the grid and replacing older assets will create an opportunity to develop and deploy next-generation grid hardware. However, successful commercialization of advanced grid components will require materials with new physical properties and enhanced functionality. Electric power infrastructure (e.g., cables, conductors, transformers) depends heavily on industrial metals such as aluminum, iron, and copper. In particular, the Institute would have aimed to spur grid infrastructure applications of recent advances in metallurgy, nanotechnology, and materials science that have enabled better control and optimization of the various properties of metals. The technical assistance provided by this proposed program would have employed system analysis to ensure that the integration of distribution energy resources with new markets would be accommodated through appropriately designed business and regulatory processes. There is broad recognition that the electricity sector is undergoing a major transformation. Much of this change is occurring at the distribution level, where utilities and other entities are working to offer consumers products and services to help them cut electricity costs and obtain new kinds of benefits from the use of electricity. Several states have embarked on major efforts to reform the regulatory frameworks for their distribution sectors, leveraging OE support. The common theme among their efforts is the need to ""unlock new sources of value"" that are latent in the existing framework, while preserving or enhancing traditional values such as reliability and affordability. Through 5 to 10 competitive awards, this program would have aimed to help states identify and address issues involving structural, policy, and/or regulatory reforms. While OE already provides high-level policy and technical expertise to states, this support would have allowed state officials to utilize DOE's national laboratories, associated academic institutions, and other subject matter experts to develop targeted solutions to specific issues that are too situation specific to be addressed by existing OE programs. This program was designed to assist state, local, tribal, and territorial stakeholders in planning, training, and exercising in advance of energy emergencies. Specifically, it would have aimed to improve the capacity of states, localities, and tribes to identify the potential for energy disruptions, quantify the impacts of those disruptions, develop comprehensive response plans, and devise plans to mitigate the threat of future disruptions. OE has worked on energy assurance planning across the states and U.S. territories (including the District of Columbia). A key lesson learned is that such plans should be continually updated and exercised annually—in order to reflect changing conditions, identify and address new threats, and maintain staff capacity to implement plans. The proposed program would have provided funds through competitive regional cooperative assistance awards. The funds would have supported continual energy assurance plan improvement, promoted regional and state capabilities to identify potential supply disruptions, and improved training programs for energy planning and emergency response. OE's goal for state and local energy assurance planning would have been to achieve a robust, secure, and reliable energy infrastructure that is also resilient—better able to withstand catastrophic events, able to restore services rapidly in the event of any disaster, and designed to diminish future vulnerabilities. Through support of state energy assurance planning improvement and regional resilience exercises, the federal government would have partnered with states and local governments—which are ultimately responsible for responding to disasters and disruptions—to build and maintain preparedness and assurance capabilities. This activity provides for the costs associated with the federal workforce, including salaries, benefits, travel, training, building occupancy, information technology (IT) services, and other related expenses. It also provides for the costs associated with contractor services that, under the direction of the federal workforce, support OE's mission. The FY2017 request also sought to continue crosscutting programs that coordinate across the department and to employ DOE's full ability to address national energy, environmental, and security challenges. OE serves as the central hub of the Grid Modernization and Cybersecurity crosscutting programs. OE operates seven program offices and one administrative office (program direction). Each program office has its own set of goals and funding needs. The FY2017 request sought to establish three new programs. Table 3 shows the funding breakdown for existing and proposed activities by program office. It also shows congressional recommendations for FY2017. After the Administration issued its FY2017 budget request, Congress held a number of DOE oversight and appropriations hearings. As noted previously, further actions were taken in the House and Senate on DOE funding recommendations in the E&W bills, S. 2804 and H.R. 5055 . In the Senate, S. 2804 was incorporated into H.R. 2028 as an amendment in the nature of a substitute, and it was approved on the Senate floor. The Senate-passed FY2017 E&W bill included $206 million for OE—the same amount as the FY2016 appropriation. In the House, H.R. 5055 was defeated in House floor action. That bill had included $225 million for OE, which was the amount recommended by the House Appropriations Committee. In late September 2016, a continuing resolution ( P.L. 114-223 , Division C) set FY2017 funding for OE at the FY2016 level through December 9, 2016. On December 10, 2016, a second continuing resolution provided funding at the FY2016 level through April 28, 2017.The various steps of the congressional process for the FY2017 E&W appropriations are outlined in Table 4 . For additional background on selected OE programs, funding, and policy aspects, see the following CRS reports. CRS Report R44465, Energy and Water Development: FY2017 Appropriations , by [author name scrubbed] CRS Report R43966, Energy and Water Development: FY2016 Appropriations , by [author name scrubbed] CRS Report RS22858, Renewable Energy R&D Funding History: A Comparison with Funding for Nuclear Energy, Fossil Energy, and Energy Efficiency R&D , by [author name scrubbed] CRS Report R41886, The Smart Grid and Cybersecurity—Regulatory Policy and Issues , by [author name scrubbed] CRS Report R43604, Physical Security of the U.S. Power Grid: High-Voltage Transformer Substations , by [author name scrubbed] CRS Insight IN10425, Electric Grid Physical Security: Recent Legislation , by [author name scrubbed]","The nation's energy infrastructure is undergoing a major transformation. For example, new technologies and changes in electricity flows place increasing demands on the electric power grid. These changes include increased use of distributed (mostly renewable energy) resources, Internet-enabled demand response technologies, growing loads from electric vehicle use, continued expansion of natural gas use, and integration of energy storage devices. The Department of Energy's (DOE's) Office of Electricity Delivery and Energy Reliability (OE) has the lead role in addressing those infrastructure issues. OE is also responsible for the physical security and cybersecurity of all (not just electric power) energy infrastructure. Further, OE has a key role in developing energy storage, supporting the grid integration of renewable energy, and intergovernmental planning for grid emergencies. As an illustration of the breadth of its activities, OE reports that, during FY2014, its programs responded to 24 energy-related emergency events, including physical security events, wildfires, severe storms, fuel shortages, and national security events. OE manages five types of research and development (R&D) programs, usually conducted in cost-shared partnership with private sector firms. OE also operates two types of deployment programs, conducted mainly with state and tribal governments. Each OE program office has its own set of goals and objectives. OE plays the central role in two of DOE's broad cross-cutting initiatives: grid modernization and cybersecurity. President Obama treated grid modernization as a high priority, stressing its importance to jobs, economic growth, and U.S. manufacturing competitiveness. Since 2005, the Energy and Water Development (E&W) appropriations bill has funded all DOE programs, including those operated by OE. DOE's FY2017 request for OE sought $262 million, an increase of $56 million (27%) over the FY2016 appropriation of $206 million. Most congressional action for FY2017 OE funding has taken place through the two E&W appropriations bills, S. 2804 and H.R. 5055. In the Senate, S. 2804 was incorporated into H.R. 2028 as an amendment in the nature of a substitute, and it was approved on the Senate floor. That Senate-passed FY2017 E&W bill included $206 million for OE—the same amount as the FY2016 appropriation. In the House, H.R. 5055 was defeated in House floor action. That bill had included $225 million for OE, which was the amount recommended by the House Appropriations Committee. In late September 2016, a continuing resolution (P.L. 114-223, Division C) set FY2017 funding for OE at the FY2016 level through December 9, 2016. On December 10, 2016, a second continuing resolution (CR) provided funding at the FY2016 level through April 28, 2017. Most of DOE's requested FY2017 increase for OE aimed to create three new programs: a Grid (Manufacturing Innovation) Institute, a State Distribution Level Reform program, and a state Energy Assurance program. The House Appropriations Committee's report on FY2017 E&W funding does not mention those proposed programs. The Senate Appropriations Committee's report on FY2017 E&W funding expressed support for the regional and state activities that DOE proposed for two of the new programs, but encouraged DOE to support those activities with some of the funding it recommended for the OE Infrastructure Security and Energy Restoration program. Neither the first nor the second CR included funding for any of the proposed new programs.",govreport
"Since Congress approved an equestrian statue to George Washington in 1783, more than 100 other memorials have been authorized in the District of Columbia. Prior to 1986, however, statutory criteria for authorizing commemorative works, including memorials, did not exist. Not only did Congress authorize commemorative works, but it also established how the sponsoring organizations would choose site locations and approve memorial designs. In some cases, special memorial commissions were established and given authority to select a location for the memorial. The Lincoln Memorial Commission and the Jefferson Memorial Commission, for instance, were provided with such authority. Congress also authorized private organizations to select a site, sometimes with the approval of the President, as in the case of the Washington Monument. Although a general practice for the commemorative work creation process existed by the mid-20 th century, impetus for a statutory commemorative work creation program was not realized until the 1980s. In 1986, Congress debated and passed the Commemorative Works Act to guide the memorial creation process in the District of Columbia. This report examines the evolving process by which memorials have been proposed, approved, and constructed in the District of Columbia. It begins with a discussion of the creation of the District and its unique place as the center of the U.S. government and the location of numerous memorials to individuals and historic events. The report then discusses the creation and operation of the Commemorative Works Act that was enacted to guide the process for creating a commemorative work in the District of Columbia. It concludes with four appendixes: a summary of the original Commemorative Works Act legislation; the 24-step process recommended for creating a memorial in the District of Columbia; a map showing various areas eligible for memorial construction in the District of Columbia; and a list of government agencies that might be involved in the memorial creation process. This report does not address memorials outside the District of Columbia. On July 16, 1790, President George Washington signed a bill authorizing him to designate ""a district of territory, not exceeding ten miles square, to be located as hereafter directed on the river Potomac, at some place between the mouths of the Eastern Branch and Connogochegue, be, and the same is hereby accepted for the permanent seat of government of the United States."" Pursuant to the Residency Act, the President had a choice between two areas on the Potomac River—land where the Eastern Branch (now the Anacostia River) met the Potomac River and the area around the Village of Georgetown. After ordering surveys of both areas, Washington chose the confluence of the Potomac River and Anacostia Rivers as the capital site. Subsequently, he chose Major Pierre Charles L'Enfant, who had just completed a successful refurbishment of Federal Hall in New York City, as the city's architect and commissioned Major Andrew Ellicott to survey the 10-square-mile district. Major L'Enfant was charged with designing the federal city, including spaces for the President's house, the Capitol Building, and the grid of streets that would transport political leaders from one part of the city to another. The federal spaces are widely considered to be the ""most significant design feature of the plan for the nation's capital."" Within the federal precinct, L'Enfant's plan deemphasized any single part of the federal government. Political scientist James Sterling Young, in his book The Washington Community , describes L'Enfant's vision in creating the federal capital. There is no single center in the ground plan of the governmental community, no one focus of activity, no central place for the assembly of all its members. What catches the eye instead is a system of larger and lesser centers widely dispersed over the terrain, ""seemingly connect,"" as L'Enfant put it, by shared routes of communication. It is clear that the planner intended a community whose members were to work or live not together but apart from each other, segregated into distinct units. As depicted in Figure 1 , Major L'Enfant worked to provide symbolic separation between Congress, the President, and the Supreme Court as provided for by separation of powers principles found in the Constitution. In describing the decision to keep the constitutional centers of powers separated, L'Enfant ""argued that the distance between the two buildings [the President's house and the Capitol] was not all that great in his plan and further that 'no message to nor from the President is to be made without a sort of decorum which will doubtless point out the propriety of Committee waiting on him in carriage should his palace be even contiguous to Congress.'"" The original boundaries of the District of Columbia extended beyond the federal city depicted in Figure 1 . A 10-mile square, created from land ceded from Maryland and Virginia, it also included much of modern-day Alexandria, Virginia, and Arlington County. Following Congress's move to the District in 1800, proposals were introduced to retrocede (return) portions of the District south of the Potomac River to Virginia. In 1846, Congress determined that ""the portion of the District of Columbia ceded to the United States by the State of Virginia has not been, or is ever likely to be, necessary for that purpose…"" and passed legislation returning Alexandria to Virginia. President James Polk signed the bill into law on July 9, 1846. For nearly a century, Congress and city planners ignored many elements of L'Enfant's plan for Washington, DC, until a new call for planning was developed to celebrate the city's 100 th anniversary in 1900. Led by Senator James McMillan, the effort to review and create a new comprehensive plan for the District of Columbia was undertaken by the Senate Park Commission. Created in March 1901, as part of a Senate resolution directing the Committee on the District of Columbia to study the park system in the District, the commission was instructed to examine questions that had ""arisen as to the location of public buildings, of preserving spaces for parks in the portion of the District beyond the limits of the city of Washington, of connecting and developing existing parks by attractive drives, and of providing for the recreation and health of a constantly growing population."" The committee hired Daniel Burnham and Frederick Law Olmsted as consultants to study the design of the city and the landscaping of the National Mall. The McMillan Commission plan examined all aspects of L'Enfant's original design and made recommendations to return the monumental core of the city, particularly the Mall, to the intent of L'Enfant's plans. In their report to the Senate Committee on the District of Columbia, the commission summarized why such a plan was necessary. Now that the demand for new public buildings and memorials has reached an acute stage, there has been hesitation and embarrassment in locating them because of the uncertainty in securing appropriate sites. The Commission were thus brought face to face with the problem of devising such a plan as shall tend to restore that unity of design which was the fundamental conception of those who first laid out the city as a national capital, and of formulating definite principles for the placing of those future structures which, in order to become effective, demand both a landscape setting and a visible orderly relation one to another for their mutual support and enhancement. Figure 2 shows the McMillan Commission plan for the National Mall. While the McMillan plan was never fully implemented, it laid the foundation for additional studies and plans for further development in the District of Columbia over the next 100 years. Additionally, the McMillan plan included concepts for the creation of monuments within the federal landscape. The McMillan Plan also emphasized various design features of the federal core including the National Mall, Federal Triangle, the area that is now the Lincoln Memorial, and the Ellipse. In recent years, the McMillan Plan's concepts have been codified through plans and studies by the National Capital Planning Commission, the official planning agency authorized by Congress in 1924. In 1986, the Commemorative Works Act (CWA) was enacted to guide the creation of memorials in the District of Columbia. Congress created the act in an effort (1) to preserve the integrity of the comprehensive design of the L'Enfant and McMillan plans for the Nation's Capital; (2) to ensure the continued public use and enjoyment of open space in the District of Columbia and its environs, and to encourage the location of commemorative works within the urban fabric of the District of Columbia; (3) to preserve, protect, and maintain the limited amount of open space available to residents of, and visitors to, the Nation's Capital; and (4) to ensure that future commemorative works in areas administered by the National Park Service and the Administrator of General Services in the District of Columbia and its environs are…appropriately designed, constructed, and located; and…reflect a consensus of lasting national significance of the subjects involved. The act further defined a commemorative work as ""any statue, monument, sculpture, memorial, plaque, inscription, or other structure of landscape feature, including a garden or memorial grove, designed to perpetuate in a permanent manner the memory of an individual, group, event or other significant element of American history, except that the term does not include any such item which is located within the interior of a structure or a structure which is primarily used for other purposes."" The CWA does not apply to military properties, such as the Pentagon, Arlington National Cemetery, or Fort McNair, nor does the act apply to land under the jurisdiction of the Smithsonian or the Architect of the Capitol. On March 11, 1986, Representative William Hughes introduced H.R. 4378 ""a bill to govern the establishment of commemorative works within the National Capital Region of the National Park System."" It was initially referred to the House Committee on Interior and Insular Affairs, then to the Subcommittee on National Parks and Recreation, which held a hearing on April 15 and reported the bill to the full committee. On April 23, the full committee approved H.R. 4378 and on May 5 recommended its enactment by the House. The committee's report indicated that legislation was necessary because of the ""numerous groups"" seeking to place additional commemorative works in the District of Columbia and the need to strike a balance between different uses of park land. The report also indicated that ""[b]alance needs to be achieved between commemorative works on National Park land and the myriad of activities that occur there. Commemorative works erected in the future should meet the appropriate tests of being of lasting national significance, and designed and constructed to be physically durable."" On May 5, the House debated H.R. 4378 . Representative Bruce Vento, one of the bill's supporters, linked the placement of commemorative works to the L'Enfant and McMillan plans for the District of Columbia. Mr. Speaker, as Americans, we are fortunate as a nation to have a capital city specifically planned and designed to embody our ideals, a city of both magnificence and practicality. The design we now have comes to us only because of the diligence and vigilance of our predecessors. Through their efforts we can still see the city that Pierre L'Enfant planned and that the 1902 U.S. Senate Park Commission with the McMillan plan restored, with its vistas, its orderly but grand street patterns and its open space. Other Members expressed reservations about aspects of the bill. For example, Representative Michael Strang focused on placing commemorative works within the context of the city's design, and the importance of finding balance among uses of public lands. I believe the major goal of this legislation—to limit the proliferation of insignificant works in D.C.—is certainly meritorious. As additional works are located in this area, the open space which is used by numerous residents and visitors for a variety of activities, is lost forever. While I strongly support commemorating worthy individuals and events in our Nation's history, I also feel a balance of uses for the public lands in our Nation's Capital must be established shortly. H.R. 4378 passed the House by voice vote later that day. Subsequently, H.R. 4378 was referred to the Senate Committee on Energy and Natural Resources. On June 24, the Senate Energy and Natural Resources Committee's Subcommittee on Public Lands, Reserved Water, and Resource Conservation held a hearing on both S. 2522 , a ""bill to provide standards for placement of commemorative works on certain federal lands in the District of Columbia and its environs, and for other purposes,"" and H.R. 4378 . The committee reported H.R. 4378 , replacing the House language with the text of S. 2522 . The Senate debated H.R. 4378 on September 10 and passed the bill by voice vote. On September 29, the House took up H.R. 4378 , agreed to the Senate amendments with a few House clarifying amendments, and passed H.R. 4378 , as amended, by voice vote. On October 16, the Senate concurred with the House amendments and passed the bill. The Commemorative Works Act (CWA) was signed into law by President Ronald Reagan on November 14, 1986. The CWA, as enacted, contained 10 sections covering the purposes of the bill, definitions, congressional authorization for memorials, creation of the National Capital Memorial Commission, conditions for memorial placement in different parts of the District of Columbia, site design and approval, issuance of construction permits, creation of a temporary memorial site, and other administrative provisions. Table A-1 , in Appendix A , provides a summary of the original provisions contained in the CWA for each section of the bill. By 1991, Congress realized that many authorized sponsor groups were not able to complete memorial construction in the allocated time period. Pursuant to Section 10(b) of the CWA, legislative authority for commemorative works expired within five years of its enactment, unless a construction permit was issued. Of the eight commemorative works authorized between the 99 th Congress (1985-1986) and the 101 st Congress (1989-1990), only one, the American Armored Force Memorial, had met the five-year deadline. To address this issue, Representative William Clay introduced H.R. 3169 , ""To lengthen from five to seven years the expiration period applicable to legislative authority relating to construction of commemorative works on Federal land in the District of Columbia and its environs."" During the House debate, Representative Wayne Allard argued that lengthening the time required to complete a commemorative work was necessary: As the subcommittee chairman has described, the Commemorative Works Act was enacted in 1986 in order to address the numerous requests received by Congress to authorize commemorative works on public space in the D.C. area. Overall this act has been very successful in ensuring that only the most important works are constructed and that those works constructed are of the highest quality. Of course, it takes time to develop an outstanding proposal and it appears that when Congress enacted this law 5 years ago, we underestimated the amount of time required to secure the necessary approvals and raise funds for these projects. Following debate, the House passed H.R. 3169 by voice vote. The Senate Committee on Energy and Natural Resources reported the bill on November 12, and the full Senate passed the measure without debate on November 27. The bill was signed into law by President George H.W. Bush on December 11, 1991. Following the extension of authority to complete a commemorative work to seven years, on August 6, 1993, Representative Nancy Johnson introduced H.R. 2947 to further extend the legislative authority of the Black Revolutionary War Patriots Foundation to nine years from the date of initial enactment. The Committee on Natural Resources reported the bill on November 20 with amendments to not only extend the legislative authority for the Black Revolutionary War Patriots Foundation, but also for the Women in Military Service for America Memorial, and the National Peace Garden. In addition, the committee included other technical amendments to the CWA at the request of the National Capital Memorial Commission. During the ensuing floor debate, Representative Bruce Vento summarized the committee's rationale for further extending legislative authorities of the three memorials and the necessity of further amending the CWA. Mr. Speaker, H.R. 2947 as originally introduced by Congresswoman Nancy Johnson, would extend the authorization for the Black Revolutionary War Patriots Memorial…. As amended by the Committee on Natural Resources, H.R. 2947 extends the authorization for the establishment of three commemorative works to be constructed here in the Nation's Capital and makes various technical amendments to the Commemorative Works Act. …The Black Revolutionary War Patriots Memorial, the women in military service to America and the National Peace Garden have all been authorized under the Commemorative Works Act. All three have obtained the initial site and design approvals as required by the law. But for various reasons, particularly because of the difficulty of fundraising, each of them has requested an extension for the completion of their commemorative works. This legislation extends their authorizations to 10 years—an additional 3 years for each. I support this extension with the understanding that there will be no further extensions. As amended by the Committee on Natural Resources, H.R. 2947 also makes various changes to the Commemorative Works Act. Primarily technical, these changes were requested by the National Capital Memorial Commission, and by those responsible for administrating the act. The most important of these changes adds provisions on accountability for fundraisers so that the public's trust is not abused. The House passed H.R. 2947 by voice vote, and it was referred in the Senate to the Committee on Energy and Natural Resources. In the Senate, the Committee on Energy and Natural Resources reported a further amended version of the bill that included changes to the National Capital Memorial Commission amendments, including restoring a previous deleting of a provision that ""directed the Secretary of the Interior and the Administrator of the General Services Administration to develop fundraising standards and to suspend a groups' fundraising authority if the Secretary or Administrator …determined that the group's fundraising activities were not in compliance with those standards."" The Senate passed the bill, as amended, by voice vote. Upon its return to the House, H.R. 2947 was further debated. During the debate, Representative Vento explained the Senate amendments and urged passage of the bill. The Senate deleted a provision in the House-passed bill authorizing the Secretary to suspend a memorial organization's activity if there are excessive administrative and fundraising expenses. It is the committee's intent that the National Park Service develop guidelines which provide direction to memorial organizations on the subject of unreasonable or excessive administrative costs and fundraising fees. The committee believes that guidelines from the National Park Service would also be helpful to avoiding problems in the future. The committee expects the National Park Service to monitor the fundraising activities of the memorial organizations more closely and it intends that all of the provisions of H.R. 2947 apply to all commemorative works authorized under the Commemorative Works Act. The House passed H.R. 2947 , as amended in the Senate, by a vote of 378 to 0. It became P.L. 103-321 on August 26, 1994. After receiving several requests for the placement of memorials on the National Mall, Congress recognized the need to preserve the L'Enfant and McMillan visions for the Mall and prevent the area from being overbuilt. In March 2000, the Senate Committee on Energy and Natural Resources Subcommittee on National Parks, Historic Preservation, and Recreation held an oversight hearing on monuments and memorials in the District of Columbia. At the hearing, representatives from the National Capital Planning Commission, the U.S. Commission of Fine Arts, the National Park Service, the District of Columbia, and the Committee of 100 on the Federal City all testified on proposed amendments to the CWA. The proposed amendments were the result of a study conducted by the National Park Service, the National Capital Planning Commission, and the U.S. Commission of Fine Arts and provided to Congress in May 1997. In summarizing the need for the creation of a new ""reserve"" area, or no-build zone, on the National Mall, J. Carter Brown, chair of the U.S. Commission of Fine Arts, also testified that the Reserve should have a building moratorium to protect the National Mall area. With the considerable pressures to add new memorials to the city, it is inevitable that many sponsors of what they feel are preeminent causes would favor a location in the proposed reserve. Under such a continuing threat, it makes sense to define this central precinct as a no-build zone. Even with the substantial size of the reserve, there will still be many sites available for memorials in the foreseeable future. The genius of L'Enfant's plan … created literally hundreds of sites across the city, and it is our hope their abundance and desirability will lead to the placement of future memorials throughout the capital. In the 107 th Congress (2001-2002), Senator Chuck Hagel introduced S. 281 , the Vietnam Veterans Memorial Education Act. Reported by the Senate Committee on Energy and Natural Resources, it contained amendments to the CWA to create the Reserve and prohibit building of new memorials within its boundaries. S. 281 was not considered further by the Senate. The issue was reintroduced in the 108 th Congress (2003-2004) by Representative Richard Pombo. Reported by the House Committee on Resources, H.R. 1442 authorized the design and construction of the Vietnam Visitor Center, and following Senate amendment, contained language to amend the CWA to create a ""reserve"" area. Enacted as P.L. 108-126 , a reserve area and building moratorium were established on the National Mall. Pursuant to P.L. 108-126 , no additional commemorative works, unless they were authorized prior to P.L. 108-126 , are permitted in the Reserve. As a result, the definitions proscribed for memorial placement in Area I, where new commemorative works must be of preeminent historical and lasting significance to the United States, and Area II, which is reserved for subjects of lasting historical significance to the American people, became more important when deciding where a commemorative work should be placed. More information about the placement of commemorative works is contained below under "" Designation of Areas of Washington, DC "" Historically, commemorative works have been expensive. Sponsor groups are often statutorily prohibited from using federal funds to design, construct, or dedicate the monuments or memorials. Consequently, to raise the necessary funds, groups sometimes turn not only to the general public for donations, but also to corporations and foundations. Occasionally, contributors—especially corporate and foundation donors—request recognition for donation. Whether groups sponsoring monuments and memorials are allowed to recognize donations could affect the sponsor groups' ability to raise the necessary funds. Donor recognition for monuments and memorials can generally be divided into two categories: on-site and off-site donor recognition. On-site donor recognition is the acknowledgment—either permanent or temporary—of contributions at the location of a monument or memorial. Off-site donor recognition is the acknowledgement of contributions in a manner that does not involve the monument or memorial location. This recognition can include, but is not limited to, thank you letters, awards, publicity, press conferences, mementos, and online acknowledgment. Additionally, policies on recognizing donations differ for works authorized under the CWA and for non-CWA monuments and memorials. When it was enacted in 1986, the CWA prohibited the on-site recognition of donors at memorial sites in the District of Columbia. Between 1986 and 2013, memorial sponsors were not allowed to recognize donors on-site. In the 113 th Congress, the first exemption to the on-site ban on donor acknowledgement was provided to the Vietnam Veterans Memorial Fund to aid its effort to build the Vietnam Veterans Memorial Visitor Center. The law provided the sponsor group with the ability to recognize donors on-site, subject to the approval of the Secretary of the Interior, and at the expense of the sponsor group. At the same time that the Vietnam Veterans Memorial Visitor Center was granted permission to recognize donors, Representative Doc Hastings introduced H.R. 2395 , ""to provide for donor contribution acknowledgements to be displayed at projects authorized under the Commemorative Works Act."" The bill would have amended 40 U.S.C. §8905(b) to allow acknowledgement of donor contributions, subject to several conditions. Additionally, the bill would have retroactively applied to all memorials dedicated after January 1, 2010. In testimony on the bill before the House Natural Resources Committee, Subcommittee on Public Lands and Environmental Regulation, Stephen Whitesell, regional director of the National Capital Region for the National Park Service, supported the on-site recognition of donors. He said, Although the Department has supported the CWA ban on donor recognition, this ban has proven to be impractical, given the challenge of funding new memorials and the reliance of the memorial sponsors on the generosity of the public in order to establish and construct memorials that Congress has authorized. We recognize the importance of acknowledging large donations for effective fundraising and, therefore, support donor recognition with appropriate limitations as described below. We do not support permanent donor recognition. After the subcommittee hearing on July 19, 2013, H.R. 2395 did not receive further consideration. As part of the National Defense Authorization Act for FY2015, however, the language from H.R. 2395 was included as §3054. Pursuant to P.L. 113-291 , §3054(c), the CWA was amended to allow donor recognition ""inside an ancillary structure associated with the commemorative work or as part of a manmade landscape feature at the commemorative work."" Further, donor acknowledgement applies to all commemorative works dedicated after January 1, 2010, is to be paid for by the sponsor, and is subject to the permission of the Secretary of the Interior or the Administrator of General Services. The acknowledgment also must (A) be limited to an appropriate statement or credit recognizing the contribution; (B) be displayed in a form in accordance with National Park Service and General Services Administration guidelines; (C) be displayed for a period of up to 10 years, with the display period to be commensurate with the level of the contribution, as determined in accordance with the plan and guidelines described in subparagraph (B); (D) be freestanding; and (E) not be affixed to—(i) any landscape feature at the commemorative work; or (ii) any object in a museum collection. The standards for consideration and placement of commemorative works in areas administered by the National Park Service (NPS) and the General Services Administration (GSA) in the District of Columbia and its environs are contained in the Commemorative Works Act (CWA) of 1986, as amended. The following sections examine how commemorative works are established and maintained. Pursuant to the CWA, the National Park Service (NPS) has developed a 24-step outline to guide groups interested in creating a commemorative work in the District of Columbia. The NPS outline guides initiation, legislation, site election and approval, design approval, fundraising, construction, and dedication of commemorative works. In addition, groups have asked for, and been granted, extensions to their initial authorization to allow additional time to complete the memorial creation process. The full guidelines from NCPC can be found in Appendix B . Since 1986, most commemorative works placed in the District of Columbia have been sponsored by non-governmental groups. Sponsors interested in creating a commemorative work to an individual, group, or event must find a congressional sponsor to introduce authorizing legislation. The National Capital Memorial Advisory Commission offers consultative services to potential sponsors. The CWA provides that no ""commemorative work may be established in the District of Columbia unless specifically authorized by Congress."" The CWA further specifies requirements for military works and works commemorating events, individuals, or groups. For military works, the CWA requires Congress to consider legislation only for the commemoration of ""a war or similar major military conflict or a branch of the armed forces"" that has been designated as officially ended for at least 10 years. Works proposed to commemorate a limited military engagement or a unit of the armed forces are not allowed. For works commemorating events, individuals, or groups, the CWA specifies that Congress will not consider legislation ""until after the 25 th anniversary of the event, death of the individual, or death of the last surviving member of the group."" Legislation authorizing a commemorative work typically contains three sections: authorization to establish the work, payment of expenses, and deposit of excess funds. Authorizing legislation does not designate a specific site or design for the commemorative work, and additional information, such as findings, can be included, but is not a standard part of most commemorative works legislation. Once introduced, legislation is generally referred to the House Committee on Natural Resources and to the Senate Committee on Energy and Natural Resources. Following authorization, additional legislation is required to designate a commemorative work in Area I (see map in Appendix C ). For example, the Adams Memorial Foundation was authorized to consider sites in Area I by Congress following the recommendation of the National Capital Memorial Advisory Commission and the Secretary of the Interior. The first section of most commemorative works authorization bills includes specific mention of the group authorized to establish the memorial; and the individual, event, or group that is to be honored. The legislation also typically provides for the memorial's general location (i.e., in the District of Columbia or its environs), but does not provide for a specific site location. For example, the authorization language for the group authorized to create the memorial to President John Adams and his family stated, Congress approves the location for the commemorative work to honor former President John Adams and his legacy, as authorized by P.L. 107-62 (115 Stat. 411), within Area I as described in section 8908 of title 40, United States Code, subject to the limitation in section 2. Other sections of commemorative works authorization bills provide the sponsor with authority to accept contributions and requires the group to make payment for all expenses related to site selection, design, and construction of the memorial. Further, the CWA requires that the sponsor must donate an amount ""equal to 10 percent of the total estimated cost of construction to offset the costs of perpetual maintenance and preservation"" of the commemorative work. Many statutes authorizing commemorative works also contain a statement specifically prohibiting the use of federal funds. For example, the payment language for the Benjamin Banneker memorial stated, The Washington Interdependence Council shall be solely responsible for the acceptance of contributions for, and payment of the expenses of, the establishment of the memorial. No federal funds may be used to pay any expense of the establishment of the memorial. Legislation to authorize a commemorative work often provides for disposal of excess funds raised by the authorized group. Excess funds raised are often directed to be delivered to the Department of the Interior and the National Park Service for deposit with the National Park Foundation as provided for pursuant to 40 U.S.C. §8906 (b). For example, the excess funds language for the Brigadier General Francis Marion memorial stated, If, upon payment of all expenses of the establishment of the commemorative work authorized by subsection (b) (including the maintenance and preservation amount provided for in section 8906(b) of title 40, United States Code), or upon expiration of the authority for the commemorative work under chapter 89 of title 40, United States Code, there remains a balance of funds received for the establishment of that commemorative work, the Marion Park Project, a committee of the Palmetto Conservation Foundation, shall transmit the amount of the balance to the Secretary of the Treasury for deposit in the account provided for in section 8906 (b)(1) of such title. In some instances, Congress has chosen to extend the legislative authority for a commemorative work. All authorized commemorative works are provided a seven-year period to complete the work unless the group has a construction permit issued by the Secretary of the Interior (Secretary) or the Administrator of the General Services Administration (Administrator). In some circumstances, an administrative extension may be provided by the Secretary or Administrator if final design approvals have been received from the National Capital Planning Commission (NCPC) and the Commission of Fine Arts and 75% of the amount estimated to be required has been raised. If an authorized commemorative works legislative authority expires, Congress may extend that authority by amending the initial authorizing statute. For example, the Adams Memorial Foundation was initially authorized to create a commemorative work to the Adams family in 2001. In 2009, Congress extended the authority until September 30, 2010, and in 2010, it was further extended until December 2, 2013. The amendment to the legislative authority stated, Section 1(c) of P.L. 107-62 is amended by striking ""accordance with"" and all that follows through the period at the end and inserting the following: ""according with chapter 89 of title 40, United States Code, except that any reference in section 8903(e) of that chapter to the expiration at the end of or extension beyond a seven-year period shall be considered to be a reference to an expiration on or extension beyond December 2, 2013."" Based on the criteria discussed below in "" Designation of Areas of Washington, DC ,"" the Secretary or the Administrator may, after consultation with the National Capital Memorial Advisory Commission, recommend the location of a commemorative work in either Area I or Area II (depicted in Figure C-1 ). If the Secretary or Administrator agrees with the recommendation and finds that the subject of the commemorative work is of preeminent historical and lasting significance to the nation, he or she will recommend placement in Area I and notify Congress of his or her determination. The location of a commemorative work in Area I shall be deemed disapproved unless it has been approved by law within 150 calendar days. If the commemorative work is of lasting historical significance it may be located in Area II, and Congress does not require notification, nor is further legislation needed. The CWA divides the District of Columbia and its environs into three sections for the placement of memorials: the Reserve, Area I, and Area II. For each area the standards for memorial placement are specified in law and enforced through a requirement for congressional approval of monument location through the passage of a joint resolution. For a map of the District marked with these sections, see Appendix C . The Reserve, created by P.L. 108-126 , is defined as ""the great cross-axis of the Mall, which generally extends from the United States Capitol to the Lincoln Memorial, and from the White House to the Jefferson Memorial"" and ""is a substantially completed work of civic art."" Within this area, ""to preserve the integrity of the Mall … the siting of new commemorative works is prohibited."" Works authorized prior to the enactment of P.L. 108-126 in November 2003—the Dr. Martin Luther King Jr. Memorial is the only such work—continue to be eligible for placement within the Reserve, pursuant to the process established by the National Park Service and outlined below under "" Establishing a Memorial in the Nation's Capital ."" Area I is reserved for commemorative works of ""preeminent historical and lasting significance to the United States."" Shown on Figure C-1 , Area I is roughly bounded by the West Front of the Capitol; Pennsylvania Avenue N.W. (between 1 st and 15 th Street, N.W.); Lafayette Square; 17 th Street, N.W. (between H Street and Constitution Avenue); Constitution Avenue, N.W. (between 17 th and 23 rd Streets); the John F. Kennedy Center for the Performing Arts waterfront area; Theodore Roosevelt Island; National Park Service land in Virginia surrounding the George Washington Memorial Parkway; the 14 th Street Bridge area; and Maryland Avenue, S.W., from Maine Avenue, S.W., to Independence Avenue S.W., at the U.S. Botanic Garden. Pursuant to 40 U.S.C. §8908, the Secretary of the Interior or the Administrator of General Services, after seeking the advice of the National Capital Memorial Advisory Commission, can recommend that a memorial be placed in Area I. If either the Secretary or the Administrator recommends placement in Area I, he or she must notify the House Committee on Natural Resources and the Senate Committee on Energy and Natural Resources. If the recommendation is not enacted into law within 150 calendar days, the recommendation is not adopted and the memorial sponsor must consider sites in Area II. Area II is reserved for ""subjects of lasting historical significance to the American people."" Shown on Figure C-1 , Area II encompasses all sections of the District of Columbia and its environs not part of the Reserve or Area I. In considering commemorative works legislation, both the House Committee on Resources and Senate Committee on Energy and Natural Resources solicit the views of the National Capital Memorial Advisory Commission. The Secretary or the Administrator likewise seeks the advice of the commission prior to recommending a location for a commemorative work. For example, the joint resolution approving the location of the Vietnam Women's Memorial stated, Whereas section 6(a) of the Act entitled ""An Act to provide standards for placement of commemorative works on certain Federal Lands in the District of Columbia and its environs, and for other purposes,"" approved November 14, 1986 (100 Stat. 3650, 3651), provides that the location of a commemorative work in the area described therein as area I shall be deemed disapproved unless, not later than one hundred and fifty days after the Secretary of the Interior or the Administrator of General Services notifies the Congress of his determination that the commemorative work should be located in area I, the location is approved by law; Whereas the Act approved November 15, 1988 (102 Stat. 3922), authorizes the Vietnam Women's Memorial Project, Incorporated, to establish a memorial on Federal land in the District of Columbia or its environs to honor women who served in the Armed Forces of the United States in the Republic of Vietnam during the Vietnam era; Whereas section 3 of the said Act of November 15, 1988, states the sense of the Congress that it would be most fitting and appropriate to place the memorial within the two and two-tenths acre site of the Vietnam Veterans Memorial in the District of Columbia which is within area I; and Whereas the Secretary of the Interior has notified the Congress of his determination that the memorial authorized by the said Act of November 15, 1988, should be located in area I: Now, therefore, be it Resolved by the Senate and House of Representatives of the United States Of America in Congress assembled, That the location of a commemorative work to honor women who served in the Armed Forces of the United States in the Republic of Vietnam during the Vietnam era, authorized by the Act approved November 15, 1988 (102 Stat. 3922), in the area described in the Act approved November 14, 1986 (100 Stat. 3650), as area I, is hereby approved. Following site selection, the memorial planners begin the process of hiring a designer and work with National Park Service (NPS) to get plans approved by the NCPC and the Commission of Fine Arts. Memorial sponsors, in the development of a concept(s), are to consult with the National Capital Memorial Advisory Commission, which in turn provides advice to the Secretary or to Members of Congress. Once the memorial sponsor has chosen a designer and selected a concept design plan, those plans are presented to the NPS or General Services Administration, the Commission of Fine Arts, and the NCPC. In considering the plans, these entities are guided by several criteria established by the CWA. The design reviews include, but are not limited to, the memorial's surroundings, location, materials, landscape features, site specific guidelines, and the prohibition of donor contributions. Final designs and specifications are completed in coordination with NPS or GSA (as appropriate). As discussed above in "" Payment of Expenses ,"" authorizing legislation often contains a statement that the commemorative work is to be created pursuant to the CWA and that the use of federal funds is not generally authorized or appropriated for the creation of commemorative works. Subsequently, sponsor groups are statutorily authorized to raise funds for the completion of the commemorative work. Fundraising for the creation of commemorative works can sometimes be difficult. In some instances, Congress has appropriated federal funds to assist with the creation of the commemorative work. For example, in 2005, Congress appropriated $10 million to the Secretary of the Interior ""for necessary expenses for the Memorial to Martin Luther King, Jr."" The appropriation was designated as matching funds and available only after being matched by non-federal contributions. The Commemorative Works Act specifies four criteria that the Secretary or the Administrator must determine prior to issuing a construction permit: 1. Approval of site and design by the Secretary or Administrator, the National Capital Planning Commission, and the Commission of Fine Arts 2. Consultation of ""knowledgeable individuals qualified in the field of preservation and maintenance … to determine structural soundness and durability of the commemorative work and to ensure that the commemorative work meets high professional standards"" 3. Submission of construction documents by authorized memorial sponsor to the Secretary or Administrator 4. Proof that sufficient funds exist to complete project construction 5. In advance of receiving a permit, the sponsor must donate an amount equal to 10% of the estimated cost of construction to offset the costs of perpetual maintenance and preservation Once a permit is issued, memorial construction may commence. Following the memorial's completion, the sponsor schedules a dedication and transfer ceremony to NPS or GSA. Past dedications have sometimes been attended by the President, but no specific ceremony requirements exist. For example, President George W. Bush dedicated the World War II Memorial in 2004. In his remarks, President Bush briefly commented on the memorial creation process and on the importance of honoring World War II veterans. Raising up this Memorial took skill and vision and patience. Now the work is done, and it is a fitting tribute, open and expansive like America, grand and enduring like the achievements we honor. The years of World War II were a hard, heroic, and gallant time in the life of our country. When it mattered most, an entire generation of Americans showed the finest qualities of our Nation and of humanity. On this day, in their honor, we will raise the American flag over a monument that will stand as long as America itself. In November 2000, Attorney General Janet Reno and Secretary of Commerce Norman Mineta represented President Bill Clinton at the dedication ceremony for the National Japanese-American Memorial to Patriotism during World War II. In a statement following the dedication, President Clinton recognized the importance of the memorial and the presence of his Cabinet secretaries. Earlier today America honored the patriotism of Japanese-Americans during World War II with the dedication of the National Japanese-American Memorial in the Nation's Capital. Attorney General Janet Reno and Commerce Secretary Norman Mineta joined distinguished members of the Japanese-American community and Americans of all ancestries in reminding us of a time when this county lost sight of the very foundations of democracy it was defending abroad. This Nation must never forget the difficult lessons of the Japanese-American internment camps during World War II and the inspirational lessons of patriotism in the face of that injustice. Since the passage of the CWA in 1986, Congress has authorized 33 memorials to be constructed on federal lands in the District of Columbia or its environs. Of these works, 18 have been dedicated and completed—15 under the auspices of the CWA and 3 outside the CWA process —11 are in-progress, and 4 have lapsed authorizations. Table 1 provides the number of memorials authorized per Congress, pursuant to the CWA, since the 99 th Congress (1985-1987). Memorials authorized by Congress since the passage of CWA have focused on a variety of individuals, groups, and events. Among the individuals recognized have been Francis Scott Key, George Mason, and Dr. Martin Luther King Jr. Groups commemorated have included Black Revolutionary War Patriots, Victims of Communism, and Ukrainian Famine-Genocide Victims. Still others have sought to memorialize events including the Korean War, World War II, and Dr. Martin Luther King Jr.'s ""I Have a Dream Speech."" Table 2 lists memorials authorized by Congress since 1986. Appendix A. Summary of Original Commemorative Works Act Provisions The Commemorative Works Act (CWA), as enacted, contained 10 sections covering the purposes of the bill, definitions, congressional authorization for memorials, creation of the National Capital Memorial Commission, conditions for memorial placement in different parts of the District of Columbia, site design and approval, issuance of construction permits, creation of a temporary memorial site, and other administrative provisions. Table A-1 provides a summary of the original provisions contained in the CWA for each section of the bill. Appendix B. Steps for Establishing a Memorial in the Nation's Capital In 1987, the National Park Service created a 24-step outline of the commemorative works process. In 2001, the National Capital Planning Commission published the outline for establishing a monument or memorial in the District of Columbia as part of the Museums and Memorials Master Plan. The 24-steps, reprinted verbatim below, are designed to guide interested groups and help ensure appropriate legislation, site selection, design approval, fundraising, and construction. 1. Memorial sponsor seeks National Capital Memorial Advisory Commission (NCMAC) assistance to review the requirements and process established by the Commemorative Works Act (CWA) and its applicability to the proposed memorial. 2. Memorial sponsor seeks a Senator or Representative who is willing to draft and introduce a bill to authorize establishment of the memorial. 3. Staffs of NCMAC, Member of Congress who will introduce the bill, and authorizing committees draft a bill that conforms to the provisions of the CWA. 4. Congressman and/or Senator introduce bill authorizing the memorial and designating the sponsor as the entity responsible for its erection at no cost to the federal government. 5. NCMAC considers proposed authorizing legislation to establish its view pursuant to CWA. 6. Chairmen of House and Senate authorizing Subcommittees on National Parks solicit views of NCMAC, may hold hearings on proposed authorizing legislation, and take action on a bill before sending it to the full House and Senate for a vote on the bill. 7. Congress passes bill, President signs bill into law, providing memorial sponsor 7 years in which to begin construction of memorial in Area II. 8. Memorial sponsor organizes the structure of the entity that will establish the memorial and beings planning. 9. The memorial sponsor may submit to the Secretary a request to be authorized to consider sites in Area I. The Secretary seeks the advice of NCMAC to determine whether the memorial warrants placement in Area I. Based on the advice of NCMAC, the secretary notifies Congress of a determination that the subject is of preeminent and lasting historical significance so that Congress can consider passage of legislation authorizing an Area I location for enactment by the President. 10. Memorial sponsor works with NPS staff to identify potential Area II sites (may include Area I if authorized) and prepare alternative site study and accompany preliminary environmental analysis. 11. Memorial sponsor, for sites within Area II, or Area I if authorized, submits alternative site study and accompanying preliminary environmental analysis to NPS for approval of preferred site and consultation with NCMAC. 12. NPS submits recommended site and environmental document to the National Capital Planning Commission (NCPC) and the Commission of Fine Arts (CFA) for approval. NPS initiates Section 106 consultation on its recommendation of site with the State Historic Preservation Officer (SHPO). 13. After site approval by NCPC and CFA and in consultation with the SHPO, the design process begins in accordance with any approved design guidelines. 14. Memorial sponsors select a designer or initiate a design competition. 15. Memorial sponsor selects preferred design concept and meets with NPS to discuss issues that design may present. After possible refinements, sponsor submits the design concept and draft environmental assessment to the NPS. 16. NPS reviews design concept and, upon concurrence, submits to NCPC and CFA with appropriate environmental document for approval. 17. Memorial sponsor, in close coordination with NPS, refines preliminary design concept on the basis of NCPC, CFA, and SHPO comments and submits preliminary design to NPS who, upon approval, submits it to NCPC and CFA for approval. 18. Memorial sponsor, in close coordination with NPS, refines preliminary design on the basis of comments and submits final design to NPS, who upon approval, submits it to NCPC and CFA for approval. 19. Memorial design team completes final drawings and specifications in close coordination with NPS. 20. Memorial sponsor completes fund-raising. 21. Memorial sponsor submits final drawing and specifications, cost estimate and evidence of funds on hand plus 10 percent cash payment of design and construction costs for maintenance to NPS. 22. NPS issues a construction permit on behalf of the Secretary of the Interior which constitutes final approval by the Secretary and the start of construction. 23. Memorial Sponsor begins construction and preparation of operation, maintenance, and preservation plans for the memorial. 24. Memorial is dedicated and transferred to NPS for management with accompanying as-built operation, maintenance, and preservation plans. Appendix C. District of Columbia Map with Area Designations Appendix D. Entities Responsible for Memorials in the District of Columbia The process established by the Commemorative Works Act (CWA) to create a commemorative work in the District of Columbia involves the National Capital Memorial Advisory Commission, the U.S. Commission of Fine Arts, the National Capital Planning Commission, the District of Columbia Historic Preservation Office, and sometimes the American Battle Monuments Commission. Each entity is highlighted below. National Capital Memorial Advisory Commission The National Capital Memorial Advisory Commission was created in 2001 to ""advise the Secretary of the Interior and the Administrator of General Services (as appropriate) on policy and procedures for establishment of, and proposals to establish, commemorative works in the District of Columbia and its environs and on other matters concerning commemorative works in the Nation's Capital as the Commission considers appropriate."" The commission is comprised of eight members and meets at least two times a year to ""examine … each memorial proposal for conformance to the Commemorative Works Act, and make … recommendations to the Secretary and the Administrator and to Members and Committees of Congress. The Commission also serves as a source of information for persons seeking to establish memorials in Washington, DC and its environs."" U.S. Commission of Fine Arts In 1910, Representative Samuel McCall introduced a bill, H.R. 19962, to create a commission on fine arts. Reported by the Committee on the Library, the House debated the bill on February 9. During the debate, Representative McCall explained why a permanent entity was needed to govern art within the District of Columbia. We have had a very haphazard development of art in the city of Washington. We have had our streets and our squares filled up by art objects that are not always art. We have had commissions appointed—temporary, sporadic commissions—one commission to operate upon one statue and another commission to operate upon another, and the result is that we have had no uniform or well thought out development. Speaking against the creation of the commission, Representative James Tawney argued that creation of a Commission of Fine Arts amounted to an abdication of power over matters in the District of Columbia. I believe that the Congress of the United States should reserve some of its legislative functions, some of its legislative power, and not delegate it to commissions or to any other body. We are responsible to the people for legislation, and can not escape that responsibility by the appointment of commissions. …We have control by virtue of the law over the District of Columbia. When Congress authorizes the construction of a public building and fixes the location of that building and requires its erections within the authority and the appropriation made therefore, or the limit of cost, I do not believe that there is any body of men, or any man, or any executive officer, I care not how high in authority he maybe, who should have the power, or unlawfully exercise executive power, to defeat the will of Congress as express in the law it enacts. Following debate, H.R. 19962 passed the House and was referred to the Senate. The Senate debated the bill on May 2 and 3, 1910. During debate, the Senate amended the bill to give the commission the authority to ""advise generally upon questions of art when required to do so by the President, or by any committee of either House of Congress"" and specified commission staffing. The Senate passed the bill, as amended on May 3, and the House disagreed with the Senate amendments and requested a conference. The conference committee issued its report on May 9, Congress approved the bill, and President William Howard Taft signed the bill on May 17, 1910. Pursuant to the act, the Commission of Fine Arts was initially charged with providing ""advise upon the location of statues, fountains, and monuments in the public squares, streets, and parks in the District of Columbia, and upon the selection of models for statues, fountains, and monuments erected under the authority of the United States and upon the selection of artists for the execution of the same."" Comprised of seven ""well-qualified judges of the fine arts, appointed by the President,"" the commission's duties have subsequently been expanded to include ""the selection of models for statues, fountains, and monuments erected under the authority of the Federal Government; the selection of artists to carry out [the creation of statues, fountains, and monuments]; and questions of art generally when required to do so by the President or a committee of Congress."" The commission does not have authority over Capitol or Library of Congress buildings. National Capital Planning Commission In 1924, Congress established the National Capital Park and Planning Commission to implement the McMillan Plan for the District of Columbia (see Figure 2 ). Pursuant to the act of June 6, 1924, the commission was to ""preserve the flow of water in Rock Creek, to prevent pollution of Rock Creek and the Potomac and Anacostia Rivers, to preserve forests and natural scenery in and about Washington, and to provide for the comprehensive systematic, and continuous development of the park, parkway, and playground system of the National Capital."" In 1952, Congress, in the National Capital Planning Act, changed the commission's name to the National Capital Planning Commission. The act also expanded the commission's geographic boundaries and recognized the creation of the national capital region in Maryland and Virginia. In the House report accompanying the bill, the Committee on the District of Columbia emphasized the new regional mission of the commission. The bill denominates and authorizes the Commission to be the central planning agency for the Federal and District Governments within the National Capital region (the District and its environs) and to be the official representative of the aforesaid governments for collaboration with the Regional Planning Council.… The bill includes additional subjects, such as viaducts, subways, major thoroughfares, monuments and memorials , public reservations, or property such as airports, parking areas, institutions, open spaces, public utilities and surveys for transportation, redevelopment of obsolescent, blighted or slum areas, and specifically adds the all-important subject of density or distribution of population [emphasis added]. Currently, the commission consists of 12 members. Three members are appointed by the President, including the chair. Two of the three members appointed by the President must reside in Virginia and Maryland, respectively. The Mayor of the District of Columbia appoints two members who must be residents of the District. In addition, a number of regional officials serve as ex-officio members. These include the Mayor of Washington, DC, the chair the Council of the District of Columbia; heads of executive branch agencies with significant land holdings in the District; and leaders of the U.S. House and Senate committees with District oversight responsibilities. In addition to providing guidance and approval at multiple steps of the monument and memorial creation process in the District of Columbia, the NCPC also operates under the authority of other laws for planning within the National Capital Region. These include the National Capital Planning Act, Height of Buildings Act of 1910, District of Columbia Zoning Act, Foreign Missions Act, International Center Act, National Historic Preservation Act, National Environmental Policy Act, District of Columbia Home Rule Act, and the Capper-Crampton Act. State Historic Preservation Office for the District of Columbia Created pursuant to the National Historic Preservation Act of 1966, State Historic Preservation Officers ""administer the national historic preservation program at the State level, review National Register of Historic Places nominations, maintain data on historic properties that have been identified but not yet nominated, and consult with Federal agencies."" While not a statutory part of the memorial process, the National Capital Planning Commission recommends consultation with the State Historic Preservation Office for the District of Columbia as part of the design approval process. American Battle Monuments Commission The American Battle Monuments Commission was originally created in 1923 to ""prepare plans and estimates for the erection of suitable memorials to mark and commemorate the services of the American forces in Europe and erect memorials therein at such places as the commission shall determine, including works of architecture and art in the American cemeteries in Europe."" Generally, the commission has statutory authority to design, construct, operate and maintain permanent American cemeteries in foreign countries; establish and maintain U.S. military memorials, monuments and markers where American armed forces have served overseas since April 6, 1917; and control ""the design and construction of permanent U.S. military monuments and markers by other U.S. citizens and organizations, both public and private, and encouraging their maintenance."" In limited circumstances, the commission has also been tasked with creating memorials within the United States. For example, the commission was statutorily authorized to create the World War II Memorial in the District of Columbia.","In 1783, the Continental Congress authorized the first memorial in American history, an equestrian statue to honor George Washington that was to be constructed by the ""best artist"" in Europe. Since that time, Congress has authorized more than 100 commemorative works in the District of Columbia. Even with multiple authorized works, however, no specific process existed for the creation of commemorative works for almost two centuries. While Congress has long been responsible for authorizing memorials on federal land, the process for approving site locations, memorial design plans, and funding was historically haphazard. At times, Congress was involved in the entire design and building process. In other instances, that authority was delegated to executive branch officials, federal commissions were created, or Congress directly authorized a sponsor group to establish a memorial. In 1986, in an effort to create a statutory process for the creation, design, and construction of commemorative works in the District of Columbia, Congress debated and passed the Commemorative Works Act (CWA). The CWA codified congressional procedure for authorizing commemorative works when federal land is administered by the National Park Service or the General Services Administration. The act delegated responsibility for overseeing design, construction, and maintenance to the Secretary of the Interior or the Administrator of the General Services Administration, and several other federal entities, including the National Capital Planning Commission, the Commission of Fine Arts, and the National Capital Memorial Advisory Commission. Additionally, the CWA restricts placement of commemorative works to certain areas of the District of Columbia based on the subject's historic importance. These areas include the Reserve (i.e., the National Mall), where no new commemorative works are permitted; Area I, where new commemorative works must be of preeminent historical and lasting significance to the United States; and Area II, which is reserved for subjects of lasting historical significance to the American people. The act further stipulates that the Secretary of the Interior or the Administrator of the General Services Administration provide recommendations to Congress on the placement of works within Area I. Pursuant to the CWA, the National Park Service and the National Capital Planning Commission outlined a 24-step process to guide the creation of a commemorative work in the District of Columbia. The guidelines include initiation of a memorial, authorizing legislation, site selection and approval, fundraising, design approval, construction, and memorial dedication. Once a commemorative work is authorized, Congress may continue its involvement in the process in two ways. First, because the CWA provides a seven-year authorization for all commemorative works (with an administrative extension available), Congress is sometimes asked to extend a memorial sponsor group's authority beyond the initial period. Second, in some circumstances, Congress is asked to provide appropriations to assist a sponsor group's fundraising. In the past, appropriations for commemorative works have been in the form of both direct appropriations and matching funds. This report does not address memorials outside the District of Columbia.",govreport
"The Senate Finance Committee approved a measure, America's Healthy Future Act of 2009, on October 13, 2009. S. 1796 , based on that approved measure, was ordered reported on October 19. Included in the committee report accompanying S. 1796 was preliminary analysis conducted by the Congressional Budget Office (CBO) on October 7 regarding the potential impact of the Chairman's Mark. CBO projected that the Mark legislation would reduce federal deficits by $81 billion over a 10-year period (2010-2019), and would insure 94% of the non-elderly, legally present U.S. population by 2019. This report summarizes the key provisions affecting private health insurance in Titles I and VI of S. 1796 , American's Healthy Future Act of 2009, as ordered reported by the Senate Committee on Finance on October 19, 2009. Title I of the bill focuses on restructuring the private health insurance market, setting minimum standards for health benefits, and providing financial assistance to certain individuals and, in some cases, small employers. Overall, the bill includes the following provisions: Individuals would be required to maintain health insurance, and certain employers with more than 50 employees would be required to either provide insurance or pay a tax, with some exceptions. Several market reforms would be made, such as modified community rating and guaranteed issue and insurance renewal. Both the individual mandate and any employer requirements would be linked to essential health benefits coverage. Qualifying coverage would include: qualified health benefits plans (QHBPs) offered in or out of an exchange; new group or individual coverage that meets or exceeds minimum health benefits; grandfathered employment based plans; grandfathered nongroup plans; and other coverage, such as Medicare and Medicaid. Either a state would establish separate exchanges to offer individual versus small group coverage, or the Secretary of Health and Human Services (hereafter referred to as the ""Secretary"" or ""HHS Secretary"" unless noted otherwise) would contract with a nongovernmental entity to establish and operate exchanges in states that did not establish them. Exchanges would not be insurers but provide eligible individuals and small businesses with access to private plans in a comparable way. Certain individuals with incomes below 400% of the federal poverty level could qualify for credits toward their premium costs and subsidies towards their cost-sharing. This financial assistance would be available only through exchanges. States would be provided the flexibility to establish basic plans for low-income individuals not eligible for Medicaid. Existing plans offered by employers as well as plans offered in the individual market (the nongroup market) would be grandfathered. However, existing small group plans would have to meet the applicable private market reforms by July 1, 2013. New plans could also be sold in both the individual and group market outside of an exchange, but only those new plans that meet the minimum requirements specified in the bill would satisfy the requirements for individuals and employers. Title VI includes a number of provisions to raise revenues to pay for expanded health insurance coverage. The revenue provisions include excise taxes and annual fees on health insurers, as well as limitations on executive compensation of insurance companies. In addition, a number of revenue provisions limit contributions to tax-advantaged accounts (i.e., flexible spending accounts and health savings accounts) and other itemized deductions used for health care expenses. This report begins by providing background information on key aspects of the private health insurance market as it exists currently. This information is useful in setting the stage for understanding how and where S. 1796 would reform health insurance. This report summarizes key provisions affecting private health insurance in Titles I and VI of America's Healthy Future Act of 2009, as ordered reported by the Senate Committee on Finance on October 19, 2009. Although most of the provisions would be effective beginning in July 1, 2013, the table in the Appendix shows the timeline for implementing provisions effective prior to that date. Although the description that follows segments the private health insurance provisions into various categories, these provisions are interrelated and interdependent. For example, the bill includes a number of provisions to alter how current private health insurance markets function, primarily for individuals who purchase coverage directly from an insurer or through a small employer. S. 1796 would require that insurers not exclude potential enrollees or charge them premiums based on pre-existing health conditions. In a system where individuals voluntarily choose whether to obtain health insurance, however, individuals may choose to enroll only when they become sick. This can lead to a situation known as ""adverse selection,"" which may result in higher premiums and greater uninsurance. When permitted, insurers often guard against adverse selection by adopting policies such as underwriting health insurance policies based on individual health status and excluding coverage for pre-existing conditions. If reform eliminates many of the tools insurers use to guard against adverse selection, America's Health Insurance Plans (AHIP), the association that represents health insurers, has stated that all individuals must be required to have coverage (""individual mandate""), so that not just the sick enroll. Furthermore, some individuals currently forgo health insurance because they cannot afford the premiums. If individuals are required to obtain health insurance, one could argue that adequate premium subsidies must be provided by the government and/or employers to make practical the individual mandate to obtain health insurance, which is in turn arguably necessary to make the market reforms possible. In addition, premium subsidies without cost-sharing subsidies may provide individuals with health insurance that they cannot afford to use. So, while the descriptions below discuss various provisions separately, the removal of one from the bill could be deleterious to the implementation of the others. The private health insurance provisions are presented under the following topics, with the primary CRS contact listed for each: Individual mandate and employer requirements: the mandate for individuals to maintain health insurance and any requirements for employers. [[author name scrubbed], [phone number scrubbed]] Private health insurance market reforms. [[author name scrubbed], [phone number scrubbed]] Exchange [Chris Peterson, [phone number scrubbed]], through which the following two items can only be offered: Health Care Cooperatives. [[author name scrubbed], [phone number scrubbed]] Premium subsidies. [Chris Peterson, [phone number scrubbed]] Title VI: Select Revenue Provisions Relating to Private Health Insurance [[author name scrubbed], [phone number scrubbed]] Americans obtain health insurance in different settings and through a variety of methods. People may get health coverage in the private sector or through a publicly funded program, such as Medicare or Medicaid. In 2008, 60% of the U.S. population had employment-based health insurance. Employers choosing to offer health coverage may either purchase insurance or choose to self-fund health benefits for their employees. Other individuals obtained coverage on their own in the nongroup market. However, there is no federal law that either requires individuals to have health insurance or requires employers to offer health insurance. Approximately 46 million individuals (15% of the U.S. population) were estimated to be uninsured in 2008. Individuals and employers choosing to purchase health insurance in the private market fit into one of the three segments of the market, depending on their situation—the large group (large employer) market, the small group market, and the nongroup market. More than 96% of large employers offer coverage. Large employers are generally able to obtain lower premiums for a given health insurance package than small employers and individuals seeking nongroup coverage. This is partly because larger employers have a larger ""risk pool"" of enrollees that makes the expected costs of care more predictable. Employers generally offer large subsidies toward health insurance, thus making it more attractive for both the healthier and the sicker workers to enter the pool. So, not only is the risk pool large in size, but it is also contains diverse risks. States have experimented with ways to create a single site where individuals and small employers could compare different insurance plans, obtain coverage, and sometimes pool risk. Although most of these past experiments failed (e.g., California's PacAdvantage ), other states have learned from these experiences and have fashioned potentially more sustainable models (e.g., Massachusetts' Connector ). There are private-sector companies that also serve the role of making various health insurance plans easier to compare for individuals and small groups (e.g., eHealthInsurance), available in most, but not all, states because of variation in states' regulations. Less than half of all small employers (less than 50 employees) offer health insurance coverage; such employers cite cost as the primary reason for not offering health benefits. One of the main reasons is a small group's limited ability to spread risk across a small pool. Insurers generally consider small firms to be less stable than larger pools, as one or two employees moving in or out of the pool (or developing an illness) would have a greater impact on the risk pool than they would in large firms. Other factors that impact a small employer's ability to provide health insurance include certain disadvantages small firms have in comparison with their larger counterparts: small groups are more likely to be medically underwritten, have relatively little market power to negotiate benefits and rates with insurance carriers, and generally lack economies of scale. Allowing these firms to purchase insurance through a larger pool, such as an Association, Gateway or an Exchange, could lower premiums for those with high-cost employees. Depending on the applicable state laws, individuals who purchase health insurance in the nongroup market may be rejected or face premiums that reflect their health status, which can make premiums lower for the healthy but higher for the sick. Even when these individuals obtain coverage, there may be coverage exclusions for certain conditions. Reforms affecting premiums ratings would likely increase premiums for some, while lowering premiums for others, depending on their age, health, behaviors, and other factors. States are the primary regulators of the private health insurance market, though some federal regulation applies, mostly affecting employer-sponsored health insurance (ESI). The federal Health Insurance Portability and Accountability Act (HIPAA) requires that coverage sold to small groups (2-50 employees) must be sold on a guaranteed issue basis. That is, the issuer must accept every small employer that applies for coverage. All states require issuers to offer policies to firms with 2-50 workers on a guaranteed issue basis, in compliance with HIPAA. As of January 2009 in the small group market, 13 states also require issuers to offer policies on a guaranteed issue basis to self-employed ""groups of one."" And as of December 2008 in the individual market, 15 states require issuers to offer some or all of their insurance products on a guaranteed issue basis to non-HIPAA eligible individuals. Most states currently impose premium rating rules on insurance carriers in the small group and individual markets. The spectrum of existing state rating limitations ranges from pure community rating to adjusted (or modified) community rating, to rate bands, to no restrictions. Under pure community rating, all enrollees in a plan pay the same premium, regardless of their health, age or any other factor related to insurance risk. As of December 2008, only two states (New Jersey and New York) use pure community rating in their nongroup markets, and only New York imposes pure community rating rules in the small group market. Adjusted community rating prohibits issuers from pricing health insurance policies based on health factors, but allows it for other key factors such as age or gender. Rate bands allow premium variation based on health, but such variation is limited according to a range specified by the state. Rate bands are typically expressed as a percentage above and below the index rate (i.e., the rate that would be charged to a standard population if the plan is prohibited from rating based on health factors). Federal law requires that group health plans and health insurance issuers offering group health coverage must limit the period of time when coverage for pre-existing health conditions may be excluded. As of January 2009 in the small group market, 21 states had pre-existing condition exclusion rules that provided consumer protection above the federal standard. And as of December 2008 in the individual market, 42 states limit the period of time when coverage for pre-existing health conditions may be excluded for certain enrollees in that market. Moreover, while there are a handful of federal benefit mandates for health insurance that apply to group coverage, there are more than 2,000 cumulative benefit mandates imposed by the states. One issue receiving congressional attention is whether a publicly sponsored health insurance plan should be offered as part of the insurance market reform. Some proponents of a public option see it as potentially less expensive than private alternatives, as it would not need to generate profits or pay brokers to enroll individuals and might have lower administrative costs. Some proponents argue that offering a public plan could provide additional choice and may increase competition, since the public plan might require lower provider payments and thus charge lower premiums. Some opponents question whether these advantages would make the plan a fair competitor, or rather provide the government with an unfair advantage in setting prices, in authorizing legislation, or in future amendments. Ultimately, opponents are concerned that these advantages might drive private plans from the market. Health insurance is provided by organizations that are either for-profit or non-profit in terms of their tax status. Some studies have suggested that non-profits perform better in key areas such as quality. For example, a study published in the Journal of the American Medical Association (JAMA) in 1999 found that non-profit health maintenance organizations (HMOs) scored higher on all 14 Healthplan Employer Data and Information Set (HEDIS®) quality measures studied. These results were generally replicated in a study published in 2006 of 272 health plans conducted by researchers at the University of California at Berkeley and the National Committee for Quality Assurance (NCQA). Health insurance co-operatives, a subset of non-profit plans, have performed particularly well as detailed in recent case studies of Group Health Cooperative of Seattle (GHC) and HealthPartners of Minnesota. As of 2008, 47% of the enrollment in private health plans was in non-profit health insurance organizations. However, there are relatively few health insurance co-operative organizations in the United States. Some Congressional attention has been focused on options to incentivize the creation of new health insurance co-operatives. Advocates of this position argue that co-operatives invest retained earnings back into the plan or return the dollar to the membership, thus resulting in lower premiums, lower cost-sharing, expanded benefits, and innovations such as wellness programs, chronic disease management, and integrated care. Opponents of the proposal assert that co-operatives have not been successful in most of the country and that evidence is lacking that co-operatives would make health insurance more affordable. S. 1796 would establish new health insurance plans and define existing ones in the private market applicable to Title I. New health plans include the following: In the individual and small group markets, any new health plan must meet the specified requirements to be a ""qualified health benefits plan"" (QHBP). QHBPs must comply with new federal standards related to market reforms (e.g., guaranteed issue) and essential benefit requirements, and state rules including licensure requirements. Any plan offered through the Exchange (described below) must be a QHBP. A ""qualified basic health plan"" would be a plan established and maintained by the state under which only eligible individuals may enroll. Such a plan would provide coverage equal to at least the essential benefits package (described below), and have a medical loss ratio of at least 85%. The Senate Finance bill defines several terms related to health insurance applicable to Title I, including: ""Health benefits plan"" refers to health insurance coverage and a group health plan, not including self-insured plans and multiple employer welfare arrangements (MEWAs). ""Offeror"" refers to the plan sponsor in the case of a group health plan and health insurance coverage, or the employer in the case of a plan jointly offered by one or more employers and one or more employee organizations in which the employer is the primary financing source. Essential health benefits coverage (i.e., coverage required to fulfill the individual mandate) is defined as coverage under a QHBP, a grandfathered health benefits plan, eligible employer-sponsored plans, Medicare part A, Medicaid, coverage for members of the Armed Forces and their dependents (including Tricare), certain veteran's health care program coverage, Federal Employees Health Benefits Program (FEHBP), and as determined by the HHS Secretary and Secretary of Labor, any other health benefits coverage such as a State health benefits risk pool or coverage while incarcerated. S. 1796 would include a mandate for most individuals age 18 and over to have health insurance beginning July 1, 2013, or to pay a penalty for noncompliance. Individuals would be required to maintain essential health benefits coverage for themselves and their dependents. Most individuals who do not maintain essential health benefits coverage for themselves and their dependents would be required to pay a penalty. The penalty would be phased-in—$200 in 2014, $400 in 2015, $600 in 2016, reaching $750 in 2017. In any given year, there would be a limit of no more than two times the penalty amount in total for the taxpayer and any dependents. The penalty amount would be adjusted for inflation, beginning with taxable years after 2017. Members of Congress and congressional staff would be qualified to enroll in a QHBP in the individual market offered through an exchange in the state in which they reside. Any employer contribution made on their behalf could only be paid to the offeror of the QHBP in the which they were enrolled in the exchange. Employer contributions for Members of Congress and congressional staff could not be made to a plan offered through the Federal Employees Health benefit program (FEHBP). Some individuals would be provided with subsidies to help pay for their premiums and cost-sharing. (A complete description of who would be eligible and the amount of subsidies is found in the section on Individual Eligibility for Premium Credits and Cost-sharing Subsidies). Others would be exempt from the individual mandate, including those without coverage for less than 90 days, Indians (as defined in the Indian Health Care Improvement Act), those with qualifying religious exemptions, those in a health care sharing ministry, undocumented aliens, individuals whose adjusted gross income did not exceed 100% of the federal poverty level (FPL), or any individual who the Secretary of Labor determines to have suffered a hardship with respect to the capability to obtain coverage under a QHBP. Additionally, individuals whose required contribution for a calendar year exceeds 8% of household income would be exempt from the mandate. For tax years after 2013, the 8% would be adjusted by the Secretary to reflect the excess rate of premium growth and the rate of income growth for the period. S. 1796 would not mandate employers to provide employees with coverage, however employers with more than 50 full-time employees (defined as working on average at least 30 hours per week) who did not provide coverage could be required to pay a penalty for certain employees. For those employers that chose to offer health insurance, the following rules would apply: Current employment-based plans would be grandfathered. Small employers could offer full-time employees and their dependents coverage in a QHBP. Large employers could offer full-time employees the opportunity to enroll in a group health plan, as long as the plan met requirements relating to annual and lifetime limits, annual limits on cost-sharing, and provided preventive items and services with cost-sharing only as allowed. An employer would not be treated as meeting the employer requirements for an employee, if (1) the employee is eligible for a premium credit because the employee's required contribution exceeds 10% of the employee's household income or (2) the plan's share of the total allowed costs of benefits provided under the plan is less than 65% of the costs (this requirement would not apply to QHBPs). Employers would not have to provide coverage for seasonal workers. Employers would be required to file a return providing the name of each individual for whom they provide essential health benefits coverage, the number of months of coverage, and any other information required by the Secretary. They would also be required to provide notice to employees about the existence of the exchange, including a description of the services provided by the exchange. A firm with more than 50 employees that chose not to offer health insurance could be subject to a penalty if any of its full-time employees were enrolled in a QHBP for which a premium credit or cost-sharing subsidy is allowed or paid for, for that employee. The penalty assessed to the employer for each such employee would be equal to the sum of the average annual credit and the average annual cost-sharing subsidy. However, the total penalty for an employer would be limited to $400 times the average number of the firm's employees. For example, consider an employer who did not offer health coverage and had 100 employees of which 30 full-time employees qualified for credits or subsidies through an exchange plan. If the penalty amount set by the Secretary of HHS for that year is $3,000 per employee, the total penalty for the firm would be $90,000 (30 x $3,000). Since the maximum amount an employer must pay per year is limited to the number of employees multiplied by $400, which in this case is $40,000 (100 x $400), the employer must pay only $40,000 (the lesser of $40,000 and the $90,000 calculated tax). After 2013, the $400 amount would be indexed by a premium adjustment percentage for the calendar year. Certain small businesses would be eligible for a tax credit toward their share of the cost of health insurance coverage. In 2011 and 2012, the credit could cover up to 35% of a qualified employer's share of health insurance coverage. Beginning in 2013, a qualified small employer purchasing insurance through the exchange could receive a tax credit for two years that covers up to 50% of the employer's contribution. Small businesses with 10 or fewer full-time employees and with average taxable wages of $20,000 or less could claim the full credit amount. This credit would be phased out as average employee compensation increased from $20,000 to $40,000 and as the number of full-time employees increased from 10 to 25. Employees would be counted if they received at least $5,000 in compensation, but the credit would not apply toward insurance for employees whose compensation exceeded $80,000 (highly compensated employees). Adjustments would be made for inflation after 2010. Full-time employees would be calculated by dividing the total hours worked by all employees during the tax year by 2,080 (with a maximum of 2,080 hours for any one employee). Seasonal workers would be exempt from this calculation. Non-profit organizations with 25 or fewer employees would also be eligible to receive tax credits if they meet the same requirements. These organizations would be eligible for a 25 percent credit from 2011–2013 and a 35 percent credit in 2013 and thereafter. The credit would not be available to self-employed individuals. The Senate Finance bill would also reduce the administrative costs for small businesses who provided cafeteria plans (Section 125 plans). A cafeteria plan is a salary reduction arrangement that allows workers to fund accounts for health care expenses (e.g., copayments, deductibles and non-covered services) on a pre-tax basis. S. 1796 would simplify nondiscrimination testing requirements for cafeteria plans established by small businesses. Nondiscrimination testing measures whether an employer disproportionately favors highly compensated employees within the cafeteria plan. The bill would not require nondiscrimination testing by small businesses if they meet certain safe harbor requirements. Under the bill, small employers would have to either provide a uniform percentage of compensation to all employees (not less than 2%) or contribute an amount equal to the greater of: 6% of the employee's compensation for the year or twice the amount of the salary reduction contribution of each employee. S. 1796 would establish new federal standards applicable to private health insurance plans. These standards would primarily affect private health insurance in the individual market and the small group (small employer) market. These standards would impose new requirements on states related to the allocation of insurance risk, modify the current state-based regulatory system applicable to private plans, and require coverage for specified categories of benefits. Before 2015, states would have the option to define ""small employers"" either as those with (1) 100 or fewer employees, or (2) 50 or fewer employees. Beginning in 2015, small employers would be defined as those with 100 or fewer employees. Large employers would be affected by some provisions. After 2009, health insurance offered in the large and small group markets (excluding grandfathered plans and qualified health benefits plans) would be prohibited from imposing ""unreasonable annual or lifetime limits"" on plan enrollees. After June 30, 2013, health plans offered in the large group market could not charge cost-sharing for preventive services and would be required to adhere to the annual out-of-pocket limits applicable to high deductible health plans (HDHPs) as defined under the health savings account (HSA) section of the Internal Revenue Code (IRC). Employers with more than 200 employees that offer coverage would be required to automatically enroll new employees in a plan unless the employee opted out. S. 1796 would require that all new health benefits plans offered in the individual and small group market be qualified health benefit plans (QHBPs) that meet the insurance rating reforms and essential benefits package requirements specified in the bill (described below). A QHBP would be issued certification or recognized by the state that it meets the requirements relating to market reforms and health insurance affordability. Additionally, the offeror of the plan would be licensed by the state and comply with other requirements established by the Secretary or the state. QHBPs would be required to provide coverage for essential benefits and to charge the same premium regardless of whether the plan is purchased through an exchange (described below), the offeror, or an insurance agent. QHBPs also would be prohibited from excluding coverage for pre-existing conditions and would be required to offer coverage in the individual and small group markets on a guaranteed issue and guaranteed renewal basis. S. 1796 would apply new federal health insurance standards to new, generally available health plans in the individual and small group markets. Among the market reforms are provisions that would do the following: Prohibit qualified health benefits plans (QHBPs) from excluding coverage for pre-existing health conditions, or imposing limits on coverage based on health status-related factors. (A ""pre-existing health condition"" is a medical condition that was present before the date of enrollment for health coverage, whether or not any medical advice, diagnosis, care, or treatment was recommended or received before such date.) Require QHBPs to offer coverage on a guaranteed issue and guaranteed renewal basis. (""Guaranteed issue"" in health insurance is the requirement that an issuer accept every applicant for health coverage. ""Guaranteed renewal"" in health insurance is the requirement on an issuer to renew group coverage at the option of the plan sponsor (e.g., employer) or nongroup coverage at the option of the enrollee. Guaranteed issue and renewal alone would not guarantee that the insurance offered was affordable.) Require health benefits plans, offered in a rating area established by states, to determine premiums using adjusted community rating rules. (""Adjusted, or modified, community rating"" prohibits issuers from pricing health insurance policies based on health factors, but allows it for other key characteristics such as age or gender.) Under S. 1796 , premiums would only be allowed to vary according to specified ratios for the following risk factors: family enrollment (Individual, 1:1; Adult with child, 1.8:1, Two adults, 2:1, and Family, 3:1); age (by no more than a 4:1 ratio across age rating bands established by the Secretary), and tobacco use (by no more than 1.5:1 ratio). Require health benefits plans to provide an outline of the plan's coverage that meets uniformity standards adopted by the Secretary. Such standards would ensure that the outline both accurately describes the coverage offered by the plan, and is presented in a uniform format. S. 1796 would include provisions which take into account the variation of insurance risk among plan enrollees and across health plans. Such provisions would: Require individual and small group issuers that offer a QHBP through an exchange (described below) to consider all enrollees of that plan as members of a single risk pool. (""Pooling"" refers to the insurance industry practice of pooling the insurance risk of individuals or groups in order to determine premiums.) Give states the option to merge the individual and small group markets for the purposes of applying the pooling requirements. Require each state to adopt a risk-adjustment model, established by the Secretary, to apply risk adjustment to QHBPs and grandfathered plans in the individual and small group markets. (""Risk adjustment"" refers to a mechanism that adjusts payments to health plans to take into account the risk that each plan is bearing based on its enrollee population.) Require each state to establish a reinsurance program no later than July 1, 2013. (""Reinsurance"" typically is thought of as insurance for insurers. When issuing policies, an insurer faces the risk that the premiums it collects will not be sufficient to cover its expenses and generate profit. For a health insurer, an unusually high health care claims could lead to significant financial loss. Reinsurance shifts the risk of covering such high expenses from the primary insurer to a reinsurer.) Require all plan offerors to contribute to a temporary reinsurance program for individual policies that is administered by a non-profit reinsurance entity. Require the Secretary to establish and administer temporary risk corridors, under which payments to QHBPs in the individual and small group markets would be made according to applicable risk corridor rules. (""Risk corridors"" refer to a mechanism which adjusts payments to plans according to a formula based on each plan's actual, allowed expenses in relation to a target amount. If a plan's expenses exceed a certain percentage above the target, the plan's payment is increased. Likewise, if a plan's expenses exceed a certain percentage below the target, the plan's payment is decreased.) Require the Secretary to establish one or more temporary high risk pools that offer coverage with no coverage exclusions for pre-existing health conditions. High risk pools would provide coverage for the essential benefits package (described below), and provide the bronze level of coverage (described under the Exchange section). Require the Secretary to create, within 90 days after enactment, a temporary reinsurance program to assist participating employment-based plans with the cost of providing health benefits to eligible retirees who are 55 and older and their dependents. Funding would not exceed $5 billion. The Secretary would reimburse the plan for 80% of the portion of a claim above $15,000 and below $90,000 (adjusted annually for inflation). Amounts paid to the plan would be used to lower costs directly to participants in the form of premiums, co-payments, and other out-of-pocket costs, but could be not used to reduce the costs of an employer maintaining the plan. The Senate Finance bill would also require states to (1) implement regulations or standards that effectuate the reforms applicable to the private individual and small group markets; (2) establish one or more exchanges including a small business exchange; (3) require QHBPs to provide an internal claims appeal process; and (4) establish an external review process. In addition, S. 1796 would allow states to (1) establish programs to allow for the automatic enrollment of individual and employees in QHBPs; (2) establish or continue any health insurance requirements that offer greater protections to consumers than the new federal standards specified in this bill; and (3) apply for a waiver of any and all private market requirements and the individual mandate. The Senate Finance bill also would allow QHBPs to be subject to the health insurance laws and regulations of one state while operating in multiple states. Plans could continue to offer coverage in a grandfathered plan in both the individual and group market. Enrollment would be limited to those who were currently enrolled, their dependents, or for grandfathered employer-sponsored insurance to new employees and their dependents. Beginning July 1, 2013, the insurance reform requirements of this bill (relating to the requirements in the small group market, such as a prohibition of pre-existing condition exclusions) would apply to grandfathered plans in the small group market. If a state is phasing in those requirements for QHBPs, the phase-in would apply in the same manner to grandfathered plans. Additionally, health insurance coverage in the individual market (in effect before enactment) that is actuarially equivalent to a catastrophic plan for young individuals would be treated as a grandfathered plan. The Secretary would specify the benefits included in the ""essential benefits package"" that qualified health benefits plans would be required to cover. Those benefits would include at least the following general categories: hospitalization; outpatient hospital and clinic services, including emergency department services; professional services of physicians and other health professionals; medical and surgical care; such services, equipment, and supplies incident to the services of a physician's or a health professional's delivery of care in institutional settings, physician offices, patients' homes or place of residence, or other settings as appropriate; prescription drugs; rehabilitative and habilitative services; mental health and substance use disorder services, including behavioral health treatment; preventive services, including those services recommended with a grade of A or B by the U.S. Preventive Services Task Force and those vaccines recommended for use by the Advisory Committee on Immunization Practices; maternity benefits; and well baby and well child care and oral health, vision, hearing services, equipment, and supplies for children under 21 years of age. Essential benefits package coverage would be prohibited from imposing any annual or lifetime limits. No cost-sharing would be allowed for preventive services. For all other services included in the essential benefits package, cost-sharing could not exceed the minimum deductible and would have to meet the out-of-pocket limits applicable to high deductible health plans (HDHPs) as defined under the health savings account (HSA) section of the IRC. By July 1, 2012, the Senate Finance bill would require the Secretary to specify the covered treatments, items, and services within each of the categories listed above, and update such benefits annually thereafter. The Secretary would ensure that the scope of the essential benefits package is not more extensive (as certified by the Chief Actuary of the Centers for Medicare and Medicaid Services) than the scope of benefits under a typical employer-provided health plan. Each state would be required to ensure that at least one plan offered in the exchange is actuarially equivalent to the standard Blue Cross Blue Shield plan offered to Federal employees. S. 1796 would require insurers in the individual or small group market to offer QHBPs that include the essential benefits package and that provide coverage at one of the following tiers of coverage: bronze, silver, gold, or platinum. This requirement on insurers in the individual and small group market would apply regardless of whether or not the plan is offered through an exchange. For each coverage tier, the Senate Finance bill specifies an actuarial value (i.e., the average percentage of total covered costs in the essential benefits package paid for by the plan for a given population), as shown in Figure 1 . An insurer that offers coverage in any of these tiers would be permitted to offer a separate plan in that tier that covers only those (1) who are under age 21, or (2) who are 21 or older but are the dependent of another person. Besides these four tiers, S. 1796 also would permit some additional plan options. A catastrophic plan would be permitted for young adults (those under age 26 before the plan year begins) and for those exempt from the individual mandate because no affordable coverage is available. The catastrophic plan could have no cost-sharing for preventive services, but for all other expenses would have a deductible in 2013 equal to the largest annual out-of-pocket maximum permitted for QHBPs, which is based on the limitations for HSA-qualified HDHPs. There is no existing Federal law providing direct on-going program financing to the States for health insurance coverage of low-income individuals not eligible for Medicaid either under standard criteria or via waivers. However, S. 1796 would establish a program that is modeled after the Basic Health (BH) Plan program administered and financed by the Washington State Health Care Authority (HCA). BH started as a pilot program established by the Washington State ''Health Care Access Act of 1987."" The Washington State HCA contracts with private health plans to implement the BH program. In turn, the private plans contract with health care providers for services under the BH benefits plan. Currently the following five private insurers participate: Columbia United Providers, Community Health Plan of Washington, Group Health Cooperative, Kaiser Permanente, and Molina. Choice of plans is made at the county level. Not every participating plan is available in every county. S. 1796 would require the Secretary to establish a program where a state or a regional compact of states would establish one or more qualified basic health plans (""basic plan"") to provide at least an essential benefits package to eligible individuals rather than offering coverage to them through an exchange. The Secretary would be required to certify that the state's basic plan has premiums and cost-sharing that does not exceed the costs under QHBPs within the state, and that the benefits provided under the qualified basic health plan covers the items and services required under an essential benefits package. The Senate Finance bill would also require states to establish a competitive process to enter into contracts with coverage providers under the plan. Contract negotiations would include payment rates, premiums, cost-sharing, and extra benefits. The competitive process would also require consideration of contracting with managed care systems or with systems that offer as many of the attributes of managed care as feasible in the local health care market. The bill would also mandate consideration in the competitive process of establishment of specific performance measures that focus on quality of care and improved outcomes, in addition to requiring providers to report measures and standards. These data would have to be made available to enrollees. Under the bill, if the Secretary determines that a state meets the requirements of the program, then the Secretary would provide funds to participating states in order to provide affordable health care coverage through private health care systems under contract. A state's Basic Health Plan funding level would be based on the Secretary's estimates of 85 percent of the value of individual tax credits and cost sharing subsidies that otherwise would have been made for enrollment in QHBPs offered through an exchange. This amount would be calculated on a per enrollee basis. Funds distributed to the states would be provided to independent trusts and would be used by the states only to reduce the premiums and cost sharing for eligible enrolled individuals. If states do not implement the reforms to the individual and small group markets described above by July 1, 2013, then the Secretary would implement and enforce those requirements. States that implemented the reforms would also be required to establish an exchange by July 1, 2013, through which individuals and small employers could obtain QHBPs—otherwise, the Secretary would enter into a contract with a ""nongovernmental entity to establish and operate the exchanges within the state."" ( S. 1796 also would permit the creation of ""interim exchanges"" prior to July 1, 2013, discussed in the Appendix .) Exchanges would be similar in many respects to existing entities like the Massachusetts Connector and eHealthInsurance. Exchanges would not be insurers but would provide eligible individuals and small businesses with access to insurers' plans in a comparable way (in the same way, for example, that Travelocity or Expedia are not airlines but provide access to available flights and fares in a comparable way). The Senate Finance bill calls for the creation of separate exchanges in each state for individuals versus small employers (""a Small Business Health Options Program … [or] SHOP exchange'""). A state would be permitted to merge them into a single exchange, ""but only if the exchange has separate resources to assist individuals and employers."" An exchange could be permitted to operate in multiple states, if each state agrees to the operation of the exchange and if the Secretary approves. All plans offered by insurers in the individual and small groups markets would have to be offered through an exchange, but could also be offered outside an exchange. Insurers would have to offer plans in the silver and gold tiers, but could also offer plans in the bronze and platinum tiers. Insurers could also offer through an exchange the catastrophic and child-only plans described in the Tiers section above. The exchange could also include dental-only plans. The Secretary would enter into an agreement with each state to specify which of the following functions would be done by the Secretary, the state, or the exchange: provide for the state to establish procedures to certify, recertify and decertify QHBPs; establish an outreach plan, call centers, internet portals, and a system to rate exchange plans; determine whether applying individuals and employers are eligible to participate in the exchange; establish and carry out a process which provides for enrollment in person, by mail, by telephone (call center), or electronically (internet portal)—including through local hospitals and schools, state motor vehicle offices, local Social Security offices, locations operated by Indian tribes and tribal organizations, and other locations specified by the exchange; provide open enrollment periods from March 1 through May 31 (with some exceptions), beginning in 2013; establish uniform enrollment forms, standardized marketing requirements, and a standardized format for presenting options among exchange plans; provide for a calculator to determine the actual cost of coverage to individuals after taking into account any premium credits and cost-sharing subsidies; and certify whether individuals are exempt from the individual mandate excise tax because there is no affordable QHBP through the exchange or the through individual's employer, and transfer the list of such individuals to the Treasury Secretary. The HHS and Treasury Secretaries would have responsibility for advance determination of premium credits and cost-sharing subsidies. The HHS Secretary would designate an office to provide technical assistance to states for SHOP exchanges. The Secretary would pay states ""the amount the Secretary reasonably estimates to be the unreimbursed start-up costs for any exchange."" The Secretary could not make payment for exchanges' ongoing operations; that funding would be from assessments on QHBPs set by exchanges. The Secretary would also establish procedures under which a state would be required to allow insurance agents or brokers to enroll individuals in an exchange plan and to assist them in applying for premium credits and cost-sharing subsidies. Each state would establish rate schedules for broker commissions paid by exchange plans. Individuals could enroll in a plan through their state's exchange if they are (a) residing in a state that established an exchange, (b) not incarcerated, except individuals in custody pending the disposition of charges, and (c) are lawful residents. Undocumented aliens would be prohibited from obtaining coverage through an exchange. Only small employers may opt to offer coverage to their workers through an exchange. Before 2015, states would have the option to define ""small employers"" either as those with (1) 100 or fewer employees, or (2) 50 or fewer employees. Beginning in 2015, small employers would be defined as those with 100 or fewer employees. Beginning in 2017, states could allow large employers to obtain coverage through an exchange (but could not be required to do so). Participating employers could limit the choice of exchange plans available to their employees; plan choice could be limited to a particular benefit level (tier) or even to a single plan. As previously mentioned, Members of Congress and congressional staff would be eligible to obtain coverage through an exchange. Indeed, the only way they could obtain their employer's contribution toward premiums would be to enroll in an exchange plan. Otherwise, they would be responsible for 100% of the premium (unless their income was low enough to qualify for premium credits). Some individuals would be eligible for premium credits (i.e., subsidies) toward their required purchase of health insurance, based on income. However, even when individuals have health insurance, they may be unable to afford the cost-sharing (deductible and copayments) required to obtain health care. Thus subsidies may also be necessary to lower the cost-sharing. Under S. 1796 , those eligible for premium credits would also be eligible for cost-sharing subsidies. Both premium credits and cost-sharing subsidies would only be available for silver plans sold through an exchange, including both the private plans and public option. Beginning January 1, 2013, qualifying individuals could receive advanceable, refundable tax credits toward the purchase of an exchange plan. Individuals above 400% of the federal poverty level (FPL) would not be eligible for credits. Qualifying individuals between 300% and 400% FPL would have to pay no more than 12% of their incomes in premiums. For qualifying individuals with income between 133% (100% after 2013) and 300% FPL, the percent of income they would have to pay toward premiums would rise in a straight line from 2% of income to 12% of income, as illustrated in the solid line of Figure 2 and Table 1 below. For a family of three in the 48 contiguous states in 2009, 100% FPL is $18,310, and 400% FPL is $73,240. The premium credit amount would be based on the second lowest cost silver plan available to the individual in an exchange. Individuals who enrolled in more expensive plans would have to pay any additional amount. However, the cost-sharing subsidies would only be available to credit-eligible individuals enrolled in a silver plan. Although the Medicaid provisions of S. 1796 are generally beyond the scope of this report, eligibility for Medicaid as expanded under S. 1796 interacts with the bill's provisions regarding premium credits and cost-sharing subsidies. From 2011 to 2013, states could expand Medicaid to all non-elderly, non-pregnant individuals (i.e., childless adults and certain parents, except for those ineligible based on certain noncitizenship status) who are otherwise ineligible for Medicaid up to 133% FPL. Beginning in 2014, states would be required to extend Medicaid to these individuals. Thus, all non-elderly citizens up to 133% FPL would be eligible for Medicaid. S. 1796 would not change noncitizens' eligibility for Medicaid. Thus, for example, in 2013, legal permanent residents (LPRs) who are below 100% FPL could be ineligible for Medicaid and would also be ineligible for premium credits. However, beginning in 2014, lawfully present taxpayers below 100% FPL who are not eligible for Medicaid would be eligible for premium credits. Besides the previously mentioned eligibility criteria, individuals would also generally be ineligible for credits if they were eligible for an employer-sponsored plan, Medicare, Medicaid, coverage related to military service, FEHBP, and other coverage recognized by the Secretary. An individual eligible for, but not enrolled in, an employer-sponsored plan could still be eligible for subsidies if the employee's contribution to premiums exceeded 10% of household income or if the plan covered less than 65% of total allowed costs. Those who qualified for premium credits and were enrolled in an exchange plan at the silver tier would also be eligible for assistance in paying any required cost-sharing for their health services. As previously mentioned, exchange plans would be required to limit out-of-pocket costs based on high deductible health plans (HDHPs) that qualify individuals for health savings accounts (HSAs). For 2009, the out-of-pocket maximum for HSA-qualified HDHPs is $5,800 for single coverage and $11,600 for family coverage. As shown in Table 2 , the cost-sharing subsidies would further reduce those out-of-pocket maximums by two-thirds for qualifying individuals between 100% and 200% FPL, by one-half for qualifying individuals between 201% and 300% FPL, and by one-third for qualifying individuals between 301% and 400% FPL. Additional cost-sharing subsidies (i.e., reductions in copayments, deductibles, etc.), if necessary, would be provided to ensure that the plan cost-sharing was equivalent to the platinum tier for qualifying individuals between 100% and 150% FPL, was equivalent to the gold tier for qualifying individuals between 151% and 200% FPL, but was not more than the gold tier for qualifying individuals between 201% and 400% FPL. The Secretary would make periodic payments to insurers (potentially using capitated, risk-adjusted payments) for the cost-sharing subsidies of their qualified enrollees. However, subsidy amounts could also be reduced to ensure S. 1796 does not increase the federal deficit. S. 1796 would provide incentives for the creation of health insurance co-operatives. The bill provides these incentives primarily through the distribution of $6 billion in funding under the Consumer Operated and Oriented Plan (CO-OP) program. The Secretary would use the authorized funds to foster the creation of non-profit member-run health insurance companies that offer qualified health benefits that serve eligible individuals in one or more states. CO-OP grantees would compete in the reformed individual and small group insurance markets on a level regulatory playing field. Federal funds would be distributed as loans for start-up costs and grants for meeting solvency requirements. S. 1796 would direct the Secretary to make grant and loan awards after taking into account the recommendations of an advisory board. The Secretary would make grant and loan awards giving priority to applicants that offer qualified health benefits on a statewide basis, use an integrated care model, and have significant private support. The Secretary would ensure that there is sufficient funding to establish at least one qualified non-profit health insurance issuer in each state and the District of Columbia. If no health insurance issuer applies within a state, the Secretary would use funds for the program to award grants to encourage the establishment of qualified issuers within the state or the expansion of an issuer from another state to the state with no applicants. Grantees would enter into an agreement with the Secretary to follow the provisions of S. 1796 and any regulations promulgated by the Secretary. The agreement would include prohibitions for the use of loan or grant funds for ""carrying on propaganda,"" attempting to influence legislation, or marketing. S. 1796 would define a qualified nonprofit health insurance issuer as an organization meeting the following requirements: It must be organized as a non-profit, member corporation under State law; It must not be an existing organization that provides insurance as of July 16, 2009, and must not be an affiliate or successor of any such organization; Substantially all of its activities must consist of the issuance of qualified health benefit plans in the individual and small group markets in each state in which it is licensed to issue such plans; It must not be sponsored by a state, county, or local government, or any government instrumentality; Its governing documents incorporate ethics and conflict of interest standards protecting against insurance industry involvement and interference; Governance of the organization must be subject to a majority vote of its members; It must operate with a strong consumer focus, including timeliness, responsiveness, and accountability to members in accordance with regulations to be promulgated by the Secretary of HHS; It must be in compliance with all the other requirements that other qualified health benefits plans must meet in any state, including solvency and licensure requirements, rules on payments to providers, rules on network adequacy, rates and form filing rules, and any applicable state premium assessments. Additionally, the organization would be required to coordinate with state insurance reforms described in Sec.2225(a)(2)(A); and Any profits made would be required to be used to lower premiums, improve benefits, or other programs intended to improve the quality of health care delivered to members. S. 1796 would permit organizations participating in the CO–OP program to enter into collective purchasing arrangements for services and items that increase administrative and other cost efficiencies, especially to facilitate start-up of the entities, including claims administration, general administrative services, health information technology, and actuarial services. S. 1796 would permit establishment of a purchasing council to execute these collective purchasing agreements. The council would be explicitly prohibited from setting payment rates for health care facilities and providers. There would not be any representatives of Federal, state, or local government or any employee or affiliate of an existing private insurer on the council. The Secretary of HHS would be prohibited from participation in any negotiations between qualified health insurance issuers or a private purchasing council and any health care facilities, providers or drug manufacturer. The Secretary would also be prohibited from establishing or maintaining a price structure or interfering in any way with the competitive nature of providing health benefits through the program. Under S. 1796 , an organization receiving a grant or loan under the CO–OP program would qualify for exemption from Federal income tax only with respect to periods for which the organization is in compliance with the requirements of the CO–OP program and with the terms of any CO–OP grant or loan agreement to which such organization is a party. CO–OP organizations would also be subject to organizational and operational requirements applicable to certain non-profits under tax law, including the prohibitions on net earnings benefiting any private shareholder or individual, on substantial involvement in political activities, and on lobbying activities. CO–OP grantees would be required to file an application for exempt status with the Internal Revenue Service and would be subject to annual information reporting requirements. In addition, CO–OP grantees would be required to disclose on their annual information return the amount of reserves required by each state in which it operates (''solvency requirement'') and the amount of reserves on hand. Under S. 1796 , a health benefits plan would not be required to provide coverage of either elective abortions or abortions that could be paid for with funds appropriated to the Department of Health and Human Services (""HHS""). Under current law, funds appropriated to HHS may be used to pay for an abortion if a pregnancy is the result of an act of rape or incest, or if a woman suffers from a physical disorder, physical injury, or physical illness that would endanger her life if an abortion is not performed. S. 1796 indicates that the offeror of a health benefits plan would determine whether the plan would provide coverage of either type of abortion as part of its essential benefits package for the plan year. S. 1796 would require the Secretary of HHS to ensure that in any exchange, at least one qualified health benefits plan provides coverage of both elective abortions and abortions for which funds appropriated to HHS are permitted. In addition, the Secretary would be required to ensure that in any exchange, at least one qualified health benefits plan does not provide coverage of elective abortions. If a state has one exchange covering both the individual and small group markets, the Secretary would have to provide the aforementioned assurances with respect to each market. A qualified health benefits plan would be treated as not providing coverage of elective abortions if it did not provide either type of abortion. The offeror of a qualified health benefits plan that provides coverage of elective abortions could not use any amount attributable to a premium assistance credit or any cost-sharing subsidy to pay for such services. In addition, the offeror would be required to segregate from the aforementioned amount an amount equal to the actuarial value of providing elective abortions for all enrollees, as estimated by the Secretary. The Secretary would be required to estimate, on an average actuarial basis, the basic per enrollee, per month cost of including coverage of elective abortions. In making that estimate, the Secretary could take into account the impact of including such coverage on overall costs, but could not consider any cost reduction estimated to result from providing such abortions, such as prenatal care. The Secretary would be required to estimate the costs as if coverage were included for the entire covered population, but the costs could not be estimated at less than $1 per enrollee, per month. Under S. 1796 , a qualified health benefits plan could not discriminate against any individual health care provider or health care facility because of its willingness or unwillingness to provide, pay for, provide coverage of, or refer for abortions. In addition, state laws regarding the prohibition or requirement of coverage or funding for abortions, and state laws involving abortion-related procedural requirements would not be preempted. Federal conscience protection and abortion-related antidiscrimination laws would also not be affected by S. 1796 . Finally, the rights and obligations of employees and employers under Title VII of the Civil Rights Act of 1964 would not be affected by the measure. The Senate Finance bill includes a number of provisions in Title VI that would raise revenues in order to pay for expanded health insurance coverage. The revenue provisions would include excise taxes and limitations on employer deductions that would impact health insurers, health plan sponsors and administrators. In addition, there are a number of revenue provisions that would affect workers through modifications to current tax-advantaged accounts and deductions used for health care spending and coverage. Table 3 shows those revenue provisions directly related to private health insurance, their effective dates and estimates by the Joint Committee on Taxation (JCT) of the revenues each provision will raise over a 10-year period. According to the JCT, these provisions are expected to raise $304 billion in revenues over a 10-year period. S. 1796 would impose excise taxes on health insurers and health plan administrators. Specifically, two provisions would impose the following taxes directly on health insurers and plan administrators: an excise tax on high-cost employer-sponsored health insurance, and an annual fee on health insurance providers. In addition, S. 1796 would limit the deductibility of compensation for health insurance executives. The bill also would affect employers who currently provide retiree health insurance and would limit their ability to deduct federal subsides for retiree prescription drug coverage from their taxable income. S. 1796 would impose an excise tax of 40% on health insurance coverage that exceeds certain thresholds in 2013. The thresholds are $8,000 for single coverage and $21,000 for family coverage, and would be indexed by growth in the Consumer Price Index (CPI) plus 1% in subsequent years. Taxpayers who are retired and age 55 and older, and workers engaged in high risk professions would be subject to higher thresholds ($9,850 for single coverage and $26,000 for family coverage in 2013). In addition, for individuals residing in high-cost states the thresholds would be phased in between 2013 and 2016. Specifically, they would be 20% above the proposed levels in 2013, 10% above in 2014, and 5% above in 2015. Health insurance coverage subject to the excise tax is broadly defined to include not only the employer and employee premium payments for health insurance (including self-insured plans), but also premiums paid by the employee and the employer for dental and vision. In addition, tax-advantaged accounts such as flexible spending accounts (FSAs), health savings accounts (HSAs) and health reimbursement accounts (HRAs) are also specified as health insurance coverage and subject to the excise tax. For these tax-advantaged accounts, the plan administrator (which is often the employer) would be subject to the excise tax. The excise tax would be levied on each of these components (i.e. health insurance, dental and vision, FSAs, etc.) based on their share of the total for health insurance coverage. This share would then be applied to the amount of the total contribution that exceeds the applicable threshold to determine the excise tax imposed on each component. S. 1796 would impose additional reporting requirement on employers providing health insurance coverage. Specifically, under the proposal, employers would be responsible for: determining the aggregate amount of health insurance coverage subject to the excise tax, estimating the share of the tax allocated to the insurer and the plan administrator, reporting these amounts to the insurer, plan administrator and the Internal Revenue Service, and reporting the total value of health insurance coverage subject to the excise tax on the worker's W2 form. Employers who under-report the amount of the excise tax to be paid by insurers and plan administrators would be subject to a penalty. The amount of the excise tax would not be deductible from federal income taxes. The Joint Committee on Taxation (JCT) has estimated that the excise tax would raise $201 billion in revenues from 2010 to 2019 and would be levied on nearly one-third of health plans by 2019. In addition to an excise tax on high cost plans, S. 1796 would also impose a fee on all health insurers based on their market share. The fee would be applied to net premiums written and would be imposed beginning in 2010. The fee would not apply to self-insured plans or federal, state or government entities. However, it would apply to companies or organizations that underwrite these government-funded insurance (i.e., Medicaid managed care plans, Federal Employee Health Benefit Plans [FEHBP]). According to the JCT, this fee is expected to raise $60.4 billion over a 10-year period (see Table 3 ). The Senate Finance bill would limit the amount of executive compensation that is deductible by health insurers. Specifically, health insurance providers where at least 25% of their gross premium income is derived from health insurance plans that meet the minimum creditable coverage requirements (i.e., covered health insurance provider) would not be able to deduct compensation above $500,000 per year. This income threshold would include deferred compensation. This provision would be effective for compensation paid in taxable years beginning after 2012 with respect to services performed after 2009. According to the JCT, this limitation on executive compensation would raise $600 million over a 10-year period (see Table 3 ). Under current law, employers providing prescription drug coverage to retirees that meet federal standards are eligible for subsidy payments from the federal government. These qualified retiree prescription drug plan subsidies are excludible from the employer's gross income for the purposes of regular income tax and alternative minimum tax calculations. The employer is also allowed to claim a business deduction for retiree prescription drug expenses even though they also receive the federal subsidy to cover a portion of those expenses. S. 1796 would require employers to coordinate the subsidy and the deduction for retiree prescription drug coverage. In this provision, the amount allowable as a deduction for retiree prescription drug coverage would be reduced by the amount of the federal subsidy received. According to the JCT, this provision would raise $5.4 billion over a 10-year period (see Table 3 ). There are a number of tax-advantaged accounts and tax deductions for health care spending and coverage that would be affected by the revenue provisions in Title VI of S. 1796 . S. 1796 includes a number of provisions that directly and indirectly would affect tax-advantaged accounts to help workers pay for their health care expenses. Under current law FSAs, HSAs, HRAs and Medical Saving Accounts (MSAs) all allow workers under varying circumstances to exclude a certain portion of qualified medical expenses from income taxes. Under current law, health FSAs are employer-established benefit plans that reimburse employees for specified health care expenses (e.g., deductibles, co-payments, and non-covered expenses) as they are incurred on a pre-tax basis. About one-third of workers in 2007 have access to an FSA. Under current law, it is at the discretion of each employer to set their limits on FSA contributions. In 2008, the average FSA contribution was $1,350. S. 1796 would limit the amount of annual FSA contributions to $2,500 per FSA beginning in 2011. According to the JCT, this provision would raise $14.6 billion over 10 years (see Table 3 ). HSAs are also tax-advantaged accounts that allow individuals to fund unreimbursed medical expenses (deductibles, copayments, and services not covered by insurance) on a pre-tax basis. Eligible individuals can establish and fund accounts when they have a qualifying high deductible health plan and no other health plan (with some exceptions). Unlike FSAs, HSAs may be rolled over and the funds accumulated over time. Distributions from an HSA that are used for qualified medical expenses are not included in taxable income. Distributions from an HSA that are not used for qualified medical expenses are taxable as ordinary income and, under current law, an additional 10% penalty tax. S. 1796 would raise this penalty on non-qualified distributions to 20% of the disbursed amount. According to the JCT, this provision would raise $1.3 billion over 10 years (see Table 3 ). In addition to the specific provisions in S. 1796 that would directly modify these tax-advantaged plans, this proposal would also modify the definition of qualified medical expenses. Under current law qualified medical expenses for FSAs, HSAs, and HRAs can include over-the-counter medications. S. 1796 would restrict this practice and excludes over-the counter prescriptions (except those prescribed by a physician) as a qualified medical expense. According to the JCT, this provision would increase revenues by $5.4 billion over 10 years (see Table 3 ). Currently, taxpayers who itemize their deductions may deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income (AGI). Medical expenses include health insurance premiums paid by the taxpayer, but also can include certain transportation and lodging expenses related to medical care as well as qualified long-term care costs, and long-term care premiums that do not exceed a certain amount. About 7% of tax returns for tax year 2007 reported a deduction for medical expenses. Taxpayers with adjusted gross income below $50,000 accounted for 52% of those taking this itemized deduction for medical expenses. S. 1796 would increase the threshold to 10% of AGI for taxpayers who are under age 65 which would limit the amount of medical expenses that can be deducted. Taxpayers over age 65 would still be subject to the 7.5% limit under current law. According to the JCT, this provision would raise revenues by $15.2 billion over 10 years (see Table 3 ). ","This report summarizes key provisions affecting private health insurance in S. 1796, America's Healthy Future Act of 2009, as ordered reported by the Senate Committee on Finance on October 19, 2009. Title I of the bill imposes new requirements on individuals, employers, and health plans; restructures the private health insurance market; sets minimum standards for health benefits; and provides financial assistance to certain individuals and, in some cases, small employers. Title VI of the bill include a number of new provisions to raise revenues to pay for health care reform. These provisions include excise taxes, annual fees on health insurers, and limits on tax deductions for out-of-pocket health care expenses. In general, the Senate Finance bill would require adult individuals to maintain health insurance, with some exceptions. Employers would not be required to provide health insurance, although certain employers with more than 50 full-time employees who did not provide insurance could be required to pay a tax, under certain circumstances. Several insurance market reforms would be made, such as modified community rating and guaranteed issue and renewal. Both the individual mandates and the employer requirements would be linked to essential health benefits coverage. Essential health benefits coverage would include (1) coverage under a qualified health benefits plan (QHBP); (2) new group or individual coverage that meets or exceeds minimum health benefits; (3) grandfathered employment-based plans; (4) grandfathered nongroup plans; and (5) other coverage, such as Medicare and Medicaid. Individual and small group coverage under qualified health benefits plans would be allowed to be offered through non-profit, member-run health insurance companies. Such non-profit insurers would be eligible for grants and loans distributed through the new Consumer Operated and Oriented Plan (CO-OP) program. QHBP exchanges would offer a choice of private plans for coverage in the individual and small group markets. Based on income, certain individuals could qualify for a credit toward their premium costs and a subsidy for their cost-sharing; the credits and subsidies would be available only through an exchange. States would have the flexibility to establish basic health plans for low-income individuals not eligible for Medicaid. Existing plans would be grandfathered; however, once the bill is fully implemented, the private market reforms applicable to the small group market would also apply to grandfathered small group plans. New plans would be allowed to be offered in the individual and group markets outside of the Exchange, but only those new plans that meet the minimum requirements specified in the bill would satisfy the requirements on individuals and employers.",govreport
"In an effort to expand the options for health coverage, 35 states have established high risk health insurance pools. These programs target individuals who cannot obtain or afford health insurance in the private market, primarily due to preexisting health conditions. High risk pools (HRPs) generally cover people who have sought health coverage in the individual (nongroup) market, but have been denied coverage, received quotes from insurers that are higher than the premiums offered by the high risk pools, or received offers from insurers that permanently exclude coverage of preexisting health conditions. Many states also use their high risk pools to comply with the portability and guaranteed availability provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L. 104-191 ). For eligible individuals moving from the group to nongroup market, HIPAA requires state-licensed health insurers to make coverage available to such individuals, and prohibits exclusion of coverage for preexisting conditions. To enforce these rules, states are given a choice. They may either enforce the HIPAA individual market guarantees (""federal fallback""), or establish an ""acceptable alternative state mechanism,"" such as a high risk health insurance pool. In general, state high risk pools tend to enroll a small percentage of the uninsured. For example, approximately 200,000 individuals were enrolled in the 34 high risk pools in operation in 2008. In contrast, the Government Accountability Office (GAO) estimated that nearly 4 million additional persons were potentially eligible for enrollment. However, such limited enrollment reflects, in part, the narrow focus of these pools: individuals with preexisting health conditions, who do not have access to public or group health insurance, and seek coverage in the private, non-group market. In addition to state-established high risk pools, the 111 th Congress passed the Patient Protection and Affordable Care Act (PPACA), which President Obama signed into law ( P.L. 111-148 ) on March 23, 2010. PPACA, as amended, requires the Secretary of Health and Human Services to establish a temporary high risk pool program, prior to 2014, to provide health insurance coverage to certain individuals with preexisting health conditions who have been uninsured for six or more months. This report will focus on the original, state-established high risk pools. High risk pools fill a niche in the health insurance system—a patchwork system of private markets and public programs designed to meet the needs of different types of health care consumers. In the private health insurance market, most people get health coverage through the group market. This market provides health benefits to groups of people that are drawn together by an employer or other organization, such as a trade union. Such groups are generally formed for some purpose other than obtaining insurance, like employment. While most Americans receive their health coverage through the workplace—as a current employee, a dependent of an employee, or a retiree—some individuals do not have access to employer-sponsored insurance (ESI). They may be workers who do not qualify for an offer of health benefits from their employer (e.g., because the workers have part-time or seasonal employment status), or they may work for a company that does not provide health insurance at all, or they may be unemployed. Public programs also are a source of health coverage, but individuals and families must meet eligibility requirements in order to qualify for benefits. Individuals who cannot access ESI and are not eligible for public programs may seek health insurance in the nongroup (individual) market. Applicants to the individual insurance market must go through robust medical underwriting—the process by which an insurer considers information about an applicant and determines (1) whether to offer an insurance policy in the first place, and (2) the terms of that policy (e.g., the monthly premium). The information that a health insurer considers may include personal characteristics, such as an individual's health conditions, family medical history, and other relevant factors. Though uncommon, the insurance carrier may ask an applicant to undergo a physical exam, or provide medical specimens. In the group market, insurers forgo underwriting in the traditional sense, that is, reviewing each person's demographics and medical history. Instead, an insurer would consider the overall characteristics of the group, and calculate a premium for a set of benefits that would be charged to each person in the group, regardless of their individual health status. (For very small groups, insurers may individually underwrite policies, if permitted by law.) Federal and state laws restrict somewhat insurers' ability to reject applications or design coverage based on health factors in the nongroup market. Nonetheless, some applicants are rejected from the individual market altogether, others may receive insurance offers with riders that exclude coverage for a specific health condition or body part, or others may be charged premiums that are higher than those in the group market for similar coverage. Rigorous underwriting results in an enrollee population in the individual market that is fairly healthy (three out of four enrollees report that their health is excellent or very good ), thereby excluding persons with moderate to severe health conditions from this private market. High risk pools were designed to assist such individuals who—because of their health conditions—have very few options for private health coverage. High risk pools appeal to policymakers who prefer an incremental approach to coverage expansion and reliance on current state oversight of health insurance. Supporters of HRPs contend that states can use their existing regulatory infrastructure, as well as their knowledge of health care markets, to efficiently insure previously uninsurable individuals. Supporters also contend that the private, nongroup market will benefit. They reason that by removing high risk persons from the individual market and placing them in publicly subsidized insurance pools, coverage in the individual market will become more affordable. They argue that better risk spreading helps to stabilize the market, promote competition, and retain insurance carriers—earning the support of such organizations. Moreover, HRPs function as a safety net for the nongroup market by assuring that individuals have access to health insurance as long as they are able and willing to pay for it. Others contend that high risk pools are generally too small and underfunded to meet the needs of the majority of persons who cannot access health insurance in the private market. By design, HRPs experience losses, but federal attempts to subsidize these losses have been limited. Premiums combined with other cost-sharing requirements can often make the coverage offered by these pools unaffordable. Moreover, most state HRPs exclude coverage for preexisting conditions for six months or more. As a result, some researchers remain skeptical that high risk pools will be able to substantially reduce the number of uninsured, particularly among those with serious medical conditions. With respect to reducing the number of people without health coverage, consumer groups generally advocate for expansion of the federal role in providing coverage, whether through existing public programs or broader health care reform, not unlike some of the private market reforms included under PPACA. While state high risk pools have existed since the mid-1970s, congressional support of state pools began in the 1990s. The enactment of HIPAA during the 104 th Congress specified state HRPs as acceptable mechanisms for complying with the group-to-individual market requirements. The 107 th Congress passed the Trade Act of 2002 ( P.L. 107-210 ), which authorized a new federal program to provide grants to state high risk pools and made appropriations for FY2003 and FY2004. With expiration of the authorizing legislation for the grant program to states, the 109 th Congress reauthorized the program through FY2010 and made appropriations for FY2006. The 110 th Congress passed legislation in December 2007 and the 111 th Congress passed legislation in March and December 2009 to provide additional appropriations to state high risk pools. (See detailed discussion under "" Federal Grants to State High Risk Pools "" section.) Currently, 35 states have high risk health insurance pools. States have a great deal of discretion regarding the establishment and operation of these pools, including covered benefits, eligibility requirements, pre-existing condition exclusion periods, and funding sources. State high risk pools usually are operated through state-established nonprofit organizations. While private insurance companies typically are responsible for daily administrative duties (along with pool administrative staff), traditional high risk pools bear the insurance risk. Boards oversee the governance of HRPs and usually consist of representatives from insurance companies, consumer groups, health care providers, and state agencies. In order to limit health insurance premiums for persons with costly medical conditions, all states cap high risk pool premiums (most are specified in statute). Almost all states have caps between 150% and 200% of standard risk rates. High risk pools generally operate at a loss, ""because it isn't feasible to pool a group of individuals known to have major health problems and expect their premium contributions to cover the entire cost."" Thus, many state pools tap other sources of funding to cover their operating expenses. States may augment premium collection with one or more of the following sources: assessments on insurers, in some instances combined with offsetting tax credits; general revenue; and other state sources. Almost all states with HRPs assess a fee on insurance carriers and health maintenance organizations; two states place an assessment on hospitals. Many state HRPs also receive grants from the federal government (see discussion under "" Federal Grants to State High Risk Pools ""). Although health benefits provided through high risk pools vary across plans and states, they generally reflect coverage that is available in the private nongroup market. State pools usually offer more than one plan from which enrollees may choose. Deductibles and other cost-sharing requirements vary from state to state. Nearly all state HRPs have at least one plan with lifetime maximums on benefits (based on a dollar limit), except for Indiana and New Mexico. In contrast, most pools do not apply annual maximums on benefits, except for California, Louisiana, Tennessee, Utah, and West Virginia. In addition, most state HRPs exclude coverage for preexisting health conditions for 6-12 months. States establish the eligibility criteria for high risk pools. As noted, many states allow HIPAA-eligible persons to enroll in their HRPs. HIPAA eligibles are persons who did not have or are losing coverage and seeking it in the individual market. They must meet the following requirements: (1) have at least 18 months of ""creditable coverage"" (specified in statute) without a significant break in that coverage (63 or more days); (2) most recent coverage must have been through a group health plan; (3) exhausted federal or state continuation coverage; (4) not eligible for Medicaid or Medicare; and (5) not have any other health insurance. For HIPAA eligibles, high risk pools guarantee the availability of health insurance and prohibit exclusion of coverage for preexisting conditions. High risk pools also are designed to address the insurance needs of non-HIPAA-eligible persons with costly medical conditions. A number of states provide for presumptive eligibility, allowing individuals to become automatically eligible for HRPs if they have a certain medical condition specified under state law. In addition to HIPAA eligibles and persons with specific conditions, many states allow individuals who have experienced coverage denials, coverage restrictions, or premium increases to enroll in high risk pools. Lastly, some states allow persons who receive the Health Coverage Tax Credit to enroll in their high risk pools. High risk pool participation varies significantly across states, with average enrollment ranging from a high of 27,187 participants in Minnesota to a low of 265 enrollees in Florida in December 2009. Among state HRPs, the enrollment distribution clusters toward the low end. To illustrate, two-thirds of state pools had participation below 4,000 individuals (23 states). In contrast, only seven states had more than 10,000 participants. Given that state high risk pools typically operate at a loss (see discussion above), the federal government has provided financial assistance to states during the past several years. Congress established a grant program, administered by the Centers for Medicare and Medicaid Services (CMS), to provide seed grants to states that did not already have high risk pools but wanted to establish them, and operational and bonus grants to existing state pools. Once Congress appropriates funding for these grants, CMS announces the funding opportunity and collects and reviews applications. A state may receive up to $1 million in seed grant funding; operational grant amounts are determined by formula. (Not all states with existing HRPs receive grants.) With enactment of the Trade Act of 2002 ( P.L. 107-210 ), the federal government provided funding to state high risk pools for the first time. The Trade Act authorized and appropriated $20 million in the form of seed grants. Each qualifying state could receive up to $1 million to support the creation and implementation of a high risk pool. In 2003, CMS awarded seed grants to six states: Maryland ($1 million), New Hampshire ($1 million), Ohio ($150,000), South Dakota ($1 million), Utah ($52,618), and West Virginia ($1 million). The Trade Act also authorized and appropriated $80 million to be split evenly over FY2003 and FY2004 to defray some of the operating losses experienced by states with existing high risk pools. Each operational grant could cover up to 50% of a pool's operating losses for the year. To qualify, each state must have established a high risk pool that restricts premiums to no more than 150% of the premium for standard risk rates in the state, offers a choice of two or more coverage options, and has in effect a mechanism designed to ensure continued funding of losses incurred after the end of FY2004. However, states may still be able to determine, within federal standards, how much to charge enrollees in out-of-pocket costs, what benefits to include under the plans, how long coverage for preexisting conditions may be excluded, and whom among otherwise uninsurable individuals will be eligible. Table 1 shows which states received operational grants for FY2003 and FY2004, and the funding levels. Nineteen states were awarded operational grants in FY2003; 22 states in FY2004. With expiration of authorizing legislation for the grant program, the House passed H.R. 4519 , the State High Risk Pool Funding Extension Act of 2006, on December 17, 2005. H.R. 4519 reauthorized federal grants to state high risk pools through FY2010, and changed the funding formula used for such grants. The formula for operational grants was changed to the following: 40% to all qualifying states in equal amounts, 30% based on state proportion of uninsured population among all qualifying states, and 30% based on state proportion of the high risk pool population. H.R. 4519 also allowed operational grants to cover up to 100% of pool losses and authorized the following amounts for FY2006: $15 million for seed grants and $75 million for operational and bonus grants. The Senate passed H.R. 4519 without amendment on February 1, 2006, and President Bush signed it into law ( P.L. 109-172 ) on February 10, 2006. As part of the budget reconciliation process, the Senate passed S. 1932 , the Deficit Reduction Act of 2005 (DRA) conference agreement. DRA included provisions that would provide specific appropriations for the grants authorized under H.R. 4519 . Section 6202 of the Senate measure amended the Public Health Service Act to provide $90 million in appropriations for grants to states for FY2006. DRA provided $75 million for operational grants and $15 million for seed grants. The grants are distributed according to existing statutory requirements. This measure also included conforming language on enactment of H.R. 4519 . Pursuant to H.Res. 653 , the House agreed to the Senate-amended bill on February 1, 2006. On February 8, 2006, President Bush signed DRA into law ( P.L. 109-171 ). The appropriations provided under DRA were used to extend federal funding for this program. On September 30, 2006, CMS awarded seed grants to five states that wanted either to establish high risk pools or conduct feasibility studies: California ($150,000), New York ($150,000), North Carolina ($150,000), Tennessee ($1 million), and Vermont ($1 million). That same year, CMS awarded grants to 31 states that experienced operational losses in 2005. Of those 31 states, 25 also received bonus grants, exhausting the entire appropriations for operational and bonus grants. Table 2 shows which states received operational and bonus grants. Because the funding for seed grants was not exhausted with the 2006 awards, CMS awarded five seed grants in 2007. The states that received these grants were the District of Columbia ($150,000), Florida ($150,000), Georgia ($150,000), North Carolina ($850,000), and Rhode Island ($150,000). Pursuant to the Consolidated Appropriations Act of 2008 ( P.L. 110-161 ), Congress made additional funding available for grants to state high risk pools. CMS issued a grant notification letter to states on May 1, 2008. It stated that a total of $49,127,000 would be split to fund operational grants (two-thirds of the appropriated amount) and bonus grants (remaining one-third). Applications were due by June 9, 2008. On July 21, 2008, CMS announced that 30 states received grants totaling $49, 126,500. Table 3 shows which states received grants and the combined grant amounts. The Omnibus Appropriations Act of 2009 ( P.L. 111-8 ) provided $75,000,000 for grants to state high risk pools. CMS announced the availability of these grants in May 2009. On September 30, 2009, CMS awarded operational grants to 31 states and bonus grants to 28 states (see Table 4 ). Furthermore, the Consolidated Appropriations Act of 2010 ( P.L. 111-117 ) provided $55,000,000 in additional appropriations for high risk pools. The 111 th Congress passed the Patient Protection and Affordable Care Act (PPACA), which President Obama signed into law ( P.L. 111-148 ) on March 23, 2010. PPACA, as amended, requires the Secretary of Health and Human Services to establish a temporary high risk pool program, prior to 2014, to provide health insurance coverage to certain individuals with preexisting health conditions who have been uninsured for six or more months. States can run the program or elect to have the Department of Health and Human Services (HHS) operate the program in their states. The majority of states (29 states and DC) contracted to operate their own HRPs. HHS administers the HRPs in 21 states, under the Pre-Existing Condition Insurance Plan (PCIP) name. ","In an effort to expand the options for health coverage, 35 states have established high risk health insurance pools. These programs target individuals who cannot obtain or afford health insurance in the private market, primarily because of preexisting health conditions. Also, many states use their high risk pools to comply with the portability and guaranteed availability provisions of the Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191). In general, state high risk pools tend to enroll a small percentage of the uninsured. In December 2009, approximately 208,000 individuals were enrolled in high risk pools. State-established nonprofit organizations typically run these pools, with private insurance companies handling day-to-day operations, along with plan administrative staff. Although benefit packages vary across states and plans, they generally reflect health benefits that are available in the private insurance market. The majority of high risk pools cap premiums between 150% to 200% of market rates, and pools are subsidized through insurer assessments and other funding mechanisms. The Trade Act of 2002 (P.L. 107-210) appropriated a total of $100 million for FY2003-FY2004. With the expiration of authorizing legislation for federal funding of state pools, the 109th Congress took up this issue. The House passed H.R. 4519, the State High Risk Pool Funding Extension Act of 2006, which reauthorized federal grants to state high risk pools through FY2010, and changed the funding formula used for such grants. The act authorized $15 million for seed grants and $75 million for operational and bonus grants for FY2006. The Senate passed H.R. 4519 without amendment, and it was signed into law (P.L. 109-172) on February 10, 2006. As part of the budget reconciliation process, the Senate passed S. 1932, the Deficit Reduction Act of 2005 (DRA) conference agreement, which provided appropriations for the grants authorized under H.R. 4519. The measure also included conforming language on enactment of H.R. 4519. The House agreed to the Senate-amended DRA bill, and it was signed into law (P.L. 109-171) on February 8, 2006. The Centers for Medicare and Medicaid Services (CMS) awarded grants to 31 states that experienced operational losses in 2005. Of those 31 states, 25 also received bonus grants. In 2006, CMS awarded seed grants to five states, and to another five states in 2007. The 110th Congress took up the issue of extending the federal grant program by making funding available pursuant to the Consolidated Appropriations Act of 2008 (P.L. 110-161). The grant funding totaled $49,127,000. In July 2008, CMS announced that 30 states received operational and bonus grants totaling $49,126,500. The 111th Congress provided $75 million in appropriations for grants to state high risk pools under the Omnibus Appropriations Act of 2009 (P.L. 111-8). On September 30, 2009, CMS awarded operational grants to 31 states and bonus grants to 28 states. Furthermore, the Consolidated Appropriations Act of 2010 (P.L. 111-117) provided $55 million in additional appropriations for high risk pools. In addition to state-established high risk pools, the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), as amended, requires the Secretary of Health and Human Services to establish a temporary high risk pool program to provide health insurance coverage for certain uninsured individuals with preexisting health conditions. This report will be updated periodically.",govreport
"The Civil Reserve Air Fleet (CRAF) was created by President Truman in 1951. As a result, the Departments of Commerce (DOC) and Defense (DOD) formulated a contingency plan to meet the nation's airlift needs in times of crisis. When the Department of Transportation (DOT) was created, it assumed DOC's role in the CRAF program, and today, DOD and DOT work together to manage the CRAF program. This report provides background, analyzes current issues, and summarizes recent legislation for the CRAF. The CRAF supports DOD airlift requirements in emergencies when the need for airlift exceeds the capacity of DOD's organic airlift fleet. While DOD strategic airlift aircraft are designed to carry outsized and oversized cargo, CRAF air carriers are primarily expected to transport passengers and cargo pallets. All CRAF participants must be U.S. carriers fully certified by the Federal Aviation Administration (FAA), and meet the stringent standards of the Federal Aviation Regulations pertaining to commercial airlines (Part 121). To join CRAF, a carrier must commit at least 30% of its CRAF-capable passenger fleet, and 15% of its CRAF-capable cargo fleet. Aircraft committed must be U.S. registered and air carriers must also commit and maintain at least four complete crews for each aircraft in CRAF. Air Mobility Command (AMC) analysts implement a number of surveillance initiatives to monitor the carrier's safety record, operations and maintenance status, contract performance, financial condition and management initiatives, summarizing significant trends in a comprehensive review every six months. These initiatives are supplemented by an open flow of information on all contract carriers between AMC and the FAA through established liaison officers. The CRAF has three main segments: international, national, and aeromedical evacuation. The international segment is further divided into the long-range and short-range sections, while the national segment is divided into the domestic and Alaskan sections. Assignment of aircraft to a segment depends on the nature of the requirement and the aircraft performance characteristics needed. The long-range international section consists commercial airliners capable of transoceanic operations. Medium-sized passenger and cargo aircraft make up the short-range international section supporting near offshore airlift requirements. The aircraft in the Alaskan section provide airlift within U.S. Pacific Command's area of responsibility, specific to Alaska needs. The domestic section is designed to satisfy increased DOD airlift requirements in the United States during an emergency. The aeromedical evacuation segment assists in the evacuation of casualties from operational theaters to hospitals in the continental United States. Kits containing litter stanchions, litters, and other aeromedical equipment are used to convert civil Boeing 767 passenger aircraft into air ambulances. The airlines contractually pledge aircraft to the various segments of CRAF, ready for activation when needed. To provide incentives for civil carriers to commit aircraft to the CRAF program and to assure the United States of adequate airlift reserves, the government makes peacetime airlift business available to civilian airlines that obligate aircraft to the CRAF through the International Airlift Services. For FY2007, the guaranteed portion of DOD's CRAF contract was $379 million, while AMC expected to award $2.1 billion in additional business that were not guaranteed. The Air Force announced $2.2 billion in CRAF contracts had been let in FY2005. DOD let contracts worth $3.8 billion between FY1998 and FY2002: 1998, $646 million; 1999, $710 million; 2000, $629 million; 2001, $572 million; and 2002, $1,280 million. Three stages of incremental activation allow for tailoring an airlift force suitable for the contingency at hand. The stages of activation are as follows: Stage I —minor regional crises. Stage II —major theater war. Stage III —periods of national mobilization. The commander, U.S. Transportation Command (TRANSCOM), with approval of the Secretary of Defense, is the activation authority for all three stages of CRAF. During a crisis, if the Air Force Air Mobility Command (AMC) has a need for additional aircraft, it would request the TRANSCOM commander to take steps to activate the appropriate CRAF stage. Each stage of the CRAF activation is only used to the extent necessary to provide the amount of civil augmentation airlift needed by DOD. When notified of call-up, the carrier response time to have its aircraft ready for a CRAF mission is 24 to 48 hours after the mission is assigned by AMC. The air carriers continue to operate and maintain the aircraft with their resources; however, AMC controls the aircraft missions. CRAF has been formally activated on two separate occasions over the program's 57-year history. The first instance occurred for Operations Desert Shield/Storm from August 18, 1990, through May 24, 1991, and included long-range international passenger and cargo segments up to Stage II. During Operation Desert Storm, CRAF airlines executed 5,460 missions transporting 726,000 passengers and 230,000 tons of cargo at a cost of $1.4 billion. The second activation, during Operation Iraqi Freedom, lasted from February 8, 2003 through June 18, 2003, and included the long-range international passenger segment up to Stage 1—long-range cargo requirements were met organically or with voluntary commercial contracts. As of March 2008, 35 carriers with 1,262 aircraft were enrolled in the CRAF. This includes 1,172 aircraft in the international segment (905 long-range and 267 short-range), 40 aircraft in the national segment, and 50 aircraft in the aeromedical evacuation segments. Table 1 summarizes current CRAF members: CRAF presents benefits and opportunities for both the DOD and the U.S. airline industry—by all accounts it appears to be a symbiotic relationship. Yet, as circumstances change, pressures and diverging interests may emerge that could bring changes to CRAF. The primary benefit that CRAF imparts to DOD is its relatively low cost when compared to procuring and maintaining a larger organic fleet. For example, a 1996 Government Accountability Office (GAO) report noted that CRAF ""provides up to half of the nation's strategic airlift capability without the government having to buy additional aircraft, pay personnel costs, or maintain the aircraft during peacetime"" —all factors that remain relevant today. While CRAF is relatively inexpensive, some may point out that commercial aircraft have operational limitations when compared to DOD's organic airlift fleet. For example, commercial aircraft cannot carry outsized cargo, conduct special missions such as airdrop, or support special operations forces. Also, commercial aircraft tend to congest airfields because of longer ground times resulting from a lack of roll on/roll off capability and reduced ramp maneuverability. Further, potential hostile fire effectively deters civilian crews from entering combat zones. However, commercial aircraft typically have longer range, and are optimized to efficiently transport passengers and cargo pallets. GAO references the use of CRAF during Operation Desert Storm to illustrate CRAF's cost advantages: The use of CRAF aircraft during an activation is not free—DOD pays rates based on weighted average carrier costs—but the cost is minimal in comparison to the costs of acquiring and supporting aircraft, paying and training aircrew, and other expenses of maintaining standby military airlift capability. AMC paid the carriers about $1.5 billion for using their aircraft during the operation. Purchasing additional military aircraft to provide similar capability would cost from $15 to $50 billion, according to Air Force officials, depending on assumptions used for aircraft replacement cost. A RAND study ( Finding the Right Mix of Military and Civil Airlift, Issues and Implications ) also includes a discussion of the cost-effectiveness of CRAF: For a very small cost, the DOD has had on call a very substantial airlift capacity. Replacing CRAF's 1992 Stage II capability with military-style transports would have cost the DOD about $1 billion annually (1992 dollars) over the past several decades. Replacing the Stage III capability would have cost about $3 billion annually. The RAND analysis points out that to have adequate airlift for a major crisis, DOD maintains a military airlift fleet with a total capacity four to five times greater than the average daily use. Costs associated with acquiring and maintaining this excess airlift capability must be routinely incurred, even if the full capacity is rarely used. As DOD's procurement and operations and maintenance accounts come under increasing pressure, it may appear attractive to increase the size of CRAF in lieu of procuring and operating a certain fraction of the Air Force strategic airlift fleet. Recent events may suggest that a growing use of commercial aircraft for every-day DOD needs is already in evidence. In January 2005, for example, it was reported that commercial airlines moved twice as many U.S. troops overseas as they moved in January 2004. Contracting with air carriers to commit their aircraft to wartime needs is cheaper, in a sense, than purchasing and operating additional Air Force cargo aircraft. However, CRAF is not free, and it costs more once activated. RAND points out that: Although holding reserve capacity in the CRAF is far more cost effective than holding the reserve in the military airlift fleet, the government has a financial incentive to use its own resources (for which it has already committed funds) in a crisis to the extent that they are conveniently available, rather than give additional business to CRAF carriers. CRAF is not the only means by which DOD transports troops by civil aircraft. Through the General Services Administration (GSA), the U.S. government negotiates and lets contracts to commercial airlines to fly government employees on official U.S. government business. Federal employees, including DOD civilian and military personnel, traveling on government business are obliged to fly with these contracted airlines at the official government rate. DOD also charters commercial aircraft to satisfy peacetime mobility needs. In July 2006 the U.S. Central Command had initiated a pilot program—""Commercial and Government Air Program""—to enlist commercial air cargo carriers to deliver military supplies into Afghanistan and Iraq. The pilot program is hoped to deliver up to 20% of DOD cargo to the region and to save DOD approximately $9 million per month. DOD hopes to dramatically reduce its flight costs by creating competition among carriers for the work, and by leveraging excess cargo capacity on regularly scheduled commercial flights. This trial program could be viewed as something of an alternative to CRAF, or an indication that more CRAF would be welcome. The increased scope and pace of military operations following the terrorist attacks of September 11, 2001, have increased the Air Force's mobility needs and made commercial air carriers a more prominent component of this capability. Potential changes in DOD's strategic airlift requirements and air mobility force structure may affect the CRAF program. DOD periodically examines the state of its current air mobility fleet and quantifies future airlift requirements to determine whether current force structure is sufficient to meet the President's national security strategy. DOD's most recent air mobility requirements study, Mobility Capability Study (MCS), was completed in December 2005. However, during congressional testimony, General Arthur L. Lichte, Commander of the Air Force's Air Mobility Command, pointed to changes that have occurred since the MCS was completed that include the increase of 92,000 ground forces, the repositioning of DOD force structure overseas, and the growth of the Army's Future Combat System. Further, DOD has reduced the number of C-5 Galaxies planned for upgrade with new engines and other enhancements that were expected to bolster capability of the C-5 fleet to levels required by MCS-2005. As a result, General Lichte stated that the current program of record for the Air Force's strategic airlift fleet of C-5s and C-17s falls short of the organic strategic airlift capability of 33.95 million ton miles day (MTM/D) requirement. The MCS called for the same level of CRAF contribution to total airlift capabilities (20.5 million ton miles per day of the overall 54.5 million ton miles per day objective) as required in the prior study. However, DOD's projected use of CRAF to fulfill total airlift needs has increased from roughly 12 MTM/D in the late 1980s to roughly 20 MTM/D in 2005. Further, this increase in capacity has occurred gradually, and many view DOD's requirement for CRAF as being stable over this 19-year span. As Figure 1 indicates, commercial aircraft committed to CRAF exceed DOD requirements. Thus, any foreseeable increases in CRAF requirements are unlikely to result in shortfalls of commercial aircraft committed to CRAF. Some favor acquisition of additional C-17s to meet potential current and future strategic airlift requirement shortfalls. For example, in March 2008, General Norton A. Schwartz, Commander of U.S. Transportation Command, stated that based on the C-5 Reliability Enhancement and Re-engining Program being reduced and recertified by DOD, he believes DOD needs a fleet of 111 C-5s and 205 C-17s. Further, the Air Force's FY2009 Unfunded Priority List contained a request for 15 additional C-17s. In contrast, the Administration's FY2009 budget request did not contain funding for new C-17s, nor did it request funding to close the C-17 production line. However, during congressional testimony, Gen. Schwartz cautioned that too large of an organic airlift fleet could potentially hurt the CRAF program in the future when he stated, One of the things that you hold me accountable for is sort of maintaining the balance between the organic fleet and the commercial capability. And as I mentioned in my opening remarks, I caution about overbuilding the organic fleet; because if that occurs, it can competes in peace time with that preference cargo, the incentives that we offer our commercial partners. And so that's one of the reasons that I believe 205 is the right number of C-17s. Because Air Force budget limitations make additional large-scale procurement of C-17s difficult to fund, some have suggested the design of a commercial version of the C-17 aircraft (BC-17) that might become part of the CRAF fleet. However, is there sufficient market for these aircraft to be commercially viable? In May of 2007, Boeing's C-17 Program Manager, Dave Bowman, stated, ""we have several customers with money that have given us requests for proposals."" Some industry studies suggest that a commercial market for up to 10 C-17s may exist for use in heavy industry, mining, or similar endeavors, while Boeing believes there is market potential of ""upwards of 100 aircraft."" On the other hand, at present, there are no orders for a commercial variant of the C-17. Acquisition decisions regarding KC-X, the Air Force's next generation tanker program, may also affect future DOD CRAF needs and use. Both competitors for the KC-X program, the Northrop Grumman KC-30 based on the Airbus 330-200 and the KC-767 based on Boeing's 767-200, could add airlift capability compared to the KC-135s they are envisioned to replace. Table 2 summarizes the airlift capabilities of the KC-135 and potential KC-X replacements. Like their commercial counterparts, potential KC-X tankers will have limited oversized cargo capability, but a significant capability to transport passengers and cargo pallets. Thus, as the Air Force's KC-X tanker fleet potentially grows, DOD's day-to-day need for commercial airlift that participants in the CRAF program provide could potentially be reduced. However, because most tankers could be needed to perform air refueling during a potential crisis, DOD would likely still rely on the CRAF program to meet surges in airlift demand. On February 29, 2008, the Air Force awarded the KC-X contract to Northrop Grumman. The initial $12.1 billion KC-X contract provides for the purchase the first 68 KC-45s of the anticipated 179 aircraft. On March 11, 2008, Boeing protested the Air Force's decision to the Government Accountability Office (GAO). GAO has 100 days to evaluate the protest. All major passenger and cargo carriers participate in CRAF. This strong participation can be inferred to reflect broad support for CRAF. The program is voluntary, and it appears logical that if the airlines didn't find participation to be in their interest, they would not participate. Every indication suggests that U.S. air carriers value CRAF and want to participate. Table 3 illustrates the growth in CRAF participation over the last 10 years. Following the terrorist attacks of September 11, 2001, many U.S. commercial air carriers struggled because of a lack of business and other factors. Today, rising fuel prices continue to pose a threat to the commercial airline industry. As economic and financial conditions for commercial air carriers potentially worsen, the benefit of CRAF for the commercial sector has been increasingly discussed. It may be that if economic conditions remain difficult, pressure may build on DOD to use more commercial airlift, not necessarily to satisfy DOD needs, but to support the private sector. Also, some, including the DOT, have proposed changes to Federal Aviation Administration (FAA) regulations that might potentially lead to increased foreign investment in U.S. airlines, including those that participate in CRAF. While some support the additional capital that foreign investment could bring to the airline industry, others oppose the concept of allowing foreign corporations to yield increased influence over a sector of the U.S. economy that makes a significant contribution to our nation's defense. This section provides a summary of recent legislation regarding the Department of Defense's (DOD's) Civil Reserve Air Fleet (CRAF) program. The FY2008 National Defense Authorization Act (NDAA) contained three provisions that affected the CRAF ( P.L. 110-181 ). First, Section 356 called for a comprehensive and independent assessment of CRAF. This assessment is designed to examine current and long-range issues associated with CRAF and make specific recommendations for preserving and improving the program. The FY2008 NDAA required a report to be delivered to congressional defense committee no later than April 2008. An excerpt of Section 356 is provided at Appendix A . Second, Section 378 of the FY2008 NDAA extended authorization of the Aviation Insurance Program (AIP) from March 30, 2008, to December 30, 2103. As part of the AIP, the FAA offers a non-premium insurance program to air carriers that participate in the CRAF. The Congressional Budget Office estimated ""that extending the CRAF program through 2013 would have no significant budgetary impact."" Third, Section 1046 called for a DOD study on the size and mix of the airlift force to specifically include how the CRAF could potentially affect DOD's airlift fleet requirements. This report is expected to be completed by January 2009. An excerpt of Section 1046 is provided at Appendix B . Many expect this study to inform force structure decisions regarding the optimal mix of DOD's organic air mobility fleets and the CRAF. In FY2007, the Senate version of the FY2007 NDAA contained a provision (sec. 1052) that would allow the Department of Defense to guarantee higher minimum levels of business to U.S. Civil Reserve Air Fleet carriers than are currently authorized by law. However, the provision was not adopted in the final legislation ( P.L. 109-364 ). Section 131 of the FY2006 NDAA contained a provision that required DOD to conduct an analysis of inter-theater airlift capabilities to include the impact of the CRAF on DOD's inter-theater airlift force structure requirements ( P.L. 109-163 ). Appendix A. FY2008 National Defense Authorization Act ( P.L. 110-181 ), Section 356 Section 356 of the Conference Report ( H.Rept. 110-477 , December 6, 2007) to H.R. 1585 stated the following: SEC. 356. INDEPENDENT ASSESSMENT OF CIVIL RESERVE AIR FLEET VIABILITY (a) Independent Assessment Required- The Secretary of Defense shall provide for an independent assessment of the viability of the Civil Reserve Air Fleet to be conducted by a federally-funded research and development center selected by the Secretary. (b) Contents of Assessment- The assessment required by subsection (a) shall include each of the following: (1) An assessment of the Civil Reserve Air Fleet as of the date of the enactment of this Act, including an assessment of— (A) the level of increased use of commercial assets to fulfill Department of Defense transportation requirements as a result of the increased global mobility requirements in response to the terrorist attacks of September 11, 2001; (B) the extent of charter air carrier participation in fulfilling increased Department of Defense transportation requirements as a result of the increased global mobility requirements in response to the terrorist attacks of September 11, 2001; (C) any policy of the Secretary of Defense to limit the percentage of income a single air carrier participating in the Civil Reserve Air Fleet may earn under contracts with the Secretary during any calendar year and the effects of such policy on the air carrier industry in peacetime and during periods during which the Armed Forces are deployed in support of a contingency operation for which the Civil Reserve Air Fleet is not activated; and (D) any risks to the charter air carrier industry as a result of the expansion of the industry in response to contingency operations resulting in increased demand by the Department of Defense. (2) A strategic assessment of the viability of the Civil Reserve Air Fleet that compares such viability as of the date of the enactment of this Act with the projected viability of the Civil Reserve Air Fleet 5, 10, and 15 years after the date of the enactment of this Act, including for activations at each of stages 1, 2, and 3— (A) an examination of the requirements of the Department of Defense for the Civil Reserve Air Fleet for the support of operational and contingency plans, including any anticipated changes in the Department's organic airlift capacity, logistics concepts, and personnel and training requirements; (B) an assessment of air carrier participation in the Civil Reserve Air Fleet; and (C) a comparison between the requirements of the Department described in subparagraph (A) and air carrier participation described in subparagraph (B). (3) An examination of any perceived barriers to Civil Reserve Air Fleet viability, including— (A) the operational planning system of the Civil Reserve Air Fleet; (B) the reward system of the Civil Reserve Air Fleet; (C) the long-term affordability of the Aviation War Risk Insurance Program; (D) the effect on United States air carriers operating overseas routes during periods of Civil Reserve Air Fleet activation; (E) increased foreign ownership of United States air carriers; (F) increased operational costs during activation as a result of hazardous duty pay, routing delays, and inefficiencies in cargo handling by the Department of Defense; (G) the effect of policy initiatives by the Secretary of Transportation to encourage international code sharing and alliances; and (H) the effect of limitations imposed by the Secretary of Defense to limit commercial shipping options for certain routes and package sizes. (4) Recommendations for improving the Civil Reserve Air Fleet program, including an assessment of potential incentives for increasing participation in the Civil Reserve Air Fleet program, including establishing a minimum annual purchase amount during peacetime. (c) Submission to Congress- Upon the completion of the assessment required under subsection (a) and by not later than April 1, 2008, the Secretary shall submit to the congressional defense committees a report on the assessment. (d) Comptroller General Report- Not later than 90 days after the report is submitted under subsection (c), the Comptroller General shall conduct a review of the assessment required under subsection (a). Appendix B. FY2008 National Defense Authorization Act ( P.L. 110-181 ), Section 1046 Section 1046 of the Conference Report ( H.Rept. 110-477 , December 6, 2007) to H.R. 1585 stated the following: SEC. 1046. STUDY ON SIZE AND MIX OF AIRLIFT FORCE. (a) Study Required- The Secretary of Defense shall conduct a requirements-based study on alternatives for the proper size and mix of fixed-wing intratheater and intertheater airlift assets to meet the National Military Strategy for each of the following timeframes: fiscal year 2012, 2018, and 2024. The study shall— (1) focus on organic and commercially programmed airlift capabilities; (2) analyze the full-spectrum lifecycle costs of the various alternatives for organic models of each of the following aircraft: C-5A/B/C/M, C-17A, KC-X, KC-10, KC-135R, C-130E/H/J, Joint Cargo Aircraft; and (3) incorporate the augmentation capability, viability, and feasibility of the Civil Reserve Air Fleet during activation stages I, II, and III. (b) Use of FFRDC- The Secretary shall select, to carry out the study required by subsection (a), a federally funded research and development center that has experience and expertise in conducting similar studies. (c) Study Plan- The study required by subsection (a) shall be carried out under a study plan. The study plan shall be developed as follows: (1) The center selected under subsection (b) shall develop the study plan and shall, not later than 60 days after the date of enactment of this Act, submit the study plan to the congressional defense committees, the Secretary, and the Comptroller General of the United States. (2) The Comptroller General shall review the study plan to determine whether it is complete and objective, and whether it has any flaws or weaknesses in scope or methodology, and shall, not later than 30 days after receiving the study plan, submit to the Secretary and the center a report that contains the results of that review and provides any recommendations that the Comptroller General considers appropriate for improvements to the study plan. (3) The center shall modify the study plan to incorporate the recommendations under paragraph (2) and shall, not later than 45 days after receiving that report, submit to the Secretary and the congressional defense committees a report on those modifications. The report shall describe each modification and, if the modifications do not incorporate one or more of the recommendations, shall explain the reasons for not doing so. (d) Elements of Study Plan- The study plan required by subsection (c) shall address, at minimum, the following: (1) A description of lift requirements and operating profiles for airlift aircraft required to meet the National Military Strategy, including assumptions regarding the following: (A) Current and future military combat and support missions. (B) The planned force structure growth of the military services. (C) Potential changes in lift requirements, including the deployment of the Future Combat Systems by the Army. (D) New capability in airlift to be provided by the KC(X) aircraft and the expected utilization of such capability, including its use in intratheater lift. (E) The utilization of intertheater lift aircraft in intratheater combat mission support roles. (F) The availability and application of Civil Reserve Air Fleet assets in future military scenarios. (G) Air mobility requirements associated with the Global Rebasing Initiative of the Department of Defense. (H) Air mobility requirements in support of worldwide peacekeeping and humanitarian missions. (I) Air mobility requirements in support of homeland defense and national emergencies. (J) The viability and capability of the Civil Reserve Air Fleet to augment organic forces in both friendly and hostile environments. (K) An assessment of the Civil Reserve Air Fleet to adequately augment the organic fleet as it relates to commercial inventory management restructuring in response to future commercial markets, streamlining of operations, efficiency measures, or downsizing of the participant. (2) An evaluation of the state of the current airlift fleet of the Air Force, including assessments of the following: (A) The extent to which the increased use of airlift aircraft in on-going operations is affecting the programmed service life of the aircraft of that fleet. (B) The adequacy of the current airlift force, including whether or not a minimum of 299 strategic airlift aircraft for the Air Force is sufficient to support future expeditionary combat and non-combat missions, as well as domestic and training mission demands consistent with the requirements of meeting the National Military Strategy. (C) The optimal mix of C-5 and C-17 aircraft for the strategic airlift fleet of the Air Force, to include the following: (i) The cost-effectiveness of modernizing various iterations of the C-5A and C-5B/C aircraft fleet versus procuring additional C-17 aircraft. (ii) The military capability, operational availability, usefulness, and service life of the C-5A/B/C/M aircraft and the C-17 aircraft. Such an assessment shall examine appropriate metrics, such as aircraft availability rates, departure rates, and mission capable rates, in each of the following cases: (I) Completion of the Avionics Modernization Program and the Reliability Enhancement and Re-engining Program. (II) Partial completion of the Avionics Modernization Program and the Reliability Enhancement and Re-engining Program, with partial completion of either such program being considered the point at which the continued execution of each program is no longer supported by the cost-effectiveness analysis. (iii) At what specific fleet inventory for each organic aircraft, to include air refueling aircraft used in the airlift role, would it impede the ability of Civil Reserve Air Fleet participants to remain a viable augmentation option. (D) An analysis and assessment of the lessons that may be learned from the experience of the Air Force in restarting the production line for the C-5 aircraft after having closed the line for several years, and recommendations for the actions that the Department of Defense should take to ensure that the production line for the C-17 aircraft could be restarted if necessary, including— (i) an analysis of the methods that were used and costs that were incurred in closing and re-opening the production line for the C-5 aircraft; (ii) an assessment of the methods and actions that should be employed and the expected costs and risks of closing and re-opening the production line for the C-17 aircraft in view of that experience. Such analysis and assessment should deal with issues such as production work force, production facilities, tooling, industrial base suppliers, contractor logistics support versus organic maintenance, and diminished manufacturing sources. (E) Assessing the military capability, operational availability, usefulness, service life and optimal mix of intra-theater airlift aircraft, to include— (i) the cost-effectiveness of procuring the Joint Cargo Aircraft versus procuring additional C-130J or refurbishing C-130E/H platforms to meet intra-theater airlift requirements of the combatant commander and component commands; and (ii) the cost-effectiveness of procuring additional C-17 aircraft versus procuring additional C-130J platforms or refurbishing C-130E/H platforms to meet intra-theater airlift requirements of the combatant commander and component commands. (3) Each analysis required by paragraph (2) shall include— (A) a description of the assumptions and sensitivity analysis utilized in the study regarding aircraft performances and cargo loading factors; and (B) a comprehensive statement of the data and assumptions utilized in making the program life cycle cost estimates and a comparison of cost and risk associated with the optimally mixed fleet of airlift aircraft versus the program of record airlift aircraft fleet. (e) Utilization of Other Studies- The study required by subsection (a) shall build upon the results of the 2005 Mobility Capabilities Studies, the on-going Intra-theater Airlift Fleet Mix Analysis, the Intra-theater Lift Capabilities Study, the Joint Future Theater Airlift Capabilities Analysis, and other appropriate studies and analyses, such as Fleet Viability Board Reports or special aircraft assessments. The study shall also include any testing data collected on modernization, recapitalization, and upgrade efforts of current organic aircraft. (f) Collaboration With United States Transportation Command- In conducting the study required by subsection (a) and preparing the report required by subsection (c)(3), the center shall collaborate with the commander of the United States Transportation Command. (g) Collaboration With Cost Analysis Improvement Group- In conducting the study required by subsection (a) and constructing the analysis required by subsection (a)(2), the center shall collaborate with the Cost Analysis Improvement Group of the Department of Defense. (h) Report- Not later than January 10, 2009, the center selected under subsection (b) shall submit to the Secretary and the congressional defense committees a report on the study required by subsection (a). The report shall be submitted in unclassified form, but shall include a classified annex.","The Civil Reserve Air Fleet (CRAF) was created by executive order in 1951. As a result, the Departments of Commerce (DOC) and Defense (DOD) formulated a contingency plan to meet the nation's airlift needs in times of crisis. When the Department of Transportation (DOT) was created, it assumed DOC's role in the CRAF program, and today, DOD and DOT work together to manage the CRAF program. The CRAF supports DOD airlift requirements in emergencies when the need for airlift exceeds the capability of the military aircraft fleet. All CRAF participants must be U.S. carriers fully certified by the Federal Aviation Administration, and meet the stringent standards of Federal Aviation Regulations pertaining to commercial airlines. The CRAF has three main segments: international, national, and aeromedical evacuation. The international segment is further divided into the long-range and short-range sections and the national segment into the domestic and Alaskan sections. Assignment of aircraft to a segment depends on the nature of the requirement and the performance characteristics needed. The commercial airlines contractually pledge aircraft to the various segments of CRAF, ready for activation when needed. To provide incentives for civil carriers to commit aircraft to the CRAF program and to assure the United States of adequate airlift reserves, the government makes peacetime airlift business available to civilian airlines that obligate aircraft to the CRAF. DOD offers business through the International Airlift Services. CRAF presents benefits and opportunities for both DOD and U.S. airlines. By all accounts it appears to be a symbiotic relationship. Yet, as circumstances change, pressures and diverging interests may emerge that could bring changes to CRAF. A number of factors may be considered when examining the future size, character and role of CRAF. These factors include cost, other potential government / commercial arrangements, potential change in DOD requirement for CRAF, and industrial base or financial assistance to U.S. air carriers. This report will be updated as events warrant.",govreport
"The National Telecommunications and Information Administration (NTIA) is an agency in the U.S. Department of Commerce (DOC) that serves as the executive branch's principal advisory office on domestic and international telecommunications and information technology policies. The NTIA frequently works with other executive branch agencies to develop and present the Administration's position on key policy matters. It represents the executive branch in both domestic and international telecommunications and information policy activities. Policy areas in which NTIA acts as the representative of the Administration include international negotiations regarding global agreements on spectrum management and domestic use of spectrum resources by federal agencies. In recent years, one of the responsibilities of NTIA has been to oversee the transfer of some radio frequencies from the federal domain to the commercial domain. Many of these frequencies have subsequently been auctioned to the commercial sector and the proceeds paid into the U.S. Treasury. The NTIA administers some grants programs, including—at present—the Broadband Technology Opportunities Program (BTOP) and the Public Safety Interoperable Communications (PSIC) grant program. As required by the Middle Class Tax Relief and Job Creation Act of 2012 ( P.L. 112-96 ), the NTIA is in the process of establishing requirements for a $135 million grant program to help states plan for participation in a new, nationwide public safety broadband network. To deploy the new network, the act established the First Responder Network Authority, or FirstNet, within the NTIA and assigned the agency various responsibilities to support FirstNet. The NTIA fulfills many responsibilities for different constituencies. Its role in federal spectrum management includes acting as a facilitator and mediator in negotiations among the various federal agencies regarding usage, priority access, causes of interference, and other radio spectrum questions. As the agency responsible for managing spectrum used by federal agencies, the NTIA often works in consultation with the Federal Communications Commission (FCC) on matters concerning spectrum access, technology, and policy. The FCC regulates private sector, state, local, and tribal spectrum use. Because many spectrum issues are international in scope and negotiated through treaty-making, the NTIA and the FCC collaborate with the Department of State in representing American interests. NTIA leads and participates in interagency efforts to develop Internet policy. It plays a lead role in the DOC's Internet Policy Task Force. The NTIA and the National Institute of Standards (NIST) have adjoining facilities on the Department of Commerce campus in Boulder, CO, where they collaborate on research projects with each other and with other federal agencies, such as the FCC. The NTIA works with the Rural Utilities Service in coordinating loans and grants made through BTOP and with the Department of Homeland Security (DHS) in overseeing grants made through the PSIC grants program. NTIA collaborates with NIST, DHS, and the FCC in providing expertise and guidance to public safety agencies who are using PSIC or BTOP funds to build new wireless networks for broadband communications. NTIA policies and programs are administered through The Office of Spectrum Management (OSM), which formulates and establishes plans and policies that ensure the effective, efficient, and equitable use of the spectrum both nationally and internationally. Through the development of long range spectrum plans, the OSM works to address future federal government spectrum requirements, including public safety operations and the coordination and registration of federal government satellite networks. The OSM also handles the frequency assignment needs of the federal agencies and provides spectrum certification for new federal agency radio communication systems. The Office of Policy Analysis and Development (OPAD), which is the domestic policy division of NTIA. OPAD supports NTIA's role as principal adviser to the Executive Branch and the Secretary of Commerce on telecommunications and information policies by conducting research and analysis and preparing policy recommendations. The Office of International Affairs (OIA), which develops and implements policies to enhance U.S. companies' ability to compete globally in the information technology and communications (ICT) sectors. In consultation with other U.S. agencies and the U.S. private sector, OIA participates in international and regional fora to promote policies that open ICT markets and encourage competition. The Institute for Telecommunication Sciences (ITS), which is the research and engineering laboratory of NTIA. ITS provides technical support to NTIA in advancing telecommunications and information infrastructure development, enhancing domestic competition, improving U.S. telecommunications trade opportunities, and promoting more efficient and effective use of the radio spectrum. The Office of Telecommunications and Information Applications (OTIA), which administers grant programs that further the deployment and use of technology in America, and the advancement of other national priorities. Many decisions regarding the use of federal spectrum are also made through the Interdepartmental Radio Access Committee, IRAC. IRAC membership comprises representatives of all branches of the U.S. military and a number of federal department agencies affected by spectrum management decisions. Enacted legislation for FY2012 has provided $45.6 million to the NTIA for salaries and expenses, an increase over the previous year of 9.6% but 18.4% less than requested by the Administration. The Administration had requested $55.8 million for Salaries and Expenses for FY2012, an increase of $14.3 million over FY2011-enacted appropriations of $41.6 million. The Administration request represented a significant increase over the $21.8 million requested for Salaries and Expenses for FY2011 and the $19.999 million appropriated for that category in FY2010. The increase is largely attributable to the costs of administration and oversight of the $4.4 billion Recovery Act program for broadband technologies and deployment mapping, as required by the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 ). Total requests for all oversight programs administered by the NTIA totaled $32.3 million for FY2012. In addition, the Administration requested new funding for the NTIA of $1.7 million to support efforts to foster new wireless broadband technologies and of $1.0 million for its Internet Innovation initiative to address Internet-based privacy principles. In the past, the OTIA has awarded grants from the Public Telecommunications Facilities Program, which was terminated by Congress in FY2011. This program has helped public broadcasting stations and other organizations construct facilities to bring educational and cultural programs to the American public. Funding for the program, Public Telecommunications Facilities, Planning and Construction (PTFPC), was not reauthorized and has been discontinued. For FY2013, the Administration proposes $46.9 million for NTIA salaries and expenses. This is an increase of 2.9% over the enacted FY2012 budget amount of $45.6 million. An FY2013 Continuing Resolution ( P.L. 112-175 ) for appropriations is in effect until March 27, 2013. The Administration and Congress have taken steps to increase the amount of radio frequency spectrum available for mobile services such as access to the Internet. The increasingly popular smart phones and tablets require greater spectrum capacity (broadband) than the services of earlier generations of cell phones. Proposals from policy makers to use federal spectrum to provide commercial mobile broadband services include: Clearing federal users from designated frequencies for transfer to the commercial sector through a competitive bidding system. Sharing federal frequencies with specific commercial users. Improving the efficiency of federal spectrum use and management. Using emerging technologies for network management to allow multiple users to share spectrum as needed. The NTIA supports the Administration's policy goal of increasing spectrum capacity for mobile broadband by 500 MHz. To this purpose, NTIA, with input from the Policy and Plans Steering Group (PPSG), has produced a 10-year plan and timetable that identifies bands of spectrum that might be available for commercial wireless broadband service. As part of its planning efforts, the NTIA prepared a ""Fast Track Evaluation"" of spectrum that might be made available in the near future. Specific recommendations were to make available 15 MHz of spectrum from frequencies between 1695 MHz and 1710 MHz, and 100 MHz of spectrum within bands from 3550 MHz to 3650 MHz. The fast track evaluation also recommended studying two 20 MHz bands to be identified within 4200-4400 MHz for possible repurposing, and placement for consideration of this proposal on the agenda of the World Radio Conference (WRC-2015) scheduled for 2015-2016. The NTIA also lead an evaluation process regarding commercial use of 95MHz of spectrum in the 1755-1850 MHz band, currently used by federal agencies. These frequencies are valued for commercial use in part because they are among those designated for international harmonization of advanced wireless technology. Harmonization enables important economies of scale in the production of wireless mobile equipment by providing global markets for standardized products. Federal users are completing the transfer of spectrum to commercial license-holders in the 1710-1755 MHz band, also designated for harmonization. Working through the PPSG, the NTIA studied federal spectrum use by more than 20 agencies with over 3,100 separate frequency assignments in the 1755-1850 MHz band. After evaluating the multiple steps involved in transferring current uses and users to other frequency locations, the NTIA concluded that it would cost $18,098 million to clear federal users from all 95 MHz of the band. Based on this assessment, the report included recommendations for seeking ways for federal and commercial users to share many of the frequencies, although some frequencies were identified to be cleared for auction to the private sector. The assumptions for the estimates of the cost were challenged in a congressional hearing, leading to a request to the General Accountability Office (GAO) to examine the process. The GAO provided testimony at the hearing regarding its preliminary findings on spectrum sharing. The most recent legislative action to provide more spectrum for commercial services were provisions included in Title VI of the Middle Class Tax Relief and Job Creation Act of 2012 ( P.L. 112-96 ). The act has updated existing and specified new procedures for spectrum to be reallocated from federal government to commercial use. Under the act, the NTIA is required to work with the FCC to identify specific bands for auction. The NTIA will also be responsible for collecting auction proceeds and making distributions from a Public Safety Trust Fund that remains in effect through FY2022. Most of the proceeds from auctions of licenses in designated spectrum as specified in the act are to be deposited directly into the Public Safety Trust Fund, with these proceeds appropriated for purposes defined in the act. The act has also given the NTIA responsibilities to create and support FirstNet in planning, building, and managing a new, nationwide, broadband network for public safety communications. The act requires the NTIA, in consultation with FirstNet, to establish grant program requirements for a State and Local Implementation Fund. The NTIA is also to facilitate payments to states that participate in the deployment of the network. Separately, the NTIA will administer grants and spectrum access for states that do not participate directly in the national network and that receive permission from the FCC to build the state's part of the FirstNet network. In compliance with the act's deadline for setting up the Fund, the NTIA has published initial programmatic requirements under which it will award grants. The act has addressed how spectrum resources might be repurposed from federal to commercial use through auction or sharing, and how the cost of such reassignment would be defined and compensated, among other provisions. Although spectrum sharing to facilitate the transition from federal to commercial use is supported in the act's provisions, the NTIA has been required to give priority to reallocation options that assign spectrum for exclusive, non-federal uses through competitive bidding. The act has required the establishment of a Technical Panel within the NTIA to review transition plans that each federal agency must prepare in accordance with provisions in the act. The Technical Panel is required to have three members qualified as a radio engineer or technical expert. The Director of the Office of Management and Budget, the Assistant Secretary of Commerce for Communications and Information, and the Chairman of the FCC have been required to appoint one member each. A full discussion and interpretation of provisions of the act as regards the technical panel and related procedural requirements such as dispute resolution have been published by the NTIA as part of the rulemaking process. The Institute for Telecommunication Sciences, located in Boulder, CO, is the research and engineering arm of NTIA. ITS provides core telecommunications research and engineering services to promote: enhanced domestic competition and new technology deployment; advanced telecommunications and information services; foreign trade opportunities for American telecommunication firms; and more efficient use of spectrum. Current areas of focus include: Research, development, testing, and evaluation to foster nationwide public safety communications interoperability; Test and Demonstration Networks to facilitate accelerated development of standards for emerging communications devices; Analysis and resolution of interference issues; and Development and testing of secure federal electronic record repositories. There are a number of works in progress that could benefit public safety communications. One example is the development and acceptance of international standards for public safety communications. Like the commercial sector, public safety could benefit from global economies of scale if there are international standards. ITS and NIST are providing important leadership in developing global standards for public safety. Spectrum allocation and assignment is not uniquely domestic. Some spectrum allocations are governed by international treaty. Additionally, there is a trend to harmonize spectrum allocations for commercial use across countries through international agreements. Harmonization of radio frequencies is achieved by designating specific bands for the same category of use worldwide. With harmonization, consumers and businesses are able to benefit from the convenience and efficiency of having common frequencies for similar uses, thus promoting development of a seamless, global communications market. Spectrum allocation at the national level, therefore, is sometimes coordinated with international spectrum allocation agreements. The Advanced Wireless Services (AWS) auction in the United States, completed in 2006, was the conclusion of a process initiated by an agreement for international harmonization of spectrum bands. The International Telecommunications Union (ITU), the lead United Nations agency for information and communication technologies, has been vested with responsibility to ensure interference-free operations of wireless communication through implementation of international agreements. The ITU adopts an international table of frequency allocations that shows agreed spectrum uses worldwide, and includes—directly or indirectly—conditions for the use of the allocated spectrum. There are 39 internationally defined wireless services that include broadcasting, meteorological satellite, and mobile services. There is also a domestic table for each country. The United States Table of Allocations is maintained by NTIA. The World Radio Conference (WRC), held approximately every four years, is the primary forum for negotiating international treaties on spectrum use. Each WRC provides an opportunity to revise the International Radio Regulations and International Table of Frequency Allocations in response to changes in technology and other factors. Modifications to rules from one WRC to the next are part of an ongoing process of technical review and negotiations. Separate tracks of preparations to develop the U.S. positions on WRC agenda items are handled by the FCC and the NTIA. The Office of Spectrum Management of NTIA, in consultation with federal agencies, reviews the WRC agenda and prepares its comments for the U.S. position. NTIA and the FCC solicit input from the private sector and create working groups to address specific agenda items. NTIA and the FCC submit recommendations to the Department of State. The Department of State coordinates and mediates the development of the U.S. position for each WRC and leads the U.S. delegation at each conference. All three agencies use committees and other means to interact with the private sector. Preparation for each WRC is a collaborative process that includes opportunities for affected parties to comment on and participate in the formation of U.S. policy. The U.S. delegation to each WRC includes representatives from the federal government and the private sector. Each WRC delegation is led by an Ambassador appointed for that purpose by the President. The most recent conference (WRC-12) concluded on February 17, 2012, with the signing of a new treaty covering accords on technical and regulatory matters and other issues. As is customary, the preliminary agenda for the next WRC meeting was approved during WRC-12. WRC-15 will be held in 2015-2016.","The National Telecommunications and Information Administration (NTIA), an agency of the Department of Commerce, is the executive branch's principal advisory office on domestic and international telecommunications and information policies. Its mandate is to provide greater access for all Americans to telecommunications services, support U.S. attempts to open foreign markets, advise on international telecommunications negotiations, and fund research for new technologies and their applications. NTIA also manages the distribution of funds for several key grant programs. Its role in federal spectrum management includes acting as a facilitator and mediator in negotiations among the various federal agencies regarding usage, priority access, causes of interference, and other radio spectrum questions. The 112th Congress, with the passage of the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96), in February 2012, has given the NTIA new responsibilities in spectrum management and the support of public safety initiatives.",govreport
"The Energy Policy Act of 2005 ( P.L. 109-58 ), signed by President Bush on August 8, 2005,was the first omnibus energy legislation enacted in more than a decade. Major provisions include taxincentives for domestic energy production and energy efficiency, a mandate to double the nation'suse of biofuels, faster procedures for energy production on federal lands, and authorization ofnumerous federal energy research and development programs. This report describes the electricityprovisions. Sec. 1201. Short title. This title may be cited asthe ""Electric Reliability Act of 2005."" Summary of Provisions. This subtitle is intendedto provide federal jurisdiction over activities that are required to support reliability of the U.S. bulkpower system. Clarifying the Federal Energy Regulatory Commission's (FERC) authority toestablish and regulate an electric reliability organization (ERO) is intended to improve reliability asrestructuring of the U.S. bulk power system proceeds. Electric Reliability Standards (Sec. 1211). Thissection requires FERC to promulgate rules within 180 days of enactment to create a FERC-certifiedERO. The North American Electric Reliability Council (NERC) currently has responsibility forreliability of the bulk power system. NERC has established reliability guidelines but has noenforcement authority. Before enactment of P.L. 109-58 , the Federal Power Act (1) gave FERC jurisdiction overunbundled transmission and authority to regulate wholesale rates; however, no authority wasprovided to regulate reliability. Under this section, the ERO will develop and enforce reliabilitystandards for the bulk power system, including cybersecurity protection. All ERO standards will beapproved by FERC. Under this title, the ERO can impose penalties on a user, owner, or operator ofa bulk power system that violates any FERC-approved reliability standard. In addition, FERC canorder compliance with a reliability standard and can impose a penalty if FERC finds that a user,owner, or operator of a bulk power system has engaged in or is about to engage in a violation of areliability standard. This provision does not give an ERO or FERC authorization to orderconstruction of additional generation or transmission capacity. This provision also requires that FERC establish a regional advisory body if requested by atleast two-thirds of the states within a region that have more than half of their electric load servedwithin that region. The advisory body will be composed of one member from each participating statein the region, appointed by the governor of each state, and is able to provide advice to the ERO orFERC on reliability standards, proposed regional entities, proposed fees, and any otherresponsibilities requested by FERC. The entire reliability provision does not apply to Alaska orHawaii. The state of New York is authorized to develop rules that would result in greater reliabilityfor New York, as long as those rules do not result in lower reliability for neighboring states. If the penalties employed by the ERO are not successful, then FERC has the authority toenforce penalties for entities that do not comply with reliability standards. Establishing this newrelationship between FERC and the ERO could have the potential to improve coordination betweenmarket functions and reliability functions. Siting of Interstate Electric Transmission Facilities (Sec.1221). The Secretary of Energy is required to conduct a study of electrictransmission congestion every three years. Based on the findings, the Secretary of Energy maydesignate a geographic area as being congested. Under certain conditions, FERC is authorized toissue construction permits. Under new Section 216(d) of the Federal Power Act (FPA), affectedstates, federal agencies, Indian tribes, property owners, and other interested parties will have anopportunity to present their views and recommendations with respect to the need for, and impact of,a proposed construction permit. However, there is no requirement for a specific comment period. New FPA Section 216(e) will allow permit holders to petition in U.S. District Court to acquirerights-of-way through the exercise of the right of eminent domain. Any exercise of eminent domainauthority would be considered to be takings of private property for which just compensation is due. New FPA Section 216(g) does not state whether property owners would be required to reimbursecompensation if the rights-of-way were transferred back to the owner. An applicant for federal authorization to site transmission facilities on federal lands couldrequest that the Department of Energy be the lead agency to coordinate environmental review andother federal authorization. Once a completed application is submitted, all related environmentalreviews are required to be completed within one year unless another federal law makes thatimpossible. FPA Section 216(h) gives the Department of Energy (DOE) new authority to prepareenvironmental documents and appears to give DOE additional decision-making authority forrights-of-way and siting on federal lands. This would appear to give DOE input into the decisionprocess for creating rights-of-way. Review under Section 503 of the Federal Land Policy andManagement Act (2) couldbe streamlined by relying on prior analyses. If a federal agency has denied an authorization requiredby a transmission or distribution facility, the denial could be appealed by the applicant or relevantstate to the President. The President is required to issue a decision within 90 days of the appeal'sfiling. With congressional approval, states may enter into interstate compacts for the purposes ofsiting transmission facilities and the Secretary of Energy could provide technical assistance. Thissection does not apply to the Electric Reliability Council of Texas (ERCOT). Third-Party Finance (Sec. 1222). The WesternArea Power Administration (WAPA) and the Southwestern Power Administration (SWPA) are ableeither to continue to design, develop, construct, operate, maintain, or own transmission facilitieswithin their regions or to participate with other entities for the same purposes if the Secretary ofEnergy designates the area as a National Interest Electric Transmission Corridor and if the facilitywill reduce congestion or is needed to accommodate projected increases in demand for transmissioncapacity. The project is required to be consistent with the needs identified by the appropriateRegional Transmission Organization or Independent System Operator. Under certain circumstances,the Secretary of Energy, acting through WAPA and/or SWPA, may design, develop, construct,operate, maintain, or own an electric power transmission facility in the WAPA and SWPA region. No more than $100 million from third-party financing may be used during fiscal years 2006 through2015. Before enactment, the enabling statutes for power marketing administrations could haverestricted third-party financing, construction, operation, and maintenance of transmissionfacilities. (3) Advanced Transmission Technologies (Sec.1223). FERC is directed to encourage deployment of advanced transmissiontechnologies. Advanced Power System Technology Incentive Program (Sec.1224). A program is established to provide incentive payments to owners oroperators of advanced power generation systems. Subject to the availability of funds, 1.8 cents perkilowatt-hour will be paid to the owner or operator of a qualifying advanced power systemtechnology facility. For facilities that the Secretary of Homeland Security and the Secretary ofEnergy determine are ""qualifying security and assured power facilities,"" an additional 0.7 cents perkilowatt-hour will be paid to the owner or operator of such a facility. Under the incentive program,the first 10,000,000 kilowatt-hours produced in any facility in a fiscal year are eligible for theincentives. Eligible systems include advanced fuel cells, turbines, or hybrid power systems. ForFY2006 through FY2012, an annual appropriation of $10 million is authorized. Open Nondiscriminatory Access (Sec. 1231). FERC is authorized to require, by rule or order, unregulated transmitting utilities (power marketingadministrations, state entities, and rural electric cooperatives) to charge rates comparable to whatthey charge themselves and require that the terms and conditions of the sales be comparable to thoserequired of other utilities. Before enactment of P.L. 109-58 , under the Federal Power Act (Section201(f)), federal power marketing administrations, state entities, and rural electric cooperatives werenot subject to FERC's rate-making. Under this provision, exemptions are established for utilitiesselling less than 4 million megawatt-hours of electricity per year, for distribution utilities, and forutilities that own or operate transmission facilities that are not necessary to facilitate a nationwideinterconnected transmission system. This exemption can be revoked to maintain transmission systemreliability. FERC is not authorized to order states or municipalities to take action under this sectionif such action would constitute a private use under Section 141 of the Internal Revenue Code of1986. FERC may remand transmission rates to an unregulated transmitting utility if the rates do notcomply with this section. FERC is not authorized to order an unregulated transmitting utility to joina Regional Transmission Organization or other FERC-approved independent transmissionorganization. (This section is often referred to as ""FERC-lite."") Federal Utility Participation in Regional TransmissionOrganizations (Sec. 1232). Federal utilities (power marketing administrations orthe Tennessee Valley Authority) are authorized to participate in regional transmission organizations.A law allowing federal utilities to study formation and operation of a regional transmissionorganization is repealed (16 U.S.C. 824n). Native Load Service Obligation (Sec. 1233). Thissection amends the Federal Power Act to clarify that a load-serving entity is entitled to use itstransmission facilities or firm transmission rights to serve its existing customers before it is obligatedto make its transmission capacity available for other uses. FERC is not able to change any approvedallocation of transmission rights by an Regional Transmission Organization (RTO) or IndependentSystem Operator (ISO) approved prior to January 1, 2005. A government entity that ownstransmission facilities used predominantly to support its own water pumping facilities is providedprotections for transmission service to such facilities comparable to protections provided toload-serving entities. This section does not apply to ERCOT and does apply to load-serving entitieslocated within the service area of the Tennessee Valley Authority. Within one year of enactment,FERC is required to issue a rule or order on long-term transmission rights and organized markets. Section 201 of the Federal Power Act gives FERC jurisdiction over ""the transmission ofelectric energy in interstate commerce and the sale of such energy at wholesale in interstatecommerce."" Section 205 of the Federal Power Act prohibits utilities from granting ""undue preferenceor advantage to any person or subject any person to any undue prejudice or disadvantage"" (16 U.S.C.824). The new language of this section is intended to clarify that reserving transmission for existingcustomers (native load) is not considered unduly discriminatory. Study on the Benefits of Economic Dispatch (Sec.1234). The Secretary of Energy, in consultation with the states, is required to issuean annual report to Congress and the states on the current status of economic dispatch. Economicdispatch is defined as ""the operation of generation facilities to produce energy at the lowest cost toreliably serve consumers, recognizing any operational limits of generation and transmissionfacilities."" Protection of Transmission Contracts in the Pacific Northwest(Sec. 1235). FERC does not have the authority to require electric utilities in thePacific Northwest to convert firm transmission rights to tradable or financial rights. The area of thePacific Northwest is the region defined in Section 3 of the Pacific Northwest Electric PowerPlanning and Conservation Act (16 U.S.C.839a) or a portion of a state included in the geographicarea proposed for a Regional Transmission Organization in FERC Docket No. RT01-35. Sense of Congress Regarding Locational Installed CapacityMechanism (Sec. 1236). It is the sense of Congress that FERC should carefullyconsider the objections of the states to a proposed locational installed capacity mechanism in NewEngland. The objections include that a locational installed capacity mechanism would not provideadequate assurance that necessary electric generation capacity or reliability will be provided and itwould impose a high cost on consumers. Transmission Infrastructure Investment (Sec.1241). Within one year of enactment, FERC is required to establish a rule to createincentive-based, including performance-based, transmission rates. The rule is to promote reliable andeconomically efficient electric transmission and generation, provide for a return on equity thatattracts new investment in transmission, encourage use of technologies that increase the transfercapacity of existing transmission facilities, and allow for the recovery of all prudently incurred coststhat are necessary to comply with mandatory reliability standards and those that would result fromtransmission siting and construction on a National Interest Electric Transmission Corridor. FERCis directed to implement incentive rate-making for utilities that join a Regional TransmissionOrganization. Funding New Interconnection and Transmission Upgrades (Sec.1242). FERC may approve a participant funding plan for new transmission or fornew generator interconnection if the plan results in rates that are just and reasonable, not undulydiscriminatory or preferential, and otherwise consistent with sections 205 and 206 of the FederalPower Act. Net Metering and Additional Standards (Sec.1251). For states that have not considered implementation and adoption of netmetering standards, within two years of enactment, state regulatory authorities are required to beginconsidering whether to implement net metering. This process must be completed within three yearsof enactment. Net metering service is defined as service to an electric consumer under which electricenergy generated by that electric consumer from an eligible on-site generating facility (e.g., solar orsmall generator) and delivered to local distribution facilities may be used to offset electric energyprovided by the electric utility to the electric consumer during the applicable billing period. Duringthe same time frame, states must consider whether to implement a standard to require electricutilities to develop a plan to minimize dependence on one fuel source. In addition, states mustconsider whether to implement a requirement that electric utilities develop and implement a 10-yearplan to increase the efficiency of fossil fuel generation. Smart Metering (Sec. 1252). For states that havenot considered implementation and adoption of a smart metering standard, state regulatoryauthorities are required issue a decision within 18 months of enactment on whether to implement astandard for time-based rate schedules for electric utility customers. Customers using time-based rateschedules must be provided with a time-based meter capable of allowing utility customer to receivethe time-based rate. This section amends the Public Utility Regulatory Policies Act of 1978 (5) (PURPA) and requires theSecretary of Energy to provide consumer education on advanced metering and communicationstechnologies, to identify and address barriers to adoption of demand response programs, and to issuea report to Congress not later than 180 days after enactment that identifies and quantifies the benefitsof demand response. The Secretary of Energy must provide technical assistance to regionalorganizations to identify demand response potential and to develop demand response programs torespond to peak demand or emergency needs. FERC is directed to issue an annual report, by region,to assess demand response resources. Cogeneration and Small Power Production Purchase and SaleRequirements (Sec. 1253). Section 210 of PURPA required utilities to purchasepower from qualifying facilities and small power producers at a rate based on the utilities' avoidedcost, the cost they would have incurred to generate the additional power themselves, as determinedby utility regulators. (6) Thissection repeals the mandatory purchase requirement under Section 210 of PURPA for new contractsif FERC finds that a competitive electricity market exists and a qualifying facility has access toindependently administered, auction-based, day-ahead, real-time wholesale markets and long-termwholesale markets. Qualifying facilities also need to have access to transmission andinterconnection services provided by a FERC-approved regional transmission entity that providesnondiscriminatory treatment for all customers. Ownership limitations under PURPA are repealed. Background and Analysis. The oil embargoes of the1970s created concerns about the security of the nation's electricity supply and led to enactment ofthe Public Utility Regulatory Policies Act of 1978. For the first time, utilities were required topurchase power from outside sources, or ""qualifying facilities."" The purchase price was set at theutilities' avoided cost. PURPA was established in part to augment electric utility generation withmore efficiently produced electricity and to provide equitable rates to electric consumers. In addition to PURPA, the Fuel Use Act of 1978 (FUA) helped qualifying facilities (QFs)become established. (7) Under FUA, utilities were not permitted to use natural gas to fuel new generating facilities. QFs,which are by definition not utilities, were able to take advantage of then-abundant natural gas as wellas new generating technology, such as combined-cycle plants that use hot gases from combustionturbines to generate additional power. These technologies lowered the financial threshold forentrance into the electricity generation business and shortened the lead time for constructing newplants. FUA was repealed in 1987, but by that time, QFs and small power producers had gained aportion of the total electricity supply. This influx of QF power challenged the cost-based rates that previously guided wholesaletransactions. Before implementation of PURPA, FERC approved wholesale interstate electricitytransactions based on the seller's costs to generate and transmit the power. Because nonutilitygenerators typically do not have enough market power to influence the rates they charge, FERCbegan approving certain wholesale transactions whose rates were a result of a competitive biddingprocess. These rates are called market-based rates. This first incremental change to traditional electricity regulation started a movement towarda market-oriented approach to electricity supply. Following the enactment of PURPA, two basicissues stimulated calls for further change: whether to encourage nonutility generation and whetherto permit utilities to diversify into nonregulated activities. The Energy Policy Act of 1992 (EPACT) (8) removed several regulatory barriers for entry into electricitygeneration to increase competition of electricity supply. However, EPACT does not permit FERCto mandate that utilities transmit exempt wholesale generator (EWG) power to retail consumers(commonly called ""retail wheeling"" or ""retail competition""), an activity that remains under thejurisdiction of state public utility commissions. PURPA began to shift more regulatoryresponsibilities to the federal government, and EPACT continued that shift away from the states bycreating new options for utilities and regulators to meet electricity demand. Proponents of the PURPA repeal -- primarily investor-owned utilities (IOUs) located in theNortheast and in California -- argued that their state regulators' ""misguided"" implementation ofPURPA in the early 1980s had forced them to pay contractually high prices for power they did notneed. They argued that, given the current environment for cost-conscious competition, PURPA wasoutdated. Investor-owned utility interests strongly supported the repeal of Section 210 of PURPA,contending that PURPA's mandatory purchase obligation was anticompetitive andanticonsumer. (9) Opponents of mandatory purchase requirement repeal (independent power producers,industrial power customers, most segments of the natural gas industry, the renewable energyindustry, and environmental groups) had many reasons to support PURPA as it stood. Mainly, theirargument was that PURPA introduced competition in the electric generating sector and, at the sametime, helped promote wider use of cleaner, alternative fuels to generate electricity. Since theelectric-generating sector is not yet fully competitive, they argued, repealing PURPA would decreasecompetition and impede the development of the renewable energy industry. Additionally, opponentsof the PURPA repeal argued that it would result in less competition and greater utility monopolycontrol over the electric industry. Some state regulators had expressed concern that repealingSection 210 would prevent them from deciding matters currently under their jurisdiction. Interconnection (Sec. 1254). Each stateregulatory authority, if it has not already done so, and each nonregulated utility must considerestablishing an interconnection standard for on-site generating facilities that request to be connectedto the local distribution facilities. Interconnection services will be offered according to the Instituteof Electrical and Electronics Engineers (IEEE) Standard 1547 for Interconnecting DistributedResources with Electric Power Systems. Consideration of the standard is to commence not later thanone year after enactment and be completed not later than two years after the date of enactment. Short Title (Sec. 1261). This subtitle is to becited as the ""Public Utility Holding Company Act of 2005."" Definitions (Sec. 1262). This section establishesdefinitions for the following terms: affiliate, associate company, commission, company, electricutility company, exempt wholesale generator and foreign utility company, gas utility company,holding company, holding company system, jurisdictional rates, natural gas company, person, publicutility, public-utility company, state commission, subsidiary company, and voting security. Repeal of the Public Utility Holding Company Act of 1935 (Sec.1263). The Public Utility Holding Company Act of 1935 (PUHCA) is repealed. Background and Analysis. In general, PUHCA setforth the structure of holding companies by prohibiting all holding companies that were more thantwice removed from the operating subsidiaries. It also federally regulated holding companies ofinvestor-owned utilities and provided for Securities and Exchange Commission (SEC) regulationof mergers and diversification proposals. Registered holding companies of subsidiaries wererequired to have SEC approval prior to issuing securities; all loans in intercompany financialtransactions were regulated by the SEC. A holding company could have been exempt from PUHCAif its business operations and those of its subsidiaries occurred within one state or with a contiguousstate. Historically, electricity service was defined as a natural monopoly, meaning that the industryhas (1) an inherent tendency toward declining long-term costs, (2) high threshold investment, and(3) technological conditions that limit the number of potential entrants. In addition, many regulatorshave considered unified control of generation, transmission, and distribution as the most efficientmeans of providing service. As a result, most people (about 75%) are currently served by a verticallyintegrated, investor-owned utility. As the electric utility industry has evolved, however, there has been a growing belief that thehistoric classification of electric utilities as natural monopolies has been overtaken by events and thatmarket forces can and should replace some of the traditional economic regulatory structure. Forexample, the existence of utilities that do not own all of their generating facilities, primarilycooperatives and publicly owned utilities, has provided evidence that vertical integration has notbeen necessary for providing efficient electric service. Moreover, recent changes in electric utilityregulation and improved technologies have allowed additional generating capacity to be providedby independent firms rather than utilities. The Public Utility Holding Company Act and the Federal Power Act of 1935 (Title I andTitle II of the Public Utility Act) established a regime of regulating electric utilities that gave specificand separate powers to the states and the federal government. A regulatory bargain was madebetween the government and utilities. In exchange for an exclusive franchise service territory,utilities must provide electricity to all users at reasonable, regulated rates. State regulatory commissions address intrastate utility activities, including wholesale andretail rate-making. State authority currently tends to be as broad and as varied as the states arediverse. At the least, a state public utility commission will have authority over retail rates, and oftenover investment and debt. At the other end of the spectrum, the state regulatory body will overseemany facets of utility operation. Despite this diversity, the essential mission of the state regulatorin states that have not restructured is the establishment of retail electric prices. This is accomplishedthrough an adversarial hearing process. The central issues in such cases are the total amount ofmoney the utility will be permitted to collect and how the burden of the revenue requirement willbe distributed among the various customer classes (residential, commercial, and industrial). Under the FPA, federal economic regulation addresses wholesale transactions and rates forelectric power flowing in interstate commerce. Federal regulation follows state regulation and ispremised on the need to fill the regulatory vacuum resulting from the constitutional inability of statesto regulate interstate commerce. In this bifurcation of regulatory jurisdiction, federal regulation islimited and conceived to supplement state regulation. FERC has the principal functions at thefederal level for the economic regulation of the electric utility industry, including financialtransactions, wholesale rate regulation, transactions involving transmission of unbundled retailelectricity, interconnection and wheeling of wholesale electricity, and ensuring adequate and reliableservice. Before enactment of P.L. 109-58 , in order to prevent a recurrence of the abusive practicesof the 1920s (e.g., cross-subsidization, self-dealing, pyramiding), SEC regulated utilities' corporatestructure and business ventures under PUHCA. The electric utility industry has been in the process of transformation. During the past twodecades, there has been a major change in direction concerning generation. First, improvedtechnologies have reduced the cost of generating electricity as well as the size of generating facilities. Prior preference for large-scale -- often nuclear or coal-fired -- powerplants has been supplanted bya preference for small-scale production facilities that can be brought on-line more quickly andcheaply, with fewer regulatory impediments. Second, technological advances have lowered the entrybarrier to electricity generation and permitted nonutility entities to build profitable facilities. One argument for additional PUHCA change was made by electric utilities that wanted tofurther diversify their assets. Under PUHCA, a holding company could acquire securities or utilityassets only if the SEC found that such a purchase would improve the economic efficiency andservice of an integrated public utility system. It was argued that reform to allow diversification wouldimprove the risk profile of electric utilities in much the same way as in other businesses: the risk ofany one investment is diluted by the risk associated with all investments. Utilities also argued thatdiversification would lead to better use of underutilized resources (due to the seasonal nature ofelectric demand). Utility holding companies that were exempt from SEC regulation argued thatPUHCA discouraged diversification because the SEC could have repealed their exempt status ifexemption would be ""detrimental to the public interest."" (11) State regulators expressed concerns that increased diversification could lead to abuses,including cross-subsidization -- a regulated company subsidizing an unregulated affiliate. Cross-subsidization was a major argument against the creation of exempt wholesale generators(EWGs) and reemerged as an argument against further PUHCA change. In the case of electric andgas companies, nonutility ventures that are undertaken as a result of diversification may benefit fromthe regulated utilities' allowed rate of return. Moneymaking nonutility enterprises would contributeto the overall financial health of a holding company. However, unsuccessful ventures could harmthe entire holding company, including utility subsidiaries. In this situation, opponents feared thatutilities would not be penalized for failure in terms of reduced access to new capital, because theycould increase retail rates. Several consumer and environmental public interest groups, as well as state legislators,expressed concerns about the PUHCA repeal. Such groups argued that the repeal could onlyexacerbate market power abuses in what they viewed as a monopolistic industry where truecompetition does not yet exist. Federal Access to Books and Records (Sec.1264). Holding companies and their affiliates are required to make available toFERC books and records of affiliate transactions that FERC determines are relevant to costs incurredby a public utility or natural gas company within the holding company system to protect ratepayerswith respect to FERC jurisdictional rates. Federal officials are required to maintain confidentialityof such books and records. Before enactment, registered holding companies and subsidiarycompanies were required to preserve accounts, cost-accounting procedures, correspondence,memoranda, papers, and books that the SEC deemed necessary or appropriate in the public interestor for the protection of investors and consumers. State Access to Books and Records (Sec. 1265). A jurisdictional state commission may make a reasonably detailed written request to a holdingcompany or any associate company for access to specific books and records. The states mustsafeguard against unwarranted disclosure to the public of any trade secrets or sensitive commercialinformation. Response to such a request is mandatory. Compliance with this section is enforceablein U.S. District Court. This section does not apply to an entity that is considered to be a holdingcompany solely by reason of ownership of one or more qualifying facilities. Before enactment, the Federal Power Act allowed state commissions to examine the books,accounts, memoranda, contracts, and records of a jurisdictional electric utility company, an exemptwholesale generator that sells to such electric utility, and an electric utility company or holdingcompany that is an associate company or affiliate of an exempt wholesale generator. In issuing suchan order for information, a state commission was not required to specify which books, accounts,memoranda, contracts, and records it was requesting. Exemption Authority (Sec. 1266). FERC isdirected to promulgate rules within 90 days from the effective date of this section to exemptqualifying facilities, exempt wholesale generators, and foreign utilities from the federal access tobooks and records provision (Section 1264). FERC is also required to exempt books, accounts,memoranda, and other records that are not relevant to the jurisdictional rates of a public utility ornatural gas company. Any class of transactions that is not relevant to the jurisdictional rates of apublic utility or natural gas company is also exempt. Affiliate Transactions (Sec. 1267). FERC retainsthe authority to prevent cross-subsidization and to assure that jurisdictional rates are just andreasonable. FERC and state commissions retain jurisdiction to determine whether associate companyactivities could be recovered in rates. Before enactment of the new energy law, the Federal PowerAct required that jurisdictional rates were just and reasonable and prohibitedcross-subsidization. (12) Applicability (Sec. 1268). Except as specificallynoted, this subtitle does not apply to the U.S. government, a state, or any political subdivision of thestate, or foreign governmental authority operating outside the United States. Effect on Other Regulations (Sec. 1269). FERCor state commissions are not precluded from exercising their jurisdiction under otherwise applicablelaws to protect utility customers. Enforcement (Sec. 1270). FERC is given theauthority to enforce provisions under sections 306-317 of the Federal Power Act. Before enactment,the Securities and Exchange Commission had the authority to investigate and enforce provisions ofthe Public Utility Holding Company Act of 1935. Savings Provisions (Sec. 1271). Persons maycontinue to participate in legal activities in which they have been engaged or are authorized toengage in on the effective date of this act. This subtitle would not limit the authority of FERC underthe Federal Power Act or the Natural Gas Act. (13) Tax treatment for exchanges of stock or securities under section1081 of the Internal Revenue Service Code, Nonrecognition of Gain or Loss on Exchanges orDistributions in Obedience to Orders of the SEC , is not affected due to the repeal of PUHCA. Implementation (Sec. 1272). Not later than fourmonths after enactment, FERC is required to promulgate regulations necessary to implement thissubtitle (excluding section 1265, which relates to state access to books and records) and submit toCongress recommendations for technical or conforming amendments to federal law necessary tocarry out this subtitle. Transfer of Resources (Sec. 1273). The Securitiesand Exchange Commission is required to transfer all applicable books and records to FERC. Effective Date (Sec. 1274). Six months afterenactment, this subtitle will take effect. This effective date does not apply to Section 1282(implementation). If any FERC rule-making that modifies the standards of conduct governingentities that own, operate, or control facilities for transmission of electricity in interstate commerceor transportation of natural gas in interstate commerce takes effect prior to the effective date of thissection, any action taken by a public utility company or utility holding company to comply with theFERC requirements will not subject these companies to any regulatory requirement under PUHCA. Service Allocation (Sec. 1275). FERC is requiredto review and authorize cost allocations for nonpower goods or administrative or managementservices provided by an associate company that was organized specifically for the purpose ofproviding such goods or services. This section does not preclude FERC or state commissions fromexercising their jurisdiction under other applicable laws with respect to review or authorization ofany costs. FERC is required to issue rules within four months of enactment to exempt from thesection any company and holding company system if operations are confined substantially to a singlestate. Authorization of Appropriations (Sec. 1276). Necessary funds to carry out this subtitle are authorized to be appropriated. Conforming Amendments to the Federal Power Act (Sec.1277). The Federal Power Act is amended to reflect the changes to the PublicUtility Holding Company Act of 1935. Electricity Market Transparency (Sec. 1281). FERC is directed to facilitate price transparency in wholesale electric markets. FERC may prescriberules to provide on a timely basis information about the availability and prices of wholesale electricenergy and transmission service to FERC, state commissions, buyers and sellers of wholesale electricenergy, users of transmission services, and the public. FERC is directed to rely on existing pricepublishers and providers of trade processing services the maximum extent possible. However,FERC may establish an electronic information system if it determines that existing price informationis not adequate. Any rules promulgated by FERC will exempt from disclosure any information thatwould be detrimental to the operation of an effective market or jeopardize system security. Within180 days of enactment, FERC must enter into a memorandum of understanding (MOU) with theCommodity Futures Trading Commission to ensure coordination of information requests to markets. Entities with a de minimis market presence are not required to comply with the reportingrequirements of the section. No one will be subject to civil penalties for any violation of thereporting requirements that occur more than three years before the date on which the person hasprovided notice of the proposed penalty. This would not apply to entities that have engaged infraudulent market manipulation activities. The section does not apply to the area of the ElectricReliability Council Texas. False Statements (Sec. 1282). The Federal PowerAct is amended to expressly prohibit any entity from willingly and knowingly reporting falseinformation to a federal agency relating to the price of electricity sold at wholesale or the availabilityof transmission capacity. Existing mail fraud laws, in part, apply to use of the mail for the purpose of executing, orattempting to execute, a scheme or artifice to defraud, or for obtaining money or property by falseor fraudulent pretenses, representations, or promises. Wire fraud statutes cover use of wire, radio,or television communication in interstate or foreign commerce to transmit or to cause to betransmitted, any writings, science, signals, pictures, or sounds for the purpose of executing a schemeor artifice to defraud, or to obtain money or property by means of false or fraudulent pretenses,representations, or promises. Market Manipulation (Sec. 1283). Amends theFederal Power Act to expressly prohibit any entity, in connection with the purchase or sale of FERCjurisdictional electric energy or transmission services, from directly or indirectly using anymanipulative or deceptive device or contrivance. Enforcement (Sec. 1284). The Federal Power Actis amended to allow electric utilities to file complaints with FERC and to allow complaints to befiled against transmitting utilities. Criminal and civil penalties under the Federal Power Act areincreased. Criminal penalties may not exceed $1 million and/or five years' imprisonment. Inaddition, a fine of $25,000 may be imposed. A civil penalty not exceeding $1 million per day perviolation may be assessed for violations of sections 211, 212, 213, or 214 of the Federal Power Act. Before enactment of the new energy law, criminal penalties could not have exceeded $5,000 and/ortwo years' imprisonment. An additional fine of $500 could have been imposed. A civil penalty notexceeding $10,000 per day per violation could have been assessed for violations of sections 211,212, 213, or 214 of the Federal Power Act. Refund Effective Date (Sec. 1285). Section206(b) of the Federal Power Act is amended to allow the effective date for refunds to begin at thetime of the filing of a complaint with FERC, but not later than five months after such a filing. IfFERC does not make its decision within the time frame provided, FERC would be required to stateits reasons for not acting in the provided time frame for the decision. Refund Authority (Sec. 1286). Any entity thatis not a public utility (including an entity referred to under Section 201(f) of the Federal Power Act)and enters into a short-term sale of electricity is subject to the FERC refund authority. A short-termsale includes any agreement to the sale of electric energy at wholesale that is for a period of 31 daysor less. This section does not apply to electric cooperatives or any entity that sells less than 8 millionmegawatt-hours of electricity per year. FERC is given refund authority over voluntary short-termsales of electricity by Bonneville Power Administration if the rates charged are unjust andunreasonable. FERC is given authority over all power marketing administrations and the TennesseeValley Authority to order refunds to achieve just and reasonable rates. Before enactment, Section201(f) of the Federal Power Act exempted government entities from FERC rate regulation. Consumer Privacy and Unfair Trade Practices (Sec.1287). The Federal Trade Commission is authorized to issue rules to prohibit slamming and cramming . Slamming occurs when an electric utility switches a customer's electricprovider without the consumer's knowledge. Cramming occurs when an electric utility addsadditional services and charges to a customer's account without permission of the customer. If theFederal Trade Commission determines that a state's regulations provide equivalent or greaterprotection, then the state regulations would apply in lieu of regulations issued by the Federal TradeCommission. Authority of Court to Prohibit Individuals from Serving AsOfficers, Directors, and Energy Traders (Sec. 1288). The court is allowed toprohibit any person who is found to have violated Section 221 of the Federal Power Act (Prohibitionon Filing False Information) from acting as an officer or director of an electric utility or engagingin the business of purchasing or selling FERC jurisdictional electric energy or transmission services. Merger Review Reform (Sec. 1289). The FederalPower Act is amended to give FERC approval authority over the acquisition of securities and the merger, sale, lease, or disposition of facilities under FERC's jurisdiction with a value in excess of$10 million. FERC is required to give state public utility commissions and governors reasonablenotice in writing of the acquisition of securities and the merger, sale, lease, or disposition offacilities under FERC's jurisdiction. FERC must approve the proposed change of control,acquisition, disposition, or consolidation if it finds that the proposed transaction is consistent withthe public interest and will not result in cross-subsidization of a nonutility associate company or thepledge or encumbrance of utility assets for the benefit of an associate company, unless it is consistentwith the public interest. If FERC does not act within 180 days of an application, the application willbe deemed granted unless FERC finds that further consideration is required. This section takes effectsix months after enactment. Before enactment, under section 203(a) of the Federal Power Act,FERC review of asset transfers applied to transactions valued at $50,000 or more. Relief for Extraordinary Violations (Sec. 1290). This section applies to contracts for wholesale electricity within the Western Interconnection priorto June 20, 2001, for which FERC has found that the wholesale power sellers manipulated thatelectricity market, resulting in unjust and unreasonable rates, and FERC has revoked the seller'sauthority to sell at market-based rates. For these contracts, FERC may determine whether terminationpayments for power not delivered by the seller are unlawful on the grounds that the contract is unjustand unreasonable or contrary to the public interest. This applies only to cases still pending beforeFERC and not previously settled. Definitions (Sec. 1291). The definitions forelectric utility and transmitting utility under the Federal Power Act are amended. Definitions for thefollowing terms are added to the Federal Power Act: electric cooperative, regional transmissionorganization, independent system operator, and transmission organization. Section 201(f) of the Federal Power Act is amended to add that, in addition to a politicalsubdivision of a state, an electric cooperative that receives financing under the Rural ElectrificationAct of 1936 or an electric cooperative that sells less than 4,000,000 MW-hours of electricity per yearis not subject to FERC rate regulation. Conforming Amendments (Sec. 1295). TheFederal Power Act is amended to conform with this section. Economic Dispatch (Sec. 1298). FERC isdirected to convene regional boards to study ""security constrained economic dispatch."" A memberof FERC will chair each regional joint board, composed of a representative from each state. Withinone year of enactment, FERC is required to submit a report to Congress on the recommendations ofthe joint regional boards. This section does not define ""security constrained economic dispatch,"" butit generally means a dispatch system that ensures that all normal and contingency limits of the systemare simultaneously met under a base case with one contingency: the loss of a critical network element(n-1 security analysis). Effect of Electrical Contaminants Unreliability of EnergyProduction Systems (Sec. 1822). Within 180 days after enactment, the Secretaryof Energy will enter into a contract with the National Academy of Sciences (Academy), under whichthe Academy will determine the effect that electrical contaminants may have on the reliability ofenergy production systems, including nuclear energy. Final Action on Refunds for Excessive Charges (Sec.1824). FERC is directed to complete its investigation into the unjust andunreasonable charges incurred by California during the 2000-2001 electricity crisis. A report toCongress will be submitted by December 31, 2005, that describes FERC's actions and a timetablefor further actions. This was submitted to Congress on December 27, 2005. (14) Study the Benefits of Economic Dispatch (Sec.1832). The Secretary of Energy, in consultation with the states, must studyeconomic dispatch and issue an annual report to Congress and the states. Economic dispatch isdefined as ""the operation of generation facilities to produce energy at the lowest cost to reliably serveconsumers, recognizing any operational limits of generation and transmission facilities."" Transmission System Monitoring (Sec. 1839). Within six months after enactment, the Secretary of Energy and FERC will study and report toCongress on what would be involved in providing all transmission system owners and RegionalTransmission Organizations with real-time transmission line operating status.","The Energy Policy Act of 2005 ( P.L. 109-58 ), signed by President Bush on August 8, 2005,was the first omnibus energy legislation enacted in more than a decade. Major provisions include taxincentives for domestic energy production and energy efficiency, a mandate to double the nation'suse of biofuels, faster procedures for energy production on federal lands, and authorization ofnumerous federal energy research and development programs. This report describes the electricityprovisions. It will not be updated. Title XII authorizes the Federal Energy Regulatory Commission (FERC) to certify a nationalelectric reliability organization (ERO) to enforce mandatory reliability standards for the bulk powersystem. All ERO standards must be approved by FERC. The ERO can impose penalties on a user,owner, or operator of the bulk power system for violations of any FERC-approved reliabilitystandard. The Secretary of Energy is required to conduct a study of electric transmission congestionevery three years and may designate a geographic area as being congested. Under certain conditions,FERC is authorized to issue construction permits in congested areas. Permit holders may petitionin U.S. District Court to acquire rights-of-way through eminent domain. An applicant for federalauthorization to site transmission facilities on federal lands could request that the Department ofEnergy be the lead agency to coordinate environmental review and other federal authorization. Ifa federal agency has denied an authorization required by a transmission or distribution facility, thedenial could be appealed by the applicant or relevant state to the President. Section 210 of the Public Utility Regulatory Policies Act (PURPA) had required utilities topurchase power from all qualifying facilities and small power producers at a rate based on theutilities' avoided cost. The Energy Policy Act repeals the PURPA mandatory purchase requirementfor new contracts if FERC finds that a competitive electricity market exists and a qualifying facilityhas adequate access to wholesale markets. Also repealed is the Public Utility Holding Company Act of 1935 (PUHCA), which restrictedthe structure of holding companies of investor-owned utilities and provided for Securities andExchange Commission (SEC) regulation of mergers and diversification proposals. FERC and stateregulatory bodies must be given access to utility books and records. FERC is directed to facilitate price transparency in wholesale electric markets, relying onexisting price publishers and providers of trade processing services to the maximum extent possible. However, FERC may establish an electronic information system if it determines that existing priceinformation is not adequate. FERC is given approval authority over the acquisition of securities andthe merger, sale, lease, or disposition of facilities under FERC's jurisdiction with a value in excessof $10 million.",govreport
"The Robinson-Patman Act (R-P)(15 U.S.C. §§13, 13a, 13b, 21a) was enacted in 1936 with the specific purpose of creating and maintaining a market atmosphere in which small business could compete effectively, at least in the purchase of commodities, with its larger rivals. The immediate impetus for that Depression-era legislation was concern for smaller grocery store operators who complained that their businesses were suffering as the direct result of the activities of the chain grocery stores generally and the Great Atlantic & Pacific Tea Company (A&P) particularly. In pertinent part, the statute states that it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or sale within the United States ..., and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with the customers of either of them. As is noted in a 1986 article, ""[f]or the first time within the umbrella of the federal antitrust laws, the Congress declared that it was enacting legislation to remedy injury to competitors rather than a generalized injury to competition itself."" Very simply, the act prohibits sellers in interstate commerce from charging different purchasers different prices for goods of ""like grade and quality."" It applies only to the sale of goods (i.e., it does not apply to the sale of services) and only where each sale is of goods purchased for resale within the United States (i.e., it does not prohibit price differentials between goods sold for resale within the United States and those sold for export). Since its enactment in 1936, the Robinson-Patman Act has been less than enthusiastically viewed by the Department of Justice, which believes that the act is not beneficial to consumers. In its 1977 Report on the Robinson-Patman Act, the Antitrust Division noted that It should not be surprising ... that Robinson-Patman can be shown to have many adverse effects on the economy. To be sure, there are some who do not recognize these effects or who argue that they are outweighed by benefits to specific sectors of the economy, notably small business; to competition by preventing increased concentration in a line of commerce; and to public values in general by establishing as a legal norm the concept of 'fair dealing' in pricing. But any discussion of the benefits of Robinson-Patman can be made only with a clear understanding of the burdens that the statute places on American economic activity. Government enforcement of the act, therefore, has always been entrusted to the Federal Trade Commission (FTC), which over the years has acted inconsistently with respect to R-P actions. The bulk of R-P cases have generally been brought by disfavored buyers. In addition to the commodities-not-of-""like grade and quality"" and sales-for-export justifications for price differentials, an additional, affirmative defense permitted to refute the Robinson-Patman illegality of differential pricing is the so-called ""meeting competition"" defense, which has at least two levels: a defendant may assert (and must prove) that the lower price charged to a favored buyer was selected in order to permit the seller to meet that of a competing seller (primary line competition); or he may assert (and must prove) that the challenged price was necessary in order to enable his buyer to meet the competition of one of the buyer's competitors (secondary line competition). A seller may not, however, knowingly ""beat"" the prices of a competitor. A Robinson-Patman defendant may also successfully defend his challenged pricing activity if he can show that his price differentials were ""cost justified""—that is, that the price differential made only due allowance for the costs incurred in producing or delivering the goods. There is yet another defense to an allegation of unlawful price differentials under the Robinson-Patman Act. The 1938 Nonprofit Institutions Act (15 U.S.C. §13c), which expressly permits price breaks on ""purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit"" (emphasis added), created a broad exemption from the general price-discrimination prohibition. As the Court of Appeals for the Ninth Circuit stated in 1967: The underlying intent in granting such an exemption was indisputably to permit institutions which are not in business for a profit to operate as inexpensively as possible. Two Supreme Court opinions, announced in the mid-1970s and early 1980s, provided significant interpretations of the scope of the nonprofit exemption from the Robinson-Patman prohibition. Both involved challenges to the practice of a pharmaceutical supplier who was selling its products to certain hospitals at prices lower than those charged to retail pharmacists in the areas surrounding the hospitals in question. Abbott Laboratories v. Portland Retail Druggists Association, Inc ., 425 U.S. 1 (1976), discussed the ""for their own use"" phrase in the Nonprofit Institutions Act, and interpreted the provision strictly. The Court relied largely on the ""for their own use"" language to hold that not all purchases made by a nonprofit hospital are necessarily exempt from price discrimination prohibitions. The exemption is applicable only to those purchases made in order to enable the hospital to meet the needs of the hospital (e.g., dispensing to inpatients, outpatients treated in the hospital, emergency room use) and those of staff physicians, medical and nursing students, and their dependents: ""The Congress surely did not intend to give the hospital a blank check."" Although the Court included within permissible uses by the hospital, ""genuine take home prescription[s], intended, for a limited and reasonable time, as a continuation of, or supplement to, the treatment that was administered at the hospital to the patient who needed, and now continues to need, that treatment,"" it specifically excluded from the Robinson-Patman exemption embodied in the Nonprofit Institutions Act ""the refill for the hospital's former patient."" Further, the Court refused to sanction purchases by the hospital-based physician for use in ""that portion of his private practice unconnected with the hospital."" While the primary concern addressed by the Court in Portland was the sale of pharmaceuticals to nonprofit hospitals for all uses, including patient care and resale, four years later, in Jefferson County Pharmaceutical Ass'n., Inc. v. Abbott Laboratories, 460 U.S. 150 (1983), the Court set out the limits of the exception to Robinson-Patman for government purchases: Jefferson County presented an issue ""limited to state [read 'nonprofit hospital'] purchases for the purposes of competing against private enterprise—with the advantage of discriminatory prices—in the retail market."" Jefferson County stressed that Robinson-Patman's prohibitions against unjustified discriminatory price differentials in the sale of commodities of ""like grade and quality"" dictated that government [nonprofit hospital] purchases for use in retail competition with private enterprise, as opposed to those for ""traditional governmental [hospital] functions,"" are fully subject to the strictures of the act. The Court held that purchases of pharmaceuticals by the University of Alabama Hospital for uses other than in the treatment of its patients, as, for example, in retail sales, may not be made at prices which would give the University Hospital an unfair price advantage over its competitors in the retail sale of pharmaceuticals. Health maintenance organizations were found to be ""eligible institutions"" under the Nonprofit Institutions Act in De Modena v. Kaiser Foundation Health Plan, Inc ., 743 F.2d 1388 (9 th Cir. 1984), cert. denied , 469 U.S. 1229 (1985). After acknowledging that the act ""does not explicitly list HPs [health plans],"" and that no case law at that time specifically included HPs as ""charitable"" institutions, the appeals court relied on ""precedent defining the term charitable for purposes of the tax code and the law of charitable trusts"" to reach its conclusion: ""[T]he emergence of social welfare, insurance, and municipal hospitals [has] drastically reduced the number of poor requiring free or below cost medical services"": This reduction eliminated the rationale upon which the traditional, limited definition of charitable was predicated, resulting in a move towards a less restrictive interpretation of the term in recent years. Now all non-profit organizations which promote health are considered charitable under the law of charitable trusts. Further, a number of courts have specifically held that health maintenance organizations, such as HPs, are charitable institutions for tax purposes. ... Given this increasingly liberal interpretation of the term, we conclude that the [defendant] HPs are charitable institutions within the meaning of the Nonprofit Institutions Act. Further, the court relied on the expression of the ""for their own use"" criterion propounded by the Supreme Court in Abbott Laboratories v. Portland Retail Druggist s to decide that the ""basic institutional function"" of a health plan—providing a ""complete panoply"" of health-care services, including continuing and preventative services, to its members—requires that ""drugs purchased by an HMO ... for resale to its members [be considered as] purchased for the HMO's 'own use' within the meaning of the Nonprofit Institutions Act."" De Modena was endorsed in 1995 by the United States District Court for Northern Illinois: In De Modena the Ninth Circuit resolved to 'follow the true mandate of Abbott ... by determin[ing] the basic institutional function of [the HMO in issue] and then decid[ing] which sales are in keeping with this function.' De Modena , 743 F.2d at 1393. The court began its analysis by recognizing that the intended institutional operation of an HMO is to 'provide a complete panoply of health care to [its] members.' Id. The court further observed that, unlike the 'temporary and usually remedial' care that fee-for-service hospitals provide to their patients, HMOs 'provide continuing and often preventative health care for their members.' Id . Thus, concluded the De Modena court, 'any sale of drugs by an HMO to one of its members falls within the basic function of the HMO' and, therefore, constitutes 'own use' within the meaning of the Nonprofit Institutions Act. Id . To our knowledge, the inclusion of HMOs in the list of entities entitled to take advantage of the ""for their own use"" language of the Nonprofit Institutions Act has not been judicially repudiated, although the Supreme Court has not yet provided an opinion on the subject. If none of the affirmative defenses set out above justifies a challenged price differential, and the non-profit exemption is unavailable to the defendant, price discrimination in violation of the Robinson-Patman Act is proved. That the successful plaintiff is entitled to damages in the amount of the unlawful price differential is not, however, a foregone conclusion. In J.Truett Payne Company, Inc. v. Chrysler Motors Corporation, the Supreme Court, deciding ""the appropriate measure of damages in a suit brought under § 2(a) of the Clayton Act,"" rejected the contention that ""once [a plaintiff] has proved a price discrimination in violation of § 2(a) it is entitled at a minimum to so-called 'automatic damages' in the amount of the price discrimination:"" To recover treble damages [the measure of antitrust damages under 15 U.S.C. § 15, which requires as a prerequisite to recovery that one have been 'injured in his business or property'], then, a plaintiff must make some showing of actual injury attributable to something the antitrust laws were designed to prevent. Previously, the Court had noted that ""[t]he automatic-damages theory has split the lower courts,"" but found more persuasive the opinions that rejected it, noting that Robinson-Patman ""is violated merely upon showing that 'the effect of such discrimination may be substantially to lessen competition.'"" In the mid 1970s, the 94 th Congress, through an Ad Hoc Subcommittee of the House Small Business Committee, held hearings on and considered proposals to amend or repeal the Robinson-Patman Act. At that time, representatives of small business, and others, contended that retention of Robinson-Patman was essential. Although the Subcommittee received several draft bills from the Department of Justice to either substantially amend, or to repeal the act, no legislation was introduced at that time, and CRS is not aware of any introduced at any time thereafter. The Antitrust Modernization Commission was authorized in P.L. 107-273 , ""21 st Century Department of Justice Appropriations Authorization Act,"" to ""examine whether the need exists to modernize the antitrust laws and to identify and study related issues,"" and issued its final Report in April 2007. In its chapter on ""Government Exceptions to Free-Market Competition,"" it devoted several pages to its study of the Robinson-Patman Act, noting that despite the aim of supporters of its passage to remedy the ""concern of small businesses … that they were losing share to larger supermarkets and chain stores and in some cases were being forced to leave the market,"" [i]n its operation … the Act has had the unintended effect of limiting the extent of discounting generally and therefore has likely caused consumers to pay higher prices than they otherwise would. The Commission recommended that ""Congress should repeal the Robinson-Patman Act in its entirety."" Whether the current economic climate will result in a further renewal of efforts to modify or repeal the statute, or whether Congress will determine that statutory intervention is appropriate, is not known at this time.","The Robinson-Patman (R-P) Act, 15 U.S.C. §§ 13, 13a, 13b, 21a, makes it unlawful, with certain exceptions, to knowingly sell goods ""in commerce,"" for use or sale within the United States, at differing prices to contemporaneous buyers of those goods. The ""in commerce"" language of Robinson-Patman has been held to mean that the interstate commerce requirement is satisfied only when at least one of the two (or more) sales is made ""in the stream of commerce""—that is, across state lines. Enacted during the Depression at the behest of small grocers who feared the buying power of large and growing chain grocers, Robinson-Patman is the exception to the notion that the antitrust laws protect competition, not competitors in that it generally prohibits precisely the kind of price differentiation which would normally be thought to result from vigorous competition. Allegations of Robinson-Patman violations may be defended by asserting and proving either that the differing prices reflect only the cost of the seller's manufacture or delivery (the ""cost justification"" defense); or, that the seller is attempting either (1) to meet the competition of another seller, or (2) enable his buyer to meet the competition of a competitor of the buyer (""meeting competition"" defense). In addition, there is also a broad exception to the prohibition against price discrimination when one of the sales is made to any of certain entities listed in the Nonprofit Institutions Act, 15 U.S.C. § 13c, and the goods are purchased for the institution's ""own use""; nonprofits may not, however, take advantage of their privileged Robinson-Patman status to purchase commodities at favorable prices in order to compete commercially with entities not so entitled. Further, lower courts have found that health maintenance organizations (HMOs) qualify as organizations entitled to take advantage of the Nonprofit Institutions Act, on the theory that they perform services that traditionally have been considered as ""charitable""; the Supreme Court has not had occasion to rule on the status of HMOs. Disfavored purchasers who prove a Robinson-Patman violation are not, however, automatically entitled to damages on that account. The Supreme Court has held that since, technically, Robinson-Patman prohibits any price differential whose effect ""may be substantially to lessen competition, (emphasis added),"" not all proven R-P violations actually damage those who prove them: ""[t]o recover treble damages … a plaintiff must … make some showing of actual injury attributable to something the antitrust laws were designed to prevent""—that is, a causal connection between the violation and the injury allegedly suffered. Although there have been some attempts at amending or repealing Robinson-Patman, none has been successful. The Antitrust Division of the Department of Justice has always believed the statute to be inflationary; that it artificially deprives consumers of the advantages of the lower prices that are the aim of the antitrust laws; and that, inter alia, it ""reduces pricing flexibility [and] discourages the development of efficient distribution systems."" Small businesses, and others, have contended, on the other hand, that their survival depends on the prevention of unjustified price differentials. Whether the current economic climate will revive efforts to modify the statute, which has not been enforced by the Department of Justice since its enactment, and has been enforced sporadically by the Federal Trade Commission, is not known.",govreport
"The Obama Administration has faced significant scrutiny following a series of determinations in which the relevant federal agency charged with the implementation of a given statute has chosen to limit or delay the enforcement of specific provisions of federal law. These nonenforcement, under enforcement, or delayed enforcement decisions have generally been implemented through stated agency policies directing officials not to take action to ensure compliance with statutory requirements that federal law imposes upon a third party. Notably, these policies have been grounded in practical or policy considerations, and have not been based on any argument that the statutory provisions themselves are unconstitutional or otherwise invalid. Instead, the Administration has largely justified its inaction as consistent with a proper exercise of enforcement discretion, a legal doctrine that generally shields executive branch enforcement decisions, including the determination of whether to initiate a criminal, civil, or administrative enforcement action, from judicial review. This report focuses on two distinct forms of enforcement discretion: prosecutorial discretion, exercised in the criminal context; and administrative enforcement discretion, exercised in the administrative context. The Department of Justice (DOJ) has cited prosecutorial discretion as the basis for its efforts to curtail the enforcement of the federal Controlled Substances Act (CSA) in states that have adopted both medical and recreational marijuana legalization initiatives. Although the possession, cultivation, or distribution of marijuana remains a clear federal crime, the DOJ has directed federal prosecutors to ""not focus federal resources [] on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana."" Rather, U.S. Attorneys have been directed to prioritize investigative and prosecutorial resources on persons whose actions relate to identified federal priorities such as distribution to minors, the participation of criminal enterprises and cartels, or the use of marijuana on federal property. In 2012, the Secretary of Homeland Security relied on the doctrine of administrative enforcement discretion in a memorandum setting forth guidelines on how to ""enforce the Nation's immigration laws against certain young people who were brought to this country as children and know only this country as home."" The directive provided that, rather than use limited agency removal resources on low priority deportation cases, immigration officers should exercise their discretion to forego enforcement actions, for at least a period of time, against a specific class of individuals who unlawfully entered the United States as children, have not committed certain crimes, and meet other key requirements. It has been argued, however, that the Secretary's memorandum contravenes statutory mandates under the Immigration and Nationality Act which, opponents of the policy assert, require that aliens who entered the country without inspection be ""detained for removal proceedings."" In 2013 and 2014, the Administration utilized enforcement discretion to justify delays in the enforcement of a number of provisions of the Affordable care act (ACA), including the law's employer mandate and minimum coverage requirements. These provisions were to take effect beginning on January 1, 2014. In July 2013, the Treasury Department announced that enforcement of the ACA's new excise tax on employers with 50 or more employees that fail to provide affordable health coverage (the ""employer mandate"") would be delayed for one year, until 2015. In February 2014, the Administration announced that employers with at least 50 but fewer than 100 full-time equivalent employees would have an additional year to comply with the mandate. Similarly, the Centers for Medicare and Medicaid Services announced in November 2013 that it was adopting a ""transitional policy,"" under which health insurers can continue to offer coverage that fails to meet certain statutorily required minimum standards for private health insurance under the ACA without threat of federal enforcement consequences.   In contrast to the Administration position, some Members of Congress have asserted that these unilateral Presidential nonenforcement determinations upset the separation of powers, harm Congress as an institution and a coordinate branch of government, and are in direct violation of the President's constitutional obligation to ""take Care that the Laws be faithfully executed..."" Although the House has held hearings addressing the issue and has approved legislation that would require the Administration to provide Congress with a report describing the legal grounds for any nonenforcement decisions, the Senate has not concurred with the House's objections. As a result, the House appears to be focusing on the judicial process as a means of addressing the Administration's nonenforcement policies. The ENFORCE the Law Act of 2014, which passed the House in March 2014, would establish an expedited process by which either house of Congress could file a lawsuit challenging a ""formal or informal policy, practice, or procedure to refrain from enforcing, applying, following, or administering any provision of a Federal statute, rule, regulation, program, policy, or other law in violation of the requirement that the President take care that the laws be faithfully executed..."" In addition, the House approved a joint resolution that would authorize the Speaker—through the House General Counsel—to file a lawsuit seeking ""any appropriate relief regarding the failure of the President, the head of any department or agency, or any other officer or employee of the executive branch, to act in a manner consistent with that official's duties under the Constitution and laws of the United States with respect to implementation of any provision of the [ACA]."" In light of these ongoing controversies, this report will address the President's general obligation to ""take Care that the Laws be faithfully executed."" The report will then discuss the limited role the judicial branch has traditionally adopted in reviewing discretionary enforcement decisions, including the decision to initiate a criminal prosecution or an administrative enforcement action. The report will conclude with a discussion of Congress's authority to restrict executive discretion in the enforcement of federal law. [H]e shall take Care that the Laws be faithfully executed... U.S. Constitution, Article II, §3 The Take Care Clause would appear to stand for two, at times diametrically opposed propositions—one imposing a ""duty"" upon the President and the other viewing the Clause as a source of Presidential ""power."" Primarily, the Take Care Clause has been interpreted as placing an obligation on both the President and those under his supervision to comply with and execute clear statutory directives as enacted by Congress. However, the Supreme Court has also construed the Clause as ensuring Presidential control over the enforcement of federal law. As a result, courts generally will not review Presidential enforcement decisions, including the decision of whether to initiate a criminal prosecution or administrative enforcement action in response to a violation of federal law or regulation. The puzzling result is that the Clause has been invoked as forming the constitutional basis for both the President's obligation to enforce the law, and his discretion not to. It is beyond dispute that the President plays a significant role in the legislative process. The specific powers enumerated in Article II, §3 and Article I, §7 of the Constitution, along with the general vesting of ""the executive power"" in Article II, §1, provide the President with the authority to recommend legislation to Congress, communicate his opposition or support for legislation under consideration, and, ultimately, to either sign legislation that meets his approval, or veto that legislation which ""he thinks bad."" It is equally well established, however, that once a bill is enacted into law, the President's legislative role comes to an end and is supplanted by his express constitutional obligation under Article II, §3 to ""take Care that the Law[] be faithfully executed."" Although there was little discussion of the Clause at the Constitutional Convention, most scholars have agreed that, at a minimum, the Clause represents a repudiation of the royal suspending and dispensing power that had been historically exercised by English monarchs. James Wilson, delegate to the constitutional convention form Pennsylvania, summarized this view in characterizing the Clause as providing the President with the ""authority, not to make, or alter, or dispense with the laws, but to execute and act the laws."" The executive branch has agreed with this view, acknowledging that ""the Supreme Court and the Attorneys General have long interpreted the Take Care Clause as standing for the proposition that the President has no inherent constitutional authority to suspend the enforcement of the laws, particularly of statutes."" The Clause would appear then to prevent the President from simply disregarding or suspending laws enacted by Congress. Today, the Take Care Clause makes a significant contribution to the separation of powers. The constitutionally created distinction between the ""faithful"" execution of the law under Article II, and the ""finely wrought"" process for the creation of law under Article I §4, operates as a clear demarcation of the legitimate powers and responsibilities of both the President and Congress in our constitutional system. Just as Congress may neither enforce the laws nor improperly intrude into the President's execution of the same, the President and his subordinates may not create law by unilaterally disregarding, amending, or repealing a validly enacted statute. The ultimate power to legislate is a power possessed solely by Congress, and to permit the President the freedom to suspend, amend, or disregard laws of his choosing would be to ""clothe"" the executive branch with the power of lawmaking. A long line of Supreme Court precedent indicates the Court's consistent view that the Take Care Clause imposes a ""duty"" or ""obligation"" upon the President to ensure that executive branch officials obey Congress's commands, and, additionally, that the Clause does not provide the President with the authority to frustrate legal requirements imposed by law. The notion that the President and executive branch officers must ""faithfully"" implement and execute the law can be seen as early as the seminal case of Marbury v. Madison in 1803. Although Marbury is best known for Chief Justice John Marshall's discussion of the Supreme Court's power of ""judicial review""—the authority of the Court to invalidate laws it determines to be unconstitutional— the case also contains strong language relating to the obligation of executive branch officials to comply with the law. In the final hours of his Presidency, John Adams had appointed William Marbury to serve as Justice of the Peace for the District of Columbia. Marbury's commission, however, was never delivered, and upon assuming office President Thomas Jefferson instructed Secretary of State James Madison to withhold the commission, thus denying Marbury the position. Marbury filed suit, asking the Supreme Court to compel Madison to deliver the commission as, Marbury argued, was required by law. Although the Supreme Court determined that it lacked jurisdiction to hear the case and therefore did not compel Madison to take any action, Chief Justice Marshall nonetheless established that when an executive officer fails to perform a ""specific duty [] assigned by law,"" the courts may enforce the obligation through a writ of mandamus. The Marbury opinion recognized Congress's authority to impose specific duties upon executive branch officials by law, as well as the official's corresponding obligation to execute the congressional directive. The general rule established in Marbury had limits, however; the Chief Justice drew a clear distinction between the enforceability of ministerial or mandatory requirements—which were subject to judicial enforcement— and political acts involving either statutory or constitutional discretion—which were not. The Supreme Court's most forceful articulation of the President's obligation to execute the law came thirty years later in Kendall v. United States ex rel. Stokes . In Kendall , a federal law directed the Postmaster General to provide back pay to a group of mail carrier contractors in an amount determined by the Solicitor of the Treasury. The Postmaster General, apparently at the express direction of the President, refused to pay the amount that the Solicitor had found owing. The Supreme Court, viewing the Postmaster General's duty to pay the full amount as ministerial rather than discretionary, held that the President had no authority to direct the Postmaster's performance of his statutory obligation. Where Congress has imposed upon an executive officer a valid duty, the Court declared ""the duty and responsibility grow out of and are subject to the control of the law, and not to the direction of the President."" Any interpretation of the Constitution that characterized the obligation of an executive branch official to execute the law as arising from the direction of the President alone, and not as arising from the law itself, would ""cloth[e] the President with a power entirely to control the legislation of Congress, and paralyze the administration of justice."" ""This is a doctrine,"" the majority held ""that cannot receive the sanction of this court."" Perhaps the most significant aspect of the Kendall opinion was its repudiation of the government's assertion that the Take Care Clause constituted a source of presidential power. The Court plainly rejected this argument, holding that the Clause could not be relied upon as a basis for noncompliance with the law. ""To contend that the obligation imposed on the President to see the laws faithfully executed implies a power to forbid their execution,"" the Court held, ""is a novel construction of the Constitution, and entirely inadmissible."" The legal reasoning in Kendall has long been cited as refuting any asserted presidential power to block the execution of validly enacted statutes. The Supreme Court reinforced the Constitution's clear distinction between Congress's role in the creation of the law and the President's role in the execution of the law in Youngstown Sheet & Tube Co. v. Sawyer . In Youngstown , the Court heard a challenge to an Executive Order issued by President Harry Truman directing the Secretary of Commerce to seize various steel mills in an effort to avert the detrimental effect a potential workers' strike would have on the prosecution of the Korean conflict. The Court invalidated the President's directive, holding that neither the Constitution nor any statutory delegation from Congress authorized such an order. The majority opinion was based chiefly on the proposition that the Constitution limits the President's ""functions in the lawmaking process"" to recommending laws he supports, vetoing laws he opposes, and executing laws that have been enacted by Congress. ""In the framework of our Constitution,"" wrote Justice Black, ""the President's power to see that the laws be faithfully executed refutes the idea that he is to be a lawmaker."" Justice Jackson's influential concurring opinion likewise concluded that ""the Executive, except for recommendation and veto, has no legislative power."" The legal reasoning espoused in Marbury , Kendall , and Youngstown is buttressed by the judicial response to an illustrative conflict in which President Richard Nixon claimed the authority to disregard congressional enactments. Beginning in 1972, President Nixon asserted the authority to decline to spend or obligate appropriated funds in order to reduce public spending and to negate programs established by congressional legislation. Termed an ""impoundment,"" the legal justification for Nixon's policy was claimed to have derived from the Take Care Clause. Most of the courts that reviewed the matter rejected the declared authority, holding—generally on statutory grounds—that neither the President nor the agency heads involved had discretion as to whether to spend appropriated funds. To permit such an action would be to allow a President to substitute his policy choices on spending for those established by congressional appropriations. The Supreme Court agreed in Train v. City of New York, holding that as a statutory matter the Administrator of the Environmental Protection Agency had no discretion to withhold funds that had been validly appropriated. The U.S. District Court for the District of Columbia, however, offered a more robust rejection of the impoundments and the President's claimed constitutional authority. In Local 2677 AFGE v. Phillips, the district court held that until Congress terminates a program, ""historical precedent, logic, and the text of the Constitution itself obligate the [President] to continue to operate [the program] as was intended by the Congress..."" The opinion further suggested that were the President's asserted power to be accepted, ""no barrier would remain to the executive ignoring any and all Congressional authorizations if he deemed them, no matter how conscientiously, to be contrary to the needs of the nation."" Notwithstanding the Supreme Court's articulation of the President's constitutional responsibility to execute the law, it is important to note that judicial enforcement of that duty is wholly contingent upon the creation of a well-defined statutory mandate or prohibition. Where Congress has legislated broadly, ambiguously, or in a nonobligatory manner, courts are unlikely to command or halt action by either the President or his officials. Absent the creation of a clear duty, ""the executive must be allowed to operate freely within the sphere of discretion created for him by that legislation."" In addition to establishing the President's obligation to execute the law, the Supreme Court has simultaneously interpreted the Take Care Clause as ensuring presidential control over those who execute and enforce the law. In framing the Clause as establishing a personal responsibility in the President, the court has previously invalidated laws that would undermine the President's ability to oversee the execution and enforcement of the law. These principles have grown mainly out of the Court's consideration of the President's appointment and removal power. In Bowsher v. Synar , for example, the Court invalidated a law that had delegated executive powers, including the authority to interpret and execute the law, to the Comptroller General—a legislative branch officer removable by Congress. The Court held that ""[a] direct congressional role in the removal of officers charged with the execution of the laws ... is inconsistent with separation of powers."" Likewise, in Buckley v. Valeo , the Court determined that Congress could not provide itself with the power to appoint members of an independent commission that had been vested, among other powers, with the authority to undertake enforcement actions. In striking down the appointment structure of the Federal Election Commission, the Court held that ""a lawsuit is the ultimate remedy for a breach of the law, and it is to the President, and not to Congress, that the Constitution entrusts the responsibility to take care that the laws be faithfully executed."" In Printz v. U.S, the Court suggested that vesting state and local officers with the authority to enforce federal law may also intrude upon the President's duty to oversee those that execute the law. Although Printz is primarily known as a 10 th Amendment case addressing federal intrusion into state sovereignty, the Court also considered the effect the Brady Handgun Violence Prevention Act would have on the President's obligation to ""take Care that the Laws be faithfully executed."" At issue in Printz was a provision of the Act that required the chief law enforcement officers (CLEOs) of state and local governments to conduct background checks to ascertain whether individuals were ineligible to purchase handguns. The Court suggested that the law may impermissibly diminish presidential power, noting: The Constitution does not leave to speculation who is to administer the laws enacted by Congress; the President, it says, ""shall take Care that the Laws be faithfully executed,"" personally and through officers whom he appoints...The Brady Act effectively transfers this responsibility to thousands of CLEOs in the 50 States, who are left to implement the program without meaningful Presidential control (if indeed meaningful Presidential control is possible without the power to appoint and remove). The insistence of the Framers upon unity in the Federal Executive—to ensure both vigor and accountability—is well known. That unity would be shattered, and the power of the President would be subject to reduction, if Congress could act as effectively without the President as with him, by simply requiring state officers to execute its laws. More recently in Free Enterprise Fund v. PCAOB , the Supreme Court invalidated a statute that insulated officers of the Public Company Accountability Oversight Board from the President by providing Board members with dual layers of ""for cause"" removal protections. In the course of striking down the law, the Court cited with approval the holding in Myers v. U.S . that the President must retain ""general administrative control of those executing the laws,"" for he cannot ""'take Care that the laws be faithfully executed' if he cannot oversee the faithfulness of the officers who execute them."" Whereas the President must be able to oversee those who enforce the law, Presidential control over law enforcement officers need not be absolute. In Morrison v Olson , a case upholding a law establishing the office of the Independent Counsel, the Court summarized its removal jurisprudence as ensuring that ""Congress does not interfere with the President's exercise of the 'executive power' and his constitutionally appointed duty to 'take care that the laws be faithfully executed' under Article II."" However, the opinion then sanctioned Congress's authority to provide a prosecutor with independence from the President by providing the officer with ""for cause"" removal protections—holding that such protections did not ""sufficiently deprive[] the President of control over the independent counsel to interfere impermissibly with his constitutional obligation to ensure the faithful execution of the laws. "" Morrison , which may act as a significant limitation on the exclusivity of executive branch enforcement discretion, will subsequently be discussed in greater detail. As a corollary to the requirement that the President must retain some level of control over those that enforce the law, the courts have similarly cited the Clause as providing the President and his officers with discretion as to how the laws are to be enforced against the general public. This discretion has been considered an essential component of the President's obligation to ""discharge his constitutional responsibility to 'take Care that the Laws be faithfully executed.'"" It is worth emphasizing, however, that any discretion that may arise from the Take Care Clause would extend only to decisions directly related to the enforcement of federal law upon third parties. At no time has the Court recognized the Clause as a justification for either affirmatively suspending federal law or refusing to comply with explicit mandates or restrictions imposed on the executive branch. Moreover, whether executive enforcement discretion constitutes a presidential ""power"" or a rule of judicial restraint is an important question, and a crucial one in delineating Congress's authority to restrict that discretion, yet unanswered by the Supreme Court. The Obama Administration has relied upon enforcement discretion, in both the criminal and administrative context, as the chief legal justification for the previously identified actions and it is to this doctrine that this report now turns. The judicial branch has traditionally accorded federal prosecutors ""broad"" latitude in making a range of investigatory and prosecutorial determinations, including when, against whom, and whether to prosecute particular criminal violations of federal law. This doctrine of prosecutorial discretion has a long historical pedigree—the early roots of which can be traced at least to a sixteenth century English common law procedural mechanism known as the nolle prosequi . In the early English legal system, criminal prosecutions were generally initiated by private individuals rather than public prosecutors. The nolle prosequi , however, allowed the government, generally at the direction of the Crown, to intervene in and terminate a privately initiated criminal action it viewed as ""frivolous or in contravention of royal interests."" The discretionary device and its principles were later adopted into American common law, permitting prosecutors to avoid prosecutions that were determined to be unwarranted or which the prosecuting authority chose not to pursue. Notwithstanding this historical background, the modern doctrine of prosecutorial discretion derives more from our constitutional structure than English common law. The exact justification for the doctrine, however, does not appear to have been explicitly established. Generally, courts have characterized prosecutorial discretion as a function of some mixture of constitutional principles, including the separation of powers, the Take Care Clause, and the duties of a prosecutor as an appointee of the President. Regardless of its precise textual source, courts generally will not review discretionary prosecutorial decisions in criminal matters, nor coerce the executive branch to initiate a particular prosecution. Most courts have agreed that judicial review of prosecutorial decisions is generally improper given that the ""prosecutorial function, and the discretion that accompanies it, is [] committed by the Constitution to the executive."" Judicial deference to prosecutorial decisions made by federal prosecutors has been justified on the ground that the ""decision to prosecute is particularly ill-suited to judicial review."" The courts have repeatedly acknowledged that these types of discretionary decisions involve the consideration of factors—such as the strength of evidence, deterrence value, available resources, and existing enforcement priorities—""not readily susceptible to the kind of analysis the courts are competent to undertake."" Indeed, ""[f]ew subjects are less adapted to judicial review than the exercise by the Executive of his discretion in deciding when and whether to institute criminal proceedings, or what precise charge shall be made, or whether to dismiss a proceeding once brought."" A core aspect of prosecutorial discretion would appear to be the decision to initiate a criminal prosecution. As a result, judicial hesitance to review prosecutorial decisions is perhaps at its peak when the government chooses not to prosecute. The Supreme Court issued one of its strongest pronouncements of this principle in U.S. v. Nixon , proclaiming that ""the Executive Branch has exclusive authority and absolute discretion to decide whether to prosecute a case."" Although the Court did not elaborate on the statement, other lower courts have adopted similar lines of reasoning. For example, a strong statement of judicial restraint was issued in the oft cited case of United States v. Cox , in which the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) held that a district court could not compel a U.S. Attorney to sign an indictment returned by the grand jury. The court held that as an officer of the executive department...[the prosecutor] exercises a discretion as to whether or not there shall be a prosecution in a particular case. It follows as an incident of the constitutional separation of powers, that the courts are not to interfere with the free exercise of the discretionary powers of the attorneys of the United States in their control over criminal prosecutions. This principle was further exemplified by the U.S. Court of Appeals for the Second Circuit (Second Circuit) in Inmates of Attica Correctional Facility v. Rockefeller . In that case, prison inmates brought suit against the U.S. Attorney for the Western District of New York for his failure to take any action against government officials following the suppression of the Attica prison revolt that resulted in the deaths of 32 inmates. The plaintiffs sought a mandamus order, directing the U.S. Attorney to ""investigate, arrest, and prosecute"" those state officials who committed federal criminal civil rights violations. The court dismissed the claim, holding that ""federal courts have traditionally and, to our knowledge, uniformly refrained from overturning...discretionary decisions of federal prosecuting authorities not to prosecute..."" The court noted that this ""judicial reluctance"" and the ""traditional judicial aversion to compelling prosecutions"" is grounded in the constitutional separation of powers as well as the practical consideration that ""the manifold imponderables which enter into the prosecutor's decision to prosecute or not to prosecute make the choice not readily amendable to judicial supervision."" In its view, the executive branch has asserted that it must maintain absolute control over prosecutorial decisions, concluding specifically that ""because the essential core of the President's constitutional responsibility is the duty to enforce the laws, the Executive Branch has exclusive authority to initiate and prosecute actions to enforce the laws adopted by Congress."" The DOJ has also asserted a ""corollary"" proposition, ""that neither the Judicial nor Legislative Branches may directly interfere with the prosecutorial discretion of the Executive by directing the Executive Branch to prosecute particular individuals."" While prosecutorial discretion is broad, it is not ""unfettered. "" Indeed, the government ""cannot cloak constitutional violations under the guise of prosecutorial discretion and expect the federal courts simply to look the other way."" For example, in discussing the scope of the executive branch's discretion, courts have repeatedly noted that the determination as to whether to prosecute may not be based upon ""race, religion, or other arbitrary classification. "" Nor may an exercise of prosecutorial discretion infringe individual constitutional rights. Where prosecutions (or other enforcement actions) are based upon impermissible factors ""the judiciary must protect against unconstitutional deprivations."" This principle was evident in Yick Wo v. Hopkins , where the Supreme Court found that prosecutors' practice of enforcing a state law prohibiting the operation of laundries against only persons of Chinese descent ran afoul of the Equal Protection Clause. In practice, however, defendants generally find it difficult to maintain a claim of selective prosecution. Courts generally require defendants to introduce ""clear evidence"" displacing the presumption that the prosecutor has acted lawfully. In addition to reviewing decisions that violate individual constitutional rights, courts may also choose to review prosecutorial decisions for compliance with express statutory requirements. In Nader v Saxbe , a case involving nonenforcement of the Federal Corrupt Practices Act, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) suggested that ""the exercise of prosecutorial discretion, like the exercise of Executive discretion generally, is subject to statutory and constitutional limits enforceable through judicial review."" Although dismissing the case for lack of standing, the D.C. Circuit rejected the district court's determination that ""prosecutorial decision-making is wholly immune from judicial review."" Therefore, it would appear that where Congress has explicitly established a statutory framework under which prosecutions are to take place, and as a result altered the traditional scope of prosecutorial discretion, ""the judiciary has the responsibility of assuring that the purpose and intent of congressional enactments are not negated..."" Under these rare circumstances, courts may elect to review prosecutorial decisions—including the decision of whether to initiate a criminal prosecution— to ensure compliance with federal law. However, courts have been reluctant to read criminal statutes as establishing the type of framework necessary to withdraw the executive's discretion to decide whether to initiate a prosecution, instead requiring clear and unambiguous evidence of Congress's intent to withdraw traditional prosecutorial discretion. For example, in Powell v Katzenbach, the D.C. Circuit dismissed a challenge to the Attorney' General's failure to prosecute a national bank for certain criminal violations. After assuming, ""without deciding, that where Congress has withdrawn all discretion from the prosecutor by special legislation, a court might be empowered to force prosecutions in some circumstances,"" the circuit court determined ""the language of [the provision in question] and its legislative history fail to disclose a congressional intent to alter the traditional scope of the prosecutor's discretion."" Moreover, both the U.S. Court of appeals for the Fourth Circuit (Fourth Circuit) and the U.S. District Court for the District of Columbia have held that language in the federal civil rights statutes stating that U.S. Attorneys are ""authorized and required to institute prosecutions against all persons violating"" certain provisions of the Civil Rights Act similarly failed to ""strip"" federal prosecutors of ""their normal prosecutorial discretion."" The Fourth Circuit specifically found the use of the word ""require"" to be ""insufficient to evince a broad congressional purpose to bar the exercise of executive discretion in the prosecution of federal civil rights crimes."" As a result, the court determined that it was ""unnecessary to decide whether, if Congress were by explicit direction and guidelines to remove all prosecutorial discretion with respect to certain crimes or in certain circumstances we would properly direct that a prosecution be undertaken."" The separation of powers concerns that would derive from a law that unambiguously and expressly sought to remove prosecutorial discretion and compel criminal prosecutions will be explored in greater detail infra . Agency civil enforcement decisions in the administrative context ""share[] to some extent the characteristics of the decision of a prosecutor"" in the criminal context. This freedom in setting enforcement priorities, allocating resources, and making specific strategic enforcement decisions— including the decision to initiate an enforcement action— is commonly described as ""administrative enforcement discretion."" Whether this form of enforcement discretion enjoys the same constitutional footing as prosecutorial discretion is not entirely clear. Indeed, the judicial reluctance to review agency enforcement decisions would appear to arise as much from the Administrative Procedure Act (APA) as it does from the Take Care Clause. Although the APA establishes a general presumption that all final agency decisions are subject to judicial review, it also specifically precludes from judicial consideration any agency action that is ""committed to agency discretion by law."" A decision is generally considered ""committed to agency discretion"" when a reviewing court would have ""no law to apply"" in evaluating the determination. Consistent with this framework, and in light of the traditional discretion exercised by agencies in enforcing statutes they administer, courts generally will not review discretionary agency enforcement decisions. These discretionary activities may include any range of actions and decisions taken throughout the investigative and enforcement process, including, but not limited to, the imposition of penalties or the initiation of an agency investigation, prosecution, adjudication, lawsuit, or audit. In situations where an agency refrains from bringing an enforcement action, courts have historically been cautious in reviewing the agency determination—generally holding that these nonenforcement decisions are ""committed to agency discretion"" and therefore not subject to judicial review under the APA. The seminal case on this topic is Heckler v. Chaney , a Supreme Court decision in which death row inmates challenged the Food and Drug Administration's refusal to initiate an enforcement action to block the use of certain drugs in lethal injection. In rejecting the challenge, the Supreme Court held that ""an agency's decision not to prosecute or enforce...is a decision generally committed to an agency's absolute discretion."" The Court noted that agency enforcement decisions, involve a ""complicated balancing of a number of factors which are peculiarly within [the agency's] expertise"" including, whether agency resources are best spent on this violation or another, whether the agency is likely to succeed if it acts, whether the particular enforcement action requested best fits the agency's overall policies, and, indeed, whether the agency has enough resources to undertake the action at all. An agency generally cannot act against each technical violation of the statute it is charged with enforcing. Agencies, the Court reasoned, are ""far better equipped"" to evaluate ""the many variables involved in the proper ordering of its priorities"" than are the courts. Consistent with this deferential view, the Heckler opinion proceeded to establish the standard for the reviewability of agency nonenforcement decisions, holding that an ""agency's decision not to take enforcement action should be presumed immune from judicial review ."" However, the Court also clearly indicated that the presumption against judicial review of agency nonenforcement decisions may be overcome in a variety of specific situations. For purposes of this report, two identified exceptions necessitate significant discussion. First, a court may review an agency nonenforcement determination ""where the substantive statute has provided guidelines for the agency to follow in exercising its enforcement powers."" In such a situation, Congress has supplied the court with ""law to apply"" in reviewing the agency decision. Second, the Court suggested that judicial review of nonenforcement may be appropriate when an agency has ""'consciously and expressly adopted a general policy' that is so extreme as to amount to an abdication of its statutory responsibilities."" Due presumably to standing limitations, lower federal courts have only rarely had opportunity to clarify these exceptions to Heckler's presumption of non-reviewability of nonenforcement decisions. The Heckler opinion specifically recognized Congress's authority to curtail an agency's ability to exercise enforcement discretion ""either by setting substantive priorities, or by otherwise circumscribing an agency's power to discriminate among issues or cases it will pursue."" Congress may, for instance, choose to remove an agency's discretion by indicating ""an intent to circumscribe agency enforcement discretion"" and ""provid[ing] meaningful standards for defining the limits of that discretion."" In this manner Congress overrides the inherent discretion possessed by the agencies in the enforcement of federal law and provides a reviewing court with a standard upon which to review the agency inaction. The Court succinctly articulated the principle in Heckler : If [Congress] has indicated an intent to circumscribe agency enforcement discretion, and has provided meaningful standards for defining the limits of that discretion, there is ""law to apply"" under [the APA] and courts may require that the agency follow that law; if it has not, then an agency refusal to institute proceedings is a decision ""committed to agency discretion by law"" within the meaning of that section. Although the exercise of agency discretion may therefore be influenced by congressional controls, it would appear that Congress's intent to curtail the agency enforcement discretion must be made explicit, as courts are hesitant to imply such limitations. In applying this standard, the Heckler opinion held that the FFDCA had not curtailed the FDA's discretion in a manner sufficient to allow the court to review the agency's nonenforcement determination. The FFDCA provided only that the Secretary was ""authorized to conduct examinations and investigations;"" and not that he was required to do so. Moreover, the Court determined that the FFDCA's requirement that any person who violates the Act ""shall be imprisoned...or fined,"" could not be read to mandate that the FDA initiate an enforcement action in response to every violation. The FFDCA's prohibition on certain conduct, although framed in mandatory terms, was insufficient to permit review of nonenforcement absent additional language delineating how and when the agency was to respond to violations. ""The Act's enforcement provisions,"" held the Court ""thus commit complete discretion to the Secretary to decide how and when they should be exercised."" In his concurrence, Justice Brennan identified the potential consequences of the majority's position and attempted to narrow the scope of the opinion, writing that agencies should not feel ""free to disregard legislative direction in the statutory scheme that the agency administers."" Brennan emphasized that the presumption against reviewability applied only to the ""individual, isolated nonenforcement decisions"" that ""must be made by hundreds of agencies each day."" ""Absent some indication of congressional intent to the contrary,"" Brennan found it reasonable to believe that Congress did not intend the courts to review ""such mundane matters."" Justice Brennan's more limited reasoning had carried the day in the pre- Heckler case of Dunlop v. Bachowski . In Dunlop , a union member challenged the Secretary of Labor's refusal to bring an enforcement action to set aside a union election. The Labor-Management Reporting and Disclosure Act (L-MRDA) provides that upon the filing of a complaint, ""[t]he Secretary shall investigate such complaint and, if he finds probable cause to believe that a violation... has occurred...he shall...bring a civil action..."" Brennan's majority opinion rejected the agency's argument that the Secretary's determination of whether to bring a civil action was an unreviewable exercise of administrative discretion. In doing so, the Court did not itself address the enforcement discretion question, but rather stated its agreement with the appellate court's conclusion that ""[a]lthough the Secretary's decision to bring suit bears some similarity to the decision to commence a criminal prosecution, the principle of absolute prosecutorial discretion is not applicable to the facts of this case."" The appellate court identified two reasons for this conclusion. First, the court found that enforcement discretion in the civil context should be limited to cases which, ""like criminal prosecutions, involve the vindication of societal or governmental interests, rather than the protection of individual rights."" Second, the court found the ""most convincing reasoning"" for reviewability of the Secretary's decision was that in criminal cases, a prosecutor generally must balance ""considerations that are 'beyond the judicial capacity to supervise.'"" To the contrary, the court found the ""factors to be considered by the secretary"" under the L-MRDA to be ""more limited and clearly defined."" The court determined that the statute: provides that after investigating a complaint, he must determine whether there is probable cause to believe that violations of § 481 have occurred affecting the outcome of the election. Where a complaint is meritorious and no settlement has been reached which would remedy the violations found to exist, the language and purpose of § 402(b) indicate that Congress intended the Secretary to file suit. Thus, apart from the possibility of settlement, the Secretary's decision whether to bring suit depends on a rather straightforward factual determination, and we see nothing in the nature of that task that places the Secretary's decision 'beyond the judicial capacity to supervise.' The language held to override the presumption against review of agency nonenforcement in Dunlop contained an express trigger for an enforcement action. The Secretary, however, retained discretion in determining whether the precondition (whether there was probable cause to believe a violation had occurred) was met. The Supreme Court confirmed the continued validity of Dunlop in Heckler , but distinguished the two decisions, holding that unlike the FFDCA, the L-MRDA ""quite clearly withdrew discretion from the agency and provided guidelines for exercise of its enforcement power."" Federal statutes, unlike the L-MRDA, that do not contain language defining how and when the agency is to exercise its enforcement discretion, even when framed in mandatory terms, generally have not been held to override agency enforcement discretion. As previously discussed, a congressional command that an agency ""shall enforce"" a particular statute, without additional guidelines as to the circumstances under which enforcement is to occur, is generally insufficient to permit review of a nonenforcement decision. The Heckler court suggested as much, noting that it could not ""attribute such a sweeping meaning"" to the type of mandatory language that was commonly found in federal law. A Florida district court applied this reasoning in its review of a statute commanding that ""the provisions of [the Endangered Species Act (ESA)] and any regulations or permits issued pursuant thereto shall be enforced by the Secretary."" Citing to Heckler , the court held that the provision ""plainly does not mandate an impossibility—i.e., the Service to pursue to the fullest each and every possible violation of the ESA or permits thereunder."" Moreover, the ESA did not ""provide criteria or guidelines charting a process the Service shall use to investigate possible noncompliance."" The U.S. District Court for the Northern District of Texas applied Heckler and Dunlop in a recent challenge to the Secretary of Homeland Security's exercise of administrative enforcement discretion in the granting of ""deferred action""— the name given to one type of relief from removal whereby immigration officials agree to forego taking action against an individual for a specified time frame—under the DACA memorandum. In Crane v. Napolitano , Immigration and Customs Enforcement (ICE) agents asserted that the Secretary's directive was in violation of the Immigration and Nationality Act (INA), which, the plaintiffs argued, ""requires"" ICE officers to initiate a removal proceeding if they encounter an unlawfully present alien who is not ""clearly and beyond a doubt entitled to be admitted."" Section 1225(b)(2)(A) of the INA provides that if an ""examining immigration officer determines that an alien seeking admission is not clearly and beyond a doubt entitled to be admitted, the alien shall be detained for a [removal] proceeding..."" In response to a motion for a preliminary injunction, the district court determined that the INA established an obligation for officers to initiate a removal proceeding against any alien whom the officer determines is not ""clearly and beyond a doubt entitled to be admitted."" The court held that judicial review of the agency nonenforcement policy was appropriate because the INA ""provides clearly defined factors for when inspecting immigration officers are required to initiate removal proceedings against an arriving alien, just as the statute at issue in Dunlop provided certain clearly defined factors for when the Secretary of Labor was required to file a civil action."" The district court ultimately dismissed the case, however, holding that the employment related claims asserted by the ICE agents were within the exclusive jurisdiction of the Merit Systems Protection Board and, therefore, not properly before the court. The above cases would appear to establish the proposition that agency nonenforcement decisions are presumptively unreviewable exercises of administrative discretion. However, when Congress removes or restricts that discretion, by expressly providing ""guidelines"" or ""meaningful standards"" for the manner in which the agency may exercise its enforcement powers, the presumption of nonreviewability may be overcome. Whether Congress has provided sufficient guidelines is difficult to determine. For example, establishing that certain conduct constitutes a violation of law and then authorizing an agency to enforce that law, or even establishing that the agency ""shall"" enforce the law or is ""required"" to enforce the law, would appear to be insufficient to overcome the Heckler presumption. However, where Congress clearly imposes criteria, considerations, standards, or guidelines on the agency's exercise of its enforcement discretion (i.e., when, or how the agency is to take enforcement actions) or establishes clear conditions to trigger enforcement actions, it would appear that courts may review whether a nonenforcement decision contravenes the statutory framework. If a court finds that a statute permits review of an agency nonenforcement decision, it would appear that that decision will be evaluated for compliance with statutory requirements under the ""arbitrary and capricious"" test established in §706 of the APA. In Dunlop , the Court was careful to make clear that in such a situation, the reviewing court may not ""substitute its judgment for the decision of the [agency] not to bring suit."" The court's role is limited to determining ""whether or not the discretion, which still remains in the [agency], has been exercised in a manner that is neither arbitrary nor capricious."" In order to conduct this review, a court may require that the agency provide a statement of reasons as to why the nonenforcement decision was made that addressed ""both the grounds of decision and the essential facts upon which the [agency's] inferences are based."" The court can then evaluate whether the agency's decision was ""reached for an impermissible reason or for no reason at all."" To the contrary, ""if the court concludes there is a rational and defensible basis [for the agency's] determination, then that should be an end of [the] matter, for it is not the function of the Court to determine whether or not the case should be brought or what its outcome would be."" In Heckler , the Supreme Court also suggested that the presumption against the review of nonenforcement decisions may be overcome if the agency has ""'consciously and expressly adopted a general policy' that is so extreme as to amount to an abdication of its statutory responsibilities."" The Court, however, was unclear as to whether such an agency policy would in fact be reviewable, stating only that ""[a]lthough we express no opinion on whether such decisions would be unreviewable under [the APA], we note that in those situations the statute conferring authority on the agency might indicate that such decisions were not ""committed to agency discretion."" In raising the ""statutory abdication"" argument, the Court cited to Adams v. Richardson , a decision from the D.C. Circuit. Adams involved a challenge to the Secretary of Health, Education, and Welfare's (HEW) failure to enforce Title VI of the Civil rights Act of 1964. The Act ""authorizes and directs"" federal agencies to ensure that federal financial assistance is not provided to segregated educational institutions. The district court had rejected the Secretary's assertion that the law provided federal agencies with ""absolute discretion"" with respect to whether to take action to terminate funding, holding that the agency has ""the duty of accomplishing the purposes of the statute through administrative enforcement proceedings or by other legal means."" The district court ordered the agency to commence enforcement proceedings against certain school districts within a specified time period. The D.C. Circuit affirmed the district court decision in language characteristic of the ""statutory guidelines"" exception, holding that ""Title VI not only requires the agency to enforce the Act, but also sets forth specific enforcement procedures."" The court distinguished the Adams nonenforcement scenario from traditional exercises of enforcement discretion, noting that in past cases, Congress had not enacted ""specific legislation requiring particular action."" The court appeared to then give great weight to the breadth of the Secretary's nonenforcement, noting: More significantly, this suit is not brought to challenge HEW's decisions with regard to a few school districts in the course of a generally effective enforcement program. To the contrary, appellants allege that HEW has consciously and expressly adopted a general policy which is in effect an abdication of its statutory duty. The court determined that HEW had consistently and unsuccessfully relied on voluntary compliance as a means of enforcing Title VI without resorting to the more formal and effective enforcement procedures available to the agency. This ""consistent failure"" was a ""dereliction of duty reviewable in the courts."" Although arguably applicable to any ""general policy"" of nonenforcement, the Adams opinion may be limited to certain types of enforcement. In reaching its conclusion the court stressed the ""nature of the relationship between the agency and the institutions in question."" The court noted that: HEW is actively supplying segregated institutions with federal funds, contrary to the expressed purposes of Congress. It is one thing to say the Justice Department lacks the resources necessary to locate and prosecute every civil rights violator; it is quite another to say HEW may affirmatively continue to channel federal funds to defaulting schools. The anomaly of this latter assertion fully supports the conclusion that Congress's clear statement of an affirmative enforcement duty should not be discounted. As such, it is not clear that the Adams exception would apply with equal force to more traditional enforcement actions—such as those that require the expenditure of significant agency resources in investigating and penalizing members of the public for violations of law. Given the sparse case law associated with this exception, it is difficult to assess what level of nonenforcement constitutes an ""abdication of statutory responsibilities."" Presumably, if an agency announced that it would no longer enforce a provision of law against any individual at any time, regardless of the nature of the violation, a court would likely be willing to review the policy. The Fifth Circuit, however, has stated that merely ""inadequate"" enforcement is insufficient to overcome the Heckler presumption of nonreviewability. In Texas v. United States , the state of Texas sued the United States arguing that the Attorney General had failed to control immigration as dictated by the INA, and that the failure to enforce the immigration laws had resulted in substantial costs to the state. With respect to the enforcement claim, the court rejected ""out-of-hand the State's contention that the federal defendants' alleged systemic failure to control immigration is so extreme as to constitute a reviewable abdication of duty."" In holding that nonenforcement decisions are not subject to judicial review, the court concluded: The State does not contend that federal defendants are doing nothing to enforce the immigration laws or that they have consciously decided to abdicate their enforcement responsibilities. Real or perceived inadequate enforcement of immigration laws does not constitute a reviewable abdication of duty. Whether limited nonenforcement policies— for instance if an agency announced that it will delay enforcement of a particular provision for a specified period of time—could also be subject to review would appear to be less clear. For example, in Schering Corp. v. Heckler , the D.C. Circuit held that the FDA decision not to pursue an enforcement action against a drug manufacturer for a specific period of time fell ""squarely within the confines of Chaney "" and was therefore not reviewable. In that case, the FDA had reached a settlement with an animal drug manufacturer in which the agency had agreed not to ""initiate any enforcement action...for a period of 18 months."" A rival drug manufacturer brought a claim seeking a declaration that the settlement was invalid. The court dismissed the claim, holding that there was no ""policy or pattern of nonenforcment that amounts to 'an abdication of its statutory responsibilities,'"" and that the agency decision to hold enforcement in ""abeyance"" while it considered its position was a ""paradigm case of enforcement discretion."" It should be noted that as a general matter, agency delays are notoriously difficult to enforce, even in situations where Congress has established a clear statutory deadline for mandatory action. In light of the standards established in Heckler and other cases, it would appear that, absent explicit statutory language, challenges to particular prosecutorial or agency nonenforcement decisions are unlikely to meet with much success. Courts have made clear that these decisions are generally committed to the agency's or the prosecutor's discretion and are not subject to judicial review. However, the mere invocation of prosecutorial or enforcement discretion is not ""to be treated as a magical incantation which automatically provides a shield for arbitrariness."" It would appear that courts may be more willing to grant review of established agency policies of nonenforcement than more traditional, case-by-case, individual enforcement decisions. Justice Brennan emphasized this point in his Heckler concurrence, noting that that the presumption against reviewability applied only to ""individual, isolated nonenforcement decisions."" Similarly, in Crowley Caribbean Transportation v. Pena , the D.C. Circuit made a clear distinction between ""single-shot nonenforcement decisions"" on one hand, and ""an agency's statement of a general enforcement policy"" on the other. The court determined that review of an agency's ""general enforcement policy"" was reviewable where the agency had 1) ""expressed the policy as a formal regulation,"" 2) ""articulated [the policy] in some form of universal policy statement,"" or 3) otherwise ""[laid] out a general policy delineating the boundary between enforcement and nonenforcement"" that ""purport[s] to speak to a broad class of parties."" The court articulated its reasons for finding review of general enforcement, or nonenforcement policies to be appropriate as follows: By definition, expressions of broad enforcement policies are abstracted from the particular combinations of facts the agency would encounter in individual enforcement proceedings. As general statements, they are more likely to be direct interpretations of the commands of the substantive statute rather than the sort of mingled assessments of fact, policy, and law that drive an individual enforcement decision and that are, as Chaney recognizes, peculiarly within the agency's expertise and discretion. Second, an agency's pronouncement of a broad policy against enforcement poses special risks that it 'has consciously and expressly adopted a general policy that is so extreme as to amount to an abdication of its statutory responsibilities,' a situation in which the normal presumption of nonreviewability may be inappropriate. Finally, an agency will generally present a clearer (and more easily reviewable) statement of its reasons for acting when formally articulating a broadly applicable enforcement policy, whereas such statements in the context of individual decisions to forego enforcement tend to be cursory, ad hoc, or post hoc. Other cases similarly support the notion that courts are more willing to review nonenforcement policies than individual enforcement-based decisions in both the criminal and administrative contexts. In Nader v. Saxbe , the D.C. Circuit drew a clear distinction between judicial review of discretionary enforcement decisions, and judicial review of compliance with ""statutory and constitutional limits to"" those decisions. Nader was a suit in which a nonprofit corporation asked the court to compel the Attorney General to initiate criminal prosecutions under the Federal Corrupt Practices Act, a law that required presidential candidates and committees supporting presidential candidates to file reports on campaign contributions and expenditures. The plaintiffs argued that despite numerous allegations of violations of the law, DOJ had adopted a policy, based on prosecutorial discretion, to only respond to violations referred by the Clerk of the House or the Secretary of the Senate. Although the court found that the plaintiffs lacked standing to bring the claim, it nevertheless determined that ""established precedents"" do not ""necessarily foreclose judicial review of [nonenforcement] policies."" The court then drew a clear distinction between the review of individual enforcement decisions and the review of broad nonenforcement policies: The instant complaint does not ask the court to assume the essentially Executive function of deciding whether a particular alleged violator should be prosecuted. Rather, the complaint seeks a conventionally judicial determination of whether certain fixed policies allegedly followed by the Justice Department and the United States Attorney's office lie outside the constitutional and statutory limits of ""prosecutorial discretion."" One reason a court may be more receptive to reviewing a nonenforcement policy, as opposed to an individual nonenforcement decision, could relate to the remedy that would ultimately be provided if the court reached a decision favorable to the plaintiffs. The remedy to an individual nonenforcement decision would likely be a court order, perhaps in the form of a writ of mandamus, directing the agency to initiate an enforcement action. Mandamus is an ""extraordinary remedy reserved for extraordinary circumstances,"" and will generally only be issued where there is a violation of a ""clear duty to act."" While courts have granted mandamus to compel an agency to issue a rule where Congress has provided an explicit deadline, courts are generally loathe to order enforcement actions. Indeed, the D.C. Circuit has held in the criminal context that ""it is well settled that the question of whether and when prosecution is to be instituted is within the discretion of the Attorney General. Mandamus will not lie to control the exercise of this discretion."" To the contrary, a court may have greater flexibility in crafting a remedy to an invalid agency nonenforcement policy. For instance, if a reviewing court found the agency policy to be inconsistent with the existing statutory framework, the court may simply invalidate the policy, or direct the agency to reconsider its policy, without necessarily taking additional steps or directing the agency to take any specific action. This line of reasoning was evident in the U.S. Court of Appeals for the Eleventh Circuit opinion of Smith v. Meese . Meese involved a claim by black voters and elected officials challenging ""a policy and pattern of investigatory and prosecutory decisions,"" including the nonenforcement of federal civil rights laws, that allegedly had the effect of depriving the plaintiffs of their constitutional rights. In holding that the separation of powers was not threatened by judicial review of the prosecutorial decisions, the court found it ""important to note"" that rather than being ""asked to block or require the prosecution of any individual"" the plaintiffs had instead ""asked the federal court to order the defendants to stop following a deliberate policy of discriminatory investigations and prosecutions."" The court went on to address the type of remedy that a court may be likely to grant in a challenge to nonenforcement, suggesting that It is unlikely that the appropriate remedy would be for the district court to enjoin all voting fraud prosecutions or to require prosecutions of all possible election crimes. Instead, it is likely that the district court would order the defendants to make prosecutorial decisions based on constitutional factors, instead of targeting one race or one political party for investigation. The Executive branch likewise acknowledges that ""the individual prosecutorial decision is distinguishable from instances in which courts have reviewed the legality of general executive branch policies."" As the foregoing discussion makes clear, there is a default presumption that the executive branch has discretion in making a wide range of decisions relating to the discharge of its duty to enforce federal law. Congress, however, may alter the default rule by explicitly guiding or restricting the exercise of that discretion through statute. The Supreme Court has stated quite bluntly that ""[a]ll constitutional questions aside, it is for Congress to determine how the rights which it creates shall be enforced."" In the administrative context, this principle was reflected in Heckler , where the Court expressly held that Congress may establish ""guidelines for the agency to follow in exercising its enforcement powers"" and the ""Congress may limit an agency's exercise of enforcement power if it wishes, either by setting substantive priorities, or by otherwise circumscribing an agency's power to discriminate among issues or cases it will pursue."" Thus, Congress may restrain administrative enforcement discretion by statute, and enact laws that reduce agency officials' freedom in making enforcement, and indeed nonenforcement, decisions. These principles arguably apply with equal force in the criminal context. Indeed, a pair of early Supreme Court cases suggest that the exercise of prosecutorial discretion must conform to statutory restrictions. In U.S. v. Morgan the Supreme Court considered whether a Department of Agriculture hearing was a required condition precedent to a DOJ criminal prosecution under the Pure Food and Drug Act. Under the law, if agency officials determined that a violation had occurred, the federal prosecutor was obliged ""to cause appropriate proceedings to be commenced and prosecuted."" Although the case did not focus on whether the law mandated prosecutions, the court nonetheless stated in dicta that the law created a ""condition where the district attorney is compelled to prosecute without delay."" In noting that the statute ""compels [the prosecutor] to act"" and that "" he...is bound to accept the finding of the Department,"" the Court made no mention of prosecutorial discretion or the separation of powers. The Court suggested a similar congressional role in influencing criminal prosecutorial decisions in the Confiscation Cases . In that decision, which has been viewed as ""one of the canonical statements of executive authority over prosecution,"" the Supreme Court nonetheless suggested in dicta that the executive branch's control over the termination of criminal prosecutions may be subject to limits imposed by statute. Although the case upheld the federal prosecutor's discretion to dismiss a forfeiture suit, the Court qualified that discretion by suggesting that ""public prosecutions...are within the exclusive direction of the district attorney..... except in cases where it is otherwise provided in some act of Congress. "" Assuming then that Congress has the authority to regulate the exercise of executive enforcement discretion, what limits exist, if any, to that authority? There has been relatively little judicial discussion of the scope of Congress's authority to restrict the executive exercise of enforcement discretion. It is clear, however, that the judicial branch's reluctance to review executive branch prosecutorial and administrative enforcement decisions is grounded in a respect for the roles and functions of each branch of government; an acknowledgement that it would generally be improper and impractical for the court to review discretionary enforcement decisions made by executive branch officers; and the Take Care Clause, as control over the enforcement of law has been viewed as within the ""special province of the Executive Branch"" and an aspect of executive power that ""lies at the core of the Executive's duty to see to the faithful execution of the laws."" However, the presumption against the review of enforcement decisions is also founded upon statutory principles, limitations on judicial review imposed by the APA, and the notion that when Congress delegates enforcement authority to the executive branch, it intends to provide the agency with the discretion that traditionally accompanies those delegations. To the extent that judicial deference to executive enforcement decisions is based on statutory principles, it would appear that Congress must be free to modify the statutory environment and alter the traditional scope of enforcement discretion. Other forms of administrative discretion, for instance, can be enlarged, reduced, or altered by Congress through statute. While acknowledging that Congress can guide enforcement discretion, the Supreme Court has never directly addressed the precise limits of Congress's power, nor whether Congress can remove that discretion entirely by enacting mandatory enforcement language. Nor has the Court addressed whether Congress's authority to restrict administrative enforcement discretion differs in any meaningful way from its authority to restrict criminal prosecutorial discretion. A comparison of the strong constitutionally-based language used in cases addressing the executive's discretionary authority to initiate a criminal prosecution, with the mainly statutorily-based language in Heckler , would appear to suggest that Congress would have wider latitude in controlling civil or administrative enforcement actions than it would over federal criminal prosecutions. Justice Marshall, for instance, felt compelled to draw a distinction between prosecutorial and administrative discretion in his concurrence in Heckler , noting that it was ""inappropriate to rely on notions of prosecutorial discretion to hold agency action unreviewable"" because ""arguments about prosecutorial discretion do not necessarily translate into the context of agency refusals to act."" The Fifth Circuit has made a similar distinction based expressly on presidential power. In Riley v. St. Luke's Episcopal Hospital , the circuit court found intrusions into the executive's control over criminal cases to be more worrisome than intrusions into civil litigation. The Riley court made this distinction in upholding the qui tam provision of the False Claims Act against a claim that the law unconstitutionally infringed on the executive's civil enforcement power. The circuit court held that ""no function cuts more to the heart of the Executive's constitutional duty to take care that the laws are faithfully executed than criminal prosecution."" The conduct of civil litigation, on the other hand, involved ""lesser uses of traditional executive power."" Given the separate status accorded presidential control over criminal and civil matters, the court determined that: the Executive must wield two different types of control in order to ensure that its constitutional duties under Article II are not impinged. Should the occasion arise, these two different types of control necessarily require the application of two different sorts of tests. While it would appear that Congress may have greater authority over administrative enforcement discretion, legislation that can be characterized as significantly restricting the exercise of executive branch enforcement decisions, in either the criminal, civil, or administrative context, could raise questions under the separation of powers. This is especially true considering the Supreme Court has had little opportunity to address the precise contours and outer reaches of Congress's authority to impinge on discretionary executive enforcement decisions. In the absence of clearly established judicial precedent, the executive branch has historically opposed any judicial or legislative ""interference"" with enforcement decisions as a violation of the Take Care Clause. It may be helpful to first outline what would appear to be general limits to Congress's authority to intrude upon the executive's enforcement power. First, Congress may neither itself, nor through its officers, directly enforce federal law. To exercise both the power to make and enforce the law would be an apparent violation of the separation of powers. The Supreme Court has clearly stated that ""Legislative power, as distinguished from executive power, is the authority to make laws, but not to enforce them..."" James Madison outlined this fundamental principle in Federalist 47, where he characterized the accumulation of legislative and executive power in a single entity as ""the very definition of tyranny."" Second, Congress may neither appoint, nor reserve for itself the power to remove officers engaged in the enforcement of law. The Supreme Court's appointment and removal jurisprudence makes clear that Congress's role in selecting or controlling those who execute and enforce the law is severely limited. The President, and the President alone, must be permitted a degree of control over those engaged in enforcement. Congress may place limits on that control, by providing such officers with ""for cause"" removal restrictions, but it may not remove presidential control entirely. Third, it would appear unlikely that Congress could direct the executive to bring a criminal prosecution against a specific individual. In light of the Supreme Court's statement in U.S. v. Nixon that ""the Executive Branch has exclusive authority and absolute discretion to decide whether to prosecute a case,"" the initiation of criminal prosecutions has been considered to be within the ""special province of the executive branch"" and at the heart of prosecutorial discretion. The executive branch would presumably consider such a directive from Congress to be a significant intrusion into Presidential power. Regardless of the validity of that position, there are other reasons why such legislation would be problematic. First, legislation that targets an individual for punishment may run afoul of the constitutional prohibition on bills of attainder. Second, if Congress were to enact such a law, and the executive failed to comply, it is unlikely that a court would be willing to enforce the provision by issuing an order directing the executive branch to initiate a prosecution against a specific individual. Whether the separation of powers would be violated if Congress used less restrictive means to influence or confine the exercise of enforcement discretion, rather than to use its own officers to enforce the law or compel specific enforcement actions remains less clear. Any such legislation would presumably be evaluated under the standards established by the Supreme Court in Morrison v. Olson . Morrison , as previously mentioned, involved a constitutional challenge to the independent counsel provisions of the Ethics in Government Act (EGA). The EGA authorized the appointment of an independent counsel to investigate and prosecute high ranking executive branch officials for violations of certain federal laws. Under the statute, the Attorney General was required to conduct a preliminary investigation once he received ""specific"" and ""credible"" information alleging that certain executive officials had committed serious federal offenses. Under the now expired law, if the Attorney General determined that there were ""reasonable grounds to believe that further investigation or prosecution [was] warranted"" then the law stated that he ""shall apply"" to a special three-judge panel of the D.C. Circuit for the appointment of an independent counsel. Once appointed, the independent counsel was granted ""full power and independent authority to exercise all investigative and prosecutorial functions and powers of the [DOJ]"" and was removable by the Attorney General ""only for good cause.""   Former Assistant Attorney General Theodore Olson argued that by providing an individual, who was not under the President's control, with the authority to initiate and conduct criminal prosecutions, the law constituted an unconstitutional congressional intrusion into the President's enforcement power. The court rejected this argument, determining that the law was consistent with the appointments clause; did not impermissibly expand the judicial function; did not infringe upon the President's removal power; and finally did not violate the separation of powers. With respect to the separation of powers, the Court determined that the law neither ""'impermissibly undermine[s]' the powers of the Executive Branch, [n]or 'disrupts the proper balance between the coordinate branches [by] prevent[ing] the Executive Branch from accomplishing its constitutionally assigned functions.'"" In reaching this conclusion, the Court placed great weight on the fact that the independent counsel provisions did not ""involve an attempt by Congress to increase its own powers at the expense of the Executive Branch."" Congress retained no powers of ""control of supervision."" Rather its role was limited to receiving reports and exercising oversight. Although the law clearly ""reduce[d] the amount of control or supervision"" exercised by the President over the ""investigation and prosecution of a certain class of alleged criminal activity,"" it did not do so in an impermissible manner. Furthermore, the President retained an adequate ""degree of control over the power to initiate an investigation"" because the Independent Counsel could be appointed only at the request of the Attorney General, and—""most importantly""—the Attorney General retained the power to remove the counsel for ""good cause."" As a result, the court concluded: Notwithstanding the fact that the counsel is to some degree 'independent' and free from executive supervision to a greater extent than other federal prosecutors, in our view these features of the Act give the Executive Branch sufficient control over the independent counsel to ensure that the President is able to perform his constitutionally assigned duties. Justice Scalia's dissent in Morrison adopted a much stronger view of executive enforcement powers, holding that the investigation and prosecution of crimes was a ""quintessential"" and ""exclusive"" executive function. Scalia would have invalidated the independent counsel provisions, and expressly rejected the majority's conclusion that ""the ability to control the decision whether to investigate and prosecute the President's closest advisers, and indeed the President himself, is not 'so central to the functioning of the Executive Branch' as to be constitutionally required to be within the President's control."" He went on to assert that: We should say here that the President's constitutionally assigned duties include complete control over investigation and prosecution of violations of the law, and that the inexorable command of Article II is clear and definite: the executive power must be vested in the President of the United States. Morrison may reasonably be interpreted as rejecting the notion that the executive's power over the enforcement of law is the type of core, or exclusive presidential power that is beyond the reach of Congress. The Court explicitly acknowledged, that it was ""undeniable that the Act reduces the amount of control or supervision that the Attorney General and, through him, the President exercises over the investigation and prosecution of a certain class of alleged criminal activity."" That reduction, however, was not in itself unconstitutional. The majority opinion would appear to authorize legislative restrictions on the exercise of executive branch enforcement discretion, so long as Congress does not violate the established limitations previously discussed or otherwise ""prevent the executive branch from accomplishing its constitutionally assigned functions."" The Morrison standard for evaluating intrusions into the executive's enforcement power has been applied by a number of appellate courts in upholding the qui tam provision of the False Claims Act (FCA). This provision authorizes a private person, known as the relator, to initiate a civil proceeding ""in the name of the government"" for violations of the FCA. Upon filing a qui tam action, the relator must give notice to the government disclosing all material evidence the relator has gathered. The government then has 60 days to investigate the allegations and determine whether it wishes to take control of the enforcement action or allow the relator to continue to ""conduct"" the proceeding. If the government chooses to assume responsibility for the enforcement action, the relator may continue as a party, but the DOJ may make enforcement decisions without the approval of the relator, including a decision to dismiss the case or settle the claim. In a series of appellate level cases, the government argued that by granting private parties the authority to initiate a civil action on behalf of the United States, the FCA had violated the separation of powers and unconstitutionally infringed upon the President's enforcement function. Each circuit to review the question ultimately rejected this position, holding generally that the FCA does not impermissibly ""interfere"" with the President's constitutional functions under the Take Care Clause. In applying the Morrison standard, the courts generally focused on the degree of control that the executive branch exercises over the relator, including the government's authority to intervene, place limits on the relators participation, restrict the relators power in discovery, and ultimately to decide whether to settle or dismiss the case. As such, although the provision may "" diminish Executive branch control over the initiation and prosecution of a defined class of civil ligation,"" the Executive retains ""'sufficient control' over the relator's conduct to insure that the President is able to perform his constitutionally assigned duty."" Acknowledging the limitations imposed by the separation of powers, the precise scope of Congress's authority to counter agency policies of nonenforcement remains an open question. There may, however, be a number of ways in which Congress can use its legislative powers to encourage the executive branch to enforce laws in a manner reflective of Congress's will. For example, it would appear that Congress may prohibit or require the consideration of certain factors in the decision to initiate an enforcement action, or affirmatively set enforcement priorities reflective of Congress's intent. With respect to permissible factors for consideration, the Court has made clear, in other contexts, that it will reject agency action where the agency has ""relied on factors which Congress has not intended it to consider."" With respect to setting enforcement priorities, the Supreme Court acknowledged in Heckler that congress may set ""substantive priorities"" for an agency to follow in exercising its enforcement power. Further support for Congress's prominent role in setting agency priorities appears in TVA v. Hill . There, the Court stated ""emphatically"" that it is ""the exclusive province of the Congress not only to formulate legislative policies and mandate programs and projects, but also to establish their relative priority for the Nation. Once Congress [] has decided the order of priorities in a given area, it is for the Executive to administer the laws and for the courts to enforce them when enforcement is sought."" If Congress does utilize its legislative authority to set enforcement priorities or establish factors for consideration in making enforcement decisions, it would appear to be within the judicial authority to ensure executive compliance with those explicit statutory requirements. This would especially be the case in a situation where a stated agency enforcement policy is in direct conflict with the statutory framework. Whether Congress can remove the discretion to initiate an enforcement action by establishing a generally applicable statutory framework that requires the executive branch to enforce the law, not against specific individuals, but rather under certain factual scenarios; where certain criteria are met; or where certain aggravating factors are present; may raise concerns. This is especially true in the criminal context, where some courts have made broad statements about the nature of the executive's power to decide whether to bring a criminal prosecution. But these statements have generally occurred in opinions that either focus the power of the courts (as opposed to Congress) to interfere in prosecutorial decisions, or that avoid the question of congressional authority by interpreting a statute as insufficient to curtail prosecutorial discretion. Although no court appears to have directly addressed the issue, the Supreme Court did note in U.S. v. Nixon that ""the Executive Branch has exclusive authority and absolute discretion to decide whether to prosecute a case."" While the value of the Nixon dicta is debatable, it nevertheless suggests that congressional attempts to require prosecutions may be problematic. The executive branch has previously determined that Congress lacks the authority to compel prosecutions in the criminal context. In its evaluation of whether the criminal contempt statute requires the U.S. Attorney to refer a contempt citation to the grand jury, the DOJ argued that ""although prosecutorial discretion may be regulated to a certain extent by Congress and in some instances by the Constitution, the decision not to prosecute an individual may not be controlled because it is fundamental to the executive's prerogative."" The DOJ went on to assert that ""divesting"" a federal prosecutor of the discretion to decide whether to bring a prosecution would ""run afoul...of the separation of powers by stripping the Executive of its proper constitutional authority and by vesting improper power in Congress."" The DOJ position was reached four years prior to the Supreme Court's important decision on Presidential control over the enforcement of law in Morrison. Under Morrison , the standard for evaluating the separation of powers concerns associated with a law that arguably intrudes on the President's personal obligation to ""take Care that the laws be faithfully executed"" would appear to be whether the law ""'impermissibly undermine[s]' the powers of the Executive Branch,"" or ""prevent[s] the Executive Branch from accomplishing its constitutionally assigned functions."" The chief considerations in the Morrison analysis appear to have related to ""aggrandizement"" and ""control."" The Court upheld the independent counsel provisions because Congress had not sought to aggrandize its own powers (the independent counsel was ""independent"" from both the President and Congress), and because the President, through the Attorney General, retained sufficient ""supervision"" and ""control"" over actions of the independent counsel. How a court would apply these principles to a law that sought to compel a criminal prosecution upon the occurrence of certain conditions is difficult to determine. It could be argued that by mandating scenarios under which criminal prosecutions must occur, Congress is, in effect, replacing the prosecutor's discretionary decision of whether to initiate a case, with its own congressional determination. This could be seen as ""controlling"" the exercise of a discretionary enforcement decision, depriving the President of adequate control over federal prosecutors, and an ""aggrandizement"" of congressional power, as Congress would have vested power in itself to determine when and whether prosecutions are to be initiated. To the contrary, a court may be equally likely to decide that such a law is a permissible legislative restriction on the exercise of the initial discretionary decision of whether to initiate a prosecution that neither aggrandizes Congress's power nor subverts Presidential control, as the conduct of the prosecution, once initiated, remains entirely in the hands of the executive branch. Characterized in this manner, Congress has acted to limit, but not remove, executive control over enforcement. Morrison and the qui tam cases suggest that it is constitutionally permissible for Congress to ""reduce"" or ""diminish"" executive branch control over the initiation of an enforcement action. In addition, constitutional issues may be ameliorated by ensuring that the executive branch retains significant discretion to determine whether the conditions that trigger the mandated prosecution are met. In the administrative context, Heckler's approval of the reasoning in Dunlop would appear to approve of legislation that creates a mandatory administrative enforcement framework. Even so, obtaining a court order actually compelling enforcement may be difficult, as was evident in how the Dunlop case ultimately concluded. As previously discussed, the Supreme Court stated that the ""principle of absolute prosecutorial discretion"" was inapplicable in Dunlop because Congress had, by statute, required the Secretary to bring an enforcement action if certain ""clearly defined"" factors were present. In confirming the continued validity of Dunlop , the Court in Heckler stated that ""The statute being administered quite clearly withdrew discretion from the agency and provided guidelines for exercise of its enforcement power."" The removal of discretion, the Court held, was a: decision [] in the first instance for Congress... If it has indicated an intent to circumscribe agency enforcement discretion, and has provided meaningful standards for defining the limits of that discretion, there is 'law to apply' under [the APA] and courts may require that the agency follow that law; if it has not, then an agency refusal to institute proceedings is a decision 'committed to agency discretion by law.' However, the court did not order the Secretary to initiate an enforcement proceeding, but rather directed the Secretary to file a ""statement of reasons"" as to why no action was brought and directed the district court to review that document to determine whether the nonenforcement decision was ""arbitrary and capricious."" The court further directed that if the district court ""determines that the Secretary's statement of reasons adequately demonstrates that his decision not to sue is not contrary to law, the ... suit fails and should be dismissed."" The court then noted that if the district court came to the opposite conclusion, new concerns under the separation of powers may arise, stating: The district court may, however, ultimately come to the conclusion that the Secretary's statement of reasons on its face renders necessary the conclusion that his decision not to sue is so irrational as to constitute the decision arbitrary and capricious. There would then be presented the question whether the district court is empowered to order the Secretary to bring a civil suit against the union to set aside the election. We have no occasion to address that question at this time. It obviously presents some difficulty in light of the strong evidence that Congress deliberately gave exclusive enforcement authority to the Secretary. We prefer therefore at this time to assume that the Secretary would proceed appropriately without the coercion of a court order when finally advised by the courts that his decision was in law arbitrary and capricious. In a footnote, the Court noted the union's argument that the separation of powers does not ""countenance a court order requiring the executive branch, against its wishes, to institute a lawsuit in federal court."" The Court stated only that ""[s]ince we do not consider at this time the question of the court's power to order the Secretary to file suit, we need not address [the separation of powers] contentions."" On remand, the district court found the provided statement of reasons to be inadequate to justify the agency inaction, but again, did not order the Secretary to initiate an enforcement action. Instead it simply directed a reconsideration of the agency decision and prohibited the Secretary from using a method of determining whether a violation occurred that the court found to be inconsistent with congressional intent. ","The Take Care Clause would appear to stand for two, at times diametrically opposed propositions—one imposing a ""duty"" upon the President and the other viewing the Clause as a source of Presidential ""power."" Primarily, the Take Care Clause has been interpreted as placing an obligation on both the President and those under his supervision to comply with and execute clear statutory directives as enacted by Congress. However, the Supreme Court has also construed the Clause as ensuring Presidential control over the enforcement of federal law. As a result, courts generally will not review Presidential enforcement decisions, including the decision of whether to initiate a criminal prosecution or administrative enforcement action in response to a violation of federal law. In situations where an agency refrains from bringing an enforcement action, courts have historically been cautious in reviewing the agency determination—generally holding that these nonenforcement decisions are ""committed to agency discretion"" and therefore not subject to judicial review under the Administrative Procedure Act. The seminal case on this topic is Heckler v. Chaney, in which the Supreme Court held that an ""agency's decision not to take enforcement action should be presumed immune from judicial review."" However, the Court also clearly indicated that the presumption against judicial review of agency nonenforcement decisions may be overcome in a variety of specific situations. For example, a court may review an agency nonenforcement determination ""where the substantive statute has provided guidelines for the agency to follow in exercising its enforcement powers,"" or where the agency has ""'consciously and expressly adopted a general policy' that is so extreme as to amount to an abdication of its statutory responsibilities."" As such, it would appear that Congress may overcome the presumption of nonreviewability and restrict executive discretion through statute by expressly providing ""meaningful standards"" for the manner in which the agency may exercise its enforcement powers. Nevertheless, legislation that can be characterized as significantly restricting the exercise of executive branch enforcement decisions, in either the criminal, civil, or administrative context, could raise questions under the separation of powers.",govreport
"In 2013, the official U.S. poverty rate was 14.5%, compared to 15.0% in 2012, and marked the first statistically significant drop in the rate since 2006. In 2013, 45.3 million persons were estimated as having income below the official poverty line, a number statistically unchanged from the estimated 46.5 million poor in 2012. (See Figure 1 .) Figure 1 shows a clear relationship between poverty and the economy. The level of poverty tends to follow the economic cycle quite closely, tending to rise when the economy is faltering and fall when the economy is in sustained growth. The poverty rate increased markedly over the past decade, in part a response to two economic recessions (periods marked in red). A strong economy during most of the 1990s is generally credited with the declines in poverty that occurred over the latter half of that decade, resulting in a record-tying, historic low poverty rate of 11.3% in 2000 (a rate statistically tied with the previous lowest recorded rate of 11.1% in 1973). The poverty rate increased each year from 2001 through 2004, a trend generally attributed to economic recession (March 2001 to November 2001), and failed to recede appreciably before the onset of the December 2007 recession. This most recent recession, which officially ended in June 2009, was the longest recorded (18 months) in the post-World War II period. Over the course of the most recent recession, the unemployment rate increased from 4.9% (January 2008) to 7.2% (December 2008), and continued to rise over most of 2009, peaking at 10.0% in October of that year. Even as the economy has been recovering, poverty has remained well above pre-recessionary levels. Although the unemployment rate has generally been falling since late 2009, it has not been until this past year that we have seen a marked (statistically significant) decline in the official poverty rate. That the unemployment rate has continued to fall over 2014 suggests that poverty levels are likely to fall in 2014. Poverty statistics for 2014 poverty will be issued in the late summer of 2015. The recession especially affected non-aged adults (persons age 18 to 64) and children. (See Figure 2 .) The poverty rate of non-aged adults reached 13.8% in 2010, the highest it has been since the early 1960s. In 2013 the non-aged poverty rate of 13.6% remained statistically unchanged from rates seen in the prior three years. The poverty rate for non-aged adults will need to fall to 10.8% to reach its 2006 pre-recession level. The 2013 poverty data provide one encouraging sign with respect to children. Both the estimated number of poor children and their poverty rate fell from 2012 to 2013. In 2013, the number of poor children fell by an estimated 1.3 million (15.4 million in 2012 to 14.1 million in 2013), and their poverty rate fell from 21.3% in 2012 to 19.5% in 2013. The 2013 child poverty rate is still well above its pre-recession low of 16.9% (2006). Child poverty appears to be especially sensitive to economic cycles, as it often takes two working parents to support a family, and a loss of work by one may put the family at risk of falling into poverty. Moreover, roughly one-third of all children in the country live with only one parent, making them even more prone to falling into poverty when the economy falters. In 2013, the aged poverty rate (9.5%) was statistically unchanged from 2012, although the number of poor rose by an estimated 305,000 (from 3.9 million in 2012 to 4.2 million in 2013). In spite of the recession, the aged poverty rate remains near an historic low level. The longer-term secular trend in poverty has been affected by changes in household and family composition and by government income security and transfer programs. In 1959, over one-third (35.2%) of persons age 65 and over were poor, a rate well above that of children (26.9%). Social Security, in combination with a maturing pension system, has helped greatly to reduce the incidence of poverty among the aged over the years, and as recent evidence seems to show, it has helped protect them during the economic downturn. The Census Bureau's poverty thresholds form the basis for statistical estimates of poverty in the United States. The thresholds reflect crude estimates of the amount of money individuals or families, of various size and composition, need per year to purchase a basket of goods and services deemed as ""minimally adequate,"" according to the living standards of the early 1960s. The thresholds are updated each year for changes in consumer prices. In 2013, for example, the average poverty threshold for an individual living alone was $11,888; for a two-person family, $15,142; and for a family of four, $23,834. The current official U.S. poverty measure was developed in the early 1960s using data available at the time. It was based on the concept of a minimal standard of food consumption, derived from research that used data from the U.S. Department of Agriculture's (USDA's) 1955 Food Consumption Survey. That research showed that the average U.S. family spent one-third of its pre-tax income on food. A standard of food adequacy was set by pricing out the USDA's Economy Food Plan—a bare-bones plan designed to provide a healthy diet for a temporary period when funds are low. An overall poverty income level was then set by multiplying the food plan by three, to correspond to the findings from the 1955 USDA Survey that an average family spent one-third of its pre-tax income on food and two-thirds on everything else. The ""official"" U.S. poverty measure has changed little since it was originally adopted in 1969, with the exception of annual adjustments for overall price changes in the economy, as measured by the Consumer Price Index for all Urban Consumers (CPI-U). Thus, the poverty line reflects a measure of economic need based on living standards that prevailed in the mid-1950s. It is often characterized as an ""absolute"" poverty measure, in that it is not adjusted to reflect changes in needs associated with improved standards of living that have occurred over the decades since the measure was first developed. If the same basic methodology developed in the early 1960s was applied today, the poverty thresholds would be over three times higher than the current thresholds. Persons are considered poor, for statistical purposes, if their family's countable money income is below its corresponding poverty threshold. Annual poverty estimates are based on a Census Bureau household survey (Annual Social and Economic Supplement to the Current Population Survey, CPS/ASEC, conducted February through April). The official definition of poverty counts most sources of money income received by families during the prior year (e.g., earnings, social security, pensions, cash public assistance, interest and dividends, alimony, and child support, among others). For purposes of officially counting the poor, noncash benefits (such as the value of Medicare and Medicaid, public housing, or employer provided health care) and ""near cash"" benefits (e.g., food stamps, renamed Supplemental Assistance Nutrition (SNAP) benefits beginning in FY2009) are not counted as income, nor are tax payments subtracted from income, nor are tax credits added (e.g., Earned Income Tax Credit (EITC)). Many believe that these and other benefits should be included in a poverty measure so as to better reflect the effects of government programs on poverty. The Census Bureau, in partnership with the Bureau of Labor Statistics (BLS), has recently released a Supplemental Poverty Measure (SPM), designed to address many of the perceived flaws of the ""official"" measure. The SPM is discussed in a separate section at the end this report (see "" The Research Supplemental Poverty Measure ""). Even during periods of general prosperity, poverty is concentrated among certain groups and in certain areas. Minorities; women and children; the very old; the unemployed; and those with low levels of educational attainment, low skills, or disability, among others, are especially prone to poverty. The incidence of poverty among African Americans and Hispanics exceeds that of whites by several times. In 2013, 27.2% of blacks (11.0 million) and 23.5% of Hispanics (12.7 million) had incomes below poverty, compared to 9.6% of non-Hispanic whites (18.8 million) and 10.5% of Asians (1.8 million). Although blacks represent only 13.0% of the total population, they make up 24.4% of the poor population; Hispanics, who represent 17.3% of the population, account for 28.1% of the poor. Poverty rates for Hispanics fell from 25.6% in 2012 to 23.5% in 2013, as did the number of poor Hispanics, from 13.6 million in 2012, to 12.7 million in 2013. Poverty rates and the numbers estimated as poor were statistically unchanged from 2012 to 2013 for white non-Hispanics, blacks, and Asians. In 2013, among the native-born population, 13.9% (37.9 million) were poor—a rate and number statistically unchanged from 2012 (14.3%, 38.8 million). Among the foreign-born population, 18.0% (7.4 million) were poor in 2013—a statistically significant drop in the poverty rate (from 19.7%), but not in the number estimated as poor. The poverty rate among foreign-born naturalized citizens (12.7%, in 2013) was lower than that of the native-born U.S. population (13.9%). In 2013, the poverty rate of non-citizens (22.8%) dropped significantly from 2012 (24.9%), as did the estimated number who were poor (about one-half million, dropping from 5.4 million in 2012, to 4.0 million in 2013). Poverty among children dropped significantly from 2012 to 2013. Their estimated poverty rate fell from 21.3% in 2012, to 19.5% in 2013. In 2013, an estimated 1.3 million fewer children were poor than in 2012 (14.1 million versus 15.4 million, respectively). However, the 2013 child poverty rate (19.5%) is still well above its pre-recession low of 16.9% (2006). The lowest recorded rate of child poverty was in 1969, when 13.8% of children were counted as poor. Children living in single female-headed families are especially prone to poverty. In 2013 a child living in a single female-headed family was nearly five times more likely to be poor than a child living in a married-couple family. In 2013, among all children living in single female-headed families, 45.8% were poor. In contrast, among children living in married-couple families, 9.5% were poor. The increased share of children who live in single female-headed families has contributed to the high overall child poverty rate. In 2013, one quarter (25.0%) of children were living in single female-headed families, more than double the share who lived in such families when the overall child poverty rate was at a historical low (1969). Among all poor children, nearly 6 in 10 (58.7%) were living in single female-headed families in 2013. In 2013, 38.0% of black children were poor (4.2 million), compared to 30.0% of Hispanic children (5.3 million) and 10.1% of non-Hispanic white children (3.8 million). (See Figure 3 .) Among children living in single female-headed families, more than half of black children (54.0%) and Hispanic children (52.3%) were poor; in contrast, one-third of non-Hispanic white children (33.6%) were poor. The poverty rate among Hispanic children who live in married-couple families (19.9%) was above that of black children (16.8%), and four times that of non-Hispanic white children (4.9%) who live in such families. Contributing to the high rate of overall black child poverty is the large share of black children who live in single female-headed families (54.0%) compared to Hispanic children (30.1%) or non-Hispanic white children (15.7%). (See Figure 4 .) Adults with low education, those who are unemployed, or those who have a work-related disability are especially prone to poverty. Among 25- to 34-year-olds without a high school diploma, between one-third and two-fifths (36.8%) were poor in 2013. In 2013, 1 in 10 25- to 34-year-olds lacked a high school diploma. Within the same age group whose highest level of educational attainment was a high school diploma, about one in five (20.7%) were poor. In contrast, only about 1 in 16 (6.5%) of 25- to 34-year-olds with at least a bachelor's degree were found to be living below the poverty line. Among persons between the ages of 16 and 64 who were unemployed in March 2014, nearly 3 out of 10 (29.8%) were poor based on their families' incomes in 2013; among those who were employed, 6.9% were poor. In 2013, persons who had a work disability represented 11.3% of the 16- to 64-year-old population, and about one-quarter (26.0%) of the poor population within this age range. Among those with a severe work disability, 35.6% were poor, compared to 17.0% of those with a less severe disability and 11.4% who reported having no work-related disability. In 2013, the 9.5% poverty rate among persons age 65 and older was statistically unchanged from the 2012 rate (9.1%), but statistically higher than the all-time low-poverty rate among the aged of 8.7% attained in 2011. The number of aged poor grew by 305,000 from 2012 to 2013, from 3.9 million to 4.2 million,. Among persons age 75 and over, 11.2% were poor in 2013, compared to 8.3% of those ages 65 to 74. Measured by a slightly raised poverty standard (125% of the poverty threshold), 15.1% of the aged could be considered poor or "" near poor "" in 2013; 12.6% who are ages 65 to 74, and 18.4% who are 75 years of age and over, could be considered poor or ""near poor."" In 2013, nearly three of every four poor persons (73.8%) lived in households that received any means-tested assistance during the year. Such assistance could include cash aid, such as Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI) payments, SNAP benefits (Food Stamps), Medicaid, subsidized housing, free or reduced price school lunches, and other programs. In 2013, somewhat over one in five (17.4%) poor persons lived in households that received cash aid ; half (49.5%) received SNAP benefits (formerly named Food Stamps); 6 in 10 (61.3%) lived in households where one or more household members were covered by Medicaid; and about 1 in 7 (14.8%) lived in subsidized housing. Poor single-parent families with children are among those families most likely to receive cash aid. Among poor children who were living in single female-headed families, about one-fifth (21.9%) were in households that received government cash aid in 2013, down from 24.0% in 2012. The share of poor children in single female-headed families receiving cash aid is well below historical levels. In 1993, 70.2% of these children's families received cash aid. In 1995, the year prior to passage of sweeping welfare changes under PRWORA, 65% of such children were in families receiving cash aid. Poverty is more highly concentrated in some areas than in others; it is about twice as high in center cities as it is in suburban areas and nearly three times as high in the poorest states as it is in the least poor states. Some neighborhoods may be characterized as having high concentrations of poverty. Among the poor, the likelihood of living in an area of concentrated or extreme poverty varies by race and ethnicity. Within metropolitan areas, the incidence of poverty in central city areas is considerably higher than in suburban areas—19.1% versus 11.1%, respectively, in 2013. Nonmetropolitan areas had a poverty rate of 16.1%. A typical pattern is for poverty rates to be highest in center city areas, with poverty rates dropping off in suburban areas, and then rising with increasing distance from an urban core. In 2013, only nonmetropolitan areas experienced a statistically significant decline in poverty (both rate and numbers poor) from 2012, with the poverty rate decreasing from the 17.7% in 2012 to 16.1% in 2013, and the number of poor declining by an estimated 891,000 persons. Poverty rates and estimated numbers of poor people remained statistically unchanged in metropolitan areas, center cities, and suburbs from 2012 to 2013. In 2013, poverty rates were lowest in the Northeast (12.7%) and Midwest (12.9%), followed by the West (14.7%), with the South (16.1%) having the highest poverty rate. Poverty remained statistically unchanged (measured both in terms of numbers poor and rates) in each of the four regions from 2012 to 2013. Based on 2012 American Community Survey (ACS) data, poverty rates were highest in the South (with the exception of Virginia), extending across to Southwestern states bordering Mexico (Texas, New Mexico, and Arizona). (See Figure 5 .) Poverty rates in several states bordering the Ohio River (Ohio, West Virginia, Kentucky) also exceeded the national rate, as did those of Michigan and New York, and the District of Columbia, in the eastern half of the nation, and California, Oregon, and Montana in the western half. States along the Atlantic Seaboard from Virginia northward tended to have poverty rates well below the national rate, as did three contiguous states in the upper Midwest/plains (Iowa, Minnesota, and North Dakota), as well as Utah, Wyoming, Alaska, and Hawaii. Figure 6 shows estimated poverty rates for the United States and for each of the 50 states and the District of Columbia on the basis of the 2013 American Community Survey (ACS), the most recent ACS data currently available. In addition to the point estimates, the figure displays a 90% statistical confidence interval around each state's estimate, indicating the degree to which these estimates might be expected to vary based on sample size. Although the states are sorted from lowest to highest by their respective poverty rate point estimates, the precise ranking of each state is not possible because of the depicted margin of error around each state's estimate. All states with non-overlapping statistical confidence intervals have statistically significant different poverty rates from one another. Some states with overlapping confidence intervals may also have significantly different poverty rates from one another, measured at the 90% confidence interval. For example, New Hampshire, shown as having the lowest poverty rate (8.7%) in 2013, is statistically tied with Alaska (9.3%). Mississippi clearly stands out as the state with the highest poverty rate (24.0%) and New Mexico, with a poverty rate of 21.8%, has the second-highest poverty rate. Louisiana, a state ranked as having the third-highest poverty rate (19.7%), is statistically tied with Arkansas (19.7%) and the District of Columbia (18.9%), but not with Georgia (19.0%), even though Louisiana and Georgia's statistical confidence intervals overlap. Table 1 provides estimates of state and national poverty rates from 2002 through 2013 from the ACS. Statistically significant changes from one year to the next are indicated by an upward-pointing arrow (▲) if a state's poverty rate was statistically higher, and by a downward-pointing arrow (▼) if statistically lower, than in the immediately preceding year or for other selected periods (i.e., 2005 vs. 2002, 2013 vs. 2007). It should be noted that ACS poverty estimates for 2006 and later are not strictly comparable to those of earlier years, due to a change in ACS methodology that began in 2006 to include some persons living in non-institutionalized group quarters who were not included in earlier years. Table 1 shows that three states (New Jersey, New Mexico, and Washington) experienced statistically significant increases in their poverty rates from the 2012 to 2013 ACS. New Jersey's estimated poverty rate increased from 10.8% in 2012 to 11.4% in 2013, New Mexico's rate increased from 20.8% to 21.9%, and Washington's rate increased from 13.5% to 14.1%. Four states (Colorado, New Hampshire, Texas, and Wyoming) experienced statistically significant decreases in their poverty rates from 2012 to 2013. The table shows that poverty among states generally increased over the 2002 to 2005 period, as measured by the ACS, consequent to the 2001 (March to November) economic recession. From the 2002 to 2003 ACS, five states (including the District of Columbia) experienced statistically significant increases in their poverty rates, whereas none experienced a statistically significant decrease. From 2003 to 2004, eight states saw their poverty rates increase, whereas two saw decreases. From 2004 to 2005, 13 states saw their poverty rates increase, whereas only 1 saw its poverty rate decrease. Comparing poverty rates from the 2005 ACS to those from the 2002 ACS, poverty was statistically higher in 22 states, and lower in only one. By 2007, poverty rates among states were beginning to improve, with 13 states (including the District of Columbia) experiencing statistically significant declines in their poverty rates from 2006; only Michigan experienced a statistically significant increase in its poverty rate in 2007 compared to a year earlier. Since 2007, state poverty rates have generally increased consequent to the 18-month recession (December 2007 to June 2009). From 2007 to 2008, the ACS data showed eight states (California, Connecticut, Florida, Hawaii, Indiana, Michigan, Oregon, and Pennsylvania) as experiencing statistically significant increases in their poverty rates, whereas three states (Alabama, Louisiana, and Texas) experienced statistically significant decreases. From 2008 to 2009, 32 states saw their poverty rates increase, and no state experienced a statistically significant decrease, and from 2009 to 2010, 34 states experienced statistically significant increases in poverty, and again, no state experienced a decrease. As noted above, from 2012 to 2013, three states saw their poverty rates rise, and four saw a decline. Comparing 2013 to 2007, poverty rates were statistically higher in 48 states (including the District of Columbia), and no state had a poverty rate statistically below its prerecession rate. The four tables that follow provide poverty estimates for large metropolitan areas having a population of 500,000 and over, and for smaller metropolitan areas having a population of 50,000 or more but less than 500,000. Among large metropolitan areas, 10 areas with some of the lowest poverty rates are shown in Table 2 , and the 10 areas with some of the highest poverty rates are shown in Table 3 . Among smaller metropolitan areas, 10 areas with some of the lowest poverty rates are shown in Table 4 , and 10 among those with the highest poverty rates in Table 5 . It should be noted that metropolitan areas shown in these tables may not be statistically different from one another, or from others not shown in the tables. Poverty estimates for all metropolitan areas in 2013 are shown in Appendix B . Table B-1 . Poverty estimates for congressional districts are shown in Appendix C . Table C-1 includes poverty rate estimates for 2012. Congressional districts in 2012 are not directly comparable to earlier years, due to re-districting. Neighborhoods can be delineated from U.S. Census Bureau census tracts. Census tracts usually have between 2,500 and 8,000 persons and, when first delineated, are designed to be homogeneous with respect to population characteristics, economic status, and living conditions. The Census Bureau defines ""poverty areas"" as census tracts having poverty rates of 20% or more. Figure 7 groups census tracts according to their level of poverty. The first two groupings are based on poor persons living in census tracts with poverty rates below the national average (15.4% based on the five-year ACS data), and from 15.4% to less than 20.0%. Poor persons living in census tracts with poverty rates of 20% or more meet the Census Bureau definition of living in ""poverty areas."" Poverty areas are further demarcated in terms of poor persons living in areas of ""concentrated"" poverty (i.e., census tracts with poverty rates of 30% to 39.9%), and areas of ""extreme"" poverty (i.e., census tracts with poverty rates of 40% or more). The figure is based on five years of data (2009-2013) from the U.S. Census Bureau's American Community Survey (ACS). Five years of data are required in order to get reasonably reliable statistical data at the census tract level while at the same time preserving the confidentiality of survey respondents. Figure 7 shows that over the five-year period 2009-2013, over half of all poor persons (55.0%) lived in ""poverty areas"" (i.e., census tracts with poverty rates of 20% or more). Among the poor, about three out of ten (30.7%) lived in areas with poverty of 30% or more, and about one in seven (14.5%) lived in areas of ""extreme"" poverty, having poverty rates of 40% or more. Among the poor, African Americans, American Indian and Alaska Natives, and Hispanics are more likely to live in poverty areas than either Asians or white non-Hispanics. Among poor blacks, nearly half (48.0%) live in neighborhoods with poverty rates of 30% or more, and one-quarter (25.2%) live in ""extreme"" poverty areas, with poverty rates of 40% or more. Among poor Hispanics, about two-fifths (39.6%) live in areas with poverty rates of 30% or more, and about one in six (17.5%) live in areas of ""extreme"" poverty. Among poor white non-Hispanics, over half (53.2%) live outside poverty areas, while nearly one-quarter (23.2%) live in areas with poverty rates of 30% or more. On October 16, 2014, the Census Bureau released its fourth annual report using a new Supplemental Poverty Measure (SPM). As its name implies, the SPM is intended to ""supplement,"" rather than replace, the ""official"" poverty measure. The ""official"" Census Bureau statistical measure of poverty will continue to be used by programs that allocate funds to states or other jurisdictions on the basis of poverty, and the Department of Health and Human Services (HHS) will continue to derive Poverty Income Guidelines from the ""official"" Census Bureau measure. Many experts consider the ""official"" poverty measure to be flawed and outmoded. In 1990, Congress commissioned a study on how poverty is measured in the United States, resulting in the National Academy of Sciences (NAS) convening a 12-member expert panel to study the issue. The NAS panel issued a wide range of specific recommendations to develop an improved statistical measure of poverty in its 1995 report M easuring Poverty: A New Approach . In late 2009, the Office of Management and Budget (OMB) formed an Interagency Technical Working Group (ITWG) to suggest how the Census Bureau, in cooperation with the Bureau of Labor Statistics (BLS), should develop a new Supplemental Poverty Measure, using the NAS expert panel's recommendations as a starting point. Referencing the work of the ITWG, the Department of Commerce announced in March 2010 that the Census Bureau was developing a new Supplemental Poverty Measure, as ""an alternative lens to understand poverty and measure the effects of anti-poverty policies,"" with the intention that the new measure ""will be dynamic and will benefit from improvements over time based on new data and new methodologies."" The SPM is intended to address a number of weaknesses of the ""official"" measure. Criticisms of the ""official"" poverty measure raised by the NAS expert panel include the following: The ""official"" poverty measure, by counting only families' total cash, pre-tax income as a resource in determining poverty status, ignores a host of government programs and policies that affect the disposable income families may actually have available. For example, the official measure ignores the effects of payroll taxes paid by families, and tax benefits they may receive such as the EITC and the Child Tax Credit. It ignores a variety of in-kind benefits, such as SNAP benefits and free or reduced-price lunches under the National School Lunch Program, that free up resources to meet other needs. Similarly, it ignores housing subsidies that help make housing more affordable. The ""official"" poverty income thresholds used in determining families' and individu als' poverty status, devised in the early 1960s, have changed little since . Except for minor technical changes and adjustments for price inflation, poverty income thresholds have essentially been frozen in time, reflecting living standards of a half-century ago. The ""official"" poverty measure does not take into account necessary work-related expenses, such as child care and transportation costs that are associated with getting to work. Child care expenses are much more common today than when the ""official"" poverty measure was originally developed, as mothers' labor force participation has since increased. The ""official"" poverty measure does not take into account medical expenses that individuals and families may incur , affecting their ability to meet other basic needs. These costs, which tend to vary by age, health status, and insurance coverage of individuals, may differentially affect families' abilities to meet other basic needs, especially given rising health care costs. The ""official"" poverty measure does not take into account changing family situations, such as cohabitation among unmarried couples, or child support payments. The ""official"" poverty measure does not adjust for differences in prices across geographic areas, which may affect the cost of living from one area to another. The ITWG, using the NAS-panel recommendations as a starting point, suggested an approach to developing the SPM that addressed how income thresholds should be set and resources counted in measuring poverty. Conceptual differences between the ""official"" and supplemental poverty measures are summarized in Table 6 . The SPM incorporates a more comprehensive income/resource definition than that used by the ""official"" poverty measure, including in-kind benefits (e.g., SNAP) and refundable tax credits (e.g., EITC). It also expands upon the traditional family definition based on blood, marriage, and adoption to include cohabiting partners and their family relatives as part of a broader economic unit for assessing poverty status. The SPM subtracts necessary expenses (i.e., taxes, work-related expenses including child-care, child support paid, medical out-of-pocket [MOOP] expenses) from resources to arrive at a measure of an economic unit's disposable income/resources that may be applied to a standard of need based on food, clothing, shelter, and utilities (FCSU), plus ""a little bit more"" for everything else. The SPM income/resource thresholds are initially set at a range in the distribution (30 th to 36 th percentile) of what reference families (families with exactly two children) actually spend on FCSU. Separate thresholds are derived for homeowners with a mortgage and those without a mortgage, and for renters. Thresholds are adjusted for price differences in housing costs by geographic area (metropolitan and nonmetropolitan areas in a state). Thresholds for economic units other than initial reference units (i.e., those with exactly two children) are adjusted upwards or downwards for the number of adults and number of children in the unit. As described earlier, the ""official"" U.S. poverty measure measures cash—pre-tax—income against income thresholds that vary by family size and composition. The thresholds were derived from research that showed that the average U.S. family spent one-third of its pre-tax income on food, based on a USDA 1955 Food Consumption Survey. After pricing minimally adequate food plans for families of varying sizes and compositions, poverty thresholds were derived by multiplying the cost of those food plans by a factor of three (i.e., one-third of the thresholds were assumed to address families' food needs, and two-thirds addressed everything else). The thresholds, established in 1963, are adjusted each year for price inflation. The SPM poverty thresholds are based on the NAS panel recommendation that thresholds be based on a point in the empirical distribution that ""reference"" families spend on food, clothing, shelter, and utilities (FCSU). Based on ITWG's suggestions, the Census Bureau derives FCSU thresholds for ""reference"" units with exactly two children, between the 30 th and 36 th percentile of what such units spend on FCSU, averaged over five years of survey data from the BLS Consumer Expenditure (CE) Survey. Whereas ""official"" poverty thresholds are based on initial thresholds adjusted for price changes over time, the SPM thresholds are based on changes in reference consumer units' actual spending on FCSU over time. Following the ITWG's suggestion, three separate sets of thresholds are established: one set for homeowners with a mortgage, another set for homeowners without a mortgage, and a third set for renters. Following NAS panel recommendations, the ITWG suggested that initial poverty thresholds based on FCSU be multiplied by a factor of 1.2, to account for all other needs (e.g., household supplies, personal care, non-work-related transportation). Additionally, thresholds are adjusted upward and downward based on SPM reference unit size using a three parameter equivalence scale based on the number of adults and children in the unit. Lastly, the thresholds are adjusted to account for variation in geographic price differences across metropolitan and nonmetropolitan areas, by state, based on differences in median housing costs across areas relative to the nation. The geographic housing cost adjustment is applied to the shelter portion of the FCSU-based thresholds. Figure 8 depicts poverty threshold levels under the ""official"" poverty measure and under the Research SPM for a resource unit consisting of two adults and two children. The figure shows that in 2013, the official poverty threshold for a family with two adults and two children was $23,624. In comparison, for a similar family, the SPM poverty threshold for homeowners with a mortgage was $25,639, $2,015 (8.5%) above the official poverty threshold, and for homeowners without a mortgage, $21,397, or $2,227 (9.4%) below the official threshold. The SPM poverty threshold for renters was $25,144 or $1,520 (6.4%), above the official measure. As discussed earlier, the ""official"" poverty measure is based on counting families' and unrelated individuals' pre-tax cash income against poverty thresholds that vary by family size and composition. The SPM expands upon the pre-tax cash income resource definition used by the ""official"" measure to develop a more comprehensive measure of ""disposable"" income that SPM units might use to help meet basic needs (i.e., poverty thresholds based on FCSU, plus ""a little more""). The SPM resource measure includes the value of a number of federal in-kind benefits, such as Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamp) benefits; free and reduced-price school lunches; nutrition assistance for women, infants, and children (WIC); federal housing assistance; and energy assistance under the Low Income Home Energy Assistance Program (LIHEAP). It also includes federal tax benefits administered by the Internal Revenue Service, such as the Earned Income Tax Credit (EITC) and the partially refundable portion of the Child Tax Credit (CTC), known as the Additional Child Tax Credit (ACTC). The SPM subtracts a number of necessary expenses from SPM units' resources to arrive at a measure of ""disposable"" income that units might have available to meet basic needs. Necessary expenses subtracted from resources on the SPM include child support paid; estimated federal, state, and local income taxes; estimated social security payroll (FICA) taxes; estimated work-related expenses other than child care (e.g., work-related commuting costs, purchase of uniforms or tools required for work); reported work-related child care expenses; and reported medical out of pocket (MOOP) expenses, including the employee share of health insurance premiums plus other medically necessary items such as prescription drugs and doctor copayments. The effects of counting each of these resources and expenses in the SPM are assessed later in this report (see "" Marginal Effects of Counting Specified Resources and Expenses on Poverty under the SPM ""). In 2013, the overall poverty rate was somewhat higher under the SPM (15.5%) than under an "" adjusted official"" poverty measure (14.6%)— ""adjusted"" to include unrelated children typically excluded from the ""official"" measure. In 2013, an estimated 48.671 million people were poor under the SPM, 2.9 million people more than the 45.748 million estimated under the ""official"" (adjusted) poverty measure. The remainder of this report focuses on differences in poverty rates among and between various groups under the two measures. The SPM yields a very different impression of the incidence of poverty with respect to age than that portrayed by the ""official"" measure. Figure 9 compares poverty rates by age group under the SPM and the ""official"" measure in 2013. The poverty rate for adults ages 18 to 64 is somewhat higher under the SPM than under the ""official"" measure (15.4% compared to 13.6%). The figure shows that the poverty rate for children (under age 18) is lower under the SPM than under the ""official"" measure (16.4% compared to 20.4%). In contrast, the poverty rate among persons age 65 and over is much higher under the SPM than under the ""official"" measure (14.6% compared to 9.5%). Although the child poverty rate is lower under the SPM than under the ""official"" measure, and the aged poverty rate is considerably higher, the incidence of poverty among children still exceeds that of the aged under the SPM, as it did under the ""official"" measure. The SPM paints a much different picture of poverty among the aged than that conveyed by the ""official"" measure. As will be shown later, much of the difference between the aged poverty rate measured under the SPM compared to the ""official"" measure is attributable to the effect of medical expenses on the disposable income among aged units to meet basic needs represented by the SPM resource thresholds. As noted above, the SPM expands the definition of the economic unit considered for poverty measurement purposes over that used under the ""official"" poverty measure. The ""official"" poverty measure groups all co-residing household members related by marriage, birth, or adoption as sharing resources for purposes of poverty determination. Unrelated individuals, whether living alone as a single person household or with other unrelated members, are treated as separate economic units under the ""official"" poverty measure. The ""official"" measure also excludes unrelated children under age 15 from the universe for poverty determination. As noted earlier, the ""adjusted official"" poverty measure presented in this section of the report includes unrelated children, resulting in a 14.6% poverty rate as opposed to the published rate of 14.5% in 2013. The SPM expands the economic unit used for poverty determination beyond that used by the ""official"" measure. The SPM assesses the relationship of unrelated household members to others in the household to determine whether they will be joined with others to construct expanded economic units. For example, the SPM combines unrelated co-residing household members age 14 and older who are not married and who identify each other as boyfriend, girlfriend, or partner as cohabiting partners. Cohabiting partners, as well as any of their co-resident family members, are combined as an economic unit under the SPM. The SPM also combines unmarried co-residing parents of a child living in the household as an economic unit, even if the parents do not identify as a cohabiting couple. Any unrelated children who are under age 15 and are not foster children are assigned to the householder's economic unit, as are foster children under the age of 22. Additionally, the SPM combines children over age 18 living in a household with a parent, and any younger children of the parent, as an economic unit. Under the ""official"" poverty measure, a child age 18 and over is treated as an unrelated individual, and the child's parent is also treated as an unrelated individual if no other family members are present, or as an unrelated subfamily head if a spouse or other children (under age 18) are also residing in the household. In 2013, an estimated 27.953 million persons, 8.9% of the 313.395 million persons represented in the CPS/ASEC, were classified as either joining an economic unit or having members added to their economic unit under the SPM measure, compared to how they would have been classified under the ""official"" measure's economic unit definition. Combining the resources of these additional household members had the effect of reducing poverty under the SPM measure, compared to the ""official"" measure, in 2013. Figure 10 shows poverty rates in 2013 by type of economic unit. Persons identified as being in a married-couple unit, or in female- or male-householder units, are persons in those economic units whose members remained unchanged under the SPM compared to the ""official"" poverty measure. Persons who were added to an economic unit, or were part of an economic unit that had members added to it under the SPM definition, are labeled as being in a ""new SPM unit."" The figure shows that poverty rates for persons in married-couple units, and in male-householder units, are higher under the SPM than under the ""official"" poverty measure (9.5% versus 6.7% for persons in married-couple units, and 23.1% versus 18.7% for persons in male-householder units). Poverty rates for persons living in female-householder units did not statistically differ from one another, with about three out of ten persons in such units considered poor under either measure. In contrast, poverty among persons who were members of ""new SPM units"" fell by about two-fifths, from 31.4% under the ""official"" measure to 17.9% under the SPM. Figure 11 compares poverty rates in 2013 under the SPM with the ""official"" measure by Census region. The figure shows that poverty rates in the West are considerably higher (26% higher) under the SPM (18.7%) than under the ""official"" measure (14.8%). Poverty rates are about 11% higher in the Northeast under the SPM (14.3%) compared to the ""official"" measure (12.8%). Poverty rates in the Midwest are lower under the SPM than under the ""official"" measure, and in the South, essentially equal. The differences in poverty rates within and between regions based on the SPM compared to the ""official"" measure are most directly due to the SPM's geographic price adjustments to poverty thresholds for differences in the cost of housing in metropolitan and nonmetropolitan areas across states. The cost of housing tends to be higher in the West and Northeast, causing their poverty rates to rise under the SPM relative to the ""official"" measure and relative to the South and Midwest, where housing tends to be less expensive. Figure 12 depicts poverty rates by residence in metropolitan (principal city, and outside principal city [i.e., ""suburban""]) and nonmetropolitan areas in 2013. The figure shows that under the SPM, the poverty rate for persons living in Metropolitan Statistical Areas (MSAs) (15.9%) is somewhat higher than under the ""official"" measure (14.3%), whereas for persons living outside MSAs, the poverty rate is lower under the SPM (13.2%) than under the ""official"" measure (16.2%). Again, this most likely reflects differences in the cost of housing between MSAs and non-MSAs. Within MSAs, poverty rates are higher for persons living within principal cities under both measures than for people living outside them in ""suburban"" or ""ex-urban"" areas. Figure 13 depicts states according to whether the state's SPM poverty rate statistically differs from its ""official"" poverty rate. Estimates are based on three-year (2011 to 2013) averages of CPS/ASEC data. Three years of data are combined in order to improve the statistical reliability of CPS/ASEC estimates at the state level. The figure shows that 13 states (Alaska, California, Connecticut, Florida, Hawaii, Illinois, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New York, and Virginia) and the District of Columbia had higher poverty rates under the SPM than under the ""official"" measure. Among the 13 states with higher SPM poverty rates than their respective ""official"" poverty rate, only Illinois and Nevada were inland, and with the exception of Florida and Virginia, none were in the South. The figure shows that the SPM poverty rate was not statistically different than the ""official"" poverty rate in 11 states (Arizona, Colorado, Delaware, Georgia, Minnesota, Oregon, Pennsylvania, Rhode Island, Utah, Vermont, and Washington). Among the 26 remaining states in which their SPM poverty rates were lower than their respective ""official"" poverty rates, nearly all (with Maine being the exception) were either in the South, or inland. Figure 14 and Figure 15 depict poverty rates by state under the official poverty measure and the SPM based on three years of CPS/ASEC data. Estimates are based on three-year (2011 to 2013) averages to improve the statistical reliability of estimates attainable from CPS/ASEC data at the state level. The two figures differ only in terms of the order in which states are sorted. In Figure 14 , states are sorted from lowest to highest based on their respective ""official"" poverty rate point estimates, whereas in Figure 15 states are sorted from lowest to highest based on their respective SPM poverty rate point estimates. In neither figure are precise rankings of states possible because of the depicted margin of error around each state's estimate. Within a state, a statistically significant difference between a state's official poverty rate and its SPM poverty rate is signified by solid-filled markers, indicating the point estimate under each measure, and a line connecting them, indicating the estimated difference (which is also shown in parentheses after each state name). The figures show the magnitude of the difference among the 13 states and the District of Columbia that had statistically significant higher poverty rates under the SPM than under the ""official"" measure, as well as for the 26 states in which the state's SPM rate was lower than its ""official"" poverty rate and the 11 states in which the incidence of poverty under the two measures did not differ statistically. Differences in state poverty rates based on the SPM compared to the ""official"" measure may be due to a variety of factors. Geographic adjustments to SPM poverty income thresholds to account for differences in housing costs tend to result in higher poverty rates in areas with higher-priced housing than in areas with lower-priced housing. The mix of housing tenure (e.g., owner occupied, with or without a mortgage, renter occupied) may account for some of the difference between ""official"" and SPM poverty rates, within and between areas. Similarly, taxes may differ among areas. Also, populations may differ across areas in terms of household composition (e.g., share of households with cohabiting partners). The composition of the population based on age, or health insurance status, may also affect the incidence of SPM poverty relative to ""official"" poverty within and between geographic areas, by affecting medical out of pocket spending (MOOP), which is considered by SPM in estimating poverty. Among the states with a statistically significant increase in poverty under the SPM, California's poverty rate increased by more than any other state's, increasing from 16.0% under the ""official"" measure to 23.4% under the SPM, or 7.4 percentage points. Under the ""official"" measure, California's poverty rate was substantially above the U.S. rate (14.6%), but under the SPM, California's poverty rate is estimated as the highest in the nation. Other states with comparatively large increases in their poverty rates (in the four to five percentage point range) under the SPM compared to the ""official"" measure include Florida (a 15.1% to 19.1% increase), Hawaii (an increase from 12.4% to 18.4%), and New Jersey (a 10.7% to 15.9% increase). Four states had decreases in their SPM poverty rate compared to their ""official"" rate in the four to five percentage point range. Among the states with the highest ""official"" poverty rates, New Mexico and Mississippi, (21.5% and 20.7%, respectively) both have estimated SPM poverty rates (16.0% and 15.3%, respectively) statistically tied with U.S. SPM rate (15.9%). Kentucky and West Virginia's ""official"" poverty rates (18.1% and 17.4%, respectively) are well above the ""official"" U.S. rate (14.9%), but their SPM poverty rates (13.8% and 13.2%) fall well below the U.S. SPM rate (15.9%). Figure 16 focuses strictly on the SPM, examining the marginal effects on poverty rates attributable to the inclusion of each selected income/resource or expenditure element on the measure. The marginal effects of each element on the SPM are displayed by age group. Elements that marginally contribute resources, and thereby have a poverty reducing effect when included in the SPM, are ranked from left to right in terms of their effect on poverty reduction among all persons. Similarly, expenditure elements, which are subtracted from resources and thereby marginally increase poverty as measured by the SPM, are ranked from left to right by their marginal poverty increasing effects on all persons. The figure shows, for example, that the EITC has a greater poverty reducing effect than any of the other depicted resource elements. Overall, the EITC lowers the SPM poverty rate for all persons by 2.9 percentage points. The EITC is followed by SNAP benefits (1.6 percentage point reduction), housing subsidies (1.3 percentage point reduction), school lunch (0.5 percentage point reduction), and WIC (0.2 percentage point reduction) and LIHEAP (0.1 percentage point reduction). In contrast, on the expenditure side, child support paid to members outside the household has a relatively small effect on increasing the overall poverty rate. Federal income taxes before considering refundable credits, such as the EITC (counted on the resource side), result in an increase in overall poverty of 0.4 percentage points. FICA payroll taxes have a larger effect on marginal poverty (1.5 percentage point increase) than federal income taxes, as do work expenses (1.9 percentage points). Among all of the expense elements presented, medical out of pocket expenses (MOOP) contribute to the largest increase in poverty (3.5 percentage point increase for all persons). Among the three age groups, the additional resources included in the SPM have a greater effect on reducing poverty among children (persons under age 18) and poverty among working age adults (ages 18 to 64) than on the aged (age 65 and older), with the exception of housing subsidies, which reduce the aged poverty rate by about the same amount as that of children. The EITC has a greater effect of reducing poverty among children (6.4 percentage point reduction) than any of the other added SPM resources. On the expenditure side, FICA payroll taxes and work expenses have a greater effect on increasing poverty among children (due to a working parent) and non-aged adults than on the aged, who are less likely to be in the labor force and incur work-related taxes and expenses. Notably, under the SPM, MOOP expenses contribute to a substantial increase in poverty among the aged, contributing to a 6.3 percentage point increase in their poverty rate. The relative distribution of additional resources and expenses in the SPM by age group helps to explain why poverty among children is lower under the SPM than it is under the ""official"" measure, whereas it is considerably higher for the aged. Figure 17 shows the distribution of the population by age group according to the degree to which their income and resources fall below or above poverty under the ""official"" and SPM definitions. The figure breaks out the poor population, depicted by brackets, into the share whose income and resources fall below half of their respective poverty lines (a classification sometimes referred to as ""deep poverty"") and the remainder. Others are categorized by the extent to which their income/resources exceed poverty under the two definitions, with those who fall below twice the poverty line also demarcated by brackets. The figure shows, for example, that the share of children in ""deep poverty"" under the SPM is considerably lower than under the ""official"" measure (4.4% compared to 9.3%). As shown earlier, the SPM child poverty rate (16.4%) is lower than the ""official"" rate (20.3%). However, under the SPM, a much greater share of children live in ""families"" with income/resources between one and two times the poverty line than under the ""official"" measure (38.2% compared to 22.5%, respectively). Altogether, well over half of the children live in ""families"" having income/resources below twice the poverty line under the SPM (54.6%) compared to about two-fifths (42.8%) under the ""official"" measure. Thus, while the SPM appears to result in fewer children being counted as poor than under the ""official"" measure, under the SPM a greater share than under the ""official"" measure are concentrated at income levels just above poverty. Among persons age 65 and over, a greater share are poor under the SPM than under the ""official"" measure, as shown earlier (14.6% compared to 9.5%), and a greater share are in ""deep poverty"" under the SPM (4.8%) than under the ""official"" measure (2.7%). In contrast to the ""official"" measure, under which one-third (33.1%) of the aged have income below 200% of poverty, somewhat under half (45.1%) have income/resources below that level under the SPM. As a research measure, the SPM offers potential for improved insight leading to better understanding of the nature and circumstances of those deemed to be among the nation's most economically and socially vulnerable. The SPM offers the means to better assess the performance of the economy, government policies, and programs with regard to the population's ability to secure sufficient income/resources to be able to meet basic expenditures for food, clothing, shelter, and utilities (plus ""a little bit more""). The SPM counts considerably more elderly as poor than does the ""official"" measure. Medical expenses appear to be the driving factor in increasing poverty among the elderly under the SPM (see Figure 16 ). While not negating the improvement in the poverty status of the aged over the years, based on the ""official"" measure (see Figure 2 ), the SPM points more directly to the economic vulnerability of the aged, based not on income/resources alone, but rather, medical expenses competing for income that might otherwise be used to meet basic needs (i.e., FCSU plus ""a little bit more""). Rising medical costs in society overall and individuals' personal health and insurance statuses pose potential economic risk to the aged being able to meet basic needs, as captured by FCSU-based poverty thresholds. The SPM provides additional insight that poverty reduction among the elderly depends not only on improving income, but also on their ability to reduce exposure to high medical expenses through ""affordable"" insurance. Rising medical costs in society also place the aged at increased risk of poverty under the SPM. It is worth noting that the SPM does not consider financial assets, other than interest, dividends, and annuity income from those assets, nor non-liquid assets (e.g., home equity) in determining poverty status. The SPM therefore does not address the means or extent to which the aged might tap those assets to meet medical or other needs. The SPM results in fewer children being counted as poor than under the ""official"" measure. Still, the incidence of child poverty under the SPM, as under the ""official"" measure, exceeds that of the aged, but by a much slimmer margin (see Figure 9 ). Work-based supports, which both encourage work and help to offset the costs of going to work, appear be especially important to families with children, as captured by the SPM. The EITC, not counted under the ""official"" measure, significantly reduces child poverty as measured by the SPM, helping to offset taxes and work-related expenses working families with children incur (also captured by the SPM, but not under the ""official"" measure) (see Figure 16 ). The lack of safe, reliable, and affordable child care may limit parents' attachment to the labor force, contributing to poverty by reducing earnings that parents might otherwise secure. The SPM recognizes child care as a necessary expense many families face in their decisions relating to work by subtracting work-related child care expenses from income/resources that might otherwise go to meeting basic needs (i.e., FCSU plus ""a little bit more""). As a consequence, the SPM should be sensitive to measuring the effects of child care programs and policies on child care affordability and poverty. The SPM captures the policy effects of assisting the poor through the provision of in-kind benefits, as opposed to just cash, whereas the ""official"" measure does not. For example, SNAP benefits, not captured under the ""official"" poverty measure, appear to have a sizeable effect in reducing child poverty under the SPM. Additionally, the expansion of the economic unit under the SPM to include cohabiting partners and their relatives may also contribute to lower child poverty rates under the SPM than under the ""official"" poverty measure, which is based on family ties defined by blood, marriage, and adoption. Appendix A. U.S. Poverty Statistics: 1959-2013 Appendix B. Metropolitan Area Poverty Estimates Appendix C. Poverty Estimates by Congressional District","In 2013, 45.3 million people were counted as poor in the United States under the official poverty measure—a number statistically unchanged from the 46.5 million people estimated as poor in 2012. The poverty rate, or percent of the population considered poor under the official definition, was reported at 14.5% in 2013, a statistically significant drop from the estimated 15.0% in 2012. Poverty in the United States increased markedly over the 2007-2010 period, in tandem with the economic recession (officially marked as running from December 2007 to June 2009), and remained unchanged at a post-recession high for three years (15.1% in 2010, and 15.0% in both 2011 and 2012). The 2013 poverty rate of 14.5% remains above a 2006 pre-recession low of 12.3%, and well above an historic low rate of 11.3% attained in 2000 (a rate statistically tied with a previous low of 11.1% in 1973). The incidence of poverty varies widely across the population according to age, education, labor force attachment, family living arrangements, and area of residence, among other factors. Under the official poverty definition, an average family of four was considered poor in 2013 if its pre-tax cash income for the year was below $23,834. The measure of poverty currently in use was developed some 50 years ago, and was adopted as the ""official"" U.S. statistical measure of poverty in 1969. Except for minor technical changes, and adjustments for price changes in the economy, the ""poverty line"" (i.e., the income thresholds by which families or individuals with incomes that fall below are deemed to be poor) is the same as that developed nearly a half century ago, reflecting a notion of economic need based on living standards that prevailed in the mid-1950s. Moreover, poverty as it is currently measured only counts families' and individuals' pre-tax money income against the poverty line in determining whether or not they are poor. In-kind benefits, such as benefits under the Supplemental Nutrition Assistance Program (SNAP, formerly named the Food Stamp program) and housing assistance, are not accounted for under the ""official"" poverty definition, nor are the effects of taxes or tax credits, such as the Earned Income Tax Credit (EITC) or Child Tax Credit (CTC). In this sense, the ""official"" measure fails to capture the effects of a variety of programs and policies specifically designed to address income poverty. A congressionally commissioned study conducted by a National Academy of Sciences (NAS) panel of experts recommended, some 20 years ago, that a new U.S. poverty measure be developed, offering a number of specific recommendations. The Census Bureau, in partnership with the Bureau of Labor Statistics (BLS), has developed a Supplemental Poverty Measure (SPM) designed to implement many of the NAS panel recommendations. The SPM is to be considered a ""research"" measure, to supplement the ""official"" poverty measure. Guided by new research, the Census Bureau and BLS intend to improve the SPM over time. The ""official"" statistical poverty measure will continue to be used by programs that use it as the basis for allocating funds under formula and matching grant programs. The Department of Health and Human Services (HHS) will continue to issue poverty income guidelines derived from ""official"" Census Bureau poverty thresholds. HHS poverty guidelines are used in determining individual and family income eligibility under a number of federal and state programs. Estimates from the SPM differ from the ""official"" poverty measure and are presented in a final section of this report.",govreport
"Trade plays a critical role in the U.S. agricultural sector. USDA estimates that exports account for about 20% of total U.S. agricultural production. Because the United States plays such an important role in so many agricultural markets, its farm policy is often subject to intense scrutiny both for compliance with current WTO rules and for its potential to diminish the breadth or impede the success of future multilateral negotiations—in part because a farm bill locks in U.S. policy behavior for an extended period of time during which the United States would be unable to accept any new restrictions on its domestic support programs. Omnibus U.S. farm legislation—referred to as the farm bill—is renewed every five or six years. Farm income and commodity price support programs have been a part of U.S. farm legislation since the 1930s. Each successive farm bill usually involves some modification or replacement of existing farm programs. The current omnibus farm bill, the Agricultural Act of 2014 ( P.L. 113-79 ; the 2014 farm bill), which was signed into law on February 7, 2014, made several substantial changes to the previous farm safety net of the 2008 farm bill. Many of the new farm programs became operational for the current 2014 crop year. Most of the 2014 farm bill agricultural provisions will not expire until September 30, 2018, or with the 2018 crop year. Ultimately the current farm bill will either be replaced with new legislation, temporarily extended, or allowed to lapse and be replaced with ""permanent law""—a set of essentially mothballed provisions for the farm commodity programs that date from the 1930s and 1940s. The most recent U.S. notification to the WTO of domestic support outlays (made on December 8, 2014) is for the 2012 crop year, which was governed by farm programs of the 2008 farm bill. A potential major constraint affecting U.S. agricultural policy choices is the set of commitments made as part of membership in the World Trade Organization (WTO) , with its various agreements governing agriculture and trade, including dispute settlement. With respect to disciplines governing domestic agricultural support, two WTO agreements are paramount—the Agreement on Agriculture (AoA) and the Agreement on Subsidies and Countervailing Measures (SCM). The AoA sets country-specific aggregate spending limits on the most market-distorting policies. It also defines very general rules covering trade among member countries. In general, domestic policies or programs found to be in violation of WTO rules may be subject to challenge by another WTO member under the WTO dispute settlement process. If a WTO challenge occurs and is successful, the WTO remedy likely would imply the elimination, alteration, or amendment by Congress of the program in question to bring it into compliance. Since most governing provisions over U.S. farm programs are statutory, new legislation could be required to implement even minor changes to achieve compliance. As a result, designing farm programs that comply with WTO rules can avoid potential trade disputes. This report provides a brief overview of the WTO commitments most relevant for U.S. domestic farm policy. A key question that policymakers ask of virtually every new farm proposal is, how will it affect U.S. commitments under the WTO? The answer depends not only on cost, but also on the proposal's design and objectives, as described below. Under the AoA, WTO member countries agreed to general rules regarding disciplines on domestic subsidies (as well as on export subsidies and market access). The AoA's goal was to provide a framework for the leading members of the WTO to make changes in their domestic farm policies to facilitate more open trade. The WTO's AoA categorizes and restricts agricultural domestic support programs according to their potential to distort commercial markets. Whenever a program payment influences a producer's behavior it has the potential to distort markets (i.e., to alter the supply of a commodity) from the equilibrium that would otherwise exist in the absence of the program's influence. Those outlays that have the greatest potential to distort agricultural markets—referred to as amber box subsidies—are subject to spending limits. In contrast, more benign outlays (i.e., which cause less or minimal market distortion) are exempted from spending limits under green box, blue box, de minimis , or special and differential treatment exemptions. The AoA contains detailed rules and procedures to guide countries in determining how to classify its programs in terms of which are most likely to distort production and trade; in calculating their annual cost, measured by the Aggregate Measure of Support (AMS) index; and in reporting the total cost to the WTO. Specifically, the WTO uses a traffic light analogy to group programs. Green Box programs are minimally or non-trade distorting and not subject to any spending limits. Blue Box programs are described as production-limiting. They have payments that are based on either a fixed area or yield, or a fixed number of livestock, and are made on less than 85% of base production. As such, blue box programs are also not subject to any payment limits. Amber Box programs are the most market-distorting programs and are subject to a strict aggregate, annual spending limit. The United States is subject to a spending limit of $19.1 billion in amber box outlays subject to certain de minimis exclusions. De minimis exemptions are domestic support spending that is sufficiently small—relative to either the value of a specific product or total production—to be deemed benign. De minimis exemptions are limited by 5% of the value of production—either total or product-specific. Prohibited (i.e., Red Box) programs include certain types of export and import subsidies and non-tariff trade barriers that are not explicitly included in a country's WTO schedule or identified in the WTO legal texts. These AoA classifications are described in more detail below in the section entitled, "" Questions for Evaluating WTO Compliance of Domestic Farm Spending ."" The most recent U.S. notification to the WTO of its domestic farm program spending is provided in the Appendix . To the extent that domestic farm policy effects spill over into international markets, U.S. farm programs are also subject to certain rules under the Agreement on Subsidies and Countervailing Measures (SCM). The SCM details rules for determining when a subsidy is ""prohibited"" (as in the case of certain export and import-substitution subsidies) and when it is ""actionable"" (as in the case of certain domestic support policies that incentivize overproduction and result in significant market distortion—whether as lower market prices or altered trade patterns). The key aspect of SCM commitments is the degree to which a domestic support program engenders market distortion. Based on precedent from past WTO decisions, several criteria are important in establishing whether a subsidy could result in significant market distortions: the subsidy constitutes a substantial share of farmer returns or covers a substantial share of production costs; the subsidized commodity is important to world markets because it forms a large share of either world production or world trade; and a causal relationship exists between the subsidy and adverse effects in the relevant market. The SCM evaluates the ""market distortion"" of a program or policy in terms of its measurable market effects on the international trade and/or market price for the affected commodity: did the subsidy displace or impede the import of a like product into the subsidizing member's domestic market; did the subsidy displace or impede the exports of a like product by another WTO member country other than the subsidizing member; did the subsidy (via overproduction and resultant export of the surplus) result in significant price suppression, price undercutting, or lost sales in the relevant commodity's international market; and did the subsidy result in an increase in the world market share of the subsidizing member? For any farm program that is challenged under the SCM, a WTO dispute settlement panel will review the relevant trade and market data and make a determination of whether the particular program being challenged resulted in a significant market distortion. Under WTO rules, challenged subsidies that are found to be prohibited by a WTO dispute settlement panel must be stopped or withdrawn ""without delay"" in accordance with a timetable laid out by the panel; otherwise the member nation bringing the challenge may take appropriate countermeasures. Similarly, actionable subsidies, if successfully challenged, must be withdrawn or altered so as to minimize or eliminate the distorting aspect of the subsidy, again as laid out by a WTO panel or as negotiated between the two disputing parties. The WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) provides a means for WTO members to resolve disputes arising under WTO agreements. WTO members must first attempt to settle their dispute through consultations, but if these fail, the member initiating the dispute may request that a panel examine and report on its complaint. The DSU provides for Appellate Body review of panel reports, panels to determine if a defending member has complied with an adverse WTO decision by the established deadline in a case, and possible retaliation if the defending member has failed to do so. As of April 8, 2015, 492 complaints have been filed under the DSU, with nearly one-half (232) involving the United States as a complainant or defendant. The Office of the United States Trade Representative (USTR) represents the United States in WTO disputes. The United States currently is committed, under the AoA, to spend no more than $19.1 billion per year on amber box trade-distorting support. The WTO's AoA procedures for classifying and counting trade-distorting support are somewhat complex; however, four questions might be asked to determine whether a particular farm measure will cause total U.S. domestic support to be above or below the $19.1 billion annual AMS limit. A subsequent fifth question may be asked to ascertain whether AoA-compliant outlays are also SCM-compliant. 1. Can the measure be classified as a ""green box"" policy —one presumed to have the least potential for distorting production and trade and therefore not counted as part of the AMS? 2. Can it be classified as a ""blue box"" policy —that is, a production-limiting program that receives a special exemption and therefore is also not counted as part of the AMS? 3. If it is a potentially trade-distorting ""amber box"" policy , can support still be excluded from the AMS calculation under the so-called 5% de minimis exemption (explained later in more detail) because total support is no more than 5% of either: a. the value of total annual production if the support is non-product specific, or b. the value of annual production of a particular commodity if the support is specific to that commodity? 4. If such support exceeds the de minimis 5% threshold (and thus cannot be exempted), when it is added to all other forms of non-exempt amber box support is total U.S. AMS still beneath the $19.1 billion limit? 5. If a program is fully compliant with the AoA rules and limits, does its support result in price or trade distortion in international markets that, in turn, cause adverse effects upon another WTO member? If so, then it may be subject to challenge under SCM rules. No limits are placed on green box spending, since it is considered to be minimally or non-trade distorting. To qualify for exemption in the green box, a program must meet two general criteria, as well as a set of policy-specific criteria relative to the different types of agriculture-related programs. The two general criteria are: 1. It must be a publicly funded government program (defined to include either outlays or forgone revenue) that does not involve transfers from consumers. 2. It must not have the effect of providing price support to producers. In addition, every green-box-qualifying program must comply with at least one of the following criteria and conditions specific to the program itself. A ""general service"" benefitting the agricultural or rural community in general cannot involve direct payments to producers or processors. Such programs can include research; pest and disease control; training, extension, or advisory services; inspection services, including for health, safety, grading, or standardization; marketing and promotion services, including information advice and promotion (but not spending for unspecified purposes that sellers could use to provide price discounts or other economic benefits to purchasers); and generally available infrastructure like utility, transportation, or port facilities, water supply facilities, or other capital works construction. Public acquisition (at current market prices) and stockholding of products for food security must be integral to a nationally legislated food security program and be financially transparent. Domestic food aid is to be based upon clearly defined eligibility and nutritional criteria, be financially transparent, and involve government food purchases at current market prices. ""Decoupled"" income support is to use clearly defined eligibility criteria in a specified, fixed base period; not be related in any way after the base period to (a) domestic or world prices, (b) type or volume of crop or livestock production, or (c) factors of production; and, further, not be contingent on any production in exchange for payments. Government financial participation in an income insurance or income safety net program should define eligibility as agricultural income loss exceeding 30% of average gross income (or equivalent in net income terms) in the preceding three-year period (or preceding five-year period, excluding the highest and lowest years—the so-called Olympic average), with such payment compensating for less than 70% of the income loss in year of eligibility, and payments based solely on income, not production, price, or inputs. Total annual payments under this and natural disaster relief (see next paragraph) cannot exceed 100% of a producer's total loss. Payments (whether direct or through government crop insurance) for natural disaster relief are to use eligibility based on formal government recognition of the disaster. Payments are to be determined by a production loss exceeding 30% of production in the preceding three-year (or five-year Olympic average) period, apply only to losses of income, livestock, land, or other production factors, and cannot exceed the total replacement cost or require types/quantities of future production. Total annual payments under this and the income insurance or safety net measure cannot exceed 100% of a producer's total loss. Structural adjustment through producer retirement shall tie eligibility to clearly defined criteria in programs to facilitate producers' ""total and permanent"" retirement from agricultural production or their movement into nonagricultural activities. Structural adjustment through resource retirement shall be determined through clearly defined programs designed to remove land, livestock, or other resources from marketable production, with payments (a) conditioned on land being retired for at least three years and on livestock being permanently disposed; (b) not contingent upon any alternative specified use of such resources involving marketing agricultural production; and (c) not related to production type/quantity, or to prices of products using remaining productive resources. Structural adjustment provided through investment aids must be determined by clearly defined criteria for programs assisting financial or physical restructuring of a producer's operations in response to objectively demonstrated structural disadvantages (and may also be based on a clearly defined program for ""re-privatization"" of agricultural land). The amount of payments (a) cannot be tied to type/volume of production, or to prices, in any year after the base period; (b) shall be provided only for a time period needed for realization of the investment in respect of which they are provided; (c) cannot be contingent on the required production of designated products (except to require participants not to produce a designated product); and (d) must be limited to the amount required to compensate for the structural disadvantage. Environmental program payments must have eligibility determined as part of a clearly defined government environmental or conservation program, and must be dependent upon meeting specific program conditions, including conditions related to production methods or inputs. Payments must be limited to the extra costs (or loss of income) involved with program compliance. Regional assistance program payments shall be limited only to producers in a clearly designated, contiguous geographic region with definable economic and administrative identity, considered to be disadvantaged based on objective, clearly defined criteria in the law or regulation, which indicate that the region's difficulties are more than temporary. Such payments in any year (a) shall not be related to or based on type/volume of production in any year after the base period (other than to reduce production) or to prices after the base period; (b) where related to production factors, must be made at a degressive rate above a threshold level of the factor concerned; and (c) must be limited to the extra costs or income loss involved in agriculture in the prescribed area. In summary, the above measures are eligible for placement in the green box (i.e., exempted from AMS) as long as they (1) meet general criteria one and two, above; and (2) additionally comply with any criteria specific to the type of measure itself. If these conditions are satisfied, no further steps are necessary; the measure is exempt. However, if not, then the next step is to determine whether it qualifies for the blue box exemption. No limits are placed on blue box spending, in part because it contains safeguards to prevent program incentives from expanding production. To qualify for exemption in the blue box, a program must be a direct payment under a production-limiting program, and must also either: be based on fixed areas and yields, or be made on 85% or less of the base level of production, or, if livestock payments, be made on a fixed number of head. If these conditions are satisfied, the measure is exempt. However, if not, then it is considered to be an amber box policy , and the next step is to determine whether spending is above or below the 5% de minimis rate (see below). The AoA states that developed country members (including the United States) do not have to count, when calculating their total AMS, the value of amber box programs whose total cost is small (or benign) relative to the value of either a specific commodity, if the program is commodity-specific, or the value of total production, if the program is not commodity-specific. In other words, ""amber box"" (i.e., potentially trade-distorting) policies may be excluded under the following two de minimis exclusions. Product-specific domestic support, whereby it does not exceed 5% of the member's ""total value of production of a basic agricultural product during the relevant year."" Support provided through all of the measures specific to a product—not just a single measure in question—is tallied to determine whether the 5% level is exceeded. For example, the value of the 2012 U.S. corn crop was $74.3 billion, and 5% of that was $3.8 billion. This compares with corn-specific AMS outlays of $2.7 billion. As a result, the entire $2.7 billion was exempted from inclusion under the AMS limit for the marketing year 2012. In contrast, U.S. sugar support of $1.454 billion for 2012 easily exceeded its 5% product-specific de minimis of $184.8 million (based on total sugar value of $3.7 billion) and, therefore, was counted against the AMS limit. Non-product-specific domestic support, whereby it does not exceed 5% of the ""value of the Member's total agricultural production."" All non-product-specific support is tallied to determine whether the 5% level is exceeded. For example, the value of 2012 U.S. agricultural production was notified to the WTO as $396.6 billion. The 5% threshold for non-product-specific support was calculated as $19.8 billion. The United States notified outlays of $309.3 million for non-product-specific support in 2012. As a result, the entire $309.3 million was exempted from inclusion under the AMS limit. These provisions are known as the so-called de minimis clause. To reiterate, it is not enough to determine whether a single amber box measure (i.e., one not classified as either green or blue) by itself may be beneath the 5%-of-production-value trigger. Its level of support must be added to the support provided by other non-exempt (amber box) measures. If the cost of any particular measure effectively boosts the total support above 5%, then all such support must be counted toward the U.S. total annual AMS. Finally, all support that fails to qualify for an exemption is added for the year. If total U.S. AMS does not exceed $19.1 billion, the WTO commitment is met. The 2014 farm bill includes a provision, Section 1601(d), that serves as a safety trigger for USDA to adjust program outlays (subject to notification being given to both the House and Senate agriculture committees) in such a way as to avoid breaching the AMS limit ( Figure 1 and Figure 2 ). Through 2012, the most recent year for which the United States has made notifications to the WTO, the United States has never exceeded its AMS limit. The closest approach was in 2000, when the United States notified a total AMS of $16.8 billion. An additional consideration for WTO compliance—the SCM rules governing adverse market effects resulting from a domestic farm support program—comes into play when a domestic farm policy effect spills over into international markets. This is particularly relevant for the United States because it is a major producer, consumer, exporter, and/or importer of most major agricultural commodities, but especially of temperate field crops (which are the main beneficiaries of U.S. farm program support). If a particular U.S. farm program is deemed to result in market distortion that adversely affects other WTO members—even if it is compliant with all AoA commitments and agreed-upon spending limits—then that program may be subject to challenge under the WTO dispute settlement procedures (Brazil's WTO case against U.S. cotton programs is a prime example of this). The AoA's structure of varying spending limits across the amber, blue, and green boxes is intentional. By leaving no constraint on spending in the green box while imposing limits on AMS spending, the WTO implicitly encourages countries to design their domestic farm support programs to be green-box-compliant. Negotiations to further reform agricultural trade within the context of the WTO—referred to as the Doha Round of multilateral trade negotiations—began in 2001. They are not expected to be completed in the near future. As lawmakers consider policy options, other countries will be evaluating not only whether, in their view, these options will comply with the U.S. commitments under the AoA, but also how they reflect on the U.S. negotiating position in the Doha Round of talks. The U.S. objective is for negotiations to result in substantial reductions in trade-distorting support and stronger rules that ensure that all production-related support is subject to discipline, while preserving criteria-based ""green box"" policies that can support agriculture in ways that minimize trade distortions. At the same time, Congress might seek domestic farm policy measures that it can justify as AoA- and SCM-compliant. The last U.S. notification to the WTO was made on December 8, 2014, for the 2012 marketing year and the farm programs of the 2008 farm bill. Following are examples of how various U.S. domestic policies were classified in that notification, along with the associated values. Green Box Policies ($127.5 Billion) The United States notified $127.5 billion in green box outlays, including outlays under the following programs ( Figure 4 ). General Services ($10.3 Billion) State programs for agriculture ($2.4B) Risk Management Agency (RMA) total costs ($1.5B) including: 1. Risk Management Agency (RMA) administrative costs ($0.08B) 2. RMA A&O reimbursements ($1.4B) 3. RMA underwriting gains ($0.0B) Farm Service Agency (FSA) & Natural Resources Conservation Service (NRCS) ($1.0B) Agricultural Research Service ($1.2B) Animal and Plant Health Inspection Service (APHIS) programs ($1.1B) National Institute for Food and Agriculture (NIFA) programs ($1.4B) Food Safety and Inspection Service (FSIS) meat and poultry inspection ($1.0B) Agricultural Marketing Service (AMS) ($0.3B) National Agricultural Statistics Service (NASS) ($0.164B) Economic Research Service (ERS) ($0.08B) Grain Inspection, Packers and Stockyards Administration (GIPSA) ($0.04B) Trade Adjustment Assistance for Farmers (TAA for Farmers) ($0.04B) Domestic Food Aid ($106.8 Billion) Supplemental Nutrition Assistance Program (SNAP) ($80.4B) Child nutrition programs ($18.3B) Special supplemental food program for women, infants, children (WIC) ($6.8B) Section 32 food purchases ($0.8B) Other food assistance programs ($0.4B) Decoupled Income Support ($4.8 Billion) Direct payments ($3.8B) Tobacco quota buyout payments ($1.0B) Payments for Relief from Natural Disasters ($0.344 Billion) Non-insured crop disaster assistance program (NAP) payments ($0.342B) Structural Adjustment Through Investment Aids ($0.135 Billion) Farm credit programs ($0.131B) Environmental Payments ($5.2 Billion) Conservation Reserve Program (CRP) payments ($1.8B) Environmental Quality Incentives Program (EQIP) ($1.4B) Conservation Stewardship Program ($0.9B) Wetland Reserve Program ($0.6B) Farmland Protection Program ($0.145B) Grassland Reserve Program ($0.065B) Blue Box Policies ($0) The United States has not notified any payments under the blue box since 1995 (the first year of WTO notifications). In that year, U.S. blue box notifications consisted entirely of target-price deficiency payments, which ended with 1996 farm law ( P.L. 104-127 ). De Minimis Exclusions ($5.3 Billion) Product-specific de minimis exclusions totaled $5.0 billion in 2012, including certain federal subsidies for commodity-specific crop insurance premiums that were below 5% of the value of production for those specific commodities. Non-product-specific de minimis exclusions of $0.3 billion in 2012 were well below 5% of the total value of U.S. agricultural production of $396.6 billion. Amber Box Policies ($6.9 Billion) Prior to the d e m inimis exclusions, U.S. amber box notifications totaled $12.1 billion, including $11.8 billion of product-specific outlays and $0.3 billion of non-product-specific outlays. However, $5.0 billion in product-specific support and all non-product-specific support of $0.3 billion were exempted from the AMS limit under the d e m inimis exclusions, leaving $6.9 billion in amber box support subject to the $19.1 billion limit. Product-Specific Support ($11.8 Billion) Commodity-specific crop and revenue insurance subsidies ($7.0B) Dairy price support ($2.9B) Sugar price support ($1.5B) Milk Income Loss Contract (MILC) ($0.4B) Marketing loan benefits, including gains from repaying marketing loans at less than the loan rate and loan deficiency payments ($0.0B) Commodity loan-related interest subsidies ($0.087B) Special cotton marketing payments ($0.060B) Average Crop Revenue Election (ACRE) program ($0.003B) Disaster Assistance Programs LIP, LFP, ELAP, and TAP ($0.0B) Non-Product Specific Support ($0.3 Billion) Irrigation subsidies in western states ($0.167B) Grazing programs ($0.054B) Renewable Energy for America Program (REAP) ($0.068B) Biomass Crop Assistance Program (BCAP) ($0.0B) Supplemental Crop Revenue Assurance (SURE) program ($0.0B) Counter-cyclical payments ($0.0B)","Omnibus U.S. farm legislation—referred to as the farm bill—is renewed every five or six years. Farm income and commodity price support programs have been a part of U.S. farm bills since the 1930s. Each successive farm bill usually involves some modification or replacement of existing farm programs. A key question likely to be asked of every new farm proposal or program is how it will affect U.S. commitments under the World Trade Organization's (WTO's) Agreement on Agriculture (AoA) and its Agreement on Subsidies and Countervailing Measures (SCM). The United States currently is committed, under the AoA, to spend no more than $19.1 billion annually on those domestic farm support programs most likely to distort trade—referred to as amber box programs and measured by the aggregate measure of support (AMS). The AoA spells out the rules for countries to determine whether their policies—for any given year—are potentially trade-distorting, and how to calculate the costs. An additional consideration for WTO compliance—the SCM rules governing adverse market effects resulting from a farm program—comes into play when a domestic farm policy effect spills over into international markets. The SCM details rules for determining when a subsidy is ""prohibited"" (e.g., certain export- and import-substitution subsidies) and when it is ""actionable"" (e.g., certain domestic support policies that incentivize overproduction and result in significant market distortion—whether as lower market prices or altered trade patterns). Because the United States is a major producer, consumer, exporter, and/or importer of most major agricultural commodities, the SCM is relevant for most major U.S. agricultural products. As a result, if a particular U.S. farm program is deemed to result in market distortion that adversely affects other WTO members—even if it is within agreed-upon AoA spending limits—then that program may be subject to challenge under the WTO dispute settlement procedures. Designing farm programs that comply with WTO rules can avoid potential trade disputes. Based on AoA and SCM rules, U.S. domestic agricultural support can be evaluated against five specific successive questions to determine how it is classified under the WTO rules, whether total support is within WTO limits, and whether a specific program fully complies with WTO rules. 1. Can a program's support outlays be excluded from the AMS total by being placed in the green box of minimally distorting programs? 2. Can a program's support outlays be excluded from the AMS total by being placed in the blue box of production-limiting programs? 3. If amber, will support be less than 5% of production value (either product-specific or non-product-specific) thus qualifying for the de minimis exclusion? 4. Does the total, remaining annual AMS exceed the $19.1 billion amber box limit? 5. Even if a program is found to be fully compliant with the AoA rules and limits, does its support result in price or trade distortion in international markets? If so, then it may be subject to challenge under SCM rules.",govreport
"Three need-based student financial aid programs authorized under Title IV of the Higher Education Act of 1965 (HEA)—Federal Supplemental Educational Opportunity Grant (FSEOG) program, the Federal Work-Study (FWS) program, and the Federal Perkins Loan program—are collectively referred to as the ""campus-based"" programs. These programs are considered campus-based because federal funds are awarded directly to institutions of higher education (IHEs) that administer the programs and provide institutional funds to match the federal funds they receive for them. The campus-based programs are unique in that the mix and amount of aid awarded to students are determined according to institution-specific award criteria, rather than according to non-discretionary award criteria such as those applicable to Pell Grants and Direct Loans. The campus-based programs' authorizations of appropriations, along with many other provisions under the HEA, expired at the end of FY2015. The FSEOG and FWS programs have continued to be funded through annual appropriation bills, most recently through the Continuing Appropriations Act 2018 ( P.L. 115-56 ), which extended funding for the programs through December 8, 2017. The Perkins Loan program was amended and extended through FY2017 under the Federal Perkins Loan Program Extension Act of 2015 (Extension Act; P.L. 114-105 ). The Extension Act prohibits future appropriations for the Perkins Loan program and prohibits an automatic extension of it under the General Education Provisions Act (GEPA; P.L. 90-247, as amended). The campus-based programs are among the oldest of the federal financial aid programs. As federal aid has largely transitioned to a system that allows for ""portability"" in receipt of student aid, meaning that most forms of aid are made available to students at whichever participating institution a student chooses to attend, the campus-based programs have come to play a relatively smaller role in the federal student aid effort. For example, of the approximately $125 billion of federal aid that was made available to students through programs authorized under the HEA in FY2016, 76% was through the Direct Loan program, 21% through the Pell Grant program, and 2% through the campus-based aid programs. The HEA authorizes most of the federal programs that provide direct financial aid to postsecondary students. As lawmakers consider reauthorization of the HEA, several issues related to the campus-based programs may be considered. These include the extent to which the campus-based programs provide types of aid to students that are not provided via other postsecondary aid programs, whether the current formula for allocating funds to institutions is optimal, and the potential role of the campus-based aid programs in a redesigned federal aid system. Provisions specific to each program, such as requirements for community service under FWS and terms and conditions of Perkins Loans, are also likely to be considered. This report begins with a brief discussion of the history of each of the campus-based programs and the formula used to allocate funds among IHEs participating in them. This is followed by a discussion of institutional and student participation in the programs relative to participation in other federal aid programs. The report concludes with a discussion of issues related to the campus-based programs that might garner attention as the 115 th Congress considers reauthorization of the HEA. For a more complete description of the campus-based programs and trends in participation, refer to CRS Report RL31618, Campus-Based Student Financial Aid Programs Under the Higher Education Act . The campus-based aid programs were among the first of the federally funded student aid programs. Each of the programs was designed to increase access to higher education for students who demonstrated financial need. This section of the report discusses the history of each program and the formula for allocating funds to the institutions. The Federal Perkins Loan program is the oldest of the campus-based aid programs. It was originally enacted under Title II of the National Defense Education Act of 1958 (NDEA; P.L. 85-864), and was established in part as a response to the space-race between the United States and the Soviet Union and concerns over national security. The program authorized participating IHEs to award low-interest rate loans (fixed at 3%) to undergraduate, graduate, and professional students who were enrolled full-time and who demonstrated financial need. These loans were originally known as National Defense Student Loans (NDSLs), and were later known as National Direct Student Loans. When selecting award recipients, IHEs were required to give ""special consideration"" to those students who demonstrated ""superior academic backgrounds"" in mathematics, science, engineering, or modern foreign language, or who intended to teach in any elementary or secondary school. NDSL loan amounts, which were also determined by the IHE, could not exceed $1,000 in any academic year or $5,000 over the student's entire postsecondary education career. Loan repayments were deferred for as long as the student attended the institution full-time and for up to three years while the borrower served in the military. Borrowers who worked full-time as teachers in a public elementary or secondary school could have 50% of their loan principal and interest repayments cancelled. Repayments were also cancelled for borrowers who died or became permanently and totally disabled. The program was incorporated into the HEA through the Education Amendments of 1972 (P.L. 92-318) and was later renamed the Federal Perkins Loan program by amendments made through the Higher Education Amendments of 1986 ( P.L. 99-498 ). When originally enacted, the appropriations for the program were authorized through FY1966. Funds for the program were allocated to participating institutions as a Federal Capital Contribution (FCC) that could not exceed $250,000 during any fiscal year. Institutions were required to provide an institutional capital contribution (ICC) of at least $1 for each $9 the IHE received in FCC. After FY1966, it was hoped the program would become self-sustaining because institutions would be required to use repayments on loans awarded to students before 1966 to fund loans in future years. The idea was that funds from loan repayments would provide sufficient amounts, without additional FCCs, for loans to future students. However, the number of postsecondary institutions participating in the program grew, and the number of students receiving Perkins Loans increased faster than most institutions could build up loan funds. Thus, the Perkins Loan FCCs continued to be provided beyond FY1966 and were last provided in FY2004. The NDEA also required that the Commissioner of Education reimburse institutions for Perkins Loans cancellations for students engaged in public service. Initially, funding for the loan cancellation reimbursements was taken from appropriations designated for Perkins Loan FCCs. However, under the 1972 amendments to the HEA, the loan cancellation reimbursement provisions were amended to require that funds for the reimbursement of Perkins Loan cancellation be appropriated under an authorization separate from that for funds for Perkins Loan FCCs. Funding for Perkins Loan cancellations was last provided in FY2009. In subsequent years after the original enactment of the program, several notable revisions were made to the program itself and loans provided through it, including the following: the requirement that institutions give special consideration to students in certain majors when selecting award recipients was repealed; the ICC was increased to require that institutions eventually provide $1 for every $3 in FCC; the loan cancellation and deferment provisions were amended and expanded; students attending an IHE on a less than full-time basis were deemed eligible to receive a loan; institutions were permitted to use a portion of the Perkins allocation to cover the costs of administering the program; institutions were required to make loans first to students with exceptional need; interest rates were gradually increased to 5%; and the annual loan limit on Perkins Loans was gradually increased to $5,500 for undergraduate students and $8,000 for graduate students. The authorizations of appropriations for the Secretary of Education (the Secretary) to make new FCCs to institutional revolving loan funds and for IHEs to award new Perkins Loans to students expired at the end of FY2014. However, Section 422 of GEPA automatically extended the programs' authorizations through FY2015. On October 1, 2015, the program's operations were significantly curtailed. Several months later, Congress passed The Extension Act, which extended IHEs' ability to make new Perkins Loans to eligible graduate students through October 1, 2016, and to eligible undergraduate students through September 30, 2017. The Extension Act prohibits additional appropriations beyond FY2015 for the purpose of enabling the Secretary to make new FCCs. It also prohibits an automatic extension of the program under GEPA. In addition, the Extension Act amended several Perkins Loan program provisions relating to student eligibility to receive new Perkins Loans and the distribution of Perkins Loan fund assets upon the program's conclusion. The Federal Work-Study (FWS) program is the second oldest of the campus-based programs. It was originally authorized as the College Work Study program under the Economic Opportunity Act of 1964 (P.L. 88-452). The purpose of the program as originally enacted was: to stimulate and promote the part-time employment of students in institutions of higher education who are from low-income families and are in need of the earnings from such employment to pursue courses of study at such institutions. The law authorized two types of student employment: on-campus work at the IHE and off-campus work for a public or private organization. The law further required that the off-campus work be related to the student's educational interest or serve a public interest. IHEs that participated in the original work study program were required to provide an institutional match of 10% for the initial year of the program and 25% each subsequent year. The program was incorporated into the HEA in 1968, and the institutional match was changed to 20%. Several notable revisions were made to the FWS program through subsequent amendments to the HEA, including the following: The Job Location and Development program was created, allowing institutions to use a portion of their FWS allocation to locate and develop off-campus student jobs. The Work Colleges program was created to support comprehensive work-learning-service programs at select institutions called ""work colleges."" The purpose of the FWS program was amended to include community service as an explicit purpose, and institutions were required to use at least 5% of their Work-Study allocation for community service. Under current law, institutions are required to use at least 7% of their FWS allocation for community service. In meeting the 7% requirements, institutions must ensure that they are operating at least one tutoring or family literacy project in service to the community.The institutional match was increased to 25% for most FWS jobs. Title IV of the Higher Education Act of 1965 authorized Education Opportunity Grants, the predecessor to the current Federal Supplemental Educational Opportunity Grant (FSEOG). The purpose of the program was to assist students with exceptional financial need in attending institutions of higher education. Under the Higher Education Amendments of 1972 (P.L. 92-318), the program was extended and renamed as the FSEOG program, serving as a supplement to the Basic Educational Opportunity Grant program (BEOG) (later renamed the Pell Grant program). As originally enacted, the purpose of the FSEOG program was: to provide, through institutions of higher education, supplemental grants to assist in making available the benefits of postsecondary education to qualified students who, for lack of financial means, would be unable to obtain such benefits without such a grant. The law required that institutions give priority first to students who received financial aid under the Pell Grant program, and then to students with exceptional need who did not receive a Pell Grant award. The minimum award amount was $200 and the maximum amount was $1,500. Students could receive no more than $4,000 in total aid over a four-year period. In order to participate, students had to be undergraduate students enrolled at least half-time and could not have previously received a bachelor's degree. In subsequent years, many of the original provisions of the FSEOG were maintained; however, there have been a few notable revisions to the program. Under the Higher Education Amendments of 1986 ( P.L. 99-498 ), the following revisions were made: For the first time, institutions were required to match federal funds received. Under the 1986 amendments, institutions were required to provide at least 5% of funding for award year (AY) 1989-1990; at least 10% for AY1990-1991; and at least 15% in AY1991-1992 and each succeeding year. Students enrolled less than half-time were deemed eligible to receive awards. The award limits were changed to their current minimum level of $100 and maximum level of $4,400. Institutions were required to provide a nonfederal share of 25% of total FSEOG funds. Students participating in study abroad programs were deemed eligible to receive awards. When each campus-based aid program was originally authorized, funds for it were allocated to institutions using a two-stage, state distribution formula. First, funds were allocated to each state based on the population of students in the state. In the second stage, funds received by each state were sub-allocated to IHEs within the state based on the financial need of the IHE's students. In order for an IHE to receive a share of the state allocated funds, it was required to submit an application of the projected financial need of its students to a regional panel, which then reviewed the application and determined the amount of funding each IHE would receive. In the mid-1970s, the panel review process was criticized as too complex, time consuming, and inequitable. As a result, a panel of experts was brought together to recommend new allocation procedures. Over time, the procedures recommended by the panel have been slightly modified; however, the same basic structure still remains. Under the current formula, funds for each of the campus-based programs are allocated to IHEs through a two-stage process. Although allocation procedures for each of the programs vary somewhat from one another, they share a basic framework. First, each participating IHE is allocated a base guarantee (discussed below), which in most cases is equal to a portion of the amount of program funds it received in prior award years. In the second stage, any funds that are remaining after the allocation of base guarantees are allocated to institutions according to formula-based procedures. This is known as the fair share (discussed below). If an IHE's fair share is greater than its base guarantee, it has a shortfall in funding and is eligible to receive additional funding—a fair share increase—to help reduce the shortfall between its base guarantee and its fair share. If an institution's base guarantee is greater than its fair share, it receives only the base guarantee amount. The sum of the IHE's base guarantee and fair share amount accounts for nearly all of the IHE's allocation. Under the current formula, an IHE's base guarantee is determined based on the year it began participating in each of the campus-based programs. If an IHE participated in a particular program in FY1999, it receives a base guarantee equal to 100% of the sum of its FY1999 base guarantee and its FY1999 pro rata share. If an IHE began participation after FY1999 but is not a first- or second-time participant, it receives a base guarantee that is the greater of $5,000 or 90% of the amount it received in its second year of participation. For an IHE that is a first- or second-time participant, it receives a base guarantee equal to the greatest of (1) $5,000, (2) 90% of its allocation from its first year of participation, or (3) 90% of an amount proportional to that received by comparable institutions. For AY2016-2017, the total of the base guarantees allotted to IHEs comprised more than 60% of total amounts allotted under both the FSEOG and FWS programs. Given that the base guarantee is based on prior-year participation, it is often stated that the current allocation procedures favor long-term participants over new participants. More specifically, the base guarantee provides a funding advantage for institutions with a base guarantee that is greater than their fair share. Under each of the programs, any funds remaining from the annual appropriation after the allocation of base guarantees are allocated to IHEs for fair share increases according to formula-based procedures. The first step in the fair share allocation procedures involves determining each IHE's institutional need. While the calculation of institutional need differs slightly across programs, it is generally an expression of the relationship between the institution's average cost of attendance (COA) and the average expected family contribution (EFC) of students who attend it. For purposes of the campus-based programs' allocation procedures, an IHE's COA is calculated by first dividing the total tuition and fees received by the IHE by the total number of students in attendance at the institution, and then adding to that amount an allowance for living costs and books and supplies. In AY2016-2017, on a per-student basis, the living cost allowance was $11,370, and the books and supplies allowance was $600. For purposes of calculating institutional fair share amounts, each student at an IHE is assigned an EFC based on his or her dependency status and class level. A discussion of the EFC procedures is provided below. When the fair share formulas were developed, a uniform methodology was adopted (and is still used today) in which average EFCs are calculated for categories of students grouped by income bands and dependency status, in lieu of using actual EFCs of the students at each institution. This procedure was adopted, in part, because it could be administratively burdensome for institutions to collect and report EFCs for each student in attendance, and because it was presumed that students with the same dependency status and comparable incomes will have similar EFCs. In implementing the fair-share formulas, ED calculates average EFCs for students categorized into 14 income bands. Table 1 provides the income bands and EFCs for AY2017-2018. The income bands used in the Table of EFCs (shown in Table 1 ) are determined administratively by ED and have been adjusted only a few times since the formulas were first implemented. The last revision to the income bands occurred in 1994 for AY1995-1996. Institutions have flexibility to transfer funds between the campus-based programs in which they participate. They may transfer up to a total of 25% of their allotment under the Federal Perkins Loan program for use in the FSEOG and/or FWS programs. Institutions may transfer up to 25% of their allotment under the FWS program for use in the FSEOG and/or Federal Perkins Loan programs. Institutions may also transfer up to 25% of their FSEOG allocation for use in the FWS program. Work Colleges may transfer up to 100% of their Perkins Loan FCC or FWS allocation to their Work Colleges program. Institutions participating in the campus-based programs are also entitled to an administrative cost allowance (ACA) to cover the expenses of administering the programs. An institution's ACA is calculated as follows: 5% of the institution's first $2.75 million in campus-based expenditures; plus 4% of the institution's campus-based expenditures greater than $2.75 million and less than $5.5 million; plus 3% of the institution's campus-based expenditures in excess of $5.5 million. When calculating the ACA, institutions are required to include both federal and institutional expenditures. The ACA may be taken from the annual authorization the institution receives for the FSEOG and FWS programs and from the available cash on hand in its Perkins Loan funds. An institution can withdraw its ACA from any combination of the campus-based programs for which it disbursed funds to students during the award year. This section of the report discusses institutional and student participation in the campus-based programs relative to other federal aid programs. These data may be useful as Congress considers reauthorizing and/or amending the campus-based programs. In AY2016-2017 , approximately 6,733 postsecondary i nstitutions in the United States participated in Title IV programs authorized under the HEA . Approximately 56% of these institutions awarded FSEOG aid, 49% employed students in FWS, and 21% made loans under the Perkins Loan program. Table 2 provides the percentage of U.S. Title IV institutions that have participated in the campus-based programs over the last 10 years. From AY2007-2008 to AY2015-2016, there was an overall decline in the proportion of U.S. Title IV institutions that participated in the campus-based programs. In AY2016-2017, there was an uptick in participation in the FSEOG and FWS programs. In FY2015, nearly 12 million students received aid through Title IV federal student aid programs. Students who participate in the campus-based programs comprise a relatively small proportion of those participating in the federal student aid programs. In AY2015-2016, approximately 1.5 million students received aid through the FSEOG program; approximately 635,000 received aid through the FWS program; and approximately 422,000 received a Perkins Loan. The tables below present an analysis of the characteristics of campus-based aid recipients and the extent to which campus-based aid has assisted students in covering the cost of higher education. The analysis is based on data retrieved from the National Postsecondary Student Aid Study for AY2011-2012 (NPSAS:12), which is the most recent year for which the data are available. The analysis focuses exclusively on undergraduate students and explores some of the major factors that can account for variation in aid received, such as type of institution, dependency status, income, and cost of attendance. Table 3 provides the proportion of undergraduate students who received aid through the campus-based programs and through all federal student aid programs in AY 2011- 20 12 . Overall, 10% of undergraduate students received campus-based aid compared to 57% of undergraduate students who received any federal student aid. In terms of each campus-based program, 5% of all undergraduates received FSEOG awards, 5% received FWS awards, and 2% participated in the Perkins Loan program. Table 3 also shows that students attending a private nonprofit institution were much more likely to receive campus-based aid than students attending other sector schools. For instance, 28% of students attending private nonprofit institutions received some form of campus-based aid in AY2011-2012, while 10% of students attending public four-year institutions, 4% of students attending public two-year institutions, and 13% of students attending proprietary institutions received some form of campus-based aid in the same year. In terms of income, 16% of dependent students with incomes less than $20,000 received FSEOG, while 10% received FWS, and 4% received a Perkins Loan. Students attending institutions with high COAs were much more likely to receive a campus-based award than students attending institutions with lower COA. Finally, the average FSEOG award was $541, the average FWS award was $2,213, and the average borrowed Perkins loan amount was $1,824. The average award amount across all the campus-based programs was $1,676, while average total federal student aid was $8,233. Table 4 shows the average percentage of COA that was covered by aid received through each of the campus-based programs for recipients of such aid in AY2011-2012. In general, each of the campus-based programs covered less than 10% of COA for campus-based aid recipients. A few notable exceptions were campus-based aid recipients attending public two-year or less than two-year institutions, whose average FWS award covered 22% of their COA, and independent students with incomes between $20,000 and $40,000, whose average FWS award covered 16% of their COA. Over the past few decades, there has been growing interest in reforming aspects of federal student financial aid programs so that students and parents may be better served. Some policy options that have been suggested include simplifying the student aid programs, increasing transparency with regard to how aid is awarded and the amounts that likely may be received by students and prospective students, targeting aid to the student populations with the highest levels of financial need, and linking financial aid eligibility to measures of programmatic or institutional quality. The discussion around redesigning federal aid has brought to light a number of considerations pertaining to the future of the campus-based programs. For instance, the President's FY2018 budget proposes to eliminate the FSEOG program, allow for the wind-down of the Perkins Loan program to occur, and decrease funding for the FWS program by nearly half of its current level. In debating HEA reauthorization, Congress may consider a number of issues related to the campus-based programs, including the extent to which they serve a distinctive purpose that sets them apart from other federal aid programs and whether the formula for allocating funds to institutions is optimal. Other program specific issues are also likely to be considered during reauthorization. Several topics that may garner attention are discussed below. When the campus-based programs were created, they were designed to provide students who demonstrated financial need with aid to help meet the costs of postsecondary education. The programs now operate amidst a host of other financial aid programs and tax benefits that are available for postsecondary students. The other federal student financial aid programs and benefits generally make available ""portable aid,"" which allows students to shop among institutions that participate in the federal student aid programs. These programs are characterized by having statutorily specified methods for determining the levels of assistance available to students. In contrast, under the campus-based programs, federal funds are first allocated to IHEs, which are afforded some discretion with regard to the awarding of aid among eligible students. Possibly because of this difference in approach, debate sometimes surfaces about whether it is optimal to sustain a smaller set of federal student aid programs through which aid may be awarded in a different manner than most other federal student aid programs. Given the complexities of the federal student aid system, some have proposed eliminating one or more of the campus-based programs that could be considered to be duplicative of or overlapping with other aid programs. These proposals sometimes identify the FSEOG program and the Perkins Loan program as candidates for elimination. In considering whether overlap may exist, it can be noted that when making FSEOG awards, IHEs are required to give priority to Pell Grant recipients. Hence, it can be argued that the FSEOG program serves a student population similar to that of the Pell Grant program. This line of thought suggests that once an aggregate amount of grant aid is determined to be made available to students at the federal level, a more streamlined approach might be to disburse the aid through only one program. In AY2011-2012, the most recent year for which data are available, 99% of FSEOG recipients had also received a Pell Grant. Similar arguments can be made in relation to the Perkins Loan program. There are several federal loan programs available for students, and many offer terms that are similar to those offered by the Perkins Loans. For example, during AY2017-2018 the interest rate on Direct Subsidized Loans and Direct Unsubsidized Loans being disbursed to undergraduate students is 4.45%, which is 0.55 percentage points lower than the 5% interest rate on Perkins Loans. In addition, no interest accrues on Direct Loans or Perkins Loans while the student is enrolled in school. If individual borrowing limits would not be adversely affected, it could be argued that streamlining loan programs may be advantageous for students from a transparency standpoint and streamlining may simplify IHE administrative work and loan servicing. There have been proposals in recent years to eliminate or wind down the FSEOG and/or Perkins programs. Some legislative proposals, and proposals forwarded by groups, researchers, and organizations outside of Congress, have promoted adoption of a one-grant, one-loan approach to federal student aid. Simplification is an aim under such proposals, and it is seemingly assumed that the FWS program would be the only remaining campus-based program. Eliminating the FSEOG and Perkins Loan programs could support the goal of simplifying the federal aid programs, which could help students to navigate the different forms of aid available to them more easily. It could also reduce the burden on financial aid administrators at institutions by reducing the number of aid programs the institutions have to administer. Should the consolidation or elimination of programs be pursued, one policy question to be addressed might be whether the aggregate amount of aid made available to individual students should be affected by a new aid configuration consisting of fewer programs. Another policy question might be whether an effort to eliminate and/or consolidate programs could lead to budgetary savings. Proponents of the campus-based programs note that despite the similarities that exist between them and some of the other federal student aid programs, the campus-based programs are unique in some important ways. For instance, institutions participating in the programs are required to provide a partial match of the federal funds received. The institutional match means that more aid is made available to students for each federal dollar provided. With regard to the Perkins Loan program, the requirement that institutions make capital contributions to the funding of Perkins Loans means that institutions incur a financial risk when they lend to student borrowers. By being required to contribute some of their own funds to the capitalizing of Perkins Loans, institutions may have more incentive to ensure that students repay their Perkins Loans because the institution suffers a loss of its own funds if borrowers do not repay their loans. If one or more of the campus-based programs were eliminated, students could lose access to the aid currently made available through them. Students could also become eligible to receive a lower total amount of aid. This could occur under a new aid configuration if amounts of aid currently available through campus-based programs were not made available through another source. If the campus-based programs were eliminated, institutions might also lose the flexibility in awarding aid to help meet students' need that is available to them under the campus-based programs. An argument could be made that financial aid administrators are uniquely situated to determine which students could benefit the most from some types of aid such as campus-based aid. A counterpoint to this is that institutions allocate aid in different ways, not all of which target students with the highest level of need to the same degree, and that statutory specification of targeting procedures for the other student aid programs allows for consistency in targeting and alignment with congressional priorities. Some limitations of the campus-based aid approach are the lack of portability of the aid and more-limited availability of campus-based aid funds. The amount of campus-based aid available to students at an IHE is affected by the institution the student attends and the funding it receives, which is based on annual appropriations and a statutorily defined formula that allocates a substantial portion of funding among IHEs largely based on amounts received decades ago, when the last major change to the funding allocation procedures was enacted. Institutions that receive a campus-based allocation are afforded some discretion in determining the mix and amount of aid to award to students. A student's eligibility for campus-based aid and potential award amounts thus depend in part on institution-specific award criteria. These features of the campus-based programs are unlike other portable federal aid programs, such as the Pell Grant and Direct Loan programs, under which aid availability is more certain. Students are generally entitled to receive an award, at levels determined by statutorily specified award rules, regardless of the school they attend, if the student and the school meet federal program eligibility requirements. Under the Pell Grant and Direct Loan programs, fund availability to make awards is not dependent on how a school fares in an allocation formula. Additionally, institutions have no discretion in selecting which students to award Pell Grants and limited discretion regarding whether to originate a Direct Loan or adjust data inputs that may be used to determine the amount of Direct Loans for which a student is eligible. In this way, the Pell Grant and Direct Loan programs operate as entitlement programs, whereas campus-based aid is heavily dependent on institutional discretion and appropriations. Another issue that is likely to be considered during HEA reauthorization is whether the formula for allocating funds to institutions that participate in the campus-based programs is optimal. While the processes for allocating funds differ for each program, they are all similar in that a portion of the program funds are allocated to an institution based on the amount of funds it received in a prior year (base guarantee), and a portion is based on each institution's fair share of unmet need. A criticism of the campus-based funding formula is that the base guarantee, which accounts for more than 60% of the FSEOG and FWS allocations, does not take into account current student demographics and need. As a result, funds are not distributed across institutions based primarily on student need. Some have also argued that the current allocation procedures favor long-term IHE participants over new participants, as institutions are first allocated funds according to their base guarantee, which is largely a function of duration of institutional participation. There is also concern that campus-based aid may not be adequately targeting low-income students. Under current law, institutional need is generally an expression of the relationship between average COA and average EFC of an IHE's eligible students. The use of COA when calculating need has resulted in a tendency for high-cost IHEs to have higher levels of need per student than low-cost IHEs. In addition, while the uniform methodology for determining EFC (i.e., the income bands developed by ED) was intended to provide a fair way of determining institutional need, the income bands have not kept up with inflation. Therefore, the EFC categories may not provide an accurate reflection of an individual student's EFC, and thus may not accurately reflect an institution's fair share need. There have been a number of proposals to change the formula for allocating campus-based funds to institutions. While the proposals differ in their approach, a common goal shared across several of them is to allocate funds using a formula that is more reflective of current student demographics and financial need. Some proposals would target funds to institutions that demonstrate positive student outcomes and some would prioritize allocating funds to IHEs enrolling high numbers of low-income students. Some examples of recommended changes to the formula include the following: eliminate the base guarantee and allocate all funds based on need; reconstruct the income bands for determining EFC; develop a need calculation that places greater emphasis on the economic circumstances of students served by the IHE (for example, need could be calculated based on the dollar amount of Pell Grants awarded at the IHE); target funds to institutions based on outcome metrics of students, such as graduation rates; and limit student eligibility to participate in the FWS programs to undergraduate students. A number of issues specific to particular campus-based programs might also be considered during reauthorization; examples are discussed in this section of the report. One issue that could be considered is whether FSEOG funds can be better targeted to low-income students. During the 1972 reauthorization of the HEA, the Pell Grant program was created as a way of increasing portability in student aid. The FSEOG program was then retained to serve as a supplement to the Pell Grant program. Under current law, IHEs are required to give priority to Pell Grant recipients when awarding FSEOG; however, financial aid administrators are afforded discretion in determining the amount of aid that students receive. Congress could consider amending FSEOG award rules so that FSEOG funds are only awarded according to statutorily specified targeting preferences. A few issues pertaining to the FWS program could be considered during reauthorization. One is whether community service should continue to be an explicit purpose of the program. Currently, institutions are required to use 7% of their FWS allocation to compensate students employed in community service. Some have argued that the 7% requirement may be too difficult for some institutions to meet. Institutions may request a waiver from the community service requirements. However, the Department of Education (ED) has determined that the fact that it may be difficult for a school to comply with the requirements is not, in and of itself, a basis for granting a waiver. Congress could consider altering or eliminating the community service requirement or redefining what types of employment constitute community service. Another issue is whether employment provided through the FWS program should be more closely linked with students' career or education goals. HEA Section 443 requires that institutions, to the maximum extent practicable, ensure that FWS employment ""complement[s] and reinforce[s] the educational program or vocational goals"" of each FWS student participant. Currently, there is no ongoing evaluation of the FWS program. The last national study of it was completed in 2000, and 27% of institutions were able to report the extent to which the FWS jobs related to a student's academic program. Of the institutions that reported data, an average of 51% of FWS students worked in academically related jobs. A related issue is whether student participation in FWS adversely affects students' academic performance and ability to complete postsecondary education. The FWS study from 2000 found that less than 10% of FWS students felt that their job had a negative effect on their academic performance. More-recent research on the effects of the FWS program on student academic performance has generated mixed results. In addition, the research has a number of methodological limitations and does not provide a national view of student participants. Ongoing evaluation of the FWS program could provide federal policymakers with a better sense of the extent to which FWS employment supports students' career interests. It could also help to identify the extent to which populations of students may experience any adverse effects on their academic performance. The authorization for IHEs to make new Perkins Loans expired on September 30, 2017. A few institutional and student issues related to the wind-down of the Perkins Loan program may be considered prior to or during HEA reauthorization. Additionally, Congress may consider proposals to extend the Perkins Loan program again, as well as proposals to incorporate certain features of the Perkins Loan program into the Direct Loan program or another federal student loan program. Upon the expiration of the authorization to make new Perkins Loans under the program, institutions are required to begin the process of distributing the assets of their Perkins Loan funds. Each participating IHE is required to return to the Secretary the federal share of its Perkins Loans funds and the federal share of payments and collections made on outstanding Perkins Loans. The federal share is equal to the amount of the loan fund balance that is proportional to ED's overall FCC as of September 30, 2017. IHEs may retain any remaining amounts (e.g., their ICCs). Under current regulations, when an IHE discontinues its participation in the Perkins Loan program, it is required to assign all loans with outstanding balances to ED. If an institution assigns its loans to ED, it relinquishes all rights to the loan, without recompense, (i.e., ED will not reimburse it for the institutional funds used to make the loan, and it will not receive any future payments made on the outstanding loans). ED has indicated that during the Perkins wind-down, IHEs have the option to assign Perkins Loans to ED or to continue servicing them. Prior to the expiration of the Perkins Loan program, institutions were allowed to use a portion of their Perkins Loan revolving fund to cover the administrative costs of servicing the loans. ED has indicated that during the wind-down, institutions will no longer be permitted to charge an administrative cost allowance against their Perkins Loan funds. Without the administrative cost allowance, some institutions might find it too costly to continue servicing the loans, and thus may decide to assign loans to ED and forgo future payments made on the outstanding loans. Another wind-down issue relates to IHEs reimbursement for previous or future loan cancellations. Under current law, ED is required to reimburse IHEs for their cancelled Perkins Loans. The law prohibits Perkins Loan cancellations from being funded through the appropriation for FCCs; thus, a separate authorization of appropriations is required for Perkins loan cancellations. An appropriation for the Perkins Loan cancellations reimbursements has not been provided since FY2009. ED has indicated that, based on the HEA's prohibition on using FCC funds to cover the cost for cancellation reimbursements, it will not consider unreimbursed cancellations when determining IHEs' FCC. As the program winds down, it is not clear if Congress will authorize funds for Perkins Loan cancellations or allow ED to consider the cancellations when calculating IHEs' FCC. Under the Extension Act, institutions are prohibited from making new loans as of September 30, 2017. However, if an eligible student received a disbursement prior to the expiration of the program for the award year, the student may receive any subsequent disbursements of that Perkins Loan through June 30, 2018. After all the Perkins Loan final disbursements are made, undergraduate students will lose access to aid currently made available under the Perkins Loan program. While the Direct Subsidized Loan has many terms and conditions that are similar to Perkins Loans terms and conditions, annual and cumulative loan limits on Direct Subsidized Loans prevent students from borrowing above a certain amount. Access to Perkins Loans provides students with additional borrowing capacity to help cover their COA. For example, in AY2011-2012, prior to amendments to the program made under the Extension Act, Perkins Loans covered an average of 6% of Perkins Loan borrowers COA. Without the Perkins Loan program, it is not clear whether students will be able to access other forms of aid that could cover the portion of COA currently covered by Perkins Loans. Whether there is a need to provide for additional borrowing capacity may be an issue that receives attention during reauthorization. In order to maintain the amount of aid that students could be eligible to borrow, Congress might consider extending the Perkins Loan program for a second time, either as a part of or independent from reauthorization. Extending IHEs' authority to make awards to undergraduate students could enable some students, at the discretion of the IHE, to borrow additional loans to help cover their COA. However, it is not clear what the cost would be to extend the program, and what, if any, offsets could be used to cover that cost. For instance, under the Extension Act, a grandfathering provision that would have allowed students to receive Perkins Loans until FY2020 was eliminated. Eliminating the grandfathering provision provided program savings that were used to offset the cost of the Extension Act. If the program were to be extended again, such offsets may not be available under the current Perkins Loan program provisions. In lieu of extending the program, some have suggested creating a new Federal Direct Perkins Loan program that would be managed by ED, with IHEs being given lending authority to make awards to students. These proposals recommend retaining the current interest rate and borrowing limits of Perkins Loans, but the terms and conditions of the loans would be based on those that are applicable for Direct Unsubsidized Loans. The key aim of such a program would essentially be to retain some of the features that currently exist in the Perkins Loan program, but also to place greater emphasis on encouraging IHEs to keep tuition low and rewarding IHEs for graduating Pell Grant recipients.","Three need-based student financial aid programs authorized under Title IV of the Higher Education Act of 1965 (HEA)—Federal Supplemental Educational Opportunity Grant (FSEOG) program, the Federal Work-Study (FWS) program, and the Federal Perkins Loan program—are collectively referred to as the ""campus-based"" programs. These programs are considered campus-based because federal funds are awarded directly to institutions of higher education (IHEs) that administer the programs and provide institutional funds to match the federal funds they receive for them. The campus-based programs are among the oldest of the federal student financial aid programs. As federal aid has largely transitioned to a system that allows for ""portability"" in receipt of student aid, meaning that most forms of aid are made available to students at whichever participating institution a student chooses to attend, the campus-based programs have come to play a relatively smaller role in the federal student aid effort. The campus-based programs' authorizations of appropriations, along with many other provisions under the HEA, were set to expire at the end of FY2014, and were automatically extended through FY2015 under Section 422 of the General Education Provisions Act (GEPA). The FSEOG and FWS programs have continued to be funded through annual appropriation bills, most recently through the Continuing Appropriations Act 2018 (P.L. 115-56), which extended the programs through December 8, 2017. The Perkins Loan program was amended and extended through FY2017 under the Federal Perkins Loan Program Extension Act of 2015 (Extension Act; P.L. 114-105). The Extension Act prohibits future appropriations for the Perkins Loan program and prohibits an automatic extension of it under GEPA. During consideration of reauthorization of the HEA, several issues related to the campus-based programs may be considered. These include the extent to which the campus-based programs provide types of aid to students that are not provided via other postsecondary aid programs, whether the current formula for allocating funds to institutions is optimal, and the potential role of the campus-based aid programs in a redesigned federal aid system. Provisions specific to each program, such as requirements for community service under FWS and terms and conditions of Perkins Loans, are also likely to be considered.",govreport
"Adults may go missing for a variety of reasons. In some cases, the disappearance of an individual may be a personal choice. However, adults may go missing as a result of a disabling condition, a natural catastrophe, or a crime such as an abduction and other instances when foul play is involved. Unlike children, adults have the legal right to go missing under most circumstances. As a result, families of missing adults may receive limited assistance from state and local law enforcement agencies in recovering their loved ones. Media attention to cases of missing adults—particularly seniors with dementia who have been found deceased after wandering from home either on foot or in a vehicle—has prompted policymakers to consider expanding the federal government's role in helping to recover vulnerable adults who go missing. Congress has recently proposed measures to assist in such recovery efforts. At the start of the 111 th Congress, the House passed legislation ( H.R. 632 ) to establish a grant program to encourage states to establish, expand, and coordinate alert systems for vulnerable adults who may go missing due to cognitive or physical disabilities, among other reasons. A companion bill ( S. 557 ) was introduced in the Senate on March 10, 2009. The proposed program is similar to a federal grant program that funds training and technical assistance for what are known as AMBER (America's Missing: Broadcast Emergency Response) Alert systems. Each state has developed an AMBER Alert system to enlist the support of law enforcement agencies and the public in recovering children who are believed to have been abducted. In response to the increased congressional focus on alert systems for missing adults, the Congressional Research Service (CRS) gathered data on existing state alert systems in 11 states. CRS conducted a review of state laws, regulations, or executive orders that established the systems, and contacted officials in the 11 states to learn more about how they are carried out. These systems were established beginning in 2006, and are administered by local and/or state law enforcement agencies. The systems are intended to alert law enforcement entities and/or the public that vulnerable adults are missing and may need assistance. Many states activate the alerts on behalf of targeted groups of individuals who may be at high risk of going missing, such as those persons with cognitive or mental impairment, including Alzheimer's and other forms of dementia, as well as persons with developmental disability. This report provides an overview of the alert systems in 11 states. It begins with background information on current federal efforts to recover missing adults, followed by a description of the methods CRS used to obtain data from each state identified as having an alert system. Subsequent sections of this report provide an overview of each state's alert systems, including (1) the legal authority to establish the systems; (2) the target population for the alerts; (3) administrative responsibility for the alerts, including coordination with AMBER Alerts; (4) training of law enforcement agencies and other entities about the alerts; (5) the process for activating alerts; (6) coordination of alerts with other states; (7) system costs; (8) use of the systems; and (9) any information about outcomes of the individuals who were believed to be lost and for whom alerts were activated. The last section of the report provides a discussion of issues for Congress to consider with respect to the federal role, if any, in developing state alert systems for missing adults. Individuals can go missing for a variety of reasons. They may become lost or disoriented due to a mental or cognitive impairment, developmental disability, or physical disability. Natural disasters, such as hurricanes or floods, may cause individuals to become displaced from their families and communities. Individuals may voluntarily go missing to escape domestic abuse, law enforcement, or for other reasons. Policymakers and advocates for the missing have identified persons with Alzheimer's disease and other forms of dementia as being particularly vulnerable to missing episodes. Increases in longevity among the older population and the aging of the baby boom generation have contributed to interest in establishing these systems. Wandering from home can be a frequent behavior that may pose a significant, sometimes life-threatening, danger to the well-being of those with Alzheimer's disease and other forms of dementia. According to the Alzheimer's Association, if not found within 24 hours, nearly 50% of those who wander risk serious illness or death. Illness or death may occur from exposure to the elements, lack of food or hydration for an extended period, and general inability of the individual to think, act, or communicate to gain assistance. While local and state law enforcement agencies are responsible for leading efforts to recover missing adults, in recent years the federal government has increasingly played a role in both helping to prevent certain types of missing adult incidents—particularly among vulnerable populations—and assisting in identifying and recovering those who go missing. The federal Missing Alzheimer's Disease Patient Alert grant assists in identifying missing individuals with Alzheimer's disease and other forms of dementia by funding what is known as Safe Return, a program administered by the Alzheimer's Association. Safe Return provides a MedicAlert bracelet or other form of identification to enrolled individuals. The identification indicates that the individual is memory impaired and includes a toll-free, 24-hour emergency response number to call if the person is found wandering or lost. As part of the program, the Alzheimer's Association provides support and referrals to caregivers of those enrolled in the program, and provides some training to law enforcement agencies about individuals with Alzheimer's disease. Authorization for the program has lapsed, but Congress has continued to appropriate funds. For each of FY2002 through FY2009 Congress appropriated between $800,000 and $2 million in funding. The Missing Alzheimer's Disease Patient Alert Program Reauthorization of 2009 ( H.R. 908 ), which was approved by the House on February 10, 2009, would amend the Violent Crime Control and Law Enforcement Act of 1994 to reauthorize the program through FY2016, and would revise program requirements to: (1) provide for competitive grants to nonprofit organizations to assist in locating missing patients with Alzheimer's disease and related dementia; (2) expand the program to include locating other missing elderly individuals; and (3) establish a preference in awarding grants to national nonprofit organizations that have a direct link to patients with Alzheimer's disease and related dementias and their families. Currently, grants may be awarded to only such organizations. Separately, Congress provided funding from FY2002 through FY2006 for the Kristen's Act grant program which provided funding for a national clearinghouse and resource center for missing adults generally. Federal funding for Kristen's Act grants ranged from a high of $1.7 million in FY2002, decreasing in each subsequent year to a low of $150,000 in FY2006. The National Center for Missing Adults (NCMA) was the sole recipient of the grant. NCMA continues to operate, with non-federal funds, and takes reports of persons who go missing under a variety of circumstances, including due to a diagnosed medical condition, mental illness or diminished mental capacity, Alzheimer's disease or dementia, or alcohol or substance abuse. NCMA adds profiles and pictures of missing persons to its website ( http://www.missingadults.org ), sends missing person flyers to the family and law enforcement, assists with press releases, helps generate or manage media attention, and maintains routine contact with the families of missing individuals. Authorization for Kristen's Act expired in FY2006. H.R. 632 , which passed the House on February 10, 2009, would reauthorize the grant at $4 million for each of FY2010 through FY2020. Companion legislation, S. 557 , was introduced in the Senate on March 10, 2008. In addition to funding the Kristen's Act grant, H.R. 632 would direct the Attorney General to establish a national ""Silver Alert communications network"" to assist regional and local search efforts for missing seniors, in coordination with states, local governments, and law enforcement agencies. The bill defines ""missing senior"" as any individual who is reported to, or identified by, a law enforcement agency as a missing person; and meets the requirements to be designated as a missing senior, as determined by the state in which the individual is reported or identified as a missing person. The bill further directs the Department of Justice (DOJ) to appoint a National Coordinator of the network to: (1) establish voluntary guidelines for states to use in developing alert programs to recover missing seniors; (2) develop protocols for recovering missing seniors and for notifying law enforcement agencies that a senior is missing; and (3) implement an advisory group to assist states, local governments, law enforcement agencies, and other entities involved in the network, among other activities. The bill authorizes such sums as necessary for these purposes. No time period is specified. In addition, H.R. 632 would authorize appropriations of $5 million annually for FY2009 through FY2013 for grants to states to develop and enhance Silver Alert plans. The grants would be distributed by DOJ on an equitable basis throughout the United States. The federal share of the grant would not exceed 50%. The focus of this report is on those state alert systems for missing adults. CRS sought to obtain detailed information from states about their alert systems to better inform Congress about their activities as well as analyze the similarities and differences among various state alert systems. In general, these alert systems are intended to rapidly disperse information about a missing person to law enforcement entities, and often the public. This type of alert system is different from the federally funded Safe Return program in that Safe Return maintains a database of individuals who have been pre-identified as being at risk of wandering due to Alzheimer's disease and related dementia and choose to enroll in the program. In the event that an individual enrolled in the Safe Return program does go missing, Safe Return can provide information and a physical description of the missing individual, which can assist family members in filing a missing persons report and help law enforcement agencies, regardless of whether the state has an alert system, in search and recovery efforts. Provided that the missing individual is wearing identification, Safe Return can also facilitate reuniting missing persons with their caregivers. Based on requests from some Members of Congress for information regarding the administration of alert systems for missing adults, CRS sought to identify states that were believed to have missing adult alert systems and contact those states to obtain further information. Using information from a variety of sources, including recent news articles, policy publications, and discussions with various stakeholders from organizations such as the Alzheimer's Association and Project Lifesaver International, Inc., CRS identified 11 states with alert systems for missing adults—Colorado, Delaware, Florida, Georgia, Kentucky, North Carolina, Ohio, Oklahoma, Rhode Island, Texas, and Virginia. CRS did not conduct a search of state statutes or survey all 50 states to determine whether each state had implemented an alert system for missing adults. Thus, the 11 identified states may not be an exhaustive list of all states with alert systems for vulnerable missing adults. For the 11 selected states, CRS reviewed authorizing legislation, executive orders, and regulations to obtain program data on these state alert systems. CRS also contacted officials in each of the states to obtain additional information. Based on key areas of interest in state alert systems for missing adults that have been expressed by some Members of Congress, CRS prepared a detailed list of questions for state officials covering the following attributes (see Appendix A for a copy of the questions submitted to state officials): 1. Legal authority—whether authority for implementation and administration of the alert system was established by the state through statute, executive order, and/or regulations. 2. Target population—information on the characteristics of those who may go missing and the population eligible to be the subject of an alert. 3. Administrative responsibility—the entity or entities responsible for implementation of and administering the alert system and any administrative coordination with the state's AMBER Alert program. 4. Training—any training provided to law enforcement agencies and other stakeholders on the use of the alert system. 5. Process for activating alerts—includes information on: eligible entities authorized to file an actionable missing persons report; criteria for activating an alert; communication mechanisms for disseminating the alert; target audiences; and duration of the alert. 6. Interstate coordination—any state protocols for alert systems to coordinate with other states when an eligible missing person is believed to have crossed state lines. 7. System costs—costs associated with implementing the alert system as well as any costs for ongoing administration of the system. 8. Use of the system—the history of utilization of the alert system including any available data on the number of alerts that have been activated. 9. Outcomes—any available data on: the characteristics of those missing individuals who are the subject of an alert; circumstances related to their disappearance; and outcomes related to any search and recovery efforts. Between September 2008 and March 2009, questions were electronically submitted to the state official identified by CRS as responsible for or most knowledgeable about the missing adult alert system in that state. All 11 states responded and, when necessary, CRS followed up with state officials for clarification. Officials provided varying levels of detail about their systems. For some states, CRS was unable to obtain information about the number of alerts activated and/or the costs associated with the alert system. Alert systems for vulnerable missing adults appear to be a recent but growing initiative. Among the 11 states CRS identified with active alert systems, Colorado and Georgia were the first to implement an alert system for missing vulnerable adults in 2006. Since then, nine other states have adopted the systems. Eight of the 11 states are in the South (Delaware, Florida, Georgia, Kentucky, North Carolina, Oklahoma, Texas, and Virginia), one state is in the West (Colorado), one state is in the Midwest (Ohio), and one state is in the Northeast (Rhode Island). See Figure 1 for a U.S. map with the 11 states identified by CRS as having missing adult alert systems. Table 1 provides a general overview of the alert systems implemented in the 11 states identified by CRS as having active programs. State alert systems were authorized either by law or executive order, with most states passing a law to create the alert system for missing adults. The administration of state alert systems for missing vulnerable adults appears to be a cooperative effort among state and local law enforcement agencies. These alert systems are intended to rapidly disseminate information to other law enforcement agencies and the public through various media outlets (e.g., television, radio, print media, lottery terminals, electronic highway signs, trucker alert systems) about a missing person by providing descriptive information about the missing person or vehicle, in the event a missing person is believed to be driving. For some states, the impetus for legislation to establish the alert system came as a result of public attention surrounding missing person investigations that involved adults with mental or cognitive impairment. Multiple states reported that they modeled their missing adult alert systems after their state AMBER Alert systems for abducted children. States indicated that while their alert systems for missing adults are similar to their AMBER Alert systems, AMBER alerts were more widely disseminated. Generally, the same state-level agencies administer or are involved in administering both alert systems, and in some cases, the two systems share one budget. Most states reported that training on the use of the alert system for missing adults is provided to state and/or local law enforcement agencies with some states providing education to the public and other stakeholders. States have defined their target population for their alert systems differently. Some states include age as a factor for activating an alert, such as the population age 65 and older. Other factors include whether the individual has a cognitive, physical, or developmental disability, or a severe mental health impairment. In general, the process for activating an alert begins with the local law enforcement agency taking a missing persons report (see Figure 2 ). In order for an alert to then be activated, entities at the local and state level, depending on the state's protocol, must ensure that the criteria for activating an alert have been met. States may require that certain individuals file a missing persons report in order to activate the alert system. In most states, verification that the individual has a mental or cognitive impairment can be through a family member, caregiver, or guardian. One difference among states with alert systems is the designated entity responsible for activating the alert. In six states, a lead state agency is responsible for activating alerts at the request of a local law enforcement agency. The remaining five states have localized models for the dissemination of alerts where the local law enforcement agency activates the alerts locally and/or regionally and may seek assistance from the state law enforcement agency to disseminate the alert statewide. In general, the entity responsible for activating an alert will disseminate the missing person's information to other law enforcement agencies and various media outlets to alert the public. When the public is alerted about the missing information, generally information is publicized on how to contact law enforcement with tips or information. Most states have some mechanisms in place for coordinating alerts with other states to recover individuals who were believed to have crossed state lines during their disappearance. Several states indicated there was no additional cost to implement the alert system or that implementation costs were absorbed by the existing budget for the AMBER alert program or another program. Some states provided data on the actual costs of operating the alert system. Data from these states estimated that the annual cost of operating an alert system was between $40,000 and $182,000. However, these estimates exclude costs to local law enforcement agencies or other stakeholders that may be involved in helping to administer the alert system. Ten out of 11 states reported having used the alert system, the exception being Delaware. Although some states reported no information about the number of alerts that have been activated, states that did report this information reported activating anywhere between one (Rhode Island) and 82 alerts (North Carolina) since implementation of their alert system. However, the number of alerts a state has activated is likely affected by how long the system has been active, the process and criteria for activating the alerts, the state's identified target population for the alert, and whether the system is generally accepted by law enforcement agencies and other stakeholders as a viable tool to assist in the recovery of missing vulnerable adults. Most states were able to provide information about the outcomes of recovery efforts for these missing persons with the majority of states reporting that individuals were found recovered, though almost every state reported at least one individual who was found deceased. States provided varying levels of detail about their alert systems. This section summarizes information provided by state officials, including (1) legal authority; (2) target population; (3) administrative responsibility; (4) training; (5) process for activating alerts; (6) interstate coordination; (7) system costs; (8) use of the system; and (9) outcomes. These attributes are described in tables for each state in Appendix B . Missing adult alert systems appear to be recent initiatives. Among the 11 states CRS identified, two states implemented their alert systems for missing adults in 2006, four states implemented alert systems in 2007, and five states implemented them in 2008. States that adopted these alert systems may have been more likely to be located near states that also have an alert system. In fact, Virginia state officials indicated that their alert system was developed as a result of similar efforts underway in other states. The majority of states with alert systems for missing adults derived their authority to establish the program from enacted law, with two exceptions. In 2006, Oklahoma created a Silver Alert program through a non-binding resolution adopted by the state House of Representatives. In 2008, Florida's governor signed an executive order to establish the state's Silver Alert Plan. In some cases, the impetus for legislation to establish the alert system came as a result of public attention surrounding missing person investigations that involved adults with mental or cognitive impairment. For example, Georgia's system was established in 2006 in response to a patient with Alzheimer's disease who went missing from her home in 2004. Ohio indicated that their system was developed in response to several incidents throughout the country, as well as elsewhere in Ohio, that involved missing older individuals or individuals with mental impairment. Other states indicated that the need to focus on the senior population as well as advocacy efforts on behalf of seniors was an important consideration for implementation of an alert system. Florida's executive order states that the senior population is growing and that the state needed to implement a standardized system to aid in the search of seniors who go missing. Colorado's authorizing law (S.B. 06-057) states that the program will aid in the recovery of missing seniors within the first few hours of their disappearance, a critical time frame for those with cognitive impairment. In general, state alert systems for missing adults are targeted at a vulnerable population of adults due to advanced age, cognitive, physical, or developmental disability, or a combination of age and disability. However, states have defined their target populations differently. Table 2 describes the target populations for state alert systems based on age and disability status. Four states (Colorado, Rhode Island, Texas, and Virginia) have alert systems that exclusively target older adults, defined as either 60 or 65 years of age or older with an ""impaired mental condition"" or ""cognitive impairment."" Florida and Ohio target older adults, but also provide conditions for activating alerts on behalf of missing younger adults. The remaining five states (Delaware, Georgia, Kentucky, North Carolina, Oklahoma) have alert systems that can be activated on behalf of adults of any age. In all states, alert systems for missing adults are activated on behalf of adults who are disabled due to a mental or cognitive impairment. At least three states activate alerts on behalf of persons with physical disabilities or with severe mental health conditions. Oklahoma activates alerts on behalf of adults with physical disabilities. Georgia will activate an alert for an adult with a developmental disability. And in addition to targeting missing seniors and persons with a disability, Delaware's alert system targets missing suicidal persons. Three states (Georgia, Ohio, and Virginia) provided language defining cognitive or mental impairment (see Table 3 ). Verification of a cognitive impairment or other disability is often included as part of the state's criteria for activating an alert (see discussion of Criteria for Activating Alert below). Six states (Delaware, Florida, Kentucky, North Carolina, Ohio, and Virginia) indicated that the reporting party attests to the missing person's condition and that this information is then verified by the investigating officer (no further information was provided about how the officer verifies the information). Other states (Oklahoma, Rhode Island, and Texas) require further documentation, such as prescription medications or medical records, in order to verify an individual's condition. Texas reported requiring documentation from a medical or mental health provider regarding the missing senior's condition. To verify an impaired mental condition in Colorado, family members must sign a statement stating that the missing person is mentally impaired. In Georgia verification that the individual has a cognitive impairment or other disability can be made through a family member, caregiver, or guardian, with no further verification by local law enforcement or additional documentation required. Administration of a state's alert system is often a cooperative effort among state and local law enforcement agencies. Statewide agencies in six states (Colorado, Georgia, North Carolina, Ohio, Rhode Island, and Texas) take the lead in administering the program and activate alerts at the request of a local law enforcement agency. For example, in North Carolina, the Center for Missing Persons within the state's Department of Crime Control and Safety activates alerts. In Texas, the Governor's Division of Emergency Management activates alerts; however, a local law enforcement agency also has the option of issuing an alert locally or regionally, if they are in area that has a regional alert program for missing seniors. Both Ohio and Texas reported having steering committees that provide guidance to the administering state agencies concerning the alert systems. The committees are comprised of local and state law enforcement agencies and other stakeholders. In four other states (Delaware, Kentucky, Oklahoma, and Virginia), the local law enforcement agency takes the lead in administering the program and activates the alert locally or regionally, but can also seek assistance from the state law enforcement agency to disseminate the alert statewide or coordinate the alert with other states, if necessary (see section on Interstate Coordination below). Similarly, local law enforcement agencies in Virginia will administer and activate alerts locally and can make requests to the Virginia State Police to activate an alert regionally or statewide. In Oklahoma, local law enforcement agencies administer and activate alerts but may seek assistance from the state's Department of Public Safety in order to disseminate an alert to multiple law enforcement agencies throughout the state. Finally, Florida's system of administration is somewhat different from the other states. The state's Silver Alert Plan is administered by the state Missing Endangered Persons Information Clearinghouse, within the Florida Department of Law Enforcement (FDLE). A Silver Alert is activated when the local law enforcement agency requests assistance from the Florida Department of Law Enforcement for an alert in multiple regions of the state via electronic highway signs. Alerts may be activated by the state only for persons who are believed to be driving and only alert the public through electronic highway signs and the FLDE website. Separately, local law enforcement agencies may activate a Silver Alert locally based on criteria established by the local law enforcement agencies. The 11 states provided information about coordination between their missing adult alert systems and AMBER Alert systems for abducted children. AMBER Alert systems are voluntary partnerships—between law enforcement agencies, broadcasters, and transportation agencies—to activate messages in a targeted area when a child is abducted and believed to be in grave danger (see Figure 3 ). Generally, states responded that the same state-level agency administers or is involved with both the AMBER alert and missing adult alert systems, and in some cases, the two systems share a budget. For example, Texas indicated that its Silver Alert Network and its AMBER Alert system are administered by the Governor's Division of Emergency Management, but operate as separate programs. Further, multiple states reported that they modeled their alert systems for missing adults after their AMBER Alert systems. States also reported that law enforcement agencies often disseminate the information to the public through various media using the same communication mechanisms. State officials identified two major distinctions between missing adult alert and AMBER alert systems. First, five of the states (Colorado, Delaware, Florida, Kentucky, and Texas) indicated that AMBER Alerts are more widely disseminated than alerts for missing adults. For example, Texas officials indicated that both the missing adult alerts and AMBER Alerts are distributed via the media and on billboards and lottery machines. However, AMBER Alerts in the state are additionally distributed through venues including the National Center for Missing and Exploited Children's Secondary Notification System, which notifies numerous stakeholders—law enforcement agencies, public service entities, internet and wireless providers, trucking companies, and others—about the missing child alert. Second, at least seven of the states (Colorado, Georgia, North Carolina, Ohio, Oklahoma, Texas, and Virginia) use emergency alert system (EAS) technology to report AMBER Alerts, and not alerts about missing adults. (Note that the states were not prompted to provide information about the EAS, and the other four states did not.) The EAS sends emergency messages to the public with the cooperation of broadcast radio and television and most cable television stations. The Federal Communication Commission (FCC) is designated by the Federal Emergency Management Administration (FEMA) to manage broadcaster involvement in EAS. The FCC currently provides technical standards and support for EAS, rules for its operation, and enforcement within the broadcasting and cable industries. According to the FCC, states and localities are not permitted to use the EAS to broadcast an alert about a missing adult. States provided varying levels of detail about the type of training and education law enforcement agencies and the public received about the state's alert system for missing vulnerable adults. Eight of the 11 states (Colorado, Delaware, Georgia, Ohio, North Carolina, Rhode Island, Texas, and Virginia) reported that training was provided to state and/or local enforcement agencies. In four of these states, training or educational materials were also provided to the public and other stakeholders. For example, the Colorado Bureau of Investigation provided training or educational materials to law enforcement agencies, the public, media, and the state Alzheimer's Association chapter. Virginia State Police provided training to local law enforcement on the activation criteria and the procedures for activating the alert, while the Attorney General's office provided information to the public about the alert system. Florida state officials reported that funding is currently not available for training, but if funds become available, training on procedures for activating the system will be targeted to law enforcement and transportation officials. Finally, Kentucky and Oklahoma state officials reported that they were uncertain whether local law enforcement agencies received training, and did not provide any further information. There is wide variation among states with respect to the process for activating alerts for vulnerable adults in the 11 states. The following describes the process for activating an alert. This process includes information on: (1) filing an actionable missing persons report; (2) criteria for activating an alert; (3) communication mechanisms for disseminating the alert; (4) target audiences; and (5) duration of the alert. In general, the process for activating an alert originates with the local law enforcement agency taking a missing persons report. Seven states (Delaware, Georgia, North Carolina, Oklahoma, Rhode Island, Texas, Virginia) specified that certain individuals must file a missing persons report in order to activate the state or local alert system. For example, in Georgia a family member or caretaker must file a missing person's report. North Carolina requires a parent, spouse, legal guardian or custodian, or person responsible for the supervision of the missing individual to file the missing person's report. Other states identified medical personnel, long-term care ombudsman, a long-term care facility, cohabitants, and neighbors or close friends among those eligible to file a missing persons report in order to active an alert. Four states (Colorado, Florida, Kentucky, and Ohio) indicated that any individual can file a missing persons report in order to activate an alert. Once the appropriate individual has filed a missing persons report with the local law enforcement agency, the agency must review the report to determine if the state's criteria for activating an alert have been met. In addition to determining whether or not the missing person meets any age or disability criteria for activating an alert system (see section on Target Population above), all states reported additional criteria. Four criteria for activating an alert that are common across the 11 states include (1) the person's status is unknown; (2) the person's disappearance poses a credible threat to his or her health or safety; (3) there is sufficient information to provide information to law enforcement agencies and/or the public about the missing individual; and (4) the person is domiciled in or a resident of the state in which they went missing. Table 4 summarizes the presence of these four criteria by state. States with alert systems for missing vulnerable adults have certain criteria for activating an alert that are somewhat similar across the states. Most states reported that a person's whereabouts must be unknown in order for an alert to be activated. In some states, local law enforcement have conducted a missing person's investigation and verified that the person is missing. Almost all states, the exception being North Carolina, indicated that the person's disappearance must either pose a credible threat to his or her health and safety or that the missing person is in immediate danger of serious bodily injury or death. Six of the 11 states reported that the alert may only be activated if there is sufficient information about the person's disappearance. For example, in Texas and Georgia there must be sufficient information to disseminate to the public and in Oklahoma submitting information to the public or media would assist in locating the person. Only a few states require that alerts be activated on behalf of persons who are domiciled or a resident of the state. In Colorado and Texas, the missing person must have been domiciled in the state. To activate an alert in Delaware, the missing person must be a Delaware resident. In addition to these four criteria, states may have other criteria that must be met before an alert is activated. For example, Florida only activates statewide alerts on electronic highway signs for those individuals who are missing and believed to be driving a vehicle, thus the state first requires activation of a local or regional alert and a description of a vehicle or tag number. Florida also requires the missing person's information be entered into the Florida Crime Information Center. North Carolina requires the local law enforcement agency to report the incident to the North Carolina Center for Missing Persons. Rhode Island reported that the person must have last been seen in the state in order for an alert to be activated. As discussed above, one difference among states with alert systems is the designated entity responsible for activating the alert. Among the 11 states, six states (Colorado, Georgia, North Carolina, Ohio, Rhode Island, and Texas) have a lead state agency that is responsible for activating alerts at the request of a local law enforcement agency. In the remaining five states (Delaware, Florida, Kentucky, Oklahoma, and Virginia) the local law enforcement agency activates the alert locally or regionally and can seek assistance from the state law enforcement agency to disseminate the alert statewide or to another state, if necessary. For example, in Oklahoma, local law enforcement agencies activate alerts to law enforcement entities via the Oklahoma Law Enforcement Telecommunication System (OLETS), a communication system operated by the state's Department of Public Safety, which facilitates communication about missing adult alerts to law enforcement agencies throughout the state. In general, the entity responsible for activating the alert will disseminate descriptive information about the missing person to other law enforcement entities and the public through agreements with designated media and other information outlets. States identified television, radio, newsprint, lottery terminals, electronic highway signs, and trucker alert systems among those entities involved in further disseminating information about the missing person. States reported that this descriptive information may be disseminated electronically by e-mail or by facsimile. Some states will use the National Law Enforcement Telecommunications System (NLETS) or a similar state-named system (e.g., OLETS) to disseminate information about the missing person, this may be through a ""be on the lookout"" message to law enforcement agencies. Multiple states automatically authorize the use of electronic highway signs for dissemination of the alert, while other states use electronic highway signs on a case-by-case basis. Two states, Florida and North Carolina, reported the ability to use a reverse 911 system that leaves a recorded telephone message with information about the missing person and whom to contact with information. Once an alert has been activated and information has been disseminated to local law enforcement and the media, local law enforcement agencies in all states are asked to ""be on the lookout"" for the missing person and media outlets are encouraged, but not required, to provide the public with information on the missing person and their disappearance. States that post information in lottery terminals and on electronic highway signs provide information about the missing person to the public through these forms of communication. When information is disseminated to the public, information on how to contact law enforcement with tips or information is also included. States may include one or more contact numbers for the public to utilize such as the telephone number for the local law enforcement agency directing the search or the state alert system's coordinating office, emergency telephone systems such as 911 or 511, or the telephone number for state highway patrol. Some states impose certain conditions related to the timing and duration of an alert that has been activated, while others do not. In general, states do not have a waiting period prior to the activation of an alert. One state, Texas, requires that the activation of an alert be implemented within 72 hours of the person's disappearance. Five states (Florida, Ohio, Oklahoma, Texas, and Virginia) reported certain time constraints regarding the duration of active alerts. Oklahoma and Texas activate alerts for up to 24 hours; however, the requesting agency in Texas has the option to ask for an extension. In addition, time durations could also differ if a law enforcement agency decided to issue an alert locally or through an existing regional program. In Virginia, alerts can be activated for up to 12 hours, while Ohio evaluates the need for the alert after 48 hours and each 24 hours thereafter. The electronic highway signs in Florida are activated for six hours; however, information on the Florida Department of Law Enforcement's (FDLE) web-site can be posted as long as the person is missing. The remaining six states (Colorado, Delaware, Georgia, Kentucky, North Carolina, and Rhode Island) do not impose a time limit for the activation of alerts, but may give various stakeholders discretion regarding the duration of the alert. In Rhode Island and Delaware, the media outlets can determine how long they will broadcast the alert. Georgia will discontinue the alert at the family's discretion. North Carolina does not impose a time period for activation of the alert, but reported that alert information on electronic highway signs is activated for up to 12 hours. The 11 states were asked about whether they coordinated with other states to recover individuals who are believed to have crossed state lines during their disappearance. Most of the states have some mechanisms in place for coordinating with other states. Notably, most also share a border with at least one other state with an alert system. If needed, officials said they would send information about a missing adult from their state through national or interstate law enforcement communication systems. Colorado, Florida, Georgia, Texas, and Virginia reported that they would use NLETS. Delaware would disseminate information about a missing resident to fusion centers in nearby states, which are comprised of relevant law enforcement agencies in a particular jurisdiction that share information. Ohio officials said that information would be conveyed to other states through ""law enforcement computer systems,"" but did not specify which systems. Florida, Georgia, and North Carolina indicated that their missing persons clearinghouses could coordinate with clearinghouses in other states. Rhode Island reported that it would coordinate with the other state's state law enforcement agency. Officials in a few of the states noted possible constraints in reporting residents missing, since most other states do not appear to have alert systems. Some officials suggested that states without the systems could ask law enforcement officials to ""be on the lookout"" for a missing individual. At least four states have requested other states (all of which are featured in the report) to activate alerts on behalf of residents (though this information was provided only by the states that were asked to activate the alert). Nearly all states, with the exception of Texas, reported that an alert could be activated on behalf of a missing individual from another state. Texas officials said that a missing senior who came from another state would not meet one of the alert criteria – that the individual is domiciled in Texas, meaning that he or she is a full-time resident of the state. However, a local law enforcement agency could coordinate a public notification response within the affected areas for an individual not domiciled in the state, if permitted by the local authorities, without requesting assistance from the state alert network. For instance, a local law enforcement agency could enlist the assistance of media, public agencies, and other local entities. Further, officials in at least four regions could seek assistance from regional alert networks which have been established to recover missing adults. As discussed above, Colorado and Delaware include residency as part of their alert criteria; nonetheless, these states indicated that an alert could be issued on behalf of an individual who is not a resident. Finally, nearly all states require that reports of missing persons be entered into the National Crime Information Center (NCIC) Missing Person File. The NCIC is used by law enforcement agencies in all states to inquire about criminal and missing person cases. For instance, if a law enforcement officer comes across a missing individual, the officer can search the NCIC database for any information about the individual that may have been entered by a law enforcement agency in that state or another state. All states provided data about costs related to state-level agencies that carry out (or assist in carrying out) alerts for missing adults. For states that provided detailed information, cost estimates ranged from about $40,000 to $182,000 to operate the alert systems annually. No states provided information about any costs to local law enforcement agencies or other stakeholders that may be involved in helping to administer the alert system. Colorado and Florida specified that the costs for implementing and administering the missing adult alert systems have been absorbed, in part, by the budget for the AMBER Alert system. Colorado additionally reported that there are ongoing costs for personnel and maintenance of both systems, but these costs were not specified. Florida reported that the administrative costs for both the AMBER and missing adult alerts include the salaries of on-call missing adult clearinghouse staff. The approximate cost is $40,000 per fiscal year. Georgia, North Carolina, and Ohio explained that funds are not set aside specifically for their adult alert systems, but that the cost of administration is absorbed by the budgets of the agencies that administer the alerts. North Carolina estimated that the cost to the missing person's clearinghouse, the agency that administers the alert, is $125,000 annually. Officials in Ohio reported that an upgrade to their AMBER Alert and missing person alert technology will cost approximately $100,000 at some future point. Virginia and Texas provided more detailed cost information. Texas reported costs associated with the Governor's Division of Emergency Management (GDEM) and the Texas Missing Persons Clearinghouse, which jointly administer the alert system (and does not include costs to other agencies). The approximate cost to the GDEM for coordinating the program with its existing AMBER Alert and Blue Alert programs and providing training on these programs was approximately $92,000, which excludes initial operating costs. The GDEM has a coordinator to administer the alert system, along with the state's other alert systems. This position, along with ongoing costs for training and coordination activities are funded in state FY2009 through a grant ($47,280) and internal operating expenses for the GDEM ($45,000). The Missing Persons Clearinghouse, which provides investigative support to the GDEM, has two analysts dedicated to the alert system. Actual expenses, including salaries, operations, and travel for state FY2008, were approximately $90,000. In total, the approximate cost annually to Texas for the alert system is about $182,000. Virginia officials provided cost data for the state police to activate regional or statewide alerts (local alerts are activated by local law enforcement agencies). In state FY2007, the cost was $30,000 for implementing the program, and an additional $30,000 for staff time and technology. The estimated ongoing costs are $25,000 annually. The ongoing costs are for staff time to administer the system, including handling and processing requests for the alert, activating the alert, assessing the alert after it has been activated, posting and removing information to the Virginia State Police Department missing persons website, and creating posters. According to state officials, the state will need about $50,000 to implement technology for the alert system and $45,000 annually for training, outreach, and staff support. Delaware, Rhode Island, and Oklahoma reported that no costs for the states are associated with the alert system. This appears to be, in part, because the alerts in Delaware and Oklahoma are administered and activated primarily by local law enforcement agencies, with some assistance from the state police or department of public safety. Kentucky did not provide any funding information, which also may be due to the fact that alerts are locally managed. Nearly all states, with the exception of Delaware, reported that alerts have been activated. Kentucky and Oklahoma do not keep records of alerts activated by local law enforcement agencies, but estimated that no more than 10 alerts have been activated in each state. The other eight reporting states provided the number of alerts activated, even if only at the state level, and most provided information about the outcomes of missing individuals. States reported activating between one (Rhode Island) and 82 alerts (North Carolina) as of the time they were surveyed. As previously mentioned, the number of alerts is likely affected by when the systems were implemented, the size of the state's population, and criteria for activating the alerts. Most states provided some information about the circumstances around a missing person's disappearance and their recovery. All states reported that the majority of the individuals were found alive, though at least one individual was found deceased in nearly every state, except Rhode Island. Five states (Florida, North Carolina, Ohio, Texas, and Virginia) indicated how the missing individuals were traveling. Florida's missing adult alert is activated only for individuals who are driving; therefore, all 32 (100%) missing individuals for whom alerts were activated were driving. In North Carolina, of the 82 alerts activated, 43 (52.4%) were on behalf of individuals who were driving and 39 (47.6%) had wandered away. Of those 39 individuals, three took a plane to another state, two were last seen on bikes, one took a bus to another state, and one took a taxi. Of the 14 individuals for whom alerts were activated in Ohio, nine (64.3%) of the individuals were driving. In Texas, of 71 alerts activated, 58 (81.7%) of the individuals were driving and 13 (18.3%) individuals wandered from their home or another location. Of the seven individuals for whom alerts were activated in Virginia, one (14.3%) was believed to have been driving. Two states (Florida and Georgia) provided information about where the missing individuals were found. Of the seven individuals in Florida who were recovered as a result of the alert system, six were located a few counties away from their home county. In Georgia, of the 78 alerts for individuals who were found, one was located in another state with family and the other 77 were located within their home city or county. Six states (Florida, Georgia, North Carolina, Rhode Island, Texas, and Virginia) were able to report whether the alerts aided in the recovery of missing individuals. Half of those states reported that the alert systems have been instrumental in recovering missing adults while the other states reported that the alerts did not help in recovery efforts. Florida officials stated that seven of 32 individuals (21.9%) were recovered based on tips provided by drivers who had seen electronic messages on the highway about the missing adults. According to officials in Georgia, the alert aided in the recovery of all individuals who were recovered alive (which was all but one individual). In Texas, of the 77 alerts activated, they contributed to the recovery of 21 senior citizens (27.3%). Rhode Island has activated one alert, and according to state officials, the alert did not assist in the individual's recovery. Officials in North Carolina reported that the alerts did not directly assist in the recovery of the missing individuals; however, family members of the missing individuals and the law enforcement agencies that recommended the alert be activated are pleased with the design of the program. Finally, Virginia officials reported that the alert did not assist in the recovery of the seven individuals who went missing and for whom alerts were activated. This report describes the detailed findings of 11 states with active alert systems for missing adults. Findings from this study suggest that there is an existing patchwork of state alert systems with wide variation in target populations and administrative procedures for activating alerts. These systems are similar to alert systems for abducted children (AMBER Alerts), but target adults who are vulnerable to going missing due to cognitive or mental impairment, developmental or physical disabilities, and certain mental health conditions. Although the systems in each state vary, in all states either local or state law enforcement agencies are responsible for activating the alerts. Often these law enforcement agencies involve multiple stakeholders in the process of recovering those who go missing, including other local law enforcement agencies, the state highway patrol, the public through various media outlets, and the state's missing persons clearinghouse. As the nation prepares for an aging population and likely increase in the number of individuals living in the community with cognitive impairment or other forms of disability, Congress may want to consider whether there is a role for the federal government in further developing state alert systems. For example, the federal government could provide funding to facilitate the expansion of alert systems to additional states. Similar to the federal role for state AMBER Alert programs, the federal government could assist in developing minimum guidelines for a missing adult alert system as well as provide states with technical support and training. Establishing a uniform network of state alert systems in every state could assist states and localities, in the event that a person is believed to be missing, with any necessary coordination across state lines. Further, the federal government could also play a role in assisting states with developing their systems so that data are more uniformly collected about the use and efficacy of state alert systems. Finally, the federal government could disseminate information about best practices for states looking to implement alert systems. The following sections discuss various issues for Congress in considering the role of the federal government, if any, in state alert systems for vulnerable missing adults. These issues are: autonomy and individual rights; creating a uniform identity; training; coordination across states; efficacy of alerts; use of alerts; and support to family caregivers. The use of any alert system for missing adults may challenge the legal rights of an individual, in this case an adult, who may choose to go missing. Unlike the AMBER Alert program which was established to alert law enforcement and the public when a child is missing and criminal activity may be involved, it is not a crime for an adult to wander from home or purposely go missing. To attempt to balance the rights of an individual with the concerns of family members or caregivers, states with alert systems have established specific criteria that must be met in order to activate a missing adult alert. In general, states have targeted missing individuals who are particularly vulnerable due to a credible threat to the individual's health and safety. Also, as previously mentioned, timing can be a critical factor in locating individuals with cognitive or mental impairment who wander either on foot or in a vehicle and may be without basic provisions or medicine, or exposed to the elements for extended periods. Concerns about violating an individual's privacy with respect to filing a missing person's report appear to outweigh the perceived benefits among various stakeholders including family members, law enforcement officials, and policymakers. While states were not explicitly asked for information about whether reports of missing persons were credible, state officials in one state, Texas, indicated that all alerts activated by the state were based on legitimate reports of missing vulnerable seniors. In general, states felt the criteria they had established contained appropriate safeguards to ensure that missing persons were in fact missing due to a cognitive impairment or some other disabling condition. The popularity of state AMBER Alert systems appears to provide a platform for states to develop their missing adult alerts. Naming the missing adult alert system as a Senior, Silver, or Gold Alert may be an attempt by states to create a ""brand"" identity for the system similar to that of state AMBER Alerts. For example, three states use the word ""Senior"" in the title of their system: Colorado's Missing Senior Citizen Alert Program; Rhode Island's Missing Senior Citizen Alert Program; and Virginia's Senior Alert System. Another four states refer to their alert systems as a ""Silver Alert,"" which is likely a reference to an older person (i.e., someone with grey or silver hair). However, the senior or silver reference may also be misleading in that it may not accurately describe the target population for these alert systems. In some states with a ""Silver Alert"" or ""Senior Alert"" system, alerts can also be activated on behalf of missing persons aged 18 to 59. Other states refer to their alert systems as Gold or Golden Alert or Missing Adult Alert. These named programs tend not to specify age criteria for activating an alert. The use of a name to create a specific brand identity for the alert system could also serve to distinguish the alert system from AMBER Alerts or other types of alerts. Further, creating a brand identity could be done to prompt law enforcement entities and the public to respond to the alert in a specific way that may be different from the response for other types of alerts. Similar to AMBER Alert, the federal government may want to consider a uniform name or identity for state alert systems for missing vulnerable adults to assist states in implementing alert systems, coordinating alerts across states, and educating various stakeholders about the system. Most states with alert systems reported that law enforcement agencies have been trained on the procedures for activating missing adult alerts in their respective states. However, in some states where a local law enforcement agency activates the alert, it was not known whether there was uniform training at the local level. In addition, states were not asked the extent to which these alert systems train law enforcement and other public safety officials in techniques to assist in recovering persons with cognitive or mental impairments. Some advocates argue that specific training on Alzheimer's disease and related dementia can be effective in both identifying and recovering these individuals in the event they go missing. Moreover, persons who wander away from home may easily attract the attention of law enforcement through auto accidents or erratic driving, indecent exposure, shoplifting, and other deviant behavior. Often these individuals can not think, act, or communicate in a way that can assist them. However, proper training in identifying and communicating with an individual who has a mental or cognitive impairment can help to ensure that these individuals are returned safely to their home. Pending legislation ( H.R. 632 and S. 557 ) to assist states develop and coordinate missing adult alert systems would include a training component where a federal coordinator, working in collaboration with the Administration on Aging and the Missing Alzheimer's Disease Patient Alert program, would provide training opportunities and educational resources to law enforcement and other entities. Some states with alert systems reported that they might have difficulty coordinating with another state that lacks a similar system. States may also have challenges coordinating with states that have alert systems with different criteria for activating an alert. Although state and local governments have taken the lead in implementing alert systems, the federal government could play a role in coordinating efforts when a missing individual is believed to have crossed state lines as well as assist in the development of formal agreements or protocols for the use of interstate alerts. The federal government could model any policies to coordinate across state lines on the AMBER Alert program, which provides training and technical assistance to states on a number of issues related to abducted children. This training addresses how jurisdictions, including those in different states, can work together to recover children who are abducted, among other topics. Through conference and training exercises, state AMBER Alert coordinators, state and local law enforcement agencies, and other stakeholders have opportunities to meet and exchange ideas, which may further facilitate coordination. In addition, the DOJ has issued recommended guidelines for activating AMBER Alerts to encourage states and localities to adopt similar alert criteria. Existing legislation ( H.R. 632 and S. 557 ) that would create a similar network of state missing adult alert systems seeks to provide greater coordination between states for missing adult cases by establishing a Silver Alert Coordinator position at the DOJ. The purpose of the position is to help establish voluntary guidelines for states in developing Silver Alert plans that will promote compatible and integrated Silver Alert systems throughout the United States. It is not clear how effective state alert systems are in recovering missing vulnerable adults. At least a few of the states with alert systems did not maintain detailed outcomes data on the alerts that had been activated to date, and many could not report whether the alert was useful. In states where alerts are activated at the local level, aggregating data on the outcomes of these alerts may be more complicated than in states that have a designated agency at the state level that activates alerts. Furthermore, tracking outcomes from alerts is an administrative task that may require additional technology and resources, which states may not have the funding to support. Further, only three (Florida, Georgia, and Texas) of six states that reported whether the alerts were effective could say for certain that the reports aided in the recovery in the missing individual. For Georgia, the alert aided in all cases, while in Florida and Texas the alerts aided in fewer than 30% of all cases. The federal government could play a role in developing guidelines for data collection and outcomes measures as well as assisting states with developing technology and infrastructure necessary for reporting on the use and effectiveness of their alert systems. Some states expressed that overuse of alerts for vulnerable adults could desensitize the public to alerts in general, including AMBER Alerts. State officials in Oklahoma and Virginia, both of which administer missing adult alert systems locally with some state-level involvement, commented that the Emergency Alert System, which may be used for AMBER Alerts, should not be used for missing adult alerts so that the public does not become desensitized to AMBER Alerts (note that the FCC does not allow the system to be used for purposes related to missing persons except for abducted children). Officials in Virginia further stated that the EAS is best for missing children because they are more likely to have been removed from their communities, whereas missing vulnerable adults tend to wander on foot in close proximity to the place they were last seen. This is consistent with the Alzheimer's Association's statement that most wandering adults with the disease are found within one mile of their home. State officials concerned about using scarce law enforcement resources to recover missing vulnerable adults raised the issue of whether activating the alert system was the best use of these resources. Some states have expressed concern as to whether the alert systems should be used only in select circumstances and/or for select populations. In response to these concerns, states may choose to activate alerts regionally or statewide only in the case where an individual is believed to be driving, given that they can readily travel outside of their community. Alert systems for vulnerable adults can assist local and state law enforcement agencies in the recovery of a missing adult; however, they often fail to address the circumstances that led to the person's disappearance. As previously mentioned, it is not uncommon for people with cognitive impairment resulting from Alzheimer's disease to wander away from home and become lost. According to the Alzheimer's Association, six out of ten people with Alzheimer's disease will wander during the course of the disease, sometimes frequently. Some state and local law enforcement agencies have integrated the Alzheimer's Association's Safe Return program into their routines. Other law enforcement agencies are working in their communities to provide electronic monitoring services for certain individuals who are susceptible to going missing close to home and may not be visible to the public. Missing alert systems for vulnerable adults could benefit from developing formal linkages with these programs, where they exist, and assist with disseminating information to the community about accessing these programs. Proposed legislation would authorize funding for grants to states and local governments to carry out programs that provide electronic monitoring services to elderly individuals that could assist in their recovery if they go missing. In the event that a state activates an alert for a missing vulnerable person and that individual is recovered alive, state alert systems may benefit from engaging community social services agencies or, in the case the individual is a senior, partnering with state units on aging and local area agencies on aging, funded under the Older Americans Act. These agencies or organizations could conduct caregiver assessments with the aim of preventing future wandering behavior. The caregiver assessment process could identify and link appropriate services and support for family caregivers such as back-up support, in cases of emergency, counseling, or respite care. Many of these services are already available to caregivers through federal funding that supports the National Family Caregiver Support Program (NFCSP). Caregiver assessments would also elicit information about the caregiver's health, willingness to provide care, and training and support needs. Through the assessment process family caregivers could learn about the resources available to them in their communities including the Alzheimer's Association's Safe Return Program or Project Lifesaver International, Inc., which has developed a program to track missing vulnerable adults through electronic technology. State alert systems for missing vulnerable adults appear to be an emerging trend, with alert systems developed in at least 11 states. As a result, Congress is considering legislation that would provide the federal government with a role in assisting states to develop these systems nationwide. Most states with existing alert systems have modeled their program after the AMBER Alert program. All state systems target persons with cognitive or mental impairments; however, there is wide variation in the specific target population and procedures for activating alerts. While states will continue to be faced with the challenge of balancing individual rights with efforts that can assist the most vulnerable of residents, states may benefit from federal efforts that could facilitate interstate coordination for missing persons believed to have crossed state lines. In addition, federal efforts could model the federal role in developing state AMBER Alerts systems by providing states with minimum guidelines, technical assistance, and training. State alert systems may also benefit from coordinating with existing federal, state, and local initiatives that can assist in locating vulnerable adults that go missing. In the event that the alert system assists in recovering a missing vulnerable adult, family caregivers may benefit from referral to the Safe Return Program, funded in part by federal appropriations under the Missing Alzheimer's Disease Patient Alert grant, or Project Lifesaver International, Inc. These alert systems could also educate and assess family caregivers about the needs of vulnerable adults and provide linkages to available community resources in an effort to prevent future wandering behavior. Appendix A. Questions for State Officials Appendix B. Detailed Tables of State Programs","A patchwork of alert systems to recover vulnerable missing adults is developing through the country. These systems, administered at the state and local levels, are intended to alert law enforcement entities and the public that adults with cognitive impairment or other disabilities are missing and may need assistance. The alerts are activated on behalf of targeted groups of individuals—such as those with cognitive or mental impairment (e.g., Alzheimer's disease and other forms of dementia), developmental disabilities, or suicidal tendencies—who may be at high risk of going missing and unable to make their way home or to a safe place. Recent media attention to cases of vulnerable missing adults has prompted policymakers to consider whether the federal government should expand its role in helping these individuals. Currently, the federal Missing Alzheimer's Disease Patient Alert program funds a service that provides enrollees—individuals with Alzheimer's or dementia—with a bracelet indicating that the individual is memory impaired, including a toll-free, 24-hour emergency response number to call if the person is found wandering or lost. Some Members of Congress have expressed interest in assisting states to create and expand alert systems for missing adults. In the opening weeks of the 111th Congress, the House passed legislation (H.R. 632) to establish a grant program to encourage states to develop, expand, and coordinate these alert systems. A companion bill (S. 557) was introduced in the Senate shortly thereafter. The proposed program is similar to a federal grant program that funds training and technical assistance for what are known as AMBER (America's Missing: Broadcast Emergency Response) Alert systems. Each state has developed an AMBER Alert system to assist in the recovery of children who are believed to have been abducted. In response to the increased congressional focus on alert systems for missing adults, the Congressional Research Service (CRS) gathered data on 11 states (Colorado, Delaware, Florida, Georgia, Kentucky, North Carolina, Ohio, Oklahoma, Rhode Island, Texas, and Virginia) that were known to have developed such systems. CRS conducted a review of state laws, regulations, or executive orders that established the systems, and contacted officials in each of the states to learn more about how the systems were administered. CRS found that most of the systems were established only recently, since 2006. This report provides an overview of the alert systems in these 11 states, including (1) the legal authority to establish the systems; (2) the target population for the alerts; (3) administrative responsibility for the alerts, including coordination with AMBER Alerts; (4) training of law enforcement agencies and other entities about the alerts; (5) the process for activating alerts; (6) coordination of alerts with other states; (7) system costs; (8) use of the systems; and (9) any information about outcomes of the individuals for whom alerts were activated. The last section of the report provides a discussion of issues for Congress to consider with respect to the federal role, if any, in developing state alert programs for missing adults. For example, some states with alert systems noted that they might have difficulty coordinating with another state that lacks a similar system. States may also have challenges coordinating with states that have alert systems with different criteria that must be met before an alert is activated. The federal government may be able to help establish protocols to coordinate cross-state alerts and to assist in establishing formal agreements or protocols for the use of interstate alerts. This report will not be updated.",govreport
"This report describes and analyzes annual appropriations for the Department of Homeland Security (DHS) for FY2017. It compares the enacted FY2016 appropriations for DHS, the Barack Obama Administration's FY2017 budget request, the Donald J. Trump Administration's requests for additional funding, and the appropriations measures developed in response. This report identifies additional informational resources, reports, and products on DHS appropriations that provide additional context for the discussion, and it provides a list of Congressional Research Service (CRS) policy experts whom clients may consult with inquiries on specific topics. The suite of CRS reports on homeland security appropriations tracks legislative action and congressional issues related to DHS appropriations, with particular attention paid to discretionary funding amounts. The reports do not provide in-depth analysis of specific issues related to mandatory funding—such as retirement pay—nor do they systematically follow other legislation related to the authorization or amending of DHS programs, activities, or fee revenues. Discussion of appropriations legislation involves a variety of specialized budgetary concepts. The Appendix to this report explains several of these concepts, including budget authority, obligations, outlays, discretionary and mandatory spending, offsetting collections, allocations, and adjustments to the discretionary spending caps under the Budget Control Act ( P.L. 112-25 ). A more complete discussion of those terms and the appropriations process in general can be found in CRS Report R42388, The Congressional Appropriations Process: An Introduction , coordinated by [author name scrubbed], and the Government Accountability Office's A Glossary of Terms Used in the Federal Budget Process . Generally, the homeland security appropriations bill includes all annual appropriations provided for DHS, allocating resources to every departmental component. Discretionary appropriations provide roughly two-thirds to three-fourths of the annual funding for DHS operations, depending on how one accounts for disaster relief spending and funding for overseas contingency operations. The remainder of the budget is a mix of fee revenues, trust funds, and mandatory spending. Except in summary discussions and when discussing total amounts for the bill as a whole, all amounts contained in the suite of CRS reports on homeland security appropriations represent budget authority and are rounded to the nearest million. However, for precision in percentages and totals, all calculations were performed using unrounded data. Data used in this report for FY2016 and FY2017 amounts are derived from a single source. Normally, this report would rely on previous fiscal year enacted legislation and reports, as well as House and Senate legislative efforts in response to the Administration's budget request. However, due to the implementation of the Common Appropriations Structure for DHS (see below), this report relies on the Consolidated Appropriations Act, 2017 ( P.L. 115-31 ) and the accompanying explanatory statement, which was printed in the May 3, 2017, Congressional Record . Division F of this act is the Department of Homeland Security Appropriations Act, 2017. Information on the second supplemental appropriation for DHS components is drawn from P.L. 115-56 . On February 9, 2016, the Obama Administration released its budget request for FY2017. The Administration requested $40.62 billion in adjusted net discretionary budget authority for DHS for FY2017, as part of an overall budget that the Office of Management and Budget (OMB) estimated at the time to be $66.2 billion (including fees, trust funds, and other funding that is not annually appropriated or does not score against discretionary budget limits). The request amounted to a $332 million, or 0.8%, decrease from the $40.96 billion enacted for FY2016 through the Department of Homeland Security Appropriations Act, 2016 ( P.L. 114-113 , Division F). The Obama Administration also requested discretionary funding for DHS components that does not count against discretionary spending limits set by the Budget Control Act (BCA; P.L. 112-25 ) and is not reflected in the above totals. The Administration requested an additional $6.7 billion for the Federal Emergency Management Agency (FEMA) in disaster relief funding, as defined by the BCA, and in the budget request for the Department of Defense, a transfer of $163 million in Overseas Contingency Operations/Global War on Terror (OCO) designated funding to the U.S. Coast Guard. On May 26, 2016, the Senate Committee on Appropriations reported out S. 3001 , accompanied by S.Rept. 114-264 . According to the committee report, S. 3001 included $41.2 billion in adjusted net discretionary budget authority for FY2017. This was $578 million (1.4%) above the level requested by the Administration, but $246 million (0.6%) above the enacted level for FY2016. The Senate committee-reported bill included the Administration-requested levels for disaster relief funding and OCO funding covered by BCA adjustments—the latter as an appropriation in the DHS appropriations bill rather than the requested transfer. On June 22, the House Committee on Appropriations reported out H.R. 5634 , accompanied by H.Rept. 114-668 . H.R. 5634 included $41.04 billion in adjusted net discretionary budget authority for FY2017. This was $426 million (1.0%) above the level requested by the Administration, and $95 million (0.2%) above the enacted level for FY2016. The bill reported by the House committee included the Administration-requested levels for disaster relief funding. The House Appropriations Committee chose to provide the OCO funding as a transfer from the Department of Defense budget as requested. No further action was taken on these measures in 2016, and they expired at the end of the 114 th Congress on January 3, 2017. On September 29, 2016, President Obama signed into law P.L. 114-223 , which contained a continuing resolution that funded the government through December 9, 2016, at the same rate of operations as FY2016, minus 0.496%. The continuing resolution contained three sections providing specific authority to DHS to carry out key functions. All of these authorities had been requested by the Administration: Section 130:  As described above, this was a new provision allowing DHS to obligate funds in the account and budget structure of the CAS as laid out in a report submitted to the appropriations committees prior to the start of FY2017. Authorization to implement the CAS structure as outlined in the FY2017 request was originally laid out in the FY2016 Department of Homeland Security Act; Section 130 allowed modifications to the structure developed since that time. Section 131: This was a new provision similar to ones provided in past years to allow DHS to maintain the staffing levels of certain components. Section 131 allowed resources provided under the CR to be apportioned at the rate needed to maintain the staffing levels of TSA screeners and CBP personnel attained at the end of FY2016. The Obama Administration, in their request for anomalies in the CR, indicated that TSA required an anomaly because TSA repurposed funding provided for FY2016 to allow for hiring of additional screeners and converting a number of part-time screeners to full-time screeners. The Administration indicated that it would not be able to sustain that level of effort operating under a CR without the anomaly. Section 132: This was a provision extending special procurement authorities for research and development activities at DHS, known as ""other transaction authority."" This provision has been carried in many CRs covering DHS, including most recently as Section 129 of the FY2016 CR, P.L. 114-53 . A second continuing resolution was signed into law on December 10, 2016 ( P.L. 114-254 ), funding the government through April 28, 2017, at the same rate of operations as FY2016, minus 0.1901%. The second continuing resolution amended the first, leaving the three DHS-specific provisions above in effect, while adding a fourth. The new DHS-specific provision, Section 163, was similar to Section 131, but was broader in both the components of DHS it applied to and the flexibility it provided. The Obama Administration requested flexibility not only to maintain staffing levels of CBP and ICE, but also to maintain border security and fulfill immigration enforcement priorities. In their request, they specifically noted this flexibility was for both salaries and non-pay expenses, and was needed to ""respond to unpredictable surges in migration."" Congress chose to broaden the requested flexibility, extending it to the TSA and U.S. Secret Service, ""to ensure border security, fulfill immigration enforcement priorities, maintain aviation security activities, and carry out the mission associated with the protection of the President-elect."" A third short-term continuing resolution ( P.L. 115-30 ) was signed into law on April 28, 2017, which extended the second continuing resolution through May 5, 2017, and provided a temporary extension of health benefits for miners. No other provisions affected DHS, and the continuing resolutions and the flexibilities they provided were superseded by the Department of Homeland Security Appropriations Act, 2017. On March 16, 2017, the Trump Administration submitted an amendment to the FY2017 budget request, which included a request for $3 billion in additional funding for DHS. Congress addressed this request at the same time as it resolved annual appropriations for the federal government, through the Consolidated Appropriations Act, 2017 (signed into law as P.L. 115-31 on May 5, 2017). The act included both annual and supplemental appropriations for DHS as Division F, which is titled the Department of Homeland Security Appropriations Act, 2017. The first five titles of Division F provided annual appropriations for DHS in response to the Obama Administration's request as submitted. The bill included $41.3 billion in adjusted net discretionary budget authority in annual appropriations, as well as $6.7 billion in funding for the costs of major disasters under the Stafford Act and $163 million in funding for overseas contingency operations. A sixth title responded to the Trump Administration's request for $3 billion in additional funding for DHS. Title VI included over $1.1 billion in supplemental appropriations for U.S. Customs and Border Protection, Immigration and Customs Enforcement, and the U.S. Secret Service. The explanatory statement accompanying the act noted that ""the language and allocations contained in the House and Senate reports [ H.Rept. 114-668 and S.Rept. 114-264 ] carry the same weight as language included in this explanatory statement unless specifically addressed to the contrary"" in the act or the statement. Such language is common in appropriations conference reports, but it is especially important in cases like this one where there is no direct procedural link between the House and Senate committee-reported bills from a previous Congress and the consolidated appropriations act. On September 1, 2017, the Trump Administration requested $7.85 billion in supplemental funding for FY2017, including $7.4 billion for the DRF. On September 6, the House passed the relief package requested by the Administration as an amendment to H.R. 601 . On September 7, the Senate passed an amended version, which included the House-passed funding as well as an additional $7.4 billion for disaster relief through another department, a short-term increase to the debt limit, and a short-term continuing resolution that would fund government operations into FY2018. The House passed the Senate amended version of the bill on September 8, 2017, which became P.L. 115-56 . When DHS was established in 2003, components of other agencies were brought together over a matter of months, in the midst of ongoing budget cycles. Rather than developing a new structure of appropriations for the entire department, Congress and the Administration continued to provide resources through existing account structures when possible. In H.Rept. 113-481 , accompanying the House version of the FY2015 Department of Homeland Security Appropriations Act, the House Appropriations Committee wrote, ""In order to provide the Department and the Committees increased visibility, comparability, and information on which to base resource allocation decisions, particularly in the current fiscal climate, the Committee believes DHS would benefit from the implementation of a common appropriation structure across the Department."" It went on to direct the DHS Office of the Chief Financial Officer ""to work with the components, the Office of Management and Budget (OMB), and the Committee to develop a common appropriation structure for the President's fiscal year 2017 budget request."" In an interim report in 2015, DHS noted that operating with ""over 70 different appropriations and over 100 Programs, Projects, and Activities ... has contributed to a lack of transparency, inhibited comparisons between programs, and complicated spending decisions and other managerial decision-making."" Section 563 of Division F of P.L. 114-113 (the FY2016 Department of Homeland Security Appropriations Act) provided authority for DHS to submit its FY2017 appropriations request under the new common appropriations structure (or CAS), and implement it in FY2017. Under the act, the new structure was to have four categories of appropriations: Operations and Support; Procurement, Construction and Improvement; Research and Development; and Federal Assistance. Most of the FY2017 DHS appropriations request categorized its appropriations in this fashion. The exception was the Coast Guard, which was in the process of migrating its financial information to a new system. The Senate Appropriations Committee did not use the new structure, instead drafting its annual DHS appropriations bill and report using the same structure as was used in FY2016. In explaining its actions, the committee wrote the following: As proposed, the new structure would reduce controls and congressional oversight to a degree that is unacceptable to this Committee. It is disappointing that the Department failed to address the Committee's concerns before transmitting the budget request in this structure. At the same time, the Committee continues to believe that the goal of following funds from planning through execution is critical to departmental oversight of the components as well as establishing a capability to make tradeoffs in resource allocation and budget development decisions. As such, the Committee is willing to undertake the effort necessary, working with the Department and the House Committee on Appropriations, to transition from the current structure to a more common appropriations structure, specifically in common accounts, consistent with the guidance provided in fiscal year 2016. Under the account level, a structure closer to the current PPAs would maintain controls and transparency regarding congressional priorities and the offices and officials responsible for execution of funds. The House Appropriations Committee used the new structure, and noted the following in its report: Pursuant to P.L. 114-113 , the fiscal year 2017 budget was presented in a new structure that included four common appropriations accounts for every DHS component. Establishing and implementing this structure required significant time and effort by the entire financial management staff of DHS and its components, for which they are to be commended. As the use of this new structure matures and becomes more disciplined, the Committee believes the agency's leadership, as well as congressional stakeholders, will be better positioned to: 1) conduct more effective oversight of DHS components; 2) better track the life cycle costs of DHS acquisition programs; and, 3) recommend more informed trade-offs among programs when faced with limited resources. No authoritative crosswalk between the House Appropriations Committee proposal in the CAS structure and Senate Appropriations Committee proposal in the legacy structure is publicly available. Section 130 of the Continuing Appropriations Act, 2017 ( P.L. 114-223 ) included specific authority for DHS to obligate resources provided under the continuing resolution in a revised structure, reflected in a table provided to the appropriations committees by the DHS CFO prior to the end of the fiscal year. The explanatory statement for the Division F of the Consolidated Appropriations Act, 2017, included a ""detail table,"" outlining the new structure of DHS appropriations, as well as Programs, Projects, and Activities (PPAs)—the next level of funding detail below the appropriation level. The Administration requested FY2018 funding for DHS in essentially the same structure. If historical trends continue, it is likely that within this general structure, small changes at the PPA level will continue to occur from year to year. A visual representation of this new structure follows in Figure 1 , which illuminates the proportion of these funding categories for each component, as well as the department as a whole. On the left are the five appropriations categories of the revised CAS with a black bar representing the total FY2017 funding levels enacted for DHS for each. A sixth catch-all category is included for budget authority associated with the legislation that does not fit the CAS categories, and a seventh category is included for appropriations for the U.S. Coast Guard, which has not transitioned its accounting system to the CAS format. Colored lines flow to the DHS components listed on the right, showing the amount of funding provided through each category to each component. Appropriations measures for DHS typically have been organized into five titles. The first four are thematic groupings of components, while the fifth provides general direction to the department, and sometimes includes provisions providing additional budget authority. The Department of Homeland Security Appropriations Act, 2017 not only introduced a restructuring of appropriations, it also provided direction to the department and its components differently than in previous years. In previous years, the legislative language of many appropriations included directions to components or specific conditions on how the budget priority it provided could be used. Similarly, general provisions provided directions or conditions to one or more components. In the FY2017 act, a number of these provisions within appropriations and component-specific general provisions were grouped at the ends of the titles where their targeted components are funded, and identified as ""administrative provisions."" Other general provisions, including those affecting multiple components, restrictions on uses of funds in the act, and rescissions of previously appropriated funds, remain in Title V. As noted above, for FY2017 a sixth title provided additional appropriations for several components, in response to evolving situations. It also addressed a March 16, 2017, amendment of the FY2017 budget request by the Trump Administration, seeking additional budget authority for various appropriations. The following sections present textual and tabular comparisons of FY2016 enacted and FY2017 requested and enacted appropriations for the department. The structure of the appropriations and programs, projects, and activities (PPAs) reflects the organization outlined in the explanatory statement accompanying the Department of Homeland Security Appropriations Act, 2017. As the House and Senate appropriations committees did not release the recommendations for funding included in S. 3001 or H.R. 5634 realigned to this structure, authoritative comparisons below the component level of those bills is not possible. The tables summarize the appropriations provided for each component, subtotaling the resources provided through the appropriations legislation and recommended in the accompanying explanatory statement. The ""FY2017 Request"" column reflects the FY2017 budget request by the Obama Administration for annual appropriations, and the Trump Administration's requests for supplemental FY2017 funding from its letters of March 16, 2017, and September 1, 2017. Where supplemental appropriations were requested or provided for a given component, those are displayed after discussion of annual appropriations, and separate totals are provided for each. Following the methodology used by the appropriations committees, totals of ""appropriations"" do not include resources provided by transfer or under adjustments to discretionary spending limits (i.e., for overseas contingency operations for the Coast Guard or the cost of major disasters under the Stafford Act for the Federal Emergency Management Agency). Those amounts are included in the budget authority totals. A subtotal for each component of total estimated resources that would be available under the legislation and from other sources (such as fees, mandatory spending, and trust funds) for the given fiscal year is also provided. At the bottom of each table, totals indicate the total for the title on its own, funding through general provisions and supplemental appropriations (when such were requested or provided), the total for the title's components in the entire bill, and the projected total FY2017 funding for the title's components from all sources (such as fees not governed by the bill, trust funds, etc.). Departmental Management and Operations, the smallest of the first four titles, contains appropriations for the departmental management accounts, Analysis and Operations (A&O), and the Office of the Inspector General (OIG). For FY2016, these components received almost $1.50 billion in net discretionary budget authority through the appropriations process. The Obama Administration requested $1.46 billion in FY2017 net discretionary budget authority for components included in this title. The appropriations request was $37 million (2.5%) less than was provided for FY2016. The Department of Homeland Security Appropriations Act, 2017 provided the components included in this title $1.25 billion in net discretionary budget authority. This was $209 million (14.3%) less than requested by the Obama Administration and $246 million (16.5%) less than was provided in FY2016. Table 1 shows these comparisons in greater detail. As the management directorate and Office of the Inspector General are funded in part with resources from outside Title I, a separate line is included for those components showing a total for exclusively what is provided within Title I, above the line providing the total annual appropriation. Security, Enforcement, and Investigations, comprising roughly three-quarters of the funding appropriated for the department, contains appropriations for U.S. Customs and Border Protection (CBP), Immigration and Customs Enforcement (ICE), the Transportation Security Administration (TSA), the Coast Guard (USCG), and the U.S. Secret Service (USSS). In FY2016, these components received $33.22 billion in net discretionary budget authority through the appropriations process. The Obama Administration requested $32.26 billion in FY2017 net discretionary budget authority for components included in this title, as part of a total budget for these components of $40.04 billion for FY2017. The appropriations request was $957 million (2.9%) less than was provided for FY2016. The first five titles of the Department of Homeland Security Appropriations Act, 2017 provided the components included in this title $33.50 billion in net discretionary budget authority. This was $1.24 billion (3.8%) more than requested by the Obama Administration and $280 million (0.8%) more than was provided in FY2016. The components included in this title received $1.14 billion in additional net discretionary budget authority in Title VI of the act. This was $1.76 billion (60.7%) less than requested by the Trump Administration. Table 2 shows these comparisons in greater detail. Protection, Preparedness, Response, and Recovery, the second largest of the first four titles, contains appropriations for the National Protection and Programs Directorate (NPPD), the Office of Health Affairs (OHA), and the Federal Emergency Management Agency (FEMA). In FY2016, these components received $6.38 billion in net discretionary budget authority and $6.71 billion in specially designated funding for disaster relief through the appropriations process. The Obama Administration requested $5.71 billion in FY2017 net discretionary budget authority for components included in this title, and $6.71 billion in specially designated funding for disaster relief as part of a total budget for these components of $19.82 billion for FY2017. The appropriations request was $718 million (11.2%) less than was provided for FY2016 in net discretionary budget authority. The Department of Homeland Security Appropriations Act, 2017 provided the components included in this title $6.67 billion in net discretionary budget authority. This was $957 million (16.8%) more than requested, and $239 million (4.2%) more than was provided in FY2016. The act also included the requested disaster relief funding. In addition, the Trump Administration requested $7.4 billion in supplemental appropriations for FEMA for FY2017, which was enacted as a part of P.L. 115-56 . Table 3 shows these comparisons in greater detail. As some annually appropriated resources are provided for FEMA from outside Title III, a separate line is included showing a total for exclusively what is provided within Title III, above the line providing the total annual appropriation. Title IV, Research and Development, Training, and Services, the second smallest of the first four titles, contains appropriations for the U.S. Citizenship and Immigration Services (USCIS), the Federal Law Enforcement Training Center (FLETC), the Science and Technology Directorate (S&T), and the Domestic Nuclear Detection Office (DNDO). In FY2016, these components received $1.50 billion in net discretionary budget authority. The Obama Administration requested $1.63 billion in FY2017 net discretionary budget authority for components included in this title, as part of a total budget for these components of $5.52 billion for FY2017. The appropriations request was $134 million (8.9%) more than was provided for FY2016. The Department of Homeland Security Appropriations Act, 2017 provided the components included in this title $1.50 billion in net discretionary budget authority. This was $137 million (8.4%) less than requested, and $3 million (0.2%) less than was provided in FY2016. Table 4 shows these comparisons in greater detail. As noted above, the fifth title of the act contains general provisions, the impact of which may reach across the entire department, impact multiple components, or focus on a single activity. Rescissions of prior-year appropriations—cancellations of budget authority that reduce the net funding level in the bill—are found here. For FY2016, Division F of P.L. 114-113 included $1.51 billion in rescissions. For FY2017, the Administration proposed rescinding $420 million in prior-year funding. Senate Appropriations Committee-reported S. 3001 included $1.23 billion in rescissions, while House Appropriations Committee-reported H.R. 5634 included $1.20 billion. Division F of P.L. 115-31 included $1.48 billion in rescissions. Most of the DHS budget is outside of the defense budget function (050). As a result, most of the department competes with the rest of the federal nondefense budget for nondefense discretionary spending allocations under the budget controls imposed by the Budget Control Act. However, more than $2.0 billion of the FY2017 budget authority enacted for the department is classified as defense discretionary spending—roughly $1.5 billion of which is for the National Protection and Programs Directorate (NPPD). In noting the minority party's concern over the level of funding in the House version of the bill to support government-wide cybersecurity funding, House Appropriations Committee Ranking Member Nita Lowey and Homeland Security Subcommittee Ranking Member Lucille Roybal-Allard wrote in their additional views that the subcommittee's limited defense allocation resulted in underfunding of such activities, and that ""to ensure that upgrades to federal cyber networks are deployed on time,"" the subcommittee's allocation of defense discretionary spending would need to be increased so that additional funding could be provided in the final enacted annual appropriations vehicle. The Obama Administration proposed a 1.6% pay increase for all civilian federal employees and members of the military in its FY2017 budget request. Almost all DHS employees are considered civilians, with the significant exception of Coast Guard military personnel. Executive Order 13756 issued by President Barack Obama on December 27, 2016, provided a pay adjustment of 2.1% for civilian federal employees, allocated as 1.0% base pay and an average 1.1% locality pay. The pay increase became effective on January 8, 2017. Section 601 of the National Defense Authorization Act for Fiscal Year 2017 also provided a 2.1% pay increase, which covers Coast Guard military personnel. The FY2016 Homeland Security Appropriations Act included a new general provision that had been carried in both House- and Senate-reported bills. The provision temporarily prohibited the obligation of appropriated funds for any structural pay reform that affects more than 100 full-time positions or costs more than $5 million in a single year. This prohibition would last until the end of the 30-day period that begins when the Secretary notifies Congress about (1) the number of FTE positions affected by the change, (2) funding required for the change for the current year and through the Future Years Homeland Security Program, (3) the justification for the change, and (4) an analysis of the compensation alternatives to the change that the department considered. This provision was repeated in the House and Senate committee-reported bills for FY2017 and in P.L. 115-31 . Stating that hiring remains the department's ""most daunting management challenge,"" resulting in ""a vicious cycle of bloated and unrealistic budget requests, unfilled mission needs, poor morale, and higher attrition,"" the Senate report expressed the committee's belief that hiring process steps need to be regularly monitored to ensure transparency and the accountability of DHS officials. The Senate committee noted Customs and Border Protection's approach as a model for streamlining the hiring process and directed DHS to continue developing metrics on hiring, attrition, and the overall process that are consistent and repeatable. The report directed DHS to provide a briefing on the strategy to reduce hiring times, provide quarterly metrics by component, and progress toward eventual monthly reporting of metrics within 60 days after the act's enactment. The House committee report directed the Office of the Under Secretary for Management (USM) to continue to provide updates to the committee on a corrective action plan on hiring and hiring metrics. Reiterating the Senate committee's concerns, the report stated that ""most components are still unable to meet their hiring goals, particularly when faced with continued high attrition levels."" According to the report, the lengthy hiring process continues to prevent DHS from signing the most capable applicants and discourages potential recruits from applying. The committee directed the USM to brief the House and Senate Appropriations Committees, within 90 days after the act's enactment, on progress in taking the following actions and any others needed to reform the hiring process: Conduct any necessary polygraph examinations as early as possible in the personnel security process in order to avoid unnecessary background investigation, medical clearance, and other hiring-related expenses; Reevaluate current polygraph disqualifiers; Maximize the use of existing background investigations for applicants who are current federal employees or members of the U.S. Military unless specific fitness factors precluded the acceptance of a previous suitability/fitness determination; Reevaluate fitness factors to improve consistency across the Department, as appropriate, and better promote current reciprocity in acceptance of existing security clearances. The explanatory statement that accompanied P.L. 115-31 reiterated the instructions included in the Senate and House committee reports by directing DHS ""to continue working with every component to develop metrics on hiring, attrition, the processes used to bring staff on board, and a hiring corrective action plan."" The department is to brief the committees within 90 days after the act's enactment on the ""strategy to decrease the number of days it takes to hire new employees."" Among the information to be provided in the briefing are ""quarterly hiring metrics by component,"" ""progress toward monthly metrics reporting,"" and ""progress made to establish reciprocity with other agencies on polygraph examinations and security clearances."" CBP is to ""continue monthly reporting of hiring gains and attrition losses."" Stating that skills in cost analysis, modeling, and statistics are ""in small supply"" within the DHS workforce, the House committee report advised the department that it should consider conducting an analysis of skills and capabilities across the department to determine whether adequate resources are dedicated to its budget and acquisition and management functions. The report also noted that DHS must ""recognize that the private sector is a critical partner in filling capability gaps."" The Senate committee report continued to require DHS to provide monthly data, by component, on the use of paid administrative leave that extends beyond a one-month period. To better understand the assignment of employees to details in other departments, agencies, and entities, for periods longer than three years, the Senate committee directed the department to provide data on such long-term assignments, by home office or component, the receiving office or component, employee grade levels, and underlying authority. The information must also include data on details which are reimbursable and be submitted within 120 days after the act's enactment date. P.L. 115-31 and the explanatory statement that accompanied it did not address this matter, and therefore, the direction stands. The Senate committee report directed DHS, including components, to include a statement within text, audio, or video advertisements (including Internet advertisements) that such advertisements are printed, published, or produced and disseminated at taxpayer expense. An advertisement would be exempt from this requirement if it would adversely impact safety or security or impede an agency from carrying out its statutory authority. P.L. 115-31 and the explanatory statement that accompanied it did not address this matter, and therefore, the direction stands. Several DHS components have specific limitations placed on their funding for ""reception and representation expenses."" These limits range from $2,000 for the Office of the Under Secretary for Management in Senate-reported S. 3001 to $34,425 for Customs and Border Protection in both Senate and House committee-reported bills. Thirteen such limitations, totaling $169,655, appear in Senate committee-reported S. 3001 and 12 such limitations, totaling $154,655, appear in House committee-reported H.R. 5634 . The House committee report indicated that this $15,000 reduction was made in the amount allowed for reception and representation expenses for the Office of the Secretary and Executive Management ""because of DHS's continued failure to fill the position of Assistant Secretary for Policy despite repeated congressional directives, and because the budget request assumed the enactment of new TSA fees totaling $880,000,000 that will almost certainly be unavailable as offsetting collections."" The Senate Appropriations Committee report continued to require quarterly reports on obligations for all reception and representation expenses and stated that the funds should not be used ""to purchase unnecessary collectibles or memorabilia."" In the Department of Homeland Security Appropriations Act, 2017, 13 such limitations appear, totaling $164,655. The explanatory statement restates the House position thusly: A decrease of $5,000 is assessed to the Secretary's ORR funds due to the assumption of $880,000,000 in unauthorized fee revenue in the fiscal year 2017 budget request that artificially reduced the amount of net discretionary appropriations required to fully fund the Transportation Security Administration. DHS should be prepared for additional decrements to ORR funds and other headquarters activities in the future should future requests include similar proposals. For additional perspectives on FY2017 DHS appropriations, see the following: CRS Report R44604, Trends in the Timing and Size of DHS Appropriations: In Brief ; CRS Report R44611, Comparing DHS Component Funding, FY2017: Fact Sheet ; CRS Report R44052, DHS Budget v. DHS Appropriations: Fact Sheet ; CRS Report R44661, DHS Appropriations FY2017: Departmental Management and Operations ; CRS Report R44666, DHS Appropriations FY2017: Security, Enforcement, and Investigations ; CRS Report R44660, DHS Appropriations FY2017: Protection, Preparedness, Response, and Recovery ; and CRS Report R44658, DHS Appropriations FY2017: Research and Development, Training, and Services . Readers also may wish to consult CRS's experts directly. The following table lists names and contact information for the CRS analysts and specialists who contribute to CRS DHS appropriations reports. Budget Authority, Obligations, and Outlays Federal government spending involves a multistep process that begins with the enactment of budget authority by Congress. Federal agencies then obligate funds from enacted budget authority to pay for their activities. Finally, payments are made to liquidate those obligations; the actual payment amounts are reflected in the budget as outlays. Budget authority is established through appropriations acts or direct spending legislation and determines the amounts that are available for federal agencies to spend. The Antideficiency Act prohibits federal agencies from obligating more funds than the budget authority enacted by Congress. Budget authority also may be indefinite, as when Congress enacts language providing ""such sums as may be necessary"" to complete a project or purpose. Budget authority may be available on a one-year, multiyear, or no-year basis. One-year budget authority is available for obligation only during a specific fiscal year; any unobligated funds at the end of that year are no longer available for spending. Multiyear budget authority specifies a range of time during which funds may be obligated for spending, and no-year budget authority is available for obligation for an indefinite period of time. Obligations are incurred when federal agencies employ personnel, enter into contracts, receive services, and engage in similar transactions in a given fiscal year. Outlays are the funds that are actually spent during the fiscal year. Because multiyear and no-year budget authorities may be obligated over a number of years, outlays do not always match the budget authority enacted in a given year. Additionally, budget authority may be obligated in one fiscal year but spent in a future fiscal year, especially with certain contracts. In sum, budget authority allows federal agencies to incur obligations and authorizes payments, or outlays, to be made from the Treasury. Discretionary funded agencies and programs, and appropriated entitlement programs, are funded each year in appropriations acts. Discretionary and Mandatory Spending Gross budget authority , or the total funds available for spending by a federal agency, may be composed of discretionary and mandatory spending. Discretionary spending is not mandated by existing law and is thus appropriated yearly by Congress through appropriations acts. The Budget Enforcement Act of 1990 defines discretionary appropriations as budget authority provided in annual appropriations acts and the outlays derived from that authority, but it excludes appropriations for entitlements. Mandatory spending , also known as direct spending , consists of budget authority and resulting outlays provided in laws other than appropriations acts and is typically not appropriated each year. Some mandatory entitlement programs, however, must be appropriated each year and are included in appropriations acts. Within DHS, Coast Guard retirement pay is an example of appropriated mandatory spending. Offsetting Collections Offsetting funds are collected by the federal government, either from government accounts or the public, as part of a business-type transaction such as collection of a fee. These funds are not considered federal revenue. Instead, they are counted as negative outlays. DHS net discretionary budget authority , or the total funds that are appropriated by Congress each year, is composed of discretionary spending minus any fee or fund collections that offset discretionary spending. Some collections offset a portion of an agency's discretionary budget authority. Other collections offset an agency's mandatory spending. These mandatory spending elements are typically entitlement programs under which individuals, businesses, or units of government that meet the requirements or qualifications established by law are entitled to receive certain payments if they establish eligibility. The DHS budget features two mandatory entitlement programs: the Secret Service and the Coast Guard retired pay accounts (pensions). Some entitlements are funded by permanent appropriations, and others are funded by annual appropriations. Secret Service retirement pay is a permanent appropriation and, as such, is not annually appropriated. In contrast, Coast Guard retirement pay is annually appropriated. In addition to these entitlements, the DHS budget contains offsetting Trust and Public Enterprise Funds. These funds are not appropriated by Congress. They are available for obligation and included in the President's budget to calculate the gross budget authority. 302(a) and 302(b) Allocations In general practice, the maximum budget authority for annual appropriations (including DHS) is determined through a two-stage congressional budget process. In the first stage, Congress sets overall spending totals in the annual concurrent resolution on the budget. Subsequently, these totals are allocated among the appropriations committees, usually through the statement of managers for the conference report on the budget resolution. These amounts are known as the 302(a) allocations . They include discretionary totals available to the House and Senate Committees on Appropriations for enactment in annual appropriations bills through the subcommittees responsible for the development of the bills. In the second stage of the process, the appropriations committees allocate the 302(a) discretionary funds among their subcommittees for each of the appropriations bills. These amounts are known as the 302(b) allocations . These allocations must add up to no more than the 302(a) discretionary allocation and form the basis for enforcing budget discipline, since any bill reported with a total above the ceiling is subject to a point of order. The 302(b) allocations may be adjusted during the year by the respective Appropriations Committee issuing a report delineating the revised suballocations as the various appropriations bills progress toward final enactment. No subcommittee allocations are developed for conference reports or enacted appropriations bills. Table A-1 shows comparable figures for the 302(b) allocation for FY2016, based on the adjusted net discretionary budget authority included in Division F of P.L. 114-113 , the Obama Administration's request for FY2017, and the House and Senate subcommittee allocations for the Homeland Security appropriations bills for FY2017. The Budget Control Act, Discretionary Spending Caps, and Adjustments The FY2012 appropriations bills were the first appropriations bills governed by the Budget Control Act, which established discretionary security and non-security spending caps for FY2012 and FY2013. The bill also established overall caps that govern the actions of appropriations committees in both chambers. Subsequent legislation, including the Bipartisan Budget Act of 2013, amended those caps. Most of the budget for DHS is considered nondefense spending. In addition, the Budget Control Act allows for adjustments that would raise the statutory caps to cover funding for overseas contingency operations/Global War on Terror, emergency spending, and, to a limited extent, disaster relief and appropriations for continuing disability reviews and control of health care fraud and abuse. Three of the four justifications outlined in the Budget Control Act for adjusting the caps on discretionary budget authority have played a role in DHS's appropriations process. Two of these—emergency spending and overseas contingency operations/Global War on Terror—are not limited. The third justification—disaster relief—is limited. Under the Budget Control Act, the allowable adjustment for disaster relief is determined by the Office of Management and Budget (OMB), using the following formula: Limit on disaster relief cap adjustment for the fiscal year = Rolling average of the disaster relief spending over the last ten fiscal years (throwing out the high and low years) + the unused amount of the rolling average from the previous fiscal year. The disaster relief allowable adjustment for FY2017 was $8.129 billion, and was used to provide $6.713 billion for FEMA's Disaster Relief Fund and $1.416 billion for the Department of Housing and Urban Development's (HUD's) Community Development Fund. With the disaster relief allowable adjustment exhausted for the fiscal year, the emergency designation was exercised in P.L. 115-56 to provide $7.4 billion for FEMA's Disaster Relief Fund, $450 million for Small Business Administration disaster loans, and $7.4 billion to HUD's Community Development Fund in the wake of Hurricane Harvey. The adjustment for overseas contingency operations was exercised in P.L. 115-31 , Division F, to provide $163 million to the U.S. Coast Guard. ","This report discusses the FY2017 appropriations for the Department of Homeland Security (DHS). Its primary focus is on funding approved by Congress through the appropriations process. It includes an Appendix with definitions of key budget terms used throughout the suite of Congressional Research Service reports on homeland security appropriations. It also directs the reader to other reports providing context for and additional details regarding specific component appropriations and issues engaged through the FY2016 appropriations process. The Obama Administration requested $40.62 billion in adjusted net discretionary budget authority for DHS for FY2017. The request amounted to a $332 million, or 0.8%, decrease from the $40.96 billion enacted for FY2016 through the Department of Homeland Security Appropriations Act, 2016 (P.L. 114-113, Division F). On May 26, 2016, the Senate Committee on Appropriations reported out S. 3001, accompanied by S.Rept. 114-264. S. 3001 included $41.2 billion in adjusted net discretionary budget authority for FY2017. This was $578 million (1.4%) above the level requested by the Obama Administration, but $246 million (0.6%) above the enacted level for FY2016. On June 22, the House Committee on Appropriations reported out H.R. 5634, accompanied by H.Rept. 114-668. H.R. 5634 included $41.04 billion in adjusted net discretionary budget authority for FY2017. This was $426 million (1.0%) above the level requested by the Administration, and $95 million (0.2%) above the enacted level for FY2016. Direct comparisons of certain aspects of the funding provided by the committee legislation have been complicated by a congressionally mandated restructuring of the department's appropriations. On September 29, 2016, President Obama signed P.L. 114-223 into law, which contained a continuing resolution that funded the government at the same rate of operations as FY2016, minus 0.496%, through December 9, 2016. A second continuing resolution was signed into law on December 10, 2016 (P.L. 114-254), funding the government at the same rate of operations as FY2016, minus 0.1901%, through April 28, 2017. This report discusses anomalies in the continuing resolution that specifically addressed DHS. On March 16, 2017, the Trump Administration submitted an amendment to the FY2017 budget request, which included a request for $3 billion in additional funding for DHS. Congress chose to address this request in the Consolidated Appropriations Act, 2017 (signed into law as P.L. 115-31 on May 5, 2017), which would include both annual and supplemental appropriations for DHS as Division F. The bill included $41.3 billion in adjusted net discretionary budget authority in annual appropriations, as well as $6.7 billion in funding for the costs of major disasters under the Stafford Act and $163 million in funding for overseas contingency operations. Title VI included over $1.1 billion in supplemental appropriations for U.S. Customs and Border Protection, Immigration and Customs Enforcement, and the U.S. Secret Service. On September 1, 2017, the Trump Administration requested $7.85 billion in supplemental funding for FY2017, including $7.4 billion for the DRF. On September 6, the House passed the relief package requested by the Administration as an amendment to H.R. 601. On September 7, the Senate passed an amended version as part of a broader relief package. The House passed the Senate amended version of the bill on September 8, which was signed into law as P.L. 115-56.",govreport
"The September 11, 2001, attacks on the World Trade Center and the Pentagon have drawn attention to the security of many institutions, facilities, and systems in the United States, including the nation's water supply and water quality infrastructure. These systems have long been recognized as being potentially vulnerable to terrorist attacks of various types, including physical disruption, bioterrorism/chemical contamination, and cyber attack. Damage or destruction by terrorist attack could disrupt the delivery of vital human services in this country, threatening public health and the environment, or possibly causing loss of life. Further, since most water infrastructure is government-owned, it may serve as a symbolic and political target for some. This report presents an overview of this large and diverse sector, describes security-related actions by the government and private sector since 9/11, and discusses additional policy issues and responses, including congressional interest. The potential for terrorism is not new. In 1941, Federal Bureau of Investigation Director J. Edgar Hoover wrote, ""It has long been recognized that among public utilities, water supply facilities offer a particularly vulnerable point of attack to the foreign agent, due to the strategic position they occupy in keeping the wheels of industry turning and in preserving the health and morale of the American populace."" Water infrastructure systems also are highly linked with other infrastructure systems, especially electric power and transportation, as well as the chemical industry which supplies treatment chemicals, making security of all of them an issue of concern. These types of vulnerable interconnections were evident, for example, during the August 2003 electricity blackout in the Northeast United States: wastewater treatment plants in Cleveland, Detroit, New York, and other locations that lacked backup generation systems lost power and discharged millions of gallons of untreated sewage during the emergency, and power failures at drinking water plants led to boil-water advisories in many communities. Likewise, natural disasters such as the 2005 Gulf Coast hurricanes and 2007 Mississippi River floods caused extensive and costly damage to multiple infrastructure systems—transportation, water, electric power, and telecommunications. Broadly speaking, water infrastructure systems include surface and ground water sources of untreated water for municipal, industrial, agricultural, and household needs; dams, reservoirs, aqueducts, and pipes that contain and transport raw water; treatment facilities that remove contaminants from raw water; finished water reservoirs; systems that distribute water to users; and wastewater collection and treatment facilities. Across the country, these systems comprise approximately 77,000 dams and reservoirs; thousands of miles of pipes, aqueducts, water distribution, and sewer lines; 168,000 public drinking water facilities (many serving as few as 25 customers); and about 16,000 publicly owned wastewater treatment facilities. All of these systems and facilities must be operable 24 hours a day, seven days a week. Ownership and management are both public and private; the federal government has ownership responsibility for hundreds of dams and diversion structures, but the vast majority of the nation's water infrastructure is either privately owned or owned by non-federal units of government. The federal government has built hundreds of water projects, primarily dams and reservoirs for irrigation development and flood control, with municipal and industrial water use as an incidental, self-financed, project purpose. Many of these facilities are critically entwined with the nation's overall water supply, transportation, and electricity infrastructure. The largest federal facilities were built and are managed by the Bureau of Reclamation (Reclamation) of the Department of the Interior and the U.S. Army Corps of Engineers (Corps) of the Department of Defense. Reclamation reservoirs, particularly those along the Colorado River, supply water to millions of people in southern California, Arizona, and Nevada via Reclamation and non-Reclamation aqueducts. Reclamation's inventory of assets includes 471 dams and dikes that create 348 reservoirs with a total storage capacity of 245 million acre-feet of water. Reclamation projects also supply water to 9 million acres of farmland and other municipal and industrial water users in the 17 western states. The Corps operates 276 navigation locks, 11,000 miles of commercial navigation channel, and approximately 1,200 projects of varying types, including 609 dams. It supplies water to thousands of cities, towns, and industries from the 9.5 million acre-feet of water stored in its 116 lakes and reservoirs throughout the country, including service to approximately 1 million residents of the District of Columbia and portions of northern Virginia. The largest Corps and Reclamation facilities also produce enormous amounts of power. For example, Hoover and Glen Canyon dams on the Colorado River represent 23% of the installed electrical capacity of the Bureau of Reclamation's 58 power plants in the West and 7% of the total installed capacity in the Western United States. Similarly, Corps facilities and Reclamation's Grand Coulee Dam on the Columbia River provide 43% of the total installed hydroelectric capacity in the West (25% nationwide). Still, despite its critical involvement in such projects, especially in the West, the federal government is responsible for only about 5% of the dams whose failure could result in loss of life or significant property damage. The remaining dams belong to state or local governments, utilities, and corporate or private owners. A fairly small number of large drinking water and wastewater utilities located primarily in urban areas (about 15% of the systems) provide water services to more than 75% of the U.S. population. Arguably, these systems represent the greatest targets of opportunity for terrorist attacks, while the larger number of small systems that each serve fewer than 10,000 persons are less likely to be perceived as key targets by terrorists who might seek to disrupt water infrastructure systems. However, the more numerous smaller systems also tend to be less protected and, thus, are potentially more vulnerable to attack, whether by vandals or terrorists. A successful attack on even a small system could cause widespread panic, economic impacts, and a loss of public confidence in water supply systems. Attacks resulting in physical destruction to any of these systems could include disruption of operating or distribution system components, power or telecommunications systems, electronic control systems, and actual damage to reservoirs and pumping stations. A loss of flow and pressure would cause problems for customers and would hinder firefighting efforts. Further, destruction of a large dam could result in catastrophic flooding and loss of life. Bioterrorism or chemical attacks could deliver widespread contamination with small amounts of microbiological agents or toxic chemicals, and could endanger the public health of thousands. While some experts believe that risks to water systems actually are small, because it would be difficult to introduce sufficient quantities of agents to cause widespread harm, concern and heightened awareness of potential problems are apparent. Factors that are relevant to a biological agent's potential as a weapon include its stability in a drinking water system, virulence, culturability in the quantity required, and resistance to detection and treatment. Cyber attacks on computer operations can affect an entire infrastructure network, and hacking in water utility systems could result in theft or corruption of information, or denial and disruption of service. Water infrastructure system designers, managers, and operators have long made preparing for extreme events a standard practice. Historically, their focus has been on natural events—major storms, blizzards, and earthquakes—some of which could be predicted hours or longer before they occurred. When considering the risk of manmade threats, operators generally focused on purposeful acts such as vandalism or theft by disgruntled employees or customers, rather than broader malevolent threats by terrorists, domestic or foreign. The events of September 11, 2001, changed this focus. Federal dam operators went on ""high-alert"" immediately following the 9/11 terrorist attacks. Reclamation closed its visitor facilities at Grand Coulee, Hoover, and Glen Canyon dams. Because of potential loss of life and property downstream if breached, security threats are under constant review, and coordination efforts with both the National Guard and local law enforcement officials are ongoing. The Corps temporarily closed all its facilities to visitors immediately after 9/11, although locks and dams remained operational; most closed facilities later re-opened, but security continues to be reassessed. Following a heightened alert issued by the federal government in February 2003, Reclamation implemented additional security measures which remain in effect at dams, powerplants, and other facilities, including limited access to facilities and roads, closure of some visitor centers, and random vehicle inspections. Although officials believe that risks to water and wastewater utilities are small, operators have been under heightened security conditions since 9/11. Local utilities have primary responsibility to assess their vulnerabilities and prioritize them for necessary security improvements. Most (especially in urban areas) have emergency preparedness plans that address issues such as redundancy of operations, public notification, and coordination with law enforcement and emergency response officials. However, many plans were developed to respond to natural disasters, domestic threats such as vandalism, and, in some cases, cyber attacks. Drinking water and wastewater utilities coordinated efforts to prepare for possible Y2K impacts on their computer systems on January 1, 2000, but these efforts focused more on cyber security than physical terrorism concerns. Thus, it was unclear whether previously existing plans incorporate sufficient procedures to address other types of terrorist threats. Utility officials are reluctant to disclose details of their systems or these confidential plans, since doing so might alert terrorists to vulnerabilities. Water supply was one of eight critical infrastructure systems identified in President Clinton's 1998 Presidential Decision Directive 63 (PDD-63) as part of a coordinated national effort to achieve the capability to protect the nation's critical infrastructure from intentional acts that would diminish them. These efforts focused primarily on the 340 large community water supply systems which each serve more than 100,000 persons. The Environmental Protection Agency (EPA) was identified as the lead federal agency for liaison with the water supply sector. In response, in 2000, EPA established a partnership with the American Metropolitan Water Association (AMWA) and American Water Works Association (AWWA) to jointly undertake measures to safeguard water supplies from terrorist acts. AWWA's Research Foundation contracted with the Department of Energy's Sandia National Laboratory to develop a vulnerability assessment tool for water systems (as an extension of methodology for assessing federal dams). EPA supported a project with the Sandia Lab to pilot test the physical vulnerability assessment tool and develop a cyber vulnerability assessment tool. An Information Sharing and Analysis Center (ISAC) supported by an EPA grant became operational under AMWA's leadership in December 2002. It allows for dissemination of alerts to drinking water and wastewater utilities about potential threats or vulnerabilities to the integrity of their operations that have been detected and viable resolutions to problems. Research on water sector infrastructure protection has been underway for some time. The Department of the Army conducts research in the area of detection and treatment to remove various chemical agents. The Federal Emergency Management Agency (FEMA) has led an effort to produce databases of water distribution systems and to develop assessment tools for evaluating threats posed by the introduction of a biological or chemical agent into a water system. The Centers for Disease Control and Prevention is developing guidance on potential biological agents and the effects of standard water treatment practices on their persistence. However, in the 2001 report of the President's Commission on Critical Infrastructure Protection, ongoing water sector research was then characterized as a small effort that leaves a number of gaps and shortfalls relative to U.S. water supplies. This report stated that gaps exist in four major areas, concerns that remain relevant and continue to guide policymakers. Threat/vulnerability risk assessments, Identification and characterization of biological and chemical agents, A need to establish a center of excellence to support communities in conducting vulnerability and risk assessment, and Application of information assurance techniques to computerized systems used by water utilities, as well as the oil, gas, and electric sectors, for operational data and control operations. For some time, less attention was focused on protecting wastewater treatment facilities than drinking water systems, perhaps because destruction of them likely represents more of an environmental threat (i.e., by release of untreated sewage) than a direct threat to life or public welfare. Vulnerabilities do exist, however. Large underground collector sewers could be accessed by terrorist groups for purposes of placing destructive devices beneath buildings or city streets. Pipelines can be made into weapons via the introduction of a highly flammable substance such as gasoline through a manhole or inlet. Explosions in the sewers can cause collapse of roads, sidewalks, and adjacent structures and injure and kill people nearby. Damage to a wastewater facility prevents water from being treated and can impact downriver water intakes. Destruction of containers that hold large amounts of chemicals at treatment plants could result in release of toxic chemical agents, such as chlorine gas, which can be deadly to humans if inhaled and, at lower doses, can burn eyes and skin and inflame the lungs. Since the 2001 terrorist attacks, many water and wastewater utilities have switched from using chlorine gas as disinfection to alternatives which are believed to be safer, such as sodium hypochlorite or ultraviolet light. However, some consumer groups remain concerned that many wastewater utilities, including facilities that serve heavily populated areas, continue to use chlorine gas. To prepare for potential accidental releases of hazardous chemicals from their facilities, more than 2,800 wastewater and drinking water utilities, water supply systems, and irrigation systems already are subject to risk management planning requirements under the Clean Air Act. Still, some observers advocate requiring federal standards to ensure that facilities using dangerous chemicals, such as wastewater treatment plants, use the best possible industry practices (practices that are referred to as Inherently Safer Technologies, or ISTs) to reduce hazards. In 2007, the U.S. Chemical Safety and Hazard Investigation Board issued a safety bulletin recommending that the Department of Transportation increase regulation of wastewater and drinking water treatment plants and other types of facilities that receive chlorine gas by railcar to require that they install remotely operated emergency isolation devices to unload chlorine railcars, for rapid shutdown in the event of leakage or other failure. In 2006, the Government Accountability Office (GAO) reported on a survey of security measures at 200 of the nation's largest wastewater utilities. GAO found that many have made security improvements since the 2001 terrorist attacks. Most utilities said they had completed, or intended to complete, a plan to conduct some type of security assessment, although there is no federal mandate to do so. More than half of responding facilities indicated they did not use potentially dangerous gaseous chlorine as a wastewater disinfectant. However, the report noted that these utilities have made little effort to address collection system vulnerabilities, due to the technical complexity and expense of securing collection systems that cover large areas and have many access points. Some told GAO investigators that taking other measures, such as converting from gaseous chlorine, took priority over collection system protections. In a 2007 follow-on study, GAO reported that actual and projected capital costs to convert from chlorine gas to alternative disinfection methods range from about $650,000 to just over $13 million. Factors affecting conversion costs included the type of alternative method; the size of the facility; and labor, building, and supply costs, which varied considerably. There are no federal standards or agreed-upon practices within the water infrastructure sector to govern readiness, response to security incidents, and recovery. EPA is not authorized to require water infrastructure systems to implement specific security improvements or meet particular security standards. Efforts to develop voluntary protocols and tools are ongoing since the 2001 terrorist attacks. Wastewater and drinking water utility organizations are implementing computer software and training materials to evaluate vulnerabilities at large, medium, and small utility systems, and EPA has provided some grant assistance to drinking water utilities for vulnerability assessments. Out of funds appropriated in 2002 ( P.L. 107-117 ), EPA awarded grants to nearly 900 large and medium drinking water utilities to conduct vulnerability assessments. EPA also has targeted grants to ""train the trainers,"" delivering technical assistance to organizations such as the Rural Community Assistance Program and the Water Environment Federation that, in turn, can assist and train personnel at thousands of medium and small utilities throughout the country. Rural and small systems also have received support from the U.S. Department of Agriculture. With financial support from EPA, drinking water and wastewater utility and engineering groups developed three security guidance documents, issued in 2004, that cover the physical design of online contaminant monitoring systems, and physical security enhancements of drinking water, wastewater, and stormwater infrastructure systems. The documents provide voluntary guidelines for assisting utilities that have completed vulnerability assessments to mitigate vulnerabilities of their systems through the design, construction, operation, and maintenance of both new and existing systems. Based on the three guidance documents, these groups also have drafted training materials and a set of voluntary standardized best engineering practices that recommend measures to protect water and wastewater infrastructure against a range of threats, including terrorist attacks and other sources of potential harm, such as accidents, chemical contamination, and natural disasters. EPA has taken a number of organizational and planning steps to strengthen water security. The agency created a National Homeland Security Research Center within the Office of Research and Development to develop the scientific foundations and tools that can be used to respond to attacks on water systems. The Center conducts applied research on ways to protect and prevent, mitigate, respond to, and recover from security events. EPA also created a Water Security Division in the Office of Water, taking over activities initiated by a Water Protection Task Force after the 9/11 terrorist attacks. This office provides guidance and tools to utilities as they assess and reduce vulnerabilities of their systems. It trains water utility personnel on security issues, supports the WaterISAC, and implements the agency's comprehensive research plan. In 2004 EPA issued a Water Security Research and Technical Support Action Plan, identifying critical research needs and providing an implementation plan for addressing those needs. A preliminary review of the Research and Action Plan by a panel of the National Research Council identified some gaps, suggested alternative priorities, and noted that the Plan was silent on the financial resources required to complete the research and to implement needed countermeasures to improve water security. Subsequently, in 2007, the National Research Council concluded that EPA has developed useful contaminant information and exposure assessment tools in several key areas, but that other areas, such as physical and cyber security, contingency planning, and wastewater security, have shown weaker or somewhat disjointed progress. An overarching issue is making water security information accessible to those who might need it . GAO has issued two reports discussing how future federal funding can best be spent to improve security at drinking water and wastewater utilities. Both reports are based on the views of subject matter experts identified by GAO. In the drinking water report, specific activities judged by the experts to be most deserving of federal support included physical and technological upgrades, education and training for staff and responders, and strengthening key relationships between water utilities and others such as law enforcement and public health agencies. In the wastewater report, the experts cited the replacement of gaseous chemicals used in the disinfection process with less hazardous alternatives as a key activity deserving of federal funds, along with improving local, state, and regional collaboration, and support facilities' vulnerability assessments. Asked how federal funds should be allocated, both groups of experts favored giving priority to utilities that serve critical assets (such as public health institutions, government, and military bases) and to utilities serving areas with large populations. A key focus of EPA's activities since 2005 has been the Water Sector Initiative. Initially known as WaterSentinel, it is a pilot project that could serve as a model for water utilities throughout the country. Its purpose is to test and demonstrate contamination warning systems at drinking water utilities and municipalities. EPA awarded grants to install and evaluate early warning systems in five cities under this program (Cincinnati, New York, San Francisco, Dallas, and Philadelphia). More broadly, EPA has expanded its security activities in two ways. First, its focus has enlarged from the post-9/11 emphasis on terrorism to an ""all hazards"" approach, emphasizing to water utilities that issues of risk identification and risk reduction also include natural disasters (which were the focus of much of the industry's attention before 2001) and protection of hazardous chemicals. Second, EPA supports the establishment of intrastate mutual aid and assistance agreements, known as Water/Wastewater Agency Response Networks (WARNS), to facilitate flow of personnel and resources during response to emergencies. They are intended to provide mechanisms for establishing emergency contacts and facilitating short-term emergency assistance to restore critical operations. Mutual aid agreements existed in California and Florida before the 2005 Gulf hurricanes, and more formal efforts to establish similar programs in all 50 states followed on those disasters. So far, WARNS have been established in about 20 states, according to EPA. The agency also has developed a variety of guidance documents and other information resources to support drinking water and wastewater utility preparedness, response, and recovery. A Vulnerability Self-Assessment Tool (VSAT), a risk assessment software tool to assist drinking water and wastewater owners and operators in performing security threats and natural hazards risk assessments, as well as updating emergency response plans. A Water Contaminant Information Tool (WCIT), a secure online database with information for federal, state, and local agencies and emergency responders about chemical, biological, and radiochemical contaminants of concern for the water sector. A scenario-based Tabletop Exercise Tool for Water Systems (TTX Tool) that addresses emergency preparedness and response for a number of potential natural hazards and manmade incidents. A Water Health and Economic Analysis Tool (WHEAT) to assist drinking water utilities in quantifying public health impacts, utility financial costs, and regional economic impacts of an adverse event. Currently this two examines two scenarios: release of hazardous gas, or loss of operating assets in a drinking water distribution system. Officials have been reassessing federal infrastructure status and vulnerabilities for several years. The Bureau of Reclamation's site security program is aimed at ensuring protection of Reclamation's 252 high- and significant-hazard dams and facilities and 58 hydroelectric plants. After September 11, Reclamation committed to conducting vulnerability and risk assessments at 280 high-priority facilities. Risk assessments at these facilities were completed between FY2002 and FY2006. These assessments resulted in recommendations now being implemented to enhance security procedures and physical facilities, such as additional security staffing, limited vehicle and visitor access, and coordination with local law enforcement agencies. The Corps implements a facility protection program to detect, protect, and respond to threats to Corps facilities and a dam security program to coordinate security systems for Corps infrastructure. It also implements a national emergency preparedness program which assists civilian governments in responding to all regional/national emergencies, including acts of terrorism. Both agencies participate in the Interagency Committee on Dam Safety (ICODS), which is part of the National Dam Safety Program that is led by FEMA. A 2003 White House report presented a national strategy for protecting the nation's critical infrastructures and identified four water sector initiatives: identify high-priority vulnerabilities and improve site security; improve monitoring and analytic capabilities; improve information exchange and coordinate contingency planning; and work with other sectors to manage unique risks resulting from interdependencies. The strategy was intended to focus national protection priorities, inform resource allocation processes, and be the basis for cooperative public and private protection actions. The Department of Homeland Security (DHS, established in P.L. 107-297 ) has a mandate to coordinate securing the nation's critical infrastructure, including water infrastructure, through partnerships with the public and private sectors. It is responsible for detailed implementation of core elements of the national strategy for protection of critical infrastructures. One of its tasks is to assess infrastructure vulnerabilities, an activity that wastewater and drinking water utilities have been doing since the 9/11 attacks, under their own initiatives and congressional mandates ( P.L. 107-188 ; see "" Legislative Issues "").The legislative reorganization did not transfer Corps or Reclamation responsibilities for security protection of dams and other facilities or EPA's responsibilities to assist drinking water and wastewater utilities. In 2003, President Bush issued Homeland Security Presidential Directive/HSPD-7 which established a national policy for the federal government to identify, prioritize, and protect critical infrastructure as a part of homeland security. The directive called for DHS to integrate all security efforts among federal agencies and to complete a comprehensive national plan for critical infrastructure protection. In 2006, DHS issued a National Infrastructure Protection Plan (NIPP), proposing a framework of partnerships between private industry sectors and the government that would work together to secure the nation's vital resources. For example, EPA would work with water treatment and wastewater systems, while dams would cooperate with DHS. The Department updated the NIPP in February 2009. The plan is intended to provide the unifying structure for the integration of a wide range of efforts for the enhanced protection and resiliency of the nation's critical infrastructure and key resources into a single national program. The Department established the Critical Infrastructure Partnership Advisory Council (CIPAC) to coordinate federal infrastructure protection programs with similar activities of the private sector, and state, local, and tribal governments. In 2004, CIPAC established a Government Coordinating Council (GCC) and non-government coordinating council for each sector. The CIPAC Water Sector Committee includes representatives from both the Water GCC (federal members) and the Water Sector Coordinating Council (WSCC). The WSCC consists of 24 members from state and local agencies, water utilities, and water affinity organizations. In response to the original NIPP, DHS and the GCCs, in conjunction with the Sector Coordinating Councils, prepared 17 sector-specific plans which were completed in 2007. The plans identify sector profiles and assets, assess risks, prioritize infrastructure, identify sector protection plans and measures of progress. The water sector plan for wastewater and drinking water focuses on four goals: (1) sustaining protection of public health and the environment; (2) recognize and reduce risks; (3) maintain a resilient infrastructure; and (4) increase communication, outreach, and public confidence. The sector plan for dams, including federal dams, is one of 10 that DHS determined presents security sensitivity issues if widely distributed; thus, those 10 plans were not released to the public. In an early review of the sector plans, GAO found that the drinking water and wastewater sector plan was more developed than that of many other sectors, largely because the sector has a 30-year history of protection and cooperation, but for that reason, the plan did not provide added value for the sector. In the NIPP, DHS described a plan to develop a risk analysis method that would include a uniform means of measuring risk and assessing consequences across infrastructure sectors. Some drinking water and wastewater treatment industry officials commented that this plan, known as the Risk Analysis and Management for Critical Asset Protection (RAMCAP), raised concern that it could force some facilities to conduct new, or revise existing, vulnerability assessments. Drinking water industry officials are said to be concerned that a new method may not recognize vulnerability assessments that many drinking water utilities have already completed under requirements of the 2002 Bioterrorism Preparedness Act (see "" Legislative Issues ""). This is a particular concern for small and rural utilities, many of which have used simpler security models to complete their vulnerability assessment plans and would prefer to build on that model to conduct RAMCAP and similar activities. While physical security of facilities is a key concern, cyber security issues continue to draw attention, as well. The Water Sector Coordinating Council has developed guidance on protecting potentially vulnerable drinking water and wastewater systems from targeted cyber attack or accidental cyber events and has hosted workshops for utility employees who are responsible for control system security. The Homeland Security Department's involvement in water security concerns has been growing, although under HSPD-7, EPA continues as the lead federal agency to ensure protection of drinking water and wastewater treatment systems from possible terrorist acts and other sabotage. Since early 2004, DHS has been preparing guidance documents on how each infrastructure sector, including water systems, can protect itself from security threats. For some time, the two agencies have been working to clarify their roles in providing security to water utilities. One of the functions of the Water Sector Coordinating Council is to be a point of contact for DHS to vet potential water security policies, allowing one-stop shopping for federal officials. In 2003, DHS created an information-sharing network, called the Homeland Security Information Network (HSIN). Both it and the existing WaterISAC share the goal of providing security information to water utilities, but they differ in some respects. The WaterISAC is a private, subscription service (although it receives some federal funding) that provides information to about 450 water utilities and others on security matters. It is the primary communication tool in the water sector. The HSIN, a software program, is a free, federally funded platform for information sharing. It is not limited to the water sector, and it provides no information by itself; it acts as a bulletin board where DHS, EPA, and utilities can post security-related information. Distinct from the HSIN and the WaterISAC is the Water Security Channel (WaterSC), launched in 2004 as a free service of the WaterISAC, which disseminates EPA and DHS general security bulletins at the request of those agencies to more than 8,400 utilities, state agencies, engineering firms, and researchers. Congress and other policymakers have considered a number of initiatives in this area, including enhanced physical security, communication and coordination, and research. Regarding physical security, a key question is whether protective measures should be focused on the largest water systems and facilities, where risks to the public are greatest, or on all, since small facilities may be more vulnerable. A related question is responsibility for additional steps, because the federal government has direct control over only a limited portion of the water infrastructure sector. The distributed and diverse nature of ownership (federal, non-federal government, and private) complicates assessing and managing risks, as does the reality of limited resources. The adequacy of physical and operational security safeguards is an issue for all in this sector. One possible option for federal facilities (dams and reservoirs maintained by Reclamation and the Corps) is to restrict visitor access, including at adjacent recreational facilities, although such actions could raise objections from the public. Some operators of non-federal facilities and utilities are likewise concerned. As a precaution after the 9/11 attacks, New York City, which provides water to 9 million consumers, closed its reservoirs indefinitely to all fishing, hiking, and boating and blocked access to some roads. Policymakers have examined measures that could improve coordination and exchange of information on vulnerabilities, risks, threats, and responses. This is a key objective of the WaterISAC and also of the Department of Homeland Security, which includes, for example, functions of the National Infrastructure Protection Center (NIPC) of the FBI that brings together the private sector and government agencies at all levels to protect critical infrastructure, especially on cyber issues. One issue of interest is how the Department is coordinating its activities with ongoing security efforts by other federal agencies and non-federal entities that operate water infrastructure systems, including its implementation of the comprehensive national plan required by Presidential Directive/HSPD-7. For some time, the two agencies have been working to clarify their roles in providing security to water utilities and in other areas and have negotiated agreements concerning joint research projects and coordination for specific field operations. Nevertheless, in the conference report accompanying the FY2005 Consolidated Appropriations Act, Congress directed EPA to enter into a memorandum of understanding (MOU) with DHS to define the relationship of the two entities with regard to the protection and security of the nation. The memorandum was expected to specifically identify areas of responsibilities and the potential costs (including which entity pays, in whole or part) for meeting such responsibilities. EPA responded to this directive in November 2005 by issuing a report that identified general authorities that govern EPA's and DHS's respective actions, ongoing projects that reflect coordination, and existing project-specific MOUs. This EPA report on roles and responsibilities still may not resolve the potential for duplication and overlap among agencies. Currently, for example, policies are being developed both by DHS and EPA, although both agencies are represented on DHS's Water Sector Committee through the CIPAC process. Information sharing and dissemination even in this one sector are occurring through several different mechanisms: DHS supports the Homeland Security Information Network (HSIN), while drinking water and wastewater utilities also may receive security-related advisories from two other sources, the WaterISAC and the Water Security Channel. Some have questioned the multiple advisory groups, on top of existing entities, and in particular the potential that the several mechanisms for sharing homeland security information could transmit inconsistent information and make the exchange of information more complicated, not less. Others are optimistic that the systems and groups will sort themselves out into compatible and complementary networks of information sharing, but that process could take considerable time. In its March 2006 report, GAO commented on these multiple information services designed to communicate information to the water sector, but also acknowledged EPA's and DHS's ongoing efforts to coordinate their activities to advance water sector security. GAO recommended that DHS and the Water Sector Coordinating Council identify areas where information-sharing networks supported by EPA and DHS (especially the WaterISAC and HSIN) could be better coordinated to avoid operational duplications and overlap and to ensure that security threat information is provided to water systems on a timely basis. Water utility industry groups responded to GAO's recommendation by saying that such coordination efforts are, in fact, underway. DHS-EPA coordination again received congressional attention in the 110 th Congress. In its draft report on FY2009 funding for DHS, the House Appropriations Committee included report language urging DHS to work with EPA on water security issues. The report encouraged the National Protection and Programs Directorate of DHS to work with EPA ""to improve federal outreach to water system managers, increase support and guidance on implementation of risk assessment techniques, and publicize effective protective measures that can be taken to increase water system security."" Beyond the water sector itself, there is interest in larger coordination issues involving cross-sector interdependencies of critical infrastructures. As noted previously, water utilities are dependent on electric power to treat and distribute power, and electric power is essential to collecting and treating wastewater. Adequate and uninterrupted supply of water is necessary to support municipal firefighting. When disasters occur, what affects power also affects water supply, also affects sanitary services, also affects communications capability. The National Infrastructure Advisory Council, which provides the President, through DHS, with advice on infrastructure security, reportedly is currently engaged in a regional resilience study focused on the Philadelphia region that is examining interdependencies of water and other critical sectors (e.g., energy, telecommunications, transportation). Another information issue concerns the extent of EPA's ability to collect and analyze security data from water utilities, especially information in vulnerability assessments submitted under the Bioterrorism Preparedness Act (discussed below). EPA officials believe that the act permits reviewing utility submissions for overall compliance and allows aggregation of data but precludes the agency from asking for or analyzing data showing changes in security levels, as a safeguard against unintended release of such information. Others, including EPA's Inspector General, believe that EPA has the authority and responsibility to review and analyze the information in order to identify and prioritize threats and to develop plans to protect drinking water supplies. Among the research needs being addressed real-time monitoring of water supplies, and development of information technology. The cost of additional protections and how to pay for them are issues of great interest, and policymakers continue to consider resource needs and how to direct them at public and private sector priorities. A critical issue for drinking water and wastewater utilities is how to pay for physical security improvements, since currently there are no federal funds dedicated to these purposes, and utilities generally must pay for improvements using the same revenue or funding sources also needed for other types of capital projects. Since the September 11, 2001 attacks, Congress has conducted oversight on a number of these issues and considered legislation to address various policy issues, including government reorganization, and additional appropriations. Since the 9/11 terrorist attacks, Congress has provided appropriations to the Corps, the Bureau, and EPA for security-related programs and activities to protect water infrastructure. For both the Bureau of Reclamation and the Army Corps of Engineers, appropriations immediately after 9/11 were intended to support risk assessment of needed security improvements, followed by implementation of measures to ensure the safety and security of the public, Reclamation and Corps employees, and the facilities. For example, since FY2004, both agencies have implemented physical hardening and other protective measures, as well as personnel and information security. Both agencies continue to assess and reassess security needs at their facilities as part of ongoing efforts to ensure their long-term security. Reclamation's security budget includes a law enforcement program (guards and surveillance), facility fortification, studies, and review. For several years, Reclamation's security activities focused on five National Critical Infrastructure (NCI) dam facilities: Hoover, Shasta, Grand Coulee, Glen Canyon, and Fulsom; in recent years, other facilities also have received recommended security upgrades. Physical security enhancements at Reclamation facilities are intended to protect those facilities from terrorist threats, other criminal activities, and unauthorized operation of water control systems, thus reducing the high risk rating at critical assets. Several independent and internal reviews were conduction of Reclamation's site security program (including a review by Sandia National Laboratory, Interior's Office of Inspector General, and the National Academy of Sciences). As a result, Reclamation implemented improvements to all components of its program, including personnel security, information security, facility security, operations security, and law enforcement. The Corps' budget covers recurring security costs (i.e., guards and monitoring) for its administrative buildings and other general use facilities. The Corps also funds certain project-specific facility security upgrades. Funding appropriated to EPA has supported a number of activities. Significant portions of appropriations in FY2002 and FY2003 were for EPA grants for vulnerability assessments carried out by large and medium-size drinking water systems, to assist them in complying with requirements of the Public Health Security and Bioterrorism Preparedness and Response Act ( P.L. 107-188 , discussed below). EPA appropriations also supported training and development of voluntary industry practices for security, and grants to states and territories to coordinate activities for critical water infrastructure security efforts. EPA also provides support for water security information sharing for drinking water and wastewater utilities through the WaterISAC and the Water Security Channel. EPA has supported two special initiatives since FY2006: the Water Alliance for Threat Reduction (WATR), to train utility operators at the highest risk systems; and a related pilot program, the Water Sector Initiative, to design, deploy, and test biological or other contamination warning systems at drinking water. In May 2002, Congress approved the Public Health Security and Bioterrorism Preparedness and Response Act ( P.L. 107-188 ). Title IV of that act required drinking water systems serving more than 3,300 persons to conduct vulnerability analyses and to submit the assessments to EPA. The legislation authorized grant funding to assist utilities in meeting these requirements. Legislation authorizing Reclamation to contract with local law enforcement to protect its facilities also was enacted during the 107 th Congress ( P.L. 107-69 ). In 2001, the House and Senate considered but did not enact legislation authorizing a six-year grant program for research and development on security of water supply and wastewater treatment systems ( H.R. 3178 , S. 1593 ). Some of the drinking water research provisions in these bills were included in the Bioterrorism Preparedness Act. In 2002, the House approved a bill authorizing $220 million in grants and other assistance for vulnerability assessments by wastewater treatment utilities ( H.R. 5169 ), but the Senate did not act on a related bill ( S. 3037 ). In the 108 th Congress, legislation authorizing vulnerability assessment grants to wastewater utilities was approved by the House ( H.R. 866 , identical to H.R. 5169 in the 107 th Congress). The Senate Environment and Public Works Committee approved related legislation ( S. 1039 ). No further action occurred, due in part to concerns expressed by some that the legislation did not require that vulnerability assessments be submitted to EPA, as is the case with drinking water assessments required by the 2002 Bioterrorism Preparedness Act. Wastewater security issues again received some attention in the 109 th Congress. In May 2006, the Senate Environment and Public Works Committee approved S. 2781 , legislation similar to S. 1039 in the 108 th Congress. It would have encouraged wastewater utilities to conduct vulnerability assessments and authorized $220 million to assist utilities with assessments and preparation of site security plans. It also included provisions responding to GAO's March 2006 report that found that utilities have made little effort to address vulnerabilities of collection systems, which may be used by terrorists to introduce hazardous substances or as access points for underground travel to a potential target. S. 2781 would have authorized EPA to conduct research on this topic. During consideration of the bill, the Senate committee rejected an amendment that would have required, rather than encouraged, treatment works to conduct vulnerability assessments and also would have required high-risk facilities to switch from using chlorine and similar hazardous substances to other chemicals that are often referred to as ""inherently safer technologies."" Similar legislation was introduced in the 110 th Congress ( S. 1968 ). In the 111 th Congress, H.R. 2883 , the Wastewater Treatment Works Security Act of 2009, was introduced to require wastewater utilities that use or store substances of concern to carry out assessments and develop site security plans, in compliance with EPA guidelines. The bill would have authorized $1 billion in grants for vulnerability assessments, security enhancements, or worker training programs. No similar bill was introduced in the 112 th Congress. Another issue of interest has been the concerns of a number of water supply and power users of Bureau of Reclamation facilities about paying for security costs at these facilities. Since 9/11, Reclamation has increased security and anti-terrorist measures at federal multi-purpose dams. From 2002 through 2004, all of the incremental security costs were paid by the federal government. However, since 2005, the Administration has requested that users should fully reimburse government for the guards and patrols portion of site security costs. In the Administration's view, project beneficiaries have had several years to adjust their expectations, budgets, and planning for current guard and patrol levels and that post-9/11 cost increases should now be considered project O&M expenses subject to allocation among project purposes and reimbursement from beneficiaries. Many users argued that security costs for which the general public is the beneficiary, including obligations for national defense, should properly be the federal government's responsibility. The issue is especially a concern for beneficiaries of Reclamation's five high-priority dams, such as Hoover and Grand Coulee, which have the largest security needs, because these users are being asked to pay a proportionally higher share of total security costs than users of other Reclamation facilities. Hearings on the issue were held by the House Natural Resources Committee, in June 2006, and the Senate Energy and Natural Resources Committee, in July 2007. A compromise on the issue is reflected in legislation enacted in 2008. Section 513 of the Consolidated Natural Resources Act of 2008 ( P.L. 110-229 ) requires water and power users to pay for the cost of security guards, but sets an $18.9 million cap on the amount to be paid by users, indexed for inflation. Since FY2009, Reclamation's budget has included this annual reimbursability ceiling. The issue of security of wastewater and drinking water utilities also was debated in connection with legislation dealing with chemical manufacturing plant security. During consideration of comprehensive chemical plant security bills during the 109 th Congress, some proposed that water systems (drinking water and wastewater) be included in the legislation because many store or use extremely hazardous substances, such as chlorine gas, that can injure or kill citizens if the chemicals are suddenly released (see page 5 ). However, water system officials argued that the water sector should be excluded, because facilities have already undertaken vulnerability assessments (as required for many drinking water systems under the 2002 Bioterrorism Act, and as many wastewater utilities have done voluntarily). Further, they argued that requirements in the legislation were potentially duplicative of Risk Management Plan provisions in the Clean Air Act, which apply to more than 2,800 of the largest water systems. As part of a bill providing FY2007 appropriations for the Department of Homeland Security, Congress included provisions authorizing DHS to establish risk-based and performance-based security standards at the nation's chemical plants (the Chemical Security Act, Section 550 of P.L. 109-295 ). Under the legislation, chemical plants are required to conduct vulnerability assessment and create and implement site security plans based on identified vulnerabilities. The chemical plant security provisions in P.L. 109-295 agreed to exclude water systems from the new requirements. Implementing regulations were promulgated by DHS in 2007, the Chemical Facility Anti-Terrorism Standards (CFATS). However, under the statute, the temporary DHS rules were scheduled to sunset on September 30, 2009, after three years. At a House Homeland Security Committee oversight hearing in 2007, DHS Assistant Secretary for Infrastructure Protection Bob Stephan said that the water sector's exclusion from the Chemical Security Act created a ""regulatory gap,"" because chemicals that are covered by the act, including chlorine, are found at unregulated wastewater and drinking water facilities, as well as regulated conventional chemical plants. He also said that DHS is reviewing ways to boost safeguards at water utilities that use large amounts of gaseous chlorine. Similarly, in 2008, EPA and DHS officials testified in support of eliminating the current exemption for wastewater and drinking water facilities from chemical security regulations. Water utilities oppose being included in DHS's CFATS rules, arguing that it could lead to costly new mandates. The debate also has raised the issue of federal agency roles and leadership, such as whether EPA should be granted a formal consultative role in development and implementation of DHS chemical security rules. Some were concerned that legislation would create uncertainty about coordination between EPA and DHS and whether EPA's lead role for the water utility sector would be altered. Each Congress since the 110 th has considered legislation to extend and modify P.L. 109-295 , including to make the chemical security standards permanent. Since the CFATS authority in P.L. 109-295 expired in September 2009, Congress has been extending the standards on a year-to-year basis. During this period there have been several competing proposals: to create permanent DHS rules for wastewater and drinking water facilities; or to create permanent DHS security rules for chemical plants and wastewater facilities but exempt drinking water plants; or to require EPA to establish risk-based security rules for drinking water plants and for EPA and DHS to consult on security at co-managed drinking water and wastewater facilities; or to leave the existing exemption in place and designate in statute that EPA is the lead agency for drinking water and wastewater security. Water utilities have urged congressional committees not to create a dual or split regulatory arrangement between two agencies, arguing that EPA has long-standing expertise in water and wastewater security issues. A controversial issue debated in connection with some of these proposals is whether to require facilities that handle chemicals to take action to reduce the consequences of a terrorist attack, such as using different chemicals, or changing to safer processes for their operations—so-called inherently safer technology (IST). Under some proposals, regulated drinking water and wastewater treatment facilities in high-risk categories could be directed by states or EPA to implement methods to reduce the consequences of a chemical release from an intentional act if doing so is feasible, would significantly reduce risk, would not increase interim storage of a substance of concern at the facility, and would not render the facility unable to comply with applicable requirements of the SDWA or CWA. Supporters have said that including water facilities would close a major security gap and would strengthen chemical facility antiterrorism standards and incorporate best practices. Opponents have said that doing so would impose costly mandates while doing little to further security. Water utility officials endorse giving EPA the lead on water security, but oppose any mandate for IST. Legislative proposals addressing these issues in the 112 th Congress included H.R. 901 , approved by the House Homeland Security Committee; H.R. 908 , approved by the House Energy and Commerce Committee; and S. 473 , approved by the Senate Homeland Security and Government Affairs Committee. These bills differed in a number of respects but reflected apparent consensus regarding water utility issues: all of the bills would have preserved the existing exemption from the DHS CFATS program, and none would have mandated inherently safer technology. Further, none would have altered EPA's lead role for the water utility sector. Separate Senate legislation, S. 711 , did include provisions to require inherently safer technology and would have added coverage of wastewater and drinking water facilities in CFATS. None of these bills was enacted by the 112 th Congress. However, a provision of the Continuing Appropriations Act, 2013 ( P.L. 112-175 ) extended authority for the existing CFATS program through March 27, 2013. Since the terrorist attacks of 2001, wastewater and drinking water utilities have been engaged in numerous activities to assess potential vulnerabilities and strengthen facility and system protections. Congressional oversight of this sector's homeland security activities has been limited but could be of interest in the 113 th Congress.","Damage to or destruction of the nation's water supply and water quality infrastructure by terrorist attack or natural disaster could disrupt the delivery of vital human services in this country, threatening public health and the environment, or possibly causing loss of life. Interest in such problems increased after the September 11, 2001, terrorist attacks in the United States. Across the country, water infrastructure systems extend over vast areas, and ownership and operation responsibility are both public and private, but are overwhelmingly non-federal. Since the attacks, federal dam operators and local water and wastewater utilities have been under heightened security conditions and are evaluating security plans and measures. There are no federal standards or agreed-upon industry practices within the water infrastructure sector to govern readiness, response to security incidents, and recovery. Efforts to develop protocols and tools are ongoing since the 9/11 terrorist attacks. This report presents an overview of this large and diverse sector, describes security-related actions by the government and private sector since 9/11, and discusses additional policy issues and responses, including congressional interest. Policymakers have been considering a number of initiatives, including enhanced physical security, better communication and coordination, and research. A key issue is how additional protections and resources directed at public and private sector priorities will be funded. In response, Congress has provided some appropriations for security at water infrastructure facilities (to assess and protect federal facilities and support security assessment and risk reduction activities by non-federal facilities) and passed a bill requiring drinking water utilities to conduct security vulnerability assessments (P.L. 107-188). When Congress created the Department of Homeland Security (DHS) in 2002 (P.L. 107-297), it gave DHS responsibilities to coordinate information to secure the nation's critical infrastructure, including the water sector. Under Homeland Security Presidential Directive-7, the Environmental Protection Agency (EPA) is the lead federal agency for protecting drinking water and wastewater utility systems. Recent congressional interest has focused on two legislative issues: (1) security of wastewater utilities, and (2) whether to include water utilities in chemical plant security regulations implemented by DHS. Congress has considered legislation to encourage wastewater treatment works to conduct vulnerability assessments and develop site security plans, but none has been enacted. Congress also has considered legislation to extend DHS's Chemical Facilities Anti-Terrorism Standards and, as part of that debate, whether to preserve an existing exemption for water utilities from chemical facility standards or to include them in the scope of DHS security rules. For now, the exemption from DHS standards remains in place. Since the terrorist attacks of 2001, wastewater and drinking water utilities have been engaged in numerous activities to assess potential vulnerabilities and strengthen facility and system protections. Congressional oversight of this sector's homeland security activities has been limited but could be of interest in the 113th Congress.",govreport
"The federal government currently provides support for career and technical education through the Carl D. Perkins Vocational and Technical Education Act of 1998 (Perkins III; P.L. 105-332 ). The act authorized funding for vocational and technical education through FY2003, although the Congress continued to provide funding under the act through FY2006. The 109 th Congress has passed and the President has signed the Carl D. Perkins Career and Technical Education Improvement Act of 2006 (Perkins IV; P.L. 109-270 ), which reauthorizes and amends the Perkins Act. The House version of the legislation (the Vocational and Technical Education for the Future Act, H.R. 366 ) was introduced on January 26, 2005. On March 17, 2005, the House Committee on Education and the Workforce reported H.R. 366 ( H.Rept. 109-25 ). By a vote of 416 to 9, the House passed H.R. 366 on May 4, 2005. The Senate version of the legislation was introduced as S. 250 on February 1, 2005. The Senate Committee on Health, Education, Labor, and Pensions (HELP) reported S. 250 on March 9, 2005, without a written committee report. The Senate passed S. 250 by a vote of 99 to 0 on March 10, 2005. The House substituted H.R. 366 for the Senate version of S. 250 and passed S. 250 (House version) on July 12, 2006, without objection. On July 20, 2006, the conferees met and agreed to file the conference report. The conference report ( H.Rept. 109-597 ) was filed on July 25, 2006. The Senate agreed to the conference report by unanimous consent on July 26, 2006. The House, by a vote of 399 to 1, agreed to the conference report on July 29, 2006. The President signed the bill on August 12, 2006, P.L. 109-270 . This report analyzes selected changes that P.L. 109-270 made to Perkins III. It begins with a detailed analysis of changes to funding formulas—both state allotments and within state allocations. Following this discussion, the report analyzes changes in accountability requirements, including changes to the core indicators of performance and data reporting, and related sanctions. Changes to state and local plans and uses of funds are then considered. The next section of the report examines changes made to the tech-prep program. The report concludes with changes made to the general provisions of the bill, most notably with respect to the equitable participation of private school students in career and technical education programs. Table 1 provides a general comparison of some of the key changes made by Perkins IV. Each of these changes is discussed in detail in a subsequent section of this report. It should be noted that the act provides funding to eligible agencies and eligible recipients. An eligible agency is the state board that functions as the sole state agency responsible for the administration or supervision of career and technical education in a specific state. An eligible recipient receives funding from the eligible agency and includes, for example, local educational agencies and public or nonprofit private institutions of higher education that offer career and technical education courses leading to various outcomes, such as an industry-recognized credential. P.L. 109-270 , the Carl D. Perkins Career and Technical Education Improvement Act of 2006, amends and revises the Perkins Act. It authorizes ""such sums as may be necessary"" for FY2007-FY2012 for Perkins Act programs and activities. The act refers to career and technical education (CTE) rather than vocational and technical education. Perkins IV retains the overall purpose of the act, making only technical changes. P.L. 109-270 also retains the overall structure of the Perkins Act. Sections 1 through 9 deal with certain overarching provisions, such as purposes of the act (Section 2), definitions that apply throughout the act (Section 3), and authorization of appropriations (Section 9). Title I of the act authorizes and specifies the central provisions of the act dealing with assistance to states for career and technical education. Title I-A deals with allotments and allocations. Title I-B specifies state provisions. Title I-C details local provisions. Title II of the act authorizes the tech-prep program. Title III contains general provisions related to federal administration of the program (Part A) and state administration (Part B). Section 9 of P.L. 109-270 authorizes appropriations for Title I of the act, except for three sections that have separate authorizations: Section 114, dealing with national activities; Section 117, authorizing funding for tribally controlled postsecondary career and technical institutions; and Section 118, authorizing funds for occupational and employment information. Perkins IV, like previous versions of the act, requires the Secretary of Education (Secretary) to reserve amounts for certain purposes from funds appropriated under Section 9. However, as shown in Table 2 , Perkins IV makes several changes in these reservations to reflect certain changes in the act. The amount reserved for assistance for outlying areas has been reduced from 0.2% of funds appropriated under Section 9 to 0.13%. This reduced percentage reflects the fact that two freely associated states (FASs)—Micronesia and the Marshall Islands—are no longer eligible for Perkins funding because the United States and these FASs have signed an agreement to extend their Compacts of Free Association. In addition, P.L. 109-270 increases the amount of direct grants to outlying areas (Section 115). Under Perkins III, Guam received a direct grant of $500,000 and American Samoa and the Northern Marianas each received direct grants of $190,000. Remaining funds were then distributed to the Pacific Regional Educational Laboratory (PREL), which would make grants to these three outlying areas and to eligible FASs. Under current law, direct grants are $660,000 for Guam and $350,000 each for American Samoa and the Northern Marianas. For the first fiscal year after the enactment of Perkins IV (FY2007), the Secretary distributes remaining funds to PREL as before. In subsequent years, remaining funds are divided equally among the three outlying areas. Finally, Palau receives a direct grant of $160,000 for as long as it is eligible for Perkins funding. As Table 2 illustrates, the percentage reserved for assistance for Indians and Native Hawaiians under Section 116 has not changed. However, the reservation for incentive grants has been repealed. These funds are now distributed to states under the "" State Allotment Formula "" discussed below. Of funds appropriated under Section 9, Perkins IV, slightly more than 98% is allotted to states based on the formula detailed in Section 111. The underlying formula is identical in Perkins III and Perkins IV: Funds are initially allotted based on three population groups (population ages 15 to 19, 20 to 24, and 25 to 65). These initial allotments are adjusted by states' per capita income (PCI), such that states with below average PCIs tend to receive somewhat increased grants, and those with above average PCIs tend to receive somewhat decreased grants. Perkins IV maintains the state allotment formula used under Perkins III unless ""additional funds"" are available above the FY2006 funding level. If funding allotted to states contains no ""additional funds,"" the formula is unchanged. That is, the initial formula factors are applied, subject to the minimum grant provisions and to the provision that holds states harmless at 100% of their FY1998 grant amount. Assuming appropriations are level funded at the FY2006 amount, states with growing populations, such as Arizona and North Carolina, will tend to receive increased grants. States at their FY1998 grant amounts, such as Vermont and Wyoming, will continue to receive those grant amounts. Other states' grants will tend to decline, as funding shifts to states with more rapidly growing populations. P.L. 109-270 modifies the state allotment formula when there are ""additional funds"" above the amount allotted to states for FY2006. ""Additional funds"" are defined as amounts in excess of funds allotted to states for FY2006, plus the amount set-aside for incentive grants for FY2006 and $827,671. These additions to the amount allotted to states in the base year ensure that funds previously reserved for incentive grants and funds previously reserved for outlying areas no longer eligible for funding (the specified dollar amount) are not considered ""additional funds,"" which trigger the formula changes discussed below. Table 3 illustrates how ""additional funds"" would be calculated assuming a 1% overall increase in FY2006 appropriations under Section 9. First the FY2006 state grant amount would be calculated by subtracting the set-asides from the total appropriation ($1.182 billion minus $26.5 million = $1.156 billion), which was the amount allotted by formula to states for FY2006. Next the amount for incentive grants ($6.384 million) and $827,671 are added to the state formula amount. This results in the FY2006 ""base"" amount of $1.163 billion. Any funds in excess of this base amount is defined as new money, which is allotted as described below. In Table 3 , this amount is $1.175 billion (the amount allotted to states by formula) minus $1.163 billion (the FY2006 base amount) which equals $11.631 million (the additional funds). Up to one-third of the ""additional funds"" (about $3.88 million based on the example in Table 3 ) would be allotted to states (except for the Virgin Islands) with FY2006 grants that are less than the minimum grant amount of ½% of the current-year funds allotted to states. Based on the example, these would be states with FY2006 grants less than $5.87 million (i.e., ½% of the amount allotted to states—$1.175 billion), which would be Alaska, Delaware, District of Columbia, Hawaii, Maine, Montana, New Hampshire, North Dakota, Rhode Island, South Dakota, Vermont, and Wyoming. The ""additional funds"" for these ""qualifying"" states would be allotted in proportion to how much below the minimum grant amount of ½% each state's FY2006 grant is. For example, Vermont and Wyoming, with FY2006 grants of $4.2 million, would receive larger amounts of funding than Maine and Rhode Island, which received FY2006 grants of nearly $5.8 million. As a result of this allotment procedure, none of these states could receive more than the minimum grant amount of ½% of the current amount allotted to states. The remaining funds (at least two-thirds of the ""additional funds"" or about $7.75 million based on the above example) would be allotted to the other states based on the underlying formula, except that no state would receive a grant less than its FY1998 grant. The Perkins Act specifics how funds received by states must be allocated with respect to the percentage reserved at the state level and the percentage subsequently distributed to the local level. It also specifies how funds must be distributed at the local level. As under prior law, Section 112 requires states to distribute at least 85% of state grant funds to the local level (i.e., to eligible recipients, such as local educational agencies (LEAs) and community colleges). States may reserve up to 10% of the funds distributed to the local level for eligible recipients in rural areas and in areas with high percentages or high numbers of career and technical education students. States have complete discretion in how much of local funding is distributed for career and technical education at the secondary level versus postsecondary career and technical education. States may reserve up to 5% of their grants (or $250,000 if that amount is greater) for ""administration of the State plan."" P.L. 109-270 continues to require states to match administrative funds ""on a dollar-for-dollar basis."" States may use up to 10% of the state grant for state leadership functions. Perkins IV continues to specify substate formulas for distribution of Perkins grant funds to eligible recipients (Sections 131 and 132). The act does not change the distribution of funds for eligible postsecondary institutions (e.g., community colleges) and consortia of such institutions. Funds continue to be distributed based on each eligible institution's number of Pell grant recipients and recipients of assistance from the Bureau of Indian Affairs. For example, if an eligible institution accounted for 10% of all such recipients among all eligible institutions in a state, that institution would receive 10% of the funds the state set-aside for postsecondary career and technical education. P.L. 109-270 does change the substate formula for distribution of funds for secondary school CTE programs, although this change should have no practical impact. Under prior law, 30% of funds designated for secondary education programs were to be distributed based on school districts' shares of resident population ages 15 to 19; and 70% of funds were to be distributed based on shares of individuals ages 15 to 19 from poor families. The act permitted the Secretary to waive this formula if a state could demonstrate ""that a proposed formula more effectively targets funds on the basis of poverty"" (Section 131(c)(1)). Because population and poverty data for the 15 to 19 age group are not available at the school district level, the Secretary has waived the application of this formula (apparently for all states). Instead, the Secretary has allowed states to use resident population and poverty data for ages 5 to 17, which is available at the school district level because these data are used to allot grants under Title I-A of the Elementary and Secondary Education Act (ESEA). P.L. 109-270 codifies this procedure in law: 30% of funds designated for secondary education programs is distributed based on school districts' shares of resident population ages 5 to 17; 70% is distributed based on shares of residents ages 5 to 17 who are from poor families. Section 114 of the Perkins Act authorizes certain national programs and activities, such as a national assessment of vocational education, research, and dissemination. Such sums as may be necessary to conduct these activities are authorized for FY2007 through FY2012. Similar to Perkins III, an independent advisory panel advises the Secretary on the evaluation and assessment of CTE programs funded under the act. Perkins IV, however, includes greater specification of membership on the independent advisory panel. The contents of the assessment are similar under Perkins III and Perkins IV, but Perkins IV adds additional requirements. For example, in examining teacher preparation and qualifications, it is recommended that this include whether CTE faculty meet teacher certification or licensing requirements. The evaluation must also consider career and technical education achievement, in addition to academic achievement and employment outcomes. It must also examine the ""extent and success of the integration of rigorous and challenging academic and career and technical education"" and the outcomes of such integration on academic and technical proficiency achievement. The assessment must also determine whether CTE programs are preparing students for employment in occupations in which mathematics and science skills are critical. An interim report on the assessment must be submitted to Congress on or before January 1, 2010. A final report must be submitted on or before July 1, 2011. With respect to the conduct of research, the Secretary shall make a competitive award to a single entity or consortium of entities to establish a single national research center. Under Perkins III, multiple national research centers could be supported. Under Perkins IV, the center's research must focus on conducting scientifically based research and evaluation. This work, among other goals, must address the education, employment and training needs of CTE participants, including special populations. It must also focus on improving the implementation of CTE programs that are ""integrated with coherent and rigorous content aligned with challenging academic standards."" The research and evaluation must also be used to improve the preparation and professional development of CTE staff, including the recruitment and retention of staff. Section 118 of the Perkins Act authorizes the Secretary to provide assistance and funding to state-designated entities that collect and disseminate occupational and employment information. These entities are jointly designated in each state by the Governor and the state agency that oversees career and technical education. Perkins IV adds a state application process that requires the jointly designated state entity to submit an application to the Secretary at the same time the state submits its state plan under Section 122 (see discussion in subsequent section). The application must include information as required by the Secretary, as well as information based on trends provided in accordance with Section 15 of the Wagner-Peyser Act. Perkins IV also alters authorized state-level activities under Section 118. For example, Perkins III states that designated entities must provide programs to assist ""individuals"" to improve career and occupational decision making. Perkins IV changes the language to ""students (and parents, as appropriate)."" A possible impact of such changes would be to target occupation and employment information programs rather than to make such programs available to the population in general. Other changes include an emphasis on preparing relevant staff to provide parents and students with exposure to high skill, high wage, or high demand occupations, and to assist state entities in creating educational resources and training that include information on these types of occupations. In Perkins IV, Congress acted to strengthen and substantially change accountability requirements (Section 113) and the associated sanctions for failing to meet these requirements (Section 123). Highlights of these changes include the following: specifies separate core indicators of performance for the secondary and postsecondary levels; links established between secondary core indicators of performance and ESEA; requires eligible recipients to accept state-adjusted levels of performance or negotiate their own adjusted levels of performance with the eligible agency for each of the core indicators of performance at the secondary and postsecondary levels; requires annual data reported on eligible agencies' and recipients' progress in meeting their core indicators of performance to be disaggregated as required for data reporting under ESEA; requires eligible agencies and recipients to meet at least 90% of an adjusted level of performance for each core indicator of performance, or be required to write an improvement plan; allows the Secretary to withhold only state leadership and administrative funds from eligible agencies that fail to make progress or show improvement, but no longer allows funds withheld to be redistributed to other eligible agencies; and permits eligible agencies to withhold funds from an eligible recipient, but requires the funds be used by the eligible agency to provide services to students who would otherwise have received services from the eligible recipient. Perkins IV establishes six explicit core indicators of performance at the secondary level. Both eligible agencies and eligible recipients are required to establish measures for each of the indicators. Many of the core indicators of performance included in Perkins IV are similar to those required under Perkins III but include several modifications, such as establishing links to ESEA. It should be noted that Perkins was last reauthorized in 1998, prior to the reauthorization of ESEA that included the new requirements of the No Child Left Behind Act. Under Perkins III, eligible agencies were required to include measures of ""student attainment of challenging state established academic ... proficiencies"" in their identification of core indicators of performance. The first core indicator of performance under Perkins IV must measure student attainment of challenging academic content standards and student academic achievement standards. The standards used in this measure must be the ones adopted by the state under Title I-A of the ESEA (Section 1111(b)(1) and (b)(3)). Student attainment of these standards must be based on the state determined levels of proficiency for assessments required under Title I-A of the ESEA in math, language arts, and, beginning with the 2007-2008 school year, science. Similar to Perkins III, the second core indicator of performance must measure student attainment of career and technical skill proficiencies. Unlike Perkins III, however, it does not require the student attainment of ""challenging"" career and technical skill proficiencies. Perkins IV specifies, however, that measures of student attainment may include student achievement on technical assessments that are aligned with industry-recognized standards, if such assessments are available and relevant. The third core indicator of performance is also similar to an indicator included in Perkins III. Eligible agencies must measure student rates of attainment of a secondary school diploma. They must also measure student rates of attainment of a General Education Development (GED) credential or state recognized equivalent for a high school diploma, including alternative standards for individuals with disabilities. States must also measure student rates of attainment of a proficiency credential, certificate, or degree in conjunction with a secondary school diploma, if the state makes this option available to students. Based on the most recent performance data available, only 17 states offered the latter option to students. The fourth core indicator of performance requires eligible agencies to measure student graduation rates as required under Title I-A of the ESEA. Under the ESEA, graduation rates for secondary students are defined as the ""percentage of students who graduate from secondary school with a regular diploma in the standard number of years"" (Section 1111(b)(2)(C)(vi)). Thus, students who take longer than the standard number of years to graduate, earn a GED in lieu of a regular diploma, or earn some type of alternative high school diploma would not be counted as graduates under this measure. Perkins III did not include a similar core indicator of performance. The last two core indicators of performance are nearly identical to those included in Perkins III. The eligible agency must measure student placement in postsecondary education or advanced training, placement in military service, and placement in employment. The eligible agency must also measure student participation in and completion of CTE programs that lead to employment in non-traditional fields. Perkins IV includes five core indicators of performance at the postsecondary level. Both eligible agencies and eligible recipients are required to establish measures for each of the indicators. Several of the core indicators of performance included in Perkins IV are similar to those required under Perkins III. Similar to Perkins III, the first core indicator of performance must measure student attainment of ""challenging"" career and technical skill proficiencies. Perkins IV specifies, however, that measures of this attainment may include student achievement on technical assessments that are aligned with industry-recognized standards, if such assessments are available and relevant. The second and third core indicators of performance focus on completion and retention at the postsecondary level. The second core indicator of performance requires measures of student attainment of an industry-recognized credential, a certificate, or a degree. The third core indicator of performance requires measures of student retention in postsecondary education or transfer to a bachelor's degree program. While Perkins III addressed completion and retention, it was not as specific as Perkins IV. For example, it did not require measures of student transfers. The fourth core indicator of performance, similar to Perkins III, requires measures of student placement in military service or placement or retention in employment. Perkins IV adds placement in apprenticeship programs to the required measures. It also specifies that measures of employment must include student placement in high-skill, high-wage, or high-demand occupations or professions. The final core indicator of performance is identical to the final core indicator of performance at the secondary level. Eligible agencies and recipients must measure student participation in and completion of CTE programs that lead to employment in non-traditional fields. Eligible agencies and eligible recipients are required to negotiate adjusted levels of performance for each of the core indicators for which they will be held responsible. For eligible agencies, this process is essentially identical to the process used under Perkins III. Based on input from eligible recipients, the eligible agency establishes levels of performance for each of the core indicators in its state plan. The eligible agency then negotiates adjusted levels of performance for the core indicators with the Secretary for the first two program years and then reaches agreement prior to the third program year and the fifth program year for adjusted levels of performance for the relevant time period. As under Perkins III, the agreement on the state adjusted levels of performance must take into account the state adjusted levels of performance established by other eligible recipients, while considering the characteristics of the participants served and the specific services offered, as well as the extent to which the levels will promote continuous improvement on the core indicators of performance. Under Perkins IV, eligible recipients will also be required to establish levels of performance for each of the core indicators in their local plans. Eligible recipients have the option of accepting the state adjusted levels of performance as their own or negotiating with the eligible agency to establish new local adjusted levels of performance. If an eligible recipient chooses to negotiate its adjusted levels of performance, the process will mirror the process at the state level. The agreement on the local adjusted levels of performance must take into account the local adjusted levels of performance established by other eligible recipients, while considering the characteristics of the participants served and the specific services offered, as well as the extent to which the levels will promote continuous improvement on the core indicators of performance. Each eligible agency will continue to be required to submit an annual report detailing its progress in meeting its adjusted levels of performance on the core indicators of performance to the Secretary. Perkins IV also requires eligible recipients to submit annual reports describing their progress in meeting their indicators to the eligible agency. Under Perkins IV, eligible agencies and eligible recipients are required to disaggregate the data for each of the indicators of performance, including any additional indicators selected by the eligible agency or recipient, based on the categories of students included in Title I-A of the ESEA for data reporting purposes. That is, data must be disaggregated by race, ethnicity, gender, disability status, migrant status, English proficiency, and status as economically disadvantaged (ESEA, Section 1111(h)(1)(C)(i)). After disaggregating the data, eligible agencies and recipients must identify and quantify any discrepancies or gaps in performance between the specific categories of students and overall student performance. Under Perkins IV, if a state fails to meet at least 90% of an adjusted level of performance for any of the core indicators, it is required to develop and implement a program improvement plan. This plan must give special consideration to performance gaps identified among categories of students. Perkins III required a state to develop and implement a program improvement plan if it failed to meet the state adjusted levels of performance. In practice, this meant that states only had to develop an improvement plan if they missed their adjusted levels of performance in the aggregate (e.g., poor performance in meeting one adjusted level of performance for a core indicator could be compensated for by exceeding the adjusted level of performance for another core indicator). Similar to Perkins III, if the Secretary determines that an eligible agency is not carrying out its state plan appropriately or is not making ""substantial progress"" in meeting the goals of the act, as determined by the state's adjusted levels of performance, the Secretary may provide technical assistance to the eligible agency to implement improvement strategies. If an eligible agency fails to implement a required improvement plan, fails to make any improvement on the indicators that triggered the improvement plan within the first year of implementation of the improvement plan, or fails to meet at least 90% of the state adjusted level of performance for the same core indicator of performance for three consecutive years, the Secretary may, after providing the eligible agency with an opportunity for a hearing, withhold all or a portion of the eligible agency's funding for state leadership and administration. This is a substantial departure from the sanction provisions contained in Perkins III, under which an eligible agency could be sanctioned for failing to meet its state adjusted levels of performance for two or more consecutive years. The Secretary was also permitted to withhold any funds received by the state under this title, including funds that would otherwise be provided to eligible recipients. Perkins IV requires that funds withheld from an eligible agency be used only to provide technical assistance, assist in the development of an improved state improvement plan, or other relevant improvement activities to benefit the state. The Secretary will no longer be permitted to redistribute funds withheld from one eligible agency to other eligible agencies as was possible under Perkins III. Finally, Perkins IV retains the exception included in Perkins III that allows the Secretary to waive financial sanctions due to ""exceptional or uncontrollable circumstances"" or a ""precipitous and unforseen decline"" in the state's financial resources. Under Perkins IV, the requirements for improvement plans and sanctions for eligible recipients are similar to those imposed on eligible agencies. If, after reviewing the eligible recipient's progress in meeting its local adjusted levels of performance, the eligible agency determines that the eligible recipient failed to meet at least 90% of an agreed upon local adjusted level for any of the core indicators of performance, the eligible recipient will be required to develop and implement a program improvement plan. The program improvement plan must provide special consideration to performance gaps identified among categories of students. Under Perkins III, if an eligible agency determined that an eligible recipient was not making substantial progress in achieving the state adjusted levels of performance, the eligible agency was required to assess the educational needs of the eligible recipients, enter into an improvement plan with the eligible recipient, and conduct regular assessments of the eligible recipient's progress in meeting the state adjusted levels of performance. Under Perkins IV, eligible agencies are required to provide technical assistance to eligible recipients failing to meet their responsibilities or make substantial progress in meeting the purposes of the act as determined based on their local adjusted levels of performance. Perkins III did not include specific sanctions to be applied to eligible recipients subsequently failing to show improvement, and no specific sanctions that would result in an eligible recipient losing funding. Perkins IV subjects eligible recipients to similar financial sanctions as imposed on eligible agencies. After providing an opportunity for a hearing, an eligible agency may withhold all or a portion of an eligible recipient's funding if the eligible recipient fails to make any improvement on the indicators that triggered the improvement plan within the first year of implementation of the improvement plan, or fails to meet at least 90% of the state adjusted level of performance for the same core indicator of performance for three consecutive years. Funds withheld must be used to provide services and activities to students in the area that would have otherwise been served by the eligible recipient. Funds may not be redistributed to other eligible agencies. For eligible agencies, both current law and Perkins IV includes an exception to financial sanctions due to exceptional or uncontrollable circumstances. This exception is extended to financial sanctions for eligible recipients. In addition, the eligible agency may opt not to impose sanctions if the small size of the eligible recipient's CTE program affects its performance. Perkins III provided states with flexibility to select performance measures most appropriate for meeting their goals. This resulted in a multitude of definitions and measurement strategies across states, making state-to-state data comparisons virtually impossible. In response, ED awarded a grant for the Performance Measurement Initiative, a project to develop and pilot test new secondary and postsecondary assessment and accountability measures for academic and career and technical programs that build on existing state and local data systems. Perkins IV contains language that may partially address the data comparability issue. It requires that when identifying core indicators of performance and other indicators of performance, states shall, to the extent possible, define the indicators so that they are aligned with similar data collected for other federal and state programs. The usefulness of this requirement, however, may depend upon how it is implemented by states and interpreted by ED. For example, if states rely on definitions used within their states, and these definitions vary from state to state, it may be difficult to obtain comparable data among states. The data comparability issue could also be complicated if some states opt to use federal definitions for measures, while other states use state definitions that do not match the federal definition. As pointed out by ED, however, if the measures of the core indicators of performance selected by each state were valid and reliable, as required by Perkins IV, it would be possible to make comparisons of an individual state's performance from year to year even if the performance of all states could not be compared. To receive funding, all eligible agencies are required to submit a state plan to the Secretary under Section 122. Under Perkins IV, these plans must cover a six-year time period rather than a five-year time period as required under Perkins III. Perkins IV also contains specific transition provisions to provide eligible agencies time to adjust to the new requirements of the law (Section 4). Eligible agencies are permitted to submit a transition plan for the first fiscal year following the enactment of Perkins IV. They will then submit state plans to cover the remaining five years of the authorization. In practice, a timetable for transitioning from the requirements of Perkins III to Perkins IV may resemble the following: April 2007: States submit transition plans to the U.S. Department of Education (ED); 2007-2008 school year: Transition year and baseline data collection; and Summer 2008: Establish adjusted levels of performance (discussed in a subsequent section of the report). In developing the state plan, both Perkins III and Perkins IV require eligible agencies to consult with a variety of interested parties. Perkins IV expands the list of interested parties with whom the eligible agency must consult to include, for example, academic and career and technical education administrators, career guidance and academic counselors, and charter school authorizers. State plans submitted by eligible agencies are required to include specific information. While Perkins IV incorporates many of the same requirements of Perkins III, it modifies several existing requirements and adds several additional requirements. Below is a summary of substantial changes and additions made to the plan contents. Selected key changes are subsequently discussed in greater detail. The state plan must: describe the career and technical programs of study for career and technical content areas that meet specific requirements and how the programs will be developed and implemented; detail how the eligible agency will assist eligible recipients in developing articulation agreements; describe how the eligible agency will publicize career and technical programs of study offered by eligible recipients; include criteria that will be used to determine the extent to which the local plan will promote continuous improvement in academic achievement and technical skill attainment, and identify and address current or emerging occupational opportunities; explain how CTE programs will prepare secondary students, including special populations, to graduate with a diploma; detail how funds will be used to develop or improve CTE courses at the secondary level that will be aligned with the academic content and student achievement standards adopted by the state under ESEA Title I-A, are relevant and challenging at the postsecondary level, and lead to employment in high skill, high wage, or high demand occupations; describe how the eligible agency will ensure that best practices among eligible recipients and tech-prep recipients are shared; detail how academic and career and technical education at the secondary and postsecondary levels will be linked to improve achievement; describe how the eligible agency will report on and evaluate the integration of CTE programs with coherent and rigorous content aligned with state academic standards; describe how professional development will promote the integration of academic content standards and CTE curricula, increase the percentage of teachers meeting licensure or certification requirements, be sustained and of high quality, encourage applied learning, improve instruction for special populations, improve the use of data, and promote integration with professional development activities carried out under Title II of the ESEA and Title II of the Higher Education Act; detail how the recruitment and retention of CTE faculty and the transition to teaching from business and industry will be improved; explain how the transfer of subbaccalaureate CTE students to baccalaureate programs will be facilitated; describe how CTE will be integrated with academics to ensure learning in the core subjects and career and technical subjects; develop a plan for negotiating local adjusted levels of performance; include assurances that the eligible agency will comply with the requirements of the act and its state plan; and describe how data will be reported. Two of the most significant changes include the specification of elements that CTE programs must include and a greater emphasis on academic achievement, particularly evidenced by the links that must be established to academic requirements included in the ESEA. First, CTE programs of study must include both secondary and postsecondary education elements. They must include ""coherent and rigorous content aligned with challenging academic standards and relevant career and technical content in a coordinated, nonduplicative progression of courses"" aligning secondary and postsecondary education. The programs may also include opportunities for dual or concurrent enrollment or other strategies for students to earn postsecondary credits. Finally, the programs must lead to an industry-recognized credential or certificate at the postsecondary level or an associate's or bachelor's degree. The state plan must also discuss how the state will link CTE with requirements included under the ESEA. For example, the plan must specify how funds will be used to improve or develop new CTE courses that are aligned with student academic achievement standards adopted by the state under the ESEA (Section 1111(b)(1)). The eligible agency must also describe how learning in the core academic subjects defined under the ESEA will be ensured. Section 9101(11) of the ESEA defines the core academic subjects as language arts, mathematics, science, foreign languages, civics and government, economics, art, history, and geography. Similar to Perkins III, states will continue to have the option to submit unified plans under the Workforce Investment Act (WIA; P.L. 105-220 , Section 501). Otherwise, under Perkins IV, states not opting to consolidate their basic state grant funding with their tech-prep funding must fulfill the state plan requirements for the basic state grants program and tech-prep by submitting a single state plan. Perkins IV retains many of the same required and permissible uses of state leadership funds as Perkins III with some modifications and adds several new uses of funds (Section 124). For example, eligible agencies will have to use state leadership funds to provide professional development focused on the use of scientifically based research and data to improve instruction. Professional development must be high quality, sustained, and intensive, and should not be based on one-day or short-term training sessions. In addition, professional development programs must support education programs to ensure that teachers and other staff are able to develop a higher level of academic and industry knowledge and skills in CTE and effectively use applied learning. While Perkins IV retains many of the same permissible uses of funds as Perkins III, there are some notable differences. For example, Perkins IV adds new uses of funds for career guidance and academic counseling, facilitating transitions from subbaccalaureate CTE programs to baccalaureate degree granting institutions, developing assessments of technical skills, developing and enhancing data systems, and improving the recruitment and retention of CTE staff and the transition of individuals from business and industry into CTE. Eligible agencies are also permitted to use state leadership funds to award incentive grants to eligible recipients meeting various criteria, such as exceeding local adjusted levels of performance, developing connections between secondary and postsecondary education, integrating coherent and rigorous content that is aligned with academic standards and technical coursework, or having special populations meet local adjusted levels of performance. Incentive grants may also be awarded to eligible recipients that combine funding with other eligible recipients for innovative initiatives. To receive funding, all eligible recipients are required to submit a local plan to the eligible agency under Section 134. These plans must cover the same time period covered in the state plan. Under Perkins IV, state plans must cover a six-year time period rather than a five-year time period as required under Perkins III. Similar to the contents of state plans, Perkins IV retains many of the provisions for local plan content contained in Perkins III with some modifications, including linkages to ESEA provisions. For example, the local plan must describe how the academic and technical skills of students will be improved through the integration of ""coherent and rigorous content aligned with challenging academic standards and relevant career and technical education programs to ensure learning in the core academic subjects"" as defined in the ESEA. Other provisions require the eligible recipient to ensure that CTE students will enroll in rigorous and challenging courses in the core academic subjects, and that professional development will be provided to promote the integration of coherent and rigorous content aligned with challenging academic standards and relevant CTE. The local plan must also describe how the eligible applicant will offer at least one career and technical program of study that meets the requirements of these programs as described in the requirements for the state plan, and how the eligible recipient will improve the recruitment and retention of CTE staff and the transition of individuals from business and industry into CTE. Both required and allowable uses of funds are stipulated for local recipients. Many of the uses of funds included in Perkins IV were previously included in Perkins III but have been modified. Among the required uses of funds, significant changes and new uses of funds include, for example, establishing linkages to the core academic subjects defined under the ESEA, establishing linkages between secondary education CTE and postsecondary CTE, providing training to support the effective integration of challenging academics and CTE, providing training to enable staff to use scientifically based research and data to improve instruction, and providing activities specifically to prepare special populations for high skill, high wage, or high demand occupations leading to self-sufficiency. Several new uses of funds were added to the permissible uses of funds. For example, funds may be used to provide career and academic counseling that improves graduation rates, provides information on postsecondary education and career options, and assists postsecondary students, including adult students. They may be used to establish local education and business partnerships including developing adjunct faculty arrangements for industry professionals and obtaining industry experience for teachers. Funds may also be used to develop initiatives that facilitate the transition of students from subbaccalaureate CTE programs into baccalaureate degree programs, including the development of articulation agreements and dual or concurrent enrollment programs. The local recipient may also use funds to develop new CTE courses and programs of study, including for consideration by the eligible agency; courses that prepare individuals for high skill, high wage, or high demand occupations; and courses that create dual or concurrent enrollment opportunities for secondary education students. Local recipients may also pool their funds with at least one other local recipient to support innovative initiatives, such as improving the initial preparation and professional development of CTE staff or improving accountability data collection or reporting. The provisions for administrative costs are identical under Perkins III and IV. Eligible recipients may use up to 5% of their funds for administrative costs. The tech-prep program is authorized under Title II of the Perkins Act. During congressional consideration of Perkins IV, there was debate about whether tech-prep should be retained as a separate program or integrated into the basic state grants program. The compromise that was reached on this issue allows tech-prep to remain a separate program, but adds new provisions that permit eligible agencies to combine their tech-prep funds with their state grant funds. If eligible agencies choose to combine program funds, funds are considered as being allotted under the basic state grants program and must be distributed to eligible recipients in accordance with the formulas pertaining to that program. All eligible agencies that want to receive tech-prep funding, regardless of whether they choose to consolidate funds or not, must describe in their state plan required under Section 122 how tech-prep activities will be coordinated with other activities described in the state plan. Perkins IV also expands the contents of tech-prep programs and establishes a link between the programs and ESEA. Under Perkins IV, a tech-prep program of study is required to build student competence in technical skills and in the core academic subjects as defined under ESEA, as appropriate, through ""applied, contextual, and integrated instruction, in a coherent sequence of courses."" A tech-prep program of study is also required to integrate academic and career and technical instruction with work-based learning experiences when possible; provide technical preparation in a career field; lead to technical skill proficiency, an industry-recognized credential, a certificate, or a degree in a specific career field; lead to placement in further education or in high skill or high wage employment; and use CTE programs of study, to the extent practicable. Tech-prep programs are also required to use articulation agreements; provide in-service professional development for teachers, faculty, and administrators; and provide professional development on using and accessing data, including student achievement data. Professional development programs for counselors must include a new focus on aiding staff in providing comprehensive career guidance and academic counseling to tech-prep students, including students from special populations. Finally, a tech-prep program must coordinate its activities with activities conducted under Title I of the act. Perkins IV also includes two additional permissible uses of funds. Tech-prep funds may be used to improve career guidance and academic counseling through the use of graduation and career plans. Funds may also be used to develop curricula to aid in transitions between secondary and postsecondary CTE programs. Substantial changes were also made with respect to accountability provisions and associated sanctions. Under Perkins III, tech-prep recipients were not subject to specific accountability requirements or sanctions. Rather, each eligible agency receiving funds was required to report annually to the Secretary on the effectiveness of tech-prep programs. Under Perkins IV, each consortium receiving funding is required to establish and report on the following indicators of performance with respect to tech-prep participants: number of secondary and postsecondary education students served; number and percent of secondary education students who enroll in postsecondary education, enroll in postsecondary education in the same field of study pursued at the secondary level, complete a state or industry-recognized credential or licensure, earn postsecondary credit while enrolled at the secondary level, and enroll in remedial math, writing, or reading courses in postsecondary education; and number and percent of postsecondary education students who are placed in a related field of employment not later than 12 months following graduation from the program, complete a state or industry-recognized credential or licensure, compete a two-year degree or certificate program within the normal time of completion for the program, and complete a bachelor's degree within the normal time of completion for the degree. Each consortium receiving tech-prep funding must enter into an agreement with the eligible agency to meet a minimum level of performance on the aforementioned indicators of performance, as well as on the core indicators of performance established at the secondary and postsecondary levels (see previous discussion). If a consortium does not meet these performance levels for three consecutive years, the eligible agency must require the consortium to resubmit an application for a tech-prep grant. In addition, if grants are made to consortia on a formula basis, the eligible agency may terminate funding to a consortium that fails to meet its performance levels for three consecutive years. Perkins IV authorizes ""such sums as may be necessary"" for FY2007-FY2012 for tech-prep. The tech-prep demonstration program, however, was not reauthorized. The demonstration program was last funded in FY2005 at $4.9 million. Perkins III permitted eligible agencies and eligible recipients to include secondary education staff in nonprofit private schools in the geographical area served by the eligible agency or recipient to participate in vocational and technical education professional development activities (Section 317). Perkins IV modifies this provision to require, ""to the extent practicable, upon written request,"" eligible agencies and eligible recipients to include the aforementioned private school personnel in career and technical education professional development activities upon written request of the private school personnel. Perkins III did not specifically address the issue of the equitable participation of secondary school students enrolled in nonprofit private schools in programs and activities funded under the act, stating only that students were not barred from participation (Section 313). Perkins IV adds new provisions making it optional, upon written request, for eligible recipients to provide for the ""meaningful"" participation of these students in career and technical education programs and activities (Section 317). In addition, upon written request, the eligible recipient must consult ""in a timely and meaningful manner"" with representatives of nonprofit private schools located in the geographical area served by the eligible recipient to discuss the meaningful participation of secondary education students attending these schools in career and technical education programs and activities funded under this act.","The federal government currently provides support for career and technical education through the Carl D. Perkins Vocational and Technical Education Act of 1998 (Perkins III; P.L. 105-332). The act authorized funding for vocational and technical education through FY2003, although the Congress continued to provide funding under the act through FY2006. The 109th Congress has reauthorized the Perkins Act. On August 12, 2006, the Carl D. Perkins Career and Technical Education Improvement Act of 2006 was signed into law (Perkins IV; P.L. 109-270). While many aspects of the Perkins Act remain intact, Perkins IV made several key changes to the act: refers to career and technical education rather than vocational and technical education; retains the basic state grant formula for allocating funds to states if appropriations are level funded or decreasing, but implements a modified formula if appropriations increase; establishes separate core indicators of performance for the secondary and postsecondary levels; modifies the required contents of state and local plans, including adding linkages between the Perkins Act and the Elementary and Secondary Education Act, as modified by the No Child Left Behind Act; requires eligible agencies and eligible recipients to meet at least 90% of their adjusted levels of performance on each of their core indicators of performance or be required to develop and implement an improvement plan; allows the Secretary of Education to withhold only state leadership and administrative funds from eligible agencies that fail to make progress or show improvement, but no longer allows funds withheld to be redistributed to other eligible agencies; permits eligible agencies to withhold funds from eligible recipients failing to make progress or show improvement; modifies the required and allowable uses of state leadership funds; modifies the required and allowable uses of local funds; and maintains the tech-prep program as a separate program, but permits eligible agencies to consolidate their funding under the basic state grants program and the tech-prep program. This report will not be updated.",govreport
"This report explains the major provisions of the federal estate, gift, and generation-skipping transfer taxes as they apply to transfers in 2014. The enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 phased out the estate and generation-skipping transfer taxes over a 10-year period, leaving the gift tax as the only federal transfer tax in 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily (through the end of 2012) reinstated the estate and generation-skipping transfer taxes with lower top rates and larger exemptions and reunified the estate and gift taxes. The American Taxpayer Relief Act of 2012 permanently extended the estate tax rules enacted by the 2010 Act except for the top tax rate, which increased from 35% to 40%. The federal estate and gift taxes are unified as they utilize the same rate structure. Federal estate and gift taxes also share a lifetime transfer credit. For 2014, this unified credit covers an applicable amount of $5,340,000 per individual. The federal estate, gift, and generation-skipping transfer tax laws are rather lengthy and complex. This report discusses those major Internal Revenue Code (IRC) and Internal Revenue Service (IRS) regulation provisions which play the dominant role in the determination of estate, gift, and generation-skipping transfer tax liability. This discussion relates only to the taxation of United States citizens and resident aliens while different rules apply to the taxation of nonresident alien individuals. For a discussion on transfer taxes for nonresident aliens, see CRS Report R43576, Estate and Gift Taxes for Nonresident Aliens , by [author name scrubbed]. The federal estate tax is a tax on the estate of a decedent, levied against and paid by the estate. Contrastingly, the inheritance tax is imposed on and paid by the heirs of the decedent based upon the money or property that they receive. The determination of federal estate tax liability involves a series of adjustments and modifications of a tax base known as the ""gross estate."" Certain allowable deductions reduce the gross estate to the ""taxable estate."" Then, the total of all lifetime taxable gifts made by the decedent is added to the taxable estate before tax rates are applied. The result is the decedent's estate tax which, after reduction for certain allowable credits, is the amount of tax paid by the estate. This discussion will divide the federal estate tax into three components: the gross estate, deductions from the gross estate, and computation of the tax, including allowable tax credits. The gross estate of a decedent includes the value of all property, real or personal, tangible or intangible, wherever situated, in which the decedent owned an interest on the date of the decedent's death. The gross estate may also include certain interests in property which the decedent had transferred to another person at some time prior to the date of death. Certain types of property may be included in the decedent's gross estate if specific IRC conditions are met. Proceeds from a life insurance policy on the life of the deceased may qualify as part of the gross estate if either the proceeds are payable to or for the use of the estate's executor, or if the decedent held any ""incidents of ownership"" in the policy on the date of death or gave away such incidents of ownership within three years of the date of death. An incident of ownership is an economic right in the policy, such as the right to cancel the policy, change the beneficiary, or borrow against its cash surrender value. Similarly, the value of a survivor's annuity payable because of the death of the decedent is included in the decedent's gross estate if the deceased had the right to receive a lifetime annuity under the same contract. The value of property owned by the decedent jointly with a right of survivorship in another person, other than the decedent's spouse, may also qualify as part of the gross estate. The contribution of money or money's worth of consideration towards the cost of acquiring the property by someone other than the decedent subsequently reduces the contribution of that property to the gross estate. However, only one-half of the value of property owned jointly with a right of survivorship by a decedent and the surviving spouse, regardless of the relative contributions of the decedent and the surviving spouse, may qualify as part of the gross estate. In a number of instances, the value of a decedent's gross estate encompasses the value of property not owned by the decedent on the date of death. For example, a decedent's gross estate can include the value of lifetime gifts over which the decedent retained a life interest or the power to alter, amend, terminate, or destroy the beneficial enjoyment of the property. Lifetime gifts that do not take effect until the date of death, irrespective of the number of years that have elapsed between the date of the gift and the date of the donor's death, are also included in the donor's gross estate. However, the gross estate does not include property sold during the decedent's lifetime for full and adequate consideration. The decedent's gross estate also includes all property subject to a general power of appointment held by the decedent on the date of death, even if the decedent died without exercising that power. A power of appointment is a right, held by a person other than the owner of property, to determine who will enjoy the ownership of or benefit of the property. A power of appointment is ""general"" if it may be exercised by its holder in favor of the holder, the holder's estate, the holder's creditors, or the creditors of the holder's estate. If a power cannot be exercised in favor of these classes of persons, it is not a general power of appointment, regardless of the size of the classes of beneficiaries in whose favor the power can be exercised. The property and interests included in the decedent's gross estate are valued at their fair market value on the date of death or, if elected by the executor at his/her discretion, the alternate valuation date. The alternate valuation date is the earlier of either the date of distribution or disposition of the property by the estate or the date six months after the date of death. The ""fair market value"" of property is the price at which the estate property would change hands between a willing buyer and seller. In such a sale, the buyer and seller should not be compelled to buy or sell. Additionally, both parties should have reasonable knowledge of the relevant facts. The fair market value price does not reflect a forced sale price but the sale price in a market in which the item is most commonly sold to the public. The IRS regulations outline valuation rules for certain types of property such as stocks and bonds, family farms, and closely held businesses where the estate must determine the fair market value under specific conditions. A decedent's taxable estate is determined by reducing the gross estate with allowable deductions, including estate administration expenses, certain debts and losses, the amount of qualified transfers to a surviving spouse, charitable bequests, and state death taxes. The first deduction to which an estate is entitled is for the funeral expenses, administration expenses, claims against the estate, and unpaid mortgages paid by the estate (to the extent not reflected in the reduced value of estate assets). The estate may deduct these payments if they are paid by the estate and are permitted under the laws of the applicable jurisdiction in which the estate is administered. Additionally, the estate may deduct the amount of any casualty or theft losses sustained by the estate during the settlement of the estate, to the extent such losses are not compensated by insurance. The estate may also claim a ""marital deduction"" for the value of all property passing to the decedent's surviving spouse. Only non-terminable interests passing to the surviving spouse qualify for this marital deduction. Interests that may terminate in favor of another person upon the lapse of time, the occurrence of an event or contingency, or the failure of an event or contingency to occur, generally do not qualify for the estate tax marital deduction. Special exceptions to the terminable interest rule are made for certain transfers in trust of a lifetime income interest if the executor elects to include the value of the trust property in the surviving spouse's gross estate and for certain life estates coupled with a general power of appointment. Certain life insurance settlement options and certain interests conditioned upon survivorship for a reasonable period not exceeding six months also serve as exceptions to the terminable interest rule. A deduction for certain charitable bequests and devises to qualified charitable organizations also reduce the value of the gross estate. Although the rules are not identical, the estate tax charitable deduction functions similarly to its income tax counterpart with the purpose of encouraging charitable contributions. The gross estate is also reduced by the amount of any estate, inheritance, legacy, or succession taxes actually paid to any state or the District of Columbia in respect to property included in the gross estate. Under the unified estate and gift tax system, computation of a decedent's estate tax liability requires a ""grossed-up,"" or a combination, of the decedent's lifetime taxable gifts and the decedent's taxable estate to which the tax rate schedule is then applied. Any available credits are subsequently taken to obtain the decedent's actual estate tax liability (the amount of tax to be paid by the estate). The estate rate schedule is as follows: There are three major estate tax credits presently in effect: the unified transfer tax credit, the credit for foreign death taxes, and the credit for federal estate taxes paid by previous estates. Each credit is a dollar-for-dollar offset against an estate's federal estate tax liability. The unified transfer tax credit is available against both lifetime gift tax liabilities and the estate tax liability. To the extent this credit is used to offset gift taxes, it is unavailable to offset estate taxes. The IRC refers to the credit as an ""applicable exclusion amount,"" that is, the amount of taxable gifts or estate that the credit would cover. The applicable exclusion amount in 2014 is $5,340,000. Each estate may also use credits for foreign death taxes, including estate, inheritance, legacy, or succession taxes actually paid by the estate or any heir with respect to property included in the federal gross estate. This credit is limited to the amount of U.S. estate taxes paid on the same property. The credit is computed as the same proportionate share of the total U.S. estate taxes as the value of the foreign taxed property bears to the total of the U.S. taxable estate. The credit for previously taxed property (PTP credit) is provided to relieve some of the harshness that could otherwise result when an individual dies soon after inheriting property upon which a federal estate tax has already been imposed. The PTP credit is allowed for all or some portion of the federal estate taxes paid on property transferred to the decedent within the past ten years. The PTP credit is graduated according to the amount of time that has elapsed between the date the property was transferred to the decedent and the date of death. The maximum PTP credit is 100% of the previously paid taxes, when the decedent received the property within two years prior to the date of death. The minimum PTP credit is 20% of the previously paid taxes, when the decedent received the property during the ninth or tenth years preceding the date of death. The federal gift tax is a tax imposed on an annual basis on all gratuitous transfers of property made during life. The tax seeks to account for transfers of property that would otherwise reduce the estate and accordingly estate tax liability at death. The donor's tax liability on the gift depends upon the value of the ""taxable gift."" The taxable gift is determined by reducing the gross value of the gift by the available deductions and exclusions. The gift tax liability created on the basis of the donor's taxable gifts may be reduced by the available unified transfer tax credit. This discussion will divide the federal gift tax into two components: the taxable gift and the computation of the gift tax. The donor calculates the gift tax liability by first determining the amount of the taxable gift. The amount of the taxable gift is the fair market value of the gift at the time it was made, less certain exclusions and deductions. The major deductions and exclusions are the annual per donee exclusion, the gift tax marital deduction, and the gift tax charitable deduction. Through the annual exclusion, every donor may exclude from his/her federal gift tax base the first $14,000 of cash or property given to each donee annually. An unlimited exclusion is available for gifts of direct payments to the donee's educational institution for tuition expenses or to the donee's medical provider for health care expenses. Under the present interest rule, the annual exclusion is unavailable, however, for gifts of future interests which vest in the donee only upon some future date. The present interest rule often requires complicated drafting techniques to obtain the annual exclusion for the value of a gift of a life insurance policy made in trust, or a gift to a minor, to be held in trust until the minor reaches a certain age. Married couples may double the annual exclusion through ""gift-splitting,"" an arrangement in which one spouse consents to being treated as having made one-half of the gifts made by his or her spouse in that taxable year. The election is made by a notation on the gift tax return, and results in each spouse receiving a $14,000 per donee exclusion for one-half of the value of the same gift. Therefore, married couples may annually exclude $28,000 per donee from their tax liability by gift-splitting. Several deductions are also available for the donor to reduce his/her tax liability. A donor may deduct the value of certain interspousal gifts. Like its estate tax counterpart, the gift tax marital deduction is not allowed for most gifts of terminable interests. A donor may also deduct the value of certain charitable gifts. The value of the gift may be deducted only if the charity is of a type described in the applicable statutory provision, which describes most, but not all, of the charities for which deductible income tax contributions may be made. The division of property incident to a divorce or separation agreement may result in the interspousal transfer of property for consideration which is not adequate for gift tax purposes. Consequently, the IRC provides that interspousal transfers pursuant to a written agreement dividing the property of the spouses and occurring within one year before and two years after a decree of divorce will not be treated as taxable gifts. However, in order to meet this provision, the agreement must settle the marital rights of the spouses or provide for a reasonable allowance for the support of minor children. The renunciation of property given one by another person might be viewed as either the negation of the initial gift, resulting in no gift tax liability, or as a reciprocal gift, resulting in two gift tax liabilities. The gift will be ignored for gift tax purposes if a disclaimer is made in writing before the donee has accepted any benefits of the property and within nine months of the gift's date. The tax liability of a taxable gift is measured initially by the value of the transferred property. The gift tax follows the same progressive rates as the estate tax. The tax is then applied cumulatively to taxable gifts made over the donor's lifetime. The actual computation of the gift tax for each calendar year is completed in three steps. First, the donor's taxable gifts for the calendar year and any preceding calendar periods are totaled and the tentative tax determined. Second, the tentative tax is again calculated using the total taxable gifts for preceding calendar periods. Third, the result from step two is subtracted from the result of step one, and the donor's unused unified tax credit is applied to the remaining amount. The combination of the progressive tax rates and the cumulative computation of the gift tax generates the tax liability of larger gifts at progressively higher rates. The Tax Reform Act of 1986 repealed the original generation-skipping transfer (GST) tax, enacted in 1976, because of its complexity and replaced it with a simplified flat-rate tax. The purpose of the resulting GST tax is the same as its predecessor, to close a loophole in the estate and gift tax system where property could be transferred to successive generations without paying multiple estate or gift taxes. The traditional generation-skipping transfers were trusts established by a parent for the lifetime benefit of the children with the remainder passing to the grandchildren. If properly drafted, an estate or gift tax would not be imposed when the trust corpus passed from the settlor's children to the settlor's grandchildren because the estate tax is not imposed on interests that terminate at death. This discussion will divide the generation-skipping transfer tax into two components: generation-skipping transfers and the computation of the tax. The GST tax is a flat-rate tax. The rate is set at the highest estate tax rate, currently 40%. This tax rate is applied to three different transfer events: a direct skip, a taxable termination, or a taxable distribution. A direct skip is a transfer to a skip person. A skip person is a person assigned to a generation two or more generations below the transferor's. A transfer to a trust is a direct skip if all the interests in the trust are held by skip persons. A taxable termination is a termination by death, lapse of time, release of power, or otherwise of an interest in property held in trust. A taxable termination does not occur if immediately after the termination a non-skip person has an interest in the property or if after the termination, the trust makes a distribution to a skip person. A taxable distribution is a distribution from a trust, other than a taxable termination or direct skip, to a skip person. An important step in determining the GST tax is to assign all persons involved to a specific generation level, as outlined in the IRC. Persons related to the transferor or spouse are assigned along family lines. For example, the transferor, spouse, and brothers and sisters are in one generation, their children in the next, and grandchildren in the next. Lineal descendants of a grandparent of the transferor or spouse are assigned to generations on the same basis. Anyone ever married to a lineal descendant of the transferor's grandparent or the spouse's grandparent are assigned to the level of their spouse who was a lineal descendant. Non-relatives of the transferor are assigned generations measured from the birth of the transferor. Persons not more than 12½ years younger are treated as members of the same generation as the transferor. Each 25-year period thereafter is treated as a new generation. A grandchild of the transferor or spouse is moved up one generation if his parents are deceased at the time of the transfer. The first step in calculating the GST tax is to determine the taxable amount. For direct skips, the taxable amount is the value of the property received by the transferee. The GST tax on direct skips is tax-exclusive, meaning that the amount of tax paid is proportional to the pretax value of the transferred property. Contrastingly, the taxable amount for taxable terminations and distributions is tax-inclusive. The taxable amount for these property transfers is determined by including the tax value with the value of the property before applying the tax rate. The second step in calculating the GST tax is to apply the applicable rate. The applicable rate is the maximum Federal estate tax rate (40% for 2014) and the inclusion ratio of the transfer. The inclusion ratio is figured by subtracting from one (""1"") the following fraction: the portion of the GST exemption allocated to the transfer as the numerator and the value of the property transferred as the denominator. To compute the generation-skipping tax, the value of the transfer is multiplied by the tax rate (40%) and by the inclusion ratio. The IRC provides several exemptions and exclusions for the GST tax. Unlike the estate and gift taxes, the GST tax does not use the unified credit. Instead, a $5,340,000 GST exemption is allowed to each individual for generation-skipping transfers during life or at death. The exemption is doubled for married individuals who elect to treat the transfers as made one-half by each spouse. An indirect skip property transfer automatically triggers the GST exemption. An indirect skip occurs when the generation one level below the decedent (e.g., children) receives some beneficial interest in the property before the property passes to the generation two or more levels below (e.g., grandchildren). The exclusions for tuition and medical expense payments from the gift tax also apply to the generation-skipping tax. Additionally, the $14,000 per donee annual exclusion from the gift tax is recognized against taxation of direct skips only (i.e., where the property passes directly to the generation two or more levels below the decedent). The liability for the tax is determined by the type of transfer. In the case of a taxable distribution, the tax is paid by the transferee. The tax on taxable terminations or direct skips from a trust is paid by the trustee. Direct skips, other than those from a trust, are taxed to the transferor.","This report contains an explanation of the major provisions of the federal estate, gift, and generation-skipping transfer taxes as they apply to transfers in 2014. The following discussion provides basic principles regarding the computation of these three transfer taxes. The federal estate and generation-skipping transfer taxes were resurrected by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) after a hiatus of one year (2010). The American Taxpayer Relief Act of 2012 (ATRA) permanently extended the estate tax rules enacted by the 2010 Act except for the top tax rate, which increased from 35% to 40% for both the estate and gift taxes. The federal estate tax is a tax levied on the transfer of property at death and measured by the size of the decedent's estate. The tax is computed through a series of adjustments and modifications of a tax base known as the ""gross estate."" Certain allowable deductions reduce the gross estate to the ""taxable estate,"" to which is then added the total of all lifetime taxable gifts made by the decedent. The tax rates are applied and, after reduction for certain allowable credits, the amount of tax owed by the estate is reached. The federal gift tax is a tax imposed on all gratuitous transfers of property made during life. The tax seeks to account for transfers of property that would otherwise reduce the estate and accordingly estate tax liability at death. The donor's tax liability of the gift depends upon the value of the ""taxable gift."" The taxable gift is determined by reducing the gross value of the gift by the available deductions and exclusions. The unified transfer tax credit is available against both gift and estate tax liability. To the extent this credit is used to offset gift taxes, it is unavailable to offset estate taxes. The Internal Revenue Code refers to the credit as an ""applicable exclusion amount,"" that is, the amount of taxable gifts or estate that the credit would cover. The applicable exclusion amount in 2014 is $5,340,000. The generation-skipping transfer tax attempts to close a perceived loophole in the estate and gift tax system where property could be transferred to successive generations without intervening estate or gift tax consequences. There are two basic forms of generation-skipping transfers: the indirect skip, where the generation one level below the decedent receives some beneficial interest in the property before the property passes to the generation two or more levels below; and the direct skip, where the property passes directly to the generation two or more levels below the decedent. The generation-skipping transfer tax is imposed at a flat rate of 40% with an available exclusion of $5,340,000. While it is of the same value, this exclusion is separate from the unified transfer tax credit available for the estate and gift taxes.",govreport
"Border and Transportation Security (BTS) is a pivotal function in protecting the Americanpeople from terrorists and their instruments of destruction. While BTS may be difficult to attain, thefederal government has put into place multiple programs and policies to achieve this goal. The threereports in this series attempt to provide an understanding of the complex problems faced in seekingenhanced border and transportation security, suggest a framework to better understand existingprograms and policies, and explore some possible new directions and policy options. As noted in the first report (1) in this series, homeland security efforts can be seen as a series ofconcentric circles or screens, with the outer screen being that of preventive efforts launched outside the country -- before terrorists or their weapons can reach the country. The continuum of activitiesto provide homeland security then moves through progressively smaller circles starting from moredistant efforts to closer and more localized measures, ending with emergency preparedness andresponse. Thus, the process starts with prevention abroad and progresses through the other stagesas needed. As the first report in this series observes, border management is a complex task and currentprograms and policies in place to strengthen the border and facilitate the flow of legitimate peopleand things can seem overwhelmingly complex and difficult to approach in a systematic way. Thisreport addresses the myriad programs and policies that make up the nation's current approach toattaining higher levels of BTS. Before doing so, however, it is useful to review the development ofcongressional concern and policy approaches. Congressional concern with terrorism and border security was manifested early, followinga series of terrorist attacks beginning in the 1990s. The shock of the first World Trade Center attackin 1993 was followed by two attacks in Saudi Arabia (Riyadh in 1995 and Khobar Towers nearDhahran in 1996), the simultaneous Embassy bombings in 1998 (Kenya and Tanzania), the attackon the USS Cole in 2000, and culminating in the catastrophic attack on the World Trade Center andthe Pentagon on September 11, 2001. The congressional response began with inquiries related tothe nature of the terrorist threat, and was followed by specific, targeted measures to protect the nationfollowing the events of 9/11. There are indications that congressional interest continues in broader,more comprehensive approaches including recent efforts to respond to the report of the 9/11Commission contained in the National Intelligence Reform Act of 2004 ( P.L. 108-458 ). Congressional policy evolution is charted briefly below: Broad efforts to understand the terrorist threat -- Starting in 1998, Congresscreated three commissions to better understand the nature of the terrorist threat facing the nation. These included the Gilmore Commission (to investigate domestic preparedness to cope withweapons of mass destruction), the Bremer Commission (to explore the terrorist threat and what couldbe done to prepare for it), and the Hart-Rudman Commission (to investigate national securitychallenges in the 21st Century). (2) Structural changes to provide a proper framework for action -- Following the9/11 attacks, Congress enacted legislation to create the Department of Homeland Security to providea structural framework for subsequent action, and the USA PATRIOT ACT to provide the toolsneeded for the new challenge to national security. (3) Starting even earlier, but continuing through this period, Congressattempted to remedy perceived flaws in the immigration system with a series of legislativemeasures. (4) Highly specific actions to protect against immediate threats -- Understandably, following the 9/11 attacks that were committed by foreign national extremists, early legislativeaction called for the immediate implementation of the entry and exit control system, the use ofbiometric identifiers in travel documents, and intelligence sharing among federal law enforcementand immigration agencies through the passage of the PATRIOT Act. Airline security measures weretaken with the creation of the Transportation Security Administration, among other things in theAviation and Transportation Security Act. That was soon followed by the Enhanced Border Securityand Visa Entry Reform Act to tighten immigration practices and tools, and legislation to protectagainst the serious threats posed in the maritime domain with enactment of the MaritimeTransportation Security Act. (5) Interest in broader, more comprehensive approaches -- As evidenced in recentoversight hearings, Congress has been frustrated by the failure to more aggressively address otherborder and transportation security threats (including the need to create integrated terroristwatch-lists, and measures to address other modes of transportation -- rail and mass transit, air cargo,trucking, and buses). These concerns were given a strong impetus by the Final Report of the 9/11Commission, which highlighted the need for more strategic approaches to the terrorist threat, andare expressed in legislative form in the Intelligence Reform and Terrorism Prevention Act of 2004( P.L. 108-458 ). (6) The next section of the report traces the development of selected programs and policiesdesigned to achieve higher levels of border and transportation security, and presents them in aframework that facilitates a better understanding of current approaches and some possible newdirections. Since the September 11, 2001 terrorist attacks, the nation has made securing the homelandits primary objective. Border security has emerged as a critical stage in achieving this goal. Priorto the terrorist attacks, federal agencies involved in securing the homeland were fragmented andoften plagued by internal performance problems. As discussed below, many federal agencies taskedwith securing the nation's borders did not communicate with one another. Moreover, technology wasinadequate for communications within many of these agencies as well as between agencies. Forexample, immigration systems and databases, which are critical when trying to determine theadmissibility of a foreign national and keep bad people out of the country were not (and to someextent still are not) integrated. In an effort to address some of these issues, Congress passed theHomeland Security Act of 2002 ( P.L. 107-296 ). (7) The Homeland Security Act of 2002 consolidated many of the federal agencies responsiblefor border and transportation security into a single department. Within the Department of HomelandSecurity (DHS) is a Directorate of BTS, which is charged with securing: the borders; territorialwaters; terminals; waterways; and air, land and sea transportation systems of the United States. BTShouses the Bureau of Customs and Border Protection (CBP), the Transportation Security Agency(TSA) and Immigration and Customs Enforcement (ICE). Within CBP are the inspections serviceof the former Immigration and Naturalization Services (INS), the U.S. Border Patrol, the inspectionsservice of the U.S. Customs Service, and the border-related inspection programs of the Animal andPlant Health Inspection Service (APHIS). In addition to the border security-related functions of theformer INS and U.S. Customs Service being transferred to CBP, the following agencies were alsotransferred to DHS: (1) U.S. Coast Guard; (2) TSA; and (3) immigration investigations, intelligence,interior enforcement and detention and removal functions of the former INS and U.S. Customsinvestigations and interior enforcement. The Coast Guard was transferred to DHS as a stand-aloneagency and TSA was maintained in DHS' BTS as a distinct entity. (8) This section focuses on current border security activities of CBP, (9) the Coast Guard and the airlinesecurity component of the TSA. The activities discussed in this section are divided into categoriesof how they provide BTS and further divided into people and goods security-related programs. The DHS is the primary federal agency responsible for securing the border. CBP's functionis to secure U.S. borders while facilitating the legitimate flow of people and goods across the border. CBP personnel carry out these duties by inspecting people and goods prior to entry into the UnitedStates and by dispatching border patrol agents to patrol the border between ports of entry to preventpeople from illegally entering the country. In addition to the various components in DHS, the CoastGuard aids in securing U.S. ports and waterways. In securing the ports and waterways, the CoastGuard performs the following functions: (1) defense readiness; (2) drug interdiction; (3) migrantinterdiction; and (4) law enforcement-related functions. (10) Another component of border security is securing the nation'sair system, which is primarily done by TSA. Current policies at the border can be separated into twomajor categories: people-related border security and goods-related border security. Since the terrorist attacks, considerable focus has been placed on the fact that the 19 terroristswere aliens who apparently entered the United States legally despite provisions in immigration lawthat could have barred their admission. (11) Fears that lax enforcement of immigration laws regulating theadmission of foreign nationals into the United States may continue to make the United Statesvulnerable to terrorist attacks have led many to call for tighter measures at the border (as well asduring the screening process for visas). These concerns, which are constantly weighed with effortsto facilitate the legitimate travel of people across the border, have been expressed frequently in alegislative form. (12) The U.S. maritime system consists of more than 300 sea and river ports with more than 3,700cargo and passenger terminals, with most ships calling at U.S. ports being foreign-owned. Containerships have been the focus of much of the attention on seaport security due to the potential ofterrorists infiltrating them. More than 6 million marine containers enter U.S. ports each year andwhile all cargo information is analyzed by CBP officers for possible targeting for closer inspection,only a fraction is actually physically inspected. (13) CBP works in tandem with the U.S. Coast Guard at sea portsof entry. Efforts such as the Coast Guard's requirement that ships provide a 96-hour Notice ofArrival and CBP's Container Security Initiative (CSI) program aid in preventing more harmful thingsfrom getting to the United States. In addition to maritime security, much attention has been focused on the nation's air, truckand rail system. Similar to the massive volume of containers entering the nation's seaports, airportsalso experience large volumes of cargo. The U.S. government has employed a number of strategies and programs to make the nation'sborders more secure. The following actions are set in a framework that suggests types of possiblepolicy actions: Pushing the border outwards to intercept unwanted people or goods before theyreach the United States; Hardening the border through the use of technology and the presence of moreagents at the border; Making the border more accessible for legitimate trade andtravel; Strengthening the border through more effective use of intelligence;and Multiplying effectiveness through the engagement of other actors in theenforcement effort (including engaging Canada, Mexico, state and local law enforcement resources,and the private sector). Many contend that the best way to secure the border is by addressing issues before they reachthe border. While this concept is not new, greater emphasis has been placed on ""pushing the borderout"" since the terrorist attacks. (The following discussion is organized to highlight activities thattarget people and goods for inspection). In 2004, there were more than 427 million travelers who were inspected at a U.S. port ofentry. (15) Of the 427million travelers who sought entry into the United States in 2003, approximately 62% were foreignnationals. While the majority of travelers seeking entry into the United States are admitted duringprimary inspections, (16) a small percentage of travelers (less than one percent) are referred to secondary inspections. (17) In theory, by pushing outthe border, the number of travelers needing closer scrutiny at the border (i.e., referrals to secondaryinspection) would diminish, which would create a higher level of security. Following are a fewexamples of either congressional mandates and/or administrative initiatives that are aimed at pushingout the border. Pre-Inspections. Pre-inspections are immigrationinspections conducted at foreign ports of embarkation by United States authorities for passengersseeking entry into the U.S. Congress first authorized immigration pre-inspections in 1996. (18) However, efforts topreinspect travelers had previously been underway for several years. As of spring 2005, 15 foreignairports participated in the pre-inspection program, (19) and Congress has mandated that preinspections be extended to""at least 25 foreign airports."" (20) Under the pre-inspection program, the Secretary of Homeland Security details immigrationofficers to foreign airports. While immigration officers that are located at pre-inspection sites canperform general inspection functions, other law enforcement functions performed by immigrationofficers within the United States may be limited in the countries where pre-inspection sites arelocated. (21) Although the original intention of pre-inspections was to decrease the number of inadmissiblealiens entering the United States, some officials now view it as a useful means to better secure ourborders while facilitating the flow of travel. Setting up pre-inspection sites at foreign airports,however, is not without controversy. In order to have a pre-inspection site at a foreign airport, theUnited States must enter into diplomatic negotiations with the host country. These negotiationsinclude addressing issues such as sovereignty and the extent to which immigration officers canenforce United States' immigration laws in the foreign country. Another issue in setting uppre-inspection sites at foreign airports is the amount of resources it takes to staff them. Immigrationofficials are assigned to pre-inspection sites based on the volume of travelers seeking entry to theUnited States. Thus, countries that may not have the volume of travelers to justify a pre-inspectionsite may still justify having such a site based on the number of ""high risk"" travelers. Advanced Passenger Manifest. Air carriers enroute to the United States from a foreign country are required to submit passenger manifests inadvance of their arrival at a U.S. port of entry. While inspections are done on U.S. soil, suchadvance notification alerts the CBP inspectors to which travelers will need closer scrutiny. Themanifest is transmitted electronically via the Advanced Passenger Information System (APIS), whichis integrated with the Interagency Border Inspection System (IBIS), a component of the US-VISITprogram. TSA and ICE Border Security-Related Activities. TSA and ICE have several programs that have implications for securing the nation's borders but areusually not considered to be directly applicable to border security. These programs are either gearedtowards pre-screening individuals before they embark on a flight originating in the United States orproviding intervention during a flight should an act of terrorism occur. Computer Aided Passenger Pre-Screening System. Since 1996, the Computer Aided Passenger Pre-screening (CAPPS) System has analyzed ticketpurchasing behavior to identify air travelers who may pose a threat. While the TSA maintains thatthe methods of identifying suspicious passengers under the existing CAPPS program has largelybeen compromised by information publicly discussed following the terrorist attacks, efforts to createa next-generation passenger risk assessment and pre-screening system (CAPPS II) have beenscrapped due to mounting privacy concerns and operational problems. On August 26, 2004,however, TSA announced its plans to test a new passenger pre-screening program, SecureFlight. (22) Under SecureFlight, TSA will be responsible for checking domestic airline passengers' names against terroristwatch lists (see discussion below, ""Strengthening the Border Through More Effective Use ofIntelligence""). (23) The ""No-Fly"" and ""Selectees"" Lists. (24) TSA is mandated by lawto maintain a watchlist of names of individuals suspected of posing ""a risk of air piracy or terrorismor a threat to airline or passenger safety."" The watchlist was created in 1990 and was initiallyadministered by the Federal Bureau of Investigations, then the Federal Aviation Administrationbefore TSA finally took over the administrative responsibility. Individuals whose names are on theselists are subjected to additional security measures, with a ""no-fly"" match requiring the individual tobe detained and questioned by federal law enforcement and a ""selectees"" match requiring additionalscreening. P.L. 108-458 sets forth procedures for appealing erroneous information or determinationsmade by TSA with respect to the aforementioned records. (25) Federal Air Marshal Service. The Federal AirMarshall Service (FAMS) was created as a direct result of the events of the terrorist attacks. It wasoriginally a part of TSA but was moved to ICE by DHS in December 2003. FAMS places plainclothes federal law enforcement agents on board ""high-risk"" flights either destined to the UnitedStates or originating in the United States. In the two-year period following the terrorist attacks, airmarshals responded to over 2,000 aviation security incidents, used non-lethal force 16 times,discharged their weapons on three occasions and were involved in 28 arrests or detainments ofindividuals. (26) In addition to FAMS, other measures to secure passenger airlines include the hardening ofcockpit doors, training and arming pilots who volunteer to be Federal Flight Deck Officers, and thetraining of flight attendants to handle security threats in the aircraft cabin. As discussed above, the massive volume of containers that arrive at U.S. ports each yearmakes it impractical for CBP to inspect every container. In order to focus its limited inspectionresources, CBP has launched several initiatives designed to enhance the targeting of high-riskshipments and securing the entire supply chain from point of origin to final destination. While theseinitiatives assist CBP inspectors with targeting high-risk containers, thus requiring a physicalinspection at the border, they also permit the identification of such containers in advance of theirarrival at the border. Advance Electronic Cargo Manifest Requirement. Cargo inspections are dependent on receiving accurate information in a timely manner in order toexecute risk assessment and targeting procedures before shipments reach the border. To giveinspectors adequate information and time to perform a risk assessment on arriving cargo shipments,the legacy Customs agency published a rule (known as the 24-hour rule) (27) requiring the submissionof certain manifest information to Customs 24-hours in advance of the vessel cargo being laden atthe foreign port. Current law required CBP to develop rules concerning the mandatory electronicsubmission of cargo manifest data. (28) CBP published regulations establishing these rules accordingto the following time-frames: Vessel -- 24 hours prior to lading in the foreign port; Air -- 'wheels up' or four hours prior to departure for the United States(depending upon where the flight originated); Rail -- two hours prior to arrival in the United States; Truck -- one hour prior to arrival for shipments entered through the Pre-ArrivalProcessing System (PAPS) or the Automated Broker Interface (ABI) and 30 minutes prior to arrivalfor shipments entered through FAST. (29) Container Security Initiative. The ContainerSecurity Initiative (CSI) program, one of a series of initiatives aimed at securing the supply chain,was initiated by the U.S. Customs Service (now CBP) in January of 2002 to prevent terrorists fromexploiting containers entering into the United States. CSI is based on four core elements: (1)developing criteria to identify high-risk containers; (2) pre-screening high-risk containers at theearliest possible point in the supply chain; (3) using technology to pre-screen high risk containersquickly; and (4) developing and using smart and secure containers. Under the CSI program, CBPofficers are sent to participating ports where they collaborate with host country customs officers toidentify and pre-screen high-risk containers using non-intrusive inspection technology before thecontainers are laden on U.S.-bound ships. Similar to CBP inspectors who conduct pre-inspectionsat foreign airports, (as discussed above), CBP officers stationed at CSI ports are neither armed, norhave arrest powers. CBP continues to expand CSI to additional foreign ports. As of spring 2005,CSI was at 32 foreign ports. Customs-Trade Partnership Against Terrorism. The Customs-Trade Partnership Against Terrorism (C-TPAT) was initiated in April 2002 and offersimporters expedited processing of cargo if they comply with CBP requirements for securing theirentire supply chain. C-TPAT participants benefit from fewer cargo inspections, as membership inC-TPAT reduces a company's overall risk score in the Automated Targeting System (ATS). (30) In order to participate inthe C-TPAT businesses must sign an agreement that commits them to the following actions: conduct a comprehensive self-assessment of supply chain security using theC-TPAT security guidelines jointly developed by CBP and the tradecommunity; submit a completed supply-chain security profile questionnaire toCBP; develop and implement a program to enhance security throughout the supplychain in accordance with C-TPAT guidelines; and communicate C-TPAT guidelines to other companies in the supply chain andwork toward building the guidelines into relationships with these companies. Once the applicant company has conducted the security self-assessment and submitted thesecurity profile, C-TPAT officials review the security profile to develop an understanding of thecompany's security practices. C-TPAT officials also gather information regarding the company'strade compliance history and any past criminal investigations. Based upon the results of the review,CBP will work with the company to address any security concerns discovered during the review, orwill further reduce the company's risk score. Additional efforts to push the border out include the following (see Appendix A for adescription of each program): Carrier Consultant Program (people); Immigration Security Initiative (people); Known Shipper Programs (goods); and North American Perimeter Security (people). The U.S. northern and southwest borders extend over 6,000 miles, with vast areas of bothborders lacking direct surveillance by border patrol personnel. While the northern border,historically, has posed less of a problem than its southwestern counterpart, the terrorist attacks havebrought attention to the vulnerabilities that both borders pose. The southwest border, on the otherhand, has a longstanding history of illegal migrants attempting to gain entry into the United Statesas well as individuals attempting to smuggle human beings and drugs into the country. The borderpatrol has increased its manpower along portions of the border and various types of technology arealso being used such as video cameras, ground sensors, radiation detectors, geographic informationsystems, and physical barriers to provide surveillance at the border. (31) While critics of the current technological infrastructure contend that its weaknesses pose asecurity risk, efforts are underway to enhance border technology. Issues such as integrating datasystems, sharing intelligence among agencies and departments, having technology that can track thecomings and goings of foreign nationals and having technology that can read biometric identifiersare all important to border management. Additionally, agencies continue to invest in technology that will aid in detecting things thatmay cause harm, including technology that would detect explosives. (32) For example, inspectorsare increasingly using portal scanning devices on commercial vehicles to detect radiation. Theborder patrol has begun using Unmanned Aerial Vehicles (UAV) in its Tucson Border Patrol Sectoras part of its Arizona Border Control (ABC) initiative in an attempt to control the flow of illegalmigration between ports of entry. (33) The border patrol also uses other technology such as groundsensors and video cameras. In addition, CBP has deployed an array of non-intrusive inspection (NII) technologies at portsof entry to assist inspectors with the examination of cargos and the identification of contraband. Large scale NII technologies include a number of x-ray and gamma ray systems. The Vehicle andCargo Inspection System (VACIS) uses gamma rays to produce an image of the contents of acontainer for review by the CBP inspector. The VACIS can be deployed in a stationary or mobileconfiguration depending on the needs of the port. CBP has also deployed several rail VACISsystems to screen railcars entering the country. Other large scale NII systems include truck x-raysystems, which like the VACIS can be deployed in a either a stationary or mobile configuration; theMobile Sea Container Examination System, and the Pallet Gamma Ray system. CBP also continuesto deploy nuclear and radiological detection equipment in the form of personal radiation detectors,radiation portal monitors, and radiation isotope detectors at ports of entry. Following are selectedexamples of either congressional mandates and/or administrative initiatives that are aimed athardening the border. In 1996, Congress first mandated that the former INS implement an automated entry and exitdata system (now referred to as the U.S.-VISIT program) that would track the arrival and departureof every alien. (35) Theobjective for an automated entry and exit data system was, in part, to develop a mechanism thatwould be able to track nonimmigrants (36) who overstayed their visas as part of a broader emphasis onimmigration control. Following the September 11, 2001 terrorist attacks, however, there was amarked shift in priority for implementing an automated entry and exit data system. While thetracking of nonimmigrants who overstayed their visas remained an important goal of the system,border security has become the paramount concern. Tracking the entry and exit of most foreign nationals at U.S. ports of entry is not a smallundertaking. The massive volume of travelers seeking entry into the United States at one of the 300land, air and sea ports of entry coupled with the demands such a system would place on portinfrastructure makes implementing the system challenging. Nonetheless, implementation of theU.S.-VISIT program began at selected air and sea ports on January 5, 2004, and selected land portsof entry on December 31, 2004. Although initially required by Congress in 1996 to curtail the use of fraudulent MexicanBorder Crossing Cards (now referred to as Laser Visas), (37) biometric identifiers have received a great deal of attention post9/11 as the need to positively identify people seeking entry into the United States became paramount. The U.S.-VISIT program, as discussed above, brought national attention to such technology asdiscussion centered around which type of biometrics (i.e., iris scan, fingerprint, facial photograph,etc.) would be best for the program. Under current law, travel documents must have a biometric identifier that is unique to thecardholder. In May 2003, the International Civil Aviation Organization (ICAO) finalized standardsfor biometric identifiers, which asserted that facial recognition is the globally interoperable biometricfor machine readable documents with respect to identifying a person. (38) In an earlier reportpublished by the National Institute of Standards and Technology (NIST), it was determined that twofingerprints, as opposed to ten-fingerprints, and a facial photograph ""... are the only biometricsavailable with large enough operational databases for testing at this time."" (39) Although NIST set thetwo-fingerprint standard for identifying one's identity, concern has been raised about the possiblelimitation two-fingerprints pose for obtaining additional information on a person, such as arrestwarrants and criminal history. In an effort to secure the supply chain across international boundaries, CBP and selectvolunteer importers participating in C-TPAT have begun testing a new ""smart container."" Althoughincreasingly sophisticated tools exist, such as bomb sniffers and high-tech locks, many view smartcontainers that are capable of sensing changes in the surrounding environment as a critical meansto prevent crime and terrorism. In theory, ""a smart container would include the means of detectingwhether someone has broken into a sealed container and would have the ability to communicate thatinformation to a shipper or receiver, via satellite or radio."" (40) Under this initiative, CBP provides selected importers with sensors to be secured inside acontainer. The sensors can detect whether or not a container has been entered during transit and willsubmit the information to CBP. The first phase of 'smart box' testing involves volunteer importerswith containers originating in Europe and Asia, moving through U.S. ports in New York-New Jersey,Los Angeles-Long Beach, Seattle and Charleston. (41) Additional efforts to harden the border through the use of technology include the following(see Appendix A for a description of each program): Integration of Data Systems; Integrated Surveillance Intelligence System (ISIS); Operation Safe Commerce; and Unmanned Aerial Vehicles (UAV). The facilitation of legitimate cross-border travel and commerce, while still providing foradequate border security, has long been a challenge for policy makers. CBP inherited severalinitiatives aimed at using technology to help speed up the inspection processes for low-risk travelersand goods, which allows CBP inspectors to focus their attention on high-risk situations, as discussedbelow. NEXUS and the Secure Electronic Network for Travelers' Rapid Inspection (SENTRI) areprograms used at land ports of entry to facilitate the speedy passage of low-risk, frequent travelers. NEXUS is located at selected northern ports of entry while SENTRI is located at selected southwestports of entry. Ports of entry are selected based on the following criteria: (1) they have anidentifiable group of low-risk frequent border crossers; (2) the program will not significantly inhibitnormal traffic flow; and (3) there are sufficient CBP staff to perform primary and secondaryinspections. Travelers can participate in the program if: (1) they are citizens or legally permanentresidents of the United States, citizens of Mexico or Canada, or legally permanent residents ofCanada; (2) they have submitted certain documentation and passed a background check; (3) they paya user fee; and (4) they agree to abide by the program rules. (42) Both programs use an electronic identifier (e.g., a proximity card for NEXUS participantsor a radio transponder for SENTRI participants) that triggers an automated system to review theInteragency Border Inspection System (a background check system) and other records related to thevehicle and its designated passengers once the vehicle enters the NEXUS or SENTRI lane. WhileNEXUS and SENTRI lanes are not at all land border crossings, efforts are underway to implementthem at additional land border crossings. The Free and Secure Trade (FAST) program is a joint U.S.- Canada and U.S. - Mexicoinitiative that is aimed at expediting commerce across both the Southwest and the Northern border. FAST offers pre-approved importers, carriers, and registered drivers an expedited processing throughland ports of entry. FAST is available to ""low-risk"" participants who have a demonstrated historyof compliance with relevant legislation and regulations. Importers and carriers must be C-TPAT-certified in order to participate; carriers must also be approved as FAST Highway carriers; anddrivers must possess a FAST Commercial Driver Card. In order for a shipment to be processedacross the border as a FAST shipment, each of the parties involved must be FAST-certified, andless-than-truckload FAST shipments cannot be consolidated with non-FAST shipments and beprocessed through the FAST lanes at the border. While FAST lanes are not at all land bordercrossings, efforts are underway to implement them at additional land border crossings. FAST is alsoan harmonized clearance process, in that it operates in both directions across the Northern border(shipments exported from the United States into Canada can also be processed through the Canadianversion of FAST: Partners in Protection). Additional efforts to make the border more accessible for legitimate travel and trade includethe following (see Appendix A for a description of each program): INS Passenger Accelerated Service System (INSPASS)and I-68 Canadian Border Boat Landing Program / Outlying Area Reporting Station(OARS) In addition to technology used to facilitate legitimate travel and goods across the border byway of a vehicle, DHS also inherited programs designed to facilitate legitimate travel of certaingroups of people. An example of such a program is the Visa Waiver Program, as discussed below,and the Laser Visa (Mexican Border Crossing Card). (See Appendix A for a discussion of the LaserVisa). The VWP allows nationals from certain countries to enter the United States as temporaryvisitors for business or pleasure without first obtaining a visa from a U.S. consulate abroad. (44) By eliminating the visarequirement, this program facilitates international travel and commerce and eases consular officeworkloads abroad, but it also bypasses the first step by which foreign visitors are screened foradmissibility to enter the United States. Travelers under the VWP do not need a visa, and thus nobackground checks are done prior to their arrival at U.S. ports of entry, which allows only oneopportunity -- immigration inspection at the port of entry -- to identify inadmissable aliens. Whilethis program facilitates travel, questions have been raised about the VWP being a potential loopholefor terrorists. Of concern to some is the delay in issuing nationals from the participating countriespassports that contain biometric identifiers, although this concern may have abated since theAdministration is now requiring foreign nationals entering the United States through the VWP to beenrolled in the U.S.-VISIT program. (45) Intelligence plays an essential role in the protection of U.S. national security, one elementof which is to contribute to the protection of U.S. borders. As with traditional foreignintelligence, (47) theprimary role intelligence plays in the context of border security is to provide indications andwarnings to government personnel responsible for border protection -- primarily DHS personnel. Regardless of where the intelligence is collected -- domestically or internationally -- intelligencecontributes to the protection of U.S. borders by seeking to prevent certain goods and individualsfrom crossing U.S. borders. However, as the tragic events of September 11, 2001, demonstrated,even when intelligence systems and mechanisms are in place to prevent individuals with inimicalintent from crossing U.S. borders, it only takes one failure of the intelligence process and/orindividuals involved in it, to contribute to a potential catastrophe. (48) Traditional foreignintelligence as well as criminal intelligence contribute to enhancing border security. At the most basic level, intelligence is designed to find where the danger lies. With respectto protection of the U.S. borders, the primary goal is to collect, analyze and rapidly disseminateintelligence that can deny entry into the United States of terrorists or dangerous material that couldbe used as a weapon by terrorists. With respect to terrorists, one of the most useful tools in thegovernment's counterterrorism arsenal for border protection is the Terrorist Screening Database(TSDB) first compiled by the Terrorist Threat Integration Center. (49) As a testament to therobust role that traditional foreign intelligence entities are playing in the protection of bordersecurity, of the more than 20,000 records in the Terrorist Screening Database in 2004, the CentralIntelligence Agency provided just over 42% of the entries, the State Department provided almost42%, the National Security Agency provided 10%, the Federal Bureau of Investigation almost 4%,and the Defense Intelligence Agency just under 3%. (50) At the sensitive but unclassified (SBU) security level, the TSDBis then shared broadly across the U.S. government, to include agencies such as the DHS, the FederalBureau of Investigation (and the FBI-led Terrorist Screening Center), the Department of Justice-ledForeign Terrorist Tracking Task Force (51) ), the Department of Defense, as well as the Department of State,among others. A ""hit"" on the TSDB will trigger certain protective actions by the law enforcement,intelligence or security personnel having interaction with the individual. With respect to protection against illicit cargo coming into the United States and the potentialfor shipping to be used as a conveyance of weapons of mass destruction, one of the unique toolsbeing used by DHS's CBP is its Automated Targeting System. With shipments into the UnitedStates in the thousands of containers per day, it is not practically or financially feasible to inspecteach container. Building on years of experience in interdicting drugs being shipped into the UnitedStates through cargo containers, DHS's CBP established the interagency-supported NationalTargeting Center (NTC) as a tool to triage and effectively target cargo containers for inspection. Working with the intelligence community and law enforcement community personnel, the NTC'sAutomated Targeting System develops dynamic rules and algorithms which allow it to examine abroad scope of passenger and cargo factors to assign appropriate risk scores. Certain risk scores flaga shipment or container for human inspection. In short, intelligence serves as a force multiplier in contributing to the protection of U.S.borders. It serves the direct purpose of providing advance warnings to alert officials on the frontlines of U.S. borders. However, its indirect use may be equally valuable. That is why domesticintelligence officials, including those at the state and local levels, collect intelligence within theircommunities to put international terrorist activities into a local context. It is also why experts believethere needs to be a wide access to information that may not seem to be relevant in a national context,yet may prove what's happening in Sanaa, Yemen, may be directly or indirectly relevant and valuableto state and local law enforcement and intelligence personnel on the ground. While border security policies may not have received heightened attention until after theterrorists attacks, efforts to improve border management date back to 1995. For example, the UnitedStates and Canadian governments entered into a joint accord on February 24, 1995 called OurShared Border . The 1995 accord brought together five agencies (the former United States INS, theformer U.S. Customs Service, Revenue Canada, Citizenship and Immigration Canada, and the RoyalCanadian Mounted Police) to focus on joint border issues such as enhancing security through moreeffective inspection efforts that target specific problem areas (e.g., drugs, and smugglers), and thecontinued commitment to pool inspection and enforcement resources. And in 1999, the twocountries entered into a partnership, Canada-U.S. Partnership Forum (CUSP). CUSP provided amechanism for the two governments, border communities and stakeholders to discuss issues ofborder management. The guiding principles for U.S.-Canada cooperation resulting from thesedialogues are as follows: Streamline, harmonize and collaborate on border policies andmanagement; Expand cooperation to increase efficiencies in customs, immigration, lawenforcement, and environmental protection at and beyond the border; and Collaborate on common threats from outside the United States andCanada. Current bilateral efforts include a declaration signed on December 12, 2001, by the UnitedStates and Canadian governments establishing a ""smart-border."" The declaration included a 32-pointplan to secure the border and facilitate the flow of low-risk travelers and goods through thefollowing: Coordinated law enforcement operations (i.e., IBETS, see AppendixA ); Intelligence sharing; Infrastructure improvements; The improvement of compatible immigration databases; Visa policy coordination; Common biometric identifiers in certain documentation; Prescreening of air passengers; Joint passenger analysis units; and Improved processing of refugee and asylum claims, among otherthings. On December 3, 2001, the two countries signed a joint statement of cooperation on bordersecurity and migration that focused on detection and prosecution of security threats, the disruptionof illegal migration, and the efficient management of legitimate travel. In March 2002, the United States and Mexico announced a partnership to create a new,technologically advanced ""smart border"" to assure tighter security while facilitating legitimate travel. The U.S.-Mexico Border Partnership Action Plan has 22 points that include greater cooperationbetween the two governments in order to better secure border infrastructure and facilitate the flowof people and goods between the countries. The plan also calls for the development of integratedcomputer databases between the two countries and express lanes at high volume ports of entry forfrequent, pre-cleared low-risk travelers. (53) In addition to the bilateral agreements between the U.S./Canada and the U.S./Mexico, theUnited States has begun working with the European Union (EU) to facilitate cooperation on the CSI,as discussed above. On November 18, 2003, the United States and EU signed an agreement thatwould facilitate such cooperation by establishing an EU-wide container security policy. (54) Figure 1 maps some of the current policy approaches discussed in this report. For example,illustrations of ""pushing the border outward"" in order to intercept unwanted people and goods beforethey reach the United States include CBP's and FDA's advance manifest rules; the Coast Guard's96-hour rule; the CSI; and passenger pre-inspection at foreign airports. Examples of ""making theborder more accessible for legitimate travel and trade"" include the C-TPAT; FAST; and theNEXUS/SENTRI trusted traveler/frequent crosser programs. Examples of ""multiplyingeffectiveness through the engagement of other actors"" include C-TPAT; CSI; FAST; NEXUS; andpassenger pre-inspection. Figure 1. Movement of Goods and People Source: CRS and CRS analysis of OECD figures in Security in Maritime Transport . Note : FPOE = foreign port of exit, and DPOE = domestic port of entry. Balancing security with trade and travel may require a ""layered approach"" to attain bothgoals. The next report in this series, Border and Transportation Security: Possible New Directionsand Policy Options , examines the concept of layering and how it may fit into BTS. The currentprograms and policies in place, however, do reflect some layering. For example, the framework setforth in this report highlights the purposeful overlapping of programs and policies in order to attainBTS. Efforts to push the border outwards are aimed at preempting potential attacks and preventingindividuals who are trying to surreptitiously enter the United States. The various preinspections andadvance passenger/cargo notice programs were developed with this in mind. If someone, however,is able to penetrate the first layer of security then efforts to harden the border are put to the test. Theuse of biometric identifiers in travel documents and smart containers for the shipment of goods areboth examples of how technology is being used to harden the border. In addition to efforts to hardenthe border , the use of intelligence and engaging other actors such as state and local law enforcementand our foreign neighbors are other cumulative measures that have been taken to attain better BTS. While the programs and policies highlighted in this report may reflect an attempt at layering,some contend that there are still gaps in the system. (55) The current programs and policies were either put into place asa result of the 9/11 terrorist attacks or predated the attacks. Those programs and policies that wereput into place as a result of the attacks were done so with a sense of urgency -- to prevent anotherattack . Programs and policies already in existence prior to the attacks, however, were created witha different focus and not necessarily with the goal of keeping terrorists out of the country. As willbe examined in the next report, current efforts to provide a layered approach to BTS would meanapplying some measures of security effort to almost every point of vulnerability or opportunity. As noted earlier, this report is one of a series of three CRS reports that address the issue ofBTS. The first report in the series, CRS Report RL32839 , Border and Transportation Security: TheComplexity of the Challenge , analyzes the reasons why BTS is so difficult to attain. This report isthe second in the series. The final report is CRS Report RL32841 , Border and TransportationSecurity: Possible New Directions and Policy Options . Carrier Consultant Program (CCP). Sometimesreferred to as prescreening, the CCP was originally developed in the former INS. Working withofficials from the Department of State, CBP deploys officers to work with air carriers to preemptattempts to use those carriers to gain illegal entry into the United States using fraudulent documents. In doing so, CCP officials work towards eliminating the arrival of improperly documented aliens ata U.S. port of entry prior to their departure from the foreign port. At domestic airports, CCP officialswork with airlines in identifying any illegal or suspect activity involving the carrier, primarily relatedto the use of fraudulent documents. While the goal of CCP is to reduce illegal migration, theprogram has received heightened attention in this post 9/11 era. I-68 Canadian Border Boat Landing Program/Outlying AreaReporting Station (OARS). The I-68 Canadian Border Boat Landing Programpermits enrolled participants admission to the United States by small pleasure boats without aninspection. The program requires applicants (56) to appear in person for an inspection and interview. During theinspection/interview process, applicants names are checked against the IBIS and biometrics arecollected. Upon approval, participants are issued a boating permit for the season that allows themto enter the United States from Canada without submitting to an inspection. OARS allows travelers of small boats who are not in possession of a valid I-68 form to enterthe United States via Canada without presenting themselves for inspections. Travelers can use oneof the 33 OARS videophone stations upon entry into the United States. (57) The stations are locatedat public marinas along the Canadian border and provide automated inspections through a two-wayvisual and audio communication between the person and the remote inspector. Immigration Security Initiative (ISI). Like CCP,ISI was originally developed in the former INS. CBP is now piloting ISI at several foreign airports. ISI relies on CBP inspectors positioned at foreign airports to intercept people who have beenidentified as national security threats from traveling to the United States ISI has been compared toCBP's CSI, discussed above, which targets high risk containers for inspections. Integrated Border Enforcement Teams (IBETS). IBETs are bi-national, multi-agency law enforcement teams that target cross-border criminal activity. Although IBETS were originally created in 1996 along the British Columbia and Washington stateborder to target cross-border crimes that usually involved illicit drug violations, the terrorist attackshave prompted officials in both countries to expand IBETs role to include counterterrorismmeasures. INS Passenger Accelerated Service System(INSPASS). INSPASS is used at selected international airports. (58) It is a form ofpre-inspections for low-risk, frequent travelers. (59) INSPASS records a biometric geometry (of the hand) for eachenrollee that is verified when the traveler inserts his card. Upon arrival at an airport that hasINSPASS, enrollees proceed to an INSPASS kiosk where they access an automated hand geometryreader. Upon approval by the kiosk, the traveler receives a receipt of his inspection. INSPASSapplicants must enter the United States on certain nonimmigrant visas (60) or under the Visa WaiverProgram. (61) Integration of Data Systems. CBP officials useseveral data systems and databases that assist them with identifying aliens who are potentiallyinadmissible under the Immigration and Nationality Act or otherwise may pose a threat to thecountry. CBP officials also utilize several data systems and databases with respect to identifyinghigh-risk commercial goods that warrant further inspection or review. Of concern are the numerousdata systems and databases that are not integrated or not readily accessible. Critical to the successof border security is the ability to process information in real time. The legacy Customs Service and now CBP have been engaged in a long-term effort todevelop a new automated system to process and track the entry of all goods into the country. TheAutomated Commercial Environment (ACE) will utilize web-based electronic accounts to provideinformation regarding cargo inspections, status of clearance and other information to CBP andaccount users. Integrated Surveillance Intelligence System(ISIS). Along the northern and southwest borders, the border patrol uses ISIS asa surveillance tool. ISIS is comprised of remote video surveillance cameras that are mounted on topof towers, which are remotely monitored. According to CBP, ""one camera uses natural light andtakes traditional video images; the other uses 'infrared' imaging for night vision."" (62) ISIS also consists ofsensors and an Integrated Computer Assisted Detection (ICAD) database. Known Shipper Programs. The TransportationSecurity Administration uses a program that differentiates trusted shippers that are known to a freightforwarder or air carrier through prior business dealings, from unknown shippers. Under such aprogram, shipments from unknown sources are identified and placed under closer scrutiny. (63) Laser Visa (Mexican Border Crossing Card). Mexican nationals applying for admission to the United States as visitors are required to obtain avisa or hold a Mexican Border Crossing Card, now referred to as the ""laser visa."" The laser visa isused by citizens of Mexico to gain short-term entry (up to six months) for business or tourism intothe United States. It may be used for multiple entries and is good for ten years. Under currentpractices, Mexican nationals in possession of a laser visa will be exempt from the requirements ofthe U.S.-VISIT program, thus allowing for a speedy passage into the United States. North American Security Perimeter. As theUnited States moves forward with implementing much of the security requirements in the PATRIOTAct and the Border Security Act, many fear that the tighter security requirements will impede theflow of people across the border. Some critics are advocating for a more open border. The ideal ofa North American Perimeter Security concept has been around for several years and the basicpremise of a North American Perimeter Security would move inspections and enforcement activitiesaway from the border. Such a concept would essentially eliminate barriers to the movement ofpeople (and goods) across the shared border. P.L. 107-173 called for a study to examine thefeasibility of establishing a North American Perimeter Security program that would provide forincreased cooperation with foreign governments on questions related to border security. The NorthAmerican Perimeter Security, however, would require the harmonization of United States andCanadian immigration and refugee policies, among other things. While such a harmonization ofpolicies may be problematic following the events of 9/11, both countries have begun to harmonizeother policies at incremental levels that could be viewed as ""pushing the border out"" (i.e.,preinspections and reverse inspections). Operation Safe Commerce (OSC). OSC is a pilotprogram that brings together private businesses, the maritime industry and the government to analyzesecurity procedures and practices for cargo entering the country and develop improved methods forsecuring the supply chain. OSC's goal is to protect the global supply chain while facilitating the flowof commerce by identifying potential supply chain security weaknesses. Unmanned Aerial Vehicles (UAV). In 2004 DHSlaunched an initiative, dubbed the Arizona Border Control (ABC) Initiative that uses technologysuch as the UAV to increase border surveillance along the Arizona/Mexico border. Currently, theborder patrol is piloting two UAVs along the Arizona and Mexico border.","Border and Transportation Security (BTS) is a pivotal function in protecting the Americanpeople from terrorists and their instruments of destruction. This report addresses selected programsand policies now in place that seek to attain higher levels of BTS. It is the second in a three-partseries of CRS reports that make use of analytical frameworks to better understand complexphenomena and cast them in terms that facilitate consideration of alternative policies and practices. (The first report in the series, CRS Report RL32839 , Border and Transportation Security: TheComplexity of the Challenge , analyzes the reasons why BTS is so difficult to attain. This report isthe second in the series. The final report is CRS Report RL32841 , Border and TransportationSecurity: Possible New Directions and Policy Options .) Congressional concern with terrorism and border security was manifested as early as 1993,with the first World Trade Center attack and subsequent terrorist attacks against U.S. targets abroad. The congressional response to these events began with attempts to understand the nature of theterrorist threat through the creation of several commissions. The response to the 9/11 attacks wasfollowed by specific, targeted measures to protect the nation such as the creation of theTransportation Security Administration and the passage of laws that were aimed at strengtheningsecurity at the border, including immigration policies with respect to the admission of foreignnationals; and strengthening security in the maritime domain. Congressional interest continues inmore comprehensive approaches including recent efforts to respond to the report of the 9/11Commission. There are several broad strategies that could be pursued to enhance border security. Currentprograms and policies can be grouped under the following generic categories, which include pushingthe border outwards to intercept unwanted people or goods before they reach the United States (asin the passenger pre-screening program); hardening the border through the use of technology (asshown by biometric identifiers); making the border more accessible for legitimate trade and travel(as in ""trusted traveler"" programs); strengthening the border inspection process through moreeffective use of intelligence (with the integration of terrorist watch lists); and multiplying theeffectiveness of interdiction programs through the engagement of other actors in the enforcementeffort (as displayed by bi-national accords with Canada and Mexico). It is also possible to use thestrategies as a checklist for what new efforts might be explored. Many current programs and policies to enhance border and transportation security were putinto place as a result of the 9/11 terrorist attacks with a sense of urgency -- to prevent another attack . Programs and policies in existence prior to the attacks, however, were often created with a differentfocus and not necessarily with the terrorist threat in mind. The challenge for Congress is to reviewthese programs and policies comprehensively to help them form a more coherent and effectiveoverall strategy. This report will be updated periodically as events warrant.",govreport
"Cabo Verde is a small island nation that has historical ties to the United States. Contemporary U.S.-Cabo Verdean relations are predicated upon Cabo Verde's status as ""one of Africa's success stories and an important U.S. partner in West Africa,"" and as an African ""model of democratic governance"" with high per capita income levels, a high literacy rate, and positive social indicators. Cabo Verde is of strategic significance because its geographic location has made the country a transshipment point for Latin American cocaine bound for Europe for more than two decades. Its location has also made it a key refueling stopover for trans-Atlantic air traffic between Africa and the United States. U.S.-Cabo Verdean cooperation focuses on counternarcotics efforts and related military professionalization under the State Department's International Military Education and Training (IMET) program, and development projects supported by the Millennium Challenge Corporation (MCC). There is also an Open Skies commercial aviation and flight safety and security agreement, and Cabo Verde is eligible for tariff preferences under the African Growth and Opportunity Act (AGOA), although its use of these benefits is very minimal, as is the total value of its trade with the United States. Congressional activity centering on Cabo Verde generally centers on high-level meetings with Cabo Verdean officials during periodic congressional delegations to the country. Cabo Verde, a small volcanic island archipelago located off the coast of Senegal in West Africa, is slightly larger than Rhode Island. Most of the islands are wind-eroded, mountainous, and arid, and 10% of land is arable. A lack of rain causes recurrent water shortages, which pose a challenge for food production. Cabo Verde has few natural resources, apart from a large maritime zone and its beaches, which are a tourism destination. Cabo Verde was uninhabited when it was discovered in the 15 th century by Portugal, which then colonized the island and later made it a slave trading center. It remained a Portuguese colony until 1975. Most Cabo Verdeans are of mixed Portuguese and African descent and speak a Portuguese-African Creole. Cabo Verde's location in an 18 th - and 19 th - century whaling zone made it a key ship resupply and sailor recruiting center for U.S. vessels and gave rise to a long-standing tradition of emigration to the United States and friendly U.S. ties, which both endure. There is a large Cabo Verdean population in New England. Cabo Verde's political system takes into account its large expatriate population, whose remittances are a key source of private investment and hard currency. Expatriates may vote in national elections, although in presidential elections their collective vote may constitute no more than a fifth of all votes cast within the national territory. Foreign nationals resident in Cabo Verde are eligible to vote in local elections. Formerly a one-party state ruled by the former independence movement, the socialist-oriented African Party for the Independence of Cabo Verde (PAICV), Cabo Verde became a democracy in 1991. This followed increasing demands for a multi-party political system by civil society activists and the Movement for Democracy (MPD), which had recently been created. In response to this pressure, in 1991, the PAICV government organized multi-party elections, in which the MPD won a large parliamentary majority, the presidency, and multiple municipal elections. Seven political parties have run in legislative polls since 1993, but the PAICV and the MPD strongly dominate politics. Expatriate voters in Africa, the Americas, and Europe elect six parliamentarians (two from each region) of the 72-member legislature. Cabo Verde's transition to democracy is widely seen as successful and enduring, and as having engendered a generally consensus-based polity. While in power in the 1990s, the MPD pursued an economic reform-focused agenda, seeking to privatize state-owned firms, reform public spending, alleviate poverty, boost social services, and promote exports. It also sought to promote political pluralism and increase and diversify Cabo Verde's trade and development relations with other countries. This policy agenda continues to define the MPD and is broadly shared with the PAICV, although the political and policy rhetoric of the latter tends to emphasize a more social democratic agenda. In the most recent parliamentary elections, in March 2016, the MPD won 40 seats, the PAICV 29, and the small Independent and Democratic Cabo Verdean Union three. The MPD victory ended 15 consecutive years of PAICV parliamentary majorities. In April, the parliament selected MPD leader Ulisses Correia e Silva to serve as Prime Minister. The new government has prioritized economic expansion and job growth; poverty reduction; infrastructure and business environment enhancements; expanded foreign direct investment (FDI); crime reduction measures; and national security, in part by countering drug trafficking. In October 2016, Cabo Verde held a presidential election in which incumbent President Jorge Carlos Fonseca, of the MPD, won reelection. Fonseca, a former foreign minister and an attorney, garnered 74% of the vote, besting two independents; no PAICV-affiliated candidate ran. Voter turnout was low, at 35% (compared to 65% in the 2016 parliamentary elections and 59% in the 2011 presidential first round vote), perhaps because Fonseca faced no major opponent. Presidential elections are significant in Cabo Verde because while the prime minister leads the government, the president wields appointment and legislative veto powers, commands the armed forces, convenes or leads various consultative bodies, and represents the Republic domestically and abroad as chief of state . Presidential elections are usually as closely contested as legislative ones. Fonseca first won the presidency in 2011 in a run-off following a four-candidate first-round vote, in which then-incumbent president Pedro Pires was ineligible to participate due to term limits. While Cabo Verde faces some rule of law and human rights challenges, such as abuse of prisoners, trial delays, violence against women, and child labor, its record is far better than that of most other African countries. Civil rights are widely respected, and Transparency International rated it as the second least corrupt sub-Saharan Africa country in its global Corruption Perceptions Index 201 5 . Cabo Verde is classified as a lower-middle-income economy (one with a Gross National Income (GNI) of between $1,026 and $4,035), based on its per capita GNI of $3,280 (2015). The country ranks within the medium tier of human development under the annual United Nations (U.N.) Human Development Index (HDI), at 122 out of 188 countries assessed in 2015, higher than is common in much of sub-Saharan Africa. The Heritage Foundation ranked Cabo Verde as the third freest African economy (after Mauritius and Botswana, and the 57 th freest globally in its 2016 Index of Economic Freedom . In 2012, the Cabo Verdean government reported that it had met all of the U.N. Millennium Development Goals. It recorded particular success in its implementation of health, primary education, gender equality, and poverty eradication efforts. Cabo Verde has a high literacy rate (87% in 2015) and generally high social services and health indicators, although they are lower in rural areas, and access to economic opportunities is unequal, with women and youth often excluded. Weak economic growth in Europe—a major trading partner and source of investment, aid, and tourist arrivals—contributed to a sluggish economy in recent years, but despite this, in 2016 Cabo Verdean growth recovered substantially on the back of resurgent tourism and foreign investment. Gross Domestic Product (GDP) growth averaged 0.93% in 2012 and 2013, grew to an average of 1.66% in 2014 and 2015, and jumped to 3.63% in 2016, according to the International Monetary Fund (IMF), which projects growth of 4.02% in 2017. Unemployment has dropped to an estimated 9%, from a high of 16.8% in 2012, but remains significantly higher among youth. Economic discontent is viewed as having contributed to the PAICV's March 2016 election defeat, and remains a key challenge for the current MPD government. Cabo Verde is continuing efforts to diversify its aid and trade partnerships to lessen its dependence on Europe, and has sought to strengthen relationships with countries such as China, Brazil, and Angola. Cabo Verde imports about 80% of its grain supply, and has been recovering from a drought-stricken harvest in 2014-2015 that saw domestic maize production fall by roughly 82% from the previous year, resulting in the poorest harvest on record. The new government is prioritizing agricultural growth. Poverty has decreased since the 1990s, but remains a challenge. The share of Cabo Verdeans living in poverty declined from 37% in 2002 to 27% in 2010 (more recent data is lacking), and extreme poverty rates have dropped as well. Poverty is concentrated in rural areas and some high density urban areas. Tourism has grown rapidly, from 150,000 arrivals in 2003 to a record 569,000 in 2015. Despite fears of a slowdown in 2016 linked, in part, to reported cases of the Zika virus in the country and an ensuing travel alert issued by the Centers for Disease Control and Prevention, tourism remained during the year, powering the country's growth spurt. Analysts warn that tourism may fall in the short term, however, amid ongoing sluggishness in Europe and a projected slowdown in the United Kingdom, the largest source of tourists to Cabo Verde. In 2007, the European Union (EU) established a ""Special Partnership"" with Cabo Verde. It provides for close bilateral policy development and coordination, with a focus on trade, investment, and shared efforts to stem illicit migration, drug-trafficking, and organized crime. Cabo Verde is also pursuing deeper bilateral and investment ties with the United States, individual European states, and Portuguese-speaking countries—notably Angola, which in early 2014 agreed to provide Cabo Verde with $13 million in aid focused on infrastructure enhancements. Cabo Verde's main transnational security challenges relate to the threat of illicit narcotics transshipment through its territory. A related need is to protect its large maritime territory and strengthen its criminal justice system capacities. Cabo Verde has a small national military of about 1,000 personnel, including a small coast guard. Cabo Verde is an active member of the Economic Community of West African States (ECOWAS). Former President Pires—who won the 2011 Mo Ibrahim Foundation Prize for ""transforming Cabo Verde into a model of democracy, stability and increased prosperity"" —was a member of an ECOWAS mediation team that sought to resolve the 2010-2011 political crisis in Côte d'Ivoire. Cabo Verde periodically hosts ECOWAS fora, such as a 2008 high-level ECOWAS conference on drug trafficking in West Africa and a 2014 ECOWAS conference on small arms and light weapons. U.S.-Cabo Verdean relations have traditionally been friendly, in part due to the relationship between Cabo Verde and the extensive Cabo Verdean-American and diaspora community in the United States. President Fonseca was a participant in the 2014 U.S.-Africa Leaders Summit in Washington, D.C., and in 2013, former President Barack Obama met with former Prime Minister José Maria Neves and three other African leaders at the White House to discuss good governance, transparency, and economic growth and development issues. Former First Lady Michelle Obama also met with her counterpart, Ligia Fonseca, during a stop-over in Cabo Verde while returning from a 2016 trip to several African countries. There is also youth education cooperation: Cabo Verde is a participant in the Young African Leaders Initiative (YALI). Whether the Administration of President Donald Trump or the 115 th Congress will pursue any changes in bilateral relations remains to be seen. Congressional activity relating to Cabo Verde is generally limited to periodic congressional delegations to Cabo Verde involving meetings between Members and high-level Cabo Verdean officials. According to the Congress.gov database, Congress has never considered or enacted legislation centering on Cabo Verde, although the country has periodically been referenced in broader foreign operations authorization or appropriation bills or acts. Cabo Verde receives Millennium Challenge Corporation (MCC)-administered development assistance, as well as limited U.S. security aid, and engages in bilateral security cooperation with the United States and European partners centering on counternarcotics and related maritime security efforts. The U.S. Fish and Wildlife Service (FWS) has also funded small projects supporting marine turtle conservation valued at a total of $226,000 in FY2015 and $208,000 in FY2014. Due largely to its relatively positive socio-economic record, however, Cabo Verde—which once regularly received U.S. food aid and periodic other support—has not received additional bilateral assistance from the U.S. Agency for International Development (USAID) or the State Department in recent years. In FY2013, the Peace Corps closed its Cabo Verde country program, which had operated since 1988; it was one of eight county programs closed that year based on an agency global portfolio review. While traditional sources of bilateral aid have fallen in recent years, Cabo Verde has received substantial U.S. development assistance administered under two MCC Compacts, a form of assistance awarded to selected countries that meet a range of governance, economic, and rights performance criteria. In 2010 Cabo Verde completed a $110 million five-year MCC Compact (Compact I), and in 2012 it signed a second Compact with the MCC, becoming the first country to sign a second Compact. Cabo Verde's second Compact is slated to be completed in late 2017. The bulk of the $66.2 million agreement supports a $41 million set of water utility-focused development projects. They are designed to support financially sustainable, effective public water and sanitation delivery services. An additional $17.3 million component supports the reform and strengthening of the legal, procedural, and technical aspects of Cabo Verde's land registration system. The goal is to reduce the costs and time necessary to register or transfer property rights, and generally to make property ownership more secure. The project prioritizes such efforts on selected islands seen as having a high tourism-sector investment potential. The balance of the Compact supports program costs and monitoring and evaluation. Cabo Verde's first MCC Compact (2005-2010) sought to help Cabo Verde transition from being aid-dependent to pursuing a sustainable, private sector-led growth agenda. It focused on improving the investment climate; financial sector reforms; port, road, and bridge upgrades; watershed management; agribusiness development; and fiscal improvements. Government Accountability Office (GAO) assessments have found that while MCC Compact I projects ""met some key original targets and many final targets,"" the MCC ""altered the scope"" of key projects during Compact execution—for instance, when it divided a major port activity into two phases due to inaccurate initial planning assumptions and cost estimates. In addition, the planned $5 million establishment of a credit bureau was dramatically scaled back, to $400,000, due to discord among the MCC, the World Bank, and the government regarding what sectors should receive investment. The GAO also found that the government of Cabo Verde ""may have difficulty maintaining the infrastructure projects in the long term due to lack of funding, among other challenges,"" including a plan to privatize port operations and road maintenance. The United States and Cabo Verde have a bilateral Open Skies aviation services agreement, which provides for a market-based system of direct flights between the two countries while seeking to guarantee flight safety and security. Some airlines also use Cabo Verde as a refueling stop during flights between the United States and Africa. Cabo Verde is eligible for African Growth and Opportunity Act (AGOA) tariff preferences, but is a very minor U.S. trade partner. Its exports under AGOA have generally been paltry (e.g., no more than a few hundred thousand dollars annually) and made up a small portion of total exports to the United States, but jumped to more than half a million dollars in 2015, when AGOA exports grew to nearly 24% of all such exports. Recent rises in AGOA benefits have largely been attributable to exports of tuna and other types of fish. While positive, the impact of this development is limited, given the low value of both AGOA and overall exports to the United States. Total Cabo Verdean exports to the United States from 2011 through 2015 averaged $2.3 million a year, compared to $191 million in exports to all countries. From 2011 through 2015, U.S. exports to Cabo Verde—which are dominated by meat products—were far higher, averaging $8.6 million a year, but still minor in global comparison. Narcotics trafficking poses an increasing threat in Cabo Verde and was were reportedly a factor in several shootings in 2014, including the September killing of the mother of a top police investigator and a non-fatal attack on Prime Minister Neves's son late in the year. The killings were linked to a multi-year drug investigation and reportedly represented an attempt by drug traffickers to intimidate state authorities. According to the State Department's FY2017 Congressional Budget Justification (CBJ) for Foreign Operations, Cabo Verde's ""strategic location"" has placed the country ""increasingly at the crossroads of the transatlantic narcotics trade,"" principally focused on cocaine destined for Europe from South America. The CBJ states that ""maritime security, domain awareness, and border control are among the highest priorities for the United States"" in Cabo Verde. Programs that support these ends, in particular countering the use of Cabo Verde as a drug transshipment point, include an International Military Education and Training (IMET) professionalization program and occasional Department of Defense (DOD)-funded support. In past years, the State Department provided bilateral law enforcement and prosecutorial aid to help Cabo Verdean authorities to better investigate and prosecute drug cases and undertake counternarcotics-related antimoney laundering efforts. IMET was funded at an estimated $144,000 in FY2015, with $150,000 estimated for FY2016 and requested for FY2017, respectively. Cabo Verde has received limited assistance under the West Africa Regional Security Initiative (WARSI), a State Department regional program that seeks to help countries promote adherence to the rule of law, improve criminal justice systems, combat transnational organized crime—including drug trafficking—and promote stability, among other related goals. Cabo Verde receives several hundreds of thousands of dollars in DOD non-lethal, interdiction-related counternarcotics equipment assistance. Cabo Verde also engages in other cooperation efforts with DOD's Africa Command (AFRICOM). It has hosted multinational military exercises, such as Saharan Express , which focuses on challenges such as maritime security, drug interdiction, and anti-arms proliferation training and is supported by AFRICOM's U.S. Navy Africa Partnership Station (APS) West. The most recent Saharan Express took place off Cabo Verdean and Senegalese waters in April 2015. APS is a regional U.S. Navy-led, ship-based, multi-disciplinary, inter-agency effort focused on training, capacity-building, humanitarian, and cultural activities. Cabo Verde routinely receives additional APS and U.S. Coast Guard training visits. In 2010, the Counternarcotics and Maritime Security Interagency Operations Center (COSMAR) was established in Cabo Verde with assistance from DOD and other donors. COSMAR is designed to serve as a multilateral, cross-agency intelligence and operations fusion center. It seeks to leverage joint Cabo Verdean military, police, and intelligence capacities to counter drug trafficking and protect maritime waters and fisheries in cooperation with U.S. military and law enforcement agency efforts. The African Maritime Law Enforcement Partnership (AMLEP)—a U.S. Coast Guard and U.S. Navy APS activity aimed at demonstrating international cooperative interdiction operations and building COSMAR's applied capacities—has also undertaken cooperation activities in Cabo Verde, and the United States has helped upgrade Cabo Verde's small patrol boat fleet.","Cabo Verde, a small island nation of just over half a million people located off the west coast of Africa, is of strategic significance to the United States because its geographic location has made the country a transshipment point for Latin American cocaine bound for Europe and a key refueling stopover for trans-Atlantic air traffic between Africa and the United States. The country is also a long-standing U.S. ally in Africa that the State Department has cited as a model of democratic governance in the region since its transition from single party rule to a multi-party political system in 1991. U.S. bilateral aid to Cabo Verde is limited, and centers on military professionalization, counternarcotics efforts, and development projects supported by the Millennium Challenge Corporation (MCC).",govreport
"The return of security cooperation between the United States and New Zealand to a high level has forged a new security partnership between the two countries. The two nations, which fought together in many of America's wars and established the Australia-New Zealand-United States (ANZUS) alliance in 1951, are once again close security partners in the Asia Pacific and beyond. New Zealand's nuclear policies in the mid-1980s that prohibited nuclear-armed or nuclear-powered ships from entering New Zealand ports led the United States to restrict bilateral defense cooperation with New Zealand. For many years this difference largely defined the relationship between the two nations. Recent developments, while not restoring the formal alliance relationship, have greatly bolstered practical aspects of the two nation's bilateral defense and security cooperation as well as reaffirmed an overall close United States bilateral relationship with New Zealand. The extent to which the nuclear issue had been put into the past was demonstrated when President Obama invited Prime Minister John Key to attend the Nuclear Summit in April 2010 and stated that New Zealand had ""well and truly earned a place at the table. "" New Zealand was the only non-nuclear state invited to the conference. Several organizations and groups, some involving Members of Congress, help promote bilateral ties between the United States and New Zealand, including the United States-New Zealand Council in Washington, DC, and its counterpart, the New Zealand-United States Council in Wellington; the Friends of New Zealand Congressional Caucus and its New Zealand parliamentary counterpart; and the more recent Pacific Partnership Forum. The U.S.-N.Z. Council was established in 1986 to promote cooperation between the two countries and works with government agencies and business groups to this end. The bipartisan Friends of New Zealand Congressional Caucus was launched by former Representatives Jim Kolbe, Ellen Tauscher, and 52 other Members in February 2005. The caucus has included over 60 Members of Congress. Representative Kevin Brady has since replaced Kolbe as the Republican co-chair of the caucus. The Democrat co-chair, Representative Rick Larsen, replaced Ellen Tauscher when she left the House. The first Partnership Forum was held in April 2006. The next Partnership Forum meeting is scheduled for May 2013. The Wellington Declaration of 2010 was a key turning point in United States-New Zealand relations. It built on ongoing improvements in the relationship to enable a reorientation of the bilateral relationship that has put aside past differences to focus on the present and future. The degree to which the Wellington Declaration was able to move the relationship forward is attested to by the 2012 Washington Declaration on Defense Cooperation, which consolidated the developing relationship and opened the way for further enhanced strategic dialogue and defense cooperation. This positive momentum in the relationship has been maintained by subsequent developments such as then U.S. Secretary of Defense Leon Panetta's September 2012 visit to New Zealand where he lifted a ban on New Zealand naval ship visits. New Zealand, like many countries in its region, has both benefited economically by the rise of China while at the same time found itself in a period of geopolitical uncertainty that has resulted from China's rise. Continuing to develop bilateral security ties with New Zealand within this geopolitical context will likely require continued attention by the United States. New Zealand's military commitment to Afghanistan did much to change U.S. perceptions of New Zealand. New Zealand's commitment of regular troops and other assistance in support of the Provincial Reconstruction Team in Bamiyan Province, Afghanistan, as well as the commitment of Special Forces, demonstrated New Zealand's value not only in political or diplomatic terms but also as a military partner in the field. These deployments were instrumental in positively affecting perceptions in Washington and underlining the value of partnering with New Zealand in the future. President Obama described New Zealand as ""an outstanding partner"" during Prime Minister Key's visit to Washington in July 2011. This warming of relations added ballast to the relationship and moved forward a process for contemplating how the two nations could enhance their cooperation in a Pacific and broader context. The Wellington Declaration of November 2010 established in a public way a new strategic partnership between the United States and New Zealand. It stated that ""our shared democratic values and common interests"" will guide the two nations' collective action. The Declaration is viewed as putting to rest past differences, which had been fading for some time, to focus on areas of ongoing and future cooperation between the two nations. The agreement reaffirmed their close ties and established a framework of ""strategic partnership to shape future practical cooperation and political dialogue."" The agreement also noted that the United States and New Zealand are Pacific nations in addition to emphasizing shared interests and values: Our governments and peoples share a deep and abiding interest in maintaining peace, prosperity and stability in the region, expanding the benefits of freer and more open trade, and promoting and protecting freedom, democracy and human rights. The agreement pointed to the need to address regional and global challenges including enhanced dialogue on regional security in the Pacific. New Zealand and the United States actively support Pacific island countries (PICs) by helping them patrol their Exclusive Economic Zones. Pacific island states have few naval or air assets of their own to patrol these vast maritime zones. New Zealand's upgraded P-3K2 Orion aircraft and Offshore Patrol Vessels provide it with enhanced capabilities to conduct aerial surveillance and enforcement in the Pacific. New Zealand supports the work of the Forum Fisheries Agency, which is an agency of the main regional grouping of Pacific island states, the Pacific Islands Forum, and the Te Vaka Toa Arrangement which provides for enhanced collaboration between New Zealand and PICs in the areas of fisheries protection. The region-wide Niue Treaty also seeks to strengthen regional fisheries protection. New Zealand works with the United States, as well as with Australia and France, in providing maritime surveillance of the region, particularly in fisheries. This group is known as the Quadrilateral Defense Coordination Group, or Quad. A World Bank study has projected that strengthening fisheries management could yield PICs an additional U.S. $60 million in revenue annually. The U.S. Coast Guard Ship Rider Program works with Forum Fisheries Agency Member states to help them enforce control of their fisheries. The Ship Rider Program seeks to ""build capacity and strengthen interoperability among Pacific Island countries"" to deal with illegal fishing. The Program puts law enforcement officers from various Pacific Island nations on U.S. Coast Guard ships, which can then serve as platforms for boarding commercial vessels found in Pacific Island nations' exclusive economic zones. The United States and New Zealand also participated in Operation Kurukuru , . the single largest monitoring control and surveillance operation conducted in the region to date. New Zealand has also joined the United States in the annual U.S.-led Pacific Partnership exercise. The annual humanitarian assistance and disaster relief exercise is aimed at increasing interoperability in the Pacific among U.S., Australian, New Zealand, and French forces. Bilateral relations were further enhanced in May and June 2012 by the New Zealand government's hosting a number of events to mark the remembrance of U.S. forces that were based in New Zealand during World War II. Exercises Alam Halfa and Bold Alligator are further evidence of the removal of barriers to bilateral defense exercises between the United States and New Zealand. U.S. troops travelled to New Zealand in June 2012 to work with their New Zealand counterparts in exercise Alam Halfa , which provided soldiers from both countries an opportunity to exchange knowledge on tactics and procedures and set a precedent for future training opportunities. Bold Alligator 2012 was held in January and February 2012 off the coast of Virginia, North Carolina and Florida and included participants from nine countries including New Zealand. The significant development of bilateral defense cooperation that followed the Wellington Declaration of 2010, as discussed above, was consolidated and substantially extended by the Washington Declaration of June 2012. The Washington Declaration does much to provide a framework for the new strategic partnership for which the Wellington Declaration called. The Washington Declaration, signed by Secretary of Defense Panetta and the Key government's Minister of Defence Coleman, reaffirmed the increasingly close bilateral relationship by setting principles of cooperation while also discussing purposes, scope, and implementation of expanded defense and security cooperation. The agreement marks a return to close security cooperation. Minister Coleman described the Declaration as foreshadowing greater cooperation in maritime security, counterterrorism, humanitarian assistance, and disaster relief in the region while also promoting peace support initiatives. Coleman stated, ""This high level arrangement recognizes the significant security cooperation that exists between New Zealand and the United States within the context of our independent foreign policy, and seeks to build upon that cooperation in the years ahead."" The agreement does much to codify many of the ongoing bilateral arrangements that have been re-established since the Wellington Declaration while also providing a framework for moving defense cooperation forward. New Zealand's return to increasingly close defense cooperation with the United States is not limited to disaster relief and humanitarian assistance. For the first time in 28 years New Zealand defense forces joined with 21 other nations' militaries in the biennial Rim of the Pacific (RIMPAC) military exercise hosted by the U.S. Pacific Fleet and held off Hawaii. The June to August 2012 exercise involved 42 ships, 6 submarines, over 200 aircraft, and 25,000 defense personnel. New Zealand sent HMNZS Te Kaha and HMNZS Endeavour , a rifle platoon, an Orion P-3K aircraft, and headquarters staff to participate in RIMPAC. Commander Joint Forces New Zealand Major General Dave Gawn stated, ""Participation in exercises like RIMPAC also enables the Defence Force to prepare for a variety of contingencies to ensure that New Zealand can play its part effectively in working with other nations to reduce conflict and improve stability in the Pacific and around the world."" During his September 2012 visit to New Zealand then-U.S. Defense Secretary Panetta lifted a ban on New Zealand naval ship visits to U.S. ports. This ban had been in place since 1985 and had necessitated obtaining a waiver in order for New Zealand ships to visit U.S. ports. This irritant in the bilateral relationship was demonstrated when New Zealand's naval vessels participating in RIMPAC 2012 off Hawaii had to berth at a civilian rather than naval port facility in Honolulu. Secretary Panetta stated that the policy shift signals a new era in bilateral ties. He also signaled that the U.S. Marine Corps may become involved in assisting New Zealand develop its amphibious capabilities as part of the renewed and expanding partnership. Further high-level exchanges and joint military exercises, particularly in the areas of humanitarian and disaster relief in a Pacific context, appear to be forthcoming. New Zealand's foreign policy orientation has shifted over time as has its national identity. New Zealand's credentials as a loyal supporter of the British Empire were once at the core of the country's military commitments, external orientation, and identity. This was demonstrated by the sacrifices that New Zealand made in support of the British Empire. This commitment existed at a time when the ethnic composition of New Zealand was largely drawn from the United Kingdom. Further, the national narrative was predominantly written by British settlers and their descendants with limited input from the indigenous Māori or inhabitants of New Zealand's Pacific colonies. In recent decades, the demographics of New Zealand's growing Māori, Pacific Islander, and Asian populations have changed the country's national identity and will likely continue to influence New Zealand's foreign policy towards the Asia Pacific region in future decades. Through a series of policy documents in recent years New Zealand has been examining its relationships with the South Pacific, Asia, and China. New Zealand's national security and defense interests were defined in the 2010 Defence White Paper as follows: A safe and secure New Zealand, including its border and approaches; A rules-based international order which respects national sovereignty; A network of strong international linkages; and A sound global economy underpinned by open trade routes. The White Paper highlights how ""a rules-based international order based on values sympathetic to New Zealand's own,"" such as the primacy of the rule of law and constraints on the unilateral exercise of force, is in New Zealand's national security interest. While its national interests are arguably the more salient rationale for existing and past involvement with the South Pacific, New Zealand's evolving national identity stemming from its shifting demographic composition will likely add impetus to its involvement in the region. The government of New Zealand has identified seven key objectives that underpin its comprehensive concept of national security. The list demonstrates the interrelated nature of interests and values in a New Zealand context: Preserving sovereignty and territorial integrity; Protecting lines of communication; Strengthening international order to promote security; Sustaining economic prosperity; Maintaining democratic institutions and national values; Ensuring public safety; and Protecting the natural environment. Also articulated in New Zealand's National Security System document of May 2011 are concerns with structural shifts in global economic power. The document pays particular attention to the implications these shifts could have for the distribution of global military power, as states with growing economies allocate more resources to military spending. The document also points out how New Zealand derives significant benefit from a stable and prosperous Asia, and that ""it is in our national interest to uphold and contribute to that favourable environment by supporting regional peace and security."" New Zealand has set itself a goal of strengthening its leadership role in the South Pacific, which it has identified as an area of fragility. In the 2010 Defence White Paper, New Zealand identified the Pacific as a top security priorities for the nation. In articulating New Zealand's interests in the South Pacific, the White Paper states: It is in New Zealand's interest to play a leadership role in the South Pacific for the foreseeable future, acting in concert with our South Pacific neighbours. A weak or unstable South Pacific region poses demographic, economic, criminal, and reputational risks to New Zealand.... It will remain in our interests for Pacific Island states to view New Zealand as a trusted member and friend of the Pacific community. New Zealand has a special relationship with the South Pacific and can play a key role as a partner to promote security, stability and prosperity in the region and beyond. The New Zealand Ministry of Defence has plans for a new Joint Amphibious Task Force (JATF) that will provide ""a long term plan for an NZDF which is combat capable, maritime in outlook and expeditionary in nature ... it's about being able to do this across the great expanse of the Pacific."" Based on New Zealand's experience with peace operations in places such as Bougainville, Timor-Leste, and the Solomon Islands, it appears that the JATF structure will facilitate potential future deployments in the Pacific. New Zealand's strategic geography views Polynesia, Melanesia, and Micronesia as its ""near abroad."" It should be noted that ""near"" is a relative term and that the maritime environment encompassed by the South Pacific is immense. New Zealand's focus on its place in the South Pacific increased in the mid-1980s. This has in part been influenced, as noted above, by New Zealand's increasing Pacifika population as well as by New Zealand's national interests in the region. New Zealand has traditionally partnered with Australia, which is its most important strategic partner, in promoting shared security interests in the South Pacific and beyond. The Australian and New Zealand Army Corps (ANZAC) spirit remains a core identity for many New Zealanders and gives New Zealand a special bond with Australia. This bond has found expression in a regional context in joint security operations in Timor-Leste and the Regional Assistance Mission to the Solomon Islands (RAMSI). New Zealand's strong security relationship with Australia, which was forged at the battle of Gallipoli in World War I, was formalized in the Canberra Pact of 1944 and strengthened through the trilateral Australia-New Zealand-United States (ANZUS) Treaty in 1951. The security relationship was further defined in the bilateral Closer Defense Relations (CDR) agreement in 1991 which was updated in 2008. The 2011 review of New Zealand's defense relationship with Australia noted Australia and New Zealand's ""mutual commitment to each other's security and overlapping interest in the security, stability, and cohesion of our neighborhood and the broader Asia Pacific."" An understanding of the role of Pacific identities in the New Zealand polity, as well as New Zealand's regional interests, informs an understanding of New Zealand's external gaze and its sense of region. Because of this increasing sense that New Zealand is a Pacific nation, which also stems from its historical role in the Cook Islands, Niue, Samoa, Tuvalu, and Tokelau, there is an expectation within the country that it should play a constructive role in regional Pacific affairs. This will likely inform future decisions on New Zealand's engagement in the region. It has been noted that New Zealand ""took a long time to make up its mind that it was a Pacific country, not a European outpost."" It was not until after Britain entered the European Common Market in the 1970s and the ANZUS spilt in 1984 that New Zealand fully embraced its role as a Pacific state in the post-colonial world. While New Zealand's place within the British Empire has done much to shape its history and sense of identity, New Zealand's role as a colonizing power itself, as in Samoa, is less well understood. In its early history, New Zealand sought to exert a sphere of influence in the area of the Pacific closest to itself by urging the British to ""adopt a more forward policy of annexations"" while claiming that New Zealand was well suited to rule in Polynesia. In 1849, Sir George Grey sought to thwart the French in New Caledonia. In 1897, Prime Minister Seddon, who viewed New Zealand as a natural leader of island peoples, advocated for the annexation of Pacific islands as far away as Hawaii. The failure of Britain to develop a Monroe Doctrine for the South Pacific apparently ""caused chagrin"" in New Zealand as American, German, and French influence extended into the region. A legacy of these desires for a South Pacific sphere of influence can be seen in New Zealand's constitutional relationships with Tokelau, Niue, and the Cook Islands and through its Treaty of Friendship with Samoa. These relationships have some similarities with the United States relationships with Pacific island states and territories. R.J. Seddon also opposed the British withdrawal from Samoa in 1899. The Cook Islands and Niue, which were British protectorates, became part of New Zealand in 1901 and in 1914 New Zealand seized Western Samoa from Germany. New Zealand's poor handling of the global influenza epidemic in Samoa in 1918, in which an estimated 20% of the population died, led to widespread resentment of New Zealand's rule and the Samoan Mau uprising. Tokelau was included in New Zealand's administration in 1948. At the close of World War II, Australia and New Zealand sought to secure their part of the Pacific. Samoa became the first independent state in Polynesia in 1962 and signed a Treaty of Friendship with New Zealand in the same year. By 1989, 15 Pacific Island states received 70% of New Zealand's overseas aid. The 2010 ""Inquiry into New Zealand's Relationships with South Pacific Countries,"" by the Foreign Affairs, Defence, and Trade Committee of Parliament acknowledged the increasing Pacific composition of New Zealand and found that ""New Zealand is increasingly part of the regional fabric."" It also noted that ""Key partners expect New Zealand to strongly support the maintenance of peace and stability in this region."" The report further stated that ""Any instability in the neighbourhood has consequences for all its neighbours."" Recent New Zealand governments have concluded that the country must invest more time and energy into strengthening its ties with Asia and that it needs to look to new ways to build a shared future in the Asia Pacific region and increase trade and investment linkages. Beyond the first circle of interest and engagement, which includes Australia and the South Pacific, is New Zealand's relationship with the broader Asia Pacific. The relative importance of this extended region has increased in recent years as alternative patterns of trade since the 1970s have shifted New Zealand's economic focus away from Britain and Europe towards Asia and to a lesser extent the United States. New Zealand's focus on Asia has to a large extent been an extension of New Zealand's drive to diversify its export markets and thereby promote its economic security. New Zealand's multilateral approach and trade agenda has led it to increase its linkages with Asia through such organizations as the East Asia Summit (EAS) and the proposed Trans Pacific Partnership (TPP) agreement. New Zealanders generally appreciate the importance of Asia. A recent Asia-New Zealand Foundation poll found that 77% of New Zealanders see the Asian region as important to New Zealand's future. This compares to ratings of importance for Europe with 66%, North America 56%, and the South Pacific 43%. Only Australia, at 86%, was deemed more important to New Zealand's future than Asia. Eight out of ten New Zealanders also believe that conflict, threats, or instability in Asia could have some impact on New Zealand. While New Zealand's indigenous Polynesian Māori, and to a lesser but increasing extent Pacific Island populations, have largely been brought into the national identity, it is still unclear how far Asian identities will be brought into it in New Zealand. This sociological process is largely driven by demographics rather than explicit government policy. Current immigration trends indicate that Asian identities will likely be far more prominent in the near future. In 1994 only 3% of New Zealanders were of Asian ancestry. By 2026, this is projected to grow to 16%. This growth represents a rapid demographic shift that may have implications for the social fabric of New Zealand society. The New Zealand government further articulated its strategy for engaging China in the China strategy document ""Opening Doors to China: New Zealand's 2015 Vision."" The document identifies a whole-of-government approach to growing exports and new markets in China and highlights that New Zealand's trade relationship with China is ""crucial in delivering the Government's Economic Growth Agenda."" China is New Zealand's second largest export destination and New Zealand exports to China have increased dramatically in recent years. China and New Zealand also significantly reached a Free Trade Agreement in 2008. China also sent approximately 150,000 tourists and 21,000 students to New Zealand in 2010. Prime Minister Key has stated that ""New Zealand welcomes a closer dialogue with China on development cooperation in the Pacific."" In April 2012, Foreign Minister McCully reiterated the Key government's desire to work more closely with China in the Pacific by stating ""we can maximise our efforts if we work together more closely."" McCully has observed that China has more diplomats in the Pacific than Australia and New Zealand combined despite only having diplomatic representation in 8 of the 14 countries in the Pacific Islands Forum. McCully has also stated that I do not regard greater Chinese activity in the Pacific as a great mystery. Nor do I attribute unwholesome motives. China is simply ... undertaking a level of engagement designed to secure access to resources on a scale that will meet its future needs, and establishing a presence through which it can make its other interests clear. New Zealand's economy has become increasingly linked to China. The New Zealand government promotes trade with China and is sensitive to anything that might disturb the nation's lucrative and growing trade relationship due to the increasing importance of that relationship to New Zealand's overall economic wellbeing. New Zealand's Free Trade Agreement with China has done much to facilitate New Zealand's trade. There are a range of views in New Zealand on the rise of China, its implications for New Zealand, and the way New Zealand should position itself within the shifting geopolitical and trade dynamics of the region. These views are overwhelmingly informed by New Zealand perceptions of the increasingly important role that China plays in buying New Zealand exports, although geopolitical considerations and the role of values are also important. Foreign Minister McCully has stated that there is a ""natural tendency for the rising powers to define and pursue their interests in a more forthright way."" As a result, McCully has argued that countries large and small should ""help mediate that relationship"" through diplomacy and regional institutions. McCully also stated that China is looking for resources and seeking to protect its interests as a global player and that the challenge is to increase cooperation and transparency with China and to work together. He added that New Zealand ""needs to meet China half way"" and develop a more cooperative effort in the Pacific. Signs exist of increasing sensitivity within some segments of New Zealand society to China's growing economic influence over the country. This can be seen in the 2012 debate over the Crafar Farms sale of New Zealand agricultural land to a Chinese corporation. This dynamic may in some ways parallel past changes in attitudes towards China in Australia. In Australia, the 2010 trial of Rio Tinto mining executives on charges of spying, and China's urging of suppression of publicity surrounding Uighur leader Rebiya Kadeer and the Dalai Lama led to a perception by many Australians that the high degree of Australia's economic closeness to China was leading to Chinese pressure on Australia to make policy decisions that ran counter to many Australians' values. There are a range of academic views in New Zealand (and Australia) on China's role in the region. Some view China as filling a vacuum created by the West while ""incorporating the Pacific islands into its broader quest to become a major-Asia-Pacific power"" with the long term goal to ""ultimately replace the United States as the pre-eminent power in the Pacific Ocean."" Some have also emphasized that China's ""Look South"" strategy has led Pacific Island countries to increasingly ""Look North"" to China rather than to traditional Western partners. Others take a less concerned view, seeing opportunities for PICs to gain foreign assistance while pointing to China's limited naval reach. While China has adopted a more assertive stance and hardened its position in the South China Sea and the East China Sea, its approach to the Pacific has thus far been less overtly assertive according to some analysts. Chinese strategic perceptions of the Pacific, as well as the manner in which it pursues its interest in the region, will influence U.S. and New Zealand perceptions of its role. There is also the potential that a deterioration of the strategic situation in the Western Pacific could influence the dynamic between China and Western powers in the South Pacific. China's aid to the Pacific, with its relative lack of transparency and focus on buildings and soft loans, differs in its approach from Western development assistance. The region had been an arena for Chinese and Taiwanese diplomatic rivalry, which manifested itself in terms of dollar diplomacy. This rivalry was suspended following the election in 2008 of President Ma Ying-jeou of the Nationalist Party of Taiwan who sought improved relations with China. Ma was returned to office in 2012. Kiribati, the Marshal Islands, Nauru, Palau, the Solomon Islands, and Tuvalu are among the 23 governments globally that recognize Taiwan. In recent years, it appears that China has increased its aid to and engagement with the Pacific to pursue other interests as well. In addition to seeking diplomatic leverage, China is thought to seek to gain access to resources, including minerals, timber, and fish, and to extend its influence in the region. China's aid program to the Pacific is difficult to quantify but appears to be significant and growing. China is thought to be the third largest aid donor to the Pacific, after Australia and the United States. New Zealand has expressed interest in working with China in aid projects in the Pacific. This could help draw China into a collaborative posture in the region. If China resists such efforts to cooperate on development projects with Western nations it would then appear that China views its assistance as in competition with Western assistance. China's strategy in the Pacific, when combined with the projected further expansion of Chinese naval capabilities, such as the launch of its first aircraft carrier for sea trials in 2011, appears to be drawing China militarily closer to the Pacific region. China's increasing military capability will likely give it the ability to be more directly involved in the Pacific region in the future, though the operational integration of naval capabilities, such as aircraft carriers, may take considerable time to develop. China's relations with Fiji offer an example of the impact of China's foreign relations in a South Pacific context. Expanding foreign assistance from and other ties to China have helped Fiji work around the political ostracism that Australia, New Zealand, and others sought to impose on the regime of Commodore Bainimarama for leading a coup that undermined democratic government in Fiji. Commodore Bainimarama has stated that it makes sense for Fiji to more closely align itself with China which does not care about the nature of the regime. Commodore Bainimarama stated in January 2013 that the draft constitution would be scrapped and that he would have his legal office draw up a new constitution. New Zealand Foreign Minister McCully reportedly stated that this brings into question whether elections anticipated in 2014 would be free and fair. An examination of the interrelationship of identity, interests, and values yields insight into the nature of bilateral relations between the United States and New Zealand. Focusing on identity fosters understanding of why some in New Zealand have been somewhat skeptical of becoming overly reliant on a single great and powerful friend. Looking at interests helps explain the extent to which New Zealand seeks to maximize its economic opportunities in a globalized economy as well as its perceptions of China. New Zealand's desire for independence in its external relations can also be viewed as a consequence of its historical experience. In terms of values, while the U.S.-New Zealand bilateral relationship has changed over time from close allies to estranged ones and now back to increasingly close partners, the relationship between the two states has been close on a cultural or people-to-people basis. Inquiry based on interests alone does not do justice to the strong ties of culture, history, and values that the two nations share. It is these common values, as well as shared interests, that explain why these two democratic nations are once again on track to becoming even closer security partners. Subtle differences in values can explain past differences, and a more layered and nuanced understanding of these areas of commonality, and difference, can inform future policy decisions and further develop an enduring Pacific partnership between the two nations. While shared values are at the core of the relationship, past history tells us that the relationship must also be tended in order to reach its full potential. When New Zealand and U.S. leaders meet there is often an opening reference to the theme of shared values, partnership, and friendship between the two nations. This makes the relationship qualitatively deeper than those based only, or predominantly, on common interests. ""We are very pleased that the relationship between New Zealand and the United States is growing stronger by the day. Part of that has to do with the great affection that our peoples have towards each other. Part of it has to do with a great deal of common interests and a common set of values."" –President Barack Obama ""New Zealand sees itself as a small but important partner for the US and with our shared values we believe New Zealand can work with the US on efforts to enhance global peace and security."" –Prime Minister John Key If the United States and New Zealand have largely common values, then why did these two nations, in the period after 1984, have such distance in their relationship? Insights into this answer can be found in subtle differences in the two nation's values. The United States and New Zealand share many values drawn from their common roots as largely British settler societies. The two nations' values, and from these their national identities, have, however, evolved differently over time. David Hackett Fischer attributes key differences in values between the United States and New Zealand to the timing of their founding. The United States was founded during the First British Empire when concepts of freedom were paramount. New Zealand was founded later, during the Second British Empire, when concepts of fairness were more prominent. While values are a deep force that can draw the two nations together, they can also be at the core of differences of opinion. The importance of independence of action must be highlighted as a key value for New Zealand foreign policy. This is evident in New Zealand's support for the U.N. as well as close relations with the United States, its FTA with China, its leadership on climate change and the environment, and its anti-nuclear policy. Other value differences—including differences in the political spectrum of the two nations, views on the role of religion and the state, and views on the role of government in public welfare, for example—indirectly influence the bilateral relationship. Attention to these differences can also lead to better understanding of both nations. After decades of being friends but not allies, the New Zealand government under Prime Minister John Key has effectively consolidated a return to close security and defense relations with the United States. The government's desire to return to closer ties with the United States coincided with, and was facilitated by, the Obama's Administration's move to rebalance U.S. involvement in the Indo-Pacific region. It should be noted that the Key government built on improvements in the bilateral relationship begun under Key's predecessor, Helen Clark of the Labour Party, including in the area of security and defense. That said, there is a debate within defense and foreign policy circles in New Zealand where a significant minority would challenge the government's decision to bring New Zealand closer to the United States. In one poll 47.6% of New Zealanders approved of ""the U.S. resuming military exercises in New Zealand"" while 44% disapproved. Strategic debate in New Zealand appears to be coalescing around three loosely defined positions. The first position in the debate, represented by the New Zealand government, is comfortable with American power in Asia and the Pacific and seeks to actively establish closer political, security, and trade ties with the United States while maintaining close trade relations with China. This dominant view emphasizes the shared values that have underpinned past cooperation with the United States. This position is closer to that of Australia's strategic posture than the other two positions. This is important because of the central position that Australia plays in New Zealand's strategic plans. The second perspective places relatively more emphasis on New Zealand's economic closeness to China, is more worried that New Zealand may have to choose between the United States and China, and fears that this could have negative, largely economic, consequences for New Zealand. This second group, if pushed by an adverse strategic environment, would likely side with the United States. Like all New Zealanders, this group does not want to have to choose between economic and security interests. The third group views the United States and China as two great powers, places less emphasis on the role of traditional values, and prefers a more even-handed approach to relations with the United States and China. It also emphasizes New Zealand's economic interests with China as key to New Zealand's economic security. This group generally does not oppose enhanced cooperation with the United States as long as it does not compromise New Zealand's relationship with China. As such, it would likely place limits on developing the bilateral relationship with the United States. Some in this group also emphasize the economic—and by implication the eventual military—decline of the United States relative to China's rise. China has gained much geopolitical influence from its expanding trade relationship with New Zealand. This could lessen somewhat if a potential trade agreement, such as the TPP, were to lessen New Zealand's reliance on China trade. A more nuanced understanding of New Zealand's international posture depends on continuing to better understand New Zealand's search for independence and economic security and its conceptualization of its strategic space in the South Pacific and more broadly in Asia, as well as its values as they pertain to international and strategic affairs. The relative impact of history and geography in shaping these conceptions has changed over time. As a result, New Zealand is more Pacific-focused and increasingly Asia-focused. Understanding this change will continue to facilitate the United States' and New Zealand's partnership in the Pacific and beyond. While the United States' strategic and economic geography is global, New Zealand's geography is more regionally focused on the South Pacific and Asia. New Zealand's current strategic guidance, as well as its historical relationship with the South Pacific, its changing demographic composition, and regional security concerns will continue to call for it to be an active player in its near region. As a result, New Zealand will likely focus its efforts in the South Pacific as its primary area of strategic interest. New Zealand's economic geography, and its continuing efforts to diversify its trade relations, will likely continue its increasingly broad focus on Asia and regional economic architectures such as the TPP. China's increasing presence in the South Pacific will also continue to be of interest to New Zealand. Mainstream thinking in New Zealand sees the country's strategic interests in the South Pacific and its larger Asia Pacific political and economic interests running largely in tandem with America's rebalancing towards Asia. America's rebalancing to the Asia Pacific contains within it a renewed focus on the Pacific which directly brings U.S. and New Zealand conceptions of their strategic geography into the same space. By agreeing to let past differences over nuclear policy no longer define the relationship, the United States shifted its approach to New Zealand in a way that demonstrates respect for New Zealand's nuclear policy and its independence in foreign affairs and opened the way for a resumption of closer security cooperation. Continued sensitivity to New Zealand's nuclear stance and its desires for independence in international affairs will likely facilitate further deepening of the rapidly expanding linkages between these two great open societies. Expansion of economic and trade relations between these two, and other, nations through the Trans Pacific Partnership agreement could also further enhance political and strategic ties between the United States and New Zealand. The above discussion of developing security cooperation between the United States and New Zealand raises a number of questions that may be of interest to Members of Congress interested in oversight of the Administration's rebalancing to Asia strategy. Among these questions are: How does the developing security relationship with New Zealand fit in with the future course of the United States' rebalancing to Asia strategy? What is the correct balance that should be struck between security and economic aspects of the bilateral relationship? Is there need for enhanced collaboration between the United States, New Zealand, Australia, and others in coordinating humanitarian assistance, disaster relief, maritime awareness, and regional posture in the South Pacific? In what areas and in what ways can the United States and New Zealand best cooperate to advance shared interests in the Asia Pacific region in the future? Does the history of bilateral relations with New Zealand contain any lessons that can be learned for improving other bilateral security relationships in the Asia Pacific context?","As part of its strategy to rebalance toward Asia the Obama Administration has greatly expanded cooperation and reestablished close ties with New Zealand. Changes in the security realm have been particularly notable as the two sides have restored close defense cooperation, which was suspended in the mid-1980s due to differences over nuclear policy. The two nations are now working together increasingly closely in the area of defense and security cooperation while also seeking to coordinate efforts in the South Pacific. The United States and New Zealand are also working together to help shape emerging architectures in the Asia-Pacific such as the 11-nation Trans Pacific Partnership (TPP) free trade agreement negotiation in which New Zealand has played a key role. Members of Congress interested in oversight of the Obama Administration's rebalancing to Asia strategy and the United States' presence in the South Pacific as well as Members associated with the Friends of New Zealand Congressional Caucus may be interested in these new developments in the bilateral relationship. Congressional interest has also been demonstrated through Members' participation in the Pacific Partnership Forum with New Zealand. In discussing how the United States is updating alliances to address new demands and ""building new partnerships,"" then-Secretary of State Hillary Rodham Clinton cited in November 2011 the outreach effort to New Zealand, among other countries, as ""part of a broader effort to ensure a more comprehensive approach to American strategy and engagement in the region."" She added that ""We are asking these emerging partners to join us in shaping and participating in a rules-based regional and global order."" It is of interest to note that New Zealand, a nation that like Australia has fought alongside the United States in most of its wars, is now being reconceived as a ""new"" partner. While the current right-of-center government of Prime Minister John Key has moved forward in restoring bilateral ties with the United States, some analysts in New Zealand are concerned that if this trend is taken too far it may threaten New Zealand's trade interests with China. Others in New Zealand are also concerned that moving too far too fast with the United States may jeopardize New Zealand's independence in foreign policy. The Obama Administration's move away from old restrictions on bilateral ties, as demonstrated by the opening of U.S. naval ports to New Zealand ships, will likely continue to move bilateral ties forward. This desire on both sides to continue to strengthen relations was demonstrated by the 2010 Wellington Declaration and the 2012 Washington Declaration. In the view of many, the improvement in bilateral relations marked by these two agreements will better enable both nations to navigate the shifting geopolitical dynamics of both the South Pacific and the larger the Asia Pacific region, including the rise of China. New Zealand's national identity, values, and economic interests will all likely influence its external engagement in the years ahead. Values, as well as interests, have played a role in explaining past differences between the United States and New Zealand and why the two nations are once again close Pacific partners.",govreport
"The U.S. Constitution establishes two methods by which Presidents may appoint officers of the United States: either with the advice and consent of the Senate, or unilaterally ""during the Recess of the Senate."" These two constitutional provisions have long served as sources of political tension between Presidents and Congresses, and the same has held true since President Obama took office. This tension is illuminated by President Obama's difficulty in obtaining Senate confirmation of nominations for the Directorship of the newly-established Bureau of Consumer Financial Protection (CFPB or Bureau) and Members of the National Labor Relations Board (NLRB or Board). President Obama formally nominated Richard Cordray to be the first Director of the CFPB on July 18, 2011. In May 2011, 44 Senators signed a letter to the President stating that they would oppose the confirmation of any nominee to serve as CFPB Director until substantive changes to the structure of the Bureau were enacted into law. On October 6, 2011, the Senate Committee on Banking, Housing, and Urban Affairs (Senate Banking Committee) approved Cordray's nomination for a full vote of the Senate. However, on December 8, 2011, the Senate fell seven votes shy of the 60-vote threshold necessary to reach cloture and move to a vote on the nomination. The NLRB, an agency with certain powers to investigate and adjudicate unfair labor practices, consists of up to five officials who are to be appointed by the President with the advice and consent of the Senate. However, there have been periods during the presidencies of both George W. Bush and Obama in which the board has had vacancies, including a period of more than two years in which the NLRB operated with only two members. In a 2010 decision, New Process Steel, L.P. v. National Labor Relations Board , the U.S. Supreme Court ruled that the National Labor Relations Act prevents the NLRB from exercising rulemaking powers without having three or more acting members. In 2010, the NLRB had operated with a quorum of three or more members; however, by August 2011, there were only three members remaining, the minimum number of members required to establish a quorum. The NLRB was slated to lose one member by the end of the first session of the 112 th Congress. Therefore, in an effort to prevent board membership from dropping below the minimum quorum required for the NLRB to fully conduct business, President Obama nominated Terrence F. Flynn, Sharon Block, and Richard F. Griffin Jr. to be Board members. However, the Senate did not confirm any of the nominees before the third member's term expired. Following Senate inaction, the President reportedly considered making recess appointments should the Senate go into recess. However, the Senate, at various times during the 112 th Congress, has held ""pro forma"" sessions, which are intended, at least in part, to prevent the existence of a Senate recess sufficient to permit the President to exercise his constitutional authority to unilaterally appoint officers. These pro forma sessions typically are governed by unanimous consent agreements of the Senate that prohibit the chamber from conducting any formal business. The pro forma sessions generally have been held every three or four days, and typically consist of a single Senator gaveling in the session and, shortly thereafter, gaveling the session out. On December 17, 2011, the Senate adopted a unanimous consent agreement that scheduled a series of pro forma sessions to occur from December 20, 2011, until January 23, 2012, with brief recesses in between. The unanimous consent agreement established that ""no business"" would be conducted during the pro forma sessions and that the second session would begin at 12:00 p.m., January 3, 2012. On January 4, 2012, despite the periodic pro forma sessions of the Senate, the President, asserting his authority under the Recess Appointments Clause, announced his intent to appoint Cordray to serve as the first CFPB Director and Block, Griffin Jr., and Terrence F. Flynn, to be members of the NLRB. The appointments occurred in the time between pro forma sessions on January 3 and January 6, 2012. The President's actions have proven to be contentious. In addition to their impact on relations between the executive and legislative branches, these appointments also raise a number of significant legal questions regarding the scope of the President's authority under the Recess Appointments Clause and the statutory authorities these individuals may exercise—questions that may spark litigation. This report analyzes the legal issues associated with the President's exercise of his Recess Appointments Clause power on January 4, 2012. To set the framework of our discussion, the report begins with a general legal overview of the Recess Appointments Clause. This is followed by an analysis of two legal principles, standing and the political question doctrine, which may impede a reviewing court from reaching the merits of a potential legal challenge to the appointments. The examination of these justiciability issues is followed by an analysis of the constitutional validity of the appointments; potential statutory restrictions on a recess appointee's authority to exercise the powers of the CFPB; and how actions taken by the recess appointees may be impacted by a court ruling that the appointments are unlawful. The U.S. Constitution explicitly provides the President with two methods of appointing officers of the United States. First, the Appointments Clause establishes that the President ""shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for and which shall be established by Law."" Second, the Recess Appointments Clause authorizes the President to ""fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session."" During the meetings of the Constitutional Convention, there was no debate on the Recess Appointments Clause. However, in light of the constitutional text and historical pronouncements, it is generally accepted that the Recess Appointments Clause was designed to foster administrative continuity by enabling the President to ensure unfettered operation of the government during periods when the Senate was not in session and, therefore, unable to perform its advice and consent function. The inherent ambiguities of the Recess Appointments Clause, such as the interpretation of the phrases ""Vacancies that may happen"" and ""Recess of the Senate,"" have primarily received formal consideration from the executive branch in the form of Attorneys General opinions, with only periodic attention from the courts and Congress. Some interpretive questions surrounding the Clause are generally regarded as settled. For example, through interpretation and practice, a ""Recess"" for purposes of the Recess Appointments Clause encompasses both the inter- and intrasession recesses of the Congress. While there have been varying opinions about the duration of an intrasession recess sufficient for the President to make a recess appointment, the shortest duration in the modern era for an intrasession recess appointment has been 10 days. In addition, it is generally understood that the commission of a recess appointee expires at the sine die adjournment of the Senate's ""next Session."" In practice, an individual receiving an intersession appointment would serve until the end of the following session. However, an individual receiving an intrasession appointment—for example, during the traditional August recess of a first session of Congress—would serve until the end of the following session, that is, the end of the second session. As an intrasession recess appointment during the second session of the 112 th Congress, President Obama's January 4 appointments could serve until the end of the first session of the 113 th Congress. Furthermore, as a constitutional matter, a recess appointee possesses the same legal authority as a confirmed appointee. In upholding the President's authority to make a recess appointment of an Article III judge, the U.S. Court of Appeals for the Eleventh Circuit (11 th Circuit) stated: The Constitution, on its face, neither distinguishes nor limits the powers that a recess appointee may exercise while in office. That is, during the limited term in which a recess appointee serves, the appointee is afforded the full extent of authority commensurate with that office. Similarly, a federal district court explained: There is nothing to suggest that the Recess Appointments Clause was designed as some sort of extraordinary and lesser method of appointment.… In the absence of persuasive evidence to the contrary, it is therefore not appropriate to assume that this Clause has a species of subordinate standing in the constitutional scheme…. There is no justification for implying additional restrictions not supported by the constitutional language. Congress has, however, attempted to dissuade the President from making recess appointments through legislation. For example, Congress has passed legislation that restricts certain recess appointees from receiving salaries. Given the historical interpretation of the Recess Appointments Clause and the historical use of its authority, the President's appointments of Cordray, Flynn, Block, and Griffin Jr. during a three-day recess between pro forma sessions raises a number of significant legal questions that may lead to judicial challenge. However, prior to assessing the merits of any challenge, a reviewing court would first consider a number of preliminary questions of justiciability—including whether the plaintiffs who have brought the claim have standing and whether the asserted claims present matters appropriately resolved by a court. An extended preliminary discussion of these justiciability questions is necessary because they may have relevance to many of the underlying legal questions posed by the Recess Appointments Clause, the President's recent actions thereunder, and the operation of the statutory authorities exercised by the recess appointees in this case. Although the Supreme Court has established a number of ""justiciability"" doctrines to ensure that a claim is properly before a court, concerns relating to standing and the political question doctrine appear to present the most likely hurdles to judicial resolution of any challenge to the President's appointments. The standing doctrine asks whether the particular plaintiff has a legal right to a judicial determination on the merits before the court, while the political question doctrine asks whether the claim presented is inappropriate for judicial review. If a court determines that a plaintiff lacks standing or that the nature of the questions presented precludes review, the court will dismiss the claim, leaving the status quo undisturbed. The law with respect to standing is a mix of both constitutional requirements and prudential considerations. To satisfy Article III constitutional standing, a plaintiff must satisfy three requirements. First, a plaintiff must allege to have suffered an injury in fact, which is personal, concrete, and particularized, not vague or abstract. Second, the plaintiff's injury must be ""fairly traceable to the defendant's allegedly unlawful conduct."" Third, the plaintiff's injury must be an injury that is likely to be redressed by the relief requested from the court. In addition to the constitutional questions posed by the doctrine of standing, federal courts also follow a well-developed set of prudential principles that are relevant to a standing inquiry. Like their constitutional counterparts, these judicially created limits are ""founded in concern about the proper—and properly limited—role of the courts in a democratic society."" However, unlike the constitutional requirements, prudential standing requirements ""can be modified or abrogated by Congress."" These prudential principles require that (1) a plaintiff assert his own legal rights and interests, not those of a third party; (2) a plaintiff's complaint be encompassed by the ""zone of interests"" protected or regulated by the constitutional or statutory guarantee at issue; and (3) the court not adjudicate ""abstract questions of wide public significance which amount to generalized grievances pervasively shared and most appropriately addressed in the representative branches."" A challenge to President Obama's recess appointments will likely come from one of three classes of plaintiffs. A private individual who has suffered an injury as a result of some discrete action by either the CFPB or the NLRB would be the most likely plaintiff to obtain standing. However, given the separation of powers issues associated with the President's recess appointments, either individual Members of Congress, or the Senate as a whole may also seek to challenge the appointments. Congressional plaintiffs, however, would need to survive an ""especially rigorous"" standing inquiry. Private plaintiffs must comply with the three constitutional standing requirements and the judicially imposed prudential principles. Private plaintiffs who are impacted by rules issued or enforcement actions implemented against them by the CFPB or NLRB after President Obama's recess appointments may likely have standing to challenge the validity of the appointments. These private plaintiffs may include individuals, businesses, or an association suing on behalf of its members, if it meets the independent requirements of associational standing. These claims would assert either that the Director lacked the authority to take action due to his improper appointment, or that the NLRB lacked a quorum given that three of the five board members were improperly appointed. Private plaintiffs would also need to ensure that their claims are ripe and that their alleged injury is sufficiently concrete and particularized. The recent case New Process Steel, L.P. v. NLRB , provides an example of how a private plaintiff may obtain standing based on an injury arising from an agency action. In New Process Steel , L.P. , the court found that the plaintiff suffered a concrete and particularized injury in fact when the NLRB issued a decision finding it had engaged in unfair labor practices. The Court found that the injury was personal, not vague or abstract, since the Board issued the decision specifically against New Process Steel and imposed mandatory conditions on the business to remedy its violation, including compensating its employees for any losses caused by the business's action. Additionally, the Court found that the injury was fairly traceable to the actions of the NLRB, and it was the type of injury that is typically redressed via judicial action. A private plaintiff alleging an injury caused by actions taken by the CFPB or NLRB after the recess appointments were made that is similar to the injury alleged in New Process Steel, L.P. may be likely to have standing to challenge the validity of the appointments. The Supreme Court last delved into the issue of individual Member standing in its 1997 decision in Raines v. Byrd . The Court held that six Members of Congress did not have standing to challenge the Line Item Veto Act of 1996 because their complaint did not establish that they had suffered a personal, particularized, and concrete injury. In light of this decision, there appear to be two ways that a Member of Congress may satisfy the standing injury requirement discussed above. First, a Member plaintiff who alleges a personal injury, such as the loss of a Member's seat, may likely fulfill the injury requirement of standing. Second, a Member plaintiff who alleges an institutional injury may likely also obtain standing, but only if the injury amounts to ""vote nullification."" Additionally, when a case invokes ""core separation of powers questions at the heart of the relationship among the three branches of our government"" an ""especially rigorous"" standing inquiry may be administered by the court. The U.S. Court of Appeals for the District of Columbia (D.C. Circuit) has held that ""vote nullification"" only occurs if Congress has no other legislative remedies available to rectify its alleged injury. For example, the Member plaintiffs in Campbell v. Clinton did not have standing to challenge the President's decision to assert military force in the Federal Republic of Yugoslavia without congressional authorization because Congress had available legislative remedies, namely to ""[pass] a law forbidding the use of U.S. forces in the Yugoslav campaign."" Therefore, the Member plaintiffs' institutional injury did not rise to the level of vote nullification and could not satisfy the standing requirements. A Member challenging President Obama's recess appointments may argue that the President's actions circumvented the Senate's ""Advice and Consent"" appointments function under Article II of the Constitution, causing the Member to suffer an institutional injury akin to the loss of legislative authority. Whether or not this institutional injury amounts to vote nullification depends on how broadly the requirement that Congress lack a legislative remedy is interpreted. On the one hand, if the legislative remedy question is narrowly framed, a reviewing court could find that Congress has no legislative remedy available because Congress likely cannot directly remove a recess appointee from his position. On the other hand, if the injury is framed more broadly, Congress has the authority to pass legislation that substantively impacts the NLRB and CFPB recess appointees. For instance, Congress could pass legislation that cuts off funding for the CFPB and NLRB or that dilutes the authority of the CFPB Director by converting the Bureau's leadership structure to a board or commission. Indeed, Congress also has the authority to repeal the legislation creating the agencies or the statutory authorization for the specific offices. Given the analysis in Raines and Campbell , substantial arguments could likely be made that legislative remedies are available to a Member plaintiff seeking to challenge the President's recess appointments, which may call into question the Member's ability to satisfy the injury prong of the standing doctrine. On several occasions, courts have held that congressional institutions, such as the full House or Senate or authorized Committees, have standing to sue based on an institutional injury. However, in order to sue as an institutional plaintiff, it appears that an authorization from a House of Congress to bring suit may be required. Authorization ""is the key factor that moves [the suit] from the impermissible category of an individual plaintiff asserting an institutional injury ... to the permissible category of an institutional plaintiff asserting an institutional injury...."" An institutional plaintiff's institutional injury must be a concrete and particularized injury in fact in order to satisfy the standing requirement. For example, the courts have determined that ""being denied access to information that is the subject of a subpoena"" is a ""concrete and personalized"" injury in fact. Outside the subpoena context, a full House has been permitted to intervene in a case where the alleged injury ""directly (particularly) implicated the authority of Congress within our scheme of government, and the scope and reach of its ability to allocate power among the three branches."" Following Raines , it is unclear if an institutional plaintiff's injury would be considered ""concrete and personalized"" if the plaintiff has legislative remedies available to redress its injury. A congressional institution challenging President Obama's recess appointments would likely be subject to an ""especially rigorous"" standing inquiry, since the case would raise significant separation of powers questions. The institutional plaintiff would likely argue that the President's actions thwarted the Senate's constitutional obligation to provide ""Advice and Consent"" on nominations—thereby establishing a concrete and particularized injury in fact. The plaintiff would likely need Senate authorization to bring a suit, showing that the institutional plaintiff is permitted to represent the alleged institutional harm. However, it remains unclear if the Raines and Campbell standard, denying standing to a plaintiff alleging an institutional injury if a legislative remedy is available to rectify the injury, is applied to institutional plaintiffs as it is to Member plaintiffs. If authorized institutional plaintiffs can establish standing notwithstanding any available legislative remedies, then arguably, the Senate's alleged institutional injury satisfies the injury requirement, since it probably directly impacts the Senate's authority within the governmental scheme. To the contrary, if institutional plaintiffs are treated similarly to Member plaintiffs, the Senate would likely be denied standing because it arguably has an alternate legislative remedy to redress its injury. Even if a reviewing court determines that a plaintiff has standing, the court may still dismiss aspects of a challenge to the President's recess appointments—prior to reaching the merits of the case—as a nonjusticiable political question. The political question doctrine is generally characterized as an ""amorphous,"" self-imposed bar to adjudicating certain disputes that are considered ""inappropriate"" for judicial review. Thus, courts may abstain from resolving matters that, due to their political nature, may more appropriately be resolved by the other branches. By encouraging judicial self-restraint, especially in the face of inter-branch conflicts, the doctrine seeks to preserve the limited role of the judicial branch vis-à-vis the other branches of government. The doctrine finds its roots in Marbury v. Madison , in which Chief Justice John Marshall noted that ""questions in their nature political,"" or that are committed to presidential discretion either by the Constitution or by statute, ""can not be [resolved] by this court."" However, the modern doctrine, which ""hing[es] on conceptions of separation of powers,"" has expanded to apply beyond challenges to executive action and is often invoked to bar judicial review of cases involving disputes between the executive and legislative branch. Although the Supreme Court articulated criteria for use in applying the political question doctrine in the 1962 decision of Baker v. Carr , most commentators consider the standards supplied to be an insufficient basis for determining what does or does not constitute a political question. In Baker , the Court explained that political questions typically involve: a textually demonstrable constitutional commitment of the issue to a coordinate political department; or a lack of judicially discoverable and manageable standards for resolving it; or the impossibility of deciding without an initial policy determination of a kind clearly for nonjudicial discretion; or the impossibility of a court's undertaking independent resolution without expressing lack of the respect due coordinate branches of government; or an unusual need for unquestioning adherence to a political decision already made; or the potentiality of embarrassment from multifarious pronouncements by various departments on one question. Although the Baker standards may be of limited usefulness, the Court has identified a number of constitutional provisions that, by their very subject matter, tend to trigger the political question doctrine—therefore precluding judicial review in most circumstances. For example, the Supreme Court has repeatedly held that legal challenges founded on the Republican Form of Government Clause are nonjusticiable. Additionally, the political question doctrine has previously been invoked as a justification for abstaining from reviewing Congress's own internal processes, procedural aspects of the impeachment process, and the manner in which Constitutional amendments are ratified. Given the ambiguities of the Baker criteria, it can be difficult to predict how, and even whether a reviewing court would invoke the political question doctrine. Notwithstanding this ambiguity, no court has held that the Recess Appointments Clause, by its very subject matter, precludes judicial review. Indeed, a number of lower federal courts have considered challenges to presidential appointments made pursuant to the Clause. In hearing these cases, courts have used constitutional text, history, practice, and precedent to resolve significant interpretive controversies such as when a vacancy arises for the purpose of the Clause; whether the Clause applies to both intersession and intrasession recesses; and whether the President can rely on the Clause to appoint an Article III Judge. All these questions were found to be appropriate for judicial consideration—providing evidence of the courts' willingness to look closely at the constitutional text and interpret the contours of the President's recess appointment power. However, there are important aspects of any potential challenge to a presidential recess appointment that a court may view as ""political questions"" inappropriate for consideration. For example, the U.S. Court of Appeals for the Eleventh Circuit has previously held that any claim that the President's recess appointment ""circumvented and showed an improper lack of deference to the Senate's advice-and-consent role"" raises a nonjusticiable political question. In dismissing the argument, the circuit court was uncomfortable departing from the text of the constitutional provision in order to determine ""how much presidential deference is due to the Senate when the President is exercising the discretionary authority that the Constitution gives fully to him."" The unique nature of the circumstances surrounding President Obama's recess appointments may raise additional questions that a reviewing court may hesitate to consider on the merits. For example, an eventual plaintiff could argue that, due to the Senate's pro forma sessions, the Senate was not in a recess of sufficient duration to trigger the President's recess appointment power. Such an argument could present two potential political questions. First, out of respect for the independence of the Senate, a reviewing court may decline to consider the question of whether pro forma sessions are constitutionally meaningful or constitute a session of Congress adequate to prevent the President's use of his recess appointment power, as evaluating such a question may force a court to review the internal proceedings of the Senate. The Constitution provides an express textual commitment to the Senate to establish its own rules and procedures. Courts have historically ""grappled with whether challenges to this type of internal rule present nonjusticiable political questions for the reason that there is an explicit textual commitment to each house to set its own rules."" Accordingly, if a reviewing court finds the question of whether the Senate is in session or in recess to be one more appropriately answered by the Senate—as the source of its own rules and proceedings—the political question doctrine may prevent review. However, the Supreme Court has previously reviewed the validity and application of Senate rules that may violate the Constitution or affect interests outside of the legislative branch. Second, unless a court draws from the Adjournment Clause, there is a substantial possibility that a reviewing court would be unwilling to establish an alternative minimum duration of a recess (i.e. number of days) necessary to trigger the President's recess apportionment authority. Such a question may lack a ""judicially discoverable and manageable standard"" upon which the court can rely. As will be discussed infra , the Recess Appointments Clause is silent as to how long the Senate must be in recess before the President may validly assert his recess appointment powers. Although the executive branch appears to have historically implied that a recess of at least three days is likely necessary, that result does not appear to be constitutionally required. Given the constitutional ambiguity—and without additional criteria or other ""judicially discoverable standards""—a reviewing court may determine that the precise length of time for which the Senate must be in recess before a recess appointment is permissible is a question best resolved by the political branches. The scope of the Clause in this respect would thus be defined by the President and Congress, rather than the courts, with each branch utilizing the tools provided to it under the Constitution to influence the actions of the other branch. A court may, of course, extract its own standard by drawing from the Adjournment Clause, for example, or from history and precedent. Furthermore, even if a reviewing court considers the questions relating to pro forma sessions and the minimum recess duration to be nonjusticiable, the court would not necessarily be forced to dismiss the case as a whole. Indeed, the court could avoid these determinations and still reach the merits of the appointments on other grounds. If a reviewing court determines that a plaintiff challenging the appointments of Cordray, Flynn, Block, or Griffin Jr. has met all elements of justiciability, the court may proceed to assess the merits of the suit. The primary issue before a court would be whether the appointments were made in compliance with the strictures of the Recess Appointments Clause, which provides the President with the ""Power to fill up all Vacancies that may happen during the Recess of the Senate."" Prior to proceeding to a consideration of this question, a brief recitation of the unique factual circumstances underlying the President's January 4 recess appointments may be helpful. The Senate, on December 17, 2011, adopted a unanimous consent agreement that scheduled a series of pro forma sessions to occur every few days from December 20, 2011, until January 23, 2012. The unanimous consent agreement expressly established that ""no business"" would be conducted during the pro forma sessions. The agreement also provided that the second session of the 112 th Congress would commence with a pro forma session at 12:00 p.m. on January 3, 2012, and that a subsequent pro forma session would be held on January 6, 2012. On January 4, 2012, between these two pro forma sessions, the President, asserting his Recess Appointments Clause powers, announced his intent to appoint Cordray to serve as the first CFPB Director and Block, Griffin Jr., and Flynn, to be members of the NLRB. While it appears well established that the Senate was in an intrasession recess following the conclusion of the January 3 rd pro forma session that convened the second session of the 112 th Congress, it is not clear how to measure that intrasession recess and whether it was sufficient to trigger the President's power under the Recess Appointments Clause. The Senate was either in one of a series of short recesses created by the pro forma sessions, or in a single intrasession recess of 20 days—spanning from January 3 rd to January 23 rd . The length of the recess may be of great importance, as it appears that no President, at least in the modern era, has made an intrasession recess appointment during a recess of less than 10 days. The President has asserted that pro forma sessions are not meaningful sessions of Congress for purposes of the Recess Appointments Clause and, therefore, cannot interrupt a longer recess. Under this reasoning, the President's January 4 recess appointments were consistent with established historical precedent as they were made during a 20-day recess. Critics, however, assert that the pro forma sessions are meaningful sessions of Congress and, therefore terminate a recess. Under this reasoning, the President's recess appointments broke from established historical precedent, as they were made during a recess of only three days. These unique facts raise at least two significant, and mostly unresolved constitutional questions. First, may Congress utilize pro forma sessions to interrupt the duration of an otherwise continual intrasession recess so as to prevent a recess appointment? Second, is there a minimum number of days for which the Senate must be out of session before a President may constitutionally exercise his recess appointment power? The following section now examines each of these questions in turn. Beginning in 2007, the Senate began using ""pro forma"" sessions to avoid a sustained break of more than three days, with the apparent intent of preventing the President from exercising his recess appointment powers. A pro forma session is generally understood to be a short meeting of the chamber in which little or no business is typically conducted, and in recent Senate practice it is often routinely agreed upon by unanimous consent that no business will be conducted. Pro forma sessions of the Senate typically involve a Senator convening the session, assuming the chair, and adjourning. For example, during the first session of the 112 th Congress, there were eight occasions when the Senate suspended its business for an overall period of longer than three days but held pro forma sessions at least every three days pursuant to a unanimous consent agreement. During each of these periods, the Senate held pro forma sessions at least every three days pursuant to a unanimous consent agreement. The President did not make any recess appointments during these periods. To evaluate the lawfulness of the January 4 appointments, a reviewing court would likely first need to determine the length of the recess within which President Obama made his recess appointments. Assuming such a consideration is not barred by the political question doctrine, a court would likely need to determine whether a pro forma session is a session of Congress sufficient to interrupt an otherwise continual intrasession recess (such a session will hereinafter be called a ""standard session""), and therefore meaningful for purposes of the Recess Appointment Clause. If the Senate's pro forma sessions do act as standard sessions, then the recess within which the President made his appointments would have been one of three days. There appear to be at least three potential approaches a reviewing court could take to evaluate whether pro forma sessions constitute standard sessions. First, it is possible that a court could determine that any session of Congress, including any pro forma session, constitutes a standard session. Second, a court could determine that a pro forma session is a standard session only if business is actually conducted during the pro forma session. Lastly, a court could determine that a pro forma session is a standard session so long as the Senate has the capacity to conduct business during the session. Each approach will be evaluated below. First, a reviewing court could find that any pro forma session, regardless of its length, purpose, attendance, or other characteristic, is not distinguishable from any other standard session of Congress where Members vote on legislation or engage in debate. This approach could be affected by a court's inclination to show deference to the Senate in determining its own schedule. Viewed in this light, all pro forma sessions held by the Senate would break up a long intrasession recess by creating shorter recesses. If a court were to reach this conclusion, the January 4 appointments would have occurred during a three-day recess of the Senate (i.e., January 4 to January 6). Under this approach, whether the appointments were lawfully made would depend on whether a three-day recess constitutes a ""Recess"" sufficient to trigger the Presidents authority for purposes of the Recess Appointments Clause. A reviewing court may, however, choose to look at what specifically occurs during pro forma sessions to determine whether they constitute standard sessions, and are therefore meaningful for purposes of the Recess Appointments Clause. Under this approach, only if ""business"" were actually conducted during a pro forma session would it be considered a standard session. As explicitly provided for by the unanimous consent agreements, ""business"" has generally not been conducted at recent pro forma sessions. With respect to the specific sessions at issue here, the December 17, 2011, unanimous consent agreement provided that ""no business"" was to be conducted during any of the pro forma sessions. During the January 3, 2012, pro forma session, the Senate convened at 12:01 p.m. and adjourned at 12:02 p.m. until January 6, 2012, when it convened at 11:00:03 a.m. and adjourned at 11:00:32 a.m. Nor does it appear that ""business"" has been conducted at any subsequent pro forma session. Under an approach that considers the content of the specific session, it seems unlikely that any of the January pro forma sessions would be considered standard sessions. Under this approach, the January 4 appointments could be considered to have occurred during an intrasession recess of 20 days, in which case a court would likely consider them to be consistent with established historical precedent. Finally, a reviewing court may determine that a pro forma session is a standard session so long as the Senate has the capacity to conduct business. Although the Senate agreed by unanimous consent that no business would be conducted during the pro forma sessions, that decision can be reversed by the same means. For example, there were two occasions during the 112 th Congress when the Senate conducted business by unanimous consent after it had previously adopted a unanimous consent agreement to adjourn and hold a series of pro forma sessions in which no business was to be conducted. Under these subsequent agreements, the Senate approved legislation, H.R. 2553 , the Airport and Airway Extension Act of 2011 Part IV, on August 5, 2011, and H.R. 3765 , Temporary Payroll Tax Cut Continuation Act of 2011 on December 23, 2011. Additionally, it should be noted that with respect to appointments, the Senate has previously confirmed nominees by unanimous consent. Therefore, as the Senate may be considered to have the capacity to consider nominations and conduct other business pursuant to separate unanimous consent agreements, a court may then determine that pro forma sessions are standard sessions, and therefore meaningful for purposes of the Recess Appointments Clause. If a court were to reach this conclusion, then all the January 2012 pro forma sessions could be considered standard sessions, such that they break up a long intrasession recess into brief recesses. Under this approach, the President would have made the January 4 appointments over a three-day recess. Whether the appointments were lawfully made in this situation, again, depends upon whether a ""Recess"" for purposes of the Recess Appointments Clause must be a minimum number of days for the President to exercise his authority. Based on the preceding analytical framework, it is possible a hypothetical reviewing court could determine that the President made the January 4 appointments during a three-day recess. Given the brevity of this recess, a reviewing court may then consider whether the Recess Appointments Clause requires that a recess of the Senate be in progress for a minimum number of days before the President is authorized to exercise his recess appointment power. This conclusion could likely depend upon whether a court finds a link between the Recess Appointments Clause and the Adjournment Clause. As stated previously, it appears to be generally settled that a ""Recess"" under the Recess Appointments Clause encompasses both inter- and intrasession recesses of the Senate. Historical practice seems to indicate that an intrasession ""Recess"" should be one of sufficient length for the President to make a recess appointment. However, the Constitution does not explicitly define ""Recess"" for purposes of the Recess Appointments Clause, nor does there appear to be a constitutionally required length of time that must be satisfied before the President exercises his authority under the Clause. Because of the ambiguous nature of the Recess Appointments Clause, the Adjournment Clause has historically been drawn upon to impart meaning to the term ""Recess."" The Adjournment Clause provides that ""Neither House, during the Session of Congress, shall, without the Consent of the other, adjourn for more than three days, nor to any other Place than that in which the two Houses shall be sitting."" Based on this linkage, it could be argued that a ""Recess"" must be longer than three days for the President to exercise his recess appointment power. Prior to 1857, Presidents had virtually no occasion to make intrasession recess appointments, because Congress did not take such breaks. However, since the late 19 th century, Congress has frequently scheduled more intrasession recesses, during which periods Presidents have exercised their recess appointment authority. In 1921, Attorney General Daugherty declared that the President had the authority to make a recess appointment during an intrasession recess of 29 days. However, he also arguably limited the scope of his opinion when, referencing the Adjournment Clause, he stated the opinion was not meant to imply that ""the power exists if the adjournment is for only 2 instead of 28 days ... Nor do I think an adjournment for 5 or even 10 days can be said to constitute the recess intended by the Constitution."" In fact, in 1979 the Office of Legal Counsel (OLC) informally advised against making a recess appointment over a six-day intrasession recess based on ""the warning in Attorney General Daugherty's opinion."" Furthermore, the Department of Justice (DOJ), during litigation, appears to have supported a link between the Adjournment Clause and Recess Appointments Clause. In 1993, the DOJ submitted a brief in the case Mackie v. Clinton , where it responded to the plaintiff's assertion that the 13-day recess in question was of insufficient duration to trigger the recess appointment power. The brief noted that no Attorney General or court has found that the President lacks the authority to make recess appointments during a 13-day recess. Nevertheless, the brief stated: If the [intrasession] recess here at issue were of three days or less, a closer question would be presented. The Constitution restricts the Senate's ability to adjourn its session for more than three days without obtaining the consent of the House of Representatives. It might be argued that the Framers did not consider one, two and three day recesses to be constitutionally significant. The DOJ has reiterated this view in subsequent briefs, and more recently during oral argument before the Supreme Court in New Process Steel v. National Labor Relations Board . Specifically, the Deputy Solicitor General, Neil Katyal, stated that ""[T]he recess appointment power can work—in a recess. I think our office has opined the recess has to be longer than 3 days."" A reviewing court may consider accepting that the Adjournment Clause informs the meaning of ""Recess"" for purposes of the Recess Appointments Clause. When considering historical practice, courts have stated: ""The ... Supreme Court has made clear that considerable weight is to be given to an unbroken practice, which has prevailed since the inception of our nation and was acquiesced in by the Framers of the Constitution ...."" (internal citations omitted). While intrasession recess appointments cannot be traced to the founding period, the executive branch appears to have acknowledged some link between the two clauses since the President first began making such appointments. In light of the historical views and acceptance of the executive branch, discussed above, a court may therefore conclude that recess appointments may only be made during intrasession recesses of more three days. As discussed above, it is possible that a court may find that pro forma sessions constitute standard sessions of the Senate such that they could break up a continual intrasession recess into shorter recesses. However, if a court were to determine that a ""Recess"" for purposes of the Recess Appointments Clause must be more than three days , then the President would not be able to exercise his recess appointment powers where the interpretations of pro forma session resulted in the President making the January 4 appointments during a recess of only three days. However, arguments could also be made that there is no determinative constitutional basis for linking the Adjournment Clause to the Recess Appointments Clause. First, the Adjournment Clause does not use the term ""recess,"" and the Recess Appointment Clause, likewise, does not use the term ""adjourn."" Second, from a structural perspective, the Adjournment Clause is located in Article I, Section 5 of the Constitution, which sets forth the internal rulemaking authorities of the houses. The Recess Appointments Clause, on the other hand, is located in Article II, Section 2 of the Constitution, which establishes the express authorities of the President. As the two sections do not speak to similar functions or duties of the respective branches, a court may find no basis for referencing a constitutionally required rule of legislative procedure as relevant to the interpretation of a term related to the President's recess appointment powers. Accordingly, a court could define ""Recess"" for purposes of the Clause in a manner wholly unrelated to the Adjournment Clause. If a ""Recess"" for purposes of the Clause is not tied to the three-day requirement from the Adjournment Clause, a court may be hesitant to establish a bright-line minimum length of time without a constitutional provision upon which it can rely. As noted previously, the political question doctrine may act as a deterrent to making such a determination. However, the Senate's ability to exercise its advice and consent prerogative may be greatly undermined absent a time requirement because the President arguably would have the authority to make a recess appointment whenever there is any break of the Senate at all, for instance over a weekend. Given this potential, it is possible a court may depend upon descriptive criteria to define a ""Recess"" for purposes of the Clause, as did a 1905 report of the Senate Committee on the Judiciary. The Senate report, which was issued in response to President Theodore Roosevelt's intersession recess appointments during the 58 th Congress, first stated: ""The word 'recess' is one of ordinary, not technical signification, and it is evidently used in the constitutional provision in its common and popular sense."" It further states that it was the intention of the Framers that ""[a recess] should mean something real, not something imaginary; something actual, not something fictitious."" Perhaps most instructive, the report asserts: [Recess] means, in our judgment, in this connection the period of time when the Senate is not sitting in regular or extraordinary session as a branch of the Congress ... ; when its members owe no duty of attendance; when its Chamber is empty; when, because of its absence, it can not [ sic ] receive communications from the President or participate as a body in making appointments. Attorneys General opinions have made statements similar to that of the Senate report. An Attorneys General opinion from 1960 stated: does the word ""recess"" relate only to a formal termination of the session of the Senate, or does it refer as well to a temporary adjournment of the Senate, protracted enough to prevent that body from performing its functions of advising and consenting to executive nominations? It is my opinion, which finds its support in executive as well as in the legislative and judicial authority, that the latter interpretation is the correct one. Without an explicit standard for a required minimum length of time, for purposes of the Clause, a court might turn to what it means for the Senate to be ""absent"" in such a way that permits the President to use his recess appointment power. Alternatively, as it would to evaluate pro forma sessions, a court could look at what it means for the Senate to conduct ""business"" in such a way that prevents the President from using his recess appointment power. However, it may prove difficult for a court to provide meaningful definitions for these terms. The January 2012 OLC opinion makes a similar argument. Without reaching a conclusion on a minimum length of time, the OLC emphasized the practical purpose of the recess appointment power and opined that a ""Recess"" exists when, ""as a practical matter, the Senate is not available to give its advice and consent to executive nominations."" If a court were to establish a descriptive meaning of ""Recess"" for purposes of the Clause, that standard would determine whether the President could rely upon his recess appointment power to make the January 4 appointments. In such case, the length of the recess in which the President made his recess appointments may not be a dispositive factor. As described above, a reviewing court could evaluate the effect pro forma sessions have, or may not have, on a recess from several different perspectives. Given this framework, it may be possible that a court could find the Senate to be ""absent,"" despite its use of pro forma sessions, if it determined that the Senate could not ""receive communications from the President or participate as a body in making appointments,"" in the words of the 1905 Senate report. If a court were to reach this conclusion, then it seems that the President could have the ability to rely upon his recess appointment power to make the January 4 appointments. Alternatively, if a reviewing court were to find that the Senate was indeed able to conduct ""business"" such that it could take up its ""advising and consenting functions [to] executive nominations"" by unanimous consent. Under this viewpoint, it seems unlikely that the President could have relied upon his recess appointment power to make the January 4 appointments. A reviewing court may also take into account general separation of powers concerns that may arise from the prolonged use of pro forma sessions. For example, were a court to conclude that pro forma sessions are standard sessions such that they prevent a ""Recess"" from occurring under the Clause, the Senate may be able to utilize such sessions to repeatedly and consistently block the President from making recess appointments. Such a scenario could result in a complete abrogation of the President's recess appointment power during lengthy intrasession recesses. This scenario may raise constitutional concerns under the separation of powers doctrine. The separation of powers doctrine stands for the proposition that certain political functions must be allocated amongst various governmental branches, so as to avoid domination by any one entity. The doctrine primarily acts to prevent the aggrandizement of a particular branch through the Constitution's structure of checks and balances. However, not all encroachments by one branch upon another violate the separation of powers doctrine—especially in areas where the Constitution envisions shared power between the branches. The Appointments Clause clearly contemplates roles for both the President and the Senate in appointing officers of the United States, whereas the Recess Appointments Clause provides the President with the ability to unilaterally make temporary appointments, but only during the Senate's absence. If the Congress took formal steps to prevent the President from exercising his powers under the Appointments Clause, such action likely would violate the separation of powers doctrine. Likewise, if the Senate took measures, such as the prolonged use of pro forma sessions, to effectively prevent the President's exercise of his authority under the Recess Appointments Clause, such actions could raise similar separation of powers concerns. While there is no uniform jurisprudential approach to evaluating separation of powers cases, the Supreme Court appears to have developed two main analytical frameworks by which it scrutinizes the Constitution's allocation of power. These analytical approaches are referred to as formalism—which emphasizes precise definitional boundaries—and functionalism—which deemphasizes the efficacy of adhering to such precise boundaries, relying instead on the effect of the exercise of power. Although these frameworks share a common concern regarding branch self-aggrandizement, they differ greatly in their views regarding the scope of the separation of powers and the degree to which governmental functions may be intermingled. Under what could be considered a formalist approach, a reviewing court may view the plain text of the Recess Appointments Clause as a purely conditional power. The Constitution has delineated clear boundaries to the President's use of his traditional appointment power as compared to his recess appointment power. Whereas the President may submit a nomination to the Senate for its advice and consent at any time, the ""auxiliary"" recess appointment power is triggered only upon a specific event—a ""Recess of the Senate."" Therefore, if pro forma sessions are found to be meaningful for purposes of the Clause, the Senate's procedural mechanism could be viewed as ensuring that the contingency the Founders deemed necessary to trigger the President's recess appointment power simply does not occur. Without the occurrence of a recess, the President's recess appointment power is not activated and therefore cannot be infringed. Under this view, the repeated, consistent, and prolonged use of pro forma sessions to prevent a ""Recess"" may not be distinguishable from a scenario in which a Senate chooses never to adjourn. The DOJ has acknowledged that ""Congress can prevent the President from making any recess appointments by remaining continuously in session and available to receive and act on nominations."" Thus, under this analytical framework, the mere fact that the President is consistently barred from using his recess appointment power may not give rise to separation of powers concerns. Under a functionalist approach, a court is more likely to consider whether the consistent and repetitive use of pro forma sessions interferes with the President's ability under the Recess Appointments Clause to maintain the continuity of administrative government. For example, in the context of ""Vacancies"" for purposes of the Clause, the judicial and executive branches have consistently rejected a narrow and literal interpretation of when a vacancy may exist because of the practical considerations behind the Clause. It was the opinion of the Attorney General in 1832 that the Constitution ""was formed for practical purposes, and a construction that defeats the very object of the grant of power cannot be the true one. It was the intention of the [C]onstitution that the offices created by law, and necessary to carry on the operations of the government, should always be full, or at all events, that the vacancy should not be a protracted one."" In addition, a court could find that the use of a tactic, which would essentially prohibit the President from effectively using his recess appointment power to ""take Care that the Laws be faithfully executed,"" would be an unconstitutional enhancement of legislative power in relation to the executive branch. Hence, from a functionalist approach, overriding separation of powers concerns may indicate that the Senate's use of pro forma sessions, even if deemed meaningful, could nonetheless ""impermissibly undermine"" the powers of the President or prevent the President ""from accomplishing [his] constitutionally assigned functions."" Overall, whether President Obama could rely upon his recess appointment power to make the January 4 appointments is dependent on whether there was a ""Recess of the Senate"" for purposes of the Recess Appointments Clause. The unique facts of the situation—appointments made between two pro forma sessions—raise significant and unresolved constitutional issues. A reviewing court may turn to the Adjournment Clause to provide a definition of ""Recess"" for purposes of the Clause, in which case a ""Recess"" must be longer than three days for the President to exercise his authority. Yet, a reviewing court may also find no basis for linking these Clauses and, alternatively, unless barred by the political question doctrine, could establish a definition of ""Recess"" by relying upon descriptive criteria. In such case, a ""Recess"" for purposes of the Clause might hinge on what it means for the Senate to be ""absent"" or ""conducting business"" in such a way that either permits or prevents the President from exercising his recess appointment power. Whether a ""Recess"" within the meaning of the Clause is specifically defined as one that is more than three days or is based on descriptive criteria, it is unclear whether Congress may utilize pro forma sessions to disrupt the duration of an otherwise continual intrasession recess. If pro forma sessions are found not to be meaningful for purposes of the Clause, then the President's recess appointments would likely be considered to have been validly made during a single intrasession recess of at least 20 days. Alternatively, if a reviewing court were to find the Senate's pro forma sessions to be meaningful for purposes of the Clause, then the sessions may be sufficient to prevent a President from making a recess appointment. However, even if these sessions are deemed meaningful such that they would prevent a ""Recess"" from occurring, prolonged use of pro forma sessions by the legislative branch may raise separation of powers concerns that could compel a court to re-evaluate the contours of each branch's role in the recess appointment context. Assuming, arguendo, that the President's appointment of Richard Cordray is constitutional, questions remain as to whether, and to what extent, the specific statutory language of the Consumer Financial Protection Act (CFP Act) restricts Cordray's powers. To address these questions, this report first provides a general description of the CFPB. It then analyzes the provisions of the CFP Act that provide the Secretary of the Treasury (Secretary) certain powers to perform the functions of the CFPB until a Director is appointed, which is followed by an analysis of the impact that the President's recess appointment may have on both Cordray's and the Secretary's CFPB authorities. The CFPB was established by Title X of the Dodd-Frank Act, the CFP Act. The CFP Act alters the consumer financial protection landscape by largely consolidating regulatory authority and, to a lesser extent, supervisory and enforcement authority in one regulator—the CFPB. It also provides the CFPB the authority to prescribe regulations to implement 18 federal ""enumerated consumer laws"" that largely were in place prior to Dodd-Frank's enactment, such as the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Section 1011 of the CFP Act provides that the Bureau is to be headed by a single Director, who ""shall be appointed by the President, by and with the advice and consent of the Senate."" However, section 1066 of the CFP Act provides the Secretary the authority to perform some, but not all, of the Bureau's authorities until a CFPB Director is appointed. CFP Act section 1066 serves as the primary source of the Secretary's interim authority over the Bureau. It states, in relevant part: (a) In General.—The Secretary is authorized to perform the functions of the Bureau under this subtitle [F] until the Director of the Bureau is confirmed by the Senate in accordance with section 1011. The first half of this provision establishes the scope of the Secretary's authority. The second half defines when the Secretary's authority shall terminate. Section 1066 does not authorize the Secretary to exercise the full panoply of the Bureau's powers. Rather, the scope of the Secretary's authority under section 1066 is limited to ""the functions of the Bureau under this subtitle [F]...."" Generally speaking, subtitle F of the CFP Act transfers certain consumer financial protection functions from seven ""transferor agencies"" to the Bureau. For clarity, this report refers to the authorities provided under subtitle F that the Secretary may exercise pursuant to section 1066 as ""transferred powers"" or ""transferred authorities."" The powers provided to the Bureau pursuant to provisions outside of subtitle F generally are the Bureau's ""newly established"" powers—that is, the enhanced consumer protection authorities that were not explicitly provided by law to federal regulators before the Dodd-Frank Act. An example of a newly established power is the authority to supervise covered non-depository financial institutions, such as payday lenders and check cashers. Given that the newly established powers are provided for by provisions other than subtitle F, they do not appear to be within the scope of the Secretary's authorities as defined by CFP Act section 1066. The Secretary's authority to exercise the Bureau's transferred powers lasts ""until the Director of the Bureau is confirmed by the Senate in accordance with section 1011."" Section 1011 sets forth that the Director of the CFPB is to be ""appointed by the President, by and with the advice and consent of the Senate."" This language in section 1011 is virtually identical to the statutory language used to establish many other advice and consent positions. This standard advice and consent language does not explicitly reference the President's recess appointment powers. However, this language has never been construed by a court to prevent the President from exercising his recess appointment powers, and there are numerous examples in which such positions have been filled by recess appointees without judicial challenge. Had Richard Cordray been nominated by the President and confirmed by the Senate to be the first CFPB Director, it would seem clear that the Secretary's power to exercise the transferred authorities would have terminated, and Cordray would have assumed the full powers of the Director position. The fact that Cordray was recess appointed without being ""confirmed by the Senate"" may call into question whether, through section 1066, Congress intended to place restrictions on the powers of a recess appointed CFPB Director. There appear to be at least two different ways that a reviewing court could interpret section 1066 with respect to both Cordray's and the Secretary's authorities. Under one interpretation, a reviewing court could find that Cordray holds all of the powers provided to the CFPB—both the transferred authorities previously exercised by the Secretary and the newly established powers. Under a second interpretation, a court could conceivably determine that Cordray assumes only the CFPB's newly established powers, while the Secretary retains the power to exercise the transferred authorities until a Director is actually confirmed by the Senate. Each interpretation is discussed below. Under the first interpretation, a reviewing court may stress that the phrase ""until a Director is confirmed by the Senate"" must be read in conjunction with the clause that follows: ""in accordance with section 1011."" As previously mentioned, section 1011 uses the standard statutory language to establish advice and consent positions, and it is generally understood that these positions can be filled pursuant to both of the procedures expressly provided for under the constitution. As a result, a court could interpret the relevant language of section 1066, with its reference to section 1011, as merely an alternative, or equivalent way, of expressing the standard process of appointing advice and consent positions. Had Congress truly intended to only allow a Senate-confirmed Director to exercise the full powers of the position, then a court may find it would not have referenced section 1011. Additionally, construing section 1066 as restricting a recess appointee's authority would run contrary to the generally established principle that, as a constitutional matter, recess appointees possess the same legal authority as Senate-confirmed appointees. A canon of statutory interpretation commonly employed by courts is to presume that Congress is aware of established law and intends for new statutes to be consistent with established interpretations of law absent a clear indication to the contrary. A court may reason that had Congress intended to take the unusual step of restricting the authority of a recess appointed CFPB Director, it would have expressed that intention more clearly. This could have been accomplished through an explicit delineation of the powers to be held by an initial recess appointee, on the one hand, and by a Senate-confirmed appointee on the other. In sum, a court could interpret section 1066 as a legislative delegation to the Secretary to exercise certain CFPB functions until a Director can be appointed pursuant to either of the standard methods that are expressly provided by the Constitution: by the advice and consent of the Senate or by a recess appointment. Under this interpretation, a Senate-confirmed Director or a recess appointed Director, such as Cordray, would assume the full authorities established by the CFP Act—both the newly established and transferred powers—and the Secretary's interim authority to exercise the Bureau's transferred powers would terminate. Under the second interpretation, it could be argued that the statutory language may be construed as stipulating that the Secretary's transferred authorities terminate, and the Director's full authorities are assumed, only upon the appointment of a Senate-confirmed Director. This construction would turn on a strict interpretation of the language ""until the Director of the Bureau is confirmed by the Senate."" To reach this conclusion, proponents likely would rely on two common canons of statutory interpretation. The first is the rule of surplusage: which provides that courts should ""give effect, if possible, to every clause and word of a statute, avoiding, if it may be, any construction which implies that the legislature was ignorant of the meaning of the language it employed."" Under this reading, it could be argued that Congress intended the language ""until confirmed by the Senate"" to have a different meaning than, and to be read distinctly from, that of section 1011. To further buttress this position, a one could apply a second canon that ""where Congress includes particular language in one section of a statute but omits it in another ..., it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion."" It could be argued that if Congress intended to merely reiterate the standard advice and consent language of section 1011, then it could have used the very same section 1011 phrasing in drafting section 1066. In other words, instead of using the phrase ""until confirmed by the Senate,"" in section 1066, the drafters could have used the phrase ""shall be appointed,"" that is used in section 1011 (and in many other places within the U.S. Code). Relying on this premise, the clearest understanding of section 1066 would be that the Secretary retains his authority to exercise the transferred powers until the Senate takes steps to confirm a CFPB Director. By extension, a recess appointed Director, such as Cordray, could only directly exercise the Bureau's newly established powers. Interpretation two may raise a number of potential interpretive problems. First, it would seem to render meaningless the clause ""in accordance with section 1011,"" given the generally established understanding of the statutory language of section 1011. Additionally, under the second interpretation, section 1066 would impose statutory restrictions on the authorities that may be exercised by a recess appointee that would not apply to a Senate-confirmed appointee. This disparate treatment of recess appointees and Senate-confirmed appointees could be viewed as interfering with the President's constitutionally provided recess appointment power. Such an interpretation would likely raise separation of powers issues that a court may want to avoid. If interpretation two raises constitutional concerns that could be avoided, it is unlikely that a reviewing court will adopt that interpretation. The Supreme Court has stated that ""where an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress."" Therefore, ""if a case can be decided upon two grounds, one involving a constitutional question, the other a question of statutory construction or general law, the Court will decide only the latter."" Under this doctrine of ""constitutional avoidance"" a reviewing court would likely resolve the ambiguities of section 1066 so as to avoid a construction that raises constitutional questions. Therefore, when presented with both possible interpretations of section 1066, a reviewing court may take into consideration that a statutory restriction on the authorities of a recess appointee, as would be imposed under interpretation two, would likely raise constitutional concerns. An interpretation of section 1066 that limits a recess appointee's ability to exercise the full authorities delegated to his office could be viewed as interfering with the President's express constitutional authority to ""fill up all Vacancies that may happen during the Recess of the Senate…"" However, not all legislative encroachments on presidential authority constitute a violation of separation of powers. Our constitutional structure ""by no means contemplates a total separation of each of [the] three essential branches of government."" Indeed, the Founding Fathers recognized that a ""hermetic sealing off"" of the various branches would ""preclude establishment of a nation capable of governing itself effectively."" The constitutionality of congressional restrictions on the authority exercised by a recess appointee—like those that would be imposed by interpretation two of section 1066—would be a question of first impression by the courts. However, if one were to interpret section 1066 as preventing Cordray from exercising the full powers of his office, then it would have to be determined whether the provision actually limits the President's constitutional authority to make recess appointments, and if so, whether that limitation is sufficient to constitute an unconstitutional legislative infringement on executive power. It is not clear whether an interpretation of section 1066 that would prevent a recess appointee from exercising the full powers of his office would actually restrict the President's authority to make recess appointments. The provision would not directly limit whom the President may appoint or how and when the President may make such an appointment. Instead, the provision purports to limit the authorities the Director may exercise, in the absence of Senate confirmation, after a recess appointment is made. Thus, the provision would arguably act to restrict the Director, rather than the President. Viewing the provision in this manner, one could characterize section 1066 as simply defining the contours and powers of the Office of the Director of the CFPB. Congress has broad authority to create, structure, and organize executive branch offices, agencies, and departments. Additionally, it is Congress, upon creating an office, that delegates to the officer the authority to act. Congress is free to limit, restrict, or condition how that delegated authority may be exercised, and an officer may not act in contravention to, or in excess of, the statutory authority provided to him by Congress. Therefore, it could be argued that, in enacting section 1066, Congress structured the office and limited the delegation of authority such that the Director could only exercise the transferred powers once ""confirmed by the Senate."" If one accepts the view that section 1066 represents a restricted delegation of authority to the Director, rather than a limitation on the President's ability to make recess appointments, then it seems unlikely that interpretation two would be determined to raise concerns under the separation of powers doctrine. Alternatively, interpretation two could be viewed as an indirect interference with the President's recess appointment power in that it restricts the authorities that may be exercised by a recess appointee—thereby designating him as having lesser constitutional standing as compared to that of a Senate-confirmed officer. Lower federal courts, however, have made clear that recess appointees possess the same constitutional authority as a Senate-confirmed appointee. History does not ""suggest that the Recess Appointments Clause was designed as some sort of extraordinary and lesser method of appointment."" The Court of Appeals for the Eleventh Circuit, for instance, has stated that ""during the limited term in which a recess appointee serves, the appointee is afforded the full extent of authority commensurate with that office."" The executive branch also has taken the position that Congress may not intrude on the President's power by ""granting less power to a recess appointee than a Senate-confirmed occupant of the office would exercise."" Thus, if section 1066 is interpreted to permit a Senate-confirmed appointee to exercise the full authority of the office, while forbidding a recess appointee from exercising those same powers, it may act to limit the effectiveness of presidential recess appointments by preventing the President from meaningfully filling an existing vacancy in the manner envisioned by the Recess Appointments Clause. Even accepting that interpretation two would amount to an indirect limitation on the President's recess appointment power, the provision cannot be characterized as a total prohibition on those appointments. However, the provision may nonetheless infringe on the President's constitutional authority to such a degree that it raises significant constitutional questions under the separation of powers doctrine. Any discussion of the division of authority between Congress and the President in the context of the Recess Appointments Clause should note that a series of lower federal court cases considering challenges to the President's use of his recess appointment power have repeatedly rejected attempts to restrict the President's constitutional authority to make such appointments. These cases also suggest that, in considering constitutional questions regarding recess appointments, reviewing courts should give deference to the President as he plays the ""primary"" role in the appointment process. In Evans v. Stephens , the appeals court noted that ""when the President is acting under the color of express authority of the United States Constitution, we start with a presumption that his acts are constitutional."" The Staebler court also noted this principle of deference to the President, stating that where there is an ""ambiguity ... it is appropriate to consider that the President was intended by the framers of the Constitution to possess the active, initiating, and preferred role with respect to the appointment of officers of the United States."" With this background in mind, a constitutional analysis would consider whether an interpretation that section 1066 restricts the powers exercised by a recess appointee would result in an infringement on the President's power sufficient to violate the separation of powers doctrine. Often the outcome of a challenge will depend on the nature of the infringement, the power that is being infringed, and the extent to which the court views that power as essential to the functioning of the branch. As noted previously, while there is no uniform jurisprudential approach to evaluating separation of powers cases, the Supreme Court appears to have developed two main analytical frameworks: formalism—which emphasizes precise definitional boundaries—and functionalism—which deemphasizes the efficacy of adhering to such precise boundaries, relying instead on the effect of the exercise of power. A formalist approach is more likely to reach a conclusion that a congressional restriction similar to interpretation two of section 1066 violates the separation of powers doctrine than a more flexible functionalist approach. Under a formalist approach, the President's recess appointment authority would likely be viewed as deriving from a clear and exclusive constitutional commitment to the President. Therefore, any congressional attempt to limit the President's exercise of his recess appointment power could be considered an unconstitutional legislative encroachment. Under this reasoning, a statutory provision that permits a Senate-confirmed appointee to exercise powers denied to a recess appointee may be characterized as intruding on the President's authority to make recess appointments, thus constituting an unconstitutional limitation on an express presidential power. A similar analysis has been applied to other expressly enumerated executive powers. For example, with respect to the President's authority to ""grant Reprieves and Pardons for Offenses against the United States,"" the Supreme Court has stated that ""[t]his power of the President is not subject to legislative control. Congress can neither limit the effect of his pardon, nor exclude from its exercise any class of offenders."" Likewise, the Court has held that the authority to negotiate treaties is exclusive to the President. Although the President completes treaties with the advice and consent of the Senate, ""[i]nto the field of negotiation the Senate cannot intrude; and Congress itself is powerless to invade it."" The analogy to the President's authority to negotiate treaties may be especially apt given that the treaty context involves shared authority between the Senate and the President. With respect to the treaty making process, the Court has been willing to draw distinct lines delineating the roles of each branch. One could argue that the same may be true with respect to recess appointments. Although the Senate's participation was clearly envisioned under the traditional Appointments Clause, the Recess Appointments Clause arguably operates as a ""separate"" and independent authority of the President from which the Senate is excluded. Accordingly, significant separation of powers concerns could arise under a formalist approach to evaluating congressional restrictions on powers exercised by a recess appointee. Separation of powers concerns associated with a congressional restriction on the powers exercised by a recess appointee, however, may be less significant under a functionalist approach. The Supreme Court has recognized very few presidential powers that are entirely excluded from congressional influence or interference. The President's recess appointment power may be viewed as one in which reasonable congressional intrusions are permitted as long as Congress does not prevent the President ""from accomplishing [his] constitutionally assigned functions."" The analysis may be similar to that which has been applied to the President's traditional appointment and removal powers. Although the Constitution expressly provides the President power to appoint officers of the United States, the Court has upheld certain statutory constructs that impact the President's traditional appointment powers. While Congress may not vest the authority to appoint officers in itself, Congress may prescribe reasonable and relevant qualifications along with other rules of eligibility for appointees. Likewise, although the Court has held that the President enjoys the implied constitutional power to oversee executive officers through removal, that power is not free from reasonable congressional regulation. Application of a functionalist analysis would require a consideration of whether section 1066 has the effect of ""impermissibly undermin[ing]"" the Presidents ability to exercise a ""core function."" Under such an approach, a restriction on the powers available to a recess appointee, rather than a restriction on the recess appointment itself, may not excessively interfere with the President's ability to fill vacancies. Accordingly, separation of powers concerns could be regarded as less significant under a functionalist approach to congressional limitations on the President's recess appointment power. Although it is unclear whether interpreting section 1066 in a manner that restricts the authorities exercised by a recess appointee—but not a Senate-confirmed appointee—would violate the separation of powers doctrine, the foregoing analysis suggests that such an interpretation would at least raise constitutional concerns. Presented with two ""reasonably susceptible interpretations""—one that is consistent with historical practice, the other that may lead to a constitutional conflict—the doctrine of ""constitutional avoidance"" indicates a substantial possibility that a reviewing court would adopt the construction of section 1066 that raises no constitutional difficulties. Therefore, it seems unlikely that a court would adopt interpretation two and give effect to section 1066 in a manner that prevents a recess appointed director from exercising the transferred powers. In addition, interpretation two would arguably represent a unique and novel restriction on a longstanding presidential power. Without a clear statement of legislative intent, which section 1066 lacks, a court may be disinclined to interpret an ambiguous statutory provision in a manner that may significantly alter the division of power between the branches. Accordingly, it seems unlikely that a reviewing court would interpret section 1066 in a manner that restricts the authorities that may be exercised by a recess appointee, and therefore, if Cordray's appointment was valid, he appears likely to be free to exercise the full authorities of his office. Furthermore, it should be noted that even if a court were to construe section 1066 under the second interpretation, the statutory limitations on Cordray's ability to exercise the full powers of the CFPB Director could be circumvented simply by the Secretary delegating the transferred powers to Cordray. In other words, if a court agreed with this interpretation, Cordray could exercise the newly established powers pursuant to his recess appointment and could exercise the transferred powers upon a formal delegation from the Secretary. With the legal uncertainty surrounding the President's recess appointments of Cordray, Flynn, Block, and Griffin Jr., it seems prudent to review how decisions made and actions performed by the CFPB and NLRB under the direction of these individuals would be treated if a court determined that their appointments were unconstitutional. The de facto officer doctrine ""confers validity upon acts performed by a person acting under the color of official title even though it is later discovered that the legality of that person's appointment or election to office is deficient."" Therefore, even if a reviewing court were to invalidate the appointment of an officer, the de facto officer doctrine could be applied to limit the remedies available to the plaintiffs. The purpose of the doctrine is to maintain stability, prevent a disruption of the status quo caused by the overturning of accepted decisions, and facilitate the orderly functioning of the government despite technical defects. The Supreme Court, however, has recognized that the doctrine is applied most often in cases where an appointment is challenged based on a ""merely technical"" statutory defect. In cases that hinge on more than mere technicalities, such as cases involving a ""challenge to the constitutional validity"" of an appointment or a statutory challenge that ""embodies a strong policy concerning the proper administration of judicial business,"" courts have declined to apply the doctrine. Additionally, several circuit courts have explicitly rejected application of the doctrine when a constitutional challenge is presented. It seems unlikely that a court would choose to apply the de facto officer doctrine in a case challenging the CFPB and NLRB recess appointments. Any challenge to the recess appointments will likely raise substantial constitutional questions based on issues of separation of powers and the interpretation of the Recess Appointments Clause. Therefore, it appears this case would fall under the Court's statement in Ryder v. United States , that a ""timely challenge to the constitutional validity"" of an appointment warrants a ""decision on the merits of the question and whatever relief may be appropriate if a violation indeed occurred."" This principle was exemplified in Buckley v. Valeo , where plaintiffs successfully argued that the appointment of four members of the Federal Election Commission by Congress, rather than the President, violated the Appointments Clause. The Court did not explicitly apply the de facto officer doctrine, since it both invalidated the appointments and granted the plaintiffs their requested declaratory and injunctive relief. However, even without relying on the de facto officer doctrine, the Court still ""summarily"" held that the Commission's past actions remained valid and did not provide further explanation. More recently, following a finding that the NLRB lacked authority to issue decisions with only two Board members, the Court in New Process Steel v. NLRB granted the plaintiff relief by vacating and remanding its adjudication to the NLRB. In New Process Steel , the Court did not even address the continued validity or possible precedential value of the decisions made by the two-member Board. Although the Court's statement in Ryder means a plaintiff likely may be granted relief if a court invalidated the CFPB and NLRB appointees, the future consequences of such an invalidation remain uncertain. The unique facts underlying the President's January 4, 2012, recess appointments raise a number of unresolved constitutional questions regarding the scope of the Recess Appointments Clause. However, the Clause itself contains ambiguities, and with a lack of judicial precedent that may otherwise elucidate the provision, it is difficult to predict how a reviewing court would define the contours of the President's recess appointment authority. If the President's recess appointments are challenged, it appears the most likely plaintiffs to satisfy the court's standing requirements would be a private individual or association who, following the appointments, has suffered an injury as a result of some discrete action taken by the CFPB or NLRB. Were the court to proceed to the merits of the challenge, the primary question presented would likely be whether the President made the January 4 recess appointments ""during a recess of the Senate."" That determination may hinge on whether the Senate's pro forma sessions were adequate to interrupt an otherwise continuous recess. Although there are several approaches a court could take in evaluating the impact of the sessions, whether the President is constitutionally authorized to make a recess appointment would also depend on how a court chooses to define a ""Recess"" for purposes of the Recess Appointments Clause. Aspects of both of these determinations, which appear to involve questions of separation of powers and the internal proceedings of the Senate, may potentially be deemed to involve political questions inappropriate for judicial review and better resolved by the President and Congress. Finally, even if the recess appointments are considered constitutionally valid, it appears likely that questions may be raised as to Director Cordray's authority. However, given the potential constitutional concerns that could be associated with an interpretation of the CFP Act that restricts the authorities delegated to a recess appointee as opposed to a Senate-confirmed appointee, it is likely that a reviewing court would avoid a construction that prevents Cordray from exercising the full authorities of his office.","The U.S. Constitution establishes two methods by which Presidents may appoint officers of the United States: either with the advice and consent of the Senate, or unilaterally ""during the Recess of the Senate."" These two constitutional provisions have long served as sources of political tension between Presidents and Congresses, and the same has held true since President Obama took office. At the end of the first session of the 112th Congress, the Senate had not acted upon the nominations of the Director to the recently established Bureau of Consumer Financial Protection (CFPB or Bureau) or of members to the National Labor Relations Board (NLRB). On December 17, 2011, the Senate adopted a unanimous consent agreement that established a series of ""pro forma"" sessions to occur from December 20, 2011, until January 23, 2012, with brief recesses in between. The unanimous consent agreement established that ""no business"" would be conducted during the pro forma sessions and that the second session would begin at 12:00 p.m., January 3, 2012. On January 4, 2012, despite the periodic pro forma sessions of the Senate, the President, asserting his Recess Appointments Clause powers, announced his intent to appoint Richard Cordray to be Director of the CFPB and Terrence F. Flynn, Sharon Block, and Richard F. Griffin Jr. to be Members of the NLRB. The unique facts underlying the President's January 4, 2012, recess appointments raise a number of unresolved constitutional questions regarding the scope of the Recess Appointments Clause. However, the Clause itself contains ambiguities, and with a lack of judicial precedent that may otherwise elucidate the provision, it is difficult to predict how a reviewing court would define the contours of the President's recess appointment authority. If the President's recess appointments are challenged, it appears the most likely plaintiffs to satisfy the court's standing requirements would be a private individual or association who, following the appointments, has suffered an injury as a result of some discrete action taken by the CFPB or NLRB. Were the court to proceed to the merits of the challenge, the primary question presented would likely be whether the President made the January 4 recess appointments ""during a recess of the Senate."" This issue, however, appears to involve questions of separation of powers and the internal proceedings of the Senate, and may potentially be deemed to involve political questions inappropriate for judicial review and better resolved by the President and Congress. Finally, even if the recess appointments are considered constitutionally valid, it appears likely that other questions may be raised as to Director Cordray's authority. This report analyzes the legal issues associated with the President's asserted exercise of his Recess Appointments Clause power on January 4, 2012. The report begins with a general legal overview of the Recess Appointments Clause. This is followed by an analysis of two legal principles, standing and the political question doctrine, which may impede a reviewing court from reaching the merits of a potential legal challenge to the appointments. The examination of these justiciability issues is followed by an analysis of the constitutional validity of the appointments; potential statutory restrictions on a recess appointee's authority to exercise the powers of the CFPB; and how actions taken by the recess appointees could be impacted by a court ruling that the appointments are unlawful.",govreport
"Federal immigration laws set forth procedures governing the exclusion and removal of non-U.S. nationals (aliens) who do not meet specified criteria regarding their entry or presence within the United States. Typically, aliens within the United States may not be removed without due process. Commensurate with these constitutional protections, the Immigration and Nationality Act (INA) generally affords an alien whose removal is sought with certain procedural guarantees, including the right to written notice of the charge of removability, to seek counsel, to appear at a hearing before an immigration judge (IJ), to present evidence, to appeal an adverse decision to the Board of Immigration Appeals (BIA), and to seek judicial review. Congress, however, has broad authority over the admission of aliens seeking to enter the United States. The Supreme Court has repeatedly held that the government may exclude an alien seeking to enter this country without affording him the traditional due process protections that otherwise govern formal removal proceedings; instead, an alien seeking initial entry is entitled only to those procedural protections that Congress expressly authorized. Consistent with this broad authority, Section 235(b)(1) of the INA provides for the expedited removal of arriving aliens who do not have valid entry documents or have attempted to gain their admission by fraud or misrepresentation. Under this streamlined removal procedure, which Congress established through the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA) of 1996, such aliens may be summarily removed without a hearing or further review. In limited circumstances, however, an alien subject to expedited removal may be entitled to certain procedural protections before he may be removed from the United States. For example, an alien who expresses a fear of persecution may obtain administrative review of his claim and, if the review determines that his fear is credible, the alien will be placed in ""formal"" removal proceedings where he can pursue asylum and related protections. Additionally, an alien may seek administrative review of a claim that he is a U.S. citizen, lawful permanent resident (LPR), admitted refugee, or asylee. Unaccompanied alien children also are not subject to expedited removal. In addition to providing for expedited removal of certain arriving aliens, INA Section 235(b)(1) also confers the Secretary of the Department of Homeland Security (DHS) with the ability to expand the use of expedited removal to aliens present in the United States without being admitted or paroled if they have been in the country less than two years and do not have valid entry documents or have attempted to gain their admission by fraud or misrepresentation. In practice, the government has employed expedited removal only to (1) arriving aliens; (2) aliens who arrived in the United States by sea within the last two years, who have not been admitted or paroled by immigration authorities; and (3) aliens found in the United States within 100 miles of the border within 14 days of entering the country, who have not been admitted or paroled by immigration authorities. Nevertheless, expedited removal is a major component of immigration enforcement, and in recent years, it has been one of the most regularly employed means by which immigration authorities remove persons from the United States. Furthermore, in January 2017, President Trump issued an executive order directing DHS to apply expedited removal within the broader limitations of the statute. To date, however, DHS has not yet implemented this policy. This report provides an overview of the statutory and regulatory framework that governs expedited removal under INA Section 235(b)(1). The report also highlights the exceptions to expedited removal, including provisions that permit an alien to seek review of an asylum claim before he may be removed. Finally, the report addresses the scope of judicial review of an expedited removal order, some of the legal challenges that have been raised to the expedited removal process, and briefly considers potential legal issues that may arise if expedited removal were expanded to cover additional categories of aliens present in the United States. A glossary of some terms used frequently throughout this report can be found in Appendix A . The Supreme Court has long recognized the federal government's authority ""to expel or exclude aliens"" from the United States. The Court has described this authority as a ""fundamental act of sovereignty"" that stems not only from Congress's legislative power, but also from ""the executive power to control the foreign affairs of the nation."" The Court also has repeatedly recognized that an alien's admission into the United States is a privilege, but the alien lacks a vested right to be admitted into the country. Guided by these principles, the Supreme Court has held that the government's decision to exclude an alien from entering the United States generally lies beyond the scope of judicial review. Moreover, the Court has determined, ""the decisions of executive or administrative officers, acting within powers expressly conferred by [C]ongress, are due process of law"" for aliens seeking to enter this country. Thus, the government's decision to deny entry is often deemed ""final and conclusive,"" and immigration officials are fully ""entrusted with the duty of specifying the procedures"" for implementing that authority. Initially, the Supreme Court held that the government's broad authority covered not only the expulsion of foreign nationals seeking to enter the United States, but also aliens who were already within the territorial boundaries of this country. The Court explained that ""[t]he right of a nation to expel or deport foreigners who have not been naturalized, or taken any steps towards becoming citizens of the country, rests upon the same grounds, and is as absolute and unqualified, as the right to prohibit and prevent their entrance into the country."" Gradually, the Supreme Court modified its position regarding the reach of the government's authority. For example, the Court determined that lawfully admitted aliens were entitled to Fifth Amendment due process protections in formal removal proceedings. The Court explained that ""'once an alien lawfully enters and resides in this country he becomes invested with the rights guaranteed by the Constitution to all people within our borders.'"" In these circumstances, the alien is ""entitled to notice of the nature of the charge and a hearing at least before an executive or administrative tribunal."" The Supreme Court eventually went further and declared that all aliens who have entered the United States—including those who entered unlawfully—may not be removed without due process. The Court declared that aliens physically present in the United States, regardless of their legal status, are recognized as ""persons"" guaranteed due process of law by the Fifth and Fourteenth Amendments. Consequently, the Court reasoned, ""[e]ven one whose presence in this country is unlawful, involuntary, or transitory is entitled to that constitutional protection."" Although the Supreme Court has afforded due process protections to aliens physically present in the United States, the Court has consistently held that aliens seeking to enter the country may not avail themselves of those same protections. The Court has reasoned that, although ""aliens who have once passed through our gates, even illegally, may be expelled only after proceedings conforming to traditional standards of fairness encompassed in due process of law,"" an alien ""on the threshold of initial entry stands on a different footing"" because, theoretically, he is outside of the geographic boundaries of the United States, and thus beyond the scope of constitutional protection. This distinction, known as the ""entry fiction"" doctrine, allows courts to treat an alien seeking admission as though he had never entered the country, even if he is, technically, physically within U.S. territory, such as at a border checkpoint or airport. In those circumstances, the alien is legally considered to be ""standing on the threshold of entry,"" and outside the territorial jurisdiction of the United States. By contrast, once an alien ""enters"" the country, ""the legal circumstance changes,"" and he may become subject to constitutional rights and protections. The Supreme Court has applied this principle not only with respect to aliens seeking entry into the United States, but also to aliens seeking entry who are detained within the country's borders pending determinations of their admissibility. For example, in United States ex rel. Knauff v. Shaughnessy , the German wife of a U.S. citizen challenged her exclusion without a hearing under the War Brides Act. The German national was detained at Ellis Island during her proceedings, and, therefore, technically within U.S. territory. Nevertheless, the Supreme Court held that the government had the ""inherent executive power"" to deny her admission, and that ""[w]hatever the procedure authorized by Congress is, it is due process as far as an alien denied entry is concerned."" Similarly, in Shaughnessy v. United States ex rel. Mezei , an alien detained on Ellis Island for more than 21 months argued that the government's decision to deny admission without a hearing violated due process. Citing ""the power to expel or exclude aliens as a fundamental sovereign attribute exercised by the Government's political departments,"" the Court determined that the Executive was authorized to deny entry without a hearing, and that the decision was not subject to judicial review. Further, the Court held, although the alien had ""temporary harborage"" inside the United States pending his exclusion proceedings, he had not effected an ""entry"" for purposes of immigration law, and could be ""treated as if stopped at the border."" Therefore, existing Supreme Court jurisprudence recognizes that the federal government has broad plenary power over the admission and exclusion of aliens seeking to enter the United States, and may deny admission without affording due process protections such as the right to a hearing. Aliens seeking entry are thus generally entitled only to those protections that Congress explicitly authorized. Conversely, an alien who has entered the United States is generally entitled to due process protections prior to removal. Under the ""entry fiction"" doctrine, however, aliens who are detained within the United States pending a determination of their admissibility may be ""treated, for constitutional purposes"" as though they have not entered this country. The extent to which the entry fiction doctrine may apply to aliens who are already within the United States remains an unresolved question. While some courts have held that aliens apprehended near the U.S. border may be treated as though they had not effected an entry into the country, the degree to which this principle may be applied to aliens within the interior of the United States is unclear. Congress established the expedited removal process when it enacted IIRIRA in 1996. Before IIRIRA, federal immigration law distinguished between arriving aliens and aliens who had entered the United States. Based on this distinction, there were two types of proceedings to determine whether an alien should be removed: exclusion proceedings, which were ""the usual means of proceeding against an alien outside the United States seeking admission,"" and deportation proceedings, which applied to aliens ""already physically in the United States."" In both types of proceedings, however, the alien had statutory rights to counsel, a hearing, and administrative and judicial review before he could be removed from the United States. Confronted with what it perceived as mounting levels of unlawful migration, Congress enacted IIRIRA in 1996 and made sweeping changes to the federal immigration laws. One major shift was to replace the exclusion/deportation framework, which turned on whether an alien had physically entered the United States, with a new framework that turned on whether an alien had been lawfully admitted into the country by immigration authorities. Under the new framework, aliens who were lawfully admitted could be removed from the United States if they fell under the grounds of deportability listed in INA Section 237(a). On the other hand, aliens who had not been admitted into the United States—whether first arriving to the United States or having entered the country without being lawfully admitted—could be denied admission and removed from the United States if they fell under the grounds of inadmissibility listed in INA Section 212(a). Secondly, IIRIRA removed the distinction between deportation and exclusion proceedings. Instead, it established a standard, ""formal"" removal proceeding under INA Section 240 applicable to aliens regardless of whether they are charged with being inadmissible or deportable. These formal removal proceedings generally entail the same statutory rights and protections that previously governed deportation proceedings. IIRIRA also created a new, expedited removal process generally required for certain arriving aliens. This expedited removal process, codified in INA Section 235, does not apply to all arriving aliens who are believed inadmissible, but only to those who are inadmissible because they lack valid entry documents or have attempted to procure their admission through fraud or misrepresentation. Under this new procedure, the federal government could summarily remove these aliens without a hearing or further review unless they expressed an intent to apply for asylum or a fear of persecution. In a separate provision, Congress gave the Attorney General (now the Secretary of DHS) ""the sole and unreviewable discretion"" to apply this procedure to ""certain other aliens"" inadmissible on the same grounds if (1) they were not admitted or paroled into the United States, and (2) they could not establish that they have been physically present in the United States continuously for two years at the time of their apprehension. Table 1 illustrates the differences between expedited removal proceedings, pre-IIRIRA deportation/exclusion proceedings, and post-IIRIRA formal removal proceedings. Following IIRIRA, the former Immigration and Naturalization Service (INS) initially applied the new expedited removal authority to circumstances mandated by the governing statute (i.e., to arriving aliens), and not to other circumstances where the Attorney General was authorized (but not required) to exercise such authority. In addition, because the expedited removal provisions exempted aliens from countries in the Western Hemisphere whose governments did not have full diplomatic relations with the United States, and who arrived by aircraft at a port of entry, Cuban nationals who arrived in the United States by aircraft were not subject to expedited removal. While the expedited removal statute governs the removal of certain aliens who are ""arriving"" in the United States, it does not define this group. When promulgating regulations implementing the new expedited removal authority, the INS defined the term ""arriving alien"" to include (1) aliens seeking admission into the United States at a port of entry, (2) aliens seeking transit through the United States at a port of entry, and (3) aliens who have been interdicted at sea and brought into the United States ""by any means, whether or not to a designated port-of-entry, and regardless of the means of transport."" Over the years, however, the INS and its successor agency DHS gradually expanded the implementation of expedited removal authority to cover (1) aliens who entered the United States by sea without being admitted or paroled by immigration authorities, and who have been in the country less than two years; (2) aliens apprehended within 100 miles of the U.S. border within 14 days of entering the country, and who have not been admitted or paroled by immigration authorities; and, (3) ultimately, Cuban nationals who met the criteria for expedited removal. But despite these expansions, the agency has never employed expedited removal to the full degree authorized by INA Section 235(b)(1), which would include both arriving aliens and, potentially, all aliens physically present in the United States without being admitted or paroled who have been in the country less than two years and who fall under the expedited removal statute's specified grounds of inadmissibility. Table 2 shows how the INS and DHS implemented their expedited removal authority since 1997. (A more comprehensive discussion about the exercise of expedited removal authority over time can be found in Appendix B .) As noted above, expedited removal authority currently is exercised with regard to the following three overarching categories of aliens: 1. Arriving aliens seeking entry into the United States at a designated port of entry. 2. Aliens who arrived in the United States by sea, who have not been admitted or paroled, and who have been in this country for less than two years. 3. Aliens who are encountered within 100 miles of the border, who have not been admitted or paroled, and who have been in the United States for less than 14 days. Aliens in these categories are subject to expedited removal only if they fall under the grounds of inadmissibility found in INA Section 212(a)(6)(C) and (a)(7). These grounds of inadmissibility generally apply to aliens who lack valid entry documents or who attempt to procure admission through fraud or misrepresentation. More specifically, the two inadmissibility grounds apply to the following: An alien who is not in possession of (1) a valid unexpired immigrant visa, reentry permit, border crossing identification card, or other valid entry document; and (2) a valid unexpired passport, or other suitable travel document, or document of identity and nationality if required under applicable regulations. This provision applies, for example, to aliens who arrive with proper documents for entry into the United States for certain purposes, but who intend to enter the United States for reasons that require different authorizing documents. An alien whose immigrant visa has been issued in violation of the provisions regarding the numerical limitations on the distribution of immigrant visas. An alien whose passport will expire within six months after his authorized period of stay in the United States. An alien who is not in possession of a valid nonimmigrant visa or border crossing identification card at the time of his application for admission. An alien who seeks to procure (or has attempted to procure or has procured) a visa, other documentation, or admission into the United States or other immigration benefit through fraud or willful misrepresentation (e.g., an alien presenting a photo-substituted passport, or providing false information on a visa application). An alien who falsely represents (or has falsely represented) himself to be a U.S. citizen. Importantly, expedited removal is available in cases where the alien is charged only with being inadmissible under these grounds. If an immigration officer determines that an alien is inadmissible on additional grounds (e.g., because he has engaged in specified criminal activity), then the alien will be placed in formal removal proceedings under INA Section 240. INA Section 235(b)(1) instructs that an immigration officer must inspect an alien and determine whether he falls within the category of inadmissible aliens subject to expedited removal. If the alien meets the criteria for expedited removal, the alien will be ordered removed without a hearing or further review, unless the alien indicates an intent to apply for asylum or a fear of persecution. The alien will also be barred from reentering the United States for five years, with lengthier or even permanent bars to admission if special factors are present. While expedited removal is a more streamlined process than formal removal proceedings, it nonetheless can involve a number of determinations by multiple agencies and agency subcomponents—particularly in cases where an alien intends to apply for asylum or expresses a more generalized fear of persecution that could potentially render the alien eligible for relief from removal. U.S. Customs and Border Protection (CBP), the DHS component with primary responsibility for immigration enforcement along the border and at designated ports of entry, typically takes the lead role in the expedited removal process, from the initial inspection or apprehension of the alien through the issuance of an order of expedited removal. U.S. Immigration and Customs Enforcement (ICE), the DHS component primarily responsible for interior enforcement and removal, also regularly plays a significant role, such as when the alien seeks asylum or expresses a fear of persecution, and ICE takes responsibility for the alien's detention and removal. Another DHS component, U.S. Citizenship and Immigration Services (USCIS), is responsible for interviewing aliens who have claimed a fear of persecution and assesses whether such claims are credible. If such claims are not deemed credible, the agency may issue an expedited removal order. Finally, IJs within the Department of Justice's Executive Office for Immigration Review may become involved in the expedited removal process when either (1) an IJ is asked to review a USCIS determination that an alien does not have a credible fear of persecution or (2) in the event that an alien is determined to have a credible fear, the alien is placed in formal removal proceedings before an IJ where the alien's claim for relief can be adjudicated. The following sections provide further explanation of the expedited removal process. An alien arriving in the United States or an alien present in the United States who has not been admitted is considered an ""applicant for admission"" who is subject to inspection by an immigration officer. At a designated port of entry, the initial phase of the inspection process is referred to as ""primary inspection."" During this stage, ""the immigration officer literally has only a few seconds to examine documents, run basic lookout queries, and ask pertinent questions to determine admissibility and issue relevant entry documents."" If the immigration officer finds discrepancies in the alien's documents or statements, ""or if there are any other problems, questions, or suspicions that cannot be resolved within the exceedingly brief period allowed for primary inspection,"" the alien will be referred to ""secondary inspection"" for ""a more thorough inquiry."" During secondary inspection, the immigration officer often will not know if the alien is subject to expedited removal until the officer has sufficiently questioned the alien to assess whether the alien is inadmissible. In order to make that determination, the immigration officer may obtain statements under oath about the purpose and intention of the applicant in coming to the United States. DHS regulations provide that ""[i]nterpretative assistance shall be used if necessary to communicate with the alien."" At other locations (e.g., in cases where the alien is found between ports of entry), an alien who is apprehended by immigration authorities is typically taken to a U.S. Border Patrol station for inspection and processing to determine whether the alien is inadmissible and subject to expedited removal. DHS regulations provide that, if an immigration officer determines that an alien is inadmissible and subject to expedited removal, the officer must prepare a Record of Sworn Statement in Proceedings (Form I-867), which contains the facts of the case and any statements made by the alien. The regulations require the immigration officer to record the alien's statements in response to questions concerning his identity, nationality, and inadmissibility. Following questioning, the alien must be given an opportunity to read (or have read to him) the information in the Form I-867 and any statements he made during the inspection. Further, the alien must sign and initial each page of the Form I-867 as well as any corrections made. DHS regulations also require the immigration officer to prepare a Notice and Order of Expedited Removal (Form I-860) containing the charges of inadmissibility against the alien, and the alien must have an opportunity to respond to the charges. In addition, the regulations instruct that, in cases where an alien is suspected of being present in the United States without being admitted or paroled, the alien must be given an opportunity to show that he was admitted or paroled into the United States after inspection at a port of entry. As previously noted, an alien placed in expedited removal may be charged with being inadmissible only under the grounds involving a lack of entry documents or attempting to procure admission through fraud or misrepresentation. If the immigration officer determines that the alien is inadmissible on other grounds, and DHS intends to pursue additional charges, the alien will be placed in formal removal proceedings under INA Section 240, and the agency may lodge the additional charges during those proceedings. An expedited order of removal becomes final after supervisory review. At that point, agency regulations permit the immigration officer to serve the alien with Form I-860 and obtain the alien's signature acknowledging receipt. During this process, the alien is not entitled to an administrative hearing or appeal of the expedited removal order. Upon the issuance of the expedited removal order, the alien will be removed from the United States. As an alternative to expedited removal, DHS may permit an alien to voluntarily withdraw his application for admission if he intends, and is able, to depart the United States immediately. This option allows the agency ""to better manage its resources by removing inadmissible aliens quickly at little or no expense to the Government, and may be considered instead of expedited or regular removal when the circumstances of the inadmissibility may not warrant a formal removal."" Under DHS policy, the immigration officer typically considers a number of factors to determine whether an alien may withdraw his application for admission, including (1) the seriousness of the immigration violation; (2) any previous findings of inadmissibility against the alien; (3) the intent on the part of the alien to violate the law; (4) the alien's ability to overcome the ground of inadmissibility; (5) the alien's age and health; and (6) other humanitarian or public interest considerations. An alien does not have a right to withdraw his application for admission; instead, it is up to the discretion of the agency whether to permit the alien to withdraw his application and immediately leave the United States in lieu of undergoing removal proceedings. Furthermore, implementing regulations provide that an alien who is allowed to withdraw his application for admission will remain detained pending his departure unless DHS determines that parole is warranted. Generally, an alien subject to expedited removal will be ordered removed without further hearing to contest the immigration officer's determination. But there are exceptions. Notwithstanding these restrictions, further administrative review occurs if an alien in expedited removal indicates an intent to seek asylum or claims that he fears persecution if removed. Administrative review also occurs if a person placed in expedited removal claims that he is a U.S. citizen, an LPR, or has been granted refugee or asylee status. In these limited circumstances, DHS may not proceed with removal until the alien's claim receives consideration. When Congress created the expedited removal process in 1996, it also established special protections for those who claim they qualify for certain forms of relief from removal. Specifically, an alien otherwise subject to expedited removal who expresses an intent to apply for asylum, a fear of persecution or torture, or a fear of returning to his country is entitled to administrative review of that claim before he can be removed. In these circumstances, the statute instructs, the immigration officer must refer the alien for an interview with an asylum officer to determine whether the alien has a ""credible fear"" of persecution or torture. A credible fear determination is a screening process that evaluates whether an alien could potentially qualify for asylum, withholding of removal, or protection under the Convention Against Torture (CAT). The INA defines a ""credible fear of persecution"" as ""a significant possibility, taking into account the credibility of the statements made by the alien in support of the alien's claim and such other facts as are known to the officer, that the alien could establish eligibility for asylum."" A ""credible fear of torture"" is defined by regulation as ""a significant possibility that [the alien] is eligible for [protection] under the Convention Against Torture."" Under this ""low screening standard,"" the alien has to show only a ""substantial and realistic possibility of success on the merits"" of an application for asylum, withholding of removal, or CAT protection. An alien does not have to show that it is more likely than not that he could establish eligibility for these protections to be found to have a credible fear. The credible fear determination is not intended to fully assess the alien's claims, but only to determine whether those claims are sufficiently viable to warrant more thorough review. USCIS may conduct the credible fear interview at a designated port of entry or another location, such as a detention center. Before the interview, the alien may consult with another person at no expense to the government; the consulted person may be present at the interview and may be permitted, at the discretion of the asylum officer, to offer a statement. The alien also has the option to present evidence at the interview. DHS regulations provide that the immigration officer who refers the alien for an interview must prepare Form M-444, Information about Credible Fear Interview in Expedited Removal Cases, that explains the credible fear interview process, the right to consultation before the interview, the right to request a review of the asylum officer's determination, and the consequences of failing to show a credible fear of persecution or torture. The regulations direct the asylum officer to confirm that the alien received Form M-444, and that he understands the credible fear interview process. The asylum officer ""will conduct the interview in a nonadversarial manner, separate and apart from the general public,"" and the purpose of the interview ""shall be to elicit all relevant and useful information bearing on whether the applicant has a credible fear of persecution or torture."" If the alien cannot proceed with the interview in English, the asylum officer ""shall arrange for the assistance of an interpreter in conducting the interview."" By regulation, during the interview, the asylum officer will create ""a summary of the material facts as stated by the applicant,"" and, at the end of the interview, will review that summary with the alien, who must have an opportunity to correct any errors. The asylum officer will then create a written record of his credible fear determination, which will include the factual summary, any additional facts he relied upon, and his decision as to whether the alien established a credible fear of persecution or torture. The asylum officer's determination will not become final until it is reviewed by a supervisory asylum officer. An alien who has a credible fear of persecution or torture is not automatically granted relief. Rather, he is placed in formal removal proceedings governed by INA Section 240 in lieu of expedited removal. During these formal removal proceedings, the alien may be represented by counsel; challenge the basis for his removability; and pursue applications for asylum, withholding of removal, CAT protection, and other forms of relief. The alien may also administratively appeal the IJ's decision and (as specified by statute) seek judicial review of a final order of removal. An alien's failure to establish a credible fear to the satisfaction of the asylum officer may also be subject to further review. Under INA Section 235(b)(1) and its implementing regulations, if an asylum officer determines that an alien does not have a credible fear of persecution or torture, the officer will provide the alien with written notice of that decision and inquire whether the alien would like to seek review of the decision before an IJ. The alien indicates whether he wants to seek review on Form I-869, Record of Negative Credible Fear Finding and Request for Review by an IJ. If the alien declines further review, the asylum officer will issue Form I-860, Notice and Order of Expedited Removal, following review by a supervisory asylum officer, and order the alien removed from the United States. The statute and regulations instruct, however, that if the alien requests review of the asylum officer's negative credible fear finding (or refuses to request or decline such review), the asylum officer will issue Form I-863, Notice of Referral to Immigration Judge, for a de novo review of that determination. The IJ's review ""shall be concluded as expeditiously as possible, to the maximum extent practicable within 24 hours, but in no case later than 7 days"" after the asylum officer's decision. The alien has the opportunity to be heard and questioned by the IJ during this review, which is limited to the issue of credible fear, and may be conducted in person or by telephonic or video conferencing. If the IJ concurs with the asylum officer's negative credible fear finding, ""the case shall be returned to [DHS] for removal of the alien,"" and the IJ's decision ""is final and may not be appealed."" DHS, however, may reconsider a negative credible fear finding that has been concurred upon by an IJ after providing notice to the IJ. The alien may submit a request for reconsideration to the regional USCIS asylum office that conducted his initial interview, and if the request is granted, the alien will either have a second interview or receive a positive credible fear determination. Based on a 1997 INS memorandum, USCIS will reconsider the alien's credible fear claim if the alien ""has made a reasonable claim that compelling new information concerning the case exists and should be considered."" Conversely, if the IJ finds that the alien has a credible fear of persecution or torture, the IJ will vacate the asylum officer's negative credible fear determination, and the alien will be placed in formal removal proceedings under INA § 240, where he will have an opportunity to pursue asylum, withholding of removal, or CAT protection during those proceedings. In late 2002, the United States and Canada entered into an agreement that bars certain non-Canadian nationals arriving from Canada, or who are in transit during removal from Canada, from applying for asylum and related protections in the United States. Under the agreement, if such aliens express a fear of persecution or torture, they must be returned to Canada—the country of last presence—to seek protection under Canadian law rather than applying in the United States. Under DHS regulations, if an alien arriving in the United States from Canada expresses a fear of persecution or torture, the asylum officer will determine whether the alien is ineligible to apply for asylum in light of the agreement, or whether he qualifies for an exception. If the asylum officer (after supervisory consultation) determines that the alien does not qualify for an exception, the alien will be ineligible to apply for asylum in the United States, and will be removed to Canada, where he may pursue his claims. If the alien qualifies for an exception to the agreement, the asylum officer may determine whether the alien has a credible fear of persecution or torture. When Congress established the expedited removal process, it created an exception to the otherwise applicable expedited removal procedures for any alien who claims to be an LPR, an admitted refugee, a person who has been granted asylum (asylee), or a U.S. citizen. Congress directed the implementing agency to ""provide by regulation for prompt review"" of an expedited removal order in these circumstances, which involve persons who claim to have some legal foothold into the United States. Pursuant to the implementing regulations, an immigration officer must attempt to verify a claim of U.S. citizenship, LPR status, refugee status, or asylee status before he can issue an expedited order of removal. The verification process includes ""a check of all available [DHS] data systems and any other means available to the officer."" DHS regulations provide that, if the immigration officer cannot verify the alien's claim that he is an LPR, refugee, asylee, or U.S. citizen, the alien will be advised of the penalties of perjury, and placed under oath or permitted to make an unsworn declaration regarding his claim of lawful status. The immigration officer will obtain a written statement from the alien in his own language and handwriting ""stating that he or she declares, certifies, verifies, or states that the claim is true and correct."" Following the alien's declaration, the immigration officer will issue an expedited order of removal and refer the alien to an IJ for further review. Under the regulations, if the IJ determines that the alien has not been admitted as an LPR or refugee, granted asylum status, or is not a U.S. citizen, the IJ will affirm the expedited order of removal, and DHS typically proceeds with the alien's removal. There is no appeal of the IJ's decision. However, if the IJ determines that the individual has been admitted as an LPR or a refugee, has been granted asylum, or is a U.S. citizen, the IJ will vacate the expedited order of removal and terminate the proceedings. At this point, DHS may admit the individual or, if appropriate, commence formal removal proceedings against him under INA Section 240 ""to contest his or her current retention of such status."" The agency, however, may not initiate removal proceedings against a U.S. citizen. If, upon examination, an immigration officer verifies that an alien is a U.S. citizen, the alien may not be ordered removed and must be admitted. If the immigration officer verifies that an alien is an LPR, and that he continues to hold that status, the immigration officer cannot issue an expedited order of removal against the alien. Instead, the regulations require the immigration officer to determine whether the alien is considered to be applying for admission into the United States. Under the INA, an LPR will not be regarded as an applicant for admission unless he has abandoned or relinquished his LPR status; has been absent from the United States for a continuous period of more than 180 days; has engaged in illegal activity after departing the United States; has departed the United States while removal or extradition proceedings against him were pending; has committed a criminal offense described in INA Section 212(a)(2), such as a crime involving moral turpitude, a controlled substance offense, or a drug trafficking crime, unless the alien was previously granted a discretionary waiver or cancellation of removal; or is attempting to enter the United States at a time or place other than as designated by immigration officers, or has not been admitted to the United States after inspection and authorization by an immigration officer. If the immigration officer concludes that the LPR is an applicant for admission, and that he is otherwise admissible except that he lacks required documentation to enter the country, the officer may waive the documentary requirements if the alien shows good cause for failing to present documentation. Alternatively, the immigration officer may defer the alien's inspection ""to an onward office for presentation of the required documents."" On the other hand, if the immigration officer determines that an LPR seeking admission is inadmissible under INA Section 212(a) (e.g., because of certain criminal activity), the officer may initiate formal removal proceedings against the alien under INA Section 240. Under DHS regulations, if the immigration officer determines, through the verification process, that an alien has previously been admitted as a refugee or granted asylum in the United States, and that he continues to hold such status, the officer cannot issue an expedited order of removal against the alien. Instead, if the alien is not in possession of a valid, unexpired refugee travel document, the immigration officer may accept an application for a refugee travel document from the alien provided that he (1) did not intend to abandon his refugee or asylum status when he departed the United States; (2) did not engage in any activities outside the United States that would conflict with his refugee or asylum status (e.g., the alien engaged in persecution); and (3) has been outside the United States for less than one year. If the application is approved, the immigration officer will readmit the refugee or asylee into the United States. However, if the alien is not eligible to apply for a refugee travel document, the immigration officer may initiate regular removal proceedings against the alien under INA Section 240. Under federal statute, unaccompanied alien children are not subject to expedited removal. Instead, the governing statute provides that any unaccompanied alien child (UAC) who is determined by immigration authorities to be subject to removal must be placed in formal removal proceedings under INA Section 240, regardless of whether the alien is found in the interior of the United States or at the border. The governing statute also instructs that, during the formal removal proceedings, the UAC is eligible for voluntary departure in lieu of removal at no cost and will be provided access to pro bono counsel. In limited circumstances, DHS may permit a UAC to voluntarily return to his country in lieu of removal proceedings, but only if the UAC is ""a national or habitual resident of a country that is contiguous with the United States"" (i.e., Mexico and Canada), and the child (1) has not been a victim of human trafficking (or is not at risk of human trafficking upon return to his native country or country of last habitual residence); (2) does not have a credible fear of persecution in his native country or country of last habitual residence; and (3) is capable of independently withdrawing his application for admission to the United States. The INA generally authorizes (but does not require) immigration authorities to detain aliens pending their removal proceedings. Aliens placed in expedited removal, however, are generally subject to detention pending a determination as to whether they should be removed from the United States. Aliens in the expedited removal process who express a fear of persecution or an intent to apply for asylum are likewise generally subject to detention while the viability of those claims is considered. But depending on a number of circumstances, including whether such aliens are apprehended at a designated port of entry or crossing the border surreptitiously, such aliens may potentially be released from detention on bond, on their own recognizance, under an order of supervision, or via the exercise of DHS's parole authority. Moreover, the extended detention of alien minors and their parents is limited by a binding settlement agreement from a case in the U.S. District Court for the Central District of California now called  Flores v. Sessions . INA Section 235(b)(1) and its implementing regulations provide that an alien ""shall be detained"" pending a determination as to whether the alien should be subject to expedited removal. Historically, executive branch agencies have construed this detention authority as mandatory. The mandatory detention requirement applies not only during the initial expedited removal screening, but also during any determination as to whether the alien has a credible fear of persecution or torture and any administrative review of an alien's claim that he is a U.S. citizen, LPR, asylee, or refugee. DHS, however, has the discretion to parole an alien on a case-by-case basis ""for urgent humanitarian reasons or significant public benefit"" during these expedited removal proceedings. Based on this statutory authority, the agency has implemented regulations that allow parole of an alien subject to expedited removal, but only if parole ""is required to meet a medical emergency or is necessary for a legitimate law enforcement objective."" The agency's discretionary decision to grant parole is not subject to administrative or judicial review. INA Section 235(b)(1) provides that aliens subject to expedited removal who establish a credible fear of persecution or torture ""shall be detained"" pending consideration of their applications for asylum and related protections in formal removal proceedings. Under DHS regulations, the agency may parole such aliens on a case-by-case basis for ""urgent humanitarian reasons"" or ""significant public benefit,"" and typically will interview the alien to determine his eligibility for parole within seven days following the credible fear finding. The regulations list the following five categories of aliens who would generally meet the criteria for parole, provided that they do not present a security or flight risk: 1. aliens who have serious medical conditions; 2. women who have been medically certified as pregnant; 3. alien juveniles (defined as aliens under the age of 18) who can be released to a relative or nonrelative sponsor; 4. aliens who will be witnesses in proceedings conducted by judicial, administrative, or legislative bodies in the United States; and 5. aliens ""whose continued detention is not in the public interest."" While INA Section 235(b)(1) generally requires the detention of aliens who establish a credible fear of persecution or torture pending consideration of their applications for asylum and related protections (unless DHS grants parole), the mandatory detention requirement applies only to arriving aliens . During the formal removal proceedings, such aliens are not eligible for bond hearings before an IJ under INA Section 236(a) to determine whether they should be released from custody, and may only be considered for parole by DHS. On the other hand, aliens apprehended between ports of entry (e.g., when suspected of surreptitiously crossing the border) who are initially screened for expedited removal and subsequently placed in formal removal proceedings following a positive credible fear determination are not subject to mandatory detention under INA Section 235(b)(1). Instead, these aliens are subject to INA Section 236(a)'s discretionary detention authority, and, unlike arriving aliens, do not fall within the listed classes of aliens that are excluded from an IJ's custody jurisdiction during formal removal proceedings. Thus, to the extent they are detained by DHS, this class of aliens may seek a redetermination of their custody status at bond hearings before an IJ. INA Section 235(b)(2) covers applicants for admission who are not subject to expedited removal. This provision would thus cover unadmitted aliens who are inadmissible on grounds other than those specified in INA Section 212(a)(6)(C) and (a)(7) (e.g., because of specified criminal activity); or verified LPRs who are construed to be applicants for admission (based on the narrow criteria set forth by statute) and found to be inadmissible and subject to removal. The INA provides that aliens covered by INA Section 235(b)(2) ""shall be detained"" pending formal removal proceedings before an IJ. As discussed above, arriving aliens placed in formal removal proceedings are subject to mandatory detention, and may be considered for parole by DHS only in certain circumstances (e.g., aliens with serious medical conditions, pregnant women, juveniles, witnesses, or in cases where detention ""is not in the public interest""). But aliens apprehended within the United States following entry without inspection who are placed in formal removal proceedings are not subject to mandatory detention, and may seek review of a custody determination before an IJ. As noted above, detention is generally mandatory pending expedited removal proceedings (including during any credible fear determination), and arriving aliens placed in formal removal proceedings are also subject to detention. However, a 1997 court settlement agreement (the "" Flores Settlement"") generally limits the period of time in which an alien minor may be detained by DHS. Among other things, the settlement agreement requires DHS to transfer within days (subject to exception) a detained alien minor to the custody of a qualifying adult or a nonsecure facility that is licensed by the state to provide residential, group, or foster care services for dependent children. Further, in 2016, the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit) ruled that the Flores Settlement applies to both accompanied and unaccompanied minors. Although the court also held that the Flores Settlement does not require DHS to release parents along with their children, the effect of the agreement has been that DHS typically will release family units pending their removal proceedings given the difficulties of separating families who may be subject to removal. As a practical matter, DHS would face difficulties locating other relatives or licensed programs to accept the children while their parents remain in detention. Additionally, a federal district court has ruled that a ""government practice of family separation without a determination that the parent was unfit or presented a danger to the child"" likely violates due process. Therefore, while DHS has broad detention authority over aliens seeking admission into the United States, the agency's ability to detain minors and their accompanying relatives is notably restricted. Table 3 shows the different detention and parole requirements for applicants for admission subject to expedited removal. While the INA authorizes the detention of aliens pending proceedings to determine whether they should be removed, the duration of such detention has been the subject of litigation. Previously, the Ninth Circuit upheld an injunction requiring DHS to provide aliens detained under INA Sections 235(b), 236(a), and 236(c) with individualized bond hearings after six months' detention. The Ninth Circuit had expressed concern that these statutes, if construed to permit the indefinite detention of aliens pending removal proceedings, would raise ""serious constitutional concerns."" The court acknowledged that the constitutional concerns raised by extended periods of detention generally involved aliens within the United States, and that reviewing courts had typically considered aliens seeking initial admission into the country as having less due process protection. Nonetheless, the court believed that these constitutional concerns were pertinent to INA Section 235(b), despite this provision primarily addressing aliens seeking initial entry to the United States, because it could in some circumstances apply to returning LPRs who are entitled to more robust protections than aliens seeking initial entry into the United States. Accordingly, the Ninth Circuit ruled that INA Sections 235(b), 236(a), and 236(c) ""should be construed through the prism of constitutional avoidance"" as containing implicit time limitations. In Jennings v. Rodriguez , the Supreme Court reversed the Ninth Circuit's decision, rejecting as ""implausible"" the lower court's construction of INA Sections 235(b), 236(a), and 236(c) as containing implicit time limitations. The Court reasoned that both INA Sections 235(b) and 236(c) were textually clear in generally requiring the detention of covered aliens during removal proceedings, and that nothing in INA Section 236(a) required bond hearings after an alien was detained under that authority. The Court remanded the case to the Ninth Circuit to address, in the first instance, the plaintiffs' constitutional claim that their indefinite detention under these provisions violated their due process rights. Therefore, while the Supreme Court has upheld DHS's statutory authority to detain aliens potentially indefinitely pending their removal proceedings, the Court has left unresolved the issue of whether such detention is constitutionally permissible. An alien who is in expedited removal proceedings generally has no right to a hearing or administrative appeal of an immigration officer's determination that he should be removed from the United States. In addition to these restrictions, the alien has no statutory right to seek judicial review of the expedited order of removal except in limited circumstances. Under Section 242 of the INA, the federal courts of appeals generally have jurisdiction to review a final order of removal, and a petition for review may be filed in the circuit court in the jurisdiction where the Immigration Court proceedings were completed. INA Section 242(a)(2)(A), however, expressly precludes judicial review of an expedited order of removal unless the alien's claim falls within one of the exceptions referenced in INA Section 242(e). The jurisdictional bar applies to claims that an immigration officer improperly placed an alien in expedited removal proceedings; challenges to an immigration officer's credible fear determination; arguments challenging the procedures and policies implemented by DHS to expedite removal; and claims contesting the expedited removal order itself. Additionally, although INA Section 242(a)(2)(D) typically grants the courts jurisdiction to review constitutional claims or questions of law raised in a petition for review that would otherwise be foreclosed on jurisdictional grounds, this provision does not apply to petitions challenging expedited removal orders. The statutory bar to review of an expedited order of removal, however, is not without any exception. There are limited circumstances where an alien may seek review of an expedited order of removal. Under INA Section 242(e)(2), an alien subject to an expedited order of removal may challenge the underlying order in a habeas corpus proceeding. The district court's jurisdiction, however, is strictly limited to the following three narrow issues: 1. whether the petitioner in the habeas action is an alien; 2. whether the petitioner was ordered removed under INA Section 235(b)(1)'s expedited removal provisions; and 3. whether the petitioner can prove by a preponderance of the evidence that he is an LPR, that he has been admitted as a refugee, or that he has been granted asylum. INA Section 242(e)(5) provides that, in reviewing whether the petitioner was ordered removed under the expedited removal provisions, the district court's inquiry ""shall be limited to whether such an order in fact was issued and whether it relates to the petitioner."" However, ""[t]here shall be no review of whether the alien is actually inadmissible or entitled to any relief from removal."" If the court determines that the petitioner is an alien who was not ordered removed under the expedited removal statute, or that he was lawfully admitted for permanent residence, admitted as a refugee, or granted asylum, ""the court may order no remedy or relief other than to require that the petitioner be provided a hearing"" in formal removal proceedings under Section 240 of the INA. Further, the alien may seek judicial review of any final order of removal issued in those proceedings. Under INA Section 242(e)(3), an alien subject to an expedited order of removal may challenge the validity of the expedited removal system by filing a lawsuit in the U.S. District Court for the District of Columbia. The district court's review, however, is limited to determining one of the following issues: 1. whether the expedited removal statute or its implementing regulations is constitutional; or 2. whether a regulation, written policy directive, written policy guideline, or written procedure issued by DHS to implement expedited removal is consistent with the statute or other laws. A lawsuit raising a systemic challenge to expedited removal must be brought within 60 days after implementation of the challenged statutory provision, regulation, directive, guideline, or procedure. The D.C. District Court has held that the 60-day requirement ""is jurisdictional rather than a traditional limitations period,"" and, therefore, the period runs from the initial implementation of the challenged provision or policy, rather than from the date they were applied to a particular alien. Finally, an alien challenging the validity of the expedited removal system may file a notice of appeal within 30 days of the district court's order. The statute instructs the appellate courts to conduct review in an expedited manner. In some cases, an alien who is criminally charged with unlawful reentry after removal may collaterally challenge an expedited order of removal. Under INA Section 276, an alien who ""has been denied admission, excluded, deported, or removed or has departed the United States while an order of exclusion, deportation, or removal is outstanding,"" and subsequently ""enters, attempts to enter, or is at any time found in, the United States"" shall be subject to criminal penalty. The INA provides that, in prosecutions for unlawful reentry, the courts do not have jurisdiction to consider any claim challenging the validity of an expedited order of removal, including a determination that an alien failed to show a credible fear of persecution. In United States v. Mendoza-Lopez , however, the Supreme Court held that an alien who is prosecuted for unlawful reentry may challenge the validity of an underlying removal order during his criminal proceedings if the removal proceeding ""effectively eliminates the right of the alien to obtain judicial review"" of that order. The Court reasoned that ""where a determination made in an administrative proceeding is to play a critical role in the subsequent imposition of a criminal sanction, there must be some meaningful review of the administrative proceeding."" The Court thus declared that, at a minimum, ""where the defects in an administrative proceeding foreclose judicial review of that proceeding, an alternative means of obtaining judicial review must be made available before the administrative order may be used to establish conclusively an element of a criminal offense."" In response to the Supreme Court's decision, Congress enacted a new clause to the unlawful reentry statute, which provides that an alien charged with unlawful reentry may challenge the validity of an underlying removal order if (1) he exhausted any administrative remedies that may have been available to seek relief against the order; (2) the prior removal proceedings in which the order was issued deprived the alien of the opportunity to seek judicial review; and (3) the entry of the order was ""fundamentally unfair."" Subsequently, the Ninth Circuit determined that ""the principle established by Mendoza-Lopez is equally applicable in the expedited removal order context."" The Ninth Circuit ruled that the Supreme Court's rationale that aliens must have ""some meaningful review"" of their underlying removal orders if they serve as a basis for criminal prosecution is applicable to a criminal defendant ""regardless of whether the defendant was a nonadmitted alien or an alien in the United States when the removal order was issued."" The Ninth Circuit thus held that a defendant charged with the crime of unlawful reentry may challenge an expedited removal order that serves as the basis for prosecution if he contends that the expedited removal order is ""fundamentally unfair."" According to the Ninth Circuit, an expedited removal proceeding is ""fundamentally unfair"" if it deprives the alien of due process and results in prejudice. The Ninth Circuit, for example, has determined that expedited removal proceedings are fundamentally unfair if the immigration officer failed to obtain interpretative assistance, provide the alien with notice of the charge and nature of the proceedings, and afford the alien an opportunity to review his sworn statement—as DHS regulations require. In sum, the INA generally limits the ability of an alien to challenge an underlying expedited removal order in a subsequent criminal prosecution for unlawful reentry in violation of the order. That order can be challenged only in limited circumstances, primarily centering on whether the entry of the order was ""fundamentally unfair."" Given its summary nature and comparatively limited procedural protections, the expedited removal process has been subject to legal challenges since its implementation in 1997. However, in part because of the strict limitations to judicial review of an expedited order of removal, courts have largely dismissed such challenges for lack of jurisdiction, or, in the few occasions where courts have entertained such challenges, rejected them on substantive grounds. Nevertheless, these cases raise important issues concerning the breadth and scope of the expedited removal statute and the constitutionality of its provisions. In 1997, shortly after IIRIRA's implementation, a group of immigrant assistance organizations and aliens who had been removed challenged the new expedited removal statute and regulations in the federal district court for the District of Columbia. In American Immigration Lawyers Association v. Reno , the plaintiffs argued, among other things, that the expedited removal procedures offered insufficient protections for aliens seeking entry into the United States because they did not afford an opportunity to consult with family or counsel during that process, or to contest and seek further review of an expedited removal order. The plaintiffs also claimed that the expedited removal procedures violated aliens' due process rights because those aliens could be erroneously removed from the country without additional protections provided in formal removal proceedings. The district court held that the limited protections afforded by the expedited removal statute reasonably ""advance[d] Congress's twin goals of creating a fair yet expedited process,"" and fell well within the statute's command that an alien be summarily removed ""without further hearing or review."" The court also cited Congress's broad legislative authority over the admission of aliens, and the ""long-standing precedent"" that aliens seeking to enter the United States—including those detained just within the border—have no constitutional due process protections concerning their applications for admission, apart from what Congress provided by statute. The plaintiffs appealed the district court's order to the D.C. Circuit. In a published decision, the D.C. Circuit affirmed the dismissal of the plaintiffs' complaints ""substantially for the reasons stated in the [district] court's thorough opinion."" The court also held that the organizational plaintiffs lacked standing to challenge the expedited removal procedures because there was nothing in the statute governing judicial review of an expedited order of removal that permitted litigants to bring claims on behalf of aliens subject to expedited removal. Although the U.S. District Court for the District of Columbia rejected a legal challenge to the expedited removal system itself, some courts have addressed challenges to the application of expedited removal in individual cases. Despite the jurisdictional limitations governing review of expedited removal orders, courts have entertained such challenges in a few notable cases. The majority of reviewing courts, however, have dismissed such challenges based on jurisdictional limitations. For example, a federal district court in Michigan held that INA Section 242(e)(2) allowed the court to consider in habeas corpus proceedings whether the expedited removal statute was ""lawfully applied"" to the petitioners. Because INA Section 242(e)(2) permits judicial inquiry in habeas proceedings into ""whether the petitioner was ordered removed"" under the expedited removal statute, the district court determined it could consider ""whether such an order in fact was issued and whether it relates to the petitioner."" Such review, the court reasoned, necessarily entails a determination by a reviewing court of whether the expedited order was ""lawfully applied"" to the alien. Applying this standard, the court struck down the implementation of expedited removal to a group of Lebanese nationals who had entered the United States with fraudulent advance parole documents because they were not ""arriving aliens"" subject to the statute. In a separate case, the Third Circuit disagreed with the Michigan federal district court's determination that judicial review in habeas proceedings of whether an expedited removal order ""relates to the petitioner"" includes consideration of whether the order was ""lawfully applied."" The Third Circuit found that this construction of the statute was ""not just unsupported, but also flatly contradicted by the plain language of the [expedited removal] statute itself,"" which explicitly bars judicial review of the application of expedited removal to individual aliens. Similarly, the Fifth Circuit has held that a district court in habeas proceedings could not consider whether the agency properly applied the expedited removal statute to an alien. The court observed that the statutory language permitting habeas review of ""whether the petitioner was ordered removed"" expressly limits such inquiry to ""whether such an order in fact was issued and whether it relates to the petitioner,"" and that ""the matter ends there."" Outside of the habeas context, some courts have exercised jurisdiction to review expedited removal orders that served as predicates for unlawful reentry prosecutions under INA Section 276. As discussed in the preceding section, the Ninth Circuit has held that, under INA Section 276(d), a court may review whether an alien's underlying expedited removal proceedings were ""fundamentally unfair"" when the resulting expedited removal order serves as a basis for the unlawful reentry prosecution. Applying this standard, the court found that an arriving alien's contention that his expedited removal violated his right to counsel lacked merit because nonadmitted aliens have no right to representation, and ""are entitled only to whatever process Congress provides."" By contrast, in another unlawful reentry case, the Ninth Circuit held that an alien was entitled to due process during his expedited removal proceedings because he was already within the United States when he was apprehended, and that the immigration officer's failure to provide the alien notice of his inadmissibility charge and an opportunity to review his sworn statement violated due process. Apart from habeas and criminal reentry cases, the courts have addressed challenges to expedited removal orders raised in petitions for review filed directly with the federal courts of appeals. In these cases, the petitioners have argued that their expedited removal proceedings violated their right to due process because they were detained, had no right to counsel, and did not have an opportunity to contest their charges of inadmissibility. As discussed in this report, an alien subject to a final order of removal generally may file a petition for review of that order in the judicial circuit where the administrative removal proceedings were completed. The courts of appeals, however, have dismissed petitions for review challenging expedited removal orders, citing INA Section 242(a)(2)(A)'s language barring judicial review of claims arising in the context of expedited removal proceedings. The courts have further determined that, although INA Section 242(a)(2)(D) restores jurisdiction to review constitutional claims or questions of law raised in a petition for review that is otherwise subject to jurisdictional limitations, this exception does not apply to the statutory provisions barring judicial review of an expedited removal order. Although some courts have expressed concern that the expedited removal process is ""fraught with risk of arbitrary, mistaken, or discriminatory behavior,"" reviewing courts have nonetheless ruled that they are not ""free to disregard jurisdictional limitations"" imposed by statute on the review of expedited removal orders. Since the enactment of the expedited removal statute, immigration authorities have implemented expedited removal with respect to three overarching categories of aliens: (1) those who arrive in the United States at a designated port of entry; (2) those who arrived in the United States by sea, and who have been in the country for less than two years; and (3) those found within 100 miles of the U.S. border, within 14 days of entering the country. The overwhelming majority of aliens subject to expedited removal, in other words, have been inspected or apprehended at a designated port of entry or near the international border when attempting to enter, or shortly after entering, the United States. But as previously discussed, the expedited removal statute permits the Secretary of DHS to apply expedited removal to any alien inadmissible due to a lack of entry documents or because he sought to obtain entry through fraud or misrepresentation, regardless of the alien's location, provided that the alien has not been admitted or paroled and has been in the country for less than two years. Thus, DHS has the statutory authority to expand expedited removal on a much larger geographic and temporal scale. To that end, on January 25, 2017, President Trump issued an executive order directing the DHS Secretary to apply expedited removal within the broader framework of INA Section 235(b)(1). Less than a month later, then-DHS Secretary John Kelly announced a series of border security and immigration enforcement initiatives. Among other measures, Secretary Kelly announced that ""[t]o ensure the prompt removal of aliens apprehended soon after crossing the border illegally, the Department will publish in the Federal Register a new Notice Designating Aliens Subject to Expedited Removal Under [INA] Section 235(b)(1)(a)(iii),"" which may ""depart from the limitations set forth in the designation currently in force."" As reasons for this policy change, Secretary Kelly pointed to a ""surge of illegal immigration at the southern border,"" a ""historic backlog"" of immigration court cases, and an increase in the number of apprehensions between ports of entry on the southern border. In response, some immigrant rights advocates reportedly ""denounced the proposed expansion ... warning that the policy would strip more immigrants of due process rights to seek asylum or other legal protections that would allow them to remain in the country."" While federal statute clearly confers DHS with authority to employ expedited removal in a broader fashion, extending the process to aliens away from the border or its functional equivalent would likely prompt legal challenge. As previously discussed, the Supreme Court has long recognized that, while aliens seeking entry into the United States have no constitutional rights regarding their applications for admission, aliens who have entered the United States, even unlawfully, are entitled to some due process protections before they can be removed. Such due process protections typically involve the right to a hearing and a meaningful opportunity to be heard. As discussed in this report, an alien subject to expedited removal has no right to a hearing or further review of a determination that he should be removed from the United States. Thus, expanding expedited removal to cover aliens present in any part of the United States could come into conflict with these constitutional notions. Moreover, although some courts have, in light of the entry fiction doctrine, determined that aliens apprehended near the border may not avail themselves of these constitutional protections, the extent to which this principle may be applied to aliens in the interior, or who have developed ties to the United States, is far from certain. However, the Supreme Court, at times, has appeared to view admission into the United States by immigration authorities as the key factor that determines whether an alien is entitled to constitutional protections. For example, in Landon v. Plasencia , the Supreme Court stated that ""once an alien gains admission to our country and begins to develop the ties that go with permanent residence his constitutional status changes accordingly."" The Court has also suggested that the length of time that an alien has spent in the United States may inform the scope and degree of constitutional protections. These principles might support the argument that expedited removal can be applied on a wider basis to aliens within the interior of the United States who have been in the country for relatively short periods of time. But notwithstanding the language in Landon, the Supreme Court has continued to describe an alien's physical presence in the United States, whether lawful or unlawful, as the critical factor in assessing whether due process attaches. Therefore, if DHS undertakes a future expansion of expedited removal, the courts may be confronted with further challenges to the agency's implementation of that procedure down the road. Until now, courts have addressed such challenges only within the confines of enforcement actions at or near the border. If DHS implements expedited removal on a broader scale throughout the United States, the courts may need to address critical questions concerning the scope of the federal government's plenary power over the admission of aliens, and the limits of that ""sovereign prerogative"" with respect to aliens already present in the United States. Appendix A. Glossary Appendix B. Implementation and Expansion of Expedited Removal: 1997-2017 The following discussion is a more comprehensive overview of the Executive's implementation and expansion of expedited removal following the passage of IIRIRA in 1996. Arriving Aliens Initially, the former INS limited the application of its expedited removal authority to aliens arriving in the United States. In order to clarify the scope of the term ""arriving alien,"" the INS issued regulations that defined the term to include aliens seeking admission into the United States at a port of entry, aliens seeking transit through the United States at a port of entry, and aliens who have been interdicted at sea and brought into the United States ""by any means, whether or not to a designated port-of-entry, and regardless of the means of transport."" In response to opposition to the inclusion of aliens interdicted at sea in the definition of ""arriving alien,"" the INS pointed to BIA precedent holding that ""the mere crossing into the territorial waters of the United States has never satisfied the test of having entered the United States,"" and reasoned that ""[a]liens who have not yet established physical presence on land in the United States cannot be considered as anything other than arriving aliens."" Furthermore, the INS declared, ""[t]he inclusion of aliens interdicted at sea in the definition of arriving alien will support the Department's mandate to protect the nation's borders against illegal immigration."" The INS further determined that ""[a]n arriving alien remains an arriving alien even if paroled pursuant to INA Section 212(d)(5), and even after any such parole is terminated or revoked."" The INS explained that the inclusion of paroled aliens was based on the language of INA Section 212(d)(5), which indicated that the parole of an alien did not constitute an admission into the United States, and that the alien would be considered an applicant for admission once the purpose of the parole had been served. Looking ahead, the INS ""reserve[d] the right to apply expedited removal procedures to additional classes of aliens within the limits set by the statute , if, in the Commissioner's discretion, such action is operationally warranted."" This expanded category of aliens, the INS explained, ""may be localized, in response to specific needs within a particular region, or nationwide, as appropriate."" The agency declared that ""a proposed expansion of the expedited removal procedures may occur at any time and may be driven either by specific situations such as a sudden influx of illegal aliens motivated by political or economic unrest or other events or by a general need to increase the effectiveness of enforcement operations at one or more locations."" The INS, however, recognized that expanding the reach of expedited removal would ""involve more complex determinations of fact and will be more difficult to manage,"" and indicated that, for the time being, it would apply the new procedures ""on a more limited and controlled basis."" Therefore, upon IIRIRA's passage, the new expedited removal statute covered only arriving aliens in the United States, which, in turn, encompassed (1) aliens arriving at a port of entry, (2) aliens in transit at a port of entry, and (3) aliens interdicted at sea who have been brought into the United States. Nevertheless, at the outset, the INS's expedited removal authority ""dramatically affect[ed] the pool of persons subject to expedited procedures."" Criminal Aliens Held in Texas Correctional Facilities (Proposed but Not Implemented) In 1999, the INS considered, but ultimately did not implement, a ""pilot program"" that would have extended expedited removal to aliens who (1) had been convicted of unlawful entry; (2) had not been admitted or paroled into the United States, and had been physically present in the United States for less than two years; and (3) were serving criminal sentences in designated correctional facilities in Texas. To support its proposed expansion, the INS cited INA Section 235(b)(1)(A)(iii) and its implementing regulations, which gave it the authority to apply expedited removal to aliens who entered the United States without being admitted or paroled, and who have not been in the United States for at least two years. Citing a lack of detention space and an increase in the number of criminal alien apprehensions, the INS determined that a more effective procedure to remove aliens serving short criminal sentences was warranted. Despite this proposed expansion, neither the INS nor DHS implemented this policy. Aliens Who Arrived in the United States by Sea In 2002, the INS authorized expedited removal for a ""newly designated class"" of aliens: those who arrived in the United States by sea, ""either by boat or other means,"" and who (1) have not been admitted or paroled, and (2) have not been physically present in the United States for a continuous period of at least two years at the time of their apprehension. As it had done before, the INS cited INA Section 235(b)(1)(A)(iii) as the statutory authority for expanding expedited removal to aliens ""who arrive illegally by sea."" The INS noted that this expansion did not include aliens who arrived in the United States at a designated port of entry, or who were interdicted at sea and brought into the United States, because they were already subject to the expedited removal process for arriving aliens. In addition, the INS did not apply its expansion to Cuban nationals who arrived in the United States by sea because of the ""longstanding U.S. policy to treat Cubans differently from other aliens."" Therefore, apart from Cuban nationals, all aliens who unlawfully arrived by sea in the United States, in a location other than a port of entry, would now be subject to expedited removal, and, with limited exceptions, detained pending any determination as to whether they had a credible fear of persecution. The INS claimed that this expansion would ""assist in deterring surges in illegal migration by sea, including potential mass migration, and preventing loss of life."" The agency explained that ""[a] surge in illegal migration by sea threatens national security by diverting valuable U.S. Coast Guard and other resources from counterterrorism and homeland security responsibilities."" In addition, channeling the original legislative intent behind IIRIRA's amendments, the agency determined that its decision was ""necessary to remove quickly from the United States aliens who arrive illegally by sea and who do not establish a credible fear."" The INS thus announced that it would implement expedited removal for aliens who arrived in this country by sea on or after November 13, 2002. Aliens Unlawfully Present in the United States Within 100 Miles of the Border A few years later, in 2004, DHS (which had now replaced the INS) authorized CBP to implement expedited removal for aliens who were unlawfully present in the United States without being admitted or paroled, if (1) they were apprehended within 100 miles of the border, and (2) they had not been physically present in the United States for a continuous period of at least 14 days. As the statutory basis for this expansion, the agency again cited INA Section 235(b)(1)(A)(iii), which gave it the discretion to apply expedited removal to aliens who were physically present in the United States without being admitted or paroled, and who could not establish their continuous physical presence in this country for up to two years. In support of its decision to extend expedited removal to border areas, DHS pointed to ""an urgent need to enhance [its] ability to improve the safety and security of the nation's land borders, as well as the need to deter foreign nationals from undertaking dangerous border crossings, and thereby prevent the needless deaths and crimes associated with human trafficking and alien smuggling operations."" DHS thus determined that expanding the reach of expedited removal to aliens encountered shortly after they unlawfully entered the United States through the border would improve national security, ""increase the deterrence of illegal entries by ensuring that apprehension quickly leads to removal,"" and ""impair the ability of smuggling organizations to operate."" Ultimately, though, DHS limited its new designation of expedited removal to aliens who were neither nationals of Mexico nor Canada, and Mexican and Canadian nationals who had histories of criminal or immigration violations. With regard to non-Mexican and non-Canadian nationals (""third-country nationals""), DHS explained that there were logistical difficulties of initiating formal removal proceedings against nearly 1 million aliens apprehended each year, particularly along the southern border with Mexico, and that, while the majority of those aliens were Mexican nationals who could be ""voluntarily returned"" to Mexico without any formal removal process, aliens from other countries could not simply be returned to Mexico. Instead, they had to be detained pending arrangements for their return by aircraft, or pending formal removal proceedings. Given the agency's lack of resources to detain all third-country nationals, DHS explained, many of these aliens were released with instructions to appear for their removal proceedings, only to subsequently disappear in the United States. For these reasons, DHS had a greater incentive to apply expedited removal to third-country nationals in border areas, than it did for Mexican and Canadian nationals. On the other hand, given the agency's interest in improving national security and public safety, Mexican and Canadian nationals with prior criminal or immigration violations would be subject to expedited removal. DHS also limited the scope of its new expedited removal designation to border areas. The agency recognized that INA Section 235(b)(1)(A)(iii) did not geographically restrict expedited removal for aliens present in the United States without being admitted or paroled, and that the statute permitted expedited removal for aliens who could not establish their continuous physical presence in this country for up to two years. Nevertheless, the agency concentrated its enforcement resources ""upon unlawful entries that have a close spatial and temporal nexus to the border."" Therefore, instead of implementing expedited removal nationwide, DHS limited it to ""aliens who are apprehended immediately proximate to the land border and have negligible ties or equities in the U.S."" The agency determined that an area within 100 miles of the border was ""immediately proximate"" to the border ""because many aliens will arrive in vehicles that speedily depart the border area, and because other recent arrivals will find their way to near-border locales seeking transportation to other locations within the interior of the U.S."" DHS also cited to agency regulations that had already established that the 100-mile range was a ""reasonable distance"" from the external boundary of the United States. Accordingly, DHS limited its new application of expedited removal to aliens apprehended within 14 days after they entered the United States, and within 100 miles of any international land border. Aliens falling into this category would be detained pending their removal and any determination as to whether they feared persecution. Consistent with other expedited removal designations, however, DHS excluded Cuban nationals because their removal to Cuba ""[could not] presently be assured and for other U.S. policy reasons."" DHS indicated that it would implement expedited removal for aliens apprehended in border areas beginning on August 11, 2004. Based on this latest expansion, DHS could now apply its expedited removal authority not only to aliens who arrived in the United States at ports of entry or by sea, but also to aliens who were encountered within this country's border regions between ports of entry. Expansion to Entire Southwest Border Initially, DHS limited the implementation of its new expedited removal authority to parts of the southwestern United States, specifically the border sectors of Tucson, Arizona; Yuma, Arizona; McAllen, Texas; Laredo, Texas; San Diego, California; and El Centro, California. On September 14, 2005, DHS announced the expansion to three additional border sectors in Del Rio, TX; Marfa, TX; and El Paso, TX—thereby implementing the policy across the entire Southwest border. Former Secretary of Homeland Security Michael Chertoff, who headed the agency at the time, declared that the expansion ""gives Border Patrol agents the ability to gain greater control of our borders and to protect our country against the terrorist threat."" Further, according to DHS, the expedited removal process ""will disrupt the vicious human smuggling cycle that occurs along the southwest border."" Following the announcement, DHS implemented expedited removal along the entire land border with Mexico. Expansion to Entire U.S. Border A few months later, on January 30, 2006, DHS announced the implementation of expedited removal along the entire U.S.-Canadian border and all U.S. coastal areas. Noting decreased unlawful border crossings since expedited removal began in the southwestern United States, Secretary Chertoff asserted that expanding the process along all borders ""will provide DHS agents and officers with an additional tool to protect our nation's boundaries and quickly remove those who entered our country illegally."" According to the agency, expedited removal had proven to be ""an effective border management process that swiftly returns illegal aliens to their countries of origin while maintaining protections for those who fear persecution."" DHS also pointed to the disruption of ""human smuggling cycles"" as a factor warranting the expansion of expedited removal. Therefore, with this expansion in place, DHS could now implement expedited removal in the northern border sectors of Blaine, WA; Spokane, WA; Havre, MT; Grand Forks, ND; Detroit, MI; Buffalo, NY; Swanton, VT; and Houlton, ME. Cuban Nationals Arriving in the United States On July 20, 2015, the United States formally restored diplomatic relations with Cuba. In addition, on January 12, 2017, former President Barack Obama announced an end to the long-standing ""wet-foot, dry-foot"" policy, which allowed Cubans who arrived on American soil the right to remain in the United States and apply for lawful permanent resident status, while those who were detained at sea were returned to Cuba. In response to the restoration of diplomatic relations, DHS eliminated the exception to expedited removal for Cuban nationals who arrive in the United States at a designated port of entry by aircraft. The agency observed, moreover, that the policy justifications for exempting Cuban nationals were no longer valid given Cuba's agreement to facilitate the return of Cuban nationals ordered removed from the United States. In addition, DHS determined that ""a significant increase in attempts by Cuban nationals to illegally enter the United States"" meant that an exception for Cuban nationals would significantly undermine efforts to remove aliens who had no authorization to be in this country. Therefore, Cuban nationals who arrived in the United States at a designated port of entry by aircraft were now subject to expedited removal. DHS additionally eliminated the exception for Cuban nationals who arrive in the United States by sea, who have not been admitted or paroled, and who have not been physically present in this country for less than two years. DHS also removed the exception for Cuban nationals who are encountered within 100 miles of the border, who have not been admitted or paroled, and who have not been in the United States for less than 14 days. The agency again cited the restoration of diplomatic relations between the United States and Cuba and other ""significant changes"" in the relationship between the two countries as factors that warranted a change in policy that ""reflect[ed] these new realities."" Therefore, regardless of the manner in which they came to the United States, Cuban nationals were now subject to expedited removal if they met the statutory criteria for that process.","The federal government has broad authority over the admission of non-U.S. nationals (aliens) seeking to enter the United States. The Supreme Court has repeatedly held that the government may exclude such aliens without affording them the due process protections that traditionally apply to persons physically present in the United States. Instead, aliens seeking entry are entitled only to those procedural protections that Congress has expressly authorized. Consistent with this broad authority, Congress established an expedited removal process for certain aliens who have arrived in the United States without permission. In general, aliens whom immigration authorities seek to remove from the United States may challenge that determination in administrative proceedings with attendant statutory rights to counsel, evidentiary requirements, and appeal. Under the streamlined expedited removal process created by the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 and codified in Section 235(b)(1) of the Immigration and Nationality Act (INA), however, certain aliens deemed inadmissible by an immigration officer may be removed from the United States without further administrative hearings or review. INA Section 235(b)(1) applies only to certain aliens who are inadmissible into the United States because they either lack valid entry documents or have attempted to procure their admission through fraud or misrepresentation. The statute generally permits the government to summarily remove those aliens if they are arriving in the United States. The statute also authorizes, but does not require, the government to apply this procedure to aliens who are inadmissible on the same grounds if they have been physically present in the country for less than two years. As a matter of practice, however, immigration authorities have applied expedited removal in more limited fashion than potentially authorized by statute—in general, the process is applied strictly to (1) arriving aliens apprehended at a designated port of entry; (2) aliens who arrived in the United States by sea without being admitted or paroled into the country by immigration authorities, and who have been physically present in the United States for less than two years; or (3) aliens who are found in the United States within 100 miles of the border within 14 days of entering the country, who have not been admitted or paroled into the United States by immigration authorities. Nevertheless, expedited removal accounts for a substantial portion of the alien removals each year. And in January 2017, President Trump issued an executive order directing the Department of Homeland Security to expand expedited removal within the broader framework of INA Section 235(b)(1). The agency has yet to promulgate regulations implementing this directive. In some circumstances, however, an alien subject to expedited removal may be entitled to certain procedural protections before he may be removed from the United States. For example, an alien who expresses a fear of persecution may obtain administrative review of his claim, and if his fear is determined credible the alien will be placed in formal removal proceedings where he can pursue asylum and related protections. Additionally, an alien may seek administrative review of a claim that he is a U.S. citizen, lawful permanent resident, admitted refugee, or asylee. Unaccompanied alien children also are statutorily exempted from expedited removal. Given the streamlined nature of expedited removal and the broad discretion afforded to immigration officers to implement that process, challenges have been raised contesting the procedure's constitutionality. In particular, some have argued that the procedure violates aliens' due process rights because aliens placed in expedited removal do not have the opportunity to seek counsel or contest their removal before a judge or other arbiter. Reviewing courts have largely dismissed such challenges for lack of jurisdiction, or, in the alternative, rejected the claims on the grounds that aliens seeking entry into the United States generally do not have constitutional due process protections. But such cases have concerned aliens arriving at the U.S. border or designated ports of entry, and such aliens may be entitled to lesser constitutional protections than aliens located within the United States. Expanding the expedited removal process to aliens located within the interior could compel courts to tackle questions involving the relationship between the federal government's broad power over the entry and removal of aliens and the due process rights of aliens located within the United States.",govreport
"D uring the New York debates ratifying the U.S. Constitution, Alexander Hamilton commented that ""the true principle of a republic is, that the people should choose whom they please to govern them."" This principle is embodied in congressional redistricting, the drawing of district boundaries from which the people choose their representatives to the U.S. House of Representatives. Prior to the 1960s, court challenges to redistricting plans were considered non-justiciable political questions that were most appropriately addressed by the political branches of government, not the judiciary. In 1962, in the landmark ruling of Baker v. Carr , the Supreme Court pivoted and held that a constitutional challenge to a redistricting plan was not a political question and was justiciable. Since then, a series of constitutional and legal challenges have significantly shaped how congressional districts are drawn. Furthermore, recent and pending Supreme Court cases will likely continue to impact the process of congressional redistricting, and the degree to which challenges to redistricting plans will be successful. For example, the Supreme Court recently clarified how a court should evaluate whether race was a predominant factor in the development of a redistricting plan when considering a Fourteenth Amendment equal protection claim. It also recently upheld, under the Elections Clause, an Arizona constitutional provision, enacted by initiative, which established an independent commission for drawing congressional districts. During the 2015 Supreme Court term, the Court is continuing to focus on redistricting. In April 2016, the Court ruled that states may draw their legislative districts based on total population rather than based on eligible or registered voters. In addition, as of the date of this report, two redistricting cases are currently pending before the Court: one case presents the question of whether partisanship can justify differences in population in the context of state legislative redistricting; another case presents the question of whether, in proving that race was a predominant factor in the creation of a redistricting plan, challengers must demonstrate that considerations of race predominated over politics. This report first examines key constitutional and federal statutory requirements applicable to congressional redistricting, including the standard for equality of population among districts, and the Voting Rights Act (VRA). It then analyzes case law interpreting the constitutional requirement of congressional district equality—the ""one person, one vote"" standard—including the degree to which districts must be drawn to achieve exact population equality. It also explores the unsettled question of whether partisanship can justify differences in population, which the Supreme Court is considering in the pending case of Harris v. Arizona Independent Redistricting Commission . Then, it discusses the question of who should be counted for the purposes of achieving equality among districts, focusing on the Court's recent ruling in Evenwel v. Abbott . Next, it examines the application of Section 2 of the VRA to congressional redistricting, and relatedly, limits to VRA compliance under the Fourteenth Amendment. This section includes discussion of a pending Supreme Court case, Wittman v. Personhuballah, regarding what challengers must demonstrate in proving that race was a predominant factor in the creation of a redistricting plan. Case law in this area demonstrates a tension between compliance with the VRA and conformance with standards of equal protection. The report then addresses the Court's 2015 ruling in Arizona State Legislature v. Arizona Independent Redistricting Commission , upholding an Arizona constitutional provision—enacted through initiative—that established an independent commission for drawing congressional districts. Finally, the report provides an overview of selected legislation in the 114 th Congress that would establish additional statutory requirements and standards for congressional redistricting. The legal framework for congressional redistricting involves, in addition to various state processes, both constitutional and federal statutory requirements, and case law interpretations of each. The Elections Clause of the Constitution, Article I, Section 4, clause 1, provides that the times, places, and manner of holding congressional elections be prescribed in each state by the legislature thereof, but that Congress may at any time make or alter such laws. Article I, Section 2, clause 3 requires a count of the U.S. population every 10 years, and based on the census, requires apportionment of seats in the House of Representatives among the states, with each state entitled to at least one Representative. A federal statute requires that apportionment occur every 10 years. In order to comport with the constitutional standard of equality of population among districts, discussed below, at least once every 10 years, in response to changes in the number of Representatives apportioned to it or to shifts in its population, most states are required to draw new boundaries for its congressional districts. The Supreme Court has interpreted the Constitution to require that each congressional district within a state contain approximately the same population. This requirement is known as the ""equality standard"" or the principle of ""one person, one vote."" In 1964, in Wesberry v. Sanders , the Supreme Court interpreted Article I, Section 2, clause 1 of the Constitution, which states that Representatives be chosen ""by the People of the several States"" and ""apportioned among the several States ... according to their respective Numbers,"" to require that ""as nearly as is practicable, one man's vote in a congressional election is to be worth as much as another's."" With regard to state legislative redistricting, later that year, the Court issued its ruling in Reynolds v. Sims . In Reynolds , the Supreme Court held that the one person, one vote standard also applied in the context of state legislative redistricting, holding that the Equal Protection Clause requires all who participate in an election ""to have an equal vote."" Congressional districts must be drawn consistent with the Voting Rights Act (VRA). The VRA was enacted under Congress's authority to enforce the Fifteenth Amendment, providing that the right of citizens to vote shall not be denied or abridged on account of race, color, or previous servitude. In a series of cases and evolving jurisprudence, the U.S. Supreme Court has interpreted how the VRA applies in the context of congressional redistricting. Congressional district boundaries in every state are required to comply with Section 2 of the VRA. Section 2 provides a right of action for private citizens or the government to challenge discriminatory voting practices or procedures, including minority vote dilution, the diminishing or weakening of minority voting power. Specifically, Section 2 prohibits any voting qualification or practice—including congressional redistricting plans—applied or imposed by any state or political subdivision that results in the denial or abridgement of the right to vote based on race, color, or membership in a language minority. The statute further provides that a violation is established if, based on the totality of circumstances, electoral processes are not equally open to participation by members of a racial or language minority group in that its members have less opportunity than other members of the electorate to elect representatives of their choice. Based on this legal framework, this report next analyzes legal issues that arise in the context of congressional redistricting, addressing: the extent to which precise or ideal mathematical population equality among districts is required; whether partisanship justifies small differences in population between districts; whether the total population or eligible voters should be counted for the purposes of achieving equality among districts; when creation of a majority-minority district is required under the VRA; what limits the Fourteenth Amendment places upon congressional redistricting; and who is authorized to draw and implement a redistricting plan. In a series of cases since 1964, the Supreme Court has described the extent to which precise or ideal mathematical population equality among districts is required. Ideal or precise equality is the average population that each district would contain if a state population were evenly distributed across all districts. The total or ""maximum population deviation"" refers to the percentage difference from the ideal population between the most populated district and the least populated district in a redistricting map. It is important to note that for congressional districts, less deviation from precise equality has been found to be permissible than for state legislative districts. For example, in Kirkpatrick v. Preisler , the Supreme Court invalidated a congressional redistricting plan where the district with the greatest population was 3.13% over the equality ideal, and the district with the lowest population was 2.84% below it. The Court considered the maximum population deviation of 5.97% to be too great to comport with the ""as nearly as practicable"" standard set forth in Wes berry . Further, in Karcher v. Dagett , the Court held that ""absolute"" population equality is the standard for congressional districts unless a deviation is necessary to achieve ""some legitimate state objective."" These include ""consistently applied legislative policies"" such as achieving greater compactness, respecting municipal boundaries, preserving prior districts, and avoiding contests between incumbents. In Karcher , the Court rejected a 0.6984% deviation in population between the largest and the smallest district. More recently, in Tennant v. Jefferson County Commission , the Court further clarified that the ""as nearly as is practicable"" standard does not require congressional districts to be drawn with precise mathematical equality, but instead requires states to justify population deviation among districts with ""legitimate state objectives."" Relying on Karcher , the Court outlined a two-prong test to determine whether a congressional redistricting plan passes constitutional muster. First, the challengers have the burden of proving that the population differences could have been practicably avoided. Second, if successful, the burden shifts to the state to demonstrate ""with some specificity"" that the population differences were needed to achieve a legitimate state objective. The Court emphasized that this burden is ""flexible,"" and depends on the size of the population deviations, the importance of the state's interests, the consistency with which the plan reflects those interests, and whether alternatives exist that might substantially serve those interests while achieving greater population equality. In Tennant , the Court determined that avoiding contests between incumbents, maintaining county boundaries, and minimizing population shifts between districts were neutral, valid state policies that warranted the relatively minor population disparities. The Court also determined that none of the alternative redistricting plans that achieved greater population equality came as close to vindicating the state's legitimate objectives. Therefore, the Court upheld the 0.79% maximum population deviation between the largest and smallest congressional district. As discussed above, Supreme Court case law has permitted state legislative districts a greater deviation from precise equality than congressional districts. Nonetheless, such deviation can be found to be improper if it is motivated by partisanship. In Cox v. Larios , the Supreme Court summarily affirmed a district court decision striking down a state legislative redistricting plan, with a maximum population deviation of 9.9%, as a violation of the one-person, one-vote principle of the Equal Protection Clause. (A summary affirmance does not necessarily signal that the Court agrees with the district court's reasoning in this case, just the result.) Among other things, the district court held that the plan was intentionally designed for partisan purposes. Specifically, the district court determined that the plan allowed Democrats to maintain or increase their delegation by under-populating the districts held by incumbent Democrats, over-populating those held by Republicans, and deliberately pairing numerous Republican incumbents in districts to run against one another. During the 2015 term, the Supreme Court has the opportunity to clarify the scope of the Larios decision. In Harris v. Arizona Independent Redistricting Commission , the Court is considering whether partisan goals can justify the drawing of state legislative districts that deviate from the principle of population equality. This case also presents the Court with an opportunity to address whether the goal of obtaining preclearance under the VRA justified the creation of unequal districts, and if so, whether that justification still exists in light of the Supreme Court's 2013 decision in Shelby County v. Holder rendering the preclearance requirement inoperable. Although this case is currently limited to addressing permissible deviations from precise population equality in the context of state legislative redistricting, a broad ruling by the Court might also impact congressional redistricting. A decision is expected by June 2016. The lower court in Harris held that population deviations among the state legislative districts primarily resulted from efforts to comply with the Voting Rights Act, and that even though partisanship played some role in the map's design, the Fourteenth Amendment challenge failed. Among other things, the three-judge district court panel held that bipartisan support for changes that lead to the population deviations undermine the notion that partisanship, rather than compliance with the Voting Rights Act, motivated the population deviations. Among the districts in the state legislative map, the district with the largest population is 4.1% above the ideal population, and the district with the smallest population is 4.7% below the ideal population, creating a maximum population deviation of 8.8%. While the Supreme Court has issued several decisions on the extent to which precise mathematical equality among districts is constitutionality required, until recently, it had not addressed who should be counted (i.e., total population, eligible voters, or some other measure of population) within districts in order to achieve such equality. It had left that determination to the states. When the Court refused to review a case presenting this issue in 2001, Justice Thomas dissented, arguing that the Court should settle the matter: ""[t]he one-person, one-vote principle may, in the end, be of little consequence if we decide that each jurisdiction can choose its own measure of population. But as long as we sustain the one-person, one-vote principle, we have an obligation to explain to States and localities what it actually means."" In April 2016, the Court addressed this issue. In Evenwel v. Abbott , a unanimous Supreme Court upheld, against a Fourteenth Amendment equal protection claim, a state's decision to draw its legislative districts based on total population. Notably, however, the Court declined to rule specifically on the constitutionality of a state drawing district lines based on some other measure of population, such as eligible or registered voters. Justice Ginsburg wrote the opinion for the Court, which was joined by five Justices; while concurring in the judgment, Justices Alito and Thomas wrote separate concurrences and did not join in Justice Ginsburg's opinion. The majority opinion in Evenwel relied on constitutional history, Court precedent, and longstanding practice in analyzing the question presented. First, the opinion pointed to the analogous determination made by the framers of the Constitution who decided that apportionment of seats in the U.S. House of Representatives was to be based on all inhabitants, not just voters, even though the states were free to deny many inhabitants the right to vote for such representatives. Likewise, the opinion noted, when it debated the Fourteenth Amendment, Congress reconsidered the proper basis for apportioning House seats, and expressly rejected allocation based on voter population. Therefore, the Court reasoned, ""[i]t cannot be that the Fourteenth Amendment calls for the apportionment of congressional districts based on total population, but simultaneously prohibits States from apportioning their own legislative districts on the same basis."" The Court also determined that Court precedent reinforces its holding. For example, the Court in Evenwel noted, in Reynolds , discussed above, it ""described 'the fundamental principle of representative government in this country' as 'one of equal representation for equal numbers of people.'"" Finally, the Court in Evenwel discussed the significance of the representational duties of legislators, emphasizing that they are elected to ""serve all residents, not just those eligible or registered to vote."" Nonvoters—including children—have an ""important stake"" in many legislative debates, and in receiving constituent services. Therefore, the Court concluded that drawing district lines based on the total population of inhabitants serves to promote equitable and effective legislative representation. In a concurrence, Justice Thomas reiterated his earlier observation that the Court's case law addressing the principle of one person, one vote lacks clarity, and criticized the majority for once again failing to provide a sound basis for the principle in this case. In Justice Thomas' view, the Constitution does not prescribe any one basis for drawing district lines, and states have ""wide latitude"" to decide whether to draw districts based on total population, eligible voters, or ""any other nondiscriminatory voter base."" If the Court had ruled differently in this case, that is, by requiring the drawing of district lines based on the number of eligible or registered voters, the consequences could have been significant. For example, some have argued that redistricting based on such populations could reduce the number of districts in densely inhabited urban areas, and increase the districts in more rural or suburban areas. It is important to note, however, that the Evenwel decision did not foreclose a state from choosing to use such a practice in the future. As the Court expressly announced, it did not resolve the question—as Texas had advocated in this case—of whether states may draw districts based on the population of eligible voters. The question resolved was only that states were not required to do so as opposed to using total population. Therefore, that question could come before the Court in a future case. Finally, although it does not appear that the Court's ruling in Evenwel affects congressional redistricting, and instead impacts only state legislative and local redistricting, arguments based on Evenwel could be relevant to congressional redistricting cases in the future. Under certain circumstances, the creation of one or more ""majority-minority"" districts may be required in a congressional redistricting plan. A majority-minority district is one in which a racial or language minority group comprises a voting majority. The creation of such districts can avoid racial vote dilution by preventing the submergence of minority voters into the majority, and the denial of an equal opportunity to elect candidates of choice. In the landmark decision Thornburg v. Gingles , the Supreme Court established a three-prong test that plaintiffs claiming vote dilution under Section 2 must prove: First, the minority group must be able to demonstrate that it is sufficiently large and geographically compact to constitute a majority in a single-member district.... Second, the minority group must be able to show that it is politically cohesive.... Third, the minority must be able to demonstrate that the white majority votes sufficiently as a bloc to enable it—in the absence of special circumstances, such as the minority candidate running unopposed—usually to defeat the minority's preferred candidate. The Court also discussed how, under Section 2, a violation is established if based on the ""totality of the circumstances"" and ""as a result of the challenged practice or structure plaintiffs do not have an equal opportunity to participate in the political processes and to elect candidates of their choice."" In order to facilitate determination of the totality of the circumstances, the Court listed the following factors, which originated in the legislative history accompanying enactment of Section 2: 1. the extent of any history of official discrimination in the state or political subdivision that touched the right of the members of the minority group to register, to vote, or otherwise to participate in the democratic process; 2. the extent to which voting in the elections of the state or political subdivisions is racially polarized; 3. the extent to which the state or political subdivision has used unusually large election districts, majority vote requirements, anti-single shot provisions, or other voting practices or procedures that may enhance the opportunity for discrimination against the minority group; 4. if there is a candidate slating process, whether the members of the minority group have been denied access to that process; 5. the extent to which members of the minority group in the state or political subdivision bear the effects of discrimination in such areas as education, employment and health, which hinder their ability to participate effectively in the political process; 6. whether political campaigns have been characterized by overt or subtle racial appeals; 7. the extent to which members of the minority group have been elected to public office in the jurisdiction. Further interpreting the Gingles three-prong test, in Bartlett v. Strickland , the Supreme Court ruled that the first prong of the test—requiring geographical compactness sufficient to constitute a majority in a district—can only be satisfied if the minority group would constitute more than 50% of the voting population if it were in a single-member district. In Bartlett , it had been argued that Section 2 requires drawing district lines in such a manner to allow minority voters to join with other voters to elect the minority group's preferred candidate, even where the minority group in a given district comprises less than 50% of the voting age population. Rejecting that argument, the Court held that Section 2 does not grant special protection to minority groups that need to form political coalitions in order to elect candidates of their choice. To mandate recognition of Section 2 claims where the ability of a minority group to elect candidates of choice relies upon ""crossover"" majority voters would result in ""serious tension"" with the third prong of the Gingles test. The third prong of Gingles requires that the minority be able to demonstrate that the majority votes sufficiently as a bloc to enable it usually to defeat the minority's preferred candidate. As the discussion above indicates, in certain circumstances, Section 2 can require the creation of one or more majority-minority districts in a congressional redistricting plan. By drawing such districts, a state can avoid racial vote dilution, and the denial of minority voters' equal opportunity to elect candidates of choice. As the Supreme Court has determined, minority voters must constitute a numerical majority—over 50%—in such minority-majority districts. However, as examined in the section below, there are constitutional limits on the creation of minority-majority districts. Congressional redistricting plans must also conform with standards of equal protection under the Fourteenth Amendment to the U.S. Constitution. According to the Supreme Court, if race is the predominant factor in the drawing of district lines, above other traditional redistricting considerations—including compactness, contiguity, and respect for political subdivision lines—then a ""strict scrutiny"" standard of review is applied. In this context, strict scrutiny review requires that a court determine that the state has a compelling governmental interest in creating a majority-minority district, and that the redistricting plan is narrowly tailored to further that compelling interest. These cases are often referred to as ""racial gerrymandering"" claims, in which plaintiffs argue that race was improperly used in the drawing of district boundaries. Case law in this area demonstrates a tension between compliance with the VRA and conformance with standards of equal protection. The Supreme Court has held that, to prevail in a racial gerrymandering claim, the plaintiff has the burden of proving that racial considerations were ""dominant and controlling"" in the creation of the districts at issue. In Easley v. Cromartie (Cromartie II) , the Supreme Court upheld the constitutionality of the long-disputed 12 th Congressional District of North Carolina against the argument that the 47% black district was an unconstitutional racial gerrymander. In this case, North Carolina and a group of African American voters had appealed a lower court decision holding that the district, as redrawn by the legislature in 1997 in an attempt to cure an earlier violation, was still unconstitutional. The Court determined that the basic question presented in Cromartie II was whether the legislature drew the district boundaries ""because of race rather than because of political behavior (coupled with traditional, nonracial redistricting considerations)."" In applying its earlier precedents, the Court determined that the party attacking the legislature's plan had the burden of proving that racial considerations are ""dominant and controlling."" Overturning the lower court ruling, the Supreme Court held that the attacking party did not successfully demonstrate that race, instead of politics, predominantly accounted for the way the plan was drawn. In the 2015 case of Alabama Legislative Black Caucus v. Alabama , the Court held that in determining whether race is a predominant factor in the redistricting process, and thereby whether strict scrutiny is triggered, a court must engage in a district-by-district analysis instead of analyzing the state as an undifferentiated whole. The Court further confirmed that in calculating the predominance of race, a court is required to determine whether the legislature subordinated traditional race-neutral redistricting principles to racial considerations. The ""background rule"" of equal population is not a traditional redistricting principle and therefore should not be weighed against the use of race to determine predominance, the Court held. In other words, the Court explained, if 1,000 additional voters need to be moved to a particular district in order to achieve equal population, ascertaining the predominance of race involves examining which voters were moved, and whether the legislature relied on race instead of other traditional factors in making those decisions. The Alabama Court also determined that the preclearance requirements of Section 5 of the VRA, which are no longer operable, did not require a covered jurisdiction to maintain a particular numerical majority percentage of minority voters in a minority-majority district. Instead, the Court held that Section 5 required that a minority-majority district be drawn in order to maintain a minority's ability to elect a preferred candidate of choice. The Supreme Court vacated the lower court's ruling and remanded for reconsideration using the standards it articulated. The principal dissent, written by Justice Scalia, joined by the Chief Justice and Justices Thomas and Alito, characterized the Court's ruling as ""sweeping."" The dissent cautioned that the Court's ruling will have ""profound implications"" for future cases involving the principle of one person, one vote; the VRA; and the primacy of states to manage their own elections. In a separate dissent, Justice Thomas criticized the Court's voting rights jurisprudence generally, and this case specifically, calling it ""nothing more than a fight over the 'best' racial quota."" Alabama is notable in that minority voters successfully challenged, under the Equal Protection Clause, districts that the state maintained were created to comply with the Voting Rights Act. The decision also represents the Court's most recent interpretation of the requirements of Section 5 of the VRA. This could be of interest to Congress should it decide to draft a new coverage formula in order to reinstitute Section 5 preclearance. In another pending case, Wittman v. Personhuballah , the Supreme Court is poised to clarify what challengers must demonstrate in proving that race was a predominant factor in the creation of a redistricting plan. In Wittman , appellants are appealing a federal district court ruling that invalidated, for a second time, Virginia's Third Congressional District—comprised of a 56.3% majority African-American voting age population—as an unconstitutional racial gerrymander. The three-judge panel, by a 2-1 vote, ordered the Virginia legislature to draw a new congressional district map. In addition to citing circumstantial evidence of the district's shape and other characteristics, the court found that in establishing the district's racial composition, the legislature's predominant purpose was compliance with Section 5 of the VRA. The court also observed that the Supreme Court has not yet decided whether continued compliance with the VRA is a compelling state interest for a district drawn prior to the Court's ruling in Shelby rendering Section 5 inoperable. Relying on Alabama , discussed above, the court explained that Section 5 does not require a covered state, in drawing a redistricting plan, to maintain a particular numerical minority percentage in majority-minority districts. Instead, it is proper to inquire as to what extent existing minority percentages need to be preserved in order to maintain the minority's ability to elect its candidate of choice. As compared to Virginia's earlier redistricting plan, the 2012 plan increased the African-American voting age population in the Third Congressional District from 53.1% to 56.3%. Noting that African-American voters in the district had successfully elected representatives of choice for two decades, the court determined that the increase in African-American voters was not justified in order to avoid retrogression and therefore, was not narrowly tailored to achieve the goal of complying with Section 5. The dissent argued that the plaintiffs failed to prove that race was the predominant factor in drawing the district lines, and instead, maintained that the creation of the district was motivated by traditional redistricting principles and incumbency protection. Intervenor-defendants in the lower court proceeding, consisting of current and former Members of Congress, appealed to the Supreme Court. They argued that the lower court failed to require the challengers to the redistricting plan to prove, as required by Alabama , that the legislature subordinated the traditional race-neutral redistricting principles of incumbency protection and political affiliation to racial considerations. Further, they maintained that because race and political affiliation are often highly correlated, challengers must prove that race rather than politics caused subordination of traditional redistricting principles. In addition to questions relating to the merits of the case, as a threshold matter, the Court is also considering the question of whether the appellants lack standing because they neither reside in, nor represent, the congressional district that is being challenged. A decision in this case is expected by June 2016. In the bulk of the states, the legislature has primary authority over congressional redistricting. Due in part to concerns about partisan political gerrymandering—the drawing of districts for partisan political advantage—some states have adopted independent commissions for conducting redistricting. For example, Arizona and California created such independent redistricting commissions by ballot initiative, thereby removing control of congressional redistricting from the states' legislative bodies and vesting it in commissions. The ballot initiatives specify how commission members are to be appointed, and the procedures to be followed in drawing congressional (and state legislative) districts. In Arizona, the state legislature filed suit challenging the constitutionality of the independent commission. In 2015, in Arizona State Legislature v. Arizona Independent Redistricting Commission , the Supreme Court upheld the constitutionality of an independent commission, established by initiative, for drawing congressional district boundaries. Affirming a lower court ruling, the Supreme Court held that the Elections Clause of the Constitution, Article I, Section 4 , clause 1, permits a commission—instead of a state legislature—to draw congressional districts. The Elections Clause provides that the times, places, and manner of holding congressional elections be prescribed in each state ""by the Legislature thereof."" It further specifies that the Congress may at any time ""make or alter"" such laws. Announcing that ""all political power flows from the people,"" the Court stated that the history and purpose of the Elections Clause do not support a conclusion that the people of a state are prevented from creating an independent commission to draw congressional districts. The main purpose of the Elections Clause, in the Court's view, was to empower Congress to override state election laws, particularly those that involve political ""manipulation of electoral rules"" by state politicians acting in their own self-interest. It was not designed to restrict ""the way"" that states enact such legislation. As the Court has recognized in other cases, the term ""legislature"" is used several times in the U.S. Constitution. The Court reviewed the cases in which it had considered the term, and read them to evidence that the meaning of the term differs according to its context. For example, in a 1916 case , the Court held that the term ""legislature"" was not limited to the representative body alone, but instead, encompassed a veto power held by the people through a referendum. Similarly, in a 1932 case , the Court held that a state's legislative authority included not just the two houses of the legislature, but also the veto power of the governor. In a 1920 case, however, the Court held that in the context of ratifying constitutional amendments, the term ""legislature"" has a different meaning, one that excludes the referendum and a governor's veto. While acknowledging that initiatives were not addressed in its prior case law, the Court found no constitutional barrier to a state empowering its people with a legislative function. Furthermore, even though the framers of the Constitution may not have envisioned the modern initiative process, the Court ruled that legislating through initiative is in ""full harmony"" with the Constitution's conception that the people are the source of governmental power. The Court further cautioned that the Elections Clause should not be interpreted to single out federal elections as the one area where states cannot use citizen initiatives as an alternative legislative process. The Court also held that Arizona's congressional redistricting process comports with a federal redistricting statute, codified at 2 U. S. C. Section 2a(c), providing that until a state is redistricted as provided ""by the law"" of the state, it must follow federally prescribed congressional redistricting procedures. Examining its legislative history, the Court determined that Congress clearly intended that the statute provide states with the full authority to employ their own laws and regulations—including initiatives—in the creation of congressional districts. When Congress replaced the term ""legislature"" in the congressional apportionment laws of 1862 through 1901, to ""the manner provided by the laws"" of the state in the 1911 law, the Court determined that Congress was responding to several states supplementing the representative legislature mode of lawmaking with a direct lawmaking role for the people through initiative and referendum. As Congress used virtually identical language when it enacted Section 2a(c) in 1941, the Court concluded that Congress intended the statute to include redistricting by initiative. This case was decided by a 5-4 vote. In contrast to the majority, the dissent advocated for greater reliance on the text of the Elections Clause, maintaining that the meaning of the term ""legislature"" is unambiguous, with one consistent meaning throughout the text of the Constitution: a representative body that makes the laws of the people, rather than, as the Court held, differing meanings depending on its context. Writing the primary dissent in this case, Chief Justice Roberts pointed out that the Constitution contains 17 references to a state's legislature. All such references, he argued, are consistent with the understanding of a legislature as a representative body. More importantly, he maintained, many of these references to ""legislature"" in the Constitution are only consistent with the concept of an institutional legislature, and are indeed incompatible with the majority's interpretation that the term means the people as a whole. In sum, the dissent concluded that the Court's ruling had no basis in the text, structure, or history of the Constitution. While Congress retains the power under the Constitution to make or alter election laws affecting congressional elections, this decision clarifies that states can enact such laws through the initiative process. For example, as discussed above, California has an initiative-established independent commission for drawing congressional district boundaries similar to Arizona. Furthermore, election laws in other states, such as Ohio, prohibiting ballots providing for straight-ticket voting along party lines, and Oregon, shortening the deadline for voter registration to 20 days before an election, were enacted through the initiative process. This ruling suggests that such state laws regulating congressional elections are likely to withstand challenge under the Elections Clause. H.R. 75 , the Coretta Scott King Mid-Decade Redistricting Prohibition Act of 2015, would prohibit the states from carrying out more than one congressional redistricting following a decennial census and apportionment, unless a state is ordered by a court to do so in order to comply with the Constitution or to enforce the VRA. H.R. 1347 , the John Tanner Fairness and Independence in Redistricting Act, would prohibit the states from conducting more than one congressional redistricting following a decennial census and apportionment, unless a state is ordered by a court to do so in order to comply with the Constitution or to enforce the VRA, and would require the states to conduct redistricting through independent commissions. H.R. 934 , the Redistricting and Voter Protection Act of 2015, would require any state that, after enacting a congressional redistricting plan following a decennial census and apportionment, enacts a subsequent congressional redistricting plan prior to the next decennial census and apportionment, to obtain a declaratory judgment or preclearance as provided under Section 5 of the VRA in order for the subsequent plan to take effect. H.R. 1346 , the Redistricting Transparency Act of 2015, would require the states to conduct the process of congressional redistricting in such a manner that the public is informed about proposed redistricting plans through a public Internet site, and has the opportunity to participate in developing congressional redistricting plans before they are adopted. H.R. 2173 , the Redistricting Reform Act of 2015, would prohibit the states from conducting more than one congressional redistricting following a decennial census and apportionment, unless a state is ordered by a court to do so in order to comply with the Constitution or to enforce the VRA, and would require the states to conduct redistricting through independent commissions. The legal framework for congressional redistricting resides at the intersection of the Constitution's limits and powers, requirements prescribed under federal law, and the various processes imposed by the states. Since the 1960s, after determining that constitutional challenges to redistricting plans are justiciable, the Supreme Court has issued a series of rulings balancing these competing commands. The Court's case law has significantly shaped how congressional districts are drawn. For example, a recent redistricting decision held that the Constitution permits states to create, by ballot initiatives and referenda, nonpartisan independent redistricting commissions for congressional redistricting. If more states adopt similar laws, it could change the process of congressional redistricting nationwide. Another recent Court decision construed the inoperable preclearance requirements in Section 5 of the Voting Rights Act to require a covered jurisdiction to maintain minority voters' ability to elect candidates of choice in a new redistricting plan, not to require that a particular numerical percentage of minority voters in a minority-majority district be maintained. Looking ahead, pending Supreme Court cases could likewise impact the process of congressional redistricting, and the degree to which challenges to redistricting plans will be successful.","Congressional redistricting is the drawing of district boundaries from which the people choose their representatives to the U.S. House of Representatives. The legal framework for congressional redistricting resides at the intersection of the Constitution's limits and powers, requirements prescribed under federal law, and the various processes imposed by the states. Prior to the 1960s, court challenges to redistricting plans were considered non-justiciable political questions that were most appropriately addressed by the political branches of government, not the judiciary. In 1962, in the landmark ruling of Baker v. Carr, the Supreme Court pivoted and held that a constitutional challenge to a redistricting plan was not a political question and was justiciable. Since then, a series of constitutional and legal challenges have significantly shaped how congressional districts are drawn. Key Takeaways from This Report The Constitution requires that each congressional district contain approximately the same population. This equality standard was set forth by the Supreme Court in a series of cases articulating the principle of ""one person, one vote."" In order to comport with the equality standard, at least every 10 years, in response to changes in the number of Representatives or shifts in population, most states are required to draw new congressional district boundaries. Congressional districts are also required to comply with Section 2 of the Voting Rights Act (VRA), prohibiting any voting qualification or practice—including congressional redistricting plans—that results in the denial or abridgement of the right to vote based on race, color, or membership in a language minority. Under certain circumstances, the VRA may require the creation of one or more ""majority-minority"" districts, in which a racial or language minority group comprises a voting majority. However, if race is the predominant factor in the drawing of district lines, then a ""strict scrutiny"" standard of review applies. In 2015, in Alabama Legislative Black Caucus v. Alabama, the Supreme Court set forth standards for determining whether race is a predominant factor in creating a redistricting map when considering a Fourteenth Amendment equal protection claim. Alabama also held that the inoperable preclearance requirement in Section 5 of the VRA does not require that a new redistricting plan maintain the same percentage of minority voters in a majority-minority district. Instead, the Court held that Section 5 requires that the plan maintain a minority's ability to elect candidates of choice. Last year, in Arizona State Legislature v. Arizona Independent Redistricting Commission, the Court held that states can establish independent commissions, by ballot initiative, to conduct congressional redistricting. In April 2016, in Evenwel v. Abbott, the Court held that states may draw their legislative districts based on total population rather than based on eligible or registered voters. As of the date of this report, two redistricting cases are pending before the Supreme Court: Harris v. Arizona Independent Redistricting Commission, regarding whether partisanship can justify differences in population; and Wittman v. Personhuballah, regarding what challengers must demonstrate in proving that race was a predominant factor in the creation of a redistricting plan.",govreport
"Severe fire seasons in the past decade have prompted substantial debate and proposals related to fire protection programs and funding. President Clinton proposed a new National Fire Plan in 2000 to increase funding to protect federal, state, and private lands; Congress largely enacted this request. The severe 2002 fire season led President Bush to propose a Healthy Forests Initiative to expedite fuel reduction on federal lands. In 2003, Congress enacted the Healthy Forests Restoration Act to expedite fuel reduction on federal lands and to authorize other forest protection programs. In 2009, Congress enacted the Federal Land Assistance, Management, and Enhancement (FLAME) Act ( P.L. 111-88 ) to insulate other agency programs from high wildfire suppression costs. Wildfire funding has continued at relatively high levels since 2000, and now constitutes a substantial portion of land management agency budgets. Severe fire seasons seem to have become more common since 2000. (See Figure 1 .) Total wildfire funding for FY2008 was a record high of $4.46 billion. The high costs of firefighting continue to attract attention. This report briefly describes the three categories of federal programs for wildfire protection. One category involves protection of the federal lands managed by the U.S. Department of Agriculture's Forest Service (FS), and by the U.S. Department of the Interior (DOI), whose wildfire programs traditionally were funded through the Bureau of Land Management (BLM) but are now a department-wide funding item. A second category addresses protection of non-federal lands through programs to assist state and local governments and communities; these programs can be used by the state and local governments to reduce wildland fuels, to otherwise prepare for fire control, to contain and control wildfires, and to respond after severe wildfires have burned. A third category of federal programs supports fire research, fire facilities, and improvements in forest health. The last section of this report discusses issues associated with the high wildfire costs, including pending legislation. The FS was created in 1905 with the merger of the USDA Bureau of Forestry (which conducted research and provided technical assistance to states and private landowners) and the Forestry Division of the General Land Office (a predecessor of the BLM). An early focus was on halting wildfires in the national forests following several large fires that burned nearly 5 million acres in Montana and Idaho in 1910. Efforts to control wildfires were founded on a belief that fast, aggressive control was efficient, because fires that were stopped while small would not become the large, destructive conflagrations that are so expensive to control. The goals were to protect human lives, then private property, then natural resources. In 1926, the agency developed its 10-acre policy —that all wildfires should be controlled before they reached 10 acres in size—clearly aimed at keeping wildfires small. Then, in 1935, the FS added its 10:00 a.m. policy —that, for fires exceeding 10 acres, efforts should focus on control before the next burning period began (at 10:00 a.m.). Under the 10:00 a.m. policy, the goal in suppressing large fires is to gain control during the relatively cool and calm conditions of night and early morning, rather than spending major efforts during the heat of the day. In the 1970s, these aggressive FS fire control policies began to be questioned. Research had documented that, in some situations, wildfires brought ecological benefits to the burned areas—aiding regeneration of native flora, improving the habitat of native fauna, and reducing infestations of pests and of exotic and invasive species. The Office of Management and Budget (OMB) challenged proposed budget increases based on FS policies, and a subsequent study suggested that the fire control policies would increase expenditures beyond efficient levels. Following the 1988 fires in Yellowstone, concerns were raised about unnaturally high fuel loads leading to catastrophic fires and spiraling suppression costs. Congress established the National Commission on Wildfire Disasters, whose 1994 report described a situation of dangerously high fuel accumulations. The summer of 1994 was another severe fire season, leading to more calls for action to prevent future severe fire seasons. In addition to the concerns about fuel loads, concerns were voiced that, in a fire in Washington in 1994, federal firefighting resources had been diverted from protecting federal lands and resources to protecting nearby private residences and communities. The Clinton Administration directed a review of federal fire policy, and the agencies released the new Federal Wildland Fire Management Policy & Program Review: Final Report in December 1995. The report recommended altering federal fire policy from priority for private property to equal priority for private property and federal resources, based on values at risk. (Protecting human life is the first priority in firefighting.) The recommended change became effective after the report was accepted by the Secretaries of Agriculture and the Interior. Concerns about wildfire threats persist. In 1999, the General Accounting Office (GAO, now the Government Accountability Office) issued two reports recommending a cohesive wildfire protection strategy for the FS and a combined strategy for the FS and BLM to address certain firefighting weaknesses. GAO reiterated the need for a cohesive strategy in 2009. To address the severe 2000 fire season, the Clinton Administration developed the National Fire Plan and a supplemental budget request. Congress enacted this additional funding in the FY2001 Interior appropriations act, and has since largely maintained the higher funding. (See Figure 2 and Table A-2 .) During the severe 2002 fire season, the Bush Administration developed the Healthy Forests Initiative to expedite fuel reduction projects in priority areas through administrative and legislative changes. Some elements of the initiative have been addressed through regulatory changes; others were addressed in the Healthy Forests Restoration Act of 2003 ( P.L. 108-148 ). Wildfire management appropriations have risen over the past 15 years, as shown in Figure 2 . The tables below present data on funding for the three categories of federal fire programs—protection of federal lands ( Table 1 and Table 2 ); assistance for protection of non-federal lands ( Table 3 and Table 4 ); and other fire-related expenditures (also Table 3 and Table 4 ). The FS and DOI use three fire appropriation accounts—preparedness, suppression operations, and other operations—to fund most federal fire programs. However, the agencies include different activities in the accounts (e.g., the BLM historically included fire research and fire facility funding in the preparedness account), and the accounts change over time (e.g., the agencies split operations funding into suppression and other operations in 2001). Thus, the data, taken from the agency budget justifications for the National Fire Plan, have been rearranged in this report to present consistent data and trends on the three categories of federal wildfire programs since 1999. Many wildfire management funds are used to protect federal lands. Table 1 shows wildfire management appropriations for FY1999-FY2007; more recent data are shown in Table 2 . The data in these tables exclude funding for the other two categories of federal wildfire funding—assistance to state and local governments, communities, and private landowners; and other fire-related activities (research, fire facility maintenance, forest health improvement, etc.). Federal funding to protect federal lands differs from federal funding to protect non-federal lands primarily in that the funding is predetermined to assist with certain efforts, such as suppression or preparedness. Federal funding for non-federal lands tends to give the states and other entities substantial discretion on how the funds will be used. The BLM included funds for fire research and fire facilities under its preparedness budget line item through FY2004; these funds have been excluded from Table 1 . The tables show appropriations by fiscal year, with emergency funding identified for the year in which it was provided, rather than in the year it was spent. The agencies traditionally were authorized to borrow from other accounts for fire suppression, and emergency funds generally repay these borrowings. The tables show that total federal land fire management appropriations rose substantially in FY2001 and have since remained relatively high, with fluctuations generally depending on the severity of the fire season in the preceding calendar year. Fire preparedness appropriations provide funding for fire prevention and detection as well as for equipment, training, and baseline personnel. Preparedness funding rose substantially (58%) in FY2001 from the prior year, with DOI funding rising more (81%) than FS funding (49%). In FY2004, preparedness funding rose by a lesser amount (7%), with the rise entirely in FS preparedness. (DOI preparedness funding declined slightly.) Funding was relatively stable for FY2004 through FY2011. However, for FY2012, the appropriations law provided a substantial ($332 million, 49%) increase in FS preparedness, and a modest ($14 million, 5%) decline in DOI preparedness. The budget overview notes that the increase in FS preparedness (and roughly comparable decline in suppression funding) stems from a realignment of various preparedness costs that were shifted to the suppression account over the previous several fiscal years. Funds for fighting wildfires—appropriations for fire suppression and supplemental, contingency, or emergency funds—have fluctuated widely over the past decade, from less than $430 million in FY1999 to $2.41 billion in FY2008. Some of the variation results from differences in the severity of the fire season in the preceding year, particularly for supplemental and emergency funding. Such fluctuations have long been part of the agencies' funding; for example, total appropriations in FY1997 were double the FY1996 levels owing to a severe season in the summer of 1996. Appropriations for fire suppression rose steadily and sharply for both agencies from FY2002 through FY2008, then stabilized through FY2011. The FY2012 appropriations law substantially reduced suppression appropriations—down $457 million (46%) for FS fire suppression and $128 million (32%) for DOI fire suppression. However, this was offset by increases in supplemental, contingency, and emergency funds (including FLAME funds; see below). Title V of the FY2010 Interior, Environment, and Related Agencies Appropriations Act ( P.L. 111-88 ) was the Federal Land Assistance, Management, and Enhancement (FLAME) Act. This title established FLAME Wildfire Suppression Reserve Accounts for the FS and DOI, to be funded from annual appropriations. The FLAME funds can be used if the Secretary declares that (1) an individual wildfire covers at least 300 acres or threatens lives, property, or resources, or (2) cumulative wildfire suppression and emergency response costs will exceed, within 30 days, appropriations for wildfire suppression and emergency responses. FLAME funds allow both FS and DOI to pull from a reserve account to continue routine wildfire suppression and protection efforts if funds from other accounts are depleted. The FY2010 act also included $413 million for the FS FLAME fund and $61 million for the DOI FLAME fund. For FY2011, FLAME fund appropriations were much lower for the FS—$90 million (including the $200 million rescission)—while being stable for DOI. For FY2012, the appropriations law included $316 million for the FS FLAME fund and $92 million for the DOI FLAME fund. The sum total of these accounts for wildfire suppression for FY2012 was less than the total funds available for wildfire suppression in FY2010 or FY2011. For the FS, the request totaled $855 million ($539 million in the suppression account, $316 million in the FLAME fund); this is $231 million (21%) less than the FY2011 funding total of $1.09 billion, and $556 million (39%) less than the FY2010 funding total of $1.41 billion. For DOI, the request totaled $363 million ($271 million in the suppression account, $92 million in the FLAME fund); this is $97 million (21%) less than the FY2011 funding total of $460 million, and $82 million (18%) less than the FY2010 funding total of $445 million. Wildfire appropriations for rehabilitating burned areas have been relatively stable, except in a few fiscal years. Most wildfire site rehabilitation funds have gone to the BLM for treating burned DOI lands. Except for a fivefold increase for FY2001 and a doubling in FY2008, DOI site rehabilitation funds generally have ranged between $20 and $25 million annually since FY2000. The FY2012 appropriations law provides $13 million for DOI site rehabilitation funding, a decrease of $20 million (61%) from FY2011. The FS generally receives few wildfire funds for site rehabilitation (none prior to FY2001), and instead uses funds appropriated to other accounts, such as watershed improvement and vegetation management. However, the FS was appropriated $142 million of wildfire funds for site rehabilitation in FY2001, $63 million in FY2002, and $111 million in FY2008 (including $100 million in emergency supplemental funding). These three years account for 81% of FS wildfire appropriations for site rehabilitation since FY2000. For FY2012, no funding was provided for FS site rehabilitation. Fuel reduction funding is intended to protect lands and resources from wildfire damages by lowering the fuel loads on federal lands, and thus making the fires less intense and more controllable. Total fuel reduction funding more than tripled in FY2001. Fuel reduction funding rose slowly from FY2001 through FY2007. Funding rose substantially (24%) in FY2008 and again in FY2009 (another 28%), owing to funding in the economic stimulus, P.L. 111-5 (the American Recovery and Reinvestment Act of 2009). For FY2010, the appropriations declined substantially (41% for the FS and 5% for DOI), and FY2011 appropriations were lower still (down slightly for the FS and down another 11% for DOI). The FY2012 appropriations law brought further declines. DOI fuel reduction funding for FY2012 was $157 million, 14% below FY2011, which was the lowest level since FY2000. For the FS, fuel reduction funding for FY2012 is $57 million. The FS proposed shifting fuel reduction funding for areas outside the Wildland-Urban Interface (WUI) into a new line item within the National Forest System account—Integrated Resource Restoration—along with funding from several other line items. The FY2012 appropriations law directs both the FS and DOI to remove the requirement that 75% and 90%, respectively, of hazardous fuels funding be spent in the WUI; instead, funds are to be spent on the highest-priority projects in the highest-priority areas. Some FS fuel reduction funds have been used and proposed for wood energy programs. For FY2009-FY2012, $5 million annually was used for biomass grants. In FY2010, $10.0 million was used for the Collaborative Forest Landscape Restoration Fund, to be used in large part to restore national forest landscapes through fuel reduction, and thus is included in the fuel reduction funding in Table 1 . (In FY2011, this program was funded within the National Forest System account, and was proposed to be included in the new Integrated Resource Restoration line item for FY2012.) These programs can contribute to fuel reduction for the national forests, since they provide markets for the fuels to be removed. However, they are not limited to woody biomass from national forests, and no allocation of funding between fuels from national forests and biomass from non-federal lands is specified. Thus, these programs are included below, under assistance for non-federal lands. States are responsible for fire protection of non-federal lands, except for lands protected by the federal agencies under cooperative agreements. The federal government, primarily through the FS, has a group of wildfire programs to provide assistance to states, local governments, and communities to protect non-federal (both government and private) lands from wildfire damages. Most FS fire assistance programs are funded under the agency's State and Private Forestry (S&PF) branch. State fire assistance includes financial and technical help for fire prevention, fire control, and prescribed fire use for state foresters, and through them, for other agencies and organizations. In cooperation with the General Services Administration (GSA), the FS is encouraged to transfer ""excess personal property"" (equipment) from federal agencies to state and local firefighting forces. The FS also provides assistance directly to volunteer fire departments. Since FY2001, fire assistance funding also has come through wildfire appropriations. The economic stimulus legislation, P.L. 111-5 , contained wildfire funds for state and private forestry activities, including fuel reduction, forest health improvement activities (discussed under "" Other Fire Funding ,"" below), and wood energy grants. In addition, the 2002 farm bill ( P.L. 107-171 ) created a new community fire protection program, authorizing the FS to assist communities in protecting themselves from wildfires and to act on non-federal lands (with the consent of landowners) to assist in protecting structures and communities from wildfires. The 2008 farm bill ( P.L. 110-246 ) created two biomass energy grant programs—the Community Wood Energy Program and the Forest Biomass for Energy Program. These subsidies may stimulate markets for fuel removed from non-federal lands for wildfire protection. Wildfire funds have also been provided for economic assistance. For three years (FY2001-FY2003), FS wildfire appropriations were added to the S&PF Economic Action Program (EAP) for training and for loans to existing or new ventures to help local economies. In addition, in FY2001, the FS received fire funds to directly aid communities recovering from the severe fires in 2000. DOI also received funding to assist rural areas affected by wildfires for FY2001 through FY2010 (except for FY2007). Total assistance funds for protecting non-federal lands increased substantially in FY2001, from $27 million (all FS S&PF funds) to $148 million. Funding dropped about 20% in FY2002 (to $118 million) and fluctuated widely (by as much as 35% annually) through FY2007. Funding nearly tripled in FY2008, and jumped again (up another 42%) in FY2009. In FY2010, funding fell substantially (by 63%), to below the FY2001 level. Funding fell (by another 12%) in FY2011 and continued the downward trend in FY2012, falling by another 12%. Funding for assistance programs is shown in Table 3 and Table 4 . There appear to be multiple reasons for the fluctuations over time; no one theme explains them. Wildfire funds for assistance programs were enacted initially in FY2001, and have been maintained for FS state and volunteer assistance programs. For FY2008, some of the emergency funds provided for FS fuel reduction (in P.L. 110-116 and in P.L. 110-329 ) were directed to fuel reduction on non-federal lands; these funds have been included in state fire assistance in Table 4 , and excluded from Table 2 . FS wildfire funding for state fire assistance more than quadrupled in FY2008, and rose another 50% in FY2009, with funding in the economic stimulus. Funding declined substantially (by 74%) in FY2010, fell further (by 9%) in FY2011, and declined again (by 14%) in FY2012. FS community assistance to aid communities affected by fires in the summer of 2000 was a one-time appropriation, and FS EAP funds from wildfire appropriations were enacted for only three years. Appropriations for DOI rural assistance were provided annually from FY2001 through FY2010, except for FY2007. However, no funds were provided for FY2011 and FY2012. In contrast, funding for the two FS biomass energy programs—Forest Biomass for Energy and Community Wood Energy Program—has been minimal. Discretionary funding of $12 million annually was authorized to be appropriated for FY2009-FY2012 for the Forest Biomass for Energy program; however, no funding has been appropriated through FY2012. Discretionary funding of $5 million annually for the Community Wood Energy Program was authorized to be appropriated for FY2009-FY2012. No funding was appropriated for this program between FY2009 and FY2012; however, the FS awarded $49 million in funding from the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5 ) for wood-to-energy projects, and the appropriations committee reports for FY2010 and FY2011 directed that $5 million in Hazardous Fuels be used to fund biomass energy projects. The sustained level of funding authorized to be appropriated, although not appropriated, reflects some interest in fuel reduction, particularly on federal lands for wildfire protection, combined with the desire to produce renewable energy and transportation fuels. Additionally, the FY2012 appropriations law provided the FS with $5 million under the hazardous fuels line item for biomass grants through the Woody Biomass Utilization Grant Program. While some renewable and bioenergy programs allow biomass fuels from federal lands, others restrict such use. Wildfire appropriations are also provided for several other activities, including wildfire research, construction and maintenance of fire facilities, and forest health management, as shown in Table 3 and Table 4 . Wildfire funds for fire research have been enacted for both DOI and the FS for the Joint Fire Science program. For FY2012, the appropriations law reduced the FS funding by 9%. The FS also has been appropriated wildfire funds for fire plan research and development, beginning in FY2001 and averaging more than $22 million annually; for FY2012, the appropriations law provided $22 million. These funds supplement monies for wildfire research in the FS research account, but the amount of FS research funding for wildfire research is not specified. Both DOI and the FS have received funds to improve deteriorating fire facilities. The BLM long used a portion of its fire preparedness funds for ""deferred maintenance and capital improvements"" (i.e., for fire facilities), but the level fluctuated. DOI's FY2012 appropriation for fire facilities matched the annual appropriations of $6 million for FY2008 through FY2011. FS wildfire funds for fire facilities declined after the initial $43.9 million in FY2001 and ended in FY2004, except for $14.0 million of emergency funds in FY2008. The FS also builds and maintains fire facilities with its capital construction and maintenance account, but the portion used for fire facilities is unknown. Finally, the FS has received wildfire funds for forest health management. This S&PF program focuses on assessing and controlling insect and disease infestations on federal and cooperative (i.e., non-federal) lands, but includes efforts to control invasive species. In FY2001 and FY2002, the FS received nearly $12 million annually in wildfire funds for forest health management. Appropriations rose to nearly $25 million in FY2004, and have generally remained near that level. For FY2010 and FY2011, appropriations rose to $32 million of wildfire funding for forest health management, but FY2012 appropriations dropped to $24.3 million. Four issues related to wildfire funding have arisen in the last few years. The one receiving the most congressional attention is the high cost of wildfire management and its effect on other aspects of federal land management. Another issue is the level of fire protection funding to reduce fuel loads on federal lands. A third, related issue is the federal role in fire protection of non-federal lands and structures, and the funding of the relevant federal activities. During the 109 th Congress and again recently, a fourth issue was raised, about post-fire rehabilitation. Federal costs for wildfire management are substantially higher than they were in the 1990s, as shown in Figure 2 . Federal wildfire appropriations averaged $1.1 billion for FY1994-FY1999, and ranged from $772 million to $1.4 billion. For FY2004-FY2009, federal wildfire appropriations averaged $3.4 billion—more than three times above the FY1994-FY1999 average—and ranged from $2.7 billion to $4.5 billion. (The data are not adjusted for inflation.) Furthermore, the higher costs seem to be continuing, since FY2008 and FY2009 had the highest wildfire funding in history. This has been followed by lower FY2010, FY2011, and FY2012 appropriations, but funding has not declined as much as the decline in area burned. Management costs have risen in response to increasingly severe wildfire seasons, as shown in Figure 1 . The average acreage burned was 3.32 million acres annually for 1990-1999 and 6.93 million acres annually for 2000-2009. The six biggest fire seasons of the past 50 years—2000, 2002, 2004, 2005, 2006, and 2007—have occurred in the past decade. The threat of severe wildfires and the costs of fire protection have grown because many forests have unnaturally high amounts of biomass to fuel the fires (discussed further below). Increased costs have also been attributed to the increasing numbers of homes and people in and near forests—the wildland-urban interface . As more people and valuable homes are exposed to wildfire threats, the costs to suppress wildfires to protect those people and houses rises substantially. Wildfire management has also become relatively more important for the agencies. In addition to the absolute rise in wildfire management costs, a greater share of discretionary appropriations have been spent on wildfire management in recent years. For FY1993-FY2000, wildfire management appropriations were 25% of discretionary appropriations for the FS, ranging from 16% in FY1993 to 30% in FY1997. However, for FY2003 through FY2011, wildfire management funding averaged 47% of discretionary FS appropriations, ranging from 42% in FY2006 to 56% in FY2008. (The FY2012 appropriations law provided 45% of discretionary funding for FS wildfire management.) Concerns have focused on the continued high costs of wildfire management, especially of fire suppression expenditures, and on the indirect effects of those high costs on other agency management programs. Numerous organizations have examined wildfire suppression costs and made recommendations to the agencies for how to contain those costs. These reports present three general conclusions: (1) a fair share of wildfire suppression should be paid by state and/or local governments; (2) more, better, and better-focused fuel reduction efforts are needed (discussed below); and (3) better accountability for cost control is needed. Several reports have noted that wildfire suppression cost-share agreements are inconsistent and inequitable, and that cost apportionment and responsibilities among the various levels of government are unclear. This has led to increasing reliance by homeowners and local governments on federal fire protection, despite the relatively clear direction in the 1995 federal fire policy review to increase local responsibility for wildfire protection and suppression for non-federal lands and structures. The reports note that significant local cost responsibility is necessary to give incentives to homeowners and local governments to take actions to protect themselves, and that without such incentives, federal costs will continue to escalate. The reports also discuss the need for better cost control and accountability. Most have noted the inconsistent cost tracking and the weak measures of the benefits of fire suppression efforts. GAO noted: the agencies need to establish clear goals, strategies, and performance measures to help contain wildland fire costs. Although the agencies have taken certain steps to help contain wildland fire costs, the effectiveness of these steps may be limited because agencies have not established clear cost containment goals for the wildland fire program, including how containing costs should be considered in relation to other wildland fire program goals such as protecting lives, resources, and property; strategies to achieve these goals; or effective performance measures to track their progress. Another part of cost control and accountability is integrating wildfire management in land and resource planning and in budgeting. One aspect of this integration is maintaining local capacity for initial attack on new wildfires. Most of the reports assert that, without that local capacity, new fires could grow into additional conflagrations if resources are too focused on suppressing current large fires. However, the very high cost of implementing this vision (essentially the 10-acre policy of the 1920s) and lack of evidence of the benefits led the agencies to abandon this approach for wildfire planning in the 1970s. This leads to questions about the effectiveness of fire suppression. The Strategic Issues Panel noted that the high cost of large fires was the result of the ""unwillingness to take greater risks, unwillingness to recognize that suppression techniques are sometimes futile, the 'free' nature of wildland fire suppression funding, and public and political expectations."" FS policy results in fire managers generally not being held accountable for ""excess"" spending on fire control or for fire damages if they clearly put forth valiant efforts to control the conflagration. However, they are blamed for fire damages if the fire control efforts are seen as insufficient—too few people, too little equipment, not enough air tanker drops, or similar problems. The Strategic Issues Panel recommended better fire cost data and ""a benefit cost measure as the core measure of suppression cost effectiveness."" Wildfire suppression appropriations—including emergency supplemental funding—exceeded $1 billion for the first time in FY2001, and have remained above $1 billion annually since FY2003, exceeding $2.4 billion in FY2008. Furthermore, wildfire suppression expenditures have exceeded agency appropriations annually for more than a decade. How can an agency spend more than its appropriations? In most situations, it can't. However, provisions in the annual Interior appropriations acts authorized DOI and the FS to borrow unobligated funds from other accounts for emergency firefighting. This, in effect, was an open-ended reprogramming authority. Historically, the authority to borrow funds from other accounts was not a significant problem. The FS has several mandatory spending accounts, funded primarily from timber receipts; prior to 1990, several of these accounts had substantial running balances. One, the Knutson-Vandenberg (K-V) Fund, was particularly useful, since it had a running balance of about $500 million (about three years of spending). Firefighting funds could be borrowed from the K-V Fund (or other accounts), and repaid later with regular or supplemental appropriations, without a significant effect on agency activities, such as reforestation. The decline in timber sales since 1990 has led to a comparable decline in K-V (and other mandatory spending account) balances, and thus the FS has had to turn to other accounts to borrow funds to pay for firefighting. Another reason why the borrowing authority was not a problem historically is that, prior to FY2000, there were more discretionary funds to borrow. As noted above, FY1993-FY2000 wildfire management appropriations averaged 25% of discretionary FS appropriations for the FS, leaving significant funds in other accounts to borrow from. (This is less of an issue for DOI, since it can borrow from any DOI accounts.) However, since FY2001, fire management expenditures have averaged 47% of discretionary FS appropriations, and totaled 56% of FS discretionary appropriations in FY2008. Thus, there were relatively fewer funds available to borrow, and borrowing to pay for firefighting was having a relatively greater effect on those other accounts. Various interests increasingly expressed concerns about the effects of firefighting borrowing on the agencies' abilities to implement other programs. Legislation was introduced to address the situation. Freestanding bills in the 110 th and 111 th Congresses sought to establish a separate fund for major wildfire suppression efforts. One, the Federal Land Assistance, Management and Enhancement (FLAME) Act, was enacted in Title V of P.L. 111-88 . It established separate FLAME Wildfire Suppression Reserve Funds for the FS and DOI, to be funded from annual appropriations. The FLAME funds can be used if the Secretary declares that (1) an individual wildfire covers at least 300 acres or threatens lives, property, or resources, or (2) cumulative wildfire suppression and emergency response costs will exceed, within 30 days, appropriations for wildfire suppression and emergency responses. It also directed the Secretaries to report annually on use of the funds, and to report on estimated suppression costs periodically through the year. The funds terminate if there have been no appropriations to or withdrawals from the accounts for three consecutive fiscal years. In addition, the FLAME Act required the agencies to prepare a ""cohesive wildland fire management strategy"" as recommended by the GAO, and to revise the cohesive strategy at least every five years. The FLAME funds effectively insulate federal land and resource management programs from the financial impacts of borrowing to pay for wildfire suppression efforts. However, they do not reduce the effects of lost resource management time when agency personnel are assigned to wildfire suppression efforts. In addition, this approach offers no incentives to fire managers to reduce or constrain the costs of fire-fighting efforts, and thus is unlikely to reduce wildfire suppression costs. Since 1990, recognition of unnaturally high fuel loads of dead trees, dense understories of trees and other vegetation, and non-native species has spurred interest in fuel management activities. This substantial fuel accumulation has been attributed to various causes: past land management practices (through grazing and logging that altered the vegetation); successful historic fire suppression (by reducing surface fires that burned small-diameter fuels); decreased logging (by reducing removals of burnable materials); climate change (by exacerbating drought and insect and disease infestations and raising ambient air temperatures); and other factors that affect the ecological health of forests. Table 5 shows the acreage, by ownership class, of lands at low, moderate, and high risk of significant ecological damage from wildfire due to high fuel loads. Fuel reduction efforts, as discussed above, are commonly proposed as a means of reducing wildfire suppression costs. Fuel management is a collection of activities—primarily prescribed burning and thinning—intended to reduce the threat of significant damages by wildfires. Fuel treatment acreage increased after the mid-1990s. (Earlier data were not reported comparably.) Table 6 shows that the acreage treated from FY1995 to FY2004 increased by 400%. However, treatment acreage fell in FY2005 and again in FY2006, and has not been proposed to return to the FY2004 level. Data on treatments since FY2007 are not included in Table 6 , because the FS and DOI revised their reporting systems to include acreage of wildland fire use (natural wildfires that are allowed to burn within the prescriptions of fire plans) as fuel treatments; previous data did not include wildland fire use acreage. Fuel reduction may have increased in FY2008 and FY2009, as funding (including under the economic stimulus legislation) continued to rise. (See Table 1 and Table 2 .) However, the annual fuel treatment acreage appears to have stabilized at less than 3 million acres annually, which is less than 1% of federal lands. At this average treatment level, it would take nearly 25 years to treat the FS and DOI lands at high risk of ecological damage from wildfire, and another 52 years to treat the lands at moderate risk. Furthermore, the FY2010 and FY2011 appropriations for fuel reduction were below the FY2008 and FY2009 levels, and the FY2012 appropriations is lower than any funding level since FY2004. Funding might not be the only limiting factor for fuel treatment. Increasing fuel reduction activities was one of the primary rationales for enacting the Healthy Forests Restoration Act of 2000 (HFRA; P.L. 108-148 ). Many observers described the need for expeditious action to reduce fuel loads and fuel ladders, and the difficulties in achieving expeditious action because of the environmental documentation and public participation required by the National Environmental Policy Act of 1969 (NEPA; P.L. 91-190, 42 U.S.C. §§4321-4347). HFRA established an expedited process for environmental review and public involvement in fuel reduction activities. In addition, the FS and DOI established categorical exclusions (CEs) from NEPA for hazardous fuel reduction activities; however, in December 2007, the Ninth Circuit Court of Appeals ruled that the CE violated NEPA, and stopped the use of that CE until NEPA had been followed. It is unclear how much fuel reduction has occurred under either of these authorities. Some oppose expedited actions with limited public oversight, fearing the potential for commercial harvests of large trees (which might provide little or no wildfire protection) and the associated road construction disguised as fuel reduction. Others have suggested focusing fuel treatment in the wildland-urban interface (WUI), to enhance protection of homes and other structures. The proportion of fuel treatments in the WUI increased after FY2001 (the first year for which such data area available), from 37% (45% for the FS, 22% for DOI) to about 60% from FY2003 to FY2006 (73% for the FS, 42% for DOI), and 70% in FY2008 (83% for the FS, 47% for DOI). Research has documented that reducing fuels close to structures (within about 131 feet) is essential to protecting those structures from wildfire, but that fuel reduction beyond that close-in area (about 2 acres) provides no additional protection for structures. In addition, GAO testified that the agencies still needed to: develop a cohesive strategy that identifies the options and associated funding to reduce fuels and address wildland fire problems.… In 2005 and 2006, because the agencies had not yet developed one, GAO reiterated the need for such a strategy but broadened its focus to better address the interrelated nature of fuel reduction efforts and wildland fire response. The presumption behind fuel treatment is that lower fuel loads and a lack of fuel ladders will reduce the extent of wildfires, the damages they cause, and the cost of controlling them. Numerous on-the-ground anecdotes support this belief. However, little empirical research has documented this presumption. As noted in one research study, ""scant information exists on fuel treatment efficacy for reducing wild-fire severity."" This study also found that ""fuel treatments moderate extreme fire behavior within treated areas, at least in"" frequent fire ecosystems. Others have found different results elsewhere; one study reported ""no evidence that prescribed burning in these [southern California] brushlands provides any resource benefit ... in this crown-fire ecosystem."" A recent summary of wildfire research reported that, although prescribed burning generally reduced fire severity, mechanical fuel reduction did not consistently reduce fire severity, and that limited research had examined the potential impacts of mechanical fuel reduction with prescribed burning or of commercial logging. Thus, it is unclear whether, or to what extent, increasing fuel treatment funding and efforts will protect communities and ecosystems from damaging wildfires. Some have suggested combining the need to reduce potentially hazardous biomass fuels from the forest with the desire to produce renewable energy. Biomass can be used to produce liquid transportation fuels (e.g., ethanol) or to produce heat and electricity (most commonly through co-generation, also known as combined-heat-and-power). In either case, virtually any biomass can be used to supplant fossil fuels for energy production, and could provide a beneficial use for the fuels that need to be removed from forests. Some FS fuel reduction funds have been used for wood energy programs. For FY2009-FY2011, $5 million annually was used for biomass grants, authorized in Title II of the Healthy Forests Restoration Act ( P.L. 108-148 ). For FY2011, the Administration proposed, but Congress did not fund, $5 million for the Community Wood Energy Program and $15 million for the Forest Biomass to Energy Program, two programs established in the 2008 farm bill ( P.L. 110-246 ). These programs can contribute to fuel reduction for federal forests, since they provide markets for the fuels to be removed, but they are not limited to woody biomass from federal lands, and are also likely to be used to remove woody biomass from non-federal lands. Furthermore, this relatively limited funding provides very modest markets for the substantial volumes of biomass to be removed from federal lands. Other federal programs exist to provide incentives for renewable energy production, including from biomass. However, some prohibit the use of biomass from federal lands for the renewable energy targets and incentives. This is due at least partly to concerns about diverting federal woody biomass from traditional markets—lumber, plywood, and pulp and paper—to renewable energy markets. The validity of such concerns was illustrated by the initial payments under USDA's Biomass Crop Assistance Program (BCAP). While the goal was, in part, to stimulate removal of woody biomass waste from the forest, much of the initial funding was spent on transporting wood waste from existing wood production facilities (e.g., sawmills) to energy production facilities; previously such wood waste was sold to pulp mills, particleboard plants, and other such users who were unable to compete against the BCAP subsidies for wood-waste-to-energy. The principal difficulty in using woody biomass from forests is that, while the fuel loads might be very high by historical standards in some ecosystems, they are widely scattered and highly diverse in size and structure, making collection and transport very expensive. The states are responsible for protecting non-federal lands from wildfires, but FS cooperative fire assistance to states has been authorized since the Clarke-McNary Act of 1924. Cooperative fire assistance was questioned during the Reagan, George H. W. Bush, and Clinton Administrations, with budget proposals to substantially reduce funding (generally to less than 30% of enacted appropriations) from FY1984 through FY1995. The debate over the federal role in assisting states shifted following the severe fire season in summer of 1994. The Federal Wildland Fire Management Policy & Program Review: Final Report , released in December 1995, altered federal fire policy from priority for private property to equal priority for private property and federal resources, based on values at risk. (Protecting human life remains the first priority in firefighting.) The increased emphasis on state and local responsibility for protecting non-federal lands also led to a recognition of the importance of federal assistance to state and local agencies. (Sharing fire suppression costs with state and local governments is discussed above, under "" Wildfire Management Costs ."") In contrast to White House efforts to cut fire assistance funding in the 1980s and early 1990s, federal funding for state and volunteer fire assistance more than tripled in 2001, rising from $27 million to $91 million, pulled along by the broad rise in federal wildfire funding under the National Fire Plan. (See Table 3 .) State and volunteer fire assistance funding continued to rise for a few years, peaking at $314 million in FY2009, including the funding in the economic stimulus legislation. The 2002 farm bill ( P.L. 107-171 , the Farm Security and Rural Investment Act of 2002) authorized a new fire assistance program, the Community Fire Protection Program. The program authorizes the FS, working with and through state forestry agencies, to assist local fire protection planning, education, and activities. The program was authorized at $35 million annually for FY2002-FY2007, and ""such sums as are necessary"" thereafter; to date, no explicit budget line items have been enacted for this program. Questions persist about the appropriate role of federal firefighters and funds in protecting structures, communities, and privately owned resources. States bear the responsibility for fire protection on all non-federal lands. The FS and others also support the FIREWISE program to educate landowners and communities about how to protect their properties and structures from wildfire. The National Interagency Fire Center coordinates the movement of firefighting forces (federal, state, and private contractors) to areas with lots of wildfires. The federal agencies are also directed to give ""excess personal property"" (such as surplus firefighting equipment) to state or local fire departments. Some question whether these programs are sufficient; others suggest that perhaps federal financial assistance could be terminated. Still others question federal firefighting actions, where state or local responsibility for structure fires has been used as an excuse for inaction. On the other hand, federal firefighters are not trained to fight structure fires, and such efforts without proper training might endanger the firefighters, it has been argued. The appropriate federal response following wildfire damages to private lands and resources has also been questioned. Catastrophic wildfires sometimes lead to disaster declarations, and thus to recovery efforts coordinated and assisted by the Federal Emergency Management Agency (FEMA) of the Department of Homeland Security. Wildfire damages not in declared disaster areas are sometimes, but not always, covered by private insurance (which is regulated by the states). Homeowners without fire insurance or whose fire insurance does not cover wildfires may be left without compensation for their losses. Similarly, landowners with resource losses (e.g., many trees killed by wildfire) may receive no compensation or recovery assistance. It seems unfair to some that wildfire damages are substantially covered only when total damages are sufficient to declare the area a disaster. To address these concerns, some have suggested that the National Flood Insurance Program might provide a model for federal wildfire insurance for private landowners. Others assert that private insurance exists and is more efficient than a government insurance program, and that the National Flood Insurance Program has not prevented building in flood zones or repetitive flood losses, despite these being among its goals. Rehabilitation of burned sites following intense wildfires has been a generally accepted practice. As shown in Table 1 and Table 2 , the DOI has traditionally received modest appropriations for rehabilitation of DOI lands, except in FY2001; in contrast, the FS has generally funded burned area rehabilitation from regular appropriations for vegetation management, wildlife habitat, watershed management, and other accounts, with modest appropriations (less than $13 million annually) for rehabilitation except in FY2001, FY2002, and FY2008. Attention to post-fire rehabilitation has increased since 2000. The Bush Administration finalized regulations authorizing NEPA categorical exclusions for post-fire rehabilitation activities affecting up to 4,200 acres in June 2003. These (and other) regulations were successfully challenged as violating the Forest Service Decision Making and Appeals Reform Act (§322 of P.L. 102-381 ; 16 U.S.C. §1612 note), and the FS suspended many proposed actions in response to the court's order. Legislation was introduced relating to post-fire rehabilitation in the 109 th Congress. One bill that passed the House ( H.R. 4200 , the Forest Emergency Recovery and Research Act of 2006) would have directed the FS and BLM to establish research protocols for catastrophic events affecting forests, to provide an expedited process for recovery of forests from catastrophic events, and to authorize financial assistance to restore landscapes and communities affected by catastrophic events. The expedited process would have required catastrophic event recovery assessments, with pre-approved management practices and alternative NEPA arrangements, and foreshortened administrative and judicial reviews of related activities. The bill has not been introduced in subsequent Congresses. More recently, other bills have proposed national or regional post-fire and other forest restoration programs with modified procedures for assessing and implementing practices. The Collaborative Forest Landscape Restoration Act was included as Title IV in the Omnibus Public Lands Management Act of 2009 ( P.L. 111-11 ). It provides a collaborative (diverse, multi-party) process for geographically dispersed, long-term (10-year), large-scale (at least 50,000-acre) strategies to restore forests, reduce wildfire threats, and utilize the available biomass, with multi-party monitoring of and reporting on activities. For FY2012, the Obama Administration requested funding for this program as part of a new line item (Integrated Resource Restoration) within the National Forest System appropriation account. This request was permitted on a pilot basis. Other bills typically address specific areas or specific restoration needs. Post-fire rehabilitation needs and funding have arisen again in the 112 th Congress, in the wake of the worst wildfire in Arizona history. Attention is being given to the burned area emergency response (BAER) program—authorized activities, funding mechanisms, public involvement, and more. To date, no legislation has been introduced, nor have any oversight hearings been held or scheduled. Nonetheless, given the importance of the process and the concerns about conditions, the BAER program may receive congressional consideration in the 112 th Congress. No data or assessments have examined the adequacy of current rehabilitation activities. It is unclear how often rehabilitation activities are necessary or feasible. It is also unclear whether NEPA environmental reviews or public involvement have delayed rehabilitation activities significantly. Opponents of legislated changes to existing environmental review and public involvement processes have expressed concerns that changes could reduce review and oversight of salvage logging decisions, since salvage logging is not generally precluded as a rehabilitation activity. They note that salvage logging can cause significant environmental damage. Proponents of changes contend that timber salvage can help in site rehabilitation, both by reducing costs and by removing dead biomass that may interfere with vegetative regrowth on the site, and that expedited processes are necessary to utilize the timber before it deteriorates. Table A-1 presents the data on acres burned annually in the United States since 1960. These data are presented graphically in Figure 1 . Table A-2 presents data on the total appropriations to the FS and DOI wildland fire management accounts. These data are presented graphically in Figure 2 .","The Forest Service (FS) and the Department of the Interior (DOI) are responsible for protecting most federal lands from wildfires. Wildfire appropriations nearly doubled in FY2001, following a severe fire season in the summer of 2000, and have remained at relatively high levels. Acres burned annually have also increased over the past 50 years, with the six highest annual totals occurring since 2000. Many in Congress are concerned that wildfire costs are spiraling upward without a reduction in damages. With emergency supplemental funding, FY2008 wildfire funding reached a record high of $4.46 billion. There are three basic categories of federal programs for wildfire: federal lands protection, non-federal lands protection, and other fire-related expenditures. The vast majority (about 95%) of federal wildfire funds are spent to protect federal lands—for fire preparedness (equipment, baseline personnel, and training); fire suppression operations (including emergency funding); post-fire rehabilitation (to help sites recover after the wildfire); and fuel reduction (to reduce wildfire damages by reducing fuel levels). Since FY2001, FS fire appropriations have included funds for state fire assistance, volunteer fire assistance, and forest health management, as well as for community assistance, fire research, and fire facilities. Four issues have dominated wildfire funding debates. One is the high cost of fire management and its effects on other agency programs. Several studies have recommended actions to try to control wildfire costs, and the agencies have taken various steps, but it is unclear whether these actions will be sufficient. Wildfire suppression expenditures have exceeded agency appropriations annually for more than a decade. Borrowing to pay high wildfire suppression costs has affected other agency programs. The Federal Land Assistance, Management, and Enhancement (FLAME) Act of 2009 was enacted in P.L. 111-88 to insulate other agency programs from high wildfire suppression costs by creating a separate funding structure for emergency supplemental wildfire suppression efforts. Another issue is funding for fuel reduction. Funding and acres treated rose (roughly doubling) between FY2000 and FY2003, and have stabilized since. Currently about 3 million acres, less than 1% of federal lands, are treated annually. However, 75 million acres of federal land are at high risk, and another 156 million acres are at moderate risk, of ecological damage from catastrophic wildfire. Since many ecosystems need to be treated on a 10-35 year cycle (depending on the ecosystem), current treatment rates are insufficient to address the problem. A third issue is the federal role in protecting non-federal lands, communities, and private structures. In 1994, federal firefighting resources were apparently used to protect private residences at a cost to federal lands and resources in one severe fire. A federal policy review recommended increased state and local efforts to match their responsibilities, but federal programs to protect non-federal lands have also expanded, reducing incentives for local participation in fire protection. Finally, post-fire rehabilitation is raising concerns. Agency regulations and legislation in the 109th Congress focused on expediting such activities, but opponents expressed concerns that this would restrict environmental review of and public involvement in salvage logging decisions, leading to greater environmental damage. Legislation was introduced but not enacted in the 110th Congress to provide alternative means of addressing post-fire restoration in particular areas. The large wildfires to date in 2011 have reignited concerns about post-fire rehabilitation. Except for appropriations, legislative action regarding this issue since the 110th Congress has been minimal.",govreport
"Across the United States, about 27.5% of state and local government employees (about 6.6 million persons) work in positions that are not covered by Social Security. Coverage rates vary considerably across states. Congress made Social Security coverage mandatory, starting in July 1991, for most state and local government employees who were not already covered by public pension plans. Under current law, public employees who have a pension plan, but who are not covered by Social Security, may hold a referendum on whether to elect Social Security coverage. Once Social Security coverage is provided, it generally cannot be terminated, and all future employees in covered positions are required to participate in Social Security. Proposals to mandate Social Security coverage for all state and local government employees hired in the future have been part of the Social Security policy debate for many years. Under such a proposal, all state and local government positions eventually would be covered by Social Security. This report describes current law, provides some historical background, and discusses some of the potential advantages and disadvantages of mandating Social Security coverage for newly hired state and local government employees from a variety of perspectives. Social Security coverage is extended to state and local government employees through ""Section 218 Agreements"" between a state and the Social Security Administration (SSA). All states, as well as Puerto Rico and the Virgin Islands, have a voluntary Section 218 Agreement with SSA. A state's Section 218 Agreement details which state and local government positions are covered by Social Security and Medicare. Each state, as well as Puerto Rico and the Virgin Islands, designates a State Social Security Administrator who is responsible for administering, preparing modifications for, and monitoring coverage of, its subdivisions under the state's Section 218 Agreement. The Administrator, who is a state employee, serves as a bridge between state and local public employers and SSA. Coverage under Section 218 Agreements differs greatly from state to state. For example, within a state, teachers in one county may be covered under Social Security, whereas teachers in the neighboring county may not be covered. The State Social Security Administrator is the main resource for information about Social Security and Medicare coverage and reporting issues for state and local government employers and employees. Section 218 Agreements cover positions, not individuals. If the government position is covered by Social Security and Medicare under a Section 218 Agreement, then any employee (current or future) filling that position is subject to Social Security and Medicare payroll taxes. Coverage is extended to groups of employee positions known as ""coverage groups;"" coverage may not be extended on an individual basis. Various laws and regulations govern how coverage may be extended via employee referendums. All states are authorized to use a majority vote referendum process, and 23 states also are authorized to use a divided vote referendum process created in 1956 (see below). Most often, state governments allow their subdivisions (e.g., a school board) to decide whether to hold a referendum on coverage. Generally, a Section 218 Agreement may be modified to increase, but not reduce, the extent of coverage. With certain exceptions, once Social Security coverage is provided, it cannot be terminated, and all future employees in covered positions are required to participate in Social Security. The 1935 Social Security Act did not extend Social Security coverage to state and local government workers. In 1950, Congress added Section 218 to the Social Security Act to allow all 50 states, Puerto Rico, and the Virgin Islands to elect Social Security coverage for certain state and local government employees. In 1954, Congress extended voluntary coverage to employees who were already covered by pension plans, effective starting in 1955, if a majority of employees who were members of a pension system voted in favor of Social Security coverage. Further amendments in 1956 permitted certain states to split state or local retirement systems into ""divided retirement systems"" based on groups of employees that voted for Social Security coverage and groups of employees that voted against Social Security coverage. Currently, 23 states are authorized to operate a divided retirement system. Until April 1983, public employers could opt in and out of the Social Security program. In 1983, legislation prohibited public employees from withdrawing from the Social Security program once they are in it. The state of California challenged the 1983 law, however the Supreme Court rejected California's arguments. In 1984, Congress extended Social Security coverage to many groups that had not been covered previously, including many state and local government employees, Members of Congress, and federal civilian employees hired on or after January 1, 1984. Until 1984, federal employees were not covered by Social Security, but instead participated in the Civil Service Retirement System. In 1990, Congress made Social Security coverage mandatory, starting in July 1991, for most state and local government employees who are not covered by an alternative public pension plan. Across the United States, about 27.5% of state and local government employees (about 6.6 million persons) work in positions that are not covered by Social Security. Coverage rates vary considerably across the states, as shown in Table 1 . In 26 states, 90% or more of state and local government employees work in positions that are covered by Social Security. In three states, more than 95% of state and local government employees are covered by Social Security: Arizona (95.3%), New York (96.7%), and Vermont (97.9%). In two states, fewer than 5% of state and local government employees work in positions covered by Social Security: Massachusetts (4.1%) and Ohio (2.5%). States in which less than half of state and local government employees are in positions covered by Social Security include California (43.6%), Colorado (29.1%), Louisiana (27.9%), Nevada (17.6%), and Texas (47.9%). About 70% of non-covered state and local government employees reside in seven states: California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas. Almost half (48.4%) of non-covered state and local government employees reside in three states: California, Texas, and Ohio. Mandatory Social Security coverage of newly hired state and local government employees has been recommended by recent deficit reduction groups. For example, in November 2010, the Bipartisan Policy Center's Debt Reduction Task Force, co-chaired by former Senator Pete Domenici and Dr. Alice Rivlin, recommended that all newly hired state and local government employees be covered under the Social Security system, beginning in 2020, to increase the universality of the program. In addition, the Bipartisan Policy Center recommended that state and local pension plans be required to share data with SSA until the transition is complete. The Bipartisan Policy Center noted that implementation should be delayed until 2020 to give state and local governments time to ""shore up and reform their pension systems"" pointing to the poor fiscal condition of state and local governments and the underfunding of public employee pensions. Similarly, in December 2010, the National Commission on Fiscal Responsibility and Reform established by President Obama recommended that all newly hired state and local government employees be covered under the Social Security system beginning in 2021. The commission noted that, as states face prolonged fiscal challenges and an aging workforce, maintaining separate retirement systems (i.e., outside of Social Security) could pose risks for plan sponsors and participants. In the commission's view, mandatory Social Security coverage could mitigate these risks, as well as a potential future bailout risk for the federal government. In addition, the commission recommended that state and local pension plans be required to share data with SSA to improve the coordination of benefits for current workers who spend part of their careers working in state and local government positions. The following discussion highlights some of the issues underlying potential advantages and disadvantages of mandatory Social Security coverage: the financial status of the Social Security system, benefit protections for workers and their families, the impact on states and localities that currently maintain pension systems outside of Social Security, and a broader social perspective. Long-range projections published by the Social Security Board of Trustees in May 2011 show that Social Security expenditures will exceed income by 16% on average over the next 75 years. Stated another way, the projected average 75-year funding shortfall is an amount equal to 2.22% of taxable payroll. The trustees project that Social Security expenditures will exceed total income (tax revenues plus interest income) starting in 2023, and that trust fund assets will be exhausted in 2036. Social Security benefits scheduled under current law can be paid in full until trust fund assets are exhausted (2036). After trust fund exhaustion, annual Social Security revenues are projected to cover about three-fourths of benefit payments scheduled under current law. SSA's Office of the Chief Actuary has estimated the impact of covering newly hired state and local government employees on the Social Security Trust Funds. These estimates are based on the intermediate assumptions of the 2010 Trustees Report, which differ somewhat from the 2011 Trustees Report. Two variations of this option are discussed below—one with an immediate implementation date (2011) and one with a delayed implementation date (2020). As shown in Table 2 , mandatory Social Security coverage for newly hired state and local government employees is projected to have a net positive effect on the Social Security Trust Funds on average over the 75-year projection period. SSA's Office of the Chief Actuary estimates that, if mandatory coverage were implemented in 2011, it would close 9% of the system's projected long-range funding shortfall and extend the projected trust fund exhaustion date to 2040. Similarly, if mandatory coverage were implemented in 2020, it would close 8% of the system's projected long-range funding shortfall and extend the projected trust fund exhaustion date to 2039. Although mandatory coverage is projected to have a net positive effect on the Social Security Trust Funds on average over the 75-year projection period , the greatest positive effect with respect to Social Security's finances would occur during the initial period following implementation. Mandatory coverage of newly hired state and local government employees is projected to result in a net increase in payroll tax revenues to the Social Security system. These payroll tax revenues are credited to the Social Security Trust Funds in the form of special-issue Treasury securities, and as a result of this exchange the revenues become available in the Treasury's general fund for other government operations. A report published by the Congressional Budget Office (CBO) in March 2011, Reducing the Deficit: Spending and Revenue Options , provides revenue estimates for an option that would expand Social Security coverage to include all state and local government employees hired after December 31, 2011. This option is projected to increase revenues by about $24 billion over 5 years (2012 to 2016) and $96 billion over 10 years (2012 to 2021). CBO points out that the estimates do not include any effect on outlays during the 2012 to 2021 period, because most state and local government employees that would be hired during this period would not begin receiving benefits for many years. Beyond the 10-year projection window, although this option would increase the number of Social Security beneficiaries, CBO estimates that the additional benefit payments would be about half the size of the additional revenues. Detailed annual estimates are shown in Table 3 . Some observers point out that making Social Security coverage more universal could simplify retirement planning and benefit coordination for workers who divide their careers between state and local government positions and other positions. In addition, they maintain that mandatory Social Security coverage of newly hired state and local government employees would prevent gaps in pension or Social Security coverage, resulting in better retirement, survivor, and disability insurance protections for workers who move between state and local government positions and other positions. For example, under Social Security Disability Insurance, a recency of work test requires the worker to have at least 20 quarters of Social Security coverage in the 40 quarters preceding the onset of disability (generally 5 years of Social Security-covered employment in the last 10 years). Supporters of mandatory coverage also point out that it could result in better benefit protections for workers and their families through the provision of dependents' and survivors' benefits under Social Security. Social Security provides dependents' and survivors' benefits that generally are not available under state and local pension plans. For example, Social Security provides spouses or former spouses a benefit equal to 50% of the worker's basic monthly benefit amount. Most state and local pension plans do not provide benefits for spouses while the worker is alive. In addition, Social Security provides widow(er)s a benefit equal to 100% of the deceased worker's basic monthly benefit amount. Most state and local pension plans provide only modest benefits to young widow(er)s, and provide benefits for widow(er)s at retirement age only if the deceased worker elected a joint-and-survivor annuity option. In addition, supporters point out that mandatory coverage could result in better benefit protections through the provision of full cost-of-living adjustments under Social Security. Although state and local pension plans are more likely than private sector plans to provide inflation protection, state and local pension plans generally cap cost-of-living adjustments at 3%. Some observers point to the current funding status of state and local pension plans and argue that non-covered pensions may be subject to benefit reductions, or contribution increases, in future years. For example, in a recent report, CBO stated: ""By any measure, nearly all state and local pension plans are underfunded, which means that the value of the plans' assets is less than their accrued pension liabilities for current workers and retirees."" Some view the addition of a Social Security benefit component to state and local pension plans as a way to provide better benefit protections for workers whose future non-covered pensions may be at risk. The net effect on a worker's total benefits, however, would depend in part on how state and local governments modify their existing non-covered pension plans in response to mandatory coverage. Opponents argue that mandatory Social Security coverage would not necessarily result in better benefit protections for workers because state and local governments could reduce some pension benefits currently available under non-covered pension plans to keep overall pension costs down. Moreover, Congress could enact changes to the Social Security contribution and benefit structure that result in higher payroll taxes and lower benefits for current workers (compared with current law) in response to Social Security's projected long-range funding shortfall. In addition, state and local government employees tend to be higher-wage workers. According to data from the Bureau of Labor Statistics (BLS), state and local government workers have higher hourly earnings, on average, than the rest of the population. Because Social Security has a progressive benefit formula, higher-wage workers receive lower replacement rates under Social Security compared to lower-wage workers. Therefore, the potential advantages and disadvantages of mandatory Social Security coverage could depend in part on a worker's wage level. Still others who oppose mandatory Social Security coverage maintain that, while Social Security may provide better benefit protections for some workers, others may be better off in a separate retirement system (i.e., outside of Social Security) in which eligibility rules and other plan features are tailored to workers in certain occupations. For example, public pension plans for fire fighters and police officers typically provide full pension benefits at younger ages and with fewer years of service compared to other public pension plans. In contrast to some specialized public pension plans, Social Security retired-worker benefits are available beginning at the age of 62, and benefits claimed before the full retirement age (age 65 to age 67, depending on the person's year of birth) are permanently reduced for early retirement. In addition, Social Security benefits are based on a worker's 35 highest years of earnings in covered employment. If a worker has fewer than 35 years of covered earnings, years with no earnings are counted as zeros in the benefit computation, resulting in a lower initial monthly benefit amount. Some believe that the eligibility requirements under public pension plans for certain categories of workers (e.g., fire fighters and police officers) reflect the circumstances of these occupations, such as physical demands and higher disability rates. The International Association of Fire Fighters (IAFF), for example, opposes mandatory Social Security coverage for non-covered public sector employees. The IAFF points out that an estimated 70% of all fire fighters are covered by pension plans that are separate from Social Security. In a March 2011 document, the IAFF stated that ""Opponents of mandatory coverage believe that forcing all public employees into Social Security—even if it is only new hires—would undermine existing pension systems that provide superior benefits and reflect the unique circumstances of public safety work."" If Congress were to mandate Social Security coverage for all newly hired state and local government employees, as it did for newly hired federal employees in the 1980s, the Federal Employees' Retirement System (FERS) could serve as an example of how to address differences between an existing non-covered pension plan and Social Security with respect to eligibility requirements (retirement age, years of service, etc.) and other features. Under FERS, for example, certain categories of workers, including federal law enforcement officers and fire fighters, accrue benefits at higher rates than other federal employees. In addition, a temporary supplemental benefit is provided under FERS for workers who retire before the age of 62, the earliest age at which a Social Security retired-worker benefit is available. The FERS supplement is available to workers who retire at the age of 55 or older with 30 or more years of service, or at the age of 60 with 20 or more years of service. The FERS supplement, however, is available to law enforcement officers, fire fighters and air traffic controllers who retire at the age of 50 or older with 20 or more years of service. The FERS supplement is equal to the estimated Social Security benefit that the person earned while employed by the federal government, and it is paid only until the person attains the age of 62, regardless of whether the person claims Social Security retired-worker benefits at the age of 62. The portability of state and local pension plans (defined benefit plans) is usually limited to positions that fall within the same public pension system. By contrast, Social Security coverage is portable among most jobs, with the exceptions of non-covered public employment and certain other non-covered positions such as election workers and household workers earning less than an annual threshold amount. Retirement benefits from defined benefit plans are generally based on years of service and final pay. A worker who changes jobs frequently may not stay long enough in a given state or local government position to become vested in the retirement plan. Also, benefit amounts in defined benefit plans are generally based on earnings at the time the worker leaves the job, and many plans do not index earnings at departure for inflation. This may lower benefits significantly for a worker who leaves a state or local government position years before he or she retires from the workforce, or after only a few years of service. Social Security beneficiaries can move from job to job, continue to build years of service and earnings, and all covered earnings are indexed for inflation as part of the benefit computation, regardless of when the worker left covered employment. Under current law, two Social Security provisions affect individuals who are receiving a pension from work that was not covered by Social Security: the windfall elimination provision (WEP) and the government pension offset (GPO). If a worker qualifies for a Social Security retired-worker benefit based on fewer than 30 years of Social Security coverage and is also receiving a pension from work that was not covered by Social Security (a non-covered pension), he or she is subject to the WEP. Under the WEP, the worker's Social Security retirement benefit is computed using the windfall benefit formula, rather than the regular benefit formula, which results in a lower initial monthly benefit. The amount of the reduction in the worker's Social Security retirement benefit under the WEP is phased out for workers with between 21 and 30 years of Social Security-covered employment, and it is limited to one-half the amount of the worker's non-covered pension. The windfall benefit formula is designed to remove the unintended advantage that the regular benefit formula would otherwise provide to a worker who has less than a full career in Social Security-covered employment. The Social Security benefit formula is progressive. That is, it is structured to provide a long-term, low-wage worker with a benefit that replaces a greater percentage of his or her pre-retirement earnings (i.e., a higher replacement rate). The benefit formula, however, does not distinguish between a long-term, low-wage worker and a high-wage worker with a relatively short career in Social Security-covered employment. Both of these workers receive the advantage of Social Security's progressive benefit formula. The windfall benefit formula is designed to remove this unintended advantage for workers who have less than a full career in Social Security-covered employment (sometimes with high wages) because they also worked in non-covered employment and receive a pension based on non-covered work. If a person qualifies for a Social Security spousal benefit and is receiving a non-covered pension, he or she is subject to the GPO. Under the GPO, a person's Social Security spousal benefit is reduced by two-thirds the amount of his or her non-covered pension. The GPO is intended to replicate the dual entitlement rule, which affects persons who qualify for both a Social Security retired-worker benefit and a Social Security spousal benefit. Under the dual entitlement rule, a person's Social Security spousal benefit is reduced by 100% of the amount of his or her Social Security retired-worker benefit. The WEP and the GPO are unpopular provisions of Social Security law among the public and some policymakers. Some observers point out that the way Social Security benefit reductions are computed under the WEP and the GPO seems arbitrary and unfair. Legislation is introduced routinely to modify or repeal these provisions. In terms of administering these provisions, SSA must rely on self-reported data to determine if a person's Social Security retired-worker benefit should be reduced under the WEP, or if a person's Social Security spousal benefit should be reduced under the GPO, and what the Social Security benefit reduction should be under these provisions. In other words, a Social Security claimant or a current Social Security beneficiary must inform SSA that he or she is receiving a non-covered pension, and the amount of the non-covered pension, so that the WEP and the GPO can be applied in the Social Security benefit computation. Proposals have been made over the years to require state and local governments to provide information on their non-covered pension payments to SSA for purposes of administering the WEP and the GPO. President Obama's FY2012 budget request, for example, included up to $50 million for the development of a mechanism for SSA to enforce the WEP and the GPO and estimated that greater enforcement would result in Social Security program savings of almost $3.4 billion over 10 years. Mandatory Social Security coverage of newly hired state and local government employees would eventually eliminate the need for the WEP and the GPO, two provisions of Social Security law that are unpopular among the public and that present administrative difficulties for SSA. Some state and local government pension plans could be affected if newly hired state and local government employees were required to participate in Social Security. In response to mandatory Social Security coverage, employers might change the pension benefits of newly hired public employees to reflect the added Social Security coverage. The basic options for state and local governments include (1) maintaining the current pension structure for newly hired employees; (2) providing a different, presumably lower, benefit structure for newly hired employees within an existing pension plan; (3) closing the existing pension plan to new participants and creating a new pension plan for newly hired employees with a different, presumably lower, benefit structure; and (4) eliminating pension benefits (apart from Social Security) for new hires. Most state and local government workers currently participate in defined benefit (DB) pension plans. In DB pension plans, participants are guaranteed a monthly benefit in retirement that is determined using a formula based on an accrual rate, years of service, and the average of a number of years' final salary. In contrast, many private sector workers are covered by defined contribution (DC) pension plans. In DC pension plans, participants are provided with individual accounts that accumulate employees' (and often employers') contributions and investment returns. Employees use the funds in their accounts as a source of income in retirement. States would have to decide what pension benefits to offer new employees who would be covered by Social Security. Some of the changes that states and localities might consider include lowering the accrual rate for covered workers, increasing the number of high or final years of salary in the benefit formula, altering early retirement benefits, or creating defined contribution pensions. For example, one survey indicated that in 1997 the accrual rate for DB pensions provided to state and local government workers who were participating in Social Security at the time of the survey was 1.84%, compared with an accrual rate of 2.24% for workers who were not participating in Social Security. In some cases, state and local government employers might ""freeze"" their pension plans in which new hires or current employees do not accrue benefits. Plan sponsors have several types of pension freezes available. In a hard freeze, a pension plan is closed to new entrants and current participants cease accruing benefits. In a soft freeze, a pension plan is closed to new entrants but current participants continue to accrue benefits. Frozen pension plans remain subject to Internal Revenue Service rules that apply to state and local government pension plans. Bureau of Labor Statistics data from March 2009 indicated that 10% of state and local government workers who participated in a DB pension plan were in a frozen DB pension plan. The data indicated that 99% of the state and local government workers in frozen plans continued to accrue benefits; that is, the pension plan was a soft freeze. In addition, pension plans for 94% of workers in frozen plans were frozen more than five years prior to the survey, and 95% of the workers in frozen plans were offered a new DB pension plan. None of the workers in frozen DB pension plans were offered a new DC pension plan. Increased costs might come as a result of states operating several pension plans or several benefit structures within a single pension plan. For example, states could decide to offer some combination of DB and DC pension benefits. It could take several years to determine and fully implement the changes. Whether overall costs to employees and governments would increase, decrease, or remain the same depends on the type of pension benefit structure governments adopt in response to mandatory participation in Social Security. Factors that would affect this include the 6.2% Social Security payroll tax paid by employers, the 6.2% Social Security payroll tax paid by employees, the amount of employer contributions to retirement plans, and the amount of employee contributions, if any, to retirement plans. Because the pension benefits (apart from Social Security) that the plans would provide to new employees would likely decrease, pension plan contributions made by employers, and possibly employee contributions, would likely decrease as well. The impact would likely be minimal in plans that have sufficient assets from which to pay 100% of the benefits that participants have accrued. However, the resulting decrease in contributions could add financial strain to pension systems that are currently underfunded and do not have sufficient assets on hand. For example, a plan that is underfunded and ceases to have new participants will find that plan assets will have been used up and that some benefits for some participants do not have a funding source. Sponsors of pension plans that are not fully funded would have to eventually make up for the funding shortfalls that exist within their plans. Although many state and local government pension plans do not have enough assets set aside to pay 100% of promised benefits, participants are not at risk of not receiving their promised benefits in the short or medium term as most pension plans have enough funds set aside to pay benefits for many years. Potential sources of funding to make up for shortfalls include state or local general revenues, increased contributions from current employees, and greater returns on pension plan investments. Currently, many states and localities are facing revenue shortfalls and may be reluctant to set aside funds to cover pension benefits payable several years in the future. It may be difficult or impossible to require increased employee contributions from current employees. Pension plan sponsors may be tempted to increase the riskiness of their investments to capture market gains. However, in the event of a market downturn, riskier pension fund investments would lose value, exacerbating the situation. Unlike private-sector employers, state and local pension plans do not participate in a pension insurance system. Most private-sector employers participate in the Pension Benefit Guarantee Corporation (PBGC), which is a government run insurance company that pays pension benefits to retirees in bankrupt private-sector pension plans. State and local pension plans do not have the opportunity to transfer pension plan liabilities to a PBGC-like entity if they cannot pay benefits. Census Bureau data indicate that in 2007 there were 2,547 state and local pension plans, of which 2,115 responded to a Census Bureau survey of state and local pension plans. As shown in Table 4 , the 2,115 plans that responded to the survey had a total of 18.5 million participants. Although most of these plans (1,897 plans or 89.7%) were local pension plans, statewide plans accounted for more than 90% of plan participants. Some plans were very large; however, most plans had relatively few participants. The average number of participants per plan was 8,755, while the median number of participants per plan was 43. A common measure of the financial health of a DB pension plan is its funding ratio, which measures the adequacy of a DB pension plan's ability to pay promised benefits. The funding ratio is calculated as A funding ratio of 100% indicates that the DB pension plan has set aside enough funds, if the invested funds grow at the expected rate of return or better, to pay all of the benefit obligations. Funding ratios that are less than 100% indicate that the DB pension plan will not be able to meet all of its future benefit obligations. Table 5 details the funding ratios for 122 public pension plans in the Public Pension Plans Database, which was developed by the Center for State and Local Government Excellence and the Center for Retirement Research at Boston College. The pension plans in the database cover approximately 90% of the participants in state and local government pension plans. Funding ratios varied considerably among the pension plans in the database. Among the 122 pension plans for which actuarial information is provided for 2009, the median funding ratio was 77.5%. Some pension plans were well-funded: in 2009, 11 of the 122 pension plans had funding ratios of 100% or greater. Nearly one-third of the pension plans (31.2%), which covered 24.0% of plan participants, had funding ratios of less than 70%. Some argue that mandating Social Security coverage for all public employees would impose significant administrative burdens on state and local governments. State and local governments would have to administer two different systems, one for existing non-covered employees and another for employees who are newly covered by Social Security, until there were no more pensioners under the original pension system. Additional costs would include communicating with employees and actuarial reviews. SSA would also need to administer two systems for a while, one system for covered employees and a second system for remaining beneficiaries with pensions from non-covered employment who are subject to WEP or GPO reductions on their Social Security benefits. State and local governments would need to negotiate extensively with employees and legislatures about the redesign of existing pension systems, in order to adapt existing plans to Social Security coverage. When Congress mandated Social Security coverage for new federal workers in 1983, the federal government enacted a new federal pension plan after three years. GAO has suggested that four years might be required to complete negotiations among legislatures and employee representatives about adapting existing plans to Social Security coverage. Others counter that states and localities already withhold workers' federal income taxes, so the additional administrative costs associated with payroll tax deductions would not be significant. Opponents of mandatory coverage sometimes argue that mandated coverage would raise constitutional issues and might be challenged in court. GAO wrote in 1998, ""we believe that mandatory coverage is likely to be upheld under current U.S. Supreme Court decisions."" ( A discussion of t he potential legal issues associated with mandatory Social Security coverage is beyond the scope of this report. ) Some argue that non-covered state and local government workers should share in providing the poverty reduction that occurs through the Social Security system, which offers disability benefits, dependents' benefits and survivors' benefits, in addition to retirement benefits. In June 2011, retired workers and their dependents accounted for 73% of total benefits paid. The remaining 27% was paid to disabled workers and their dependents (16% of total benefits paid) and to the survivors of deceased workers (11% of total benefits paid). Social Security also redistributes income from workers with higher lifetime earnings to workers with lower lifetime earnings. According to data from BLS, state and local government workers have higher hourly earnings, on average, than the rest of the population. To the extent that state and local government workers do not participate in Social Security, they do not share in providing the poverty reduction that occurs through Social Security. This places an extra burden on higher-earning workers within the Social Security system. According to the 1994-1996 Advisory Council on Social Security, ""an effective Social Security program helps to reduce public costs for relief and assistance, which, in turn, means lower general taxes. There is an element of unfairness in a situation where ... a few benefit both directly and indirectly, but are excused from contributing to the program."" A related argument is that non-covered workers do not share the ongoing costs related to the start-up of the Social Security program. When Social Security was created, the first beneficiaries—often the parents and grandparents of current state and local government employees—paid into the system for a short period and received benefits far in excess of their contributions. About 25% of today's Social Security payroll tax revenues (about 3 percentage points of the current 12.4% payroll tax) go to cover the implicit interest costs of these net transfers to the first beneficiaries. Non-covered workers do not share in these costs, which are sometimes known as ""legacy costs."" In addition, as noted above, CBO projects that mandatory Social Security coverage would increase the number of Social Security beneficiaries in the long term, though the additional benefit payments would be about half the size of the additional revenues. The reason, as explained by CBO, is that most of the newly hired state and local government employees would receive Social Security benefits under current law because they may have held other covered jobs in the past or they were covered by a spouse's employment. Supporters of mandatory Social Security coverage argue that, if most non-covered state and local government employees will qualify for Social Security benefits under current law based on a second job or a spouse's employment, they should be required to pay into the Social Security system throughout their careers. Opponents of mandatory coverage maintain that Social Security benefit reductions under the WEP and the GPO already take into account that some workers participate in alternative public pension plans that operate outside of Social Security. Opponents argue that Social Security coverage has been available to state and local governments since the early 1950s. Thus, many states and localities have had the opportunity to weigh the pros and cons of Social Security coverage. States and localities that have chosen not to participate in the Social Security system would likely view mandatory Social Security coverage as unfair. The majority of state and local government employees are covered by Social Security (72.5% in 2008). Proposals to mandate Social Security coverage for all state and local government employees hired in the future have been part of the Social Security policy debate for many years. The underlying issues to consider in evaluating the potential advantages and disadvantages of mandatory Social Security coverage include Social Security's long-range financial status; benefit protections for workers and their families; the impact on states and localities that would be required to revise their public pension plans to incorporate a Social Security component; and a broader social perspective. ","Social Security covers about 94% of all workers in the United States. Most of the remaining 6% of non-covered workers are public employees. About one-fourth of state and local government employees are not covered by Social Security for various historical and other reasons. The 1935 Social Security Act did not extend coverage to state and local government workers. Since the 1950s, Congress has passed laws to allow state and local government employees who have public pensions to elect Social Security coverage through employee referendums. In 1990, Congress made Social Security coverage mandatory, starting in July 1991, for most state and local government employees who are not covered by an alternative public pension plan. Some have proposed extending mandatory Social Security coverage to all newly hired public employees. Recently, this proposal was included in the recommendations of the Bipartisan Policy Center's Debt Reduction Task Force and the National Commission on Fiscal Responsibility and Reform. According to the Social Security Administration (SSA), mandatory Social Security coverage of newly hired state and local government workers would close an estimated 8% to 9% of Social Security's projected average 75-year funding shortfall (the greatest positive financial effect would occur during the initial period following implementation) and extend Social Security trust fund solvency by 2 to 3 years. The Congressional Budget Office estimates that the proposal would increase net federal revenues by $24 billion over 5 years and $96 billion over 10 years. Supporters of mandatory Social Security coverage maintain that it would result in better benefit protections for workers and their families through the provision of dependents' and survivors' benefits and full cost-of-living adjustments under Social Security. Opponents argue that mandatory coverage would not necessarily provide better benefit protections compared with existing non-covered pension plans; the net effect on a worker's total benefits would depend in part on how state and local governments modify their existing pension plans in response to mandatory coverage. Moreover, Congress could enact changes to the Social Security contribution and benefit structure that result in higher payroll taxes and lower benefits for current workers in response to Social Security's projected long-range funding shortfall. Supporters point out that, unlike state and local pension plan coverage, Social Security coverage is portable (i.e., coverage is transferrable as a worker moves from job to job). Mandatory Social Security coverage would prevent gaps in coverage that can adversely affect workers, especially those who become disabled. Some supporters of mandatory coverage argue that Social Security reduces poverty among retired and disabled workers, spouses, dependent children, and the survivors of deceased workers. They argue that all workers should share in providing this poverty reduction, which has national benefits. Many state and local government employers and employees oppose mandatory Social Security coverage, even if it were extended only to newly hired employees. State and local governments are concerned that mandatory coverage could increase pension system costs significantly at a time when many state and local pension systems are struggling financially. The extent of cost increases would depend on how states and localities adjust their existing pension plans in response to mandatory Social Security coverage. Some state and local government employees and advocacy groups express concern that existing non-covered pension plans, including those designed for specific categories of workers such as fire fighters and police officers, could be ""undermined"" if Social Security coverage were mandated.",govreport
"T rade Adjustment Assistance for Workers (TAA) provides federal assistance to workers who involuntarily lose their jobs due to foreign competition. The primary benefits for TAA-eligible workers are funding for training and reemployment services as well as income support while a worker is enrolled in training. Workers may also be eligible for other benefits, including a tax credit equal to a portion of qualified health insurance premiums. Workers age 50 and over may be eligible for Reemployment Trade Adjustment Assistance, a wage supplement program. After a brief discussion of the program's purpose and most recent reauthorization, this report describes TAA as reauthorized by the Trade Adjustment Assistance Reauthorization Act of 2015 (TAARA, Title IV of P.L. 114-27 ). Reduced barriers to international trade are widely acknowledged to offer benefits to consumers in the form of increased choices and lower prices. Expanded trade may also offer expansionary opportunities to firms that produce goods or services that see increased exports. Reduced barriers to trade may, however, have concentrated negative effects on domestic industries and workers that face increased competition. TAA is designed to provide readjustment assistance to workers who suffer dislocation (job loss) due to foreign competition or offshoring. Generally, TAA provides a more robust set of benefits and services than would be available to a worker who lost his or her job for reasons other than foreign competition. TAA is designed to assist workers who have been adversely affected by reduced trade barriers and increased trade. Its availability to workers who are adversely affected by declines in international trade may be limited. TAA was created in 1962 and, historically, has been reauthorized alongside expansionary trade policies. A detailed legislative history of the program is in the Appendix . In June 2015, TAA was reauthorized by TAARA. The eligibility and benefit provisions of TAARA are authorized to continue through June 30, 2021. TAARA was part of a bill that extended other trade-related policies. TAARA was also passed in conjunction with a separate bill that reauthorized the Trade Promotion Authority (TPA, Title I of P.L. 114-26 ). TPA (also known as ""fast track"") grants the President authority to negotiate trade agreements, which are then subject to an ""up or down"" vote in Congress. Since the reauthorization of TPA in 2015, Congress has not voted on any presidentially negotiated trade agreements. This report focuses on the eligibility and benefit provisions of TAA as enacted by TAARA. These provisions apply to all workers certified for TAA after the law's enactment. The law also had retroactivity provisions and, in some cases, workers who were parts of groups certified prior to the 2015 reauthorization may be covered under the TAARA provisions. In other cases, however, a worker who was certified under pre-2015 provisions may continue to receive benefits under the prior provisions. As such, while the version of the program described in this report will apply to all new program participants certified through June 30, 2021, it may not apply to some participants who are covered by a TAA petition that was certified prior to the enactment of TAARA. In these cases, states may operate multiple TAA programs to concurrently serve workers certified under the TAARA provisions and workers certified under other provisions. TAA is jointly administered by the federal government and the states. It is funded by the federal government. The respective roles of federal and state governments in administering and financing the TAA program were in place prior to TAARA and were not substantively changed by the reauthorization law. TAA is jointly administered by the U.S. Department of Labor (DOL) and cooperating state agencies. DOL makes group eligibility determinations, allots appropriated funds to cooperating state agencies, and oversees grantees. Individual benefits are provided through state workforce systems and state unemployment insurance systems. Workers may physically receive benefits and services through local American Job Centers (also known as One-Stop Career Centers). States are responsible for collecting participation and outcome data and reporting these data to DOL. The Health Coverage Tax Credit, which is available to qualified TAA-certified workers who purchase qualified health insurance, is administered by the Internal Revenue Service (IRS). It is administered separately from the TAA program's other benefits and services. TAA is funded by mandatory appropriations. Typically, Congress appropriates a single sum that supports all TAA activities. DOL then allocates these funds to various program activities. Under TAARA, funding for training and reemployment services is capped at $450 million per year. These funds are allotted to the states via a grant allocation formula that considers past and anticipated program usage. States may expend training and reemployment service funds in the year of allotment or in either of the next two fiscal years. Training subsidies are states' primary expenditures out of their reemployment services funding. TAARA specifies that states must allocate at least 5% of their reemployment services funding to case management and no more than 10% to administrative costs. Funds for the Trade Readjustment Allowance income support and Reemployment Trade Adjustment Assistance wage insurance program are not capped. Appropriations for these benefits are based on congressional estimates. Funding for these benefits that is not spent in the year of allotment is returned to the Treasury. TAA is a direct spending (also referred to as ""mandatory"") program and subject to sequestration under the Budget Control Act of 2011, as amended. For FY2018, the Office of Management and Budget (OMB) determined that the reduction for nonexempt, nondefense spending would be 6.6%. Sequester levels in subsequent years will be determined by OMB. In FY2018, Congress appropriated $790 million for the TAA for Workers programs. Of this amount, $450 million was for training and reemployment services and the remaining $340 million was for income support and wage insurance. The entire $790 million appropriation was subject to 6.6% sequestration ($52.14 million). DOL opted to apply the entirety of the sequestration to the training and reemployment services funding, reducing the funding for training and reemployment services from $450 million to $397.86 million and leaving the $340 million for income support and wage insurance unchanged. Obtaining TAA benefits is a two-stage process. First, a group of workers or their representative (e.g., firm, union, or state) must petition DOL to establish that their job loss was attributable to foreign trade and met statutory criteria. Once a group has been certified by DOL, individual workers covered by the group's petition apply for state-administered benefits at local American Job Centers (AJCs; also known as One-Stop Career Centers). TAA is available to workers in the 50 states, the District of Columbia, and Puerto Rico. To be eligible for TAA group certification, a group of workers from a firm (or a subdivision of a firm) must have become totally or partially separated from their employment or have been threatened with becoming totally or partially separated. Private sector workers who produce goods (""articles"" in the law) or services are eligible for TAA. The petitioning workers must establish that foreign trade contributed importantly to their separation. The role of foreign trade can be established in one of several ways: An increase in competitive imports . The sales or production of the petitioning firm have decreased absolutely and imports of articles or services like or directly competitive with those produced by the petitioning firm have increased. A shift in production to a foreign country . The workers' firm has moved production of the articles or services that the petitioning workers produced to a foreign country or the firm has acquired, from a foreign provider, articles or services that are directly competitive with those produced by the workers. Adversely affected secondary workers . The petitioning firm is a supplier or a downstream producer to a TAA-certified firm and either (1) the sales or production for the TAA-certified firm accounted for at least 20% of the sales or production of the petitioning firm or (2) a loss of business with a TAA-certified firm contributed importantly to the workers' job losses. USITC workers . Workers separated from firms that have been publicly identified by the United States International Trade Commission (USITC) as injured by a market disruption or other qualified action. The TAA eligibility criteria are designed to target workers who lose their jobs due to increased international trade and increased imports. The structure of the eligibility criteria mean that the program may not be available to workers who are adversely affected by reductions in international trade or declines in exports. To establish TAA eligibility, a group of workers (or their representative, such as a union, firm, or state) must complete a two-page petition and submit it, along with any supporting documentation, to DOL. An additional copy of the TAA petition must also be filed with the governor of the state in which the affected firm is located. After receiving the petition, DOL investigates to determine if the petition meets any of the criteria outlined in the previous subsection of this report. Determinations of TAA petitions are published in the Federal Register and on the DOL website. If a petition is certified, DOL will also determine an impact date on which trade-related layoffs began or threatened to begin. This date can be as early as one year prior to the petition. A certified petition will cover all workers laid off by the firm (or applicable subdivision of the firm) between the impact date and two years after the certification of the petition. For example, if a petition is certified on November 1, 2015, and the impact date is found to be March 1, 2015, all members of the certified group laid off between March 1, 2015, and November 1, 2017, would be eligible for TAA benefits. If a petition is denied, the group may request administrative reconsideration by DOL. Reconsideration requests must be mailed within 30 days of the publication of the initial denial in the Federal Register . Workers who are denied certification may seek judicial review of DOL's initial petition denial or denial following administrative reconsideration. Appeals for judicial review must be filed with the U.S. Court of International Trade within 60 days of Federal Register publication of the initial denial or the administrative reconsideration denial. After DOL certifies a group of workers as eligible, the individual workers covered by the certification then apply to their local AJCs for individual benefits. To be eligible for Trade Readjustment Allowance payments, a worker must meet all of the following conditions: (1) separation from the firm on or after the impact date specified in the certification but within two years of DOL certification, (2) employment with the affected firm in at least 26 of the 52 weeks preceding layoff, (3) entitlement to state unemployment compensation (UC) benefits, and (4) no disqualification for extended unemployment benefits. Additionally, workers must be enrolled in an approved training program or have received a waiver from training. Group-certified workers who are denied individual benefits can appeal the decision. The determination notice that individual workers receive after filing their applications for each benefit explains their appeal rights and time limits for filing appeals. TAA benefits for individual workers include training and reemployment services and income support for workers who have exhausted their UC benefits and are enrolled in training. Workers age 50 and over may participate in the Reemployment Trade Adjustment Assistance (RTAA) wage insurance program. Certified workers may also be eligible for a tax credit for a portion of the premium costs for qualified health insurance. TAA-certified workers may receive several types of benefits and services to aid them in preparing for and obtaining new employment. The largest reemployment benefit from a budgetary standpoint is training assistance. Workers may also receive case management services and reimbursements for qualified job search and relocation expenses. TAARA caps annual funding for training and reemployment services at $450 million per year. Training and reemployment services funds are granted to state workforce agencies via formula. Eligible workers request training assistance through their local AJCs. Statute specifies that training for a worker shall be approved if all of the following conditions are met: there is no suitable employment available for an adversely affected worker, the worker would benefit from appropriate training, there is a reasonable expectation of employment following completion of such training, training approved by the Secretary is reasonably available to the worker from either governmental agencies or private sources, the worker is qualified to undertake and complete such training, and such training is suitable for the worker and available at a reasonable cost. Once approved, training can be paid on the worker's behalf directly to the service provider or through a voucher system. The range of approved training includes a variety of governmental and private programs. There is no federal limit on the amount of training funding an individual can receive, though some states have a cap. A concise summation of TAA training programs is difficult due to the range of acceptable activities and the decentralized nature of approval and training. Data from DOL, however, offer some insight into the nature and duration of TAA-sponsored training programs. In FY2015, approximately 88% of TAA training participants received what DOL describes as occupational skills training: training in a specific occupation, typically provided in a classroom setting. The remainder of training was classified as remedial, prerequisite, on-the-job, or other customized training. Among program participants who exited the TAA program in FY2015 and participated in training, 70% completed their program of training. Among the training participants who completed their training programs in FY2015, the average duration of enrollment in the program was 512 days and the average training cost was $13,062. TAA does not require training programs to lead to a degree or other credential. In its FY2015 annual report, DOL reported that 89% of workers who completed training earned an industry-recognized credential, or a secondary school diploma or equivalent. TAA funding may be the only source of funding for a worker's training costs. Statute addresses scenarios in which other resources are used in the pursuit of TAA-funded training. In determining if the cost of a training program is reasonable, an administering state agency may consider public and private non-TAA funding available to the worker. For example, a worker may voluntarily offer to pay for a portion of a program with personal funds so that an agency may approve a program for which the costs would not otherwise be reasonable. An administering state agency may not require a TAA-certified worker to contribute personal funds or apply for other assistance as a condition of approving a TAA training program. A key exception of the policy of administering state agencies considering non-TAA aid is that the Higher Education Act specifies that certain types of federal student aid (including Pell Grants) ""shall not be taken into account in determining the need or eligibility of any person for benefits or assistance, or the amount of such benefits or assistance, under any Federal, State, or local program financed in whole or in part with Federal funds."" As such, a TAA-certified worker's training benefit could not be reduced on the basis of that worker's access to a Pell Grant. Guidance from DOL notes that this policy ""allows a worker to use student financial assistance for living expenses instead of tuition and thus provides the worker income support during long-term training."" TAARA specifies that, through the administering state agencies and AJC system, DOL shall provide a series of case management and employment services to all TAA-certified workers. These services include a comprehensive assessment of a worker's skills and needs, assistance in developing an individual employment objective and identifying the training and services necessary to achieve that goal, and guidance on training and other services for which a worker may be eligible. Under TAARA, states are required to use at least 5% of their reemployment services allotments for case management and employment services. States may use their reemployment services funding to provide job search and relocation allowances. These allowances target workers who are unable to obtain suitable employment within their commuting areas. Certified workers can receive an allowance equal to 90% of each of their job search and relocation expenses, up to a maximum of $1,250 for each benefit. A Job Search Allowance may be available to subsidize transportation and subsistence costs related to job search activities outside an eligible worker's local commuting area. Subsistence payments may not exceed 50% of the federal per diem rate and travel payments may not exceed the prevailing mileage rate authorized under federal travel regulations. A Relocation Allowance may be available to workers who have secured permanent employment outside their local commuting area. The benefit covers 90% of the reasonable and necessary expenses of moving the workers, their families, and their household items. Relocating workers may also be eligible for a lump sum payment of up to three times their weekly wage, though the total relocation benefit may not exceed $1,250. Trade Readjustment Allowance (TRA) is a weekly income support payment to certified workers who have exhausted their UC benefits and who are enrolled in training. To be eligible for TRA, a worker must be enrolled in training within 26 weeks of separation from the worker's job or within 26 weeks of TAA certification, whichever is later. In limited circumstances, a worker may obtain a training waiver. TRA is funded by the federal government and administered by the states through their unemployment insurance systems. TRA is an individual entitlement and not subject to an annual funding cap. Appropriation levels are based on estimated usage and unused funds are returned to the Treasury at the end of the fiscal year. Individual TRA benefit levels are equal to a worker's final UC benefit. UC benefit levels are based on earnings during a base period of employment (typically, the first four of the last five completed calendar quarters). UC benefits typically replace a portion of a worker's wages up to a statewide maximum. Since states each administer their own UC programs, there is some variation in benefit levels. In July 2015, the highest maximum weekly UC benefit for a worker with no dependents was $698 in Massachusetts and the lowest maximum weekly benefit was $240 in Arizona. There are three stages of TRA Basic TRA. The weekly basic TRA payment begins the week after a worker's UC eligibility expires. To receive the basic TRA benefit, workers must be enrolled or participating in TAA-approved training, have completed such training, or have obtained a waiver from the training requirement. The total amount of basic TRA benefits available to a worker is equal to 52 times the weekly TRA benefit minus the total amount of UC benefits. For example, assuming a constant benefit level, a worker who received 20 weeks of UC benefits would be eligible for 32 weeks of basic TRA. Additional TRA. After basic TRA has been exhausted, workers who are enrolled in a TAA-approved training program are eligible for an additional 65 weeks of income support, for a total of 117 weeks of benefits. Additional TRA is limited to workers who are enrolled in a training program; workers who have received a training waiver are not eligible for additional TRA. TAA participants may only collect additional TRA as long as they remain enrolled in a qualified training program. In cases where a worker's training program is shorter than the maximum TRA duration, the worker is not entitled to the maximum number of TRA weeks. Completion TRA. In cases where a worker has collected 117 weeks of combined TRA and UC and is still enrolled in a training program that leads to a degree or industry-recognized credential, the worker may collect TRA for up to 13 additional weeks (130 weeks total) if the worker will complete the training program during that time. RTAA is an entitlement that provides a wage supplement for workers age 50 and over who are certified for TAA benefits and obtain reemployment at a lower wage. The program provides a cash payment to an eligible worker equal to 50% of the difference between the worker's wage at the trade-affected job and the worker's wage at his or her new job. The maximum benefit is $10,000 over a two-year period. Workers may not receive TRA and RTAA benefits simultaneously. To be eligible for RTAA, a worker must either (1) be reemployed on a full-time basis, as defined by the law of the state in which the worker is employed or (2) be reemployed at least 20 hours a week and be enrolled in a TAA-sponsored training program. Workers who receive RTAA payments while enrolled in training and working less than full time may be subject to a reduced benefit. Workers who are receiving TRA, UC in lieu of TRA, or RTAA benefits may also be eligible for a tax credit that covers a portion of eligible health insurance premiums. The Health Coverage Tax Credit (HCTC) is equal to 72.5% of qualified health insurance premiums. TAARA includes provisions specifying that a worker must elect between the HCTC and premium credits under the Patient Protection and Affordable Care Act ( P.L. 111-148 , amended). Unlike other provisions of TAARA, which are in effect through June 30, 2021, the HCTC is authorized through December 31, 2019. The Trade Act requires DOL to collect and publish specified data on TAA participation, benefits, outcomes, and spending. Data to be collected and reported include (but are not limited to) the following: Data on petitions filed, certified, and denied . These data include the number of petitions filed, certified, and denied, as well as the average processing time for such petitions. Certified petitions must be disaggregated on the basis of eligibility. Data on benefits received . These data include the number of workers receiving TRA and other benefits as well as the average duration for which workers received benefits. Data on training . These data include the number of workers who participated in training, the average duration of such training, and the average per-worker cost of training. Data on outcomes . These data include the percentage of workers who are in unsubsidized employment during the second calendar quarter after exit, the earnings of such workers, the percentage of workers who are in unsubsidized employment in the fourth quarter after exit, and the percentage of workers who received a recognized postsecondary credential. Data on rapid response activities . These data include whether or not a state provided rapid response services to each firm that petitioned for benefits. Data on spending . These data include state and national payments for TRA benefits, training, administration, and job search and relocation allowances. The data required by the Trade Act are collected by the state agencies that administer the TAA program. These data are submitted to DOL, which publishes the data and other relevant information in annual reports. Since 2014, DOL has also published quarterly data and analysis on its website. In addition to participation data, DOL maintains a database of individual firms' TAA petitions. Users can access firm-level information, including the firm's full petition and DOL's assessment and determination of the petition. Early History The first TAA programs were enacted in 1962 but little used until the Trade Act of 1974 eased eligibility requirements. Program use expanded through the 1970s and the number of certified workers increased from about 59,000 in FY1975 to nearly 600,000 in FY1980. In light of rapidly increasing program costs, the Omnibus Budget Reconciliation Act of 1981 ( P.L. 97-35 ) cut spending by reducing benefits and emphasizing training and other reemployment services. TAA participation levels fluctuated throughout the 1980s, but were mostly well below the levels of the 1970s. In 1988, the program was reauthorized through FY1993 by the Omnibus Trade and Competitiveness Act of 1988 ( P.L. 100-418 ). Among other changes, the 1988 reauthorization expanded eligibility for TRA but also placed a new emphasis on training by making it a program requirement. 1990s and NAFTA The Omnibus Reconciliation Act of 1993 ( P.L. 103-66 ) reauthorized TAA through 1998 with reductions in training funding. The North American Free Trade Agreement (NAFTA) Implementation Act of 1993 ( P.L. 103-182 ) established a new component of TAA that offered dedicated benefits to workers whose job loss was attributable to trade with Mexico and Canada. Trade Act of 2002 The next major reauthorization of TAA was part of the Trade Act of 2002 ( P.L. 107-210 ). This law combined TAA, TPA, and other trade-related issues into a single piece of legislation. Among other changes, the 2002 TAA reauthorization merged the NAFTA-TAA program into the general TAA program and created the Health Coverage Tax Credit for TAA workers. The Trade Act of 2002 reauthorized TAA through FY2007. Several short-term extensions continued the program until it was reauthorized in February 2009. American Recovery and Reinvestment Act In February 2009, TAA was reauthorized and expanded by the American Recovery and Reinvestment Act (ARRA; P.L. 111-5 ). Unlike other reauthorizations, which tended to be aligned with expansionary trade policy or budget reconciliations, this reauthorization was aligned with other domestic initiatives to spur economic activity during a time of above-average unemployment. The ARRA reauthorization of TAA expanded the program in several ways. Among other provisions, it increased funding for training, increased the maximum number of weeks that a worker could receive TRA, and extended eligibility to service sector and public sector workers who had been displaced by trade. The ARRA provisions of TAA were scheduled to expire after December 31, 2010. A short-term extension continued the program through February 12, 2011. After that date, TAA reverted to the more limited eligibility and benefit provisions that were in place prior to ARRA. 2011 Reauthorization: Trade Adjustment Assistance Extension Act In October 2011, the Trade Adjustment Assistance Extension Act (TAAEA; Title II of P.L. 112-40 ) was enacted. This reauthorization was aligned with the separate passage of three implementing bills of free trade agreements with Colombia, Panama, and South Korea. TAAEA reinstated some, but not all, of the expansions that had been enacted under ARRA. Most notably, it re-expanded eligibility to service sector (but not public sector) workers and increased training funding to near-ARRA levels. TAAEA also curtailed benefits by reducing the eligible reasons for training waivers from six to three. Sunset and Termination Provisions of 2011 Reauthorization The eligibility and benefit provisions initially enacted by TAAEA were scheduled to remain in place until December 31, 2013. Beginning January 1, 2014, the TAA program reverted to a more limited set of eligibility and benefit provisions (""Reversion 2014 provisions""). Among other changes, the Reversion 2014 provisions ended eligibility for service workers and reduced the cap on training funding to the 2002 levels. The Reversion 2014 provisions were scheduled to remain in place for one year before authorization expired after December 31, 2014, and the program was scheduled to begin to be phased out. The program did not, however, expire as scheduled at the end of 2014. Instead, the Consolidated and Further Continuing Appropriations Act, 2015 ( P.L. 113-235 ) provided funding for full operation of the program under the Reversion 2014 provisions through FY2015. 2015 Reauthorization: Trade Adjustment Assistance Reauthorization Act TAA continued to operate under the Reversion 2014 provisions until the enactment of the Trade Adjustment Assistance Reauthorization Act of 2015 (TAARA; Title IV of P.L. 114-27 ). This reauthorization was aligned with the separate extension of the Trade Promotion Authority (TPA, also known as ""fast track""). Any agreements negotiated under TPA are subject to an ""up or down"" vote in Congress. TAARA reinstated many of the eligibility and benefit provisions that were enacted by TAAEA in 2011. TAARA reinstated eligibility for service workers and increased training funding to a level between those of TAAEA and the Reversion 2014 provisions. Sunset and Termination Provisions of 2015 Reauthorization TAARA contains sunset provisions similar to those in TAAEA that took effect in 2014. Beginning July 1, 2021, the TAA program is scheduled to revert to a more limited set of eligibility and benefit provisions that are similar to the Reversion 2014 provisions. These provisions are scheduled to remain in place for one year until authorization is set to expire after June 30, 2022, and then the program is scheduled to begin to be phased out.","Trade Adjustment Assistance for Workers (TAA) provides federal assistance to workers who have involuntarily lost their jobs due to foreign competition. It was last reauthorized by the Trade Adjustment Assistance Reauthorization Act of 2015 (TAARA; Title IV of P.L. 114-27). This report discusses the TAA program as enacted by TAARA. To be eligible for TAA, a group of workers must establish that they were separated from their employment either because their jobs moved outside the United States or because of an increase in directly competitive imports. Workers at firms that are suppliers to or downstream producers of TAA-certified firms may also be eligible for TAA benefits. Private sector workers who produce goods or services are eligible for TAA benefits. To establish eligibility for TAA benefits, a group of trade-affected workers (or their representative) must petition the Department of Labor (DOL) and a DOL investigation must verify the role of increased foreign trade in the workers' job losses. Once a petition is certified by DOL, covered workers may apply for individual benefits. Individual benefits are funded by the federal government and administered by state agencies through their workforce systems and unemployment insurance systems. Benefits available to individual workers include the following: Training and reemployment services are designed to assist workers in preparing for and obtaining new employment. Training subsidies are the largest reemployment services expenditure and support workers in developing skills for a new occupation. Workers may also receive case management services and job search assistance. In some cases, workers who pursue employment outside their local commuting area may be eligible for job search or relocation allowances. Trade Readjustment Allowance (TRA) is a weekly income support payment for TAA-certified workers who have exhausted their unemployment compensation (UC) and who are enrolled in an eligible training program. Weekly TRA payments are equal to the worker's final weekly UC benefit. Workers may collect UC and TRA for a combined maximum of 130 weeks, the final 13 of which are only available if necessary for the worker to complete a qualified training program. Reemployment Trade Adjustment Assistance (RTAA) is a wage insurance program available to certified workers age 50 and over who obtain reemployment at a lower wage. The wage insurance program provides a cash payment equal to 50% of the difference between the worker's new wage and previous wage, up to a two-year maximum of $10,000. The Health Coverage Tax Credit is a credit equal to 72.5% of qualified health insurance premiums. Eligibility is aligned with TRA. Unlike other TAA benefits, it is administered through the tax code. TAA is a mandatory program that is supported through annual appropriations. Appropriations for the program in FY2018 were $790 million.",govreport
"The Federal Employee Dental and Vision Benefits Enhancement Act of 2004 was enacted on December 23, 2004, requiring the Office of Personnel Management (OPM) to establish arrangements under which supplemental dental and vision benefits are available to federal employees, Members of Congress, annuitants, and dependents. OPM established the Federal Employees Dental and Vision Insurance Program (FEDVIP), with coverage first available on December 31, 2006. Enrollees are responsible for 100% of the premiums, and OPM does not review disputed claims. Employees who are eligible to enroll in the Federal Employees Health Benefits (FEHB) program, whether or not they are actually enrolled, may enroll in FEDVIP. Annuitants, survivor annuitants, and compensationers (someone receiving monthly compensation from the Department of Labor's Office of Workers' Compensation program) may also enroll in FEDVIP. Eligible family members include a spouse, unmarried dependent children under age 22, and continued coverage for qualified disabled children 22 years or older. Former spouses receiving an apportionment of an annuity, deferred annuitants, and those in FEHB temporary continuation of coverage are not eligible to enroll in FEDVIP. There are four nationwide dental plans, and three additional dental plans that are only available regionally. The nationwide plans also provide coverage overseas. There are three vision plans, which all provide both nationwide and overseas coverage. Eligible individuals may enroll in a FEDVIP plan during the standard open season for FEHB plans (for 2008 coverage, open season is from November 12 through December 10, 2007). Individuals may change plans during open season each year, or following a qualifying life event. As with FEHB, new employees have 60 days to enroll. FEDVIP enrollment can be done through the Internet at http://www.BENEFEDS.com , or, for those without Internet access, by calling 1-877-888-FEDS. Individuals may choose a self-only, self +1, or a family plan. This set of options differs from the FEHB plans, which only allow for two choices: a self-only or a family plan. Individuals who choose to enroll in FEDVIP are not required to enroll in both a dental and a vision plan; they may choose only one type of coverage or both. Individuals are not required to enroll in the dental plan offered by their FEHB plan; for example, an individual whose health insurance is provided by GEHA may enroll in MetLife's dental plan and in Blue Cross Blue Shield's vision plan. However, any coverage for dental and/or vision services provided under the individual's FEHB plan is the primary source of coverage, and the FEDVIP supplemental dental and vision plans pay secondary. Additionally, active workers (not annuitants) may still contribute to a Flexible Spending Account (FSA) to cover any qualified unmet medical expenses, such as dental copayments or deductibles. Premiums vary by plan, by whether the enrollment includes other family members, and by residency (for dental plans only). Unlike nationwide FEHB plans, individuals enrolled in a FEDVIP dental plan pay different premiums depending on where they live in the country or overseas. Active employees pay FEDVIP premiums on a pre-tax basis (called premium conversion). However, unlike FEHB plans, employees may not opt out of premium conversion. Pre-tax premiums are not available to annuitants, survivor annuitants, or compensationers. While there are no preexisting condition exclusions for this coverage, there are waiting periods for orthodontia. Individuals must be in the same plan for the entire waiting period, and switching to a new plan may require beginning the waiting period over again. There are no waiting periods for vision services. While the statutes allow for more stringent waiting periods for individuals who do not enroll at their first enrollment opportunity, the brochures for 2008 do not indicate that plans have imposed additional restrictions. Enrollees will pay less out-of-pocket costs if they use in-network services. For 2008, the four nationwide dental plans are Aetna, GEHA, MetLife, and United Concordia. Both GEHA and MetLife have two options—a high and a standard option. There are also three regional plans: Triple-S (covering Puerto Rico), GHI (covering New York and parts of Pennsylvania, Connecticut, and New Jersey), and CompBenefits (covering 19 states, Washington, D.C., and parts of Maryland). Only the nationwide plans also provide coverage overseas. The benefits provided by these plans include, but are not limited to, the following: (1) Class A (Basic) services—oral examinations, prophylaxis, diagnostic evaluations, sealants, and X-rays; (2) Class B (Intermediate) services—restorative procedures such as fillings, prefabricated stainless steel crowns, periodontal scaling, tooth extractions, and denture adjustments; (3) Class C (Major) services—endodontic services such as root canals, periodontal services such as gingivectomy, major restorative services such as crowns, oral surgery, and bridges, and prosthodontic services such as complete dentures; and (4) Class D (Orthodontic) service. Premiums for these plans vary by geographic area. For example, an Aetna enrollee in Washington, D.C., will pay a monthly premium of $28.97 for self-only coverage. Monthly premiums for Aetna's plan range from $26.35 to $36.83, depending on where the enrollee resides. For all dental plans, self + 1 premiums are approximately twice the plan's self-only premium, and family premiums are about three times the plan's self-only premium. Thus, comparing plan premiums is slightly more complex than comparing nationwide FEHB plan premiums, for which everyone in the same self-only plan pays the same premium, regardless of where they live, and for which there is no self + 1 option. Similar to the FEHB program, premiums also vary by high or standard options. Table 1 , below, compares the national dental plans, including the monthly premiums for the Washington, D.C., area. Monthly self-only premiums range from $22.71 for MetLife's standard plan to $37.90 for GEHA's high option plan. Only Aetna had no premium increase over last year, with other plans increasing self-only premiums from about $1 per month (GEHA high option, with about a 2% increase) to $4.50 per month (United Concordia, with about a 15% increase) per month. The percentage of services covered by a plan varies by class of service, with only GEHA's standard plan requiring a copayment for preventive services. Enrollees who choose out-of-network services pay their coinsurance plus any amount over the plan's payment. The United Concordia plan pays only for emergency out-of-network services. All of the plans cover underserved areas, as well as those overseas. The plans also impose an annual benefit limit for total Class A through C services of $1,200 for all plans, except MetLife's high option plan with a $3,000 limit. There is a lifetime orthodontia limit, which is $1,500 for all plans, except MetLife's high option plan, which has a $3,000 limit. For 2008, the three vision plans are FEP BlueVision (Blue Cross and Blue Shield), Spectera, and Vision Service Plans (VSP). Each of these plans has both a high and a standard option, and also provides both nationwide and overseas coverage. Annual premiums for the three plans are similar; annual self-only coverage is $71.76 for Spectera, $99.36 for VSP, and $103.20 for FEP BlueVision's plan. The high-option plans cost about $20 to $40 more per year. Premiums for self + 1 plans are about double the costs of self-only plans, and premiums for family plans are about triple the costs. For 2008, Spectera had a very small premium increase (for self-only standard coverage, premiums increased by $0.20 per month, and high plan premiums increased by $0.39 per month, each about a 5% increase). The other vision plans' premiums remained the same. The more significant differences are found in benefits and network limitations. For example, under the FEP BlueVision plan, enrollees must stay in-network for covered services, with two exceptions: those who living in a limited access area or those who receive services overseas. Enrollees are responsible for any difference between the amount billed by the provider and the actual plan payment. Spectera and VSP both allow for reimbursement for visits to out-of-network providers. Generally, covered services are limited to eye exams, a choice between lenses for glasses or contacts, and extra discounts and savings on non-covered services, such as progressive lenses and additional glasses. The services are provided according to a schedule, such as eye exams every 12 months and new frames every 24 months. Additionally, plans cover low vision coverage on a limited basis. As shown in Table 2 , an individual enrolled in either of Spectera's plans could have an exam and new lenses and frames once during the course of a year. The copayment would be $10 for the exam and $10 for the lenses, or $25 for both lenses and frames, if new frames were purchased. Spectera's standard option includes scratch-resistant coating and polycarbonate lenses, and the high option also covers basic progressive lenses, tinted lenses, and UV coating. Plan brochures provide more detail on the differences between the standard and high options. The choice of covered frames is also limited. For those using services outside the network, the plans provide a schedule of payments. Enrollees may opt for contact lenses in lieu of glasses, subject to each plan's limits (i.e., generally a limit on disposable contacts, supplying only enough for part of the year). Several factors should be considered in deciding whether or not to enroll in FEDVIP, including (1) coverage of these services in a FEHB plan—more likely for those enrolled in a Health Maintenance Organization (HMO), (2) likelihood of using services covered by the plans, and (3) placing the same dollar amount that would be used toward dental and/or vision benefits premiums in an FSA (available to employees and not annuitants). Each prospective enrollee must weigh these considerations and others against his or her own level of risk aversion, as well as the fact that the individual pays 100% of the premium. Under the FEDVIP program, any coverage provided by an individual's FEHB health plan is primary, and the FEDVIP plans are the secondary payers. However, generally, the nationally available FEHB plans, have limited dental and vision coverage. This year, GEHA added limited vision coverage under its plans, offering an annual eye exam with a $25 copayment. GEHA, similar to some of the other national plans, has an arrangement with certain providers for discounted eyewear, but the enrollee would still be responsible for 100% of the discounted cost. In contrast, some of the FEHB HMO-type plans offer more comprehensive dental and vision benefits. Some high-deductible plans also provide some coverage. It is important to compare FEHB coverage to determine if also enrolling in FEDVIP is beneficial. While some enrollees know that they will use services, such an individual who wears glasses or a dependent who will need orthodontics, some services cannot be as easily predicted, such as an individual needing a root canal. Individuals must weigh their expected benefits against the premiums. For example, an individual who wears glasses, has a yearly eye exam, and uses a provider in-network may find that paying the premium will result in lower costs than paying for each of these services separately, even with pre-tax FSA funds for employees. On the other hand, an individual who does not wear glasses may not benefit from vision supplemental insurance. There is not, however, a one-to-one correlation between buying any insurance and the expectation of using the services. There is still a large share of unknown risk that any insurance protects against, so that some individuals may find themselves using services that they did not anticipate using. Both FEDVIP premiums and FSA contributions are pre-tax for employees, so that they may decide to enroll in one, none, or both. (Annuitants can not contribute to an FSA or pay premiums with pre-tax dollars.) Enrollees who choose both can use funds in the FSA for any copayments, coinsurance amounts, deductibles, amounts exceeding annual or lifetime maximums, or amounts above the plan's payment for out-of-network services. Some individuals may decide that they prefer to only contribute to an FSA and not enroll in either the dental or vision plan, and instead use their FSA funds to pay for any dental or vision expenditures. While using FSA funds provides the most flexibility, it may be that the dental and vision premiums cover more than the same dollars in the FSA. Individuals who are not sure they will use the services provided under FEDVIP can ""wait and see,"" and if they do not use dental or vision services, they can use the FSA dollars for other qualified medical expenses. Others may choose to enroll only in FEDVIP and minimize their out-of-pocket expenditures by staying in-network. Decisions about FEDVIP and FSA can be revisited every year during open season.","The Federal Employee Dental and Vision Benefits Enhancement Act of 2004 was enacted on December 23, 2004 ( P.L. 108-496 ), directing the Office of Personnel Management (OPM) to establish a supplemental dental and vision benefits program. OPM created the Federal Employees Dental and Vision Insurance Program (FEDVIP), with coverage first available on December 31, 2006. Enrollees are responsible for 100% of premiums and may choose a self-only, self + 1, or family plan. Coverage for dental and/or vision services provided through Federal Employees Health Benefits (FEHB) plans is the primary source of coverage, and the supplemental dental and vision plan is secondary. Employees may still contribute to a Flexible Spending Account (FSA) to cover any qualified unmet medical expenses.",govreport
"The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ), which the President signed into law on February 17, 2009, provided $17.15 billion in supplemental FY2009 discretionary appropriations for biomedical research, public health, and other health-related programs within the Department of Health and Human Services (HHS). ARRA also included new authorizing language to promote the widespread adoption of electronic health records and other health information technology (HIT), and established a federal interagency advisory panel to coordinate comparative effectiveness research. This report discusses the health-related programs and activities funded by ARRA and provides details on how the administering HHS agencies and offices are allocating and obligating the funds. ARRA funds were designated as emergency supplemental appropriations for FY2009. Unless otherwise specified in the law, the ARRA funds are to remain available for obligation through the end of FY2010 (i.e., September 30, 2010). Most of the health-related programs and activities for which ARRA provided supplemental funds also receive funding in annual appropriations acts through regular procedures. HHS FY2009 appropriations were included in the Omnibus Appropriations Act, 2009 ( P.L. 111-8 ), which was signed into law on March 11, 2009. The Consolidated Appropriations Act, 2010 ( P.L. 111-117 ), signed on December 16, 2009, included HHS appropriations for FY2010. For more information, see CRS Report RL34577, Labor, Health and Human Services, and Education: FY2009 Appropriations ; and CRS Report R40730, Labor, Health and Human Services, and Education: Highlights of FY2010 Budget and Appropriations . Table 1 summarizes ARRA's discretionary health funding, by HHS agency and office. Figure 1 shows the percentage distribution of the ARRA funds, by HHS agency and office. Two additional tables that appear at the end of this report provide more details on the ARRA funding. Table 4 shows the ARRA health funding, by type of activity funded, and includes a comparison of the amounts provided in ARRA with the regular FY2009 and FY2010 appropriations and the FY2011 budget request. Table 5 shows the obligation of ARRA funds, by type of activity funding, for FY2009 and FY2010. As part of its efforts to ensure transparency and accountability in the use of ARRA funds, the Office of Management and Budget (OMB) issued detailed government-wide guidance for implementing ARRA and established a website, ""Recovery.gov,"" which allows the public to track ARRA spending. The guidance required each federal agency to establish a Recovery page on its existing website, linked to Recovery.gov, on which they must post all agency-specific information related to ARRA. In most cases, ARRA specified that the agency receiving funding had to submit an initial implementation plan before the funds could be obligated. Those plans are posted on the HHS Recovery Plans website. In addition, ARRA required that a report on the actual obligations, expenditures, and unobligated balances for each ARRA-funded activity be submitted by November 1, 2009, and each six months thereafter as long as funding remains available for obligation or expenditure. Each ARRA grant recipient is required to submit to the funding agency a quarterly report that includes the following information: (1) the total amount of ARRA funds received, (2) the amount of ARRA funds received that have been expended on projects and activities, and (3) details about the funded project or activity, including an estimate of the number of jobs created and the number of jobs retained by the project or activity. ARRA requires that the information submitted by grantees be posted on the funding agency's Recovery website. In addition to funding health-related programs and activities, ARRA included discretionary funds for human services programs administered by HHS. It provided $100 million to the Administration on Aging (AoA) for senior nutrition programs authorized under Title III of the Older Americans Act, and gave $5.15 billion to the Administration for Children and Families (ACF) for the Child Care and Development Block Grant, the Community Services Block Grant, and Head Start. For more information on those funds, see CRS Report RL33880, Older Americans Act: Funding ; and CRS Report R40211, Human Services Provisions of the American Recovery and Reinvestment Act . Throughout this report, unless otherwise specified, all references to the Secretary refer to the HHS Secretary. ARRA provided $2 billion to the Health Resources and Services Administration (HRSA) for grants to health centers authorized under section 330 of the Public Health Service (PHS) Act. Of this total, $1.5 billion is for the construction and renovation of health centers and the acquisition of HIT systems. The remaining $500 million is for operating grants to health centers to increase the number of underinsured and uninsured patients who receive health care services at these facilities. The implementation plan for ARRA funding of health center capital projects is available on the HHS Recovery Plans website. For more information on health centers, see CRS Report RL32046, Federal Health Centers Program . HRSA allocated the $1.5 billion for health center infrastructure as follows: $862.5 million for Capital Improvement Program (CIP) grants to support the construction, repair, and renovation of over 1,500 health center sites nationwide, including purchasing HIT and expanding the use of electronic health records (EHRs); $512.5 million for Facility Investment Program (FIP) grants to expand the capacity of health centers to provide primary and preventive health services; and $125 million for HIT systems/networks grants to support electronic health information exchange. Almost 60% of these funds were obligated in FY2009 (see Table 5 ). There is no regular appropriation for health center infrastructure. However, some health centers receive facilities and equipment funds in congressionally directed (i.e., earmarked) spending. Of the $500 million ARRA appropriation for health center operations, HRSA allocated $157 million for New Access Point (NAP) grants to support health centers' new service delivery sites, and $343 million for Increased Demand for Services (IDS) grants to increase health center staffing, extend hours of operations, and expand existing health care services. These funds, which were obligated in FY2009, supplemented the $2.2 billion provided for health centers in FY2009 through regular appropriations (see Table 4 and Table 5 ). HRSA awarded NAP competitive grants to establish 126 new health centers located in 39 states, Puerto Rico, and American Samoa. The award amounts range from $478,000 to $1,300,000. IDS grants were awarded to 1,128 federally qualified health centers in all 50 states, the District of Columbia, Puerto Rico, and the U.S. territories, based on a formula. The project period for all IDS grantees is limited to two years, from March 27, 2009, through March 26, 2011. The IDS funds are projected to create or retain approximately 6,400 jobs and provide care to an estimated additional 2.1 million patients, including 1 million uninsured people. ARRA provided $500 million to HRSA for health workforce programs authorized in the PHS Act. Of this total, $300 million is for the National Health Service Corps (NHSC) recruitment and field activities (PHS Act Title III), $75 million of which is to remain available through September 30, 2011. The remaining $200 million is for the health professions programs authorized in PHS Act Title VII (health professions education) and Title VIII (nursing workforce development). Some of these funds may also be used to develop interstate licensing agreements to promote telemedicine (PHS Act section 330L). The NHSC program provides scholarships and student loan repayments for medical students, nurse practitioners, physician assistants, and others who agree to a period of service as a health care provider in a federally designated health professional shortage area (HPSA). NHSC clinicians may fulfill their service commitments in health centers, rural health clinics, public or nonprofit medical facilities, or within other community-based systems of care. ARRA stipulated that 80% of the NHSC funds be used for scholarships and loan repayments, and the remaining 20% for field operations, including recruitment, placements and assignments, and HPSA designations. In regular appropriations, the NHSC program received $135 million for FY2009 and $142 million for FY2010 (see Table 4 ). For more information, see CRS Report R40533, Health Care Workforce: National Health Service Corps . Health professions programs authorized under Title VII provide grants, scholarships and loans to students and professionals in medicine and allied health professions. Nursing workforce programs authorized under Title VIII provide similar types of assistance to nursing students and professionals. Of the $200 million ARRA appropriation for health workforce programs, $148.4 million has been allocated for programs that target medical and dental professionals in primary care, nurses, disadvantaged students, and others; $50 million is for equipment grants to enhance the training of health professionals; and $1.5 million has been applied toward the development of interstate licensure agreements that promote telemedicine. In regular appropriations, Title VII and Title VIII programs received a total of $392 million for FY2009 and $497 million for FY2010 (see Table 4 ). For more information, see CRS Report RS22438, Health Workforce Programs in the Public Health Service Act (PHSA): Appropriations History, FY2001-FY2010 . ARRA provided $10.0 billion directly to the National Institutes of Health (NIH) for biomedical research and extramural research facilities, plus $400 million more through a transfer from AHRQ for comparative effectiveness research (discussed below). Of the $10.0 billion, the law provided $8.2 billion to the Office of the Director for broad support of NIH scientific research, both extramural and intramural. Most of that funding, $7.4 billion, was transferred to the NIH institutes and centers and the Common Fund in proportion to their regular appropriations. The remaining $800 million is being used at the Director's discretion, with an emphasis on short-term (two-year) projects, including $400 million that may be used under the Director's flexible research authority. Also included in the $10.0 billion total was $1 billion to the National Centers for Research Resources (NCRR) for grants to construct and renovate university research facilities, as well as $300 million to NCRR for grants for shared instrumentation and other capital research equipment at extramural research facilities. Finally, the Buildings and Facilities account received $500 million for construction, repair, and improvement of NIH intramural facilities. NIH received a program level total of $30.3 billion in regular FY2009 appropriations and $30.9 billion in FY2010 appropriations. The additional funds from ARRA, which are being obligated at roughly $5 billion in each of the two years, have therefore boosted NIH resources by about one-sixth each year. The $8.2 billion in ARRA research funding is being used by the institutes and centers and the Director for a wide variety of competitive grant programs, as is the case with the regular appropriations. The intent, however, is to ""follow the spirit of the ARRA by funding projects that will stimulate the economy, create or retain jobs, and have the potential for making scientific progress in 2 years."" The $1 billion for NCRR construction and renovation grants for extramural research facilities is being spent under a program that has received no regular funding since FY2005, while the $300 million for shared instrumentation grants is several times larger than the usual funding for that program (see Table 4 ). NIH activities with ARRA funding are being tracked on the NIH Recovery website, which includes links to news releases, information on current grant funding opportunities, awards already made, and ARRA-funded job postings at NIH. NIH's ARRA implementation plans for the various funding categories are available on the HHS Recovery Plans website. NIH is focusing activities on (1) funding new and recently peer-reviewed, highly meritorious research grant applications that can be accomplished in two years or less; (2) giving targeted supplemental awards to current grants to push research forward; and (3) supporting a new initiative called the NIH Challenge Grants in Health and Science Research for research on specific topics that would benefit from significant two-year jumpstart funds (grants have budgets under $500,000 per year). Another new program, called Research and Research Infrastructure ""Grand Opportunities"" (GO) grants, will devote about $200 million to large-scale research projects (budgets over $500,000 per year) that work in areas of specific knowledge gaps, create new technologies, or develop new approaches to multi- and interdisciplinary research teams. On September 30, 2009, President Obama spoke about the nearly $5 billion that NIH had awarded in ARRA funding in FY2009, supporting over 12,000 grants to research institutions in every state (see Table 5 ). A White House press release highlighted examples of research in cancer, heart disease, and autism, particularly over $1 billion in research applying the technology produced by the Human Genome Project. On February 1, 2010, NIH released actual FY2009 spending in 218 major research, disease, and condition categories, including the amounts provided under ARRA. Spending estimates for FY2010, FY2010 ARRA (partial), and FY2011 are also available. ARRA provided $1.1 billion to the Agency for Healthcare Research and Quality (AHRQ) for comparative effectiveness research (CER), also referred to as patient-centered health research. These funds are to be used to support research that (1) compares the clinical outcomes, effectiveness, and appropriateness of preventive, diagnostic, and therapeutic items, services, and procedures; and (2) encourages the development and use of clinical registries, clinical data networks, and other forms of electronic health data that can be used to generate or obtain outcomes data. Of the total amount of funding provided, $300 million is for AHRQ to invest in CER activities, $400 million was transferred to NIH, and $400 million is to be allocated at the discretion of the Secretary. ARRA also stipulated that AHRQ could use no more than 1% of the $300 million under its own discretion for additional FTEs. According to the agency, that amount (i.e., $3 million) provides sufficient funding to hire approximately 15 FTEs (two-year appointments). The $1.1 billion that ARRA provided for CER represents a substantial increase in federal research funding in this area. In its regular appropriations, AHRQ received $50 million in FY2009 for CER, and $21 million in FY2010. The agency's FY2011 budget request includes $286 million for CER (see Table 4 ). AHRQ's research on comparative effectiveness is authorized by Section 1013 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ( P.L. 108-173 ) and is part of the agency's Effective Health Care Program. ARRA instructed the Secretary to contract with the Institute of Medicine (IOM) to produce a report with recommendations on national CER priorities. IOM released its report on June 30, 2009. Reflecting broad stakeholder input, the IOM report identified 100 health topics as high-priority areas for CER. Almost one-quarter of the priority topics address the health care delivery system. They include topics related to dissemination of CER study results; patient decision making; health behavior and care management; comparing settings of care; and utilization of surgical, radiological, and medical procedures. The IOM concluded that the country needs a robust CER infrastructure to sustain the research well into the future, including carrying out the research recommended in the report and studying new topics identified by future priority setting. In addition, ARRA established an interagency advisory panel to help coordinate and support CER. The Federal Coordinating Council for Comparative Effectiveness Research, composed of senior officials from federal agencies with health-related programs, was instructed to submit an initial report describing current federal CER activities and providing recommendations for future research. Thereafter, the council is to prepare an annual report on its activities and include recommendations on infrastructure needs and coordination of federal CER. Importantly, ARRA included language stating that (1) the council may not mandate coverage, reimbursement, or other policies for public and private payers of health care; and (2) council reports and recommendations may not be construed as mandates or clinical guidelines for payment, coverage, or treatment. The council published its initial report on June 30, 2009. The report's recommendations focused on (1) the importance of disseminating CER findings to doctors and patients; (2) targeting CER to the needs of priority populations such as racial and ethnic minorities, and persons with multiple chronic conditions; (3) researching high-impact health arenas such as medical and assistive devices, surgical procedures, and behavioral interventions and prevention; and (4) electronic data networks and exchange. Three implementation plans for ARRA-funded CER—one for funds to be obligated by AHRQ, a second for the NIH funds, and a third for the funds to be allocated at the discretion of the Secretary—are available on the HHS Recovery Plans website. While NIH obligated almost half of its ARRA funds for CER in FY2009, with the remainder to be obligated in FY2010, almost all of the ARRA funds for CER that are to be obligated by AHRQ or at the discretion of the Secretary will be awarded in FY2010 (see Table 5 ). AHRQ has published 11 CER funding announcements for ARRA funds to date; these announcements are available on AHRQ's website. ARRA provided $2 billion to the HHS Office of the National Coordinator for Health Information Technology (ONC) to fund activities and grant programs authorized by the Health Information Technology for Economic and Clinical Health (HITECH) Act, which was incorporated in ARRA. Of that amount, $300 million is to support regional health information exchange networks. In addition, the Secretary was instructed to transfer $20 million to the National Institute of Standards and Technology (NIST) for HIT standards analysis and testing. An implementation plan that discusses ONC's administrative and regulatory responsibilities under ARRA is available on the HHS Recovery Plans website. ONC received $61 million in regular appropriations in both FY2009 and FY2010 (see Table 4 ). Details of the allocation and obligation of ARRA funds for the various HITECH Act grant programs are provided below, following a brief overview of the HITECH Act. The HITECH Act is intended to promote the widespread adoption of HIT for the electronic sharing of clinical data among hospitals, physicians, and other health care providers. To that end, the HITECH Act included the following provisions. First, it codified ONC within the Office of the HHS Secretary. Created by a presidential executive order in 2004, ONC has played an important role directing HIT activities both inside and outside the federal government. It has focused on developing technical standards necessary to achieve interoperability among varying EHR applications; establishing criteria for certifying that HIT products meet those standards; ensuring the privacy and security of electronic health information; and helping facilitate the creation of prototype health information networks. The goal is to develop a national capability to exchange standards-based health care data in a secure computer environment. The HITECH Act required the HHS Secretary, by December 31, 2009, to issue a comprehensive set of interoperability standards and certification criteria for EHRs. Second, the HITECH Act established six grant programs to provide funding for investing in HIT infrastructure, purchasing certified EHRs, training, and disseminating information on best practices, among other things (see below). Third, the HITECH Act authorized HIT incentive payments under the Medicare and Medicaid programs. Beginning in 2011, the Medicare program will begin providing bonus payments to doctors and hospitals that adopt and use certified EHRs in such a way as to improve the quality and coordination of health care. Those incentive payments are phased out over time and replaced by financial penalties for physicians and hospitals that are not using certified EHRs. The HITECH Act also provides for a 100% federal match for payments to certain qualifying Medicaid providers who acquire and use certified EHR technology. Finally, the HITECH Act included a series of privacy and security provisions that amended and expanded the current federal standards under the Health Insurance Portability and Accountability Act (HIPAA). Among other things, it established a breach notification requirement for health information that is not encrypted, strengthened enforcement of the HIPAA standards, placed new restrictions on marketing activities by health plans and providers, and created transparency by allowing patients to request an audit trail showing all disclosures of their electronic health information. For more information, see CRS Report R40161, The Health Information Technology for Economic and Clinical Health (HITECH) Act . As noted above, ARRA included $2 billion in supplemental funding for the new HIT grant programs authorized under the HITECH Act. The allocation of those funds among the various programs and the status of their obligations are briefly summarized below. ONC has allocated $693 million of the ARRA funds for the Health IT Extension Program. Of that amount, $643 million is for cooperative agreements to support approximately 60 to 65 Regional Extension Centers (RECs) each serving a defined geographic area. The RECs will offer technical assistance, training, and other support services to help physicians and other providers in the adoption and meaningful use of EHR systems. The RECs are expected to support at least 100,000 priority primary care providers in rural and other medically underserved areas. In February 2010, ONC announced the first cycle of awards providing $375 million to create 32 RECs. A second round of REC awards is anticipated in April 2010. The remaining $50 million of the funds allocated for the Health IT Extension Program will be used to establish a national Health Information Technology Research Center (HITRC) to foster collaboration among the RECs and with other stakeholders to identify and share best practices in EHR adoption, effective use, and provider support. ONC has allocated $564 million for states and qualified state designated entities (SDEs) to facilitate electronic health information exchange (HIE) through the meaningful use of EHR systems. Legal, financial, and technical support is necessary to enable consistent, secure, statewide HIE across health care provider systems. The State HIE Cooperative Agreement Program will fund efforts at the state level to establish and implement appropriate governance, policies, and network services within the broader national framework to build capacity for connectivity between and among providers. States and SDEs will be required to match grant awards beginning in 2011. The first cycle of state HIE awards, announced in February 2010 along with the initial round of REC awards, provided a total of $386 million to 34 states (or SDEs), the District of Columbia, Puerto Rico, and the U.S. territories to develop HIE capability. In March 2010, a second round of state HIE awards was announced, providing a total of $162 million to the remaining 16 states (or SDEs). ONC has set aside a total of $120 million for the Health IT Workforce Development Program to establish and/or expand education programs for training HIT professionals. The funds will be used to award grants under four separate programs. Award announcements are expected soon. First, the Community College Consortia Program will provide approximately $70 million in assistance through cooperative agreements with about five institutions of higher education to create or expand HIT training programs at about 70 community colleges throughout the nation. Community colleges funded under this initiative will establish intensive, non-degree training programs that can be completed in six months or less by individuals with appropriate prior education and/or experience. ONC expects the participating colleges collectively to establish training programs with the capacity to train at least 10,500 students annually to be part of the HIT workforce. Second, the Curriculum Development Centers Program will provide approximately $10 million in assistance through cooperative agreements with about five non-profit institutions of higher education to develop curriculum and instructional materials to enhance workforce training programs primarily at the community college level. Third, the Competency Examination Program will provide approximately $6 million through a cooperative agreement to an institution of higher education to support the development and initial administration of a set of HIT competency examinations. Finally, the University-Based Training Program will provide approximately $32 million in assistance through cooperative agreements with eight or more institutions of higher education to establish programs for increasing the supply of individuals qualified to serve in specific HIT professional roles requiring university-level training. ONC has allocated a total of $235 million for the Beacon Community Program to strengthen the HIT infrastructure in the United States. Of that amount, $220 will be provided in cooperative agreements with integrated health systems, consortia of health care providers, or government entities to build on existing infrastructure to support electronic HIE. The remaining $15 million will be used to provide technical assistance to the grantees and evaluate the success of the program. Beacon Community awards are expected to be announced soon. Finally, ONC has allocated $60 million for the SHARP Program to fund research in areas where breakthrough advances are needed to address barriers to the widespread adoption of HIT. SHARP grantees will implement a research program in one of the following areas: (1) developing security and risk mitigation policies to build public trust in HIT; (2) harnessing HIT to support clinicians' decision making; (3) developing new applications and platforms for achieving electronic HIE; and (4) enhancing the secondary use of EHR clinical data to improve health care quality. SHARP awards are expected to be announced soon. ARRA provided $1 billion to the Secretary for a Prevention and Wellness Fund , for three specified activities: (1) $300 million to the Centers for Disease Control and Prevention (CDC) for PHS Act ""Section 317"" immunization grants; (2) $50 million for state activities to reduce health care-associated infections (HAIs); and (3) $650 million for evidence-based clinical and community prevention and wellness programs that address chronic diseases. On April 9, 2009, HHS announced the allocation of $300 million in ARRA funds for the Section 317 immunization program to the existing 64 state, territorial, and municipal public health department grantees. Funds were transferred to CDC, which administers the program, and were to be distributed as follows: $200 million in specified amounts to each grantee; $50 million for program operation grants for grantees to deliver vaccines and strengthen their immunization programs; and $18 million for innovation grants to increase vaccination rates and improve reimbursement practices. The remaining $32 million would be for immunization information, communication, education, and evidence development activities. Funds were to be obligated in both FY2009 and FY2010 (see Table 4 and Table 5 ). Of the $50 million in ARRA funds to reduce HAIs, HHS transferred $40 million to CDC for grants to state health departments to improve hospital infection control practices, and the remaining $10 million to the Centers for Medicare and Medicaid Services (CMS) for state survey agency oversight of infection control practices in ambulatory surgical centers (ASCs). On July 30, 2009, CMS announced that it was awarding $1 million, distributed among 12 states, for onsite reviews of ASCs to ensure that the facilities are following Medicare health and safety standards, and that the remaining $9 million would be available for all states in October 2009. On September 1, 2009, CDC announced plans to distribute the $40 million to health departments in 49 states, the District of Columbia, and Puerto Rico, for the following HAI prevention activities: (1) creating or expanding state and local efforts to implement recommendations in the HHS HAI action plan; (2) increasing health care facilities' and health departments' use of CDC's National Healthcare Safety Network, an HAI surveillance system; (3) hiring and training of public health staff to promote and lead HAI prevention initiatives; and (4) complementing HAI investments from other HHS agencies. Funds were to be obligated in both FY2009 and FY2010 (see Table 5 ). The Administration has noted that ARRA-funded CMS and CDC activities support a broader national strategy and action plan to reduce HAIs, published by HHS in January 2009. Congress provided funding to HHS for a variety of HAI prevention activities in FY2009 and FY2010 appropriations, and HHS requests additional HAI funding for CDC and AHRQ activities for FY2011. However, except for the ARRA funds, HHS has not generally presented comparable agency or departmental budget lines for HAI activities. The majority of the $650 million in ARRA funds for prevention and wellness programs is being administered by CDC. The agency notes that there are four program components, as presented in Table 2 . For each component, funds are to be used by grantees to deliver evidence-based prevention strategies and programs for adults and children, utilizing local resources and strengthening state capacity for chronic disease prevention. Each component is intended to focus on the following prevention and wellness goals: (1) increase levels of physical activity; (2) improve nutrition; (3) decrease obesity rates; and (4) decrease smoking prevalence, teen smoking initiation, and exposure to second-hand smoke. No funds for these activities were obligated in FY2009. As a result, according to the law, all of these funds must be obligated in FY2010 (see Table 5 ). In its budget request for FY2011, HHS did not provide amounts for comparable activities in regular appropriations. The CDC National Center for Chronic Disease Prevention and Health Promotion conducts activities that are somewhat similar. There is a key difference, however, between CDC's annual chronic disease prevention appropriations and the ARRA prevention and wellness funding. Regular appropriations are generally provided for disease-specific activities, whereas the ARRA funding was not designated for specific diseases. As noted earlier, ARRA funding goals instead target disease risk factors—often behavioral or lifestyle-based—that may predispose to multiple chronic conditions. As a result, ARRA prevention and wellness funding is not strictly comparable to activities funded through regular appropriations. Health reform proposals pending in the 111 th Congress would establish mechanisms to provide annual baseline funding for similar prevention and wellness activities. Also, in its FY2011 budget justification, CDC requests new appropriations language that would allow state grantees to reprogram up to 10% of funds from all CDC grants to carry out activities ""to address one or more of the top six leading causes of death."" These causes are not defined. ARRA provided a total of $500 million for the Indian Health Service (IHS)—$415 million for IHS health facilities-related activities, including maintenance and improvement, and $85 million for HIT activities. Within the health facilities account, IHS received $227 million for health care facilities construction, $100 million for facilities maintenance and improvement, $68 million for sanitation facilities construction, and $20 million for equipment (including HIT). The $85 million IHS received for HIT activities, including funds for telehealth services, were included in the IHS health services account but could also include HIT-related infrastructure activities. These funds were to be allocated at the discretion of the IHS director. As of January 29, 2010, IHS has obligated over 65% of these funds; the remaining funds will be obligated by the end of FY2010. Table 4 compares ARRA funding with regular IHS FY2009-FY2010 appropriations and FY2011-requested appropriations for the same activities. IHS constructs, maintains, and operates hospitals, clinics, and health centers throughout Indian Country, and also funds construction of Indian sanitation facilities. For health care facilities construction, ARRA required that the $227 million be used to complete up to two facilities from IHS's current priority list on which work had already begun. The facilities chosen are the Norton Sound Regional Hospital in Nome, AK, and the hospital and staff quarters at Eagle Butte Health Center in South Dakota. Both projects are expected to be completed by the fourth quarter of FY2012. As of January 29, 2010, approximately $150 million had been obligated, with an estimated 95 jobs created or saved as a result of the construction projects. Funds for facilities maintenance and improvement, sanitation, construction, and medical equipment were to be obligated in FY2009 and FY2010. Obligations for FY2009 through January 29, 2010 are included in Table 3 . The table also includes information on the scheduled completion data of projects and estimates on the number of jobs created or saved as of the end of the first quarter of FY2010 (i.e., end of December 2009). For a list of the IHS construction projects and equipment, organized by state and type of project, see the HHS Recovery website, Tribal Pre-Award Funding by State. IHS has existing HIT operations for both personal health services and public health activities, funded chiefly through the hospital and health clinics budget in IHS's health services account. ARRA directed that the additional $85 million in HIT funds be allocated by the IHS director. IHS distributed the HIT funds for the development of existing management and EHR software, and to telehealth infrastructure and development, with 20% allocated to hardware. IHS identified non-localized HIT projects, with $61.4 million going for EHR development and deployment, $2.45 million for personal health record development, $16.96 million for telehealth and network infrastructure, and $4.0 million for administration. Of the HIT funds, IHS obligated $53.55 million as of January 29, 2010, with the remainder to be obligated by the end of FY2010. Unlike the rest of HHS, IHS received its appropriations under ARRA's title for Interior and Environment appropriations (Title VII). The provision for IHS facilities in Title VII excluded IHS health facilities funds from the Interior and Environment appropriations bill's usual annual spending caps for medical equipment, and also excluded them from ARRA's general provision requiring payment of prevailing wage rates under the Davis-Bacon Act for construction and repair projects. (Separate prevailing wage rate requirements apply to IHS construction activities.) ARRA report language for Title VII allowed agencies covered by the title to expend up to 5% of ARRA funds for administrative and support costs, but also noted that oversight of IHS activities under ARRA was to be included in the general oversight of HHS's ARRA activities funded under ARRA's title for HHS appropriations (Title VIII). Further information on IHS's ARRA expenditures, by project category, with links to more detailed implementation plans, is available on the HHS Recovery website. For more on IHS appropriations in FY2009 and FY2010, see CRS Report R40685, Interior, Environment, and Related Agencies: FY2010 Appropriations . For general information on IHS, see CRS Report RL33022, Indian Health Service: Health Care Delivery, Status, Funding, and Legislative Issues .","The American Recovery and Reinvestment Act of 2009 (ARRA), the economic stimulus legislation signed into law on February 17, 2009 (P.L. 111-5), included supplemental FY2009 discretionary appropriations for biomedical research, public health, and other health-related programs within the Department of Health and Human Services (HHS). Generally, the appropriations are to remain available through September 30, 2010. P.L. 111-5 also incorporated new authorizing language to promote health information technology (HIT) and established a federal interagency advisory panel to coordinate comparative effectiveness research. As enacted, ARRA included $17.15 billion for community health centers, health care workforce training, biomedical research, comparative effectiveness research, HIT, disease prevention, and Indian health facilities. This report discusses the health-related programs and activities funded by ARRA and provides details on how the administering HHS agencies and offices are allocating, awarding, and spending the funds. It will be regularly updated as new information becomes available.",govreport
"T he Livestock Mandatory Reporting Act ( P.L. 106-78 , Title IX; LMR ) requires that meat packers report prices and other information on purchases of cattle, hogs, lamb, boxed beef, wholesale pork, and lamb carcasses and boxed lamb to the U.S. Department of Agriculture (USDA). Authority for mandatory reporting was set to expire on September 30, 2015. Livestock industry stakeholders supported the reauthorization of the act, and producer groups put forward proposals amending mandatory reporting. The House passed a reauthorization bill ( H.R. 2051 ) in June 2015. In September 2015, the Senate amended the House-passed bill, and Congress reauthorized LMR until September 30, 2020, in the enacted Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ). Before livestock mandatory price reporting was enacted by Congress in 1999, the USDA's Agricultural Marketing Service (AMS) collected livestock and meat price and related market information from meat packers on a voluntary basis under the authority of the Agricultural Marketing Act of 1946 (7 U.S.C. §1621 et seq.). AMS market reporters collected and reported prices from livestock auctions, feedlots, and packing plants. The information was disseminated through hundreds of daily, weekly, monthly, and annual written and electronic USDA reports on sales of live cattle, hogs, and sheep and wholesale meat products from these animals. The goal was to provide all buyers and sellers with accurate and objective market information. By the 1990s, the livestock industry had undergone many sweeping changes, including increased concentration in meat packing and animal feeding, more production specialization, and more vertical integration (firms controlling more than one aspect of production). Fewer animals were sold through negotiated (cash; or ""spot"") sales, and more frequently sold under alternative marketing arrangements (e.g., formula sales based on a negotiated price established in the future) with prices not publicly disclosed or reported. Some livestock producers, believing such arrangements made it difficult or impossible for them to determine ""fair"" market prices for livestock going to slaughter, called for mandatory price reporting for packers and others who process and market meat. USDA had estimated in 2000 that the former voluntary system was not reporting 35%-40% of cattle, 75% of hog, and 40% of lamb transactions. During debate on mandatory price reporting, opponents, including some meat packers and other farmers and ranchers, argued that a mandate would impose costly new burdens on the industry and could cause the release of confidential company information. Nonetheless, some of these earlier opponents decided to support a mandatory price reporting law. Livestock producers had been hit by very low prices in the late 1990s and were looking for ways to strengthen the markets. Some meat packers also decided to support a national consensus bill at least partly to preempt what they viewed as an emerging ""patchwork"" of state price reporting laws that could alter competition between packers operating under different state reporting laws. The Livestock Mandatory Reporting Act of 1999 (LMR, P.L. 106-78 , Title IX; 7 U.S.C. §1635 et seq.) was enacted in October 1999 as part of the FY2000 Agriculture appropriations act. The law mandated price reporting for live cattle, boxed beef, and live swine and allowed USDA to establish mandatory price reporting for lamb sales. The law authorized appropriations as necessary and required USDA to implement regulations no later than 180 days after the law was enacted. Mandatory price reporting was authorized for five years, until September 30, 2004. USDA issued a final rule on December 1, 2000. Although reporting for lamb was optional in the LMR statute, USDA established mandatory reporting for lamb in the final rule. The rule was to be implemented on January 30, 2001, but USDA delayed implementation for two months until April 2, 2001, to allow for additional time to test the automated LMR program to ensure program requirements were being met. The implementation of mandatory reporting did not affect the continuation of the AMS voluntary price-reporting program. AMS continues to publish prices from livestock auctions, and feeder cattle and pig sales, through voluntary-based market news reports. LMR authority lapsed briefly in October 2004 before Congress extended mandatory price reporting for one year to September 30, 2005. Authority for LMR lapsed again on September 30, 2005. At that time, USDA requested that all packers who were required to report under the 1999 act continue to submit required information voluntarily. About 90% of packers voluntarily reported, which allowed USDA to publish most reports. In October 2006, Congress passed legislation to reauthorize reporting through September 30, 2010. This act also amended swine reporting requirements from the original 1999 law, by separating the reporting requirements for sows and boars from barrows and gilts, among other changes. Because statutory authority for the program had lapsed, USDA determined that it had to reestablish regulatory authority through rulemaking in order to continue LMR operations. On May 16, 2008, USDA issued the final rule to reestablish and revise the mandatory reporting program. This rule incorporated the swine reporting changes and was intended to enhance the program's overall effectiveness and efficiency based on AMS' experience in the administration of the program. The rule became effective on July 15, 2008. Mandatory wholesale pork price reporting was not included in the original price-reporting act because the hog industry could not agree on reporting for pork. Section 11001 of the 2008 farm bill ( P.L. 110-246 ) directed USDA to conduct a study on the effects of requiring packers to report the price and volume of wholesale pork cuts, which was a voluntary reporting activity at the time. The farm bill study on wholesale pork pricing was released in November 2009 and concluded that there would be benefits from a mandatory pork reporting program. On September 27, 2010, the Mandatory Price Reporting Act of 2010 ( P.L. 111-239 ) was enacted, reauthorizing mandatory price reporting through September 30, 2015. The act added a provision for mandatory reporting of wholesale pork cuts, directed the Secretary to engage in negotiated rulemaking to make required regulatory changes for mandatory wholesale pork reporting, and established a negotiated rulemaking committee to develop these changes. The committee was composed of representatives of pork producers, packers, processors, and retailers. The committee met three times, was open to the public, and developed recommendations for mandatory pork reporting. USDA released the final rule on August 22, 2012, and the regulation was implemented on January 7, 2013. See the Appendix for a description of selected LMR reporting provisions, marketing definitions, confidentiality rules, and USDA reporting and enforcement. The House Agriculture Subcommittee on Livestock and Foreign Agriculture started the reauthorization process by holding a hearing on April 22, 2015, that included producer representatives from the National Pork Producers Council (NPPC), the National Cattlemen's Beef Association (NCBA), and the American Sheep Industry Association (ASI) and a representative from the North American Meat Institute (NAMI), which represents meat packers. All representatives voiced support for mandatory reporting, and the producer representatives identified changes to specific reporting requirements they would like to see incorporated into LMR. All stakeholders agreed that the loss of reporting during the October 2013 government shutdown was disruptive to the market, and they would like LMR to be deemed an ""essential"" service that operates if another government shutdown should occur. On April 28, 2015, the Mandatory Price Reporting Act of 2015 ( H.R. 2051 ) was introduced in the House. The House Committee on Agriculture marked up the bill on April 30. H.R. 2051 reauthorized LMR through September 30, 2020, and included several sections that addressed hog and lamb market issues that livestock stakeholders raised about LMR. (See "" Livestock Sector Issues for Reauthorization in 2015 "" for a discussion of LMR issues of interest to the livestock industry.) On June 9, 2015, the House passed H.R. 2051 on a voice vote. On September 17, 2015, by voice vote, the Senate Agriculture Committee marked up and reported to the full Senate an amended version of the House-passed H.R. 2051 . Amended H.R. 2051 , the Agriculture Reauthorizations Act of 2015, included provisions to reauthorize Mandatory Price Reporting, the U.S. Grain Standards Act, and the National Forest Foundation Act, three laws that were set to expire on September 30, 2015. On September 21, 2015, the Senate passed the bill by unanimous consent, and the House passed the Senate-amended bill on September 28 by voice vote. The Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ) was signed into law on September 30, 2015. The Agriculture Reauthorizations Act of 2015 ( P.L. 114-54 ) extended mandatory price reporting until September 30, 2020. In addition, the act makes several changes to swine reporting, revises definitions in lamb reporting, and requires USDA to conduct a study on LMR ahead of the next reauthorization. The provisions in P.L. 114-54 on swine and lamb were proposed to Congress by livestock industry stakeholders as measures that would improve LMR (see "" Livestock Sector Issues for Reauthorization in 2015 "" for selected industry proposals for reauthorization). The cattle industry did not formally propose any changes to cattle LMR requirements, but several swine and lamb industry proposals were incorporated in the House-passed Mandatory Price Reporting Act of 2015 ( H.R. 2051 ). The Senate-amended version included most of the House-passed provisions. However, the section of the House-passed bill that granted emergency authority to USDA to continue price reporting in the event of a government shutdown because of a lapse in appropriations, which was widely supported by the cattle, swine, and lamb industries, was not included in the enacted law. (See "" LMR as an ""Essential"" Service "" below for industry views.) The enacted legislation establishes the new negotiated formula purchase reporting category. Under this category, swine purchases are based on a formula, negotiated on a lot-by-lot basis, and the swine are scheduled for delivery to the packer no later than 14 days after the formula is negotiated and the swine are committed to packers. The enacted legislation also amends swine LMR by requiring the reporting of the low and high range of net swine prices, to include the number of barrows and the number of gilts within the ranges, and the total number and weighted average price of barrows and gilts. Lastly, the act requires that next-day reports include transaction prices that were concluded after the previous day's reporting deadlines. The enacted swine reporting provisions are the same as those in Section 3 of the House-passed bill. (See "" New Reporting Proposals for Swine "" below for industry views.) P.L. 114-54 amends the regulations (7 C.F.R. 59.300) for lamb reporting to redefine lamb importers and lamb packers. Now, importers are defined as entities that import an average of 1,000 metric tons of lamb meat per year during the immediately preceding four years. The original limit was 2,500 metric tons. If an importing entity does not meet the volume limit, the Secretary still may determine that an entity should be considered an importer. In P.L. 114-54 , lamb packers are defined as entities having 50% or more ownership in facilities, and include federally inspected facilities that slaughter and process an average of 35,000 head per year over the immediately preceding five years. The original threshold was 75,000 head. Also, other facilities may be considered packers if the Secretary determines they should be considered a packer based on processing plant capacity. These enacted revised definitions for lamb importers and packers are the same as those in Section 4 of the House-passed bill. (See "" Concentrated Lamb Markets "" below for industry views.) USDA is required to conduct a study of the price-reporting program for cattle, swine, and lamb in P.L. 114-54 . The study is to be submitted to the House and Senate Agriculture Committees by March 1, 2018. The study, to be conducted by USDA's Agricultural Marketing Service and the Office of Chief Economist, is directed to analyze current marketing practices and to identify legislative and regulatory recommendations that are readily understandable; reflect current market practices; and are relevant and useful to producers, packers, and other market participants. Also, the study is to analyze USDA reporting services. This LMR study provision was included in Section 5 of the House-passed bill, but with a later deadline of January 1, 2020. A simple reauthorization of mandatory reporting would amend the termination date in Section 260 of the Agricultural Marketing Act of 1946 (7 U.S.C. 1636i). However, like past reauthorizations, livestock industry stakeholders suggested changes that were intended to improve mandatory reporting and to address issues that emerged since the last reauthorization. Several of the issues are discussed below. During the nearly 15 years that LMR has been in place, livestock producers, processors, and industry analysts have come to rely on the AMS mandatory price reporting data to make marketing decisions. Many livestock contracts between buyers and sellers are based on prices reported under LMR. In October 2013, during the government shutdown when most federal operations came to a standstill, meat packers continued to report LMR data to AMS, but mandatory daily and weekly reports were not published. In addition to the loss of price information for producers, the gap in LMR data affected the futures market because the CME Group uses LMR data to settle live hog contracts. CME also uses LMR-reported cattle carcass characteristics to settle live cattle futures contracts. CME has noted that LMR price data are trusted and that few other public alternatives to the LMR data exist. During the reauthorization debate, livestock stakeholders urged USDA to deem mandatory reporting an ""essential"" service in order to avoid the loss of livestock price information if another government shutdown, such as in October 2013, occurs due to a lapse in appropriations. Many contend that any gap in mandatory reporting is disruptive to livestock markets. Although the House-passed version ( H.R. 2051 ) contained such a provision, it was not included in the final bill. The NPPC recommended that AMS add another purchase category for swine called negotiated formula purchase . Under this purchasing arrangement, a producer negotiates the sale of swine on a lot-by-lot basis, but the price will be determined by formula at a later date. NPPC believes this represents a negotiated sale, but under AMS reporting it is classified as a swine or pork market formula purchase because there is no established price at the time of purchase. Negotiated purchases , or cash sales, are often viewed as the true measure of price discovery, but negotiated purchases as a share of total hog sales has dropped to less than 4%. According to NPPC testimony before the Subcommittee on Livestock and Foreign Agriculture of the House Agriculture Committee, the total number of hogs that would trade under this new category is not known, but possibly could increase the number of reported negotiated hog sales by 50-100%. Boosting the volume of negotiated purchases would be expected to increase price discovery. Some livestock sales occur after the afternoon reporting deadline for packers to send reports to AMS and are not reported in a daily report. Pork producers believe that sales of hogs after the afternoon deadline are usually delivered to packing plants the next day. To provide more timely hog marketing and price information, NPPC recommends that hog trades that occur late in the day be reported in the next day's morning or afternoon daily reports. The additional reporting would better reflect the daily hog market; increase trade volume, thus reducing data disclosure issues; and result in more complete reports. These swine proposals were included in P.L. 114-54 . The U.S. sheep and lamb industry is confronted with a very concentrated market that results in price-reporting challenges not necessarily experienced by the larger cattle and hog sectors. The sheep and lamb industry as a whole (production, feeding, and processing) believes that LMR is crucial for creating a transparent market, and the American Sheep Industry Association (ASI) worked with AMS from 2012-2014 to amend LMR in ways to improve lamb reporting ahead of reauthorization. Although the ASI effort did not result in rulemaking, proposals developed in earlier years are the basis for the lamb industry's proposals during current reauthorization. U.S. lamb imports account for half of the lamb consumed in the United States. Therefore, the pricing of lamb imports is crucial for U.S. lamb producers in making marketing decisions. ASI recommended that the reporting threshold for lamb imports be lowered to 1,000 metric tons from the current 2,500 metric tons to capture prices for a greater share of lamb imports. In addition, smaller or mid-size lamb processors have entered the business to capture specialty lamb markets, but because of the smaller size, these businesses are often exempt from reporting. To capture pricing data from mid-size lamb slaughters and processors, ASI recommended that the threshold for packer reporting be reduced to an average of 35,000 head slaughtered per year during the immediately preceding five years from the current 75,000 head. These two threshold changes for importers and packers were designed to pick up a larger share of the total lamb market and better reflect average prices in the market. Both proposals were included in P.L. 114-54 . The sheep and lamb industry also faces the situation where there are few participants in the processing sector. This leads to problems with non-reporting because of confidentiality requirements. Also, a substantial share of lamb processing is conducted on a ""custom slaughter"" basis, which is not counted as a buyer-seller transaction, and thus not reported under LMR. In addition, almost one-third of U.S. lambs are processed by one cooperative that does not report under LMR because its business structure is treated as a packer-owned operation, even though, reportedly, the cooperative is willing to report under LMR. ASI recommended that AMS be flexible with its packer definitions to allow such an operation to report under LMR. P.L. 114-54 granted USDA discretion to determine that importers and packers not meeting the threshold requirements may still be required to report. The cattle industry supported the reauthorization of LMR, but the new law does not contain any cattle-specific proposals. During the markup of the House bill, House Agriculture Committee Chairman Conaway indicated that the cattlemen and meat packers were working on proposals that could be included as amendments to the bill. Various cattle stakeholders raised some issues with mandatory reporting, but no consensus developed to amend LMR cattle provisions. The NCBA recommended that AMS have flexibility to request additional information, as needed, to identify and report appropriate industry standards as cattle marketing changes. Also, NCBA recommended that LMR include a new category for fed-cows, to be added to reporting for steers and heifers, and cows and bulls. Currently, AMS reports cover all cows, but a breakout of fed-cows could have provided additional price and marketing information beneficial for cattle producers who market fed-cows. In a letter to the Senate Agriculture Committees, the Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF) expressed specific concerns about new types of cattle purchases that are not captured in LMR. These include (1) negotiated basis trade-type contracts that do not appear to be reported when negotiated, (2) negotiated cash sales that have extended delivery dates, and (3) ""Tops"" trades, where a negotiated premium is offered on a cash trade and is then reported as a formula purchase. R-CALF also raised concern about the frequency of late-day transactions that miss the day's reporting deadline, thus possibly distorting the day's price. The National Farms Union (NFU) expressed its support for the reauthorization of mandatory reporting as an important tool for combating market concentration. In letters to the Senate and House Agriculture Committees, NFU suggested changes to LMR for cattle that would have addressed confidentiality rules, reporting on imported cattle that go into feedlots, reporting on weekly market concentration, and separate data from forward contracts from those tied to the futures market. The following sections discuss some of the main Livestock Mandatory Reporting Act (LMR) reporting requirements, as well as confidentiality rules, Agricultural Marketing Service reporting, and enforcement of LMR. The text box, included below, provides definitions for selected terms used in LMR. Selected Reporting Requirements Packers that are subject to mandatory reporting are defined as federally inspected plants that have slaughtered a minimum annual average of 125,000 head of cattle, 100,000 head of swine, 200,000 head of sows and boars or a combination thereof, and 35,000 lambs during the immediate five preceding years. If a plant has operated for fewer than five years, USDA will determine, based on capacity, if the packer must report. Packers are required to report the prices established for steers and heifers twice daily (10 a.m. and 2 p.m. central time); cows and bulls twice daily (10 a.m. central for current day, and 2 p.m. for previous-day purchases); barrows and gilts three times daily (7 a.m. central for prior-day purchases, and 10 a.m. and 2 p.m. central); sows and boars once daily (7 a.m. central for prior-day purchases); and lambs once daily (2 p.m. central). Besides the established prices, packers report premiums and discounts and the type of purchase (e.g., negotiated, formula, or forward contract). Packers are required to report, depending on the species, the quantity delivered for the day; the quantity committed to the packer; the estimated weight on a live weight basis or a dressed weight basis; and quality characteristics, such as Choice grade. In addition to daily reporting, on the first reporting day of the week, packers file a cumulative weekly report of the previous week's purchases of steers and heifers, and swine. Lamb packers are required to report the previous week's purchases on the first and second reporting day of the week, depending on the data. Steer and heifer and lamb packers are to include data on type of purchase (negotiated, formula, or forward contract), premiums and discounts, and some carcass characteristics (e.g., quality grade and yield, average dressing percentage). Swine packers are required to report the amount paid in premiums that are based on noncarcass characteristics (e.g., volume, delivery timing, hog breed). Also, packers must make available to producers a list of such premiums. In addition to livestock purchase prices, packers are required to report sales data for boxed beef, wholesale pork, and carcass and boxed lamb. Sales are reported twice daily for beef and pork; once daily for lamb. Packers are required to provide price, quantity, quality grade for beef and lamb, and type of cut. Packers report beef and pork domestic and export sales and domestic boxed lamb sales. Lamb importers who have imported a minimum average of 1,000 metric tons of lamb in the immediate five preceding years are required to report such information as weekly lamb prices, quantities imported, the type of sale (negotiated, formula, or forward contract), cuts of lamb, and delivery period. Confidentiality The LMR law requires that price reporting be confidential to protect the identity of packers and contracts and proprietary business information. In determining what data could be published, AMS initially adopted a ""3/60"" confidentiality guideline (commonly used throughout the federal government), i.e., at least three entities in the regional or national reporting area, and no single entity could account for more than 60% of the reported market volume. Otherwise, the data cannot be published in order to protect the identity of those reporting. AMS found that the ""3/60"" guideline resulted in large gaps in data reporting. For example, during April 2, 2001, and June 15, 2001, 24% of daily reports and 20% of weekly reports were not published because of confidentiality provisions. In order to address the data gaps, AMS adopted a ""3/70/20"" guideline in August 2001. It required that at least three entities report 50% of the time over a 60-day period; no one entity could account for more than 70% of volume over a 60-day period; and in cases where only one entity reports, the entity cannot be the only reporter more than 20% of the time over a 60-day period. These new guidelines substantially eliminated the data gaps. AMS Reporting The Livestock, Poultry, and Grain Market News Division (LPGMN) of the AMS Livestock, Poultry, and Seed Program is responsible for compiling and disseminating the information collected under LMR. In addition, LPGMN continues to operate a voluntary reporting program for livestock not covered under LMR, poultry and grain. Under LMR, LPGMN publishes 62 daily reports and 47 weekly reports. AMS publishes 29 daily reports for cattle, 20 for swine, 6 for beef, 4 for pork, and 3 for lamb. Weekly reports total 24 for cattle, 2 for swine, 11 for beef, 8 for pork, and 2 for lamb. According to AMS budget documents, mandatory reporting currently provides data for 79% of total slaughtered cattle, 94% of hogs, and 46% of sheep. For meat products, LMR covers 94% of boxed beef production, 87% of wholesale pork, and 57% of lamb meat. Small plants, which fall below required thresholds, or non-federally inspected plants account for the remaining percentage of slaughter and production. AMS market news operates on an annual appropriation of about $34 million, and the LMR program accounts for about $5 million to $6 million of that amount. Enforcement AMS compliance staff enforces LMR through audits once every six months. AMS reviews support documentation for randomly sampled lots. If non-compliance is found, AMS will ask the packer to correct the problem. If the packer does not correct the problem, AMS may issue a warning letter, and ultimately, the packer could be fined $10,000 for each violation if corrective action is not taken. AMS published quarterly compliance reports through September 2014, and then released a six month (October 2014-March 2015) compliance report.","The U.S. Department of Agriculture's (USDA's) Agricultural Marketing Service (AMS) collected livestock and meat price and related market information from meat packers on a voluntary basis under the authority of the Agricultural Marketing Act of 1946 (7 U.S.C. §1621 et seq.). However, as the livestock industry became increasingly concentrated in the 1990s, fewer animals were sold through negotiated (cash; or ""spot"") purchases and more frequently sold under alternative marketing arrangements that were not publicly disclosed under voluntary reporting. Some livestock producers, believing such arrangements made it difficult or impossible for them to determine ""fair"" market prices for livestock going to slaughter, called for mandatory price reporting for packers and others who process and market meat. In response, Congress passed the Livestock Mandatory Reporting Act of 1999 (P.L. 106-78, Title IX; LMR). The law mandated price reporting for live cattle, boxed beef, and live swine and allowed USDA to establish mandatory price reporting for lamb sales. USDA issued a final rule in December 2000 that went into effect in April 2001. The final rule included mandatory reporting for lamb. The law has been amended to include more detail on swine and to add wholesale pork. The act has been reauthorized three times, and the last reauthorization was set to expire September 30, 2015. In September 2015, the Senate and House passed the Agriculture Reauthorizations Act of 2015 (H.R. 2051), a Senate-amended version of the House-passed Mandatory Price Reporting Act of 2015, which reauthorized mandatory price reporting until September 30, 2020. The act was signed into law (P.L. 114-54) on September 30, 2015. Reauthorization was widely supported by livestock industry stakeholders. As in past years, stakeholders proposed changes that were intended to improve mandatory reporting as issues emerged between reauthorizations. In response to livestock stakeholders, the act makes several changes to swine reporting, creating a new negotiated formula purchase category and requiring that transactions reported after the day's reporting deadline be reported in the next-day price reports. It revises the definitions of lamb importers and packers by lowering the volume thresholds for determining if an importer or packer is subject to reporting requirements. Lastly, the act requires USDA to conduct a study on LMR ahead of the next reauthorization. However, the act did not include a provision to grant emergency authority to USDA to continue price reporting in the event of a government shutdown because of a lapse in appropriations. This provision was widely supported by livestock industry stakeholders and had been included in the House-passed version of H.R. 2051.",govreport
"This report summarizes the potential consequences, with respect to congressional status, that may result when a sitting Member of the United States Senate is indicted for or is convicted of a felony. If a sitting United States Senator is indicted for a criminal offense that constitutes a felony, the status and service of that Member is not directly affected by any federal statute, constitutional provision, or Rule of the Senate. No rights or privileges are forfeited under the Constitution, statutory law, or the Rules of the Senate merely upon an indictment for an offense. Internal party rules in the Senate may be relevant, however, and the Senate Republican Conference Rules, for example, have required an indicted chairman or ranking Member of a Senate committee, or a member of the Senate party leadership, to temporarily step aside from his or her leadership or chairmanship position, although the Member's service in Congress would otherwise continue. It should be noted that Members of Congress do not automatically forfeit their offices even upon conviction of a crime that constitutes a felony. There is no express constitutional disability or ""disqualification"" from Congress for the conviction of a crime, other than under the Fourteenth Amendment for certain treasonous conduct after having taken an oath of office. Under party rules, however, Members may lose their chairmanships of committees or ranking Member status upon conviction of a felony, and this has been expressly provided under the Senate Republican Conference Rules. Conviction of certain crimes may subject Senators to internal legislative disciplinary proceedings, including resolutions of censure, as well as expulsion from the Senate upon approval of two-thirds of the Members. Expulsion of a Member from Congress does not result in the forfeiture or loss of one's federal pension, but the Member's conviction of certain crimes may lead to such forfeiture of retirement annuities, or the loss of all of the ""creditable service"" as a Member that one would have earned towards a federal pension. Indictment and/or conviction of a crime that is a felony does not constitutionally disqualify one from being a Member of Congress (nor from being a candidate for a future Congress), unless a Member's conviction is for certain treasonous conduct committed after taking an oath of office to support the Constitution. There are only three qualifications for congressional office and these are set out in the United States Constitution at Article I, Section 3, clause 3 for Senators (and Article I, Section 2, clause 2, for Representatives): age, citizenship, and inhabitancy in the state when elected. These constitutional qualifications are the exclusive qualifications for being a Member of Congress, and they may not be altered or added to by Congress or by any state unilaterally. Once a person meets those constitutional qualifications, that person, if elected, is constitutionally ""qualified"" to serve in Congress, even if under indictment or a convicted felon. No specific or formal Rule of the Senate exists concerning the status of a Senator who has been indicted with respect to chairmanships or ranking Member status on committees of the Senate. However, the political parties in the Senate may adopt internal conference and caucus rules that may affect a Senator's leadership and committee positions and assignments. For example, Senate Republican Conference Rules have provided for the temporary loss of one's position as the chairman or ranking Member of a committee, and the temporary loss of one's leadership position, if the Senator has been indicted for a felony; and if the Senator is convicted, the replacement of the chair/ranking Member on the committee. Although Members of the House of Representatives convicted of an offense that may result in two or more years' imprisonment are instructed under House Rule XXIII (10) to ""refrain from participation in the business of each committee of which he is a member, and a Member should refrain from voting"" on any question on the floor of the House until his or her presumption of innocence is restored (or until the individual is reelected to Congress), there is no comparable provision in the Senate Rules. Each house of Congress has the express authority under Article I, Section 5, clause 2, of the United States Constitution to punish a Member for ""disorderly Behaviour"" and, with the concurrence of two-thirds, to expel a Member. Although the breadth of authority and discretion within the Senate (and House) as to the timing, nature, and underlying conduct involved in an internal discipline of a Member of that body is extensive, the traditional practice in Congress, in cases where a Member of Congress has been indicted, has been to wait to impose congressional discipline, such as expulsion or censure against the Member, until the question of guilt has been at least initially resolved through the judicial system. Members of Congress, like many other individuals, have been indicted and charged with various offenses and then been subsequently exonerated in judicial proceedings. Both the Senate and the House have thus been reluctant to remove from Congress individuals who have been lawfully elected to represent their constituents based merely upon charges in an indictment. However, no impediment in law or rule exists for ongoing congressional inquiries concurrent with criminal proceedings (although such actions may complicate some evidentiary issues in subsequent judicial proceedings, and certain internal, concurrent congressional inquiries have in the past been postponed or partially deferred because of arrangements with the Department of Justice). An attempt to mandatorily suspend an indicted or convicted Member from voting or participating in congressional proceedings raises several issues. In general, elected Senators are not in the same situation as persons appointed to positions in the government with indefinite tenure, nor as private professionals, who might be suspended for a period of time merely upon suspicion or charges being levied, because Members of Congress are directly elected by, answerable to, and personally represent the people of their state or district in the Congress. The authority of either house of Congress to mandatorily suspend a Member from participation in congressional business has thus been questioned on grounds of both policy and power because such action would, in effect, disenfranchise that Member's constituency, deprive the people of their full constitutional representation in Congress, and would not allow the constituents to replace a Member, such as they could after an expulsion action. Conviction of a crime may subject a Member of the Senate to internal disciplinary action, including a resolution for censure of the Member, up to and including an expulsion from Congress upon a two-thirds vote of the Members of the Senate present and voting. The Senate has demonstrated that in cases of conviction of a Member of crimes that relate to official misconduct that the institution need not wait until all the Senator's appeals are exhausted, but that the Senate may independently investigate and adjudicate the underlying factual circumstances involved in the judicial proceedings, regardless of the potential legal or procedural issues that may be raised and resolved on appeal. No specific guidelines exist regarding actionable grounds for congressional discipline under the constitutional authority of each house to punish its own Members. Each house of Congress has significant discretion to discipline misconduct that the membership finds to be worthy of censure, reprimand, or expulsion from Congress. When the most severe sanction of expulsion has been actually employed in the Senate (and in the House of Representatives), however, the conduct has historically involved either disloyalty to the United States or the violation of a criminal law involving the abuse of one's official position, such as bribery. In the United States Senate, 15 Senators have been expelled, 14 during the Civil War period for disloyalty to the Union (one expulsion was later revoked by the Senate), and one Senator was expelled in 1797 for other disloyal conduct. Although the Senate has actually expelled relatively few Members, and none since the Civil War, other Senators, when facing a recommended expulsion for misconduct, have resigned their seat rather than face the potential expulsion action. In addition to expulsion, the Senate as an institution may take other disciplinary actions against one of its Members, including censure or fine. The Senate, like the House of Representatives, has taken a broad view of its authority to censure or otherwise discipline its Members for any conduct that the Senate finds to be reprehensible and/or to reflect discredit on the institution and which is, therefore, worthy of rebuke or condemnation. A censure by the Senate, whereby the full Senate adopts by majority vote a formal resolution of disapproval of a Member, may therefore encompass conduct that does not violate any express state or federal law, nor any specific Rule of the Senate. The Senate, in a similar manner as the House of Representatives in relation to its Members, has expressed reticence to exercise the power of expulsion (but not censure) for conduct in a prior Congress when a Senator has been elected or reelected to the Senate after the Member's conviction, when the electorate knew of the misconduct and still sent the Member to the Senate. The apparent reticence of the Senate or House to expel a Member for past misconduct after the Member has been duly elected or reelected by the qualified electors of a state, with knowledge of the Member's conduct, appears to reflect the deference traditionally paid in U.S. heritage to the popular will and election choice of the people. The authority to expel would thus be used cautiously when the institution of Congress might be seen as usurping or supplanting its own institutional judgment for the judgment of the electorate as to the character or fitness for office of an individual whom the people have chosen to represent them in Congress. Concerning a sitting Member of the Senate (or House) who is either indicted for or convicted of a felony offense, it should be noted that the United States Constitution does not provide for nor authorize the recall of any United States officials, such as United States Senators, Representatives to Congress, or the President or Vice President, and thus no Senator or Representative has ever been recalled in the history of the United States. Under the Constitution and congressional practice, Members of Congress may have their services ended prior to the normal expiration of their constitutional terms of office by their resignation, death, or by action of the house of Congress in which they sit by way of an expulsion or by a finding that a subsequent public office accepted by a Member is ""incompatible"" with congressional office (and that the Member has thus vacated his seat in Congress). The recall of Members of Congress was considered during the drafting of the federal Constitution, but no such provisions were included in the final version sent to the states for ratification, and the drafting and ratifying debates indicate a clear understanding and intent of the framers and ratifiers of the Constitution that no right or power to recall a Senator or Representative from Congress existed under the Constitution. As noted by an academic authority on this subject, The Constitutional Convention of 1787 considered but eventually rejected resolutions calling for this same type of recall [recall of Senators as provided in the Articles of Confederation].... In the end, the idea of placing a recall provision in the Constitution died for lack of support.... Although the Supreme Court has not needed to address the subject of recall of Members of Congress directly, other Supreme Court decisions, as well as other judicial and administrative rulings, decisions, and opinions, indicate that (1) the right to remove a Member of Congress before the expiration of his or her constitutionally established term of office resides exclusively in each house of Congress as established in the expulsion clause of the United States Constitution and (2) the length and number of the terms of office for federal officials, established and agreed upon by the states in the Constitution creating that federal government, may not be unilaterally changed by an individual state, such as through the enactment of a recall provision or other provision limiting, changing, or cutting short the term of a United States Senator or Representative. State administrative and judicial rulings have thus consistently found that there exists no right or power for an electorate in that state to ""recall"" a federal officer such as a United States Representative or Senator, regardless of the language of a particular state statute. No law or Rule exists providing that a Member of the Senate who is indicted for or convicted of a crime must forfeit his or her congressional salary. As discussed earlier concerning qualifications to hold the office of Member of Congress, indictment for or conviction of a felony offense is not a constitutional bar for eligibility to be elected or reelected as a Member of Congress, other than a conviction for treasonous conduct after having taken an oath of office, under the ""disqualification"" provision of the Fourteenth Amendment. Additionally, a congressional censure or expulsion does not act as a permanent disability to hold congressional office in the future. A person under indictment or a convicted felon, even one who has also been disciplined by Congress, may run for and, in theory, be reelected to Congress and may not be ""excluded"" from Congress, but must be seated, if such person meets the three constitutional qualifications for office and has been duly elected. Once a Member is seated, however, that Member may be subject to certain discipline by the Senate. Under the United States Constitution there is no impediment for the people of a state (or district in the case of a Representative) to choose an individual who is under indictment, or who is a convicted felon, to represent them in Congress. Furthermore, because the qualifications for elective federal office are established and fixed within the United States Constitution, they are the exclusive qualifications for congressional office, and may not be altered or added to by the state legislatures except by constitutional amendment. The states may not, therefore, by statute or otherwise, bar from the ballot a candidate for federal office because such person is indicted or has been convicted of a felony. The required qualifications, as well as the disqualifications, to serve in Congress were intentionally kept at a minimum by the framers of the Constitution to allow the people broad discretion to send whom they wish to represent them in Congress. That is, the people voting in a district or state, rather than the institutions of Congress, the courts, or the executive, were meant to substantially control their own decisions concerning their representation in the federal legislature. Officers and employees of the United States, including Members of Congress, do not, upon indictment for any crime, nor upon conviction of every crime that constitutes a felony, forfeit the federal pensions for which they qualify and the retirement income that they have accumulated. However, the federal pensions of Members of Congress will be affected in two general instances: upon the conviction of a crime concerning any of the national security offenses listed in the so-called ""Hiss Act,"" and upon the conviction of any one of several felony offenses relating to public corruption, abuse of one's official position in the Congress, fraud, or campaign finance laws if the elements of the offense relate to the official duties of the Member. Under the so-called ""Hiss Act,"" Members of Congress, in a similar manner as most other officers and employees of the federal government, forfeit all of their federal retirement annuities for which they had qualified if convicted of a federal crime which relates to disclosure of classified information, espionage, sabotage, treason, misprision of treason, rebellion or insurrection, seditious conspiracy, harboring or concealing persons, gathering or transmitting defense information, perjury in relation to those offenses, and other designated offenses relating to secrets and national security offenses against the United States. Additionally, under provisions of law first enacted in 2007, and then expanded in 2012, a Member of Congress will lose all ""creditable service"" as a Member for federal pension (and disability) purposes if that Member is convicted for conduct which constitutes a violation of any one of a number of federal laws concerning public corruption, fraud, and campaign finance regulation. The forfeiture provisions of this law will apply if the criminal misconduct was engaged in while the individual was a Member of Congress (or while the individual was the President, Vice President, or an elected official of a state or local government), and if every element of the offense ""directly relates to the performance of the individual's official duties as a Member, the President, the Vice President, or an elected official of a State or local government."" The laws within these pension forfeiture provisions include, for example, bribery and illegal gratuities; conflicts of interest; acting as an agent of a foreign principal; false claims; vote buying; unlawful solicitations of political contributions; theft or embezzlement of public funds; false statements or fraud before the federal government; wire fraud and mail fraud, including ""honest services"" fraud; obstruction of justice; extortion; money laundering; bribery of foreign officials; depositing proceeds from various criminal activities; obstruction of justice or intimidation or harassment of witnesses; an offense under ""RICO,"" racketeer influenced and corrupt organizations; conspiracy to commit an offense or to defraud the United States to the extent that the conspiracy constitutes an act to commit one of the offenses listed above; conspiracy to violate the post-employment, ""revolving door"" laws; perjury in relation to the commission of any offense described above; or subornation of perjury in relation to the commission of any offense described above. As to the loss of one's federal pension annuity, or the loss of creditable service as a Member for the purposes of the Member's retirement annuity, the nature and the elements of the offense are controlling; and it does not matter if the individual resigns from office prior to or after indictment or conviction, or if the individual is expelled from Congress.","There are no federal statutes or Rules of the Senate that directly affect the status of a Senator who has been indicted for a crime that constitutes a felony. No rights or privileges are forfeited under the Constitution, statutory law, nor the Rules of the Senate upon an indictment. Under the Rules of the Senate, therefore, an indicted Senator may continue to participate in congressional proceedings and considerations. Under the United States Constitution, a person under indictment is not disqualified from being a Member of or a candidate for reelection to Congress. Internal party rules in the Senate may, however, provide for certain steps to be taken by an indicted Senator. For example, the Senate Republican Conference Rules require an indicted chairman or ranking Member of a Senate committee, or a member of the party leadership, to temporarily step aside from his or her leadership or chairmanship position. Members of Congress do not automatically forfeit their offices upon conviction of a crime that constitutes a felony. No express constitutional disability or ""disqualification"" from Congress exists for the conviction of a crime, other than under the Fourteenth Amendment for certain treasonous conduct by someone who has taken an oath of office to support the Constitution. Unlike Members of the House, Senators are not instructed by internal Senate Rules to refrain from voting in committee or on the Senate floor once they have been convicted of a crime which carries a particular punishment. Internal party rules in the Senate may affect a Senator's position in committees. Under the Senate Republican Conference Rules, for example, Senators lose their chairmanships of committees or ranking Member status upon conviction of a felony. Conviction of certain crimes may subject—and has subjected in the past—Senators to internal legislative disciplinary proceedings, including resolutions of censure, as well as an expulsion from the Senate upon approval of two-thirds of the Members. Conviction of certain crimes relating to national security offenses would result in the Member's forfeiture of his or her entire federal pension annuity under the provisions of the so-called ""Hiss Act"" and, under more recent provisions of law, conviction of a number of crimes by Members relating to public corruption, fraud, or campaign finance law will result in the loss of the Member's entire ""creditable service"" as a Member for purposes of calculating his or her federal retirement annuities if the conduct underlying the conviction related to one's official duties. This report has been updated from an earlier version, and will be updated in the future as changes to law, congressional rules, or judicial and administrative decisions may warrant.",govreport
"T here are approximately 766 million acres of forestlands in the United States, most of which are privately owned (445 million acres, or 58%) by individuals, families, Native American tribes, corporations, nongovernmental organizations, and other groups (see Figure 1 ). The federal government has numerous programs to support forest management on those private forests and also public—state and local—forests. These programs support a variety of forest management and protection goals, including activities related to planning for and responding to wildfires, as well as supporting the development of new uses and markets for wood products. These programs are primarily administered by the Forest Service (FS) in the U.S. Department of Agriculture (USDA), and often with the assistance of state partner agencies. This report describes current forestry assistance programs mostly funded and administered through the State and Private Forestry (SPF) branch of the FS. Following a brief background and overview, this report presents information on the purposes of the programs, types of activities funded, eligibility requirements, authorized program duration and funding level, and requested and enacted program appropriations. Figure 1. Forest Landownership in the Conterminous United StatesSource: CRS. Data from Jaketon H. Hewes, Brett J. Butler, and Greg C. Liknes, Forest Ownership in the Conterminous United States circa 2014 - geospatial data set, Forest Service Research Data Archive, 2017, https://doi.og/10.2737/RDS-2017-0007. Providing federal assistance for nonfederal forest landowners has been a component of USDA's programs for more than a century. Initial forestry assistance efforts began with the creation of the USDA Division of Forestry in 1881 (to complement forestry research, which began in 1876). Forestry assistance and research programs grew slowly, and in 1901 the division was upgraded to the USDA Bureau of Forestry. In 1905, the bureau merged with the Interior Department's Division of Forestry (which administered the forest reserves, later renamed national forests) and became the USDA Forest Service (FS). The FS has three primary mission areas: managing the National Forest System, conducting forestry research, and providing forestry assistance. The Senate and House Agriculture Committees have jurisdiction over forestry in general, forestry assistance, and forestry research programs. Congress authorized specific forestry assistance programs in the Clarke-McNary Act of 1924. This law guided those programs for more than half a century, until it was revised in the Cooperative Forestry Assistance Act of 1978 (CFAA). The House and Senate Agriculture Committees often examine these programs in the periodic omnibus legislation to reauthorize agriculture and food policy programs, commonly known as farm bills. The 2008 farm bill established national funding priorities (conserve working forests, protect and restore forests, and enhance public benefits from private forests); enacted a standardized process for states to assess forest resource conditions and strategize about funding needs; and established, modified, and repealed specific assistance programs, among other provisions. The 2014 farm bill repealed several programs, mostly programs whose authorizations had expired or programs that had never received appropriations. The 2014 farm bill also reauthorized and modified the requirement for statewide assessments and the Office of International Forestry. Many of the agricultural programs—including two forestry programs—authorized by the 2014 farm bill are scheduled to expire at the end of FY2018 unless Congress provides for an extension or reauthorizes them. Most forestry assistance programs are administered by the FS, but the programs are typically implemented by state partners (e.g., state forestry or natural resource agencies). In these cases, the FS provides technical and financial aid to the states, which then provides information and assistance to private landowners or specified eligible entities. However, the 2008 farm bill expanded the definition of authorized conservation practices for agricultural conservation programs generally to include forestry practices, and thus direct federal financial assistance to private forest landowners may be feasible through the conservation programs. See Table 1 for a brief summary of the FS programs addressed in this report; more information on each program is available in the "" Forest Service Assistance Programs "" section of this report. To be eligible to receive funds for most of the programs, each state must prepare a State Forest Action Plan, consisting of a statewide assessment of forest resource conditions, including the conditions and trends of forest resources in the state; threats to forest lands and resources, consistent with national priorities; any areas or regions of the state that are a priority; and any multistate areas that are a regional priority; and a long-term statewide forest resource strategy , including strategies for addressing the threats to forest resources identified in the assessment; and a description of the resources necessary for the state forester to address the statewide strategy. The State Forest Action Plans are to be reviewed every 5 years and revised every 10 years. All 50 states, the District of Columbia, and 8 territories are covered by a State Forest Action Plan. Each state must also publish an annual funding report and have a State Forest Stewardship Coordination (FSC) Committee. Chaired by the state forester and composed of federal, state, and local representatives (including representatives from conservation, industry, recreation, and other organizations), the FSC Committee makes recommendations on statewide priorities on specific programs as well as on the development and maintenance of the State Forest Action Plan. The forestry programs may provide technical assistance, financial assistance, or both. Technical assistance includes providing guidance documents, skills training, data, or otherwise sharing information, expertise, and advice broadly or on specific projects. Technical assistance may also include the development and transfer of technological innovations. Financial assistance is typically delivered through formula or competitive grants (with or without contributions from recipients) or cost-sharing (with varying levels of matching contributions from recipients). As an example, the Forest Health Protection program provides both types of assistance: financial assistance in the form of funding for FS to perform surveys and to control insects or diseases on state or private lands (with the consent and cooperation of the landowner) and technical assistance in the form of data, expertise, and guidance for addressing specific insect and disease infestations. Most—but not all—FS assistance programs are available nationally and have permanently authorized funding and without specified funding levels. No forestry assistance programs have mandatory spending; all require funding through the annual discretionary appropriations process, and are typically funded in the annual Interior, Environment, and Related Agencies appropriations acts. Most of the assistance programs are funded through the FS's State and Private Forestry (SPF) account, although some programs are funded or allocated from other accounts or programs. Some programs have been combined for funding purposes or for administrative reasons. Funding for forestry assistance programs has declined over the past 15 years, in both real and constant dollars (see Figure 2 ). The average annual appropriation over that time, from FY2004 through FY2018, was $362.7 million, with a peak of $420.5 million in FY2010 and a low of $328.9 million in FY2017. Funding increased in FY2018 to $355.1 million, but remains below the 15-year average. When adjusting for inflation, however, overall funding in FY2018 was 32% below FY2004 levels and 25% below FY2010 levels. In total, these forestry assistance programs made up 7% of the FS's total annual discretionary appropriation on average across those 15 years. The Administration requested $197.4 million in FY2019 and proposed to eliminate funding for seven of the programs and decreased funding for the others (see Table 2 for FY2014-FY2018 appropriations and the FY2019 budget request; more information on each program is available in the "" Forest Service Assistance Programs "" section of this report). Some FS programs have been repealed by previous farm bills, or have gone unfunded by Congress for several years. Table 3 lists these programs and the most recent congressional action. Some activities authorized by these unfunded or repealed programs may continue to be performed or provided by FS through other authorizations or funding sources. This report focuses on forestry assistance programs administered by FS. Other agencies, inside and outside of USDA, also administer programs that may have forest conservation or protection benefits. For example, the USDA Farm Services Agency (FSA) administers several programs, including the Emergency Forest Restoration program, which provides assistance to nonindustrial forest landowners to recover or restore forests following catastrophic events. The USDA Natural Resources Conservation Service (NRCS) administers the Healthy Forest Reserve program, which funds agreements, contracts, or easements to assist landowners with forest restoration or enhancement projects. The Department of the Interior administers a community assistance program to support collaborative community planning and projects to mitigate wildfire risk. The tabular presentation that follows provides basic information covering each of the FS forestry and fire assistance programs, including brief program description; program activities; eligibility requirements; the FS appropriations account budget line item that provides funding for the program; authorized funding levels and any funding restrictions; FY2018 funding level in the Consolidated Appropriations Act of 2018 ( P.L. 115-141 ); FY2019 funding level requested by the Administration; statutory authority, recent amendments, and U.S. Code reference; expiration date of program authority unless permanently authorized; and program's website link. Information for the following tables is drawn largely from agency budget documents and presentations, explanatory notes, and websites. Further information about these programs may be found on the FS SPF website at http://www.fs.fed.us/spf and on the ""cooperative forestry"" page.","The U.S. Department of Agriculture (USDA) has numerous programs to support the management of state and private forests. These programs are under the jurisdiction of the House and Senate Agriculture Committees and are often examined in the periodic legislation to reauthorize agricultural programs, commonly known as farm bills. For example, the 2014 farm bill repealed, reauthorized, or modified many of these programs. The House version of the 2018 farm bill, the Agriculture and Nutrition Act of 2018 (H.R. 2), contains a forestry title (Title VIII) that would reauthorize, modify, and establish new forestry assistance programs. Forestry-specific assistance programs (in contrast to agriculture conservation programs that include forestry activities) are primarily administered by the USDA Forest Service (FS), with permanent authorization of funding as needed. Some programs have been combined through the appropriations process or for administration purposes. These programs generally provide technical and educational assistance such as information, advice, and aid on specific projects. Other programs provide financial assistance, usually through grants (with or without matching contributions from recipients) or cost-sharing (typically through state agencies, with varying levels of contributions from recipients). Many programs provide both technical and financial assistance. Some of the assistance programs provide support for planning and implementing forestry and related land management practices (e.g., Forest Stewardship, Urban and Community Forestry). Other programs provide assistance for forest restoration projects that involve more than one jurisdiction and address regional or national priorities (e.g., Landscape Scale Restoration). Other programs provide support for protecting forestlands from wildfires, insects and diseases, and from converting forestland to nonforest uses (e.g., Community Forest and Open Space Conservation, Forest Legacy). The Forest Health program provides support for protecting both federal and nonfederal forests from continuing threats, although most of the funding goes to federal forests. Programs also exist to enhance state and rural wildfire management capabilities (e.g., State Fire Assistance and Volunteer Fire Assistance) and to promote the use of forest products (e.g., Wood Innovation). International Forestry is often included as a forestry assistance program, because it provides technical forestry help and because it is funded through the FS appropriations account for forestry assistance programs (State and Private Forestry). Most of the programs provide assistance to state partner agencies. The state agencies can use the aid on state forestlands or to assist local governments or private landowners. How the states use the resources is largely at the discretion of the states, within the authorization of each program and consistent with the national priorities for state assistance established by Congress in the 2008 farm bill. Overall funding for the Forest Service's forestry assistance programs in FY2018 was $355.1 million, an 8% increase over FY2017 funding of $328.9 million. The Trump Administration requested $197.4 million in funding for FY2019. Overall funding has declined over the past 15 years, however, in both real and constant dollars. Over that time, funding for forestry assistance programs has ranged between 5% and 9% of the total annual Forest Service discretionary appropriation.",govreport
"Transnational organized crime groups flourish in Burma, trafficking contraband that includes drugs, humans, guns, wildlife, gems, and timber. Transnational crime is highly profitable, reportedly generating roughly several billion dollars each year. The country's extra-legal economy, both black market and illicit border trade, is reportedly so large that an accurate assessment of the size and structure of the country's economy is unavailable. Contraband trafficking also remains a low-risk enterprise, as corruption among officials in Burma's ruling military junta, the State Peace and Development Council (SPDC), appears to facilitate trafficking and effectively provide the criminal underground immunity from law enforcement and judicial action. Synergistic links connect various forms of contraband trafficking; smugglers use the same routes for many forms of trafficking, following paths of least resistance, where corruption and lax law enforcement prevail. The continued presence of transnational crime in Burma and the illicit trafficking routes across Burma's borders share many features of so-called ""ungoverned spaces""—regions of the world where governments have difficulty establishing control or are complicit in the corruption of the rule of law. Among the commonalities that Burma's border regions share with other ungoverned spaces is physical terrain that is difficult to control. Burma's long borders, through which much smuggled contraband passes, stretch across vast trackless hills and mountains that are poorly patrolled. In addition, continuing ethnic tensions with some ethnic armed rebel groups hamper government control in some regions of the country, which is another common feature of ungoverned spaces. Recent cease-fire agreements in other border regions have not markedly improved the situation; instead, these cease-fires have provided groups known for their activity in transnational crime with near autonomy, essentially placing these areas beyond the reach of Burmese law. Congress has long been active in U.S. policy toward Burma for a variety of reasons, including on issues related to transnational crime. Because the State Department lists Burma as a major drug-producing state, the country is barred access from U.S. foreign assistance under several long-standing legislative provisions. Congress also authorizes sanctions against countries that the State Department deems in non-compliance with the minimum standards for the elimination of trafficking in persons, which includes Burma. The 110 th Congress sought to strengthen unilateral sanctions against Burma. In response to the Burmese government's forced suppression of anti-regime protests in August and September of 2007, as well as its internationally criticized humanitarian response to destruction resulting from tropical cyclone Nargis in May 2008, Congress passed P.L. 110-286 , the Tom Lantos Block Burmese JADE Act of 2008 (signed by the President on July 29, 2008). This law imposes further sanctions on SPDC officials and prohibits the indirect import of Burmese gems, among other actions. H.Rept. 110-418 , which accompanies H.R. 3890 , also cites ""Burma's rampant drug trade"" and ""its role as a source for international trafficking in persons and illicit goods"" as additional reasons for these new sanctions. The 111 th Congress may choose to continue its interest in oversight of U.S. policy toward Burma, including the country's role in criminal activity. Secretary of State Hillary Clinton announced in February 2009 the beginning of a review of U.S.-Burma relations. In September 2009, the conclusions of this policy review were released, noting in particular the beginning of direct dialogue with Burmese authorities on international crime-related issues, including compliance with U.N. arms sanctions and counternarcotics. Already in the first session of the 111 th Congress, both the Senate and the House have held hearings in which crime issues related to Burma have been addressed. The United Wa State Army (UWSA), Shan State Army-South (SSA-S), Shan State Army-North (SSA-N), Democratic Karen Buddhist Army (DBKA), ethnic Chinese criminal groups (including the Triads), and other armed groups have criminal networks that stretch from India to Malaysia and up into China. Many of the transnational criminal elements along Burma's border are linked to past or ongoing ethnic insurgencies. While not necessarily a threat to SPDC control, they continue to constitute a transnational security threat for Burma and the region. The State Department states that the UWSA is the largest of the organized criminal groups in the region and operates freely along the China and Thailand borders, controlling much of the Shan State with a militia estimated to have 16,000 to 20,000 members. Other criminal groups, including the 14K Triad, reportedly operate in the north of the country and in major population centers. According to the Economist Intelligence Unit (EIU), these criminal organizations remain nearly immune from SPDC interference, because of widespread collusion with junta military, police, and political officials. Many analysts agree that much of this apparent collusion is part of concerted SPDC efforts to coopt ethnic groups and avoid hostilities with them. One possible consequence of this policy is that the influence of organized crime in Burma and the region could remain virtually impossible to reduce. The U.S. State Department and other observers indicate that corruption is common among the bureaucracy and military in Burma. Burmese officials, especially army and police personnel in the border areas, are widely believed to be involved in the smuggling of goods and drugs, money laundering, and corruption. Burma has no laws on record specifically related to corruption and has signed but not ratified the U.N. Convention against Corruption. The 2006 EIU country report on Burma states that ""corruption and cronyism"" are widespread ""throughout all levels of the government, the military, the bureaucracy and business communities."" Burma is reported to be the third-most corrupt country in the world according to Transparency International's 2009 Corruption Perceptions Index , after Somalia and Afghanistan. In addition, the State Department states that Burma's weak implementation of anti-money laundering controls remains at the root of the continued use by narcotics traffickers and other criminal elements of Burmese financial institutions. Burma has signed, but not ratified, the United Nations Convention against Corruption, which entered into force in December 2005. Although there is little direct evidence of top-level regime members' involvement in trafficking-related corruption, there is evidence that high-level officials and Burmese military officers have benefitted financially from the earnings of transnational crime organizations. In the case of the drug trade, reports indicate Burmese military officials at various levels have several means to gain substantial shares of narcotics trafficking earnings. Some reports indicate that the Burmese armed forces, or Tatmadaw , may be directly involved in opium poppy cultivation in Burma's Shan state. Some local Tatmadaw units and their families reportedly work the poppy fields and collect high taxes from the traffickers, as well as fees for military protection and transportation assistance. According to the State Department, Burma has not indicted any military official above the rank of colonel for drug-related corruption. The SPDC also reportedly allows and encourages traffickers to invest in an array of domestic businesses, including infrastructure and transportation enterprises, receiving start-up fees and taxes from these enterprises in the process. The traffickers usually deposit the earnings from these enterprises into banks controlled by the military, and military officers reportedly deposit much of their crime-related money in foreign bank accounts in places like Bangkok and Singapore. In 2003, the Secretary of the Treasury reported that some Burmese financial institutions were controlled by, or used to facilitate money laundering for, organized drug trafficking organizations. In the same report, the Secretary of the Treasury also stated that Burmese government officials were suspected of being involved in the counterfeiting of U.S. currency. Possible links between drug trafficking operations and official corruption have been raised recently in the context of SPDC reconstruction contracts in the aftermath of cyclone Nargis. Specifically, some reports have pointed to SPDC's reconstruction contract with Asia World Company Ltd., a firm managed by Steven Law (Tun Myint Naing), as a possible indication of continued links between drug traffickers and official corruption. Steven Law, against whom the U.S. government has maintained financial sanctions since February 2008, allegedly provides material support to the Burmese junta, receives business concessions from the junta, facilitates the movement of illicit narcotics, and launders drug profits through his firms, including Asia World Company Ltd. The most frequent destinations for much of Burmese contraband—opium, methamphetamine, illegal timber, endangered wildlife, and trafficked humans—are China and Thailand. Other destinations include India, Laos, Bangladesh, Vietnam, Indonesia, Malaysia, Brunei Darussalam, South Korea, and Cambodia. Demand for Burma's contraband reaches beyond the region, including the United States. The U.S. Drug Enforcement Administration (DEA), for example, reports that Burmese-trafficked methamphetamine pills have been confiscated within the United States. The United States is also reputed to be among the world's largest importers of illegal wildlife; no concrete data exist, however, to link such transnational ties with Burma. Ready recruits for organized crime activities can be found in both urban ghettos and impoverished rural areas. According to the Asian Development Bank, 27% of Burma's population live below the poverty line, making the country one of the poorest in Southeast Asia. Many analysts state that peasant farmers, rural hunters, and other poor often serve at the base of Burma's international crime network, growing opium poppy crops, poaching exotic and endangered species in Burma's lush forests, and serving as couriers and mules for contraband. In addition, the State Department and other observers have found that many victims of transnational crime in Burma are the poor, becoming commodities themselves as they are trafficked to be child soldiers for the junta or slaves for sexual exploitation. Burma is party to all three major United Nations international drug control treaties—the 1961 Single Convention on Narcotic Drugs, as amended; the 1971 Convention on Psychotropic Substances; and the 1988 Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances. Burma's official strategy to combat drugs aims to end all production and trafficking of illegal drugs by 2014, a goal that parallels the region's ambition to be drug free by 2015. Many analysts, however, consider the goal of achieving a drug-free Burma as unlikely. In September 2007, the Administration once again included Burma on the list of major drug transit or major illicit drug producing countries. Located at the heart of the ""Golden Triangle"" of narcotics trafficking, Burma is among the world's top producers of opium, heroin, and methamphetamine. Illicit narcotics reportedly generate between $1 billion and $2 billion annually in exports. In addition, Burma's drug trafficking activities appear to be linked to the recent spread of HIV and AIDS in the region, as drug users along Burma's trafficking routes share contaminated drug injection needles. Some analysts warn that clashes between the government of Burma, rebel groups in the border areas of Burma, and neighboring countries could be possible. For example, should the SPDC begin to combat the drug trade more vigorously, current cease-fire groups may choose to break their agreements with the SPDC in order to protect their drug trade territories. Several cease-fire groups, including the UWSA, have chosen not to heed calls by the SPDC to disarm and reportedly use illicit drug proceeds to equip and maintain their paramilitary forces. Beginning in June 2009 through at least late August 2009, the Burmese Army initiated a military campaign against several ethnic minority groups, including the Karen and the Kokang. Thai counterdrug officials report a concurrent spike in heroin and methamphetamine sales in the region. It appears that various ethnic rebels are selling off their stockpiles of drugs in order to expand their weapons arsenals and prepare for the possibility of active conflict. Further, some suggest that the continued flow of illicit drugs from Burma to Thailand may be a source of tension between the two countries—especially in the face of Thailand's renewed war on drugs. The most recent campaign to combat illegal drugs, which began in April 2009, is a reprise of a 2003 campaign. Though media reports indicate that the current Thai war on drugs appears to be more restrained than the 2003 version, which resulted in the deaths of several thousand people over a three-month period, human rights activists remain on alert. Burma is the world's second-largest producer of illicit opium, behind Afghanistan. Further, the DEA reports that Burma accounts for 80% of all heroin produced in Southeast Asia and is a source of heroin for the United States. Although poppy cultivation has declined significantly in the past decade, prices have increased significantly in recent years, reflecting ongoing demand despite production declines since a decade ago (see Table 1 ). Some suggest that future dynamics of the opiate market in Burma may be dependent on developments in other opium-producing regions, particularly Afghanistan, which replaced Burma as the primary opium producer in the world. Much of the decline in recent years has been attributed to UWSA's 2005 public commitment to stop its activity in the opium and heroin markets, after prolonged international pressure to do so. However, recent reports suggest that the UWSA's self-imposed ban may be short-lived. The UWSA has reportedly warned that alternative livelihood sources will be necessary in order to sustain its ban against opium poppy cultivation—a point with which many international observers agree. Most analysts acknowledge that opium production in certain parts of Burma is one of the few viable means for small-scale peasant farmers to compensate for structural food security shortages. A 2009 United Nations Office on Drugs and Crime (UNODC) study supports this, finding that households in former poppy-growing villages were unable to find sufficient substitutes for their lost income from opium. According to the same UNODC study, the average annual cash income of a household involved in opium poppy cultivation was approximately $700, while the annual income of a household not involved in opium poppy cultivation was approximately $750. In Burma's Shan State in 2009, known for its pockets of opium production, 28% of poppy growing households (versus 22% of non-poppy growing households) reported food insecurity due to a shortage of rice. In the meantime, reports indicate that opium poppy production is shifting to areas controlled by other cease-fire ethnic groups, and to areas apparently administered by Burma's armed forces, the Tatmadaw, who tax the farmers and traders for a portion of the farmgate value. The UWSA may also be organizing Wa poppy farmers to seasonally migrate to nearby provinces, where the UWSA did not commit to a ban, in order to continue their cultivation. In addition to producing heroin and opium, Burma is reportedly the largest producer of methamphetamine in the world and a significant producer of other synthetic drugs. Methamphetamine is produced in small, mobile labs in insurgent-controlled border areas, mainly in eastern Burma (for export mainly to Thailand) and sometimes co-located with heroin refineries. Burma's rise to prominence in the global synthetic drug trade is in part the consequence of UWSA's commitment to ban opium poppy cultivation. According to some, UWSA leadership may be intentionally replacing opium cultivation with the manufacturing and trafficking of amphetamine-type stimulants. As a result, Burma has emerged as one of the world's largest producers of methamphetamine and other amphetamine-type stimulants. The State Department states that this sharp increase in methamphetamine trafficking is ""threatening to turn the Golden Triangle into an 'Ice Triangle.'"" A July 2008 media report indicates that international assistance for relief from the cyclone Nargis may have been used as a cover to smuggle illegal drugs into Burma. According to the Irrawaddy , an independent Burmese newspaper, several customs officials were suspected of involvement in a scheme to smuggle ecstasy pills into Burma as part of shipments of relief aid from Burmese communities abroad. Burma is a party to the United Nations Convention against Transnational Organized Crime and its protocol on migrant smuggling and trafficking in persons. However, Burma has been designated as a ""Tier 3"" state in every Trafficking in Persons (TIP) Report ever published by the State Department. Tier 3 is the worst designation in the TIP Report, indicating that the country does not comply with minimum standards for combating human trafficking under the Trafficking Victims Protection Act of 2000, as amended (Division A of P.L. 106-386 , 22 U.S.C. 7101, et seq.). As the TIP reports explain, laws to criminally prohibit sex and labor trafficking, as well as military recruitment of children, exist in Burma—and the penalties prescribed by these laws for those convicted of breaking these laws are ""sufficiently stringent."" Nevertheless, the State Department continues to report that these laws are arbitrarily enforced by the SPDC and that cases involving high-level officials or well-connected individuals are not fully investigated. Victims are trafficked internally and regionally, and junta officials are directly involved in trafficking for forced labor and the unlawful conscription of child soldiers, according to several reports. Women and girls, especially those of ethnic minority groups and those among the thousands of refugees along Burma's borders, are reportedly trafficked for sexual exploitation. Victims are reportedly trafficked from rural villages to urban centers and commerce nodes, such as truck stops, border towns, and mining and military camps. One incident in early 2008 revealed the risks associated with migrant smuggling from Burma to Thailand, when 54 Burmese migrants were found dead in the back of a seafood truck headed to Thailand after the truck's air conditioning failed. Based on media accounts, 67 migrants survived, including at least 14 minors. In September 2009, the U.S. Department of Labor released a report and initial list of goods produced by child labor or forced labor. This is a congressionally mandated report, pursuant to the Trafficking Victims Protection Reauthorization Acts of 2005 and 2008, which required that the Department of Labor's Bureau of International Labor Affairs (DOL/ILAB) develop and publish a list of goods from countries in which ILAB had ""reason to believe"" were produced as a result of child or forced labor. Burma is listed among the 58 countries described in the ILAB report, with 14 separate production sectors implicated. Burma is rich in natural resources, including extensive forests, high biodiversity, and deposits of minerals and gemstones. Illegal trafficking of these resources is reportedly flowing to the same destination states and along the same trafficking routes as other forms of trafficking. Global Witness, a London-based non-governmental organization, estimates that 98% of Burma's timber exports to China, from 2001 to 2004, were illegally logged, amounting to an average of $200 million worth of illegal exports each year. Many analysts also claim that the region's illegal timber trade is characterized by complex patronage and corruption systems. Wild Asiatic black bears, clouded leopards, Asian elephants, and a plethora of reptiles, turtles, and other unusual animals reportedly are sold in various forms—whole or in parts, stuffed, ground, or, sometimes, alive—in open-air markets in lawless border towns. Growing demand in countries such as China and Thailand has increased regional prices for exotic wildlife; for example, a tiger's skin can be worth up to $20,000, according to media reports. One report suggests that valuable wildlife is used as currency in exchange for drugs and in the laundering of other contraband proceeds. Rubies, sapphires, jade, and other gems have also been used as non-cash currency equivalents for transborder smuggling. The legal sale of Burmese gems is among the country's most significant foreign currency earners—$297 million during the 2006-2007 fiscal year, according to Burma's customs department; more may be traded through illicit channels. Some observers claim that the junta is heavily involved in both the legal and illegal trade of gemstones, as the regime controls most mining operations and the sale of gems through official auctions and private sales reportedly arranged by senior military officers. Congress has also accused the Burmese regime of attempting to evade U.S. sanctions against the import of Burmese gemstones by concealing the gems' origin from potential buyers. Congress estimates that while 90% of the world's rubies originate from Burma, only 3% of those entering the United States are claimed to have originated there. AK-47s, B-40 rocket launchers, and other small arms are reportedly smuggled into Burma along the Thai-Burmese border. These weapons reportedly go to the Karen guerrillas, who continue to fight a decades-long insurgency against the Burmese junta. Another report implicates the Shan State Army in trafficking in military hardware. Although analysts say it is unlikely that the ruling junta benefits from the criminal profits of small arms trafficking, reports indicate that the government distributes such weapons to its cadre of child soldiers. Other less high-profile markets for contraband reportedly exist, including trafficking in cigarettes, cars, CDs, pornography, antiques, religious items, fertilizer, and counterfeit documents—many of which are believed to involve at least the complicity of some Burmese government officials. In April 2008, Japan's public broadcaster NHK reported that Burma has been importing multiple-launch rockets from North Korea, raising international concerns and speculation about why Burma would seek out such weapons in violation of U.N. sanctions imposed on North Korea after its nuclear test in October 2006. Some observers speculate that the Burmese military has been seeking to upgrade its artillery to improve the country's protection against potential external threats. Burma and North Korea are thought to have been involved in conventional weapons trade in violation of U.N. sanctions since spring 2007, when North Korea and Burma resumed diplomatic relations with each other. Observers further claim that ""Western intelligence officials have suspected for several years that the regime has had an interest in following the model of North Korea and achieving military autarky by developing ballistic missiles and nuclear weapons."" The State Department reports in 2008 that Burma is a money laundering risk because of its underdeveloped financial sector and large volume of informal trade. In 2001, the international Financial Action Task Force on Money Laundering (FATF) designated Burma as a Non-Cooperative Country or Territory (NCCT) for deficient anti-money laundering provisions and weak oversight of its banking sector. A year later in 2002, the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN) issued an advisory to U.S. financial institutions to give enhanced scrutiny to any financial transaction related to Burma. In 2003, two of Burma's largest private banks—Myanmar Mayflower Bank and Asia Wealth Bank—were implicated by FATF as involved in laundering illicit narcotics proceeds and counterfeiting. The Secretary of the Treasury in 2003 listed Burma as a ""major money laundering country of primary concern"" and in 2004 imposed additional countermeasures. Burma has since revoked the operating licenses of the two banks implicated in 2003. However, the U.S. government and international bodies, such as FATF, continue to monitor the widespread use of informal money transfer networks, sometimes also referred to as ""hundi"" or ""hawala."" Monies sent through these informal systems are usually legitimate remittances from relatives abroad. The lack of transparency and regulation of these money transfers remain issues of concern for the United States. In other parts of the world, hawala or hawala-like techniques have been used, or are suspected of being used, to launder proceeds derived from narcotics trafficking, terrorism, alien smuggling, and other criminal activities. Burma is subject to a broad sanctions regime that addresses issues of U.S. interest, which include democracy, human rights, and international crime. Specifically in response to the extent of transnational crime occurring in Burma, the President has taken additional actions against the country under several different legislative authorities. Burma is listed as a major drug-producing state, and because of its insufficient effort to combat the narcotics trade, the country is barred access to some U.S. foreign assistance. As an uncooperative, major drug-producing state, Burma is also subject to trade sanctions. In 2005, the Department of Justice indicted eight Burmese individuals identified in 2003 by the U.S. Treasury's Office of Foreign Assets Control (OFAC) for their alleged role in drug trafficking and money laundering. On November 13, 2008, OFAC named 26 individuals and 17 companies tied to Burma's Wei Hsueh Kang and the UWSA as Specially Designated Narcotics Traffickers pursuant to the Foreign Narcotics Kingpin Designation Act (21 U.S.C. 1901-1908). Burma is characterized by the State Department's 2009 Trafficking in Persons report as a Tier 3 state engaged in the most severe forms of trafficking in persons; as such, Burma is subject to sanctions, barring the country from non-humanitarian, non-trade-related U.S. assistance and loss of U.S. support for loans from international financial institutions. As a major money laundering country—defined by Section 481(e)(7) of the Foreign Assistance Act of 1961, as amended, as one ""whose financial institutions engage in currency transactions including significant amounts of proceeds from international narcotics trafficking""—Burma is subject to several ""special measures"" to regulate and monitor financial flows. These include Department of Treasury advisories for enhanced scrutiny over financial transactions, as well as five special measures listed under 31 U.S.C. 5318A. The United States does not apply sanctions against Burma in specific response to its activity in other illicit trades, including wildlife. The Block Burmese JADE (Junta's Anti-Democratic Efforts) Act of 2007 ( H.R. 3890 ), however, would prohibit the importation of gems and hardwoods from Burma, among other restrictions. After more than a decade of applying sanctions against Burma, however, many analysts have concluded that the sanctions have done little to change the situation. The effectiveness of U.S. sanctions is limited by several factors. These include (1) unevenly applied sanctions against Burma by other countries and international organizations, including the European Union and Japan; (2) a booming natural gas production and export industry that provides the SPDC with significant revenue; (3) continued unwillingness of Burma's fellow members in the Association of Southeast Asian Nations (ASEAN) to impose economic sanctions against Burma; (4) Burma's historical isolation from the global economy; and (5) China's continued economic and military assistance to Burma. In addition, some analysts suggest that sanctions are, in part, culpable for the flourishing black markets in Burma, including trafficking in humans, gems, and drugs, because legal exports are barred. Several analysts indicate that many Burmese women who lost their jobs in the textile industry as a result of Western sanctions are among the victims of trafficking for sexual exploitation. The United States is assisting neighboring countries with stemming the flow of trafficked contraband from Burma into their territories. Although most U.S. assistance to combat transnational crime in Burma remains in suspension, the United States is working to train law enforcement and border control officials in neighboring countries through anti-crime assistance programs. Currently, the bulk of funding to Burma's neighbors remains concentrated in counter-narcotics and anti-human trafficking projects; no funding is allocated to the State Department for combating ""organized and gang-related crime"" in the region. Overall funding to combat trafficking has been in decline for several years; the Administration's FY2008 appropriations request for Foreign Operations in the region represents a 24.2% decrease from FY2006 actual funding. Despite Burma's recent progress in reducing opium poppy cultivation, most experts believe U.S. policies have not yielded substantial leverage in combating transnational crime emanating from Burma. In light of the most recent displays of junta violence against political demonstrators in September 2007, however, there are indications of increasing political interest in re-evaluating U.S. policy toward Burma. Among the considerations that policy makers have recently raised are (1) whether the United States should increase the amount of humanitarian aid sent to Burma; (2) what role ASEAN and other multilateral vehicles for dialogue could play in increasing political pressure on the junta regime; (3) what role the United States sees India, as the world's largest democracy and Burma's neighbor, playing in ensuring that Burma does not become a source of regional instability; and (4) how the United States can further work with China and Thailand, as the largest destinations of trafficked goods from Burma, to address transnational crime along Burma's borders.","Transnational organized crime groups in Burma (Myanmar) operate a multi-billion dollar criminal industry that stretches across Southeast Asia. Trafficked drugs, humans, wildlife, gems, timber, and other contraband flow through Burma, supporting the illicit demands of the region and beyond. Widespread collusion between traffickers and Burma's ruling military junta, the State Peace and Development Council (SPDC), allows organized crime groups to function with impunity. Transnational crime in Burma bears upon U.S. interests as it threatens regional security in Southeast Asia and bolsters a regime that fosters a culture of corruption and disrespect for the rule of law and human rights. Congress has been active in U.S. policy toward Burma for a variety of reasons, including combating Burma's transnational crime situation. At times, it has imposed sanctions on Burmese imports, suspended foreign assistance and loans, and ensured that U.S. funds remain out of the regime's reach. The 110th Congress passed P.L. 110-286, the Tom Lantos Block Burmese JADE Act of 2008 (signed by the President on July 29, 2008), which imposes further sanctions on SPDC officials and prohibits the indirect importation of Burmese gems, among other actions. On the same day, the President directed the U.S. Department of Treasury to impose financial sanctions against 10 Burmese companies, including companies involved in the gem-mining industry, pursuant to Executive Order 13464 of April 30, 2008. The second session of the 111th Congress may choose to conduct oversight of U.S. policy toward Burma, including the country's role in criminal activity. Secretary of State Hillary Clinton announced in February 2009 the beginning of a review of U.S.-Burma relations. In September 2009, the conclusions of this policy review were released, noting in particular the beginning of direct dialogue with Burmese authorities on international crime-related issues, including compliance with U.N. arms sanctions and counternarcotics. Already in the first session of the 111th Congress, both the Senate and the House have held hearings in which crime issues related to Burma have been addressed. This report analyzes the primary actors driving transnational crime in Burma, the forms of transnational crime occurring, and current U.S. policy in combating these crimes. This report will be updated as events warrant. For further analysis of U.S. policy to Burma, see CRS Report RL33479, Burma-U.S. Relations, by [author name scrubbed].",govreport
"Implementation of the Patient Protection and Affordable Care Act (Affordable Care Act, or ACA) is having a significan t impact on federal mandatory—also known as direct—spending. Most of the projected spending under the law is for expanding health insurance coverage. This includes premium tax credits and cost-sharing reduction payments for individuals and families who purchase private insurance coverage through the health insurance exchanges established under the ACA, as well as federal matching funds for states that choose to expand their Medicaid programs. The Internal Revenue Service (IRS) reports that spending on the premium tax credits and cost-sharing reductions totaled $79.2 billion for first three fiscal years (i.e., FY2014-FY2016) in which the ACA exchanges were operational. An analysis of preliminary data from the Medicaid Budget and Expenditure System (MBES) released by the Centers for Medicare and Medicaid Services (CMS) provides some insight into the initial impact of the Medicaid expansion on spending. For calendar year 2014, the 27 states that implemented the expansion reported spending a total of $36.7 billion on newly eligible adults, which under the ACA was paid for entirely with federal funds (i.e., 100% federal match). The same states spent an additional $10.5 billion on adults that were previously eligible at traditional federal match rates or subject to technical adjustments. Expenditures for these individuals were subject to a higher rate than the traditional match rate, but not 100%. In its March 2016 baseline budget projections, the Congressional Budget Office (CBO) estimates that gross spending on insurance coverage expansion under the ACA will total $1.938 trillion over the 10-year period FY2017 through FY2026. That total includes $866 billion on exchanges subsidies—premium tax credits and cost-sharing reductions—and related spending, and $1.063 trillion on Medicaid and the State Children's Health Insurance Program (CHIP). CBO projects that these costs will be offset by revenues from the ACA's taxes and fees, and by savings from the law's changes to the Medicare program that are designed to slow the rate of growth of Medicare payments to certain health care providers. The ACA also included numerous appropriations that are providing billions of dollars in mandatory funds to support new and existing grant programs and other activities. Several other provisions in the law require the Secretary of Health and Human Services (HHS) to transfer amounts from the Medicare Part A and Part B trust funds for specified purposes. This report summarizes all the mandatory appropriations and Medicare trust fund transfers in the ACA and provides details, where publicly available, on the status of obligation of these funds. The information is presented in two tables. The report also includes a brief discussion of the impact that sequestration is having on ACA mandatory spending. This report is periodically revised and updated to reflect important legislative and other developments. A companion CRS report discusses the ACA's impact on discretionary spending, which is controlled by the annual appropriations process. Discretionary spending under the ACA falls into two broad categories. First, there are the amounts provided in appropriations acts for specific grant and other programs pursuant to explicit authorizations of appropriations in the ACA. Second, there are the costs incurred by the federal agencies that are responsible for administering and enforcing the ACA's core provisions to expand insurance coverage. Table 2 summarizes all the ACA provisions that include an appropriation of funds or a transfer of amounts from the Medicare trust funds. The provisions are grouped under the following headings: (1) Private Health Insurance; (2) Medicaid and the State Children's Health Insurance Program (CHIP); (3) Medicare; (4) Fraud and Abuse; (5) Health Centers; (6) Health Workforce and the National Health Service Corps; (7) Community-Based Prevention and Wellness; (8) Maternal and Child Health; (9) Long-Term Care; (10) Comparative Effectiveness Research; (11) Biomedical Research; and (12) ACA Implementation: Administrative Expenses. Each table row provides information on a specific ACA provision, organized across four columns. The first column shows the ACA section or subsection number. The second column indicates whether the provision is freestanding (i.e., statutory authority that is not amending an existing statute) or amendatory (i.e., amends an existing statute, typically the Social Security Act). Amendatory provisions either add a new program to the statute or modify an existing one. The third column gives a brief description of the program or activity, including details of the appropriation or fund transfer. The entry also includes the name of the administering agency within HHS and, if applicable, the Catalog of Federal Domestic Assistance (CFDA) number for the grant program. The fourth column shows how much funding has been obligated to date. An agency incurs an obligation, for example, by placing an order, signing a contract, awarding a grant, purchasing a service, or taking other actions that require the government to make payments. The obligation amounts are based on information in the HHS Tracking Accountability in Government Grants System (TAGGS) unless specified otherwise. The TAGGS database is a central repository for grants awarded by all the HHS operating divisions (agencies) and several offices within the Office of the Secretary. It is updated daily with new data provided by these entities. In many instances the ACA provided annual appropriations of specified amounts for one or more fiscal years. Generally, these funds must be obligated during the fiscal year in which the funds become available for obligation. A few provisions are multiple-year appropriations , in which the amount appropriated is available for obligation for a period of time in excess of one fiscal year (e.g., for the period FY2011 through FY2014). Often the provision includes additional language stating that the funds are to remain available ""until expended"" or ""without fiscal year limitation."" Most ACA appropriations and fund transfers are temporary (i.e., time-limited). Often they end in FY2014 or FY2015, though in a handful of instances they extend until FY2019. The law included four provisions (i.e., Sections 3021(a), 3403, 10323(b), and 4002) that continue to provide annual or multiple-year appropriations in perpetuity. The ACA also included three indefinite appropriations that provide an unspecified amount of funding as indicated by the phrase ""such sums as may be necessary,"" or SSAN. One such provision (i.e., Section 1311) appropriated SSAN and authorized the HHS Secretary to determine the specific amount necessary for the grant program. Table 3 provides additional details on each of the appropriations (and fund transfers) summarized in Table 2 . It shows the amount available for obligation in each fiscal year (or multi-year period) over the 10-year period FY2010 through FY2019. Note that the provisions are organized and grouped under the same headings used in Table 2 . The final column in Table 3 (""Total"") shows for each provision the total amount of appropriations or fund transfers. Note that in several cases the total amount has yet to be determined (see table entries for Sections 1311, 3403, 6301(d) & (e), 9023(e), and 10323(a)). For three of the provisions that continue to provide funding beyond FY2019, the amount in the total column represents the cumulative amount appropriated through FY2019 (see table entries for Sections 3021(a), 4002, and 10323(b)). Unless otherwise stated, references to the Secretary in both tables refer to the HHS Secretary. A list of the federal laws, agencies, programs, and funds referred to in this report by their acronym is provided in Appendix A . As summarized in the tables, the ACA funded a broad range of new and existing programs. The law appropriated significant amounts to support the following short-term health care programs for targeted groups prior to the health insurance exchanges becoming operational in 2014: (1) $5 billion for the Pre-Existing Condition Insurance Plan (PCIP), a temporary insurance program that provided health insurance coverage for uninsured individuals with a pre-existing condition; (2) $5 billion for a temporary reinsurance program to reimburse employers for a portion of the costs of providing health benefits to early retirees aged 55-64; and (3) $6 billion for the Consumer Operated and Oriented Plan (CO-OP) program, to support temporary health insurance cooperatives. The ACA appropriated $2.4 billion for maternal and child health programs and provided an unspecified amount of funding for state grants to plan and establish health insurance exchanges. The law established the Center for Medicare and Medicaid Innovation (CMMI) within CMS and appropriated $10 billion for the FY2011-FY2019 period—and $10 billion for each subsequent 10-year period—for CMMI to test and implement innovative payment and service delivery models. It also established and funded an Independent Payment Advisory Board (IPAB) to make recommendations to Congress for achieving specific Medicare spending reductions if costs exceed a target growth rate. IPAB's recommendations are to take effect unless Congress overrides them, in which case Congress would be responsible for achieving the same level of savings. The ACA created four special funds and appropriated substantial amounts to each one: The Community Health Center Fund (CHCF) , to which the ACA appropriated a total of $11 billion in annual appropriations over the five-year period FY2011-FY2015, has helped support the federal health centers program and the National Health Service Corps (NHSC). (Note: A separate ACA appropriation provided $1.5 billion for health center construction and renovation.) Congress has since appropriated two additional years of funding for the CHCF (see below). While CHCF funding may have been intended to supplement annual discretionary appropriations for the health centers program and the NHSC, the funds have partially supplanted (i.e., replaced) discretionary health center funding and have become the sole source of funding for the NHSC program, which has not received an annual discretionary appropriation since FY2011. The Prevention and Public Health Fund (PPHF) , for which the ACA provided a permanent annual appropriation, is intended to support prevention, wellness, and other public health-related programs and activities authorized under the Public Health Service Act (PHSA). In two separate legislative actions, Congress has reduced the ACA's annual appropriation to the PPHF for each of FY2013 through FY2024 by a total of $9.75 billion. PPHF funds have been used to support several new discretionary grant programs authorized by the ACA. The funds are also supplementing, and in some cases supplanting, annual discretionary appropriations for a number of established programs, including ones that were reauthorized by the ACA. In FY2013, almost half of the PPHF funds were used to help pay for CMS's administrative costs associated with exchange operations. The Patient-Centered Outcomes Research Trust Fund (PCORTF) is supporting comparative effectiveness research with a mix of annual appropriations—some of which are offset by revenues from a fee imposed on private health plans—and transfers from the Medicare Part A and Part B trust funds through FY2019. The Health Insurance Reform Implementation Fund (HIRIF) , to which the ACA appropriated $1 billion, has helped cover the administrative costs of implementing the law. As already noted, most of the ACA appropriations are temporary. The following laws enacted since 2012 have extended funding for several programs funded by the ACA: American Taxpayer Relief Act of 2012 (ATRA); Pathway for SGR Reform Act of 2013 (PSGRRA); Protecting Access to Medicare Act of 2014 (PAMA); and Medicare Access and CHIP Reauthorization Act of 2015. Lawmakers opposed to specific ACA provisions also have succeeded in getting some ACA funding reduced or rescinded. ATRA, the Middle Class Tax Relief and Job Creation Act of 2012, the 21 st Century Cures Act, and enacted appropriations acts for each of the past six fiscal years (i.e., FY2011-FY2016) all included ACA funding reductions or rescissions. The ACA funding extensions, reductions, and rescissions are summarized in Table 2 and Table 3 . While the federal spending on insurance expansion coverage under the ACA is almost entirely exempt from annual sequestration, the ACA appropriations discussed in this report are, in general, fully sequestrable at the percentage rate applicable to nonexempt nondefense mandatory spending (see Table 1 ). Under the sequestration general rules, cuts in CHCF funding for community health centers and migrant health centers are capped at 2%. See Appendix B for more background on the annual spending reductions triggered by the Budget Control Act of 2011. Importantly, only new budget authority for nondefense programs is sequestrable in any given fiscal year. That includes advance appropriations that first become available for obligation in that year. Unobligated balances carried over from previous fiscal years are exempt from sequestration. Overall, the ACA provided more than $100 billion in mandatory appropriations and Medicare fund transfers over the 10-year period FY2010-FY2019. As enacted, the law included the following amounts: $40 billion for CHIP (FY2014 and FY2015); $15 billion for the PPHF through FY2019 (and $2 billion for each year thereafter); $11 billion for the CHCF; $10 billion for CMMI through FY2019 (and $10 billion for each 10-year period thereafter); $6 billion for the CO-OP program; $5 billion for PCIP; $5 billion for the Early Retiree Reinsurance program $4 billion (projected) for the PCORTF; $2.25 billion for the Medicaid Money Follows the Person (MFP) demonstration; and $1.5 billion for the maternal, infant, and early childhood visitation program. Only four of the ACA appropriations are permanent (i.e., CMMI, IPAB, PPHF, and environmental health screening). All the other appropriations were temporary. In a series of legislative actions (described in more detail in Table 2 and Table 3 ), Congress extended funding for several programs whose ACA appropriations were about to expire. The following programs are now funded through FY2017: health centers (CHCF funding); National Health Service Corps (CHCF funding); graduate medical education (GME) payments for teaching health centers; maternal, infant, and early childhood home visiting program; personal responsibility education program (PREP); health workforce demonstration programs; abstinence education grants; family-to-family health information centers; and outreach and assistance for low-income programs. Congress has also provided two more years of funding (FY2016-FY2017) for CHIP. Finally, Congress has partially reduced or rescinded ACA funding for IPAB, PPHF, and the CO-OP program. Appendix A. Acronyms Used in the Report The following laws, agencies, programs, and funds are referred to in this report by their acronym. Appendix B. Annual Spending Reductions Under the Budget Control Act The Budget Control Act of 2011 (BCA) amended the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) by establishing two budget enforcement mechanisms to reduce federal spending by at least $2.1 trillion over the 10-year period FY2012 through FY2021. First, the BCA established enforceable discretionary spending limits, or caps, for defense and nondefense spending for each of those years. Second, the BCA created a Joint Committee on Deficit Reduction to develop legislation to further limit federal spending. The failure of the Joint Committee to agree on deficit-reduction legislation triggered automatic annual spending reductions for each of FY2013 through FY2021. The BCA specified that a total of $109 billion must be cut each year from nonexempt budget accounts. That amount is equally divided between the categories of defense and nondefense spending. Within each category, the spending cuts are allocated proportionately to discretionary spending and nonexempt mandatory (i.e., direct) spending. Under the BCA, the spending reductions are achieved through two methods: (1) sequestration (i.e., an across-the-board cancellation of budgetary resources); and (2) lowering the BCA-imposed discretionary spending caps. The BCA requires that the mandatory spending reductions in each category—defense and nondefense—must be executed in each of FY2013 through FY2021 by a sequestration of all nonexempt accounts, subject to the BBEDCA sequestration rules. Discretionary spending in each category is also subject to sequestration, but only in FY2013. For each of the remaining fiscal years (i.e., FY2014 through FY2021), discretionary spending reductions are to be achieved by lowering the discretionary spending caps for defense and nondefense spending by the total dollar amount of the required reduction. Thus, congressional appropriators get to decide how to apportion the cuts within the lowered spending caps rather than having the cuts applied across-the-board to all nonexempt discretionary spending accounts through sequestration. The Office of Management and Budget (OMB) is responsible for calculating the percentages and amounts by which mandatory and discretionary spending are required to be reduced each year, and for applying the BBEDCA's sequestration exemptions and rules. Congress has amended the BCA several times since its enactment in 2011. The American Taxpayer Relief Act of 2012 (ATRA) revised the discretionary spending caps for FY2013 and FY2014 and reduced the overall dollar amount that needed to be sequestered from FY2013 mandatory defense and nondefense spending. The Bipartisan Budget Act of 2013 established new discretionary spending caps for FY2014 and FY2015 and eliminated the requirement for these caps to be lowered. It also extended the sequestration of mandatory spending in the defense and nondefense categories for two additional years—FY2022 and FY2023—and specified that the percentage reduction calculated for FY2021 be applied to both those years. A provision in a 2014 law on military retirement pay extended the sequestration of mandatory spending to include FY2024 and, again, specified that the percentage reduction calculated for FY2021 be applied to that additional year. The Bipartisan Budget Act of 2015 established new discretionary spending caps for FY2016 and FY2017 and eliminated the requirement for these caps to be lowered. It further extended the sequestration of mandatory spending to include FY2025, once again using the percentage reduction calculated for FY2021.","Implementation of the Patient Protection and Affordable Care Act (Affordable Care Act, or ACA) is having a significant impact on federal mandatory—also known as direct—spending. Most of the projected spending under the law is for expanding health insurance coverage. This spending includes premium tax credits and other subsidies for individuals and families that purchase private insurance coverage through the health insurance exchanges established under the ACA, as well as federal matching funds for states that have expanded their Medicaid programs. In addition, the ACA included numerous appropriations that have provided billions of dollars in mandatory funds to support new and existing grant programs and other activities. Other ACA provisions require the Secretary of Health and Human Services (HHS) to transfer amounts from the Medicare Part A and Part B trust funds for specified purposes. The law appropriated significant amounts to support short-term health care programs for targeted groups prior to the health insurance exchanges becoming operational in 2014. It also created a Center for Medicare and Medicaid Innovation (CMMI) within the Centers for Medicare and Medicaid Services (CMS) and appropriated $10 billion for the FY2011-FY2019 period—and $10 billion for each subsequent 10-year period—for CMMI to test and implement innovative payment and service delivery models. The ACA established four special funds and appropriated substantial amounts to each one. First, the Community Health Center Fund, to which the ACA appropriated a total of $11 billion over the five-year period FY2011-FY2015, has helped support the federal health centers program and the National Health Service Corps. Second, the Prevention and Public Health Fund, for which the ACA provided a permanent annual appropriation, is supporting prevention, wellness, and other programs authorized under the Public Health Service Act. Third, the Patient-Centered Outcomes Research Trust Fund is supporting comparative effectiveness research through FY2019 with a mix of annual appropriations, fees assessed on private health insurance, and Medicare trust fund transfers. Finally, the Health Insurance Reform Implementation Fund, to which the ACA appropriated $1 billion, helped pay for implementing the law. Overall, the ACA included more than $100 billion in appropriations over the 10-year period FY2010-FY2019, including $40 billion to fund the State Children's Health Insurance Program (CHIP) for FY2014 and FY2015. In subsequent legislative actions, Congress has extended funding through FY2017 for several programs whose ACA appropriations were about to expire, and reduced or rescinded ACA funding other some other activities. Federal outlays on insurance expansion coverage under the ACA, which constitutes most of the law's mandatory spending, are almost entirely exempt from sequestration. However, the mandatory appropriations in the ACA are, in general, fully sequestrable at the percentage rate applicable to nonexempt nondefense mandatory spending. Besides the mandatory appropriations discussed in this report, the ACA also is having an effect on federal discretionary spending, which is controlled by the annual appropriations acts. A companion report, CRS Report R41390, Discretionary Spending Under the Affordable Care Act (ACA), discusses the law's impact on discretionary spending.",govreport
"The increased presence of foreign students in graduate science and engineering programs and in the scientific workforce has been and continues to be of concern to some in the scientific community. Enrollment of U.S. citizens in graduate science and engineering programs has not kept pace with that of foreign students in those programs. In addition to the number of foreign students in graduate science and engineering programs, a significant number of university faculty in the scientific disciplines are foreign, and foreign doctorates are employed in large numbers by industry. Those in the scientific community, arguing for ceilings on admissions for immigrants, maintain that foreign students use U.S. graduate education programs as stepping stones to immigration through sponsorships for legal permanent residence. Approximately 56% of foreign doctorate degree earners on temporary visas remain in the United States, with many eventually becoming citizens. Data on adjustments from temporary visas to permanent status reveal that approximately 6 in 10 new permanent residents occurred in both 2007 and 2008 from adjustments of status admissions. In 2008, approximately 15.0% of those individuals awarded legal permanent resident status resulted from employment-based preferences. Few will dispute that U.S. universities and industry have chosen foreign talent to fill many positions. Foreign scientists and engineers serve the needs of industry at the doctorate level and also have been found to serve in major roles at the masters level. Not surprisingly, there are charges that U.S. workers are adversely affected by the entry of foreign scientists and engineers, who reportedly accept lower wages than U.S. citizens would accept in order to enter or remain in the United States. These arguments occur in the context of a debate on projections and potential imbalances in certain scientific and technical disciplines. The U.S. Bureau of Labor Statistics reports that between the years 2006 and 2016, employment in science and engineering fields will increase at a faster rate than other professional groups. The growth rate will result, primarily, from growth in mathematics and computer-related occupations. Much attention in the scientific community has focused on the H-1B temporary admissions program. A report of the National Science Foundation (NSF) during the late 1980s claiming a nationwide shortage of scientists and engineers may have contributed to the decision by Congress to expand the skilled-labor preference system contained in the Immigration Act of 1990. The 1990 legislation more than doubled employment-based immigration, including scientists and engineers entering under the H-1B visa category. The act raised the numerical limits or ceilings on permanent, employment-based admissions, from 54,000 to 140,000 annually. In addition, the legislation ascribed high priority to the entry of selected skilled and professional workers, and simplified admissions procedures for foreign nationals seeking to temporarily work, study, or conduct business in the United States. On October 17, 2000, the American Competitiveness in the Twenty-First Century Act of 2000 was signed into law ( P.L. 106 - 313 ), significantly changing the H-1B program and the employment-based immigration program. The legislation raised the annual number of H-1B visas to 195,000 for FY2001, FY2002, and FY2003, and returned to 65,000 in FY2004. It excluded from the new ceiling all H-1B nonimmigrants who are employed by institutions of higher education and nonprofit or governmental research organizations. The law authorized additional H-1B visas for FY1999 to offset the visas inadvertently approved for the year that exceeded the cap. In addition, the law increased the fees employers paid for each petition for nonimmigrant status—from $500 to $1,000 per petition. A portion of the fees were made available to the NSF for the development of private-public partnerships in K-12 education, the expansion of computer science, engineering, and mathematics scholarships, and the establishment of demonstration programs or projects that provide technical skills training for U.S. workers, both employed and unemployed. Signed into law on December 8, 2004, P.L. 108 - 447 , The Consolidated Appropriations Act, 2005, reauthorized H-1B funding. The fee employers pay for each petition was raised from $1,000 to $1,500 per petition. For employers with less than 25 full-time equivalent employees, the fee was set at $750 per petition. Also, the legislation created an additional 20,000 H-1B visas for FY2005, for those who had earned a masters degree or higher from a U.S. institution of higher education. The scientific community has been divided over proposals to impose stricter immigration limits on people with scientific and technical skills. Attempts to settle upon the balance between the needs for a highly skilled scientific and technical workforce, and the need to protect and ensure job opportunities, salaries, and working conditions of U.S. scientific personnel, will continue to be debated. This paper addresses these issues. The number of non-U.S. citizens enrolling in U.S. colleges and universities slowed following the September 11 th terrorist attacks. The slowing of enrollments has been attributed to, among other things, the tightening of U.S. visa policies and increased global competition for graduates in the scientific and technical disciplines from countries such as China, India, and Canada. However, a 2009 report of the Institute of International Education reveals that for the academic year 2008-2009, the number of foreign-born students (in all disciplines) increased by 8.0%, the largest recorded increase since 1980. The growth of students from China contributed significantly to the increase. In addition, new foreign student enrollment for 2008-2009 increased by approximately 16.0% from the previous academic year. The new enrollments are said to result from both recruitment efforts by U.S. institutions and recently improved visa processing for students. The international student enrollment changes are reflected differently by types of institutions, levels of study, and disciplines. There are noticeable differences by world region of origin in the flow of foreign students to the United States. India's students were 15.4% of the population for academic year 2008-2009. The other countries of origin of foreign students falling within the top ten were China (14.6%), South Korea (11.2%), Canada (4.4%), Japan (4.4%), Taiwan (4.2%), Mexico (2.2%), Turkey (2.0%), Vietnam, (1.9%), and Saudi Arabia (1.9%). The top ten fields of study for all foreign students were: business and management (20.6%), engineering (17.7%), physical and life sciences (9.2%), social sciences (8.5%), mathematics and computer sciences (8.4%), health professions (5.2%), fine and applied arts (5.2%), intensive English language (4.2%), humanities (2.9%), education (2.7%), and agriculture (1.3%). NSF data reveal that in 2006, the foreign student population earned approximately 36.2% of the doctorate degrees in the sciences and approximately 63.6% of the doctorate degrees in engineering. In 2006, foreign students on temporary resident visas earned 32.0% of the doctorates in the sciences, and 58.6% of the doctorates in engineering. (See Figure 1 .) The participation rates in 2005 were 30.8% and 58.4%, respectively. In 2006, permanent resident status students earned 4.2% of the doctorates in both the sciences and engineering, a slight change from the 2005 levels of 3.8% in the sciences and 4.4% in engineering. Trend data for science and engineering degrees for the years 1996-2005 reveal that of the non-U.S. citizen population, temporary resident status students consistently have earned the majority of the doctorate degrees. (See Table 1 and Table 2 .) Disaggregated data for the subfields of science provide a detailed picture of degree recipients by U.S. citizenship and non-U.S. citizenship status. In 2006, foreign students (temporary and permanent resident status) were awarded 47.9% of the doctorates in the physical sciences, an increase from the 46.2% awarded in 2005. In mathematics, 55.3% of the doctorates were awarded to foreign students in 2006, a slight increase from the 55.1% awarded in 2005. For the computer sciences, 61.3% were awarded to foreign students, an increase above the 2005 level of 58.8%. The earth, atmospheric, and ocean sciences and the agricultural and biological sciences awarded 35.4% and 33.6% of the degrees respectively to foreign-born students in 2006, compared to the 2005 levels of 35.7% and 32.1%. In the social sciences and psychology, 24.6% of the doctorates were awarded to foreign students in 2006, almost level with the 24.5% awarded in 2005. The NSF provides specific data on the country of origin of foreign-born science and engineering doctorate awards. Data for 2006 reveal that of the earned doctorate degree holders (non-U.S. citizens), 33.5% were from China, 11.9% were from India, 3.4% were from Taiwan, 2.8% from Canada, 3.4% from Africa, 2.8% from Turkey, 1.7% from Japan, and 1.4% from Germany. See Figure 2 for additional disaggregated data on doctorate degrees awarded to non-U.S. citizens by country of origin. Certain restrictions have been placed on foreign students with temporary resident student status who are enrolled in graduate programs in U.S. institutions. Foreign graduate students are required to be full-time students, and are prohibited, due to visa restrictions, from seeking employment. While they are prohibited also from obtaining most fellowships, traineeships or federally guaranteed loans, they are able to be employed as research assistants or teaching assistants on federally funded research projects. Foreign and U.S. science and engineering graduate students receive financial support from many resources—personal, university (primarily through teaching assistantships, research assistantships/traineeships, fellowships/dissertation grants) , foreign government, employer, and other. Many foreign students receive support from their home country, though it is generally limited to the first year of study. For the continuing years, the university usually provides support mostly in the form of research assistantships or teaching assistantships. While temporary resident foreign students are ineligible for direct federal aid, the university support provided to them through research assistantships and teaching assistantships often results from federally funded research grants awarded to their home institution. The 2007 report, Doctorate Recipients from United States Universities: Summary Report 2006 , reveals that institutions of higher education provide a significant amount of support, primarily through teaching assistantships, research assistantships/traineeships, and fellowships/dissertation grants, to foreign students on temporary and permanent resident visas. In all fields, a greater percentage of non-U.S. citizen doctoral recipients receive financial assistance from universities than do U.S. doctoral recipients. (See Table 3 for primary sources of financial support.) A disaggregation of the data by race/ethnicity reveal that 40.6% of Native Americans/Alaska Natives doctoral students relieved on their own resources to finance their graduate studies, followed by blacks at 38.8%, whites, at 30.1%, Hispanics, at 30.7%, and Asians, at 16.9%. In the physical sciences, which include mathematics, computer and information sciences, universities provided the primary support for 84.6% of temporary resident students, 73.1% for permanent residents, and 58.8% for U.S. citizens. In engineering, 84.8% of temporary resident students received primary financial support from universities, as did 63.9% of permanent resident students, and 42.8% of U.S. citizen doctoral students. Even in those disciplines where foreign students do not participate with any degree of frequency (i.e., education and the social sciences), larger percentages of foreign doctoral students on temporary and permanent resident visas obtained their primary financial assistance from universities than did comparable U.S. students. In the field of education, 43.6% of temporary resident doctoral students received their primary financial support from universities; for permanent resident students, 41.5%, and for U.S. citizens, 13.4%. In the social sciences, universities provided financial support to 54.0% of temporary resident doctoral students, 43.9% for permanent residents, and 35.7% for U.S. citizens. There are divergent views in the scientific and academic community about the effects of a measurable foreign student presence in graduate science and engineering programs. Some argue that U.S. universities benefit from a large foreign citizen enrollment by helping to meet the needs of the university and, for those students who remain in the United States, the nation's economy. Foreign students generate three distinct types of measurable costs and benefits. First, 13 percent of foreign students remain in the United States, permanently increasing the number of skilled workers in the labor force. Second, foreign students, while enrolled in schools, are an important part of the workforce at those institutions, particularly at large research universities. They help teach large undergraduate classes, provide research assistance to the faculty, and make up an important fraction of the bench workers in scientific labs. Finally, many foreign students pay tuition, and those revenues may be an important source of income for educational institutions. The noticeable participation of foreign students in graduate programs has generated critical responses by many in the minority community. Blacks, Hispanics, and Native Americans, historically underrepresented in the science and engineering fields, contend that disparity exists in the university science community with respect to foreign students. It is charged that there is not equal access for U.S. minorities to graduate education, receipt of scholarships, promotion to higher ranks, receipt of research funds, access to outstanding research collaborators, and coauthorship of papers and other outlets for scientific publications. Frank L. Morris, former professor, University of Texas, charged that colleges and universities employ exclusionary mechanisms. Rather than supporting minority graduate students, institutions provided the majority of their resources to departments that have admitted foreign students. In testimony before the Subcommittee on Immigration and Claims, Morris stated that: The generous immigration policy coupled with the much better and disproportionate and much better subsidy out of U.S. taxpayer funds of foreign doctoral student over all American minority students and especially much better than the support given to African American doctoral students.... This has created a situation that place the economic well being of the African American community in jeopardy because we have received inadequate doctoral training to prepare for or compete in an increasing information and higher order scientifically technologically driven current and future U.S. economy. Another criticism noted by some is that foreign student teaching assistants do not communicate well with American students. Language as a barrier has been a perennial problem for some foreign students. There are charges that the ""accented English"" of the foreign teaching assistants affects the learning process. A large number of graduate schools require foreign teaching assistants to demonstrate their proficiency in English, but problems remain. Several states have passed legislation setting English-language standards for foreign students serving as teaching assistants. Some academics and scientists do not view scientific migration as a problem, but as a net gain. These proponents believe that the international flow of knowledge and personnel has enabled the U.S. economy to remain at the cutting-edge of science and technology. A 2005 report of the National Academies states that: The participation of international graduate students and postdoctoral scholars is an important part of the research enterprise of the United States. In some fields they make up more than half the populations of graduate students and postdoctoral scholars. If their presence were substantially diminished, important research and teaching activities in academe, industry, and federal laboratories would be curtailed, particularly if universities did not give more attention to recruiting and retaining domestic students. During the 1980s, the number of immigrant scientists and engineering entering the United States remained somewhat stable (12,000), registering only slight annual increases. In 1992, there was a marked increase in the admissions of scientists and engineering, fueled primarily by the changes in the Immigration Act of 1990 that allowed significant increases in employment-based quotas of H-1B visas. By 1993, the number of scientists and engineers on permanent visas increased to 23,534. The numbers were increased further as a result of the Chinese Students Protection Act of 1992. The proportion of foreign born scientists and engineers in the U.S. labor force reached a record in 2000, revealing high levels of entry by holders of permanent and temporary visas during the 1990s. The issuance of permanent visas in the past few years has been impacted by administrative changes at the U.S. Citizenship and Immigration Services (USCIS), changes in immigration legislation, and any impact of September 11 th . Foreign scientists and engineers on temporary work visas have generated considerable discussion. As previously stated, recent legislation has increased the annual quota for the H-1B program in which foreign-born workers can obtain visas to work in an occupation for up to six years. The H-1B program, generally, is thought of as an entry for technology workers, but it is used also to hire other skilled workers. A report of the NSF notes that ""An H-1B visa is sometimes used to fill a position not considered temporary, for a company may view an H-1B visa as the only way to employ workers waiting long periods for a permanent visa."" Data on selected occupations for which companies have been given permission to hire H-1B visa workers are contained in Table 4 . Some argue that the influx of immigrant scientists and engineers has resulted in depressed job opportunities, lowered wages, and declining working conditions for U.S. scientific personnel. While many businesses, especially high-tech companies, have recently downsized, the federal government issued thousands of H-1B visas to foreign workers. There are those in the scientific and technical community who contend that an over-reliance on H-1B visa workers to fill high-tech positions has weakened opportunities for the U.S. workforce. Many U.S. workers argue that a number of the available positions are being filled by foreign labor hired at lower salaries. Those critical of the influx of immigrant scientists have advocated placing restrictions on the hiring of foreign skilled employees in addition to enforcing the existing laws designed to protect workers. Those in support of the H-1B program maintain that there is no ""clear evidence"" that foreign workers displace U.S. workers in comparable positions and that it is necessary to hire foreign workers to fill needed positions, even during periods of slow economic growth. A September 2006 report of the Government Accountability Office (GAO), H-1B Visa Program: More Oversight by Labor Can Improve Compliance with Program Requirements, states that: Labor's review of employers' H-1B applications is limited by law to identifying omissions and obvious inaccuracies, but we found it does not consistently identify all obvious inaccuracies. ...Labor's Wage and Hour Division (WHD) enforces H-1B program requirements by investigating complaints made against H-1B employers and recently began random investigations of previous program violators. From fiscal year 2000 through fiscal year 2005, complaints and violations increased but changes in the program, such as temporary increases in visa caps, may have been a factor.... However, USCIS does not have a formal mechanism to report such information to Labor, and current law precludes WHD from using this information to initiate an investigation of an employer. Justice pursues charges filed by U.S. workers alleging they were not hired or were displaced so that an H-1B worker could be hired instead, but it has not found discriminatory conduct in most cases. The maturing of the computer industry has wrought its own set of problems relative to employment of foreign scientists and engineers. There are some who contend that the salary of the foreign-born computer professionals working in the United States is lower than that of their U.S. counterparts who are the same age and educational level. Others charge that the hiring of H-1B workers ""undermines the status and bargaining position of U.S. workers."" The Department of Labor (DOL) has sought to enforce the existing policies on temporary employment of nonimmigrant foreign workers under H-1B visas, and to penalize those employers who are found to be in violation. Many in the scientific community maintain that in order to compete with countries that are rapidly expanding their scientific and technological capabilities, the United States needs to bring in those whose skills will benefit society and will enable us to compete in the new-technology-based global economy. Individuals supporting this position do believe that the conditions under which foreign talent enters U.S. colleges and universities and the labor force should be monitored more carefully. And there are those who contend that the underlying concern of foreign students in graduate science and engineering programs is not necessarily that there are too many foreign-born students, but that there are not enough native-born students entering the scientific and technical disciplines. A May 2010 report of the National Science Board states that: Attracting and retaining foreign-born talent remains an essential pillar of our Nation's STEM [science, technology, engineering, and mathematics] enterprise. As global demand for STEM talent surges, we cannot reliably expect that the best and brightest from abroad will remain in the United States and continue to be a sufficient source of talent. It is essential that we develop our own domestic human capital as well. Ideally, foreign talent should augment a robust domestic STEM talent pipeline, not compensate for its deficiencies. The debate on the presence of foreign students in graduate science and engineering programs and the workforce intensified following the terrorist attacks of September 11, 2001. It has been reported that foreign students in the United States are encountering ""a progressively more inhospitable environment."" A June 2006 report of the Association of International Educators, Restoring U.S. Competitiveness for International Students and Scholars , states that "" ... [F]or the first time, the United States seems to be losing its status as the destination of choice for international students."" Concerns have been expressed about certain foreign students receiving education and training in sensitive areas. There has been increased discussion about the access of foreign scientists and engineers to research and development (R&D) related to chemical and biological weapons. Also, there is discussion of the added scrutiny of foreign students from countries that sponsor terrorism. The academic community is concerned that the more stringent requirements of foreign students may have a continued impact on enrollments in colleges and universities. Others contend that a possible reduction in the immigration of foreign scientists may affect negatively on the competitiveness of U.S. industry and compromise commitments made in long-standing international cooperative agreements. The issue of tracking foreign students attending U.S. institutions has generated particular debate in the academic and scientific community following the September 11 th terrorist attacks. Prior to September 11 th , the Illegal Immigration Reform and Immigrant Responsibility Act ( P.L. 104 - 208 ) authorized the Student and Exchange Visa Program/Coordinated Interagency Partnership Regulating International Students (SEVP/CIPRIS). This electronic information reporting system for tracking foreign students and researchers was to replace the existing paper-based format. The legislation required colleges and universities to monitor and compile data on foreign students attending their respective institutions in such areas as date of enrollment/reporting, field of study, credits earned, and source of financial support for the student. The information was to be provided to the INS by the colleges and universities. However, the system was never fully implemented, primarily because institutions described it as being too costly, an ""unnecessary burden on colleges and universities,"" and ""an unreasonable barrier to foreign students."" The USA Patriot Act ( P.L. 107 - 56 ) and the Enhanced Border Security and Visa Entry Reform Act ( P.L. 107 - 173 ) revised and enhanced the process for collecting and monitoring data on foreign students and researchers in U.S. institutions. In response to the legislation, the INS developed the Student and Exchange Visitor Information System (SEVIS). SEVIS, a web-based system, was designed to maintain current information on foreign students and exchange visitors in order to ensure that they arrive in the United States, register at the institution or predetermined exchange program, and properly maintain their visa status during their stay. Congress directed the then INS to have the tracking system in operation by January 30, 2003. The deadline for implementation of SEVIS was extended to February 15, 2003. However, SEVIS experienced considerable problems and created excessive delays in processing visa applications. The more rigorous screening of visa applicants was one factor contributing to the delays. The existing problems with SEVIS are described as being primarily those relating to technical matters and personnel costs. Currently, there is a proposal to implement a second-generation system, SEVIS II, that would expand the capabilities of the current tracking system and address any reported technical difficulties or security issues. On September 13, 2005, the House Subcommittee on National Security, Emerging Threats, and International Relations held a hearing to examine the procedures put in place to correct the gaps and vulnerabilities in the visa process. Attention was directed at the mechanisms that are necessary to strengthen the visa process as an antiterrorism tool while simultaneously facilitating legitimate travel by foreign students, scientists, researchers, and others in the United States. Witnesses testified that consular workloads had increased significantly, yet the visa-processing offices continued to lack strategic direction, adequate resources, and training. In addition, reliable data were not readily available, across and among departments and agencies, to determine security and visa fraud related issues and overall increased visa wait times. Witnesses stated that because visa policies and requirements are ongoing and can change quickly, clear procedures on visa issuance and monitoring operations worldwide are necessary to guarantee that visas are adjudicated in a consistent manner at each visa-issuing post. The Government Accountability Office (GAO) has released several reports detailing the efforts and the improvements that have been made in the visa processing. Other reports of the GAO assessed agencies' progress in implementing recommended changes in visa operations. An April 4, 2006 report— Border Security, Reassessment of Consular Requirements Could Help Address Visa Delays, stated that while steps have been taken to improve the visa application system, additional issues required immediate attention. The recommendations included clarifying visa policies and procedures in order to facilitate their implementation, and ensuring that consular officers have access to the needed tools to improve national security and promote legitimate travel. Comprehensive immigration reform legislation was debated and under consideration during the beginning of the 110 th Congress. Those attempts at reform failed and comprehensive reform legislation was not revisited. Comprehensive federal immigration reform has been reintroduced in the 111 th Congress. H.R. 4321 , Comprehensive Immigration Reform for America's Security and Prosperity Act, would, among other things, exempt specified categories of U.S.-educated immigrants from employment-based immigration limits. The bill would also amend H-1B visa employer application requirements by lengthening U.S. worker displacement protection and prohibiting employer position announcements that specify positions solely to, or that gives priority to, H-1B immigrants. In addition, bills have been introduced in the 111 th Congress that are directed at attracting foreign students in the scientific and technical disciplines while maintaining the interests of American scientists. H.R. 1736 , International Science and Technology Cooperation Act, would, among other things, address the various issues that impact the ability of U.S. scientists and engineers to collaborate with foreign counterparts. S. 887 , H-1B and L-1 Visa Reform Act, would amend H-1B employer requirements by limiting the number of H-1B and L-1 employees that an employer of 50 or more workers in the United States may hire. The bill would also direct the DOL to conduct annual audits of businesses with large numbers of H-1B workers. H.R. 1791 , Stopping Trained in America Ph.D.s from Leaving the Economy Act (STAPLE), would direct numerical limitations on immigrants who have been awarded a doctorate degree in the scientific disciplines from a U.S. institution and who have an offer of employment from a U.S. employer in a degree-related field. In addition, the bill would provide H-1B visa numerical limitations on immigrants who have earned a doctorate in a scientific discipline and with respect to a petitioning employer, requires that education as a condition of employment.","The increased presence of foreign students in graduate science and engineering programs and in the scientific workforce has been and continues to be of concern to some in the scientific community. Enrollment of U.S. citizens in graduate science and engineering programs has not kept pace with that of foreign students in those programs. In addition to the number of foreign students in graduate science and engineering programs, a significant number of university faculty in the scientific disciplines are foreign, and foreign doctorates are employed in large numbers by industry. Few will dispute that U.S. universities and industry have chosen foreign talent to fill many positions. Foreign scientists and engineers serve the needs of industry at the doctorate level and also have been found to serve in major roles at the masters level. However, there are charges that U.S. workers are adversely affected by the entry of foreign scientists and engineers, who reportedly accept lower wages than U.S. citizens would accept in order to enter or remain in the United States. NSF data reveal that in 2006, the foreign student population earned approximately 36.2% of the doctorate degrees in the sciences and approximately 63.6% of the doctorate degrees in engineering. In 2006, foreign students on temporary resident visas earned 32.0% of the doctorates in the sciences, and 58.6% of the doctorates in engineering. The participation rates in 2005 were 30.8% and 58.4%, respectively. In 2006, permanent resident status students earned 4.2% of the doctorates in both the sciences and in engineering, a slight change from the 2005 levels of 3.8% in the sciences and 4.4% in engineering. Many in the scientific community maintain that in order to compete with countries that are rapidly expanding their scientific and technological capabilities, the country needs to bring to the United States those whose skills will benefit society and will enable us to compete in the new-technology based global economy. The academic community is concerned that the more stringent visa requirements for foreign students may have a continued impact on enrollments in colleges and universities. There are those who believe that the underlying problem of foreign students in graduate science and engineering programs is not necessarily that there are too many foreign-born students, but that there are not enough native-born students pursuing scientific and technical disciplines. Legislation has been introduced in the 111th Congress to attract foreign students in the scientific and technical disciplines and to maintain the interests of American scientists. H.R. 4321, Comprehensive Immigration Reform for America's Security and Prosperity Act, would, among other things, amend H-1B visa employer application requirements by lengthening U.S. worker protection and prohibiting employer position announcements that specify positions solely to, or give priority to, H-1B visa holders. H.R. 1791, Stopping Trained in America Ph.D.s from Leaving the Economy Act (STAPLE), would place numerical limitations on immigrants who have been awarded a doctorate degree in the scientific disciplines from a U.S. institution and who have an offer of employment from a U.S. employer in a degree-related field.",govreport
"Funding for the U.S. Department of Energy (DOE), including the Office of Energy Efficiency and Renewable Energy (EERE), is provided in the annual Energy and Water Development (E&W) Appropriations bill. EERE supports renewable energy and end-use energy efficiency technology research, development, and implementation. The funding level Congress decides to provide for FY2018 could impact goals set by EERE and priorities identified in the Administration's FY2018 budget request. President Trump submitted his FY2018 budget request to Congress on May 23, 2017. The budget requests $28.2 billion for DOE, a decrease of nearly $3 billion, or 9.5%, from the FY2017 enacted level. Nearly half of the reduction ($1.5 billion) in the DOE budget request would come from EERE programs. The request specifies two EERE program eliminations: the Weatherization Assistance Program and the State Energy Program. The funding level Congress provides could affect continued support for these programs and other efforts within EERE including sustainable transportation, renewable energy, and energy efficiency. This report discusses the FY2018 EERE budget request and the proposed EERE funding levels and priorities in the related E&W appropriations bills. It does not discuss the opportunities, challenges, economic value, or commercial status of the various renewable energy technologies and energy efficiency initiatives selected by EERE, nor does it delve into the goals of the individual EERE programs or congressional oversight of certain EERE issues. EERE leads the DOE's effort to support research, accelerate development, and facilitate deployment of energy efficiency and renewable energy technologies. EERE is led by the Assistant Secretary for Energy Efficiency and Renewable Energy, and it is organized into four offices: Office of Transportation, Office of Renewable Power, Office of Energy Efficiency, and Office of Operations. EERE contends that it invests in what it considers to be the highest-impact activities. The office collaborates with industry, academia, national laboratories, and others to develop technology-specific road maps and then focuses funding on early stage research and development (R&D), technology validation and risk-reduction activities, and the reduction of barriers to the adoption of market-ready new technologies. EERE also manages a portfolio of research and development programs that support state and local governments, tribes, and schools. In addition, EERE oversees the National Renewable Energy Laboratory (NREL)—the only national laboratory solely dedicated to researching and developing renewable energy and energy efficiency technologies. EERE funding is provided from the annual E&W appropriations bill. During the last several years of the Obama Administration, the budget request sought to increase funding to support EERE programs and objectives. Congress provided funding at levels lower than the request. Appropriations for EERE have averaged $2.0 billion annually for the last three years in current dollars (see Table 1 ). DOE categorizes EERE funding into four major categories: sustainable transportation, energy efficiency, renewable energy, and corporate support (e.g., program administration). From FY2015 to FY2017, approximately 30% of EERE appropriations supported sustainable transportation, 35% went to energy efficiency, 23% went to renewable energy, and 12% went to corporate support. President Trump submitted his FY2018 budget request to Congress on May 23, 2017. The budget requests $28.2 billion for DOE, a decrease of nearly $3 billion, or 9.5%, from the FY2017 enacted level. Nearly half of the reduction ($1.45 billion) in the DOE budget request comes from EERE programs. The EERE request of $636 million is a nearly 70% decrease from FY2017. According to the budget request, funding for EERE would focus on ""early-stage R&D, where the Federal role is critically important, and reflects an increased reliance on the private sector to fund later-stage research, development, and commercialization of energy technologies."" For FY2018, the bulk of the EERE request would be split among three areas: about 29% for sustainable transportation programs, 25% for energy efficiency programs, and 21% for renewable energy programs. Under the request, funding for both the Office of Sustainable Transportation and Office of Renewable Power would decrease by 70% from FY2017 enacted levels. The Office of Energy Efficiency would see funding decrease by 79% from FY2017 enacted levels, and funding for corporate support would decrease by 18%. The budget request specifies two EERE program eliminations: the Weatherization Assistance Program and the State Energy Program, which received FY2017 appropriations of $225 million and $50.0 million, respectively. The request would reduce EERE funded full-time equivalents (FTE) by approximately 30%. Some of the goals, highlights, and major changes presented in the EERE FY2018 request, as reported by DOE, are discussed below. The Administration's request for the Office of Sustainable Transportation is $184 million for FY2018, $429 million (70.0%) less than the FY2017 enacted level of $613 million. Sustainable transportation includes vehicle technologies, bioenergy technologies, and hydrogen and fuel cell technologies. Research priorities for FY2018 in vehicle technologies include the following: Explore new battery chemistry and cell technologies to reduce the cost of electric vehicle batteries by more than 50% (the ultimate goal is $80/kWh with a near-term goal of $125/kWh by 2022), to increase range to 300 miles, and to decrease charge time to 15 minutes or less. [$36.3 million] Improve understanding of combustion processes to support industry development of next generation engines and fuels to improve passenger vehicle fuel economy by 50% from a 2009 baseline. [$22.0 million] Create modeling, simulations, and high-performance computing-enabled data analytics to contribute to the energy efficiency of automobiles, trucks, and other vehicles building upon the prior-year Transportation as a System initiative. [$12.2 million] Continue to support advanced materials research to enable lightweight, multi-material structures that could reduce light-duty vehicle weight by 25% as compared to a 2012 baseline. [$7.5 million] According to the request, activities identified as later-stage development or a lower priority would be terminated. These include but are not limited to electric drive technologies R&D, advanced electrode processing research for lithium ion batteries, SuperTruck II, advanced vehicle testing and evaluation (AVTE), work to optimize vehicle powertrains, engine enabling technologies, particulate emissions control/after-treatment, lubricant R&D, reactivity controlled compression ignition, advanced high-strength steel, safety statistics, vehicle technologies deployment (including Clean Cities coalitions and Alternative Community Partner projects), and advanced vehicle competitions. Research priorities for bioenergy technologies in the FY2018 request include the following: Develop a fundamental understanding of feedstock preprocessing and the deconstruction of polymers within biomass to improve downstream conversion efficiency and throughput. [$6 million] Develop new advanced algal strains, approaches to culture management, and methods of crop protection. [$5 million] Support R&D in synthetic biology through the Agile BioFoundry and in new catalysts through the Chemical Catalysis for Bioenergy (ChemCatBio) consortium. [$34.6 million] Collaborate with the Vehicle Technologies Program on the co-optimization of fuels and engines to develop bio-based fuels/additives to enable 15-20% fuel economy gain beyond projected results of existing R&D efforts. [$6 million] Analyze pathways and strategies to achieve $2 per gallon gasoline-equivalent (gge) and conduct sustainability research. [$5 million] The proposed reduction in funding would include the termination of later-stage bioenergy R&D activities including, but not limited to, pilot-scale and demonstration-scale projects. Priorities for FY2018 hydrogen and fuel cell technologies research include the following: Support fuel cell R&D in catalysts, membranes, performance, and durability. Conduct proof-of-concept testing and technical analysis coupled with high-performance modeling to enable development of platinum group metal-free (PGM-free) catalysts and electrodes. [$15 million] Focus on applied materials research and early-stage component and process development for hydrogen production, delivery, and storage. [$29 million] Identify key areas for prioritization by assessing R&D gaps, planning, budgeting, and identifying synergies with other energy sectors such as natural gas and nuclear. [$1 million] The FY2018 request for hydrogen and fuel cell technologies would discontinue or reduce later-stage and lower-priority research in several areas including but not limited to low-PGM catalysts, balance of plant, low-cost 700 bar composite tanks, storage balance of plant components, cryo-compressed on-board hydrogen storage R&D, measurement of program impacts and return on investment, infrastructure financing analysis, and codes and standards support. The Administration's request for the Office of Renewable Energy is $134.3 million for FY2018, $317 million (70.2%) less than the FY2017 enacted level of $451 million. Renewable energy includes solar energy, wind energy, water power, and geothermal technologies. Research priorities in the FY2018 request for solar energy include the following: Address the challenges of higher levels of grid integration and focus on tools and technologies to measure, analyze, predict, protect, and manage the impacts of solar generation on the grid. [$18 million] Support research to better understand high temperature component design for higher efficiencies. Investigate advanced diffusion-bonded heat exchangers and new concepts for collecting and harvesting light. [$8 million] Support 2030 SunShot target through research on emerging photovoltaic technologies and physics and materials science to improve microelectronics reliability, performance, and durability. [$43.7 million] The FY2018 request for solar energy would discontinue funding for the Balance of Systems Soft Cost Reduction subprogram and Innovations in Manufacturing Competitiveness subprogram. Priorities for FY2018 wind energy research include the following: Continue to support the Atmosphere to Electrons (A2e) initiative to develop modeling and simulation capabilities that enable performance optimization of wind plants. Address R&D challenges to the design and manufacture of low-specific power rotors. [$26.7 million] Continue research to improve wind energy grid integration and develop and evaluate technology solutions to inform processes to address deployment issues such as radar interference. [$3.8 million] Refocus modeling and analysis on evaluation of early-stage, transformative science and technology opportunities. [$1.2 million] The FY2018 request for wind energy would discontinue funding for later-stage R&D including the technology validation and market transformation subprogram and wind plant performance benchmarking. Research priorities for water power in FY2018 include the following: Support early-stage research in modular hydropower systems, hydropower grid reliability services, and novel hydropower turbines. [$11.7 million] Develop tools to model and evaluate control strategies for marine hydrokinetic (MHK) and test full sensor-based control algorithms in a wave tank setting. Develop instrumentation for environmental monitoring instruments for harsh marine environments. [$8.8 million] The FY2018 request for water power would discontinue funding for later-stage development and testing of MHK systems and components and research on the environmental impacts of MHK technologies. Priorities in the FY2018 request for geothermal technologies include the following: Support research in the enhanced geothermal system (EGS) in the fundamental relationships between seismicity, stress state, and permeability, and the validation and verification of thermal hydro mechanical chemical models. These concepts would be directly applied at the Frontier Observatory for Research in Geothermal Energy (FORGE) EGS field laboratory. [$5.4 million] Conclude final year of three-year hydrothermal effort at three national laboratories targeting research on microhole drilling applications, self-healing cements, and subsurface imaging. Support R&D in waterless stimulation to reduce impact of geothermal development in water-limited areas. [$6 million] Continue to support data collection and dissemination including input into the Geothermal Electricity Technology Evaluation Model (GETEM), deployment of a node on the National Geothermal Data System (NGDS) for researchers, and deployment of integrated hydrothermal datasets into the NGDS to reduce time and cost of determining geothermal potential. [$1 million] The FY2018 request for geothermal technologies would discontinue funding for later-stage R&D in the EGS topics of advanced stimulation, zonal isolation, and fracture propping tools; the hydrothermal topics of wellbore integrity, subsurface stress and induced seismicity, and new subsurface signals; and all low-temperature and co-produced resource topics. The Administration's request for the Office of Energy Efficiency is $159.5 million for FY2018, $602 million (79%) less than the FY2017 enacted level of $762 million). Energy Efficiency includes advanced manufacturing, the federal energy management program, building technologies, and the weatherization and intergovernmental programs. Priorities for FY2018 for advanced manufacturing include the following: Support advanced manufacturing R&D for energy applications in high-impact foundational technology areas. Prioritize high-performance computing for manufacturing. [$41 million] Support the manufacturing demonstration facility (MDF) and the Carbon Fiber Test Facility (CFTF). Additional support would focus on early stage applied research to address challenges in key technical areas for semiconductors and manufacturing cybersecurity. [$27.5 million] Continue to engage with the private sector to ensure that technical knowledge and results from R&D are effectively transferred to the private sector for further development or commercialization. [$13.5 million] The request does not include funds for the Critical Materials Hub, Clean Water Hub, the five Clean Energy Manufacturing Innovation Institutes in the National Network for Manufacturing Innovation (NNMI) program, or the Industrial Assessment Centers (IACs). The request notes that these hubs and institutes previously supported later-stage demonstration and deployment activities. Prior year balances would be used to wind down and terminate existing institutes. The federal energy management program would focus on the following: Continue to support federal agencies in meeting statutory energy and water management related goals and requirements and focus on reducing government operating costs. [$10 million] The request would not support the Federal Energy Efficiency Fund/AFFECT subprogram, which previously provided grants to federal agencies to meet energy management requirements. The request for building technologies would focus on the following priorities in FY2018: Support building energy R&D priorities such as cyber-physical systems for buildings-to-grid R&D and solid state cooling and non-vapor compression solutions for HVAC and refrigeration. Refocus on early-stage R&D for solid state lighting, building envelope, and building energy modeling. Continue to support fulfillment of U.S.-China Clean Energy Research Center. [$29.5 million] Refocus commercial and residential buildings integration on early-stage R&D with emphasis on connected, efficient, and secure building systems and advanced construction and retrofit design principles. [$12 million] Limit energy conservation standard compliance activities to the minimum to maintain compliance with statute. [$26 million] The request would not support late-stage R&D. This includes but is not limited to eliminations of funding for technology application R&D for solid-state lighting; cooperative research and development agreements (CRADAs) for heating, ventilation, air conditioning, and refrigeration; demonstration and deployment of transactive controls at the campus- and neighborhood-level; early adoption efforts for high impact technologies; commercial buildings funding opportunity announcements; and research evaluating linkages between energy efficiency and building financial performance metrics. Energy Star efforts that would be eliminated include Home Performance with Energy Star, test procedure development, and performance verification. The Administration's budget for FY2018 requests no funding for the Weatherization and Intergovernmental Programs that partner with state and local organizations to facilitate investments in states' energy priorities. The House Appropriations Committee reported its version of the FY2018 Energy and Water Development Appropriations bill with a manager's amendment by voice vote on July 12, 2017. The bill would provide funding for EERE of $1.1 billion—$1.0 billion below FY2017 and $449 million above the Administration request ( H.R. 3266 ). H.R. 3266 was incorporated as Division D of H.R. 3219 , the Defense, Military Construction, Veterans Affairs, Legislative Branch, and Energy and Water Development National Security Appropriations Act, 2018 (also referred to as the Make America Secure Appropriations Act, 2018). The House passed H.R. 3219 on July 27, 2017. H.R. 3219 was received in the Senate on July 31, 2017. The Senate Committee on Appropriations reported its version of the FY2018 Energy and Water Appropriations bill, S. 1609 , on July 20, 2017. S. 1609 would provide $1.9 billion for EERE—$153 million below the FY2017 level and $1.3 billion above the Administration request ( S.Rept. 115-132 ). The President signed P.L. 115-56 , Continuing Appropriations Act, 2018 and Supplemental Appropriations for Disaster Relief Requirements Act, 2017 on September 8, 2017, providing appropriations at the FY2017 level through December 8, 2017. There are several EERE issues before the 115 th Congress. Concerns may include not only the level of EERE appropriations for FY2018, but also which activities EERE should support. Congress might consider whether the goals of EERE can be met with the proposed funding cuts in the Administration's request, or whether to limit the scope of federal R&D activities. The issues described in this section—listed approximately in the order they appear in the Energy and Water Development appropriations bills—were selected based on the total funding involved, the percentage increases or decreases proposed by the Administration, and their possible impact on broader public policy considerations. For H.R. 3219 , the funding levels for specific offices and programs are those specified in H.Rept. 115-230 , the report accompanying H.R. 3266 , which reported $1.104 billion in total funding for EERE. The House-passed version of H.R. 3219 would provide $1.086 billion for EERE, $18.4 million less than the committee-reported bill. It is unclear how this reduction would be implemented. For S. 1609 , the funding levels for specific offices and programs are those that are in S.Rept. 115-132 , the report accompanying the committee-passed version of the bill. The reported funding levels are consistent with the total funding for EERE that would be provided in the Senate committee bill. According to the budget request, funding for EERE would focus on ""early-stage R&D,"" and would result in a decrease of nearly 70% for EERE programs. The two appropriation bills before Congress— H.R. 3219 and S. 1609 —address the Administration's request for EERE to focus on ""early-stage R&D"" in different ways. According to H.Rept. 115-230 , the report accompanying H.R. 3266 , the House appropriations bill reflects ""a gradual shift towards early stage research and development activities,"" and includes ""a limited scope of deployment activities."" The appropriation recommendation in S. 1609 affirms ""the importance of the development and deployment of energy efficiency and renewable energy technologies, which are critical to expanding U.S. energy security and global leadership."" Both statements are supported with proposed appropriations that would fund most EERE programs at levels above the Administration's request. Both H.R. 3219 and S. 1609 would provide appropriations for FY2018 above the Administration's request of $184 million for sustainable transportation. H.R. 3219 would appropriate $268 million for sustainable transportation in FY2018, while S. 1609 would appropriate $553 million. Both appropriations reports also express continued support for the following programs within vehicle technologies that the Administration's request would terminate: SuperTruck II, the Clean Cities program, and efforts to reduce energy consumption of the commercial off-road vehicle sector. H.R. 3219 would support these and other projects within vehicle technologies at $125 million, while S. 1609 would provide approximately $278 million. H.R. 3219 and S. 1609 both recommend appropriations for FY2018 above the Administration's request of $134 million for renewable energy. H.R. 3219 would appropriate nearly $190 million, while S. 1609 would appropriate nearly $390 million. Both bills would provide support for later-stage R&D and deployment projects in contrast to the Administration's request. For solar energy, both the House bill and Senate committee bill support research in thin-film photovoltaics. H.R. 3219 would also encourage access to solar energy for low-income communities. S. 1609 would support solar workforce development training for veterans and continued research for systems integration, balance of system cost reduction, and innovations in manufacturing competitiveness. For wind energy, the House bill supports efforts to lower market barriers for distributed wind including small wind for rural homes, farms, and schools. The Senate committee bill would support demonstration projects for distributed wind and offshore wind and would support testing facilities such as the National Wind Technology Center. For the water program, H.R. 3219 would continue to support the HydroNEXT initiative and research, development, and deployment of marine energy components and systems for marine hydrokinetic technology. S. 1609 would support funding for commercial viability of pumped storage hydropower and research into mitigation of marine ecosystem impacts and continued construction of an open-water wave energy test facility. For geothermal, there were no specific comments in H.Rept. 115-230 ; S. 1609 would continue to support low-temperature co-produced resources and FORGE in FY2018. Both bills would provide appropriations for FY2018 above the Administration's request of $160 million for energy efficiency. H.R. 3219 would appropriate nearly $481 million, while S. 1609 would appropriate nearly $737 million. For advanced manufacturing, H.R. 3219 would provide funds for improvements in steel industry and transient kinetic analysis, and would also support advanced textile research. The House bill would follow the Administration's request to eliminate funding for the Critical Materials Energy Innovation Hub, the Energy Water Desalination Hub, and the Clean Energy Manufacturing Innovation Institutes; however, the bill would support phasing out operations that ensure that the most promising early stage R&D efforts of the hubs and institutes are continued through competitive awards in similar areas. In contrast, S. 1609 would provide funding for the Manufacturing Demonstration Facility, the Critical Materials Energy Innovation Hub, the Energy Water Desalination Hub, and Clean Energy Manufacturing Innovation Institutes. It would also support the Combined Heat and Power Technical Assistance Partnerships (CHP TAPs) and related activities, and Industrial Assessment Centers, among other efforts. For building technologies, H.R. 3219 would continue to support the goals of the Transformation in Cities initiative and the research, development, and market transformation of direct use of natural gas in residential applications. S. 1609 would support ongoing efforts to work with state and local agencies to incorporate the latest technical knowledge and best practices into construction requirements and to engage with industry teams to facilitate widespread deployment. For commercial buildings, the report on S. 1609 encourages support for more cost-effective integration techniques and technologies to facilitate deep retrofits. S. 1609 also would support emerging technologies efforts, including transactive controls R&D, regional demonstration of utility-led efforts advancing smart grid systems in communities, advanced solid-state lighting technology, and R&D for energy efficiency efforts for natural gas applications. S. 1609 would also provide funding for equipment and building standards. The Administration's budget for FY2018 would terminate the Weatherization and Intergovernmental Programs. The Weatherization Assistance Program (WAP) provides funding through formula grants to states, tribes, the District of Columbia, and U.S. territories to provide weatherization services that reduce energy costs for low-income households by increasing the energy efficiency of their homes. The State Energy Program (SEP) provides funding and technical assistance to states, the District of Columbia, and U.S. territories to promote the efficient use of energy and reduce the rate of growth of energy demand through the development and implementation of specific state energy programs. Both H.R. 3219 and S. 1609 do not follow the Administration's request to terminate these programs and would continue to support WAP and SEP. The House bill would continue those programs at FY2017 funding levels—$225 million for WAP and $50 million for SEP. The Senate committee bill would fund those programs at $212 million for WAP and $50 million for SEP.","The U.S. Department of Energy's (DOE's) Office of Energy Efficiency and Renewable Energy (EERE) administers renewable energy and end-use energy efficiency technology programs in research, development, and implementation. EERE works with industry, academia, national laboratories, and others to support research and development (R&D). EERE also works with state and local governments to assist in technology implementation and deployment. EERE supports nearly a dozen offices and programs including vehicle technologies, solar energy, advanced manufacturing, and weatherization and intergovernmental programs, among others. Funding for EERE is provided in the annual Energy and Water Development (E&W) Appropriations bill. At issue for the 115th Congress is the level of EERE appropriations and which activities EERE should support, including whether to continue support for specific initiatives and programs. On May 23, 2017, the Trump Administration submitted the budget proposal for FY2018. The FY2018 budget request for DOE is $28.2 billion of which about 2% is for EERE. The budget request for EERE is $636.1 million, a decrease of $1.5 billion, or nearly 70%, from the FY2017 enacted level of approximately $2.1 billion. The proposed reduction, if enacted, would affect all offices within EERE. For FY2018, the bulk of the EERE request is allocated to three areas: 25% for energy efficiency programs, 21% for renewable energy programs, and about 29% for sustainable transportation programs. The request estimates that two-thirds of the current portfolio of 2,500 multi-year projects (e.g., early-stage R&D projects) would remain active in FY2018. DOE anticipates that eliminating one-third of these projects would result in a reduction of approximately 30% in EERE-funded full-time equivalent staff. The President's request would include two specific program eliminations: the Weatherization Assistance Program and the State Energy Program, which received FY2017 appropriations of $225.0 million and $50.0 million, respectively. The President's request for EERE emphasizes early-stage R&D, limited validation testing and simulation to inform R&D, and analysis to support regulatory activities. The DOE budget justification states that funding for EERE would focus on ""early-stage R&D, where the Federal role is critically important, and reflects an increased reliance on the private sector to fund later-stage research, development, and commercialization of energy technologies."" There are several bills before Congress that recommend FY2018 appropriations for EERE. The bills contain EERE funding levels that are below the FY2017 enacted level, but higher than the President's budget request. The House passed H.R. 3219, the Defense, Military Construction, Veterans Affairs, Legislative Branch, and Energy and Water Development National Security Appropriations Act, 2018, on July 27, 2017. Division D of H.R. 3219—which contains the E&W appropriations—provides funding of $1.1 billion for EERE, $1.0 billion below the FY2017 enacted level and $449 million above the request. Floor amendments to H.R. 3219 reduced funding for EERE in H.R. 3219 by $18.4 million from H.R. 3266, the House Appropriations Committee version of the FY2018 E&W appropriations bill. H.R. 3266 would provide funding of $1.1 billion to EERE—$986 million below the FY2017 enacted level and $468 million above the request (H.Rept. 115-230). The Senate Committee on Appropriations reported S. 1609, the Energy and Water Development and Related Agencies Appropriations Act of 2018, on July 20, 2017. S. 1609 would appropriate $1.9 billion to EERE—$153 million below the FY2017 enacted level and $1.3 billion above the request (S.Rept. 115-132). The President signed P.L. 115-56, the Continuing Appropriations Act, 2018 and Supplemental Appropriations for Disaster Relief Requirements Act, 2017 on September 8, 2017, providing FY2018 funding at the FY2017 appropriations level through December 8, 2017.",govreport
"In 2008, an unknown computer programmer or group of programmers using the pseudonym Satoshi Nakamoto created a computer platform that would allow users to make valid transfers of digital representations of value. The system, called Bitcoin , is the first known cryptocurrency . A cryptocurrency is digital money in an electronic payment system in which payments are validated by a decentralized network of system users and cryptographic protocols instead of by a centralized intermediary (such as a bank). Since 2009, cryptocurrencies have gone from little-known, niche technological curiosities to rapidly proliferating financial instruments that are the subject of intense public interest. Recently, they have been incorporated into a variety of other financial transactions and products. For example, cryptocurrencies have been sold to investors to raise funding through initial coin offerings (ICOs), and the terms of certain derivatives are now based on cryptocurrencies. Some government central banks have examined the possibility of issuing cryptocurrencies or other digital currency. Media coverage of cryptocurrencies has been widespread, and various observers have characterized cryptocurrencies as either the future of monetary and payment systems that will displace government-backed currencies or a fad with little real value. When analyzing the public policy implications posed by cryptocurrencies, it is important to keep in mind what these currencies are expressly designed and intended to be—alternative electronic payment systems. The purpose of this report is to assess how and how well cryptocurrencies perform this function, and in so doing to identify possible benefits, challenges, risks, and policy issues surrounding cryptocurrencies. The report begins by reviewing the most basic characteristics and economic functions of money, the traditional systems for creating money, and traditional systems for transferring money electronically. It then describes the features and characteristics of cryptocurrencies and examines the potential benefits they offer and the challenges they face regarding their use as money. The report also examines certain risks posed by cryptocurrencies when they are used as money and related policy issues, focusing in particular on two issues: cryptocurrencies' potential role in facilitating criminal activity and concerns about protections for consumers who use these currencies. Finally, the report analyzes cryptocurrencies' impact on monetary policy. Money exists because it serves a useful economic purpose: it facilitates the exchange of goods and services. Without it, people would have to engage in a barter economy , wherein people trade goods and services for other goods and services. In a barter system, every exchange requires a double coincidence of wants —each party must possess the exact good or be offering the exact service that the other party wants. Anytime a potato farmer wanted to buy meat or clothes or have a toothache treated, the farmer would have to find a particular rancher, tailor, or dentist who wanted potatoes at that particular time and negotiate how many potatoes a side of beef, a shirt, and a tooth removal were worth. In turn, the rancher, tailor, and dentist would have to make the same search and negotiation with each other to satisfy their wants. Wants are satisfied more efficiently if all members of a society agree they will accept money —a mutually recognized representation of value—for payment, be that ounces of gold, a government-endorsed slip of paper called a dollar, or a digital entry in an electronic ledger. How well something serves as money depends on how well it serves as (1) a medium of exchange, (2) a unit of account, and (3) a store of value. To function as a medium of exchange , the thing must be tradable and agreed to have value. To function as unit of account , the thing must act as a good measurement system. To function as a store of value , the thing must be able to purchase approximately the same value of goods and services at some future date as it can purchase now. Returning to the example above, could society decide potatoes are money? Conceivably, yes. A potato has intrinsic value (this report will examine value in more detail in the following section, "" Traditional Money ""), as it provides nourishment. However, a potato's tradability is limited: many people would find it impractical to carry around sacks of potatoes for daily transactions or to buy a car for many thousands of pounds of potatoes. A measurement system based on potatoes is also problematic. Each potato has a different size and degree of freshness, so to say something is worth ""one potato"" is imprecise and variable. In addition, a potato cannot be divided without changing its value. Two halves of a potato are worth less than a whole potato—the exposed flesh will soon turn brown and rot—so people would be unlikely to agree to prices in fractions of potato. The issue of freshness also limits potatoes' ability to be a store of value; a potato eventually sprouts eyes and spoils, and so must be spent quickly or it will lose value. In contrast, an ounce of gold and a dollar bill can be carried easily in a pocket and thus are tradeable. Each unit is identical and can be divided into fractions of an ounce or cents, respectively, making both gold and dollars effective units of account. Gold is an inert metal and a dollar bill, when well cared for, will not degrade substantively for years, meaning can both function as a store of value. Likewise, with the use of digital technology, electronic messages to change entries in a ledger can be sent easily by swiping a card or pushing a button and can be denominated in identical and divisible units. Those units could have a stable value, as their number stays unchanging in an account on a ledger. The question becomes how does a lump of metal, a thing called a dollar, and the numbers on a ledger come to be deemed valuable by society, as has been accomplished in traditional monetary systems. Money has been in existence throughout history. However, how that money came to have value, how it was exchanged, and what roles government and intermediaries such as banks have played have changed over time. This section examines three different monetary systems with varying degrees of government and bank involvement. Early forms of money were often things that had intrinsic value, such as precious metals (e.g., copper, silver, gold). Part of their value was derived from the fact that they could be worked into aesthetically pleasing objects. More importantly, other physical characteristics of these metals made them well suited to perform the three functions of money and so created the economic efficiency societies needed: these metals are elemental and thus an amount of the pure material is identical to a different sample of the same amount; they are malleable and thus easy divisible; and they are chemically inert and thus do not degrade. In addition, they are scarce and difficult to extract from the earth, which is vital to them having and maintaining value. Sand also could perform the functions of money and can be worked into aesthetically pleasing glass. However, if sand were money, then people would quickly gather vast quantities of it and soon even low-cost goods would be priced at huge amounts of sand. Even when forms of money had intrinsic value, governments played a role in assigning value to money. For example, government mints would make coins of precious metals with a government symbol, which validated that these particular samples were of some verified amount and purity. Fiat money takes the government role a step further, as discussed below. In contrast to money with intrinsic value, fiat m oney has no intrinsic value but instead derives its value by government decree. If a government is sufficiently powerful and credible, it can declare that some thing—a dollar, a euro, a yen, for example—shall be money. In practice, these decrees can take a number of forms, but generally they involve a mandate that the money be used for some economic activity, such as paying taxes or settling debts. Thus, if members of society want to participate in the relevant economic activities, it behooves them to accept the money as payment in their dealings. In addition to such decrees, the government generally controls the supply of the money to ensure it is sufficiently scarce to retain value yet in ample-enough supply to facilitate economic activity. Relatedly, the government generally attempts to minimize the incidence of counterfeiting by making the physical money in circulation difficult to replicate and creating a deterrence through criminal punishment. Modern monies are generally fiat money, including the U.S. dollar. The dollar is legal tender in the United States, meaning parties are obligated to accept the dollar to settle debts, and U.S. taxes can (and generally must) be paid in dollars. This status instills dollars with value, because anyone who wants to undertake these basic economic activities in the largest economy and financial system in the world must have and use this type of money. In the United States, the Board of Governors of the Federal Reserve System maintains the value of the dollar by setting monetary policy. Congress mandated that the Federal Reserve would conduct monetary policy in the Federal Reserve Reform Act of 1977 ( P.L. 95-188 ), directing it to ""maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."" Under this system, a money stock currently exceeding $14 trillion circulates in support of an economy that generates over $20 trillion worth of new production a year, and average annual inflation has not exceeded a rate of 3% since 1993. In addition, the Federal Reserve operates key electronic payment systems, including those involving interbank transfers. In this way, the Federal Reserve acts as the intermediary when banks transfer money between each other. Banks have played a role in another evolution of money: providing an alternative to the physical exchange of tangible currency between two parties. Verifying the valid exchange of physical currency is relatively easy. The payer shows the payee he or she is in fact in possession of the money, and the transfer is valid the moment the money passes into the payee's possession. This system is not without problems, though. Physically possessing money subjects it to theft, misplacement, or destruction through accident. A physical exchange of money typically requires the payer and payee be physically near each other (because both parties would have to have a high degree of trust in each other to believe any assurance that the money will be brought or sent later). From early in history, banks have offered services to accomplish valid transfers of value between parties who are not in physical proximity and do not necessarily trust each other. Customers give banks their money for, among other reasons, secure safekeeping and the ability to send payment to a payee located somewhere else (originally using paper checks or bills of exchange). Historically and today, maintaining accurate ledgers of accounts is a vital tool for providing these services. It allows people to hold money as numerical data stored in a ledger instead of as a physical thing that can be lost or stolen. In the simplest form, a payment system works by a bank recording how much money an individual has access to and, upon instruction, making appropriate additions and reductions to that amount. The mechanics of the modern payment system, in which instructions are sent and records are stored electronically, are covered in more detail in the following section, "" The Electronic Exchange of Money ."" What can be noted here in this basic description is that participants must trust the banks and that ledgers must be accurate and must be changed only for valid transfers. Otherwise, an individual's money could be lost or stolen if a bank records the payer's account as having an inaccurately low amount or transfers value without permission. A number of mechanisms can create trust in banks. For example, a bank has a market incentive to be accurate, because a bank that does not have a good reputation for protecting customers' money and processing transactions accurately will lose customers. In addition, governments typically subject banks to laws and regulations designed in part to ensure that banks are run well and that people's money is safe in them. As such, banks take substantial measures to ensure security and accuracy. Today, money is widely exchanged electronically, but electronic payments systems can be subject to certain difficulties related to lack of scarcity (a digital file can be copied many times over, retaining the exact information as its predecessor) and lack of trust between parties. Electronic transfers of money are subject to what observers refer to as the double spending problem. In an electronic transfer of money, a payer may wish to send a digital file directly to a payee in the hopes that the file will act as a transfer of value. However, if the payee cannot confirm that the payer has not sent the same file to multiple other payees, the transfer is problematic. Because money in such a system could be double (or any number of times) spent, the money would not retain its value. As described in the preceding section, this problem traditionally has been resolved by involving at least one centralized, trusted intermediary—such as a private bank, government central bank, or other financial institution—in electronic transfers of money. The trusted intermediaries maintain private ledgers of accounts recording how much money each participant holds. To make a payment, an electronic message (or messages) is sent to an intermediary or to and between various intermediaries, instructing each to make the necessary changes to its ledgers. The intermediary or intermediaries validate the transaction, ensure the payer has sufficient funds for the payment, deduct the appropriate amount from the payer's account, and add that amount to the payee's account. For example, in the United States, a retail consumer may initiate an electronic payment through a debit card transaction, at which time an electronic message is sent over a network instructing the purchaser's bank to send payment to the seller's bank. Those banks then make the appropriate changes to their account ledgers (possibly using the Federal Reserve's payment system) reflecting that value has been transferred from the purchaser's account to the seller's account. Significant costs and physical infrastructure underlie systems for electronic money transfers to ensure the systems' integrity, performance, and availability. For example, payment system providers operate and maintain vast electronic networks to connect retail locations with banks, and the Federal Reserve operates and maintains networks to connect banks to itself and each other. These intermediaries store and protect huge amounts of data. In general, these intermediaries are highly regulated to ensure safety, profitability, consumer protection, and financial stability. Intermediaries recoup the costs associated with these systems and earn profits by charging fees directly when the system is used (such as the fees a merchant pays to have a card reading machine and on each transaction) or by charging fees for related services (such as checking account fees). In addition, intermediaries generally are required to provide certain protections to consumers involved in electronic transactions. For example, the Electronic Fund Transfer Act ( P.L. 95-630 ) limits consumers' liability for unauthorized transfers made using their accounts. Similarly, the Fair Credit Billing Act ( P.L. 93-495 ) requires credit card companies to take certain steps to correct billing errors, including when the goods or services a consumer purchased are not delivered as agreed. Both acts also require financial institutions to make certain disclosures to consumers related to the costs and terms of using an institution's services. Notably, certain individuals may lack access to electronic payment systems. To use an electronic payment system, a consumer or merchant generally must have access to a bank account or some retail payment service, which some may find cost prohibitive or geographically inconvenient, resulting in underbanked or unbanked populations (i.e., people who have limited interaction with the traditional banking system). In addition, the consumer or merchant typically must provide the bank or other intermediary with personal information. The use of electronic payment services generates a huge amount of data about an individual's financial transactions. This information could be accessed by the bank, law enforcement (provided proper procedures are followed), or nefarious actors (provided they are capable of circumventing the intermediaries' security measures). Cryptocurrencies—such as Bitcoin, Ether, and Litecoin—provide an alternative to this traditional electronic payment system. As noted above, cryptocurrency acts as money in an electronic payment system in which a network of computers, rather than a single third-party intermediary, validates transactions. In general, these electronic payment systems use public ledgers that allow individuals to establish an account with a pseudonymous name known to the entire network—or an address corresponding to a public key—and a passcode or private key that is paired to the public key and known only to the account holder. A transaction occurs when two parties agree to transfer cryptocurrency (perhaps in payment for a good or service) from one account to another. The buying party will unlock the cryptocurrency they will use as payment with their private key, allowing the selling party to lock it with their private key. In general, to access the cryptocurrency system, users will create a ""wallet"" with a third-party cryptocurrency exchange or service provider. From the perspective of the individuals using the system, the mechanics are similar to authorizing payment on any website that requires an individual to enter a username and password. In addition, certain companies offer applications or interfaces that users can download onto a device to make transacting in cryptocurrencies more user-friendly. Cryptocurrency platforms often use blockchain technology to validate changes to the ledgers. Blockchain technology uses cryptographic protocols to prevent invalid alteration or manipulation of the public ledger. Specifically, before any transaction is entered into the ledger and the ledger is irreversibly changed, some member of the network must validate the transaction. In certain cryptocurrency platforms, validation requires the member to solve an extremely difficult computational decryption. Once the transaction is validated, it is entered into the ledger. These protocols secure each transaction by using digital signatures to validate the identity of the two parties involved and to validate that the entire ledger is secure so that any changes in the ledger are visible to all parties. In this system, parties that otherwise do not know each other can exchange something of value (i.e., a digital currency) not because they trust each other but because they trust the platform and its cryptographic protocols to prevent double spending and invalid changes to the ledger. Cryptocurrency platforms often incentivize users to perform the functions necessary for validation by awarding them newly created units of the currency for successful computations (often the first person to solve the problem is given the new units), although in some cases the payer or payee also is charged a fee that goes to the validating member. In general, the rate at which new units are created—and therefore the total amount of currency in the system—is limited by the platform protocols designed by the creators of the cryptocurrency. These limits create scarcity with the intention of ensuring the cryptocurrency retains value. Because users of the cryptocurrency platform must perform work to extract the scarce unit of value from the platform, much as people do with precious metals, it is said that these users mine the cryptocurrencies. Alternatively, people can acquire cryptocurrency on certain exchanges that allow individuals to purchase cryptocurrency using official government-backed currencies or other cryptocurrencies. Cryptographers and computer scientists generally agree that cryptocurrency ledgers that use blockchain technology are mathematically secure and that it would be exceedingly difficult—approaching impossible—to manipulate them. However, hackers have exploited vulnerabilities in certain exchanges and individuals' devices to steal cryptocurrency from the exchange or individual. Analyzing data about certain characteristics and the use of cryptocurrency would be helpful in measuring how well cryptocurrency functions as an alternative source of payment and thus its future prospects for functioning as money. However, conducting such an analysis currently presents challenges. The decentralized nature of cryptocurrencies makes identifying authoritative sources of industry data difficult. In addition, the recent proliferation of cryptocurrency adds additional challenges to performing industry-wide analysis. For example, as of August 27, 2018, one industry group purported to track 1,890 cryptocurrencies trading at prices that suggest an aggregate value in circulation of almost $220 billion. Because of these challenges, an exhaustive quantitative analysis of the entire cryptocurrency industry is beyond the scope of this report. Instead, the report uses Bitcoin—the first and most well-known cryptocurrency, the total value of which accounts for more than half of the industry as a whole —as an illustrative example. Examining recent trends in Bitcoin prices, value in circulation, and number of transactions may shed some light on how well cryptocurrencies in general have been performing as an alternative payment system. The rapid appreciation in cryptocurrencies' value in 2017 likely contributed to the recent increase in public interest in these currencies. At the beginning of 2017, the price of a Bitcoin on an exchange was about $993. The price surged during the year, peaking at about $19,650 in December 2017 (see Figure 1 ), an almost 1,880% increase from prices in January 2017. However, the price then dramatically declined by 65% to $6,905 in less than two months. From February through August 2018, the price of a Bitcoin remained volatile. Other major cryptocurrencies such as Ether and Litecoin have had similar price movements. As of October 7, 2018, the price of one Bitcoin was $6,570 and approximately 17.3 million Bitcoins were in circulation, making the value of all Bitcoins in existence about $113.6 billion. Although these statistics drive interest in and are central to the analysis of cryptocurrencies as investment s , they reveal little about the prevalence of cryptocurrencies' use as money . Recent volatility in the price of cryptocurrencies suggests they function poorly as a unit of account and a store of value (two of the three functions of money discussed in "" The Functions of Money ,"" above), an issue covered in the "" Potential Challenges to Widespread Adoption "" section of this report. Nevertheless, the price or the exchange rate of a currency in dollars at any point in time (rather than over time) does not have a substantive influence on how well the currency serves the functions of money. The number of Bitcoin transactions, by contrast, can serve as an indicator—though a flawed one —of the prevalence of the use of Bitcoin as money. This number indicates how many times a day Bitcoins are transferred between accounts. Two industry data sources indicate that the number of Bitcoin transactions averaged about 208,000 per day globally in 2018 through August. In comparison, the Automated Clearing House—an electronic payments network operated by the Federal Reserve Bank and the private company Electronic Payments Network—processed almost 59 million transactions per day on average in 2017. Visa's payments systems processed on average more than 300 million transactions per day globally in 2017. The previous section illustrates that the use of cryptocurrencies as money in a payment system is still quite limited compared with traditional systems. However, the invention and growth in awareness of cryptocurrencies occurred only recently. Some observers assert that cryptocurrencies' potential benefits will be realized in the coming years or decades, which will lead to their widespread adoption. Skeptics, however, emphasize the obstacles facing the widespread adoption of cryptocurrencies and doubt that cryptocurrencies can overcome these challenges. This section of the report describes some of the potential benefits cryptocurrencies may provide to the public and the economic system as a whole. Later sections—"" Potential Challenges to Widespread Adoption "" and "" Potential Risks Posed by Cryptocurrencies ""—discuss certain potential challenges to widespread adoption of cryptocurrencies and some potential risks cryptocurrencies pose. As discussed in the "" The Electronic Exchange of Money "" section, traditional monetary and electronic payment systems involve a number of intermediaries, such as government central banks and private financial institutions. To carry out transactions, these institutions operate and maintain extensive electronic networks and other infrastructure, employ workers, and require time to finalize transactions. To meet costs and earn profits, these institutions charge various fees to users of their systems. Advocates of cryptocurrencies hope that a decentralized payment system operated through the internet will be less costly than the traditional payment systems and existing infrastructures. Cryptocurrency proponents assert that cryptocurrency may provide an especially pronounced cost advantage over traditional payment systems for international money transfers and payments. Sending money internationally generally involves further intermediation than domestic transfers, typically requiring transfers between banks and other money transmitters in different countries and possibly exchanges of one national currency for another. Proponents assert that cryptocurrencies could avoid these particular costs because cryptocurrency transactions take place over the internet—which is already global—and are not backed by government-fiat currencies. Nevertheless, it is difficult to quantify how much traditional payment systems cost and what portion of those costs is passed on to consumers. Performing such a quantitative analysis is beyond the scope of this report. What bears mentioning here is that certain costs of traditional payment systems—and, in particular, the fees intermediaries in those systems have charged consumers—have at times been high enough to raise policymakers' concern and elicit policy responses. For example, in response to retailers' assertions that Visa and MasterCard had exercised market power in setting debit card swipe fees at unfairly high levels, Congress included Section 1075 in the Dodd-Frank Consumer Protection and Wall Street Reform Act (Dodd-Frank Act; P.L. 111-203 )—sometimes called the ""Durbin Amendment."" Section 1075 directs the Federal Reserve to limit debit card swipe fees charged by banks with assets of more than $10 billion. In addition, studies on unbanked and underbanked populations cite the fees associated with traditional bank accounts, a portion of which may be the result of providing payment services, as a possible cause for those populations' limited interaction with the traditional banking system. Proponents of cryptocurrencies argue that an increase in the use of cryptocurrencies as an alternative payment system would reduce these costs through competition or would eliminate the need to pay them altogether. As discussed in the "" Traditional Money "" section, traditional payment systems require that government and financial institutions be credible and have people's trust. Even if general trust in those institutions is sufficient to make them credible in a society, certain individuals may nevertheless mistrust them. For people who do not find various institutions sufficiently trustworthy, cryptocurrencies could provide a desirable alternative. In countries with advanced economies, such as the United States, mistrust may not be as prevalent (although not wholly absent) as in other countries. Typically, developed economies are relatively stable and have relatively low inflation; often, they also have carefully regulated financial institutions and strong government institutions. Not all economies share these features. Thus, cryptocurrencies may experience more widespread adoption in countries with a higher degree of mistrust of existing systems than in countries where there is generally a high degree of trust in existing systems. A person may mistrust traditional private financial institutions for a number of reasons. An individual may be concerned that an institution will go bankrupt or otherwise lose his or her money without adequately apprising him or her of such a risk (or while actively misleading him or her about it). In addition, opening a bank account or otherwise using traditional electronic payment systems generally requires an individual to divulge to a financial institution certain basic personal information, such as name, social security number, and birthdate. Financial institutions store this information and information about the transactions linked to this identity. Under certain circumstances, they may analyze or share this information, such as with a credit-reporting agency. In some instances hackers have stolen personal information from financial institutions, causing concerns over how well these institutions can protect sensitive data. Individuals seeking a higher degree of privacy or control over their personal data than that afforded by traditional systems may choose to use cryptocurrency. Certain individuals also may mistrust a government's willingness or ability to maintain a stable value of a fiat currency. Because fiat currency does not have intrinsic value and, historically, incidents of hyperinflation in certain countries have seen government-backed currencies lose most or nearly all of their value, some individuals may judge the probability of their fiat money losing a significant portion of its value to be undesirably high in some circumstances. These individuals may place greater trust in a decentralized network using cryptographic protocols that limit the creation of new money than in government institutions. The appropriate policy approach to cryptocurrencies likely depends, in part, on how prevalent these currencies become. For cryptocurrencies to deliver the potential benefits mentioned above, people must use them as money to some substantive degree. After all, as money, cryptocurrencies would do little good if few people and businesses accept them as payment. For this reason, currencies are subject to network effects , wherein their value and usefulness depends in part on how many people are willing to use them. Currently, cryptocurrencies face certain challenges to widespread adoption, some of which are discussed below. Recall that how well cryptocurrency serves as money depends on how well it serves as (1) a medium of exchange, (2) a unit of account, and (3) a store of value. Several characteristics of cryptocurrency undermine its ability to serve these three interrelated functions in the United States and elsewhere. Currently, a relatively small number of businesses or individuals use or accept cryptocurrency for payment. As discussed in the "" The Price and Usage of Cryptocurrency "" section, there were 208,000 transactions involving Bitcoin per day globally (out of the billions of transactions that take place) in 2018 through August, and a portion of those transactions involved people buying Bitcoins for the purposes of holding them as an investment rather than as payment for goods and services. Cryptocurrency may be used as a medium of exchange less frequently than traditional money for several reasons. Unlike the dollar and most other government-backed currencies, cryptocurrencies are not legal tender, meaning creditors are not legally required to accept them to settle debts. Consumers and businesses also may be hesitant to place their trust in a decentralized computer network of pseudonymous participants that they may not completely understand. Relatedly, consumers and businesses may have sufficient trust in and be generally satisfied with existing payment systems. As previously mentioned, the recent high volatility in the price of many cryptocurrencies undermines their ability to serve as a unit of account and a store of value. Cryptocurrencies can have significant value fluctuations within short periods of time; as a result, pricing goods and services in units of cryptocurrency would require frequent repricing and likely would cause confusion among buyers and sellers. In regard to serving as a store of value, Bitcoin lost almost 53% of its value in the first half of 2018, which equates to a 346% annualized rate of inflation. In comparison, the annualized inflation of prices in the U.S. dollar was 2.1% over the same period. Whether cryptocurrency systems are scalable —meaning their capacity can be increased in a cost-effective way without loss of functionality—is uncertain. At present, the technologies and systems underlying cryptocurrencies do not appear capable of processing the number of transactions that would be required of a widely adopted, global payment system. As discussed in the "" The Price and Usage of Cryptocurrency "" section, the platform of the largest (by a wide margin) cryptocurrency, Bitcoin, processes a small fraction of the overall financial transactions parties engage in per day. The overwhelming majority of such transactions are processed through established payment systems. As well, Bitcoin's processing speed is still comparatively slow relative to the nearly instant transaction speed many electronic payment methods, such as credit and debit cards, achieve. For example, blocks of transactions are published to the Bitcoin ledger every 10 minutes, but because a limited number of transactions can be added in a block, it may take over an hour before an individual transaction is posted. Part of the reason for the relatively slow processing speed of certain cryptocurrency transactions is the large computational resources involved with mining—or validating—transactions. When prices for cryptocurrencies were increasing rapidly, many miners were incentivized to participate in validating transactions, seeking to win the rights to publish the next block and collect any reward or fees attached to that block. This incentive led to an increasing number of miners and to additional investment in faster computers by new and existing miners. The combination of more miners and more energy required to power their computers led to ballooning electricity requirements. However, as the prices of cryptocurrencies have deflated, validating cryptocurrency transactions has become a less rewarding investment for miners; consequently, fewer individuals participate in mining operations. The energy consumption required to run and cool the computers involved in cryptocurrency mining is substantial. Some estimates indicate the daily energy needs of the Bitcoin network are comparable to the needs of a small country, such as Ireland. In addition to raising questions about whether cryptocurrencies ultimately will be more efficient than existing payment systems, such high energy consumption could result in high negative e xternalities —wherein the price of a market transaction, such as purchasing electricity, may not fully reflect all societal costs, such as pollution from electricity production. In general, when a buyer of a good or a service provided remotely sends a cryptocurrency to another account, that transaction is irreversible and made to a pseudonymous identity. Although a cryptocurrency platform validates that the currency has been transferred, the platform generally does not validate that a good or service has been delivered. Unless a transfer is done face-to-face, it will involve some degree of trust between one party and the other or a trusted intermediary. For example, imagine a buyer agrees to purchase a collectible item from a seller located across the country for one Bitcoin. If the buyer transfers the Bitcoin before she has received the item, she takes on the risk that the seller will never ship the item to her; if that happened, the buyer would have little, if any, recourse. Conversely, if the seller ships the item before the buyer has transferred the Bitcoin, he assumes the risk that the buyer never will transfer the Bitcoin. These risks could act as a disincentive to parties considering using cryptocurrencies in certain transactions and thus could hinder cryptocurrencies' ability to act as a medium of exchange. As mentioned in the "" Banks: Transferring Value Through Intermediaries "" section, sending cash to someone in another location presents a similar problem, which historically has been solved by using a trusted intermediary. In response to this problem, several companies offer cryptocurrency escrow services. Typically, the escrow company holds the buyer's cryptocurrency until delivery is confirmed. Only then will the escrow company pass the cryptocurrency onto the seller. Although an escrow service may enable parties who otherwise do not trust each other to exchange cryptocurrency for goods and services, the use of such services reintroduces the need for a trusted third-party intermediary in cryptocurrency transactions. As with the use of intermediaries in traditional electronic transactions discussed above, both a buyer and a seller in a cryptocurrency transaction would have to trust that the escrow company will not abscond with their cryptocurrency and is adequately protected against hacking. For cryptocurrencies to gain widespread acceptance as payment systems and displace existing traditional intermediaries, new procedures and intermediaries such as those described in this section may first need to achieve a sufficient level of trustworthiness and efficiency among the public. If cryptocurrencies ultimately require their own system of intermediaries to function as money, questions may arise about whether this requirement defeats their original purpose. Policymakers developed most financial laws and regulations before the invention and subsequent growth of cryptocurrencies, which raises questions about whether existing laws and regulations appropriately and efficiently address the risks posed by cryptocurrency. Some of the more commonly cited risks include the potential that cryptocurrencies will be used to facilitate criminal activity and the lack of consumer protections applicable to parties buying or using cryptocurrency. Each of these risks is discussed below. Criminals and terrorists are more likely to conduct business in cash and to hold cash as an asset than to use financial intermediaries such as banks, in part because cash is anonymous and allows them to avoid establishing relationships with and records at financial institutions that may be subject to anti-money laundering reporting and compliance requirements. Some observers are concerned that the pseudonymous and decentralized nature of cryptocurrency transactions may similarly provide a means for criminals to hide their financial dealings from authorities. For example, Bitcoin was the currency used on the internet-based, illegal drug marketplace called Silk Road. This marketplace and Bitcoin escrow service facilitated more than 100,000 illegal drug sales from approximately January 2011 to October 2013, at which time the government shut down the website and arrested the individuals running the site. Criminal use of cryptocurrency does not necessarily mean the technology is a net negative for society, because the benefits it provides could exceed the societal costs of the additional crime facilitated by cryptocurrency. In addition, law enforcement has existing authorities and abilities to mitigate the use of cryptocurrencies for the purposes of evading law enforcement. Recall that cryptocurrency platforms generally function as an immutable, public ledger of accounts and transactions. Thus, every transaction ever made by a member of the network is relatively easy to observe, and this characteristic can be helpful to law enforcement in tracking criminal finances. Although the accounts may be identified with a pseudonym on the cryptocurrency platform, law enforcement can exercise methods involving analysis of transaction patterns to link those pseudonyms to real-life identities. For example, it may be possible to link a cryptocurrency public key with a cryptocurrency exchange customer. Certain cryptocurrencies may provide users with greater anonymity than others, but use of these technologies currently is comparatively rare. In addition to law enforcement's abilities to investigate crime, the government has authorities to subject cryptocurrency exchanges to regulation related to reporting suspicious activity. The Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) has issued guidance explaining how its regulations apply to the use of virtual currencies —a term that refers to a broader class of electronic money that includes cryptocurrencies. FinCEN has indicated that an exchanger (""a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency"") and an administrator (""a person engaged as a business in issuing [putting into circulation] a virtual currency, and who has the authority to redeem [to withdraw from circulation] such virtual currency"") generally qualify as money services businesses (MSBs) subject to federal regulation. Among other things, MSBs generally must register with and report suspicious transactions to FinCEN, and they must maintain anti-money laundering compliance programs. State law and regulation generally impose a variety of registration anti-money laundering requirements on money services businesses. The specific requirements generally vary across different states; a state-by-state analysis is beyond the scope of this report. Bills focused on investigating the criminal use of cryptocurrencies and improving government agencies' ability to address the problem have seen action in the 115 th Congress. These bills include the following: H.R. 2433 passed the House on September 12, 2017, and would direct the Department of Homeland Security, in coordination with appropriate federal agencies, to develop an assessment of the threat of individuals using cryptocurrencies to carry out acts of terrorism. H.R. 5036 passed the House on September 28, 2018, and would (1) establish the Independent Financial Technology Task Force to research and develop proposals regarding the use of digital currencies in terrorism and illicit activity, (2) direct the Treasury to pay a reward to anyone who provides information that leads to a conviction of an individual involved with terrorist use of digital currencies, and (3) establish the FinTech Leadership in Innovation Program to fund the development of tools and programs to detect terrorist and illicit use of digital currencies. H.R. 6069 passed the House on June 25, 2018, and would direct the Government Accountability Office to produce a study on the use of virtual currencies and online marketplaces to facilitate sex and drug trafficking. H.R. 6411 passed the House on September 12, 2018, and would amend FinCEN's duties and powers to explicitly include ""emerging technologies or value that substitutes for currency"" as an area in which FinCEN can coordinate with foreign financial intelligence in anti-money laundering efforts. The Internal Revenue Service (IRS) has issued guidance stating that it will treat virtual currencies as property (as opposed to currency ), meaning users owe taxes on any realized gains whenever they dispose of virtual currency, including when they use it to purchase goods and services. In a court filing seeking to obtain information on customers of Coinbase—the largest U.S. cryptocurrency exchange—the IRS identified approximately 800 to 900 returns per year from 2013 to 2015 that included capital gains that likely came from cryptocurrencies. In addition, recent anecdotal reporting—based in part on individuals' tax return filings from one filing service—suggests that few 2017 tax filings included reported capital gains from cryptocurrencies. Nevertheless, considering the level of activity in the cryptocurrency markets, one analysis estimated the U.S. tax liability on cryptocurrency gains was $25 billion in 2017. The lack of clarity surrounding whether and to what degree people are appropriately declaring gains from cryptocurrency on their tax returns has raised concerns that the technology could facilitate tax evasion. As with money laundering, individuals could use the opportunity to hide and move money in a pseudonymous, decentralized platform (and thus avoid generating records at traditional financial institutions) as a mechanism for hiding income from tax authorities. Data that would aid in analyzing whether this is occurring are scarce at this time, because the IRS has only recently begun actively collecting customer information from cryptocurrency exchanges. Although it is outside the scope of this report, another potential reason a person or entity may want to move money or assets while avoiding engagement with traditional financial institutions could be to evade financial sanctions. For example, the Venezuelan government has launched a digital currency with the stated intention of using it to evade U.S. sanctions. The governments of Iran and Russia have expressed interest in doing so, as well. For more information on the potential use of cryptocurrencies to evade financial sanctions, see CRS In Focus IF10825, Digital Currencies: Sanctions Evasion Risks , by Rebecca M. Nelson and Liana W. Rosen. Although there is no overarching regulation or regulatory framework specifically aimed at providing consumer protections in cryptocurrencies markets, numerous consumer protection laws and regulatory authorities at both the federal and state levels are applicable to cryptocurrencies. Whether these regulations adequately protect consumers and whether existing regulation is unnecessarily burdensome are topics subject to debate. This section will examine some of these consumer protections and present arguments related to these debated issues. A related concern has to do with whether investors in certain cryptocurrency instruments such as initial coin offerings —wherein companies developing an application or platform issue cryptocurrencies or other digital or virtual currency that are or will be used on the application or platform—or cryptocurrency derivatives contracts are adequately informed of risk and protected from scams. However, this secondary use of cryptocurrency as investment vehicles is different from the use of cryptocurrencies as money, and it is beyond the scope of this report. For examinations of these issues, see CRS Report R45221, Capital Markets, Securities Offerings, and Related Policy Issues , by Eva Su; and CRS Report R45301, Securities Regulation and Initial Coin Offerings: A Legal Primer , by Jay B. Sykes. No federal consumer protection law specifically targets cryptocurrencies. However, the way cryptocurrencies are sold, exchanged, or marketed can subject cryptocurrency exchanges or other cryptocurrency-related businesses to generally applicable consumer protection laws. For example, Section 5(a) of the Federal Trade Commission Act (P.L. 63-203) declares ""unfair or deceptive acts or practices in or affecting commerce"" unlawful and empowers the Federal Trade Commission (FTC) to prevent people and most companies from engaging in such acts and practices. In recent years, the FTC has brought a number of enforcement actions against cryptocurrency promoters and mining operations due to potential violations of Section 5(a). In addition, Title X of the Dodd-Frank Act grants the Consumer Financial Protection Bureau (CFPB) certain rulemaking, supervisory, and enforcement authorities to implement and enforce certain federal consumer financial laws that protect consumers from ""unfair, deceptive, or abusive acts and practices."" These authorities apply to a broad range of financial industries and products, and they arguably could apply to cryptocurrency exchanges as well. Although the CFPB has not actively exercised regulatory authorities in regard to the cryptocurrency industry to date, the agency is accepting cryptocurrency-related complaints and previously has indicated it would enforce consumer financial laws in appropriate cases. Both the FTC and the CFPB have made available informational material, such as consumer advisories, to educate consumers about potential risks associated with transacting in cryptocurrencies. In addition, all states have laws against deceptive acts and practices, and state regulators have enforcement authorities that could be exercised against cryptocurrency-related businesses. Additional consumer protections generally are applied to cryptocurrency exchanges at the state level through money transmission laws and licensing requirements. Money transmitters, including cryptocurrency exchanges, must obtain applicable state licenses and are subject to state regulatory regimes applicable to the money transmitter industry in each state in which they operate. For example, money transmitters generally must maintain some amount of low-risk investments and surety bonds—which are akin to an insurance policy that pays customers who do not receive their money—as safeguards for customers in the event they do not receive money that was to be sent to them. Certain observers assert that consumers may be especially susceptible to being deceived or misinformed when dealing in cryptocurrencies. Cryptocurrency is a relatively new type of asset, and consumers may not be familiar with how cryptocurrencies work and how they derive their value. This unfamiliarity may mean a consumer could be unknowingly charged excessive fees when using or exchanging cryptocurrencies; deceived about cryptocurrencies' true value; or unaware of the possibility or likelihood of loss of value, electronic theft, or loss of access to cryptocurrency due to losing or forgetting associated public or private keys. In addition, a feature of cryptocurrency transfers is irreversibility, which could leave consumers without recourse in certain cryptocurrency transactions. Although certain federal laws and regulations intended to protect consumers (such as those described in "" Applicable Regulation ,"" above) do apply to certain cryptocurrency transactions, others may not. Some of those laws and regulations that do not currently apply are specifically designed to protect consumers engaged in the electronic transfer of money, require certain disclosures about the terms of financial transactions, and require transfers to be reversed under certain circumstances. For example, the Electronic Fund Transfer Act of 1978 (EFTA; P.L. 95-630 ) requires traditional financial institutions engaging in electronic fund transfers to make certain disclosures about fees, correct errors when identified by the consumer, and limit consumer liability in the event of unauthorized transfers. In general, EFTA protections appear not to apply to cryptocurrency transactions, because these transactions do not involve a financial institution as defined in the EFTA. The application of state laws and consumer protections to cryptocurrency transactions is not uniform, and the stringency of regulation can vary across states. This variation could create a situation in which consumers in states with relatively lax regulation are inadequately protected. If Congress decides current consumer protections are inadequate, policy options could include extending the application of certain electronic fund transfer protections to consumers using cryptocurrency exchanges and service providers and granting federal agencies additional authorities to regulate those businesses. Proponents of cryptocurrencies have asserted that the application of a state-by-state consumer protection regulatory regime to cryptocurrency exchanges is unnecessarily onerous. They note that certain state regulations applicable to these exchanges are designed to address risks presented by traditional money transmission transactions (i.e., allowing fiat money to be submitted at one location and picked up at another location). For example, the previously mentioned requirements to maintain low-risk investments and surety bonds are intended to ensure customers will receive transmitted money. Cryptocurrency proponents argue that the services provided and the risks presented by cryptocurrency exchanges are substantively different from those of traditional money transmitters and that the requirements placed on those businesses—particularly requirements to hold minimum amounts of assets to back cryptocurrencies they hold on behalf of customers—are ill-suited to the cryptocurrency exchange industry. Supporters of cryptocurrencies further argue that if the United States does not reduce the regulatory burdens involved in cryptocurrency exchanges, the country will be at a disadvantage relative to others in regard to the development of cryptocurrency systems and platforms. If Congress decides the current regulatory framework is unnecessarily burdensome, some argue that one policy option would be to enact federal law applicable to cryptocurrency exchanges (or virtual currency exchanges more broadly) that preempts state-level requirements. As discussed in the "" Government Authority: Fiat Money "" section, in the United States, the Federal Reserve has the authority to conduct monetary policy with the goals of achieving price stability and low unemployment. The central banks of other countries generally have similar authorities and goals. Some central bankers and other experts and observers have speculated that the widespread adoption of cryptocurrencies could affect the ability of the Federal Reserve and other central banks to implement and transmit monetary policy, and some have suggested that these institutions should issue their own digital, fiat currencies. The mechanisms through which central banks implement monetary policy can be technical, but at the most fundamental level these banks conduct monetary policy by regulating how much money is in circulation in an economy. Currently, the vast majority of money circulating in most economies is government-issued fiat money, and so governments (particularly credible governments in countries with relatively strong, stable economies) have effective control over how much is in circulation. However, if one or more additional currencies that the government did not control (such as cryptocurrencies) were also prevalent and viable payment options, their prevalence could have a number of implications. The widespread adoption of such payment options would limit central banks' ability to control inflation, as they do now, because actors in the economy would be buying, selling, lending, and settling in cryptocurrency. Central banks would have to make larger adjustments to the fiat currency to have the same effect as previous adjustments, or they would have to start buying and selling the cryptocurrencies themselves in an effort to affect the availability of these currencies in the economy. Because cryptocurrency circulates on a global network, the actions of one country that buys and sells cryptocurrency to control its availability could have a destabilizing effect on other economies that also widely use that cryptocurrency; in this way, one country's approach to cryptocurrency could undermine price stability or exacerbate recessions or overheating in another country. For example, as economic conditions in one country changed, that country would respond by attempting to alter its monetary conditions, including the amount of cryptocurrency in circulation. However, the prescribed change for that economy would not necessarily be appropriate in a country that was experiencing different economic conditions. The supply of cryptocurrency in this second country nevertheless could be affected by the first country's actions. Another challenge in an economy with multiple currencies—as would be the case in an economy with a fiat currency and cryptocurrencies—is that the existence of multiple currencies adds difficulty to buyers and sellers making exchanges; all buyers and sellers must be aware of and continually monitor the value of different currencies relative to each other. As an example, such a system existed in the United States for periods before the Civil War when banks issued their own private currencies. The inefficiency and costs of tracking the exchange rates and multiple prices in multiple currencies eventually led to calls for and the establishment of a uniform currency. To date, governments (Venezuela excepted) generally have not been directly involved in the creation of cryptocurrencies; one of the central goals in developing the technology was to eliminate the need for government involvement in money creation and payment systems. However, cryptocurrency's decentralized nature is at the root of certain risks and challenges related to its lack of widespread adoption by the public and its use by criminals. These risks and challenges have led some observers to suggest that perhaps central banks could use the technologies underlying cryptocurrencies to issue their own central bank digital currencies (CBDCs) to realize certain hoped-for efficiencies in the payment system in a way that would be ""safe, robust, and convenient."" Much of the discussion related to CBDCs is speculative at this point. The extent to which a central bank could or would want to create a blockchain-enabled payment system likely would be weighed against the consideration that these government institutions already have trusted digital payment systems in place. Because of such considerations, the exact form that CBDCs would take is not clear; such currencies could vary across a number of features and characteristics. For example, it is not clear that cryptography would be necessary to validate transactions when a trusted intermediary such as a central bank could reliably validate them. Nevertheless, some central banks are examining the idea of CBDCs and the possible benefits and issues they may present. The possibility of CBDCs' introduction raises a number of questions about their potential benefits, challenges, and impacts on the effectiveness of monetary policy. Numerous observers assert that CBDCs could provide certain benefits. For example, some proponents extend the arguments related to cryptocurrencies providing efficiency gains over traditional legacy systems to CBCDs; they contend that central banks could use the technologies underlying cryptocurrencies to deploy a faster, less costly government-supported payment system. Observers have speculated that a CBDC could take the form of a central bank allowing individuals to hold accounts directly at the central bank. Advocates argue that a CBDC created in this way could increase systemic stability by imposing additional discipline on commercial banks. Because consumers would have the alternative of safe deposits made directly with the central bank, commercial banks would likely have to offer interest rates and security at a level necessary to attract deposits above any deposit insurance limit. One of the main arguments against CBDCs made by critics, including various central bank officials, is that there is no ""compelling demonstrated need"" for such a currency, as central banks and private banks already operate trusted electronic payment systems that generally offer fast, easy, and inexpensive transfers of value. These opponents argue that a CBDC in the form of individual direct accounts at the central bank would reduce bank lending or inappropriately expand central banks' role in lending. A portion of consumers likely would shift their deposits away from private banks toward central bank digital money, which would be a safe, government-backed liquid asset. Deprived of this funding, private banks likely would have to reduce their lending, leaving central banks to decide whether or how they should support lending markets to avoid a reduction in credit availability. In addition, skeptics of CBDCs object to the assertion that these currencies would increase systemic stability, arguing that CBDCs would create a less stable system because they would facilitate runs on private banks. These critics argue that at the first signs of distress at an individual institution or the bank industry, depositors would transfer their funds to this alternative liquid, government-backed asset. Observers also disagree over whether CBDCs would have a desirable effect on central banks' ability to carry out monetary policy. Proponents argue that, if individuals held a CBDC on which the central bank set interest rates, the central bank could directly transmit a policy rate to the macroeconomy, rather than achieving transmission through the rates the central bank charged banks and the indirect influence of rates in particular markets. In addition, if holding cash (which in effect has a 0% interest rate) were not an option for consumers, central banks potentially would be less constrained by the zero lower bound . The zero lower bound is the idea that the ability of individuals and businesses to hold cash and thus avoid negative interest rates limits central banks' ability to transmit negative interest rates to the economy. Critics argue that taking on such a direct and influential role in private financial markets is an inappropriately expansive role for a central bank. They assert that if CBDCs were to displace cash and private bank deposits, central banks would have to increase asset holdings, support lending markets, and otherwise provide a number of credit intermediation activities that private institutions currently perform in response to market conditions. The future role and value of cryptocurrencies remain highly uncertain, due mainly to unanswered questions about these currencies' ability to effectively and efficiently serve the functions of money and displace existing money and payment systems. Proponents of the technology assert cryptocurrencies will become a widely used payment method and provide increased economic efficiency, privacy, and independence from centralized institutions and authorities. Skeptics—citing technological challenges and obstacles to widespread adoption—assert cryptocurrencies do not effectively perform the functions of money and will not be a valuable, widely used form of money in the future. As technological advancements and economic conditions play out, policymakers likely will be faced with various issues related to cryptocurrency, including concerns about its alleged facilitation of crime, the adequacy of consumer protections for those engaged in cryptocurrency transactions, the level of appropriate regulation of the industry, and cryptocurrency's potential effect on monetary policy. ","Cryptocurrencies are digital money in electronic payment systems that generally do not require government backing or the involvement of an intermediary, such as a bank. Instead, users of the system validate payments using certain protocols. Since the 2008 invention of the first cryptocurrency, Bitcoin, cryptocurrencies have proliferated. In recent years, they experienced a rapid increase and subsequent decrease in value. One estimate found that, as of August 2018, there were nearly 1,900 different cryptocurrencies worth about $220 billion. Given this rapid growth and volatility, cryptocurrencies have drawn the attention of the public and policymakers. A particularly notable feature of cryptocurrencies is their potential to act as an alternative form of money. Historically, money has either had intrinsic value or derived value from government decree. Using money electronically generally has involved using the private ledgers and systems of at least one trusted intermediary. Cryptocurrencies, by contrast, generally employ user agreement, a network of users, and cryptographic protocols to achieve valid transfers of value. Cryptocurrency users typically use a pseudonymous address to identify each other and a passcode or private key to make changes to a public ledger in order to transfer value between accounts. Other computers in the network validate these transfers. Through this use of blockchain technology, cryptocurrency systems protect their public ledgers of accounts against manipulation, so that users can only send cryptocurrency to which they have access, thus allowing users to make valid transfers without a centralized, trusted intermediary. Money serves three interrelated economic functions: it is a medium of exchange, a unit of account, and a store of value. How well cryptocurrencies can serve those functions relative to existing money and payment systems likely will play a large part in determining cryptocurrencies' future value and importance. Proponents of the technology argue cryptocurrency can effectively serve those functions and will be widely adopted. They contend that a decentralized system using cryptocurrencies ultimately will be more efficient and secure than existing monetary and payment systems. Skeptics doubt that cryptocurrencies can effectively act as money and achieve widespread use. They note various obstacles to extensive adoption of cryptocurrencies, including economic (e.g., existing trust in traditional systems and volatile cryptocurrency value), technological (e.g., scalability), and usability obstacles (e.g., access to equipment necessary to participate). In addition, skeptics assert that cryptocurrencies are currently overvalued and under-regulated. The invention and proliferation of cryptocurrencies present numerous risks and related policy issues. Cryptocurrencies, because they are pseudonymous and decentralized, could facilitate money laundering and other crimes, raising the issue of whether existing regulations appropriately guard against this possibility. Many consumers may lack familiarity with cryptocurrencies and how they work and derive value. In addition, although cryptocurrency ledgers appear safe from manipulation, individuals and exchanges have been hacked or targeted in scams involving cryptocurrencies. Accordingly, critics of cryptocurrencies have raised concerns that existing laws and regulations do not adequately protect consumers dealing in cryptocurrencies. At the same time, proponents of cryptocurrencies warn against over-regulating what they argue is a technology that will yield large benefits. Finally, if cryptocurrency becomes a widely used form of money, it could affect the ability of the Federal Reserve and other central banks to implement and transmit monetary policy, leading some observers to argue that central banks should develop their own digital currencies (as opposed to a cryptocurrency); others oppose this idea. The 115th Congress has shown significant interest in these and other issues relating to cryptocurrencies. For example, the House passed several bills (H.R. 2433, H.R. 5036, and H.R. 6069, and H.R. 6411) aimed at better understanding or regulating cryptocurrencies. The 116th Congress—and beyond—may continue to consider the numerous policy issues raised by the increasing use of cryptocurrencies.",govreport
"Chapter 11 of the U.S. Bankruptcy Code is used by financially troubled business debtors that want to reorganize their financial affairs so that they may remain in business rather than liquidate. Although a trustee is appointed in chapter 7 liquidations, in a business reorganization under chapter 11, the debtor generally remains in possession and no trustee is appointed, thus allowing those most familiar with the business to continue managing it. The Bankruptcy Code generally provides debtors the opportunity to either assume or reject executory contracts in existence at the time the bankruptcy petition is filed. One sort of executory contract, collective bargaining agreements (CBAs), is treated somewhat differently. Although rejection of any executory contract is subject to the approval of the court, for most contracts, the business judgment rule applies and courts generally approve rejections that the debtor deems to be in its business interest. Rejection of CBAs must meet a higher standard. Section 1113 of the Bankruptcy Code provides the procedures that must be followed to reject a CBA. Recently introduced legislation would modify several sections of the Bankruptcy Code, including § 1113. H.R. 3652 and its companion bill, S. 2092 , were introduced by Representative Conyers and Senator Kennedy and are entitled the ""Protecting Employees and Retirees in Business Bankruptcies Act of 2007."" In this report, the two bills will be referred to as either H.R. 3652 or ""the bill."" This report's analysis of the bill will be limited to the modifications it proposes for § 1113 of the Bankruptcy Code. These modifications are found in § 8 of the bill. In its findings section, the bill asserts that despite recently enacted provisions to limit executive compensation, executive pay enhancements flourish in business bankruptcies at the expense of workers and retirees. According to the bill, workers and retirees are being disproportionately burdened in business bankruptcies. These workers and retirees have no way to diversify the risk of an employer's bankruptcy and are least able to absorb the losses imposed. H.R. 3652 urges ""[c]omprehensive reform ... to remedy these fundamental inequities in the bankruptcy process and to recognize the unique firm-specific investment by employees and retirees in their employers' business through their labor."" In 1984, the Bankruptcy Code was amended to add 11 U.S.C. § 1113, which outlines the requirements that must be met before a court can approve rejection of a collective bargaining agreement (CBA) by a debtor company using chapter 11 to reorganize. The section applies only to chapter 11 bankruptcies. Although there are no committee reports to explain the reason for adding 11 U.S.C. § 1113, its addition followed the U.S. Supreme Court's holding in National Labor Relations Board v. Bildisco and Bildisco . It is generally believed that Congress added the section in response to Bildisco . Bildisco was decided in February 1984, resolving a split between the circuits regarding the standard for rejection of a CBA. The Court held that rejection required that the agreement be burdensome to the debtor company and that rejection was favored after balancing the equities of the specific case. The Court also held that the debtor in possession did not automatically assume the CBA post-petition and would not violate § 8(a)(5) of the National Labor Relations Act (NLRA) if it unilaterally changed the terms of a CBA prior to the bankruptcy court's approval of rejection of that agreement. By adding § 1113, Congress provided both a procedure and a standard for rejection of CBAs and clarified that they could not be rejected under 11 U.S.C. § 365 as are other executory contracts. Furthermore, unilateral changes to the CBA were addressed and generally prohibited. H.R. 3652 proposes a number of changes to existing subsections of 11 U.S.C. § 1113 as well as adding six new subsections. As written, the bill would entirely replace the text of the first three subsections; however, the actual change to the text of the first subsection is minimal. At first glance, the bill appears to make dramatic changes in the Bankruptcy Code, but in some cases, the bill's language may be clarifying the Code rather than substantively changing it. In other cases, the language in the bill may be intended to either legislate resolution of some point of law that has been disputed in the courts or legislatively overrule existing case law. However, since there are no committee reports as yet, CRS cannot discern with certainty the sponsors' intent in proposing the changes. The proposed changes will be discussed in order, subsection by subsection, with accompanying discussion about the current state of the law, including ambiguities in the current code, various courts' interpretations, and scholarly writings about 11 U.S.C. § 1113. All headings referencing a subsection of 11 U.S.C. § 1113 refer to the subsections as proposed by this bill. Although the language of H.R. 3652 indicates that subsection (a) is deleted entirely, there is only one difference between the current text and the proposed text—that is the removal of the words ""assume or."" As currently written, 11 U.S.C. § 1113(a) states that a debtor ""may assume or reject a collective bargaining agreement only in accordance with the provisions of this section."" However, that is the only time that assumption of CBAs is referred to in the entire section. Courts generally have found that 11 U.S.C. § 365 governs the assumption of CBAs, but removing ""assume"" from the language of 11 U.S.C. § 1113(a), would seem to make it clear from the statute that nothing in 11 U.S.C. § 1113 applies to assumptions of CBAs. Note, however, although it would remove ""assume"" from this subsection, the bill would add a later subsection stating that assumptions of CBAs are in accordance with 11 U.S.C. § 365, which addresses executory contracts generally. H.R. 3652 would limit the modifications to the existing CBA that can be proposed by the debtor. The current law provides general guidance about the type of proposal that should be made: a proposal should provide the modifications in benefits and protections that are necessary for reorganization and assure fair treatment to ""all creditors, the debtor, and all of the affected parties."" In contrast, the bill would limit proposals to those that would (1) limit the effect of the labor group's financial concessions to no more than two years after the effective date of the plan; (2) be the minimum savings the debtor needs to successfully reorganize; and (3) not put too great a burden on the labor group, either in amount or nature of the concession, in comparison to burdens placed on other groups, ""including management personnel."" Current law puts no time limit on the duration of the effects a debtor's proposed modifications to a CBA may have on the relevant affected labor group. Although an authorized representative always has the option of rejecting a debtor's proposal, a court will not necessarily find that the debtor's proposal was not fair and equitable to all affected parties even if its effects on the labor group are long-lasting. If the court finds the proposal fair and equitable, it may grant rejection of the CBA. H.R. 3652 would prohibit court approval of rejection unless the debtor's proposals for modification were in compliance with the proposed limitations. Therefore, limiting the debtor to proposals affecting the labor group for no more than two years would assure labor groups that they would not be confronted with situations in which a CBA's rejection was approved by the court after the labor group had rejected a debtor's proposal for lengthy concessions. If such lengthy concessions were proposed, the court would not be allowed to approve rejection because the debtor's proposal would not be in compliance with the requirements of (proposed) 11 U.S.C. § 1113(b)(1)(A). However, limiting the duration of modifications to a CBA may limit the debtor's ability to successfully reorganize. Modifications that can, in just two years, provide sufficient economic relief for the company's survival may necessarily require economic concessions from employees that are too burdensome to be acceptable because the effect on paychecks is too great. Conversely, modifications that last no more than two years but also have a smaller effect on paychecks may not provide sufficient economic relief to allow the debtor company to survive, effectively forcing the company into liquidation. The bill's second requirement for debtors' proposals is that they must ""be no more than the minimal savings necessary to permit the debtor to exit bankruptcy such that confirmation of such plan is not likely to be followed by the liquidation of the debtor."" It is questionable whether this will do anything to clarify existing law, under which there have been conflicts over the meaning of ""necessary"" in the current requirement that the debtor make a proposal that ""provides for those necessary modifications in the employees benefits and protections that are necessary to permit . . . reorganization."" Some courts have held that necessary means the minimum needed to avoid immediate liquidation; other courts have found that ""necessary"" is a more lenient standard than ""essential,"" and have looked at whether the modifications will ensure the debtor's ability to survive reorganization. By including the phrase ""such that confirmation of the plan is not likely to be followed by the liquidation of the debtor,"" it seems that the bill is intended to use the more lenient standard. However, the use of ""no more than the minimal savings"" could cause a court to use a stricter standard. If the bill's language were strictly interpreted to mean that the debtor may propose no more than the absolute minimum savings, the debtor might be in a virtually untenable position. One court, in construing the current law's requirement that modifications be ""necessary"" to allow reorganization, noted that in the context of this statute ""necessary"" must be read as a term of lesser degree than ""essential."" To find otherwise, would be to render the subsequent requirement of good faith negotiation, which the statute requires must take place after the making of the original proposal and prior to the date of the hearing, meaningless, since the debtor would thereby be subject to a finding that any substantial lessening of the demands made in the original proposal proves that the original proposal's modifications were not ""necessary."" If the proposed requirement that proposed modifications would produce no more than the minimal savings required were taken literally, debtors would be similarly constrained. The third limitation on proposals looks only at the burdens that are placed on the groups with whom the debtor is expected to have continuing relationships, rather than looking at whether all are being treated ""fairly and equitably"" as required by current law. The proposed change would also specify management personnel as one of the groups to be considered in determining whether the labor group is being overly burdened. Throughout the history of 11 U.S.C. § 1113, courts have considered management personnel when considering whether a debtor's proposal treated all parties fairly and equitably. However, they have looked at the whole picture rather than simply comparing burdens. For example, a proposal to reduce wages for union employees was considered fair and equitable even though some management employees received an increase in pay. The court's rationale was that it was fair to increase the pay of supervisors who had been earning less than those they were supervising. The language for proposed 11 U.S.C. § 1113(b)(1)(C) could be construed to require those cuts in wages and benefits for employees must be matched by similar cuts for management employees. Whether that similarity would be construed to require dollar-for-dollar parity or percentage-based parity is unknown. Current law requires three conditions be met before a court can grant a motion to reject a CBA: (1) The debtor must meet the requirements of 11 U.S.C. § 1113(b)(1) by (a) presenting a proposal that both treats all parties equitably and proposes changes necessary for reorganization, and (b) providing the representative with information needed to evaluate the proposal; (2) The representative must have refused to accept the debtor's proposal without good cause; and (3) ""[T]he balance of equities [must] clearly favor[] rejection."" H.R. 3652 's proposed subsection (c) would have three main prongs as does the current subsection, but most of its similarity ends there. Current law has three fairly simple subparagraphs, each of which involves some discretionary judgment regarding facts and circumstances. The subparagraphs in proposed subsection (c) are complex and one provides a presumption that would bar rejection of a CBA if not effectively rebutted. Current practices among companies in bankruptcy may have triggered a perceived need for this provision. It appears that other provisions of this subsection may be in part a response to recent court decisions, but may be responding to Bildisco as well. Impasse . One of the changes in the process required for a court to approve rejection of a CBA is a new requirement that the parties have reached an impasse. The Bildisco Court specifically stated that approving a debtor's request for rejection should not require the courts to determine that negotiations had reached an impasse. Although 11 U.S.C. § 1113 was introduced in response to concern over the Bildisco decision, neither the word ""impasse"" nor the concept appears in the current section 1113. In proposed 11 U.S.C. § 1113(c)(1) the word appears twice and it appears a third time as a concept. CRS is uncertain if including ""impasse"" in H.R. 3652 is an attempt to resolve a long-standing issue or a response to current court decisions involving the airline industry. As noted below, courts have recently enjoined strikes that were threatened in response to rejection of CBAs. The Railroad Labor Act (RLA), unlike the National Labor Relations Act (NLRA), requires parties to ""exert every reasonable effort to make ... [an] agreement."" According to recent court decisions, labor groups governed by the RLA continue to be bound by this obligation even after a court has approved rejection of a CBA under 11 U.S.C. § 1113. These courts interpreted the RLA as requiring labor groups to continue collective bargaining until there is no possibility that the parties can agree. At that point, most would agree that the parties have reached an impasse. If the changes to § 1113(c)(1) are adopted, courts may need to determine if impasse is reached at some earlier point. CRS is uncertain how courts would construe the requirement that the parties be at ""impasse."" Since the proposed bill includes the phrase ""further negotiations are not likely to produce a mutually satisfactory agreement,"" courts may use a ""more likely than not"" standard. If, however, the courts construed ""impasse"" as equivalent to the recent court interpretations of the RLA standard, requiring an impasse as a prerequisite to rejection could effectively eliminate most rejections—possibly through attrition since bargaining may well continue for a considerable period of time before a court would consider the parties at an impasse. If the company were to delay filing for bankruptcy and try to negotiate modifications to the CBA, parties who had not been able to reach a mutually satisfactory agreement might be considered to be at impasse when the bankruptcy case commences. However, whether the bargaining takes place before or after the bankruptcy filing, if it takes place over an extended period of time, a company might be forced to liquidate rather than reorganize. Those opposing this provision are likely to argue this would defeat the purpose of chapter 11 and, by not preserving jobs, would not protect workers. Those in favor of this provision are likely to argue that it encourages the parties to negotiate modifications each can accept, allowing the company to then continue with its workforce in place under a revised CBA. 11 U.S.C. § 1113(c)(1)(A) . In addition to finding that the parties are at an impasse, this subparagraph requires that, before approving a request for rejection, the court find that the debtor has fulfilled the requirements regarding proposing modifications. This is similar to current law, which also requires the debtor to have fulfilled the requirements of current subsection (b)(1), except that the requirements that must be met are different. The proposed change mirrors current law in requiring that the debtor provide appropriate information to the representative and bargain in good faith. 11 U.S.C. § 1113(c)(1)(B) . Under the bill, before approving rejection, the court must also ""consider[] alternative proposals by the authorized representative and determine[] that such proposals do not meet the requirements of subparagraphs (A) and (B) of subsection (b)(1)."" There is some ambiguity in this wording. Is the court to evaluate the representative's proposals as possible alternatives to the current CBA that the court might be able to impose on both the debtor and the labor group in lieu of outright rejection? On the other hand, could it mean that the court is simply to look at the representatives' proposals to determine whether they all meet the requirements of the subparagraphs? If they do, is the court then powerless to change the status quo of the CBA? There is nothing in the bill that explicitly gives the court the discretion to evaluate the representative's counterproposals and substitute one for the existing CBA. However, nothing in the current 11 U.S.C. § 1113(c) gives courts the power to impose the debtor's last proposal on both the debtor and the labor group after the court has approved rejection, yet courts have exercised that power. Inconsistencies between courts in applying the current law appear to be part of the impetus behind H.R. 3652 . Allowing the courts more discretion might increase those inconsistencies and lead to more ""forum shopping"" in bankruptcy filings. Courts might construe proposed subsection (c)(1) as simply providing prerequisites that must be met before a CBA can be rejected. In this case, proposed subparagraphs (A) and (B) might act as a constraint on negotiations by the representative. Since liquidation of the company normally would involve loss of jobs, it may be in the labor group's interest to make concessions if the debtor cannot reorganize without those concessions. However, as noted earlier, at times the burden on employees would be too great if the required economic relief provided to the employer were concentrated in a period of two years. To lessen the immediate impact on employees' paychecks, a representative might want to spread the effect of the financial concessions over three years rather than two. However, a representative might be reluctant to offer such a proposal if making it would open the door for court-approval of rejection. This might create a built-in conflict between the labor group's interest in avoiding rejection of the CBA and its interest in preserving jobs by making sufficient concessions to the debtor to assure successful reorganization. Current law does not require the court to look at the representative's counterproposals, but only at whether the representative had good cause for rejecting the debtor's proposals. Under current law, rejection has generally been the ""stick"" that was applied when representatives could not come to an agreement with debtors and did not have good cause for refusing to agree. The effect was to encourage negotiations, which is what section 1113 was intended to do. It is unclear whether the proposed provisions would encourage both parties to negotiate. It is possible that the provisions could create an imbalance in the two parties' motivation to negotiate, but at this point, we do not know which party might be more motivated by the proposed provisions. 11 U.S.C. § 1113(c)(1)(C) . This simply reiterates the impasse requirement by specifying that the court may only approve rejection if it finds that ""further negotiations are not likely to produce a mutually satisfactory agreement."" As noted earlier, courts may construe this as requiring less certainty as to the futility of further negotiations than exists under the RLA's requirement for continued bargaining. Under current law, the bankruptcy courts do not evaluate the prospects for an eventual agreement between the parties. 11 U.S.C. § 1113(c)(1)(D) . This provision requires the court to consider how the labor group would be affected by the debtor's proposal, but it seems to presume that the labor group will strike if the CBA is rejected. It requires the court to consider the effect of such a strike, including the debtor company's ability to ""retain an experienced and qualified workforce."" Reorganization in bankruptcy is based on the concept that it is better for all concerned if a company can continue in business rather than liquidate. If the result of rejection of a CBA is a strike that would effectively put the company out of business, the court may decide not to allow a rejection. If, however, the debtor company is not in a position to remain in business under the terms of the existing CBA, the company may be forced to liquidate rather than reorganize. This alternative might leave all creditors, including the labor group, in worse shape than they would have been had the company reorganized. This subsection provides parameters for the court's consideration of whether the debtor's proposed modifications meet the requirements of subsection (b). The court must consider the impact on all subsidiaries and affiliates of the debtor company, including foreign subsidiaries and affiliates, but what this means in practice is unclear. The court is also required to examine the history of financial concessions made by the labor group. If any have been made within twenty-four months prior to the filing of the bankruptcy petition, the court's evaluation of the debtor's proposed modifications must aggregate the effect of the earlier concession with the effect of the currently proposed modifications. This aggregation is unlikely to affect whether the proposed modifications meet the requirements of proposed 11 U.S.C. 1113(b)(1)(A)-(B), but is likely to affect evaluation of the burden imposed on the labor group as compared to other groups. Under current law, in considering whether to approve rejection, the court has discretion in concluding that the required conditions have been met. While H.R. 3652 does not remove all of the court's discretion, in one area the bill appears to significantly restrict the court's discretion. H.R. 3652 would establish a presumption that the debtor has overly burdened the labor group in comparison to the burdens on other groups, including management, if it ""has implemented a program of incentive pay, bonuses, or other financial returns for insiders or senior management personnel during the bankruptcy, or . . . within 180 days"" before the case began. Unless that presumption can be effectively rebutted, the debtor will have failed to meet the requirements for rejection. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) restricted ""key employee retention plans"" (KERPS), which provided retention bonuses and severance pay to management employees who were retained to manage the business through its reorganization. Since BAPCPA became effective, there has been a move toward paying managers incentive payments, which were not restricted. Though some of these incentive pay schemes have been rejected by the courts as actually being retention bonuses that did not meet BAPCPA's requirements, others have been upheld as incentive bonuses and, therefore, not subject to the restrictions imposed by the post-BAPCPA Bankruptcy Code restrictions. In 2006, both the Senate and the House introduced bills that would have limited the use of incentive bonuses in the same way that BAPCPA had limited retention pay. Though the bills were not passed by the 109 th Congress, their provisions are included in H.R. 3652 . This bill would extend BAPCPA restrictions on retention pay to incentive and performance bonuses as well as ""bonus[es] of any kind, or other financial returns designed to replace or enhance incentive, stock, or other compensation in effect"" before the bankruptcy petition was filed. These restrictions are bolstered by the bill's proposed amendment to 11 U.S.C. § 1113(c)(3). This proposed amendment could make it difficult for the court to approve rejection of a CBA if there were any sort of incentive pay, even if the court had approved the incentive pay after finding that it was necessary to retain a person whose services were essential for the business to continue, and met the other restrictions of 11 U.S.C. § 503(c)(1). Arguably, this could put a court in the position of having little flexibility to make decisions that could result in the debtor company's successful reorganization—if it allowed incentive pay to retain someone essential to the business, it could be unable to approve rejection of a CBA if the debtor could not rebut the presumption that the labor group was being burdened more than management. If it did not allow incentive payments, the company might lose an employee who was seen as necessary for survival. Either alternative might cause the debtor to liquidate rather than reorganize. However, it could also be argued that this provision would encourage debtors to carefully consider whether incentive pay was necessary and, if necessary, limit it so that an effective argument could be made that the incentive did not create a situation in which the labor group was disproportionately burdened by the modifications in a CBA. Under current law, the court is required to schedule a hearing within fourteen days after the debtor files an application for rejection. All interested parties currently have the right to attend the hearing and be heard and must receive notice at least ten days before the hearing. The court must rule on the application within thirty days unless otherwise agreed to by the debtor and representative. If the court does not rule within the required time, the debtor may unilaterally modify or terminate the CBA pending the court's ruling. H.R. 3652 would extend the period required for notice to at least twenty-one days. The bill deletes, rather than modifies, the provision for holding the hearing within fourteen days of the filing date. The deletion may have been unintentional—the intent may have been to set the same time frame for notice as for hearing. On the other hand, the deletion may have been intended to avoid requiring an early hearing on an application for rejection, permitting additional time for continuing negotiation between the debtor and the authorized representative. The bill would restrict the parties who could appear and be heard, limiting them to only the debtor and the authorized representative. This may have the effect of streamlining the hearing process by eliminating consideration of other parties' concerns. Under both current and proposed law, the creditors would have an opportunity to approve or reject the reorganization plan, which would incorporate the results of the rejection hearing. Under the bill's proposals, there would be no time frame within which the court would be required to rule and no provision allowing the debtor to unilaterally modify a CBA while a ruling was pending. This appears to encourage continuing negotiations between the debtor and the authorized representative without a statutory deadline. The bill proposes no changes to this section—while parties continue to negotiate changes to a CBA, courts would continue to be allowed to approve interim modifications to a CBA ""if essential to the continuation of the debtor's business, or in order to avoid irreparable damage to the estate."" However, the addition of subsection (g) as proposed in the bill, allowing labor groups to strike or engage in other methods of ""self-help"" in response to court-ordered modifications under this subsection, may tend to reduce either the extent to which courts are willing to approve interim modifications or the potential benefit to the debtor of an interim modification. If so, it could lead to liquidations rather than reorganizations when interim modifications are essential for the company to remain in business. H.R. 3652 would not change the current language, but would add a provision regarding allowed administrative claims. Under the bill's proposal, all payments required under 11 U.S.C. § 1113 on or before the date of confirmation of the reorganization plan would be considered allowed administrative claims. That would mean that the plan would be required to provide for full payment of the claims. Currently there is no statute addressing whether court-approved rejection of a CBA gives rise to a claim for damages and courts have been divided on the subject. The bill would add a subsection that would define rejection of a CBA as a breach and would address the effect of rejection of a CBA, in terms of both money damages and ""self-help""—the right of affected employees to strike. This is one of the subsections where the use of a particular word may have import that is not immediately obvious. In general, rejection of executory contracts has been treated as a breach. However, recently, in Northwest Airlines Corporation v. Association of Flight Attendants , rejection of a CBA was characterized not as a breach but as an abrogation. As the court viewed it, an abrogation has a different legal effect than does a breach. While a breach would have a remedy, an abrogation under 11 U.S.C. § 1113 terminates the provisions of the CBA and allows substitution of court-approved provisions. It is possible that the word breach is used in this proposed subsection merely to identify the rationale for the prescribed remedy. On the other hand, it is possible that the word was used to legislate an effect of rejection that is different than that determined by the Northwest Airlines court. In evaluating which is more likely to be the case, one should consider that the court specifically contrasted the effect of rejection under 11 U.S.C. § 365 with that under 11 U.S.C. § 1113, stating, ""Contract rejection under § 1113, unlike contract rejection under § 365, permits more than non-performance."" According to the court, the purpose of 11 U.S.C. § 1113 is ""to permit CBA rejection in favor of alternate terms without fear of liability after a final negotiation before, and authorization from, a bankruptcy court."" This seems to imply that the Northwest Airlines court's position is not only that rejection is an abrogation rather than a breach, but also that there are no damages to be recovered from rejection of a CBA under 11 U.S.C.§ 1113. Under the bill, court-approved rejection would be a breach of contract with the same effect as rejection of any other executory contract under 11 U.S.C. § 365(g), but would exclude those damages from the limitations of 11 U.S.C. § 502(b)(7). Under 11 U.S.C. § 365(g), rejection of a contract is treated as a breach of contract immediately before the date the bankruptcy petition was filed. Section 502(b)(7) limits damages for termination of an employment contract to one year's compensation, without acceleration, plus any unpaid compensation. Although H.R. 3652 specifically excludes damages for rejected CBAs from the damage limitation of 11 U.S.C. § 501(b)(7), the explicit exclusion may not be necessary since courts have held that the subsection does not apply to CBAs. Section 365(g) of the Bankruptcy Code sets the date of the breach as just before the filing of the petition, which would make such claims pre-petition claims. Pre-petition claims are generally unsecured, nonpriority claims. However, this bill proposes to define administrative expenses, which are priority claims, as including all payments required under 11 U.S.C. § 1113 that must be paid on or before the date the reorganization plan is confirmed. Proposed subsection (g) does not actually mandate payment of the breach damages before the confirmation date, so it is unclear whether those damages are intended to be treated as an administrative expense and, therefore, a priority claim rather than as a pre-petition, nonpriority claim. If given the status of an administrative claim, it is difficult to foresee a situation in which a company could benefit from rejection of a CBA since it would appear likely that any financial gain garnered by rejecting the CBA would be lost through the breach damages for rejections. If those damages are treated as are other breach damages for rejection of executory contracts, they would be unsecured, nonpriority, pre-petition claims, and the reorganization plan could provide for partial rather than full payment of them, thereby allowing some economic benefit to the company in bankruptcy. Self-help by a labor group may consist of a strike or a threat of strike even though a strike could be an economic blow that a distressed company might arguably be unable to recover from. When a CBA is rejected in chapter 11 reorganization under the current provisions of 11 U.S.C. § 1113(c), labor groups' right to strike seems to depend upon whether the group is covered by the RLA or the NLRA. Groups covered by the NLRA may strike even if the rejected CBA contained a ""no strike"" clause. Since the CBA no longer exists after rejection, the ""no strike"" clause has no continuing effect. Airline transportation workers, however, are covered by the RLA, which requires that the parties exert every reasonable effort to negotiate agreements even after a court-approved rejection. Therefore, several recent cases involving the airlines have resulted in injunctions prohibiting the unions from striking. Modifications to CBAs under current 11 U.S.C. § 1113(d)(2) or (e) do not make the CBA ineffective in its entirety. Therefore, although a ""no strike"" clause would become ineffective after rejection of a CBA, it would remain in effect under current law when there are interim modifications to a CBA. H.R. 3652 would change the law so that all labor groups, even those controlled by the RLA would have the right to strike when a CBA was rejected. The right to strike would also exist if interim modifications were approved by a court—apparently without reference to whether the CBA included a ""no strike"" clause. Since a strike might be a fatal economic blow to a distressed company and since interim modifications are approved by the court only when they are either ""essential to the debtor's business []or . . . to avoid irreparable harm to the estate,"" codifying the right to strike after court-approved interim modifications might jeopardize both the debtor company's existence and its creditors' claims. The proposed subsection would, by its language, also preempt all other federal and state laws regarding labor groups' right to engage in self-help. Under current law, there is no provision for future modifications of a CBA if the debtor's financial condition improves. In negotiations over CBAs, representatives may ask for ""snap-back"" provisions that would provide for future modifications, but the absence of such a provision would not necessarily lead to a court's determination that the representative had good cause for rejecting the debtor's proposal. H.R. 3652 would add a subsection to assure that, based on changed circumstances, representatives could request modifications after CBAs were either rejected or modified. The bill would require the court to grant the request if the change would result in the new provisions being no more than the minimum savings needed for the debtor to reorganize successfully. Assurance of the possibility of future favorable modifications might make representatives more inclined to cooperate with debtors' proposals for modifications. However, under current law, while ""snap-back"" provisions have been available for modifications, they have not been required as part of either a negotiated modification or a court-approved rejection. Currently there is no provision for arbitration rather than a court hearing to rule on a motion for rejection of a CBA. H.R. 3652 would add a subsection to allow arbitration in lieu of a court hearing if requested by the authorized representative, so long as the court finds that arbitration would help the parties reach an agreement that was mutually satisfying. This could reduce the demand for courts' resources; however, only the authorized representative can make the request. The debtor cannot make the request, and the court cannot order arbitration without a request. Using arbitration to resolve a debtor's request to reject a CBA may open greater possibilities for finding a middle ground between complete rejection of a CBA and assumption of the existing CBA. It may also, however, increase the time required to resolve the issue. Under current law, unless otherwise agreed to by the debtor and representative, the court is required to hold hearings on requests for approval of rejection within no more than twenty-one days and to rule on the application no later than thirty days after the beginning of the hearing. As noted earlier, the proposed changes to § 1113 eliminate both of these deadlines. The bill does not directly address which party will pay for arbitration. It appears, however, that if all of the bill's provisions were to become law, the debtor would probably pay for the arbitration as an administrative expense since subsection (j) provides for reimbursing the representative for reasonable costs and fees incurred. Although current law includes provisions for allowing priority claims as administrative expenses for various expenses incurred in reorganization, there is no provision for reimbursing the authorized representative for fees and costs incurred in complying with the requirements of 11 U.S.C. § 1113. The bill would add subsection (j) to make these costs reimbursable upon request and notice and hearing. Under the bill's proposed changes, they would be considered administrative expenses. As administrative expenses, they would be priority claims whose payment in full must be provided for in the plan for reorganization. This provision could result in shorter negotiations or more flexible proposals by the debtor, who would need to balance the cost of continued negotiations with the economic benefit that might be gained through those negotiations. However, it could also lead to more liquidations if administrative expenses increased to the point that they could not be accommodated in a reorganization plan. When a debtor's reorganization plan involves either selling all or part of the business or ceasing some or all of the business, the bill would require the debtor and authorized representative to meet to determine the effects on the labor group. Any accrued obligations that were not assumed as part of a sale transaction would be treated as administrative expenses. Under current law, all post-petition obligations that are required by the CBA are considered administrative expenses. Additionally, where a CBA has been assumed, accrued pre-petition obligations under the CBA may also be administrative expenses. Although the bill would remove the word ""assume"" from 11 U.S.C. § 1113(a), it would add a subsection that would clearly state that assumption of CBAs are treated as are other executory contracts and assumed under 11 U.S.C. § 365. In its findings, the bill states that Congress finds that chapter 11 was enacted ""to protect jobs and enhance enterprise value for all stakeholders,"" but is, instead, being used to ""caus[e] the burdens of bankruptcy to fall disproportionately and overwhelmingly on employees and retirees."" Revising the process for rejection of CBAs is one of the ways this bill proposes to rectify the inequities it asserts. For many companies in bankruptcy, expense for employees is the largest expense in the budget, and some modification of that expense may be essential to their successful reorganization. Section 1113, as it currently exists, has provided labor groups with protection from debtor companies' unfettered rejections of CBAs, but has also provided a method for debtor companies to reject CBAs when they could not reach a compromise with the authorized representatives of the labor groups. The proposed revisions to section 1113 would constrain both debtor companies and the courts when debtors file under chapter 11. The bill clearly contemplates allowing labor groups to have a greater, possibly definitive, role in determining the feasibility of reorganization. Labor groups, but not debtors, would be allowed to request arbitration rather than a court hearing to determine approval of a debtor's request to reject a CBA. In certain circumstances, the bill would allow labor groups to obtain future relief due to changed circumstances without having to bargain with the company. The bill would also extend the right to strike to all labor groups whenever a CBA was modified or rejected without their consent. Finally, the bill provides labor groups with a defined remedy for rejection of a CBA, though courts might differ in their interpretation of that remedy. Companies in financial distress may argue that the bill's proposed changes to chapter 11 are insufficiently flexible to allow successful reorganization. If that is their conclusion, they might try to resolve their financial difficulties outside of bankruptcy or choose to liquidate rather than reorganize.","Introduced in the 110 th Congress, the Protecting Employees and Retirees in Business Bankruptcies Act of 2007 ( H.R. 3652 ) proposes a number of changes to the U.S. Bankruptcy Code. According to the sponsors, the changes are needed to remedy inequities in the bankruptcy process and to recognize that employees and retirees have a unique investment in their companies through their labor. The bill contains many proposals for changing the Bankruptcy Code. This report focuses on the amendments and additions to 11 U.S.C. § 1113, which provides the procedures that are to be followed if a debtor in possession wants to reject a collective bargaining agreement (CBA). The changes proposed for § 1113 may be intended to promote negotiation between the debtor and the authorized representatives of labor groups that have existing CBAs with the debtor company. They also appear to constrain court involvement in the process. This could lead to more agreed-upon modifications and fewer rejections of CBAs. Alternatively, it could prolong the negotiation process and put burdens on the debtor that would make liquidation more feasible than reorganization. The bill prescribes the parameters of offers that may be made by the debtor in negotiations as well as the requirements that must be met before a court can approve rejection. It attempts to curtail what the sponsors have referred to as ""excesses of executive pay"" by making rejection of a CBA difficult if executives are to receive incentive pay and by requiring consideration of past concessions by the labor group in determining whether the labor group is being disproportionately burdened by proposed modifications to a CBA. H.R. 3652 appears to propose changes to § 1113 that would resolve some differences between courts in interpreting the requirements for modification or rejection of a CBA. It also clearly states that rejection of a CBA is a breach of contract, even when approved by the court, and clarifies the damages that are available. The bill provides an absolute right of all employees to strike if their CBA is modified or rejected. This contrasts with recent court decisions involving unions representing employees of financially distressed airlines in which the employees were enjoined from striking.",govreport
"This report is part of a suite of reports tha t discuss appropriations for the Department of Homeland Security (DHS) for FY2016. It specifically discusses appropriations for the components of DHS included in the first title of the homeland security appropriations bill—the Office of the Secretary and Executive Management, the Office of the Under Secretary for Management, the DHS headquarters consolidation project, the Office of the Chief Financial Officer, the Office of the Chief Information Officer, Analysis and Operations, and the Office of Inspector General for the department. Collectively, Congress has labeled these components in recent years as ""Departmental Management and Operations."" The report provides an overview of the Administration's FY2016 request for Departmental Management and Operations, the appropriations proposed by Congress in response, and those enacted thus far. Rather than limiting the scope of its review to the first title, the report includes information on provisions throughout the proposed bills and reports that directly affect these functions. The suite of CRS reports on homeland security appropriations tracks legislative action and congressional issues related to DHS appropriations, with particular attention paid to discretionary funding amounts. The reports do not provide in-depth analysis of specific issues related to mandatory funding—such as retirement pay—nor do they systematically follow other legislation related to the authorization or amending of DHS programs, activities, or fee revenues. Discussion of appropriations legislation involves a variety of specialized budgetary concepts. The appendix to CRS Report R44053, Department of Homeland Security Appropriations: FY2016 , explains several of these concepts, including budget authority, obligations, outlays, discretionary and mandatory spending, offsetting collections, allocations, and adjustments to the discretionary spending caps under the Budget Control Act ( P.L. 112-25 ). A more complete discussion of those terms and the appropriations process in general can be found in CRS Report R42388, The Congressional Appropriations Process: An Introduction , by [author name scrubbed], and the Government Accountability Office's A Glossary of Terms Used in the Federal Budget Process . Except in summary discussions and when discussing total amounts for the bill as a whole, all amounts contained in the suite of CRS reports on homeland security appropriations represent budget authority and are rounded to the nearest million. However, for precision in percentages and totals, all calculations were performed using unrounded data. Data used in this report for FY2015 amounts are derived from the Department of Homeland Security Appropriations Act, 2015 ( P.L. 114-4 ) and the explanatory statement that accompanied H.R. 240 as printed in the Congressional Record of January 13, 2015, pp. H275-H322. Contextual information on the FY2016 request is generally from the Budget of the United States Government, Fiscal Year 2016 , the FY2016 DHS congressional budget justifications, and the FY2016 DHS Budget in Brief . However, most data used in CRS analyses in reports on DHS appropriations are drawn from congressional documentation to ensure consistent scoring whenever possible. Information on the FY2016 budget request and Senate-reported recommended funding levels is from S. 1619 and S.Rept. 114-68 . Information on the House-reported recommended funding levels is from H.R. 3128 and H.Rept. 114-215 . Information on FY2016 enacted appropriations is derived from P.L. 114-113 , the Omnibus Appropriations Act, 2016—Division F of which is the Homeland Security Appropriations Act, 2016—and the accompanying explanatory statement published in Books II and III of the Congressional Record for December 17, 2015. Generally, the homeland security appropriations bill includes all annual appropriations provided for DHS, allocating resources to every departmental component. Discretionary appropriations provide roughly two-thirds to three-fourths of the annual funding for DHS operations, depending how one accounts for disaster relief spending and funding for overseas contingency operations. The remainder of the budget is a mix of fee revenues, trust funds, and mandatory spending. Appropriations measures for DHS typically have been organized into five titles. The first four are thematic groupings of components: Departmental Management and Operations; Security, Enforcement, and Investigations; Protection, Preparedness, Response, and Recovery; and Research and Development, Training, and Services. A fifth title contains general provisions, the impact of which may reach across the entire department, impact multiple components, or focus on a single activity. The following pie chart presents a visual comparison of the share of annual appropriations requested for the components of each title, highlighting the title containing the components discussed in this report in purple. Departmental Management and Operations components made up about 3% of the discretionary appropriations requested for DHS for FY2016. As noted above, Title I of the DHS appropriations bill provides funding for the department's management activities, Analysis and Operations (A&O) account, and the Office of the Inspector General (OIG). Funding is also included in Title V, General Provisions, for some of these components. The Administration requested $1,396 million in total budgetary resources for these accounts in FY2016, an increase of $255 million (22.3%) above the FY2015 enacted level. The Senate-reported bill would have provided $1,346 million, a decrease of $73 million (5.2%) from the request and $182 million (16.0%) above FY2015. The House-reported bill would have provided $1,217 million, a decrease of $178 million (12.8%) from the request, but $76 million (6.7%) above FY2015. On December 18, 2015, the President signed into law P.L. 114-113 , the Consolidated Appropriations Act, 2016, Division F of which was the Department of Homeland Security Appropriations Act, 2016. The act included $1,546 million for Title I components in FY2016, $405 million (35.5%) more than was provided for FY2015, and $150 million (10.7%) more than was requested. Table 1 presents the enacted funding level for the individual components funded under Departmental Management and Operations for FY2015, as well as the amounts requested for these accounts for FY2016 by the Administration, recommended by the Senate and House appropriations committees, and provided by the enacted annual appropriation for FY2016. The table includes information on funding under Title I as well as other provisions in the bill. The departmental management accounts cover the general administrative expenses of DHS. They include the Office of the Secretary and Executive Management (OSEM), which is comprised of the Immediate Office of the Secretary and 11 entities that report directly to the Secretary; the Under Secretary for Management (USM) and its components—the offices of the Chief Readiness Support Officer (formerly, the Office of the Chief Administrative Officer [OCAO]), Chief Human Capital Officer (OCHCO), Chief Procurement Officer (OCPO), and Chief Security Officer (OCSO); the Office of the Chief Financial Officer (OCFO); and the Office of the Chief Information Officer (OCIO). The Administration has usually requested funding for the consolidation of its headquarters here as well, although this report treats that project separately, and does not include it in the totals in this section. The Administration requested $702 million for departmental management, plus $43 million for a crosscutting financial systems consolidation effort in a general provision. This total included $134 million ($1 million, or 0.7% above the FY2015 level) for OSEM and $193 million for USM ($5 million, or 2.6% above the FY2015 level). The Administration requested $97 million for OCFO, including the $43 million noted above, for an overall increase of $12 million (12.4%) above the FY2015 level. Most of the increase was for the financial systems consolidation, which had been funded at $34 million in FY2015. The Administration requested $321 million for OCIO as well ($32 million, or 11.3% above the FY2015 level). S. 1619 , as reported by the Senate Committee on Appropriations, included $675 million for departmental management in Title I and $36 million for the crosscutting financial systems consolidation effort in the general provisions. The proposed funding level was $18 million (2.6%) more than FY2015, and $33 million (4.4%) less than requested by the Administration. H.R. 3128 , as reported by the House Committee on Appropriations, included $690 million for departmental management in Title I, and $53 million for the crosscutting financial systems consolidation effort in the general provisions. The proposed funding level was $49 million (7.1%) more than FY2015 and $1 million (0.2%) less than requested by the Administration. The law provided total funding of $701 million for Departmental Management in Title I, and $203 million in three general provisions, not including the funding for DHS headquarters consolidation at St. Elizabeths. This was a decrease of $2 million or 0.3% from the President's request of $702 million under Title I, but an increase of $160 million in funding provided through general provisions, including $150 million to address emergent threats and support cybersecurity efforts. See Table 2 for additional detail. The Administration requested $134 million for OSEM and 597 full-time employee equivalents (FTEs). H.R. 3128 , as reported, included $132 million for OSEM, $2 million (1.5%) less than requested. S. 1619 , as reported, included $133 million, $1 million (0.7%) less than requested. Title I of P.L. 114-113 provided $137 million for OSEM, $3.2 million (2.4%) more than requested. As in the Senate-reported bill, $13 million of OSEM funding was withheld from obligation until both the comprehensive plan to implement the biometric entry and exit data system and the report on visa overstay data by country are submitted, as required, within 30 days after the act's enactment, to the House Committees on Appropriations, the Judiciary, and Homeland Security and the Senate Committees on Appropriations, the Judiciary, and Homeland Security and Governmental Affairs. The explanatory statement specified that the visa overstay report must include (1) overstays from all nonimmigrant visa categories under the immigration laws, by each class and sub-class; and (2) numbers and rates of overstays for each class and sub-class of nonimmigrant categories per country. The House committee recommended the requested $5 million for the Joint Requirements Council (JRC). The committee report directed the department to keep the committee informed on the Council's efforts to examine and reform joint operations within DHS and to clearly display in its budget execution and justification materials efficiencies and savings achieved from JRC operations. The explanatory statement directed the JRC to provide quarterly briefings beginning no later than January 30, 2016, on its results with regard to improving and leveraging joint requirements across components. The House report stated the committee's expectation that DHS would track the number of times that unmanned aircraft systems are used along the border, in a maritime environment, or in support of state, local, and tribal law enforcement entities, to monitor compliance with laws and standards on privacy and civil liberties. The report also stated that committee's expectations that the department would submit, by the required deadlines, reports that (1) assess the feasibility, cost, and benefits of implementing a universal complaint system across the department, to ensure that complaints are promptly addressed, and (2) provide an update on the corrective action plan to address low employee morale and the poor climate for workplace innovation. The explanatory statement directed the department to expeditiously brief the House and Senate Appropriations Committees on the report (which is overdue) on a universal complaint system. The House committee report directed the Office of Policy to provide a detailed description of all DHS countering violent extremism (CVE) programs and initiatives, including associated personnel and funding levels, within 60 days after the act's enactment as a means to ensure that the United States ""is positioned to counter homegrown violent extremism and prevent domestic radicalization."" A new general provision at Section 543 in P.L. 114-113 provided $50 million ""for emergent threats from violent extremism and from complex coordinated terrorist attacks."" The funds may be transferred by the Secretary between appropriations upon 15 days advance notice to the House and Senate Appropriations Committees. The explanatory statement specified that the funds be allocated as $10 million for a CVE initiative to assist states and local communities to ""prepare for, prevent, and respond to emergent threats from violent extremism""; up to $39 million for an initiative to assist states and local governments to ""prepare for, prevent, and respond to complex, coordinated terrorist attacks with the potential for mass casualties and infrastructure damage""; and at least $1 million to expand or enhance the Joint Counterterrorism Awareness Workshop Series. The funds will be provided on a competitive basis directly to states, local governments, tribal governments, nonprofit organizations, or institutions of higher education. The explanatory statement provided information on activities that would be eligible for funding. According to the explanatory statement, the Office of Partnership and Engagement received $13 million, including an increase of $3.1 million for the Office of Community Partnerships. It directed the office to describe in detail its CVE programs and initiatives within 60 days after the act's enactment. The House committee report also directed the Office of Policy to (1) continue developing border security metrics that are focused on reducing illegal import and entry and include measuring inflow rates, apprehension rates, and consequences for the department's jurisdiction over the Southwest Border and (2) brief the committee on such within 30 days after the act's enactment. The report directed the department to ensure that the office fully participates in interagency discussions on visa policy matters. The explanatory statement directed the office to coordinate with components to finalize the metrics, including those specified in the House report and survey and historical data, which can be assessed against operational and strategic requirements for improved security at the border. According to the statement, the metrics will inform decisions on resource allocations and management of the mission. Within the Office of Policy, the House committee report directed the Office of Immigration Statistics (1) to develop and implement a plan to collect, analyze, and report appropriate data on immigration enforcement activities, including data on the use of prosecutorial discretion; (2) to include steps in the plan to ensure complete and accurate data on such activities from encounter to final disposition; and (3) to brief the committee on the plan within 60 days after the act's enactment. The explanatory statement included the directive and further specified that data, including those collected by the Executive Office for Immigration Review at the Department of Justice and the Office of Refugee Resettlement at the Department of Health and Human Services, on the department's effectiveness in enforcing immigration laws be considered and prioritized. According to the statement, the plan should result in outcome-based metrics on immigration enforcement that are consistent and able to be released to the public on a regular basis. Both the House and Senate reports addressed the issue of increased trafficking in wildlife. The House report directed the Secretary to report, within 120 days after the act's enactment, on (1) the department's activities to address wildlife trafficking (rhinoceros horns and elephant ivory from Africa) and the illegal natural resources trade (illegally harvested timber); (2) its continued membership on the Presidential Task Force on Wildlife Trafficking; (3) efforts to improve coordination with the U.S. Fish and Wildlife Service (USFWS) Office of Law Enforcement; (4) steps taken to implement the National Strategy on Wildlife Trafficking; and (5) aligning resources to activities and initiatives that address wildlife trafficking and natural resources trade. The Senate report continued the requirement for a report on wildlife trafficking activities and recommended that CBP and the USFWS ""improve cooperation and coordination among the agencies to better address"" this matter. The explanatory statement directed the Secretary to update the report on activities related to wildlife trafficking and illegal natural resources trade within 120 days after the act's enactment. The Administration requested $193 million for the USM and 822 FTEs. S. 1619 , as reported, included $184 million for the USM, $9 million (4.5%) less than requested. H.R. 3128 , as reported, included $194 million for the USM, less than $1 million (0.2%) more than requested. Title I of Division F of P.L. 114-113 provided $197 million for the USM, $3.6 million (1.9%) more than requested. Of the total, the Human Resources Information Technology program received almost $8 million. The House- and Senate-reported bills, and the law, again required the Under Secretary to include a Comprehensive Acquisition Status Report (CASR) in the FY2017 budget proposal and thereafter, within 45 days after the completion of each quarter. The House Appropriations Committee report directed that an unclassified version of the CASR be posted on the department's public website with all programs displayed by appropriation and PPA (Program/Project Activities), and that the Chief Acquisition Officer and each Component Acquisition Executive (CAE) provide briefings on all acquisition projects at levels 1, 2, and 3, within 30 days after the CASR is submitted. The explanatory statement specified that the briefings are to be provided on Level 1, Level 2, and special interest projects. The House report stated that ""The Committee is deeply troubled by the fact that DHS operational components remain unable to communicate with each other a decade after the 9/11 Commission highlighted the problem and after expending $430 million to address the problem."" Therefore, the committee directed the USM to provide a briefing to the committee on the ""plan to achieve and maintain interoperable communications"" among DHS components within 90 days after the act's enactment. The report listed eight required information and data points for the contents of the plan. The USM was directed to develop written guidance to manage the IT enterprise architecture by April 1, 2016, that ""institutionalizes a consumption-based IT business model across DHS based on the acquisition of IT services rather than IT assets when appropriate and cost-effective; and defines and distinguishes IT sustainment costs versus new development and investment."" The explanatory statement directed the USM to brief the House and Senate Committees on Appropriations on a plan and timeline ""to remedy the operational communications shortfalls [long known by the department] with existing communications capabilities"" within 90 days after the act's enactment. It also specified that the briefing must specifically address how the department will manage requirements and procurements for joint communications to ensure that interoperability across components is sustained. Within USM subcomponents, the committees, and the explanatory statement, recommended the following appropriations: Office of the Chief Security Officer —Responding to a request for $67 million, the Senate report recommended $65 million, while the House report recommended $68 million, in part driven by increased funding of $2 million for Continuous Evaluation, ""a technique used to investigate an individual's continued eligibility to access classified information or to hold a sensitive position."" The explanatory statement recommended $69 million, including the increase of $2 million for Continuous Evaluation. Office of the Chief Procurement Officer (OCPO) —Responding to a request for $59 million, the Senate report recommended $59 million, while the House report recommended $61 million, driven in part by increased funding of $2 million for critical personnel needed by Program Accountability and Risk Management (PARM) to oversee major acquisition programs. The committee also recommended the requested funding to comply with the DATA Act, which requires that procurements have unique identification numbers. The explanatory statement recommended almost $61 million, including the increase of $2 million for PARM personnel. Office of the Chief Human Capital Officer (OCHCO) —Responding to a request for $34 million, of which $24 million was for salaries and expenses (S&E), the Senate report recommended less than $27 million, of which $19 million was for S&E. The House report recommended $31 million, of which almost $22 million was for S&E. One key difference was the treatment of the Administration's CyberSkills initiative: The Senate report noted that the $5 million in requested funding for the CyberSkills initiative was included in the recommended appropriations for the OCIO and NPPD, while the House report indicated the project was not funded. The Senate-reported bill provided less than $8 million for Human Resources Information Technology, almost $2 million less than the budget request and House-reported bill. The explanatory statement recommended $32 million, of which $24 million was for S&E. Of the total, $2.5 million funded the CyberSkills initiative, $2.5 million funded management and improvement of the hiring processes in components, and up to $350,000 funded the DHS Leader Development Program. Office of the Chief Readiness Support Officer —Responding to a request for $30 million, the Senate- and House-reported bills included $30 million, to be allocated as $27 million for salaries and expenses and almost $3 million for repairs to the Nebraska Avenue Complex. Noting substantial progress by the department in developing a common flying hour program, the House report directed the office to continue to provide quarterly updates on the program and to expand the Field Efficiencies Pilot Program to at least 10 additional cities by the end of FY2016, to further savings realized through cost avoidance. The explanatory statement recommended almost $32 million, to be allocated as $27 million for S&E and more than $4 million for repairs to the Nebraska Avenue Complex. As noted above, the Administration requested $97 million for the OCFO and 228 FTEs. Title I included $54 million for the OCFO and Title V included an additional $43 million for financial systems modernization efforts. The FY2016 request represented an $11 million, or 12.8%, increase above the $86 million provided to the CFO in FY2015. S. 1619 , as reported, included $53 million for the OCFO under Title I, and $36 million under Title V, for a total OCFO investment of $89 million, $8 million (8.2%) less than requested. The Senate Appropriations Committee report explained that the recommendation for funding Financial Systems Modernization at a level that was almost $7 million below the President's request was ""due to program delays that have occurred since the budget request was formulated."" H.R. 3128 , as reported, included $56 million for OCFO under Title I, and $53 million under Title V for the Financial Systems Modernization Program, for a total OCFO investment of $109 million, $12 million (12.4%) above the amount requested. Division F of P.L. 114-113 provided $56 million for OCFO in Title I and $53 million in Title V, for a total OCFO investment of $109 million, almost $13 million (13%) more than requested. Of the Title I funding, the explanatory statement recommended that $3 million ""be used to improve financial management processes and cost estimation capabilities."" According to the statement, the Title V funding will enable the Secretary to allocate resources according to the program execution plan for modernization. The House- and Senate-reported bills, and the law, provided that the Secretary must submit the Future Years Homeland Security Program (FYHSP) at the same time as the President's budget is submitted. The Senate Appropriations Committee report again specified that the FYHSP show funding by appropriation account and subordinate program, project, or activity and be accessible to the public. Both bills, and Division F of P.L. 114-113 , continued a general provision at Section 513 requiring budget and staffing reports to be submitted to the House and Senate Appropriations Committees within 30 days after the close of each month, with specifications for information to be included. The House Appropriations Committee report included an additional content requirement that the staffing levels for each account be based on the most recent pay period. To facilitate oversight of the department's financial management activities, the House committee report directed the OCFO to develop a regulation on financial management to: 1. establish financial management policies; 2. ensure compliance with applicable accounting policy, standards, and principals; 3. establish, review, and enforce internal control policies, standards, and compliance guidelines for financial management; 4. ensure that complete, reliable, consistent, timely, and accurate information on disbursements is available in financial management systems; and 5. provide oversight of financial management activities and operations including developing budget requests and preparing for audits. The House committee report recommended funding of $3 million for subject matter experts and support staff to assist with developing the regulation and implementation of a common appropriations structure for the department. Expressing persistent concerns about the transition to a federal shared service provider for financial management services, the House committee report directed GAO ""to assess the risks of utilizing the Department of Interior's Business Center (IBC), whether the IBC is capable of expanding its services to additional Federal agencies, and [compare] the services and capabilities of Federal and commercial shared service providers."" The OCFO was directed to update the estimate of lifecycle costs to include all contract awards and projected overall costs ""for every component of the department that plans to migrate to a Federal shared service provider."" Noting that the budget justification materials are ""woefully inadequate"" and ""undermine"" analysis and oversight of the budget request by the committees, the explanatory statement directed that the department's budget submission for FY2017, and thereafter, include tables that compare prior year actual, current year estimates, and projected year appropriations and obligations for all PPAs, subprograms, and FTE. It reminded the department that any significant new activity that has not been previously justified or funded requires a request for reprogramming or transfer of appropriations. The Administration requested $321 million for the OCIO and 382 FTEs. S. 1619 , as reported, included $304 million for the OCIO, $17 million (5.3%) less than requested. H.R. 3128 , as reported, included $308 million for the OCIO, $13 million (4.0%) less than requested. Both the Senate- and House-reported bills provided that, within the total amount appropriated, almost $105 million would fund OCIO salaries and expenses (S&E) (slightly less than requested). The House Appropriations Committee recommended $4 million more than the Senate Appropriations Committee for information technology services, while both committees recommended the requested level for infrastructure and security activities and the Homeland Secure Data Network. Title I of Division F of P.L. 114-113 provided $310 million for OCIO, almost $11 million (3.3%) less than requested. Within the OCIO account, S&E received $110 million and development and acquisition of information technology equipment, software services, and related activities for the department received $200 million. The explanatory statement directed that the information technology funds be used to support requested initiatives, including the DHS Data Framework, Single Sign-On, security, the Federal Risk and Authorization Management Program, the Trusted Tester Program, and the Infrastructure Transformation Program. In addition to the Title I resources for OCIO, Title V of Division F of P.L. 114-113 included a new general provision which provided $100 million dollars for cybersecurity to safeguard and enhance the department's systems and capabilities. According to the explanatory statement, the ""funding is in addition to base funding made available to the CIO and the components, and is intended to help the Department more quickly address known vulnerabilities and technology gaps through enhancements to the DHS network and perimeter security, better access controls, stronger authentication, equipment upgrades, data loss and theft prevention, and incident response and assessments."" Stating that ""DHS must lead government agencies in protecting its own data and systems,"" the explanatory statement directed the CIO to ""utilize a risk-based approach, using threat intelligence, to optimize the Department's cybersecurity investments and operations."" In addition, it directed the CIO to brief the committees on the department's cybersecurity spending, the obligation plan for the cybersecurity funds, and the metrics by which improvements in the DHS cybersecurity posture will be measured, within 45 days after the act's enactment. The Senate report mandated that the OCIO support the Chief Human Capital Officer on the Cyberskills Support Initiative. Noting that P.L. 114-4 did not include the requirement provided in the FY2015 Senate-reported bill that the CIO submit a multiyear investment plan for 2015 through 2018, the Senate report stated the expectation that the same level of information be provided in the annual budget justification. The OCIO was directed to provide semi-annual briefings on the execution of major initiatives and investment areas. The Senate report also expressed the expectation that the Digital Services Team members, requested in the budget, will be used to address challenges in immigration data reporting as the top priority and that DHS will make great progress on such reporting by December 2015. The House Appropriations Committee did not recommend funding for this program. The explanatory statement recommended that up to $10 million of the S&E funds be used for Digital Services, in lieu of the House and Senate report language. With regard to the department's data center consolidation efforts, the Senate Appropriations Committee report stated the committee's expectation that DHS support the National Aeronautics and Space Administration in its use of the Data Center 1 facility and directed the department to continue periodic briefings on the execution of remaining data center migration funds, future plans for the data center, and the open market strategy for cloud services. To monitor progress in achieving the objectives of the DHS Information Technology Strategic Plan, the House report directed the OCIO to provide a briefing and quarterly updates on the enterprise architecture that supports the plan. Included in the briefing are to be details on savings achieved through data center consolidation and reducing commodity IT spending at the component level. Stating the importance of ""[p]reventing the compromise or unauthorized disclosure of sensitive digital content or other personally identifiable information,"" the House report directed the OCIO to continue working to prevent data loss at the enterprise level by using technology at the department's Trusted Internet Connection. Table 2 outlines the funding levels for existing management functions. Several issues related to departmental management and administration were discussed by the House and Senate Appropriations Committees in considering the FY2016 Department of Homeland Security Appropriations bill. Among the issues were those related to acquisition matters, and the implementation of a common appropriations structure. These issues were, in part, related to the department's Unity of Effort initiative. Brief discussions of each of these issues follow. Noting that the USM is developing timelines and metrics for the procurement process, the Senate Appropriations Committee report directed DHS to provide a briefing within 120 days after the act's enactment ""on its efforts to ensure an effective, efficient, and transparent procurement process"" with metrics that are ""consistent and repeatable"" for the purposes of reporting on such. The House Appropriations Committee report stated that the ""USM acts as the Department's Chief Acquisition Officer and Chief Performance Improvement Officer"" and that the committee included several directives in the report ""to build on the momentum of the Unity of Effort initiative."" The report directed the USM to develop written guidance by April 1, 2016, to (1) clarify the roles and responsibilities of the Office of Program Accountability and Risk Management (PARM) and the Office of the Chief Information Officer (OCIO) for overseeing program management of major IT acquisition programs; (2) require components to provide cost estimates for operations and maintenance for sustaining programs; (3) establish responsibility at the component level for tracking the adherence of sustainment programs to existing cost estimates; and (4) require components to enter data into the next generation Period Reporting System (nPRS) on a quarterly basis, and hold CAEs accountable for validating the information. Executive Director of PARM to provide an update on data for major acquisition programs by component, by each month of the prior fiscal year, and assessing its accuracy, completeness, and timeliness by April 15, 2016. USM to review the current structure of the OCPO, consider whether the name of the office accurately reflects its function, and determine whether PARM should report to a different supervisor. The explanatory statement directed the Executive Director of PARM to provide quarterly briefings to the House and Senate Appropriations Committees on major acquisition programs, by component, beginning no later than April 15, 2016. Both Senate and House Appropriations Committee reports addressed potential reform of the structure of the appropriations accounts in the DHS budget. The House Appropriations Committee outlined the current state of affairs thusly: A key element of the Secretary's Unity of Effort initiative is to strengthen DHS budget processes. Integral to the effort is an appropriations framework that supports and standardizes budgeting and programming across the homeland security enterprise. With over 70 different appropriations and over 100 PPAs, DHS has functioned for over a decade with significant budget disparities and inconsistencies in component's [sic] appropriations accounts and PPAs. Without question, the current budget structure is a contributing factor to the failure to recognize how poorly components have been underexecuting personnel costs. More frustrating is that neither DHS nor the components can provide details on how the funds were spent. From the perspective of leaders making judgments about programs, the lack of uniformity and transparency makes it impossible to compare costs. Pursuant to Committee direction, DHS presented a notional common appropriations structure shortly after the President's fiscal year 2016 budget was submitted. The structure included four standard types of appropriations (Operations and Support; Procurement, Construction, and Improvements; Research and Development; and Federal Assistance) and specific periods of availability for each. The Senate Appropriations Committee report expressed the committee's belief that ""following funds from planning through execution is critical to departmental oversight of the components as well as establishing a capability to make tradeoffs in resource allocation and budget development decisions."" The committee directed the department to work closely with it and stated that a proposal that reduced transparency or congressional oversight and controls, or ""create[d] a distraction through the time and opportunity costs associated with such a change,"" would not be accepted. The House Appropriations Committee took their stance more explicitly, noting in their report: This structure makes sense. It enables cost comparisons between components and simplifies the transition from legacy financial management systems to modernized systems. Implementing this methodology is a strategic imperative and must move forward with haste. To that end, a general provision is included in title V of the bill mandating that the fiscal year 2017 budget request be presented to the Congress in this format and be fully implemented upon the enactment of full year appropriations for fiscal year 2017. In addition to mandating the implementation of the common appropriations structure, the House committee directed DHS to ""begin developing a standard template for the budget justification material based"" on that structure and incorporate the template into the FY2018 budget request. The template would provide that the justification for each appropriation would ""start from a zero base and build to the requested level."" Furthermore, beginning with the FY2017 budget request, and for each fiscal year thereafter, the justification materials must ""include tables that compare prior year actual, estimates of current year, and the projected budget year appropriations and obligations, for all PPAs, programs, subprograms, and FTE."" Noting the language in the House report about the need for a common appropriations account structure, the explanatory statement mentioned that the law included a modified version of the provision that the House bill proposed. The new general provision authorized the Secretary to include with the budget justification an account structure under which each appropriation under each agency heading either remains the same as FY2016 or falls within the four categories of appropriations outlined in the notional common structure previously outlined by DHS. The general provision establishes a timeline, procedures and requirements for the Secretary to be able to transfer and reprogram funds into the new structure, including a number of materials to be submitted by the CFO by April 1, 2016, including technical assistance on new legislative language in the account structure; tables comparing FY2015, FY2016, and FY2017 funding in the account structure; comparisons across components that the account structure facilitates; a revised interim financial management policy manual that has been requested from the CFO; an outline of changes in the financial management policy manual necessary for the account structure; proposed changes to requirements for transfers and reprogramming, including technical assistance on legislative language; CFO certification that the department's financial systems can report in the new account structure; and a plan to provide training on and to implement the account structure. As of February 2015, the Department of Homeland Security's headquarters footprint occupied space in approximately 50 separate locations in the greater Washington, DC, area. This is largely a legacy of how the department was assembled in a short period of time from 22 separate federal agencies that were themselves spread across the National Capital region. The fragmentation of headquarters is cited by the department as a major contributor to inefficiencies, including time lost shuttling staff between headquarters elements; additional security, real estate, and administrative costs; and reduced cohesion among the components that make up the department. To unify the department's headquarters functions, the department and General Services Administration (GSA) approved a multi-year $3.4 billion master plan to create a new DHS headquarters on the grounds of St. Elizabeths in Anacostia. According to GSA, this would be the largest federal office construction since the Pentagon was built during World War II. Originally, $1.4 billion of this project was to be funded through the DHS budget, and $2 billion through the GSA. Phase 1A of the project—a new Coast Guard headquarters facility—has been completed with the funding already provided by Congress and is now in use. Not all DHS functions in the greater Washington, DC, area are slated to move to the new facility. The Administration has sought funding several times in recent years for consolidation of some of those other offices to fewer locations to save money on lease costs. As part of the Administration's budget request, DHS and GSA requested $204 million and $380 million, respectively, as the FY2016 tranche of design and construction funding to support a new ""enhanced plan"" for DHS headquarters consolidation. This new plan represents a revision of the original project, reducing its cost and size through efficiencies, faster completion, altering the mix of component headquarters that would move to the campus, and consolidating FEMA's headquarters to the West Campus rather than the East Campus of St. Elizabeths. The $3.4 billion projected cost for the original 4.5 million gross square-foot plan of record had grown to $4.5 billion: The revised project would provide 3.6 billion gross square feet of office space, at a cost of $3.7 billion. The revised project would also house an additional 3,000 headquarters personnel compared to the original plan, bringing the total to 17,000—more than half of the total DHS headquarters personnel in the National Capital Region. Requested GSA funding would support continued work on perimeter security, completing road access improvements (including a new highway interchange), rehabilitating buildings to hold elements of the Office of the Secretary and the Under Secretary, and continuing design and historic preservation activities. Requested DHS funding would support construction, as well as reconfiguration of part of the USCG headquarters to accommodate 40% more personnel, including other DHS headquarters functions. The request for DHS also included roughly $11 million for operational support costs for the existing facility and construction site, bringing the total request for headquarters consolidation to almost $216 million. Section 537 of Senate-reported S. 1619 includes $212 million for DHS headquarters and mission support consolidation, $4 million (1.9%) below the amount requested through DHS, and $164 million (336.8%) above the FY2015 enacted level. The section also includes a requirement that the department provide an expenditure plan within 90 days of enactment, while the committee report also requires quarterly briefing for the committee on headquarters and mission support consolidation activities. The Senate committee report also specifically mentions the project in its overview of issues affecting the department, noting: The bill includes funds to continue progress on the Department's headquarters consolidation at the St. Elizabeths campus. In the National Capital Region, 32,000 headquarters employees of the Department and its components operate from 50 locations, most of them leased with many of those leases now expiring. While cost concerns have been raised in the past regarding the St. Elizabeths project, the Department now has a more affordable enhanced plan and the timing of these lease expirations strengthens the case. The benefits of consolidation are coupled with cost avoidance and cost savings. While the proposed fiscal year 2016 effort to bring remaining secretarial offices and the Management Directorate to St. Elizabeths makes sense, the Committee will take a fresh look each year to ensure that the investment continues to be worthwhile. Section 535 of House-reported H.R. 3128 includes $44 million for DHS headquarters consolidation, $172 million (79.6%) below the request for DHS, and $5 million (9.7%) below the FY2015 enacted level. The House report notes: The Committee appreciates changes to the DHS Consolidation Plan that have reduced requirements and costs.... Importantly, the new plan would save DHS $1,200,000,000 over 30 years compared to the costs of continuing to rely on multiple rented facilities across the Washington, DC region over the same time period. Given the constraints of the current budget environment, however, the recommendation provides only that portion of the request related to existing operations at the consolidated headquarters location, which is included in title V of the bill. Unlike in the Senate-reported bill, there is no expenditure plan or briefing requirement. Section 539 of Division F of P.L. 114-113 included almost $216 million for the DHS headquarters consolidation, which includes over $3 million for security services. This is less than 0.1% less than requested for the overall project. The department is required to submit an expenditure plan for these funds no later than 90 days after the enactment of the act. The $557 million in combined funding provided in FY2016 through DHS and GSA in FY2016 for this project represents the largest tranche of funding provided for DHS headquarters consolidation since 2009, and the largest combined amount provided to date through annual appropriations legislation for DHS headquarters consolidation. The Analysis and Operations account includes resources for both the Office of Intelligence and Analysis (I&A) and the Office of Operations Coordination. I&A is responsible for managing the DHS intelligence enterprise and for collecting, analyzing, and sharing intelligence information for and among all components of DHS, and with the state, local, tribal, and private sector homeland security partners. Because I&A is a member of the intelligence community, its budget comes in part from the classified National Intelligence Program. The Office of Operations Coordination develops and coordinates departmental and interagency operations plans. It also manages the National Operations Center, the primary 24/7 national-level hub for domestic incident management, operations coordination, and situational awareness, fusing law enforcement, national intelligence, emergency response, and private sector information. The Administration requested $269 million for the Analysis and Operations account (see Table 1 ). Senate-reported S. 1619 recommended that the Analysis and Operations account receive $263 million, $6 million (2.1%) below the amount requested by the Administration. The committee required a briefing from DHS's Chief Intelligence Officer on the I&A expenditure plan for FY2016 no later than 60 days after the date of S. 1619 's enactment. DHS was also directed to continue its semiannual briefings to the committee on state and local fusion centers. As part of the first FY2016 briefing related to fusion centers, the committee expected DHS to assess the feasibility of establishing a state-level ""center of excellence"" featuring a focus on threats to cybersecurity and critical infrastructure in the United States. The center would focus on enhancing multi-agency, multi-discipline public private partnerships to improve threat information sharing and collaboration among federal, state, and private sector critical infrastructure entities. The assessment shall consider authorities and costs for such a center incurred by partner agencies. House-reported H.R. 3128 recommended $265 million for Analysis and Operations, $4 million (1.6%) below the amount requested by the Administration and $1 million more than Senate-reported S. 1619 . The committee directed DHS to make available $300,000 for enhancing the Criminal Intelligence Enterprise, a national initiative designed to identify, prioritize, and catalog the criminal and terrorist threat groups that present the greatest concern to each major city and county. Division F of P.L. 114-113 (the Homeland Security Appropriations Act, 2016) provided $265 million in appropriations for Analysis and Operations, $4 million below the amount requested by the Administration, $2 million more than Senate-reported S. 1619 , and the same as House-reported H.R. 3128 . The DHS Office of the Inspector General (OIG) is intended to be an independent, objective body that conducts audits and investigations of the department's activities to prevent waste, fraud, and abuse. The OIG is required by law to keep Congress informed about problems within the department's programs and operations and reviews and makes recommendations regarding existing and proposed legislation and regulations related to the department. The OIG is required to report to Congress and to the Secretary of DHS. The Administration requested a $142 million appropriation for the OIG, $24 million (20.0%) more than was appropriated in FY2015. The Administration also requested a $24 million transfer from the Disaster Relief Fund (DRF) specifically for oversight of disaster relief activities. Transfers from the DRF are a long-standing means of supporting the DHS OIG's annual budget for oversight of disaster relief, first occurring in FY2004, the first annual appropriations act for the department. The OIG noted in their budget justifications that their initial request submitted to the Office of Management and Budget (OMB) was larger than what the President ultimately requested—almost $2 million more in appropriations and almost $18 million more by transfer from the DRF for oversight of disaster relief. The President's request for the OIG was reduced from the funding level of the OIG's original proposal as a part of the budget formulation process. The OIG went on to note: We made our request after benchmarking our staffing against comparable Offices of Inspector General and assessing our ability to address high risk areas in DHS. This process revealed that we have been historically underfunded and unable to address the risk [sic], particularly in the area of DHS integration and acquisition management. Senate-reported S. 1619 included a $134 million appropriation for the OIG, almost $8 million (5.5%) below the amount requested, and $16 million (13.4%) above the amount appropriated in FY2015. The Senate-reported bill included the requested transfer from the DRF for disaster relief oversight activities. House-reported H.R. 3128 included a $141 million appropriation for the OIG, $1 million (0.8%) below the amount requested, and almost $23 million ($19.0%) above the amount appropriated in FY2015. Like the Senate-reported bill, the House-reported bill included the requested transfer from the DRF for disaster relief oversight activities. The omnibus included a $137 million appropriation for the OIG, almost $5 million (3.4%) below the amount requested, and almost $19 million ($18.9%) above the amount appropriated in FY2015. Like both the House- and Senate-reported bills, the omnibus included the requested transfer from the DRF for disaster relief oversight activities. Issues surrounding the DHS OIG are generally issues that impact the broader oversight community, or are issues that are shared throughout the broader community of inspectors general. A much fuller analysis is available in the discussion of statutory Offices of Inspectors General in CRS Report R43814, Federal Inspectors General: History, Characteristics, and Recent Congressional Actions , by [author name scrubbed] and [author name scrubbed], and CRS Report RL30240, Congressional Oversight Manual , by [author name scrubbed] et al.","This report is part of a suite of reports that discuss appropriations for the Department of Homeland Security (DHS) for FY2016. It specifically discusses appropriations for the components of DHS included in the first title of the homeland security appropriations bill—the Office of the Secretary and Executive Management, the Office of the Under Secretary for Management, the DHS headquarters consolidation project, the Office of the Chief Financial Officer, the Office of the Chief Information Officer, Analysis and Operations, and the Office of Inspector General for the department. Collectively, Congress has labeled these components in recent years as ""Departmental Management and Operations."" The report provides an overview of the Administration's FY2016 request for Departmental Management and Operations, the appropriations proposed by Congress in response, and those enacted thus far. Rather than limiting the scope of its review to the first title, the report includes information on provisions throughout the proposed bills and reports that directly affect these functions. Departmental Management and Operations is the smallest of the four titles that carry the bulk of the funding in the bill. The Administration requested $1,396 million in total budgetary resources for these components in FY2016, $255 million more than was provided for FY2015. Although only 3.4% of the Administration's $41.4 billion request for the department, the proposed additional funding was 17.8% of the total net increase requested. While the Administration proposed increasing the budget of every component of Departmental Management and Operations, the largest increase, both in dollars ($167 million) and by percentage terms (441%), was to fund a revised plan for consolidation of DHS headquarters offices in the National Capital Region. Senate-reported S. 1619 would have provided $1,346 million, a decrease of $50 million (3.6%) from the request and $205 million (18.0%) above FY2015. House-reported H.R. 3128 would have provided $1,217 million, a $179 million (12.8%) decrease from the request and $76 million (6.7%) above FY2015. On December 18, 2015, the President signed into law P.L. 114-113, the Consolidated Appropriations Act, 2016, Division F of which was the Department of Homeland Security Appropriations Act, 2016. The act included $1,546 million for these components in FY2016, $405 million more than was provided for FY2015, and $150 million more than was requested. Additional information on the broader subject of FY2016 funding for the department can be found in CRS Report R44053, Department of Homeland Security Appropriations: FY2016, as well as links to analytical overviews and details regarding appropriations for other components. This report will be updated if supplemental appropriations are provided for any of these components for FY2016.",govreport
"Total private nonfarm employment fell from a peak of 111.6 million in February 2001 to a trough of 108.4 million in July 2003. It then expanded through 2007, reducing the unemployment rate to a relatively low level, although not as low as was reached at the end of the previous expansion. Since the beginning of 2008, employment has fallen again and the unemployment rate has risen. Job loss—declines in employment—is one of the most important macroeconomic problems facing policymakers, both in terms of its economic cost and the social toll it takes on our society. But what is often missing from the policy debate is a distinction between net job loss and gross job loss. Gross job loss is the total number of jobs eliminated by all contracting firms in a given period, whereas net job loss is the result of greater gross job loss than gross job gains in a given period. In expansions, the labor market is characterized by net job creation amidst gross job loss. This is required to maintain steady employment rates with a growing population. It is only during recessions that the overall labor market experiences persistent net job loss. Economists view net job loss as a detrimental phenomenon and most recommend that policy be used to mitigate it. However, they view gross job loss, as long as it is offset by gross job gains, as a healthy and normal part of a functioning market economy, although it may have social costs. A quarterly data series from the U.S. Bureau of Labor Statistics (BLS), shown in Figure 1 , provides data that help to put the distinction between gross and net job loss into perspective. These data are measured from the firm's perspective—changes in the size of the firm's workforce—not the employee's perspective. For this reason, the data, in a sense, undercount the amount of change in the workforce because they do not account for movements of individual workers to and from any given firm if the firm remains the same size (e.g., a worker quits and is quickly replaced by a new hire). The gross job loss figures, from the employee's perspective, could be involuntary (layoff, firing) or voluntary (quitting, retirement). In the third quarter of 2007, gross job loss and gains equaled 7.5 million and 7.2 million per quarter, respectively, each about 5% of total employment. As can be seen in Figure 1 , gross job loss and job gains are each, on average, around 20 times higher than net job loss (or gains) in any given quarter. This is true in both expansions and recessions. The rate of job gains increased steadily from the beginning of the series in 1992 until the end of 1999; at the same time, job losses increased steadily from 1992 to 2001. Some, but not all, of the long run increase in gross job gains and losses can be attributed to a growing labor force. The rest of the increase indicates that the U.S. labor force is becoming more mobile over time, but the data do not indicate whether this is the worker's or the firm's decision, or both. Most of the gross job flows occur at existing firms, and are not due to new firms opening or old firms closing. Clearly, gross job loss is not incompatible with a healthy labor market: during an expansion in which the unemployment rate was lower than it had been in three decades, gross job losses steadily increased as the expansion progressed. And even during the 2001 recession and subsequent ""jobless recovery,"" gross job gains continued to average about 8 million per quarter; but gross job gains in this period were more than offset by gross job losses. In the current expansion, job gains and losses have been modestly lower than in the second half of the 1990s. Although gross job gains stayed relatively constant, net employment began to rise again because gross job losses fell. There is not yet data available on whether net job loss in 2008 has been driven primarily by gross job gains or losses. It is often claimed that small businesses are the engine of job creation in the U.S. economy. To an extent, this is a misconception based on the confusion between net and gross job flows. Firms with 99 employees or fewer, which account for 38.1% of total private employment, accounted for 61.1% of gross job gains between 1992:3 and 2005:1. But while these firms had a disproportionate share of gross job gains, they also had a disproportionate share of gross job loss, 62.1% of the total. On net, they accounted for 46.3% of net job gains over that time period—modestly more than their share of total employment, but significantly less than gross flows would indicate. (Recent employment trends followed a similar pattern.) Interestingly, in the 2001 recession and jobless recovery, very large firms accounted for a disproportionate share of net job loss. Overall, these data provide a picture, during expansions, of a highly dynamic U.S. labor market in which labor rapidly shifts from firm to firm to its most efficient use. This vitality is the essence of economic growth and rising living standards for society as a whole in a market economy. It is caused both by output shifting from some firms to more efficient ones within an industry and by shifts in spending from one industry to another, due to factors such as changing consumer tastes, technology, or comparative advantage. Of course, there will always be winners and losers in a market economy. Although significant gross job loss is consistent with net job creation (because it is offset by gross job gains) for the nation as a whole, gross job loss can translate into net job loss at the local level even when national employment is rising because the losses and gains may not occur in the same geographic area. Furthermore, while steady net employment gains are unambiguously good for society as a whole, the data do not necessarily indicate that the same individuals who lose jobs also gain jobs. The data also do not indicate whether the job loss is voluntary or involuntary, nor how many of the individuals who involuntarily changed jobs were forced to take new jobs that were less desirable or paid less. A separate (and noncomparable) data series on worker displacement from BLS can help to answer these questions. BLS classifies workers as displaced if they lost their job because their plant closed down or moved, their positions or shifts were abolished, or there was insufficient work. From 2003 to 2005, 3.8 million workers with tenure of three years or more were displaced (another 4.3 million short-tenured workers were displaced during that period). Although the two data series cannot be compared directly, gross job loss equaled 90 million over that three-year period. Displacement is significantly higher during recessions; for example, from 2001 to 2003, 5.3 million long-tenured workers were displaced. Of the displaced workers, about 70% were reemployed, 13% were unemployed, and 17% had left the labor force at the beginning of 2004. Of those reemployed full-time, about 51% were now earning more than they had at the displaced job, and 29% were now earning significantly lower wages (at least 20% lower). Workers 55 years of age and older had lower reemployment rates than younger workers. Displaced workers fared better during expansions. For example, in 2001-2003, 20% of displaced workers were unemployed, and 33% of those re-employed had significantly lower wages. Some gross job loss takes the form of mass layoffs, during both expansions and recessions. In another (non-comparable) survey from BLS, 0.9 million workers lost their jobs from extended mass layoffs in the four quarters ending 2008:1. This figure undercounts workers affected by mass layoffs because it does not include mass layoffs of less than 50 workers or layoffs that lasted less than 30 days. Mass layoffs tend to be cyclical: workers separated by mass layoffs rose from 1.2 million in 2000 to 1.5 million in 2002. Since unemployment totaled 8.4 million in 2002, mass layoffs are an important but not primary cause of unemployment. BLS has not kept a continuous data series long enough to determine if there has been a long-term upward trend in mass layoffs beyond the cyclical trend. Several economic phenomena have been identified in popular discussion as purportedly causing job loss. Although all of these phenomena cause gross job loss, most have a much smaller effect on net job loss than popularly perceived. The exception is the business cycle: in each instance, recessions have been the cause of persistent net job loss in the post-war period. When trade expands, greater imports cause gross job loss, as products that were previously produced in the United States are now produced by workers in other countries, rendering those U.S. workers redundant. However, economic theory states that expansions in trade have no effect on net employment. As foreign countries increasingly exchange their goods for U.S. exports, more workers are needed in U.S. export industries. In addition, because trade is based on comparative advantage, trade increases the purchasing power of U.S. incomes in the aggregate. Thus, trade allows the U.S. economy as a whole to produce and consume more domestic goods, requiring more workers to produce them. It is possible that there could be some transitional loss in net employment if workers cannot easily be reallocated into other sectors of the economy, causing net employment to temporarily be greater than zero. For example, workers who have lost their jobs in the import-competing industries may not have the skills needed by export industries. But this transitional effect would disappear once markets had adjusted. U.S. history offers persuasive evidence that trade liberalization has no effect on net employment, as can be seen in Figure 3 . During the post-war period, U.S. trade has become progressively liberalized, with eight rounds of world trade liberalization negotiated between 1947 and 1993 through the General Agreements on Tariffs and Trade (GATT, later became World Trade Organization), as well as the Canadian Free Trade Agreement in 1989 and North American Free Trade Agreement (NAFTA) in 1994. Imports have increased steadily as a percentage of GDP throughout the post-war period, from about 4% of GDP in the 1940s to about 14% of GDP in recent years. If trade caused net job loss, employment would have declined and unemployment risen throughout the post-war period. The opposite is the case: employment has steadily increased during the post-war period, and the unemployment rate has mirrored the business cycle, not trade patterns. Indeed, trade liberalization does not appear to have strong effects on even transitional unemployment. For example, NAFTA was implemented when aggregate employment was rising and unemployment was falling. GATT Rounds 1, 3, 4, 6, 7, and 8 were completed when unemployment was low, and unemployment, though high, fell subsequent to GATT Rounds 2 and 5. The most recent example the United States has with significantly increasing trade restrictions was the Smoot-Hawley tariffs, which did not stem the loss of employment during the Great Depression. Although regression analysis, which allows other factors to be held constant, is beyond the scope of this report, informal quantitative evidence on the relationships portrayed in Figure 3 can be gleaned using correlation analysis. The results are presented in Table 1 , which shows that between 1946 and 2007, changes in employment are highly correlated with changes in imports. Thus, the historical experience is the opposite of the typically claimed relationship: when imports increased, employment typically also increased. Although this is not evidence that higher imports cause higher employment—the two variables are correlated because both usually increase—it is evidence that higher imports do not cause lower employment. The table also demonstrates that the implementation of trade liberalization agreements has virtually no relationship historically to changes in net employment in the same or following year (in case there is a lagged effect), as economic theory would suggest. In sum, the results suggest that trade either has no negative effect on employment, or the effect is swamped by other factors. Survey data from mass layoffs does not identify trade as a major source of gross job loss either. For example, only 2,900 of the 301,400 workers laid off in the first quarter of 2008 reported import competition to be the cause of the layoff. A recent study found that trade had a limited effect on net job loss in the recent recession and jobless recovery. It found that the industries with the greatest job loss during that period included both those affected (business services, manufacturing) and unaffected (leisure and hospitality, transportation, construction, and communications) by trade and outsourcing. It then measured the number of American workers that would be needed to produce U.S. imports compared to the number of workers that are needed to produce U.S. exports, and found that the difference amounted to only 2.4% of total employment in 2003. This estimate should not be interpreted as how much employment would rise in the absence of trade since workers affected by trade may be re-employed producing non-tradable goods. Some policymakers are particularly concerned that trade is responsible for the continuing decline in manufacturing employment in recent years. Even after employment began increasing in the rest of the economy in 2003, manufacturing employment has continued to fall, from 17.6 million in 1998 to 13.9 million in 2007. Yet trade cannot be the primary cause of this decline because manufacturing output has grown by 22% in real terms over those years. By identity, employment can fall as output rises only if productivity is rising faster than output. So the decline in manufacturing employment must be primarily attributable to rapid technological change and efficiency gains, not trade. Some who concede that trade has no effect on net employment when higher imports are matched by higher exports argue that trade nevertheless reduces net employment when higher imports are matched instead by a larger trade deficit. They reason that higher imports cause gross job loss, but are not offset by gross job gains in the export sector if they lead to a trade deficit. While this is true, trade deficits do lead to gross job gains in other ways. When the United States runs a trade deficit, it exchanges foreign imports for U.S. assets. This puts downward pressure on U.S. interest rates, stimulating spending on physical investment (plant and equipment). Lower interest rates also stimulate spending on housing and interest-sensitive goods, such as automobiles and appliances. As a result, the trade deficit causes gross job gains in the sectors that produce plant, equipment, housing, and interest-sensitive goods, all else equal. These gross job gains may not occur instantaneously—so there could be transitional net job loss—but when they do occur, they will offset the gross job loss caused by higher imports so that the trade deficit causes no net job loss. As can be seen in Figure 3 , the historical experience confirms this conclusion: the large increase in the trade deficit in the 1980s and 1990s took place at a time of rising employment and falling unemployment. While the trade deficit rose during the 2001 recession and jobless recovery, it continued to rise from 2003 to 2007 as unemployment fell. This suggests that some other factor, such as strong aggregate demand growth, tends to simultaneously push the trade deficit up and unemployment down. In 2008 (to date), unemployment rose despite a decline in the trade deficit. Table 1 demonstrates that there was almost no correlation between changes in the trade balance and changes in employment. The term offshore outsourcing or offshoring is frequently used in several different ways. It can refer to U.S. multinational firms shifting production from the United States to an overseas subsidiary, U.S. firms importing intermediate goods from foreign companies, importing services, or U.S. firms making overseas investments. Economists view the first three phenomena similarly to trade (the latter phenomenon will be discussed separately in the next section). When U.S. firms outsource production to foreign firms, gross job loss occurs because goods and services that were being produced by U.S. workers are now being produced by workers in other nations. When outsourcing occurs, those foreign firms must be paid using U.S. dollars. The foreign firms, in turn, can use those dollars in three ways. First, they can buy U.S. exports, resulting in gross job gains in the export sector. Second, they can buy U.S. assets (increase the trade deficit), resulting in gross job gains in the interest-sensitive sectors that produce plant, equipment, housing, and interest-sensitive goods, as explained in the previous section. Third, they can sell their U.S. dollars for another currency, causing the dollar to depreciate; as a result, the output of U.S. exporting firms and U.S. import-competing firms would increase as U.S. goods become more price competitive internationally. Thus, in all three scenarios, gross job loss is offset by gross job gains so that there is no net job loss, although there may be for a transitional period. Quality data on outsourcing is scarce because the term has only recently been coined, there is not yet any consensus as to how it should be defined, and the concept cannot easily be measured accurately. It is popularly used to mean net job loss, but conceptually the term applies only to gross job loss. A net measure of outsourcing's effects would be hard to calculate because it would be difficult for BLS to measure gross job gains caused by foreign firms outsourcing to the United States, and impossible to trace the rise in employment caused by the spending on U.S. goods of foreign firms that U.S. firms have engaged in outsourcing. Changes in imports of services suggests that outsourcing, by that definition, is a minor phenomenon relative to total gross job loss. The one official data source on outsourcing comes from the BLS mass layoffs series, and this only includes one type of outsourcing, U.S. firms relocating work abroad. In the first quarter of 2008, only 1,200 employees out of 301,400 were subject to extended mass layoff because of relocation abroad. The argument is sometimes made that when U.S. firms decide to undertake direct investment abroad, it reduces U.S. employment. According to the argument, if the U.S. firm had not, say, built the new factory abroad that employs foreign workers, it would have built a factory in the United States that employed U.S. workers. As a result, net employment is lower than it would have been. Economic theory states that capital investment determines the wages of employees, not the level of employment. That is because capital investment increases the productivity of existing workers, and in a competitive market wages are determined by productivity. If the level of employment was based on the amount of capital available per worker, then the United States would not have been able to achieve full employment in the past since capital per worker has increased steadily over time. Yet throughout its history, the United States has achieved full employment most of the time. Even if U.S. investment abroad did lead to net job loss, the data do not suggest that this explanation is possible since the United States is a net recipient of foreign capital, and has been for the past few decades. In other words, any jobs hypothetically lost by U.S. investment abroad have been more than offset by the jobs created by greater foreign investment in the United States. Although U.S. direct investment abroad exceeds foreign direct investment in the United States, overall foreign investment in the U.S. (direct, portfolio, and official) is greater than U.S. investment abroad. Ultimately, foreign investment has the same effect on the economy regardless of the form it takes. Net foreign investment in the United States is, by identity, equal to the U.S. current account deficit (trade deficit plus net transfers and net investment income). That is because capital cannot flow into the country on net (net borrowing cannot occur) unless the United States imports more than it exports. Any time U.S. investment abroad increases, all else equal, the trade deficit must fall. Thus, explanations of net job loss attributed to the trade deficit and explanations of net job loss attributed to U.S. investment abroad are mutually exclusive— both stories cannot be correct . This can be proven by considering the foreign exchange market. If U.S. direct investment in the euro area increased, dollars must be exchanged for euros. This causes the dollar to depreciate against the euro, causing U.S. exports to the euro area to rise and euro imports to the United States to fall. As a result, the trade deficit narrows. Declines in aggregate employment are often blamed on restructuring in the economy. For example, the decline in employment from 2001 to 2003 is often attributed to the collapse of the ""dot-com"" industry. According to this argument, resources had been overinvested in the dot-com industry in the late 1990s. When this situation was rectified in the late 1990s, workers in that industry were no longer needed, causing overall employment to decline. The reallocation of resources in the economy is probably the primary reason that gross job loss occurs. Changes in tastes, technology, and comparative advantage continually cause labor and capital to be shifted from one industry to another in a market economy. As this report has demonstrated, sizeable reallocations of labor across industries has been a constant in the United States for as long as data has been collected. But in most years, the economy has not had any problem offsetting gross job loss with a greater number of gross job gains. Thus, economic restructuring typically is not accompanied by net job loss overall, even though it often results in net job loss at the local level. It is possible that if restructuring were unusually large at any given time, perhaps like the dot-com collapse, the economy could be unable to absorb that many workers in new jobs fast enough to prevent net job loss. Unfortunately, there is no way to systematically identify which restructuring events are large enough and separate their effects on net job loss from other economic phenomena occurring simultaneously. For example, the net job loss associated with the 2001 recession could be caused by nothing more than an unrelated decline in aggregate spending, as is typical of other historical recessions. In the absence of this decline in aggregate spending, it is possible that the dot-com collapse would not have had any effect on aggregate employment. Even if restructuring does not cause net job loss, there is debate as to whether recessions have the beneficial effect of hastening restructuring. Some argue that when times are tough, firms are forced to innovate to survive and during booms weak firms are propped up by prosperity. If correct, this points to an economic benefit from recessions, in contrast to the mainstream economic view that recessions are economically wasteful because they cause productive labor and capital to lay idle. But it is difficult to evaluate this argument quantitatively. Unlike the other factors described above, economic downturns are the only factor that causes both gross and net job loss according to economic theory. This theory is borne out by historical experience, as illustrated in Table 2 , which show the high correlation between contemporaneous GDP growth and employment growth. (In fact, falling employment is part of the official definition of a recession.) Economic downturns are characterized by insufficient aggregate spending to support existing labor and capital resources. As a result, capital goes idle and workers are laid off until spending revives. The government can boost aggregate spending back to ""full employment"" through expansionary fiscal policy (a larger government budget deficit) or monetary policy (lower short term interest rates by the Federal Reserve). Net job loss caused by economic downturns is temporary because insufficient aggregate spending is only a temporary phenomenon—in the long run, markets adjust to bring spending back into line with potential production. Since 1947, net job loss lasting more than one quarter has only occurred during or immediately following a recession. There have only been two recoveries in which net job loss has continued for more than one quarter after the recession had ended, the recoveries beginning in 1991 and 2001. In the long run, the effects of business cycle changes on net job creation cancel out—net job loss in downturns is offset by net job gains in booms. Thus, in the long run net job creation is determined by the characteristics of the labor market. Over time, a growing population leads to rising employment, or net job creation. In 1950, the U.S. population equaled 151.3 million and nonfarm employment equaled 45.3 million; in 2000, the U.S. population equaled 281.4 million and employment equaled 131.8 million. (The fraction of the population employed in 2000 was so much higher than in 1950 primarily because of the entrance of women into the labor force.) What proportion of the population is employed—both the labor force participation rate and what economists refer to as the ""natural rate"" of unemployment or NAIRU (non-accelerating inflation rate of unemployment)—is determined in the long run by demography (e.g., younger workers have higher unemployment rates), social norms (e.g., the large scale entrance of wives into the working force), and policy (e.g., welfare reform). In the long run, the rate of net job creation will equal the rate needed to keep the economy at the natural rate of unemployment. Sometimes the rate of employment growth will change because the natural rate is changing. For example, from the 1970s until the early 1990s, the average unemployment rate was higher than in the 1950s or 1960s for reasons that cannot be explained by the business cycle alone. Changes in demography, social norms, and policy, as well as the coinciding productivity slowdown, all played a role in the increase, but there is little consensus among economists on the relative importance of each factor. Because changes in the natural rate are gradual, an increase in the natural rate is more likely to be associated with a slower rate of net job creation than net job loss, all else equal. At other times, the employment growth rate will change in order for the actual unemployment rate to return to the NAIRU. Since unemployment rates in the most recent expansion never fell to 1990s levels, part of the labor market sluggishness from 2001 to 2003 may have been caused by a return to the natural rate after unemployment was held below it in the late 1990s. Most economists agree that net job loss is an undesirable phenomenon, and recommend that public policy be used to offset it. Policymakers can use expansionary monetary policy (lower short term interest rates by the Federal Reserve) or expansionary fiscal policy (an increase in the budget deficit) to stimulate aggregate spending and offset net job loss. If used properly and prudently, these policy tools can theoretically minimize net job loss. Unfortunately because of policy lags in recognition, implementation, and effectiveness, fiscal and monetary policy will probably never be conducted effectively enough to eliminate recessionary periods of net job loss. Direct job creation programs have been used by the government in past recessions to stem net job loss, but from an economic perspective, these policies have a similar effect to any expansionary fiscal policy, and they also are prone to implementation lags. Policies that impede gross job loss (e.g., regulatory restrictions on dismissal or layoffs) may seem to be a desirable way to limit net job loss at first blush. However, such policies could have the unintended effect of making firms reluctant to take on new workers, because a firm would not be able to subsequently reduce its workforce easily if the need for the new workers proved to be only temporary. As a result, gross job gains could decline; if gross job gains declined by more than gross job loss declined, net job creation would decline. This suggests that attempts to limit gross job loss could be counterproductive. Because gross job flows are, on the whole, caused by the reallocation of resources to their most efficient use, policies to impede gross job loss would also likely have adverse consequences for growth and efficiency. Helping job losers make the transition into a new employment situation is a less costly alternative, and one that is compatible with an efficient, dynamic labor market. International comparison confirms this view. The Organization of Economic Cooperation and Development (OECD) ranked countries on a scale of zero to six based on regulatory restrictions on dismissal from regular employment, temporary employment, and mass layoffs. As seen in Table 2 , countries with little protection such as Switzerland, Japan, Australia, New Zealand, and the United States had low unemployment rates, between 3.6% and 5.3% in 2007. Countries with greater protection had a mixed experience: some small countries like Austria, the Netherlands, and Norway kept unemployment low, but the four large countries with the most protection (Germany, France, Italy, and Spain) had relatively high unemployment rates. The unemployment rate in the United States was lower at the trough of the recession than the lowest level many of these countries attained at the peak of their business cycles. If policies to forestall gross job loss are deemed to have too high an efficiency cost, what role can policy play? Two perspectives can be used to answer that question. One perspective would view the labor reallocation issue as a purely social problem. That is, allowing gross job loss to occur with no impediment from the government may be an economically desirable outcome as long as it is cancelled out by job creation, but the situation creates social problems that government may wish to tackle on non-economic grounds. These social problems include poverty, psychological problems, crime, alcoholism and substance abuse, the undermining of families and communities, and so on that reportedly increase when gross job loss occurs. Economic analysis provides little guidance on the best role for the government to play in tackling these non-economic problems. Alternatively, an economic perspective would ask if any market failure is associated with gross job loss, and what role the government can play in potentially rectifying that market failure. Although it can be argued that gross job loss poses no market failure in and of itself, a persuasive argument can be made that there are market failures that prevent individuals from efficiently insuring themselves in the private market against the risks posed by gross job loss. To a considerable extent, the possibility of gross job loss is a risky event beyond a worker's control, such as adverse changes in the business cycle, tastes, technology, or trade patterns. One would expect a worker to be willing to use some of his income to privately purchase insurance against those risks, just as individuals insure against the risk of death, fire, health problems, and so on. Yet the limited use of private unemployment insurance to supplement government-provided insurance suggests that market failures may significantly hamper the functioning of the private market. All insurance markets are hampered by two important market failures—adverse selection and moral hazard. A persuasive argument can be made that unemployment insurance may be more adversely affected by both types of market failure than most other types of insurance. Adverse selection is caused by asymmetric information: buyers of insurance know more about their riskiness than sellers. As a result, only buyers with higher risks will tend to purchase insurance because they are more certain that the benefit of the insurance will exceed the cost. This pushes up the price of insurance and hampers insurers' efforts to pool risk. Adverse selection hampers efficiency in the market for unemployment insurance because some causes of unemployment are beyond the worker's control, and some are not. Since insurance firms cannot identify which workers have a greater chance of losing their jobs because of the factors within their control, they cannot efficiently pool the risks that workers do not control. Moral hazard occurs when an individual's behavior becomes more risky once he is insured. Moral hazard also drives the cost of insurance above its efficient level. Moral hazard can occur in the unemployment insurance market in two ways: it can cause insured workers to engage in behavior that is more likely to lead to job loss, and once job loss has occurred it can make an insured worker less willing to take a new job (because the worker can subsist on the income provided by the insurance). Government provision of unemployment insurance solves the adverse selection problem by making participation universal. As long as all workers are participating, insurance can be priced at its efficient level, even though benefit will not match cost for any given worker. Government mitigates, but does not eliminate, the moral hazard problem by making the insurance temporary (normally 26 weeks in most states) and imposing eligibility restrictions (e.g., not providing insurance when the worker has quit or been fired). The government has also tended to extend the duration of insurance during economic downturns, since events beyond the worker's control are a greater source of job loss then. The private sector could use the same methods as the government to mitigate moral hazard, but it could not prevent adverse selection. If one accepts that government provision of unemployment insurance is more efficient than private provision, then the policy issue is whether or not insurance is adequate or excessive at current levels. Are workers adequately protected against the risk of gross job loss at existing benefit levels? Should benefit levels or duration be increased or coverage be expanded since gross job loss seems to be following an upward trend? Would more generous insurance reduce the social problems associated with gross job loss? The tradeoff here is between both benefit and cost to the individual (more generous insurance would require higher premiums) and cost to the economy because of the moral hazard problem: as the insurance becomes more generous, disincentives to maintain employment or seek new employment among the unemployed increase. Government's role in insuring workers against the risks associated with gross job loss can also be viewed through a broader prism than the unemployment insurance program. Disability insurance insures against the risk of job loss due to physical incapacity. Trade Adjustment Assistance (TAA), which offers extended unemployment benefits and job training, reduces the risk that workers adversely affected by trade will be unable to find re-employment. (Some policymakers have suggested that TAA be extended to workers in the service industry, given the growing concern with offshore outsourcing.) Government programs such as COBRA (named after Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985) reduce the loss of health care associated with job loss. Some would argue that income redistribution, in general, is a form of income insurance, whether it takes the form of progressive taxation, the Earned Income Tax Credit, the food stamps program, the Supplemental Security Income program, and so on. Kletzer and Litan have argued that the government should implement a ""wage insurance"" program so that workers who lose their jobs and are forced to take lower paid employment are directly compensated by the government. Along these lines, the Alternative Trade Adjustment Assistance Program for Older Workers was introduced in 2002. An eligible worker (over 50 years old, earning less than $50,000, and meeting other criteria) can receive half the difference between the wages received from reemployment and the wages received at the displaced job for up to two years and payments up to $10,000. This program applies only to workers affected by trade, although the economic rationale for such a program could apply to all workers. Bills in the 110 th Congress, such as S. 1330 (Senator Schumer) and H.R. 2202 (Representative McDermott), would create broader wage insurance programs. At the community level, fiscal transfers (differences between outlays received and taxes paid) that change with economic conditions and government programs such as the Empowerment Zone/Enterprise Communities Program provide what could be characterized as ""insurance"" for the community as a whole against the economic effects of significant job loss. Drawing a distinction between net job loss and gross job loss can help to inform the policy debate. Net job loss is a serious economic problem that fiscal and monetary policy can be used to mitigate. Although it has social costs, gross job loss is part of the normal functioning of a market economy, and has the beneficial role of reallocating resources to their most efficient use when tastes, technology, or comparative advantage changes. Even in expansions, gross job loss is sizeable, between 6.5 million and 8.5 million per quarter from 1992 to 2000, but it is more than offset by gross job gains. Trade, trade deficits, offshore outsourcing, overseas investment, and economic restructuring all cause gross job loss. But in normal economic conditions, none typically causes net job loss, according to theory and evidence. To see why, consider that they all have the same effect on employment as technological advances. For example, the advent of the automobile caused gross job loss in the horse buggy industry, but was more than offset by gross job gains in the rest of the economy. As the buggy example suggests, policies that impede gross job loss can have high efficiency costs. The difference in the unemployment experience of countries with high barriers to job loss, such as the high unemployment countries of Western Europe, and countries with low barriers, such as the United States, offers some evidence that barriers to gross job loss can lead to lower gross job gains, making such barriers ultimately self-defeating. However, public policies to protect workers against the risks posed by gross job loss can be justified on both social and economic grounds. If crafted properly, they have been shown not to reduce gross job gains, and they can arguably raise efficiency by addressing market failures. For example, public provision of unemployment insurance helps overcome moral hazard and adverse selection problems in that market. The challenge for policymakers going forward is to find the right balance between mitigating risk and maintaining market dynamism in an increasingly fluid labor market.","Total nonfarm private employment has fallen since the beginning of 2008. Job loss is one of the most important macroeconomic problems facing policymakers, both in terms of its economic and social cost. But what is often missing from the policy debate is a distinction between net job loss and gross job loss. Gross job loss is the total number of jobs eliminated by all contracting firms in a given period, whereas net job loss is the result of greater gross job loss than gross job gains in a given period. Economists view net job loss as a detrimental phenomenon, and most recommend that fiscal and monetary policy be used to mitigate it. However, they view gross job loss, as long as it is offset by gross job gains, as a healthy and normal part of a functioning market economy, although it may have social costs and will not affect all regions or industries equally. Data reveal that gross job loss and job gains are each, on average, 20 times higher than net job loss (or gains) in any given quarter. This is true in both expansions and recessions. Clearly, gross job loss is not incompatible with a healthy labor market: during the 1990s expansion in which the unemployment rate was lower than it had been in three decades, gross job losses steadily increased as the expansion progressed. Even during the 2001 recession and subsequent ""jobless recovery,"" gross job gains continued to average about 8 million per quarter; but these gross job gains were more than offset by gross job losses. In the subsequent expansion, gross job gains stayed relatively constant, but gross job losses fell. Small businesses have both higher gross job gains and losses than large firms, and have tended to contribute modestly more net job creation. Many causes of job loss have been offered, including imports, trade deficits, offshore outsourcing, direct investment abroad, and restructuring. But economic theory suggests that all of these cause gross job loss, not net job loss. Historical experience is supportive: neither imports, the trade deficit, nor the implementation of trade liberalization agreements are correlated with net job loss. Theory suggests, and empirical evidence has confirmed, that only recessions cause net job loss. Policies that impede gross job loss may seem to be a desirable way to limit net job loss at first blush. However, such policies could make firms reluctant to hire new workers, because a firm would not be able to subsequently reduce its workforce easily if the need for the new workers proved to be only temporary. As a result, gross job gains could decline; if gross job gains declined by more than gross job loss declined, net job creation would decline. International comparison confirms this view: Germany, France, Italy, and Spain all had high barriers to job loss and unemployment rates that were typically twice as high in the 1990s as low barrier countries like the United States. Although attempts to impede gross job loss may reduce economic efficiency, policy can (and does) assist some of those affected by gross job loss through unemployment insurance and other parts of the social safety net. Whether the existing social safety net is adequate as gross job loss increases is the subject of policy debate. This report will be updated as events warrant.",govreport
"T his report contains two main parts: a section describing recent events and a longer background section on key elements of the U.S.-Japan relationship. Shinzo Abe has been Japan's prime minister since December 2012, and in 2017 he succeeded in extending the LDP's term-limit rules for party president from two consecutive three-year terms to three consecutive terms. In September 2018, Abe's Liberal Democratic Party (LDP) held an internal party leadership vote in which Abe defeated former Defense Minister Shigeru Ishiba, securing a three-year term as party president. With the LDP and its coalition partner, the much smaller Komeito party, firmly in control of Japan's legislature, Abe's victory in the LDP leadership contest means that he will continue serving as premier. If Abe remains in power beyond November 2019, he will become the longest-serving prime minister in the history of modern Japan. Shortly after his victory, Abe appointed a new Cabinet, retaining the members in charge of foreign affairs and U.S. relations, a likely indication of continuity in Japanese foreign and trade policy. Abe's new Cabinet includes one woman, down from two, despite Abe's campaign to increase women's representation in government and participation in the workforce. (See "" Emphasis on ""Womenomics"" '"" section below.) Abe's next electoral test will come in July 2019, when half the seats of Japan's Upper House of the bicameral legislature (called the Diet) will be chosen. In a reflection of the disarray of Japan's opposition parties, the LDP's approval ratings in most early October 2018 polls were between 40% and 50%, while none of Japan's other parties received more than 10% support. The September 2018 LDP vote exposed a gap between the LDP's Diet members, over 80% of whom voted for Abe, and the LDP's rank-and-file members, over 55% of whom voted for Abe's opponent, Ishiba. (For background on Japanese politics, see the "" Japanese Politics "" section.) At the outset of the Trump presidency, a shared approach to confronting the North Korean threat appeared to cement the U.S.-Japan relationship. Beginning at their first summit in Mar-a-Lago in February 2017, Abe and Trump presented a united front on dealing with Pyongyang's nuclear weapon test and multiple missile launches. The two leaders met multiple times and spoke often by phone, and Abe wholeheartedly endorsed the Trump Administration's ""maximum pressure"" strategy. Since the beginning of 2018, Trump has pursued a rapprochement with Pyongyang and held a friendly summit with North Korean leader Kim Jong-un. Many Japanese are unconvinced that North Korea will give up its nuclear weapons or missiles and fear that Tokyo's interests vis-à-vis Pyongyang will be marginalized if U.S.-North Korea relations continue to warm. Chief among those issues are the abduction of Japanese citizens by North Korean agents in the 1970s and 1980s, an issue on which Abe built his political career. Abe has said he would be willing to meet with Kim to resolve the abduction issue but analysts doubt that Kim has reason to conciliate Abe given his newfound stature in international diplomacy. Trump's shift on North Korea—including his decision to suspend U.S.-South Korean military exercises to obtain greater concessions from Pyongyang—and his statements critical of the value of alliances generally and Japan specifically have increased questions among Japanese policymakers about the depth and durability of the U.S. commitment to Japan's security. U.S. trade policy under the Trump Administration has focused partly on reducing U.S. bilateral trade deficits. This has strained U.S. trade relations with Japan, which accounted for $70 billion or 9% of the total U.S. goods trade deficit in 2017, with a deficit in auto trade alone of over $50 billion. As part of its focus on reducing the trade deficit and encouraging domestic manufacturing, among other rationales, the Administration has proclaimed increased tariffs and other import restrictions under rarely used U.S. trade laws. In addition to raising concerns over potential economic costs in the United States, these tariff actions have heightened tensions with U.S. trading partners. Japan, given its longstanding close alliance with the United States, has taken particular issue with the steel and aluminum tariffs imposed under Section 232 of the Trade Act of 1962, which are based on an investigation into the potential threat to national security posed by the imports. An ongoing Section 232 investigation on motor vehicles may pose a larger threat to the Japanese economy. U.S. imports of Japanese autos and parts were nearly $56 billion, about one-third of total U.S. imports from Japan in 2017. On September 26, 2018, the United States and Japan announced their intent to start new formal bilateral trade negotiations. On October 16, the United States Trade Representative (USTR) gave Congress official notification to that effect, allowing negotiations to start under Trade Promotion Authority (TPA) procedures after 90 days. Japan was reluctant to agree to such negotiations, but likely saw the talks as a way to avoid the possible increased U.S. motor vehicle tariffs. As it did in talks with the EU, the Trump Administration has agreed not to impose new tariffs while bilateral negotiations remain ongoing. The agreement may be negotiated in stages and be less comprehensive than a typical U.S. free trade agreement (FTA), though the scope of talks is unclear. Instead of bilateral talks, Japan had urged the Trump Administration to return to the regional Trans-Pacific Partnership (TPP). After the U.S. withdrawal from TPP in 2017, Japan took the lead in negotiating revisions to the agreement among the remaining 11 members, suspending certain commitments largely sought by the United States. The new deal, called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or TPP-11, was signed in July 2018 and requires ratification by six participants to take effect. Australia, Japan, Mexico, and Singapore have ratified the agreement to date, and Canada's parliament is in the final stages of ratification. Despite an ongoing territorial dispute in the East China Sea, Japan and China appear to be seeking stability in their bilateral relationship, a trend that has accelerated in the past several months. Abe is scheduled to visit Beijing in late October, the first dedicated leaders' summit between the two countries since 2011. On the agenda is deepening economic cooperation and increasing people-to-people exchanges. The emphasis on economic issues has emerged as the two sides have sought to manage tensions in the security realm. In May 2018, Tokyo and Beijing established a hotline for senior defense officials to avoid an unintended escalation in the event of a crisis over maritime disputes in the East China Sea. (See "" Territorial Dispute with China in the East China Sea "" for more background.) Abe's government has reversed its initial opposition to China's Belt and Road Initiative, which calls for building infrastructure projects in various regions around the world, saying that under the proper conditions it will cooperate with Beijing in providing infrastructure development. Some analysts posit that the mutual interest in improving relations may be driven by both countries' trade friction with the United States and more general sense of uncertainty about the durability of U.S. presence in the region. Although deep-seated historical distrust and regional rivalry are likely to endure in the long-run, relations appear to be on the upswing. Japan's relations with South Korea remain precarious despite a rapprochement in 2016. Koreans hold strong grievances about Japan's colonial rule over the peninsula (1910-1945), particularly on the issue of Korean comfort women who were forced to provide sex to Japanese soldiers in the World War II era. (See "" Japan's Ties with South Korea "" section.) After South Korea's progressive president, Moon Jae-in, was elected in May 2017, Seoul said it would uphold a U.S.-supported 2015 agreement on how to resolve the comfort women issue, but public mistrust suggests that it will remain a diplomatic irritant. Moon also has continued to participate in a 2016 ROK-Japan military intelligence-sharing agreement, which the United States helped to broker, but trilateral defense cooperation has flagged. Even when official relations are steady, historical grievances are just beneath the surface and can flare unexpectedly. In early October 2018, the Japanese Maritime Self Defense Force pulled out of an international fleet review in South Korea after the hosts asked Japan to refrain from hoisting its ensign, which is identical to Japan's pre-World War II imperial ""rising sun"" flag. In addition, Moon has suggested that his government plans to shut down the foundation established to oversee compensating comfort women after the 2015 agreement was signed, likely in response to public opinion that is critical of the arrangement. Recently, Abe has emphasized publicly that he wants to improve ties with South Korea, possibly reflecting the central role that Seoul has taken in driving international diplomacy with North Korea. The warming of relations between North and South Korea since early 2018 presents additional challenges to the relationship between the two U.S. allies. The North Korean threat has traditionally driven closer U.S.-Japan-South Korea trilateral coordination, and North Korea's consistent provocations in the past have provided both the motivation and the political room for South Korea and Japan to expand security cooperation. Japan is wary of Seoul's outreach to North Korea and Pyongyang's ""smile diplomacy,"" however, particularly if it is not accompanied by significant tangible reductions in North Korean nuclear and missile capabilities. Although candidate Donald Trump made statements critical of Japan during his campaign, relations have remained strong on the surface throughout several visits and leaders' meetings. After Trump's victory, Abe was the first foreign leader to visit the President-Elect, and the second leader to visit the White House after the U.S. inauguration. Abe and Trump displayed a strong personal rapport and issued a joint statement that echoed many of the previous tenets of the bilateral alliance. However, Trump's long-standing wariness of Japan's trade practices and skepticism of the value of U.S. alliances abroad may have unnerved Tokyo. With Abe's political position ensured, he has looked to hedge against Japan's strong dependency on the United States by championing regional trade deals, stabilizing relations with China, and reaching out to other partners such as Russia, India, Australia, and the European Union. Japan remains committed to the alliance with the United States, and security cooperation at the working level continues to be robust. In some ways, U.S. pressure to provide more in the security realm may boost Abe's efforts aimed at increasing the flexibility and capabilities of Japan's military. The Japanese public remains somewhat wary of moving away from a strictly self-defense armed force, as well as of altering Japan's constitution to allow for more offensive capabilities. As a baseline, the Trump Administration has reaffirmed several key statements seen as crucial to Japan. Tokyo was likely reassured by the joint statement from the leaders' first summit, in February 2017. The United States provided a three-fold affirmation on the Senkaku Islands (the small islands are also claimed by China and Taiwan, and known as Diaoyu and Diaoyutai, respectively): recognizing Japanese administration of the islands, stating that Article 5 of the mutual defense treaty applies to the islands, and stating that it opposed ""any unilateral action that seeks to undermine"" Japan's administration of the islands. The Secretaries of State and Defense further affirmed the United States' ""steadfast commitment"" to Japan, and President Trump called the alliance ""the cornerstone of peace and stability in the Pacific region."" Some analysts have expressed concern about the differences in approach to global issues between the Trump Administration and Tokyo. Internationally, the two countries traditionally have cooperated on scores of multilateral issues, from nuclear nonproliferation to climate change to pandemics. Japan is a firm supporter of the United Nations as a forum for dealing with international disputes and concerns. In the past Japan and the United States have worked closely in fora such as the East Asia Summit and the Association of Southeast Asian Nations (ASEAN) Regional Forum. The shared sense of working together to forge a rules- and norms-based international order has long been a key component of the bilateral relationship. The Trump Administration, however, has expressed skepticism of multilateral organizations. To cite one example, several Japanese cabinet members expressed disappointment in the Trump Administration's decision to withdraw from the Paris climate accord. Additionally, under the President's ""America First"" approach, a shift away from the United States' role as the guarantor of regional stability raises broader questions for Japan and other countries in the region about the durability of the alliance. If Japan perceives the United States is moving away from its traditional security role, many experts believe Japan may decide to form other partnerships with like-minded countries and adjust its foreign policy to allow more flexibility to independently pursue its own national interests. If Abe remains in office through November 2019, as expected, he will become the longest-serving prime minister in post-war Japan. After his first stint as premier in 2006-2007, Abe led the conservative LDP back into power in late 2012 following a six-year period in which six different prime ministers served. Since then, he appears to have stabilized Japanese politics and emphasized strong defense ties with the United States. Under Abe's leadership, the government increased the defense budget after a decade of decline, passed a set of controversial bills that are reforming Japanese security policies, and won approval from a previous Okinawan governor for the construction of a new U.S. Marine Corps base on Okinawa. Abe also led Japan into the TPP FTA negotiations and has attempted to revitalize Japan's economy, including seeking a number of economic reforms favored by many in the United States. Historical issues have long colored Japan's relationships with its neighbors, particularly China and South Korea, which argue that the Japanese government has neither sufficiently ""atoned"" for nor adequately compensated them for Japan's occupation and belligerence in the first half of the 20 th century. Abe's selections for his cabinet posts over the years include a number of politicians known for advocating nationalist, and in some cases ultra-nationalist, views that many argue appear to glorify Imperial Japan's actions. Some of Abe's positions—such as changing the interpretation of Japan's constitution to allow for Japanese participation in collective self-defense—largely have been welcomed by U.S. officials eager to advance military cooperation. Other statements, however, suggest that Abe embraces a revisionist view of Japanese history that rejects the narrative of Imperial Japanese aggression and victimization of other Asians. He has been associated with groups arguing that Japan has been unjustly criticized for its behavior as a colonial and wartime power. Among the positions advocated by these groups, such as Nippon Kaigi Kyokai , are that Japan should be applauded for liberating much of East Asia from Western colonial powers, that the 1946-1948 Tokyo War Crimes tribunals were illegitimate, and that the killings by Imperial Japanese troops during the 1937 ""Nanjing massacre"" were exaggerated or fabricated. In December 2013, Abe paid a highly publicized visit to Yasukuni Shrine, a shrine that was established to house the ""spirits"" of Japanese soldiers who died during war, but also includes 14 individuals who were convicted as Class A war criminals after World War II. The U.S. Embassy in Tokyo directly criticized the move, releasing a statement that said, ""The United States is disappointed that Japan's leadership has taken an action that will exacerbate tensions with Japan's neighbors."" Since then, despite the U.S. statement, sizeable numbers of LDP lawmakers have periodically visited the Shrine on ceremonial days, including the sensitive date of August 15, the anniversary of Japan's surrender in World War II. Abe has refrained from visiting since 2013, although LDP lawmakers and cabinet ministers have periodically paid respects at the shrine. Since 2013, Abe himself has largely avoided language and actions that could upset regional relations. After some waffling on key government statements made by past Japanese leaders—chief among them the 1995 ""Murayama Statement"" that apologized for Japan's wartime action and the 1993 ""Kono Statement"" that apologized to the ""comfort women"" (see the ""Japan and the Korean Peninsula"" section below)—Abe reaffirmed the official government expressions of remorse after pressure from many forces, including U.S. government officials and Members of Congress. Abe appears to have responded to criticism that his handling of these controversial issues could be damaging to Japan's and—to some extent—the United States' national interests. Japan and China have engaged in a diplomatic and at times physical struggle over a group of uninhabited land features in the East China Sea known as the Senkaku Islands in Japan, Diaoyu in China, and Diaoyutai in Taiwan. The territory, administered by Japan but also claimed by China and Taiwan, has been a subject of contention for years, despite modest attempts by Tokyo and Beijing to jointly develop the potentially rich energy deposits nearby, most recently in 2008-2010. China and Japan also dispute maritime rights in the East China Sea more broadly, with Japan arguing for a ""median line"" equidistant from each country's claimed territorial border dividing the two countries' exclusive economic zones in the East China Sea; China rejects Japan's claimed median line, arguing it has maritime rights beyond this line. The Senkakus dispute has been in a state of varying tension since 2010, when the Japan Coast Guard arrested and detained the captain of a Chinese fishing vessel after it collided with two Japan Coast Guard ships near the Senkakus. The incident resulted in a diplomatic standoff, with Beijing suspending high-level exchanges and restricting exports of rare earth elements to Japan. In August 2012, the Japanese government purchased three of the five land features from a private landowner in order to preempt their sale to Tokyo's nationalist governor at the time, Shintaro Ishihara. Claiming that this act amounted to ""nationalization"" and thus violated the tenuous status quo, Beijing issued sharp objections. Chinese citizens held massive anti-Japan protests, and the resulting tensions led to a drop in Sino-Japanese trade. In April 2013, the Chinese Ministry of Foreign Affairs said for the first time that China considered the islands a ""core interest,"" indicating to many analysts that Beijing was unlikely to make concessions on this sensitive sovereignty issue. Starting in the fall of 2012, China began regularly deploying maritime law enforcement ships near the islands and stepped up what it called ""routine"" patrols to assert jurisdiction in ""China's territorial waters."" In 2013, near-daily encounters occasionally escalated: both countries scrambled fighter jets, and, according to the Japanese government, a Chinese navy ship locked its fire-control radar on a Japanese destroyer and helicopter on two separate occasions. The number of Chinese vessels entering the territorial seas surrounding the islands decreased to a steady level of 7-10 vessels per month in 2014 and 2015, spiked to over 20 in August of 2016, before shifting to the 8-12 vessels per month range for most of the January-August 2017 period and decreasing again to 6-8 vessels per month in the first eight months of 2018. Most of these patrols are conducted by the China Coast Guard, which has been instrumental in advancing China's interests in disputed waters in the East and South China Seas. In 2016, for example, several China Coast Guard vessels escorted between 200 and 300 Chinese fishing vessels to waters near the Senkakus in an apparent demonstration of Chinese sovereignty. China-Japan tensions have played out in the airspace above and around the Senkakus as well. Chinese aircraft activity in the area contributed to an eightfold increase in the number of scramble takeoffs by Japan Air Self Defense Force aircraft between Fiscal Year 2010 (96 scrambles) and 2016 (842 scrambles); the number of scrambles decreased somewhat to 602 in 2017, and there were 278 in the first half of 2018. In November 2013, China abruptly established an air defense identification zone (ADIZ) in the East China Sea covering the Senkakus as well as airspace that overlaps with the existing ADIZs of Japan, South Korea, and Taiwan. China's announcement of the ADIZ produced indignation and anxiety in the region and in Washington for several reasons: the ADIZ represented a new step to pressure—to coerce, some experts argue—Japan's conciliation in the territorial dispute over the islets; the requirements for flight notification in China's proclaimed ADIZ go beyond international norms and impinge on the freedom of navigation; and the overlap of ADIZs could lead to accidents or unintended clashes, thus raising the risk of conflict in the East China Sea. Tensions have subsided somewhat after peaking in 2016, with Beijing and Tokyo seemingly committed to preventing a crisis or armed clash over the Senkakus. For example, in May 2018, China and Japan announced the establishment of a ""hotline"" for senior defense officials from both countries to communicate and deescalate in the event of a maritime clash. In addition, Chinese authorities in August 2018 reportedly banned Chinese fishermen from operating near the Senkakus. Efforts by both countries to defend their claims have played out primarily in the ""gray zone,"" or the ambiguous space between peace and conflict, with non-military actors like coast guards, fishermen, and China's maritime militia on the front lines. China's approach to the dispute (as well as its disputes in the South China Sea) appears to be aimed at exploiting the gray zone to gradually consolidate its control and influence over contested space without escalating to armed conflict. In response, Japan has prioritized enhancing its ability to counter gray zone activities, in addition to strengthening its traditional military capabilities. Japan's administration of the Senkakus is the basis of the U.S. treaty commitment to defend that territory. U.S. administrations going back at least to the Nixon Administration have stated that the United States takes no position on the territorial disputes. However, it also has been U.S. policy since 1972 that the 1960 U.S.-Japan Security Treaty covers the Senkakus, because Article 5 of the treaty stipulates that the United States is bound to protect ""the territories under the Administration of Japan,"" and Japan administers the Senkakus. In its own attempt to address this perceived gap, Congress inserted in the FY2013 National Defense Authorization Act ( H.R. 4310 , P.L. 112-239 ) a resolution stating, among other items, that ""the unilateral action of a third party will not affect the United States' acknowledgment of the administration of Japan over the Senkaku Islands."" The conflict in the East China Sea in many ways embodies Japan's security challenges. The maritime confrontation with Beijing is a concrete manifestation of the threat Japan has faced for years from China's rising regional power. It also brings into relief Japan's dependence on the U.S. security guarantee and its anxiety that Washington will not defend Japanese territory if Japan goes to war with China, particularly over a group of uninhabited land features. In contrast to Japan's and China's inability to reach an agreement on sharing undersea resources in the disputed area, in April 2013 Japan and Taiwan agreed to jointly share and administer the fishing resources in their overlapping claimed EEZs Senkakus (Diaoyu/Diaoyutai). The agreement, which had been discussed for 17 years, addressed neither the two sides' conflicting sovereignty claims, nor the question of fishing rights in the islands' territorial waters. On July 29, 2013, the Senate passed S.Res. 167 , which described the pact as a ""model for other such agreements."" In the 21 st century, Japan's relationship with South Korea has fluctuated between troubled and tentatively cooperative, depending on external circumstances and the leaders in power. Washington has generally encouraged closer ties between Tokyo and Seoul as two of its most important alliance partners; the two countries have shared security concerns, developed economies, and a commitment to open markets, international rules and norms, and regional stability. A poor relationship between Seoul and Tokyo jeopardizes U.S. interests by complicating trilateral cooperation on North Korea policy and on responding to China's rise. Tense relations also complicate Japan's desire to expand its military and diplomatic influence as well as the potential creation of an integrated U.S.-Japan-South Korea ballistic missile defense system. The North Korean threat has traditionally driven closer trilateral coordination, even when Tokyo and Seoul have faced political tension. Under North Korean leader Kim Jong-un, North Korea's consistent provocations from 2011 to 2017 provided both the motivation and the political room for South Korea and Japan to forge more cooperative stances, despite lingering mutual distrust. For example, in late June 2016, the three countries held their first joint military training exercise with Aegis ships that focused on tracking North Korean missile launches by sharing intelligence. The persistent Japan-Korea discord centers on historical issues. Officials in Japan have referred to rising ""Korea fatigue"" among their public and expressed frustration that for years South Korean leaders have not recognized and in some cases have rejected the efforts Japan has made to acknowledge and apologize for Imperial Japan's actions during the 35 years following its annexation of the Korean Peninsula in 1910. In addition to the comfort women issue (see below), the perennial issues of how Japan's behavior before and during World War II is depicted in Japanese school textbooks and a territorial dispute between Japan and South Korea continue to periodically rile relations. A group of small islands in the Sea of Japan, known as Dokdo in Korean and Takeshima in Japanese (the U.S. government refers to them as the Liancourt Rocks), are administered by South Korea but claimed by Japan. Japanese statements about the claim in defense documents or by local prefectures routinely spark official criticism and public outcry in South Korea. Similarly, Seoul expresses disapproval of some of the history textbooks approved by Japan's Ministry of Education that South Koreans claim diminish or whitewash Japan's colonial-era atrocities. The most prominent stumbling block to better Japan-South Korean relations involves the ""comfort women,"" a literal translation of the Japanese euphemism referring to women who were forced to provide sexual services for Japanese soldiers during the imperial military's conquest and colonization of several Asian countries in the 1930s and 1940s. The long-standing controversy became more heated under Abe's leadership. In the past, Abe supported the claims made by many conservatives in Japan that the women were not directly coerced into service by the Japanese military. In 2015, Abe and then-President Park Geun-hye of South Korea concluded an agreement that included a new apology from Abe and the provision of 1 billion yen (about $8.3 million) from the Japanese government to a new Korean foundation that supports surviving victims. The two governments' foreign ministers agreed that this long-standing bilateral rift would be ""finally and irreversibly resolved"" pending the Japanese government's implementation of the agreement. Although the main elements of the agreement appeared to be implemented in 2016, the deal remains deeply unpopular with the South Korea public. The issue continues to be an irritant in bilateral relations: Japan objects to a comfort woman statue that stands in front of the Japanese Embassy in Seoul, and in 2018 Seoul suggested it would disband the foundation established by the agreement. The issue of the so-called comfort women has gained visibility in the United States, due in part to Korean-American activist groups. These groups have pressed successfully for the erection of monuments in California and New Jersey commemorating the victims, passage of a resolution on the issue by the New York State Senate, the naming of a city street in the New York City borough of Queens in honor of the victims, and approval to erect a memorial to the comfort women in San Francisco. In 2007, U.S. House of Representatives passed H.Res. 121 (110 th Congress), calling on the Japanese government to ""formally acknowledge, apologize, and accept historical responsibility in ... an unequivocal manner"" for forcing young women into military prostitution. Since 2009, Washington and Tokyo have been largely united in their approach to North Korea, driven by Pyongyang's string of missile launches and nuclear tests. In February 2017, North Korea launched the first of many missiles of that year during Abe's summit with Trump, setting the stage for the two leaders to bond over the North Korean threat. Japan has employed a hardline policy toward North Korea, including a virtual embargo on all bilateral trade and vocal leadership at the United Nations to punish Pyongyang for its human rights abuses and military provocations. When the Six-Party Talks were active, Japan was considered a key actor in a possible resolution of problems on the Korean peninsula, but the multilateral format has been dormant since 2009 and appears to be all but abandoned. Japan is directly threatened by North Korea given the demonstrated capability of Pyongyang's medium-range missiles; in 2017, North Korea twice tested missiles that flew over Japanese territory. North Korea has long-standing animosity toward Japan for its colonialism of the Korean peninsula in the early 20 th century. In addition, U.S. bases in Japan could be targeted by the North Koreans in any military contingency. Aside from these direct security concerns, Japan has prioritized the long-standing issue of Japanese citizens kidnapped by North Korean agents decades ago. In 2002, then-North Korean leader Kim Jong-il admitted to the abductions and returned five survivors, claiming the others had perished from natural causes. Japan officially identifies 17 individuals as abductees. Abe, then serving as Chief Cabinet Secretary to then-Prime Minister Junichiro Koizumi, has since been a passionate champion for the abductees' families and pledged as a leader to bring home all surviving Japanese. President Trump mentioned the abductee issue during his 2017 U.N. General Assembly address, and said that he also raised the issue with Kim Jong-un during the Singapore Summit in 2018. The Abe Administration's foreign policy has displayed elements of both power politics and an emphasis on democratic values, international laws, and norms. Shortly after returning to office in 2012, Abe released an article outlining his foreign and security policy strategy titled ""Asia's Democratic Security Diamond,"" which described how the democracies of Japan, Australia, India, and the United States could cooperate to deter Chinese aggression on its maritime periphery. In Abe's first year in office, Japan held numerous high-level meetings with Asian countries to bolster relations and, in many cases, to enhance security ties. Abe had summit meetings in India, Russia, Great Britain, all 10 countries in the Association of Southeast Asian Nations (ASEAN), and several countries in the Middle East and Africa. Japan has particularly focused on issues of freedom of navigation in the South China Sea, in part because of the implications for Japan's trade flows and for the East China Sea dispute. Since 2012, even before Abe came into office, Japan had been working to strengthen the maritime capabilities of Southeast Asian countries such as Vietnam and the Philippines, and Abe has accelerated these efforts, which the Obama Administration supported as part of its ""Asia Rebalance"" strategy. This energetic diplomacy indicates a desire to balance China's growing influence with a loose coalition of Asia-Pacific powers, but this strategy of realpolitik is couched in the rhetoric of international laws and democratic values. Abe's international outreach has yielded positive results, according to many observers. Despite a failed submarine deal, bilateral ties with Australia are robust. Abe's highly publicized July 2014 visit to Canberra yielded new economic and security arrangements, including an agreement to transfer defense equipment and technology. Japan-India ties have blossomed under Abe and Prime Minister Narendra Modi, including expanded military exercises and negotiations on defense export agreements. Even as cracks have appeared in the U.S.-Philippines alliance, Abe has made efforts to maintain Japan-Philippines defense relations. Part of Abe's international diplomacy push has been to reach out to Russia. Japan and the Soviet Union never signed a peace treaty following World War II due to a territorial dispute over four islands north of Hokkaido in the Kuril Chain. The islands are known in Japan as the Northern Territories and were seized by the Soviets in the waning days of the war. Both Japan and Russia face security challenges from China and may be seeking a partnership to counter Beijing's economic and military power. Particularly in the past several years, however, China and Russia have developed closer relations and cooperate in multiple areas. Tokyo's ambitious plans to revitalize relations with Moscow, including resolution of the disputed islands, however, do not appear to have made progress. Russia's aggression in Ukraine in 2014 disrupted the improving relationship. Tokyo signed on to the subsequent G7 statement condemning Russia's action and implemented sanctions and asset freezes. Japan attempted to salvage the potential breakthrough by imposing only relatively mild sanctions despite pressure from the United States and other Western powers. With many countries in the West isolating Moscow, Russia and China appear to have grown closer. For decades, U.S. soldiers who were held captive by Imperial Japan during World War II have sought official apologies from the Japanese government for their treatment. A number of Members of Congress have supported these campaigns. The brutal conditions of Japanese POW camps have been widely documented. In May 2009, the Japanese Ambassador to the United States attended the last convention of the American Defenders of Bataan and Corregidor to deliver a cabinet-approved apology for their suffering and abuse. In 2010, with the support and encouragement of the Obama Administration, the Japanese government financed a Japanese/American POW Friendship Program for former American POWs and their immediate family members to visit Japan, receive an apology from the sitting Foreign Minister and other Japanese Cabinet members, and travel to the sites of their POW camps. Annual trips were held from 2010 to 2017. In the 112 th Congress, three resolutions— S.Res. 333 , H.Res. 324 , and H.Res. 333 —were introduced thanking the government of Japan for its apology and for arranging the visitation program. The resolutions also encouraged the Japanese to do more for the U.S. POWs, including by continuing and expanding the visitation programs as well as its World War II education efforts. They also called for Japanese companies to apologize for their or their predecessor firms' use of un- or inadequately compensated forced laborers during the war. In July 2015, Mitsubishi Materials Corporation (a member of the Mitsubishi Group) became the first major Japanese company to apologize to U.S. POWs on behalf of its predecessor firm, which ran several POW camps that included over 1,000 Americans. In addition, they made a one-time grant of $50,000 to a library in West Virginia to maintain a collection of POW materials. Under the Obama Administration, Japan and the United States cooperated on a wide range of environmental initiatives both bilaterally through multiple agencies and through multilateral organizations, such as the UNFCCC, the International Energy Agency (IEA), the Asia-Pacific Economic Cooperation (APEC), the Clean Energy Ministerial (CEM), the International Energy Forum (IEF), and the East Asian Summit (EAS). Japan was generally regarded by U.S. officials as closely aligned with the Obama Administration in international climate negotiations in its position that any international climate agreement must be legally binding in a symmetrical way, with all major economies agreeing to the same elements. However, because of the shutdown of Japan's nuclear reactors (see below), international observers raised concerns about losing Japan as a global partner in promoting nuclear safety and nonproliferation measures and in reducing greenhouse gas emissions. President Trump's 2017 decision to withdraw the United States from the UNFCCC Paris Agreement, an international climate accord designed to reduce global emissions, removed one channel through which the United States and Japan cooperated closely. Japanese officials expressed dismay when the United States withdrew from the Agreement, with the Japanese Ministry of Foreign Affairs calling the decision ""regrettable""; the then Minister for the Environment had a stronger response, saying, ""It's as if they've turned their back on the wisdom of humanity…. In addition to being disappointed, I'm also angry."" Although Japanese officials—including Abe—emphasize the importance of acting on climate change both domestically and in coordination with the international community, some experts assess Japan's greenhouse gas emissions reduction plan is insufficiently ambitious, particularly in light of Japan's expansion of coal power plants. Nevertheless the two countries continue to cooperate on energy issues under a Japan-United States Strategic Energy Partnership established in November 2017. The partnership focuses on advanced nuclear energy technologies, clean coal technologies, natural gas market development, and energy infrastructure in the developing world. This effort dovetails with the Trump Administration's Asia-EDGE (Enhancing Development and Growth through Energy) initiative, one of the economic and commercial pillars of the Administration's Indo-Pacific strategy announced in July 2018. Among other things, Asia-EDGE aims to strengthen energy security in the region and grow Asian markets for U.S. energy products, particularly liquefied natural gas (LNG); Japan is the world's largest LNG buyer and has become a destination for U.S. LNG exports. Japan is undergoing a national debate on the future of nuclear power, with major implications for businesses operating in Japan, U.S.-Japan nuclear energy cooperation, and nuclear safety and nonproliferation measures worldwide. Prior to 2011, nuclear power was providing roughly 30% of Japan's power generation capacity, and the 2006 ""New National Energy Strategy"" had set out a goal of significantly increasing Japan's nuclear power generating capacity. However, the policy of expanding nuclear power was abruptly reversed in the aftermath of the March 11, 2011, natural disasters and meltdowns at the Fukushima Daiichi nuclear power plant. Public trust in the safety of nuclear power collapsed, and a vocal antinuclear political movement emerged. This movement tapped into an undercurrent of antinuclear sentiment in modern Japanese society based on its legacy as the victim of atomic bombing in 1945. As the nation's 54 nuclear reactors were shut down one by one for their annual safety inspections in the months after March 2011, the Japanese government did not restart them for several years (except a temporary reactivation for two reactors at one site in central Japan). No reactors were operating from September 2013 until August 2015. As of October 2018, only eight reactors are in operation. The drawdown of nuclear power generation resulted in many short- and long-term consequences for Japan: rising electricity costs for residences and businesses; heightened risk of blackouts in the summer, especially in the Kansai region near Osaka and Kyoto; widespread energy conservation efforts by businesses, government agencies, and ordinary citizens; significant losses for and near-bankruptcy of major utility companies; and increased fossil fuel imports. Japan's Ministry of Economy, Trade, and Industry estimated the direct cost of the decommissioning of the Fukushima Daiichi plant and compensation of victims to be $187 billion, and the cost of fossil fuel imports to replace power from subsequently shutdown reactors to be $31.3 billion in FY2013 alone. The Institute of Energy Economics, Japan, calculated that the nuclear shutdowns led to the loss of 420,000 jobs in 2012. The LDP has promoted a relatively pronuclear policy, despite persistent antinuclear sentiment among the public. The Abe Administration released a Strategic Energy Plan in April 2014 that identifies nuclear power as an ""important base-load power source,"" and in 2015 announced it would seek for nuclear energy to account for 20-22% of Japan's power supply by 2030. In the coming years, the government likely will approve the restart of many of Japan's existing 42 operable nuclear reactors, but as many as half, or even more, may never operate again. Approximately 55% of the Japanese public opposes the restart of nuclear reactors, compared to approximately 25% in favor. The Abe Cabinet faces a complex challenge: how to balance concerns about energy security, promotion of renewable energy sources, the viability of electric utility companies, the health of the overall economy, and public concerns about safety. And if Japan closes down its nuclear power industry, some analysts wonder whether it will continue to play a lead role in promoting nuclear safety and nonproliferation around the world. The U.S.-Japan alliance has long been an anchor of the U.S. security role in Asia. Forged in the U.S. occupation of Japan after its defeat in World War II, the alliance provides a platform for U.S. military readiness in the Pacific under the 1960 Treaty of Mutual Cooperation and Security between the United States and Japan. About 50,000 U.S. troops are stationed in Japan and have the exclusive use of approximately 90 facilities (see Figure 2 ). In exchange, the United States guarantees Japan's security, including through extended deterrence, known colloquially as the U.S. ""nuclear umbrella."" The U.S.-Japan alliance, which many believe was missing a strategic rationale after the end of the Cold War, may have found a new guiding rationale in shaping the environment for China's rise. In addition to serving as a hub for forward-deployed U.S. forces, Japan provides its own advanced military assets, many of which complement U.S. assets. During the 2016 presidential campaign, candidate Trump repeatedly asserted that Tokyo did not pay enough to ease the U.S. cost of providing security for Japan. In response, Japanese and U.S. officials have defended the system of host nation support that has been negotiated and renegotiated over the years. Defenders of the alliance point to the strategic benefits as well as the cost saving of basing some of the most advanced capabilities of the U.S. military in Japan, including a forward-deployed aircraft carrier. The question of how much Japan spends, particularly when including the Japanese government's payments to compensate base-hosting communities and to shoulder the costs of U.S. troop relocation in the region, remains a thorny area with few easily quantifiable answers. Japan appears to anticipate new demands from the United States, and Abe has already stated that Japan will no longer cap its defense spending at the customary 1% of GDP. Since the early 2000s, the United States and Japan have taken strides to improve the operational capability of the alliance as a combined force, despite political and legal constraints. Japan's own defense policy has continued to evolve, and its major strategic documents reflect a new attention to operational readiness and flexibility. The original, asymmetric arrangement of the alliance has moved toward a more balanced security partnership in the 21 st century, and Japan's 2014 decision to engage in collective self-defense may accelerate that trend. Unlike 25 years ago, the Japan Self-Defense Force (SDF) is now active in overseas missions, including efforts in the 2000s to support U.S.-led coalition operations in Afghanistan and the reconstruction of Iraq. Japanese military contributions to global operations like counter-piracy patrols relieve some of the burden on the U.S. military to manage security challenges. Due to the colocation of U.S. and Japanese command facilities in recent years, coordination and communication have become more integrated. The joint response to the March 2011 tsunami and earthquake in Japan demonstrated the interoperability of the two militaries. The United States and Japan have been steadily enhancing bilateral cooperation in many other aspects of the alliance, such as ballistic missile defense, cybersecurity, and military use of space. Alongside these improvements, Japan continues to pay nearly $2 billion per year to defray the cost of stationing U.S. forces in Japan. (See "" Burden-Sharing Issues "" section below.) In late April 2015, the United States and Japan announced the completion of the revision of their bilateral defense guidelines, a process that began in late 2013. First codified in 1978 and later updated in 1997, the guidelines outline how the U.S. and Japanese militaries will interact in peacetime and in war as the basic framework for defense cooperation based on a division of labor. The new guidelines account for developments in military technology, improvements in interoperability of the U.S. and Japanese militaries, and the complex nature of security threats in the 21 st century. For example, the revision addresses bilateral cooperation on cybersecurity, the use of space for defense purposes, and ballistic missile defense, none of which were mentioned in the 1997 guidelines. The 2015 guidelines lay out a framework for bilateral, whole-of-government cooperation in defending Japan's outlying islands. They also significantly expand the scope of U.S.-Japan security cooperation to include defense of sea lanes and, potentially, Japanese contributions to U.S. military operations outside East Asia. The Abe Administration pushed through controversial legislation in fall 2015 to provide a legal basis for these far-reaching defense reforms, despite vocal opposition from opposition parties and the Japanese public. Japan's implementation of the new guidelines and related defense reforms has been slow and incremental, perhaps because of the controversy that surrounded passage of the new security legislation. The bilateral defense guidelines also seek to improve alliance coordination. The guidelines establish a new standing Alliance Coordination Mechanism (ACM), which will involve participants from all the relevant agencies in the U.S. and Japanese governments, as the main body for coordinating a bilateral response to any contingency. This new mechanism removes obstacles that had inhibited alliance coordination in the past. The previous ACM only would have assembled if there was a state of war, meaning that there was no formal organization to coordinate military activities in peacetime, such as during the disaster relief response to the March 2011 disasters in northeast Japan. The U.S. and Japanese governments have convened the ACM to coordinate responses to North Korea's January 2016 nuclear weapon test, the earthquakes near Kumamoto, on Japan's western island of Kyushu in April 2016, and other episodes affecting East Asian regional security. Perhaps the most symbolically significant—and controversial—security reform of the Abe Administration has been Japan's potential participation in collective self-defense. Dating back to his first term in 2006-2007, Abe has shown a determination to adjust this highly asymmetric aspect of the alliance: the inability of Japan to defend U.S. forces or territory under attack. According to the traditional Japanese government interpretation, Japan possesses the right of collective self-defense, which is the right to defend another country that has been attacked by an aggressor, but under Article 9 of the Japanese constitution, Japan has given up that right. However, Japan has interpreted Article 9 to mean that it can maintain a military for national defense purposes and, since 1991, has allowed the SDF to participate in noncombat roles overseas in a number of U.N. peacekeeping missions and in the U.S.-led coalition in Iraq. In July 2014, the Abe Cabinet announced a new interpretation, under which collective self-defense would be constitutional as long as it met certain conditions. These conditions, developed in consultation with the LDP's dovish coalition partner Komeito and in response to cautious public sentiment, are rather restrictive and could limit significantly Japan's latitude to craft a military response to crises outside its borders. The security legislation package that the Diet passed in September 2015 provides a legal framework for new SDF missions, but institutional obstacles in Japan may inhibit full implementation in the near term. However, the removal of the blanket prohibition on collective self-defense will enable Japan to engage in more cooperative security activities, like noncombat logistical operations and defense of distant sea lanes, and to be more effective in other areas, like U.N. peacekeeping operations. For the U.S.-Japan alliance, this shift could mark a step toward a more equal and more capable defense partnership. Chinese and South Korean media, as well as some Japanese civic groups and media outlets, have been critical, implying that collective self-defense represents an aggressive, belligerent security policy for Japan. Due to the legacy of the U.S. occupation and the island's key strategic location, Okinawa hosts a disproportionate share of the U.S. military presence in Japan. About 25% of all facilities used by U.S. Forces Japan (USFJ) and over half of USFJ military personnel are located in the prefecture, which comprises less than 1% of Japan's total land area. The attitudes of native Okinawans toward U.S. military bases are generally characterized as negative, reflecting a tumultuous history and complex relationships with both ""mainland"" Japan and with the United States. Because of these widespread concerns among Okinawans, the sustainability of the U.S. military presence in Okinawa remains a critical challenge for the alliance. The United States and Japan have faced decades of delay in an agreement to relocate a Marine Air Base. The new facility, slated to be built on the existing Camp Schwab in the sparsely populated Henoko area of Nago City, would replace the functions of Marine Corps Air Station (MCAS) Futenma, located in the center of a crowded town in southern Okinawa. The encroachment of residential areas around the Futenma base over decades has raised the risks of a fatal aircraft accident, which could create a backlash on Okinawa and threaten to disrupt the alliance. Most Okinawans oppose the construction of a new U.S. base for a mix of political, environmental, and quality-of-life reasons. A U.S. military official testified to Congress in 2016 that the expected completion of the new base at Henoko had been delayed from 2022 to 2025. Tokyo and Okinawa agreed in March 2016 to a court-recommended mediation process, suspending construction of the Futenma replacement facility while central government and Okinawan prefectural officials resumed ultimately fruitless negotiations. A December 2016 Japanese Supreme Court decision ruled that then-Okinawa Governor Takeshi Onaga could not revoke the previous governor's landfill permit needed to build the offshore runways at Camp Schwab. Also in December 2016, the United States returned nearly 10,000 acres of land in the northern part of the island to Japan. Onaga passed away in August 2018, triggering a special election to replace him. Denny Tamaki, son of an Okinawan woman and U.S. Marine, won by a large margin and vowed to pursue further obstruction tactics to prevent the construction. Calculating how much Tokyo pays to defray the cost of hosting the U.S. military presence in Japan is difficult and depends heavily on how the contributions are counted. Further, the two governments present estimations based on different data depending on the political aims of the exercise; because of the skepticism among some Japanese about paying the U.S. military, for example, the Japanese government may use different baselines in justifying its contributions to the alliance when arguing for its budget in the Diet. Other questions make it challenging to assess the value and costs of the U.S. military presence in Japan. Is the U.S. cost determined based strictly on activities that provide for the defense of Japan, in a narrow sense? Or is the system of American bases in Japan valuable because it enables the United States to more quickly, easily, and cheaply disperse U.S. power in the Western Pacific? U.S. defense officials often cite the strategic advantage of forward-deploying the most advanced American military capabilities in the Asia-Pacific at a far lower cost than stationing troops on American soil. Determining the percentage of overall U.S. costs that Japan pays is even more complicated. According to DOD's 2004 Statistical Compendium on Allied Contributions to the Common Defense (the last year for which the report was required), Japan provided 74.5% of the U.S. stationing cost. In January 2017, Japan's Defense Minister provided data that set the Japanese portion of the total cost for U.S. forces stationed in Japan at over 86%. Other estimates from various media reports are in the 40-50% range. Most analysts concur that there is no authoritative, widely shared view on an accurate figure that captures the percentage that Japan shoulders. One component of the Japanese contribution is the Japanese government's payment of nearly $2 billion per year to offset the cost of stationing U.S. forces in Japan. All Japanese contributions are provided in-kind. The United States spends $2.7 billion per year (on top of the Japanese contribution) on nonpersonnel costs for troops stationed in Japan. Japanese host nation support is composed of two funding sources: Special Measures Agreements (SMAs) and the Facilities Improvement Program (FIP). Each SMA is a bilateral agreement, generally covering five years, which obligates Japan to pay a certain amount for utility and labor costs of U.S. bases and for relocating training exercises away from populated areas. Under the current SMA, covering 2016-2020, the United States and Japan agreed to keep Japan's host nation support at roughly the same level as it had been paying in the past. Japan will contribute ¥189 billion ($1.6 billion) per year under the SMA and contribute at least ¥20.6 billion ($175 million) per year for the FIP. Depending on the yen-to-dollar exchange rate, Japan's host nation support likely will be in the range of $1.7-$2.1 billion per year. The amount of FIP funding is not strictly defined, other than the agreed minimum, and thus the Japanese government adjusts the total at its discretion. Tokyo also decides which projects receive FIP funding, taking into account, but not necessarily deferring to, U.S. priorities. In addition to host nation support, which offsets costs that the U.S. government would otherwise have to pay, Japan spends approximately ¥128 billion ($1.2 billion) annually on measures to subsidize or compensate base-hosting communities. These are not costs that would be necessarily passed on to the United States, but U.S. and Japanese alliance managers may argue that the U.S. bases would not be sustainable without these payments to areas affected by the U.S. military presence. Based on its obligations defined in the U.S.-Japan Mutual Security Treaty, Japan also pays the cost of relocating U.S. bases within Japan and rent to any landowners of U.S. military facilities in Japan. Japan pays for the majority of the costs associated with three of the largest international military base construction projects since World War II: the Futenma Replacement Facility in Okinawa (Japan provides $12.1 billion), construction at the Marine Corps Air Station Iwakuni (Japan pays 94% of the $4.8 billion), and facilities on Guam to support the move of 4,800 marines from Okinawa (Japan pays $3.1 billion, about a third of the cost of construction). Japan also procures over 90% of its defense acquisitions from U.S. companies. Japan's annual U.S. Foreign Military Sales are valued at about $11 billion. Recent major acquisitions include Lockheed Martin F-35 Joint Strike Fighters, Boeing KC-46 Tankers, Northrup Grumman E2D Hawkeye airborne early warning aircraft, General Dynamics Advanced Amphibious Assault Vehicles, and Boeing/Bell MV-22 Ospreys. The growing concerns in Tokyo about North Korean nuclear weapons development and China's modernization of its nuclear arsenal in the 2000s garnered renewed attention to the U.S. policy of extended deterrence, commonly known as the ""nuclear umbrella."" The United States and Japan initiated the bilateral Extended Deterrence Dialogue in 2010, recognizing that Japanese perceptions of the credibility of U.S. extended deterrence were critical to its effectiveness. The dialogue is a forum for the United States to assure its ally and for both sides to exchange assessments of the strategic environment. The views of Japanese policymakers (among others) influenced the development of the 2010 U.S. Nuclear Posture Review. Reportedly, Tokyo discouraged a proposal to declare that the ""sole purpose"" of U.S. nuclear weapons is to deter nuclear attack. Tokyo also reportedly discouraged the Obama Administration from declaring a ""no first use"" policy on the rationale that it would weaken deterrence against North Korea. A lack of confidence in the U.S. security guarantee could lead Tokyo to reconsider its own status as a non-nuclear weapons state. As discussed above, as a presidential candidate Donald Trump in spring 2016 stated that he was open to Japan developing its own nuclear arsenal to counter the North Korean nuclear threat. Japanese leaders, however, have repeatedly rejected developing their own nuclear weapon arsenal. Analysts point to the potentially negative consequences for Japan if it were to develop its own nuclear weapons, including significant costs; reduced international standing in the campaign to denuclearize North Korea; the possible imposition of economic sanctions that would be triggered by leaving the global nonproliferation regime; and potentially encouraging South Korea to develop nuclear weapons capability. For the United States, analysts note that encouraging Japan to develop nuclear weapons could mean diminished U.S. influence in Asia, the unraveling of the U.S. alliance system, and the possibility of creating a destabilizing nuclear arms race in Asia. Japan also plays an active role in extended deterrence through its ballistic missile defense (BMD) capabilities. The United States and Japan have cooperated closely on BMD technology development since the earliest programs, conducting joint research projects as far back as the 1980s. Japan's purchases of U.S.-developed technologies and interceptors after 2003 give it the second-most potent BMD capability in the world. The U.S. and Japanese militaries both have ground-based BMD units deployed on Japanese territory and BMD-capable vessels operating in the waters near Japan. In February 2017, the joint program achieved a significant milestone in a test off of Hawaii, when a new interceptor from a guided-missile destroyer hit a medium-range missile for the first time. U.S. trade and economic ties with Japan are viewed by many experts and policymakers as highly important to the U.S. national interest. By the most conventional method of measurement, the United States and Japan are the world's largest and third-largest economies (China is number two), accounting for nearly 30% of the world's gross domestic product (GDP) in 2017. Furthermore, their economies are closely intertwined by two-way trade in goods and services, and by foreign investment. Japan is a significant economic partner of the United States. Japan was the United States' fifth-largest export market for goods and services (behind Canada, Mexico, China, and the United Kingdom) and the fourth-largest source of U.S. imports (behind China, Canada, and Mexico) in 2017. Japan accounted for 5% of total U.S. exports in 2017 ($115 billion) and 6% of total U.S. imports ($171 billion). The United States was Japan's largest goods export market and second-largest source of goods imports (after China) in 2017. Japan is also a major investor in the United States accounting for more than 10% of the stock of inward U.S. direct investment in 2017 ($469 billion). The relative significance of the bilateral economic relationship, however, has arguably declined as other countries, including China, have become increasingly important global economic actors. Over the past decade, U.S. goods exports to the world grew by nearly 20%, while exports to Japan grew by less than 2%. Similarly, U.S. goods imports from the world grew by 10% while U.S. imports from Japan fell. Some of this shift stems from structural changes in the global economic landscape, including the growth of global supply chains. U.S. import numbers probably underestimate the importance of Japan in U.S. trade since, in particular, Japanese firms export intermediate goods to China and other countries that are then used to manufacture finished goods that Chinese enterprises export to the United States. Major economic events also have influenced U.S.-Japan trade patterns over the past decade. The global economic downturn stemming from the 2008 financial crisis had a significant impact on U.S.-Japan trade: both U.S. exports and imports declined in 2009 from 2008. Although trade flows recovered quickly, they peaked in 2012 and have declined or grown only modestly in most years since that time, as measured in U.S. dollars. (See Table 1 .) The decline in the value of the Japanese yen since 2012, tied to aggressive monetary stimulus in Japan as part of ""Abenomics"" (described below) has likely affected both the value and quantity of trade—measured in yen. U.S. trade with Japan has largely risen over the same time period. Under the Trump Administration, U.S. trade policy has increasingly focused on ""unfair"" trading practices, U.S. import competition, and bilateral trade deficits, leading to greater strain in U.S. economic relations, including with Japan. Issues of ongoing U.S. attention include concerns over market access for U.S. products such as autos and agricultural goods, and various nontariff barriers, which U.S. companies argue favor domestic Japanese products over U.S. goods and services. Despite this recent shift, the major trend in bilateral economic relations over the past two decades has largely been an easing of tension, in contrast with the contentious and frequent trade frictions at the fore of the bilateral relationship in the 1980s and early 1990s. A number of factors may have contributed to this trend: Japan's slow economic growth—beginning with the burst of the asset bubble in the 1990s—has changed the general U.S. perception of Japan from one as an economic competitor to one as a ""humbled"" economic power; significant Japanese investment in the United States including in automotive manufacturing facilities has linked production of some Japanese branded products with U.S. employment; the successful conclusion of the multilateral Uruguay Round agreements in 1994 led to further market openings in Japan, and established the World Trade Organization (WTO) and its enhanced dispute settlement mechanism, which has provided a forum used by both Japan and the United States to resolve trade disputes; the rise of China as an economic power and trade partner has caused U.S. policymakers to shift attention from Japan to China as a primary source of concern; and the growth in the complexity and number of countries involved in global supply chains has likely diffused or shifted concerns over import competition as many Japanese products are now imported into the United States as components in finished products from other countries, thereby reducing the bilateral trade deficit. Between the end of World War II and 1980s, Japan experienced high levels of economic growth. It was dubbed an ""economic miracle"" until the collapse of an economic bubble in Japan in the early 1990s brought an end to rapid economic growth. Many economists have argued that, despite the government's efforts, Japan has never fully recovered from the 1990s crisis. For decades Japan's economy suffered from chronic deflation (falling prices) and low growth. In the late 2000s, Japan's economy was also hit by two economic crises: the global financial crisis in 2008 and 2009, and the March 2011 earthquake, tsunami, and nuclear reactor meltdowns in northeast Japan. As a result, since the 1980s, Japan's average GDP growth has been consistently lower than that of the United States ( Figure 3 ). In sharp contrast to the booming years of the 1980s, this decades-long history of economic stagnation coupled with, and in part a result of, the demographic challenge of a shrinking and ageing population has led to a narrative in the media and elsewhere of Japan as a nation in decline, particularly vis-à-vis the rapid economic growth and growing global influence of neighboring China and South Korea. In the face of domestic anxiety caused by this shift, Prime Minister Abe came into office in 2012 with a goal to reinvigorate the Japanese economy. Specifically, the Abe Administration made it a priority to boost economic growth and to eliminate deflation. Abe has promoted a three-pronged, or ""three arrow,"" economic program, nicknamed ""Abenomics."" The three arrows include monetary stimulus, fiscal stimulus, and structural reforms to improve the competitiveness of Japan's economy. Most economists agree that progress across the three arrows has been uneven. The first arrow of Abenomics, monetary stimulus to reverse deflation, has been implemented most aggressively. In the spring of 2013, Japan's central bank (Bank of Japan, or BOJ) announced a continued loose monetary policy with interest rates of 0%, quantitative easing measures, and a target inflation rate of 2%. The BOJ began a second round of quantitative easing in October 2014, after the economy slipped back into recession. The BOJ continued adopting new expansionary monetary policies in 2016, including negative interest rates for a portion of bank reserves and targeting 0% interest rates on 10-year government bonds. In July 2018, BOJ Governor Kuroda announced the BOJ would maintain Japan's loose monetary policy, acknowledging that the BOJ's 2% inflation target would not be reached before 2021. Japan's inflation rate was 0.5% in 2017 and the International Monetary Fund (IMF) predicts inflation of 1.2% in 2018. The BOJ actions contrast the Federal Reserve's steady tightening of U.S. monetary policy over the past year. The Japanese government has taken some steps to use fiscal policy to stimulate the economy (the second arrow), initially implementing fiscal stimulus packages worth about $145 billion, aimed at spending on infrastructure, particularly in the areas affected by the March 2011 disaster. The Abe government has also approved additional supplementary budget packages, including $32 billion in 2016. The government's willingness to use expansionary fiscal policies has been constrained by concerns about its public debt levels, the highest in the world at nearly 240% of GDP. To address fiscal pressures, the government raised the sales tax from 5% to 8% in April 2014. However, many economists argued that the sales tax increase was responsible for pushing Japan into recession in 2014. The government twice has postponed a planned second sales tax increase, to 10%, which now is scheduled to occur in October 2019, four years later than originally planned. The IMF urges Japan to implement mitigating fiscal policies to minimize the short-term downward pressure on demand expected from the tax hike. Progress on the third arrow, structural reforms, has been more uneven. The government has advanced measures to liberalize energy and agriculture sectors, promote trade and investment, reform corporate governance, and improve labor market functions. The IMF argues, however, that more reforms are needed, particularly: (1) labor market reforms to increase productivity and boost wages (such as reforming Japan's two-tier labor market system by implementing complementary measures to make recent equal pay for equal work legislation more effective); (2) reforms to increase private investment and long-term growth (such as deregulation and encouraging business investment); and (3) measures to diversify and enhance the labor supply (such as encouraging more female participation in the work force including by increasing availability of childcare). Abenomics had a difficult start, when Japan's economy slipped back into recession in 2014. This was Japan's fourth recession since 2008, and was largely attributed to the April 2014 sales tax increase. The lackluster performance of Japan's economy in 2015 and the first half of 2016 led some analysts to question whether Abenomics had run its course. More recently, Japan's economy has been building momentum, and increasingly analysts view the program as moderately successful though in need of additional productivity-enhancing measures to produce long-term growth. The IMF in its most recent evaluation of Japan's economic policies, for example, argued that ""while the strategy of Abenomics remains appropriate, reinvigorated policies are needed to reflate the economy."" The IMF urges Japan to make further progress on implementing structural reforms, particularly in the labor market; ensure fiscal policy space by establishing a feasible long-term plan for debt consolidation; and maintain patience in pursuing inflation targets with accommodative policy while closely watching the financial system for increased risk taking in the low-interest environment. In 2017, Japan's economy grew at 1.7% and unemployment, at 2.9%, reached its lowest point in over two decades. A key component of the third arrow in Abe's economic reform focuses on ""womenomics,"" or boosting economic growth through reforms and policies to encourage the participation and advancement of women in the workforce. Japan lags behind many other high-income countries in terms of gender equality, with one of the lowest rates of female participation in the workforce among Organization for Economic Cooperation and Development (OECD) countries. In 2014, a strategist with Goldman Sachs in Japan estimated that closing the gender employment gap could boost Japan's GDP by nearly 13%. To advance its ""womenomics"" initiative, the government has proposed, and is in various stages of implementing, a number of policies, such as expanding the availability of day care, increasing parental leave benefits, and allowing foreign housekeepers in special economic zones, among other measures. Progress has been made by some measures, but a dearth of women in top positions has left many disappointed in the results. Japan's overall female participation rate in the labor force has increased sharply, to a record high of 66% in 2016, surpassing the United States (64%). The uptick is attributed to high demand for workers in Japan, as well as specific ""womenomics"" initiatives, including expanded day care capacity and more generous parental leave. Some observers, however, question whether the Abe government is truly working to promote gender equality in the workplace or simply looking to fill gaps in the workforce created by the shrinking population. Efforts to increase the number of women in management positions have stalled, and in 2017, Japan ranked 114 th out of 144 countries according to the World Economic Forum's national rankings of gender equality. Japan fared worst in political empowerment rankings (123 rd ), reflecting the relatively low number of female legislators and lone female Cabinet minister. The Abe government has scrapped its target of getting women in 30% of senior positions by 2020, now aiming for 15% in the private sector, and 7% in government. Analysts note that additional policy reforms could continue to encourage women to join and remain in the workforce, including reforms to Japan's tax and social security programs that discourage married women from working outside the home. Japan's work culture, which demands long hours, also makes it difficult for women and men to balance work and family. The Trump Administration has imposed tariffs on several significant U.S. imports from Japan. In March 2018, President Trump announced tariffs of 25% and 10% on certain U.S. steel and aluminum imports, respectively. The tariffs have drawn criticism from Japan (the sixth largest supplier of U.S. steel imports in 2017, worth $1.7 billion), which argues it should be exempt from tariffs imposed for national security reasons given its close security relationship with the United States. The tariffs were imposed under Section 232 of the Trade Expansion Act of 1962, based on two investigations by the Commerce Department that found steel and aluminum imports threaten to impair U.S. national security. Unlike South Korea, Japan has not negotiated a quota arrangement with the United States in exchange for tariff exemptions. Japan notified its intent to retaliate with comparable tariffs in the WTO, but has not yet announced a date for such retaliation or a list of affected tariff lines. Japanese exports of washing machines and solar panels are also subject to additional temporary U.S. tariffs. These safeguard tariffs were imposed under Section 201 of the Trade Act of 1974 to address serious or threatened serious injury from these imports to domestic industries. Japan has also announced retaliation in the WTO in response to these safeguard measures, and in line with WTO commitments on safeguard actions, this retaliation is scheduled to become effective in 2021. Unlike several other countries, Japan has not initiated WTO dispute settlement procedures with regards to either the U.S. Section 201 or Section 232 tariff measures, but is participating as a third party in disputes initiated by other countries. The Trump Administration has initiated an additional national security (Section 232) investigation into U.S. auto and auto parts imports. The Trump Administration has agreed to not proceed with tariffs on Japanese auto imports while new bilateral trade negotiations are ongoing—a similar agreement was reached with the EU. If the Administration were to increase tariffs on these products it could have a more significant negative economic effect for Japan, as well as the U.S. economy. Autos and auto parts are consistently the largest U.S. import from Japan (nearly $56 billion), accounting for roughly one-third of U.S. goods imports from Japan in 2017. The tariffs could also potentially disrupt Japan's numerous auto production facilities in the United States, which rely on parts supplied from Japan. On September 26, President Trump and Prime Minister Abe announced their intent to start formal bilateral trade agreement negotiations. This follows two informal rounds of bilateral trade and investment discussions that had produced few concrete outcomes. Japan had been hesitant to engage in formal bilateral trade talks as it remains committed to the regional Trans-Pacific Partnership (TPP) and through which it had already agreed to politically sensitive concessions, particularly in agriculture, to the United States, who withdrew from the agreement in 2017. Japan announced it would not open its agriculture market in the new talks beyond its commitments in TPP and other existing trade agreements, while the United States signaled its intent to increase U.S. production and employment in the motor vehicle industry through the negotiations. During the negotiations, U.S. imports from Japan are to be exempt from increased U.S. motor vehicle tariffs, which the Trump Administration is considering as part of an ongoing Section 232 investigation. The full scope of the new negotiations is currently unclear. In their public announcement the two leaders stated they will focus on goods and services negotiations initially and then proceed to discussions on investment and other trade issues, suggesting the agreement could be negotiated in stages. An agreement limited in coverage would represent a shift in approach from recent U.S. trade agreements, which typically aim to be more comprehensive in addressing trade barriers and disciplines on goods, services, agriculture, investment, labor, environment, and intellectual property rights, among other issues. This may raise questions about the extent to which it may meet U.S. trade negotiating objectives as set by Congress in legislation enacted in 2015 to renew U.S. Trade Promotion Authority (TPA). TPA potentially provides for the expedited consideration of trade agreement implementing legislation, if the agreement makes progress towards achieving negotiating objectives and the Administration adheres to certain notification and consultation requirements. These include that the Administration gives Congress written notification 90 days before beginning new trade talks: USTR Lighthizer provided such notification to Congress on October 16. TPA also requires that the Administration make available to Congress and the public the specific objectives for the new negotiation, 30 days before it commences. The Trump Administration also recently released the proposed modifications to the North American Free Trade Agreement (NAFTA), renamed as the U.S.-Mexico-Canada Agreement (USMCA), which was also notified to Congress under TPA procedures. Unlike the U.S.-South Korea (KORUS) FTA modifications, the USMCA is expected to require implementing legislation for entry into force. If the Trump Administration sees USMCA as its template moving forward, some commitments in that agreement could prove politically challenging for Japan, particularly enforceable commitments on currency. USMCA also includes tightened auto rules of origin, requiring 75% North American content to qualify for duty-free treatment under the deal. Such strict origin rules could prove difficult for both U.S. and Japanese automakers in a bilateral deal given their extensive supply chains in North America and Southeast Asia, respectively. U.S. interest in the new talks with Japan are, in part, a response to trade negotiations Japan recently concluded. Japan led efforts among the remaining 11 TPP countries to conclude the Comprehensive and Progressive TPP (CPTPP or TPP-11), which was signed on March 8, 2018, and does not include the United States. Japan was the second country to ratify the TPP-11. (Australia, Mexico, and Singapore have also ratified the new agreement, which requires ratification by six of the signatories to take effect.) On July 17, Japan signed an FTA with the EU, which would eventually remove nearly all tariffs between the parties, including elimination of the EU's 10% auto tariff, and elimination or reduction of most Japanese agricultural tariffs. If entered into force, both agreements have the potential to disadvantage U.S. exporters in Japan's market, a major concern of some U.S. sectors, particularly agriculture. Prime Minister Abe's LDP enjoys a dominant position in the Japanese political world. With its coalition partner, the smaller party Komeito, it holds two-thirds of the seats in the Lower House of Japan's Diet, and nearly that proportion of the Upper House. (See Figure 4 and Figure 5 for a display of major parties' strength in Japan's parliament.) These margins theoretically give Abe's coalition the votes to amend Japan's Constitution, including the war-renouncing clauses that Abe has said he would like to change. Following his September 2018 victory in the LDP's leadership vote, Abe said he would like to submit a constitutional amendment proposal to the Diet within the coming year. Any attempt to change the constitution would have to surmount formidable political and procedural hurdles. Abe likely would have to overcome opposition from Komeito, which is torn between its pacifist leanings and its desire to support the coalition. Decisions about priorities also will take time because there are calls to amend a number of other provisions of the constitution, which was written by the United States during the U.S. occupation of Japan in 1946 and has never been changed. Furthermore, any constitutional changes passed by the Diet also must be approved by a majority in a nationwide referendum, and many opinion polls show the Japanese public to be skeptical about the need for a revision. From 2007 to 2012, Japanese politics was plagued by instability. The premiership changed hands six times in those six years, and no party controlled both the Lower and Upper Houses of the parliament for more than a few months. The Abe-led LDP coalition's dominant victories in five consecutive parliamentary elections, in December 2012, July 2013, December 2014, July 2016, and October 2017 have ended this period of turmoil. The first event, the 2012 elections for Japan's Lower House, returned the LDP and its coalition partner, the Komeito party, into power after three years in the minority. Since 1955, the LDP has ruled Japan for all but about four years. Abe has benefitted from disarray among Japanese opposition parties, which in the fall of 2018 struggled to surpass 10% in public opinion polls (compared to 40%-50% for the LDP). Some Japanese and Western analysts argue that another factor contributing to Abe's strength is his government's and the LDP's success in managing the Japanese media. According to these sources, the government and the LDP have attempted to influence Japanese news outlets through measures such as hinting at revoking licenses of broadcasters, pressuring business groups not to purchase advertisements in certain media outlets, and shunning reporters from critical broadcasters and print publications. In 2013, the Diet passed an Act on Protection of Specially Designated Secrets that has been criticized for criminalizing the publication of information that the government had disclosed to the public. Since Abe came to power in December 2012, the nongovernmental organization Reporters without Borders has moved Japan down twenty-one places, to 72 nd place, in its rankings of global freedom of the press. Abe government officials deny that they have attempted to unduly influence the press or restrict press freedoms. Japan's combination of a low birth rate, strict immigration practices, and a shrinking and rapidly ageing population presents policymakers with a significant challenge. Polls suggest that Japanese women are avoiding marriage and child-bearing because of the difficulty of combining career and family in Japan; the fertility rate has fallen to 1.25, below the 2.1 rate necessary to sustain population size. Japan's population growth rate is -0.2%, according to the World Bank, and its current population of 125 million is projected to fall to about 95 million by midcentury. Concerns about a huge shortfall in the labor force have grown, particularly as the elderly demand more care. The ratio of working age persons to retirees is projected to fall from 5:2 around 2010 to 3:2 in 2040, reducing the resources available to pay for the government social safety net. Japan's immigration policies have traditionally been strictly limited, closing one potential source of new workers.","Japan is a significant partner of the United States in a number of foreign policy areas, particularly in security concerns, which range from hedging against Chinese military modernization to countering threats from North Korea. The U.S.-Japan military alliance, formed in 1952, grants the U.S. military the right to base U.S. troops—currently around 50,000 strong—and other military assets on Japanese territory, undergirding the ""forward deployment"" of U.S. troops in East Asia. In return, the United States pledges to protect Japan's security. Although candidate Donald Trump made statements critical of Japan during his campaign, relations have remained strong, at least on the surface, throughout several visits and leaders' meetings. Bilateral tensions have arisen in 2018, however. On North Korea policy, Tokyo has conveyed some anxiety about the Trump Administration's change from confrontation to engagement, concerned that Japan's priorities will be marginalized as the United States pursues negotiations with North Korea. More broadly, Japan is worried about the U.S. commitment to its security given Trump's skepticism about U.S. alliances overseas. Contentious trade issues have also resurfaced as the two governments look to negotiate a bilateral accord. In addition, Japan has expressed disappointment about the Trump Administration's decision to withdraw from the Trans-Pacific Partnership (TPP) agreement and the United Nations Framework Convention on Climate Change (UNFCCC) Paris Agreement on addressing climate change. Japan is the United States' fourth-largest overall trading partner, Japanese firms are the second largest source of foreign direct investment in the United States, and Japanese investors are the second largest foreign holders of U.S. treasuries. Tensions in the trade relationship have increased under the Trump Administration. The U.S.-Japan announcement on September 26, 2018, of their intent to begin formal bilateral trade agreement negotiations has eased concerns over potential U.S. import restrictions on motor vehicle and parts trade, but certain U.S. steel and aluminum imports from Japan remain subject to increased U.S. tariffs. The trade talks could prove challenging given the Trump Administration's focus on the bilateral U.S. trade deficit, particularly in autos—Japan's largest export to the United States in 2017. Japan had been hesitant to pursue bilateral negotiations as it remains committed to the TPP. After years of turmoil, Japanese politics has been relatively stable since the December 2012 election victory of Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP), and further consolidated in the LDP's subsequent parliamentary gains. With the major opposition parties in disarray, the LDP's dominance does not appear to be threatened. Abe could become Japan's longest serving post-war leader if he remains in office throughout this term. However, Abe may struggle to pursue the more controversial initiatives of his agenda, such as increasing the Japanese military's capabilities and flexibility, because of his reliance on a coalition with a smaller party. With his political standing secured, Abe continues his diplomatic outreach, possibly hedging against an over-reliance on the U.S alliance. Since 2016, Abe has sought to stabilize relations with China, despite an ongoing territorial dispute and Japanese concerns about China's increasing assertiveness in its maritime periphery. Relations with South Korea, while stable, remain fraught with sensitive historical issues and differences in how to approach North Korea. Elsewhere, Abe has pursued stronger relations with Australia, India, Russia, and several Southeast Asian nations. In the past decade, U.S.-Japan defense cooperation has improved and evolved in response to security challenges, such as the North Korean missile threat and the confrontation between Japan and China over disputed islands. Abe accelerated the trend by passing controversial security legislation in 2015. Much of the implementation of the laws, as well as of U.S.-Japan defense guidelines updated the same year, lies ahead, and full realization of the goals to transform alliance coordination could require additional political capital and effort. Additional concerns remain about the implementation of an agreement to relocate the controversial Futenma base on Okinawa, particularly after the September gubernatorial election of a politician opposed to the relocation.",govreport
"Congressional hearings and press coverage critical of the medical care received by noncitizens in the custody of the Department of Homeland Security's (DHS's) Immigration and Customs Enforcement (ICE) have increased congressional interest in the subject, including the introduction of legislation related to detainee health care. An overarching debate on this issue concerns the appropriate standard of health care that should be provided to foreign nationals in immigration detention. The medical care required to be provided to detainees is outlined in ICE's National Detention Standards, and the Division of Immigrant Health Services (DIHS), which is detailed from the U.S. Public Health Service to ICE is ultimately responsible for the health care of noncitizens detained by ICE. However, the Florida Immigrant Advocacy Center has reported that problems with access to medical care is one of the chief complaints of aliens in detention. Similarly, the National Immigrant Justice Center states that complaints about access to medical care are a constant theme in conversations with detained aliens. In addition, the U.S. government recently admitted negligence in the death of Francisco Castaneda, a former ICE detainee. Thus, although standards exist, one of the questions raised is are the standards being followed? This report begins with an overview of noncitizen detention and then examines the procedures and policies related to the provision of health care to detainees. The report concludes with a discussion of the issues surrounding detainee health care. The report does not investigate the veracity of claims of substandard medical care made in the press or ICE's rebuttals. The law provides broad authority to detain aliens while awaiting a determination of whether they should be removed from the United States, and mandates that certain categories of aliens are subject to mandatory detention (i.e., the aliens must be detained) by the Department of Homeland Security (DHS). Aliens not subjected to mandatory detention can be paroled, released on bond, or continue to be detained. Any alien can be detained while DHS determines whether the alien should be removed from the United States. Although some detainees are criminal aliens, others are asylum seekers who have not committed a crime, and others are aliens who are present without status (illegal aliens) who, while in violation of their immigration status and immigration law, have not committed a criminal offense. In addition, some of the criminal alien detainees are legal permanent residents who have resided in the United States for many years. Other detained aliens include those who arrive at a port-of-entry without proper documentation (e.g., fraudulent or invalid visas, or no documentation), but most of these aliens are quickly returned to their country of origin through a process known as expedited removal . The majority of aliens arriving without proper documentation who claim asylum are held until their ""credible fear hearing"" and then released; however, some asylum seekers are held until their asylum claims have been adjudicated. Although noncitizens in immigration detention are in the custody of ICE, only a minority are detained at facilities owned or fully contracted by ICE. In October 2007, 65% of noncitizen detainees were detained at state and local prisons, 19% at contract facilities, 14% at Service Processing Centers (SPCs) owned and operated by ICE, and 2% at Bureau of Prisons (BOP) facilities. Notably, all facilities housing immigration detainees must comply with ICE's National Detention Standards (discussed below). On an average day, up to 33,000 immigration detainees are in ICE's custody in more than 300 facilities nationwide. The average stay is 37.5 days. For FY2008, as of December 31, 2007, the average daily detained population was 31,244. In FY2008, approximately 311,000 aliens were detained by ICE. As of April 30, 2007, ICE reported that, cumulatively, 25% of all detained aliens were removed within four days, and 90% within 85 days. Nonetheless, in FY2006, more than 7,000 aliens were in detention longer than six months. For FY2006, approximately 48% of the aliens in detention were criminal aliens. (For a more detailed discussion of the detention population, see Appendix A .) Currently, ICE contracts with Creative Corrections, L.L.C., to perform the annual inspections of detention facilities. ICE also contracts with another company, the Nakamoto Group Inc., to serve as on-site, full-time quality assurance inspectors at the 40 largest detention facilities. The Detention Facilities Inspection Group (DFIG) within the ICE's Office of Professional Responsibility (OPR) is primarily responsible for oversight of detention facilities. The DFIG, which began in February 2007, provides oversight and independent validation of the annual detention facility inspection program (done by Creative Corrections). DFIG also conducts investigations of serious incidents involving detainees. Lastly, DRO's Detention Standards Compliance Unit is tasked with ensuring that facilities that detain aliens comply with ICE's National Detention Standards. The press has reported that a DHS Inspector General's 2008 draft report finds that previous oversight has not been effective in identifying serious problems at the facilities. The US Immigration and Customs Enforcement (ICE), Office of Detention and Removal Operations (DRO) is responsible for ensuring safe and humane conditions of confinement for detained aliens in federal custody, including the provision of reliable, consistent, appropriate and cost-effective health services. —Immigration and Customs Enforcement In 2000, the former Immigration and Naturalization Service (INS) created National Detention Standards for aliens in detention, which are published in the Detention Operations Manual. In late 2008, ICE—reportedly with input from detention experts, non-governmental organizations, and DHS' Civil Rights and Civil Liberties Office—published new Detention Standards in a performance-based format. The standards specify the detention conditions appropriate for immigration detainees. In most cases, the standards mirror American Correctional Association (ACA) standards, though some of ICE's Detention Standards provide more specificity or are unique to the needs of alien detainees. The Detention Standards, however, do not have the force of law, thus detainees do not have legal recourse for violations of the standards. The Detention Operations Manual contains a section on health services, which addresses standards for medical care; hunger strikes; suicide prevention and intervention; and terminal illness, advanced directives, and death. The American Civil Liberties Union (ACLU) and the National Immigration Law Center have complained about the standards. They note that ICE lacks written guidelines for how to rate a facility's adherence to the Detention Standards, and that ICE notifies the facilities 30-days before their annual reviews, giving facilities opportunities to prepare for the reviews. In addition, they note that annual reviews do not require detainee interviews and are only observational reviews of the facilities and files. In 2007, the Assistant Secretary of ICE directed that ICE's Office of Detention and Removal (DRO) report semiannually on agency-wide adherence with the National Detention Standards. The semiannual reports explain the standards used to rate the detention facilities. The first report under this directive was issued in May 2008. According to ICE's Detention Operations Manual the Detention Standards ensure, ""that detainees have access to emergent, urgent or non-emergent medical, dental, and mental health care that are within the scope of services provided by the DIHS, so that their health care needs are met in a timely and efficient manner."" According to the Detention Operations Manual, every facility has to provide detainees with initial medical screening, primary medical care, and emergency care. The ICE Officer in Charge (OIC) must arrange for specialized health care, mental heath care, and hospitalization within the local community. All facilities are required to employ a medical staff large enough to provide basic exams and treatments to all detainees. Medical care at facilities ranges from small clinics with contract staff to facilities with on-site medical staff and diagnostic equipment. The facilities are required to have a mechanism (normally paper request slips) that allows detainees to request health care services provided by a physician or other qualified medical officer in a clinical setting. The facilities are required to have regularly scheduled times, known as sick call , when medical personnel are available to see detainees who have requested medical services. All detainees, without exception, have access to sick call, and the facilities have to have procedures in place that ensure that all sick call requests are received and triaged by medial personnel within 48 hours after the detainee submits the request. ICE detainee policy requires that all detainees receive an initial health screening immediately upon arrival at the detention facility to determine the appropriate necessary medical, mental health, and dental treatment. In addition to the initial screening, ICE policy also requires that detainees receive a health appraisal and physical examination within 14 days of arrival to identify medical conditions that require monitoring or treatment. In addition, all detainees are supposed to receive a mental health screening within 12 hours of admission. Detainees also receive a mental status evaluation during their physical examination, which is required to take place within 14 days of admission. According to ICE, a detainee with a medical condition will be scheduled for as many follow-up appointments as necessary. In addition, detainees have access to sick call (i.e., the opportunity to request non-emergeny health care provided by a health service provider during scheduled times at the detention facility). In addition, the manual states that an initial dental screening exam should be performed within 14 days of the detainee's arrival, and if an on-site dentist is not available, the initial dental screening may be performed by a physician, physician's assistant, or nurse practitioner. All detainees are afforded authorized emergency dental treatment. Aliens detained for more than six months are eligible for routine dental treatment. Detainees' dental care, reportedly, is often limited to extractions, and care for painful dental conditions is often delayed or denied. Dentures are not provided, nor are eyeglasses, unless the glasses were broken while the alien was in detention. In addition, detainees may not use their own money to get medical or dental care. Under the Medical Standards, detainees also have access to medication from an on-site pharmacy or a pharmacy in the community. Detainees may get medicine from their family members, provided that the medicine can be verified as appropriate for the detainee to take and is not contraband. There have been reports, however, of detainees having problems getting medications even when their families have been willing to provide them. The Division of Immigrant Health Services (DIHS), which is indefinitely detailed from the U.S. Public Health Service to ICE, is ultimately responsible for the provision of health care to noncitizens detained by ICE. At 15 of over 300 detention facilities, DIHS provides on-site health care, while in the others, mostly for detainees in local prisons and jails, health care is provided by contract workers who are not affiliated with DIHS. The amount of care available on-site at detention facilities is variable. Some facilities have full-time, on-site medical staff, while other facilities make use of local providers. Notably, DIHS is responsible for the approval of any off-site medical care, regardless of where the alien is detained. Some immigration advocates maintain that since the Detention Standards do not have the force or law or regulation, DIHS policy exercises the largest influence over the provision of medical care to detainees. Although the medical care that is supposed to be received is detailed in the Detention Standards Manual, one stated concern is that the procedures and standards are not followed. Another concern focuses on the covered benefits package (discussed below) and whether that and the Detention Standards allow for the provision of adequate services to the detained populations. DIHS is a stand-alone medical unit consisting of U.S. Public Health Service (PHS) Officers and contract medical professionals who work under DIHS supervision. DIHS serves as the medical authority for ICE. Prior to October 1, 2007, ICE received the medical services of DIHS through the Department of Health and Human Services's (HHS's) Health Resources and Services Administration (HRSA). In other words, HRSA oversaw DIHS, including the U.S. Public Health Service Officers assigned to DIHS. According to DHS, ICE was interested in greater administrative control over DIHS for a variety of reasons, including HRSA's inability to fill DIHS vacancies in a timely manner and unwillingness to provide Public Health Service (PHS) Officers to support ICE law enforcement missions. In October 2007, DIHS was detailed indefinitely to ICE. The detail of the PHS Officers in DIHS was accomplished via a memorandum of agreement (MOA), which also covers the assignment of PHS resources elsewhere within DHS. Since the detail became effective, ICE has provided both administrative support to DIHS and oversight of the administration of DIHS. Under the MOA, DHS is responsible for the day-to-day conduct of PHS Officers under its detail and assumes liability for their negligence or malpractice. Lawyers in the DHS Office of Health Affairs (OHA) handle such claims. In addition, beginning on October 1, 2007, ICE has stated that it has been collaboratively working with OHA on a variety of improvement initiatives, including selecting a new Director for DIHS at the appropriate rank; implementing aggressive hiring strategies to address staffing needs; identifying and implementing a new electronic medical records system; and reviewing (or changing, if necessary) the process by which Treatment Authorization Requests (TARS) are approved. ICE is also working with OHA to develop an enhanced process for TAR appeals. ICE has established a covered benefits package that delineates the health care services available to detainees in ICE custody, in addition to the minimum scope of services provided by the detention facilities. This package, known as the DIHS Medical Dental Detainee Covered Services Package (CSP), primarily provides health care services for emergency care, which is defined as ""a condition that is threatening to life, limb, hearing or sight,"" rather than elective or non-emergency conditions. The CSP states that: [accidental] or traumatic injuries incurred while in the custody of ICE or BP [Border Patrol] and acute illnesses will be reviewed for appropriate care. Other medical conditions which the physician believes, if left untreated during the period of ICE/BP custody, would cause deterioration of the detainee's health or uncontrolled suffering affecting his/her deportation status will be assessed and evaluated for care.... Elective, non-emergent care requires prior authorization.... Requests for pre-existing, non-life threatening conditions, will be reviewed on a case by case basis. Detainees who require non-emergency medical care beyond that which can be provided at the detention facilities must get preauthorization. They submit a Treatment Authorization Request (TAR), which is evaluated by the DIHS Managed Care Program. The TAR must be approved before the detainee may receive care. According to ICE, more than 40,000 TARs are submitted each year; the average turn-around time is 1.4 days, and 90% are approved. Nonetheless, some detainees have described waiting weeks or months to get basic care. In addition, reportedly, detainees have been told that biopsies were ""elective surgery"" and, as such, have had trouble getting the diagnostic test. According to a 2007 GAO report, officials at several detention facilities reported difficulties obtaining approval for outside medical and mental health care. TAR reviews for care are conducted by DIHS nurses in Washington, DC, who review the paperwork submitted by physicians. These nurses are known as Managed Care Coordinators (MCCs). The nurses are on duty Monday through Friday, 7:30 a.m to 4 p.m. Regardless of where the alien is held, approval from DIHS is required for diagnostic testing, speciality care, or surgery. However, when an ICE detainee is hospitalized, the hospital assumes medical decision-making authority, including the patient's drug regimen, lab tests, X-rays, and treatments. Off-site medical care for people in the custody of the U.S. Marshals service is handled in a similar manner. According to ICE, DIHS has a formal appeals process that is similar to industry standards and comparable to that of the Bureau of Prisons for declined Treatment Authorization Requests (TARs). Facilities and individual detainees have the right to appeal denial determinations. TARs denied for lack of medical necessity may be resubmitted for reconsideration to the Managed Care Coordinator (MCC) (i.e., the DIHS nurses in Washington DC). If a TAR is denied for lack of timely submission, the medical records are forwarded to the Managed Care Coordinator (MCC) Branch Chief for review. According to DIHS Standard Operating Procedure, the Managed Care Review Committee (MCRC) conducts a second level review for all appeals which are upheld by the MCC. The MCRC is comprised of the DIHS Medical Director, appropriate medical, dental, or mental health consultants, and MCC(s). Decisions of the MCRC are made in writing within three working days of the appeal. ICE, DIHS, and OHA are working to develop a more independent appeal body outside of DIHS and ICE. The preauthorization (also called pre-certification of medical necessity) requirement is similar to those of many managed care/health insurers. Nonetheless, some contend that this procedure can prevent detainees from getting the necessary care, and note that off-site nurses have the ability to deny care that was requested by on-site medical personnel. Reportedly, the DIHS Medical Dental Detainee Covered Services Package (CSP) has been amended several times since 2005, to limit the scope of medical care for detainees. A repeating theme in press reports and congressional testimony concerned difficulties getting biopsies when there is a concern about cancer. The ACLU is involved in a class action suit regarding inadequate medical care for immigration detainees at the San Diego Correctional Facility, and contends that there are serious deficiencies in the CSP which should be fixed to ensure that detainees receive adequate medical care consistent with the ICE Detention Standards on Medical Care. The CSP primarily provides health care services for emergencies only. According to the ACLU, as recently as August 2005, the CSP did not extend to pre-existing conditions. In his testimony, Tom Jawetz of the ACLU argued that there is a disconnect between ICE's Detention Standards and the CSP. In addition, he contends that ""the standard is inconsistent with established principles of constitutional law and basic notions of decency."" Representative Zoe Lofgren also stated in a question to ICE at the October 2007 hearing that there seems to be an inconsistency between the CSP and the Detention Standards because the CSP states that medical conditions will be evaluated for treatment based on the criteria that, ""if left untreated during the period of ICE/BP custody [the medical condition] would cause deterioration of the detainee's health or uncontrolled suffering affecting his/her deportation status [emphasis added],"" (i.e., the detainees health issues would have to jeopardize the ability of ICE to remove the alien before treatment would be rendered.) ICE responded that it disagrees that the Detention Standards and CSP are inconsistent. ICE contends that all detainees receive medical treatment when DIHS determines that care is required, ""regardless of whether the alien is about to be deported or not."" There have been reports of problems with detainees being transferred without their medical records. ICE does not have a system to track the transfer of medication and medical records of detainees. Some lawyers described difficulties getting access to medical records on their client's behalf. Other detainees have complained about problems with getting interpreters during medical treatment. Female detainees have also reported not getting regular gynecological or needed obstetric care. The following section synthesizes the finding in three U.S. government reports that examined selected detention facilities' compliance with all or some of the National Detention Standards. All three reports examined compliance with the Medical Care standard. The reports are as follows: U.S. Immigration and Customs Enforcement, Office of Detention and Removal (DRO), Semiannual Report on Compliance with ICE National Detention Standards: January—June 2007 , May 9, 2008. Government Accountability Office (GAO), Alien Detention Standards: Telephone Access Problems Were Pervasive at Detention Facilities; Other Deficiencies Did Not Show a Pattern of Noncompliance, GAO-07-875, July 2007. Department of Homeland Security, Office of the Inspector General (DHS OIG), Treatment of Immigration Detainees Housed at Immigration and Customs Enforcement Facilities , OIG-07-01, December 2006. Table 1 presents the time period of the reviews, the number of facilities reviewed, and the total number of standards evaluated for the studies discussed. In May 2008, ICE released its first semiannual report on compliance with the National Detention Standards. The report covers reviews conducted during the first six months of 2007 and includes the inspections of more than 175 facilities. The report rated the facilities on the Detention Standards as either ""acceptable"" or ""deficient."" Overall, on the medical care standard, 98% of the facilities were rated acceptable, while 2% were rated deficient. Of the evaluated Service Processing Centers (SPCs) owned and operated by ICE, 80% were rated acceptable, while 20% were rated deficient. In July 2007, the Government Accountability Office (GAO) released an audit of 23 detention facilities. GAO found a lack of adherence to the medical care standards at 3 of the 23 facilities, including failing to administer the mandatory physical exams within 14 days of admission and failure to administer medical screening immediately after admission. In addition, GAO found that concerns about medical care were common reasons for aliens to file complaints. The DHS Office of the Inspector General (OIG) conducted an audit of compliance with selected detention standards at five facilities used to house immigration detainees. Of the five facilities reviewed, DIHS managed and administered health care at two facilities. At the other three facilities, DIHS was responsible for approving off-site care, but the on-site care was administered by contractors at those facilities. The OIG identified instances of non-compliance with the medical care standards at four of the five detention facilities, including failure to provide timely initial medical care. The one facility found to be in full compliance with the standards for initial medical screening and physical examination was Krome SPC, where medical care is provided by DIHS. The OIG stated in its review that the Detention Standards on sick calls do not clearly define what is considered a timely response to a non-emergency sick call request. Thus, the report found that in the absence of standards, local detention facilities have established differing policies regarding response time to non-emergency care. Nonetheless, at three of the detention facilities (two local prisons and one contract facility), 196 out of 481 detainee non-emergency medical requests were not responded to in the time-frame specified by the facility. As a result, the OIG recommended that ICE develop specific criteria to define a reasonable time for medical treatment. ICE responded to the recommendation, concurring in part and promising to examine the merits of the issue, but contending that its medical program provides adequate detainee care and is consistent with industry standards. ICE also stated that it ""must rely on its service providers to make medical decisions regarding the provision of medical care and any criteria to be established that would determine timeliness."" Reports of inadequate care being provided to detainees raise several policy issues pertaining to the health care provided to the detained noncitizen population. First, the detention population, both in funded bed space and in the total detention population, increased between FY2003 and FY2007 raising interest in spending on detainee medical care, and concerns that spending has not increased in the same proportion as the detained population. In addition, ICE has the authority to release aliens due to medical and psychological problems, elevating interest in the existing guidelines and practices for medical release, and their adequacy. Similarly, due to the likely special needs of asylum seekers in detention, another policy issue focuses on whether proper care is and can be provided to this population within a detention setting. While every death is regrettable, preventable deaths of aliens in detention who are reliant on the government for medical care heighten concerns about the quality of health care. Doubts about the propriety of the number of deaths in detention as a reliable measure of standard of care, lead to the policy question of which measures would provide insight into the adequacy and quality of care. Finally, an overarching debate on this issue concerns the appropriate standard of health care that should be provided to foreign nationals in immigration detention. This debate is especially emotional because of the balancing act between basic human rights and the cost of health care when U.S. citizens also face barriers in accessing health care. Concerns about the adequacy of health care for detained aliens has increased interest in funding for detainee medical care. As shown in Table 2 , from FY2003 to FY2007, the total amount spent on detainee medical care increased by 83%, from $50 million to $92 million. During that same time period, the total amount of funded bed space increased by 41%. The total amount of funds spent on ICE detainee health care increased between FY2003 and FY2004. Between FY2004 and FY2006, the total expenditures on detainee health care fluctuated but remained between $70 and $74 million. Between FY2006 and FY2007, the total expenditures increased from $74 million to $92 million. Most of the increase in total spending on detainee health care was from increases in program operations, not in medical claims, which are for services rendered by an off-site health care provider to detainees. The total amount of money spent on detainee health care program operations doubled between FY2003 and FY2007. However, the funds expended for medical claims increased between FY2003 and FY2004, then decreased between FY2004 and FY2005. Between FY2005 and FY2007, expenditures on medical claims remained almost constant. During the same time, the funded amount of bed space increased by 49%. ICE has the authority to release aliens due to medical and psychological problems; however, how often this authority is exercised and whether it is used effectively is unknown. ICE has prosecutorial discretion in determining custody for aliens with humanitarian (including medical) concerns. The alien may be released into an Alternatives to Detention program, released on an Order of Supervision, or released on his or her own recognizance. These decisions are made on a case-by-case basis, ""whenever a medical or psychiatric evaluation makes the alien's detention problematic and/or removal [from the United States] unlikely."" ICE does not keep track of how often this discretion is exercised. While there is general debate about the merits of detaining asylum seekers, asylum seekers often have medical and psychological issues and it is not clear how well-equipped the detention health care system is to deal with the specific physical and psychological needs of asylum seekers. As discussed, aliens in expedited removal must be detained, and thus aliens in expedited removal who claim asylum are detained while their ""credible fear"" cases are pending, and they may then be detained while their case is decided. In FY2006, 5,761 asylum seekers were detained, and 1,559 (27%) were detained for more than 180 days. Notably, some claim that the practice of detaining asylum seekers has helped reduced the number of fraudulent asylum claims. However, the position of the United Nations High Commission on Refugees is that detaining asylum seekers is ""inherently undesirable."" It argues that detention may be psychologically damaging to an already fragile population such as those who are escaping from imprisonment and torture in their countries. Often, the asylum seeker does not understand why he or she is being detained, which can increase psychological stress. In addition, asylum seekers may have unusual medical conditions resulting from the imprisonment and torture suffered in their home countries. Nonetheless, ICE reports that it routinely provides medical care for life-threatening conditions, such as cardiac arrest, kidney disease, HIV/AIDS, hypertension, and diabetes. As discussed earlier in the report, according to ICE detainees receive dental care, physical exams, sick call visits, prescription drugs, and mental health services. ICE states that staff are trained to spot detainees who may be at risk of suicide, and to use prevention and intervention techniques to assist such detainees. Between May 2007 and May 2008, psychologists and social workers have managed a daily population of over 1,350 seriously mentally ill detainees without a single suicide. Thus, current ICE procedures may adequately address the health care needs of detained asylum seekers. Two policy issues become highlighted when a detainee dies in custody. The first issue concerns the quality of oversight when a death occurs and whether there is enough oversight to identify possible cases of inadequate care. Secondly, while a detainee's death may heighten concerns about the quality of health care, there are doubts about the propriety of using deaths in detention as a reliable measure of standard of care. What follows is a discussion of these two issues. Although there is a system to report the death of a detainee, some question whether there is effective oversight when a death occurs in detention. Current ICE procedure dictates that when a detainee dies while in the custody of ICE's Detention and Removal Office (DRO), the death is to be reported to ICE headquarters via a system known as the Significant Event Notification (SEN) system. Under its proceedures, DRO is also supposed to report detainee deaths to the ICE Office of Professional Responsibility (OPR) and to the DHS Office of the Inspector General (OIG) so that they can conduct independent reviews of the incident. In addition, deaths are referred to the local medical examiner's office, which decides whether to perform an autopsy. The OIG is also notified of the death by the Joint Intake Center (JIC), which is notified by the SEN system and sends all records regarding the death (including those from the local medical examiner) to the OIG. The OIG may accept the case for investigation or may decline and refer the case back to the JIC for referral to the Office of Professional Responsibility. ICE has reported a decline in the number of deaths of aliens in detention between 2004 and 2008. Some, however, question whether mortality rates should be used in appraising health care in a transitional population, and truly reflect the quality of care provided to detainees. In May 2008, ICE published a fact sheet reporting that there were 71 deaths in immigration detention facilities from calendar year 2004 (inclusive) through May 2, 2008 (see Table 3 ). ICE reported a decline in the number of detainee deaths between 2004 and 2008, a period when the detainee population increased. ICE also asserted that the mortality rate in its facilities is lower than in U.S. prisons and jails and the general U.S. population. A critical analysis of the death rates was published by physicians at the New York University School of Medicine, who commented that ICE's comparisons were not valid because, among other things, the respective mortality rates had not been adjusted for age or for length of detention. These doctors stated that mortality is an imprecise method for appraising health care in a transitional population, and that morbidity which refers to sickness or having a disease would be a better measure of ICE healthcare. They also stated that, in their calculations, the length-adjusted mortality rate for detainees increased between 2006 and 2007. In addition, critics of the reported death rates stated that those who die outside the facilities but whose deaths were precipitated by their time in detention are not included in the mortality rates. There is debate about the appropriate standard of care that should be provided to aliens in detention. Many U.S. citizens lack health insurance and face barriers in accessing health care, and there are issues of patient safety in many medical settings, not just in correctional facilities. In addition, a proportion of aliens are in detention who are not authorized to be in the country. The cost of care for aliens in detention is paid by the American taxpayer. Reportedly, the health care provided to detained aliens tends to be similar to that provided to those in criminal incarceration. According to a press report, ICE has argued that some aliens are getting better health care in detention than they would in their home countries and that they had received earlier in their lives. Assistant Secretary of ICE, Julie Myers testified that in FY2007, 34% of detainees screened were diagnosed with and treated for preexisting chronic conditions (e.g., hypertension, diabetes), and many of these detainees would not have known of their medical condition or received treatment if it were not for the comprehensive health screening they obtained when entering the detention system. In addition, some health care decisions need to be made with the consideration that the alien is going to be removed to a country where he or she may not be able to get any follow-up care. Some contend that despite ICE's acknowledgment of the substantial burden of chronic diseases among the detained population, the ICE health plan focuses on an acute care model, and is not crafted for a population with significant chronic medical or mental health needs. Some aliens in detention, especially long-term residents, do have health insurance but are unable to use it. Some further allege that officers frequently view ICE detainees as criminals, even when they do not have a criminal record, and as such are sometimes quick to assume that the detainees are faking their illnesses, and sometimes slow to get the aliens care. Appendix A. Detention Statistics On an average day, up to 33,000 immigration detainees are in ICE's custody in more than 300 facilities nationwide. The average stay is 37.5 days. In FY2007, a total of 311,213 aliens were detained by ICE. As of April 30, 2007, ICE reported that, cumulatively, 25% of all detained aliens were removed within four days, 50% within 18 days, 75% within 44 days, 90% within 85 days, 95% within 126 days, and 98% within 210 days (see Table A -1 ). For FY2006, approximately 48% of the aliens in detention were criminal aliens. As Figure A -1 shows, the average daily detained population increased between FY2003 and FY2004 and then decreased between FY2004 and FY2006. The daily average detained population increased significantly between FY2006 and FY2007, from 20,594 to 30,295 detainees. As of December 31, 2007, the average daily detention population for FY2008 was larger than the FY2007 average daily population. For FY2008, as of December 31, 2007, the average daily detained population was 31,244. As illustrated in Figure A -1 , the total number of aliens detained by ICE during the fiscal year was fairly consistent between FY2003 and FY2005, and then increased in both FY2006 and FY2007. In FY2007, ICE detained 79,713 (34%) more noncitizens than in FY2003. Some of the increase in the total annual detention population was due to the expansion of expedited removal. Aliens in expedited removal are mandatorily detained but tend to be in detention for shorter periods of time than other aliens because they are not entitled to the same judicial review as aliens who are not subject to expedited removal (i.e., who are in removal proceedings under INA §241). Appendix B. Legislation in the 110 th Congress The Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009 ( P.L. 110 - 329 ) appropriated $2 million for the Office of Professional Responsibility to undertake an immediate comprehensive review of the medical care provided to ICE detainees. The Act also directed ICE to immediately implement the Government Accountability Office's recommendation to improve medical services. The Detainee Basic Medical Care Act of 2008, H.R. 5950 , was introduced by Representative Zoe Lofgren on May 1, 2008. The companion bill, S. 3005 , was introduced by Senator Robert Menendez on May 12, 2008. The bills would have required the Secretary of Homeland Security (DHS) to establish procedures for the timely and effective delivery of medical and mental health care to immigration detainees, designed to ensure continuity of care throughout the alien's detention. The procedures would have been required to address all health needs, including but not limited to primary care, emergency care, prenatal care, dental care, eye care, and mental health care. The procedures would have to have been designed to ensure that each detainee received a comprehensive medical and mental health screening upon intake; each detainee received a comprehensive medical and mental health examination and assessment within 14 days after arrival at the detention facility; each detainee taking prescribed medications was allowed to continue taking such medications on schedule and without interruption; and each detainee with a serious medical or mental condition, subject to immigration laws, been given priority consideration for release on parole, bond, or an alternative to detention program. The procedures would also have been required to ensure that medical records are accessible by the detainee or his or her designate, and were transferred if the detainee was moved to another detention facility. Also, H.R. 5950 / S. 3005 would have required the procedures to include ""discharge planning"" for aliens with serious medical or mental health conditions to ensure continuity of care, for a reasonable period of time, upon removal or release from detention. The bills would also have required the Secretary of DHS to establish an administrative appeals process for denials of medical or mental health care. The process would have included the opportunity to appeal the denial of services to an impartial board. H.R. 5950 / S. 3005 would have required that the Secretary report to the Inspector Generals of the Departments of Homeland Security and Justice information regarding a detainee's death no later than 48 hours after the death of the detainee. The bills would have also require an annual report to Congress detailing any detainee deaths during the previous fiscal year.","Congressional hearings and press coverage critical of the medical care received by those in the custody of the Department of Homeland Security's (DHS's) Immigration and Customs Enforcement (ICE) have raised interest in the subject. The law provides broad authority to detain aliens while awaiting a determination of whether they should be removed from the United States and mandates that certain categories of aliens are subject to mandatory detention by DHS. Aliens not subject to mandatory detention may be detained, paroled, or released on bond. The medical care required to be provided to aliens detained in ICE custody is outlined in ICE's National Detention Standards, which address standards for medical care; hunger strikes; suicide prevention and intervention; and terminal illness, advanced directives, and death. According to ICE's Detention Standards, ""All detainees shall have access to medical services that promote detainee health and general well-being."" In addition, every facility has to provide detainees with initial medical screening, ""cost-effective"" primary medical care, and emergency care. The Division of Immigrant Health Services (DIHS), which is detailed indefinitely from the U.S. Public Health Service to ICE, is responsible for the health care of noncitizens detained by ICE. In some detention facilities, DIHS provides all medical care; in others, DIHS is responsible only for approving medical services that are not provided by the detention facility. ICE has established a covered benefits package that delineates the health care services available to detainees in ICE custody. Detainees who require non-emergency medical care beyond that which can be provided at the detention facilities must submit a Treatment Authorization Request (TAR) to the DIHS Managed Care Program. TARs are reviewed by DIHS nurses in Washington, DC, who review the paperwork submitted by physicians and decide whether to allow the treatment. There have been press reports and congressional testimony of individuals in ICE custody who apparently received inadequate medical care. In addition, problems with access to medical care is one of the chief complaints of aliens in detention. However, others state that immigration detainees may receive better health care than some U.S. citizens, and assert that the death rate in ICE custody is lower than that of the prison and general populations. Overall, there seem to be two major policy questions: (1) do the Detention Standards and the covered benefits package allow for the provision of adequate services to the detained populations; and (2) are the procedures and standards for the provision of medical care being followed? The report does not investigate the veracity of claims of substandard medical care made in the press, or ICE's rebuttals of such claims. This report will be updated to reflect legislative activity.",govreport
"On January 23, 2004, President Bush signed into law the Consolidated Appropriations Act,2004 ( P.L. 108-199 ) within which Congress authorized the creation of the Millennium ChallengeAccount and appropriated $994 million for FY2004. The MCA legislation, included in Division Dof the omnibus spending bill, resolved several key issues on which the House and Senate differed. The measure creates a new Millennium Challenge Corporation (MCC), headed by a CEO whoreports to the Board of MCC Directions, instead of the Secretary of State (Senate) or the President(House). The Board includes the Secretary of State (chairman), the Secretary of the Treasury, theU.S. Trade Representative, the USAID Administrator, the MCC CEO, and four others from listssubmitted by congressional leaders and nominated by the President. Low-middle income countriesmay participate in MCA programs beginning in FY2006, as proposed, but may not receive more than25% of MCA appropriations. The legislation creates a roughly 90-day period during which theCorporation will name the list of countries that will compete for MCA selection in the first year(""candidate countries""), publish the methodology that will be used for identifying best performingcountries, seek public comment on the initiative, and consult with Congress. Following this reviewperiod, countries will be selected (""eligible countries"") and invited to submit program proposals forfunding. This could take place as early as May 2004. In a speech on March 14, 2002, at the Inter-American Development Bank, President Bushoutlined a proposal for the United States to increase foreign economic assistance beginning inFY2004 so that by FY2006 American aid would be $5 billion higher than three years earlier. Hefurther pledged to maintain economic aid amounts at least at this level into the future. The fundswould be placed in a new Millennium Challenge Account (MCA) and be available on a competitivebasis to a few countries that have demonstrated a commitment to sound development policies andwhere U.S. support will have the best opportunities for achieving the intended results. These""best-performers"" will be selected based on their records in three areas: Ruling justly -- promoting good governance, fighting corruption, respecting human rights, and adhering to the rule of law. Investing in people -- providing adequate health care, education, and other opportunities that sustain an educated and healthy population. Pursuing sound economic policies that stimulate enterprise and entrepreneurship -- promoting open markets, sustainable budgets, and opportunities for economicgrowth. If fully implemented, the initiative would represent one of the largest increases in foreign aid spending in half a century, outpaced only by the Marshall Plan following World War II and the LatinAmerica-focused Alliance for Progress in the early 1960s. Administration officials characterize theMCA as representing the most comprehensive policy change ever in how the United States designs,implements, and monitors development assistance to low and lower-middle income nations. Inparticular, Executive officials emphasize the ""results-based"" aspect of the initiative in whichcountries will be selected based on past and current performance, and programs will be evaluatedon and required to show measurable achievements that impact favorably on economic growth andpoverty reduction. Conditioning assistance on policy performance and accountability by recipient nations is not a new element of U.S. aid programs. Since the late 1980s at least, portions of Americandevelopment assistance have been allocated by the U.S. Agency for International Development(USAID) to some degree on a performance-based system. What is significantly different about theMCA is that the entire $5 billion money pool -- which is nearly twice the size of the FY2003USAID ""core"" development aid budget -- will be tied to performance and results. Moreover,program proposals will be based on national development strategies developed by the countriesthemselves, with a U.S. role limited to providing technical assistance in project design. Further, inanother major departure from past policy, the MCA is intended to focus exclusively on developmentgoals without being influenced by other U.S. foreign policy and geo-strategic objectives that oftenstrongly influence U.S. aid decision making. Nevertheless, while new details regarding countryeligibility, selection criteria, and organizational structure were announced in December 2003, manyissues have not yet been decided and remain under review by the Executive branch. Congress plays a key role in the approval of the initiative by way of considering authorization and funding legislation, and in confirming the head, or CEO, of the Millennium ChallengeCorporation that manages the MCA under the President's plan. Congress will also maintaincontinuing oversight of the program as it is implemented and additional funding is sought insubsequent years. Among numerous policy issues for Congress raised by the MCA proposal were: Country eligibility : Should the MCA target both low and lower-middle income countries, as proposed by the Administration, or should it focus exclusively on the poorestnations where the needs are the greatest and where access to other financial resources is limited? And, if both, how should funds be allocated between the two groups? Performance indicators and selection process : Will the indicators and the methodology proposed by the Administration identify the ""best performers""? Implications for other U.S. development aid programs : How will the MCA affect global and country aid programs not part of the new initiative? U.S. organizational structures: Is the proposed Millennium Challenge Corporation, with a staff of 100, the most appropriate structural model for managing the MCA? What are the implications for the U.S. Agency for International Development, the primarygovernment bilateral aid agency? Program development and selection: What types of activities should the MCA fund and how will these programs be designed? Legislative and funding matters: What should be the relationship between MCA authorizing legislation and current foreign aid laws and legislative practice? What are thebudgetary implications on the MCA? The concept of the Millennium Challenge Account is based on the premise that economic development succeeds best where it is linked to sound economic and good governance policies,especially where these conditions exist prior to expanding resource transfers. Past failures ofeconomic aid provided by the United States and other international donors, some argue, have beencaused to a large extent by a lack of attention to performance and the requirement for measurableresults. (1) Executive branch officials say that theMCA abandons the process of basing aid allocationson promises by recipient governments to initiate policy changes in the future, and instead will makethose decisions based on achievements already made and policies that are currently working. (2) This view has been joined by a growing body of literature in the late 1990s concluding that there was little relationship between the amount of development aid provided and success in raisingeconomic levels and reducing poverty. Rather, some researchers argued that foreign assistanceproduced the greatest impact where the recipient country had already adopted sound policies. (3) Others have concluded that international development assistance has largely failed and will continueto do so unless the donor community fundamentally shifts its focus to support real policy change. (4) Despite many development successes in such areas as agricultural production and childimmunization, by one calculation 97 countries receiving $144 billion (constant dollars) in U.S. aidsince 1980 had their median per capita gross domestic product (GDP) decline from $1,076 to $994by 2000. (5) Also influencing the debate over the launch of a new foreign aid initiative are the terrorist attacks of September 11and an evaluation of their causes. There remain differences of perspectiveregarding a possible direct relationship between poverty and terrorism, especially given the fact thatmany terrorist leaders come from relatively wealthy backgrounds. But most agree that poverty canbe a contributing factor. President Bush, in announcing the MCA on March 14, 2002, madenumerous references to the war on terrorism, noting that ""We also work for prosperity andopportunity because they help defeat terror."" He further emphasized that although poverty does notcause terrorism, ""poverty prevents governments from controlling their borders, policing theirterritory, and enforcing their laws. Development provides the resources to build hope and prosperity,and security."" (6) Accompanying this was a renewed interest in global development aid funding levels as governments, international institutions, and non-governmental organizations prepared for amid-March 2002 U.N.-sponsored International Conference on Financing for Development inMonterrey, Mexico. Conference proponents hoped the session would serve as a catalyst for donorsto increase aid commitments in order to achieve by 2015 the ambitious goal of reducing poverty byone-half relative to 1990. At the 2000 Millennium Summit, international leaders, including theUnited States, had pledged support for a set of specific targets, including those related to hunger,education, women's empowerment, child health, HIV/AIDS, and other infectious diseases, thatbecame known collectively as the Millennium Development Goals. A World Bank analysis, releasedFebruary 2002, estimated that to achieve these goals by 2015, donors would need to increasespending by $40 to $60 billion per year, or roughly double the amount provided in 2001. (7) As theMonterrey conference approached, international development advocates began pressing participatinggovernments to issue specific pledges that would help close this funding gap identified by the WorldBank. Following the President's speech in March, an inter-agency team, including representatives from the National Security Council, Office of Management and Budget, State Department, USAID,and the Department of Treasury, met frequently to work out proposals to design and implement theU.S. initiative. The NSC managed overall policy development while the State Department tookcharge of outreach -- seeking input from the non-governmental community -- and the TreasuryDepartment assembled economic and governance indicators that would be used to determine eligiblecountries. The team drafted recommendations on many, but not all MCA issues, and after beingapproved by the Secretaries of State and Treasury, the proposals were forwarded to the President. After making further modifications, on November 25 President Bush endorsed several key principles of the initiative. Thereafter, the process of writing legislation, deciding on budget levelsfor FY2004, and consulting with Congress began. On February 3, 2003, the President proposed $1.3billion for the MCA in FY2004, followed two days later by submission of a draft bill authorizing theinitiative. The requested legislation was introduced as H.R. 1966 and S. 571 , but ultimately enacted as part of the Consolidated Appropriations Act, 2004 (Division D of P.L.108-199 ). While several important issues have been decided, both through enactment of authorizing legislation and through inter-agency discussions, others remain under review as the MCA frameworkevolves. These issues are highlighted below and discussed in more detail in the following sectionon the MCA and congressional consideration. MCA features announced by the Administration. The Administration issued proposals on a number of key MCA elements, some of which wereincorporated into the enacted authorizing legislation: Country eligibility. In the first year -- FY2004 -- countries that can borrow from the World Bank's International Development Association (IDA) with a per capita incomebelow $1,415 are eligible. The list will expand to 115 over the next two years to include allcountries with per capita GNI less than $2,935. (For complete list, see appendixB.) Selection criteria and performance indicators. MCA participants will be selected based on their performance measured by 16 economic and political indicators. In mostcases, a score above the group median on the indicator would represent a passing ""grade"". The MCABoard of Directors will be guided by the statistical outcomes, but maintain some discretion over thefinal selection. Corruption measure is ""pass-fail"". To be eligible, a country must score above the median on the corruption indicator, as compiled by the World BankInstitute. Program development and submission. MCA programs will be ""country-driven"" in which participating country officials will design and submit project proposalsbased on national development objectives. Types of programs supported. MCA programs will be available not only for government-sponsored projects, but for activities proposed and implemented by local governmentsand communities, civil society, and other private entities. National governments, however, wouldremain responsible for the program and be the party to sign a compact between the U.S. and thecountry. Moreover, according to Administration officials, all types of assistance -- budget supportfor government initiatives, infrastructure projects, and more targeted activities focused on specificsectors -- are available for consideration. Organizational management of the MCA. The Administration asked and Congress approved the creation of a new entity -- the Millennium Challenge Corporation (MCC)-- that will be supervised by a Board of Directors chaired by the Secretary ofState. FY2004 funding. The Administration proposed $1.3 billion for the MCA's first year and continues to support its pledge of $5 billion by FY2006. Congress, however, reducedthe FY2004 funding to $994 million. MCA issues undecided within the Administration. Beyond some of these key decisions, other matters remain under discussion. Number of countries participating. Because the MCA will be a ""performance-driven"" program, it is difficult to predict how many nations will qualify andparticipate. Administration officials have suggested, however, that the number will be relativelysmall -- perhaps less than 20 by the third year. It is also undecided whether all or only some of thecountries that qualify based on the performance indicators will receive MCA funding. The final listmay comprise selections from the pool of best performing countries or the selection could be basedon the quality of program proposals submitted by qualifying nations. Other options are also underreview. Impact on USAID program objectives in MCA countries. MCA participants may or may not continue to receive regular development aid under existing USAIDprograms. If they do, it is unclear whether those activities will change focus in order to supportMCA projects. The role of USAID missions in MCA countries is also yet to be clearlystated. Monitoring and accountability. Executive officials say that MCA programs will be closely monitored and scrutinized, perhaps by some independent auditing system, but theyhave not established plans or procedures. Graduation or exit strategies. A main objective in providing an increased resource pool to help ""jump-start"" or accelerate a country's development process, is to set it on theroad toward graduation. What criteria to use to end programs in successful countries or how towithdraw from a non-performing MCA participant remain undecided. As Congress considered MCA authorizing legislation and funding recommendations in 2003,and will later debate the confirmation of the MCC chief officer, followed by continuing oversightof program implementation, several key elements of the initiative have been, and will continue tobe closely examined. These will include matters that have already been decided within the executivebranch, as well as issues that remain under discussion. One of the first questions addressed by the executive steering committee was where the income cutoff point should be drawn for purposes of defining potential MCA participants. The debatechiefly focused on whether only the poorest nations should be considered for MCA programs. Asnoted above, the Administration announced in late November 2002 that a pool of 115 countries,phased in over three years, would compete for MCA resources. They are grouped into three clustersaccording to income level and World Bank borrowing status, with a new cluster added to thecompetition each year corresponding to the anticipated rise in MCA resources. In FY2004, only the75 IDA-eligible countries with per capita incomes below $1,415 can compete, while 12 more willbe added the next year. (8) By FY2006, when $5 billionis planned for MCA programs, countries withper capita incomes between $1,415 and $2,935 -- 28 in number -- will be added. Since countriesabove $1,415 per capita income are likely to score higher on the eligibility indicators, the WhiteHouse further has decided to have separate competitions for the low and low-middle income groupsto avoid income bias. Issue: Income eligibility. There emerged at the outset a relatively broad consensus within the U.S. development community that the MCA shouldfocus on IDA-eligible, low-income countries. (9) Fora policy aimed at promoting economic growth and reducing poverty, mostagreed that it made sense to place emphasis where the greatest needs existed. By expanding thenumber and income level of MCA participants beyond IDA-eligible status, some argued, the amountof money available for the poorest nations would be reduced. Some also noted that the 28 memberlow-middle income group includes nations that maintain strong political and strategic ties with theU.S. -- Egypt, Jordan, Colombia, Turkey, and Russia. That would increase the possibility, or atleast the perception, that countries might be selected on criteria other than MCA performancemeasures. It may further tend to blur the distinction between MCA goals and objectives of other aidprograms, jeopardizing the unique approach of the MCA and the need for programmatic flexibility. (10) Achieving economic results as an objective has frequently taken a position secondary to strategicinterests in U.S. aid allocation considerations in the past. In addition, some point out that the poorest countries have far less access to capital from private sources, making MCA resources even more valuable to them. According to one analysis, aid as apercent of gross national income (GNI) for IDA-eligible countries with per capita incomes below$1,415 totals 10.8% compared with 1.4% for the higher income group (below $2,935); gross privatecapital flows as a percent of GDP for the poorer IDA-eligible countries (below $1,415) is 6.9% whilethose between $1,415 and $2,935 receive 10.3%. Tax revenues and domestic savings as a percentof GDP among low-middle income countries are roughly double the level of those for IDA-eligibleborrowers below $1,415, thus providing a more expansive potential source of financing. (11) Others, however, argue that low-middle income countries deserve equal consideration in a program intended to identify and partner with the ""best-performers."" In some cases, they assert,commitments to sound policies have enabled nations to move into the higher income range. If aprimary goal of the MCA is to maximize the effectiveness of aid resources, then non-IDA countriesshould be included. (12) In addition, countries fallingin the $1,415 - $2,935 per capita income range,while maintaining higher income levels, also have large numbers of people living in poverty. Thesecountries, with stronger institutions and better capacity may also be better positioned to apply MCAresources more effectively. One argument of those favoring exclusive participation of countries below the $1,415 level -- that better-off economies would score higher on the eligibility indicators, raise the median standardsfor qualification, and squeeze out the poorest nations -- seems to be addressed by theAdministration. Based on a preliminary estimate of the median scores of each group, the medianwould be higher -- and in some cases significantly higher -- for 14 of the 16 indicators forlow-middle income countries compared with those below $1,415 GNI per capita. (13) In FY2006, whenthe 28 higher-income countries become eligible, they will be evaluated separately from the other 87,competing against each other to score above the group median on the 16 indicators. This wouldallow countries to qualify based on comparisons with their income-level peers. Whether theAdministration will divide MCA resources into two pots of money for each income group has notbeen determined. In any case, unless the Administration and Congress agree to increase the MCAbeyond the proposed $5 billion target, whatever number of low-middle income nations that qualifywill reduce the amount of resources that would otherwise be available for those below the $1,415level. Congressional proposals to modify income eligibility. Reflecting the perspective that the MCA should remain focused on thepoorest countries, the Senate Foreign Relations Committee recommended in S. 1160 (as added to S. 950 ) to permit participation by low-middle income country in FY2006and beyond only if MCA funding exceeds $5 billion. If not, MCA programs could only be supportedin countries that fall below the ""historical per capita income cutoff of the International DevelopmentAssociation,"" a level that is currently $1,415. Even in years when the MCA appropriation exceeds$5 billion, the Senate bill would limit funding to low-middle income participants to 20% of the totalamount. The Foreign Relations Committee further expressed its intention that MCA programs inthe low-middle income countries should focus on poor communities in those nations. The House International Relations Committee, in H.R. 1950 , also limited to 20% the amount of MCA resources that could be allocated in FY2006 to low-middle income participants. But unlike the Senate, the House measure did not require an appropriation in excess of $5 billion forinclusion of the low-income group in FY2006. The Committee considered two amendments duringmarkup related to the income issue. The first, offered by Congressman Payne and approved by theHouse panel, would have required low-middle income countries that are selected for MCA grantsto make a contribution from their own resources to whatever MCA programs are funded. Thesecond amendment, proposed by Congressman Menendez, originated out of concern that few (7)Latin American nations would be eligible to compete for MCA resources in the first two years,despite large pockets of poverty in these countries. The Menendez amendment, which was defeated(10-24), would have made low-middle income nations, a group which includes nine from LatinAmerica eligible from the beginning. Similarly, Congressman Kolbe proposed an amendment duringHouse floor debate that would have allowed low-middle income countries to be eligible beginningin FY2005 rather than FY2006. The Kolbe amendment failed 110-313. While sympathetic to theconcerns expressed by sponsors of the amendment, those opposed to changing the income eligibilitystructure argued that resources diverted from Latin America and many other nations would come atthe expense of the world's poorest nations where the needs are greatest. As enacted in Division D of P.L. 108-199 , the MCA authorizing legislation follows the earlier House and Senate plan of including only low-income countries in the program during FY2004 andFY2005. Beginning in FY2006, low-middle income nations, with per-capita income above $1,415,may also participate, but they can only receive 25% of the amount appropriated for the MCA in thatyear. Executive branch decisions on which performance indicators to use have been guided by whether the data and methodology are transparent, publically available, accurate, and easy tounderstand. Another key factor is whether the data source provides full coverage for as manycountries as possible and is relatively current. Officials further sought to identify indicators thatwould be few in number but sufficient to reflect broad policy results in each of the three policycategories, and valid relationships between the indicators and economic growth and povertyreduction. Finding indicators that meet all of these requirements is difficult, and according to some,impossible. Gathering valid economic, social, and political statistics, especially in developingnations, has always been difficult, often resulting in significant gaps in coverage and long lag times. Gaining consensus on whether a given set of indicators accurately measures policy achievementsunfettered of institutional bias by whatever organization or individuals collect and interpret the datais also a major challenge. As noted above, the Administration has settled on 16 indicators for measuring performance and determining country eligibility. As shown in Table 1, six fall within each of the ruling justly andencouraging economic freedom categories, while four will determine results in the area of investingin people. Sources include international institutions, such as the World Bank, IMF, and U.N., andnon-governmental and private organizations like Freedom House, Heritage Foundation, and theInstitutional Investor Magazine. National statistics will also be drawn upon where gaps occur, butnone of the data sets will be compiled by the U.S. government. For aggregating country scores, the Administration decided to use a ""hurdles"" approach instead of adding up the results and ranking nations top to bottom. To qualify, a country must score above the median on half of the indicators in each policy area; in other words, a country's ranking must beabove the median of all 75 countries in the first year on three of the six indicators for ruling justlyand economic freedom, and two of the four for investing in people. The one exception to the medianstandard is the inflation indicator -- a country's inflation must be below 20 percent in order to passthat hurdle. Officials believe that the hurdle methodology will demonstrate that a country iscommitted in all three areas and more precisely identify policy weaknesses. In year three andbeyond, when low-middle income countries are added to the competition, there will be separateevaluations for countries below and above $1,415 per capita incomes so that higher income countrieswill not drive up the median and exclude poorer nations from qualifying. Importantly, one indicator -- control of corruption -- will be a ""pass-fail"" test, in which any country scoring at or below the median on this measure will be disqualified regardless ofperformance on any of the other 15 indicators. Executive officials argue that since there are stronglinks between financial accountability and economic success, a strong commitment to fightcorruption must be demonstrated by all MCA participants. Further, after passing all the required hurdles, a country's score will be evaluated by the MCC Board of Directors who will make the final recommendations to the President. The Board will begranted a degree of discretion in selecting the final participants, taking into account such things asmissing or old data, trends in performance, and other information that might reflect on a country'scommitment to economic growth and poverty reduction. Moreover, officials have yet to decidewhether to fund programs in all countries that qualify and pass the final review. Final selection, forexample, could hinge on the quality of program proposals submitted by the best performing nations,although other selection options are also under discussion. Presumably, the President will alsomaintain flexibility as to whether to agree with the Board's recommendations. Congressional action on performance indicators. Measures considered in the Senate and House ( S. 1160 , as amended and incorporatedinto S. 925 ; and H.R. 2441 , as amended and incorporated into H.R. 1950 ) did not directly legislate the list of performance indicators to be used,thereby allowing the executive branch to apply the measures that it has recommended. Both,however, provided for advance congressional consultation and public awareness. S. 925 required that the list of proposed indicators be published in the Federal Register and on theInternet and that the Administration consider public comment prior to issuing the final determinationof the indicators. In this way, the Committee believed that the indicators could be refined andimproved. H.R. 1950 required the Corporation's CEO to consult with congressional committees prior to establishing eligibility criteria and methodology and publish such criteria oncefinalized. Both bills further directed that country eligibility would be based on an evaluation ofperformance criteria that closely matched the 16 indicators listed in Table 1 below. In its report on S. 1160 , the Senate Foreign Relations Committee expressed its intent that the selectionbe based on development needs and performance, and not on immediate political considerations. The enacted legislation, like earlier House and Senate bills, does not specify the specific performance indicators. In describing the criteria by which countries should be assessed, the MCAAct makes reference to the extent to which countries respect the rights of people with disabilities,promote the sustainable management of natural resources, and invest especially the health andeducation for women and girls. While none of the 16 indicators chosen by the Administrationdirectly address these three additional concerns, it is likely that MCC officials will review existingindicators or search for new performance measure in order to better evaluate progress on these threefactors added by Congress. The legislation further requires the Corporation to publish the eligibilitycriteria and methodology used for country evaluation on its website and in the Federal Register , andreceive public comment and congressional input prior to country selection decisions. Table 1. MCA Performance Indicators Issue: Association of performance indicators with economic growth and poverty reduction. Analysts will beexamining the set of 16 indicators to determine how well they predict successfuldevelopment outcomes. An initial assessment by the Center for Global Developmentsuggests that many of the indicators show a reasonable or strong relationship witheconomic growth, infant mortality, and literacy rates, although a few show weakassociations, especially in the economic freedom category. According to the Center'sanalysis, each of the six governance indicators maintains good or strong correlationto development outcomes. The measure of public primary education spending as apercent of GDP, however, is weakly associated with the three development standards. Three of the six economic freedom indicators -- trade policy, days to start a business,and three-year budget deficits -- are also found in the study as being weaklycorrelated with development achievements. (14) Issue: Hurdles and median vs. aggregated ranking. Some argue that an aggregation of scores andtop-to-bottom ranking rather than the use of hurdles is a better way in which todetermine eligibility with an above-the-median score requirement. While theAdministration holds that passing half the hurdles in each of the three policy areasensures broad commitment to both economic growth and poverty reduction, it alsomeans that countries do not have to meet each of the 16 standards to qualify. Thisapproach departs from more traditional aid requirements in which recipients mustcomply with all conditions associated with a program framework, especially thoseof the World Bank, IMF, and in some cases U.S. aid agreements. Once a countrypasses a hurdle, there are limited incentives to keep improving in those areas. Forcountries that miss qualifying by a small margin, however, the incentive remains. PDF version Use of the median also in some cases complicates efforts for a country to passthe hurdle due to outcomes beyond its control. The median will change over time,sometimes because new countries are added to the pool, as will be the case inFY2005. In other instances, a country may improve on a particular indicator but stillnot pass the hurdle because other countries improve more significantly and push themedian higher. Conversely, a government could regress or remain stagnant over timebut pass a hurdle it had failed the previous year because the median drops. A numberof observers have suggested that instead of using the median, it would be better eitherto set specific, individual thresholds that would be relevant to each indicator or to useabsolute scores. (15) A further issue in use of the median is that for three of the indicators -- political rights, civil liberties, and trade policy -- the range is relatively narrow for scoringcountry performance, resulting in many falling at the median. The Freedom Houseassigns scores on a 1-7 scale, while the Heritage Foundation uses a scale of 1-5. Forthe trade policy indicator, for example, 15 of the 75 IDA-eligible countries areassigned the median score of 4. Since a country must place above the median to passa hurdle, this eliminates a number of candidates with limited differentiation ofperformance. Issue: Surprising country outcomes and modifying the indicators. Many have been surprised by the possibility thatcountries such as Vietnam and China might qualify, despite scoring near the bottomon half of the indicators for ruling justly. Both countries pass the hurdles forcorruption, rule of law, and government effectiveness, but have some of the worstscores in the categories of political rights, civil liberties, and voice andaccountability. Since they score above the median for three of the six indicators andpass the corruption measure, they would qualify, at least in the ruling justly category. One analyst attributes this to the high degree of correlation among several indicators in a single category that tends to magnify existing data deficiencies. Whenhalf the indicators in a single category are strongly related to one another, and acountry scores well in those areas, the other indicators essentially become irrelevant. Egypt is also cited as an example of a country with a poor record on regulation andtrade, but would have passed the economic freedom grouping with data available inearly 2003 based on the strength of macroeconomic indicators. (16) One modification to the current proposal that would address this potential weakness would be to make sure that highly correlated indicators represent less thanone-half the total cluster. In this way, a country would not pass one of the threecategories based on a strong showing in one respect but very poor standards for theother measures. Another alteration to the Administration's plan would be to add anadditional indicator in each category so that there would be an odd number ofmeasurements in each category. In a sense, the added element would become a""tie-breaker"" in cases where the current indicators tended to cluster in two, evenlydivided, highly correlated groupings. One review of the MCA proposal argues thatthe initiative does not include sufficient attention to democracy issues because itincludes indicators in the ruling justly category that are better measures of economic,not political freedoms. This analysis recommends a shift of the corruption, rule oflaw, and government effectiveness indicators to the economic policy category. Under this scenario, countries like Vietnam and China would fail the ruling justly test. (17) Issue: Data accuracy and availability. Due to the difficulty in collecting accurate data,especially those based on perceptions, a certain degree of error can be expected ineach of the 16 measurements. This cannot be overcome but is mitigated to someextent by the requirement of only having to pass half the hurdles in each policy area. But it appears most problematic for the pass/fail test of corruption. According to anassessment made by the authors of the corruption index, there is a large margin oferror and high degree of uncertainty for 25 countries that score slightly above orslightly below the median. Either cross-country data are not informative or sourcesdisagree on a country's corruption standing. Of the total of 25, 13 fall below themedian and would therefore be eliminated from further consideration, despite strongdoubt as to whether the data measured performance accurately. To overcome thispotential weakness, the authors recommend that MCA managers employ in-depthcountry diagnostics regarding governance performance for countries that fall near themedium -- the ""yellow light countries."" (18) Missing data also pose challenges. A strict interpretation of the data would result in a failing grade on a hurdle where no figures were available. Only 87 of the115 possible MCA-eligible countries have been reported with regard to the indicator""days to start a business,"" although the number has increase from 63 a year ago. Forother indicators where data were incomplete or lagged, especially in the cases ofeducation and health spending as a percent of GDP, executive officials say they willrely on information collected at U.S. embassies in each country. Issue: MCA Board of Directors discretionary authority. Allowing the Board some latitude to depart from thepurely statistical record will help address some of the data accuracy and availabilityproblems. But there appears to be divided opinion over how much discretion shouldbe permitted. Arguing for broader flexibility, some note that countries that just miss qualifying, possibly because of the lack of data, could still be reconsidered andapproved. (19) In the case of ""close-calls,"" the Boardcould examine trends over timeto assess if a borderline country was improving or falling back in performance, andmake appropriate adjustments. In order to maintain the integrity and transparency ofthe selection process, final judgments that deviate from the methodological base willneed to be clearly explained and closely examined. (20) This will be especiallyimportant in cases where the country with close strategic and political ties to theUnited States is included despite not meeting all the hurdle tests. The same will betrue should the President decide to reject a country that has recently opposed orrefused to support an important U.S. security-related policy. Others disagree,however, contending that any discretion on the part of the Board would inviteunwarranted political influence and undermine MCA effectiveness. (21) Anotheranalyst argues that one way to avoid undue foreign policy intrusion would be tochannel MCA funds through multilateral entities, such as the World Bank. (22) Congressional proposals to modify Board of Directors discretion. As noted below, the Senate Foreign RelationsCommittee initially reported an MCA authorization bill that did not authorize thecreation of a Millennium Challenge Corporation, with a Board overseeing itsoperations. Instead, S. 1160 placed the MCA within the StateDepartment under the authority of the Secretary of State and gave the Secretary thepower to determine eligible countries through the evaluation of a government'scommitment to several factors in the three areas of ruling justly, economic freedom,and investing in people. Subsequently, however, the Senate voted on July 9, 2003, to modify the MCC structure and the role of the Board of Directors by adopting revised text that waslargely based on a proposal offered by Senator Lugar ( S. 1240 ). Themodified arrangement, which was incorporated as Division C of S. 925 ,established a Corporation to be managed by a CEO. Under the Senate measure, theCEO would report to and be under the direct authority and foreign policy guidanceof the Secretary of State. S. 925 , as amended, further established aBoard of Directors, chaired by the Secretary of State, and grants the Board the powerto determine eligible countries by evaluating the commitment of a country todemocratic governance, economic freedom, and investments in people. This did not,however, appear to limit the Board's selections based solely on the results of theperformance indicators. In this way, the Senate measure seemed to permit a similardegree of discretion that the Administration's plan envisioned. The House-passed measure ( H.R. 1950 ) was similar to the Senate bill in that it required eligible countries to have demonstrated a commitment tobolstering democracy, investing in health and education, and promoting soundeconomic policies, but did not specifically identify how such a commitment wouldbe determined, other than through the creation of eligibility criteria and amethodology. As enacted, the MCA authorizing legislation follows the general themes of earlier House and Senate bills. ""Eligible"" countries are to be determined, to themaximum extent possible, by objective and quantifiable indicators measuring acountry's commitment to the three core policy goals of ruling justly, promotingeconomic freedom, and investing in people. The legislation directs that the selectionis to be based on the consideration of three factors: the extent to which the countrymeets or exceeds the eligibility criteria; the opportunity to reduce poverty andpromote economic growth in the country; and how much money is available to carryout MCA programs. This appears to provide substantial flexibility and discretionaryauthority in the selection process. Where the House and Senate bills diverged, however, regarded who made the determination of eligibility and therefore, who would be in position to exercisediscretion in deviating from a strictly statistical evaluation. S. 925 , asamended on July 9, gave the Board of Directors authority to determine whether acountry is eligible, while H.R. 1950 placed the power with theCorporation's CEO. The enacted legislation gives this authority to the Board ofDirectors. The MCA initiative will be an additional economic assistance tool of the United States, and is not intended to replace or substitute for any existing channel of U.S.foreign aid. It can be expected, therefore, that overall American aid will continue toserve multiple national interests and foreign policy goals, including security,humanitarian, multilateral, and commercial objectives. Administration officials havemade a commitment that the MCA will be in addition to existing aid activities andthat regular U.S. programs will continue even in MCA-participating countries. Nevertheless, because of the priority being placed on the MCA policy orientation andthe size of the financial investment, there almost certainly will be ramifications of thenew initiative for current programs. Foremost may be funding tradeoffs, especiallygiven rising budget deficits and the costs of fighting the war on terrorism. (Spendingissues are also discussed below in the section on legislation and budgets.) Issue: Commitment to global initiatives. During the past year, some analysts have argued that aportion of the MCA should be dedicated to effective and results-oriented globalprograms operated on a multilateral basis. One concern is that the large amount ofresources directed to the MCA may limit the U.S. ability to maintain or expand uponcommitments to such activities as the Global Fund to Fight HIV/AIDS, Tuberculosis,and Malaria. Another worry is that soundly managed, high impact programs incountries with weak governance and poor corruption standards will miss out on theMCA opportunity to accelerate a process that is already making a contribution tolong-term economic growth and poverty reduction. Proponents of this view advocatea ""two-tiered"" approach to the MCA in which separate pools -- and perhapsmultiple pools -- are maintained to serve several types of activities. (23) The trade-off for this approach would be that significantly fewer resources per country would be available, most likely reducing the impact of MCA assistance. Some also caution that multilateral programs, regardless of their merits, do notnecessarily have the same results-oriented performance requirements of the MCA,a fact that would undermine the main objective of the MCA. Increased resources areonly one important feature of the new initiative, and to many MCA advocates, themost significant feature by far is the goal of allocating the aid where it will have thegreatest impact and be most readily accounted for. Issue: Policy coherence and USAID program goals in MCA countries. The Administration says it will maintain regulardevelopment aid programs in a country while it simultaneously launches a far largerMCA-designed activity. Executive officials have not said, however, how this mightaffect the shape and goals of continuing programs managed by USAID missions. Some may argue that regular aid objectives should be re-oriented to maintain policyconsistency with the MCA initiative and in some cases to help facilitate the corefocus of the larger pool of resources. Others, especially within USAID countrymissions, may question whether successful projects should be abandoned, with apotential negative impact on the target population. In perhaps the clearest statementto date, USAID Administrator Natsios told the House Foreign OperationsAppropriations Subcommittee that actions may vary from country to country. Henoted that USAID missions in MCA-selected countries would likely undertake astrategic review of their programs and may adjust projects to support the MCAcontract. In other cases, however, missions might continue high-priority activities,such as those combating HIV/AIDS or curbing trafficking in persons, or terminatecertain activities. (24) Some of these same issues regarding policy coherence are being raised regarding the relationship between the MCA and other U.S. economic and trade tools aimed atpromoting economic growth in developing nations. One study, for example,concludes that there is very little overlap between countries likely to qualify for theMCA and those currently eligible for debt reduction under the Heavily Indebted PoorCountry (HIPC) initiative or for trade preferences under the African Growth andOpportunity Act. (25) Congressman Jim Kolbe,Chairman of the House ForeignOperations Subcommittee, the House panel with jurisdiction over funding the MCA,suggests that MCA qualifiers should get special consideration for expedited tradepreferences that would further accelerate economic growth possibilities. (26) Still otherswho support the MCA framework find fault with the Administration for not devisingsimultaneously an overall foreign aid strategy into which the MCA fills one ofseveral elements of a comprehensive policy. (27) Beyond U.S. programs and policies, other foreign aid donors and institutions are expressing concerns that the MCA may be creating additional, and perhapscompeting performance goals to those that already exist. How MCA program goalsalign with the Millennium Development Goals is of particular concern. One of the most contentious issues associated with the MCA policy review process has been and is likely to continue to be where the MCA programmanagement will be placed. This debate has raised issues discussed for many yearsconcerning under what auspices U.S. foreign aid policy should be designed,coordinated, and managed. Over the years, suggestions have ranged fromcoordination within the National Security Council, creation of umbrellaorganizations, like the ill-fated International Development Cooperation Agency, andmost recently the merger of such responsibilities into the State Department. Afterextensive debate during the mid-1990s, a decision was reached to make USAID, theprincipal U.S. government bilateral aid agency, totally independent, but to have itoperate under the guidance of the Secretary of State. After considering numerous options, including the placement of the MCA as a separate unit with the State Department, the Administration proposed to create a newgovernment entity -- the Millennium Challenge Corporation -- to manage theinitiative. Given the innovative and non-traditional approach inherent in the MCAconcept, executive officials said it makes sense to establish a new entity to overseeits implementation. The Corporation, as proposed, would have a CEO, confirmedby the Senate, and a staff of no more than 100 that would be drawn largely from othergovernment agencies and serve for limited-term appointments. A Board of Directors,chaired by the Secretary of State and include the Treasury Secretary and OMBDirector, would oversee the MCC. Although it appears there is no precise existingmodel in the U.S. government, officials said that the MCC would most closelyresemble the Overseas Private Investment Corporation, an organization that promotesprivate American investment overseas, and the Commodity Credit Corporation, anarm of the Department of Agriculture that manages export credit guarantee programsfor the commercial sale of American agricultural goods. An important differencebetween these and the MCC, however, is the proposal to have a cabinet-memberBoard oversee the latter and make final recommendations. Issue: The need for a new organization. Before agreeing on the MCC, the inter-agencysteering committee reportedly looked seriously at the option of creating a separateunit within the State Department to manage the MCA. One reason for rejecting thisproposal may have been the relative lack of experience of State Department staff inadministering aid programs. This was one of the central issues considered when thequestion of whether to fold USAID into the Department was under debate. Thistechnical shortcoming, however, could have been overcome by adopting the MCCprinciple of detailing aid experts from other agencies to staff the office. A broaderreason for not placing the MCA within the State Department, however, may havebeen a concern that it would be located too close to the center of the U.S. foreignpolicy apparatus that would limit the program's immunity from strategic and politicalinfluences. At a minimum, many observers believed, there would be a perceptionproblem -- whether true or not -- that the MCA did not truly represent a departurefrom the past aid entanglements with broad U.S. foreign policy interests. At the same time, many groups encouraged the Administration to establish the MCA as an office within USAID, but apart from the normal operations of the agency. Various external groups have argued that USAID, with its 40 years of developmentexperience, maintained the knowledge, staff, and on-the-ground country presence tomost effectively administer and monitor the MCA. To place responsibilityelsewhere, they contend, would risk duplication of effort, competing priorities, andinconsistent policies. (28) Another, business-relatedorganization also opposes thecreation of a new institution. Rather it recommends the establishment of a ""smallcore office"" (unspecified as to where it would be placed) that would identify programpriorities and distribute the MCA funds to USAID and the Trade and DevelopmentAgency (TDA). (29) Others are skeptical, however, that USAID is best suited to implement the MCA concept. The Agency is frequently criticized as encumbered with excessiveregulations, managed with poor financial systems and time-consuming planningcycles, and burdened by extensive congressional oversight. One analysis, afterweighing both the merits and disadvantages of placing the MCA within USAID,concluded that if the Administration wants the MCA to operate differently than USAID, it should create a new agency to manage it. (30) Congressional proposals to modify the organization structure. Proposals considered by the Senate shifted positions onthe organizational issue as bills moved through the legislative process in 2003. S. 1160 , as reported by the Foreign Relations Committee in May 2003,did not authorize the creation of the MCC, as proposed by the President. Instead, thelegislation designated the Secretary of State as the coordinator of MCA assistanceand directed the Secretary to designate a coordinator within the State Department formanaging the program. The coordinator, who would be confirmed by the Senate,would have authority to develop the list of performance indicators, select eligiblecountries, and to coordinate MCA programs with other donors. The Committee adopted this approach by approving an amendment offered by Senators Hagel and Biden (approved 11-8). The sponsors noted that in 1998Congress had consolidated two independent agencies -- USIA and ACDA -- in theState Department in order to give the Secretary more director authority over all toolsof U.S. foreign policy. To create a separate entity to manage what could become thecornerstone of American foreign assistance, they argued, would run counter to theserecent efforts to better integrate and coordinate foreign policy decision-making. Supporters further questioned what value the OMB Director would provide by beingon the Board of Directors, given that the Director is generally not assignedpolicy-making responsibilities. The Administration strongly opposed the Committee's action to place the MCA in the State Department. At the markup session on May 21, 2003, Chairman Lugarread a letter from Secretary Powell underscoring the value of a new, independent, andcreative entity for managing this ""new start"" to U.S. foreign aid. The Secretary saidthat if this approach remains in the final bill, he would recommend that the Presidentveto the legislation. Senator Lugar, who opposed the Biden-Hagel amendment, proposed an alternative structure in new legislation. S. 1240 , as introduced on June11, would create a Millennium Challenge Corporation, headed by a CEO who wouldreport to the Secretary of State. Senator Lugar intended that such an arrangementwould provide the Corporation with the same degree of independence and status asUSAID, but establish a chain of command that would permit the Secretary of Stateto exercise broad authority over the MCA. S. 1240 created a Board ofDirectors, made up of the Secretary of State (Chairman), the Secretary of theTreasury, the USAID Administrator, the U.S. Trade Representative, and the MCCCEO. The full Senate adopted the general approach proposed by Senator Lugar whenit voted on July 9, 2003, to incorporate a modified text of MCA authorizinglegislation into S. 925 , an omnibus foreign policy authorization bill. The approved text further strengthened the explicit relationship between theCorporation and the Secretary of State by adding that the CEO shall ""report to andbe under the direct authority and foreign policy guidance of the Secretary."" TheAdministration did not express objection to the revised legislation. The House bill, H.R. 1950 , took a somewhat different approach than the modified Senate proposal that was closer to the Administration's position,although with some important differences. H.R. 1950 would create anew Millennium Challenge Corporation sought by the President, but altered thecomposition of the Board of Directors and, as noted above, the authority of theMCC's Chief Executive Officer. The Board would include the Secretary of State asChairman and the Secretary of the Treasury, as proposed, but deleted the Director ofOMB and added the USAID Administrator, the U.S. Trade Representative, and theCEO of the MCC. The bill also included four additional members, to be appointedby the President from a list submitted by the majority and minority leaders of theHouse and Senate. The Board would further include as non-voting ex-officiomembers, the CEO of OPIC, and the Directors of the Trade and DevelopmentAgency, Peace Corps, and OMB. The House measure further created an AdvisoryCouncil that would advise, consult, and make recommendations to the CEO andBoard of Directors for improving the MCA. The Council would include sevenCEO-appointed members from the non-governmental sector, including business,labor, private and voluntary organizations, foundations, public policy organizations,and the academic community. As enacted (Title VI of the Foreign Operations Appropriations Act, 2004, as included in Division D of P.L. 108-199 ), the MCA authorizing legislation combinedapproaches found in both House and Senate bills. The statute creates an independentMillennium Challenge Corporation, headed by a CEO who is confirmed by theSenate and reports to the Board of Directors. The Board consists of the Secretary ofState (Chairman), the Secretary of the Treasury, the USAID Administrator, the U.S.Trade Representative, and the CEO. Four additional individuals will be on the Boardthat ""should"" be named by the President from lists of candidates supplied by theMajority and Minority leaders in the House and Senate. The enacted legislation,however, does not require Advisory Council as proposed by the House. Issue: Role of MCC staff in managing and monitoring the MCA. One of the first concerns of aid managers isthe ability of a 100-staff organization to maintain proper oversight and accountabilitystandards over what will become a $5 billion program. By comparison, USAIDmaintains a staff of nearly 2,000 American direct-hires and several thousand morecontractors and foreign nationals based overseas to implement a roughly $8 billionprogram. Few would argue that a similar work-force is needed -- indeed, therewould likely be minimal support for a bureaucracy even half that size. But with acentral mandate of performance, results, and accountability, the MCA requires astrong monitoring capability. The Administration has mentioned the prospect of anoutside, independent auditing system, but the issue appears to remain unresolved. Even though USAID will not manage the MCA, it is likely that its staff, especially those located in MCA participant countries, will play a supporting role invarious capacities. USAID Administrator Andrew Natsios has told his staff that theAgency's long record of best practices and experience will be required if the MCCis to be successful. But how this will operate in the field is an open question. Thereis concern among some USAID professionals that the time and attention of missionstaff to support administrative, contracting, and procurement needs of MCAprograms will diminish their ability to manage regular aid programs. And asmentioned above, how the current mission portfolio relates to MCA objectives isunclear. Issue: Future of USAID. The creation of a new agency to manage the MCA is likely to be viewed by some as avote of no confidence in USAID. This may stimulate renewed debate over whetherthe USAID mandate should be modified -- perhaps limiting it to a strictlyhumanitarian aid agency -- or folding it into the State Department or the MCC itselfat some future date. USAID supporters are concerned that an MCA managed outsidethe principal U.S. development organization will establish a two-class aid systemwith USAID responsible for addressing the needs of the ""weaker"" performers whilethe main emphasis will transfer to the MCC. The potential impact on staffrecruitment and morale, and eventually resources, they believe, could be serious. Anargument could be made as well, however, that this provides an opportunity forUSAID not only to demonstrate its expertise as an aid organization and serve theMCC as a valued ""consultant,"" but also can serve as incentive to review its ownoperations and correct some of the persistent problems identified by critics. (31) Congressional proposals to modify USAID's role. During legislative consideration of MCA authorizing bills,Congress attempted to clarify the relationship between the MCC and USAID inefforts to minimize overlap and inconsistency of aid policies and operations. Asmentioned above, under both bills the USAID Administrator would become a votingmember of the Board of Directors. S. 925 , as amended, further directedCorporation staff posted overseas to coordinate the MCA program with the USAIDmission director in that country. The legislation also directed USAID to ensure thatagency programs would help prepare potential MCA participant countries to becomeeligible for assistance. Similarly, H.R. 1950 gave USAID the lead role in assisting countries to become eligible in the future that had demonstrated a commitment todevelopment but failed to qualify based on the performance indicators (the so-called""near-miss"" countries). Up to 15% of the amount authorized annually for the MCAcould be made available for such USAID programs. (The Senate measure alsoprovided up to 10% of annual MCA funds be available to countries that failed toqualify because of unreliable data or lack of performance on only one indicator,although the Corporation, not USAID would provide the assistance.) H.R. 1950 also directed the MCC to consult with USAID officialsregarding the contents of a contract -- or Compact -- between the U.S. and an MCAparticipant country, and required that the MCC and USAID coordinate their programsto the maximum extent possible. During House floor debate, Members adopted anamendment by Congressman Kolbe intended to further clarify USAID's role inproviding U.S. economic assistance. The language stated that the USAIDAdministrator shall report to the President ""through, and operate under the foreignpolicy authority and direction of the Secretary of State."" (32) The Kolbe amendmentalso authorized USAID to extend assistance to countries ineligible for MCA aid sothat they may become eligible, and permitted USAID to help in the evaluation,execution, and oversight of the MCA projects. The enacted legislation authorizing the MCA (Title VI of the Foreign Operations Appropriations Act, 2004, as included in Division D of P.L. 108-199 ),specifically addresses the issue of the MCA and USAID relationship. Section 615of the measure requires the CEO to consult with the USAID Administrator, and thatUSAID must ensure that its programs play a primary role in preparing countries tobecome eligible for the MCA. As such, the legislation makes available up to 10%of the MCA appropriation ($99 million in FY2004) for assisting countries thatdemonstrate a ""significant commitment"" to the MCA requirements, but narrowlymiss qualifying. USAID may provide this support. The statute further requiresUSAID to seek to ensure that agency programs play a primary role in helping preparea country that has failed to qualify previously to better compete in the next selectionprocess. With broad agreement that development programs work best when they are designed and therefore ""owned"" by the host country and not imposed from outside,executive officials stress that MCA programs will be country-driven. Once a nationis identified as eligible, it will be invited to draft and submit program proposals forevaluation and selection through the MCC. Projects should directly support broadnational development strategies already in place, preferably constructed withextensive input from civil society. Since several of the possible MCA countries havealready designed such strategies as part of the Heavily Indebted Poor Country (HIPC)debt reduction initiative -- the Poverty Reduction Strategy Papers -- these PRSPsmight serve as the guiding framework for program goals where appropriate. The Administration has outlined numerous types of programs that might be supported by the MCA: budget support for various community, sector, or nationalinitiatives; infrastructure development, commodity financing, training and technicalassistance, and capitalization of enterprise funds or foundations. Selection woulddepend on country-specific circumstances and would not be appropriate in all cases. For example, budget support programs would only be suitable where governmentsmaintain transparent budgeting, accounting, and control systems and have stronggovernance and anti-corruption records. Endowing enterprise funds or foundationsmight be appropriate where other alternatives are weak or where innovative ways offinancing development proposals appear attractive. An eligible country could submit multiple proposals annually, some of which might take several years to implement. The MCC would create a contractualrelationship with selected countries and require the establishment of project performance goals so that progress could be closely monitored. Should performancefall behind or fail, the contract could be declared void and funding cut-off. Issue: Detailing the types and targets of programs. One of the next steps for MCA planners will be to refinemore precisely the nature of programs the MCA will support, who the beneficiarieswill be, and what criteria will be used in making the selection. A number of groups,especially in the U.S. NGO community, have stressed the need to include programsthat will directly support non-governmental and civil society activities that mayoperate independently of the government. Some advocate that the MCC solicitproposals directly from private, non-governmental groups. (33) The Administration appears to be receptive to the principle that MCA funded activities need not support only government-run or sponsored initiatives, but alsocould include projects operated directly by the private sector or NGOs. The draftlegislation submitted to Congress in February 2003 allowed the MCC to issue grantsto both private and public entities. What may be more problematic is the receipt ofproposals straight from these non-governmental sources. This might result in anawkward competitive relationship between government and non-governmentsubmissions, a competition that might be best settled by the country itself prior totransferring recommendations to the MCC. USAID Administrator Natsios told theHouse Appropriations Foreign Operations Subcommittee on May 21, 2003. thatwhile the MCA would likely include programs proposed by non-governmentalentities, the contract would need to be signed by the host government and that thegovernment would be responsible for managing and overseeing the project. Another issue related to the types of programs eligible for MCA resources is the capacity of both the U.S. and participant countries to manage the projects. Budgetsupport, infrastructure, and commodity assistance most likely would be large-scaleactivities where substantial amounts of resources could be invested, thereby reducingthe total number of projects to be managed and monitored. Community-based orNGO projects, on the other hand, likely would be much smaller in size and fundingrequirements, but far more numerous in totality. While supporting the broadest arrayof development programs with MCA funds provides the maximum opportunities,U.S. policy makers will have to decide whether they are prepared to assumeresponsibility for a large number of projects in the MCA portfolio and the associatedmanagement, oversight, and accountability demands. A key principal endorsed by numerous MCA proponents is that programs must be country-owned, designed by a broad spectrum of government and civil society. As noted above, some have suggested that PRSPs that have been developed by manypotential MCA countries could be used as the guiding framework in devisingprogram proposals. (34) Recognizing, however, thatmany MCA countries do not havesufficient capacity to design program proposals on their own, many suggest thatUSAID and others assist -- but do not control -- the development of programsubmissions. (35) Congressional action on program issues. The enacted MCA authorizing legislation permits resourcesto be provided to a wide range of entities, including central governments, NGOs,regional and local governments, and private groups. Assistance may take the formof a grant, cooperative agreement, or contract with any of these eligible entities. Thelegislation requires that the United States enters into a ""Compact"" with a qualifyingcountry that describes the program to be funded, how it will be monitored, and howthe development goals will be achieved. The Compact cannot exceed a five yearcommitment. The measure specifically prohibits assistance for military purposes, forany project that would likely result in the loss of American jobs, for projects thatwould likely cause a significant environmental, health, or safety hazard, or forabortions or involuntary sterilizations. The legislation further sets out the process bywhich the CEO can suspend or terminate a Compact in cases where the country hasengaged in activities contrary to U.S. national security interests, has taken actionsinconsistent with the criteria for determining MCA country eligibility, or has failedto meet the requirements of the Compact. The Administration submitted in early February 2003 draft MCA authorizing legislation and separately proposed $1.3 billion for the first year funding level. Program flexibility, as expected, was one of the key themes integrated throughout thedraft bill. Executive officials said that while the MCA should have its own statutorybase separate from existing laws, including the Foreign Assistance Act of 1961,current restrictions that prohibit U.S. assistance to countries would remain. Theseinclude a lengthy list of potential infractions including those related to human rights,drug production, terrorism, nuclear weapons transfers and testing, military coups,debt payment arrears, and trafficking in women and children, just to name a few. In keeping with the desire for flexibility the draft legislation would make available MCA resources ""notwithstanding any provision of law,"" but with a notableexception. Countries that currently cannot qualify for U.S. assistance under part 1of the Foreign Assistance Act of 1961 -- that part of the Act authorizing programsfor bilateral development aid, narcotics control, international disasters, the formerSoviet Union, and Central Asia, among others -- would remain ineligible for MCAfunds. However, if the President waived any prohibition under Part 1 for a particularcountry, that nation would then be eligible for MCA resources. (36) Another area of flexibility highlighted in the draft bill concerned personnel and administrative authorities. The CEO of the Corporation would be granted authorityto establish and modify in the future a human resources management system withoutregard to existing laws governing Civil Service and Foreign Service activities,although certain provisions, including merit and fitness principles, cannot be waived. The draft submission further granted the CEO the authority to appoint and terminatepersonnel notwithstanding Civil Service and Foreign Service laws and regulations. The bill would also allow the MCC to transfer MCA resources to any U.S. agency,and would permit the Corporation to draw on the services and facilities of otherfederal agencies in carrying out the program. On the funding question, the Administration expressed a commitment to a $5 billion MCA program by FY2006, although the pace at which resources approachthat figure would be influenced by anticipated demand as well as larger budgetaryconsiderations stemming from competing spending priorities, a growing deficit, andother possible policy initiatives. For FY2004, the President requested $1.3 billion,a figure less than one-third of the three year goal that some had expected. TheAdministration did not provide any projections for FY2005. The President further made a commitment that MCA resources would not be drawn from existing aid programs, but would be in addition to those appropriations,although of course final decisions on appropriations are made by Congress. TheAdministration sought a large -- $2.6 billion, or 16% -- increase in ForeignOperations Appropriations programs for FY2004, including the MCA funds, butsome areas of the proposal, especially for bilateral development assistance programs,fell below current amounts for FY2003. Issue: Flexibility and congressional directives and oversight. An issue that has been heatedly argued between Congressand all Administrations for many years has been the practice of congressionallegislative directives and earmarks in foreign aid authorization and spending laws. Executive officials argue that the excessive use of such directives, both formal andinformal, seriously erodes their ability to manage foreign policy and operate acoherent foreign aid program. Most in Congress view the use of directives and earmarks, however, as a legitimate tool for congressional participation in setting foreign aid policy andspending priorities. Some Members point to congressional emphasis in recent yearson initiatives such as child health, basic education, and international HIV/AIDS,programs that both the Clinton and Bush Administrations subsequently came toembrace and support with higher budget requests. Without congressional pressurethrough earmarks, U.S. commitment and leadership on these policies would not existto the extent they do today, many argue. Moreover, some contend that these broad,sector allocation directives represent priority-setting decisions by lawmakers andreflect the appropriate and constructive power of Congress to manage the federal""purse."" It is the far more targeted earmarks, they contend, benefitting specialinterests or specific organizations and firms, that are problematic from theExecutive's perspective. The dispute over congressional foreign aid directives is unlikely to be resolved during any MCA debate. However, the distinctive nature of the MCA initiative provided the Administration with a different set of arguments against earmarks. Because of the demand-based, results-driven concept of the MCA, executive officialscontended that the traditional pattern of congressional directives -- specifyingfunding amounts for selected countries or activities, and placing restrictions oncertain operations -- would undermine the basic principles of the MCA concept. Legislative set-asides for a particular set of countries or for certain program activitieswould arguably undercut the transparent, objective process of selecting thebest-performers. In settling these differences, one model to examine might be how Congress authorizes and funds other demand-driven programs in the annual Foreign Operationsappropriation bill. Since it is not known in advance who may request or requiresupport under programs such as the Export-Import Bank, the Trade and DevelopmentAgency, or international disaster assistance, Congress generally appropriates amountsthat are expected to be needed to meet the resource demands placed on theseactivities, with few or no set-asides for specific requirements. Authorizing laws forthese programs include some restrictions, but are generally not nearly as extensiveas those for regular bilateral economic and military aid programs. An importantdifference, however, between such programs and the MCA is that their purpose is farmore narrowly defined than that of the MCA. Linking existing foreign aid eligibility requirements with the MCA drew broad support within Congress, since many of those requirements reflect fundamental socialand political values and were congressionally initiated. But the prospect of applyingto an MCA participant these overarching aid prohibitions, especially those thatrequire an Administration discretionary determination to trigger the aid cut-off, raiseda new set of issues. Would, for example, the extent to which the U.S. has a majorfinancial investment in a successful MCA project influence a decision on whether todeclare the government in violation of narcotics cooperation standards? Congressional action on flexibility and oversight issues. For the most part, the enacted MCA authorizing act refrainsfrom earmarking, providing authorities consistent with MCA principals set out by theAdministration, and permitting the executive to implement the program with a degreeof flexibility. The measure authorizes assistance ""notwithstanding any otherprovision of law."" However, countries which are ineligible for American economicaid due to restrictions contained in the Foreign Assistance Act of 1961 or any otherprovision of law cannot be selected for MCA support. This provision will likelyeliminate consideration of a number of countries, although in most cases thesecountries would most likely be weak performers under the MCA selection criteria. Moreover, as noted above, assistance may not result in the loss of American jobs,displace U.S. production, pose a major environmental, health, or safety hazard, beused for military support, or finance abortions or involuntary sterilizations. Thestatute also adds several requirements aimed at strengthening congressional oversightof the MCA. The legislation requires the Secretary of State to post information aboutthe MCA in the Federal Register and on the Internet, and to submit an annual reporton MCA operations. Issue: Funding and possible tradeoffs. Following submission of the FY2004 budget, MCAadvocates closely examined two funding issues: the size of the MCA request andproposals for other U.S. economic aid programs. Many believed that MCA resourcesshould and would grow in equal amounts of $1.67 billion per year to reach the $5billion total in three years. Conflicting Administration statements gave credibilityto the view that this was the intention, although officials have said more recently thatthis is not the case. For one reason, since the number of qualifiers the first year isstill far from certain, the funding requirements may be quite different from $1.67billion. In addition, the budget environment was much different than it was in March 2002 when the President issued his policy statement. Budget deficits had risen,creating greater pressure to hold spending down in nearly all areas. Such pressuresare likely to continue throughout future budget debates, making the task ofaccommodating a new and large funding initiative more difficult. One way to manage MCA increases would be to rearrange overall foreign aid spending priorities and reduce amounts elsewhere. But the President said theAdministration would not take that path. While the FY2004 budget request largelymaintained funding for other foreign aid programs at existing levels -- although witha few important exceptions -- congressional appropriators faced limitations in theirability to fully provide for both the MCA and other aid accounts. The effects of awar in Iraq and unanticipated foreign policy contingencies arising later in 2003created new resource demands. When Congress decided on different appropriationpriorities than the President and allocated a smaller amount to the Foreign Operationsfunding bill, it set the stage for direct trade-offs between the MCA and competingsecurity, economic, and humanitarian activities. In addition, the MCA was not theonly Foreign Operations program that was vying for increased spending for FY2004. The President's budget included several other new initiatives, including those foradditional HIV/AIDS resources, ""topping up"" the HIPC debt reduction initiative, acontingency funds addressing famine and conflict needs. While the overall requestfor Foreign Operations was well above FY2003 enacted levels -- up 16% -- thesenew initiatives accounted for most of the increase, leaving continuing programs witha more modest 3.6% rise. Some foreign aid proponents were especially concerned about reductions in the President's FY2004 budget for development assistance and global health programs. Compared with the Administration's request for FY2003, the FY2004 budgetblueprint was the same -- a combined $2.96 billion total for these ""core"" bilateraldevelopment aid activities. But due to Congressional additions, the FY2003 levelshad increased to $3.23 billion, making the FY2004 request 8% less than enactedamounts for FY2003. Some argued that these, and similar reductions below FY2003appropriations for refugees, disaster, and food aid, broke the President's pledge tomake the MCA an additional source of funding. In order to reach a conclusion,however, one would have to know whether funds proposed for the MCA would bemade available for accounts supporting similar activities if this new initiative was notsubmitted. It is unclear that in the absence of the MCA or any of the other newinitiatives, that an equivalent amount of resources would have been made availablefor other bilateral economic aid programs. Congressional proposals to modify MCA funding levels. Throughout the 2003 debate over MCA authorization andappropriation funding amounts, Congress struggled with the challenge of fullyfunding the President's $1.3 billion MCA request and addressing other foreign aidpriorities. Senate bills ( S. 1160 and S. 1426 ) authorizedand appropriated $1 billion for the MCA in FY2004. The authorization furtherprovided for $2.3 billion in FY2005 and $5 billion for FY2006. In the House, H.R. 1950 authorized $1.3 billion, while H.R. 2800 appropriated $800 million. As enacted in Title VI of the Foreign Operations Appropriations Act, 2004 (included in Division D of P.L. 108-199 ), authorizations for MCA appropriations forFY2004 and FY2005 are set as ""such sums as may be necessary."" Elsewhere in thesame Act, Congress provides $1 billion for MCA appropriations in FY2004, $300million less than requested. (37) This appropriationreduction may affect the number ofcountries and program proposals selected for FY2004, and the pace at which theinitiative would move forward towards the $5 billion goal by FY2006. Throughout this report, Congressional recommendations to alter key elements of the President's MCA initiativeare discussed. The table belowsummarizes these changes. a. The status of the Senate bill is based on S. 925 , the Foreign Affairs Act, Fiscal Year 2004, as amended during debate on July 9 and 10. S. 925 remains pending in the Senate. Previously, the Senate Foreign Relations Committee had approvedlegislation authorizing theMillennium Challenge Account in S. 1160 . A modified text of S. 1160 was subsequently incorporatedinto S. 925 as Division C on July 9. The House bill, H.R. 1950 , is also a combined foreign policy authorization measureto which earlier MCAauthorizing text was added. The House International Relations Committee had reported H.R. 2441 , whichwas incorporated, withmodifications, to H.R. 1950 , and passed by the House on July 16. For many years, the United States has been criticized by other nations andinternational development organizations for not contributing enough to fight globalpoverty and promote economic growth. Although the United States was the largestprovider of Official Development Assistance (ODA) (38) until the early 1990s and wassecond to Japan in most years since until 2001, its contribution has been at or nearthe bottom of the list of international donors when measured as a proportion ofnational wealth. Figure 1. ODA Performance 2002 The United States defends its record as a development aid provider, arguing that contributions to global poverty reduction should not be measured simply in terms ofaid transfers as a percent of GNP. (39) U.S. officialsnote that in dollar terms, AmericanODA has remained substantial, and is programmed on more favorable terms than thatof other donors. The United States, they emphasize, was a leading voice over thepast several years in the Heavily Indebted Poor Country (HIPC) debt initiative, beingthe first government to advocate 100% cancellation of bilateral debt owed by theworld's poorest nations. American charitable organizations and businesses providea significant proportion of annual aid transfers and private investment to thedeveloping world. Given the large amount spent by the United States on defense andthe security it provides to allies and friends around the world, American contributionsto global stability and a stable environment in which economic development can takeshape is much larger than ODA expenditures suggest, they contend. In the coming years, if Congress continues to appropriate funds for the MCA initiative that are in addition to other ODA resources, the dollar value of U.S. ODAwill increase -- perhaps significantly -- especially if other new foreign aid programs,like the Global HIV/AIDS Initiative, proceed as planned. The Administration saysthat the MCA would add 50% to U.S. ODA contributions, and while that figure maynot be reached by FY2006, it is likely to be in the 25-40% range. But on the otherpoint of measurement -- ODA as a percent of GDP -- the impact will not be sodramatic, largely because MCA appropriations are likely to be very small relative tothe size of the U.S. economy and because of projected GDP growth estimates overthe next several years. According to current projections, assistance would rise fromthe 2002 level of 0.12% of GDP to 0.15%. IDA-eligible, per capita income $1,415 and below MCA eligible FY2004 and beyond * Gross National Income, dollars per capita, 2002. World Bank Annual Report, 2003. ** Precise data unavailable. Per capita income $1,415 and below MCA eligible FY2005 and beyond Per capita income $1,416 - $2,935 MCA eligible FY2006 and beyond * Gross National Income, dollars per capita, 2002. World Bank Annual Report, 2003. ","In a speech on March 14, 2002, at the Inter-American Development Bank, President Bush outlined a proposal for the United States to increase foreign economic assistance beginning inFY2004 so that by FY2006 American aid would be $5 billion higher than three years earlier. Thenew funds, which would supplement the roughly $16.3 billion economic aid budget for FY2003,would be placed in a separate fund -- Millennium Challenge Account (MCA) -- and be availableon a competitive basis to a few countries that have demonstrated a commitment to sounddevelopment policies and where U.S. support is believed to have the best opportunities for achievingthe intended results. These ""best-performers"" would be selected based on their records in three areas -- ruling justly, investing in people, and pursuing sound economic policies. Development of a new foreign aid initiative by the Bush Administration was influenced by a number of factors, including the widely perceived poor track record of past aid programs, recentevidence that the existence of certain policies by aid recipients may be more important for successthan the amount of resources invested, the war on terrorism, and the March 2002 U.N.-sponsoredInternational Conference on Financing for Development in Monterrey, Mexico. The MCA initiative is limited to countries with per capita incomes below $2,935, although in the first two years -- FY2004 and FY2005 -- only countries below the $1,415 level would competefor MCA resources. Participants will be selected based on a transparent evaluation of a country'sperformance on 16 economic and political indicators, divided into three clusters corresponding tothe three policy areas of governance, economic policy, and investment in people. Eligible countriesmust score above the median on half of the indicators in each area. One indicator -- control ofcorruption -- is a pass/fail measure: a country must score above the median on this single measureor be excluded from further consideration. The Administration proposed to create a new entity -- the Millennium Challenge Corporation (MCC) -- to manage the initiative. The MCC would be supervised by a Board of Directors chairedby the Secretary of State. Several other key issues, including the number of participating countriesand monitoring mechanisms, have yet to be determined. Congress plays a key role in the policy initiative by considering authorization and funding legislation, and confirming the head of the proposed MCC. A number of issues have been addressedin the congressional debate, including country eligibility criteria, performance indicators used toselect participants, creation of the new MCC, and budget considerations. Congress approvedlegislation (Division D of P.L. 108-199 ) authorizing the new program and appropriating $994million for the first year. The measure creates a Corporation, as proposed, but alters the compositionand size of the Board of Directors. It further limits the extent to which lower-middle incomecountries in FY2006 and beyond can participate in the MCA so that more resources will be availablefor the poorest nations. The legislation creates a roughly 90-day period after the Corporation isestablished for consultation and public comment before selecting MCA participants for FY2004. It is expected that the Board will name the initial MCA eligible countries in May 2004.",govreport
"The 112 th Congress is in the midst of considering an omnibus farm bill that will establish the direction of agricultural policy for the next several years. Many provisions of the current farm bill (the Food, Conservation, and Energy Act of 2008, P.L. 110-246 ) expire this year. The Senate Agriculture Committee approved its version of the 2012 omnibus farm bill on April 26, 2012 (Agriculture Reform, Food and Jobs Act of 2012), and officially filed the measure, S. 3240 , on May 24, 2012. After the bill was filed, more than 300 amendments were proposed for consideration on the Senate floor. By mid-June, an agreement was reached to limit the debate to 77 of the proposed amendments, of which 45 were adopted between June 19 and June 21. The full Senate approved S. 3240 , as amended, by a vote of 64-35 on June 21. The House Agriculture Committee completed markup of its version of the farm bill ( H.R. 6083 , the Federal Agriculture Reform and Risk Management Act of 2012) on July 11, 2012, and approved the amended measure by a 35-11 vote. Nearly 100 amendments were offered for committee consideration, of which nearly half were adopted by the committee. The House bill was officially filed and reported by the committee on September 13, 2012. Within their 12 titles, the five-year House and Senate farm bills would reshape the structure of farm commodity support, expand crop insurance coverage, consolidate conservation programs, revise the Supplemental Nutrition Assistance Program (formerly food stamps), and extend authority to appropriate funds for many U.S. Department of Agriculture (USDA) discretionary programs through FY2017. Following are summaries of the major similarities and differences within each of the 12 titles of the respective versions of the House Agriculture Committee-approved and Senate-passed 2012 farm bills. The summaries are followed by a comprehensive title-by-title comparison of all of the House and Senate provisions with each other and with current law or policy. The Congressional Budget Office (CBO) projects that the programs of the 2008 farm bill, if they were to continue, would cost nearly $1 trillion over the next 10 years. Compared to this ""baseline,"" the Senate-passed farm bill, S. 3240 , would reduce spending by $23.1 billion (2.3%); and the House Agriculture Committee-reported bill, H.R. 6083 , would reduce it by $35.1 billion (-3.5%). The $23 billion 10-year reduction (or ""score"") in the Senate bill is consistent with a joint House-Senate Agriculture Committee proposal to the Joint Select Committee on Deficit Reduction in fall 2011. The $35 billion 10-year reduction in the House bill is consistent with reconciliation instructions in the House budget resolution for FY2013. The net reduction in each bill is composed of some titles receiving more funding than in the past, while other titles provide offsets for deficit reduction. Figure 1 illustrates the budgetary impacts of changes to each title in each bill, and the following table contains the data in tabular form. More background and detail on the budget available to write the farm bill, the CBO scores of each bill, and other budgetary issues is available in CRS Report R42484, Budget Issues Shaping a 2012 Farm Bill . Under both the Senate-passed ( S. 3240 ) and House Agriculture Committee-reported ( H.R. 6083 ) farm bills, farm support for traditional program crops is restructured by eliminating direct payments, the existing counter-cyclical price program, and the Average Crop Revenue Election (ACRE) program. Authority is continued for marketing assistance loans, which provide additional low-price protection at ""loan rates"" specified in current law (with an adjustment made to the cotton loan rate). Direct payments account for most of current commodity spending and are made to producers and landowners based on historical production of corn, wheat, soybeans, cotton, rice, peanuts, and other ""covered"" crops. Some of the 10-year, $50 billion in savings associated with the proposed elimination of direct payments would be used to offset the cost of revising farm programs and enhancing crop insurance in Title XI. Both bills provide programs for covered crops, except cotton, which would have its own program (see "" Farm Bill Title XI, Crop Insurance ""). Both bills borrow conceptually from current programs, revising (and renaming) them to enhance price or revenue protection for producers. The House bill is similar to the current mix of farm programs in that it retains producer choice between a counter-cyclical price program (renamed Price Loss Coverage or PLC) and a revenue program (renamed Revenue Loss Coverage or RLC). For PLC, the price guarantees (""reference prices"") that determine payment levels are increased relative to parameters in the current program to better protect producers in a market downturn. For RLC, the guarantee is based on historical revenue at the county level, so losses are more likely to be covered than under the current ACRE, which calculates the guarantee at the state level. In contrast to the House bill, the Senate bill provides for only a revised revenue program called Agriculture Risk Coverage (ARC). It offers a slightly higher guarantee than in the House bill, plus an option for farmers to select coverage at either the county or individual farm level. Five disaster programs were established in the 2008 farm bill for weather-induced losses in FY2008-FY2011. Both S. 3240 and H.R. 6083 reauthorize four programs covering livestock and tree assistance for FY2012-FY2017. The crop disaster program from the 2008 farm bill (i.e., Supplemental Revenue Assistance, or SURE) is not reauthorized in either bill, but elements of it are folded into the new ARC in the Senate bill by allowing producers to protect against farm-level revenue losses (not included in House bill). S. 3240 also provides disaster benefits to tree fruit producers who suffered crop losses in 2012. Farm commodity programs have certain limits that cap payments (currently $105,000 per person) and set eligibility based on adjusted gross income (AGI, currently $500,000 per person for nonfarm income and $750,000 for farm income). The two bills diverge from current law and each other, with S. 3240 reducing the farm program payment limit to $50,000 per person for ARC and adding a $75,000 limit on loan deficiency payments (LDPs). The program payment limit under the H.R. 6083 is $125,000 for PLC and RLC, with no limit on LDPs. The Senate bill changes the threshold to be considered actively engaged and to qualify for payments, by effectively requiring personal labor in the farming operation. Both bills also tighten limits on AGI, with a combined AGI limit of $750,000 in S. 3240 and $950,000 in H.R. 6083 . For dairy policy, both bills contain similar, significant changes, including elimination of the dairy product price support program, the Milk Income Loss Contract (MILC) program, and export subsidies. These are replaced by a new program, which makes payments to participating dairy producers when the national margin (average farm price of milk minus average feed costs) falls below $4.00 per hundredweight (cwt.), with coverage at higher margins available for purchase. Another provision makes participating producers subject to a separate program, which reduces incentives to produce milk when margins are low. Federal milk marketing orders have permanent statutory authority and continue intact. However, S. 3240 (but not H.R. 6083 ) includes two provisions that require more frequent reporting of dairy market information and studies on potential changes to the federal milk marketing order system. The sugar program is left unchanged in both bills, with an exception in the Senate bill that advances the date (to February 1 from April 1) that USDA can increase the import quota. The current agricultural conservation portfolio includes over 20 conservation programs. The conservation titles of both the Senate-passed ( S. 3240 ) and House Agriculture Committee-reported ( H.R. 6083 ) farm bills reduce and consolidate the number of conservation programs while also reducing mandatory funding more than $6 billion over the 10-year baseline. Many of the larger existing conservation programs, such as the Conservation Reserve Program (CRP), the Environmental Quality Incentives Program (EQIP), and the Conservation Stewardship Program (CSP), are reauthorized by both bills with smaller and similar conservation programs ""rolled"" into them. In response to reduced demand and as a budget saving measure, the largest conservation program, CRP, is reauthorized with a reduced acreage enrollment cap using a step-down approach from the current 32 million acres to 25 million by FY2017 under both bills. CRP also is amended to include the enrollment of grassland acres similar to the Grasslands Reserve Program (GRP), which is repealed. These grassland acres are limited to 1.5 million acres in S. 3240 and 2 million acres in H.R. 6083 . EQIP, a program that assists producers with conservation measures on land in production, is reauthorized by both bills with a 5% funding carve-out for wildlife habitat practices (similar to the Wildlife Habitat Incentives Program, WHIP, which is repealed). The Senate-passed bill reduces EQIP a total of almost $1 billion over 10 years, while the House committee bill offers no reduction from the current $1.75 billion annually. CSP, another working land program, is reauthorized at a reduced enrollment level under both bills: 10.348 million acres annually under S. 3240 and 9 million acres annually under H.R. 6083 , down from 12.769 million acres annually under current law. Both bills create two new conservation programs—the Agricultural Conservation Easement Program (ACEP) and the Regional Conservation Partnership Program (RCPP)—out of several of the remaining programs. Conservation easement programs, including the Wetlands Reserve Program (WRP), Farmland Protection Program (FPP), and GRP, are repealed and consolidated to create ACEP. ACEP retains most of the program provisions in the current easement programs by establishing two types of easements: wetlands easements (similar to WRP) that protect and restore wetlands, and agricultural land easements (similar to FPP and GRP) that prevent non-agricultural uses on productive farm or grassland. The Agricultural Water Enhancement Program (AWEP), Chesapeake Bay Watershed program, Cooperative Conservation Partnership Initiative (CCPI), and Great Lakes basin program are repealed by both bills and consolidated into the new RCPP. RCPP uses partnership agreements with state and local governments, Indian tribes, farmer cooperatives, and other conservation organizations to leverage federal funding and further conservation on a regional or watershed scale. The Senate-passed bill adds the federally funded portion of crop insurance premiums to the list of program benefits that could be lost if a producer is found to produce an agricultural commodity on highly erodible land without an approved conservation plan or qualifying exemption, or converts a wetland to crop production. This prerequisite, referred to as conservation compliance, has existed since the 1985 farm bill and currently affects most USDA farm program benefits, but has excluded crop insurance since 1996. The House committee bill offers no comparable provision. The trade title of the farm bill deals with statutes concerning U.S. international food aid and agricultural export market development programs. Both S. 3240 and H.R. 6083 reauthorize all of the international food aid programs, including the largest, Food for Peace Title II (emergency and nonemergency food aid). Both bills contain amendments to current food aid law that place greater emphasis on improving the quality of food aid products (i.e., enhancing their nutritional quality). The Senate bill places new restrictions on the practice of monetization or selling U.S. food aid commodities in recipient countries to raise cash to finance development projects. In this regard, S. 3240 requires implementing partners such as U.S. private voluntary organizations or cooperatives to recover 70% of the U.S. commodity procurement and shipping costs. The Senate bill repeals the specified dollar amounts for nonemergency food aid required in current law (the ""safe box""). In place of the safe box S. 3240 provides that nonemergency food aid be not less than 20% nor more than 30% of funds made available to carry out the program, subject to the requirement that a minimum of $275 million be provided for nonemergency food aid. The House bill places no limits on the practice of monetization, other than new reporting requirements, and fixes the amount of ""safe box"" nonemergency assistance at $400 million annually. Both bills reauthorize funding for the Commodity Credit Corporation (CCC) Export Credit Guarantee program and various agricultural export market promotion programs. S. 3240 reduces the value of U.S. agricultural exports that can benefit from export credit guarantees from $5.5 billion to $4.5 billion annually. The House bill retains the $5.5 billion level of guarantees. Both bills authorize CCC funding of $200 million annually for the Market Access Program (MAP), which finances promotional activities for both generic and branded U.S. agricultural products. MAP had been targeted in a number of deficit reduction proposals for elimination. Authorized CCC funding for the Foreign Market Development Program (FMDP), a generic commodity promotion program, continues in both bills at $34.5 billion annually through F2017. H.R. 6083 authorizes the Secretary of Agriculture to establish the position of Under Secretary of Agriculture for Foreign Agricultural Services, while S. 3240 calls for a study of the trade functions of USDA, noting that in implementing the study, the Secretary may include a recommendation for the establishment of an Under Secretary for Trade and Foreign Agriculture. Title IV of both S. 3240 and H.R. 6083 largely maintains the nutrition program policies and discretionary and mandatory funding that are contained in the Food and Nutrition Act of 2008 and other nutrition program authorizing statutes. Of the changes made, many are the same in the two bills, but the bills also differ in a number of ways, most notably in recognized cost savings associated with the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps). CBO estimates total 10-year budget savings of $4.0 billion in the Senate bill and $16.1 billion in the House bill. SNAP provisions in both bills include changes to the requirements for retailers who apply for authorization to accept SNAP and changes to some of the rules that govern participants' and retailers' redemption of SNAP benefits. Both bills provide additional mandatory funding for reducing SNAP trafficking (the sale of SNAP benefits for cash or ineligible goods), although the Senate provides a larger amount. In terms of eligibility for SNAP and the calculation of monthly benefit amounts, both bills identically change how a household's receipt of Low-Income Home Energy Assistance Program (LIHEAP) benefits affects the household's SNAP benefit calculation. However, the House bill also restricts categorical eligibility, repeals state performance bonuses, and clarifies the consideration of medical marijuana expenses. The House bill also makes changes to the nutrition assistance provided to the Northern Mariana Islands and Puerto Rico. Both bills increase Community Food Projects grants (the Senate by $5 million and the House by $10 million); the House bill also carves out $5 million of these grants for projects that incentivize low-income households to purchase fruits and vegetables. Both bills increase mandatory funding for the Emergency Food Assistance Program (TEFAP), the Senate by $174 million over 10 years, and the House Committee by $270 million (according to CBO). Both bills would limit eligibility for the Commodity Supplemental Food Program (CSFP) to low-income elderly participants, phasing out eligibility for low-income pregnant and post-partum women, infants, and children. The Senate adds discretionary authority for a Healthy Food Financing Initiative, a financing mechanism to sustain and create food retail opportunities in communities that lack access to healthy food; and provides $100 million (over five years) in mandatory funding for Hunger-Free Communities Incentive Grants, which funds programs that provide incentives for SNAP participants' purchase of fruits and vegetables; neither of these programs are included in the House committee's bill. Within the child nutrition programs, the Senate bill includes authorization and funding to continue a whole grain pilot program and to begin a pulse crops pilot program, whereas the House bill does not include these pilots and eliminates the ""fresh"" requirement in the Fresh Fruit and Vegetable Program. Both bills include additional authorizations for farm-to-school efforts. The Consolidated Farm and Rural Development Act (also known as the ConAct) is the permanent statute that authorizes USDA agricultural credit and rural development programs. USDA serves as a lender of last resort by providing direct and guaranteed loans to farmers and ranchers who are denied direct credit by commercial lenders but have the wherewithal to repay the loan. Both the Senate and House bills make relatively small policy changes to USDA's credit programs. Both bills give USDA discretion to recognize (1) alternative legal entities to qualify for farm loans and (2) alternatives to meet a three-year farming experience requirement; and both bills increase the maximum size of down-payment loans. The Senate farm bill also updates and modernizes the ConAct's statutory language and organizes the various programs into separate subtitles (new Subtitle A is farm loans; Subtitle B is rural development; Subtitle C is general provisions). Generally, most of the revised ConAct provisions are substantially the same, but are renumbered and reorganized. The Senate bill also extends the number of years that farmers can remain eligible for direct farm operating loans, and eliminates term limits on guaranteed operating loans. The House bill's credit title does not restructure the ConAct nor change any term limits provisions. However, the House bill does create a new microloan program, increases the percentage of a conservation loan that can be guaranteed, and adds another lending priority for beginning farmers, among other changes. Other non-USDA credit programs—such as the Farm Credit Act, which establishes the Farm Credit System and Farmer Mac—could be part of the farm bill, but neither the House bill nor the Senate addresses these programs. Like Title V, discussed above, Title VI of S. 3240 is a restructuring of the ConAct, which provides permanent authority for USDA to carry out its portfolio of rural development programs. Title VI of H.R. 6083 makes funding authorization amendments to many existing rural development programs (at levels mostly lower than those of the Senate bill), but generally offers no new provisions, nor does it significantly modify current programs authorized under the ConAct and the Rural Electrification Act. The House bill does include a new provision directing the Secretary of Agriculture to begin collecting data on the economic effects of the projects that USDA Rural Development funds, and directs the Secretary to develop simplified applications for funding. The Senate bill consolidates various rural water and wastewater assistance programs and the Community Facilities loan and grant program into a new Rural Community Program category, and establishes criteria for which rural communities will receive priority in making loan and grant awards. The restructuring of the ConAct also eliminates several business programs, but consolidates many of their objectives into a broad program of Business and Cooperative Development grants. Separately, S. 3240 provides a total of $115 million in mandatory rural development funding, including funds for the Value-Added Producer Grant Program ($12.5 million annually for FY2014-FY2017) and the Rural Microentrepreneur Assistance Program ($3.75 million annually for FY2014-FY2017), and $50 million in mandatory spending for pending rural development loans and grants. The House bill contains no mandatory spending authorization. S. 3240 retains the definition of ""rural"" and ""rural area"" for purposes of program eligibility and makes it the basis for all rural development programs. The definition of ""rural area"" for electric and telephone programs has been eliminated, and becomes the same as for other rural programs. The bill retains the 2008 farm bill provision permitting communities that might otherwise be ineligible for USDA Rural Development funding to petition USDA to designate their communities as ""rural in character,"" thereby making them eligible for program support. S. 3240 also eliminates the existing statutory definition of ""rural"" and ""rural areas"" for water and waste water programs and community facilities, but permits areas currently deemed as rural to remain eligible for these programs, unless USDA determines that they are no longer ""rural in character."" Also included in both the House and Senate bills is reauthorization of funding for programs under the Rural Electrification Act of 1936, including the Access to Broadband Telecommunications Services in Rural Areas Program and the Distance Learning and Telemedicine Program. The Senate bill also establishes a new grant program for the Access to Broadband Telecommunications Services in Rural Areas Program in addition to its current loan guarantee program. The Delta Regional Authority and the Northern Great Plains Regional Authority are reauthorized by both bills, but the Senate bill makes various technical changes to the organizational structure and operation of the two authorities. USDA is authorized under various laws to conduct agricultural research at the federal level, and provides support for cooperative research, extension, and post-secondary agricultural education programs in the states. Both bills reauthorize funding for these activities for FY2013-FY2017, subject to annual appropriations, and amend authority so that only competitive grants can be awarded under certain programs. In both bills, mandatory funding is increased for the Specialty Crop Research Initiative ($416 million over 10 years) and the Organic Agricultural Research and Extension Initiative ($80 million over 10 years). Also, mandatory funding is continued for the Beginning Farmer and Rancher Development Program in both the Senate bill ($85 million) and House bill ($50 million). New in S. 3240 is mandatory funding of $100 million to establish the Foundation for Food and Agriculture Research, a nonprofit corporation designed to supplement USDA's basic and applied research activities. It will solicit and accept private donations to award grants for collaborative public/private partnerships with scientists at USDA and in academia, nonprofits, and the private sector. General forestry legislation is within the jurisdiction of the Agriculture Committees, and past farm bills have included provisions addressing forestry assistance, especially on private lands. Both the Senate-passed and House Agriculture Committee-reported farm bills generally repeal, reauthorize, and modify existing programs and provisions under two main authorities: the Cooperative Forestry Assistance Act (CFAA), as amended, and the Healthy Forests Restoration Act of 2003 (HFRA), as amended. Most federal forestry programs are permanently authorized, and thus do not require reauthorization in the farm bill. The Senate bill, however, amends several forestry assistance programs by replacing their permanent authority to receive annual appropriations of such sums as necessary with a set level of appropriations through FY2017. The House bill also limits permanent authority for some programs, but in fewer instances than the Senate bill. Both bills repeal programs that have expired or have never received appropriations. Other provisions in both bills include reauthorizing stewardship contracting, requiring revised strategic plans for forest inventory and analysis, and adding alternatives for addressing insect infestations and disease. An energy title first appeared in the 2002 farm bill, and was both extended and expanded by the 2008 farm bill. USDA renewable energy programs have been used to incentivize research, development, and adoption of renewable energy projects, including solar, wind, and anaerobic digesters. The primary focus of USDA renewable energy programs has been to promote U.S. biofuels production and use. Cornstarch-based ethanol dominates the U.S. biofuels industry. However, the 2008 farm bill attempted to refocus U.S. biofuels policy initiatives in favor of non-corn feedstocks; the most critical program to this end is the Biomass Crop Assistance Program (BCAP), which assists farmers in developing nontraditional crops for use as feedstocks for the eventual production of cellulosic ethanol. All of the major Title IX energy programs expire at the end of FY2012 and lack baseline funding going forward. Both the Senate-passed bill ( S. 3240 ) and the House Agriculture Committee-reported measure ( H.R. 6083 ) extend most of the renewable energy provisions of Title IX, with the exception of the Repowering Assistance Program, the Rural Energy Self-Sufficiency Initiative, and the Renewable Fertilizer Study, which are repealed by both bills. In addition, S. 3240 repeals the Forest Biomass for Energy Program, while the House bill repeals the Biofuels Infrastructure Study. The primary difference between the House and Senate bills is in the source of funding. The Senate bill contains $800 million in new mandatory funding and authorizes $1.140 billion in appropriations for the various Title IX programs over the FY2013-FY2017 period. In contrast, H.R. 6083 contains no mandatory funding for Title IX programs, while authorizing $1.355 billion subject to appropriations. In addition, the House bill prevents USDA from spending Rural Energy for America (REAP) program funds on retail blender pumps and eliminates all support for the collection, harvest, storage, and transportation (CHST) component of BCAP, severely limiting its potential effectiveness as an incentive to produce cellulosic feedstocks. The horticulture titles of both S. 3240 and H.R. 6083 reauthorize many of the existing farm bill provisions supporting farming operations in the specialty crop and certified organic sectors. CBO estimates a total increase in mandatory spending of $360 million (FY2013-FY2017) for Title X in the Senate bill and $428 million in the House bill. Many of the Title X provisions fall into the categories of marketing and promotion; organic certification; data and information collection; pest and disease control; food safety and quality standards; and local foods. The House bill also includes several provisions that are not in the Senate bill that would provide exemptions from certain regulatory requirements under some laws, including the Federal Insecticide, Fungicide, and Rodenticide Act, the Clean Water Act, and the Endangered Species Act, among other modifications. Provisions affecting the specialty crop and certified organic sectors are not limited to Title X, but are contained within several other titles of the farm bill. These include programs in the research, nutrition, and trade titles, among others. Both the House and Senate bills reauthorize (and in some cases provide for increased funding for) several key programs benefitting specialty crop producers, including the Specialty Crop Block Grant Program, plant pest and disease programs, USDA's Market News for specialty crops, the Specialty Crop Research Initiative (SCRI), and also the Fresh Fruit and Vegetable Program (Snack Program) and Section 32 purchases for fruits and vegetables under the nutrition title. Both bills also reauthorize most programs benefitting certified organic agriculture producers, including continued support for USDA's National Organic Program (NOP) and development of crop insurance mechanisms for organic producers, Organic Production and Market Data Initiatives (ODI), and research programs such as the Organic Agriculture Research and Extension Initiative (OREI) and the Organic Transitions Program (ORG) under the Integrated Research, Education, and Extension Competitive Grants Program. One exception is that the House bill would repeal the National Organic Certification Cost Share Program (NOCCSP), while the Senate would maintain that program. Programs in other farm bill titles benefitting specialty crop and certified organic producers also include the Value-Added Producer Grant Program, Technical Assistance for Specialty Crops (TASC), the Market Access Program (MAP), and most conservation programs (including assistance specifically for organic producers), among other programs, within the crop insurance, credit, and miscellaneous titles. Title X and other titles in both the House and Senate bills also include provisions that would expand opportunities for local food systems and also beginning farmers and ranchers. For example, both bills reauthorize and expand the scope and overall funding for USDA's farmers' market program, which would be renamed the Farmers' Market and Local Food Promotion Program. Other provisions supporting local food producers are within the horticulture, nutrition, rural development, and research titles, among others. Both bills increase funding for crop insurance relative to baseline levels by making several changes to the existing federal crop insurance program, which is permanently authorized by the Federal Crop Insurance Act. The federal crop insurance program makes available subsidized crop insurance to producers who purchase a policy to protect against individual farm losses in yield, crop revenue, or whole farm revenue. An amendment to S. 3240 adopted during floor debate reduces crop insurance premium subsidies by 15 percentage points for producers with average adjusted gross income greater than $750,000. With cotton not covered by the farm revenue programs established in Title I of both bills, a new crop insurance policy called Stacked Income Protection Plan (STAX) is made available in both bills for cotton producers. Producers could purchase this policy alone or in addition to their individual crop insurance policy, and the indemnity from STAX would pay all or part of the deductible under the individual policy. STAX sets a revenue guarantee based on expected county revenue. For other crops, a similar type of policy called Supplemental Coverage Option (SCO), based on expected county yields or revenue, is made available by both bills as an additional policy. The farmer subsidy as a share of the policy premium is set at 80% for STAX and 70% for SCO. Additional crop insurance changes in both bills are designed to expand or improve crop insurance for other commodities, including specialty crops. Provisions in both bills revise the value of crop insurance for all organic crops to reflect prices of organic (not conventional) crops. The bills require USDA to conduct more research on whole farm revenue insurance with higher coverage levels than currently available. Studies are also required on insuring (1) specialty crop producers for food safety and contamination-related losses, (2) swine producers for a catastrophic disease event, (3) producers of catfish against reduction in the margin between the market prices and production costs, (4) commercial poultry production against business disruptions caused by integrator bankruptcy, and (5) poultry producers for a catastrophic event (House bill only). A provision in S. 3240 makes payments available to producers who purchase private-sector index weather insurance, which insures against specific weather events and not actual loss. A peanut revenue insurance product also is mandated. For conservation purposes, a ""sod saver"" provision in Title XI of S. 3240 reduces crop insurance subsidies and noninsured crop disaster assistance for the first four years of planting on native sod acreage. The same provision in the House bill would apply only to the Prairie Pothole National Priority Area (i.e., portions of Iowa, Minnesota, Montana, North Dakota, and South Dakota). In the Senate bill only, crop insurance premium subsidies are available only if producers are in compliance with wetland conservation requirements (goes into effect immediately) and conservation requirements for highly erodible land (within five years). Title XII of S. 3240 and H.R. 6083 includes provisions that cover three areas: socially disadvantaged and limited-resource producers; livestock; and other miscellaneous. Both bills extend authority through FY2017 for the Office of Small Farms and Beginning Farmers and Ranchers, which was established in the 2008 farm bill to ensure that minorities and limited-resource producers have access to all USDA programs. They also add military veteran farmers and ranchers as a qualifying group. In addition, the bills establish a military veterans agricultural liaison within USDA to advocate for and to provide information to veterans. Both bills reauthorize funding for the USDA Office of Advocacy and Outreach, which assists socially disadvantaged and limited-resource producers, and both establish an Office of Tribal Relations to coordinate USDA activities with Native American tribes. Both S. 3240 and H.R. 6083 make available higher coverage levels under the Noninsured Crop Assistance Programs, prohibit attendance at animal-fighting events, and include grants to promote the U.S. maple syrup industry and for technological training for farm workers. Within its livestock provisions, Title XII of S. 3240 renews the trichinae certification and aquatic animal health programs that were established in the 2008 farm bill; establishes a grant program for research on brucellosis, bovine tuberculosis, and other priority animal diseases; sets up a grant program to study the eradication of feral swine; and establishes a competitive grant program to improve the sheep industry. Title XII of H.R. 6083 includes identical provisions for the trichinae certification and aquatic animal health programs, but does not contain the grant provisions for the animal disease initiative, the sheep industry, and feral swine eradication that are in S. 3240 . H.R. 6083 includes a provision to repeal regulations on livestock and poultry practices that USDA finalized on February 7, 2012. Within 90 days of enactment, USDA is required to repeal regulations on the definitions of additional capital investments and suspension of delivery of birds, and on applicability of live poultry and the 90-day notification regulation for suspension of delivery of birds. The House bill also requires that USDA submit to Congress reports on how to comply with the World Trade Organization's ruling on country-of-origin labeling and how to meet the needs of small and very small meat and poultry growers and processors. H.R. 6083 reauthorizes funding for the National Sheep Industry Improvement Center, subject to appropriations. These provisions are not included in S. 3240 . Other miscellaneous provisions in Title XII of H.R. 6083 , but not in S. 3240 , are the High Plains Water Study; prohibitions on closing Farm Service Agency offices with high workloads; flood protection for the Missouri River basin; and a prohibition that states may not establish production standards that would prevent interstate sales of agricultural goods. Provisions in S. 3240 that are not in H.R. 6083 include clarifications of conditions for releasing data gathered by USDA to state or local government agencies; an increase in the population threshold for the definition of ""rural"" and ""rural areas""; an increase in administrative expenses for three regional development commissions that were established by the 2008 farm bill; and a provision to remove Canada geese from National Park Service lands near airports to diminish flight safety risks. In addition, S. 3240 repeals the 2008 farm bill provision that made catfish an amenable species subject to inspection by USDA and animal welfare provisions that exempt household pets from some exhibition regulations. Two provisions included in Title XII of S. 3240 that are unrelated to food and agriculture policy are a prohibition on federal funding for presidential nominating conventions and a requirement for three reports on sequestration under the Budget Control Act of 2011 ( P.L. 112-25 ).","Congress periodically establishes agricultural and food policy in an omnibus farm bill. The 112th Congress faces reauthorization of the current five-year farm bill (the Food, Conservation, and Energy Act of 2008, P.L. 110-246) because many of its provisions expire in 2012. The 2008 farm bill contained 15 titles covering farm commodity support, horticulture, livestock, conservation, nutrition assistance, international trade and food aid, agricultural research, farm credit, rural development, bioenergy, and forestry, among others. The Senate approved its version of the 2012 omnibus farm bill (S. 3240, the Agriculture Reform, Food, and Jobs Act of 2012) by a vote of 64-35 on June 21, 2012. Subsequently, the House Agriculture Committee conducted markup of its own version of the farm bill (H.R. 6083, the Federal Agriculture Reform and Risk Management Act of 2012) on July 11, 2012, and approved the amended bill by a vote of 35-11. Floor action on the House farm bill is pending. Within the 12 titles of S. 3240 and H.R. 6083, both farm bills would reshape the structure of farm commodity support, expand crop insurance coverage, consolidate conservation programs, revise the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), and extend authority to appropriate funds for many U.S. Department of Agriculture (USDA) discretionary programs through FY2017. Among the major differences in the two farm bills is how each would restructure the farm safety net. Both farm bills borrow conceptually from current programs, by revising (and renaming) them to enhance price or revenue protection for producers. The House farm bill is similar to the current mix of farm programs in that it retains producer choice between a counter-cyclical price program and a revenue enhancement program, while the Senate farm bill provides for a revised revenue program with a slightly higher guarantee than in the House farm bill. The Congressional Budget Office (CBO) projects that the programs of the 2008 farm bill, if they were to continue, would cost nearly $1 trillion over the next 10 years. Compared to this ""baseline,"" the Senate-passed farm bill would reduce spending by $23.1 billion and the House Agriculture Committee-reported farm bill would reduce it by $35.1 billion, both over the same 10-year horizon. Explaining much of the $12 billion difference in estimated savings between the two farm bills are provisions in the nutrition title of the House bill that would affect program eligibility for SNAP. This report contains a detailed summary of the major similarities and differences between the House and Senate 2012 farm bills and also provides a side-by-side comparison of every provision in the two farm bills and how these provisions relate to current federal law or policy.",govreport
"Inland waterways are a significant component of the nation's marine transportation system. These waterways carry approximately one-sixth of the national volume of intercity cargo on 25,000 miles of commercially active inland and intracoastal waterways. Included in this total are approximately 12,000 miles of fuel-taxed federal waterways known as the Inland Waterway System (IWS), which are managed by the U.S. Army Corps of Engineers (Corps). These waterways cover 38 states and handle approximately half of all inland waterway freight (or one-twelfth of all national freight). The Corps develops, operates, and maintains the infrastructure of these commercial waterways (e.g., navigation channels, harbors, locks, and dams), and also maintains and regulates the channel depths through dredging and water management. Costs for maintenance and construction on inland waterways are funded by the Corps (through appropriations) and the commercial user industry (through user fees paid to the federal government). The Corps pays for 100% of the cost for studies and for operations and maintenance on the IWS, while the cost for new construction or major rehabilitation (currently defined as any upgrade in excess of $8 million) is shared equally between the Corps and the commercial industry. Congress is faced with competing proposals relating to future financing for inland waterway system investments, including who will finance what investments, and at what level. The current revenue source, a set tax on fuel agreed to in the mid-1980s, is insufficient to cover the nonfederal costs of major capital expenditures on inland waterways. This has in some years resulted in federal taxpayers covering more than half of these costs. The ongoing shortfall is currently limiting the number of new and ongoing inland waterway construction projects, and is expected to continue to do so unless changes to the financing system are enacted by Congress. Recent proposals highlight a number of issues associated with inland waterways. On multiple prior occasions, the executive branch has proposed to phase out the fuel tax in favor of lock usage fees, but these efforts have been rejected by Congress. More recently, the user industry proposed and continues to favor a plan that includes increases to the existing fuel tax in combination with an increase in the overall federal share for inland waterway costs. The use of inland waterways for commercial transport predates the founding of the nation itself. Before the onset of rail and highway transport, inland waterways were a primary means of transporting many goods. Through the early 1800s, inland waterway development was left to the states, until the Supreme Court gave the United States authority over interstate commerce in 1824. Shortly thereafter, the federal government began funding and support for waterways to benefit commerce. Improvements in other forms of transportation (rail and highway) have decreased overall reliance on inland waterways as a means of commercial freight transportation, but these waterways remain a significant part of the nation's transportation mix for many commodities. Annually, inland waterway traffic on the federal IWS accounts for 4%-5% of total commercial tonnage shipped. While in terms of tonnage, inland waterways are a relatively small part of the nation's overall freight transportation network, waterways remain an important transportation route in some regions of the country, especially those that rely on movement of bulk goods over long distances. In these areas, the percentage of commercial tonnage shipped by barge, especially for specific commodities, is much higher. Along with freight rail, inland waterways are a primary means of transport for the nation's grain and oilseed exports, and for bulk products such as coal, petroleum, chemicals, processed metals, cement, sand, and gravel. Although previous estimates by the Corps and others projected that inland waterway traffic would increase, actual traffic on inland waterways has remained somewhat flat over the last 20 years in terms of both tonnage and ton-miles. At the same time, overall freight tonnage for all modes of domestic freight shipping increased at an average annual rate of 1.2% from 1997 to 2007, and is expected to continue to increase. The Department of Transportation projects that overall freight tonnage will double over the next 25 years, with inland waterway traffic projected to increase at a rate significantly less than that projected for rail and highway shipping. The system of fuel-taxed inland and intracoastal waterways is displayed in Figure 1 . Inland waterway tonnage relative to other modes of freight transit is shown in color in Figure 2 . As Figure 2 indicates, almost all of the tonnage (approximately 90%) transported on inland waterways comes through the Mississippi and Ohio River System, primarily through bulk shipping on barges. The federal government invests in inland waterways because of the value of the IWS to the nation. The federal government first began to invest in inland waterways in the early 1800s. Over time, this gave way to a significant federal investment in the form of full funding for investigations, operations and maintenance, and construction costs funded through the U.S. Army Corps of Engineers. However, legislation in the 1970s and 1980s changed this system and created user cost-sharing requirements for a subset of these costs. Two pieces of legislation transformed inland waterway financing and created the framework for the current system: the Inland Waterways Revenue Act of 1978 ( P.L. 95-502 , 26 U.S.C. §9506) and the Water Resources Development Act (WRDA) of 1986, as amended ( P.L. 99-662 , 26 U.S.C. §4042). These two laws underpin the current financing system for Corps inland waterway projects. Prior to these laws, investments had been entirely funded by the federal government as a result of established policies (see box below). Together, the acts of 1978 and 1986 established a fuel tax on commercial barges, cost-share requirements for inland waterway projects, and a trust fund to hold these revenues and fund investments in construction. The overall effect of these changes was a greater financial and decision-making responsibility for commercial operators on the inland waterway system. The federal policy of taxing fuel on commercial barge traffic was codified in the Inland Waterways Revenue Act of 1978. The act of 1978 also established the Inland Waterways Trust Fund (IWTF), which was initially funded by this fuel tax ($0.04 per gallon, beginning in FY1980, gradually increasing to $0.10 per gallon in FY1986), and established those waterways that are subject to the tax. However, no appropriations were authorized from the IWTF until later, in WRDA 1986. WRDA 1986 authorized additional increases to the 1978 act's fuel tax, which were set to rise to the current level of $0.20 per gallon beginning in 1994. (See Table 1 for the full schedule of tax increases.) Similar to the initial tax under the 1978 act, this tax was not indexed for inflation. Significantly, WRDA 1986 also laid out a cost-sharing process for inland waterway expenditures: it stipulated that inland waterway construction projects would be funded on a 50/50 basis, with 50% of the funds required for construction coming from the IWTF and the remaining 50% funded by the Treasury's General Revenue (GR) fund. On the other hand, operations and maintenance (O&M) costs were to remain a 100% federal responsibility. Under WRDA 1986, expenditures from the IWTF on a construction project are not automatic. They must be first authorized by Congress and then funded in annual discretionary appropriations. WRDA 1986 authorized an initial round of projects to be funded by the IWTF, and subsequent Water Resources Development Acts passed by Congress have authorized additional projects. Pursuant to the WRDA requirements, appropriations for these projects have been made by Congress in annual appropriations bills (see next section, "" Inland Waterways Trust Fund: Trends and Issues Since 1986 ,"" for additional information on funding trends). As previously mentioned, WRDA 1986 retained the policy of 100% federal funding for inland waterway costs besides construction and major maintenance (i.e., expenditures for studies and operations and maintenance costs less than $8 million). While not technically part of the IWTF, the amount of federal dollars spent on O&M typically exceeds the amount spent on construction and major rehabilitation by a significant amount, and is often part of policy discussions related to inland waterways. WRDA 1986 also established the Inland Waterways Users Board (IWUB), a federal advisory committee subject to the Federal Advisory Committees Act. Section 302 of WRDA 1986 stipulates that the board be made up of 11 members representing shipping interests on the primary geographical areas served by inland waterways, with due consideration given to tonnage shipped on the respective waterways. The board was established to give commercial users an opportunity to inform the priorities for federal decision-making on IWTF projects. It meets regularly three times a year to develop and make recommendations to the Secretary of the Army and Congress regarding these investments. Between 1986 and 2011, the IWTF balance has varied considerably. Beginning in 1992, balances increased, reaching their highest level, $413 million, in 2002. On multiple occasions, the executive branch (through the Clinton Administration in 1996 and the Bush Administration in 2004) proposed to further increase fees on the user industry and require the IWTF to also fund some portion of operations and maintenance expenditures (in addition to the construction and major rehabilitation requirements). These proposals were not enacted by Congress. Beginning in FY2005, appropriations from the IWTF increased significantly as the Bush Administration requested and Congress appropriated greater investments in IWTF-funded projects. These increasing expenditures significantly exceeded annual fuel tax collections going into the IWTF and interest on the IWTF balance. (See Figure 3 .) Additionally, some projects significantly exceeded their original cost estimates, further stressing the trust fund. As a result, balances fell sharply from 2005 to 2010. In an effort to reduce stress on the IWTF and prevent the balance from falling to unsustainable levels, Congress has taken a number of ""stopgap"" measures in previous years. For instance, Congress exempted major rehabilitation projects from their usual cost-sharing requirements in the continuing resolution for FY2009 ( P.L. 110-329 ) and limited the projects with access to the IWTF in regular appropriations for FY2009 ( P.L. 111-8 ). Congress also provided inland waterway projects with more than $400 million in construction funding under the American Recovery and Reinvestment Act (ARRA, P.L. 111-5 ), and exempted this funding from IWTF cost-share requirements. These measures limited the costs to the IWTF for ongoing projects, while also allowing for the completion of these projects. More recently, Congress prohibited the Corps from entering into new contracts requiring IWTF funding since FY2009, and has limited enacted appropriations from the IWTF to expected fuel tax revenues for the coming year. Due in part to these stopgap measures, the trust fund balance appears to have stabilized. A summary of these trends is provided in Figure 3 . Without changes to IWTF financing, funding for new projects is expected to be extremely limited in the foreseeable future, with most of the funding expected to go to one project, Olmsted Locks and Dam on the Ohio River. Such a scenario would likely increase the current project backlog for Corps inland waterways projects. Long-term options and proposals to address this situation are discussed in the section below, "" Inland Waterway Financing Proposals ."" In addition to problems with the IWTF financing system, other concerns have been raised in recent years. Specifically, fuel tax payers (represented by the IWUB) have registered complaints related to structural inefficiencies and inequities in the Corps project planning process for inland waterways investments. Many users note that in the past, decisions within the executive branch have led to what some consider inefficient project implementation and use of tax dollars (in the form of cost escalation and schedule delays on some IWTF projects). As a partial response to these concerns, in FY2006 the Corps implemented several reforms to its project delivery process, including implementation of risk-based cost estimates and prioritized funding for projects with a high risk of cost overruns. While the IWUB generally recognized these changes as improvements, many continue to advocate for additional structural reforms to the planning process (see below section, "" Inland Waterways Users Board Proposal ""). Some highlight cost overruns and project planning issues at one project in particular, the Olmsted Locks and Dam project, as evidencing ongoing needs for reform associated with planning and oversight of the IWTF. The estimated cost for the Olmsted project has increased significantly over time, in part due to major changes to the project's design and method of construction. The previously authorized cost of $775 billion (authorized in P.L. 100-676 in 1988) was increased to $2.9 billion in the FY2014 continuing resolution enacted on October 16, 2013. As of January 1, 2013, the project was 49% complete. As of 2013, the lock components of the project were complete. The dam and demolition components of this project are expected to be completed in 2020 and 2024, respectively. Concerns related to the solvency of the IWTF and the equity of the financing system for fuel-taxed inland waterways have led to a number of recent proposals, first by the Bush Administration in 2008, then by the Obama Administration in 2009 and 2010. While these proposals were rejected by Congress, the Administration has recently presented Congress with a new recommendation that would raise revenues for the IWTF. The user industry, represented by the IWUB, recently adopted its own proposal, which differs significantly from the Administration's proposal. The user proposal would implement an increase to the current fuel tax, while also requiring an increased federal share for some inland waterway investments (e.g., dams). Past Administrations, including both the Bush and Obama Administrations, have submitted various proposals to increase commercial user fees on inland waterways. The most recent of these proposals are discussed below. In response to concerns regarding a potential IWTF shortfall, the Bush Administration in 2008 submitted a legislative proposal to Congress that would have instituted a lock usage fee to replace the fuel tax and generate additional revenue for the IWTF beginning in FY2009. The fee proposed to phase in charges to commercial barges of $50-$80 per lockage through the end of calendar year 2012 for lock chambers greater than 600 feet in length, and $30-$48 for chambers less than 600 feet. (See Table 2 .) Additionally, it proposed to tie IWTF balances to this user fee after the end of 2012 by raising lockage fees when the IWTF balance fell below $25 million, and lowering fees when the balance rose above $75 million. At the time, the Bush Administration argued that an approach which shifted the focus of user fees toward lock users would improve equity in waterborne commerce investments, since locks account for most IWS capital construction expenditures. Both the House and Senate appropriations committees rejected this approach, noting that a lock fee would pose an unacceptable burden on lock users, who would pay considerably more under the Bush proposal than they currently pay. Congress instead provided temporary relief through stopgap measures (as previously mentioned) and requested that the executive branch revisit its approach. The Obama Administration's budget requests to Congress have each proposed some form of new user fee for inland waterways. The FY2010 budget included a proposal similar to the aforementioned Bush Administration proposal, with the only major change being an option for the Corps to further increase fees at high-traffic locks. The Administration argued that such a fee would increase both efficiency (by reducing traffic at these locks) and revenues. In its consideration of FY2010 appropriations, Congress rejected the proposal. More recent Obama Administration budgets have continued to propose user fees to replace or supplement the fuel tax, while at the same time requesting an appropriation level based only on current-year expected fuel tax revenues ($75 million-$95 million in recent years). Congress has generally rejected the user fee proposals, but has agreed with the Administration's approach of limiting revenues in lieu of a long-term solution for inland waterways financing. Most recently, the FY2013 and FY2014 budgets each assumed approximately $80 million in new revenues resulting from an unspecified inland waterway user fee (potentially similar to the system described below). To date, none of these proposals have been enacted. In addition to the aforementioned budget proposals, the 2011 Obama Administration plan for deficit reduction included a new inland waterway financing structure among its recommendations to Congress. The proposal was notable for its specificity, as it included more detail than most of the aforementioned budget proposals. The Administration proposed to maintain the existing fuel tax and institute a ""two-tier"" annual fee for commercial shippers that would be set by the Corps to achieve a revenue target. Under the proposed structure, all inland waterway shippers would be subject to a new annual fee in addition to the existing fuel tax. Vessels using inland waterway locks would pay a higher fee than those not using locks. In its proposed legislation that would have instituted this fee, the Administration did not specify an amount for the fee, but instead stipulated revenue targets to be achieved, which are shown in Table 3 . The Obama Administration estimated that the 2011 proposal would result in approximately $1 billion in additional revenues for the IWTF over 10 years. While the balance of IWTF receipts available for appropriation would increase under this plan, the overall cost share between the General Revenue Fund of the Treasury and the IWTF would not change. The Obama Administration proposal included several other changes associated with the IWS, including the addition of 39 individual segments of varying lengths to the existing inland waterway system. Most of these proposed new segments are contiguous with the current system of inland waterways, but are not likely to achieve significant new revenues. As was the case with the aforementioned budget proposals, this fee was opposed by the user industry and was not enacted. In 2010, the Inland Waterways Users Board (IWUB) adopted and transmitted to Congress a proposal of its own. The report of its Inland Marine Transportation Systems Capital Investment Strategy Team, Inland Marine Transportation Systems Capital Projects Business Model (hereinafter referred to as the IWUB report), has come to represent the preferred alternative of the inland waterway user industry and has been introduced as legislation in the 112 th and 113 th Congress (see below section, "" Issues for Congress ""). Although the report was prepared at the request of the IWUB and credited participation by some Corps employees, it was not formally endorsed by the Corps or the Administration, and many of its primary recommendations have been opposed by the Obama Administration. Based on its own research and analysis and input by some Corps employees, the IWUB report recommended a new financing system and a number of other proposed changes for inland waterways. The report's primary recommendations can generally be divided into four categories: Increase User Fees . Increase the existing IWTF fuel tax by $0.06-$0.09 per gallon (30% to 45% above the current tax of $0.20 per gallon). The exact increase would depend on future fuel tax revenues. Increase the Federal Share of Inland Waterway Costs . Modify the subset of inland waterway investments subject to IWTF cost-share requirements (see Table 4 ) and make a corresponding overall shift to a larger portion of IWTF projects being funded solely by the General Revenue fund. Increase Overall Spending on Inland Waterways . Increase the overall investment on inland waterways. Other R ecommendations . Increase IWUB involvement in project planning and construction, and other recommendations, including the promulgation of regulations that would formally adopt the report's prioritization criteria. The most prominent component of the IWUB report is a proposed increase to the inland waterway fuel tax rate (currently $0.20 per gallon) of between $0.06-$0.09 per gallon. The increase would depend on actual fuel tax collections over the next several years (i.e., if collections are below recent averages, the tax would be higher). Overall, the report projects that the new tax level would generate approximately $112 million per year in fuel tax revenues for the IWTF, an increase over revenues from the last 10 years (approximately $85 million annually). Despite this increase, most of the new revenue would not be spent until future years, which would allow the IWTF to replenish its balances. As was the case with the original tax of $0.20 per gallon, the proposed increase to the fuel tax would not be indexed for inflation and would not include a capital recovery mechanism linking future taxes to expenditures. The IWUB report also proposes to shift more of the cost for inland waterway projects toward the federal government by increasing the number of investments on inland waterways that are funded solely by the federal government and decreasing the projects that are subject to 50/50 cost-sharing. Under the report's recommendations, all dam-related expenses (construction and rehabilitation), as well as rehabilitation projects on locks with costs less than $100 million, would be exempt from WRDA 1986 cost-sharing requirements. The IWUB report also proposes to establish a ""cap"" on the use of IWTF funds at authorized levels to discourage construction cost overruns. Critics point out that this is an additional hidden cost, as currently all cost overruns are funded equally between the federal government and the IWTF. Cumulatively, these changes would affect the overall cost-share for IWTF projects. The subset of projects no longer requiring cost sharing under the proposal would in effect increase the overall federal share for new and major rehabilitation investments over the next 25 years from current levels (50%) to approximately 70% for the same subset of projects. Differences between the current arrangement and the report's proposals are outlined by project type in Table 4 . The IWUB report proposes an overall increase in funding for inland waterways, including increases in funding both from the IWTF and the General Revenue fund. As proposed in the IWUB report, full funding for this suite of investments requires that annual expenditures (from the GR fund and the IWTF) average approximately $380 million, a significant increase over historical averages. This would necessitate an increase above average total expenditures since 1994, which have been approximately $234 million annually, and a significant increase over FY2011 expenditures, which were estimated to be approximately $170 million under the aforementioned ""stopgap"" measures. In the immediate future, most of the increase needed to fund the proposed portfolio of $380 million per year would be derived from the GR fund (in order to allow the trust fund balance to rebuild). For instance, to meet the IWUB proposal's requirements over the first five years, federal funding would need to be $1.33 billion, or 74% of the total funding required for the report's proposed projects over this time period. Around 2020, the proportion of funds derived from the trust fund would gradually increase, although federal requirements would still exceed 50% of the required investments. Although the report calls for an increased investment from both sources, on the whole, more new funding would be required from the federal government (through the GR fund) than the IWTF. Expected trends under the user proposal are shown in Figure 4 . The report proposed several reforms for improving cost-effectiveness of IWTF projects overseen by the Corps. These recommendations would increase the involvement of the IWUB in the Corps project delivery process for IWTF investments, thereby expanding the board's current roles and responsibilities. The report recommends appointing IWUB representatives to the project design teams for individual projects, where they would oversee planning for IWTF investments and report back to the IWUB. The report also recommends obtaining sign-off from the IWUB on plans for projects funded by the IWTF, as well as providing the IWUB with status updates on all relevant project planning documents. The IWUB seeks these changes as representatives of the nonfederal cost-sharers. However, the degree of involvement by nonfederal entities in development of studies by a federal agency could raise concerns related to conflicts of interest and whether the federal government may lose control of the planning process. The IWUB report also delineated a list of specific projects to receive funding once its proposed changes to the IWTF financing system are made. According to the report, projects were prioritized for selection based on a number of factors, including asset condition, likelihood of diminished performance, consequence of diminished performance, and the degree to which new projects would improve system performance. The report did not propose mandatory funding for these projects. That is, the final decision on whether projects in the list would receive funding would still need to be made by Congress in the annual appropriations process (or by the Corps when it allocates discretionary appropriations for a given year that are not specified at the project level by Congress). The proposal attempts to render selection of these projects more likely by recommending that the Corps promulgate selection criteria for inland waterway projects that are similar to those used in the report. In the past, some have advocated for changes that would shift costs away from the federal government and increase the user-financed share of inland waterway costs, by decreasing the federal share of either O&M (currently 100% federal) or construction (currently 50% federal). These groups have pointed to inequalities in spending relative to the value of certain segments of the inland waterway system. An analysis by the Congressional Budget Office (CBO) in the early 1990s found that the current uniform tax throughout the inland waterway system failed to cover fixed operational costs and thus distorted the actual costs of maintaining the system. CBO concluded that a user fee structure that recovered the true costs for inland waterway operations would increase economic efficiency of the system. Such a fee would result in increased costs for waterways with low traffic-to-expense ratios, since federal costs for maintaining these waterways are greater than fuel tax receipts currently generated. Figure 5 shows estimated fuel tax revenues on major inland waterway segments relative to O&M costs and ton-miles. Several entities have pushed for significant increases to inland waterway fees as a means to achieve savings to the federal government. Recent proposals include the following: A coalition of taxpayer watchdog and environmental nongovernmental organizations recommended in its 2011 ""Green Scissors"" report that Congress increase user contributions for inland waterway expenditures. The report estimated savings from this proposal to be $1 billion over the next five years. The National Commission on Fiscal Responsibility and Reform included in its initial list of illustrative savings a proposal to make the inland waterways ""self-funding."" The commission estimated $500 million in savings from this proposal over the next five years. In its 2011 budget options report, CBO included a proposal to increase user fees on inland waterways to a level sufficient to cover the costs of construction, operations, and maintenance. CBO projected that such a change would save approximately $4 billion over a 10-year horizon. These proposals, which would all institute significant increases in the user share of inland waterways financing, have generally stopped short of providing specific recommendations regarding the exact structure of the user fees that would raise new revenues. The aforementioned 1992 CBO report noted that new user fees could take a variety of forms beyond an increase to the fuel tax, but should better reflect the price to operate individual segments of inland waterways. Such a fee could take one or more forms, including annual licensing fees, congestion pricing, tolls, and/or lockage fees. The proposals discussed above differ in important ways and bring up a number of issues for Congress. Each proposal claims to resolve ongoing issues associated with the IWTF by proposing new investment levels and revenue sources that would fundamentally alter the current financing system for inland waterways. An overarching question for Congress is what level of new and ongoing investment is warranted (or desired) for the inland waterway system. Other questions include whether to change the current fuel tax (either in the form of an increase or decrease of the fuel tax, or incorporating a new fee) and whether to alter the cost-share arrangements for inland waterways projects. Changes to inland waterways financing have been enacted in the 113th Congress. Specifically, the Water Resources Reform and Development Act of 2014 ( P.L. 113-121 ) made limited changes to inland waterways. It authorized the project delivery recommendations of the IWUB proposal, made the federal government responsible for paying all rehabilitation costs less than $20 million out of the General Revenue fund (previously the General Fund only covered costs less than $8 million), and reduced the cost-sharing requirement for the Olmsted Locks and Dam Project from 50% from the IWTF to 15% from the IWTF (thereby increasing the proportion of project funding from the General Fund, and theoretically freeing up IWTF monies for other projects). It did not alter the inland waterways fuel tax. The bill also authorized efforts to provide more information about inland waterways policy options, including a study of the efficiency of revenue collection on the inland waterways system, a study on the potential use of bonds and/or new fees to finance the IWTF, and the convening of a stakeholder roundtable to review and evaluate alternatives related to the future of inland waterways. The House and Senate have also included changes related to inland waterways in recent appropriations bills. In its recommendation for FY2015, the House Appropriations Committee funded the Olmsted Project under the newly enacted WRRDA cost-sharing requirement of 15% (rather than 50%) from the IWTF. The reduced cost-sharing requirements for the Olmsted Project allowed the House to provide significant funding for other inland waterways construction projects (at the traditional 50/50 cost-share level) for the first time in five years. Most observers agree that the changes enacted in WRRDA will be insufficient to finance all of the needed waterway upgrades in the long-term. Therefore, some continue to support enactment of part or all of the aforementioned user proposals to address the long-term solvency of the IWTF. Stand-alone legislation of this type has been proposed in the 113 th Congress, including: H.R. 1149 (the Waterways Are Vital for the Economy, Energy, Efficiency, and Environment Act of 2013, also known as the WAVE4 Act), would authorize the primary recommendations of the IWUB proposal, including its project delivery recommendations and a $0.06 per gallon increase to the fuel tax. The bill would also authorize alterations to IWTF cost-sharing that would make the federal government responsible for 100% of dam construction and any rehabilitation expenditure less than $100 million. S. 407 , the Reinvesting in Vital Economic Rivers and Waterways Act of 2013 (RIVER Act) would, similar to H.R. 1149 , authorize the primary recommendations of the IWUB proposal, except the fuel tax increase would be $0.09 per gallon. Under this bill, the federal government would be responsible for 100% of dam construction and any rehabilitation expenditure less than $50 million. Some of the issues for Congress posed by these and other inland waterways proposals that could be considered by Congress are discussed below. A central issue for Congress is the level and urgency of infrastructure investments on federal waterways. Commercial users, including shippers and some agricultural interests, have argued that additional investment is justified because of aging infrastructure, the need for expanded capacity, and positive environmental externalities associated with inland waterway shipping compared to other forms of shipping. These users argue that the benefits of inland waterways are widespread. Their claims are countered by a number of other groups, including taxpayer and environmental advocacy groups, who argue against increased federal funding for inland waterways. These groups contend that the shipping industry often misrepresents or overstates the benefits of these investments and that major funding increases for inland waterway projects are not warranted. Despite these disagreements, most entities agree that the current system of financing inland waterways is inadequate to address future needs (regardless of the precise level of those needs). As a result of the recent funding drawdown, the Corps is expected to have appropriations for just one ongoing lock replacement project (Olmstead Lock on the Ohio River) through at least FY2016 under its current baseline for IWTF revenues. Barring a new source of revenue or supplemental federal appropriations by Congress, new or ongoing IWTF construction projects may be put on hold by the Corps, regardless of their urgency. The condition of Corps inland waterway facilities has been a primary driver behind the call for increased investment on inland waterways. The Institute for Water Resources (part of the Corps of Engineers) notes that the majority of locks in the United States are now past their intended design age of 50 years. The Corps has connected this aging infrastructure to an overall decline in the efficiency of its assets on inland waterways, noting that overall lock unavailability (both scheduled and unscheduled) has increased in recent years. In some cases, the user industry favors new lock construction and expanded capacity over ongoing maintenance for a number of reasons. Other groups argue against significant new investments for inland waterway projects. In arguing against new locks on the Upper Mississippi River, a coalition of environmental groups noted that while the design life of new investments is usually only 50 years, regular maintenance can extend the life of existing locks for an additional 50 years at a considerably lesser cost than that for new construction. These groups generally argue that the costs of new lock construction greatly exceed the benefits of reduced waiting time and lock unavailability, and point out that issues associated with most aging inland waterways infrastructure can be overcome by improved small-scale and nonstructural improvements. The Corps has in the past noted that the justification for most new navigation alternatives depends greatly on traffic forecasts from future trade scenarios, which can themselves be difficult to predict. These forecasts often depend on a number of interrelated variables, such as commodity prices, the overall price sensitivity of shippers, and outside factors such as increases or decreases in the efficiency of other modes of freight transit. The Corps has noted that total domestic freight traffic is expected to increase by approximately 70% by 2020, but recently has avoided projections specific to inland waterway freight traffic. The Department of Transportation projects that the majority of this increase in freight traffic will be on freight rail and highway traffic, with annual waterway traffic projected to increase 2% per year between 2010 and 2035. Shipping interests point out that an overall increase in the efficiency of inland waterways could lessen anticipated pressure on highway and rail shipments, or at least maintain viability of inland waterways compared to these other forms of freight shipping. Future lock upgrades or new construction would likely increase demand for inland waterways. However, the extent to which these upgrades would have an effect on demand would likely also depend on a number of other external factors. Some groups have countered industry requests for new lock construction based on traffic projections by noting that traffic has been flat or decreasing at some individual locks on high-traffic portions of the inland waterway system. Observers, including former Corps employees, have also criticized previous projections of traffic increases by the Corps and as overly optimistic. To date, the Corps has avoided use of projected future traffic increases as a basis for changes to the overall level of investments on inland waterways. Shipping interests also argue for increased investment in inland waterways because of the overall value of inland waterways compared to other modes of shipping. They point to studies that have concluded that barge shipping in particular constitutes a transportation alternative that is more efficient and environmentally friendly than other forms of shipping, such as highway and rail. For example, previous industry studies have calculated that railroads are 28.3% less fuel-efficient than inland waterways. Additionally, they argue that inland waterways contribute significantly fewer greenhouse gas emissions per mile than other forms of freight transportation. Studies have also noted other benefits, including reduced highway congestion and noise reduction. Taxpayer and environmental groups have questioned studies citing environmental benefits as a basis for new investments in barge shipping. For instance, groups have disagreed with industry fuel-efficiency calculations, noting that many industry studies have not taken into account technical factors such as the directional constraints of river flow, or ""circuity."" They argue that the use of a conversion factor to account for circuity creates a more accurate picture of fuel efficiency among various modes. They have also noted that using the fuel efficiency for ""unit grain trains"" instead of an average for all rail shipping would allow for a more accurate comparison of fuel efficiency between barge and rail shipping. Environmental groups also note that inland waterway projects can negatively affect riparian habitat and species by altering natural flows. Structural changes to rivers such as locks and dams (which can create sedimentation, increase turbidity, and lead to other reservoir-like effects) and levees (which separate rivers from flood plains) affect the natural state of these bodies of water. Additionally, waterway traffic may also cause bank erosion through wave action. Thus, increased construction and expansion of inland waterways can have negative environmental effects. In addition to deciding whether additional investment is needed, Congress may also consider changes to the system that finances these investments, including options for additional revenue that were recently proposed to Congress. These options are the IWUB's proposal (an increase to the fuel tax), the White House's proposal to the Joint Committee on Deficit Reduction (new annual fees in addition to the current fuel tax), or other options such as a lock usage fee or some kind of toll system. The IWUB-proposed increase to the existing fuel tax would be somewhat in keeping with the current system for user fees and revenue collection. Combined with increased federal responsibility for some inland waterway costs, the IWUB argues, this proposal would rebuild the trust fund balance and also fund new investments. While the tax would generate additional revenue, some taxpayer and environmental groups argue that the associated increases to federal cost share responsibilities tied to this proposal are unacceptable. The user industry has not indicated whether it would accept increases to the fuel tax without the proposed changes to cost-sharing arrangements. The user fees proposed by the Obama Administration in 2011 would address the issue of inadequate revenues by raising new fees from commercial users operating on the inland waterway system. Under the proposed new system of fees, all commercial users would continue to pay costs to utilize the inland waterway system in the form of fuel taxes and new fees for non-lock users, while lock users would also continue to pay the fuel tax, but would pay an even greater fee. The Administration also proposes to add new waterway segments to the list of fuel-taxed waterways on the inland waterway system, further raising revenues. The Administration argues that since commercial shippers are the primary beneficiary of waterway investments, they should continue to pay the costs for new capital investments. Furthermore, since lock users benefit the most, they should pay the most. The IWUB and Congress have previously rejected lock usage fees and similar proposals as posing unfair burdens on a subset of waterway users, and have opposed the new Administration proposal. The IWUB argues that targeting users of individual segments runs counter to the idea of the inland waterways as a whole ""system"" whose interconnectivity benefits the nation. Additionally, users note that major fee increases will significantly affect shippers operating within the system. Finally, the user industry has also argued against the proposed new fee because it delegates the authority to set fees to the Secretary of the Army, with certain restrictions. Previously, other means to raise revenue have also been considered by Congress. Early forms of the Inland Waterways Revenue Act of 1978 proposed a lock usage fee in lieu of the fuel tax included in the final bill, and other fees have subsequently been proposed as replacements or supplements to the fuel tax. In addition to lock usage fees, options such as annual licensing fees, systemwide and segment-specific tolls, ton-mile charges, and lock charges for the most congested portions of the system have previously been discussed as a potential means to raise revenues on inland waterways. Theoretically, some of these items could also be combined with the current fuel tax or other proposals. A separate financing concept, known as ""capital recovery,"" was represented in the original 1978 legislation but was not enacted in the final bill. Under this framework, user fees would automatically adjust to recover capital investments by the government. For instance, user fees might increase when the IWTF balance drops below a certain level. Alternatively, annualized or per-use fees could be structured to recover capital costs at individual facilities over time. Such a fee could render less likely future shortfalls in the trust fund. It might also force users to narrow those projects pursued to only the most vital authorizations. The concept appears to be represented in the Obama Administration proposal, in which user fees would be tied to trust fund balances after FY2022. Users have previously argued against capital recovery, noting that it is difficult to plan for a tax that is constantly changing, and that such an increase could create an ""upward spiral"" of cost increases in which a shrinking user base is responsible for more and more costs. Congress could also consider additional means to increase the reliability of the revenue stream for inland waterways. An automatic adjustment for inflation has previously been discussed and could be incorporated into either a fuel tax increase or a new lockage fee. An inflation adjustment could provide additional future revenues and increase the real purchasing power of IWTF funds, which has decreased substantially since 1994. Some argue that such an automatic adjustment amounts to hidden (and therefore unacceptable) tax increases in the future. (See box above.) If no long-term solution is enacted to address the IWTF revenue shortfall, Congress may again be forced to take measures to ensure the solvency of the trust fund. Previously, some of these options have included capping IWTF withdrawals at the level of current year fuel tax revenues or putting a temporary hold on all new contracts and focusing on ongoing work. Both of these options would curtail investments on the inland waterway system to some extent. Congress might also stipulate that some or all of the subset of IWTF investments be exempted from WRDA 1986 cost-sharing requirements (similar to the exemption provided by Congress in FY2009 enacted appropriations). However, an exemption such as this would have an additional cost to taxpayers in the form of funds from the General Revenue account. A related question before Congress is whether the current cost-share arrangement for inland waterway projects is adequately balanced. As previously mentioned, WRDA 1986 established cost-sharing requirements for construction and major lock rehabilitation projects. Under WRDA 1986, construction and major rehabilitation were cost-shared, while ""routine"" operations and maintenance was a 100% federal cost. Several years later, WRDA 1992 ( P.L. 102-580 ) established that ""major rehabilitation"" should be defined as any upgrade requiring more than $8 million in total funding (among other requirements). The IWUB proposal would significantly modify current cost-sharing arrangements. As previously mentioned, it would change the existing cost-share arrangement to exclude dams and minor rehabilitation from cost-share requirements, shifting funding for these types of projects to 100% federal funding from the General Revenue stream. Notably, the IWUB reasons that costs for dams should be a federal responsibility because significant segments of the U.S. population benefit from these structures. The IWUB also proposes a new threshold for what it considers to be major lock rehabilitation, specifying $100 million as the new cut-off between routine operations and maintenance and major rehabilitation. In short, the IWUB proposes to redefine the $8 million threshold established for projects in WRDA 1992, and replace it with a threshold of $100 million. This would in effect greatly increase the number of maintenance and rehabilitation projects that are federally funded. Additionally, the report proposes to make all cost overruns for IWTF construction projects a 100% federal responsibility. While some note that this provides project managers within the Corps an added incentive to keep projects within budget, critics note that the change represents an additional hidden cost to the federal government that is not reflected in the IWUB report's estimates. The overall effect of the IWUB's proposed changes would be to shift the overall costs for inland waterway projects toward the federal government. Assuming the proposed project list in the IWUB report, CRS calculates that the cost-share arrangement for IWTF construction projects would shift from the current 50/50 arrangement to approximately 68% federal, 32% non-federal. While commercial waterway users and the IWUB favor this shift in order to distribute the cost-share burden, taxpayer and environmental groups note that the IWTF already benefits from significant federal support in the form of 100% federal funding for investigations (studies) and operations and maintenance. In recent years, this support has represented an additional $500 million-$650 million annually of federal expenses with no cost-sharing requirements. Assuming existing funding trends for other Corps work supporting inland waterways (e.g., operations & maintenance and investigations), CRS calculates that federal costs for inland waterways under the proposal could rise to more than 90% of the total costs for the system. Currently, the federal government is responsible for about 80%-85% of these costs annually, with some variation. As noted above, the Obama Administration's proposals have all recommended alteration of the type and amount of user fees levied but not the overall cost-share between the federal and nonfederal expenditures. Thus, although these proposals would require new revenues from users, appropriations from the IWTF would still need to be matched with funds from the General Revenue fund, and the cost-share structure for the IWTF system would remain at 50/50. As previously noted, some have argued in favor of shifting cost shares away from the federal government and increasing user responsibility not only for construction, but also for operations and maintenance of inland waterways. These groups, including some of the aforementioned environmental and taxpayer interest groups, have argued that waterway users should not only pay for 50% of construction and major rehabilitation costs, but also pay for some or all operations and maintenance costs, which are currently fully funded by the general treasury revenues. While Congress has in the past rejected these proposals, they may once again be considered in the context of overall government cost-cutting efforts. The IWUB has also asked Congress to weigh in to provide reforms to Corps IWTF planning processes. Among other things, the IWUB proposed a number of reforms to increase its involvement and improve project prioritization. Industry users argue that many of these reforms will decrease the likelihood of cost overruns, which have in the past been a problem for IWTF projects. A previous study by the Corps concluded that in several cases, a number of factors contributed to cost overruns, including inaccurate construction schedules and costs, general cost escalation, and non-optimal funding. However, the degree of involvement by a non-federal entity in the planning and decision-making process could raise concerns related to conflicts of interest. A related item that may receive congressional attention is the Corps' method for prioritization of all inland waterway projects. As noted in the IWUB report, IWTF investments to date have usually been considered in isolation; that is, there is no formal set of criteria used to make decisions among investments competing for IWTF funds. Instead, these decisions are largely left to the Corps and the Administration (in the annual budget formulation process) and Congress (in the appropriations process). The IWUB proposes to alter this practice by adopting a priority ranking system, which is described in detail in the IWUB report. Significantly, the IWUB report recommends that this system be promulgated as a regulation. This could fundamentally affect the role of Congress in the project selection and funding process. Currently, Congress decides on project-specific authorizations and appropriations for Corps inland waterway projects. If a system for prioritizing investments, such as that recommended in the IWUB report, is promulgated as a regulation, the Corps would utilize these criteria to select projects for funding, and the role of Congress could be limited to providing project authorizations and overall funding levels. Such a role would be a departure from Congress's previous role in directing Corps projects, although some might argue that it is consistent with the federal approach to project allocations for other agency programs, such as the Environmental Protection Agency's state revolving fund programs for drinking water and wastewater.","Inland waterways are a significant part of the nation's transportation system. Because of the national economic benefits of maritime transport, the federal government has invested in navigation infrastructure for two centuries. Commercial barge shippers and other waterway users receive significant support through federal funding for operational costs, capital expenditures, and major rehabilitation on inland waterways. Since the Water Resources Development Act of 1986, expenditures for construction and major rehabilitation projects on inland waterways have been cost-shared on a 50/50 basis between the federal government and commercial users through the Inland Waterways Trust Fund (IWTF). Operations and maintenance costs for inland waterways (which typically exceed construction and major rehabilitation costs) are a 100% federal responsibility. Future financing for the inland waterway system is uncertain. The IWTF is supported by a $0.20 per gallon tax on commercial barge fuel, but its balance has declined significantly since 2005 due to a combination of increased appropriations, cost overruns, and decreased revenues. Without changes to the current financing system, IWTF spending is likely to be limited. The Obama Administration recommends replacing the fuel tax with user fees that would increase revenues and potentially allow for more spending on inland waterways projects. Similar to prior administrations, the Obama Administration has regularly submitted proposals to Congress to raise inland waterways user fees. Congress and industry interests have rejected these proposals. In 2010, the Inland Waterways Users Board (IWUB), a federal advisory committee advising the U.S. Army Corps of Engineers on inland waterways, endorsed an alternative proposal that is supported by many barge industry interests. The proposal would increase the fuel tax by $0.06-$0.09 per gallon, but would require the federal government to cover all project costs for dams and rehabilitation that are currently shared with the IWTF. To date, no major changes to the inland waterway financing system have been enacted. The user industry (including the barge industry and agricultural groups) argues that its recommended changes are necessary to shore up the trust fund, improve deteriorating infrastructure, and distribute costs equitably among beneficiaries (e.g., more funding for dams by federal taxpayer beneficiaries). The Obama Administration agrees that infrastructure upgrades are needed, but argues against shifting these costs to the federal government and instead proposes higher user fees. Some taxpayer and environmental groups favor increasing nonfederal costs not just for construction, but also for operation and maintenance expenses that are not cost-shared. Changes to inland waterways financing have been enacted in the 113th Congress. The Water Resources Reform and Development Act of 2014 (WRRDA, P.L. 113-121), enacted in June 2014, authorized changes to the project delivery process, altered cost-sharing requirements for some rehabilitation projects, and partially exempted from IWTF cost-sharing requirements a project (the Olmsted Locks and Dam) that has required the majority of IWTF appropriations in recent years. It did not alter the fuel tax or IWTF requirements for other projects. Two other bills in the 113th Congress, S. 407 and H.R. 1149, would attempt to address long-term issues with the IWTF by enacting much of the user proposal, including fuel tax increases of $0.09 and $0.06 per gallon, respectively. In considering legislation related to inland waterways, Congress may consider the appropriate cost share between the federal government and users, the appropriate type of user fee to fund the nonfederal share, preferred funding levels, and other related questions.",govreport
"Since its inception, Congress has used commemoratives to express public gratitude for distinguished contributions; dramatize the virtues of individuals, groups, and causes; and perpetuate the remembrance of significant events. The first commemoratives were primarily in the form of individually struck medals. During the 19 th century, Congress gradually broadened the scope of commemoratives by recommending special days for national observance; funding monuments and memorials; creating federal holidays; authorizing the minting of commemorative coins; and establishing commissions to celebrate important anniversaries. In the 20 th century, it became increasingly commonplace for Congress to use commemorative legislation to name buildings and other public works, scholarships, endowments, fellowships, and historic sites. This report provides a discussion of commemorative options available to Congress. These commemorative options are divided into those that require legislation and those that do not. Types of commemoratives requiring legislative action include naming federal buildings, including post offices; creating postage stamps; minting commemorative coins; awarding of Congressional Gold Medals; authorizing monuments and memorials, both in the District of Columbia and on federal land in other parts of the United States; establishing commemorative commissions; authorizing commemorative observances and federal holidays; and requesting presidential proclamations. Nonlegislative options include sending certificates of recognition, making floor speeches, and sending flags flown over the Capitol Building to constituents. Beginning in the 1960s, several initiatives were undertaken to reduce the number of commemoratives proposed through legislation. These initiatives were in response to concern that the legislative time spent on commemorative measures was excessive. Efforts to curb commemoratives can be divided into two categories: creating an advisory commission to recommend appropriate commemorations and amending congressional rules on the introduction and consideration of commemorative legislation. Between the 89 th Congress (1965-1966) and the 104 th Congress (1995-1996), several proposals were introduced to shift the responsibility of recommending commemorative celebrations to a presidential commission. First introduced in 1966, the proposed Commission on National Observances and Holidays would have served to review proposals for national observances and ""report to the President with respect to any proposal for a national observance which, in the opinion of the Commission, is of national significance."" In both the 89 th Congress and the 90 th Congress (1967-1968), measures were passed by the House, but no further action was taken by the Senate. In the 104 th Congress (1995-1996), the House adopted a new rule to reduce the number of commemorative bills and resolutions introduced and considered by the chamber. House Rule XII, clause 5, prohibits the introduction and consideration of date-specific commemorative legislation. Additionally, Republican Conference Rule 28 generally prohibits the Republican leader from scheduling honorific legislation, including commemoratives under suspension of the rules , a practice also addressed in a committee rule of the House Oversight and Government Reform Committee. As part of the rules adopted by the 104 th Congress, House Rule XII was amended to preclude the introduction or consideration of any bill, resolution, or amendment that ""establishes or expresses a commemoration."" The rule, which is still in effect, defines a commemoration as any ""remembrance, celebration, or recognition for any purpose through the designation of a specified period of time."" Further, in the House Rules Committee's section-by-section analysis of the House Rules resolution ( H.Res. 6 , 104 th Congress), the following explanation was provided of the rule's intent: The new ban on date-specific commemorative measures or amendments applies to both the introduction and consideration of any measure containing such a commemorative. This is intended to include measures in which such a commemorative may only be incidental to the overall purpose of the measure. Such measures will be returned to the sponsor if they are dropped in the legislative hopper. The prohibition against consideration also extends to any measures received from the Senate which contain date-specific commemorative [sic]. While it does not block their receipt from the other body, it is intended that such measures would not be referred to the appropriate committee of the House or be considered by the House. Instead, they would simply be held at the desk without further action. Should such a commemorative be included in a conference report or Senate amendment to a House bill, the entire conference report or Senate amendment would be subject to a point of order. While the ban does not apply to commemorative [sic] which do not set aside a specified period of time, and instead simply call for some form of national recognition, it is not the intent of the rule that such alternative forms should become a new outlet for the consideration of such measures. Thus, while they could be referred to an appropriate committee, it is not expected that such committees should feel obligated or pressured to establish special rules for their release to the House floor. Nor should it be expected that the Rule [sic] Committee should become the new avenue for regular waivers of the rule against date specific commemorative [sic]. Such exceptions should be limited to those rare situations warranting special national recognition as determined by the Leadership. In relation to the current operation of House Rule XII, clause 5, the House Republican Conference adopted a rule (Rule 28 (6)) that generally prohibits the Republican leader from scheduling ""any bill or resolution for consideration under suspension of the Rules which ... expresses appreciation, commends, congratulates, celebrates, recognizes the accomplishments of, or celebrates the anniversary of, an entity, event, group, individual, institution, team or government program; or acknowledges or recognizes a period of time for such purposes.... "" Additionally, the House majority party leadership has issued protocols ""intended to guide the majority leadership in the scheduling and consideration of legislation on the House floor."" Included in the protocols is guidance on possible exemptions to Conference Rule 28. A resolution of bereavement, or condemnation, or which calls on others (such as a foreign government) to take a particular action, but which does not otherwise violate the provisions of Rule 28 is eligible to be scheduled under suspension of the Rules. Party conference rules and protocols, however, are not enforceable by points of order on the House floor, although they may reflect a general reluctance on the part of the majority party to schedule any legislation with commemorative intent. In addition, in the 114 th Congress, the House Committee on Oversight and Government Reform (which has jurisdiction over holidays and celebrations) adopted a new committee provision (which was retained in the 115 th Congress). Its Rule 13(c) states, The Chairman shall not request to have scheduled any resolution for consideration under suspension of the Rules, which expresses appreciation, commends, congratulates, celebrates, recognizes the accomplishments of, or celebrates the anniversary of, an entity, event, group, individual, institution, team or government program; or acknowledges or recognizes a period of time for such purposes. The committee has issued additional guidance that ""in accordance with the intent of this rule, it will be the policy of the Committee that resolutions deemed to fit these criteria shall not be considered by the Committee."" Since House Rule XII, clause 5, was adopted in the 104 th Congress, it has been waived by unanimous consent on at least one occasion. Specifically, the ""House by unanimous consent waived the prohibition against introduction of a certain joint resolution specified by sponsor and title proposing a commemoration,"" to allow for the consideration of H.J.Res. 71 (107 th Congress, 2001-2002), legislation establishing Patriot Day as a day of remembrance for September 11, 2001. Congress's commemorative options fall into two general categories: legislative options and nonlegislative options. All legislative options require passage of a bill or resolution by the House, the Senate, or both chambers, while nonlegislative options can be accomplished by individual offices without legislative approval. Legislative options include naming federal buildings, designing postage stamps, minting commemorative coins, awarding congressional gold medals, creating monuments and memorials, designating commemorative observances, establishing federal holidays, and requesting presidential proclamations. Nonlegislative options include creating individual office awards, giving floor speeches, sending official letters, and ordering flags. Since House Rule XII, clause 5, was adopted in the 104 th Congress, it has been waived by unanimous consent on at least one occasion. Specifically, the ""House by unanimous consent waived the prohibition against introduction of a certain joint resolution specified by sponsor and title proposing a commemoration,"" to allow for the consideration of H.J.Res. 71 (107 th Congress, 2001-2002), legislation establishing Patriot Day as a day of remembrance for September 11, 2001. Several legislative options exist to honor individuals, groups, and historic events. For each of these commemoratives, action requires passage of a bill or resolution by the House, the Senate, or both chambers. In some cases, House and Senate committees, or the majority party, have specific rules or guidance associated with commemoratives. These include requiring a minimum number of cosponsors before the bill can be considered by the relevant committee, prohibitions against commemorating sitting Members of Congress, and some restrictions on commemorating living persons. In each Congress, many bills are introduced to name a post office or other federal building in honor or in memory of locally esteemed individuals, deceased elected officials, fallen military personnel, and celebrities. To name a post office or other federal building after an individual an act of Congress is required. This section details congressional involvement in the naming of post offices and other federal buildings. Legislation naming post offices for persons has become a very common practice. Between the 110 th Congress (2007-2008) and the 114 th Congress (2015-2016), almost 18% of all statutes enacted were post office naming acts. Legislation has named post offices for a variety of persons, including locally esteemed individuals (e.g., Sister Ann Keefe), deceased elected officials (e.g., President Ronald Reagan), fallen Armed Forces personnel (e.g., Army Specialist Matthew Troy Morris), and celebrities (e.g., Bob Hope). Post office naming statutes commonly identify the address of the postal facility and provide for naming (""designating"") the facility. Renaming a post office through legislation, however, does not result in the new name being etched or painted on the facade of the building or signs. Further, for operational and logistical reasons, a post office that has been dedicated or renamed will keep its original name and geographical designation within USPS's addressing system. Instead, to commemorate the designation, a small plaque noting the designee and designation is installed within the post office. Over the years, both the House and Senate have adopted policies and practices for considering and enacting post office naming bills. These policies and practices, sometimes expressed in ""Dear Colleague"" letters or committee rules, have varied from Congress to Congress. Currently, the House Oversight and Government Reform Committee has adopted a policy that the committee will not consider legislation designating post office buildings for living persons, expect: bills naming facilities after former U.S. Presidents or Vice Presidents, former Members of Congress over 70 years of age, former state or local elected officials over 70 years of age, former judges over 70 years of age, or a wounded veteran of any age. will not consider legislation designating post office buildings for a person for whom Congress already named a post office building. Postal facility naming bills should have the co-sponsorship of the entire state delegation wherein the post office is located. Members sponsoring postal facility naming bills must provide to the Committee documentation summarizing the designee's background. Postal facility naming bills will be considered by the Committee only after the required criteria are met in full. Similarly, the Senate Homeland Security and Governmental Affairs Committee (HSGAC) adopted practices for considering and reporting post office naming legislation. For example, under its current rules, HSGAC [will] not consider any legislation that would name a postal facility for a living person with the exception of bills naming facilities after former Presidents and Vice Presidents of the United States, former Members of Congress over 70 years of age, former State or local elected officials over 70 years of age, former judges over 70 years of age, or wounded veterans. Once post office naming legislation is reported by the House and Senate Committees, the legislation, if considered on the floor, tends to pass the House under suspension of the rules and the Senate via unanimous consent. For more information on naming post offices, including sample legislation, see CRS Report RS21562, Naming Post Offices Through Legislation , by [author name scrubbed]. Bills to name other federal buildings or facilities may be considered and reported in any committee, typically in relation to the agencies under each committee's jurisdiction. Legislation naming a veterans medical facility, for example, would normally originate in the Veterans' Affairs (VA) committees in the House and the Senate. Legislation naming courthouses—which are constructed and maintained by the General Services Administration (GSA)—is considered by the committees with jurisdiction over GSA, the House Transportation and Infrastructure Committee (T&I) and the Senate Environment and Public Works Committee (EPW). Historically, the large majority of nonpostal facilities are named through legislation originating in these four committees: VA and T&I in the House, and VA and EPW in the Senate. Occasionally, legislation is introduced to name buildings held by other agencies, such as National Aeronautical and Space Administration (NASA) training facilities. NASA is under the jurisdiction of the Science, Space and Technology Committee in the House (SST) and the Commerce, Science, and Transportation Committee in the Senate (CST), so naming legislation for NASA facilities is considered by these committees. Committees vary as to whether they have specific rules regarding the introduction of naming legislation. Some have written naming rules. In the 115 th Congress, for example, the Senate and House Veterans' Affairs committees have adopted identical language in their committee rules that identifies specific criteria for naming legislation. These rules prohibit naming a VA facility after an individual unless the individual is deceased and is a veteran who (i) was instrumental in the construction of the facility to be named, or (ii) was a recipient of the Medal of Honor, or, as determined by the chairman and ranking minority member, otherwise performed military service of an extraordinarily distinguished character; a Member of the U.S. House of Representatives or Senate who had a direct association with such facility; an Administrator of Veterans Affairs, a Secretary of Veterans Affairs, a Secretary of Defense or of a service branch, or a military or other federal civilian official of comparable or higher rank; or an individual who, as determined by the chairman and ranking minority member, performed outstanding service for veterans. In addition, each Member of the congressional delegation representing the state in which the designated facility is located must indicate, in writing, his or her support of the bill. Finally, the pertinent state department or chapter of each congressionally chartered veteran's organization with a national membership of at least 500,000 must indicate, in writing, its support of the bill. By contrast, the committees with jurisdiction over courthouse naming in the 115 th Congress—T&I in the House and EPW in the Senate—do not have identical written rules. Currently, T&I does not have a formal rule pertaining to naming legislation, although it did have written policies regarding naming legislation in previous Congresses. While no longer part of the committee's written rules, some or all of these requirements may still be in place—albeit informally—and enforced. Contacting the committee is the only way to determine what informal rules are in place, if any. EPW, on the other hand, has its requirements in committee rules. According to Rule 7(d) the committee may not name a building for any living person, except a former President or Vice President of the United States; a former Member of Congress over 70 years of age; a former Supreme Court Justice over 70 years of age; a federal judge who is fully retired and over 75 years of age; or a federal judge who has taken senior status and is over 75 years of age. As with T&I, neither SST in the House nor CST in the Senate has written rules pertaining to naming legislation. Each year, the U.S. Postal Service (USPS) issues commemorative stamps to celebrate persons, anniversaries, and historical and cultural phenomena. For example, USPS has issued stamps for Lena Horne, President John F. Kennedy, the Chinese Lunar New Year, and Star Trek. The USPS issues these stamps at its own statutory discretion and operates the program as a profit-making enterprise. Legislation to direct USPS to issue a stamp to commemorate persons, historical occurrences, and groups is occasionally introduced. CRS has been able to identify one instance when a special series commemorative stamp was issued pursuant to legislation. In 1947, Congress directed the Postmaster General to issue a special series of commemorative stamps in honor of Gold Star Mothers. Additionally, on selected occasions Congress has enacted legislation directing USPS to issue a semipostal stamp, which is a stamp sold at a premium to raise funds for a particular cause. For example, the Save the Vanishing Species Semipostal Stamp was created pursuant to H.R. 1454 , Multinational Species Conservation Funds Semipostal Stamp Act of 2010 . The House Committee on Oversight and Government Reform has a rule against considering legislation that proposes the issuance of commemorative stamps. Committee Rule 13 states, in part, ""[t]he determination of the subject matter of commemorative stamps and new semi-postal issues is properly for consideration by the Postmaster General."" Recently, the Postmaster General used his discretionary authority to create a semipostal stamp to help raise funds to fight Alzheimer's disease. For more information on commemorative postage stamps, see CRS Report RS22611, Common Questions About Postage and Stamps , by [author name scrubbed]. Commemorative coins are produced by the U.S. Mint pursuant to an act of Congress. These coins celebrate and honor American people, events, and institutions. The first commemorative coin was authorized in 1892 for the Columbia Exposition in Chicago. Since 1892, Congress has authorized more than 140 new commemorative coins. Between 1954 and 1981, no new commemorative coins were authorized. In 1982, Congress restarted the commemorative coin program when it authorized a commemorative half dollar to recognize George Washington's 250 th Birthday. In 1996, the Commemorative Coin Reform Act (CCRA) was enacted to (1) limit the maximum number of different coin programs minted per year; (2) limit the maximum number of coins minted per commemorative coin program; and (3) clarify the law with respect to the recovery of Mint expenses before surcharges are disbursed and to conditions of payment of surcharges to recipient groups. The CCRA restrictions took effect in 1998. In past Congresses, the House Committee on Financial Services has adopted a committee rule to prohibit (1) the scheduling of a subcommittee hearing on commemorative coin legislation unless it was ""cosponsored by at least two-thirds of the Members of the House,"" or (2) reporting a ""bill or measure authorizing commemorative coins which does not conform with the minting regulations under 31 U.S.C. § 5112."" This rule was not adopted as part of the committee rules for the 115 th Congress. In the 115 th Congress, the Senate Banking, Housing, and Urban Affairs Committee rules require that a commemorative coin bill or resolution have at least 67 Senators as cosponsors before being considered by the committee. For more information on commemorative coins, see CRS In Focus IF10262, Commemorative Coins: An Overview , by [author name scrubbed], and CRS Report R44623, Commemorative Coins: Background, Legislative Process, and Issues for Congress , by [author name scrubbed]. Although Congress has approved legislation stipulating requirements for numerous other awards and decorations, there are no permanent statutory provisions specifically relating to the creation of Congressional Gold Medals. When a Congressional Gold Medal has been deemed appropriate, Congress has, by legislative action, provided for the creation of a medal on an ad hoc basis. In the 115 th Congress, Rule 28(a)(7) of the House Republican Conference, however, generally prohibits the Republican leader from scheduling any bill or resolution for consideration under suspension of the rules which directs the Secretary of the Treasury to strike a Congressional Gold Medal unless the recipient is a natural person; the recipient has performed an achievement that has an impact on American history and culture that is likely to be recognized as a major achievement in the recipient's field long after the achievement; the recipient has not have received a medal previously for the same or substantially the same achievement; the recipient is living or, if deceased, has not been deceased for less than 5 years or more than 25 years; and the achievements were performed in the recipient's field of endeavor, and represent either a lifetime of continuous superior achievements or a single achievement so significant that the recipient is recognized and acclaimed by others in the same field, as evidenced by the recipient having received the highest honors in the field. The rules of the House Republican Conference may also place an indirect restriction on the number of gold medals that may be awarded annually. Rule 28(a)(7) prohibits the Republican leader from scheduling, or requesting to have scheduled, any bill for consideration under suspension of the rules which ""directs the Secretary of the Treasury to strike a Congressional Gold Medal ... [that causes] the total number of measures authorizing the striking of such medals in that Congress to substantially exceed the average number of such measures enacted in prior Congresses."" A waiver on the restriction can be granted by the majority of the elected leadership of the conference. In addition, because the restriction only applies to bills considered under suspension of the rules, it appears that an otherwise-prohibited bill could be brought to the floor under an alternative procedure, such as a special rule. In the Senate, the Banking, Housing, and Urban Affairs Committee in the 115 th Congress requires that at least 67 Senators must cosponsor any Congressional Gold Medal bill before being considered by the committee. For more information on Congressional Gold Medals, see CRS Report R45101, Congressional Gold Medals: Background, Legislative Process, and Issues for Congress , by [author name scrubbed]. On many occasions, Congress has authorized the creation of monuments and memorials to commemorate historic figures, events, and movements. Whether the monument or memorial is intended to be built in the District of Columbia determines the process for placement, design, and approval of the commemorative work. In 1986, the Commemorative Works Act (CWA) was enacted to provide standards for the consideration and placement of monuments and memorials in areas administered by the National Park Service (NPS) and the General Services Administration (GSA) in the District of Columbia. The CWA provides that no ""commemorative work may be established in the District of Columbia unless specifically authorized by Congress."" Legislation proposing a new commemorative work in the District of Columbia generally consists of three main sections: a short title, definitions, and authorization for establishing the memorial. First, most authorizing legislation has a short title. This is the name of the authorizing legislation, which often includes the name of the memorial. Second, the definitions section contains terms used in further sections of the legislation. These can include ""memorial,"" ""association,"" ""foundation,"" or other relevant terms. Finally, the authorization generally consists of four parts: 1. Authorization to establish a commemorative work. This designates a specific third party entity as the ""sponsor group,"" which is the party responsible for the establishment of the new monument or memorial. 2. Compliance with the Commemorative Works Act. This applies the CWA to the monument or memorial or exempts the monument and memorial from the CWA or certain CWA provisions. 3. Prohibition of Federal Funds. This section generally prohibits the designated sponsor group from using federal funds on the monument or memorial. 4. Deposit of excess funds. This provision specifies the use of funds raised by the sponsor group in excess of those necessary for the design, construction, and dedication of the monument or memorial. Following introduction, CWA-related legislation is generally referred to the House Committee on Natural Resources and the Subcommittee on Public Lands and Environmental Policy, and the Senate Committee on Energy and Natural Resources. Either one or both of the committees (or subcommittees) will hold hearings on the proposal, inviting testimony from representatives of the National Park Service and the organization seeking approval for the monument or memorial. Important considerations will include historical importance of the commemorative work, estimated cost, and how private funds needed for construction are to be raised. Additionally, the National Capital Memorial Advisory Commission will often provide advice to the committees on the proposed memorial. For more information on the process after a commemorative work is authorized by Congress, see CRS Report R41658, Commemorative Works in the District of Columbia: Background and Practice , by [author name scrubbed]. For a list of commemorative works authorized since the enactment of the CWA in 1986, see CRS Report R43743, Monuments and Memorials Authorized and Completed Under the Commemorative Works Act in the District of Columbia , by [author name scrubbed]; and CRS Report R43744, Monuments and Memorials Authorized Under the Commemorative Works Act in the District of Columbia: Current Development of In-Progress and Lapsed Works , by [author name scrubbed]. Congressional involvement in monuments and memorials outside of the District of Columbia is not governed by the Commemorative Works Act. Instead, the process for creating the monument or memorial is determined based on whether the work will be placed on existing federal land. Recently, Congress has handled the creation of monuments and memorials outside the District of Columbia in two ways: by directly authorizing a new commemorative or by making an existing commemorative a ""national"" monument or memorial. New Commemorative . Periodically, Congress authorizes a new memorial outside of the District of Columbia. On these occasions, legislation is required to statutorily authorize a group—either federal or nonfederal—to design, construct, and maintain the memorial. For example, during the 107 th Congress (2001-2002), legislation was enacted to authorize a memorial at the crash site in Shanksville, PA, for ""a national memorial to commemorate the passengers and crew of Flight 93 who, on September 11, 2001, courageously gave their lives thereby thwarting a planned attack on our Nation's Capital."" During debate on the bill ( H.R. 3917 ), Representative William Shuster summarized the importance of Congress creating a national memorial and making it part of the National Park Service. As we debate this measure, in this most revered of halls, I cannot help but contemplate the possibility that Flight 93 was headed to a target here in the Nation's Capitol—quite possibly right here to the Capitol itself. We will, however, never know for sure where that doomed flight was headed. We will never know, because men and women, put love of country ahead of self preservation. These were not super heros [sic], but individuals just like you and me. Individuals with families and loved ones anxiously awaiting their return, who put aside their own desirers [sic] and stood up to combat terrorism and save countless lives.... The legislation before us today lays out a fair and balanced approach for construction of a memorial for these brave individuals. The legislation calls for the creation of the Flight 93 Advisory Commission which would be composed of representatives from the families of victims, the local community, the state of Pennsylvania and the United States Government. The Commission would then submit their recommendations to the Secretary of the Interior. In authorizing the Flight 93 Memorial, Congress also created an advisory committee to make recommendations to the Secretary of the Interior and Congress on the design, construction, and management of the memorial. Creation of such a commission is not uncommon and can aid government agencies with the planning and execution of commemorations. Official Recognition of Existing Commemoratives . Instead of authorizing the creation of a completely new memorial, Congress has also considered legislation to recognize existing works as national monuments or memorials. Enacting legislation to provide national recognition of a monument or memorial, but maintaining local operation and maintenance, generally requires no federal oversight or funds. For example, P.L. 113-132 designated a memorial in Riverside, CA, as the ""Distinguished Flying Cross National Memorial."" The memorial honors military aviators who have received the ""Distinguished Flying Cross [which] is the oldest military award for aviation"" with a national memorial, which does not already exist. Commemorative commissions are entities established to oversee the commemoration of a person or event. These commissions typically coordinate celebrations, scholarly events, public gatherings, and other activities, often to coincide with a milestone anniversary. For example, the Christopher Columbus Quincentenary Jubilee Commission was created ""to prepare a comprehensive program for commemorating the quincentennial of the voyages of discovery of Christopher Columbus, and to plan, encourage, coordinate, and conduct observances and activities commemorating the historic events associated with those voyages."" Bills creating commemorative commissions are introduced regularly in Congress. For example, in the 114 th Congress (2015-2016), multiple bills were introduced to establish commemorative commissions. Most of these bills, however, were not enacted. A statute establishing a commemorative commission generally includes the commission's mandate, provides a membership and appointment structure, outlines the commission's duties and powers, and sets a termination date. A variety of options are available for each of these organizational choices, and legislators can tailor the composition, organization, and working arrangements of a commission, based on the particular goals of Congress. As a result, the organizational structure and powers of individual commissions are often unique. In fulfilling their duties, most commemorative commissions have encouraged, worked closely with, and provided coordination for private groups, state and local governments, and other federal government entities taking part in the general commemoration of the person or event. Because of these cooperative efforts, federally created commissions are often only a portion of planned celebratory events. Therefore, federal funds appropriated to a commemorative commission are generally only a portion of the total funding ultimately expended nationwide for commemorative activities and events. Commemorative commissions have been funded in two ways: through appropriations or through solicitation of nonfederal money. At times, commissions are authorized both for appropriations and to fundraise or accept donations. In addition, some commemorative commissions are not provided with explicit authorization to solicit funds or accept donations. Commissions without the statutory authority to solicit funds or accept donations are generally prohibited from engaging in those activities. For more information on commemorative commissions, see CRS Report R41425, Commemorative Commissions: Overview, Structure, and Funding , by [author name scrubbed]. As discussed above in the section "" House Ban on Commemorative Legislation ,"" House Rule XII, clause 5 prohibits the introduction or consideration of commemorative legislation that includes a ""remembrance, celebration or recognition for any purpose through the designation of a specified period of time."" Additionally, House Republican Conference rules, as well as House Oversight and Government Reform Committee rules, restrict the scheduling of such bills under suspension of the rules in the House. Consequently, the number of commemorative observances and days designated by bills, concurrent resolutions, joint resolutions, and House resolutions is small. The House prohibition on commemorative observances and days, however, does not preclude the Senate from using Senate measures to honor individuals, groups, and events. In the past, the Senate Judiciary Committee has had unpublished guidelines on the consideration of commemorative legislation. These guidelines were not officially part of the committee's rules and may not be currently applicable. Past guidance restricted consideration of commemorative legislation without a minimum number of bipartisan cosponsors and prohibited commemoration of specific categories. For more information on commemorative observances and days, see CRS Report R44431, Commemorative Days, Weeks, and Months: Background and Current Practice , by [author name scrubbed] and [author name scrubbed]. The United States has established 11 permanent federal holidays. They are, in the order they appear in the calendar: New Year's Day, Martin Luther King Jr.'s Birthday, Inauguration Day (every four years following a presidential election), George Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day. Although frequently called public or national days, these celebrations are only legally applicable to federal employees and the District of Columbia, as the states individually decide their own legal holidays. To create a new federal holiday, legislation is required. In recent Congresses, legislation has been introduced to create holidays such as ""Cesar E. Chavez Day,"" or to formally establish Election Day as such. Recent legislation to create a new federal holiday has suggested adding the day to the list of holidays at 5 U.S.C. §6103. For more information on federal holidays, see CRS Report R41990, Federal Holidays: Evolution and Current Practices , by [author name scrubbed]. On many occasions, Congress has requested that the President issue a proclamation recognizing an event or individual. Usually associated with the creation of a patriotic and national observance, statutory language requests that the President issue a proclamation each year to commemorate an event or group. For example, the National Pearl Harbor Remembrance Day statute requests that the President issue a yearly proclamation ""calling on ... the people of the United States to observe National Pearl Harbor Remembrance Day with appropriate ceremonies and activities.... "" Commemorative proclamations can also be issued by Presidents without any congressional action, and have been regularly issued throughout American history. Since 1789, when President George Washington issued the first proclamation declaring November 26 of that year a National Day of Thanksgiving, there have been hundreds of such designations. In addition to the legislative options for commemoration listed above, several nonlegislative options exist to commemorate individuals, groups, and events. These include certificates of recognition, floor speeches, and the purchasing of American flags. Certificates of Recognition are ""awards"" given by individual Member offices to constituents or groups to acknowledge accomplishments. Members are generally free to create and distribute certificates of recognition to individuals or groups to constituents. In the House, official funds can be used for the creation and distribution of certificates that recognize ""a person who has achieved some public distinction"" provided that the certificates comply with Franking Regulations and do not contain political or partisan references, solicit support of a Member's position on an issue, or advertise or endorse benefits not available to all constituents. Additionally, the House Ethics Manual reminds Members that all constituents are to be treated equally, regardless of ""political support, party affiliation, or campaign contributions ..."" when deciding to provide assistance to constituents. This would likely extend to the sending of certificates of recognition as well. In the Senate, the Standing Orders of the Senate place restrictions on reimbursable expenses payable from a Senator's Official Office Account. S.Res. 294 (96 th Congress) and S.Res. 176 (104 th Congress) specifically prohibit the use of official funds for ""expenses incurred for the purchase of holiday greeting cards, flowers, trophies, awards, and certificates "" (emphasis added). Further, pursuant to 39 U.S.C. §3210(a)(3)(F), the Senate Ethics Manual provides guidance that ""[m]ail expressing congratulations to a person who achieved some public distinction may be franked only when the occasion involves a public distinction, rather than a personal distinction."" Many Members have honored individuals and groups of constituents by giving a floor speech, and then sending copies of the Congressional Record to the individual or group that was honored. This activity can include a single Member or a group of Members that want to jointly honor constituent(s) either with a group of special order speeches or a series of individual—perhaps one minute—speeches. To inquire about floor time for a commemorative speech, Members may contact their party's leadership. In 1937, a Member of Congress made the first request to fly a U.S. flag over the U.S. Capitol building. Since that time, the Architect of the Capitol (AOC) has managed the flag program for the House and Senate. Generally, U.S. flags flown over the Capitol can be purchased by a constituent through his or her Representative's or Senator's offices. In both the House and Senate, the Member office collects flag requests from constituents and facilitates the purchase of flags from the House or Senate office supply store and coordinates with the Architect of the Capitol for the flying of flags over the Capitol building. For more information on the Architect of the Capitol's flag program, see http://www.aoc.gov/trades-and-areas-practice/capitol-flag-program . Members may obtain flags from the Office Supply Service (OSS). ""Initially, the costs of the flags will be charged to the [Member Representational Allowance] MRA. ""Once payment for a flag is received by the Member office, the office may submit the check to OSS. OSS will credit the MRA. If a request is made to have a U.S. flag flown over the Capitol, an additional flag flying fee must be paid by the individual purchasing the flag."" Additionally, Members may use official funds to pay for a flag flown over the Capitol that will be used for an official gift. For more information on the House of Representatives flag program, see https://housenet.house.gov/campus/service-providers/aoc-flag-office. Senators may obtain flags from the Senate Stationary Room. Senators collect the cost of the flag, shipping fees, and flag flying and certification fees from the constituent, obtain the flag from the stationary room, and then work with the Packaging and Flags division of the Printing, Graphics, and Direct Mail (PG&DM) office to arrange for the flag to be flown over the Capitol. Additionally, pursuant to S.Res. 294 (96 th Congress), ""Senate offices can use official funds to purchase flags. The legislation limits the groups to which a gift of a flag may be made to public organizations only, such as churches, schools, and patriotic service groups."" For more information on the Senate flag program, see http://webster.senate.gov/pdgm/flag-packaging-services .","Since its inception, Congress has used commemorative legislation to express public gratitude for distinguished contributions; dramatize the virtues of individuals, groups, and causes; and perpetuate the remembrance of significant events. During the past two centuries, commemoratives have become an integral part of the American political tradition. They have been used to authorize the minting of commemorative coins and Congressional Gold Medals; fund monuments and memorials; create federal holidays; establish commissions to celebrate important anniversaries; and name public works, scholarships, endowments, fellowships, and historic sites. Current congressional practice for commemoratives includes a House Rule (Rule XII, clause 5, initially adopted during the 104th Congress [1995-1996]) that precludes the introduction or consideration of legislation that commemorates a ""remembrance, celebration, or recognition for any purpose through the designation of a specified period of time."" Such a rule does not exist in the Senate. This House Rule, together with the passage of more restrictive laws, rules, and procedures governing the enactment of several other types of commemoratives, has substantially reduced the time Congress spends considering and adopting such measures. This report summarizes the evolution of commemorative legislation as well as the laws, rules, and procedures that have been adopted to control the types of commemoratives considered and enacted. Included in the discussion of commemorative options for Congress are those that require legislation, such as naming federal buildings, including post offices and other federal structures; postage stamps; commemorative coins; Congressional Gold Medals; monuments and memorials, both in the District of Columbia and elsewhere; commemorative commissions; commemorative observances; federal holidays; and requesting presidential proclamations. Also included are commemorative options that do not require legislation. These include certificates of recognition; floor speeches; and flags flown over the U.S. Capitol.",govreport
"On January 4, 2011, President Obama signed P.L. 111-358 , the America COMPETES Reauthorization Act of 2010. The law responds to concerns about U.S. competitiveness by increasing funding for research in the physical sciences and engineering; authorizing certain federal science, technology, engineering, and mathematics (STEM) education programs and policies; as well as addressing other related issues. COMPETES 2010 reauthorized selected provisions of the 2007 America COMPETES Act ( P.L. 110-69 ). The purpose of this report is to provide information on the President's FY2013 budget request—and the status of FY2013 congressional appropriations—for the agencies, programs, and activities authorized by COMPETES 2010. For a broader treatment of the America COMPETES Reauthorization Act of 2010, see CRS Report R41819, Reauthorization of the America COMPETES Act: Selected Policy Provisions, Funding, and Implementation Issues , by [author name scrubbed]. For information about prior year funding for both COMPETES acts, see CRS Report R42779, America COMPETES Acts: FY2008-FY2013 Funding Tables , by [author name scrubbed]. COMPETES 2010—like COMPETES 2007—was designed to ""invest in innovation through research and development, to improve the competitiveness of the United States, and for other purposes."" In total, COMPETES 2010 authorized approximately $45.5 billion in funding between FY2010 and FY2013 for federal research in the physical sciences and engineering, STEM education, and other related programs. Certain provisions of the law, including many funding authorizations, expired at the end of FY2013. Among other things, COMPETES 2010 increased funding authorizations for the National Science Foundation (NSF), the National Institute of Standards and Technology (NIST) core laboratories and construction accounts, and the Department of Energy (DOE) Office of Science. It also authorized new technology transfer and commercialization activities at these agencies. In addition, COMPETES 2010 authorized inducement prizes at federal agencies, established a loan guarantee program for manufacturers, and established a Regional Innovation Program (RIP). In STEM education, COMPETES 2010 sought to provide greater coordination of federal STEM education programs, authorized support for academic programs that provide teacher certification concurrent with a bachelor's degree in a STEM field, and repealed certain unfunded STEM education programs authorized by COMPETES 2007. Like its predecessor, COMPETES 2007, the central policy contributions of COMPETES 2010 were the ""doubling path"" policy for the NSF, NIST core laboratories and construction accounts, and the DOE Office of Science, as well as the authorization of STEM education activities at various federal agencies. The President's FY2013 budget requested increased funding for the doubling path accounts (albeit at levels below those authorized) but included support for few COMPETES 2010 authorized STEM education programs. In this regard the President's FY2013 budget request was generally consistent with prior year Obama Administration requests and appropriations activity for both COMPETES acts. Of the new programs with defined funding authorizations in COMPETES 2010, only the Regional Innovation Program (RIP) at the Department of Commerce (DOC) was specifically included in the Administration's FY2013 budget request. The Administration's budget request did not seek funding for the NIST Green Jobs Act, Federal Loan Guarantees for Innovative Technologies in Manufacturing, or the STEM-Training Grant program. COMPETES 2010 also authorized new programs without providing a defined funding amount. One example of this type of authorization was the Green Chemistry Basic Research program at NSF. The FY2013 budget request included funding for a green chemistry program at NSF. The following sections discuss in greater detail the President's FY2013 budget request for selected programs and agencies authorized by COMPETES 2010. Where possible, this report has been updated to reflect FY2012 actual funding. Earlier versions of this report used FY2012 enacted, estimated, or current plan funding levels. This change provides a more accurate view of the difference between FY2012 funding levels and the President's FY2013 request. Table A-1 summarizes the FY2013 funding status of selected COMPETES 2010 provisions, including the President's FY2013 requests for these accounts. This section highlights the Administration's FY2013 budget request for selected research programs and accounts included in COMPETES 2010, including the doubling path accounts. At NIST, the President sought a total of $857.0 million in FY2013. This funding level was $106.2 million (14.1%) more than the FY2012 enacted level of $750.8 million and $182.7 million (17.6%) less than the authorized level of $1.040 billion. Within the NIST total, the President requested $648.0 million, or $81.0 million (14.3%) more than the FY2012 enacted level of $567.0 million and $28.7 million (4.2%) less than the authorized level of $676.7 million, for the core laboratories account. The President also sought $60.0 million, or $4.6 million (8.3%) more than the FY2012 enacted level of $55.4 million and $61.3 million (50.5%) less than the authorized amount of $121.3 million, for the construction account. The President's FY2013 request for NIST's Industrial Technology Services (ITS) account was $149.0 million, including $128.0 million for the Hollings Manufacturing Extension Partnership (MEP). The FY2013 Administration request for MEP was $400,000 less than the FY2012 enacted amount. The President did not seek funding for the Baldrige Performance Excellence Program in FY2013. The President did not specifically request FY2013 funds for activities authorized by the NIST Green Jobs Act. President Obama's FY2013 budget request for the NSF's Research and Related Activities (R&RA) account—which is the primary source of research funding at the foundation—was $5.983 billion. This amount was $225.0 million (3.9%) more than the FY2012 actual level of $5.758 billion and $654.5 million (9.9%) less than the COMPETES 2010 authorized amount of $6.638 billion. The President's FY2013 budget request for R&RA included specific funding for two COMPETES 2010 programs—the Experimental Program to Stimulate Competitive Research (EPSCoR) and Partnerships for Innovation (PFI). COMPETES 2010 reauthorized but did not specify funding levels for these programs. The President requested $158.2 million for EPSCoR in FY2013, $7.3 million (4.9%) more than the FY2012 actual funding level of $150.9 million. The FY2013 NSF budget request stated that the National Academy of Sciences was studying NSF's EPSCoR programs in accordance with Section 517 of COMPETES 2010. This report was published in 2013. The FY2013 request for PFI was $8.2 million, $200,000 more than the FY2012 estimate of $8.0 million. NSF FY2013 budget documents indicate that the foundation would dedicate the requested $200,000 increase to the Building Innovation Capacity track, which funds partnerships between academic researchers and small businesses. Section 509 of COMPETES 2010 directed NSF to establish a Green Chemistry Basic Research program. In response to these provisions, the FY2013 NSF budget request included funding for a new Sustainable Chemistry, Engineering and Materials (SusCHEM) program as part of NSF's Science, Engineering, and Education for Sustainability (SEES) portfolio. The President sought $76.7 million in FY2013 for SusCHEM and four other new related SEES programs. The FY2013 NSF budget request emphasized the ""OneNSF Framework,"" which sought to enable ""seamless operations across organizational and disciplinary boundaries."" Although the OneNSF Framework applied across all NSF directorates, most of the OneNSF Framework priorities were funded in the R&RA account. Other NSF-wide priorities included clean energy, advanced manufacturing, multidisciplinary research, and STEM education and workforce. The FY2013 NSF budget proposed $67.0 million in research program terminations, including reductions in Computer and Information Science and Engineering (CISE), Cyber-enabled Discovery and Innovation (CDI), Mathematics and Physical Sciences (MPS), Nanoscale Science & Engineering Centers (NSECs), and public outreach. The NSF FY2013 budget request described these programs as either duplicative or obsolete (either because the program had achieved its original goals or as a result of maturation in the field). In September 2012, NSF announced its intention to realign some of its research-related programs beginning in FY2013. The foundation moved two programs from the Office of the Director to the research directorates. The Office of Cyberinfrastructure became a division within the Directorate for Computer and Information Sciences, and the Office of Polar Programs became a division within the Directorate for Geosciences. The NSF also merged two other offices, the Office of International Science and Engineering and the Office of Integrative Activities, into the Office of International and Integrative Activities. It is not yet clear how or if these changes will affect foundation activities in these fields. NSF's FY2013 budget request to Congress did not reflect these consolidations. The foundation's FY2013 current plan does. The President's FY2013 budget request for the DOE Office of Science was $4.992 billion. This funding level was $57.0 million (1.2%) more than the FY2012 current plan funding level of $4.935 billion and $1.009 billion (16.8%) less than the authorized level in COMPETES 2010 ($6.001 billion). The President also sought $350.0 million for the ARPA-E account at DOE, which was $75.0 million (27.3%) more than the FY2012 current plan level of $275.0 million and $38.0 million (12.2%) more than the amount authorized in COMPETES 2010 ($312.0 million). Many federal policymakers have sought to increase federal funding for research in the physical sciences and engineering—and thereby, advocates assert, improve U.S. global economic competitiveness. Congress and the Bush and Obama Administrations have sought to double funding for the NSF, Department of Energy's Office of Science, and National Institute of Standards and Technology's core laboratory and construction accounts (collectively ""the targeted accounts"") from their FY2006 levels. To date, the main legislative acts authorizing the doubling path policy for the targeted accounts have been the COMPETES acts. Under COMPETES 2010, targeted account funding was authorized to increase at a compound annual growth rate of 6.3%. This growth rate was similar to the growth rate in actual appropriations for the targeted accounts during the COMPETES 2007 authorization period (6.4%). At the COMPETES 2010 authorized rate, it would have taken approximately 11 years to double funding for the targeted accounts. The President's FY2013 budget request re-asserted the Administration's ongoing support for the doubling path policy, but sought an overall increase of 4.1% for the targeted accounts. This increase was equal to the FY2012 enacted appropriations growth rate for the targeted accounts and, and if maintained, would have resulted in an 18-year doubling. The President's FY2013 STEM education request focused primarily on two groups: STEM graduates and STEM teachers. Specifically, the FY2013 budget request established a new ""government-wide goal to increase, over the next decade, the number of well-prepared college graduates with STEM degrees by one-third, or one million"" and continued the Administration's previous commitment to prepare 100,000 STEM teachers over the next decade (the ""100Kin10"" initiative). To achieve these goals, the President's FY2013 budget request sought program and funding changes to some existing COMPETES 2010 authorized programs and agencies. The President's FY2013 budget did not include specific requests for new STEM education programs authorized by COMPETES 2010, such as the STEM-Training Grant Program. The President's FY2013 budget request for the Department of Education (ED) proposed to reorganize the department (as it had previously proposed in the FY2011 and FY2012 requests). The proposed reorganization would have eliminated and consolidated certain programs, including COMPETES 2010 programs. For example, under the reorganization plan, both the Teachers for a Competitive Tomorrow (TCT) and Advanced Placement (AP) programs would have been eliminated and their program functions absorbed into the newly created Teacher and Leader Pathways (TLP) and College Pathways and Accelerated Learning (CPAL) programs, respectively. The status of both the TCT and AP programs, as authorized by the COMPETES acts, is unclear. Congress has not funded the TCT program since FY2010 and the President's FY2013 ED budget request did not specify funding for the program. Although ED operates an AP program, it typically does so under the authority of the Elementary and Secondary Education Act of 1965, as amended by No Child Left Behind (ESEA, P.L. 107-110 ), not under the authority of either COMPETES Act. The AP programs authorized by ESEA and COMPETES are substantively different, though they share some features. It is unclear if the AP program at ED complies with the AP program authorized by the COMPETES acts. The FY2013 ED request for CPAL, including the AP program authorized by ESEA, was $81.0 million. Of this amount, $24.1 million was dedicated to the advanced course test fee component of the AP program. The FY2012 enacted appropriation for the ESEA authorized AP program was $30.1 million. DOE does not typically request funding for COMPETES-acts-authorized STEM education programs. However, the department asserts that it operates programs that correspond with its responsibilities under the law. Among these is the DOE Office of Science's Science Graduate Fellowship (SCGF) program, which the department asserts is one of two fellowships that correspond with the Protecting America's Competitive Edge (PACE) graduate fellowship program. The President's FY2013 request for DOE included no funding for SCGF. This was consistent with FY2012 congressional appropriations actions. For example, House Committee on Appropriations FY2012 DOE appropriations report language directed the Office of Science to ""justify to the Committee why fellowships should be funded within the Office of Science when other agencies, in particular the National Science Foundation, are the primary federal entities for such purposes."" Current plan funding for SCGF in FY2012 was $5.0 million, which was to support a third year of funding for the FY2010 cohort of fellows. DOE also asserts that the Academies Creating Teacher Scientists (DOE ACTS) program corresponds with the Summer Institutes program and that the Office of Science Early Career Research Program corresponds with the Early Career Awards program. (COMPETES 2010 reauthorized both the Summer Institutes and Early Career Awards programs.) Based on the recommendation of a 2010 DOE Committee of Visitors report, DOE terminated DOE ACTS in FY2012. Accordingly, the President did not seek funding for DOE ACTS in FY2013. According to the DOE, each of the six Office of Science research programs supports Early Career Research Program awards out of their core research program offices. However, these research programs do not typically specify funding for Early Career Research program awards. DOE representatives state that, ""Office of Science support for Early Career Research awards is approximately $16.0 million per year."" CRS identified one specific request for the Early Career Research Program in the FY2013 Office of Science budget request. That specific request was in the Fusion Energy Sciences budget in the ""Other"" activity. In FY2012, enacted funding for the Fusion Energy Sciences ""Other"" activity was $11.9 million. These funds supported the Office of Science Early Career Research, Historically Black Colleges and Universities (HBCU), and summer internships for undergraduates programs. The FY2013 request for the Fusion Energy Sciences ""Other"" activity was $9.2 million. This amount was $2.7 million, or 22.7%, less than the FY2012 enacted amount. In FY2012 the Senate Committee on Appropriations urged Office of Science to consider redirecting funds from terminated education programs to the Distinguished Scientist Program authorized by the COMPETES acts. The President's FY2013 request for Office of Science did not include funding for this program, which DOE had not initiated. The primary source of funding for STEM education activities at NSF is the Education and Human Resources (E&HR) account. The President sought $875.6 million for E&HR in FY2013. This amount was $45.1 million (5.4%) more than the FY2012 actual level of $830.5 million and $166.2 million (15.9%) less than the COMPETES 2010 authorized level of $1.042 billion. The FY2013 NSF budget request highlighted certain NSF-wide and E&HR-specific proposals for STEM education. NSF-wide efforts centered on the planned new Expeditions in Education (E 2 ) initiative, which sought to ""address a challenge in STEM learning or education using current or emerging areas of science."" E 2 was a $49.0 million co-funded initiative that was to be supported through contributions from various Research and Related Activities (R&RA) accounts ($28.5 million) and from E&HR ($20.5 million). The FY2013 NSF request also sought increased co-funding for the Graduate Research Fellowship (GRF) program. The FY2013 request for the GRF was $243.0 million, which was $45.1 million (22.8%) more than FY2012 actual. About half of FY2013 funding for the GRF was to come from R&RA, up from 7.4% in FY2009. NSF's FY2013 budget request stated that the increased funding would provide for 2,000 new fellows in FY2013 (8,900 total) at a cost of education (COE) level of $12,000 per fellow. NSF's FY2013 budget request asserted that the FY2013 COE level was consistent with COMPETES 2010. Other major E&HR initiatives in FY2013 included increased coordination with the Department of Education (ED) on the Mathematics and Science Partnership (MSP) program, on STEM education research, and on a proposed K-16 mathematics education program. E&HR and ED proposed a jointly funded, new $60.0 million K-16 mathematics program. E&HR contributions to the program were to come from the Discovery Research K-12 (DR-K12) program and from the Transforming Undergraduate Education in STEM (TUES) program. Finally, the FY2013 request for E&HR sought to ""reframe"" E&HR programs and activities such that each division's programs and activities would align with one of three new categories of activity (e.g., core research and development investments, leadership investments, and expedition investments). The Administration sought $20.0 million in new funding ($5.0 million for each E&HR division) for a ""Core Launch Fund"" to support the reframing. The FY2013 NSF budget request included funding for existing STEM education programs authorized under COMPETES 2010, but for which the act does not specify funding levels. These include the Integrative Graduate Education and Research Traineeship (IGERT), the Robert Noyce Teacher Scholarship (Noyce) program, Research Experiences for Undergraduates (REU), and the STEM Talent Expansion Program (STEP), among others. The Administration's FY2013 requests for these programs were $51.7 million for IGERT ($8.1 million below the FY2012 estimate), $54.9 million for Noyce (same as FY2012 actual), $68.4 million for REU ($11.2 million below FY2012 actual), and $17.3 million for STEP ($7.0 million below FY2012 actual). Both America COMPETES acts authorized an NSF program to support Hispanic-serving institutions (HSIs). Section 7033 of COMPETES 2007 directed NSF to establish a program for HSIs. Section 512 of COMPETES 2010 directed the NSF to maintain its HSI program—and all other minority-serving institution (MSI) programs, such as the Historically Black Colleges and Universities Undergraduate Program (HBCU-UP)—as separate programs. Although NSF's FY2013 budget request maintained existing MSI programs separately, NSF has not established an HSI-specific program. The FY2013 request listed ""research to examine the particular STEM student and institutional capacity needs in Hispanic-serving institutions"" as one of the emphases of the Division of Human Research Development within E&HR, but did not otherwise specifically mention HSIs. The President's FY2013 budget requested funding for other COMPETES 2010 provisions as well. These include $25.0 million for the new RIP program at the DOC's Economic Development Administration (EDA). Of this amount, the President sought $7.0 million for the Science Park Infrastructure Loan Guarantee program, which COMPETES 2010 authorized as a separate component of the RIP program. The Administration's FY2013 budget request did not include specific funding for the new Federal Loan Guarantees for Innovative Technologies in Manufacturing program at the DOC or for the activities authorized by the NIST Green Jobs Act of 2010, both of which were authorized by COMPETES 2010. FY2012 funding for the DOC included $5.0 million each for the science park and manufacturing loan guarantee programs and encouraged EDA to support RIP activities through the Economic Adjustment Assistance account. Funding for COMPETES 2010 programs and agencies is typically included in three appropriations acts: Commerce, Justice, Science, and Related Agencies (CJS), for NSF, NIST, and other Department of Commerce programs; Energy and Water Development (Energy-Water), for DOE programs; and Labor, Health and Human Services, Education, and Related Agencies (Labor-HHS-Education), for ED programs. As appropriations measures often include a variety of provisions and programs, this section focuses on funding provisions that relate most closely to policies, programs, agencies, and activities specifically authorized by COMPETES 2010. Table A-1 summarizes the FY2013 funding status of these selected provisions, including House-passed, Senate Committee on Appropriations recommended, and final (post-rescission, post-sequestration) FY2013 appropriations to these accounts. Congressional appropriations for COMPETES 2010-related agencies in FY2013 were provided in two sequential acts. On September 28, 2013, the President signed P.L. 112-175 (Continuing Appropriations Resolution, 2013). Among other things, this law provided continuing appropriations to federal agencies at FY2012 levels with an across-the-board increase of 0.612% through March 27, 2013. On March 26, 2013, the President signed P.L. 113-6 (FY2013 Consolidated and Further Continuing Appropriations Act, H.R. 933 ), which provided regular appropriations for some federal agencies and continuing appropriations for others. P.L. 113-6 also included certain rescissions that applied to COMPETES 2010 accounts. In lieu of a conference report on H.R. 933 , the Chairwoman of the Senate Committee on Appropriations published an explanatory statement in the March 11, 2013, Congressional Record . Among other things, the explanatory statement sought to resolve conflicts between certain House and Senate FY2013 appropriations committee report recommendations. Of the COMPETES 2010-related agencies, those that received funding through CJS provisions (Division B) were provided with regular appropriations while those that received funding through Energy-Water and Labor-HHS-Education (both in Division F) were provided with continuing appropriations. This distinction is important for congressional policymakers who may assess the status of proposed changes to agency activities included in the President's FY2013 budget request. Agencies that received regular appropriations would typically be allowed to make Administration-requested changes within the constraints of existing federal law and direction from congressional appropriators. On the other hand, agencies that received continuing appropriations would not typically have the authority to make requested changes. The topic of across-the-board federal budget cuts (known as ""sequestration"") required under the Budget Control Act of 2011 ( P.L. 112-25 ) dominated much of the FY2013 congressional budget and appropriations debate. COMPETES 2010-related accounts were generally subject to sequestration. Where possible, the following sections include FY2013 funding levels that include the effects of sequestration, as well as any applicable rescissions in P.L. 113-6 . The House passed H.R. 5326 (Commerce, Justice, Science, and Related Agencies Appropriations Act, 2013) by a vote of 247-163 on May 10, 2012. The act would have provided FY2013 appropriations for the Department of Commerce (including NIST), NSF, and other CJS agencies. H.R. 5326 was accompanied by H.Rept. 112-463 when it was reported from the House Committee on Appropriations. The Senate Committee on Appropriations reported a bill to provide FY2013 CJS appropriations on April 19, 2012 ( S. 2323 ). The full Senate did not consider that measure. S.Rept. 112-158 accompanied S. 2323 when it was reported from committee. This section compares FY2013 post-rescission, post-sequestration CJS funding levels (where available) for selected COMPETES 2010 accounts with enacted, current, or actual FY2012 funding levels (as noted), and FY2013 COMPETES 2010 authorized funding levels. This section also compares FY2013 House-passed funding levels for selected COMPETES 2010 accounts with Senate Committee on Appropriations recommendations and Administration budget requests. (See Table A-1 for details.) Selected COMPETES 2010-related policy provisions from H.Rept. 112-463 , S.Rept. 112-158 , and the March 11, 2013, explanatory statement are also noted herein. The following sections describe the FY2013 funding status for COMPETES-related provisions at the DOC. These include ""top line,"" or full agency funding, for NIST programs and accounts, as well as provisions for various economic development programs. Top line Allocations . FY2013 post-rescission, post-sequestration funding for NIST was $769.4 million. This amount was $18.6 million (2.5%) more than the FY2012 enacted funding level of $750.8 million and was $270.3 million (26.0%) less than the COMPETES 2010 authorized funding level of $1.040 billion. H.R. 5326 , as passed by the House, would have provided a total of $830.6 million to NIST in FY2013. This amount was $4.6 million (0.6%) more than the Senate Committee on Appropriations recommendation of $826.0 million and $26.4 million (3.1%) less than the Administration's request for $857.0 million. STRS (core laboratories) . FY2013 post-rescission, post-sequestration funding for STRS was $579.8 million. This amount was $12.8 million (2.3%) more than the FY2012 enacted funding level of $567.0 million and was $96.9 million (14.3%) less than the COMPETES 2010 authorized funding level of $676.7 million. H.R. 5326 , as passed by the House, would have provided $621.2 million to STRS in FY2013. This amount was $1.8 million (0.3%) less than the Senate Committee on Appropriations recommendation of $623.0 million and $26.8 million (4.1%) less than the Administration's request for $648.0 million. The March 11, 2013, explanatory statement included language allowing NIST to locally transport Summer Undergraduate Research Fellowship (SURF) participants. CRF (construction) . FY2013 post-rescission, post-sequestration funding for CRF was $56.0 million. This amount was $4.6 million (8.3%) more than the FY2012 enacted funding level of $55.4 million and was $61.3 million (50.5%) less than the COMPETES 2010 authorized funding level of $121.3 million. H.R. 5326 (as passed by the House), S. 2323 (as recommended by the Senate Committee on Appropriations), and the March 11, 2013, explanatory statement would have provided $60.0 million to CRF in FY2013. This amount was equal to the Administration's request. MEP . FY2013 post-rescission, post-sequestration funding for the MEP program was $119.4 million. This amount was $9.0 million (7.0%) less than the FY2012 enacted funding level of $128.4 million and $45.7 million (27.7%) less than the authorized funding level of $165.1 billion. H.R. 5326 would have provided $128.4 million to the MEP in FY2013. This amount was about the same as the Senate Committee on Appropriations recommendation of $128.5 million and $400,000 more than the Administration's request for $128.0 million. Regional Innovation Program (RIP) and Innovative Technologies in Manufacturing. COMPETES 2010 authorized two regional economic development programs at the EDA: RIP, which included funding for loan guarantees for science parks, and the Federal Loan Guarantees for Innovative Technologies in Manufacturing program. P.L. 113-6 provided $5.0 million each (pre-rescission, pre-sequestration) for the loan guarantee programs. These amounts were equal to FY2012 enacted funding levels and were, respectively, $15.0 million and $2.0 million less than COMPETES 2010 authorized funding levels of $20.0 million for manufacturing loan guarantees and $7.0 million for science park loan guarantees. The DOC's FY2014 budget request states that the department anticipates initial execution of loan guarantees (from both programs) in FY2015. H.R. 5326 would have authorized unspecified funding for the RIP and would have provided up to $5.0 million for the manufacturing loan guarantee program in FY2013. S. 2323 and S.Rept. 112-158 would have provided $25.0 million for RIP, and up to $7.0 million for loan guarantees for science parks, but did not specify funding for the manufacturing loan guarantee program. Senate provisions were consistent with the President's FY2013 request. Provisions in the House committee report directed EDA to provide details of its efforts to implement the manufacturing loan guarantee program with its FY2014 budget request. Provisions in the Senate committee report directed EDA to continue providing grants and technical assistance to entities supporting clean energy technology commercialization; to consider new competitions in industries not previously targeted; and to consider geographic equity when making award decisions. Top Line Allocations. FY2013 post-rescission, post-sequestration funding for NSF was $6.884 billion. This amount was $220.6 million (3.1%) less than the FY2012 actual funding level of $7.105 billion and $1.416 billion (17.1%) less than the COMPETES 2010 authorized funding level of $8.300 billion. FY2013 funding levels in H.R. 5326 and S. 2323 were identical for five of NSF's six major accounts. A $59.4 million difference in funding for the main research account (Research and Related Activities, or R&RA) led to an equivalent difference between the two top lines, which were $7.333 billion (House) and $7.273 billion (Senate Committee on Appropriations). Other than this difference, the House and the Senate Committee on Appropriations agreed on major funding levels for the NSF in FY2013. At the top line, both the full House and Senate committee-proposed funding levels for NSF were between $40.6 and $100.0 million less than the President's request for $7.373 billion. The Senate report directed NSF to report on its progress implementing and responding to various Office of the Inspector General reports and recommendations. An amendment ( H.Amdt. 1088 ) adopted during House floor debate on H.R. 5326 would have eliminated funding for NSF's Climate Change Education program. A second amendment to H.R. 5326 that was adopted during House floor debate ( H.Amdt. 1094 ) would have eliminated funding for political science research at NSF. Research Funding. FY2013 post-rescission, post-sequestration funding for R&RA was $5.544 billion. This amount was $214.6 million (3.7%) less than the FY2012 actual funding level of $5.758 billion and was $1.094 billion (16.5%) less than the COMPETES 2010 authorized funding level of $6.638 billion. H.R. 5326 would have provided $5.943 billion for R&RA in FY2013. This amount was $59.4 million (1.0%) more than the Senate Committee on Appropriations recommendation of $5.883 million and $40.6 million (0.7%) less than the President's FY2013 request for $5.983 billion. Research provisions in the House committee report directed NSF to give priority to research in the following fields: cybersecurity; advanced manufacturing; materials research; and research in the natural and physical sciences, mathematics, and engineering. Other provisions from the House committee report directed I-Corps participants to commit to the domestic production of goods or services commercialized with NSF assistance, encouraged the foundation to establish neuroscience as a cross-cutting budget theme, required NSF to report on plans to recompete certain major facilities awards, and required NSF to report on interdisciplinary activities at NSF-funded research facilities. Research provisions in the Senate committee report directed NSF to reduce funding for new OneNSF activities and to focus on core programs and infrastructure. Other research provisions in the Senate committee report provided the full request—$244.6 million ($161.9 of which was reserved for infrastructure)—for astronomical sciences; provided funding for the Large Synoptic Survey Telescope; and encouraged NSF to allocate adequate funding for domestic radio astronomy facilities while the Atacama Large Millimeter Array transitions to full operation. The Senate committee report also provided funding for cybersecurity security research ($161.0 million) and the Academic Research Fleet ($927.8 million), and supported full funding for scientific facilities and instrumentation. EPSCoR, which was reauthorized by COMPETES 2010, would have received $158.0 million under the Senate committee proposal. (This amount is slightly less than the FY2013 request for $158.2 million and $7.1 million more than the FY2012 actual funding level of $150.9 million.) Provisions in the March 11, 2013, explanatory statement incorporated NSF's proposed R&RA terminations; adopted by reference House report language relating to advanced manufacturing; adopted by reference Senate report language on cybersecurity research; and adopted by reference House report language regarding I-Corps, with the stipulation that if NSF determines that there are practical considerations that prevent implementation, then the foundation was to report those concerns to the appropriations committees immediately. Other R&RA provisions in the explanatory statement rejected Senate report limitations on OneNSF initiatives, but stated that future growth should not come at the expense of core functions and encouraged NSF to refine the balance between core functions and OneNSF initiatives in its FY2014 and future budget requests. The explanatory statement provided $247.6 million (pre-rescission, pre-sequestration) for astronomical sciences, including $164.9 million for infrastructure, and provided $158.2 million (pre-sequester, pre-rescission) for EPSCoR. STEM Education. FY2013 post-rescission, post-sequestration funding for NSF's main education account, Education and Human Resources (E&HR), was $833.3 million. This amount was $2.8 million (0.3%) more than the FY2012 actual funding level of $830.5 million and was $208.5 million (20.0%) less than the COMPETES 2010 authorized funding level of $1.041 billion. The full House and the Senate Committee on Appropriations agreed on E&HR funding levels in FY2013. Both legislative bodies proposed $875.6 million for E&HR in FY2013. This amount was equal to the President's budget request. STEM education provisions in the House committee report incorporated NSF's proposed program reductions; directed the foundation to continue work on a tracking and evaluation system to assess implementation of the National Research Council (NRC) report on best practices in STEM education; and accepted proposed changes to the Informal Science Education (ISE) program, but encouraged NSF to work with stakeholders as it transitions ISE toward activities intended to increase focus on innovative learning and engagement strategies. The House committee report also encouraged NSF to use existing resources to promote collaboration between research institutions and STEM-focused K-12 schools. The Senate committee report encouraged NSF to continue support for undergraduate science and engineering education; rejected the Administration's proposed cuts to the ISE program; urged NSF to ensure that GRF applications are reviewed on their merit, and not rejected for reasons other than the quality of the proposal; and directed NSF to fund the Research in Disabilities Education and Research on Gender in Science and Engineering programs at FY2012 levels (and to maintain these two programs as separate programs). S.Rept. 112-158 also provided: the full requests for the Advanced Technological Education ($64.0 million) and Noyce ($54.9 million) programs, as well as $45.0 million ($20.0 million more than the request) for the Federal Cyber Service: Scholarships for Service program. Provisions in the March 11, 2013, explanatory statement incorporated most of NSF's proposed reductions, with the exception of the reductions in the ISE (now renamed Advancing Informal Science Learning or AISL). The explanatory statement directed NSF to fund AISL as described in the Senate report; provided $69.0 million for ATE; adopted by reference House report language on tracking implementation of the recommendations contained in the NRC report on best practices in STEM education; and adopted by reference Senate report language on the Federal Cyber Service: Scholarships for Service program. Broadening Participation. NSF had not published, as of the date of this report, post-rescission, post-sequestration FY2013 funding levels for all its various broadening participation programs. Total FY2012 actual funding for programs that NSF identifies as broadening participation programs was $761.1 million. Although FY2013 funding information for all NSF broadening participation programs was not yet available as of the date of this report, the NSF supplied CRS with current plan funding levels for some COMPETES 2010-related broadening participation programs. In particular, FY2013 current plan funding for the Historically Black Colleges and Universities Undergraduate Program (HBCU-UP) was $30.3 million, compared to $31.9 million in FY2012 actual. The Tribal Colleges and Universities Program (TCUP) received $12.3 million, compared to $13.4 million in FY2012 actual. The Louis Stokes Alliances for Minority Participation (Stokes) program received $42.1 million, compared to $45.5 million in FY2012 actual; and the Centers for Research Excellence in Science and Technology (CREST) program received $23.0 million, compared to $24.2 million in FY2012 actual. The House committee report provided the FY2013 request for HBCU-UP ($31.9 million), Stokes ($45.6 million), and T-CUP ($13.3 million). The Senate committee report provided $33.0 million for HBCU-UP, $47.8 million for Stokes, and $13.4 million for TCUP. Additionally, the Senate committee report provided $25.0 million for the Centers for Research Excellence in Science and Technology (CREST) program. The March 11, 2013, explanatory statement incorporated Senate report funding levels for these programs. Provisions in the House committee report also directed NSF to report on how the needs of Hispanic Serving Institutions (HSIs) would be addressed in FY2013 and on any plans to establish an HSI-focused program in FY2014. Provisions in the Senate committee report encouraged NSF to prioritize proposals that have ""demonstrated maturity, including previous partnerships with other federal agencies."" The House passed H.R. 5325 (Energy and Water Development Appropriations Bill, 2013) by a vote of 255-165 on June 6, 2012. Among other things, the act provided FY2013 appropriations for the Department of Energy's Office of Science and the Advanced Research Projects Agency–Energy (ARPA-E). COMPETES 2010 provided authorizations for both the Office of Science and ARPA-E. The Senate Committee on Appropriations reported an FY2013 Energy and Water Development appropriations bill on April 26, 2012 ( S.Rept. 112-164 , S. 2465 ). The full Senate did not consider that measure. As previously noted, P.L. 112-175 provided continuing appropriations to Energy-Water agencies through March 26, 2013. P.L. 113-6 provided continuing appropriations to Energy-Water agencies from March 27, 2013, through the end of the fiscal year. This section compares FY2013 post-rescission, post-sequestration Energy-Water funding levels (where available) for selected COMPETES 2010 accounts with enacted, current, or actual FY2012 funding levels (as noted), and FY2013 COMPETES 2010 authorized funding levels. This section also compares House-passed FY2013 funding levels for selected COMPETES 2010 accounts with Senate Committee on Appropriations FY2013 recommendations and FY2013 Administration budget requests. (See Table A-1 for details.) Selected COMPETES 2010-related policy provisions in H.Rept. 112-463 and S.Rept. 112-158 are also noted herein. Office of Science . FY2013 post-rescission, post-sequestration funding for the Office of Science was $4.621 billion. This amount was $313.9 million (6.4%) less than FY2012 current funding level of $4.935 billion and $1.380 billion (23.0%) less than the COMPETES 2010 authorized funding level of $6.001 billion. H.R. 5325 would have provided $4.801 billion for the Office of Science in FY2013. This amount was $107.6 million (2.2%) less than the Senate Committee on Appropriations' recommendation of $4.909 billion and $190.6 million (3.8%) less than the President's FY2013 request for $4.992 billion. Office of Science provisions in the House committee report included the expectation that the office would continue to support minority serving institutions. Office of Science provisions in the Senate committee report expressed continued support for research priorities in new materials, biofuels, and computing. However, the Senate committee report also expressed concerns about how the office manages lower priority research activities. In particular, the Senate committee report noted that the office has not provided sufficient strategic guidance on how lower priority research areas may or should adjust their scope of work in response to decreasing budgets. Both House and Senate committee reports also contained specific provisions for Office of Science research programs. STEM Education. Although not the only source of funding for STEM education at the Department of Energy, the Office of Science's Workforce Development for Teachers and Scientists (WDTS) account provides funding for internships, fellowships, and the National Science Bowl (among other activities). FY2013 post-rescission, post-sequestration funding for WDTS was $17.5 million. This amount was $1.0 million (5.5%) less than the FY2012 current funding level of $18.5 million. The House committee report would have provided $14.5 million for the WDTS account in FY2013. This amount was the same as both the Senate committee recommendation and the FY2013 request. H.Rept. 112-462 provided no funds for the Office of Science Graduate Fellowship (SCGF). This was consistent with the Office of Science FY2013 budget request. The Senate committee report commended the Office of Science for its efforts to evaluate its science workforce development programs. The House committee report included educational activities on its list of ""major committee concerns"" about DOE (in general, not just in the Office of Science account). Other major committee concerns with a potential COMPETES Act nexus included competitiveness and intellectual property. (See section titled ""Other DOE-wide Issues and Competitiveness."") H.Rept. 112-462 prohibited DOE from funding fellowship and scholarship programs in FY2013 unless (1) those programs were specifically requested in FY2013 DOE budget justification and (2) the program was not otherwise excluded from receiving funding. The House committee report also directed DOE to provide the committee with a comprehensive listing of all FY2012 funded educational activities. ARPA-E. FY2013 post-rescission, post-sequestration funding for ARPA-E was $250.6 million. This amount was $24.4 million (8.9%) less than FY2012 current funding level of $275.0 million and was $61.4 million (19.7%) less than the COMPETES 2010 authorized funding level of $312.0 million. H.R. 5325 would have provided $200.0 million for ARPA-E in FY2013. This amount was $112.0 million (35.9%) less than the Senate Committee on Appropriations' recommendation of $312.0 million and $150.0 million (42.9%) less than the President's FY2013 request for $350.0 million. COMPETES 2010 authorized $312.0 million for ARPA-E in FY2013. ARPA-E provisions in the House committee report expressed support for the program's increased focus on transportation technologies. An amendment added during House floor debate would have prohibited ARPA-E awardees from using federal funds to raise private capital or advertise. ARPA-E provisions in S.Rept. 112-164 encouraged DOE ""to continue tracking projects to demonstrate how federal investments have developed more energy efficient technologies and potentially new industries."" Other DOE-wide Issues and Competitiveness. H.Rept. 112-462 expressed a number of general concerns about the DOE, including concerns that the agency has failed to produce committee-requested reports on certain Office of Science activities (e.g., Energy Innovation Hubs, exascale computing, future year funding levels for Office of Science accounts) in a timely manner. The House committee report also encouraged DOE to consider aspects of the ARPA-E project and program management model for application elsewhere in the department and raised general competitiveness concerns about the possibility that foreign manufacturers may be capitalizing on ideas developed in DOE labs. In response to competitiveness concerns, H.Rept. 112-462 directed DOE to report on existing authorities to control intellectual property and help retain domestic manufacturing and to make recommendations for improving domestic intellectual property transfer and retention. S.Rept. 112-164 also expressed a number of general concerns about DOE. For example, the Senate committee report raised concerns about contractor support at the Office of Science (and elsewhere in the department), noting that the cost of contractor support functions at the office increased by 10% between FY2007 and FY2009. The Senate committee report also directed DOE to maintain existing small business contracting practices at the national laboratories—which the committee report stated the department had considered changing—and directed DOE to consult with Congress, including the Committee on Small Business and Entrepreneurship, before making any changes. Neither chamber considered a regular Labor-HHS-Education appropriations measure in FY2013. However, the Senate Committee on Appropriations reported S. 3295 (Departments of Labor, Health and Human Services, and Education, and Related Agencies Appropriations Act, 2013) on June 14, 2012. (See S.Rept. 112-176 .) The Senate committee report did not specify funding amounts for COMPETES acts-related Department of Education (ED) programs. As previously noted, P.L. 112-175 provided continuing appropriations to Labor-HHS-Education agencies through March 26, 2013. P.L. 113-6 provided continuing appropriations to Labor-HHS-Education agencies from March 27, 2013, through the end of the fiscal year. Neither act made specific provisions for COMPETES 2010 authorizations at ED. Under COMPETES 2010, targeted account funding was set to increase at a compound annual growth rate of 6.3%, close to the 6.4% growth rate in actual appropriations for the targeted accounts during the COMPETES 2007 authorization period (FY2008 to FY2010). At the 6.3% COMPETES 2010 authorized rate, it would have taken approximately 11 years to double funding for the targeted accounts. However, growth in actual appropriations to the targeted accounts during the COMPETES 2010 authorization period—FY2011 to FY2013—slowed in comparison to growth in actual appropriations during the COMPETES 2007 authorization period. As a result, FY2013 post-rescission, post-sequestration appropriations for the targeted accounts represent a growth rate of about 3.0% since the FY2006 baseline. Further, FY2013 funding levels for the targeted accounts—separately and combined—were generally below FY2010 levels. Only the NIST core laboratory account was higher in FY2013 than in FY2010. The COMPETES acts were designed to improve the competitive position of the United States by fostering scientific and technological innovation. The primary policy devices that the acts employed—to this end—were increases in authorized funding for physical sciences and engineering research (e.g., the doubling path policy) and STEM education program authorizations. The specific debate about FY2013 funding for COMPETES 2010 provisions occurred within the broader conversation about these policy choices. This section briefly summarizes this policy context. Few analysts dispute the contention that the path to global competitiveness in the 21 st century runs through the twin pillars of scientific and technological advancement. The policy question, then, is what should the federal government do (if anything) to encourage scientific and technological innovation and (thereby) national competitiveness? A broad coalition of business, academic, and government leaders has concluded that at least part of the answer to this question is that the federal government should encourage innovation by increasing support for physical sciences and engineering research and by increasing the number of U.S. students graduating with STEM degrees and skills. Supporters of this general consensus assert that a combination of external pressures and internal weaknesses threatens the United States' innovation advantage. For example, supporters note that changes in the industrial bases and educational attainment rates of rapidly developing countries like China and India mean that these countries are able to compete for a growing percentage of the world's high-value jobs and industry. Further, these advocates assert that signs of potential weakness in areas that have long been U.S. strengths—such as the U.S. STEM workforce and leading-edge research—appear to accompany these global changes. In particular, COMPETES acts proponents raise concerns about funding for research in the physical sciences and engineering and the U.S. supply of scientists, engineers, and technicians. Although support for the innovation policy approach embodied in the COMPETES acts is widespread, it is not uniform. Opposition has tended to fall into three broad categories: (1) questions about fundamental assumptions, (2) preferences for alternative policies or approaches, and (3) cost. For example, some analysts dispute fundamental assumptions behind policies designed to increase the supply of STEM workers, arguing that there is no evidence of broad shortages of STEM workers and that the bigger challenge is on the demand side. Another fundamental assumption that some analysts have called into question is whether increased investment in publically funded research will increase U.S. competiveness given that such research is typically publically available. Other analysts prefer other policy tools—such as regulatory changes and tax policy—arguing that direct federal investment in research in the physical sciences and engineering and in STEM education can distort markets. Opponents have also raised concerns about cost, arguing that authorized funding increases are too expensive in light of the federal fiscal condition, deficit, and debt. FY2013 was the third and final year for most of COMPETES 2010's major funding authorizations. Although the full House, Senate Committee on Appropriations, and the President all initially sought increases over FY2012 levels for many (not all) key COMPETES 2010 accounts in FY2013; the combined effects of sequestration, as well as rescissions and funding levels in the final FY2013 appropriations act ( P.L. 113-6 ) decreased funding levels for many (not all) of these accounts below FY2010 actual levels. Further, although there has always been a gap between COMPETES act authorizations (total, defined) and appropriations (total, defined), that gap widened in FY2013 and was larger than in all previous authorized years. It remains to be seen whether and how the FY2013 funding status of COMPETES accounts will factor in future congressional conversations about reauthorization of COMPETES 2010 and future appropriations for these accounts.","Signed on January 4, 2011, the America COMPETES Reauthorization Act of 2010 (COMPETES 2010, P.L. 111-358) sought to improve U.S. competitiveness and innovation by authorizing, among other things, increased federal support for research in the physical sciences and engineering, as well as science, technology, engineering, and mathematics (STEM) education. Certain provisions of the law, including major funding authorizations, expired in FY2013. This report describes the President's FY2013 budget request for selected COMPETES 2010 provisions and tracks the status of FY2013 funding for these appropriations accounts. The President's FY2013 budget requested an increase of 4.1% for the ""doubling path"" accounts at the National Science Foundation (NSF), Department of Energy's Office of Science, and National Institute of Standards and Technology's (NIST's) core laboratory and construction. This growth rate was less than the COMPETES 2010 authorized rate of 6.3% and equal to the FY2012 enacted appropriations rate. At the end of the COMPETES 2010 authorization period in FY2013, the growth rate in the targeted accounts was 3.0% (from the FY2006 baseline). Funding levels for the targeted accounts—individually and combined—were generally below FY2010 levels. The sole exception was the NIST core laboratory account, which was higher in FY2013 than in FY2010. For FY2013, Congress provided both regular and continuing appropriations to COMPETES 2010 agencies. NSF and NIST received regular appropriations, while the Office of Science and Department of Education received continuing funding. The combined effects of sequestration and rescissions in P.L. 113-6 (FY2013 Consolidated and Further Continuing Appropriations Act) resulted in year-over-year reductions for the Office of Science, the Advanced Research Projects Agency-Energy (ARPA-E), and most NSF accounts. FY2013 funding for most NIST accounts increased slightly over FY2012 enacted levels. All of the selected COMPETES 2010 accounts were funded below authorized levels. Table A-1 contains information about the FY2013 funding status of selected provisions from COMPETES 2010. Both the House and the Senate Committee on Appropriations approved FY2013 appropriations bills for the NSF, NIST, and Office of Science before Congress enacted P.L. 113-6. As initially proposed, differences between House and Senate top line funding levels for NSF and NIST were less than 1%, while the difference in funding for the Office of Science was 2.2%. Proposed FY2013 funding for ARPA-E revealed larger differences between the chambers. The House would have provided $200 million while the Senate Committee on Appropriations sought the authorized amount ($312.0 million). FY2013 funding for COMPETES 2010's STEM education provisions were largely consistent with previous appropriations cycles, which have not typically included specific funding levels for these activities. A notable exception to this rule is the main education account at NSF. As initially requested, passed, and recommended, the President's, House, and Senate Committee on Appropriations each provided $875.6 million for this account in FY2013. Post-rescission, post-sequestration FY2013 funding for this account was $833.3 million.",govreport
"The Lacey Act was enacted in 1900 to address game poaching and wildlife laundering, among other things. The Lacey Act regulates the trade of wildlife and plants and creates penalties for a broad spectrum of violations. Violations addressed by the Lacey Act involve domestic and international illegal trade of plants and wildlife. Before the enactment of amendments in 2008, the Lacey Act addressed these issues by making it unlawful for any person to: ""import, export, transport, sell, receive, acquire, or purchase any fish or wildlife or plant taken, possessed, transported, or sold in violation of any law, treaty, or regulation of the United States or in violation of any Indian tribal law""; or to ""import, export, transport, sell, receive, acquire, or purchase in interstate or foreign commerce any fish or wildlife taken, possessed, transported, or sold in violation of any law or regulation of any state, or in violation of any foreign law;"" and any plant taken, possessed, transported, or sold in violation of any state law or regulation. In 2008, the Lacey Act was amended to include nonindigenous plants and violations of foreign laws pertaining to certain conservation actions and other activities involving plants and plant products. Based in part on these amendments, the Lacey Act now makes it unlawful for any person to import, export, transport, sell, receive, acquire, or purchase in interstate or foreign commerce any plant taken, possessed, transported, or sold in violation of any law or regulation of any state, or any foreign law, that protects plants or that regulates taking or exporting plants and plant products in certain situations. This includes plants taken, possessed, transported, or sold without the payment of appropriate royalties, taxes, or stumpage fees; and plants exported in violation of state or foreign law. Further, in reference to plants, it is unlawful to import, export, transport, sell, receive, acquire, or purchase any plant or plant product taken, possessed, transported, or sold in violation of any law, treaty, or regulation of the United States or in violation of any Indian tribal law. In addition, the Lacey Act makes it unlawful to falsify or submit falsified documents related to any plant or plant product covered by the act, and to import certain plants and plant products without an import declaration. The provisions related to fish, wildlife, and plants in reference to laws, treaties, and regulations of the United States and any Indian tribal law were unchanged (although the definition of plants was expanded to include nonindigenous plants). The 2008 amendments to the Lacey Act (2008 amendments) also expand the definition of a plant to include any plants (including foreign plants), whereas before it referred only to plants indigenous to any state or associated commonwealths, territories, or possessions of the United States. A plant is specifically defined as ""any wild member of the plant kingdom, including roots, seeds, parts, or products thereof, and including trees from either natural or planted forest stands."" There are certain exclusions to this definition of plants, including common cultivars (except trees), common food crops, scientific specimens of plant genetic material to be used for laboratory or field research, and any plant that is to remain planted or be planted or replanted. The 2008 amendments also require importers of all covered plants and plant products to submit an import declaration to U.S. Customs and Border Protection (CBP) at the time of importation. The law requires that the declaration contain certain information, such as identification of the species and genus of plants or plants used in a product, and country of origin of plants, among other things. The declaration appears to apply to all plants and plant products, including those plants harvested or plant products made before the enactment of 2008 amendments. The primary aims of the 2008 amendments were to reduce illegal logging and to increase the value of U.S. wood exports. International illegal logging is a pervasive problem affecting several countries that produce, export, and import wood and wood products. Estimates of the extent of illegal logging vary and may not be completely accurate due to the clandestine nature of the activity. Some have estimated that 15% to 30% of the volume of all forestry is attributable to illegal logging. In tropical countries, some estimate that between 50% and 90% of all logging is illegal. Illegal logging is a concern to many because of its economic implications as well as its environmental, social, and political impacts. The economic value of global illegal logging is estimated to be between $50 billion and $100 billion of the global wood trade. An analysis by the World Bank estimates that illegal logging costs governments approximately $5 billion annually in lost royalties and an additional $10 billion in lost revenue. Some are concerned that high U.S. demand for tropical timber from countries in Latin America and Southeast Asia may exacerbate illegal logging. The United States is the world's largest wood products consumer and one of the top importers of tropical hardwoods. For example, the United States is the largest importer of Peruvian mahogany, which some estimate to be 80% illegally logged. Global illegal logging activities can devalue U.S. exports of timber. Illegally logged wood generally costs less to bring to market than legally logged wood due to nonpayment of fees or taxes, and avoidance of costs related to laws that govern harvesting. This lowers the market price of wood, potentially harming timber operations that operate legally. According to a 2004 report issued by the American Forest and Paper Association, it is estimated that illegal logging of roundwood for wood products depresses world wood prices on average by 7%-16% annually. This affects U.S. producers of wood and their exports. If there were no illegally logged wood in the global market, it has been projected that the value of U.S. exports of roundwood, sawnwood, and panels could increase by an average of approximately $460 million each year. Further, if increases in value for domestic wood production if illegal logging is halted are taken into account, then the increase in value of wood products in the United States each year could be approximately $1.0 billion, according to the study. Other countries and entities have adopted measures similar to the Lacey Act. The European Union (EU), for example, has a regulation that prohibits the placement of illegally harvested timber and timber products on the EU market and requires entities to establish due diligence schemes. Australia passed a similar law that prohibits the import of wood or wood products that were illegally logged or contain illegally logged timber. The requirements established in the Lacey Act are administered by the Departments of the Interior, Commerce, and Agriculture through their respective agencies. These include the U.S. Fish and Wildlife Service (FWS), National Marine Fisheries Service (NMFS), and Animal and Plant Health Inspection Service (APHIS). This report summarizes the implementation of the 2008 amendments to the Lacey Act and discusses policy issues related to the amendments. A raid on Gibson Guitar Corporation (see box below) brought to light several existing policy and legal issues related to the 2008 amendments to the Lacey Act. In broad terms, some question why U.S. importers should be held responsible for violations of foreign law potentially committed by foreign entities (i.e., not U.S. importers). They claim that it is difficult to monitor the harvesting and processing of plants and plant products in foreign countries to make sure that no foreign laws are being violated. Other concerns address specific provisions of the 2008 amendments such as the declaration requirements for plants and plant products imported into the United States. Several businesses have suggested that the declaration requirements for importing plants and plant products are cumbersome and in some cases, not possible to meet. For example, some claim that identifying species for the declaration can be difficult for composite wood materials or some finished products where the wood has been modified from its natural state. Compliance with other requirements in the act is another issue. Some contend that plants and plant products imported before 2008 should be exempt from the law. They note that getting declaration information about these products, sometimes years after importation, can be difficult. To temper these criticisms of the 2008 amendments of the Lacey Act, some are reiterating the intended positive effects of the amendments, such as the potential economic benefits of reducing illegal logging and the potential environmental benefits of reducing deforestation and corruption associated with the illegal timber trade. Congressional interest in this issue stems in part from the wide-reaching applicability of the Lacey Act for U.S. industries and consumers and the environmental and economic benefits of reducing illegal logging. The 2008 amendments to the Lacey Act affect all industries that import plant and plant products, including musical instrument makers, furniture manufacturers, flooring companies, toy manufacturers, the auto industry, and some textile manufacturers that use fabrics that contain plant fibers. The 2008 amendments are expected to reduce illegal logging, which will reduce corrupt practices and increase biodiversity and conservation in timber-supplying countries, and increase revenues for foreign and domestic companies that sell and process wood. The 113 th Congress has addressed the 2008 amendments with proposed legislation. H.R. 3324 would amend the Lacey Act so that importers would need to possess and make available certain information about the plant or plant products being imported. Currently, importers are required to file this information. Further, the bill would amend the rulemaking authority of the Secretary to give more flexibility for specifying the applicability of declaration requirements. H.R. 3280 would amend the Lacey Act to exempt plants and plant products imported before May 22, 2008, from the Lacey Act. This section reviews the implementation of declaration requirements, enforcement, and funding under the 2008 amendments. Policy issues associated with implementation are discussed below in "" Issues and Legislative Options ."" Under the Lacey Act, all plants or plant products being imported into the country must be declared, with some exceptions that include common cultivars, packaging material, and scientific specimens, among other things. The declaration is to be made by the importer at the time of import. According to APHIS, the declaration requirements in the 2008 amendments are expected to facilitate accountability and improve data collection on plant imports. Similar declaration requirements are used for the import of wildlife to the United States. The declaration for plants and plant products is to provide: the scientific name of any plant (genus and species) contained in the importation; the value of the plant or plant product; the quantity of the plants or plant products (including the unit of measure); and the country of origin of where the plant was taken. In cases where multiple species are found in a product, there are some variations to the declaration. If a product contains material from several different plants, of which the names of the species are uncertain, the law states that the declaration should contain the names of all plant species that could have been used to create the product. Furthermore, if the exact country of origin is not known, the declaration must contain the names of all of the countries from where the plant species could have come. Information from submitted declarations is entered into a database, maintained by APHIS. It is unclear if this information will be openly available to the public. The declaration does not require information on the chain of custody of the product or its parts. For example, if a chair was fabricated in China with wood that was harvested and shipped from Indonesia, via Singapore, a full record of transactions throughout its fabrication process would not be necessary. The declaration will require the species of plant(s) used in the making of the chair (i.e., product imported), and the origin of each plant species used (e.g., Indonesia), and the value and quantity of the plant used. In some cases, the country of harvest for the declared plant material will be different from the country of export. APHIS has also developed a series of special use designations (SUDs) to ease some burdens of declarations. A SUD is an entered code that would substitute for certain required information. SUDs apply to specific products under designation regulations and are organized into three categories: The use of shorthand names for common trade groupings of species. (APHIS has a list of acceptable names.) The use of a special code to identify composite woods or recycled and reclaimed products if species and genus cannot be determined through a process of due care. Items manufactured prior to May 22, 2008, whose sources or species cannot be identified through a process of due care could be given a SUD. The declaration requirements were to be implemented by December 2008; however, APHIS delayed implementation due to concerns about the complexity of the requirements. Consequently, the declaration requirements on certain items were implemented on a delayed schedule between April 2009 and April 2010. The implementation of the declaration requirements is related to the Harmonized Tariff Schedule (HTS) of the United States, which classifies plants and plant products under certain codes in trade for duty, quota, and statistical purposes. Implementation is based on HTS codes and follows a schedule. Some more complex plant products (e.g., those containing specialty wood) were declared by April 2010 (e.g., musical instruments). Only items classified in the current implementation schedule are subject to enforcement for compliance with the declaration schedule, according to APHIS. Several other products containing wood parts, such as some firearms, furniture, and some toys, are being considered for phased-in implementation. APHIS has stated that it is not enforcing the declaration requirement for informal entries such as personal shipments. It is uncertain when or if these types of products will have to be declared. Any additions to the items requiring a declaration are expected to be reported in the Federal Register , according to APHIS. The 2008 amendments required a review of the declaration requirements and the effects of certain exclusions to the declaration requirements not more than two years after the enactment of the amendments (by May 22, 2010). APHIS published a notice in 2011 stating that it is initiating this review and seeking comments on the implementation of the declaration requirements. Further, 180 days after the review is complete, a report reviewing the implementation of declaration requirements is to be submitted to appropriate congressional committees. The report is to contain: an evaluation of the effectiveness of the declaration requirements in assisting enforcement of the requirements and efforts to integrate the requirements with other import regulations; recommendations for legislation that would assist in the identification of plants that are imported into the United States illegally; and an analysis of the effect of prohibitions and declaration requirements on the cost of legal plant imports and the effect on illegal logging practices and trafficking. A report was completed in May 2013 and sent to Congress. The report discusses some statistics of declaration requirements. For example, APHIS is receiving approximately 40,000 declarations per month (5,000 per month on paper, the rest electronically), and, of the declarations sent, approximately 32% are missing some aspect of the declaration. The report also mentions some of the issues associated with declarations. These range from importers not being able to identify species and genus of plants in products to mislabeling the country of harvest of the species. Further, the report discusses difficulties in processing the magnitude of paper declarations and the unsuccessful pilot program to create and implement blanket declarations. The report did not suggest recommendations for creating legislation to ease declaration requirements, but did emphasize the use of SUDs to ease the burden of declaring goods for importers. Regulations to reflect the study's findings may be promulgated 180 days after the review discussed above. The 2008 amendments authorize the regulations to include limits on the applicability of the declaration requirements to specific plant products; modifications to the requirements based on the review; and limits to the scope of the exclusions to the declaration requirement if they are warranted according to the review. No recommendations for changing the regulations of the 2008 amendments have been promulgated, although SUDs are in place to address some issues. The Lacey Act states that the provisions and subsequent regulations under the act are to be enforced by the Secretaries of the Interior and Commerce, and in the case of plants, also the Secretary of Agriculture. Agencies—for example, CBP, the U.S. Coast Guard (e.g., for fisheries violations), the National Marine Fisheries Service, the Federal Bureau of Investigation, the U.S. Forest Service, the Office of the Inspector General, and U.S. Immigration and Customs Enforcement—also can enforce the Lacey Act through inspection or monitoring activities. The Lacey Act can be enforced at the border or through investigations. Agents at ports of entry inspect imports and monitor the declaration process. Inspectors can initiate and conduct investigations into violations of the Lacey Act. The FWS Office of Law Enforcement reported 2,474 investigations related to the Lacey Act in 2012. Enforcement of the Lacey Act sometimes depends on an understanding of what foreign laws might have been violated. There is no federal database of foreign wildlife and plant laws, thus making enforcement of the law challenging. However, to facilitate investigations, officials might use information gained from foreign governments, nongovernmental organizations, private citizens, anonymous tips, declarations, industry, and border agents, among others, during the investigation. Officials are also authorized to provide rewards to informants that lead to the arrest, conviction, or assessment of fines to a violator. A Lacey Act violation requires two actions to be taken. If a person violates a U.S. or tribal law by taking, possessing, transporting, or selling any fish, wildlife, or plant (or plant product), the Lacey Act is violated if that fish, wildlife, or plant is then imported, exported, transported, sold, received, acquired, or purchased. It is slightly different for violations of state or foreign laws, which require that the import, export, transport, sale, receipt, acquisition, or purchase of the fish, wildlife, or plant be in interstate or foreign commerce before there can be a violation. A Lacey Act violation can result in civil penalties that could involve fines and forfeiture of wildlife, plants, and products, and criminal penalties that could involve fines, forfeiture, and incarceration. The Lacey Act does not authorize funding to implement the act or enforce provisions within the act. However, funding for implementing the act could come from discretionary appropriations. The Secretary is directed to identify funds used to enforce the Lacey Act and any regulations as a special appropriations item in the Department of the Interior appropriations budget proposal to Congress. Funds for implementing the act could come from other accounts in federal agencies. For example, funds for FWS investigators to enforce laws that address fish, wildlife, and plant resources are provided under the Office of Law Enforcement line item for FWS. This program received $62.3 million for FY2013. This office also funds law enforcement officials to monitor and investigate the wildlife trade. The office has 219 agents and 143 inspectors on staff for FY2012. In FY2012, investigators conducted 12,996 investigations, of which 2,474 involved the Lacey Act. FWS also has an international wildlife trade program that implements domestic laws and international treaties that address the wildlife trade. APHIS also funds the implementation of the Lacey Act. Money taken from penalties and fines under the Lacey Act can be deposited into the Lacey Act Reward Fund. Money in this fund can be used to provide rewards to people who provide information that leads to an arrest, criminal conviction, and other things. Money can also be used to reimburse costs to those providing temporary care to fish, wildlife, or plants while a case is ongoing. Several policy issues are associated with the 2008 amendments, ranging from questions about the overall purpose and function of the Lacey Act to issues about specific provisions in the act such as the declaration requirements. Several environmental, trade, and industry groups have formed coalitions to identify issues and suggest solutions. Some coalitions who primarily have issues with the declaration requirements have proposed solutions that they contend could be addressed by regulations. Others contend that the regulatory process has not worked and congressional action is needed. This section discusses selected policy issues associated with the 2008 amendments and summarizes proposed and potential legislative and regulatory options. Under the Lacey Act, the importer is responsible for making sure that imported plants and plant products are legally harvested, processed, and imported. This could involve monitoring the production of plant products and verifying that plants and plant products are being harvested, processed, and imported legally under foreign laws. This requirement has been interpreted by some as requiring the United States to enforce foreign laws, which some contend should be the responsibility of the country who established the laws. Others contend that the United States contributes to illegal trade by being one of the largest consumers of plant and plant product imports, and therefore is in a special position to apply demand-side pressure to ensure legally sourced plants and plant products for export. Some might argue that there is limited potential to lower the level of illegal trade of plants and wildlife, since the illegal trade could shift away from responsible importers (i.e., U.S. importers following the Lacey Act) to those in countries with fewer restrictions. In the case of illegal logging, however, this argument is waning since other countries or blocks of countries are adopting regulations similar to the Lacey Act. For example, the European Union (EU) has adopted a regulation that prohibits the entry of illegally harvested timber into the European market. The responsibility for regulating timber falls on those who put plants and plant products in the market (e.g., importers and producers). Illegally harvested is defined under the regulation as ""harvested in contravention of the applicable legislation in the country of harvest."" The regulation applies to both timber imported into the EU and timber produced within the EU. The regulation requires that those placing timber or timber products into the market practice due diligence. Further, the regulation will require that those who buy and sell timber or timber products on the market be able to identify their suppliers and customers so that the timber and timber products can be traced. Australia has also passed a law similar to the Lacey Act and the EU regulation. This law prohibits the import of timber products that contain illegally logged timber; requires importers to undertake due diligence to mitigate the risk of products containing illegally logged timber; and establishes a monitoring, enforcement, and investigation regime. If a large portion of the world market for timber adopts regulations similar to the 2008 amendments, such as the EU regulations, the market for illegally harvested or processed plants and plant products would be expected to decrease because the consumer base addressing illegal logging would presumably increase. There is no proposed legislation in the 113 th Congress that attempts to remove foreign laws from the coverage of the Lacey Act. Some contend that the 2008 amendments of the Lacey Act overreach the original intent of their proponents by addressing laws that are not related to conservation. For example, the act makes it unlawful to possess any plant that was processed illegally according to a foreign law. As discussed in the Gibson guitar case, exporting unfinished wood conforming to HS 4407 from India is a violation of Indian law governing exports and hence a potential violation of the Lacey Act. Some could contend that illegally processing wood might not have a direct effect on conservation. Indeed, under the 2008 amendments, harvesting and exporting wood where applicable conservation laws and payment of fees and taxes are followed could still violate a country's export law (e.g., due to restrictions on unfinished wood exports) and therefore would be prohibited under the Lacey Act if the plant or plant products are imported into the United States. Counter to the argument that the Lacey Act overreaches its intent, others defend the legitimacy of the Lacey Act as a conservation tool. They contend that all areas covered by the Lacey Act, including export laws, have some connection to conservation. Enforcing payments of stumpage fees and taxes, for example, takes away the financial benefits of illegal logging and could provide revenue for conservation activities (e.g., more law enforcement officers). They also contend that enforcing export laws lowers the influx of illegal plants and plant products onto the market. For example, legally required processing or finishing of wood could provide another layer of oversight on the trade of plants and plant products, and could also increase the transparency of the supply chain of the plants and plant products, making enforcement of foreign laws easier. Removing violations of foreign laws from the Lacey Act would address this issue, yet would narrow the scope of the act significantly. Another alternative, as discussed above, would be to limit the applicability of foreign laws to those laws that directly address the protection, conservation, and management of plants. This would also narrow the scope of the law, but would keep it focused on addressing conservation. However, some might contend that violations not related to conservation might lead to charges that ultimately might address conservation. The enactment and implementation of the 2008 amendments has led some to contend that the law increases costs for certain companies and could result in the loss of jobs. Others, in contrast, contend that the law increases revenue for certain companies and thus could lead to job creation. There has been no comprehensive analysis of the costs and benefits of the 2008 amendments for various types of plant and plant product industries. This section discusses the potential areas of costs and benefits of the 2008 amendments. The primary costs to comply with the 2008 amendments are attributable to exercising due care to ensure that imported plants and plant products are harvested and processed legally, and to comply with the declaration requirements. According to H.Rept. 112-604 , APHIS has stated that it is receiving approximately 40,000 declarations per month, at a cost of $56 million annually for regulated entities. This figure could be higher when the Lacey Act is fully implemented. The costs of compliance for regulated entities depend on the amount of due care conducted by the importer and the cost of declaration requirements. Larger companies might have more resources to exercise due care than smaller companies. Further, those importing large quantities of wood or products from single sources might have lower costs applying due care than those purchasing small quantities of specialized wood or products from several sources. In addition to costs of due care, other costs might come from complying with declaration requirements. Identifying the species and genus of wood products and filling out paperwork for declarations could require additional staff for companies importing wood and wood products. Indirect costs may result from changing trade partners that might not be able to verify the legality of their wood products. This might involve searching for new markets and establishing business with new companies. Last, there are costs associated with violations created by the 2008 amendments. Violations could result in penalties up to $500,000 for criminal violations and forfeitures of goods, which can be costly depending on the quantity and species of plants or plant products confiscated. One of the primary benefits of the 2008 amendments is based on the premise that reducing illegal logging would increase revenues for legal logging operations in the United States and other countries. As discussed before, illegally logged wood is cheaper to bring to market and likely depresses wood prices for both domestic and international markets. Based on this premise, if illegally logged wood were removed from the market, prices for legally harvested wood would probably increase. According to one study, this increase could be 7%-16% annually. Less illegally harvested wood in the market could lead to an increase in the demand for legally harvested wood, causing an upward pressure on prices. To illustrate the benefits of the 2008 amendments, several cite a trade report that estimated that illegal logging contributed approximately $1 billion annually in economic losses to the U.S. forest products industry in the form of lower exports and depressed wood prices. Some contend that the revenue gained from lowering the influx of illegally harvested wood into the market could lead to more domestic jobs. Another economic benefit of reducing illegal logging would be increasing revenues for governments in countries where wood is harvested. Studies have shown that illegal logging leads to corruption and evasion of paying fees and taxes for harvested and processed wood. The World Bank estimated that governments lose approximately $15 billion annually due to illegal logging, due primarily to lost revenue from taxes and fees. It is difficult to assess whether the 2008 amendments to the Lacey Act have been effective in reducing illegal logging around the world. There have been no comprehensive studies assessing the effect of the amendments on the logging industry. Some suggest anecdotally that foreign logging operations in China and Vietnam are paying closer attention to complying with local laws because of consumer-driven pressure. Others, however, might contend that restrictions on selling illegally harvested wood to U.S. companies might drive sales of illegally harvested wood higher to companies from countries that do not have restrictions on purchasing illegally harvested wood (i.e., leakage), potentially reducing the effect of the Lacey Act on illegal logging. The declaration requirements for plants and plant products under the 2008 amendments are controversial. Some contend that the declaration requirements are a burden and difficult to comply with under certain circumstances. For example, a case study of IKEA's procurement strategy noted that it would take 25 person-years annually to complete the declaration forms for IKEA's supply chain. Further, it notes that a single shipment might generate a 1,000-page document for a declaration because of all the products being shipped. Others are concerned with specific parts of the declaration requirements and have suggested modifications. Proponents of the declaration requirements, in general, contend that they are necessary to ensure compliance with the provisions of the Lacey Act and serve as an oversight mechanism for compliance. Some contend that wood in certain plant products is difficult to identify by genus and species. For example, for composite products and materials (i.e., products that contain more than one species of wood such as particleboard), it is difficult to identify the genus and species of all the component fibers because numerous species of wood can be used to make the products. Some have suggested that these types of wood products be excluded from the declaration requirements until it is feasible to identify various fibers by species. The law attempts to address complications with identifying several species of wood in products. For example, if the species of wood used in products is uncertain, one may declare all species of wood that the product could contain. Therefore, if a composite wood product is created from by-products from several species, listing the species that may have been used to create the product would satisfy the declaration requirement. However, APHIS has acknowledged that this might not be enough to facilitate the declaration of composite wood, and has asked for information on this issue to consider regulatory options. In the request for comments for potential changes in regulations, APHIS proposes a definition for composite wood and identifies two possible approaches for declaring composite wood through regulations. APHIS would define composite wood as consisting of plant material that has been chemically or mechanically broken down and reconstituted. The approaches to declaring composite wood would involve applying a type of de minimis standard to the wood. One approach is to identify the genus, species, and country of harvest for no less than a given percentage of the wood contained in the product. The percentage could be measured in terms of weight or volume. The second approach would be to declare the ""average percent composite plant content"" of the product, without regard for the species and country of harvest for the plant. Non-composite plant material would still need the genus, species, and country of harvest in the declaration. A de minimis standard has also been proposed for certain types of products that contain plant materials which are highly processed and are in small quantities. Some argue that identifying these plant materials is difficult due to the level of processing they have undergone and their small quantity in the product. Under this proposal, plant materials in certain products would be excluded from the declaration requirements. Product examples include cosmetics, personal care products, textiles, and rubber or cork products. Proponents of this proposal contend that federal agencies have rulemaking authority to make these exclusions, but that congressional action might be needed to clarify the agency's authority to establish exclusions to the declaration requirements. APHIS has addressed this issue, in part, with the use of SUDs. SUDs provide a special code to identify composite woods or recycled and reclaimed products if species and genus cannot be determined through a process of due care. Specific guidelines on using SUDs are provided. Some counter the need for modifications to the declaration requirements because they contend that knowing the type and source of wood is important for ensuring legal practices and countering the illegal trade. They specifically oppose suggestions to broaden the exemptions of plant products from declaration requirements, arguing that modifications proposed in H.R. 3210 would have excluded pulp and paper, which constitute a significant portion of the plant imports into the United States, from declaration requirements. Some contend that repeated or regular declarations of the same plant products add administrative burden and extra costs on industries without providing additional benefits for tracing the source of wood. A proposal to address this issue would allow for a blanket declaration. In a blanket declaration, importers would submit one declaration for similar products imported over a period of time, thus potentially saving the importer from submitting duplicate declarations for each product imported. APHIS has responded to this issue by initiating the Lacey Act Blanket Declaration Pilot Program in 2009 to test the feasibility of collecting information through a blanket declaration. Eligible importers can participate in the program. A blanket declaration will apply for one month, and a reconciliation report providing how much was actually imported during the month is due within 15 days after the end of the month. The report to Congress submitted by APHIS stated that this pilot project was not a success. Further, a survey revealed that users felt the program was duplicative of efforts related to declarations. The modification of declaration requirements can be done either through regulations or by law. Regulatory changes to the declaration requirements under the Lacey Act can be implemented from recommendations provided by certain reports and reviews. As discussed above, under the Lacey Act, the Secretary is required to review the declaration requirements and report findings to appropriate congressional committees. The report to Congress contains information on several factors, including an evaluation of the effectiveness of declaration requirements. The Secretary is authorized to promulgate regulations that could modify certain declaration requirements for plant products 180 days after the Secretary completes the review. For example, the Secretary could limit the applicability of declaration requirements to any plant product; make changes to declaration requirements for plant products that are suggested in the review; and limit the scope of exclusions if they are justified by the review. This could be an avenue for excluding products (e.g., composite wood products) that are difficult to declare. It is unclear, however, if these regulations could be used to exempt plant products made before 2008 from the declaration process. In the 113 th Congress, H.R. 3324 would amend the Lacey Act so that importers would need to possess and make available certain information about the plant or plant products being imported. Currently, importers are required to file this information. This would lower the burden of processing declarations for APHIS, but would not lower the burden of creating declarations by the importers. Therefore, many of the issues associated with identifying species and genus, or country of origin, would remain. Further, the bill would amend the rulemaking authority of the Secretary to give more flexibility on the applicability of declaration requirements. Some contend that the 2008 amendments should not apply to plants imported or plant products created or imported before 2008. They note that declaration requirements under the act are difficult to complete for these plant products because the sources and species of plants used might not be known, since they were not required by law to be identified. In the 113 th Congress, H.R. 3280 proposes to exclude plants from the Lacey Act that were imported into the United States before May 22, 2008, or plant products created before May 22, 2008. The intent of this provision appeared to be to exclude plant products created and imported before 2008 from Lacey Act coverage and clarify any doubts or interpretations of the law. Note that this provision would not cover plants harvested before 2008 that were not imported before the act took effect, making them still subject to the Lacey Act. The primary method by which U.S. importers can protect themselves from criminal and certain civil penalties under the Lacey Act is to exercise due care in determining if the imported plants or plant products were legally harvested, processed, and exported. The exercise of due care refers to the amount of attention and effort that a reasonable person would expend in a similar situation to address an issue or conduct an activity. Some contend that the actions needed to demonstrate due care with respect to the Lacey Act are not sufficiently defined or clear. Some definitions of due care are found in S.Rept. 97-123, which accompanied the Lacey Act amendments of 1981, and in guidance provided by federal agencies. S.Rept. 97-123 states that ""due care means that degree of care which a reasonably prudent person would exercise under the same or similar circumstances."" Further, the Senate report notes that due care requires that a person under certain circumstances take steps that a reasonable person would take under similar circumstances to insure they are not violating the law. The exercise of due care is pivotal for determining penalties under the Lacey Act. Under the Lacey Act, certain civil and criminal violations and forfeitures can be imposed on persons if they engaged in conduct prohibited by the act. If they knowingly engaged in prohibited conduct, the penalties are steeper than if they unknowingly engaged in prohibited conduct. If they unknowingly committed a violation without exercising due care, their penalties are steeper than if they exercised due care and unknowingly committed a violation. (See Figure 1 .) Therefore, persons who exercise sufficient due care to determine if their plants or plant products were taken, possessed, transported, or sold in violation of laws, treaties, or regulations might not be held liable for certain violations under the act if a violation is committed unknowingly. However, exercising due care and unknowingly committing a violation could still result in penalties under the Lacey Act, such as forfeiting goods. The due care standard does not apply to marking or labeling violations, and is excluded from declaration requirements under the Lacey Act. According to S.Rept. 97-123, the intent behind incorporating a due care standard in the Lacey Act was to lower the potential for abusive and indiscriminate enforcement efforts. The Senate report also notes that the degree of due care is ""applied differently to different categories of persons with varying degrees of knowledge and responsibility."" For example, a horticulturalist in a professional capacity and with experience in the plant trade could be expected to apply greater knowledge toward correctly identifying plants and verifying permits than would be expected of an airline company that transported plants to the United States and has little knowledge of the plant trade and plant species. Some practical measures one could take to demonstrate due care are given by APHIS. For example, importers can ask questions about the chain of custody of the wood, implement compliance plans, abide by industry standards, record efforts at each stage of the supply chain, and change their practices in response to practical experiences. Some red flags that might indicate violations of logging or processing laws offered by APHIS include: goods trading significantly below their common market rate; cash transactions without paperwork; invalid or falsified documents or permits; and unusual sales practices or transactions. Some suggest that the Lacey Act Compliance Program described in the agreement with Gibson Guitar could be viewed as a guideline for how due care might be interpreted or applied to the 2008 amendments. The due care standard in the Compliance Program states that Gibson should follow a number of steps before buying wood or a wood product. They include: communicating with suppliers to determine any challenges they might have in implementing policies within the program; determining the origin of the wood from discussions with the supplier; conducting independent research to determine risky sources of wood or the potential for false documentation; requesting sample documentation to evaluate compliance and validity; making a determination of legality before purchasing wood and maintaining records of these effects; and declining to purchase wood if there is any uncertainty of illegality. Gibson is to supplement these requirements by continuing its own policies. Some policies include procuring wood sourced from forests where legal harvest and chain of custody can be certified by a third party, such as the Forest Stewardship Council. Further, when working with a new supplier, Gibson is to study foreign laws, verify certifications, and use watch lists to determine the risk of procuring illegal wood. This standard and compliance program is binding only to Gibson Guitar and is not intended to be a pronouncement of what DOJ intends due care to mean with respect to the 2008 amendments. Establishing a process for exercising due care under the Lacey Act when dealing with plants and plant products has been proposed for clarifying guidelines. Some suggest that a process for exercising due care should have steps a person or company can take to verify that their imported plants and plant products comply with the Lacey Act, ultimately leading to a type of certification for the plant or plant product. The process could consider certification of individual items as well as certification of manufacturers, importers, and retailers. Others are also considering a process for satisfying due care. A group of stakeholders associated with the trade of plants and plant products and conservation is creating a process that aims to define due care under the Lacey Act. Their standard centers on obtaining a type of forest certification that ensures the forest is protected and conducting risk, compliance, and legal audits related to potential illegal activities. A process for exercising due care has been adopted by the European Union (EU) in regulations that aim to curb illegal logging. The process has three primary elements that are to be provided: Information on the timber and timber products, including a description and scientific name of the timber, country of harvest, quantity of the timber or product, details on the supplier and purchaser, and documents indicating compliance with national legislation. A risk assessment of the timber being illegal throughout its supply chain based on information gathered and risk assessment criteria, which include compliance with applicable legislation, prevalence of illegal logging of specific species in the country of harvest, international sanctions on imports of timber, and complexity of the supply chain. Risk mitigation addressing the risks noted in the previous point, which can include gathering additional information and verification of legality from the supplier of the timber, including obtaining third party verification. The regulation also provides for monitoring organizations to be recognized. These organizations are expected to provide EU operators due care systems, which they can accept or refuse in lieu of creating their own system. The EU system for due diligence is similar to the 2008 amendments, but potentially more involved. Under the EU system, information on the chain of custody and a calculation for mitigating risks is required; this information is not required under the 2008 amendments. Clarity on how to exercise due care and a defense against charges when due care is exercised are two potential benefits of implementing a process for exercising due care. A process that specifies steps to ensure the legality of imported products would reduce confusion as to how due care is exercised, and provide consistent practices among importers, thus making it easier for them to coordinate efforts to verify the legality of their products. This could also lower the costs of compliance. Further, monitoring compliance according to a process could give law enforcement officials a benchmark for bringing charges against an importer who may not have taken sufficient steps to exercise due care. Potential drawbacks of establishing and implementing a process to exercise due care include determining the level of reliability for verifying timber practices in foreign countries and the potential for violations to go unnoticed when due care is applied. One component of a due care process might be employing third parties to verify timber operations in foreign countries (i.e., certification scheme). Third parties can invest resources in particular countries to monitor logging and processing operations for several importers, and provide a certificate to operations that comply with the law. For example, the Forest Stewardship Council (FSC) certifies timber operations to ensure legal, sustainable management of forested land and monitors the chain of custody to trace the life cycle of wood products originating in a certified forest. The effectiveness of third parties to monitor all aspects of plant harvesting and production, however, has been questioned by some. They claim that corruption and fraud can take place, thus undercutting the ability to certify legal wood. This would lower the credibility of the standard and lower its effect in curbing illegal logging. Further, some certification schemes might not cover all aspects of a due care process and the timber and timber products in question. FSC, for example, does not apply rigorous oversight to ""FSC Controlled Wood,"" which is non-FSC-certified wood that is allowed to be mixed with FSC-certified wood. Further, certification schemes may not cover all steps in the succession from harvesting to importation. For example, FSC standards would not cover some laws dealing with the export or processing of wood after harvest that would be subject to the Lacey Act. Exercising due care for importing plants and plant products under the Lacey Act can be challenging for importers because it requires an understanding of foreign laws and practices, and possibly monitoring in the foreign country where plant and plant materials are being harvested. Some contend that exercising due care is complicated by the quantity of foreign laws related to plants and plant products. For example, Indonesia has more than 900 laws, regulations, and decrees that address timber harvesting and processing. There is no federal database that compiles and presents foreign laws that apply to plants and plant products. According to APHIS, importers are responsible for being aware of any foreign laws that apply to the plants and plant products they are importing. Some have suggested other options for reducing illegal logging that would help importers exercise due care. These options would be supply-side driven. One option is to encourage timber-producing countries to construct timber legality standards that could be implemented as voluntary guidelines or mandatory procedures for domestic timber operations. Supply-side guidelines were implemented in a trade agreement between the United States and Peru in 2006 to address illegal logging in Peru. For example, Peru is required to implement several measures to deter illegal logging within the country, such as increasing the number of enforcement personnel, imposing criminal and civil penalties under existing laws to deter illegal logging, monitoring endangered plant species, verifying and auditing exporters and producers of timber products, and developing tools that strengthen regulatory controls and verification systems related to the harvest and trade of timber products. Individual countries have also initiated legality standards to differentiate between legal and illegal sources of wood. Indonesia, for example, has a standard with several indicators that address timber operations and forest management. Independent auditors assess timber concessions and factories against the standard and award certificates for legal operations. Another option is to promote international cooperation and coordination to identify areas of legal and illegal logging practices. With the advent of the EU regulation, opportunities exist for coordination among a large range of importers spanning two of the largest markets for plant and plant product exports—Europe and North America. Efforts could be made to identify ""hot spots"" where illegal logging is common, as well as areas where legal practices prevail. This could create incentives for suppliers to be placed on the legal lists. Further, identifying areas where illegal logging or trade exists could warn importers of areas in their supply chains they should be wary about. This might also encourage importers to change their supply chains so as to avoid these areas. However, these lists could be subjectively created and generate controversy by countries that are on the list. For example, some might question how many infractions would cause a country to be listed, or how a country could come off the list. Legal operators in the listed country might also argue that they are being unfairly targeted because of the crimes of others in their country. Some have suggested strengthening existing federal programs aimed at reducing illegal logging in foreign countries as a mechanism to make compliance with the Lacey Act easier. Some examples include programs at the U.S. Agency of International Development and Department of State that aim to educate foreign companies about the Lacey Act and provide funds to improve forest governance and law enforcement in foreign countries. An example is the Tropical Forest Conservation Act. Under this program, debt restructured in eligible countries generates funds to support programs to conserve tropical forests within the debtor country. Some of the eligible activities include improving law enforcement capacity in reserves to address illegal logging. This helps importers by reducing illegal logging practices in countries that supply plants and plant products. Some aspects of the 2008 Lacey Act Amendments have been controversial, and several observers and stakeholders have suggested potential changes. Some contend that changes should be done through law; others argue that changes should be done through regulations. Some contend that efforts to change the implementation of the Lacey Act through regulations have stalled and not produced results. This is supported, in part, by the delay by APHIS in producing a review report of implementing declaration requirements under the act. Based on this report, the Secretary is authorized to make certain changes to the declaration requirements. Some take a broader look at the Lacey Act and contend that understanding and applying foreign laws to the processes of harvesting and producing plant and wildlife products is not feasible for the average person or corporation in the United States. Thus, some might consider removing violations of foreign laws from the Lacey Act. Proponents of making changes through regulations contend that amending the act could lead to additional changes in the law that are not contemplated or supported by various stakeholders. They also contend that amending the law is subverting the intended process of making changes through regulations. ","The Lacey Act regulates the trade of wildlife and plants and creates penalties for a broad spectrum of violations. In 2008, the Lacey Act was amended to include protections for foreign plants and to require adherence to foreign laws as they pertain to certain conservation and other activities involving plants. Further, the 2008 amendments make it unlawful to submit falsified documents related to any plant or plant product covered by the act, and to import certain plants and plant products without an import declaration. The primary drivers behind the Lacey Act amendments of 2008 (2008 amendments) were to reduce illegal logging globally and increase the value of U.S. wood exports. Illegal logging is a pervasive problem with economic and environmental consequences. Some estimate that illegal logging accounts for 15%-30% of the volume of all forest extraction activities globally, and has an estimated worth of $30 billion-$100 billion of the global wood trade. Further, if there were no illegally logged wood in the global market, it has been projected that the value of U.S. exports of roundwood, sawnwood, and panels could increase by an average of approximately $460 million each year. A halt to illegal logging would also raise the value of domestic wood production. If this is added to exports, some estimate the increase in revenue for companies in the United States at approximately $1.0 billion annually. A highly publicized raid on Gibson Guitar Corporation brought to light several existing policy issues related to the 2008 amendments to the Lacey Act. Some issues are broad and address the intent of the act. For example, some question why U.S. importers should be held responsible for violations of foreign law or if the requirements under the Lacey Act actually reduce illegal logging. Other issues are narrow and address certain requirements in the act. For example, several suggest that the declaration requirements for importing plants and plant products are cumbersome and cannot be met in some cases. Further, some contend that the 2008 amendments should not apply to plants harvested or plant products fabricated before the 2008 amendments were enacted. In contrast, some reiterate the benefits of the 2008 amendments, primarily reducing illegal logging and increasing the value of legally obtained plants and plant products on the market. The 113th Congress is attempting to address some of these issues in proposed legislation. H.R. 3324 would amend the Lacey Act so that importers would need to possess and make available certain information about the plant or plant products being imported. Currently, importers are required to file this information. Further, the bill would amend the rulemaking authority of the Secretary to give more flexibility for specifying the applicability of declaration requirements. H.R. 3280 would amend the Lacey Act to exempt plants and plant products imported before May 22, 2008, from the Lacey Act. Efforts to address implementation issues could also be pursued through regulations. The law requires a review of the implementation of the Lacey Act by the Animal and Plant Health Inspection Service and a report evaluating and analyzing some implementation requirements and providing recommendations to improve plant identification. Further, the Secretary (e.g., Secretary of Interior, Commerce, or Agriculture) may promulgate regulations that aim to improve implementation as discussed in the review.",govreport
"RS20913 -- Farm ""Counter-Cyclical Assistance"" Updated May 31, 2002 Farming often is characterized as a ""cyclical"" business with exaggerated price swings that are destabilizing. Farmersrespond to high prices by boosting output. However, when prices drop, farmers are not quick to cut backproduction. Theyare more likely to operate at a loss and draw down resources. Contributing to the unstable nature of the farmeconomy arethe weather, export demand, currency exchange rate fluctuations, and the farm support and export subsidy programsofforeign competitors. Typically, farmers do not view the eventual self-correcting character of commodity prices and production with the sameequanimity as economists. In fact, U.S. producers of the major crops have asked for and received federalintervention --including various forms of counter-cyclical assistance -- to support their commodity prices and incomes for nearlythe past70 years. Between 1973 and 1995, a prominent form of counter-cyclical aid was deficiency payments linked to target prices. Congress specified, for each major crop, an annual per-unit target price (e.g., $4 per bushel for wheat). If, as oftenoccurred, the market price was below the target price, eligible producers received a deficiency payment to make upthedifference. This aid was ended by the Federal Agriculture Improvement and Reform (FAIR) Act of 1996 ( P.L.104-127 ). Under Title I of the 1996 Act, fixed production flexibility contract (PFC) payments replaced target price deficiencypayments. These payments were intended to provide, over 7 years, a total of about $36 billion to eligible producersorlandowners. The PFC payments were not linked to either current production or prices. By design, lawmakersintended thatthese fixed payments, along with the ability to make unconstrained planting decisions, would cause the marketplaceratherthan subsidies to guide farmers' production choices. However, the 1996 law did continue another form of counter-cyclical support: marketing assistance loans. Producers could(and, under the new 2002 law, continue to) pledge their stored grain, cotton, or oilseeds as collateral for a U.S.Departmentof Agriculture (USDA) nonrecourse commodity loan after harvest. These loans are based on a per-unit (bushel,pound)rate. In earlier years, these nonrecourse loans were set higher than market prices in order to support farm incomes, and farmersforfeited the commodities pledged as collateral at the end of the loan term (about 9 months). Under the more recentdesign,farmers can repay the nonrecourse ""marketing assistance loans"" at less than the original loan rate when market pricesarelower than that loan rate. The difference between the USDA loan rate and the lower repayment rate (times thenumber ofbushels under loan) constitutes the federal subsidy. In addition, those producers who choose not take out USDAcommodity loans can instead receive the equivalent subsidy as a direct payment, called a ""loan deficiency payment""(LDP). The federal subsidy (either a loan gain or LDP) increases as market prices drop below the loan rate, and the subsidydiminishes as prices rise -- thus, the ""counter-cyclical"" nature of the marketing loan program. When the 1996 farm bill was passed, commodity prices were relatively high, and policymakers widely anticipated that thePFC payments, when combined with whatever was earned from the market, would provide sufficient income toproducers. Marketing loans were set at relatively low rates so that they only would be needed as a safety net if prices declinedrelatively steeply. However, by the late 1990s, major commodity prices declined even more than expected, andgenerallydid not recover to what farmers regarded as acceptable levels. As a result, they relied heavily on marketing loanbenefits,which went from zero in FY1996, to a high of over $8 billion in FY2000 (the cost has declined somewhat sincethen). Congress determined that the ""safety net"" provided by the 1996 FAIR Act (i.e., marketing assistance loans and fixed PFCpayments) was inadequate, and supplemented the benefits with additional, emergency ""market loss payments."" Thesepayments, mainly to PFC enrollees, added about $3 billion in FY1999, $11 billion in FY2000, and $5.5 billion inFY2001to program costs. These supplemental payments also can be characterized as counter-cyclical -- even though theyare adhoc and not ""programmed"" into standing law -- because they were made (according to the sponsors) inresponse to lowprices and incomes. Nearly all of the numerous farm and commodity organizations that testified before the House and Senate AgricultureCommittees in 2001 requested that additional counter-cyclical support be developed as a supplement to the currentmarketing assistance loans and fixed annual payments. In response, the separate farm bills passed in October 2001by theHouse and February 2002 by the Senate, incorporated new counter-cyclical measures into standing law. Thus,Congresspresumably would no longer have to debate and enact periodic emergency ad hoc assistance. The final farm bill, the Farm Security and Rural Investment Act (FSRIA) of 2002 ( H.R. 2646 , P.L. 107-171 ),provides new long-term counter-cyclical support for grains and cotton, by restoring target prices and deficiencypayments,similar in some respects to the program terminated by the 1996 Act. What are now called annual PFC paymentsarereplaced with fixed, ""direct payments"" to farmers. Both types of payments will be available to producers withannualagreements with USDA. In addition, the measure maintains marketing assistance loans and loan deficiencypayments asthey now function, with changes in most loan rates. The new law, which covers the 2002-2007 crop years, brings soybeans and the minor oilseeds (e.g., sunflowers, etc.) fullyunder the support program rules that apply to grains and cotton. In a major departure from the past, FSRIAredesignspeanut support to operate like that for grains, oilseeds, and cotton -- instead of the traditional system of peanutmarketingquotas and nonrecourse price support loans. Under the new law, fixed payments and target price deficiency payments will be paid on 85% of each farm's baseproduction (base acres times base yield of each commodity). A farmer may choose, as base production, either theacreageused for PFC payments, or average acres planted to eligible crops from 1998 through 2001. Yields effectively arethe1981-85 averages, except that, for counter-cyclical payments, yields also can be updated under astatutorily-prescribedformula. A key difference between the new target price payments and those made until 1995, is that the old payments were tied toannual planting rules (i.e., an acreage reduction program.) The new system is not contingent upon such rules:payments arebased upon historical, not current, production, and farmers can plant virtually any crops except most fruits andvegetables. Under the new counter-cyclical program, the deficiency payment rate will be calculated as the difference between the targetprice, and the lower average season market price (but not to exceed the difference between the target price and thesum ofthe loan rate and fixed payment). (See Table 1 for rates). An individual may receive no more than $130,000 peryear incounter-cyclical assistance. Milk support would continue under FSRIA through government purchases of nonfat dry milk, butter, and cheese. However, it has an added feature of counter-cyclical payments. Dairy farmers nationwide will be eligible for""nationaldairy market loss payments"" whenever the minimum monthly market price for farm milk used for fluid consumptioninBoston falls below $16.94 per hundredweight (cwt.). In order to receive a payment, a dairy farmer must enter intoacontract with the Secretary of Agriculture. The value of the payment equals 45% of the difference between the$16.94 percwt. target price in any month that the Boston market price falls below $16.94. A producer can receive a paymenton allmilk production during that month, but no payments will be made on any annual production in excess of 2.4 millionpoundsper dairy operation. All contracts expire on September 30, 2005. (See Dairy Farmer Counter-Cyclical Assistance in theCRS electronic briefing book on AgriculturePolicy and the Farm Bill .) Table 1. Loan Rates, Fixed Payment Rates, and Target Prices * Reflects rates that change in some years. NA=not applicable. Whereas the final farm bill ties the availability of counter-cyclical assistance to target prices for specified commodities,other designs also were discussed. For example: One plan would have triggered payments in a state whenever state (as opposed to national) gross cash receipts for any of eight program or oilseed crops are forecast for the year to be less than 94% of that state's annualaveragecash receipts for the crop during 1996-1999. Cash receipts would be defined as the national average price timesstate-levelproduction. Those who produced the crop during 1998-2000 would be eligible for a share of total payments(AmericanFarm Bureau Federation). Another would have established a ""national target income"" for each major crop: that is, the national average annual market value of the crop during 1996-2000, plus the annual average of any marketing loan benefitsandmarket loss assistance payments made during those years. A further adjustment would be made to account for yieldincreases since then. Those who produced that crop during 1996-2000 would be eligible for a share of totalpaymentswhenever returns (defined as the crop's U.S. production times the average price for the first 3 months of themarketingyear) are below the national target income for the crop (National Corn Growers Association). The Congressional Budget Office (CBO) has estimated the commodity support provisions (Title I) of FSRIA at $98.9billion over 6 years (budget authority, March 2002 estimate, FY2002-2007). This is $37.6 billion more than thebaselinepolicy of simply extending current programs into the future. The new counter-cyclical payments for grains, cotton,andoilseeds account for $23.6 billion of the new costs (i.e., above baseline). The peanut and dairy counter-cyclicalpaymentsare projected to cost, respectively, another $904 million and $963 million. However, such cost estimates are speculative due to the extreme difficulty of predicting future market conditions, includingprices. If prices are lower than CBO's assumptions, then costs will be higher, and vice versa. Some other analystsalreadyhave differing projections. For example, the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri estimates that thetotal cost of the dairy program alone could exceed $3.6 billion. That's mainly because FAPRI projects significantlylowermarket prices for milk than CBO over the 46-month life of the program. CBO estimates that the average monthlypaymentrate over the 46-month life of the program will be about $0.45 per cwt.; FAPRI estimates an average monthlypayment rateof $0.89 per cwt. (See also What Is the Cost of the 2002 Farm Bill? in the CRS electronic briefing book on Agriculture Policy and the FarmBill .) The 1994 Uruguay Round Agreement on Agriculture (URAA) obligates countries to discipline their agricultural subsidyprograms and reduce import barriers in order to promote more open trade. Under the URAA, the United States iscommitted to providing subsidies of no more than $19.1 billion per year through domestic farm policies with themostpotential to distort production and trade. The URAA contains detailed rules for how countries should determine which of their programs must be counted towardtheir assigned subsidy limits (e.g., $19.1 billion for the United States). Generally, however, programs that are tiedtocurrent prices or current production must be counted (these are called ""amber box"" policies). Thus, marketing loangains,which rise when crop prices decline and vice versa, are ""amber"" and must be counted (but only if their value, alongwithother subsidies, exceeds 5% of the value of annual production of that crop). On the other hand, subsidies that are not linked to prices or production, and/or meet other specified criteria, might beexempted as ""green box"" policies. The United States has classified its PFC payments as ""green"" because they aremadewithout regard to prices or current production. It is anticipated the fixed, decoupled payments in the new law alsowill fallwithin the green box. The new counter-cyclical assistance will be decoupled from current output because the producer would not have to produceany particular crop now to receive the payments. However, because (like marketing loan gains) the target pricedeficiencypayments would be triggered by current market prices , they are expected to be placed in the amber box. So, they conclude, if counter-cyclical payments, when added to other ""amber"" subsidies such as marketing loanbenefits,caused U.S. spending to exceed $19.1 billion, the United States could be in violation of its world tradecommitments. Whether that would happen is unclear, in part because of the difficulty of predicting future market prices, but alsobecauseof the technicalities involved in classifying and valuing subsidies under the WTO system. ""Circuit breaker"" language in FSRIA is intended to require USDA to keep trade-distorting farm subsidies at or below the$19.1 billion limit. Questions arise about the administrative, economic, and political implications of changing (i.e.,reducing) benefits, particularly after they are announced and/or awarded. (See CRS Report RL30612(pdf) , FarmSupportPrograms and World Trade Commitments .) Some groups had argued that their own counter-cyclical policies could be designed in a way that they would not have to becounted toward the $19.1 billion limit. For example, if payments to farmers were triggered by low income (asmeasured bygross receipts for one or more commodities) rather than by low prices, they would be exempt, it has been argued. Othersdispute this assertion, noting that it is usually low prices that cause low income. The new counter-cyclical aid in the 2002 law focuses on the ""major"" commodities -- grains, cotton, oilseeds, peanuts, andmilk. These generally are the most widely produced, but that still leaves much of U.S. agriculture ineligible for suchpayments, raising questions of equity among commodities, and of the potential for distorting production towarditems thatmight receive more support (contributing to surplus production). But extending such aid to more commodities, suchasfruits, vegetables, or livestock, also would have increased federal costs, or else reduced assistance levels for themajorcommodities. Also, not all commodity groups sought such aid. For example, the National Cattlemen's BeefAssociationwas among those that opposed most forms of direct assistance, counter-cyclical or otherwise. And, the UnitedFresh Fruitand Vegetable Association argued against any subsidies that would insulate fruit or vegetable producers from marketsignals or would sustain or encourage production. Another issue was whether a new counter-cyclical program should perpetuate past patterns that tie aid to output rather thaneconomic need. Farm programs, including direct payments, marketing loans and the ad hoc ""marketloss payments,"" havebeen based on either past or current production by individual farmers, meaning that larger payments have trendedtowardlarger operations -- which do not or should not need them, critics argue. They add that if Congress intends to helpproducers in economic distress, then such recipients should have to document their need. Others counter that farmprograms are not ""welfare"" but rather part of a larger policy to ensure that U.S. agriculture remains competitive intheglobal economy (an assertion that critics challenge).","Congress has approved legislation (P.L. 107-171) reauthorizing major farmincome and commodity price support programs through crop year 2007. This legislation includes new""counter-cyclicalassistance"" programs for grains, cotton, oilseeds, peanuts, and milk. The intent of counter-cyclical assistance is toprovidemore government support when farm prices and/or incomes decline, and less support when they improve. In fact,farmershave, for many years, been eligible for various forms of counter-cyclical assistance. At issue has been the need for,andpotential impacts of, another counter-cyclical program. This report will not be updated.",govreport
"Since the United States and Vietnam established diplomatic relations in 1995, the two countries have expanded relations and cooperation across a wide range of sectors. As U.S.-Vietnam bilateral economic, military, and diplomatic ties have grown, so has interest in strengthening cooperation in the nuclear energy sphere. A civilian nuclear cooperation agreement was initialed by the two countries in December 2013 and signed in May 2014 under Section 123 of the Atomic Energy Act of 1954 (as amended). Such ""123 agreements"" are necessary for the export of nuclear reactors and components and can help facilitate the transfer of nuclear energy technology. The U.S.-Vietnam 123 agreement was subject to congressional review. Congress received the agreement with the required supporting documents on May 8, 2014, for review. It may enter into force after the 90 th day of continuous session after its submittal to Congress (a period of 30 plus 60 days of review) unless a joint resolution disapproving the agreement is enacted. The congressional review period for this agreement was completed on September 9, 2014. At least four issues were prominent during the congressional review period: (1) whether the agreement should have included stronger nonproliferation commitments such as a legally binding commitment by Vietnam not to build uranium enrichment and reprocessing facilities; (2) the extent to which Vietnam's human rights record should affect the decision to enter into a nuclear energy agreement; (3) the weight that should be given to the growing strategic relationship between the United States and Vietnam; and (4) the extent to which U.S. companies would benefit from an agreement. Vietnam also has nuclear cooperation agreements with Russia, France, China, South Korea, Japan, and Canada. The U.S. nuclear industry contends that billions of dollars of exports could result from the Vietnam 123 agreement. While it is unclear what, if any, contracts the U.S. nuclear industry would conclude with Vietnam's nuclear energy sector, it is likely that U.S. companies would provide services as part of a reactor supply agreement that Vietnam signed with Japan in 2010. Such services would not necessarily require a U.S. 123 agreement, but transfers might be facilitated if one were in place. The first major step by the United States and Vietnam toward a 123 agreement was the signing of an agreement to strengthen nuclear safety and the nascent nuclear regulatory framework in Vietnam in 2008. Under that agreement, U.S. Nuclear Regulatory Commission experts have been advising the Vietnam Agency for Radiation and Nuclear Safety and Control (VARANS). The U.S. Department of Energy (DOE) and the Nuclear Regulatory Commission (NRC) train Vietnamese officials on nonproliferation and nuclear safety best practices related to power plant operation, and assisted with the drafting of Vietnam's Atomic Energy Law, passed by Vietnam's National Assembly in June 2008. Vietnamese technicians have also attended nonproliferation safeguards training programs at U.S. national laboratories. In March 2010, the United States and Vietnam signed a Memorandum of Understanding Concerning Cooperation in the Civil Nuclear Field that was designed to increase cooperation on nuclear safety and facilitate development of an independent regulatory agency. Then-U.S. Ambassador to Vietnam Michael Michalak said he anticipated the 2010 Memorandum would be a ""stepping stone"" to a bilateral nuclear energy cooperation (Section 123 agreement). Vietnam's current nuclear infrastructure consists of a research reactor and several research institutes. Under the Atoms for Peace program in the early 1960s, the United States provided South Vietnam with a 250 kilowatt (kw) pool-type TRIGA Mark-II research reactor. This research reactor, located at Dalat, used highly enriched uranium (HEU) fuel and went critical in 1963. It was used for training, research, and radioisotope production. The research reactor was shut down during the Vietnam War. After North Vietnam defeated the South in 1975 and reunified the country, the Vietnam Atomic Energy Commission (VAEC) was established in 1976 for civilian nuclear research. The International Atomic Energy Agency (IAEA) has provided technical cooperation (TC) assistance to Vietnam since it joined the Agency in 1978. In the early 1980s, the Soviet Union helped Vietnam restore and upgrade the research reactor to a 500 kw Russian VVR-M design. This research reactor was powered with highly enriched uranium, weapons-usable material which is considered to be a potential nuclear security risk. With U.S. assistance under the Department of Energy's Global Threat Reduction Initiative, since 2007, Vietnam has converted the Dalat research reactor from HEU to low enriched uranium (LEU) fuel, and returned the HEU fresh and spent fuel to Russia. The shipments, which removed a total of 11 kg of HEU, were completed in July 2013. This activity advanced U.S.-Vietnam cooperation in the nuclear nonproliferation sphere. As Vietnam's economy has grown, so have its energy demands, which, according to one source, grew by 15% annually in the first decade of the 2000s. To help keep pace, Vietnam plans to build its first nuclear power plants in the coming decades. Nuclear power is projected to provide 20%-30% of the country's electricity by 2050. Vietnam first began considering nuclear power as an option in a 1995 government study that recommended the introduction of nuclear energy by 2015. Feasibility studies were conducted in the late 1990s and early 2000s. In 2004, then-Prime Minister Phan Van Khai endorsed the ""Strategy for Vietnam's Electricity Development 2004-2010."" In 2006, the Prime Minister signed the ""Strategy for Peaceful Uses of Atomic Energy up to 2020,"" which specified a nuclear power target of 2,000 megawatts of electric generating capacity (MWe) by 2020, and an eventual 20,000 MWe by 2040. The latter would represent 25%-30% of Vietnam's electricity production. Vietnam's National Assembly in November 2009 approved plans to build the first two 1,000 MWe reactors at Phuoc Dinh, Ninh Thuan province ( Ninh Thuan 1 plant) which were to come on-line by 2020. Two additional 1,000 MWe reactors are planned to be built in nearby Vinh Hai ( Ninh Thuan 2 plant) and be brought on-line by 2026 (see Figure 1 below). The country's nuclear energy plan envisioned a three-phase approach: Phase I, 2010-2015: training technical specialists, setting up regulatory frameworks and cooperation agreements, approval of licenses, etc. Phase II, 2015-2020: construction phase for first nuclear plants at Phuoc Dinh; beginning construction at Vinh Hai. Phase III, 2020-2030: additional reactor construction, up to an additional 6,000 MWe. The Vietnamese government issued a master plan in July 2011 that called for two additional reactors to be constructed at Phuoc Dinh by 2025 and two more at Vinh Hai by 2027, plus two larger reactors, possibly Korean, at another site to begin operating by 2029. Another 4,000 megawatts of planned capacity would bring the country's generating capacity to 14,800 megawatts by 2030. However, Vietnam's Prime Minister announced in January 2014 that it might delay construction of the first plant, at Phuoc Dinh, until 2020, potentially pushing back the planned completion of the first reactor to the mid-2020s. Difficulties in training staff for the planned nuclear power program have been mentioned by news reports as a possible reason for the delay. The Russian firm AtomStroyExport is to build two 1,200 MWe light-water reactors (standard commercial reactors) at the Ninh Thuan 1 power plant at Phuoc Dinh. They will be built on a turnkey basis, and will be operated by state-owned utility Electricity of Vietnam (EVN). As with other Russian-built nuclear power plants in non-nuclear weapon states, the contract includes a provision to both supply fuel and take back spent (used) fuel. The Russian atomic energy agency, Rosatom, will set up a training center in Vietnam to help prepare nuclear specialists. Cost estimates for the power plants vary; Rosatom reportedly has forecast the cost of the first two-reactor plants as up to $8 billion, but some press reports that included related infrastructure development estimate a total of $10 billion. Russia's Ministry of Finance is expected to finance the majority of these costs. Under the 2011 master plan, AtomStroyExport is to build two additional reactors at the site as well. Up to four light-water reactors at Ninh Thuan 2 are to be built by the Japanese consortium International Nuclear Energy Development of Japan Company (JINED). The Japanese government has offered low-interest and preferential loans for the project, as well as assistance in waste treatment and infrastructure support. According to the IAEA, Vietnam has no plans for developing a full fuel cycle capability. Current plans would store spent nuclear fuel on-site for at least 30 years, and studies on more permanent disposal are underway. As mentioned above, Russia will take back the spent fuel from the Russian-built plants. Other suppliers, such as Japan, do not usually do so, so Vietnam will need to explore spent fuel storage options. Vietnam is now exploring how to exploit its domestic uranium reserves in the north of the country, and is cooperating with Canadian and Japanese firms on initial exploration. Vietnam has signed a memorandum of understanding with India on uranium ore processing technologies. As of mid-2014, Vietnam's nuclear energy plans do not appear to have generated significant domestic opposition, though members of the Champa ethnic group, an ethnic minority in Vietnam, have said that the plants will infringe upon Champa villages and centers of worship in Ninh Tuan province and that the Vietnamese government has harassed individuals who have criticized the plants. It is unclear if the apparent absence of major opposition is due to widespread support for the government's energy vision, apathy or a lack of awareness, and/or a reluctance to challenge the government on one of its significant priorities. The U.S. nuclear industry may have a role in the reactor projects in Vietnam. The Japanese supply consortium, JINED, is offering boiling water reactor (BWR) and pressurized water reactor (PWR) designs for Ninh Thuan 2 , and Vietnam has not yet selected which type it will use. Japanese BWR designs are based on General Electric (GE) technology, while Japanese PWR designs originally came from Westinghouse (now mostly owned by Toshiba). Japan is largely self-sufficient in nuclear technology, but it is possible that some U.S. components and services would be used for the Vietnam project. JINED member Hitachi, for example, conducts nuclear business in Japan and around the world through joint ventures with GE. A U.S.-Vietnam 123 agreement would be helpful or even necessary for U.S. participation in Ninh Thuan 2 , depending on the types of components and services involved. This is because certain major reactor components would require Nuclear Regulatory Commission export licenses that cannot be approved without a 123 agreement, and approvals for other components and services that do not require export licenses could be more complicated without a 123 agreement. South Korea has also proposed building a nuclear power plant in Vietnam, for which the two countries are jointly preparing a feasibility study. The proposed South Korean reactors are based on designs licensed from the U.S. firm Combustion Engineering, which combined with Westinghouse in 2000. As a result, Westinghouse now controls the marketing of the design that South Korea plans to use in Vietnam. South Korea's only previous nuclear power plant export project, consisting of four reactors being built in the United Arab Emirates (UAE), is being implemented by a consortium that includes Westinghouse. Westinghouse and other U.S.-based firms are expected to receive 10% of the $20 billion UAE deal. If South Korea replicates that consortium for the proposed Vietnam project, a U.S.-Vietnam 123 agreement would probably be necessary. The UAE project also required a Part 810 technology transfer authorization by the Secretary of Energy. The number of potential U.S. jobs that may result from nuclear power projects in Vietnam is difficult to estimate, but the Barakah project now under construction by a Korean-led consortium in the UAE could provide a model. As noted above, Westinghouse and other U.S. companies are expected to carry out about 10% of the work on Barakah. The Export-Import Bank of the United States in September 2012 approved $2 billion in financing for U.S. equipment and services for Barakah, mostly to be provided by Westinghouse and its U.S. sub-suppliers. ""The Barakah project will allow us to maintain about 600 U.S. jobs,"" Westinghouse said after the Ex-Im Bank financing approval. The Ex-Im Bank estimated that, overall, the $2 billion in financing would ""support approximately 5,000 American jobs across 17 states."" Items to be supplied by Westinghouse and other U.S. companies include reactor coolant pumps, reactor components, controls, engineering services, and training. The nuclear disaster at the Fukushima Daichi nuclear plant in Japan in March 2011 raised concerns around the globe about the readiness of new nuclear energy countries to have sufficient safety and regulatory infrastructure to prevent such disasters. The accident also raised worries about Vietnam's capacity to administer and regulate a nuclear energy sector. The authorities in Vietnam reacted to the Fukushima disaster by reaffirming Vietnam's commitment to pursuing nuclear power. In general, the situation sparked a global reexamination of emergency preparedness and risk assessment for nuclear power plants. Vietnam's coast has been subject to tsunamis in the past, and one study suggests more investigation is still needed on seismic conditions and tsunami risk.  Also, in climate modeling exercises, Vietnam is often listed as one of the world's most vulnerable countries to the possible effects of climate change, particularly to rising sea levels. The nuclear disaster in Japan also heightened concerns about how to ensure adequate infrastructure, planning, and technical expertise and personnel in new nuclear power states. Vietnam is working closely with the International Atomic Energy Agency to meet all international safety standards and regulatory practices. The IAEA's Integrated Nuclear Infrastructure Review (INIR) mission has visited Vietnam multiple times and has developed milestones on the basis of international standards and expert recommendations. After the latest visit in 2014, the Vietnamese government announced a delay in the estimated start-up date for the first reactors, which experts view as giving Vietnam more time to develop its nuclear regulatory infrastructure and train technical personnel. Vietnam would be the first country in Southeast Asia to operate a nuclear power plant. As of early 2014, it was unclear whether other countries in the region have expressed concerns about Vietnam's nuclear energy plans. It is also unclear to what extent Vietnamese nuclear power planners are considering the energy needs and infrastructure projects of Vietnam's neighbors. Laos, for instance, is building or proposing to build dams for generating hydroelectric power along tributaries and the main stem of the Mekong River, which terminates in Vietnam. Plants such as these could generate power that could be sold to other countries in the region. Vietnam generally has opposed these dams, in part because of their possible negative impacts on the ecology, economies, and food security of downstream communities. Obama Administration officials have stated that the prospect of concluding a nuclear cooperation agreement with the United States spurred Vietnam to strengthen its nonproliferation policies. Vietnam has been a vocal supporter of nuclear disarmament and nonproliferation in international fora, and as a member of the Non-Aligned Movement. Vietnam's Law on Atomic Energy passed in 2008 forbids the development of nuclear weapons and all forms of nuclear proliferation. Vietnam is party to the major nonproliferation treaties (see Table 1 ), including the Nuclear Non-Proliferation Treaty (NPT), which it joined in 1982 as a non-nuclear weapon state. It has been an IAEA member since 1978 and its comprehensive safeguards agreement has been in force since 1990. Vietnam signed the Additional Protocol to its safeguards agreement in 2007, and it entered into force in 2012. Also, in cooperation with the IAEA and South Korea, Vietnam is developing a real-time tracking system for the movement of radiological materials in the country. Vietnam is also a member of the U.S.-led Global Nuclear Energy Partnership (GNEP), now called the International Framework for Nuclear Energy Cooperation (IFNEC). Vietnam has also joined the U.S.-led Global Initiative to Combat Nuclear Terrorism. In a move related to the bilateral nuclear energy agreement signing, in May 2014 Vietnam's government announced that it would participate in the multinational Proliferation Security Initiative (PSI), a U.S.-led group of about 100 countries that was established in 2003 to increase international cooperation in interdicting shipments of weapons of mass destruction (WMD), their delivery systems, and related materials. In the past, Vietnamese officials said they would not join PSI because it operates outside the United Nations system. As part of Vietnam's pledges at Nuclear Security Summits, it has removed all weapons-usable nuclear material from the country. In December 2010, the United States and Vietnam established a legal framework for U.S.-Vietnam cooperation for full conversion of its HEU-fueled research reactor to LEU fuel, and the return of HEU spent fuel from Dalat to Russia under the Department of Energy's Global Threat Reduction Initiative (GTRI). As noted, fresh HEU fuel was removed in 2007. The research reactor has been converted to LEU fuel, and the last shipment of HEU was completed in July 2013. Vietnam continues to develop its export control system. The U.S. State Department's Export Control and Border Security Program provides assistance to Vietnam to strengthen export controls in the country. In 2010, Vietnam issued regulations that would make any trafficking of nuclear materials in the country illegal. When reviewing the proposed agreement with Vietnam, Congress may wish to examine the extent to which Vietnam's export control system can prevent illicit transfers of nuclear materials and technologies. Enrichment and reprocessing (ENR) technology can be used both to make fuel for nuclear reactors or material for nuclear weapons. For the past several years, there has been some debate over whether the United States should ask countries, including Vietnam, to explicitly renounce enrichment and reprocessing as part of a civilian nuclear cooperation agreement. In early August 2010, the Wall Street Journal reported that the United States and Vietnam had discussed a proposed nuclear cooperation agreement that would not specifically commit Vietnam to refrain from enriching uranium. Responding to the Wall Street Journal report, the State Department spokesman said that the United States would welcome a commitment by Vietnam to refrain from pursuing enrichment, but added that such a commitment would be Vietnam's decision. A senior DOE official said in September 2010 that it would be ""inappropriate"" at this stage to ask Vietnam to forswear its fuel cycle options as part of a nuclear energy cooperation agreement. Vietnamese Atomic Energy Institute Director Vuong Huu Tan has said that Vietnam does not plan to pursue uranium enrichment. A commitment to forgo enrichment is not required for bilateral nuclear cooperation agreements under U.S. law or the Non-Proliferation Treaty (NPT), and most past 123 agreements have not included such a pledge. The recent agreement with the United Arab Emirates included a provision that would preclude enrichment or reprocessing in the UAE, and the United States has pursued similar pledges from other states in the Middle East. However, whether this policy would apply to other regions of the world was the subject of an Obama Administration interagency review from 2010 to 2013. Some Members of Congress and outside experts have argued that including a promise not to build enrichment and reprocessing facilities should be emulated in other agreements. The U.S.-Taiwan 123 agreement submitted to Congress on January 7, 2014, includes such ""gold standard"" prohibitions on enrichment and reprocessing within Taiwanese territory. Administration officials announced in December 2013 that the internal review had been completed, and there would be no change to U.S. policy. In other words, renouncing a domestic fuel-making capability would not be a prerequisite to concluding a nuclear cooperation agreement for all countries, and each partner country would be considered individually. At the same time, U.S. officials emphasize that while civilian nuclear cooperation agreements are one possible way to discourage additional countries from developing their own fuel-making (enrichment or reprocessing) technology, the United States will continue to pursue other incentives such as multilateral fuel banks to bolster partner countries' confidence in fuel supply. The Nuclear Suppliers Group (NSG) has also tightened restrictions on transfers of these technologies. Assistant Secretary of State Thomas Countryman testified on January 30, 2014: Make no mistake, our policy is to pursue 123 agreements that minimize the further proliferation of ENR technologies worldwide. The United States wants all nations interested in developing civil nuclear power to rely on the international market for fuel services rather than seek indigenous ENR capabilities. These capabilities are expensive and unnecessary, and reliable supply alternatives are available in the global fuel cycle market. The preamble of the agreement with Vietnam includes a political commitment that says Vietnam intends to rely on international markets for its nuclear fuel supply, rather than acquiring sensitive nuclear technologies. In addition, the United States promises to support international markets to ensure a reliable nuclear fuel supply for Vietnam. Although Vietnam apparently does not make a binding legal commitment to forswear ENR in the text of its 123 agreement, neither does the United States grant advance consent for those activities. Article 6 of the agreement specifically prohibits Vietnam from enriching or reprocessing U.S.-obligated nuclear materials —for instance, materials that are transferred from the United States—without specific future U.S. consent. In recent years, overlapping strategic and economic interests have led the United States and Vietnam to improve relations across a wide spectrum of issues. Obama Administration officials identify Vietnam as one of the new strategic partners they are cultivating as part of their ""rebalancing"" of U.S. priorities toward the Asia-Pacific, a move commonly referred to as the United States' ""pivot"" to the Pacific. In July 2013, President Obama and his Vietnamese counterpart, President Truong Tan Sang, announced in Washington, DC, a bilateral ""comprehensive partnership"" that is to provide an ""overarching framework"" for moving the relationship to a ""new phase"" in many areas, including science and technology cooperation in the field of nuclear energy. The U.S. embassy statement on the day the nuclear cooperation agreement was signed says that the agreement ""reflects the strength and breadth of the U.S.-Vietnam Comprehensive Partnership."" The United States and Vietnam share a concern over the rising strength of China, and they have cooperated in opposing China's perceived attempts to assert its claims to disputed waters and islands in the South China Sea. In December 2013, Secretary of State John Kerry in Vietnam announced that the United States would be providing Vietnam with $18 million in assistance, including five fast patrol vessels, to enhance Vietnam's maritime security capacity. The rise in bilateral economic ties also has strengthened the countries' interests in each other. Bilateral trade in 2013 was over $29 billion, nearly a 20-fold increase since the United States extended ""normal trade relations"" (NTR) treatment to Vietnam in 2001. The United States and Vietnam are 2 of 12 countries negotiating a Trans-Pacific Partnership (TPP) trade agreement. In order for the TPP agreement to go into effect, both houses of Congress would have to pass implementing legislation. The Obama Administration has also increased the priority given to cleaning up sites contaminated by Agent Orange/dioxin used by U.S. troops during the Vietnam War, an issue that several Members of Congress have championed. The U.S.-Vietnam nuclear cooperation agreement has been the end-goal of engagement in the nuclear field since the 2010 Memorandum of Understanding and is seen by many as expanding another bridge in the growing network of links between the two countries. Thus, those who question the direction, extent, or pace of recent improvements in U.S.-Vietnam relations may oppose the 123 agreement. A rejection of the agreement by Congress could have an impact on future U.S.-Vietnamese cooperation, including in the nuclear area, and could be interpreted by the Vietnamese as a symbolic rebuke of the new U.S.-Vietnam comprehensive partnership. The biggest obstacle to the two countries taking a dramatic step forward in their relationship is disagreement over Vietnam's human rights record. For more than a decade and a half, the ruling Vietnamese Communist Party (VCP) appears to have followed a strategy of permitting most forms of personal and religious expression while selectively repressing individuals and organizations that it deems a threat to the party's monopoly on power. For the past several years, according to many observers, repression against dissenters and protestors has worsened. The government increasingly has targeted bloggers and lawyers who represent human rights and religious freedom activists, particularly those linked to a network of pro-democracy activists. Many of the targeted blogs, bloggers, and lawyers have criticized Vietnam's policy toward China or have links to pro-democracy activist groups. As mentioned above, members of the ethnic minority group the Cham say that the Vietnamese government has harassed members who have criticized the planned construction of Vietnam's first two nuclear plants because they would be located in a Cham village. In November 2013, the United Nations General Assembly elected Vietnam to a seat on the United Nations Human Rights Council. That same month, Vietnam's National Assembly ratified new amendments to the country's constitution. Many voices called for lessening the VCP's role in society and policy. However, according to many observers, the final changes did little to weaken the Party's and the government's monopoly on power and legal ability to deny basic freedoms. Some sources argued the changes strengthened the VCP's authority and that new clauses added to protect basic rights were negated by other provisions in the revised constitution. As was true of their predecessors, Obama Administration officials have continuously expressed concerns—including via public criticisms—about human rights in Vietnam. Additionally, the two countries reportedly have often disagreed in the formal human rights dialogue that generally occurs every year. In general, however, bilateral differences over human rights have not prevented the United States and Vietnam from improving the overall relationship. Barring a dramatic downturn in Vietnam's human rights situation, U.S. officials appear to see the matter not as an impediment to short-term cooperation on various issues, but rather as a ceiling on what might be accomplished in the longer term. Over the past five years, criticisms of Vietnam's human rights record, including from Members of Congress, appear to have played a significant role in convincing the Administration to delay or oppose a number of items desired by Hanoi. Additionally, concerns about Vietnam's human rights record are likely to complicate Congress's debate over a TPP agreement, if the current negotiations are successful. It is unclear to what extent the Obama Administration has attempted to link the TPP negotiations directly to Hanoi making changes in its human rights conditions. Analysts offer different opinions about the extent to which such U.S. pressure would affect Vietnam's domestic policies, particularly when many in the Vietnamese polity view expressions of dissent as an existential threat to the current regime. Differences over human rights do not appear to have spilled over into the 123 agreement negotiations between the two governments. Human rights activists and other Vietnam watchers have argued that the United States should not advance bilateral ties with Vietnam in many areas until progress is made on the human rights agenda. During a January 2014 Senate Foreign Relations Committee hearing, some Senators called for the passage of a separate human rights bill in tandem with the U.S.-Vietnam nuclear cooperation agreement. As required by Section 123b of the Atomic Energy Act, the President announced in February 2014 his determination that a nuclear cooperation agreement with Vietnam ""will promote, and will not constitute an unreasonable risk to, the common defense and security."" The White House transmitted a package of documents to the Senate Foreign Relations Committee and the House Foreign Affairs Committee, to include the text of the agreement itself, a Nonproliferation Assessment statement, the presidential determination, and letters of concurrence by the Secretaries of Energy and State, and the Nuclear Regulatory Commission Chairman. The nuclear cooperation agreement complies with all the terms of the Atomic Energy Act as amended and therefore is a ""non-exempt"" agreement. This means that it may enter into force after the 90 th day of continuous session (a period of 30 plus 60 days of review) following its submittal to Congress on May 8, 2014, unless a joint resolution disapproving the agreement is enacted by both the House and Senate. Members of Congress may introduce resolutions of disapproval or approval during this time. If no resolution of disapproval is passed into law, then the agreement would automatically be eligible to enter into force after the 90-day review period is concluded. If a resolution of approval is passed before the 90 days have expired, then the agreement could enter into force sooner. Even before the official congressional review period, Members of Congress have weighed in on the debate over the U.S.-Vietnam nuclear cooperation agreement and Section 123 agreements generally. In December 2013, Representatives Ileana Ros-Lehtinen and Brad Sherman introduced a bill ( H.R. 3766 ) that would strengthen congressional approval procedures for agreements that did not include certain nonproliferation standards, including the pledge not to enrich or reprocess. The Senate Foreign Relations Committee held a hearing on January 30, 2014, on Section 123 agreements. Debate during the hearing spent some time on the issues surrounding the Vietnam nuclear cooperation accord. Some Senators said that a human rights bill on Vietnam would need to be passed if a nuclear cooperation agreement was to go forward. Three bills have been introduced to date that would approve the agreement with Vietnam. Senate Foreign Relations Committee Chairman Robert Menendez introduced a resolution that would approve the agreement ( S.J.Res. 36 ) on May 22. This bill was passed by the full Senate on July 31, 2014. On June 9, Senator Majority Leader Harry Reid introduced S.J.Res. 39 and Representative Adam Kinzinger with Ranking Member of the House Foreign Affairs Committee Eliot Engel introduced H.J.Res. 116 . As noted above, the 90 th day of the congressional review period was September 9, 2014. Since the agreement was not disapproved in that time, it may enter into force. Typically, such agreements enter into force after an exchange of diplomatic notes between the two countries.","U.S.-Vietnamese cooperation on nuclear energy and nonproliferation has grown in recent years along with closer bilateral economic, military, and diplomatic ties. In 2010, the two countries signed a Memorandum of Understanding that Obama Administration officials said would be a ""stepping stone"" to a bilateral nuclear cooperation agreement. This agreement was signed by the two countries on May 6, 2014, and transmitted to Congress for review on May 8. The required congressional review period for this agreement was completed in early September, and the agreement will enter into force after an exchange of diplomatic notes between the two countries. Under the agreement, the United States can license the export of nuclear reactor and research information, material, and equipment to Vietnam. The agreement does not allow for the transfer of restricted data or sensitive nuclear technology, and contains required nonproliferation provisions. The nuclear cooperation agreement complies with all the terms of the Atomic Energy Act as amended and therefore is a ""non-exempt"" agreement. This means that it may enter into force after a review period of 90 days of continuous session after its submittal to Congress (a period of 30 plus 60 days of review) unless Congress enacts a joint resolution disapproving agreement, or approving the agreement at an earlier date. Senate Foreign Relations Committee Chairman Robert Menendez introduced a resolution that would approve the agreement (S.J.Res. 36) on May 22. This bill was passed by the Senate on July 31, 2014. No equivalent bill was passed by the House. Vietnam would be the first country in Southeast Asia to operate a nuclear power plant. Vietnam has announced a nuclear energy plan that envisions installing several nuclear plants, capable of producing up to 14,800 megawatts of electric power (MWe), by 2030. Nuclear power is projected to provide 20%-30% of the country's electricity by 2050. Significant work remains, however, to develop Vietnam's nuclear energy infrastructure and regulatory framework. Since Vietnam has other commercial partners in the nuclear energy field, a lack of agreement with the United States would not be likely to have a significant impact on its nuclear energy plans. Vietnam's Law on Atomic Energy, passed in 2008, forbids the development of nuclear weapons and all forms of nuclear proliferation. In 2007, Vietnam signed the IAEA Additional Protocol, a significant nonproliferation safeguard for nuclear power, which entered into force in September 2012. Vietnamese officials have said they have no interest in developing domestic enrichment or reprocessing capabilities, which can potentially be used to make fissile material for nuclear weapons, but they have not made a binding commitment not to do so. Vietnam is exploring the possibility of eventually mining domestic uranium reserves. At least four issues were debated during the congressional review period for this agreement: (1) whether the agreement should have included stronger nonproliferation commitments such as a legally binding commitment by Vietnam not to build uranium enrichment and reprocessing facilities; (2) the extent to which Vietnam's human rights record should affect the decision to enter into a nuclear energy agreement; (3) the weight that should be given to the growing strategic relationship between the United States and Vietnam; and (4) the extent to which U.S. companies would benefit from an agreement.",govreport
"This report provides a chronology of events relevant to U.S. relations with North Korea in 2005 and is a continuation of CRS Report RL32743, North Korea: A Chronology of Events, October 2002-December 2004 , by [author name scrubbed], [author name scrubbed], and [author name scrubbed]. The chronology includes significant meetings, events, and statements that shed light on the issues surrounding North Korea's nuclear weapons program. An introductory analysis highlights the key developments and notes other significant regional dynamics. Particular attention is paid to the Six-Party Talks, inter-Korean relations, key U.S. officials in charge of North Korean policy, Chinas leadership in the negotiations, Japans relationship with its neighbors, and contact with North Korea outside of the executive branch, including a Congressional delegation. In the chronology, key events are marked by bold text. The year 2005 saw little progress in resolving the North Korea nuclear issue. Although adjustments were made, such as changes to senior U.S. officials in charge of policy in East Asia and the addition of human rights and criminal activities to the agenda of items to cover with North Korea, overall relationships and regional trends saw no major reversals or breakthroughs. In the first half of 2005, North Korea escalated the security situation on the Korean peninsula through words and actions. On February 10, Pyongyang officials announced that North Korea had nuclear weapons and would indefinitely suspend its participation in the Six-Party Talks, the multilateral negotiation forum dedicated to the peaceful denuclearization of North Korea made up of the United States, China, Japan, North Korea, South Korea, and Russia. North Korean officials followed up in April with the assertion that the focus of the negotiations should adjust to regional disarmament talks given its status as a nuclear weapons state. Reports of preparations for a possible nuclear test in April further escalated the sense of urgency. In May, North Korea announced that it had removed 8,000 fuel rods from the Yongbyon reactor for reprocessing; experts estimate that the reprocessed plutonium could provide enough material for an additional six to eight nuclear bombs. Later that month, North Korea launched a short-range missile into the East Sea. After nearly a year without meeting, negotiators from the six nations re-convened in Beijing in late July 2005 for a fourth round of talks. The outcome, a joint statement of principles agreed to in September by all parties, was hailed as a major breakthrough. The key statement committed North Korea to abandoning all nuclear weapons and existing nuclear programs and returning at any early date to the treaty on the proliferation of nuclear weapons and to the International Atomic Energy Agency (IAEA) safeguards. In exchange, North Korea was provided with security assurances; South Korea committed to provide 2 million kilowatts of electricity; and the U.S. and Japan pledged to take steps toward normalization of relations with Pyongyang. A crucial disagreement during the talks involved North Korea's right to develop peaceful nuclear energy programs; as a compromise, the United States and North Korea agreed to discuss Pyongyangs right to such a program and its demand for light-water reactors (LWRs) at an appropriate time. The accomplishment proved to be short-lived, however, as, just a day after the statement was issued, a North Korean spokesman asserted that North Korea would return to the IAEAs Nonproliferation Treaty (NPT) only after it received an LWR from the United States. Secretary Rice dismissed the claim, but the sense of significant progress diminished, and additional talks were not held in 2005. After the Six-Party Talks stalled again, hostile rhetoric between Washington and Pyongyang intensified. Incoming U.S. Ambassador to South Korea Alexander Vershbow labeled North Korea a criminal regime and likened the state to Nazi Germany for its criminal activities. The same week, Jay Lefkowitz, the Special Envoy for Human Rights in North Korea appointed under the North Korean Human Rights Act, visited North Korea and called it a deeply oppressive nation while attending a human rights conference in Seoul. The escalated attacks were met with a torrent of hostile responses from North Korean sources. At a brief reconvening of the Six-Party Talks in November, the counterfeiting issue became the main focus: the North Koreans insisted that the imposition of sanctions on a Macau bank for its alleged role in helping North Korea launder counterfeit U.S. dollars constituted a hostile action that made implementation of the Beijing joint statement impossible. Criticism of North Korea's human rights record became more prominent on the U.S. agenda in 2005. Jay Lefkowitz was appointed as the Special Envoy for Human Rights in North Korea, a position created by the North Korean Human Rights Act of 2004. His public statements on the situation facing refugees and North Korean citizens, paired with a high-profile meeting in the White House between President Bush and a prominent North Korean defector and author, amplified the Administrations concern about North Korea's human rights record. Emphasizing this record drew attention to the gap between the United States and South Korea in dealing with the Norths human rights abuses: in order to avoid provoking Pyongyang, Seoul abstained from voting on resolutions condemning North Korea at the United Nations Commission on Human Rights conference and the United Nations General Assembly meeting in 2005. In addition to human rights, North Korea's criminal activities began receiving heightened attention in late 2005. In September, American officials imposed penalties on Banco Delta Asia, a Macau bank that allegedly allowed the laundering of U.S. dollars counterfeited by North Korea. Noting the chilling effect on the Six-Party Talks, some analysts question the timing of the announcement, but Treasury officials insist that the issue is a law-enforcement activity and in no way related to the multilateral negotiations. South Korea has distanced itself from the U.S. accusations and reiterated its stance that raising such matters causes unnecessary friction with Pyongyang and jeopardizes the resolution of the nuclear issue. China, warned by the United States to crack down on illegal North Korean transaction in its banks, has taken some steps to curb such activity, but U.S. officials say it is unclear how aggressively Chinese authorities are moving. Beijing has also urged Pyongyang not to use the issue as a reason to boycott the Six-Party Talks. In December, the U.S. Treasury Department also put out an advisory warning U.S. financial institutions to be wary of financial relationships with North Korea that could be exploited for the purposes of illicit activities. In August 2005, the North Korean government announced it would no longer need humanitarian assistance from the United Nations, including from the World Food Program (WFP), the primary channel for U.S. food aid. In response, the WFP shut down its operations in December 2005 and the United States suspended its shipments of food aid. North Korea also asked all resident foreigners from the dozen or so aid NGOs operating in Pyongyang to leave the country. In November 2005, Pyongyang decided to reject aid from the European Union (EU) after the EU proposed a U.N. resolution on human rights in North Korea. Part of Pyongyangs motivation appears to be have been a desire to negotiate a less intrusive foreign presence, particularly the WFPs fairly extensive monitoring system. Officially, the North Korean government has attributed its decisions to an improved harvest, the decline in WFP food shipments, a desire to end dependence on food assistance, and its unhappiness with the United States and EUs raising the human rights issue. Apparently, North Korea will continue to accept direct food shipments from South Korea and China, and many have accused these countries with undermining the WFPs negotiating leverage with Pyongyang. China, which provides all of its assistance directly to North Korea, is widely believed to have provided even more food than the United States. Since 2001, South Korea has emerged as a major provider of food assistance, perhaps surpassing China in importance in some years. Almost 90% of Seouls food shipments from 2001-2005 have been provided bilaterally to Pyongyang. Notably, China apparently does not monitor its food assistance, and South Korea has a small monitoring system. Several key officials in charge of U.S. policy toward North Korea were reshuffled in 2005. Critics of earlier U.S. policy were optimistic that Condoleezza Rices confirmation as Secretary of State in January would bring a greater degree of coherence to U.S. policy because of her reputation as one of President Bushs most trusted confidantes. U.S. Ambassador to South Korea Christopher Hill, a career foreign service officer with a reputation as a strong negotiator, was selected to be Assistant Secretary for East Asia and the Pacific, as well as the chief envoy for the Six-Party Talks. As Rice began her post at the State Department, policy analysts studied her language for clues about the U.S. approach to North Korea. During her confirmation hearing, Rice included North Korea among the list of outposts of tyranny, thereby appearing to signal a tough approach to the North. However, her declaration during a March swing through Asia that North Korea was a sovereign state was interpreted as a willingness to negotiate with Pyongyang. Apparently operating with more authority than his predecessor, Hill engaged the North Koreans in bilateral meetings and, eventually, in the Six-Party Talks. Two figures that appeared later in the year, however, were seen by many in the policy community as delivering a more hardline message to the North Koreans: Alexander Vershbow, the incoming U.S. Ambassador to South Korea, and Jay Lefkowitz, Special Envoy for Human Rights in North Korea. (See statements above.) Pyongyang-Seoul relations, though typically moving in fits and starts, overall definitively advanced toward stronger cooperation. Major progress was achieved in developing the Kaesong Industrial Zone, an inter-Korean project of 15 South Korean firms employing about 6,000 North Korean workers. South Korea started electricity flows to firms operating in the zone, located in North Korea territory north of the Demilitarized Zone (DMZ). Tourism numbers ballooned (although all from South Korea to North Korea, and only in controlled areas), and inter-Korean trade topped $1 billion in 2005. Ministerial talks, the first in over a year, were held in June, a military hotline was established, and a variety of negotiations, if not concrete results, on joint river surveys, fishing, farming, and transportation went forward. Significantly, the South Korean Defense White Paper decided not to label North Korea as its main enemy, and instead designated it as substantial military threat. North Korea demanded 500,000 tons of fertilizer from the South, but Seoul officials only provided 200,000 tons because of Pyongyangs refusal to return to the Six-Party Talks. Ties between Washington and Seoul were often strained by the capitals different approaches to North Korea, despite official declarations that they shared the same goal of eliminating North Korea's nuclear weapons program through a diplomatic process. The Roh Administrations public embrace of a framework aimed at balancing the nuclear issue with North-South reconciliation contributed to the impression in many corners that South Korea was asserting a distinctly independent foreign policy stance, sometimes at odds with stated U.S. goals. A disagreement between the U.S. military command in Korea and the South Korean Defense Ministry on the contingency plan, known as OPLAN 5029, to respond to an internal crisis in North Korea, was diffused, if not fully resolved. Despite these tensions, Presidents Bush and Roh held a summits in June and November in which they reiterated their shared strategic goal but declined to work out tactical differences. Indicating a need to strengthen the bilateral relationship, the two leaders announced a new strategic dialogue and the intention to move forward with possible Free Trade Agreement (FTA) negotiations at their meeting preceding the November Asia-Pacific Economic Cooperation (APEC) summit in Busan, Korea. Though the North Korea nuclear issue remains unresolved, China has burnished its leadership credentials as host of the process. Beijing was praised as an effective broker and drafter of the breakthrough joint statement issued at the fourth round of Six-Party Talks. As the party viewed with having the most leverage over Pyongyang, China was called upon to re-engage North Korea after the February 10 announcement that it possessed nuclear weapons. Beijing officials have carefully timed their high-level visits to the Koreas, with an eye on balancing their interests with both. Chinese President Hu Jintaos visit to Pyongyang in October highlighted the consolidation of strong political and economic relations between the nations, and provided a significant counterweight to his visit to Seoul for the APEC summit the following month. Many analysts view Chinas strategy as largely successful in serving its national interests: avoiding major diplomatic crises, preventing the collapse of North Korea, strengthening its economic relations with South Korea, deflecting potential U.S. criticism on other issues such as human rights because of its leverage over North Korea, and enhancing its own reputation as a major diplomatic power. Apart from the dynamics surrounding the on-again, off-again Six-Party Talks, historical issues continued to simmer in Northeast Asia, generally at Japans expense. Early in the year, a dispute over the historical claims to the Tokdo/Takeshima islands, a set of small uninhabited rocks now controlled by South Korea, erupted between Seoul and Tokyo. Most observers saw the controversy as inflamed by domestic politics on both sides; as a result, a relatively minor issue derailed major diplomatic initiatives. Japanese Prime Minister Koizumis fifth visit to the Yasukuni Shrine in October prompted outraged responses from both Beijing and Seoul, and both canceled upcoming summits with Tokyo in protest. Japans attempts at moving the normalization process forward with North Korea also faltered. The appointment of Taro Aso as foreign minister and Shinzo Abe as chief cabinet secretary, both known as conservative figures who support the Yasukuni visits, was viewed by many in the region as an indication of Japans drift toward the right. Regional leaders voiced opposition to Japans bid for a permanent place on the United Nations Security Council. On the whole, Japans relations with the region declined as long-standing historical resentments and ascendant suspicions of Japans intentions hurt bilateral relationships with its neighbors. U.S.-Japan relations, meanwhile, continued to advance as leaders announced a major revamping of the military alliance that calls for Japan to take a more active role in contributing to regional stability. North Korea continued to allow periodic visits by non-Administration officials and specialists; some observers viewed the receptions as part of Pyongyangs strategy of creating divisions and distractions within the U.S. policy community. In January, Representative Curt Weldon led a congressional delegation to Pyongyang. After trying to assure senior North Korean officials that the United States was sincere about wanting to peacefully resolve the nuclear weapons issue, Weldon reported back that North Korea was ready to rejoin the Six-Party Talks. He also revealed that the North Koreans claimed to have nuclear weapons, a claim that later was announced publicly and which contributed to an increase in tension and delayed return to the Talks. High-level North Korean officials also received Selig Harrison, a North Korea specialist known for his pro-engagement views, and impressed upon him that Pyongyang was unwilling to dismantle its nuclear weapons program until the United States moved to normalize relations. This message from the North Koreans reinforced their repeated demand that they receive assurances and assistance at the front end of any exchange, while the United States maintained that any deal was predicated on first the elimination of all nuclear programs in North Korea. Stanford University professor John Lewis and former Los Alamos National Lab Director Sig Hecker also visited Pyongyang and delivered messages about the status of North Korea's nuclear program back to the Administration. Finally, former Clinton Administration official and New Mexico Governor Bill Richardson met with officials in Pyongyang in October in between sessions of the Six-Party Talks. CRS Report RL32743, North Korea: A Chronology of Events, October 2002-December 2004 , by [author name scrubbed], [author name scrubbed], and [author name scrubbed]. CRS Issue Brief IB98045, Korea: U.S.-Korean Relations Issues for Congress , by [author name scrubbed]. CRS Issue Brief IB91141, North Korea's Nuclear Weapons Program , by [author name scrubbed]. CRS Report RL31696, North Korea: Economic Sanctions Prior to Removal from Terrorism Designation , by [author name scrubbed]. CRS Report RS21834, U.S. Assistance to North Korea: Fact Sheet , by [author name scrubbed]. CRS Report RL31785, Foreign Assistance to North Korea , by [author name scrubbed]. CRS Report RL32493, North Korea: Economic Leverage and Policy Analysis , by [author name scrubbed] and [author name scrubbed]. CRS Report RS21391, North Korea's Nuclear Weapons: Latest Developments , by [author name scrubbed]. CRS Report RS21473, North Korean Ballistic Missile Threat to the United States , by [author name scrubbed]. CRS Report RL32167, Drug Trafficking and North Korea: Issues for U.S. Policy , by [author name scrubbed]. DMZ - demilitarized zone dividing North and South Korea DPRK - Democratic Peoples Republic of Korea EU - European Union GNP - gross national product HEU - highly enriched uranium IAEA - International Atomic Energy Agency KCNA - Korea Central News Agency (North Korea's official news agency) KEDO - Korea Peninsula Energy Development Organization NGO - non-governmental organization NLL - Northern Limit Line NPT - Nuclear Non-Proliferation Treaty PRC - Peoples Republic of China PSI - Proliferation Security Initiative ROK - Republic of Korea TCOG - Trilateral Coordination and Oversight Group (United States, Japan, and South Korea)","This report provides a chronology of events relevant to U.S. relations with North Korea in 2005 and is a continuation of CRS Report RL32743, North Korea: A Chronology of Events, October 2002-December 2004, by [author name scrubbed], [author name scrubbed], and [author name scrubbed]. The chronology includes significant meetings, events, and statements that shed light on the issues surrounding North Korea's nuclear weapons program. An introductory analysis highlights the key developments and notes other significant regional dynamics. Particular attention is paid to the Six-Party Talks, inter-Korean relations, key U.S. officials in charge of North Korean policy, China's leadership in the negotiations, Japan's relationship with its neighbors, and contact with North Korea outside of the executive branch, including a Congressional delegation. Information for this report came from a variety of news articles, scholarly publications, government materials, and other sources, the accuracy of which CRS has not verified. This report will not be updated.",govreport